Datadog Q3 2020 conference call summary

Summary
Lots of new products driving revenue growth and selling well. Q2 slowdown was primarily due to optimizations from companies and a one time event. Offered on all three major public clouds now: AWS, Azure and GCP. Organic growth, lots of upsells, hiring in tech and sales. Guidance is admitted to be prudent and conservative.

Olivier Pomel - CEO

  • Go to market team continuing to deliver value
  • continue to hire rapidly
  • revenue 155M, 61%+ YoY
  • 1,107 customers with 100k+ ARR, up from 727 last year
  • enterprise customers generate 75% of ARR total
  • 13,100 customers currently up from 9500 last year
  • added about 1,000 customers in the Q, more than the 630 in Q2
  • free cash flow 29M
  • DBNRR over 130%
  • growth of customers was robust and usage levels returning to normal after a slower Q2
  • pace of growth in Q3 is in line with pre-covid levels
  • trends are broad based across customer sizes and industries
  • new logo generation is robust, churn is similar to historical
  • total ARR was new record in Q3
  • platform strategy continues to win the in the market
  • 71% of customers are using 2 or more products up from 50% last year
  • 20% of customers are using 4 or more products up from 7% last year
  • 75% of new logos are landing with at least 2 or more products
  • pleased with uptake of new products, Synthetics, NPM
  • Synthetics only available for a year and today used by thousands of customers,
  • 8 figures of ARR for Synthetics and exceeding growth expectations
  • frictionless adoption is a key tenet of platform
  • land and expand still working, even in most challenged sectors
  • R&D, 8 new products at Dash conference
  • Datadog marketplace, enables tech partners to build applications on top of the platform
  • New way to measure performance
  • Expanded Synthetics to use integration deployment pipeline, embeds earlier in DevOps process
  • Mobile user monitoring for mobile
  • General availability of error tracking to aggregate
  • Compliance monitoring on mis-config
  • New types of monitors
  • Strategy partnership with Microsoft so can purchase directly from Azure
  • Expanding partnership with Google Cloud Platform, enhancing sales between DataDog and GCP
  • Existing alliance with AWS, collaborative relationships with public cloud vendors
  • R&D takeaways: high productivity, road map strong, successfully hire on scale
  • most complete end to end platform and only getting started
  • 7,000 SMBs at Dash conference, more than 5x last year
  • Dash brought together consumers, prospects and partners
  • Three notable upsells
    1. 7 figure sale, latin american e-commerce, handling record level of orders
    1. European on demand delivery company, their business doubled since last year, grown datadog usage 4x
  • company has 7 figure deal using every one of the platform products including security and real time threat protection
    1. US gaming company, 7 figure deal, supports serverless architecture and machine learning
  • good success from traditional industries
  • 6 figure deal with 150 year postal service in Europe
  • supports using multi-cloud and they are using 4 products
  • sizeable up sale to European financial services institution, increased spend 4x for over 1 million in ARR
  • up sale with 100 year old global shipping company, growing from mid six figures to seven figures as they adopt more products
  • well positioned to win in market regardless of covid

David Obstler - CFO

  • strong top and bottom line growth among a difficult macro environment
  • usage trends returned to more normalized growth
  • platform traction was strong
  • thirteen Qs in a row with DBNRR above 130%
  • pressure in Q2 as customers performed optimizations to lower bills
  • Q3 with decisive return to more normalized growth from existing customers
  • Q2 downturn was transitory optimization effort related to challenging macro environment
  • Confident that was a one bulk optimization while optimizations will continue
  • Land and expand driven by usage growth of existing products and cross selling to newer solutions
  • Newest products continue to perform well
  • Growing run rate for new products QoQ, many products are still early
  • New logos additions in line with pre-covid levels
  • Churn looks stable in line with historical levels and recovery from Q2
  • Dollar based growth retention rate has remained unchanged, low to mid 90s
  • Billings, 155M, up 39% YoY against an exceptionally difficult compare
  • Looking to align billings with growth of business
  • Some customers moved from yearly billing to semi-annual which changed where they show in renewal Q
  • They are simply breaking up their bills, into smaller increments
  • Growth of 57% in billings if you remove these 2 pro-forma items
  • RPO 316M, up ~50%
  • Billings/RPO fluctuate based on timing of invoices, revenue incorporates customer usage
  • Gross profit 121M, gross margin 79%
  • YoY improvement in gross margin due to more efficient usage of cloud infrastructure
  • Building out cloud data centers in newer geographies
  • R&D 45M, 30% of revenue, compared with 28% year ago
  • S&M 50M, 32% of revenue, compared with 39% year ago
  • Events budget going to advertising and lead generating activities
  • G&A 12M, 8% of revenue, 9% year ago
  • operating income 14M, 9% operating margin, 700k with 1% operating margin year ago
  • lower expenses for travel, office space, events contributed to operating margin
  • headcount growth in line with revenue growth for the Q
  • income 16M, 5 cents a share
  • priority is top line growth, continuing to invest in R&D and go to market
  • 1.5B in cash
  • cash flow from operations, 36M
  • free cash flow 28M
  • outlook: prudent factoring in lower growth from what they’ve seen in Q3, conservative new business assumptions
  • Q4 revenue 162-164M, 43%+ YoY, income non-gaap 3-5M
  • Full year 2020: 588-590M 62%+ YoY, income non-gaap 48-50M

Questions

  • RPO based bookings acceleration
  • organic growth rebounded particularly with larger customers, new sales helping too
  • more tightly integrated into Azure marketplace/sales
  • can reduce friction when onboarding Microsoft (Azure) customers to platform
  • Azure is not immediate additive revenue yet, GCP partnership also early on
  • see Azure/GCP being meaningful for revenue in mid to long term outlook
  • entry point for customers is usually in cloud infrastructure, gateway to platform
  • customers getting good value for the price
  • 60% of revenue growth from existing customers
  • market is not the limit on growth
  • ramping and productivity are used to forecast growth
  • ‘very big market’ and ‘very early on’
  • go to market is still building out, increasing sales headcount
  • successful in hiring during covid
  • so early in the opportunity
  • optimizing for short term and long term growth
  • competition is similar, one vendor massively lowering prices to compete
  • Olivier, nothing new on the horizon with competition
  • Landing fast is important part of the business
  • Application marketplace, how to monetize? still super early here
  • Larger customers after optimizations, continued to grow at pre-pandemic rates
  • macro backdrop giving hesitation predicting guidance
  • log product is in hyper growth
  • internet management product only in Beta, lots of interest
  • profiler product has a lot of excitement
  • make sure customers see the value they get
  • partner source is still a small portion of the revenue
  • under promise over deliver, don’t like to give demos where that are unrealistic
  • world moving to cloud, cloud native solution has little competition
  • win rate is strong still
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