My notes from the earnings call that concluded a moment ago.
DDOG Q4 FY 23 Earnings Remarks and Analyst Q/A
Announced 02/16/2023
Olivier Pomel, CEO
David Obstler, CFO
Notes:
DBNRR +130%
RPO was 1.06 billion, up 30%, and declined on a y/y basis. Current RPO was in the upper 30s %.
Usage growth within existing customers was slightly lower in q4 vs. q3 and was more pronounced than in previous years.
Current operating leverage is scaling at a faster rate than previously.
Churn has remained low, with gross retention remained in the mid 90’s%.
17 generally available products in 2022 as compared to 13 at the end of 2021.
Although customers are being more cautious, we see no change in the trend of migration to cloud transformation. We believe we’re still in the early days and we plan to keep building and growing.
Drivers of Q4, saw a typical slowdown in q4 than usual. Saw larger spending customers growing slower, as we did with smaller growing customers.
Experienced a record new bookings in new logos.
Guidance:
Use conservative guidance and basing near term guidance we are seeing with our customers. Forecasting weaker guidance in Q1 due to the typical slow period during the December Christmas holiday season.
24-25% y/y growth.
Will continue to grow R&D and go to market teams and plan to grow their operating expenses in the low 30s % range and headcount in the mid 20s % range as compared to last year when it was in the mid 50s % range.
Analyst Questions/Answers
Q Do you see your slowdown being consistent w/ the hyperscalers?
A We are seeing some of the same trends re: slowdown in Q4, which also inform our own guidance.
Q Record new ARR in the quarter. To what do you attribute that? Do you see an increase in the number of consolidating opportunities?
A In Q4, we continue to see new greenfield being the majority of the driver. Consolidation opportunities when a client is already in their cloud journey, customers have continued to build on that. We do see customers in their cloud transformation journey trying to save cost, but not stopping.
Q Customers needing all 17 of your modules. Is it over-engineered.
A We have been investing heavily in cloud innovation, and this is actually helping us to get to these cloud transformations because it helps us solve more problems that our customers may have.
Q Larger customers, relative to their commitment, are you enforcing take or pay and how you’re working with them relative to their commitment?
A We’re working with our customers if they have run into a headwind w/ their business. Haven’t seen a very meaningful amount of unused commitments from customers because most customers tend to under-commit to spending dollars up-front.
Q Color re: billings
A Underlying wave has been cloud migration and digital transformation, so focusing on new logos and new locations/geographies in the meantime. They’re similar to the hyperscalers and are not sure when this too shall pass.
Q Cloud cost management and slowdown
A Lot of products that are early in their lifecycle. It’s going to be a mix. How do we turn them all into major products 2 to 3 years out and how do they become the platform of choice?
Q Uptick in cloud migration and how it compares to APM?
A We have a very ambitious plan and see it being adopted at a very large scale with very large customers, some of which we referenced today on the call.
Q Usage patterns of large customers vs. slow customers. Not seeing as much of a slowdown in the smaller customers. When can we expect to see a slowdown w/ the smaller customers?
A Customers tend to make cuts to large budget items, such as the cloud hyperscalers where the spend is larger. On the very low end of their customer base, they are seeing more of an impact on churn.
Q Gross margin was surprisingly high. How are you doing this?
A On the Engineering side, changing prices by 1% doesn’t impact customers much and they see a better way to help customers is by innovating and adding more product benefits.
Q Levels of conservativism now vs. when you gave guidance at the end of 2022
A Organic growth and expansion of new logos. In periods of time when they saw more growth of customers, the ratio between discounts and where they ended up has not changed. The optimization continues. Not currently building “when macros will stop” into their guidance.
Q Mid-20s% growth of go to market.
A Still have ground/geographies to cover and have had great success landing new customers. These are the seeds of future success we’re planting. The growth rate that we had in 2022, the growth rate will be higher because of the work that was done by the go to market team that was brought on board in late 2022.
Q Growth rates.
A DDOG’s products that are more mature are growing at similar %s as last year, where newer products are growing at a slower rate.(???)
Q Will NRR go below 130% with 25% growth rate of revenue?
A Given that net retention is comparison to y/y customers, yes, they will report if this goes below 130%.
Q Are you seeing that layoffs at your customers and DDOG charging on a per seat basis is impacting the projected revenue slowdown?
A Optimizing their cloud infrastructure and cloud build is what’s slowing revenue. They’re not directly impacted by layoffs of their customers.
Q ROI of customers?
A Have a lot of experience w/ large cloud providers. They see more of that coming their way as customers need to optimize and be more efficient.
Q Month of December…Have trends changed now vs. December of 2022?
A We continue to have a strong pipeline of opportunities. Seasonality was higher than they’ve seen in previous years. So far in early 2023, it’s similar to what they saw in Q3.
Q Large wins on the federal size. How big could this be and how does Fedramp impact TAM?
A Still have some building on the go to market teams for this. We are getting the proof points that we’re a fit and that there’s a real market there for DDOG.
Q How long does it take customer to get to the point where their optimization projects start to make a difference?
A Generally, the fastest thing they can do to have an impact is to adjust logs. Too early and they’re all going through different projects at different times.
Q Trends and what you’re seeing ytd, optimizations and workloads and NRR, timeline it takes given the anniversary of this, how does it look from a linearity perspective?
A Given the level of macro uncertainty, we (and the cloud providers) cannot tell you when this will ease.
Q Flexibility of payments, etc.
A Free Cash flow has been historically higher than their EBIT. Have not seen material changes in payment terms or the flows of conversion, so there’s nothing they see in terms of their cash flow.
sjo
