DDOG Q2 2020 CC notes

Hi all,

My notes. Sure, its not ZM (probably). But I thought this quarter was very strong for them. They were impacted by the quarter, it wasn’t a COVID push like it was for ZM which is no surprise. Why would it be? COVID slowed a bunch of things down, software development is one of them. All of the big Cloud companies had lower growth as customers consolidated their cloud spend to conserve cash, and this slowdown impacted DDOG.

But definitely cannot complain about 68% growth. The company had mild upticks in expenses as % of revenue. They added less customers than maybe expected, but still a very strong quarter. No signs as far as I could see of any issue with the company. A ton of cash, FCF positive, strong cloud trends, some short-term headwinds.

Hopefully stock will plunge tomorrow and I can pick up some more.

cheers
Greg
ps. As always, post into https://dillinger.io for a pretty version

Q2 2020

7 Aug 2020

My thoughts

Checklist


Q: What is revenue doing yoy? A: 116%,109%,91%,83%,76%,82%, 87%, 68.2% - Q2 dropped a lot. They state that a lot
of enterprise companies were optimising cloud spend (getting rid of servers, containers etc). Sounds reasonable. A big
drop, but not in the context of the “unprecedentedness” of the quarter.

Q: What are customers doing q-1? A: Q319: +700, Q419: +1000, Q120: +1000 Q220: +600 {+8%, +10.5%, +10%, +5% q-1}
- big drop in growth, but to be expected. Nothing to worry about AFAICT.

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
Q220: $11,571 - pretty flat, which is good in the COVID environment.

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   | Q22020   |
|:--------|:-------|:-------|:-------|:-------|:-------|:-------|:---------|:---------|:---------|
| Revenue | 45,678 | 51,074 | 61,610 | 70,050 | 83,222 | 95,864 | $113,600 | $113,248 | $140,012 |
| R&D     | 12,426 | 14,159 | 17,720 | 22,815 | 24,032 | 28,684 | 31,600   | 40,824   | 45,664   |
|         | 27%    | 28%    | 29%    | 33%    | 29%    | 30%    | 28%      | 31%      | 33%      |
| S&M     | 19,335 | 25,130 | 29,102 | 30,107 | 36,118 | 38,836 | 39,300   | 45,215   | 51,269   |
|         | 42%    | 49%    | 47%    | 43%    | 43%    | 41%    | 35%      | 34%      | 37%      |
| G&A     | 4,344  | 4,322  | 5,623  | 7,840  | 6,088  | 9,265  | 10,400   | 14,952   | 13,547   |
|         | 10%    | 8%     | 9%     | 11%    | 7%     | 10%    | 9%       | 11%      | 10%      |

Not much change from previous quarter, revenue growth was subdued so expenses as % revenue ticked up.

Review

Another quarter of strong growth and efficiencies.

Cloud best path in long-term.

Revenue above high-end of guidance.

$100K+ = 75% ARR

DBNER >130%

FCF: $19m

New logo ARR grew

New customers additions matched Q1

All sizes and geos,

Anecdotes

7 figure upsell - large FinTech company. Consolidated on DataDog. >$1m savings.

European automotive company - Modernising on Azure. APM, NPM, Monitoring.

Large entertainment platform - $10m ARR. Increase investment in observability.

Leading asset manager - high 6 figure land.

6 figure upsell - social networking site. All 3 pillars, including Synthetics, Rum.

68% of customers using 2+ products vs 40% yoy

75% new logos landed with 2+ products

15% using 4+ products vs 0 last year {GD: maybe they didnt have 4 products?}

Pleased with uptake of new products: Synthetics, RUM, NPM, Security.

Winning in the market, Cloud native. Cloud, ephemeral architectures more important now.

Macro-environment, impact of growth of customers cloud usage. Rate of growth below previous growth. Mostly amongst
customers with large cloud environments. Customers conserving cash by reducing/optimising cloud spend.

Smaller customers and larger customers that are earlier in Cloud journey continued to grow strongly.

This optimisation is pretty normal, but unusual in that lots of customers doing it at the same time.

July update - notable improvement in usage growth vs Q2.

“Remain prudently conservative in outlook”

We have both subscription and usage-based revenue model.

R&D

Significant investments

Many new opportunities

Private locations fo Synthetics - internal apps

Undefined Labs acquisition - CI/CD.

DataDog mobile app

Amazon Kenesis

IoT Agent

AWS, HaloCast, Apache Ignite…

  • FedRamp approval

Approach

  1. New products
  2. Hire rapidly
  3. Aggressively expanding go-to-market

Customers


|              | Customers |               | >$100k ARR |               | >$1m |    |    |
|:-------------|:----------|:--------------|:-----------|:--------------|:-----|:---|:---|
| Q2 2020      | 12,100    | +600 +37% yoy | 1015       | +72% yoy      |      |    |    |
| 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    | $140m          | +68%yoy | Strong new logos. Enterprise and commercial.                                                 |
| DBNRR      | >130%          |         | Growth of new logo ARR. NRR declined from Q1                                                 |
|            |                |         | Existing customers grew, but below previous levels.                                          |
|            |                |         | Did see normalisation of spiked usage in Q1. March - some customers scaled rapidly in COVID. |
|            |                |         | Some optimised usage over next few months as things normalised.                              |
|            |                |         | Some COVID customers reduced usage (<10% ARR). Others increased.                             |
|            |                |         | Churn _a bit elevated_ but less than expected.                                               |
| DBGRR      | low to mid 90s |         |                                                                                              |
| Billings   | 160.1m         | +62%    | No material change in payment terms. Some slight shortening in duration.                     |
| RPO        | 287m           | +53%    | Billings and RPO can have timing variability.                                                |
| NonGAAP GP | $111.8m        |         |                                                                                              |
| NonGAAP GM | 80%            |         | 75% y-1. 80% q-1                                                                             |
| R&D        | $38.3m         |         | 27% of revenue vs 30% yoy. Growth of revenue continues to outpace R&D spend.                 |
| S&M        | $45.7m         |         | 33% vs 42% y-1. No in-person trade shows or marketing events. Redeployed most to lead-gen.   |
| G&A        | $12.5%         |         | 9% inline y-1.                                                                               |
| OpIncome   | $15.3m         |         |                                                                                              |
| OpMargin   | 11%            |         | vs -$5m, -7%.                                                                                |
| NetIncome  | $17.5m         |         | Doesnt include payroll tax benefit.                                                          |
| Shares     | 331m           |         |                                                                                              |
| Cash       | $1.5b          |         | Includes $641m from convertible note issuance.                                               |
| CFO        | $24.7m         |         |                                                                                              |
| FCF        | $18.6m         |         |                                                                                              |
| FCF margin | 13%            |         | 4.4m outflow of ESP                                                                          |
| DBNER      |                |         |                                                                                              |

Priority remains top-line growth.

Guidance

  1. Hard comps with accelerated growth rates in 2nd half 2019
  2. Running towards top-end gross margins target. Gross margins may fluctuate.
  3. Investing meaningfully. Not changed plans re: COVID

|                           | Q3            |      | FY 2020        |          |                       |
|:--------------------------|:--------------|:-----|:---------------|:---------|:----------------------|
| Q3 Revenue                | $143 to $145m | +50% | $566m to $572m | +57% yoy | previously $535-$545m |
| Non-GAAP operating income | -$1m to $1m   |      | $28m to $34m   |          |                       |
| Income/share              | -$0 to $0.01  |      | $0.11 to $0.13 |          |                       |
| WA Diluted Shares         | 333m          |      | 332m           |          |                       |
| Other income              | $2.4m         |      |                |          |                       |

Believe current environment to be a catalyst. Highly efficient business model, investing across business.

“Very pleasesd with execution. Macro = near term uncertainties. Transition to cloud will continue, Datadog ideally
placed”

Question-and-Answer Session

  • Primary factor - large customers with large cloud deployments. Why temporary pause? Something we’ve seen before, ramp
    up consumption, bills going up, optimise… everyone had same ‘optimise’ at same time, save cash. Good thing about
    cloud = opex. Hard to tell in near-term. (New) Companies are moving to cloud. Optimise is “save on AWS/Azure etc”,
    remove apps = lower Datadog usage, after few weeks start going again.
  • Guidance - Q3 = 50%, Q4 = 40%. Assumptions under guidance, usage trends. Fairly prudent with guidance, particularly
    with COVID. Strong cross-sell, continued adoption of the platform. We saw more variable usage, so more prudent.
  • Pricing - competitors have free tiers etc. Careful about pricing, don’t change by user. Want customers to align value
    to pricing. Differentiated pricing across platform. Happy with pricing now. But will probably evolve in the future.
    When you’re only tool is pricing, thats bad news.
  • Trends by customer segment, churn, NRR etc. Surprises - stable churn. All metrics in 90s. Enterprise higher, SMB
    lower. NRR come down at the larger end, but all in same bands since going public.
  • Macro impacts, slower usage of customers. Any evidence of supplementing with other tools. No - they’re slowing usage
    of cloud, less containers, instance etc. Normally we grow with them, now, their growth slowed, so ours did to. We
    saw acceleration of growth again into July
    . But remaining prudent.
  • Ramping of new sales resources. No changes. Works really well, record new logos, new product attach. When we set
    expectation eg: NRR don’t fully control this number. Impacted by rate customers transition and expand to the cloud
    Early in the transition to the Cloud.
  • Recent attach rates of APM, Log. Still growing faster? Both in hyper-growth, no real change. Other smaller products
    growing very quickly. Attach rates - very similar to previous. Continue to have increasing numbers using platforms.
    Additional spending growing in hypergrowth. Product demand signs very strong. One thing detractor - passive
    consumption.
  • Competitors pricing change, implications ({GD: NewRelic? Elastic?}). Don’t see major impact. Mostly greenfield. No
    problem with product adoption little by little. Customers can adopt as little as they want. Don’t see much change.
  • Slowing usage in the public cloud. AWS, Azure report numbers before you. AWS growth slowed, Azure slowed.
    Directionally related to those {GD: pay attention}. Don’t correlate exactly, but there is some. MORE. We are
    growing a lot faster than the cloud providers.
  • One offset, consumption of usage - not much to be done. Product updates - incentivising upselling or cross-selling, or
    just riding COVID out. No, didn’t change anything. Digital transition to cloud not going to stop.
  • Linearity in Quarter. Little bit different, early April consistent in Q1, in new logos. End of april, may much lower
    growth. Growth going up in June, and July. A lot noisier, used to consistency month-to-month. Can’t tell if we’ll see
    return to previous normal.
  • Security monitoring - 3 months availability. Still super-early product. Some very focused use-cases for specific types
    of customers. Excited, lot to do.
  • Billings - Difficult comps with significant contracts signed in 2019. RPO multi-year contracts a quarter ago. {GD:
    didnt get this}
  • Issues with 3Q re: difficult comps 2019. Nothing to point out.
  • Go To Market strategy - running into new personas in orgs? Any change in go-to-market? Bulk of portfolio the same.
    Security seeing some different buyers. We’re monitoring, but will get more data, and see how we go.
  • Opportunity private locations for synthetic monitoring. On-premise applications. Allows customers to put probes inside
    their own networks {GD: ship to Datadog, or running Datadog on-prem? Challenging ESTC?}. Verify APIs, internal
    networks, cable providers etc. “Opens a whole range of possibilities for them”.
  • Launch formal partner network in January. Early interest? How important? Fairly recent, great uptake. Making sure we
    have right processes in place. Seen some interesting outputs, closed some big deals. Can focus on partners with
    opportunities now.
  • International performance. Continuing to build out regions once critical mass of sales team. Asia, EMEA, Latin
    america. Good performance in EMEA, earlier in Asia. Pandemic hitting different parts of world at different times.
  • Undefined acquistion - opportunity? CI/CD monitoring. We haven’t done been used here before. Gets us closer to the
    developer, extremely high flexiblity information, all the way from code commit to production. Integrating to datadog
    platform.
  • How does this economy feel? Thought we’d see more churn, didn’t see it. Retrospect makes sense, predicting is hard.
    Super confident about where we are, product, customers adoption, bit more careful about what will happen over next
    few quarters
    .
  • Increased level of cloud optimisation, impact on pace of multi-cloud adoption? Don’t think so. Mostly impact the cloud
    of scale (ie, multi-cloud = one cloud of scale and a smaller cloud).
  • growth of RPO decelerated quite a bit yoy, said annual contract billing remain strong. Current RPO growth similar to
    billings, closer to revenue in 60%s. Difference is timing of multi-year contracts in second quarter of last year.
    Billing period didn’t change. Contract duration down slightly because of those contracts being consumed. Current RPO
    much more aligned with billings and revenue.
73 Likes