Datadog, Inc. (NASDAQ:DDOG) The RBC Technology, Internet, Media and Telecommunications Conference November 15, 2022 3:45 PM ET
Company Participants
David Obstler – Chief Financial Officer
Conference Call Participants
Matt Hedberg – RBC
Matt Hedberg
Ready to roll. All right. Thank you everybody for powering through the afternoon, although this one will not disappoint, I promise you that. Is this last or —
David Obstler
I think we’ve got one more after this.
Question-and-Answer Session
Q – Matt Hedberg
I think. I don’t know [indiscernible] one more, yes. So with us this afternoon is Datadog. A – David Obstler, CFO. Yuka Broderick, right here in the front, IR. Thank you everybody for joining us and thank you for being here and for having us. You guys don’t need an introduction in terms of what you guys do, everybody knows that. But coming off of a quarter, I think there was a lot of anxiety from Q2 and then your Q3 numbers were really good. In guidance you noted, taking into account the macro and some softness in certain verticals. How would you describe the overall demand environment, we’ll take it both, within those verticals, kind of the consumer discretionary side and then sort of everything else. Just as a levels setter.
David Obstler
Yes. We said was that, we’ve seen a continuation of prioritization of new projects, so new logos and new workloads, continued we had a very good new logo and new business quarter. It was across a number of industries and we — and that was very similar to what we saw in Q2. We are pleased by that and we think that means these projects are very strategic and our continuing. And then in our existing customers and the growth of those customers we found in Q2, starting in probably early May — late April, early May and then continuing through Q3, that there was some rationalization or optimization going on in the use of our platform, mainly in Cloud native scaled, meaning they scaled-up, they’re using a lot, not as in their journey, as they begin to deploy more workloads and that was most concentrated, not as a surprise in some of the industries that we’re more effective, like consumer discretionary. We talked about, our exposure. We’re pretty diversified our exposure there in the low-teens. So we watch — we can see this in fairly real-time, we watch the usage patterns by industry, by patterns, by geography et cetera and by product and that’s sort of where we saw the epicenter of the rationalization.
Matt Hedberg
Coming out of Q — I believe it was Q2. I think at the time you noted, would that be in July. July was better. And then I think linearity for the quarter for Q3 was consistent, right. As you than thought about the dynamics in your 4Q guide it was mostly just like kind of status quo for the remainder of the quarter or did you assume things get particularly worse in a particular vertical or –
David Obstler
No the net-adds were pretty much the same in Q3 as Q2. So essentially in many, many places we had a very similar performance. As we noted at the time of just when COVID started, there was more of a step-function down, it was to the low-point of our customer growth in terms of usage and then we recovered to get more towards the high point and we ended up both in Q2 and Q3 right in the middle and it’s sort of pro-rata — was sort of pro-rata. I’m sorry. After things changed in late April we pretty much had a very consistent situation of client usage in the remaining months through Q3.
Matt Hedberg
The other question that we get a lot of time is on your committed versus non-committed spend. And what that means from a consumption or — I guess, consumption element. Maybe just level-set us. When you talking about committed spend, the consumption element of that or vice-versa then on the non-committed piece how do you think about the raw consumption element with its progress?
David Obstler
Yes. It’s important to understand that we are remember land and expand, which means pretty much all of our clients start short. So we don’t like what you’re probably familiar with is, we don’t try to get a three year deal with maximum consumption. We — and this is the part of the frictionless adoption. We get the system turned on getting and using it and our clients are very short in commitment relative to what they scale into. We engineer it that way. We make it so that our sales people get the client, we don’t hold out for the maximum.
So unlike other places where you might have warehouse [indiscernible] we only have that. So, essentially, what generally happens over time is a client their new workloads, the clients is short and they and they grow. And then at some point they get to sort of the maximum that can happen in an annual contract at three months or 11 months or whatever. And that’s what the — that’s what the on demand is. And the on demand has really just been not something that gets eliminated, it gets moved into a commitment contract and you get a slight discount for that. So that’s what we help clients do. They don’t know what the usage is going to be. They stay short. I try to stay short. And when I’m buying it for Datadog, see what’s happening, and then essentially they say, oh, work capacity, we have to fix in that amount and provision again for some growth, but not the full board growth.
And that’s kind of why — one of the reasons why we haven’t had maybe the violent pullbacks because we don’t have situations where clients have bought more than they’re currently using.
Matt Hedberg
Sure. That makes a lot of sense. I want to drill down into some sort of, like, specific questions. But when you think — in your seat today, as you think about what’s to come, which is there’s a lot of uncertainty in the world. There’s an element of what you can control and what you can’t control. From your seat, what are the most important elements of what’s under your control as a business when we look to calendar ’23? Whether it’s growth elements, whether it’s the margin side? Just curious how you think about that.
David Obstler
Yeah. Well, one thing is, we think that — and I think the evidence is there that this is a very long term growth opportunity with a lot of growth drivers. And so we’re trying to effect and this sort of gets to what we can control those growth drivers, and then the path of are we moving up or moving down in terms of the organic, which we can’t control as much might vary, but over the sort of the weighted average, it continues to grow. What we can control, I think we’ve done a really good job is continue to invest in the breadth and the quality of the platform. That has enabled us to increase our dollar relationships with our clients. It has enabled clients who — when they’re using something else and the contract expires to consolidate on the platform given the compelling nature of the platform. It gives clients a lot of flexibility in a commitment what they can use. Gives us a lot of degrees of freedom and many more frankly than we had two years ago or in the beginning of COVID or maybe it’s more than two years ago.
And so we are able to have client conversations where you might want to pull back on logs, well, maybe you want to get some more diagnostics on your applications or security. So that provides a lot of flexibility. So that’s — one of the things we can control is investment in the product. Another thing that we can control is the relation with our clients and continuing to facilitate those discussions and get in a position where we’re making it easier for our clients to use, that we’re teaching them along the way, that we have account management and things like that. We’re exposing our products to them, and that — if they want a substitute or if they get sort of out of whack, maybe they let things and settings run, we work with them to get them back onto track because that creates a long term relationship.
Another thing we can control is selective expansion of our go to market. What we do is, we never do blanket, we basically look at the addressable market, the clients we cover, the clients that haven’t been assigned, the attainment of reps in that area, and then pick the ones that have the greatest opportunity, and we can modulate that depending upon what we want to do because we prioritize. So that’s something we can control because we know that in the future our growth is going to be determined both by our product side and our go to market. So those are things we can control.
We can also control the work we’ve been always trying to in a methodical way increase our spend, meaning, we’ve never gone up to the top of where the top line is and never gone to zero. So what we can do is, within that band continue to invest, but modulate it, understanding that there are some trade-offs between top line and profitability, and that’s what investors expect of us. So we can sort of modulate that and that’s what we do in the budget process. That’s what we do pretty much in any environment every quarter or six months to look at it. And then what we can control really is, we can control ultimately the expansion rate of our clients. We can put a lot in front of them to make them want to consolidate on us, buy more products. But if they’re rationalizing or slowing down their projects, we have to modulate with them because we don’t do the migration, we monitor the migrations and workloads.
Matt Hedberg
So from a cross sell opportunity. You guys just are coming off of Dash with a ton of new product announcements. From your perspective, what are the most significant cross sell opportunities when we think towards next year?
David Obstler
Well, the overwhelming one for a number of years and continuing is that, with our infrastructure customers we’re not at all saturated in APM or logs.
Matt Hedberg
Do you have any sense for how saturated you are? I think I’ve asked you that in the past.
David Obstler
Yeah. We are. So If you think about it, we said that our spend is about twice when we have more than one product, but it really could be three or more. So I think that we’re we generally on weighted average have clients having infrastructure and this is weighted average. Many of them have more than three, a one of the two, but not both. So that’s a huge quantitative opportunity. So that — and that’s been — that’s been going on. You’ve seen the charts, you’ve seen all of that. And when you add in the associated products like synthetics testing and [RAM] (ph) and all and the platform, you see just a massive opportunity within our existing customer base for them to buy the core products.
Then on top of that, you have all the additional functionality plus some earlier stage, which would be security, shift left into developer. These are all supplemental to that very core three pillar plus type of expansion. And then the other is that, our penetration of both addressable clients and of our spend relative to the Cloud spend is very small. So just winning more clients and having us adopted at — and this has been happening, higher percentage of spend of Datadog relative to the cloud. These are just huge opportunities [indiscernible] opportunity.
Matt Hedberg
Some of your bigger customers, what is that percentage of cloud spend that they allocate to Datadog?
David Obstler
Yeah. In total, we’re about 1% of the total public cloud spend. This is all based on published reports. And at the top, we’re in the upper single digits. And so in most of our customers, we’re nowhere near saturated. I would say that it’s only that section of the cloud natives whose whole business is delivering and always has been and they fully adopted Datadog, which is very small percent of our customer base. So in our core business, yes, these other things are very nice and they may well create multipliers, I think, as Ali has said, but in the core business, in adopting observability, we’re still very early stages and in cloud workloads.
Matt Hedberg
Got it. This is a big group, and so I want to make sure that we get ample time for questions from you also. Get ready, queue them up. I don’t think you’re going to be all that bashful. From a price from — inflation has been crazy. Are you thinking about doing anything from a pricing perspective as we look forward in terms of trying to adjust for inflation?
David Obstler
So our strategy has been to instead of doing unit pricing creases, our unit pricing has been very that we often get asked is the pricing environment, is the competitive environment. It’s been rock solid through all this, meaning, the unit pricing is the same. What we’ve been doing is we’ve been adding more functionality to get the average revenue per clients up as you can see in all the metrics and cross sell. So instead for the same skew, charging them more, we give supplemental value and functionality, and they pay more, and that’s what we’ve been doing. I guess you could call it price increasing through functionality. We really have — we haven’t really gone for absolute price increases. I think we’ll — I think we may look at for those, maybe that were grandfather for a very long time ago, we might look at it. But I think the basic port strategy will be to continue to do that. And again, it’s not because we don’t want to eventually grow and maximize our wallets with, it’s because that have been a great way to grow our relationships in dollars with customers.
Matt Hedberg
One other one. From a GSI perspective, I know — one of the beauties of Datadog is so easy to use. It doesn’t require really any service to get up and running. How do you think about engaging the GSIs to a greater extent? Is that another flywheel for future growth?
David Obstler
There I would say that we’re not going to ever be the professional services, and this is good revenue stream for GSIs. I think in emerging markets and some emerging markets we have where we haven’t had as much of a presence or buying pattern are through resellers or integrators, we tend to partner for that way if our clients want to do it. We’re pretty indifferent to it. I think in terms of we’re going to basically have most of our business or a lot of our business not direct. I don’t think that’s going to happen given again the frictionless and ease and deployment.
Matt Hedberg
Yeah. I’m going to pause right here, because this is overflowing here. Does anybody have a question?
David Obstler
There’s some. Some seats up here.
Matt Hedberg
Anybody have any questions? Initial questions for David? I would like to keep going for 45 minutes. Yeah. Go ahead. There’s a mic right behind you.
Unidentified Participant
Thank you, David and Matt. Appreciate the conversation. I guess on the comment that when we spoke about now we have more degrees of freedom with some of our customer. Was there just more product especially since COVID. I mean, I guess, given that, I mean, how much expansion now with customers come from product attach as well as just general growth in the product. Is there a way to think about that?
David Obstler
Yeah. In the one year and this understates [indiscernible] because customers generally start with the new product. But of the growth of a client relationship right now versus a year ago, it’s been and it’s been for a long time sort of three quarters increase of the products they already own and one quarter of new products. Now over a two year period, of course, if they keep buying new products, that would become when you would define it that way over two years, it becomes much higher than that because they do this generally in sequential years. But that’s been a pattern and that’s been a pattern for a long time in the company.
Unidentified Participant
Thank you.
Matt Hedberg
Don’t be afraid to raise your hand. The other thing that you mentioned a little bit ago, David, kind of the dev SecOps or shift left. And there’s been a lot of focus that you guys have had on, obviously, the developers, but now increasingly security. Is that a different — I think I’ve asked Ali in the past, is that a different — eventually like a different sales motion, an overlay, something to kind of get it, kind of talk to the more of the security engineers of the house? Or is it — I guess, what’s the preferred way to tap into that opportunity?
David Obstler
Well, so essentially most of our competitive advantage in this area would be that the DevOps customers are already using Datadog every day in standardizing their work flow and reports. Now we already have the infrastructure data, we have the application date, the traces, and the logs. So most — a lot of our competitive advantage, at least to start some time will be to sell through it to our existing customer base. We have — that’s what we’ve been doing. We have been very pretty successful. We have tens of millions, but we haven’t given the exact number of tens of millions and thousands of customers. And we believe strongly that the signals we’re getting from the market is that DevOps, the production and development side will be increasingly responsible for looking at security signals as they develop and then deploy their applications in production.
So we think that this is going to happen. We know that there might be — so that’s bottoms up selling. That’s — they start to use, they turn on the platform, they start to use it, and this is happening with lots of customers. To maximize the opportunity, particularly in an area that’s more, I would say, controlled by [indiscernible] and the teams in sort of the same, the log data, the same in the log data, that may be an area where we have to have some sort of overlay influencer. So that could be what we’re doing now, which is having some product specialization in our account management team and our sales engineering teams. It could be at some point overlay sales. It’s nothing we’re planning to do right now. But as we build the product out more, which will be we’re probably year two of it, year two plus. It’s probably a four to five year build. As we continue to do that, we’ll get more signals and we’ll be able to answer the question more definitively as to which way that we might go.
It may well be that the concept of dev SecOps, which is DevOps using security products in a bottoms up way, takes hold and we’re not going to, but we may well have to influence [indiscernible].
Matt Hedberg
The other thing that’s interesting, you guys lost — recently launched a cloud cost management offering. I’m curious, like, to me, especially as a CFO, you’re looking to sort of optimize cost across your business too. How does a product like that resonate with your base right now?
David Obstler
Yeah. So we do it out. We essentially have — we do this all the time. So when we talk about ourselves and using cloud, we have meetings every couple weeks on optimization cloud. We just launched it at Dash. We developed it with a couple customers. I think all of us heard a lot of excitement at Dash and a lot of sort of I’d like to get a demo, I’d like to understand it after dash. It’s too early to know. I think there’s also some product build up that has to be done. But there seems to be enthusiasm, especially in this time period for that type of product. And again, we’re well positioned and we have the data and the information right there.
Matt Hedberg
I’m going to pause again here. Let’s see if there’s — No takers. All right, let me keep going. Raise your hand. I’ll keep looking out there. All right. So, yes, well, I guess — and on that topic, when you — as a CFO too, as you look to control you’re spending too. Are there things that you — internally you’re asking your own teams like, do we need all this redundant spend? Are you looking to optimize your — I’m not talking about stuff on the cloud side. But just how are you looking at sort of even consolidating some of your own spend that you’re using with third party vendors?
David Obstler
Well, the biggest third party vendor is cloud. It’s the biggest opportunity by far. So our cost structure is essentially people and cloud. There’s some other things, but it’s really that. So looking at the cloud, programmatic I think we’ve done a good job given we’ve been in — we said 75 to 80 range and we’ve been top of that. So that means we’re doing a good job at that. So we look at that. There’s also just for my CFO seat, I know that we’re talking about a lot of the vendors are trying to get pre commits on time and that you pay upfront. And we’ve always had the philosophy like we do with our clients of we don’t want to do that, we want to grow, but do it as we need it, not buy and stick it in the closet. So that’s one of my philosophies.
And of course, as we’ve gotten bigger as a team and bigger as a company, more far flung, there are more opportunities to look at in that regard. So, of course, we look at that. We have a vendor management group that’s been established over the years. We — I think in terms of other, we are I think trying to take advantage of what is a week commercial real estate market. As we expanded different cities, we’re trying to get deals that we might not have been able to gotten two or three years ago. And so we certainly understand that in purchasing real estate. And then in terms of headcount and talent, like I said, we’re going to continue to invest substantially. We think it was a big opportunity, but injecting prioritization into the process is good for everybody, because it also causes us to do the most important things first. And that’s discipline that you can use these types of pullbacks to inject in the company and sort of do the things that might have the highest impact for us.
Matt Hedberg
Going back to maybe where we started, why do you think outside of some of the consumer discretionary things, why do you think some of those verticals have held up as well as the have? I mean, what — I mean, because there’s been weakness in other verticals out there.
David Obstler
Yeah. I mean, there’s so that’s a weighted average. So when we have — I’m just making this up. Suppose the number is 100 and it sort of the range is a 100 to 70. And let’s say we’re right in the middle at 85, just making this up. It’s a weighted average. So what we’re saying is that, you would have those verticals being closer down to the 75. And others are watching things but it hasn’t been pervasive essentially. So that’s what’s happening. We would be blind. We would expect everybody, all of our customers, would — by the way, I should say that looking at their spend, their cloud spend and their Datadog spend is something that clients have done — do every day [indiscernible] four or five years I’ve been every day. So we have this going on every day. It’s just a matter of the weighted average intensity. So everybody is — everybody does this, of course, anytime you pay attention, nobody wants to spend more if they could spend less. So we’re not smart enough to know — we’re not smart enough to know how long it lasts, et cetera. But we also have quite a number of sectors that have benefited. I mean, we have travel which is doing very well. Just take what Airbnb is going through versus Crypto or something.
And you can see, we have a very large position in financial services. These are very stable. So we are — and I’ve really learned this in the last couple of years. We are a mirror of the digital economy. That it’s not — so if you basically look, we have food, traditional food chains, many of them. They have us. So we have the delivery companies and the traditional. We have the big industrial companies that you would think, we have the car companies, we have the healthcare companies. Why is that? Because to at least some degree all of those BMS are cloud companies to certain degree and we are a leader in monitoring their workloads. So we are a reflections of the economy in many ways. And when you look across our sectors, when you look across we’re very diversified, because our product is used by every industry. So we don’t have the concentration and that’s one of the reasons why I think you see the good of diversification when you see a number of — and you also have we’re seeing in larger enterprises, they are so — like I would say, they’re so behind in this migration that there’s a huge priority that they’re continuing with. They may even — if they start to control headcount, they may even intensify that. Because it has a very strong payback to buy a system rather than have your huge IT teams create the same — create a system that’s worse and manage it internally.
So we have tons of companies that have been affected and done layoffs that have bought us for the first time. So a lot — there’s a lot of different signals, but the bottom is that, we are — our distribution reflects the breadth of the economy and who’s in [indiscernible]?
Matt Hedberg
I think there was a question earlier a couple of quarters ago about your exposure to, like, the tech startup community. That’s pretty small though.
David Obstler
What we have, like, when you say tech start up, do you mean Salesforce.com? I mean, we have — in each of these end markets, we have emerging companies and BMS. I would say software itself, SaaS software is one of our largest sectors. We feel good about that.
Matt Hedberg
But there’s a lot of maturity in that too.
David Obstler
Yeah. We have a distribution. And don’t forget, we’re about one-third SMB, one-third mid-market, we’re a mid-market companies, so Datadog is mid-market. It’s 1,000 to 5,000. So it would be like Datadog. And we have one-third 5,000 and above. So I don’t know if you consider Datadog and Enterprise, we’re pretty substantial at it. But — so that’s what — so that’s where we are. So it’s a diverse — it’s a diversification and we’re very diversified in customers. We don’t really have a lot of exposure for better or worse to a single customer.
Matt Hedberg
And then what about the competitive dynamic? I know you’ve always said we don’t see a lot of competition on kind of like a lot of the net new stuff you’re dealing with. Do you think that changes five years from now as you get even more of an enterprise focus that you start to — you run into [indiscernible] and others on a more regular basis.
David Obstler
Well, we have a very large enterprise business that might be bigger than theirs. So it’s not whether — so enterprise for us is that you have 5,000 customers. So many will have [indiscernible] on premise monitoring thing and Datadog for the digital cloud. So we have millions and millions of dollars in many, many customers who are at the top of the stodgy what you would call enterprise. I mean, the stodgiest is metal vendors and stuff. So we’ve been doing that for four or five years. That’s one of the great growth areas. I think the bigger question would be, are the workloads going to be on on premise? Are they going to be cloud native? We don’t — we’re not — we don’t offer an on premise solution. If you are a big regulated bank and you want your own instance and you don’t want a multi-tenant and you don’t want it in the cloud, we don’t do that. We think the world is going towards us, but that’s why we compete, but we don’t really compete with a lot of the others because they’re servicing a different market within the same customer.
Matt Hedberg
Maybe the last one, you talked about a lot of growth drivers here. Three years from now if we look back and you’d say, wow, I was really positively surprised with what? What do you think that one thing that we’re going to be kind of talking about three to five years on from a Datadog perspective.
David Obstler
I think if security has the same — has the same or greater velocity as DevOps. And we have a — we have bottoms up frictionless purchasing a security by DevanOps. I don’t know if you’d be surprised that would be the realization of a trend in a pretty rapid period of time. So I think that’s — and we said that’s a TAM multiplier. So I think that’s one thing. I think another could be that we have — the government takes a long time to penetrate. Some of our competitors have very large government businesses, we started later where we have the mid certification. So another kind of upside that could be not really in our vision, but we hope would be we have the same amount of government business as a percent of total that other companies in tech do. Another could be that some of the areas that have lagged a bit, like regulated banks. Maybe some of the places in Asia, maybe they become more — they catch up and they become more quick adopters of the cloud that could be an accelerant that may not be exactly in our plans today. So those are some other things.
Matt Hedberg
Excellent. Well, we are out of time. Thank you, David. Thanks for —
David Obstler
Thanks everybody. Appreciate it.
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