I’ve already posted a fair bit about Datadog this week, but I’ve spent a bit of time looking through the some of the earning reports and transcripts again to see if there are any more clues over what to expect, and why in my opinion the high scenario might not be so unrealistic after all.
“Usage from existing customers was robust, and our third-quarter dollar-based net retention rate remained above 130% for the 13th consecutive quarter.”
‘Over 130%’ is vague (similar to how Zoom reports DBNER) and it is hard to identify what the trend is, but we do know that:
“About 60% of our revenue growth comes from existing customers……Organic is always the majority of the growth in a quarter complemented by the new business.” (Q3 call). The implication therefore is that 40% of revenue growth is from new logo.
- Datadog’s Enterprise customers (ARR >$100k) account for 75% of their revenue. In Q419 this proportion was 70%, we can see that Datadog has been growing its Enterprise customer base more quickly than bringing in new logo. This can be seen in the numbers:
DBNER, New Logo & Cross-Selling
Total new customers (sequential growth)
Q219 600 (+7%)
Q319 700 (+8%)
Q419 1000 (+11%)
Q120 1000 (+10%)
Q220 600 (+5%)
Q320 1000 (+8%)
Enterprise new customers (sequential growth)
Q219 86 (+17%)
Q319 133 (+22%)
Q419 131 (+18%)
Q120 102 (+12%)
Q220 55 (+6%)
Q320 92 (+9%)
While Datadog has reaccelerated its new logo back to pre-pandemic levels successfully, it is accelerating its Enterprise customers at an even higher rate, demonstrating its effectiveness in scaling up its customer usage & cross-selling once a customer is onboarded (in spite of its Q2 usage issues). It also suggests that a significant portion of new customers have potential to grow into Enterprise customers, representing ‘pipeline’ for Datadog.
This is an important point, because it suggests that rather than expecting decelerating DBNER going forwards, there are positive signs that the DBNER may in fact continue to accelerate Datadog’s growth:
"So we haven’t changed anything to the way we proceed. What we’re doing right now is working, right? What we said earlier is we’re delivering the right numbers of new logos, the right numbers of product cross-sells. That was our focus before. That’s still our focus today.
Next, our platform strategy continues to resonate and win in the market. As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products, which is up from only 7% a year ago (and from 15% in Q2)."
This shows effectiveness in cross-selling its products, the value of its proposition to its customers, but also lots of runway to continue cross-selling into.
“We had another quarter in which approximately 75% of new logos landed with two or more products.”
This is UP from Q419 of 65% and UP from only 25% in 2018. So while Datadog’s new logo may slow with the law of large numbers, the revenue contribution/value of a new customer is growing, which might help offset this. This is part of Datadog’s strategy, to focus on cross-selling to existing customers and up-selling to new customers, while it has limited control over its existing customers’ usage:
"Everything that is within control of the sales team actually worked really well. We mentioned it during the call, but we had a record level of new logos, both in terms of numbers and in terms of revenue. We had a record level of new products attached, and this is what our sales teams spend their time on.
The growth of customers, once they’re set up, every single month, is only partially related to the world of CECL, that we don’t have full control over that, which is also why when we set expectations around our net retention initially, we said we’re going to set it at 130% because we don’t fully control that number. A great part of it is driven by the rate of migration to the cloud and the rate at which customers are scaling into the cloud. Again, we’re very early in that transition, and customers are going to keep transitioning for a much longer time, keep scaling, and we see that they only want to do that more now that they see the impact of COVID on their business and they need to transform. But from a quarter-to-quarter basis, in the near term, we don’t exactly know where that’s going.
Sales and Marketing expense has stayed constant at 34-37% of revenue over the same period, so as Datadog grows it ramps up its sales org in unison to maintain the pace of its growth:
"So we start with the land and expand and look at those cohorts inorganic. And I think we referred to looking at pre-pandemic and historical trends. So that’s at the sort of linchpin, making the business relatively predictable even in uncertain times. And then we look at the market size, the opportunity, which tends not to be a limit.
And so what is, is that the execution, how many salespeople we get in, how we can ramp them, etc.And we then essentially have some experience in understanding ramp and understanding productivity, and those are the algorithms we use in looking at growth. I think we feel, and we said this over and over again, that there’s a very big market, and we’re very early on. So both in terms of product investment but also in go to market, there’s a lot of areas that we are still building out.
There are a lot of opportunities. There are a lot of successful territories where we have to put more feet on the street. So we tend to build that from a bottom-up with sales headcount, and that’s resulted in sales and capacity as we’ve talked about in the 60% to 70% growth"
So there are some underlying positive trends for Datadog, even against the tough comparatives to come. Going into 2021, there are some other drivers that might continue to accelerate Datadog’s revenue growth:
"So we see that as a great opportunity to get more customers, more usage from Azure as Azure itself is growing and as their customers are diversifying their tech stack. I should say that this is only one of the cloud providers we’re working with. We’re active on all of the other platforms. We announced another partnership with GCP today.
We have another one with AWS. So this is an evolution, not a revolution. To your point also, our customers can use their Azure credits, and there’s going to be some cross-selling involved with the Microsoft team. So we’re excited about the lift in go-to-market there.
One last thing to remember is that this is still in preview, so we don’t expect any significant volume for that in the near term. That’s something that’s going to kick in over the next few quarters."
According to management, Azure represents an opportunity to both grow Datadog’s usage AND bring in new customers in 2021.
"We have a number of things in process for FedRAMP and etc. We think it’s going to be similar in many ways to the way we sell to all our customers and different in a few other ways.
In terms of the importance of the business, we think it can be a big part of the business. And if you look at other companies in comparable spaces, like it is a big part of their business, whether it’s cloud providers or other vendors in security or observability. So we believe that there’s really a real opportunity there. So, yeah, this is all upside for us."
For me, I think Q4 should give us a good idea over which direction Datadog might be going, in terms of a 50% or 70% grower, or somewhere in between. If it can continue to reaccelerate its growth over the next two quarters, there are softer comparatives ahead and some positive signs that it might be able to maintain or even continue to accelerate its growth rate.