Datadog, Inc. (NASDAQ:DDOG) Barclays 2022 Global Technology, Media and Telecommunications Conference Call December 8, 2022 2:35 PM ET
Company Participants
David Obstler – Chief Financial Officer
Conference Call Participants
Unidentified Analyst – Barclays
Unidentified Analyst
Welcome to our next session. David, great to have you on. I want to start actually more bigger picture a little bit with you. You’ve been on a — like we’ve met the first time, like day before the IPO, and you’ve been on a really great journey. Kind of maybe talk a little bit about like the evolution of Datadog as from when you kind of joined in terms of like how this became such a kind of nice easy company.
David Obstler
Yeah. First of all, thank you for having us. We appreciate it. And also just want to mention that we are not in this presentation going to update our comments relative to what we said on our last earnings call. So just to create expectations — manage expectations.
Yeah. I’m going on my fifth year at Datadog, believe it or not. It’s been an unbelievable journey. And when I reflect back on it, I joined in 2018 about a year before IPO. And I was — the trends that attracted me to Datadog and are driving the company in migration of cloud workloads, DevOps practices, the integration of more within the DevOps environment, including security, have accelerated and persisted, and that creates a very strong backdrop for Datadog. But back then we were more of a single product company.
Unidentified Analyst
Yeah.
David Obstler
We started with infrastructure, and we were in the build stage of APM and logs. And we had the beginnings of a platform. But that’s been a very substantial evolution since I’ve been there in the last four years. The expansion of the product set has been very rapid, very focused, and has created a tremendous adoption that’s provided more value to clients, more stickiness of product and the growth level. So, that’s a change and that’s a real evolution.
Secondly, I would say, we started out in more of a cloud native land and expand and more US focused. And in the last four or five years we’ve built out our go-to-market substantially in terms of building out the commercial, the customer success and enterprise teams continue to evolve that. We’re still midway in that. So just the maturation and the growth of our go-to-market, our marketing has been something that has been persistent.
And then when you think about scale and growing out the company, whether it be in the G&A functions, the management team, bringing in new people, getting succession, that’s been a very big focus of the team. And we’ve grown our number of employees from less than a thousand to going on 5,000 over that period of time. So that’s been a very significant growth. So just scaling the company has been a real challenge.
Question-and-Answer Session
Q – Unidentified Analyst
Yeah. Okay. Perfect. And then, talk a little bit about how have your, like hyperscaler relationship changed over those years?
David Obstler
Yeah. I think, we’ve had strong relationships, but we have developed and diversified our relationships from starting with AWS towards having strong relationships with all the hyperscalers. So being broader there. We’ve expanded the number of our instances and our ability to deliver on different clouds. We have developed strong technology partnerships with all the cloud vendors. We’ve built out Gov [ph] cloud in order to address that market. And I think we’ve deepened our go-to-market in terms of being on everybody’s marketplace.
Unidentified Analyst
Yeah.
David Obstler
And being more focused on a mutual interest of go-to-market. So, I would say that we always have had focused on it and always have had the strong relationships, but they’ve become broader and deeper over the last four or five years.
Unidentified Analyst
Yeah. And the question I get from investors a lot is like, well, gee, I’m looking at AWS group coming down, I look at Azure group going down, what’s going– what’s Datadog is doing. But talk us maybe in that respect a little bit about the product expansion, because there’s an — there’s a really nice offset here for you guys, like maybe you mentioned earlier, like infrastructure with where you started like, but talk a little bit about the scale and the growth that you see in the other parts of the product portfolio.
David Obstler
Yeah. I think if you look back and reflect on it, we’ve always had a higher growth rate then the hyperscalers.
Unidentified Analyst
Yeah.
David Obstler
And although, we are linked towards the migration of workloads to the cloud, and then to think about what the differences might be. The hyperscalers have a broader set of sort of use cases and end markets, and we tend to be focused on client facing real-time applications, which tend to also be more complex and mission-critical. So, one, we are probably exposed to some of the higher priority workloads. That’s one thing at the core. And then over the course of developing the platform, we have expanded the functionality, which has created a significant growth driver for us as clients have used more and more part — more and more pillars. And that’s in our metrics. And then I think because of that growth of the platform, we have begun to — we — our competitive position has strengthened and our ability to get more and more of that functionality on the Datadog platform versus other alternatives has been enhanced as we’ve made that product investment.
Unidentified Analyst
Yeah. Yeah. And then like, maybe just — I mean, you did comment in the past about like how logs or APM has become like a certain revenue kind of run rate, et cetera. Like where are we on these for different product sets?
David Obstler
Yeah. I think we said that a few quarters back or two or three quarters, we said that those new two pillars, logs in APM, which we didn’t have five years ago, we’re over $700 million of ARR. And if you think about where we are right now, we haven’t updated it, but something around the hoop of, half of the company has been in those new product sets. So, when you think about how meaningful that has been, not having five years ago these products, yet having about half the — around that revenue in the company, that just goes to show you the impact of that. And also the appeal of the platform and the fact that we said many times that our clients are not buying individual products, they’re using a platform to accomplish business goals, which is real-time monitoring remediation, which is enhanced by having more functionality.
Unidentified Analyst
Yeah. Yeah. I mean, like, in a way like — do you remember like at the IPO, one you had to come up with like a TAM.
David Obstler
Yeah.
Unidentified Analyst
But now with a much broader product set, like how do you think about — like the TAM for the different segments like, and then bringing that together for a Datadog level?
David Obstler
Well, we’ve updated in our filings the observability TAM.
Unidentified Analyst
Yeah.
David Obstler
And it probably — when you think about our platform, it’s the percentage of the market we can address through our platform increasing. And then on top of that, we have discussed the fact that we are developing the security product, which is in early stages, both in terms of our development and in the adoption, but that could be a TAM multiplier and that wasn’t included in the initial TAM. And then there’s the shift left in addressing a little more of the developer use cases, which could also be a TAM expander, be that as it may, we think we’re against a very large TAM in our core monitoring. And one that has many, many years to grow, et cetera. And so, that’s sort of the main TAM and then the TAM — our ability to address it and our expansion of that TAM has been methodological over time.
Unidentified Analyst
Yeah. And do you think about like a mix of the business in the future in terms of like, oh, like infrastructure is now most — the majority now it’s like — APM will be this log will be that, or is that actually a kind of a wrong question because it’s one platform. So, the platform will kind of –?
David Obstler
Yeah. I think we think about it, as I think you said more as one product to the platform, and this increases the platform wallet share by providing more functionality. That’s really the way. And when you think about how we go-to-market and how we contract and how we expose all this functionality to clients for them to use within their contracts as they want to. That’s really the way we think about it at the core.
Unidentified Analyst
Yeah. Yeah. Yeah. And then, does that — I mean, on dollar net retention kind of, you give me like a broad base number like, but do you see that, well, it must be impacting that number, I guess.
David Obstler
Yeah. Definitely. Dollar, we — I think we said that essentially in — within one year, the — or the growth, which is really dollar net retention is driven about three quarters or a little more maybe 80% by the expansion of products with the client had a year ago. And the rest of it from new products, but that probably underestimates because they’re in the process of ramping. So, when you think about the fact that about half the company, right now, are non-infrastructure products. That gives you probably a better sense over multi-year of what the actual compounded impact of the expansion of the product has on the net retention rate.
Unidentified Analyst
Yeah. Yeah. Yeah. The — and the — if you think about these — going back to my original question around the cloud workloads and the — like what the hyperscaler said versus like what you’re doing. Like how do you think about that dependency for Datadog and for your revenue in terms of like, yes, there’s something happening on a macro? But like on the other hand, I have a lot more products to sell. Like how does that come together?
David Obstler
Yeah. I think that they are like correlated in direction because at the very core, the — is cloud workloads. But then you have, as you mentioned the fact that our workloads are more mission-critical, client facing workloads, which we feel would cause stickiness and potential protection that might be a little more concentrated on the positive side, in addition to the expansion of the product. So, we don’t think we’re immune to optimization. We think we have a lot more flexibility with our customers. So, if they’re optimizing in one area, they can use another area of the product set, they can also put more and more of the product set on our platform versus other point solutions, which has been happening for some time, which could result in them controlling their costs, but it may be not be as much expense of Datadog. And then I think, overall, we think this is very early, and this is long-term. There may be variations in this growth, but we think this is a very, very long-term trend towards migration of the cloud and towards increased complexity, which benefits a data.
Unidentified Analyst
And then the — I just lost my train of [indiscernible]. On that note — no, let me change the — if you think about the environment that we are in now at the moment, have you changed your go-to-market when it comes to — in terms of the message to sales guys are giving out in terms of more value, more ROI focused, et cetera? Or is it — is it still the same kind of message that you had before?
David Obstler
We’ve been doing that over the number of years, both in terms of investing in enablement, sales engineering, et cetera, and product managers. So, we’ve been doing that. We’ve been selling both in terms of this is mission-critical. If you don’t have this your client facing could go down. And we’ve been selling in value-added selling, meaning looking at the cost side of open source to do-it-yourself. We’ve been putting more resources over time in that, continue to do so. So it’s more a continuation of the way we have been selling. I think as the product set has expanded, we know that we have to continue to invest in the training of our sales team, of our customer success, having more — some more product specialization injected in there. It hasn’t resulted in a change of the way we go-to-market, but just the focus of the resources in making that sales proposition.
Unidentified Analyst
Okay. And my last question came back to me. Like how does the — like I remember we had conversations back in 2020, and there you kind of — back then, you talked about being impacted by the optimization at the hyperscaler level because you’re part of the contract. Like how does 2020 compare to what you’re seeing now?
David Obstler
Yeah. So, now that was a — the world looks like it may and or change. We have to change our priorities very quickly, maybe focus on remote work, don’t know what’s going to happen. So, we had a very high intensity of customers across the board all at once. And it was more focused, and we have higher percentage on the infrastructure side. Now, I think we’re seeing — and then we had a rebound. I think we’re now seeing, it isn’t one size fits all. We have a diversification where we have newer customers who are ramping quite rapidly.
We have customers even in cloud native and complemented industries that are continuing, and then we have areas, I think we said on the last call, cloud native, where you’ve expanded rapidly and you’re an affected industry focusing a little more on cost optimization. So, it’s more of a portfolio, not everybody doing it all one.
Unidentified Analyst
Yeah. Yeah.
David Obstler
And also our product suite has been more diversified, meaning it hasn’t been infrastructure. It’s been a little more diversified. And in fact, we said on our calls that some of the areas that are more data focused like logs, or the part of APM where you’re storing traces rather than logs are the areas where you can change the dial. So, it’s been a little bit of a difference but for the most part, we’ve ended up in between what happened at COVID and the high point indicating that it hasn’t been one size fits all, and it’s been more sort of concentrated in portions of our customer base rather than across the board.
Unidentified Analyst
And as part of that like — the next question that follows up like remind us on — is there a vertical focus for you guys as like some of your it’s not competitors like some other guys take industries like, well, we had a lot of like coin base so now we’re suffering. Like what’s your set up?
David Obstler
Yeah. We’re pretty diversified and mirrors the digital economy where some of the larger segments might be enterprise software, financial services, I think we said that, for instance, I think consumer discretionary was in the low-teens. And I think we had said at the time of COVID, that travel and entertainment was around 10. So, we have a number of segments like that. We’re very diversified. We don’t have a lot of concentration. And so for crypto, et cetera, if we have customers there, it might be an effect, but that’s not one of our large segments, et cetera. So, it’s really the portfolio of all of this.
But in general, we are, as you know from previous we’re very diversified across industries, we don’t have great customer concentration. And we also diversified across enterprise, mid-market and SMB. So, there is pretty good diversification here. And we tried to point out on the last couple of calls where we’ve seen the brunt of it and try to illuminate where we’re seeing and I’m not saying it.
Unidentified Analyst
Yeah. Yeah. Okay. Let’s shift gear into — you started the call saying we’re not going to give you guidance for 2023. I just wanted to — and I’m not asking a question. And I just wanted to kind of maybe have you talked a little bit about the input factors need to think about so that investors kind of understand the complexity — not complexity in a bad way, but like this is not like 2025. Yeah.
David Obstler
Yeah. I think that we have the net retention, which is really the organic growth. We’ve talked about use of more of the same products and new products, which has been in the middle for the last couple of quarters. And that will certainly carryover. If you remember in COVID, we were in the 70s and we had a quarter of two of compressed growth, and that took us down at that point to 50. And so the number of quarters you have where your growth is different than historically will carry over in this model, okay? So that’s one thing. So, what I think we said we’ve been in the intermediate that the effect of having two quarters of that will carryover for four quarters or more that we’ve had strong pipeline for new logos and new business. And we haven’t seen a disruption about that. That’s another factor that is layered in.
So, it’s really the interplay of all of that and how that carries over, that governs the growth rate. And then it essentially is the rate of growth of hiring. I think we said we’ve been investing quite rapidly, but we haven’t been able — we have not been able to invest at the rate of growth of revenues that over the long-term, we try to maintain some stability in periods where you didn’t have the office expenses and you weren’t able to invest at the same level as revenues, you would have margin expansion. And then, we try to balance that across growth. So that’s the other input as you go into next year. The interplay of those two things really produces the economic model.
Unidentified Analyst
And then the — as part of the like — just to share some experience here from the last a day and a half, like pricing came up a long in terms of like, well, there’s inflation, et cetera. Like maybe let’s start with kind of what’s your — like how do we have to think about your pricing? And this kind of always talks about consumption pricing, like remind us maybe of how you price?
David Obstler
Yeah. A couple of things to remember. Land and expand we — essentially, most of our customers stay short relative to what they think they’ll evolve to. So, the concept of having software that you bought that is not used, doesn’t exist at Datadog, land and expand. That’s one concept.
Unidentified Analyst
Yeah.
David Obstler
The second concept is we have been a value increase or through investment, not a unit price increase so far. So, we have essentially gotten our clients to increase their wallet share with us by offering either their expansion of their workloads or the products they’re buying. That has put us in a position where we haven’t been a price increaser. We are open to looking at that at some point, but haven’t really found the need to do that. So, I think we’ve been someone — we’ve been a vendor who has not sold software that clients don’t use has — had the structure of increasing the discounts based on volume. So, it’s been embedded in the price structure. And has when clients go into on demand, have worked with them proactively in fixing their commitment to ameliorate that through time. We think that served us well and will continue to serve us well in this environment.
Unidentified Analyst
Yeah. Yeah. I remember like when we first met, you had like the — you always had that like secret buffer for US the CFO of overages. Like where are you like customers are probably getting better in terms of understanding how to size your kind of commitment with you, I’m sure you were getting better to kind of help them. Like is that still a factor for you? Or on the overage side or is like?
David Obstler
Yeah. Still a factor. It’s very similar because they stay short and they’ve always had a conservative and we’ve not pushed them to over commit, given our go-to-market. It’s been and continues to be the same motion, which is they float on a weighted average into on demand. They make the decision on whether they want to increase the commitment and lower the average price point or stay more flexible, we provide alternatives to them and help them too. So it’s pretty similar.
Again, back to your original question, we either — we pretty much priced based on number of hosts or sort of the infrastructure that they use on data they consume or use or test. And on our website is very, very transparent. It’s right there. And we have discount structures structures based on reserve, whether you want to reserve or stay flexible. And so that’s the pricing. It’s been — and we don’t see any reasons to change that.
Unidentified Analyst
Yeah. Yeah. Okay. Perfect. And then the last couple of minutes, I want to talk about profitability. Like the one message that came out so far today and is very consistent with like CFOs talking about like, okay, it’s a different time. The cost of capital is increasing. So, I need to think more about ROI and project ROI, like that means like I have faster failure for some new initiatives and things like that. Where are you on that kind of profitability journey? And you were always — like you were one of two companies in high growth, gross margins, like so unit cost economy must be really good anyway.
David Obstler
Yeah. So, I think it’s a very good point. So, I think that, number one, we have good unit cost economics from the way the platform is designed and that has always — and I think if you look at our D&A and our gross margin, we’ve always been very prudent cost managers, always investing not beyond our means, but doing this in all the environments.
Unidentified Analyst
Yeah.
David Obstler
We — I think we are facing a very long-term opportunity, so we don’t want to short change the company. But we essentially have always looked at sort of the top line weighted average over a long-term and try to invest against it, and we have these economies of scale. So, we’re going to continue to do that. That may mean that there’s a little higher bar, and we prioritize a little more. We don’t want to not invest in the priority. Some of the investments we make have returns in the shorter term, and some of them are longer term and we can play that against the top line to prioritize. I think as Oil said, we always have and we understand that we’re balancing growth against a long-term opportunity and profitability. And as you said, have always evidence that behavior, and we’ll continue to do so.
Unidentified Analyst
Yeah. Yeah. Okay. And then like that kind of translates into kind of cash flow, good cash flow generation, healthy cash flow. As a CFO now, how do you think about your cash, cash position usage of cash?
David Obstler
Yeah. I mean, we’ve been — we’ve been [indiscernible]. We’ve always had a very good cost — cash cushion.
Unidentified Analyst
Yeah. Yeah.
David Obstler
We’ve only burned in the history of the company before we became cash flow positive, believe it or not, in the 20s of millions of dollars. So, we’ve always been this way. So, we’re in a position where we have a good amount of cash. Our M&A strategy of basically aqua hires and always integrating the functionality in the platform has been very efficient as well. We’re not saying we’re never going to spend more money on acquisitions, but we’ve always sort of been able to be prudent there. And so, we’re essentially have a lot of flexibility and a lot — in our basic model, as you mentioned, that allows us to have degrees of freedom that as a CFO, I’m very thankful for that allow — allows us to make good choices, I think, in a variety of environments and manage that risk, and we’ll continue to do so.
Unidentified Analyst
Yeah. And then last question and then to let you to [indiscernible]. We had the LinkedIn CEO on stage here yesterday, and he said like the one thing out of the LinkedIn graph that was really interesting is that the New York and San Francisco are seeing the most inflow of people at the moment. So, people are coming back. In that respect, like — and then we also have the VC communit — VCE-funded companies all kind of looking a bit funny. Like what do you see in terms of hiring employee retention, et cetera, at the moment playing out for you?
David Obstler
We’ve been — number one, we’ve been leading the people back to the office for quite some time. We’ve never been a company where I say we’re going to be remote. We have — we have always maintained our discipline in hiring people, having gone in the crazy. We think that it will be a more benign environment for us. It’s a little too early to tell. But given what we’re seeing in terms of the competitive companies, whether it be the large companies like Facebook or Google, where the pre-IPOs. We think that puts us in a good position to press our competitive advantage and get the right people. So, we’re excited about that. But it’s too early to tell how much of a degree, but we think that will be coming.
End of Q&A
Unidentified Analyst
Perfect. Okay. Thanks for closing statement.
David Obstler
Thank you very much.
Unidentified Analyst
Good to have you, David.
David Obstler
Thank you.
Unidentified Analyst
Thank you.
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