Datadog : DDOG 3Q22 Transcript

Datadog, Inc. NasdaqGS:DDOG

FQ3 2022 Earnings Call Transcript

Thursday, November 3, 2022 12:00 PM GMT

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Contents

Table of Contents

Call Participants..................................................................................	3
Presentation..................................................................................	4
Question and Answer..................................................................................	9

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DATADOG, INC. FQ3 2022 EARNINGS CALL

NOV 03, 2022

Call Participants

EXECUTIVES

David M. Obstler

Chief Financial Officer

Olivier Pomel

Co-Founder, CEO & Director

Yuka Broderick

Investor Relations

ANALYSTS

Brent John Thill

Jefferies LLC, Research Division

Fatima Aslam Boolani

Citigroup Inc., Research Division

Frederick Lee

Crédit Suisse AG, Research Division

Ittai Kidron

Oppenheimer & Co. Inc., Research

Division

Kamil Mielczarek

William Blair & Company L.L.C.,

Research Division

Koji Ikeda

BofA Securities, Research Division

Mark Ronald Murphy

JPMorgan Chase & Co, Research

Division

Matthew George Hedberg

RBC Capital Markets, Research

Division

Michael Turits

KeyBanc Capital Markets Inc., Research

Division

Raimo Lenschow

Barclays Bank PLC, Research Division

Sanjit Kumar Singh

Morgan Stanley, Research Division

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DATADOG, INC. FQ3 2022 EARNINGS CALL NOV 03, 2022

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Q3 2022 Datadog Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Yuka Broderick, Vice President of Investor Relations and Strategic Finance. Please go ahead.

Yuka Broderick

Investor Relations

Thank you, Lauren. Good morning, and thank you for joining us to review Datadog's third quarter 2020 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO; and David Obstler, Datadog's CFO.

During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the fourth quarter and fiscal year 2022, our gross margins and operating margins, our strategy, our product capabilities and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, grow and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended June 30, 2022. Additional information will be made available in our upcoming Form 10-Q for the quarter ended September 30, 2022, and other filings with the SEC. The information is also available on the Investor Relations section of our website, along with a replay of this call.

We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investor.datadoghq.com.

With that, I'd like to turn the call over to Olivier.

Olivier Pomel

Co-Founder, CEO & Director

Thanks, Yuka, and thank you all for joining us this morning. We are pleased to report strong results in Q3 as we continued to execute on our platform vision. Let me start with a review of our financial performance.

In Q3, revenue was $437 million, an increase of 61% year-over-year and above the high end of our guidance range. We had about 22,200 customers, up from about 17,500 in the year ago quarter. We ended the quarter with about 2,600 customers with ARR of $100,000 or more, up from about 1,800 in the year ago quarter. These customers generated about 85% of our ARR.

We generated free cash flow of $67 million, with a free cash flow margin of 15%. And our dollar-based net retention rates continue to be over 130% as customers increase their usage and adopted more products.

Next, our platform strategy continues to resonate in the market. At the end of Q3, 80% of customers were using 2 or more products, up from 77% a year ago. 40% of customers were using 4 or more products, up from 31% a year ago, and 16% of our customers were using 6 or more products, up from 8% a year ago. We continue to be pleased with this continued adoption of multiple products in our platform, which indicates the additional value we are bringing to our customers.

We continue to see strong ARR growth with our newer offerings, and our products introduced since 2019, which excludes infrastructure monitoring, core APM and log management, remain in hypergrowth mode. I also want to highlight a couple of our newer products, Database Monitoring and CI Visibility. We started charging for these products 3 and 2 quarters ago, respectively, and each has already exceeded 8 figures in ARR and more than 1,000 customers. And as we are further developing them, we are confident these products will lead to a broader set of use cases for a larger set of customers over time.

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DATADOG, INC. FQ3 2022 EARNINGS CALL NOV 03, 2022

Now moving on to this quarter's business drivers. At a high level, Q3 was overall very similar to Q2, with strong performance in new logos and new [ product-attached ] activities, tempered by growth of users from existing customers, although healthy, was below our long-term historical averages. This added up to sequential net ARR added that was similar to Q2.

To give a bit more color, first on the usage trend. As we said, usage growth was overall solid but consistent with Q2 trends. From a product perspective, [ the trend ] was more homogeneous among our major products than it had been in Q2. Looking at industry verticals, similar to last quarter, we continue to see a more pronounced effect in consumer discretionary and, in particular, with our customers that are cloud-native and fully scaled into public cloud. Note that the consumer discretionary vertical represents low teens percent of ARR and includes e-commerce as well as food and delivery.

All that said, we are pleased with our continued strong performance. Revenue in Q3 grew 61% year-over-year and 7% quarter-over- quarter, with all of our products meaningfully outperforming the growth of the large cloud providers. While the macroeconomic environment is likely to remain a headwind in the near term, we continue to see positive trends underpinning our business and remain bullish about the long-term opportunities and aggressive with our investment plan.

First, we continue to see strong growth in new logo ARR, including some large wins in traditional industries. We'll talk about some of those in a bit.

Second, our sales pipeline is strong heading into Q4 for both new logos and new products. And we're seeing great opportunities across customer sizes, geographies and industries. Alongside our strength in new logo ARR, this gives us confidence that digital transformation and cloud migration remain a top priority. It is perhaps even more critical in difficult times when businesses need to be more agile and do more with less. Remember that given our usage-based operating model, new logo wins generally do not immediately translate into meaningful revenue, but they are very important to us as new customers expand their usage in succeeding quarters and succeeding years.

Third, we are seeing continued expansion on our platform, as indicated by customers adopting more of our products.

And finally, churn remains low and hasn't changed, with gross revenue retention steady in the mid- to high 90s. We believe this high gross revenue retention is indicative of the business criticality of Datadog for our customers.

Now let's move on to products and R&D. 2 weeks ago, we had our Dash user conference, which was an occasion to showcase the extension of our products and the results of our R&D investments. Let me go through some of these starting, with observability, before moving on to security, developer experience and, finally, the ability to take action within Datadog.

First, we are doubling down on our investments in observability, starting with 2 new products: data stream monitoring and Cloud Cost Management, both addressing growing needs and strong demand from our customers. We also extended our APM suite to offer mobile app testing, usage heat map and dynamic instrumentation. On the network side, we added SNMP Traps and [ network ] monitoring to our products. On the logging side, we announced log forwarding, which coupled with log archives and observability pipeline that is at the center of our customers' data management.

Responding to customer demand, we also extended our Sensitive Data Scanner beyond logs to identify sensitive data across APM and RUM. And across the platform, we've announced extended support for OpenTelemetry, PCI compliance for APM and log as well as HIPAA compliance across most of Datadog.

Second, we are extending our security platform, and we announced Cloud Security Management, which brings together Cloud Workload Security, Cloud Security Posture Management and resource catalog as a frictionless, reach-and-context aware cloud-native application protection platform, or CNAP.

We launched native protection for Application Security Management to enable blocking attacks in real time directly within the Datadog platform. And we now provide vulnerability monitoring to give our users a high-fidelity picture of all applications in production as well as their dependencies, vulnerabilities and the attacks they face.

Third, we follow through with our recent entry in developer experience. We announced continuous testing to facilitate end -to-end testing as soon as the code is developed, which increases quality and velocity at the same time. And we showcase Intelligent Test Runner using more rich APM and profiling data to automatically skip unneeded tests and drastically reduce time and money spend on CI/CD.

Fourth and last but not least, we announced new product areas that take our platform from observing to allowing our users to take action and respond all within Datadog. We announced our [ ASM ] management products to allow users to correlate and summarize alerts, events and issues in variety of [indiscernible] in order to resolve problems directly from the Datadog AIOps console.

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