Datadog : DDOG 1Q23 Transcript 5-4-23

Datadog, Inc. NasdaqGS:DDOG

FQ1 2023 Earnings Call Transcripts

Thursday, May 4, 2023 12:00 PM GMT

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Contents

Table of Contents

Call Participants	3
Presentation	4
Question and Answer	9

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DATADOG, INC. FQ1 2023 EARNINGS CALL MAY 04, 2023

Call Participants

EXECUTIVES

David M. Obstler

Chief Financial Officer

Olivier Pomel

Co-Founder, CEO & Director

Yuka Broderick

Investor Relations

ANALYSTS

Brad Robert Reback

Stifel, Nicolaus & Company,

Incorporated, Research Division

Brent John Thill

Jefferies LLC, Research Division

Gregg Steven Moskowitz

Mizuho Securities USA LLC, Research Division

Kasthuri Gopalan Rangan

Goldman Sachs Group, Inc., Research Division

Koji Ikeda

BofA Securities, Research Division

Mark Ronald Murphy

JPMorgan Chase & Co, Research Division

Matthew George Hedberg

RBC Capital Markets, Research

Division

Michael Joseph Cikos

Needham & Company, LLC, Research Division

Raimo Lenschow

Barclays Bank PLC, Research Division

Sanjit Kumar Singh

Morgan Stanley, Research Division

Unknown Analyst

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DATADOG, INC. FQ1 2023 EARNINGS CALL MAY 04, 2023

Presentation

Operator

Good morning, and thank you for standing by. Welcome to the First Quarter 2023 Datadog Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Yuka Broderick, Vice President of Investor Relations. Please go ahead.

Yuka Broderick

Investor Relations

Thank you, Michelle. Good morning, and thank you for joining us to review Datadog's first quarter 2023 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO; and David Obstler, Datadog's CFO.

During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the second quarter and the fiscal year 2023 and related notes and assumptions, our gross margins and operating margins, our strategy, our product capabilities and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10- K for the year-ended December 31, 2022. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter-ended March 31, 2023, and other filings with the SEC. This information is also available on the Investor Relations section of our website, along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com.

With that, I'd like to turn the call over to Olivier.

Olivier Pomel

Co-Founder, CEO & Director

Thanks, Yuka. Thank you all for joining us this morning. We are pleased with our execution in Q1 as we continued broadening our platform, delivering new use cases for our existing users as well as signing up more customers, all on the backdrop of continued macro uncertainty and optimization of cloud workloads.

Let me start with a review of our Q1 financial performance. In Q1, revenue was $482 million, an increase of 33% year-over-year and above the high end of our guidance range. Note that this number factors in the impact of a service outage we experienced in March and which reduced our revenue for the quarter by about $5 million.

We ended with about 25,500 customers, up from about 19,800 last year. Also note that we are now including customers who joined following our acquisition of Cloudcraft, representing about 1,400 net new customers to Datadog this quarter.

We ended the quarter with about 2,910 customers with ARR of $100,000 or more, up from about 2,250 last year. The customers generated about 85% of our ARR. And we generated free cash flow of $116 million, with a free cash flow margin of 24%.

Our platform strategy continues to resonate in the market. As of the end of Q1, 81% of customers were using 2 or more products, in line with last year. 43% of customers were using 4 or more products, up from 35% a year ago. And 19% of our customers were using 6 or more products, up from 12% last year.

Now let's discuss this quarter's business drivers. Overall, we experienced business conditions that were similar to the previous several quarters. In Q1, user's growth from existing customers came in roughly as expected. We saw existing customer users growth in

Q1 improved from the levels we saw in Q4, but remain a bit lower than the levels we experienced in Q2 and Q3. And as in recent quarters, we continue to see customers optimize their cloud spend, particularly those further along in their cloud migration and hosting a larger portion of their infrastructure in the cloud.

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DATADOG, INC. FQ1 2023 EARNINGS CALL MAY 04, 2023

Additionally, our new logo acquisition and bookings in Q1 were solid for what is a seasonally slower quarter. New local bookings reached a new record for Q1 and were up slightly from last year as we continued to add many promising new logos, which I'll discuss in a bit. With our land and expand model, we expect many of these new logos will turn into much larger customers as they add up more of our products over time.

Despite a more cost-conscious demand environment, we have continued to land new customers and expand existing ones, and we are very proud to achieve several key milestones in Q1. So first, our total ARR exceeded $2 billion for the first time, a true achievement for all of us at Datadog even though we all know we're only getting started.

Second, our APM suite and log management products together exceeded $1 billion in ARR. This demonstrates the expansion of our business well beyond our [indiscernible] monitoring product and our successful execution on the broad of the mobility platform.

Remember that our APM suite includes 4 Datadog products: core APM, Synthetics, Real User monitoring and Continuous profile.

Third, we continue to make steady progress with our cloud security products with continued growth in ARR and in customers. And I'm very pleased to announce that we now have more than 5,000 customers using our cloud security products.

Now let's move on to R&D. We introduced a number of new security capabilities last month. We announced the general availability of Application Vulnerability Management, which provides visibility into the attack surface of production environment by automatically surfacing vulnerabilities. And instead of submerging users with thousands upon thousands of vulnerabilities, this new functionality is observability data to prioritize risks based on the estimated impact to the business and closes the loop between security, operations and development teams.

We also introduced a number of new capabilities to our Cloud Security Management product. Workload security profiles allow customers to flag anomalous activity and improve overall accuracy of threat detection directly within the workload. And we now offer vulnerability detection for containers, automatically scanning live container images for known vulnerabilities.

Now moving on from security to observability, we also announced the general availability of Data Streams Monitoring. These products specifically targets queuing, streaming and even driven pipelines, such as Kafka or RabbitMQ. These systems often span many different teams and technologies and are notoriously difficult to manage and troubleshoot. And for this, even standard APM and log management solutions are not specialized enough. Data Streams Monitoring automatically identifies the topology, interdependencies and key metrics of complex streaming data pipelines, allowing customers to maintain availability, correctness and latency for what is now a critical part of their business.

Lastly, we were thrilled to unveil our newest data center in Japan last month. We see a large opportunity to serve our customers in the Asia Pacific region, which have seen significant growth over time and now represents high single digits as a percent of revenue.

I also want to take a moment and share our excitement for the latest wave of AI innovation. And I'm going to use AI in this community here to refer to the recent advances in deep learning, large language models and generative AI.

First, from a market perspective, over the long term, we believe AI will significantly expand our opportunity in observability and beyond. We seek massive improvements in developer productivity will allow individuals to write more applications and to do so faster than ever before. And as with past productivity increases, we think this will further shift value from writing code to observing, managing, fixing and securing live applications.

In the short to medium term, we believe the rise of AI will increase the demand for compute and storage to train and run models, but it will also increase the value of proprietary data and further drive digital transformation and cloud migration as these are all prerequisites for adoption. We also do expect quite a bit of noise in the market as the technology stack is progressing and changing very quickly.

Now from a product perspective, we believe that we at Datadog are uniquely positioned to deliver value to our customers in this new world. First, we built Datadog from day 1 as a pure SaaS business precisely to be able to put our data to work at full scale and to train models to solve our customers' problems.

Second, our large assets of contact with our customers gives us the insertion points to make AI relevant. This is where we see the value of having a variable customer base and being designed to be used every day by every single engineer.

And third, we serve today some of the largest builders and consumers of AI services and are quickly adapting to their needs in a rapidly changing field.

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