DDOG Q1 2020 CC notes

Hi all

my notes from the CC. As far as I can see, it would be difficult to ask for a better quarter. Apart from minor “some possible negative impact expected Q2/Q3” comments, there were few signs of any COVID headwinds. They’re enthusiastic going forward, happy to take advantage of the hiring market.

Following similar statements from MSFT, talk about how “customers are very early in their transition to the cloud”.

Only real question is valuation, with a forward EV/S of about 35ish which is a bunch, but hard to find any quibble in execution.

The thesis is “if the move to the cloud is early and inevitable, you need Datadog or some alternative”. And if its early in the cloud journey, then the runway for Datadog (and others) is likely long(er) and large(r) than we might expect.

cheers
Greg
ps. as always should be able to copy/paste in to https://dillinger.io to get a pretty version

Q1 2020

12 May 2020

Checklist


Q: What is revenue doing yoy?
A: 116%,109%,91%,83%,76%,82%, 87% - excellent

Q: What are customers doing q-1?
A: Q319: +700, Q419: +1000, Q120: +1000 {+8%, +10.5%, +10% q-1} - excellent

Q: DBNER?
A: >130% - really good

Q: Revenue per customer up or down (either revenue/customers or ARR)?
A: Q3: $10,091 Q419: $10,819 Q120: $11,413 - continuing to increase excellent sign.

Q: Expenses as percent of revenue going up or down (ie, any sign of leverage)?
A: Expenses as percent of revenue:


|         | Q2     | Q3     | Q4     | Q1 19  | Q2     | Q3     | Q4       | Q12020   |
|:--------|:-------|:-------|:-------|:-------|:-------|:-------|:---------|:---------|
| Revenue | 45,678 | 51,074 | 61,610 | 70,050 | 83,222 | 95,864 | $113,600 | $113,248 |
| R&D     | 12,426 | 14,159 | 17,720 | 22,815 | 24,032 | 28,684 | 31,600   | 40,824   |
|         | 27%    | 28%    | 29%    | 33%    | 29%    | 30%    | 28%      | 31%      |
| S&M     | 19,335 | 25,130 | 29,102 | 30,107 | 36,118 | 38,836 | 39,300   | 45,215   |
|         | 42%    | 49%    | 47%    | 43%    | 43%    | 41%    | 35%      | 34%      |
| G&A     | 4,344  | 4,322  | 5,623  | 7,840  | 6,088  | 9,265  | 10,400   | 14,952   |
|         | 10%    | 8%     | 9%     | 11%    | 7%     | 10%    | 9%       | 11%      |

is looking like a well-controlled business, their explanation was revenue accelerated faster than expected, so operating costs as a percent of revenue was down.

Review

COVID impact - “no material impact”

  1. Diverse customer base. <10% from impacted industries.
  2. Great diversity of customer sizes - 75% >100k
  3. Customer footprint
  4. Low friction land and expand - sales effort less dependent on physical meetings
  5. Pure SaaS - no hands on implementation

Some negative impact in impacted industries. Surge from other industries (gaming etc).
Strong end of quarter

Robust pipeline - too early to know impact of COVID in Q2

  • Some impact on churn
  • Some delay in new cloud implementations

“More important than ever to operate online”
“Well positioned to be a primary beneficiary”

“Investing across the board… taking advantage of talent not normally on the market”

“Very confident in mid-long term strategy”

Broad-based expansion in the quarter, verticals and geographies.

Products

Security-monitoring product - available in same platform “pleased with response”
400+ integrations incl. XXX and VMWare Carbon Black
63% using 2+ products
75% new logos landed with 2+ products

Goto market

Successfully adapted to phone/video selling
Virtual conference in Q3

Anecdotes

F100 pharma - new logo 7 figures migrating to container-based hybrid cloud.
Health insurance company new logo - “6 figure deal” - partnership with one of worlds largest SIs - DDOG partner network.
Mid-market logistic upsell - now >$1m. Incl. Synthetics, NPM and Security. Dramatically increased demand with COVID.
“One of the worlds largest financial institutions” - 6-figure upsell. Migrate “thousands” of apps with Datadog as standard across multiple public and private clouds. Extremely stringent security requirements adoption of serverless monitoring {GD: something ESTC doesn’t do very well at all}.


|              | Customers |       | >$100k ARR |               | >$1m |    |    |
|:-------------|:----------|:------|:-----------|:--------------|:-----|:---|:---|
| Q1 2020      | 11,500    | +1000 | 960        | +89%          |      |    |    |
| Q4 2019      | 10,500    | +1000 | 858        | +130 +89% yoy | 50   |    |    |
| Q3 2019      | 9,500     | +700  | 725        | +135          |      |    |    |
| Jun 30, 2019 | 8,800     | +1100 | 590        | +140          |      |    | 2Q |
| Dec 31 2018  | 7,700     | +2300 | 450        | +210          | 29   |    | 1Y |
| Dec 31 2017  | 5,400     | +1600 | 240        | +110          | 12   |    | 1Y |
| Dec 31 2016  | 3,800     |       | 130        |               |      |    |    |

Finances


|            |         |             |                                                                     |
|:-----------|:--------|:------------|:--------------------------------------------------------------------|
| Revenue    | $131.2m | +87% yoy    |                                                                     |
| Billings   | $137.9m | +55% yoy    | 2 dynamics - payment terms shortening, customers changing terms     |
|            |         |             | +$10m in quarter. Smaller impact from invoice timing for 1 customer |
|            |         |             | $4m last year, but not this year. Normalised: **+70% yoy**          |
| RPO        | $256m   | +82%        | "Commitments" - increases in longer-term commitments                |
| NonGAAP GP | $105.2m |             |                                                                     |
| NonGAAP GM | 80%     |             | vs 78% q-1 73% yoy. Efficient use of cloud. May fluctuate q to q.   |
| R&D        | $35m    | 37% revenue | High growth in Engineering headcount.                               |
| S&M        | $42.1m  | 32% revenue | vs 42% yoy - redeployed events budget to advertising                |
| G&A        | $12m    | 12% revenue | vs 10                                                               |
| OpIncome   | $16.1   |             | MORE                                                                |
| OpMargin   | 12%     |             | vs -10% yoy.                                                        |
| NetIncome  | $18.8m  |             | $0.06/share.                                                        |
| Shares     | 328m    |             |                                                                     |
| Cash       | $799m   |             |                                                                     |
| CFO        | $24.3m  |             |                                                                     |
| FCF        | $19.3m  |             | Minimal capexp - super impressive given high gross margin           |
| FCF margin | 15%     |             |                                                                     |
| DBNER      | >130%   |             | 11th consecutive quarter                                            |

NPM and RUM - “immaterial”
Broad-based, strength across segments (enterprise, mid-market, SMB). Strong land, strong expand.
“Many large enterprise deals closed in March”
Discourage billings usage - revenue better indicator as based on consumption.
Priority remains top-line growth.
Investing across the board.

Guidance

Expect some deal slippage, particularly new logos
Some impact in retention rate

  • Mostly likely in Q2-Q3
    Shorter billing duration likely to continue as customers planning for cashflow.
    Gross margin - running to top of long-term target - may fluctuate.
    Intention - invest meaningfully in S&M & R&D.
    Q2 - $5.5m tax adjustment from expired payroll tax liability (non-cash). Benefit to GAAP operating income {GD: so they had a potential liability, now they don’t, and it adds to GAAP income? Huh? They’re normalising this in non-GAAP income but seems a dumb GAAP thing.}
    $2m interest income
    $3m inflow from ESPP into CFO in both Q4 and Q1 {GD: employees buying shares?}. New ESPP program inflows ($2m to $3m) in Q2.
    Pressure on billings and DSOs in the near-term. No impact on liquidity.

|                           |                |          |                       |
|:--------------------------|:---------------|:---------|:----------------------|
| Q2 Revenue                | $134 to $136m  | +62%     |                       |
| Non-GAAP operating income | -$1m to $1m    |          |                       |
| Income/share              | -$0 to $0.01   |          |                       |
| Shares                    | 329m           |          |                       |
| FY 2020                   |                |          |                       |
| Revenue                   | $555m to $565m | +54% yoy | previously $535-$545m |
| Non-GAAP operating loss   | $0m to +$10m   |          |                       |
| Income per share          | $0.02 to $0.06 |          |                       |
| Shares                    | 330m           |          |                       |

Question-and-Answer Session

  1. March/April - unsure whats going to normalise. Too early to tell, so prudent in estimating. So far, a lot more reliance on online, cloud scale, more investment there.
  2. All pillars in place - where will product portfolio go? Beyond monitoring/alerting. APM/Logs in hypergrowth, Synthetics growing very fast, a lot of investment into all of these products. Security - very very early. Internal development going on - not going to say.
  3. Phenomenal results - some impact from delay in projects. Acceleration in transformation. Digital parts scaling like crazy (particularly for those 50/50 digital/bricks and mortar). However, difficult for companies to transform when companies in trouble. So short-term uncertainty, but underlying trends cloud/digital transformation strong.
  4. Convergence trend - benefits there, cross-sell motion? Appealing to customers before COVID, and appealing now. No data to date. But its our strategy that we’ve been building towards.
  5. Net new ARR - how much from CIO, high-level, complex transactions. We’re bottom-up selling. Start small, even for deals that end up large.
  6. Mix - infra, APM, logging. All growing, infrastructure alone “one of the best SaaS companies around”. APM, Logs in hypergrowth. Synthetics growing much faster than we thought, pleased with NPM but not material (higher friction, but long runway). Some adoption of RUM (only started charging for a portion in March). Security not charging for (Q2).

Net retention trends very consistent. Usage and cross-sell contributing.

  1. Net retention - more churn in SMB. ARR split evenly SMB & enterprise. Most SMB revenue is from larger customers so financially strong. <50% revenue from smaller (<100 employees) customers. SMB very diverse, less exposed to risk from COVID. Havent seen big change in trends, tiny uptick in churn, and increased in net retention. So nothing. Guessing SMB sees more churn.
  2. Billings mix - 2/3 ARR from annual+ commitments. 3/4 of billings annual+ commitments. Average length of commitment increased, which increased RPO. Average billing period came in {GD: as customers shifted from annual to shorter payment terms as renewals come due, or renegotiation? - managing cashflow. nb: not reducing the contract length, just changing payment terms}.
  3. End of Q1 slipped from COVID. Several closed now. Q1 slippage not out of ordinary. Anticipate some effects, but no data. Usage patterns - changed because of COVID → less predictability. Due anticipate some impact - “weird if that didn’t happen”. Nothing that concerns us right now.
  4. Pipeline remains consistent, but can’t predict lands. We’re less dependent because we land small and expand. Main request - some modest “can you chunk our bills up a bit”. Not significant percentage of ARR
  5. RPO +82% “strong by any way you look at it”. Higher than pro-forma billing due to longer contract commitment duration.
  6. Ability to sell 2+ products - examples. Big deals migrating? G2K logs and APM - when we start, don’t replace on-prem. We’re in cloud world, net new products. Very early in growth, because customers are very early in migration to Cloud. {GD: so long runway}.
  7. Churn - don’t sell by seat, some SMEs might contract infrastructure. Most cases they need to keep it up. “Don’t know if churn will come”. Assuming some small businesses will disappear, and some larger businesses might need help. Some impact will happen, because we’re very broad-based. New logo addition, lower retention rates implied in the guidance.
  8. Security - very happy. Some customers adopted at scale, super-early with feature set, goto market. A lot more investment and time to get to interesting scale.
  9. Tracking to original plan pre: COVID. Some change in office management, events. “A great time to be hiring”. Might take a bit longer for investments to pay off.
  10. Customers asking to chunk payment - try to extend contracts, some discussion around products. We care about keeping clients, growing with them. Case-by-case, spirit of partnership {GD: David sounded a bit mercenary here, Olivier came in to make “helping out” statement}
  11. Vertical exposure - <10% in most exposed, travel, hospitality, dining… Exposure to benefits, WFH, food delivery etc. Diversified customer base.
  12. No difference in (sales) conversations. Some scrutiny on spending, so different payment terms discussions. Some customers in very impacted industries reaching out because less happening day-to-day for them. In general, too early to know impact.
  13. Products - Security, so far so good. Adoption from both sides, Devops and Security - what we’re shooting for. Early.
  14. Pricing - “you’re viewed as most attractive out there”. Does it come up? Differentiation through product not pricing, but disaggregated pricing so “customers can align the price paid with value received” {GD: ie, you pay for the bits you want}. Haven’t seen any changes (in pricing environment). One thing might be an advantage, start small and grow. So not predicated on large deals, customers can manage cash.
  15. Comparison to 2008 - don’t really know where they’re (recessions) going until they’re over. Everything we can tell is everything is still working, drivers still working. But grow 80%+ needs every single cylinder firing, COVID must impact those cylinders.
  16. RPO growth - in same ballpark as revenue - reasonable way to think about it? Extension of average contract - some companies extending out 2-3 years. Will bounce around based on contract renewals etc.
  17. NPM, RUM - displacement or greenfields - how big is that opportunity? Vast majority net new cloud environment. Charging aligned with other products, based on usage.
  18. International trends - No change. Some success in all regions. Closed new logo with large enterprises in Italy.
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excellent again GD. i like the historical tables, and that Dillinger markdown viewer makes them look purdy.

but a minor tech quibble…

adoption of serverless monitoring {GD: something ESTC doesn’t do very well at all}.

Not sure why you think that about ESTC. Elastic absolutely handles serverless monitoring and handles it well, with their Functionbeat component in the Beats product. It’s been GA for about a year now.
https://www.elastic.co/beats/functionbeat

Datadog’s serverless solution came a few months later, in June of last year.

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