Datadog, Inc. (NASDAQ:DDOG) Goldman Sachs Communacopia and Technology Conference Transcript September 14, 2022 6:45 PM ET
Executives
David Obstler – Chief Financial Officer
Analysts
Kash Rangan – Goldman Sachs
Kash Rangan
[Started Abruptly]
…group is almost full. So and we know that Datadog.
David Obstler
Oh! Thanks. Thanks for having us.
Kash Rangan
Not us. It’s you guys. And if you do, so this conference, David, that I never get tired of getting to this conference, some of the stats, more than 3,100 registered [ph], more than 500 companies and get those 24,000 requests for, not one-on-one anymore. It’s many other ones…
David Obstler
Okay.
Kash Rangan
Small group on one. So thank you for your support. It’s not possible unless we have the best of the best companies to present. And on that note, David, what a delight, I guess, I should say welcome back to Goldman.
David Obstler
I know it’s been a while since we have been physically. It’s great to see so many faces that I have gotten to know on Zoom over the last two years or but our meeting. So thank you for having us.
Kash Rangan
So, I meant, you used to work at Goldman.
David Obstler
I did used to work at Goldman a long time ago. That was — yes, I was an investment banker way back. Yeah, I admit it. Yeah.
Kash Rangan
There are some of them.
David Obstler
Some of them around.
Kash Rangan
Yeah. Some of them around, yeah.
David Obstler
Yeah.
Question-and-Answer Session
Q – Kash Rangan
David, how would you describe what — so if you came back to Goldman Conference 2027, five years from now, what does — what would you want — what would you and Oli want Datadog to look like? What are your most audacious goals? It doesn’t have to be a revenue target…
David Obstler
Yeah.
Kash Rangan
… because nobody knows where the revenue is going to be in 2027. What do you want Datadog to be five years from now and how do you get there?
David Obstler
Yeah. Good question and we think about it a lot. So sort of the step back, Datadog has a — am I coming through clearly. Is that okay?
Kash Rangan
Yeah.
David Obstler
Okay. Datadog has an Observability platform that combines infrastructure, APM and logs monitoring, that is used by DevOps professionals to monitor customer-facing real-time digital applications.
And so how do we think about this? We think that we are very early in this transition of workloads to the cloud and digital applications, and that most cust — companies are potential customers.
So we want to be a centralized platform for professionals who are in DevOps to be conducting their business every day, and that includes monitoring that may include security that may include workflows that may include using BI to see what’s going on in the business.
But we want to be that platform that clients can get the value-added out and constantly expand that functionality to be that one platform they can rely on to do their work in this area. And I think that’s always been Oli’s vision for Datadog and something that we have been relentlessly building towards through product innovation.
Kash Rangan
Yeah. And I remember this when I met with Oli, I think, you dialed in via Zoom initially, right? So you described the problem statement is, just imagine the cloud is the next mainframe and all the things that you people did…
David Obstler
Yeah.
Kash Rangan
… for the networking, systems management, database monitoring. It was in the small little contained world, but then you blow it up and it’s the cloud, and that’s a problem statement. And I heard them describe it that way. It just changed my perspective.
David Obstler
Yeah.
Kash Rangan
The bigger the problem, the bigger, the solution, the bigger the company, right?
David Obstler
Yeah.
Kash Rangan
So how do you guys think about what are the other problems or issues that customers face as they do this cloud thing that are opportunities? I mean maybe it’s a product, maybe it’s not a product, we don’t know.
David Obstler
Yeah.
Kash Rangan
But what is the angle of that lens that you are looking at? What are the other things outside of the purview of those 14 products?
David Obstler
Yeah.
Kash Rangan
Yeah.
David Obstler
And I think we agree with you when you think about what’s happened, this is a generational re-architecting and in the complexity of the way software is developed, the speed and the requirements around that and this has provided the opportunity for Datadog to get where it is today.
And so when you think about how our client base in DevOps, these are again production environments, what are they doing in their day-to-day world. They are looking to see how the application is working, which we are doing. They are trying to identify problems earlier in software deployment, which is ship left, CICD and testing software going in.
They want to be able to communicate, collaborate and order all of this information and remediate very quickly, that could be anything from BI tools, dashboards, scheduling, ITSM to we acquired a small company called CoScreen, which allows that group very quickly in real-time to be able to go on a video service internal to the platform and remediate and meet.
And then on top of that, it isn’t just the design of the software and its deployment and latency, et cetera. What about security built into the software? What about instead of relying on only firewalls engage? You are talking about looking into it and design and how it works and that creates the whole security needs.
So when you think about how in a democratized, ubiquitous, very fast moving, DevOps world, what will they need in the future. Those are some of the things that we think need they need and we are trying to engineer into the platform.
Kash Rangan
Got it. The unit of work becomes a not a virtual machine as in the past or a unit of compute, but it’s a microservice…
David Obstler
Yeah.
Kash Rangan
… container, then the whole world changes and you redraw all the boundaries…
David Obstler
Yeah.
Kash Rangan
… all over, and so you mentioned…
David Obstler
Yeah.
Kash Rangan
… the service — video service monitor.
David Obstler
Yeah.
Kash Rangan
Are you making a bit of a baby step into ITSM or?
David Obstler
Yeah. I think when you say ITSM, it’s not the markets that, let’s say, ServiceNow is doing.
Kash Rangan
Yeah.
David Obstler
We are talking about enabling and making efficient the workflow of our world and our world is real time. Basically, if the application goes down, if there’s latency, if something happens, that’s lost revenues. So everything we are trying to do is to increase speed and make the life.
So I think if you think about that from the DevOps or the production environment professional, how are they going to fix problems. We are thinking about it that way. We haven’t said, maybe we will, that we are going to be engineering and workflows and things like that.
Part of that is because our problems need to be solved now. So it’s really getting everybody on it and solving it, and that has a little bit of a different need than a service queue and it happens next week, it happens next week, there’s no more delivery of the product, so you can’t do that.
Kash Rangan
Got it. I want to help us — I want you to help us understand what is exactly consumption about your only consumption business model.
David Obstler
Yeah.
Kash Rangan
If you just give a little primer. How much of it is fixed versus variable, does it vary by product, vary by size of customer, number of nodes?
David Obstler
Yeah.
Kash Rangan
Can you just give us a bit of a primer?
David Obstler
Yeah. So stepping back before we talk about contract, we are basically priced based on unit of infrastructure or host, that’s one. There are a couple of different pricing models. So that would be the servers, the applications on top of that and some other functions. So that is sort of infrastructure based pricing.
And then we have data or testing type pricing, the amount of logs data that you are ingesting and indexing or the amount of tasks. So that’s the basic denomination. We are not pricing based on compute or what happens in the application.
Then contractually, most of our relationships are subscription contracts, they tend to be around a year and they essentially are based on the amount that you are committing to, and then they have an on-demand, and this is a little AWS and others, the hyperscalers do that.
There’s two major types of this. One is a take-or-pay contract that is denominated by, let’s say, month, meaning if you don’t use it in that month, you lose it and the other might be by year. So essentially, it is a usage based model particularly in the denomination by year with an underpinning of a subscription that if they don’t use it, they lose it and we recognize it. So it’s a hybrid model.
In addition, we have — if you go over that amount of usage, you go into on-demand, most of our customers, because these are greenfield rollouts stay a little short, then go into on-demand and that’s when they fix out. So we have that, which is associated with subscription, but is priced above that subscription rate.
Kash Rangan
Got it. So if a customer does not use the product all year long. I don’t know why that would be the case so just hypothetically. Do you recognize all of the revenue in the last day of the year or you go back in a time, how does that work?
David Obstler
No. We — for that if they had all year to use it, so it was $1 million over the course of a year. And by the way, this is really rare, we have very few of these. But in that extreme case, that would be the recognition of $1 million in the last day of the contract.
Kash Rangan
Okay.
David Obstler
But — yes. But that would be — that is a — I mean…
Kash Rangan
Very good…
David Obstler
… I don’t know of any case like that.
Kash Rangan
Yeah.
David Obstler
So most of is you recognize it along the way. The major motion because these are new workflows is that a client gets to six months and so I’m getting near my limit. This is what normally happens and then they do and extend, commit, et cetera, in order to avoid staying in on demand. But, yes, if they did not use it then they would be recognized in that period, Kash.
Kash Rangan
Got it. So in an economic environment like the one we are going through, a lot of companies, I know Snowflake’s business model is very different than yours model…
David Obstler
Yeah.
Kash Rangan
…maybe very different than yours model. But hypothetically, if somebody entered into a contract and their business was going through a bit of a tough time. But then their business started to pick up, the revenue recognition would be more volatile on your part, right, or?
David Obstler
Yeah. It would be more volatile a bit. The type of contract that is denominated within the course of, let’s say, a year would be more volatile. I mean it would be slower and then pick up.
Kash Rangan
Yeah.
David Obstler
If it’s denominated by month, it would be more pro rata.
Kash Rangan
Okay.
David Obstler
So it depends on the nature of the contract.
Kash Rangan
Yeah.
David Obstler
But, yes, there is, I would say, the biggest volatility and would be the pace at which revenue is recognized off of usage in those contracts denominated over, let’s say, year.
Kash Rangan
By the — of course of the year.
David Obstler
That’s true.
Kash Rangan
If economic activity starts to pick up, then things look, there will be a positively variable outcome to the yearly contracts?
David Obstler
Yeah. That’s what happens essentially. That’s the variability. For instance, we said in COVID, we had a pause, many of us had a pause.
Kash Rangan
Yeah.
David Obstler
And the consumption slowed down suddenly and then rebounded and revenues and usage in that period…
Kash Rangan
Yeah.
David Obstler
… declined — well, nothing about the declines, we are talking about the rate of growth of usage.
Kash Rangan
Yeah.
David Obstler
This time we said that in the second quarter, and by the way, I’m speaking comments we made on our earnings call in early August, we said that, we did not see that, but we saw some areas of more controlled usage and we can go through that, resulting in sort of a middle ground.
Kash Rangan
Yeah. Yeah. So not like COVID. We are talking about a slowdown. I think quite a few software companies have — that have gone through the cycle of, oh my God to slippage, what not have come up with a more reliable forecast, maybe lower close rates, better pipeline and are sounding better coming out of that quarter when they reforecast, they sound more confident. How are you — how did you approach the process of forecasting, everybody got conservative with their forecast. What are some of the assumptions that you have made in your forecast for Q2? You didn’t raise guidance, which was fantastic, but what were your assumptions because…
David Obstler
Yeah.
Kash Rangan
…the close rates, pipeline build, et cetera?
David Obstler
Yeah. Well, sort of step back, what we said was that we saw a strong new logo accumulation. So we continue to see strong pipeline and new logos in our land and expand. We saw, I would say, the same amount of strength geographically, but we saw within our organic or usage some weakness of some larger customers, particularly in consumer discretionary. So that’s the background of what we saw.
We always, and this is since we went public, provide guidance that has lower assumptions, significantly lower assumptions in both usage and in new logo accumulation than we have experienced historically. This is — we have always done this. COVID, non-COVID, accelerating business, recession risks, et cetera and we continue to do that. So we adopted a similar.
In this case, we pointed out that normally, we pass a little more of our beat through, and I would say, or not towards conservatism, this time was we did not put through as much of our beat, but as you said, that still resulted in raising.
Kash Rangan
Yeah. Yeah. Exactly. So I suppose you sort of answered my impact of the economic environment. Qualitatively speaking, rates yesterday was a bad shock with inflation.
David Obstler
Yeah.
Kash Rangan
And I know that you and I spoke after the quarter and we talked about how some customers decided that they are going to hold on to their pocket, but have not sign a longer term contract, the RPO growth slowed down…
David Obstler
Yeah.
Kash Rangan
… but revenue growth was actually pretty fantastic. I — after the call, I wondered to myself is that customer is really worried about inflation. They should be doing the longer term contracts, but they didn’t. And so as they realize the cost of capital is going in the option of costs of holding on to your money is just really, really…
David Obstler
Yeah.
Kash Rangan
… bad tradeoff. Do you think — not just Datadog, the industry could see resurgence as these people say, let me sign these long-term contracts, you know what, I don’t want to…
David Obstler
Yeah.
Kash Rangan
… take the risk of some variability, pick-up in consumption or price increase, whatnot. Why are customers thinking exactly the flip-side of how they should be thinking?
David Obstler
Well, I can’t comment on other companies and what they are seeing. We are land and expand and because our clients have been expanding over a long period of time.
Kash Rangan
Yeah.
David Obstler
We are also not out there trying to get three-year commits and things. So essentially the question for us is, in this normal cycle of you land, you scale up, you see what your volume needs are. Why would they stay in on-demand, which complements our revenues…
Kash Rangan
Yeah.
David Obstler
… and around the edges, but rather than commit. And I would say decision-making maybe has taken a little longer, because they are more cooks in the kitchen, people like me…
Kash Rangan
On-demand is like consumption, right?
David Obstler
On-demand is their consumption above the limit of the contract.
Kash Rangan
Okay. Got it.
David Obstler
And many companies, we do that with — we do this with our own cloud consumption. We stay a little short in order to risk manage and you pay a little higher price for that. So I think that it’s logical that it’s a confidence thing.
As they get more confidence in the growth rate of their business, they will commit more. But I would say, it’s a minor effect for us, and I think, we said that, in the subsequent quarter, we had seen some of those that stayed a little short, paid a little at the higher price to the commit. So we will have to update everybody as we see. That comment was very much more about billings than it was about revenues, as you said…
Kash Rangan
Yeah.
David Obstler
… because what happens, it affects billing, it’s when the bill goes out the door rather than the revenue recognition.
Kash Rangan
Yeah.
David Obstler
And we were trying to explain some more volatility around billing versus revenues.
Kash Rangan
Got it. Yeah. So you are not alone because we had Snowflake and MongoDB that also were subject to barrage of consumption questions. Although Frank Slootman got away with it, because he was — his fireside was done by our CEO. So we didn’t get too deep to consumption…
David Obstler
Okay.
Kash Rangan
… it was very high level, but…
David Obstler
Yeah.
Kash Rangan
But so let’s say Datadog is compute, MongoDB is transactions, Snowflake is analytics.
David Obstler
Yeah.
Kash Rangan
How — would you say you are more leveraged to compute and lesser transactions and analytics like the other guys? Is there a way to think about the layer of that stack compute transactions analytics, one way compute is more stable…
David Obstler
Yeah.
Kash Rangan
… than transaction, maybe less stable analytics taken earlier.
David Obstler
Yeah. Yeah. I think that long-term like we are levered to compute in that — the number of servers.
Kash Rangan
Yeah.
David Obstler
But short-term we are not priced. I just want to make sure everybody we are not price based on compute in the variability. So I think when you think about infrastructure, a lot of our products are priced on an infrastructure mode. The elasticity and the changeability of that in the short-term is not as high if you would — if you were pricing based on compute as it’s used. So I want to make sure that’s clear.
And I think that — what we have seen is that over a longer period of time, if a client’s business is growing, they will need more servers and it were triggered there. So I think it’s not as volatile in the very short-term, but over the long-term, how quickly the client’s businesses are expanded, could be — could affect that infrastructure and APM side.
On the other hand, a lot of our products are priced based on remediation, what’s happening things go wrong, are you doing logs, are you doing tests? And I don’t think that recession sort of gives a path for, unfortunately, for things going wrong in your IT environment. So there’s likely to be a continuation of that. On that side, it has to do with some of the variability we talked about of how many logs you indexed or maybe how much you store.
Kash Rangan
Got it. I’m not going to name a company, but you mentioned APM. So we had an APM company here that said when we asked, how do you differentiate your products and the answer was you guys do dashboards, which are very pretty to look at or as they offer solutions. Do you — would you agree with that, that you are just a dashboard that this other unnamed APM company actually offers resolution and this is what our AI engine does, and therefore, would fix the problem?
David Obstler
No. I think that we have in our platform machine learning and AI.
Kash Rangan
Okay. Tell us more about this.
David Obstler
So it’s called Watchdog, et cetera. And basically, what I think we offer is, we offer a distributed, sophisticated, but easy-to-use platform that has all the functionality in it. When you think about — and it is easy to use across the organization.
When you think about a couple of different models of software, you think about maybe on-premise or deliver on the cloud, but used by super users. So there’s the group. And then you have something like salespeople would use salesforce. They are using it every day in their business. They turn it on. Everything is there. That’s Datadog.
So if you are going to want your solution, your Observability platform to be used by everybody who impact the software and the production and delivery, and you are going to want to increase speed of resolution because it’s all there, and you are going to have both dashboards and some AI in it. That’s Datadog.
But we believe we don’t believe that the IT world is going to be 1 of robots. We believe that there’s experience and data and automation of data that is then going to be used by humans and that a lot of times, these pre-canned solutions give false signals.
So we believe it’s important to have intelligence in it, but that are — it’s not really what we believe it’s what our clients believe. Our clients believe that they want to get the information and then be able to resolve and that one size doesn’t fit all.
And I think Oli has said that to you and others. He said, he doesn’t — he believes that there will be — this will not be handled in an automated one size fits all, because our client’s applications and environments are not one size fits all and that’s the power of Datadog.
Kash Rangan
Got it. I want to talk about TAM and get your thoughts. So the CRM market in 2003, 2004, the famous, not to be named industry funded very well recognized brand name said, it’s zero dollar in TAM and then several years later, they came out and said when ServiceNow has gone public, ITSM maybe $1 billion. And subsequently, everybody started to revise their TAM assessment, oh, CRM, oh, yeah, of course, it runs in the cloud.
David Obstler
Yeah.
Kash Rangan
Why would you buy anything that does not run on the cloud? Where are we with the TAM assessment in your core markets today?
David Obstler
Yeah. Yeah. I think our TAM assessment is and the path of it is related to the path of both cloud deployment of workloads and the creation of digital solutions. And if you look at the percentage of workloads that are in the cloud and the percentage of applications, that are delivered in that way and created through modern DevOps. It’s still quite small, so…
Kash Rangan
It’s outpacing cloud growth.
David Obstler
Yeah. It’s outpacing. Yes. And we think that…
Kash Rangan
And that is your growth driver.
David Obstler
We think that our growth is the underpinning it is cloud, but on top of that, you have deployment of modern development techniques, containers, microservices, et cetera, and you have the whole trend of DevOps and the democratization of data down to the users. All of those are growth drivers and we think we are pretty early in it.
So, yes, we have TAMs that are created off of the major research, et cetera. But when we really look at it, we really look at those — that percentage of the workloads that are in the cloud and what’s going to happen in digital applications and we still think we are very early in this huge opportunity.
Kash Rangan
Yeah. Yeah. So the question I should be asking is then somebody puts up cloud growth rate effects. What is the growth rate of your transformational workloads versus migrational workloads? The migration slows down the transformation picks up.
David Obstler
Yeah.
Kash Rangan
We should not be concerned. We should be…
David Obstler
Yeah.
Kash Rangan
I mean concerned on Datadog’s comment.
David Obstler
Yeah. It’s interesting to think about. I do think that the migration of static or let’s say, Microsoft Office microservices into the cloud, has less effect on Datadog…
Kash Rangan
Yeah.
David Obstler
… then that complemented by the use of modern DevOps. I think one of the biggest triggers as to whether they are going to be a Datadog customer is what is their software development strategy.
Kash Rangan
Yeah.
David Obstler
And whether it’s based on containers microservices…
Kash Rangan
The inside of the data.
David Obstler
… and whatever comes next.
Kash Rangan
The inside of the data, the inside of our — that’s exactly.
David Obstler
That’s exactly.
Kash Rangan
Yeah.
David Obstler
That is. Yeah.
Kash Rangan
David, do you have a rough feel for what percentage of cloud workloads are transformational versus migration. I mean I have heard some statistics from people, but I just wonder if you have a perspective?
David Obstler
I don’t have…
Kash Rangan
Yeah.
David Obstler
…I would love to hear from you…
Kash Rangan
Yeah.
David Obstler
… probably, have a much better.
Kash Rangan
Yeah. Like 15%, 20% is transformational…
David Obstler
Okay.
Kash Rangan
… and the rest is migration.
David Obstler
Yeah.
Kash Rangan
So if that’s true, then the transformation stuff is…
David Obstler
Yeah.
Kash Rangan
… probably outpacing.
David Obstler
I feel like if you look at Datadog…
Kash Rangan
Yeah.
David Obstler
… and you look at the intensity of the kinds of things we are monitoring, it feels like that transformational and not just the repotting, but is growing faster, and I think, certainly, Datadog’s growth rate is probably indicative of that. Although, I can’t say that we have — we are not the research factory did for the world.
Kash Rangan
No. Yeah. Yeah. Yeah.
David Obstler
Yeah.
Kash Rangan
I think it’s a good observation. You recently called out APM, log management is exceeding three quarters $1 billion in ARR. Those are some big numbers. They have been around just four years or five years.
David Obstler
Yeah.
Kash Rangan
What is driving success?
David Obstler
Yeah. Two things are driving — and by the way, we, like you said, four years, five years ago, we didn’t have this. So I think it’s two things; one, the compelling nature of the platform and everything being together. Our clients, we often say are buying various signals within one product, the platform and so having it all together is a very strong value driver. So I think that’s one.
And two is us, that we have really invested substantially in the product suite, not just individually but how it all fits together. And that investment has caused not only the pieces to be the best out there, but then the way they interact with each other in the platform is a very differentiated product.
Kash Rangan
I remember we caught up maybe a few quarters back and you made the — I said, how is your cost of customer acquisition so low and why is it that your sales and marketing…
David Obstler
Yeah.
Kash Rangan
… is so low relative to, you said, because the products are so good, they sell themselves on their own, right? What is it about development in France that is so more productive than what we get here?
David Obstler
Yeah.
Kash Rangan
Is there some secret sauce?
David Obstler
Well, I think, it all goes back to…
Kash Rangan
Is it the Burgundy wine or…
David Obstler
It could be the wine. It could be that. There’s sort of an aroma ahead. If I could download it with Datadog.
Kash Rangan
Yeah. I know…
David Obstler
Listen, it goes — I am — I have been there for years and I happen to be lucky enough to join a company that was founded by Oli and Alexis and then Ana came. And they just relentlessly thought about the customer experience.
And they often will say it’s really how easy a product can be used that creates the value, not necessarily every widget and this has been the bedrock. So I think that’s enabled us to expose the product, get feedback and have it frictionlessly adopted and get that mind share.
Once you get the mind share in an end market, you have your customers be your salespeople. They want more. And if anybody threatens their Datadog use, there’s no way, we got to have it. So I think that — and it all goes back, I think, to the genius of the platform design and then putting a go-to-market against it, that was very consistent with that type of adoption.
Kash Rangan
That’s great. Shift-Left.
David Obstler
Yeah.
Kash Rangan
If you Shift-Left, there are others that you are going to encounter like…
David Obstler
Yeah.
Kash Rangan
… GitLab, GitHub, there’s a whole chain of, like, SDOC companies that are waiting there and their view is that moving left is really, really hard…
David Obstler
Yeah.
Kash Rangan
… whereas for us to move right into ops is not that hard.
David Obstler
Yeah.
Kash Rangan
You would content otherwise.
David Obstler
Yeah.
Kash Rangan
Who’s right here?
David Obstler
Well, we think it’s hard to — we think it would be hard to Shift-Left, too. Like we are not — so we are — maybe we are seeing something different than them. Like we are not saying that we are targeting cold repository or essentially the act of software creation.
Kash Rangan
Yeah.
David Obstler
Where we start to come in we think is the border where software is created and you are in test mode into production and we think that makes sense for us, because really, we are at the interface already of software as it gets developed into production.
So I don’t think we would be — I don’t think we would say that it would be easy to shift all the way left. We think that there’s tangential market opportunity that makes sense for our customer base slightly less and that’s what we are aiming at.
Kash Rangan
Got it. Any — I know you are a CFO, but you have been at the company long enough and you are in the technology industry. So the competitive differentiation relative to the others in the space, we sort of touched upon the…
David Obstler
Yeah.
Kash Rangan
… consumption model, the architecture…
David Obstler
Yeah.
Kash Rangan
… but it does look like everybody wants to be an Observability company.
David Obstler
Yeah.
Kash Rangan
Everybody is an Observability company for…
David Obstler
Yeah.
Kash Rangan
… wanting to build a website, yeah.
David Obstler
Yeah.
Kash Rangan
Do you hear that from customers, are customers coming back and saying, oh, yeah, I got to switch from three other companies. They are also Observability, you are also Observability. So I’m confused here. Do you ever get that, and if you do, how do you proactively tell customers how and why you are so different from every other half a dozen Observability companies?
David Obstler
Yeah. I think it’s important to think about our core market, and when I mean our core market, I mean DevOps employing modern development techniques in container microservices, et cetera, real-time customer-facing with an emphasis towards having it used ubiquitously so that remediation can happen very quickly.
Now you might say that’s a specialized use case, but we don’t think so. That is what any company that is going to have digital applications in the cloud needs to do. And so when you think about that, the real competition is open source do it yourself or some point solutions and we have already said that we think our clients have told us that putting everything in a unified platform makes sense.
So it really depends whether you say Observability is this. You can say Observability. I want to monitor on-premise end cloud. Well, that’s not our market. That’s — and there might be others that might do that well or maybe they do on-premise. So I think it really depends upon the core market.
We think we have a very high growth market where everything is going and a market that finds value in this kind of monitoring. I would say that, it may have been more difficult I think in years past. But as Datadog has invested in its product become more of a name, has a very large user base and has performed for so many years. I think all of that investment is paying off in more sophisticated appreciation of Datadog’s use for this particular use case.
Kash Rangan
I was wondering if you are the Chief Product Officer, Chief Marketing Officer and Chief Financial Officer, all rolled into one.
David Obstler
I love products. I must admit, I’m a Chief Financial Officer who knows where my bread is buttered and it’s in product and selling it.
Kash Rangan
You are getting into it.
David Obstler
But — no, I think, that’s….
Kash Rangan
Microservices, yeah.
David Obstler
…end up. Yeah. I think that there is confusion, there is marketing, there is, but when you really go through the haze…
Kash Rangan
Yeah.
David Obstler
…you really see that there are solutions or platforms that are really, really best of breed in this particular use case, and in another use case, there may be another one. And if you think about that…
Kash Rangan
Yeah.
David Obstler
… I think our customers increasingly understand the difference.
Kash Rangan
Yeah. Yeah. I have just one more question before I turn it over to our clients. Maybe they are too exhausted at the end of the day to ask a question, I don’t know. But one thing that we have seen is logging is not a finite market.
David Obstler
Yeah.
Kash Rangan
Particularly every Observability company…
David Obstler
Yeah.
Kash Rangan
… that came through the Goldman conference has been talking about how surprise they are that logging is like you are driving on this highway.
David Obstler
Yeah.
Kash Rangan
You think you would get to the end of the horizon and then opens up again. So logging is bigger and bigger.
David Obstler
Yeah.
Kash Rangan
What are your observations on the logging market?
David Obstler
Yeah. I mean, definitely, when you think about it, once you get the data to investigate the problem and understand you need to index and look at logs. So it’s a very good complementary and we have been surprised at how quickly that market has grown for us.
I think our differentiation is that you can’t just say logging. We have logging that is deeply integrated with the other signals with the metrics and traces, and it’s being used and think about the speed required to remediate. So that’s where we differentiate.
I think we have done a very good job in building the logging product, integrating it and designing a pricing that has really been very closely correlated to the client’s indexes in use. But, yes, the logging market had has very strong demand and it’s because it’s one of the most important ways to do your detective work and figure out what’s wrong.
Kash Rangan
Exactly.
David Obstler
Yeah.
Kash Rangan
Anybody has a question feel free to raise, wow, we got questions. You got answers?
David Obstler
Still alive. Yeah. Yeah.
Kash Rangan
Okay. We will go to the gentleman in the light blue sweater first, if you don’t mind and then, sorry…
Unidentified Analyst
Thanks very much for the time.
Kash Rangan
Jeremy [ph], right?
Unidentified Analyst
Yeah.
Kash Rangan
Hey.
David Obstler
Hi.
Unidentified Analyst
Hi, Kash.
Kash Rangan
I got it.
Unidentified Analyst
Just in terms of the shift from DevOps to DevSecOps.
David Obstler
Yes.
Unidentified Analyst
Where it would — how are you thinking about that sort of new market and what’s your sort of security thinking around that side?
David Obstler
Yeah. Good question. It’s a new market. We think that it is essentially the bottoms-up use of security in a distributed way by DevOps. There are some progressive DevOps departments that are doing that, but it isn’t the mainstream.
What we are doing, making sure we talk about our product is we are focused on that overlap. So that would be cloud and application security for that end market, because using — looking at security signals designed in. So it’s not endpoint, it’s not network, it’s not, et cetera.
And we think it is a nascent market. There will be quite a few developments just like there was in DevOps in innovation of practices. We see some good signs. We have a lot of customers using it. But it’s early on and we are also midstream in building the product.
So the combination of the market and us building the product will allow us to take it to market more aggressively, and get some feedback and answer your question more comprehensively as time goes by as both those things happen.
Unidentified Analyst
I think his question is going to be similar to mine, but I was wondering in terms of, I think, you are referring to the application security testing product.
David Obstler
Yeah.
Unidentified Analyst
You guys are building something now to compete with like a Veracode or Checkmarx versus maybe M&A, those guys into the portfolio or somebody like that?
David Obstler
So we have testing of the performance of the application from back end out to the website. We are not — if you mean a testing market that’s outside of that and in the use of monitoring real-time DevOps, that’s not what we are doing.
And if you are — and on the sort of Shift-Left side, we are trying to use the same signals we have in our platform to allow the intersection between testing and production see signals a little earlier. I don’t know if that answers your question, but that’s our strategy in testing.
Kash Rangan
We have time for perhaps one more question, one final question. If not, I’m going to jump in, we are out of time, minus one, minus two, minus three. Okay, so maybe I will ask one. Long-term, what drives the free cash flow profile, operating margin profile, I know you don’t — you have not given long-term guidance.
David Obstler
Yeah.
Kash Rangan
But what are the things we should be looking for that good guides to the potential — free cash flow potential of the company?
David Obstler
Yeah. It starts with the gross margin and our ability to continue to innovate, yet maintain or maybe even grow gross margin, which we work hard on. And then to understand the scaling of the different lines, I think so far, we have seen some scaling and efficiencies in G&A.
We do have a very efficient go-to-market. But we are investing in R&D and we like that. So I think it’s looking at all three of those and the timing of those that get to the art of the possible in margins.
Kash Rangan
Wonderful. That’s spot on.
David Obstler
Here we go.
Kash Rangan
Yeah.
David Obstler
Thanks.
Kash Rangan
Perfect. Thank you so much, David.
David Obstler
Thank you. Thank you.
Kash Rangan
Thank you. Thank you for being here and…
David Obstler
Yeah.
Kash Rangan
… participating in the conference. Have a lovely evening and don’t miss the reception drinks on me at 6 o’clock.
David Obstler
You don’t think most CFOs.
Be the first to comment