DDOG expectation guide

I’ve really enjoyed all the discussions around DDOG. I think Saul et a.l make a great point that the company is back on track from a business standpoint but I wanted to weigh in with my framework that I am using to guide my expectations and judgement going forward.

First a bit of history and methodology. DDOG grows their revenue through new customer adds as well as having existing customers grow their spend with the company or the DBNER (Dollar based net expansion rate) . Generally as a company’s existing customer base gets bigger and bigger the new customer adds become a smaller portion of new revenue and the DBNER becomes a bigger part. Because of this I think we need to expect sequential add percentages to decrease over time.

DDOG has historically grown their revenue sequentially between 11-20% but we should remember that as their customer base grows then the DBNER of 130% becomes more important so we should see their sequential adds decrease. In their most recent quarter they grew sequentially 10.4% and when they were humming along their sequential adds were trending down from a high of 20% to 15%. I would expect that number to continue trending down unless DDOG can start signing up absolutely massive customers in large quantities or somehow accelerate their DBNER. They are starting to butt up against the law of large numbers.

I know my assumptions are going to be incorrect so I like to do a range rather than pretend I know what is going to happen in the future. This isn’t a prediction rather setting up what I think are some reasonable high/low scenarios.

Scenario 1 - low scenario
Next quarter with a 13% seq increase that slowly decreases to 9% over the next seven quarters. As DDOG mentioned, their revenue builds upon previous quarters so if they miss on any of these growth assumptions then that will affect everything going forward, although the converse of that is true also. If their sequential beat is larger than these guesses then that will affect the quarters going forward.

        Rev        %Growth
Q4   175        54
Q1   196        50
Q2   220        57.5
Q3   245        59
Q4   270        54.5
Q1   296        50.4
Q2   322        46.4

Scenario 2 - high scenario

In this scenario I assume that the law of large numbers isn’t as big of a deal, the sequential adds slowly accelerate from 13% up to 15% and then stays there.

        Rev        %Growth
Q4   175        54
Q1   198        51
Q2   226        61.7
Q3   259        67.6
Q4   296        69.6
Q1   341        71.9
Q2   392        73.4

To be frank, I doubt either of these scenarios are correct but I do think they give a useful setpoint to judge coming quarters. Does DDOG end up being a 40-50% grower or a 60-70% grower going forward. They certainly have a lot going for them with their first party azure partnership and GCP partnership. They continue to add functionality and modules. There is a lot to be excited about, the call was very positive and observability is a huge space. My general feeling is that something around scenario 1 is more likely than scenario 2. A DBNER of around 130% is worth about 6.8% in sequential quarterly growth which means their sales force is going to have to start selling 20+ million dollars that all gets booked in a quarter. That might not sound like a lot but remember a customer’s revenue is going to be spread across multiple quarters/years so that is a big ask. And also remember, we expect that DBNER number to decrease over time. That means in scenario 2 they would need to either increase their DBNER or start signing tons of high paying customers, realistically probably both.

Happy investing!


Hi Ethan,

Good post.

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.


Hi ethan, thanks for posting your hypothetical future numbers on DDOG. I would expect that the actual results will be between the two sets of numbers, but much much closer to the higher set of numbers.

I think that the low set is unrealistically low. Almost all successful companies increase their revenue sequentially by larger and larger dollar amounts, even if the sequential increases fall percentage-wise due to the law of large numbers. You have them growing by $20 million next quarter and then a full six quarters later, up to only $26 million, which is pretty hard to imagine in a company that just said they are hiring S&M people as fast as they can to keep up with what they see as demand and opportunity. That’s growing by just $1 million per quarter! For example, in the three quarters before Covid hit, they grew their dollar increases from $8 million to $18 million… in just three quarters! More than doubling those dollar increases in three quarters. In other words the chance of them dropping into the high 40’s seven quarters from now (as you have it), looks pretty slim unless covid rages unchecked.

But look, I’m just guessing too, and I could be very wrong, and if I am I’ll act accordingly.




I think that the low set is unrealistically low.

Hi Saul,

I think that the ‘low’ scenario would actually be terrible for Datadog.

Datadog has traditionally been a 15-19% sequential grower, a historical trend which management describes as the ‘lynchpin’ for its growth. If over the next 7 quarters Datadog becomes a 9-13% sequential grower, this implies significant deceleration due to the law of large numbers. By the end of it, Datadog has gone from an 83% grower to a 41% grower (forward looking).

If we continue to extrapolate out this deceleration due to law of large numbers at the same rate, in another 7 quarters Datadog will only be a 22% grower. Datadog will have gone from 83% growth to 22% growth in just over 3 years! This would suggest management are now misleading us or are just wrong about the opportunity ahead of it. At what point does this ‘large number’ effect stabilise, if at all.

I think sometimes we can overestimate the impact of ‘the law of large numbers’. We can also see in the example of Cloudfare how a company can maintain or even accelerate its sequential growth rate over a long period of time, with a predictable revenue model. If the ‘law’ mattered so much, perhaps Amazon would have entered negative growth over a decade ago (it just grew 37% YoY in its latest quarter).

Instead, I think the more important thing is whether a company can scale its sales organisation and infrastructure quick enough to meet its opportunity, keep product innovation and even find new ways to grow. For Datadog:

  • It is rapidly ramping up its sales org in line with its pace of growth and the opportunity that management sees.
  • It is rapidly cross-selling existing products, which is a key part of its growth to date and its sales strategy. “Approximately 20% of customers are using four or more products, which is up from only 7% a year ago (and up from 15% in Q2)”. Another way of looking at it, there are still 80% of customers who aren’t using four or more products, to go after!!
  • It just reaccelerated its new customers by +67% sequential increase from Q2 to Q3 (600 to 1000)!! The same increase as from Q4 19 to Q1 20. This denotes a sales org that is effective and that can scale up rapidly.
  • 75% of new logo are landed with 2 or more products. This is UP from Q419 of 65% and UP from only 25% in 2018. So not only are Datadog reaccelerating the pace of their new logo growth, they are also increasing the value of new customers that they bring in. Again, going forwards what is to stop new customers being onboarded with three or more, or four or more, products!! I would not be surprised to see management start reporting this in coming quarters (I have noticed a subtle trend of them increasing their KPI reporting about this product mix in recent quarters).
  • It is finding new avenues for growth, such as with its cloud provider partnerships (Azure and GCP) and FedRAMP, which are expected to provide meaningful revenue contribution through 2021 and beyond.
  • It is in the early innings of their growth, as management emphasises again and again. The decelerating growth rate in the low scenario might imply it were already coming up to a saturation point.

For me, these are not the signs of a slowing business, or one about to slow any time soon.

With the opportunity all ahead of it, I really don’t see how the ‘law of large numbers’ will negate this growth to the point of deceleration. It seems unlikely to me, let’s not forget that Datadog has been a very consistent and stable grower up until its Q2 usage impact. It is possible that the effects of the pandemic could continue slow it down in the short term, but as management said they expect this effect to be ‘transitory’. So I would also lean towards the high scenario because the trends look positive to me. But really, I don’t know either, so I am looking to Q4 for more clues to add to the story :slight_smile:


AThinkingFool, you do your name credit! What a great post which brings in all the great stuff that is happening to the business. Thank you. Saul, you may be right. My intention was to just give myself goalposts to quickly judge how the business is doing going forward. However, this post is going into the weeds more out of curiosity than anything else.

Lets take their three largest sequential growth quarters and see what they can do as an organization when things are going really well. Then lets compare that to their latest quarter

             Seq Growth  Dollars(m) DBNER    (5)Dollars from DBNER 6)New business    S&M   
q3 2018      20.6%        10.54     est 150%    5.46                   5.08           24.6              
q1 2019      18.8%        13.17     est 150%    7.47                   5.70           19.4    
q3 2019      18.5%        17.78     est 140%    8.44                   9.37           24.1    
q3 2020      13%          14.6      est 135%    7.79                   6.81           57.1    

Ok so what i did here was calculate how of their sequential growth was from DBNER and how much is new business. Those are columns 5 and 6. New business is just sequential growth minus dollars from DBNER.

We can see that DDOG isn’t getting near as many sales for how much they are spending on S&M. This trend is a little obfuscated since their S&M is also responsible for upsells, not just new business but it shows how much of a drop off in new business they have had.

I’m going to expand out scenario 2 assuming 130% DBNER. Dollars from DBNER is how much DDOG’s sequential growth is because of DBNER. The next column is from new Sales

 Rev        %Growth       Seq growth(Dollars)  Dollars from DBNER   New Sales
Q4   175        54          20.33                  12.25             8.1
Q1   198        51          23.63                  13.9              9.7
Q2   226        61.7        27.81                  15.9              11.96
Q3   259        67.6        32.83                  18.1              14.68
Q4   296        69.6        37.83                  20.8              16.81
Q1   341        71.9        44.53                  23.9              20.63
Q2   392        73.4        51.21                  27.5              23.73

Personally I found this exercise interesting in that it shows how reliant DDOG is on a high DBNER. The biggest quarter for new business that DDOG ever had was probably q3 2019 or q4 of 2019 and they probably did around 9 to 10 million in new sales. If DDOGs DBNER dips then DDOG will need to start pulling in LOTS of business really quickly because then they will need to be in the 15-30 million range of new business as the quarters progress.

AThingingFool said, "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. Saul said, But look, I’m just guessing too, and I could be very wrong, and if I am I’ll act accordingly. and I said, To be frank, I doubt either of these scenarios are correct but I do think they give a useful setpoint to judge coming quarters.

I think we are all saying the same thing. I really appreciate both of you weighing in and helping me look at the numbers in different ways.


oh and a disclaimer.
This post has a lot of false precision and assumptions. All these calculations should be taken with a giant grain of salt. I think they are more useful to understand the different drivers of DDOGs revenue growth rather than using the actual numbers.


Hi Ethan- can you please provide a few more details on how you calculate column 5 (Dollars from DBNER)? I’m trying to recreate your calculations but couldn’t figure out how you’re calculating that number. Thank you,