DDOG 6/1/22 Jeffries conference

1.) DDOG believes they have not seen major macro headwinds so far, and they disagree with the prevailing view that we have regarding DDOG as mostly “consumption based”.

Analyst: The elephant in the room right now is the economy. And everyone is asking, we heard from Workday, some pushouts; Snowflake, little capacity, capacity utilization was down. When you think about last night Salesforce said, we’re not seeing it, which I don’t think most people believe Benioff would show any weakness. But what’s your sense of what’s going on in the environment? And how – assuming things got worse on the macro side, what is the insulation to your model that gives you a little more protection from the headwinds that are coming in?

CFO: We said on our earnings call that in our first quarter, we didn’t see any impact from the economy or from Russia, Ukraine that we – our first quarter was very similar to our previous first quarters in terms of net retention and adoption and the growth of the business.

Of course, we’re looking – we’re not naive. Back in the second quarter of – at the beginning of 2020, at the beginning of COVID, we did see some flattening of the business. The business continued to grow very substantially, but clients began to look at their spend and do some rationalization.

And that could happen again, that clients, in periods of time where there is some economic pushback, will look at their cost structure. We take some comfort in the fact that we are only low single digits cost of their cloud expense. And there are tremendous trends towards digital migration. In fact, there may be things in a tighter labor economy and with cost management where you want to go to more of a managed solution than do-it-yourself. So there are a number of things that we look at, but we haven’t really seen any effect yet. In addition, we have a very long-term trend here in cloud migration and DevOps.

In terms of what protections do we have in our model because I know that’s top of mind, the whole world of consumption-based pricing, which was very appealing on the upside, but causes some concern is something on the mind of many investors.

And I think I want to emphasize, we have a different model. 75% to 80% of our business is in take-or-pay subscriptions. And what that provides is a very strong underpinning, meaning most of our business is committed contractually. So we only have – we have less than 10%, in fact, around 5%, of what you would call pure consumption month-to-month. The rest of it is on-demand pricing associated with the part that’s not the 75% or 80% related to subscriptions. So whereas our organic growth can vary, there’s a very strong underpinning in our business model in cases where there might be a little bit less consumption.

In addition, we’ve seen such factors as our product growth, our expansion of SKUs and things like that be strong factors in clients continue to adopt more and more of the solution even if they’re in a cost management mode.

2.) Management maintains belief in a long runway for growth via simple customer expansion of spend on their multiple products.

Analyst: I know you love all 14 modules equally, but is there a couple of areas that you see that you’re really excited about that are resonating well with clients for uptake right now?

CFO: We get that question a lot. And of course, all 14 of our kids are lovely, and we really love them.

But I think you got to go at the very start, you have to go back to the 3 pillars in observability, where, as I mentioned, the continuous investment in infrastructure, logs and APM is the core driver. There is tremendous opportunity both in terms of cloud workloads, in terms of market share and in terms of cross-selling.

We are not penetrated in our infrastructure customers as it relates to APM and logs. Yes, we have a lot of customers taking 2 or 3 or more products but we still have a lot of customers that haven’t taken most of the platforms. So that’s a very, very strong growth driver, coupled with the trends in cloud migration, digitalization and DevOps.

Secondly, we’re very excited about the security product set. Again, we didn’t have this a couple of years ago. And as we’ve told everybody, we’re still in development. It’s going to take a number of years. APM took a number of years to develop from scratch. But we have enough in the way of customers, thousands of customers on it, meaningful revenues that we think there’s a big opportunity. And we think that we’re early and have the right product for the evolution of DevSecOps. So that’s the second area that we’re excited about, that suite.

And then there are some seeds that have been planted that are also very exciting, and I would cite our CI/CD, our shift left, in terms of real-time production environments, getting a view on the development of software and how that affects production earlier is an exciting expansion. And then I think we’ve mentioned a number of initiatives in data, including observability pipelines that we’re still developing and putting out, which is all about how to manage data more efficiently for our clients and get more and more data into the platform. So I’d say those are growth shoots that we’re excited about that we’re in the beginnings of the product development.

3.) DDOG is cloud neutral and is deepening partnerships with the hyperscalers to sell more and more.

Analyst: I think you have a BFF named AWS.

CFO: They are. They are. Well, we like all our cloud. We all like all the hyperscalers as well. But they’re a good friend. And <b€I think when you say BFF, we don’t talk like that. We’re Switzerland. We like all of our cloud providers, but we have had a very, very long relationship with AWS. And it’s a deep one that has to do with partnership and technology development, making sure that as you see in a number of our releases, that we’re developing together. It has to do with marketing, going to market, it has to do with sales.

And so I think they’ve been the model of how to partner, and they’ve been a very, very substantial partner of ours. And we’ve extended that model over the years into the other cloud vendors, into GCP and into Azure.

So we want to be Switzerland. We want to be with everybody in facilitating cloud migration, both in terms of what we monitor and how we deliver the product through the public cloud.

4.) As we know, DDOG continues to see little competition. Much of the space remains greenfield for now.

Analyst: We get the question of who you’re seeing the most in the field, and what the industry experts keep saying to us is the pool is so large and the swim lanes are so wide that the swimmers have plenty of room to operate, and you’re not really running into each other as hard, but everyone asked about New Relic, Dynatrace. How do we differentiate? What are you seeing from that perspective?

CFO: The answer is yes and yes. It’s a very large market, and the swim lanes are wide. So it’s not a winner take all.

I think if you look at the amount of new business that we’re adding each quarter, you’ll see that we’re winning a lot of it. And the numbers are very striking if you line that up. And that has a lot to do with the fact that a lot of our business is greenfield. A lot of our business is – the choice is in real-time production cloud environments. The true choice is do-it-yourself open source or the integrated platform of Datadog. That’s at the core of the choice. And since that is such a large and growing market, we’ve been doing well.

We have always said that we’re looking where the puck is going, which we believe is in that direction. So we are not focusing our efforts on circling back and displacing on-premise type observability. That may happen over time.

So I think you have our strength being in integrated, 3-pillar observability for complex cloud environments. A good clue would be is the client in the cloud and using containers, micro services, et cetera. And then you have some other companies that have come from a little bit of a different heritage, whether it be APM on-premise and expanding in the cloud or security, logging, on-premise expanding in the cloud.

So we do see other competitors from time to time. But I think, broadly speaking, we stay where we’re strong, and we’ve been very successful in that.

5.) The issue of stock compensation in the setting of depressed stock prices was raised. It looks like DDOG doesn’t face the same problems as other tech companies brutalized out there and should continue to retain/attract talent.

Analyst: Obviously, with stock prices where they are now relative to where they were 6, 12 months ago, certainly seeing some commentary of employees at other companies jumping ship because stock-based compensation is down so much. What’s your view on that? And how you think those trends might play out over the next sort of 6 to 12 months and potential headwinds for your business or risks for your business if your employees can effectively earn a 20% or 30% pay bump by going to a competitor and by reselling their stock comp?

CFO: Yes. I think, first of all, we’re in a pretty good position. We went public at $27 a share. We are trading at $100 a share. We have – the vast majority of our employees are what you would say would be in the money. We have RSUs. We give RSUs to all our employees. We do refreshes. So I think we’re in a pretty good position.

We also think that there are a lot of companies that thought they were going to have their payday and have their IPO that might not right now an approximate term. But we are, of course, going to look at this, and we’re committed to provide competitive comp and opportunities for our employees.

And so we will – we’re going to look at whether there are employees that have been disadvantaged because they happened to get – joined the company at the peak stock price. I don’t think it’s a very big dilution problem for our company given what I just said, but we’re going to look at comp and do the right thing for our employees.