Datadog, Inc. (DDOG) Earnings Call Transcript

Good morning, everyone. Thank you for joining. My name is Tim Jaschevitz. I'm part of the software team at Credit Suisse, and we're very lucky to welcome David with us today. Welcome.

Thank you for having us. Glad to be here.

I was thinking maybe to kick it off. As you look over the past 10 years of Datadog, you've always operated in a very competitive environment. Maybe help us understand why you've been able to gain an outsized share of the market and then what really that magic sauce is?

Yes. Good question. It's something we think about a lot. At the center, we are a product-led innovative company. So if you look at our financials and our reporting, we have a large and growing R&D department. At the very center of it is product innovation. At sort of at the very center of it, the product was designed with clients in mind and was designed as an integrated data platform. And to the great credit of Ali and Alex, the founders in the R&D department have constantly innovated that platform over time. There are some built-in advantages. It was cloud native to begin with. It's got an integrated data structure. It was sophisticated, but also easy to use, distributed, so we were able to get quite of a mind share with developers and the operations group. And we -- as you can tell, we've continued to innovate very rapidly and therefore, extending the distance of the platform with our competitors. So that's some of the reasons why Datadog has been able to drive. We're also in very early stages in digital and cloud migration, which gives us a tremendous tailwind as well.

Your customers north of $100,000 have grown at a 66% year-on-year growth rates, twice the overall rate of your customer base. Maybe help us understand how your customer acquisition and expand strategy has evolved over the past couple of years. And what type of changes you're making on a go-forward basis, if any?

Yes. It really is really the same as it's been. Am I setting a record here correlation between revenue multiples and number of microphones? Is that what we're doing? It's been similar, but built out aggressively. So it's a bottoms-up selling motion targeted at developers and ops, a combination of inside sales, account management, sales engineering and enterprise. and the platform, no professional services, you can be up and running, downloading your data into it immediately. And so it's a frictionless selling model. We talked about that when we were -- before we came up at the podium. And so it is pretty similar. That has enabled us to both new customers and also scale existing customers. I would say that what we're doing is we're investing aggressively in it. So we're hiring on all the different levels of that ecosystem given how -- what a big opportunity is. But we really haven't changed that much. About 4, 5 years ago, went from all inside sales to having an enterprise sales team. And since then, we've evolved the same model on a consistent basis.

You mentioned on the earnings call that log management and APM suite are in hyper growth mode, and are now over $500 million in ARR. What do you think makes them grow so much still and years after you've launched the product and even as they have reach the scale?

Right. So the very base, very sort of fundamental we're in a rapidly growing market of cloud migration and digital migration, and you see that in the reports of the hyperscalers, et cetera, in a very large market. So most of what we're selling into is greenfield and new workloads. That market is growing very rapidly. And at the same time, the utility of the platform, seeing everything in one platform, being able to analyze problems remediate to real-time remediation and fixing has become increasingly popular. So -- and we've invested quite heavily and developed the different modules so that they've covered more functionality and be relentless in introductions. All of that has combined to achieve very rapid adoption, cross-selling, more clients using more parts of the platform, and we think we're very early days in that despite being in hyper growth in those markets.

Where do you think the industry is today in terms of APM penetration?

Yes. I think we still are in a situation where you have only 20-some, 20% of workloads in the cloud and less of a percentage of applications, really the important and highest-priority applications. So we think we're early stages in that. One thing, it's a little too early to judge, but we got a sense that delivery of digital applications became increasingly important in the minds of clients, particularly those that were behind because of COVID. So I think we're seeing, as you said, hyper growth in APM more and more applications going to the cloud and a higher percentage of the applications needing monitoring analysis of the digital experience and others because for many companies or many products, that is the product and the way it's delivered to the customer.

I mean it sounds like even on the mission-critical app side, it's still a pretty underpenetrated market in terms of APM. Is that a fair statement?

Yes, I think you have 3 things going on. You have a number of customers who are very early stages of delivering their applications to the clients through the public cloud or multi-cloud. You have realization in the utility of understanding the digital experience and the importance of these applications, and you have more functionality and more sophistication and more DevOp-ness in importance of developing these applications very quickly. All of that is contributing to high growth rates and use of observability tools in monitoring applications.

One of the things we were talking about previously was really how you could think of your revenue opportunity relative to the overall cloud spend. Maybe help us understand what the relationship is between the 2 and frame that for us?

Yes. We often say that once you put workloads on the cloud given the complexity, if you're using containers, servers, et cetera, you're blind unless the next thing you do is invest in observability. That can be a platform, that can be open source, et cetera. So there's a very high correlation between cloud workloads and the purchase of infrastructure. And then on top of that, we've seen the following trends. We've seen the adoption of a broader platform, sort of a movement towards our platform and increased functionality in products, which has caused us to have a higher growth rate than growth rate of the hyperscalers. But we are linked to the hyperscalers and the amount of workloads that go to the cloud. So that's sort of the base or foundation of our revenue growth.

Could you talk to how maybe a platform product could changed or is changing the unit economics behind your business, both from an LTV perspective, but also a customer acquisition cost perspective?

We have -- I would say that we've always been very efficient. So the frictionless model, essentially, when you have a product being able to be accessed by clients fairly automatically and all of the functionality is there for them, it is a very efficient model because once you make the sale and get the new logo, the client, it's not without human intervention. It's not without education, but they're able to use more and more of the platform without the selling cost that you have in other vendors. So that's always been there. And I would say the higher the usage, meaning the higher amount of the percentage of the clients using products they are already using, that becomes even more efficient because there's very little selling cost in that. It's a lot of client pull. Now at the same time, we know there's a very large opportunity. So we're investing significantly in go-to-market, everything from salespeople, sales engineers, helping clients use the product to marketing. So at the same time, we're making a very substantial investment, we are because of the nature of the product design and the fact that clients can use it so frictionlessly, we have very efficient return on our CAC and other metrics like that. And we're trying to reinvest that back into the business very rapidly in the product side, which spills to the competitive advantage that you talked about upfront.

Maybe then touches on pricing as well. Here we go. My turn. Just on pricing as well. So maybe help us understand how -- what pricing has been like before for your company and for the industry and really from a strategy perspective, how pricing had -- what's pricing been like?

Yes. I think we said over and over, we said it's a boring answer, but sort of the pricing or the average pricing for a company hasn't changed very much. So we are very much a product-led sale. Clients are buying us because of the strength of the product. Our product is very linked to usage and utilities. So we have essentially for a lot of our products, which include the infrastructure, the APM and some of the products we're launching in security, for instance, on top of infrastructure and APM and profiling, they're done based on hosts. And clients generally purchase a capacity and then they commit to it. It's very similar to the AWS model. As they ramp, they tend to go above that commitment. They pay a usage charge and then they fix out a larger capacity for a slight discount. So that's one of the major models. The other model is a data usage model that logs and some other products have, and that has to do largely linked to what you do with the data, not as much the ingestion of the data but how much you index, how many tests you do. So from day 1, we've tried to link the product to the usage and the data not to the end user. The result of that is we don't have a seat model, so everybody can use our product, and that's contribute to the ubiquity and spread of the product. Once you're paying that, we want it to be on everybody's desktop, so it becomes part of their work process, and that's helped with creating ubiquity and against the mind share in the DevOps world.

Speaking of new products, one exciting product field is security for you. Maybe help us understand what type of traction you've been having with security and what type of feedback you've been getting from customers on it?

We're in a build mode. We're launching the different models of our full security platform. We started out with our threat detection, which is essentially using logs to analyze threat detection, priced largely on the amount of logs. And we've been in the market for about a year with that. We have quite a number of hundreds of customers using it. Again, it's frictionless. The clients can use it, download it, et cetera. And we haven't reported revenue numbers, but we've gotten good feedback. And it tends to be the more progressive cloud-native companies that are using that. And we're been rolling out additional modules, including our cloud security posture management product, our cloud security which looks at the security of containers, et cetera. And we bought a company called Sqreen and are rebuilding application on top of our platform for application security. What we said was we're in build mode, organic and inorganic. We're getting good signals. We think that silos will collapse where security has been a highly centralized purchase governed by the CISO organization. We think there's evidence that DevOps and out more towards the edge is being purchased. But we're earlier on, and we said we'll report as we get success. But I think a lot of what we're doing right now is building the functionality. And once we do that, we're going to go-to-market more aggressively and experiment with these different go-to-markets to see how we can get adoption. So good early signs but early, and we'll report back as we continue to complete the build and more aggressively go to market.

You mentioned Sqreen, maybe help us understand why you decided to acquire them rather than build it in-house? And more broadly, how you think about build versus buy?

Yes. Very good question. We think about it a lot. So as you can see, we haven't -- we've done a lot of aqui-hires or sort of small technology-oriented acquisitions. You mentioned, I think earlier, Ozcode was the most recent, and what they can -- because we believe in the integrated platform, what we're doing is we're trying to accelerate the acquisition of R&D talent and expertise, and evaluating whether we can integrate that with our organization. A lot of our R&D leaders have come from these aqui-hires. And then after that, we're building that functionality on the platform. So the rationale is to look at our product plan. Most of it's organic, but to try to complement and accelerate that in areas where we might not have the domain and to speed up the development, and that's really what's been the governor of most of these aqui-hires we've done. We are generally not trying to acquire customers and/or independent businesses. We're trying to acquire technology expertise that we can then use to accelerate the development of our integrated platform.

As you look at potential acquisitions, are you more or less excited about what you could buy over the next 12 months than you were over the last 12 months?

It's a good question. We're -- as you can tell from what we reported, we're pretty discriminating. And one of the reasons is we're actually evaluating the people. And so it becomes, is this an R&D team that will be excited to be part of the Datadog journey. I think it cuts both ways. We're getting better at it. We have a bigger and better corporate development team. We've been successful at it. So I think we got the blueprint down. And so I think we're excited about our ability to do this. On the other hand, valuations are very high. and it makes a deal doing challenging. So -- and we're pretty disciplined. So you got to fine needles in haystacks. So that sort of cuts both ways.