DDOG Q4 2020 Earnings Summary

tldr - This was another great quarter. DDOG seems to be back on track with pre-pandemic levels, as comes up multiple times in the quarterly report.

Of note, they are innovating. In just a few years, they have gone from only one generally available product to nine available products. And customers are adapting said products, further juicing margins and adding to DDOG’s moat. And from a sales perspective, they continue to add large numbers of customers, both SMB’s as well as enterprise level.

The only concern in the report is the weaker guidance, but all signs seem to point towards it just being conservative management. They know it’s embarrassing to miss guidance and are just playing it safe.

Here are the notes:

We ended the year with 2,185 employees globally, a 56% increase year-over-year with high growth of both our go-to-market and R&D teams.

To summarize Q4 at a high level, revenue was $178 million, an increase of 56% year-over-year and above the high end of our guidance range.We also ended the year with 97 customers with an ARR of $1 million or more, almost double the 50 last year and more than three times of 29 we had just two years ago. We ended the year with 1,253 customers with an ARR of $100,000 or more up from 858 last year. These customers generated about 75% of our ARR.

We have about 14,200 customers, up from about 10,500 last year, which means we added about 1,100 customers in the quarter, making it another strong quarter of ads after the 1,000 we added in Q3.
We also continued to be capital efficient with free cash flow of $70 million. As in past quarters, our dollar based net retention rate was over 130% as customers increased their usage and adopted our newer products.
For the full-year, we generated revenue of $603 million, a 66% increase year-over-year, which was above the high end of our guidance and free cash flow was $83 million or a margin of 14% for the year.

Growth of existing customers was robust, as customers of all sizes continued to grow the usage of Datadog through both increased consumption and cross-selling and Q4’s growth of existing customers was broadly in line with pre-COVID trends. Lastly, churn remains very low and consistent with pre-pandemic historical rates.

Next, our platform strategy continues to resonate and win in the market. As of the end of Q4, 72% of customers are using two or more products, which is up from 58% last year. Additionally 22% of customers are using four or more products, which is up from only 10% a year ago, and we have another quarter in which approximately 75% of new logos landed with two or more products.

We are very happy with our platform traction including uptake of the newest products, NPM RUM and security, each of which has reached hundreds or thousands of customers in a short amount of time.

we announced an agreement to acquire Sqreen, a SaaS-based security platform that enables enterprises to detect, block and respond to application-level attacks.

Sqreen’s technology provides runtime application self-protection or RASP, and in-app web application firewall also known as WAF and is already used by hundreds of companies today. Security issue in the application layer are complex to solve because application security causes lines of responsibility between dev, ops and security teams. As a result, we believe this will be a powerful combination for our customers using APM or Synthetics.
ExponentialDave: anecdotally I have personally seen this blurring of responsibility at a past company between engineering and security teams - it is indeed a real problem.

we also announced the acquisition of Timber Technologies, the developers of Vector, a vendor-agnostic and high-performance observability data pipeline. With Vector, customers can collect enrich and transform logs and other signals across multiple tools and data sources in both on-premise and cloud environments and then routes this data to the destination of their choice

Beyond the acquisition, we had a number of new developments in Q4. We launched the general availability of incident management which allows users to declare incidents, investigate root cause and collaborate without leaving Datadog. And we also delivered more than 60 other new capabilities and features across our products including new and enhanced integrations such as Snowflake oracle Cloud or vulnerability analysis marrying Snyk with our brand-new Continuous Profiler.

Now taking a step back. We exit 2020 with nine generally available product. To put this in context, just four years ago, we had only one product. And we have been able to build the most complete, integrated and cloud-native observability platform because of our founding as an integrated – integration platform that is extensible to new use cases.

Looking forward to 2021, we continue to feel that we’re just getting started. First, we are doubling down on building out our platform for observability. This core market alone is a very large opportunity and is growing quickly with the replatforming to cloud architectures. We’re still early in this transition and are aggressively adding functionality to both the new SKUs as well as the more mature products.

Second, we are just getting started in security with our first product launch in 2020. We consider security a very large opportunity with a long runway of planned product development, and we envision the silos between dev, sec and ops breaking down in a similar way to what we have seen between dev and ops.

Third, we are investing in the platform and ecosystem. In addition to building up the Datadog Marketplace, we now have strategic partnerships with all of the major cloud vendors.

For example, we announced the expansion of our partnership with Azure and GCP last quarter which should be in the market in 2021. We are also introducing new cloud instances in regions such as GovCloud. Our goal is to gain distribution across vendors and regions and meet customers where they are to lower friction to adoption and to lower time to value

Revenue was $177.5 million, up 56% year over year against the challenging year-ago comp.

New logo generation was very strong. Usage trends were solid. Platform traction continued to be strong, and churn was in line to better than historical norms.

Remember that given our usage-based revenue model, new logo wins generally do not immediately translate into any revenue. Growth of existing customers was robust, and our dollar-based net retention remained above 130% for the 14th consecutive quarter.

We are pleased with the usage growth of existing customers which showed continued adoption of our platform and their cloud migration even in the face of the macro pressures. To go into a little more detail, growth of existing customers was broadly in line with long-term trends and meaningfully better than the level experienced in Q2 of last year. As a reminder, even though we have now experienced two quarters of usage growth that was approximately in line with pre-pandemic levels, Q2 was meaningfully pressured, and that pressure will impact our year-over-year metrics including revenue growth and net retention until we lap that compare. Next, in the fourth quarter, we saw continued strength of our platform strategy with over 70% of our customers using two or more products and 22% of our customers now using four or more products, up from only 10% a year ago.

Our dollar-based gross retention rate has remained largely unchanged in the low to mid-90s.

Now turning to billings which were $219.4 million, up 68% year over year. After adjusting for the timing of $6 million of billings in last year’s fourth quarter, pro forma billings growth was 61% year over year, strong and approximately in line with revenue growth. Remaining performance obligations or RPO, was $434 million, up 78% year over year

Gross profit in the quarter was $137.6 million, representing a gross margin of 78%. This compares to a gross margin of 79% last quarter and 78% in the year-ago period.

The slight decrease in gross margin sequentially is due to minor inefficiencies created from our investments in product and platform innovation. As a reminder, our gross margins may fluctuate quarter to quarter within an acceptable range as we prioritize product development and innovation as well as the build-out of our cloud data centers in newer geographies. R&D expense was $53.5 million or 30% of revenues compared to 27% in the year-ago quarter. We have continued to invest significantly in R&D including high growth of our engineering head count which was – which we added approximately 370 net R&D heads over the course of 2020.

Sales and marketing expense was $52.5 million or 30% of revenues compared to 35% in the year-ago period. Similar to R&D, we continued to make substantial investments in sales and marketing, but the pace of revenue growth has outpassed that investment.

G&A expense was $13.5 million or 8% of revenues, slightly lower than the 9% in the year-ago quarter, and operating income was $18.1 million or 10% operating margin compared to an operating income of $7.9 million with a 7% margin in the year-ago period.

Non-GAAP net income in the quarter was $19.1 million or $0.06 per share based on a 334 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $1.5 billion in cash, cash equivalents, restricted cash and marketable securities. Cash flow from operations was $23.8 million in the quarter.

After taking into consider capital expenditures and capitalized software, free cash flow was $16.7 million for a margin of 9%. For the full year, free cash flow was $83.2 million or 14% margin

Beginning with the first quarter, we expect revenue to be in the range of $185 million to $187 million which represents a year-over-year growth of 42% at the midpoint. Non-GAAP operating income is expected to be in the range of $8 million to $10 million, and non-GAAP net income per share is expected to be $0.02 to $0.03 per share based on approximately 345 million weighted average diluted shares. For the full year, revenue is expected to be in the range of $825 million to $835 million which represents 38% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $35 million to $45 million, and non-GAAP net income per share is expected to be in the range of $0.10 to $0.14 per share based on approximately 348 million weighted average diluted shares.

Additionally, our model assumes a return to the office and a resumption of travel and in-person events in the second half of the year. We have limited visibility presently on these topics but believe it’s prudent to incorporate that in our outlook.


First, I just want to quickly get an update on the headwinds you’re seeing at the top line from the lower expansion you saw last summer.
It seems like those trends have largely turned around, and we should expect another quarter or two to kind of work through those impacts. I guess my question is, as we get into the back half of next year and the growth comps become easier, should we be expecting the combination of easier growth comps and ramping kind of products and partnerships with like Azure to result in an acceleration of growth? Is that an appropriate way for us to be thinking about it?

David Obstler – Chief Financial Officer
I think that we’ve – given our guidance taking into account all of the potential upsides and risk. But you are right. The headwinds created in Q2 do create a drag on the revenue growth as we talked about through Q2 of next year. And while we are not providing that quarterly guidance through next year, we expect of that headwind in terms of the comp to abate in the second half of the year.

And I guess my question on Sqreen is kind of how does this integrate with the core Datadog platform. How does it work with core Datadog versus being a stand-alone functionality? And then on the Timber purchase, what’s the need for an observability data pipeline in the platform? Can you help us kind of better understand what Timber’s bringing to Datadog and the platform and why customers really need this functionality?

  • on the Sqreen side, what’s really interesting is the focus is application security. And application security is one of the areas where the conflict I would say between applications and there basically, ops and security is the most present and the responsibilities are not really clear-cut in there.
    And we think it’s one area where we can show particular strength because our APM is already deployed. It’s already in the heart of the application, and we can inject the security protection and detection in there directly. So we think this is a product will make a lot of sense to our customers that are using APM, and that’s going to be deployed the same way basically. So that’s for Sqreen.

For Timber and Vector which is the product, what’s really interesting there is we hear and we see from customers over and over again that they have a number of different data sources that produce logs in particular but also other kinds of observability data. And many of those sources, our legacy systems, log management systems, for example, and one thing they want to be able to do is to aggregate all that data before it leaves their own network environment, make sure they have the right privacy controls on them, so they can filter PII, for example, and things like that and then decide to route this data to us, for example, like to a cloud service but also maybe to other places, maybe to an archive they want to keep in-house. So what we think this will allow us to do is to satisfy that need from customers, make sure they are fully in control of the observability data and make it a lot easier for customers to, in the end, send us all the data that is relevant to them.

Chris Merlin

I wanted to ask about new land. I think you called out that 75% of those lands are with two or more products.
So beyond infrastructure, can you give us a sense of where you’re seeing the strongest traction more recently with the rest of your suite? Thanks.

Olivier Pomel – Co-Founder and Chief Executive Officer
It’s easy. It’s pretty much in the order of introduction of the products. So the most mature behind that are APM and logs that are I would say neck and neck in terms of which are the other ones that are getting attached first. And then you go one step down to Synthetics, and then you go one step down to NPM and RUM, and then you go down to Security.
And so that’s the order which by the way I think, is a question we might get later, but we’re planning to invest a lot more because we see so much success with that platform approach. We see all these products have a pretty interesting growth curve. And we think there’s a lot more problem space for us to cover which is why we are aggressively building a team and hiring, and we’re also proceeding to do these acquisitions.

Chris Mersin:I f we look at billings, I mean, on a pro forma basis, I think you said it was up 61% RPO, CRPO was up in the mid-60s, but then the revenue guide for '21 is in the high 30s.
So I realize billings aren’t going to factor in usage. But can you help us think about how to reconcile the really strong billings growth we saw exiting '20 and with the revenue growth guide for '21? Thanks.
David Obstler – Chief Financial Officer
Yeah. I think we had a strong new logo. We also had, as we mentioned, an extension of the duration of billings and contracts from our clients. So those were some of the factors that caused the strong performance.

We try to get everyone sort of back to the revenue growth and then the linearity within the quarter which one can look at ARR because of the variabilities in billing and RPO due to billings, but we did have strong new sales as well as the extension of duration in the quarter, as we mentioned which contributed to that performance.

RASP is a newer area. And what I’m curious is do you need a dedicated security sales force to properly penetrate the opportunity. Or is there enough buying decision and influence coming out of the dev ops areas that your existing sales force can adequately push the security products that you have?

the – the way we’re seeing it is by starting from an APM product, we really lowered the friction that is involved in deploying an application security product which typically is the problem you have. Like when you try to deploy a RASP product, there’s a high friction to deploy and the person who wants to deploy it is not the person who actually has the authority to do it or actually manages the servers or manages the application. And we solve that with Datadog.
So we think it opens up new avenues of frictionlessly deploying those products. Now how it translates on the go-to-market side and if we need to have specialist sales, we don’t know yet, and we’re open to it.

Analyst: All right. Great. And then one follow-up would be just in the two-plus products, you mentioned kind of the land and the adoptions by the maturity curve. But what I’m curious about is are you seeing the use cases, especially for log and APM driving into newer areas than what you saw let’s say maybe three or four quarters ago.
Are you getting expansion of those products, in particular, new areas of your customers?
Olivier Pomel – Co-Founder and Chief Executive Officer
So those products are still expanding a lot, right? So the adoption curve for our customers is – they usually start small and then they grow, and they expand the products to more and more and more of their business units and various activities. And so log and APM look different, but they keep growing with customers that way. So even when we say 70% of the customers have adopted the product, there’s still a lot of growth to be had within those customers.
ExponentialDave: this illustrates a good point - just because a company already has datadog doesn’t mean it can’t keep growing. It could be that they landed within one small software team of 10 engineers within a bigger org that has hundreds of engineering teams.

Mohit Gogia – Barclays – Analyst
Understood. My follow-up question is for David. So David, in terms of – so I think you followed up the record new ARR in Q3, then a strong quarter in Q4, right? So if I – I mean obviously we understand the puts and takes to billings and RPO. But if I just look at ARR, it seems to be things coming together very nicely after sort of like a slight – or rather a dip in Q2.
So like how should we think about the guidance? I know this question was already asked. But if I sort of compare that to next fiscal year guidance versus really two strong quarters of ARR, and can you help us reconcile that?
David Obstler – Chief Financial Officer

Yeah. As we said last time, and it’s a typical approach. There’s lots of positives, and we’re very proud of it. But we continue to take a conservative approach toward guidance given the uncertainty in the world from COVID and what might happen to enterprises.
As we said, we see a less – we’ve seen a less volatile world in terms of both the growth of client usage and new logos but continue to remain prudent and conservative when we provide guidance as we have in our quarters as a public company.

Olivier Pomel – Co-Founder and Chief Executive Officer
Yes. One thing I will say is, when we look at our metrics internally, usage metrics, in particular, those are still noisier than they were before the pandemic, and that’s because they basically track the way the various economical impacts of the pandemic ripple through the world and the various layers of the economy. And so we want to be a little bit cautious there.

An example of that is, typically, at the last year or the last week of the year, there’s a drop in activity because pretty much everyone takes the week off and some companies turn off their development environments and things like that. This year, it was more pronounced I think because many people haven’t taken any time off during the year and everybody took their time off at that time. So we want to be a little bit careful about what we predict in the future. We’ve learned in Q2 that the numbers can change fast as changes to the economy happen.

Analyst: But when we start to talk about more and more customers adopting more and more solutions, is this leading you into more of a displacement cycle? And how is that kind of affecting your go-to-market strategy and the sales cycles for those upsells?

Olivier Pomel – Co-Founder and Chief Executive Officer
Yeah. We’re still I would say just as dominated by greenfield as we were before, and I think it’s going to be the case for the foreseeable future which is why a lot of the – what we’re doing today is investing in building more products and growing the sales force so we can capture as much of this greenfield market as possible.

Hi. Good afternon. This is Khan in for Jack. Can you provide some color on how your relationship with Microsoft – with Azure is progressing and expected ramp time in 2021? How should we be thinking about new logo size contribution from the partnership compared to your organic total motion given Microsoft’s leverage – enterprise leverage?
Olivier Pomel – Co-Founder and Chief Executive Officer
It’s – so it’s still not live yet. It’s in previews. So we have some customers that have limited access to it. And we’re expecting this to be live in the first half of the year, but we don’t fully control it.

Analyst: That’s helpful. And can you talk about some of the gains you’re seeing from customers who adopt solutions from your marketplace in terms of sales cycles and ease of use or are you seeing any changes in like cohort behavior given that these customers can derive value from your platform more quickly?

All right. Let me try again. I was saying that the platform is still fairly new at the Marketplace. But we do see some customers that are already adopting applications through the Marketplace and completing their Datadog platform with software that we haven’t written in-house which is very, very interesting.
And some of these Marketplace deals are actually fairly meaningful. So this is – I would say this is an encouraging sign. Again, there’s still a lot of work to be done, a lot of building, a lot of partners to recruit on the platform, so still fairly early, but we have some very good validating signs very early on.

… Our strategy is to get annual commits and to offer mainly upfront billing with on-demand.
ExponentialDave: Because their product is strong, they don’t even try to get customers to commit to them for years. They are confident that customers tend to only want more as time progresses.

Just wondering, has your conversations changed at all with these larger customers, maybe just how you’re approaching them? Thank you.

Oli: And we keep pushing customers up basically. So there’s nothing new or different there. I think what this speaks to is customers continue to adopt more of our product and more of our platform, and they continue to move to the cloud.

Brad Reback – Stifel Financial Corp. – Analyst
Thank you very much. Oli, traditionally, you’ve talked about the frictionless adoption of the platform as being a key focus. So as you continue to build out into new areas, how important is it to maintain that frictionless type of environment versus taking on some more difficult problems that may include deeper sales efforts upfront? Thanks.
Olivier Pomel – Co-Founder and Chief Executive Officer
Well, we’re OK with both, right? But we can also – like there’s a lot we can still do to play to our strengths, and we’re very far from covering the full spectrum of problems we can solve in a completely frictionless way. So in some areas, especially security, like it’s possible that we will need different kinds of sales and I would say, a bit more friction of deployment. But we’re not done with the addition of frictionless products. And the ones that we have today are still very far from being fully penetrated and out of customers.

So there’s a – there’s still a very long runway for all of that.

Michael Turit – KeyBanc Capital Markets – Analyst
Hi, David and Oli. One of your competitors has made some very extensive changing – changes to their pricing structure. Are you seeing any impact from that or any pressure to make any kinds of changes structurally in the way you price?
Olivier Pomel – Co-Founder and Chief Executive Officer

We haven’t seen any developments there. No, I think it’s – and look, it’s still possible that customers want to change the way they consume so we didn’t fix. But we haven’t seen anything so far, so we’re – as I said, the competitive landscape is boring in a good way so far.
ExponentialDave: If I recall, we said it was New Relic who started aggressively pricing their offerings. Anecdotally, as a software engineer New Relic has never even come up in the conversation. Datadog is the dominant player in APM and observability.

Gregg Moskowitz – Mizuho Securities – Analyst

OK. Thank you. Hi, guys. So it’s great that the usage trends were good again this quarter and that you’re now approximately back to pre-COVID levels.
And what I was curious about is now that we’re another quarter removed from the Q2, just to get your thoughts on the likelihood of a similar spike in cloud optimization reoccurring at some point. In other words, do you think that we would probably need to see another exogenous shock or long tail type event for usage to move around materially in any given quarter?
ExponentialDave: including this because it’s a good question. But MGMT did not have a meaningful answer and basically deflected.


Thanks for the summary. From listening to all DDOGs calls Pomel seems like a very capable CEO. Just wish they didn’t sandbag their guidance so much (if that’s what they are doing). The market obviously doesn’t think so with the immediate reaction. The stock has basically gone nowhere for 7+ months and continues to underpreform… The run-up from the $30s obviously happened way too fast. Most of my shares are from down there and I didn’t trim last year for tax reasons. Oh well.

Anyways 2021 should be decent when the “re-acceleration” shows up. This is the cheapest DDOG has been in awhile. Just going to have to wait awhile longer.