Highlights I enjoyed from the March 8 Morgan Stanley conference with DDOG
- Great to have it hammered into us - the cloud migration is loud and clear and there’s no signs of slowing down so far. Something we keep hearing all the time and the numbers keep showing it!
CEO: So my view in the market haven’t changed a lot, actually. I think we knew entering in 2021 that digital transformation was here, cloud migration was here. In many ways, for us, 2021 looked a lot like 2019. If you look at the – whether it’s the growth rate, the cloud adoption, the rest of the economics of the business, it’s very similar. So what this tells us is that we’re still very early in this transformation…this transformation is broader than we thought.
- The CEO emphasizes three major factors providing a long tailwind and runway for DDOG’s growth. Which we all know but always great to hear again and reinforce our conviction.
The first is the obvious digital transformation/cloud adoption, likened to the scale of the industrial revolution.
The second is the exploding complexity within digital infrastructure.
The third is about the tech personnel shortage: companies can use DDOG’s tools that augment their existing workforce, instead of building solutions that require scrambling for workers that don’t exist.
CEO: …we’re still super early in digital transformation, as you know. It’s really a transformation dimension of which we haven’t seen since the Industrial Revolution, pretty much, so we’re still fairly early in that. And then we’re also early in the cloud migration that enables it and follows it… if you look at the way infrastructures are evolving, they’re getting more and more complicated…a single developer is going to manipulate more and more and more different components…The world is transforming. More and more is built in software. There are not enough software engineers, and so they need more help. They need more tooling. They need more ways to help them understand what’s going on and extend their reach.
- Tagging along with the worker shortage as a boost to DDOG’s growth, the CEO believes this will continue to push companies towards buying observability tools, rather than building a do-it-yourself open-source approach. The engineering resources are just too limited!
CEO: …I think the pendulum is going to swing more and more on buying versus building just because companies in general, not customers, in particular, will need to redirect their engineering resources to where it can make a difference for them…it’s going to put more pressure on DIY and build-it-yourself initiatives in the future
- An analyst asked about whether SNOW’s near term revenue hit from performance improvements would be a risk for DDOG as well. The answer seems to be no. Efficiencies are always improving for DDOG and this is reflected in gross margins going up, but DDOG doesn’t charge based on what they are consuming internally. DDOG only charges for customer’s workload size. So presumably this is not a near-term problem for DDOG versus SNOW.
Analyst: …one of the questions that we’ve been getting a lot, frankly, the past couple of days, was really on the back of Snowflake’s last earnings call…I was wondering if you can talk us through how Datadog’s pricing works and how efficient improvements, more broadly, at the cloud vendors impact your cost, your gross margins and potentially, your revenue.
CEO: So our model is actually fairly different because we charge according to the magnitude of our customers’ own workloads, not – we don’t charge for the amount of compute or storage we consume internally. So when we actually get more efficiencies, which we do on an ongoing basis, you see it through our gross margins going up, but the price isn’t affected by that.
- Interesting comment by the CEO that they have to balance product adoption from the start. They don’t want to overwhelm a new customer with too many products too early. They seek an equilibrium of 75% of new customer additions to have 2+ products.
CEO: …we’re going to land with 2 products or more in most of the situations. The first product is typically infrastructure monitoring. The second product is going to be logs or APM, sometimes both. The tension there for us is that we still aim at maximum velocity when we land a new logo, so we don’t want to complicate things too much by adding too many products too early. And we think that the number we shared, which is around 75% of our new logos with 2 or more products, I think is a good equilibrium for that.
- The infrastructure product tracks the S curve of workload adoption to the cloud closely, while the logging product gets ahead of the growth curve, and APM tracks the S curve but with a longer tail. Regardless of the intricacies here, I will just say I do like hearing about a company’s growth following S curves!
CEO: In terms of the growth curve and the adoption curve of those products…our growth compared to the transition to the cloud and the S-curve of workloads being moved from legacy IT to public and private cloud, our infrastructure product tracks that S-curve pretty closely. The moment a workload pops up in the cloud, we actually see it on the infrastructure monitoring side.
Our logging product actually gets a bit ahead of that growth curve because you can redirect logs very easily, so you can be lumpier in terms of who you – how the data is getting to us. And the APM tends to have a longer fuse, so it also tracks that S-curve, but it’s going to have slightly different parameters, going to have a longer tail because there’s more friction in actually instrumenting environments. For APM, you need to go application by application for doing that. So they have slightly different adoption curves there.
- An interesting explanation of the security opportunity for DDOG. There seems to be some inherent strengths in the go-to-market motion for leading with infrastructure and then adding security products on top of that.
There are lots and lots of security products out on the market, but the pain-point is that customers have a friction problem with actual deployment of security products. The CEO sees that operations personnel greatly outnumber security specialists, compounded by a security worker shortage that’s worse than the general tech staff shortage. Putting an entire organization’s operation + security resources, onto security, is better than only utilizing the security personnel. DDOG can implement security in a non-siloed manner: a “DevSecOps” approach.
CEO: there is a shortage of actual deployment, coverage and usage of [security] products, and that’s what we can actually give to our customers. We can deploy security without friction because we already are deployed in all those environments. We listen to the data everywhere, we listen to logs, we listen to network, we listen to the – we instrument the infrastructure, we instrument the application, we see what the end users are doing on top of that. So we have all that, meaning we can be deployed at a very low cost for our customers in terms of friction, in terms of the performance penalty they will pay for any additional instrumentation. And in terms of the data attacks, they would have to pay to send data to another place.
In addition to that, we also allow our customers to leverage their largest audience on the tech stack, which is developers and operations. In any enterprise, you’ll find that the operations folks outnumber the security folks by a factor of 10, and then definitely, maybe another 10 or 20x more developers than there are operations folks.…you need to bring to bear your whole organization, not just the very small team of specialists you have in security. And by the way, it’s impossible – it’s even harder to hire security folks than it is to hire engineers. There’s not enough of them, and we’re at a point today where very few companies outside of the largest enterprises, the hyperscalers and the top tech companies can actually attract and hire them.
- However, security is still a really early opportunity, the go-to-market details aren’t fully fleshed out yet. It was asked whether a security sales team will be needed. And they probably do, but don’t yet.
Analyst: Last question is on the one that – it’s a popular one, which is, are you going to have to build a specialist security sales team?
CEO: So the short answer exactly is we don’t know yet…a lot of the buyers in those additional teams we want to bring to the table sometimes speak a bit of a different language. So there might be a need for some level of specialization there or at least some rules that have specific experiences, speak a specific language. I don’t come from security. I don’t speak CESIL, for example, but I know many people do. So it’s one of the things that we might have to add.
- More emphasis on ‘low friction’ as the value that DDOG provides in its products. The analyst asked point blank why DDOG is just so much better at sales productivity than the competitors out there! DDOG just makes it smooth to use them, there’s no “professional services fee revenue” that we sometimes see in other companies’ sales motions.
CFO: It all goes to the low-friction selling that’s enabled by the platform. In this case, no professional services. Clients are exposed broadly to the platform, and as they see functionality, they can put their data in and use it. So a lot of the efficiency comes from clients being able to – not self-serve, but really, self-implement and use.
- The next question was why DDOG doesn’t bundle its products in terms of pricing. The answer was having clear separate products delivering value means you get immediate feedback about what provides value and what doesn’t for the customer. It puts the customer in control.
Bundling would also lead to a race to the bottom in “commoditization” of the products.
CEO: So we avoid bundling in general, and the reason for that is we think having clear SKUs for relatively small, discrete parts of our functionality actually gives us a lot of very clean signal from our customers in terms of what’s valuable and what’s not. Everybody loves your products until you start charging for them, and then you hear all the bad news about what they don’t do, what they should do better, et cetera, et cetera, et cetera…if you try to be solely a price disruptor, the cycle becomes what can you – what else can you take out so I can pay you less, and it ends up being a rest of the bottom in commoditization, which is not great.…The other benefit of unbundling is that it really allows us to put customers in control and let them align what they pay with the value they get. So they can choose, for every single piece of data send us, how much processing…how much functionality…allows them to really be fully in control.
- There was a bit of detail provided on the partnerships with the hyperscalers, but really, I just liked hearing this as it emphasizes how incredibly helpful it is to have co-selling motions with AWS, Azure etc upfront (like with SNOW)!
CEO: …we’ve been working with the cloud providers since the very beginning, and they pretty much invented the whole infrastructure we’re selling into. They’re all important in their own ways and a little bit different. Some of them are more – have more of a technical integration aspect, some others don’t. And I would say the customer base for the cloud providers are also a little bit different.
So for example, we have a lot more technical integration on the partnership with Microsoft than we have on some of the others, but that also corresponds to the fact that the customer base for Microsoft have to spend more time inside of the Microsoft UI itself than on the other cloud providers. So we adapt the partnerships to be what’s required for the specific customer bases there.
In general, what we see with those partnerships is that they tend to generalize and write down things that we’re already doing at the local level with some of these cloud providers. And so for example, with AWS, we signed a large strategic partnership last quarter and we already had a lot of the joint go-to-market motions going on in specific markets with specific teams. What this does is it helps us generalize that across many more teams.