DDOG Q3 2021 Fiscal Results -My Notes

DDOG Q3 2021 Fiscal Results
Analyst Q/A and Additional Remarks From Prepared Earnings Report
4:00 PM Central Time

Q Higher level product question re: hearing more about observability in 2021 than 2020. More
opportunities for growth of existing vs. new product?
A Long-term, yes, see new use cases. Today still remain focused on what they have as products now and
those that are in beta.

Q Usage and expansion trends are higher than pre-pandemic levels. Are you seeing longer-term
contracts?
A Two main trends underpinning success are the pace of cloud migration has come back. Newer products
are reaching scale and the combination of these two things is what has driven growth per CEO. About
1/3 of growth has been new product adoption per CFO.

Q Large renewal and penetration. What are drivers?
A Different for all customers.

Q Looking at billings growth, do you think you can quantify 10-20 point swing?
A 7 months +/- and then had contraction into the 6’s and now back to the 7-8 months billing duration.
Expanded RPO duration.

Q What factors contribute to revenue acceleration and what drove it?
A 2 main factors are resumption of cloud migration (we don’t control that) and 2nd is success of their
products that contribute to the revenue of the company. 3rd factor is demand environment is good and
they’ve successfully scaled their go to market sales teams.

Q Hyper-scalers of Azure, etc. How important is this?
A No drastic change from what they’ve seen in the past. Partnerships are perhaps more defined than
they were before. They are not the main way they go to market, however, they continue to invest in
them.

Q Existing customer growth. How much is their expansion and how much is adoption/expansion of the DDOG
products
A 1/3 has been expansion of their existing DDOG product use and 2/3 is landing of new DDOG products.

Q Where are you in sales capacity?
A Investing significantly in additional sales capacity. They continue to keep investing in this. No
big change.

Q How much influence did the large existing on-prem have on the existing client expansion?
A We probably will hear more about it on future calls.

Q Strength you saw on larger lands…At a higher level do you see this as the product set maturing or is
it organic?
A Product strength solves the customer’s product really well. With a product that is growing really
fast, you have to continue to acquire new customers. They’re always tweeking their incentives of
their go to market teams so they continue to land new customers and don’t just get revenue from
expansion.

Q What products and how does security play into this?
A Land with observability and eventually expand into security.

Q Technically, what are you adding that is enhancing revenue growth?
A The same way you can use a de-bugger on your laptop, this is technology that identifies issues within
the code. Something that allows developers to do this. Growing their team of engineers within
Israel.

Q Is there a way DDOG thinks about the 3 areas?
A 3 things that are very massive. There are very many more developers than others who influence their
sale. 2nd thing that is massive is ??__ and 3rd thing is data volumes that are increasingly
massive.

Q Numbers are accelerating. Is there any common theme in the numbers that is really driving
acceleration?
A 3 main Drivers are: Strong lands over a number of quarters, strong acceleration of budgets/spend by
customers and cross-selling with expanding to additional DDOG products.

Q Sales force: How are you addressing different buying centers? How is the sales force evolving from
people who sell 1 product to other DDOG products?
A With security, we think there may need to be training with this. However, adoption of the products
is frictionless, and they don’t need to land it all up-front, rather they can expand in the future as
the customer grows into use of the product and using what product when.

Q As your largest customers scale, are there changes and areas where you’re seeing pushback on specific
areas?
A The largest. Data loads are going to increase far faster than DDOG’s pricing and costs are going to
increase.

Q R&D is up more than 80%, can you give more detail on the decision to expand R&D? It’s obviously
paying-off.
A Very confident that platform lands are solving bigger problems. Important to go fast. There’s a
lead time between determining the problem and designing the solution.

Q You’re already growing faster than your biggest competitors. Are you seeing more standardization and
more displacement rather than selling into a greenfield?
A Depends on each customers’ cloud migration status. Legacy shops are going to be replaced. Majority
of their work is net new cloud deployment.

Q Are you seeing a mixture of new vs. competitor’s products?
A Anytime they land into a large enterprise, they’re going to have all their competitors. Eventually
DDOG will displace their competitors products as their customers grow and evolve into their
enterprise cloud migration. Do not expect much, perhaps a small amount of seasonality, but not a
significant amount.

Q Sales team readiness
A Feel good about it for now and will up the ante in the future as needed.

Q Looking at calendar 22, any changes or enhancements as you look at go to market in 2022? Are you
planning a sales force that focuses on mega-deals in the way Salesforce does?
A Definitely becoming one of the platforms they will standardize around vs. smaller customers who are
not implementing across their company/enterprise. There is some segmentation in this regard at DDOG,
but are still not looking at the very large deals. They land small and expand from there. Large
deals is not something they actively seek. Their product is very sticky.

CEO Remarks
Stronger than expected financial results per CEO
DBNRR is +130%
Record quarter of ARR and exceeded $1B in Q3
31% using +4 products
Whole platform saw strong growth in Q3,
Y/Y growth accelerated this quarter
Product and R&D:
40 new products announced in Q3
Advancing efforts to enhance service with customers who have large amounts of data
Online archives to store data in the cloud to re-trace what’s happened in the past.
Sales & Marketing:
Added net 1,001 new customers
Largest deal ever took place $60M multi-national customer
7 figure upsell with a large global customer
US based sports league is now a customer
7 figure land w/ a top 10 advertising company
Large 6 figure land w/ plumbing and building equipment company
Long-term opportunities
See video from recent investor day
Early days of this market
1 next step is in security offering expansion, in other words, we’re just getting started.

CFO Remarks
Growth of customers was robust
+130% DBNRR for 30th consecutive quarter
Significant renewals with existing customers
Record ARR adds in all of their major products
Geographical expansion in all of their geographies
New logo ARR was up strongly
Given usage basis cost model, lands and expansion do not immediately show up on their top line.
RPO was $719M, up 120% y/y
Current RPO growth was about 100% y/y
Gross profit of $210 M w/ 78% gross margin
Expect gross margin to increase next quarter, and remain approx… the same in the longer term.
Continue to plan for increased travel for sales and marketing teams.
Product innovation and frictionless land and expand model is driving strong efficiencies and sales growth.
Free cash flow margin of 21%

Guidance
Highly optimistic about the future
4th qtr expect 64% y/y revenue growth at the mid-point
$993-$995M revenue growth which is 65% y/y
Typically see growth leveling-out/stabilizing in 4th qtr, since many employees take vacation during the holidays.
Do not expect to pay taxes this year.
Continue to invest aggressively in R&D
Currently have 13 marketable products to sell.

Hope this is helpful information.
sjo

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Thanks sjo. Here are my notes, and take.

After Lightspeed, what a relief to listen to the Datadog conf call! I felt like singing after crying during the Lightspeed call.

If there is a company that should be valued highly, this is it.

The CEO is just exceptional. Olivier is so calm, in control and his answers are so well articulated. His answers to analyst questions literally sparkle to my ear.

There is nothing, seemingly, that is not accelerating. All products, all cohorts, all geographies and all parts of the business are running faster. And they are innovating like crazy too: they now have 13 products in GA, up from 11 a quarter ago. And their security offering - their act two - is nearing completion.

They are winning more, and larger customers. They added 190 new >$100k customers in the quarter - where 80% of their ARR comes from - up 12% qoq for the second consecutive quarter. What struck me also from the CEO’s customer win examples is the breadth of customers that they are winning and growing. Not just tech-savvy/new world customers, but old world. A US distributor of plumbing and building equipment. The advertising division of a Fortune 10 company. A US professional sports league. A fashion retailer in Asia. And their largest deal ever with a multinational financial company.

And of course the numbers all went up and to the right. And the commentary and trends seem to point to an even better Q4 coming up in 3 months’ time.

Revenue:

Revenue was $270.5m, up 16% qoq and 75% yoy. This was the fastest qoq growth in Q3 of the last 3 years.

The reason behind this growth was extremely broad-based, as articulated by the CEO:

Most strikingly, our whole platform saw strong growth in the third quarter. But in particular, that all of our major products added a record amount of ARR during the quarter, but also that the year-over-year growth of infrastructure monitoring ARR on its own accelerated this quarter. And finally that our log management and APM suite, which includes Synthetics, user monitoring and continuous profiler, remain in hyper growth mode.

And we saw strong growth across geographical regions, with all regions accelerated on a year-over-year basis compared to Q2.”

And in the Q&A he expanded on what was causing the acceleration:

“The two main factors really are the resumption of cloud migration to the speed it had before the pandemic, and that’s number one. And this one, we don’t fully control, right? I mean that’s something that is highly dependent on the business environment around us.
The second factor is the success of our new products and decide that we’re – we mentioned on the call, our APM and log products together reached more than $500 million in ARR. So not only are they growing very fast, like they say in hypergrowth but also they contribute quite a bit to the revenue of the company. And we have more products coming up after that, but are also going very fast. So this is the second factor.
The third factor is that on the back of that, like with all the demand environment being there and with us solving a larger and larger problem, we successfully scaled the go-to-market teams, so we can actually go after this opportunity. So combine all those three. That’s how you get the direct generation of growth, yes.”

So basically massive macro tailwinds, great product performance and innovation, and excellent sales & marketing performance.

Gross margin:

Gross margins were already excellent, up to 78% from 76% last Q. But the CFO had this to say about what to expect in Q4:

“Due to our continued efforts to drive efficiencies in cloud costs, we expect our gross margin to increase sequentially in Q4.

So gross margins will be better than 78% in Q4. Why would he call that out if it was just 1%pt? So I’m expecting something meaningful like GM moving to 80%, a level that they’ve only reached in 2 quarters previously since 2018.

Cash & FCF:

They ended the quarter with $1.5 billion in cash, cash equivalents and FCF margin was 21%, up from 18% in Q2. So they are really swimming in cash.

I wonder what they will do with that going forward? Up to now it’s only been tuck-in acquisitions. But they have the capital structure, share price and cash generation to do something really big if they wanted to.

Billings, RPO:

The CFO explicitly cautioned against looking at billings and RPO for business trends, but for me it is difficult not to read very good things to come from the combination of billings, RPO and current RPO trends.

  • Billings was up 98% yoy and 14% qoq (69% yoy in Q2)
  • RPO was up 127% yoy and 23% yoy (103% yoy and 26% qoq in Q2)
  • Current RPO was up 100% yoy (80% yoy in Q2)

From the Q&A:
“Billings duration was we had large – generally been in sort of the seven months plus or minus then we had, had some contraction when in COVID last year down into the sixes. And now we’re back up into that same range on billings duration that we had before in sort of the seven to eight months. The same thing happened in contract duration. Although the contract duration, we said was complemented by multiyear contracts, which expanded the RPO in this quarter, and maybe a bit unique in terms of the number of multiyear’s that happened this quarter.”

Underlying, even though the CFO said to rather look at revenue, this combination together with the strength in these metrics from Q2 makes for a picture pointing to acceleration ahead as all 3 metrics has grown a lot in the last 6 months.

What’s next in security:

CEO, from the Q&A:
“we’re getting to the point where soon we’ll have the full V1 of our cloud security platform. I think for that, we’re still missing the general availability of the application security component. Once we have that, I think we look into accelerating the go-to-market side a little bit and maybe doing some of the specialization we’ve been discussing earlier in this call, but we haven’t done that yet.”

The key word there for me is “soon”. They will soon have all the pieces for their security offering and then they will activate their GTM machine. Next quarter?

My analyst quotes of the call - Brent Hill of Jefferies:

“David, the numbers are obviously all accelerating. I guess, kind of underpinning the numbers, is there anything new you would call that was striking to you that you haven’t seen.”

Yun Kim, Loop Capital

“Oli, you’re already bigger than all your near-term or nearest competitors growing faster than all of them by a couple of magnitude.“

-WSM (Long DDOG)

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