Datadog, Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Welcome to the Q1 2021 Datadog Earnings Conference Call. My name is Karen. I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Yuka Broderick, Head of Investor Relations. Yuka, you may begin.

[Yuka Broderick:]

Thank you, Karen. Good afternoon, and thank you for joining us today to review Datadog's first quarter 2021 financial results, which we announced in our press release issued after the close of market today. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO; and David Obstler, Datadog's CFO.

[Olivier Pomel:]

Thanks Yuka. Welcome to the team at Datadog. And thank you all for joining us today. We had a strong start to the year and are very pleased with our performance in Q1, which was strong across all parts of the business and again showed high growth at scale and demonstrated efficiencies. It has been a busy start of the year, we had two products become generally available, Continuous Profiler, and Incident Management. We closed the acquisition of Sqreen and Timber. And we continued to release new features and innovations across our platform. In addition, we continue to hire and build our team at a very rapid pace.

[David Obstler:]

Thanks, Olivier. We had a very strong start to the year revenues was $198.5 million, up 51% year-over-year against the challenging year ago comp. Usage trends were strong and show broad-based growth. New logo generation continues to be strong and customers continue to adopt more products across the platform. To provide some more context first, growth of existing customers was robust again, and our dollar base net retention rate remained above 130% for the 15 consecutive quarter. We are pleased with the usage growth of existing customers, which indicates continued adoption of our platform and continued migration to the cloud even in the face of macro pressures. As Oliv mentioned, usage growth was stronger than expected and above historical levels and usage growth was broad base across our customer base. Also, we added a record number of 100,000 plus customers in the quarter given our land and expand model, a majority of these ads were existing customers. In addition, we had a strong uptick in the quarter in million dollar customers.

[Operator:]

Thank you. We will now begin the question-and-answer session. And we do have our first question from Raimo Lenschow from Barclays.

[Raimo Lenschow:]

Hey, thanks and congrats on an amazing quarter. Olivier, can you – you talked about the growing momentum you have around APM and the recognition you get from the industry experts? Can you talk a little bit about where we are in terms of APM adoption in your client base in terms of number of applications that are getting properly monitored? And what are you seeing in terms of where you are getting used where maybe some of the traditional legacy guys are getting used for APM? Thank you.

[Olivier Pomel:]

Yes, so great question. I think we are seeing a lot of adoption from APM, I think anyway, we back an eternity ago, when we took the company public, we were saying that APM probably had a bit of a longer fuse to it, but had a very long runway as more and more applications move to the cloud and more than become critical, and that's what we see happen today. In terms of our penetration among customer application, that keeps up with the ratio of the – let's call it the instances or containers that are covered with APM from the total recycling containers that we see for infrastructure monitoring. There is quite a bit of runway in there, but that ratio is already higher than the famous Gartner Quadrant of 5% applications being monitored. So we think we're clearly targeting to build applications in major cloud environments. We are starting to see from some of our larger enterprise customers, some of their on-prem applications that are being instrumented with our APM as well, but I would say that’s more of a Phase 2 of adoption as opposed to what we have and how we start with customers.

[Operator:]

Thank you. And we do have our next question from Sanjit Singh from Morgan Stanley

[Sanjit Singh:]

Thank you for taking the questions, and congrats to the team on a really exceptional quarter, really good start to the year. To follow on Raimo’s question, I think what sort of impressing me is the multi product adoption, and frankly, in some of the newer category, so you mentioned APM logs, but you also called out networking as well, and some of the other new products. When you think about the networking opportunity, what's driving that strong growth? Is it just maturity of the product sort of being a year two product? Or did you see some benefits from some of the competitors like SolarWinds, of course the SUNBURST attack? How do you see that networking opportunity for Datadog relative to APM and some of the other products?

[Olivier Pomel:]

I think it's a combination of – there is a lot of market need, because networking, especially in next-generation cloud environment, and especially for companies that have one foot in the cloud and one foot in prem, is not something that is well covered in terms of monitoring and understanding, so there is a big need there. And the second part of that is, as you mentioned, the product maturity, I mean, that product is getting better and better, it covers more and more of the use cases, which means it goes from being great for a small number of customers to be in great form larger and larger fraction of our market and customer data. When do we switching off that is what we announced – mentioned in the call today, which is the our performance monitoring today also works for Microsoft, Windows. And as it turns out, it's very differentiated to have a cloud-based network performance monitoring product that also works on Microsoft, Windows, and it helps a lot of those customers with very hybrid deployment.

[Sanjit Singh:]

Makes a ton of sense, Olivier. And then as a follow-up question, as we think about the new announcement with a great hire for the CEO position. Can you sort of walk us through the thinking around why now is the right time to bring the CEO on board, is it about where the businesses in terms of scale, was there a certain new market segments that you want to target? What’s sort of the thinking behind bringing on a Chief Operating Officer in today’s doc?

[Olivier Pomel:]

Well, the thinking is we need to scale the team. We – fast forward a few years will be a lot bigger, and we're building a platform, there is a number of things that we'll need to do, right and there is a number of – there is going to be a number of times to solve along the way. And it was always given that we need to grow the bandwidth of the senior management team. And as we embarked on that, we also thought to bring into the company some experience with later stages of scale and growth look like for SaaS companies, and especially SaaS platform companies, which explains to you the hire we're making here.

[Sanjit Singh:]

Makes a lot of sense. Congrats again. Thank you.

[Operator:]

And we do have our next question from Brent Thill from Jefferies.

[Brent Thill:]

Thanks, I just wanted to follow-up on the question around Adam, obviously a huge endorsement for you guys. But Adam was the founder of a company and effectively was running a lot of the outbound activity. And I'm curious, most COOs, at least the definition of taking care of the inside of the company versus the outside. Can you just talk to his role on the outside and with customers in the interaction versus the folks on the inside, I think there is just some – trying to understand, where he is going to be spending most of his time?

[Olivier Pomel:]

Yes, it's a great question. And the focus is actually on a lot of the function. And these are going to have to do with servicing our customers and growing our customers. I won't go into too much details – our teams are – like, we have a fairly idiosyncratic setup for how we go-to-market and how we serve customers. That is aligned with our learn and expand low friction model. But, Adam is going to lead a number of those teams.

[Brent Thill:]

Okay, great.

[Olivier Pomel:]

And focus is outwards instead inwards.

[Brent Thill:]

Okay, that's great. A quick one for David, just you mentioned duration is up. Can you remind us what the duration is now versus what you saw a year ago?

[David Obstler:]

Yes, the billings duration we said, it's in the seven – around seven months and the contract duration spread out towards – more towards a year and then nine plus months. And it's maintain that so what we saw was over the last couple quarters, given the multi-year contracts and the increase of annual billing, the contract duration increased.

[Brent Thill:]

Okay, thanks for the color.

[David Obstler:]

Yes.

[Operator:]

And we do have our next question from Matt Hedberg from RBC.

[Matt Swanson:]

Yes. Thank you. This is actually Matt Swanson on for Matt. So thinking about the capabilities of screen and the potential cross-sell opportunities, could you give us a little color on what type of solutions your customers currently have to address these needs? And if you think of this as a competitive environment within your customer, it's more of another greenfield opportunity.

[Olivier Pomel:]

So it's really more of a greenfield opportunity. Today, customers typically don't have anything or they have something it's not really deployed. And the reason for that is that to inject application security inside the application, there's actually quite a bit of friction. Where the combination with Datadog and with our APM makes sense is that we've already incurred that friction to instrument the application with APM and the point of infection is the same. And that's where we think the proverbial one plus one equals three happens by adding Sqreen to Datadog. And I should say, it's only going to be the start, right. I mean, we – there's a lot more we want to do in application security. In the rest of security, the first step is we need to plug the detection protection directly at the APM level with Sqreen.

[Matt Swanson:]

And that kind of leads directly into what I wanted to go to for my second question, which is, Olivier, you guys are really have a front row seat to digital transformation. And you obviously then get to also see some of the security challenges that arise from that so what are some of those other areas of security that maybe you're seeing as pain points for your customers?

[Olivier Pomel:]

Well, there's many. Look to the – it seems like every other month, there's a large scale attack that brings a new array of security into focus. But the way we see the world and the way it leads to us, we're focusing on applications in the cloud. And for that, we think there are important aspects of it that happen at the application level, which is what we're addressing with Sqreen. There are important aspects of it, that are happening at the infrastructure level. And we have a few different products that we started last year. And that we're still developing and shipping around that, then there's one big part of it that has to do with putting all this information together into an actionable system of record. In the on-prem world would be a team. We also have a product, a security monitoring product that is a precursor to a team that we're building into a team that's not there yet. So we really intend to cover that whole spectrum specifically for applications to the cloud, and specifically for use cases that are going to bring together DevOps and security. In general, when you think of the problems companies have in this current environment. The first one is that the tooling is very bare bones, most of it doesn't exist or is too high friction, it doesn’t get developed, it doesn't get deployed. But the other thing that happens in most of the companies that is really, really hard to operationalize security because it's hard to get that in ops and security to be on the same page and work together. And that's where I think we can make a big difference if we use our platform the right way and if we build those products right.

[Matt Swanson:]

Thank you.

[Operator:]

And we do have our next question from Bhavan Suri from William Blair.

[Bhavan Suri:]

Hey, thanks for taking my question and congrats on another well executed quarter. I want to touch on the partner network. You announced kind of the launch of the former partner network in January kind of expands go-to-market, sell service for implementation and things like that. Can you just talk about the early interest you're seeing there, the traction because you're not a heavy services companies. There's not a lot of implementation or lift here. So how is that playing out? And kind of how does that play into sort of more of a medium term, long-term channel strategy. Is this really a growth driver? Is this sort of efficiency driver? How should we think about that?

[Olivier Pomel:]

So for us, it's really a growth driver, right. I think when you look at Datadog, we have plenty of efficiency. And the way we think about everything is how do we get the biggest part of that market, which we think is going to be gigantic? How do we build the products we need to get to all that? How do we reach all the customers across all regions in all segments to get there so that's how we think about it. So when we look at our partner program, we see it to that lens, and we are very happy with the adoptions we've had there. There's a number of things we need to do still, I mean, it's still I would say very early, we have validating wins, like we've talked about some of those in previous calls. But there's a lot more we want to build over the next year. I would say so, more specific update in this quarter. But I do expect that we'll talk about it again.

[Bhavan Suri:]

Got you, got you, got you. And then I want to touch a little bit on sort of pricing and competition kind of combined. If I were to look at pricing in general, you're viewed as kind of having a really attractive price point in terms of modern vendors. But then, as you get into enterprises, given the scale, you're being deployed at, whether pricing is cheap or expensive is different, but it becomes a big number. And guys, like New Relic, Sumo, Splunk, have all made adjustments to pricing models in the last 12 months. In your last quarter, you said you're having a pricing model. I'm just wondering, are you seeing any pushback at the enterprise level? Are you seeing customers after price concessions? Anecdotally, just some sense of the confidence you have that there is sort of a non-issue around pricing at the enterprise level, given the scale again, I'd love to understand how you think about that, and what you're seeing competitively those guys sort of use pricing as a FUD or maybe even as a way to get into some accounts.

[Olivier Pomel:]

Yes, so first of all, on pricing and price push back. Look, we have customers that pay us more than $10 million a year. I knew that somebody’s paying them $10 million a year and is not asking for a lower price. But look, at the end of the day, the way we think about it is this is very high leverage thing for our customers. And this is a tiny compared to what they spend on their infrastructure and on their engineering teams. And the way we think about pricing for all the data and everything they send us is that these models are going to grow exponentially over time. They're going to grow faster than these customers top line for all practical purposes. And so pricing will have to adapt, how smart we are about getting, interpreting that data, or how we price and how we structure the model that is customers care more and more with us. I will say that while we do have pricing conversation with customers, especially large ones, we don't see the kind of competitive pressure, you might imagine if you read the competition in the marketing website. The best illustration of that would be, David mentioned in the call that we had gross retention in the mid-90s. And this is stable across various segments of our customers. Also stable across products if you take each of our infrastructure APM and logs products individually, you see the same numbers. What this tells you is that there's very little that goes away. There's not a lot of room there for control price-driven competition.

[Bhavan Suri:]

Got you. Super helpful. Thank you. Thanks for taking my questions and great job again.

[Operator:]

And we do have our next question from Michael Turits from KeyBanc.

[Michael Turits:]

Hey, guys, first of all quick regulations. I’d like to continue on the competitive front relative to a couple of directions. One, obviously, announcement from Splunk recently; secondly, the impact of Open-source OpenTelemetry; and third, whether or not there’s any change from the cloud vendors recent announcement AWS.

[Olivier Pomel:]

So, I have the usual boring answer, which is that we don’t really see any change to the competitive landscape. It’s a bit early for me to comment on the Splunk announcements, because if they just did that yesterday, but from what we could see, it seems to be somewhat announcement from the repackaging of the product they had been doing for the past few quarters, and that we had seen in the market. So there’s no big change of surprise. And on the other side, that we don’t see from anybody else, we don’t see any big change that is impacting us much. The biggest impact of competitive announcements I see is, is typically the day of the announcement where somebody has to figure out what’s going on and explain it. And that’s about it. We don’t – we are not condition given a productive document, and we also know condition given in our go to market.

[Michael Turits:]

So let me follow up on that maybe just drill down further, I brought up OpenTelemetry, is there any sense that with those open to energy that the agent is essentially commoditize is that. So is that forcing you in any way to focus even more, so let’s call up the stack in terms of analytics or other value at.

[Olivier Pomel:]

Also we were so first of all, we fully – we all only know OpenTelemetry as well. And to us, it’s not a change, right, our agent was Open-source already. It’s – it was free for everybody, including our competition to reduce. We lean into open source format and libraries to instrument obligations for a very long time. And we support a large number of them. The way we see the problem is not like what matters is not with technology we use to get from here to there. What matters is to solve the end to end problem for our customers. And to make it as easy as possible for them to just plug us in and everything just work everything to show that we don’t get our mess, a gigantic mess with all these different technologies and applications and clouds, everything else. We turn that into something that the understanding is well ordered, without any effort. That’s what we hit the market in the end. And that’s what we see all of this and device bits and pieces that appear in the middle like the format’s and the libraries and everything else is will change and it has changed, will change its doesn’t matter.

[Michael Turits:]

Okay, thanks very much. Nice quarter.

[Operator:]

Next question from Jack Andrews from Needham.

[Jack Andrews:]

Good afternoon. Thanks for taking my question. I apologize, I’ve been jumping around calls. But I just had a broader question. Just – when we think about just the proliferation of new products that you can continue to introduce, how would you characterize where your Salesforce is in terms of just their knowledge and ability to really understand and appropriately sell all this functionality that you have to offer?

[Olivier Pomel:]

Well, so far it’s working. I think, look, we do have a fairly differentiated go to market and the way we organize internally, which to know where we land. We’ll end with and hope customers adopt your product, and how they learn about those products. So, it doesn’t rely on having every single sales rep, understanding every single little feature we have in every product to product, that wouldn’t be practical. So it is working, we’re very confident in that. I would say, there’s a point at which we might have to consider tweaking the way we go to market. And I think that we’ll have to do more with when we start actively selling to what might be different buyers. And I think we’ve discussed this before. But as I’m thinking more specifically of the security market, we’re not there yet. We’re not actively pushing to the security buyers today with our product. But when that happens, we might have to make some tweaks, win a day.

[Jack Andrews:]

Okay, thanks. So just as a quick follow up, can you maybe just talk about how much of your new business today is perhaps generated from partnerships with the public cloud vendors, I believe, have strategic relationships with all three of the big clouds entering the year here. So, how should we be thinking about their relative contributions moving forward?

[Olivier Pomel:]

So, we don’t have any, any numbers to share on that. I will say that, a lot of the historically a lot of that has been informal in that we work alongside the provider, but there’s no formal agreement or RevShare and everything else. We started to put some of those in place more recently, around the committed resources for going to market jointly, things like that. But we didn’t have anything to share on that.

[Jack Andrews:]

Okay, thanks. Congratulations on the result.

[Operator:]

And we do have our next question from Andrew Nowinski from Davidson.

[Andrew Nowinski:]

Customers, I think he had 97 in Q4 that spent over a million in ARR. Can you just give us any more color around what do you call the strong uptick in those customers this quarter? And then did you have any outsize deals in the quarter?

[David Obstler:]

Let me just take that as a metric. We said we were going to announce that once a year and give some comment on flavors. So, we’re not going to give the number but, it was a – it’s a strong uptick. And as we talked about, it has a lot to do with the expansion of customers into that $1 million range. As far as a concentration in the quarter, nothing out of the ordinary, we continue to have some very needy labs, but given the land and expand model and the number of customers bring on we don’t have a concentration that produces a quarter.

[Andrew Nowinski:]

Okay, great. And then maybe just a follow up question on the gross margin side, you ticked down a little bit lower than expected. Was there anything abnormal on the gross margin side? Did you expect that to come back up going forward?

[David Obstler:]

It’s the way we see.

[Olivier Pomel:]

Go ahead David.

[David Obstler:]

Yes, sorry…

[Olivier Pomel:]

Yes, so on a gross margin, so the way we think about this is due to us having the product teams work on product development, instead of working on optimizing, and we’re still happy with gross margins where they are, they might still fluctuate, they probably would fluctuate a bit lower than they were last year because we’re very busy building product. But there’s nothing fundamentally changed around our margin. And there’s many other things we can do in the future to optimize if we so wish. So right now the call we’re making is we focus on product development, we focus on making sure that we grow the top-line in the short and mid-term and then we – if things get out of hand on the gross margin side, we’ll spend some more time on optimization.

[Andrew Nowinski:]

Got it? Thank you.

[Operator:]

And we do have our next question from Chris Merwin from Goldman Sachs.

[Chris Merwin:]

All right, thanks for taking my question. I wanted to ask about the CRO position, I think you mentioned that in prepared remarks looking for a new one. I mean, should we take that to mean that perhaps is more even more of an enterprise focus as it relates to your go to market organization? Just curious, what type of person you’re looking for? And what if anything we should read in queue as we think about any sort of evolution with the go to market motion of the of the company. Thank you.

[Olivier Pomel:]

Yes, there’s really nothing to read to it. I think it’s a continuation of what we have. Right now where we have a deep bench on the leadership side, we’re very happy with the leadership we have in place. And we’ll still be looking at going to be looking for a new CRO, and we’re going to be looking at candidates both internally and externally for that, but there’s no willing desire to change course or anything fundamentally different from where we were.

[Chris Merwin:]

Got it, thank you. And apologies if this has been asked, but in terms of duration, I know that, in prior quarters, it seems like that was coming in customers were looking to do shorter deals, anything changing on that front? I mean, it seems like all the work has been in the business, certainly, as we get into recovery here used to just going higher. Just curious, if you could comment on duration?

[David Obstler:]

Yes, it pulled in, and we talked about in Q3 as risk management happened. And then we said in Q4, both billings and contract duration pulled back out basically, in billings, in the seven to eight and contract duration nine, 10s around that. And it has to do with, client preferences. And we continued to have that same sort of duration in Q1 that we had in Q4. So it's very similar to the trend we talked about last time, which is more duration on contracts year-over-year but between Q4 and Q1, there really wasn't much change in the way clients approached the contracting.

[Chris Merwin:]

Got it. Thank you very much.

[Operator:]

And we do have our next question from a Yun Kim from Loop Capital.

[Yun Kim:]

Great. First, congrats on a strong quarter Oli and David, you mentioned that a strong usage trend, driving strong results in the quarter, is there any way to qualify whether that joins in usage came from, existing deployments, or relatively new deployments that just happened to ramp in the quarter and then also, on usage, I know it's only Q1. But how much of that strings in usage was already captured in the contract versus, the usage that came in well above contract provision, so that cause customers to kind of renew at a higher contract volume. Thank you.

[Olivier Pomel:]

Do you want to take? I'll start with that. So we had, it was very broad based across industries, we had a combination of customers that we brought on with the strong new logos in the second half of the year, and in Q1 begin to ramp because we are land and expand. And customers that were already using us and have been using us for a year or more increase their activities. We think it has a lot to do with the increase of activity on digital transformation and workloads. As in previous quarters, about two thirds of the increase of usage was from customers using more of the products they had purchased in the previous period and about one third was a cross sell or new and that continued in the quarter. So it was a combination of new logos, increased usage of existing products, and very robust cross selling and adoption of the bought one.

[Yun Kim:]

Okay, great. So there wasn't any necessarily different trends that kind of draw the outside in the usage trend in the quarter, per se from previous quarters.

[Olivier Pomel:]

It was very, it was brought all that, all three of those were positive in terms of both the scaling of new customers, the cross-sell and the increased usage of existing products.

[Yun Kim:]

Okay, great. And then just last question for me, can you just talk about any geographical trend that you're seeing out there that you expect to see for this year, especially in Europe. Thanks.

[David Obstler:]

Europe, let me take that. Europe has been strong for us. We have not seen the slower vaccination attract and we have seen, pretty good resumption of growth across all the geographies. We'll have to continue to watch it because there's variation in back to work and back to office but as it relates to Q1 and Q4 we saw fairly uniform strength across the regions.

[Yun Kim:]

Okay, great. Thank you so much.

[Operator:]

And we do have our next question from Gregg Moskowitz from Mizuho.

[Gregg Moskowitz:]

Okay, thank you very much and really nice quarter guys. First question is on Datadog continuous profiler and now that it's GA, what sort of trial and paid activity? Have you seen so far? It would seem like there would be a lot of interest in getting ongoing visibility into COVID performance. But any early anecdotes would be helpful there?

[David Obstler:]

Yes, so very happy with the product being very strong out of the gate. We don't have any numbers to share. And just to explore early in its cycle that is still number of things that we need to do to the product so that, it works well for everyone who wants to use it. But it's a product that is very beloved by its users put it this way. So it's got a very strong fan, a feeling that they can give you.

[Gregg Moskowitz:]

Okay, that's great. And then, you mentioned earlier that you saw an uptick in metrics, would you say that your internal metrics are back to pre pandemic levels or not quite yet?

[Olivier Pomel:]

Well, I think it's at this point, I'm losing track of what we're comparing to that pre pandemic level. So far back, but we love we're very happy with what happened over the Q3, Q4 and Q1. We had a very, very strong Q1. We still think, we don't know what the macro is going to who is going to impact us we still think the, because all customers are having an affected the same way, the same time. We just feel a bit more uncertain. There used to be, but look, we feel good about the business, right. I think we just increase the guidance for the full year. I think it went from 38% so close to 47%. That should tell you that we forget about where we are in about the business.

[Gregg Moskowitz:]

Okay, that's helpful. Thanks, Olivier.

[Operator:]

This concludes the question and answer portion. I will now turn the call over to Olivier Pomel for closing remarks.

[Olivier Pomel:]

Thank you. And in closing, I would just want to reiterate that we're very, very pleased with our performance to start the year. That I am personally very proud of our execution that I want to thank all of our employees or Datadog’s for the continued hard work. Thank you all.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.