My Take on Datadogs earnings and conf call. This is from my notes so it won’t exactly mirror the placement in the press release and transcript.
Saul
Revenue grew 68% to $140 million
Customers with over $100,000 of ARR, were 1,015, up from 594 a year ago, up 71%, and growing strongly. They generate 75% of our revenue
Total Customers are 12,100, up 37% from 8,800 a year ago. Gross new customers additions matched to the record set in Q1
Achieved FedRAMP approval
Acquired Undefined Labs to provide visibility early in the development cycle
Our growth at scale amid the global pandemic shows our importance in enabling the digital operations of our customers. While the current macro environment has caused business pressures for our customers, we expect it to accelerate digital transformation and cloud migration over the long-term. We are very well positioned to be a primary beneficiary of these trends. We continue to execute on our strategic priorities to position for the long-term, including rapid product innovation and expansion of our go-to-market.
• Revenue was $140 million, up 68%.
• Adj Gross margins were 80% of revenue, up from 75%
• Adj operating income was $15 million, up from a LOSS of $5 million
• Adj operating margin was 11%, up from a LOSS of 7%
• Operating cash flow was $25 million
• Adj net income was $17.5 million up from a LOSS of $4 million
• Adj EPS was 5 cents, up from a LOSS.
• Free cash flow was $19 million.
• Dollar-based net retention rate was over 130%
• Cash was $1.5 billion.
Business Highlights:
• Datadog is now fully available in the FedRAMP marketplace.
• Acquired Undefined Labs, a provider of observability for dev and test workflows. This acquisition enables Datadog to be injected earlier in the software lifecycle, starting even before code is committed to a central repository. This will equip customers to track continuous integration and deployment (CI/CD) workflows, and enable them to identify issues before reaching production.
• General availability of Private Locations for Synthetic Monitoring. Expanding beyond public-facing websites and endpoints, this capability enables dev and ops teams to proactively monitor internal applications that are not accessible from the public internet.
• Continued product innovations, including the general availability of the Datadog mobile app to provide access to dashboards, alerts, and integrations with on-call notification systems on the go; support for Amazon Kinesis Data Firehose to enable streaming logs directly from AWS services to Datadog; the preview release of the Datadog IoT agent to provide visibility into Internet of Things devices;
• New integrations include Amazon Elastic File System for AWS Lambda, Apache Ignite, Hazelcast, and HiveMQ and AWS 1-click integration to automate configuration with AWS services like EC2 and Lambda.
• Issued $748 million of 0.125% Convertible Senior Notes due 2025.
Guidance
• Revenue of $145 million. (50% growth)
• Adj operating income of $1 million.
• Adj net income per share of 1 cent.
Conference Call
In the quarter, we had a few small yet notable new logo wins from two global auto chains, an amusement park chain, a large US university and a European airline.
68% of customers are using two or more products, up from 40% a year ago, 75% of new logos landed with two or more products and over 15% of our customers are now using four or more products, while we had zero last year.
We are winning in the market, because we are cloud native, our support of cloud and other ephemeral architectures is more important than ever as a rapid change from work from home has demonstrated the limitation of legacy infrastructure. And we believe recent events will accelerate the migration to the cloud as the economy improves. We win because we offer the broader solution with end-to-end visibility from backend infrastructure, all the way through to the end user experience and now security as well. And we win because we offer a truly integrated platform.
While execution was strong, the macro environment did have some impact on our top line results, and in particular on growth of existing customers. Our customers continue to grow usage of our platform, but the rate of this growth was below what we saw before the pandemic. This was primarily seen in our larger customers, who already had a sizable cloud environment. Given macro uncertainty, we saw these larger customers look to conserve cash where they still could and therefore, optimize the consumption of cloud infrastructure. We see large enterprises go through these optimization exercises on a regular basis. What was unusual this quarter was to see a large number of companies going through it at the same time.
And by the way, in general what we mean by that is not that they call Datadog to cut their bill. It’s that they’re trying to figure out what they could shutdown or optimize on the Amazon side, or on the Google side, on the Azure side. So they use less Amazon instances or containers, or less Azure instances and containers.
And so we see some decrease of their data volume, or infrastructure side viewing over a period of a few weeks, but then what we see after that is that they start going again, because then their team keeps building, and they keep deploying, and keep having customers etc, etc. So it’s not an exercise that is new or unexpected. I think what’s different now is that it made sense for all of these companies to do it at the same time and it just happened.
We had a record level of new logos, both in terms of numbers and in terms of revenue. We had a record level of new product attaches. A great part of this is driven by the rate of migration to the cloud and the rate at which customers are scaling to the cloud. Again, we’re very early in that transition and customers are going to keep transitioning for much longer time, and they keep scaling and we see that they only want to do that more now that they see the impact of COVID on their business, and they feel the need to transform. But on a quarter-to-quarter basis in the near-term, we don’t exactly know where that’s going.
What is important to understand is that the signs of active demand are really strong, whether it’s new logo, or new products. That rate is actually up from what they’ve been before, and this keeps growing over time. So all that is great. The one thing that’s been a detractor this quarter has been I would say the passive consumption [of data]. Which didn’t growing quite as fast as it was.
On the flip side, smaller customers and large enterprises that are earlier in their cloud journey continue to see stronger growth.
Lastly, in July we saw a NOTABLE IMPROVEMENT in usage growth compared to Q2, driven by broad-based strength across our customer base. Things had started recovering in June, so growth was going up in June, and is recovering further in July. So these are the trends we’ve seen. So last quarter was a lot noisier than what we are used to, which is having very consistent numbers month over month.
It is too soon to know if this growth will be sustained given the macro environment. As a result, and while we are encouraged by these trends, we remain prudently conservative in our outlook for the remainder of the year.
As a reminder, we have both a subscription and usage based revenue model and the growth of our revenue is relative to the growth of our customer’s cloud footprint and data volume.
Finally, I’m very proud of the performance of our go-to-market teams during the challenging times, as we are executing well against what we can control and our teams are delivering record levels of new logos and product cross-sell. Next on to R&D, we continue to make significant investments to rapidly deliver innovation. We have a proven track record of success introducing new products and we see many new opportunities to expand our portfolio.
We thought it was possible some customers would seek to renegotiate terms or slow payments but that did not happen in a material way, pointing to the importance of our solution. Remaining performance obligations or RPO was $287 million, up 53% year-over-year. We did not see a material change in billings durations in Q2.
We had very stable gross churn. All of the metrics are in the 90s with enterprise tending to be towards the upper part of that range and SMB towards the lower, but all of them strong and in the 90s. We really didn’t see very much disruption.
On the Undefined acquisition:
Undefined focusses completely on what happens when developers check their own codes first on their own machine, and then until it ends up being deployed in production. So it’s not an area where we’ve been present before it, we haven’t been typically used by developers on coding on their machine before they commit towards production. So that’s new for us.
To be closer to the developer brings us closer to the clients in many ways and also allows us to really get extremely high value information for what happens from the time the code is committed to all the way through the release of production. So we are super excited about it, because Undefined built a great product in a short amount of time and we are very excited about building a common product together. Right now, we’re planning to sunset their old product and to rebuild it to be maximally integrated into our product, and the team is working hard at that right now.
Back to where we are today, we’re super confident about where we are, what the product is doing in the market, core customers are adopting it, developing the various parts of it and are growing with it. The one thing we are a little bit more careful about is what’s going to happen over the next few months or the next few quarters, which hopefully will get us through the rest of the pandemic.
My Take: This company is doing so well that it thinks of 68% growth as a significant slowdown. Their trends moved up in June after a nadir in May, and moved up further in July (which is the first month of the new quarter), so they are very encouraged BUT are giving low conservative guidance (of 50% growth) to be careful, but will probably come in at over 68% this time, as I figure it.
I don’t see how anyone who read the above results and conference call could have sold today! If you don’t understand what I am saying, just go back and reread my summary again. My guess is that anyone selling at $75 today is a robot, or a trader, or a person who didn’t bother to read the earnings report and conference call transcript. I added considerably today to my position and I have no worries about it.
Saul