Datadog, Inc. (DDOG) Management Presents at Credit Suisse 26th Annual Technology Conference (Transcript)

Datadog, Inc. (NASDAQ:DDOG) Credit Suisse 26th Annual Technology Conference November 29, 2022 ET

Company Participants

David Obstler – Chief Financial Officer

Conference Call Participants

Fred Lee – Credit Suisse

Fred Lee

All right, welcome to Credit Suisse’s 26th Technology Conference. My name is Fred Lee, and I’m the Small and Mid-cap software analyst for the firm. And with me today is David Obstler from Datadog, Chief Financial Officer. Thank you for joining us today.

David Obstler

Thank you for having us today.

Fred Lee

I think everyone is familiar with Datadog, but I did want to start with a higher-level — start and talk about if you could talk about the company’s overall vision and what problems Datadog solves.

David Obstler

Okay. I want to say upfront because there — it will be related to some of the questions, that we are not giving intra-quarter commentary, so much of what or all of what we’re saying will be what we spoke about on our earnings call. As far as Datadog, so we are a multi-product monitoring platform that services DevOps in real-time client-facing applications. So, our clients are essentially deploying applications using modern development techniques, containers, microservices that are delivering their product to their client, and we provide a platform for them to monitor the uptime effectiveness of that platform. Some of the advantages of Datadog have been the single pane, everything in one platform, the fact that it is easy to use.

We call it simple, but not simplistic, fully function but easy to use, and it’s ubiquitous, meaning it’s not on the seat model, it’s either on a host model, a data or test model, meaning that the whole DevOps department and — can use it in order to put applications into production and monitor them.

Question-and-Answer Session

Q – Fred Lee

And so, what do you think is the long-term structural growth rate for the company? What are the key drivers to unlocking the industry and some of the value there? And a second part to that question is how closely tied is your business to hyperscaler unit growth?

David Obstler

Yes. So, essentially, the — first of all, I think I won’t repeat all the numbers, but we have a very large TAM. It is driven by workloads being put into the cloud. We think there’s a very, very long-term high growth rate, we won’t give a number specifically in this activity, that we’re early stages in it, and that applications — a significant minority of applications are being monitored in the cloud today. So, that is sort of the underpinnings of the company’s growth. As you know, as a public company, we’ve been growing so far in the range of, I think the low is 50%; the high is around 80%. We’ve always been growing at a higher rate than the hyperscalers. The hyperscalers have a broader business which is delivering applications that are more diversified, for instance, a number of the hyperscalers who are delivering office products or types of things.

And when we think about our growth rate relative to the hyperscalers, some of the reasons that we’ve been in excess of it are, one, we tend to focus on high-priority workloads, client-facing, modern DevOp — Dev and complicated applications. And we believe the growth rate of that cloud, the workload has been higher than the weighted average of the cloud providers. We also have been expanding our product suite. So, when you look at just the infrastructure portion of it, we’ve also added on a lot of elements to the platform. Five, six years ago, we’d didn’t have the logs and APM, much less some of the other products. So, that’s created a higher growth rate as clients have adopted more of the platform.

And we’ve also been winning market share in the market from both other companies and most likely open source, although most of our business is greenfield workloads.

Fred Lee

I’d love to touch a little bit on your product portfolio today. And where — how you would evaluate the overall portfolio, where you think you are missing some features, and the products that have the greatest customer pull?

David Obstler

So, the greatest customer pull has been landing and infrastructure, which is generally right after you move workloads to the cloud as a client, you need to monitor the infrastructure. But then extending that parts of the platform that clients are buying into the other main pieces which are APM and logs, and then on to digital experience, which monitors how clients are interfacing — of their clients are interfacing with their Web sites and using the applications. And so, the biggest opportunity is that we have relatively few customers, we have 20-some-thousdand, but that’s a fraction of the available universe. And most of our customers don’t have full-bore, who are infrastructure customers, logs in APM. So, there is a huge opportunity for us in having our clients adopt more of the platform.

If you look at the metrics we’ve produced in two products, over 80%. But then, when you go out to the metrics we — in six products, in four products, you see a very rapid increase on that. In fact, we said, I think a couple quarters ago, that our APM and logs, which we didn’t even have five years ago, were over $750 million. So, that’s a huge opportunity in selling more of the platform to our clients. The next opportunity would be more clients. Again, we’ve had very good success in new logos, but there are many, many customers who are not buying Datadog who are very early in their cloud journey. A lot of traditional enterprises are just scratching the surface. So, we think there’s lots of opportunity to acquire additional clients.

And then, when you look at the DevOps client base, how they’re expanding their use cases, and DevSecOps would be a good example of that where this is very, very new, but using security data and designing security into applications as they’re launched into production, rather than monitoring it after them, we think is a very large long-term opportunity. Last one I would say would be shift-left, and getting earlier in the process of developing software and deploying, and looking at the functionality, the software, which is a nice opportunity. In addition to that, we’re investing substantially in the platform itself. At Dash, those of you that listened or paid attention saw that we’re investing in workflow and automation and collaboration and many things around the platform to create better use cases for our clients. And we think that will long term be an opportunity anything that makes our DevOps customers have a more effective work experience that means they will use more of the platform.

Fred Lee

Now, you touched a little bit on this just a moment ago. But I would love to learn more about have DevOps vendors tend to lean more towards product-led growth models? What the benefits are? As your land is closer to 25,000 versus some of your peers in worth of 100,000, what are the benefits of a product-led model? And how do you see that evolving over the next few years as your customer bases are further penetrated in your larger customers?

David Obstler

One thing in looking at those numbers is we have a broader customer base from SMB to enterprise. So, I think in looking at those numbers that’s a weighted average. If you look at the enterprise side of things, it’s more like others. And if you look at our customers over $100,000, you’ll see that the average of those customers is around $600,000. So, we have had tremendous success in getting to numbers that are higher than the numbers that you cited in customers. Product-led growth and clients adopting, why is that so good? One, clients I say simple but not simplistic meaning the platform is very easy to use. Clients can put their data in it and begin using it right away. That has looking at our cohorts over many years proven to create a lot of expansion. And so, our whole structure and strategy around has been getting clients going. That’s possible because it’s so easy to implement. And then, as clients start using it, we are seeing very rapid growth of their usage and their demand for the product. So, we think we have proven out that not only is it quite efficient, it’s quite client pleasing. And it leads to the behavior of clients spreading out and growing it in a lot of places and not having it be centralized use but democratize use which creates a larger average purchase over the long term with us.

Fred Lee

And so, this leads me a little bit into yours new security offering. And you recently repackaged it into a bit of a CNAP portfolio -– CNAP offering. There is a private company called [Lizio] [Ph] that we have been doing a little bit work on. And they have rapidly grown to 100 million ARR. And it’s been largely from scratch. You have a large existing installed base. And considering the friction-less shift over in terms of selling to them installed base, why can’t security grow as quickly as Lizio security offering.

David Obstler

We think it can. And we haven’t released the numbers, but that we have been experiencing that very rapid growth. I would say on the one hand we’re still building the product. Same this for APM, we grew very rapidly in APM. It took us a number of years to build it and be fully function. So, we’re still in the process of building that functionality. But for the amount of functionality that we do have, we are seeing tremendous traction. And we agree with you. We do believe that the fact that we have the real estate the DevOps customer base using it and we have the data means that we have a tremendous competitive advantage that we think will play out over time and result in very rapid growth. It’s just early in our evolution as we continue to construct the product. Our announcements at Dash were steps along the way. And, we’re a lot closer to having a fully function product. But, we are still building that out. And so, I think it will be the building out of the product fully. And unleashing that into our custom base that will show in the end what the possibility of that for Datadog will be.

Fred Lee

And how should we think about the pricing strategy of the security offering? Will be it similar to AMP in infrastructure, or there will be differences?

David Obstler

Yes, it’s going to be based on the same types of things whether it would be host or whether it would be data or tests. That pricing strategy of making it very transparent and having clients able to tweak and use what they want. Generally within the platform, they can now use any of the products and pull them through has proven very effective. It’s been very flexible for clients. And it’s also helped the adoption of security in that clients have been able to use it, experiment with it. See what happens is similar to what happens to some of our other products. So, at the present we intend to apprise in similar ways, but of course, we are always open to feedback. We are always experimenting and looking at price and are open if that’s not the right way to go to learning and to evolving.

Fred Lee

And are there any structural reasons why the selling motion will be any different as we think about penetration of your security products?

David Obstler

It depends, a, who the users are and who is budget decision maker. So, if we are targeting DevOps and it’s going to be used by that cohort of clients, it should be able to be adopted the same way. But security tends to be a more centralized spend having an influencer of the security department and SeSo. And, it’s the yin and yang of that will determine whether it can flow through in a very similar motion to a fully similar motion to their ability or whether there will have be some other influencers. We don’t really know the answer. It could be that like DevOps, it’s used ground up organically. The SeSo sees it, I say what’s this and I say well, this is integral to all of our operations and it continues on. Or, it could be they are gatekeepers. And what we have always said is we are going to learn about that as we build up the product suit and are willing to invest in specialist overlays those types of things if we need to breakthrough another buying room. So, it’s really the cross section between the user persona and the buyer persona that determines the behavior that we have to evidence in go-to-market.

Fred Lee

And so, I know most of the competitive landscape as well as security is Greenfield today, but as it relates to your other offerings, can you talk a little bit about how the landscape has shifted, how it’s evolved over the past 5 years? Who is getting more aggressive? Who is becoming more competitive? Who is becoming less competitive?

David Obstler

It really hasn’t changed that much for our use case which is distributed real-time, client-facing monitoring of applications and infrastructure. It’s really been since we went public as Greenfield mainly. And it’s been open sourced. Clients put it together themselves or use point solution or use the cloud solutions or Datadog. And that really hasn’t changed. If you are going to different use cases on-premise, customized, then you have a number of the other competitors having positions. We don’t really compete very much with them. And they don’t compete very much with us around the edges. But, it’s always been that the largest competitor to us has been do it yourself and put together the components and still that’s the case. I think if it’s essentially we have able to I think begin to consolidate some of the other point solutions into our platform in our deals landing first with infrastructure. And that’s been going on for 3 of 4 years and will continue we believe. And so, the competitive landscape really hasn’t changed. Some of the smaller companies that have come up and been bought haven’t really increased the competitive intensity in the market in a material way which is part of what I mentioned when I said competition really hasn’t changed very much.

Fred Lee

Got it.

David Obstler

I think it has to do with at the very centre of Datadog, Datadog is relentlessly innovating and in product-led growth. And if we continue to do that and satisfy the client needs, it closes, and it deepens the moat or closes the opportunities in some ways.

Fred Lee

And so, a number of the questions — we get a lot of questions from investors about open source and the potential threats there. Can you talk about the advantages of Datadog versus open source specifically?

David Obstler

Yes. And open source, this choice has always been there. And there are clients that use Datadog and there are clients that use open source. And there are ones that use different components. So for the advantages of Datadog are that you get the best of breed. So if you are a manufacturing company to create this yourself, you are generally not going to have the best of breed monitoring platform. Your job is manufacturing widgets. And so, you generally get the best of breed. Generally, it’s cheaper meaning that the cost of creating the platform, maintaining the platform and having the IT staff to do it is higher than subscribing the Datadog. And that’s one of the ways we sell. And you get all the continual functionality which we have been very rapid in doing from Datadog. The reasons why you might want to go open-source would be that you want — we don’t offer an on-premise solution, meaning we monitor on-premise workloads, but we don’t offer a solution that is your own instance. So, if you want something that’s your own, particularly if it has to be highly customized, so maybe only you want it, or you might have regulatory requirements that in your mind think that you can’t use the cloud, then that type of client might want to do — put open-source components together; we don’t really compete for that, like it’s horses for courses.

Another reason could be that you have a large IT staff that you want to retain and you want them to have something to do; it’s not economic, but there are a lot of IT staffs out there that are very large. So, it’s those types of things. But I would say for the most part, is that you want something that is an on-premise that you create yourself that’s specialized for you, and is therefore a managed service like Datadog might not work for you.

Fred Lee

All right. Shifting gears a little bit, I just want to talk about the dinner last night.

David Obstler

Yes.

Fred Lee

And I think one of the key questions where there was a lot of conversation around was how you derive your guidance, how you derive, your guys your process that you go through.

David Obstler

Yes.

Fred Lee

And so, if you walk a little bit through your process how you come to your guidance and share with the audience?

David Obstler

Yes. I mean, in the shorter-term, we generally have guided, and we’re using conservative assumptions relative to what we had. So, one of the most important near-term assumptions would be the organic rate of growth. And so, we’ve tended to discount that. I think it was said last night that, for the most part, we’re taking the run rate of revenues at the end of the quarter, which is the ARR. Remember, during a quarter, you generally are ramping up your ARR, and carry that forward. And that’s the way we’ve always guided. I think that you’ve seen in different periods where the organic growth is at different ranges in the next quarter or two, that the beat goes up or down because of that. And so, we’ve always taken that conservative tact in guiding, assuming not much more business comes in, in the near-term.

And so, that’s been our approach. We’ve also been conservative in our EBIT guidance, you can see, you can just plot out how we’ve done versus how we’ve guided. So, that means we are forecasting light on revenues relative to the trends we’ve seen, and heavier on expenses relative to the trends we’ve seen. And that’s been our philosophy since we went public.

Fred Lee

I’ll ask one more question and then we’ll open it up for questions, if you have any. Another inbound that we regularly is around macroeconomic pressures, and should they persist.

David Obstler

Yes.

Fred Lee

If top line were to decelerate, how confident you are in protecting your margins?

David Obstler

Yes, good question. So, I think if you step back, we’ve had revenues accelerate and decelerate; we’ve seen this in COVID. We’ve always said that, really, our way of getting resources is really more limited by what we can do. And so, therefore, when revenue spikes up we’re not able to plan and get our resources to grow with revenues. And when they go down a little bit more we’re closer. And we’ve always been a company that’s lived within our means, meaning we’ve never invested beyond what we can afford. I think Ollie cites that, in the whole history of the company, before we had cash flow positive, we burned $28 million of cash. And we’re a pretty big company for that right now, so it’s always been the way we’ve been doing. And weighted average long-term, we’ll continue there.

There will be periods, we said, where revenues might spike up and we’re not able to invest. And there’ll be periods where revenues might [decel] [Ph] like they might be doing now, given what’s going on in the world. And in that case, we’re in a good position that we can continue to invest. But we’ve always calibrate, and we think there’s a long-term opportunity, so we want to continue to compound and do that. But we’re also cognizant that it’s a balance. We’ve always operated in a balance, and we’ll continue to watch that. So, I think that we’re going to try to continue to invest, but continue to be profitable like we’ve always been. And we can’t, with a straight face, guarantee that is always going to be the exact same margin because we don’t know what the world is going to bring. And we don’t want to shortchange the company, so there’ll be certain types of investments that we’re going to want to do in most environments. But we’re going to calibrate that. The fact that we have grown so much and made the investment means that we’re in a really good position in that we can continue to invest yet still be profitable and very cash-flow generative, and are going to continue to plot out the company in that way.

Fred Lee

Great. We have a lot of people in the room; let’s open it up for some questions.

Unidentified Analyst

Hi. Thanks for the time. I was hoping you could talk a bit about your end markets, and maybe how your end markets might be evolving in terms of their consumption? I also cover kind of the financial services space, and I’ve looked at your client base, and I can see what’s going on with the crypto side of the world. But just trying to understand what’s going on maybe in your end client base.

David Obstler

Yes. So, one thing is that we are very diversified by end market or industry because we are a reflection of the digital economy. And when you think about it, they’re manufacturing companies that are delivering product digitally; you’re talking about big money center banks, investment management companies, travel, airline, et cetera. So, we’re not that concentrated. I think at the time of COVID, we said one of the more impacted sectors was travel, which was, I think we said around 10%. So, what we said was that we’re not immune from what’s going on. So, in the parts of the end markets that are more cloud-native and have expanded very rapidly but are being affected. And you could put this — consumer discretionary in that, food delivery; we don’t have a very large crypto business but, of course, they’d be affected.

Those companies, the combination of them being affected and expanding too rapidly or, let’s say, too full in a number of different ways as a result, and that being the place where we’re seeing the most intense optimization. Now, we said that the sector of consumer discretionary is low double digits. And we have a number of sectors that are low double digits. We have some sectors that might be a little bigger, like enterprise software, which is more stable, or financial services like banks and insurance companies. So, it’s the weighted average of that. All sectors optimize over time. We’ve always said that. But it’s the relative intensity. And we’re finding that in the places where there’s been the most effect given what’s happened in the environment, are the places where it’s been most intense, and we report it that way.

Unidentified Analyst

Hi.

David Obstler

Hi.

Unidentified Analyst

I was wondering if you could just talk about, so if you land a customer and you start off on the infrastructure side and then you develop additional touch points on the APM log side, so then become pretty entrenched with the customer, just what it’s like from a rip and replace standpoint as a means to kind of assess your pricing power?

David Obstler

Yes, so we’re not a rip and replace company, it’s mainly greenfield, and we land with infrastructure, we’re generally the infrastructure provider. And what tends to happen is you just look at the metrics of adoption of the different parts of the platform, they tend to grow into the other parts of the platform over time. There are various things that get replaced from open-source to cloud-native, to some of the public companies. And it’s for this use case of real-time; they tend to consolidate on this platform over time. So, it happens gradually. And it’s been part of our expansion given what the clients really are trying to do is they really view this as — and if you saw a demo you’d say, “We only have one product, the platform,” and they want to use different parts of it. So, that’s the motion that we generally have.

I think you know from some of the things we’ve said that the businesses of APM and logs are roughly the same as the business of infrastructure, and that indicates that, essentially, having those part of it roughly results in double your spend with Datadog, and then if you’d had an infrastructure only.

Unidentified Analyst

Yes. And just to clarify, I guess, less of you rip and replace, and more it’s how difficult would it be to kind of replace Datadog once it hit — once you guys have established that platform?

David Obstler

Our gross retentions are in the mid-90s including SMB. We’ve said that, in the enterprise, it’s in the very high 90s. Most of our customers are essentially standardizing their processes on our platform and are using us as one of the main ways they do their business every day. They’re building on metrics dashboards and connection. So, we have seen huge stickiness. Generally, the industry is pretty sticky. It’s been that way for a long time. And the evidence we have so far is that once Datadog is entrenched and the way it spreads out ubiquitously, it’s very hard to get rid of Datadog. And one of the major reasons is that the users essentially tell anyone who tries to mess with that, I am not going to give up my Datadog.

Fred Lee

Any other questions?

Q – Unidentified Analyst

So last year at the conference, we asked you make a technology prediction. And one of the things you said was you expected a collapse of the silos between the DevOps and security. Wondering how that’s progressed relative to your expectation and your prediction? And I guess another prediction?

David Obstler

Yes. So, I think that on that one it’s happening. We have very meaningful revenues and the companies you are stating have had [indiscernible] revenues. So, we believe that this collapse of security and even sort of the shift left side is happening. We are really pleased with both our investments we have made, our acquisitions we have made, and we have made a very small shift-lift CI/CD. And it’s done really well. So, I think it is proving out that the collapse silos is a natural blow and it is continuing. And we think it’s very early in that and it will continue. As far as predictions, one thing that’s really struck me is that the type of customers and the end markets and industries that are adopting Datadog are some of the most stagy industries, and like it surprised me when you see farm machine equipment and plumbing manufacturers and traditional grocery stores. And so, my prediction here is that we are really early stages and that there is going to be tremendous sustainability of this trend of traditional industries marching. And that that will be less affected by economic concerns than we might have thought.

Fred Lee

Great, and thank you for your time today. Everyone enjoy [indiscernible].

David Obstler

Thanks. Thank you.

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