Datadog Q4 2020 Conference Call Notes

Hey everyone, I am experimenting with building a site which covers earnings reports and S1’s from fast growing SaaS companies. The idea is to provide as objective coverage as possible on the conference calls. Any feedback is welcome, and I will include the full article contents on this board while the site is still under development.

https://www.saasinvesting.io/datadog-q4-2020-conference-call…

Olivier Pomel – CEO
– continue to introduce new products at a high velocity
– ended year with 2185 employees globally, +56% YoY, high growth in go to market and R&D teams
– very large growing market opportunity
– revenue 178M, +56% YoY and above high end of guidance range
ended with 97 customers of 1M+ ARR, almost doubled from 50 last year, and 3x amount in 2019
– 1,253 customers with 100k+ ARR customers, up from 858 last year, contributes 75%+ of ARR
– 14,200 customers up from about 10,500 last year
– added about 1,100 customers in the Q, 1,000 was added in Q3
– capital efficient, FCF 17M, DBNRR 130%+
– customers increasing usage and adding newer products
– full year 603M revenue, +66% YoY, above high end of guidance, free cash flow 83M or margin of 14% for the year
– execution very strong, record ARR added, strong enterprise sales channel
– record 1M+ ARR customers added in the Q
– growth of existing customers was robust as customers of all sizes continue to grow usage
– increased consumption and cross selling
– Q4 growth broadly in line with pre-covid trends
– churn remained very low and consistent with pre-pandemic rates
– platform strategy continues to win and resonate in the market
72% of customers using 2 or more products, up from 58% last year
22% of customers using 4 or more products, up from 10% last year
– 75% of new logos landed with 2 or more products
– good uptake of newest products, NPM, run and security, each of which has reached a lot of customers in short time
– frictionless adoption for a more integrated platform is a key value prop
– 2 acquisitions, Sqreen SaaS based security based platform that enables to detect, block and respond to attacks
– Sqreen provides runtime application protection, in app protection WAF
– acquisition of Timber Technologies developers of Vector, vendor agnostic observability performant data pipeline
– Vector works on-prem and in the cloud, technology to further empower observability data
– launched incident management product which allows users to declare incidents
– can collaborate without leaving DataDog
– 60 capabilities and features delivered across the product
new and enhanced integrations such as Snowflake and Oracle Cloud
– currently have 9 general availability products, 4 years ago only had one product
– have built the most complete, integrated, cloud native observability platform
– the integrated platform is extensible to new use cases
– feeling that they are just getting started
– doubling down on building out our platform for observability, core market alone is very big opportunity
– growing quickly with re-platforming digital architectures
– still early in this transition
– growing out new products while building upon existing products
just getting started in security
– security is very large opportunity with long runway of platform development
– silos between Dev/Sec/Ops
– trying to invest in platform
– building out develop marketplace and have strategic partnerships with all of the major cloud vendors
– announced expansion of partnerships with Azure and GCP last Q, which should be in the market in 2021
– most uses cases to solve for customers than the current offerings
– very strong quarter for go to market strategy
– seven figure ARR increasing from businesses that benefit from covid such as a large commerce platform, global video game company
– still good deals with companies negatively impacted by covid, including 7 figure upsell to a travel company
– a six figure upsell to two separate airlines
– shows impacted industries are still investing heavily in operations
– other key wins, two seven figure lands with Fortune 100 companies, a retailor and an insurance company
– both companies were struggling with teams in different silos
– seven figure land from streaming sports platform in Asia which was enabled by new Datadog program
– they adopted the full data platform, previous APM provider suffered from ‘blind spots’, samplings, and a lack of integrations
– 7 figure land SaaS, wanted to have engineers build more products
– 1M upsell replacing legacy solutions and get visibility, expansion benefitted from marketplace offering, integrated with Office 365
– Outlook, markets trends driving the business so far have only gotten stronger
– business must be digital first like never before

David Obstler – CFO
– strong top an bottom line results amongst a difficult macro backdrop
– rev 177.5M, up +56% YoY, against a challenging year ago comp
– new logo generation was very strong, usage trends solid, platform traction continued to be strong
– churn was in line or better than historical norms
both new logo ARR and the number of new logos were records for Datadog, showing strong growth versus a year ago
– given usage based model, new logo wins do not immediately translate to revenue
– growth of existing customers was robust, DBNRR above 130%+ for the 14th consecutive Q
– pleased with usage growth of existing customers, continued adoption of platform and cloud migration
– some tricky issues with the Q2 revenue last year that will impact comps
– over 70% using 2 or more products, and 22 customers using 4 or more products
– DB gross retention rate in low to mid 90s
– billings 219M, +68% YoY, pro-forma earnings growth was 61% YoY (6 million dollar charge changing comps)
– RPO 434M, up 78%
– both billings and contract duration extended in the Q, strong annual and some multi-year contracts
– multi-year commits still billed annually
– they do not press sales to go for long term deals because high NRR anyways
– current RPO growth is strong in the mid-sixties, similar to billings growth
– billings/RPO affected by timing, while revenue incorporates customer usage
– income statement, all metrics non-gaap
– gross profit 136.7M, gross margin 78%, was 79% last Q, and 78% in year ago period
– the gross margin lost sequentially was due to inefficiencies in investments in product and platform innovation
– prioritizing product development and innovation, and build out cloud data centers in newer geographies
– R&D 53.5M 30% revenue, compared with 27% in the year ago Q
– investing and high growth of engineering head count, 370 new engineers over course of 2020, attracting talent
– S&M 52.5M 30% revenue, compared with 35% in the year ago Q
– still investing in sales and marketing, but pace of revenue growth is faster
– no in person tradeshows or marketing events
– while investing in advertising still, they money was not spend as before on a one to one ratio
– G&A 13.5M 8% revenue, compared with 9% in the year ago Q
– operating income 18.1M, 10% operating margin, compare to 7.9M and 7% margin in the year ago period
– leverage from lowered expenses due to less travel
– headcount growth was in line with revenue growth in the Q
– non-gaap net income 19.1M .06/share
– balance sheet and cash flow, 1.5B cash, cash from operations was 23.8M this Q
– free cash flow was 16.7M, margin 9%, for the full year free cash flow was 83.2M, 14% margin
– outlook, Q1 185-187M +42% YoY, non-gaap operating income 8-10M, .02-.03/share
– full year 825M-835M +38% YoY, non-gaap operating income 35-45M, .10-.14/share
– embedded in the guidance are prudent assumptions on growth of existing customers as well as new logo wins
– guidance reflects current macro economic uncertainties
– investing to optimize for long term growth
– aggressive investments for R&D and go to market
– model assumes return to office, travel and other pandemic related items go back to normal in 2nd half year
– Timber Technologies has no impact to guidance, Sqreen 260M purchase, 25% of the payment was deferred in a mix of cash/stock
– Sqreen expected to be immaterial to revenue for 2021
– resolving some issue with convertible notes, gaap numbers should be closer to non-gaap now
– pleased with results, good sales and innovation, users consuming more and adding products, even greater confidence in 2021

Questions
– headwinds in Q2 do create a drag on the revenue growth, but will be easier comp going forward
– Sqreen for application security, Datadog APM already going to heart of the application and can inject security/detection
– Timber, Vector is the product, customers have a number of different data sources
– and they want observability, but data sources can be legacy systems, log management systems
– customer wants to be able to aggregate data before it leaves their network environment, and make sure they have the right privacy controls
– can filter PII and then route the data to Datadog cloud services or to an independent archive
– want to make sure customers are in full control of their observability data
– make it easier for customers to send all the data that is relevant to Datadog (Timber improving the data pipeline)
– APM and log are most mature products, neck and neck with which one lands first
– next is Synthetics, then NPM and Run, then security… this the order in which land and expand typically happens
– planning to invest more because so much success with the platform approach
– aggressively building the team and hiring because growth curve is promising
this Q had a strong new logo boosting RPO/billings, and an extension of the duration of billings/contracts
– strong new sales as well as the extension of duration
– not sure yet if they will need a dedicated sales force to security or if it will remain as general sales
– APM product has lowered the friction to deploying a new product such as security
– APM/log still extending a lot themselves
– adoption curve is they usually start small and then they grow and expand the product suite
– Vector agnostic data pipeline, integrations with Datadog will pay off and good value
– cater to the various use cases that the customer has
– ramping sales hires slightly ahead of revenue
– expanding into new geographies, and expanding teams in geographies where there has been success
– typically landing smaller then expanding given the value of the platform to across the product set
– continue to take conservative approach to guidance given uncertainty in the world
– less volatile in usage and new logos recently, but continue to remain prudent/conservative
– want to be cautious on usage since it fluctuated so much from the pandemic
– the last week of the year had even bigger drop off of usage than usual, because many people had not taken any time off for the year
– learned in Q2 the usage numbers can change fast as changes in the economy happen
– investing in growing and building sales force to capitalize of the greenfield market
– SolarWinds has caused some customers to want to replace their network monitoring
– growing problem for customers: what is running, supply chain, what application is doing
– security long term opportunity, will continue to invest in space
– short term some replacements of legacy system, but longer term is the real opportunity
– Azure integration is in preview, should be live in first half of year
– already got good feedback that partnership is giving confidence to potential customers in the pipeline
– already satisfied with the impact of the partnership as some large customers have responded positively
– Marketplace platform still fairly new, some customers already adopting applications through the Marketplace
– still a lot of building and partners to recruit on the platform, but very good trending signs
competitive landscape a bit boring, no noticeable change in past year
– will have large lands from customer switching from other providers, but that is not the dominant portion
– duration of contract assumptions are staying flat or the same
– Synthetics growing very well, very strong adoption, number four product after infrastructure, logs and APM
– good growth curve on Synthetics
– 1M+ customers number to be delivered once per year, steady growth of number over the year
– mimics rest of effects in business, Q2 was also hardest for land/expand on the largest customers, but improved throughout year
– frictionless adoption is key, but will pursue difficult projects that may not integrate right away
– competitor did extensive changes to pricing structure, Datadog saw no impact there
– competitive landscape is boring in a good way so far
– no changes in go to market, invoice duration 6-8 months, contract duration a little longer

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truly appreciate the note.

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Looks like ESTC Licensing fell off a cliff

REVENUE GROWTH. GPM
Q3(4). (Saas+79%)+39%. 77%. 94%sub Rev
670 total Customers >$100k; NER>130% Guide +28%Midpoint

Despite CRWD getting into Observability- https://techcrunch.com/2021/02/18/logging-startups-are-sudde…
A little here:
In Humio, CrowdStrike gets a company that will provide it with the ability to collect unlimited logging information. Most companies have to pick and choose what to log and how long to keep it, but with Humio, they don’t have to make these choices, with customers processing multiple terabytes of data every single day.
That means with Humio in the fold, CrowdStrike can use this massive amount of data to help deal with threats and attacks in real time as they are happening, rather than reacting to them and trying to figure out what happened later…"
Humio CEO Geeta Schmidt describes the product as “a data lake for log information.” She says, "Humio had become the data lake for these enterprises enabling searches for longer periods of time and from more data sources allowing them to understand their entire environment, prepare for the unknown, proactively prevent issues, recover quickly from incidents, and get to the root cause.

I’m thinking of adding to my 18% of Portforlio in DDOG - given there dominance in this ever growing TAM.

Best,

Jason

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