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Datadog, Inc. (NASDAQ:DDOG) The RBC Capital Markets World TIMT Convention Name November 14, 2023 1:20 PM ET
Firm Contributors
David Obstler – Chief Monetary Officer
Convention Name Contributors
Matthew George – RBC
Matthew George
We bought a pleasant dimension group right here. So I’ll work via some questions, and we’ll definitely permit a while for Q&A. And with a gaggle like this one, we’d get a query or two. So we’ll see. Get your questions prepared now…
David Obstler
Ask questions.
Matthew George
Sure, please. So sure, queue them up, get them prepared, we’ll get to that ultimately. So sure, with us this afternoon slot, we’ve bought David Obstler, CFO of Datadog; Yuka Broderick, IR down in entrance. Thanks, Yuka, for coming as properly.
Query-and-Reply Session
Q – Matthew George
So I suppose, David, for you, you guys got here off actually sturdy. There was a whole lot of concern [indiscernible]. You guys had actually, very nice outcomes. How do you’re feeling in regards to the macro tendencies you noticed? You talked about them type of publish the quarter into October. Perhaps carry us via the yr as a result of it’s been a bit little bit of an uneven yr. Let’s speak about what you stated via October.
David Obstler
Sure. Now we have a cloud-based consumption mannequin. Our revenues are related to monitoring cloud workloads, and that signifies that we’re correlated broadly to the workloads which can be via the hyperscalers in addition to how shoppers use the platform and all of the instruments. And we’ve been for properly over a yr in a price administration setting, Fed elevating charges and issues like that. And we’ve been speaking for the final year-plus in regards to the phrase optimization and shoppers managing their price construction, not shocking. There was some very caffeinated development within the interval from 2021 into a bit bit ‘22. And lots of of these corporations that had – had been cloud information and had expanded essentially the most quickly, have taken a crack at their price construction. That’s due to the adjustments of their enterprise. That’s due to all of you folks transferring from development in any respect price to a stability. It’s going to occur. And in order that resulted in some stress on our present prospects use of the platform.
I believe we talked over a yr in the past a couple of cohort of cloud-native, quickly scaled in some affected industries. And that group had moderated their utilization. And what we stated final quarter was that we began to see indicators of some stabilization in that cohort. And on this quarter, we stated that occurred. So essentially the most intense interval of the optimization that we’ve seen to this point was in the midst of Q2. And that relieved itself a bit bit. After which we stated throughout the entire buyer base, there’s an general price administration, so there’s extra concentrate on price. And whereas the remainder of the shopper base, even down into the SMB, and hasn’t been affected as a lot, there was an general form of administration lowering the speed of development of consumption of the platform. So we stated on the earnings name that we’re not declaring the top of this era. We predict there’ll nonetheless be optimization, all the time is, however that a number of the most intense areas had abated and a few of them have even begun to develop a bit bit. In order that’s form of updating everyone on what we’ve been via.
Matthew George
We, I simply – we had a keynote we talked about a few of these tendencies. And I believe the time period that we talked about at lunch was cloud – being cloud good. And as you discuss to form of prospects, I imply it’s a journey, proper? However like, I imply you stated like this era of most intense optimization has no less than settled out a bit bit right here. And even once you discuss – is there a technique to form of quantitatively take into consideration if I used to be spending X, now I’m doing this, and like that is the brand new baseline? Or like is there a chance, do you assume, for form of getting smarter even with cloud spend?
David Obstler
Sure. Sure, undoubtedly. And that occurs on a regular basis. So that is simply – so we’ve stated that cloud permits you – one of many advantages of placing your purposes on the cloud is you could management burst-up conversion, you possibly can handle capability. And it’s rather more versatile than a knowledge heart mannequin once you’re invested in CapEx or in some methods a similar mannequin. And in order that’s undoubtedly one of many advantages. We discover that our prospects are all the time – had been all the time on the lookout for optimization tasks. It’s simply that in that interval of emphasis on development, and never on good cloud, a whole lot of the world would emphasize pace and placing capability on and didn’t emphasize what they’d completed all alongside, which was optimizing that and taking a look at, as you say, cloud good. So the phrase earlier than that was cloud good for essentially the most half, and it appears prefer it’s returning to that. And I believe the businesses that had put an emphasis on their operations all alongside had been cloud good.
Matthew George
Sure. Fascinating. And also you stated – so I believe you made a remark a second in the past, I do know you made it on the earnings name, about a number of the most closely impacted prospects had been truly beginning to perhaps even do some bit higher and present some like, I don’t know, when you stated acceleration, however even higher tendencies there. Perhaps speak about – was that as a result of do you assume they optimized virtually an excessive amount of and now they’re type of coming again? Or what was the dynamic there?
David Obstler
Sure, the conduct there evidencing is that they rightsized. Lots of them – and we talked about signing contracts – our commitments with us and long run. Lots of them discovered the best equilibrium. One of many nice issues about our product is it’s form of essential utility. So in – for the huge, overwhelming majority, and you’ll see it within the gross retentions, it’s not a matter of turning it off, switching, insourcing, it’s a matter of calibrating the price. And so we noticed that exercise, after which we noticed a interval of extra dedication in there. After which I believe we stated, we noticed some modest development in that group. So we don’t know. We don’t know what’s going to occur subsequent. However that possible signifies that for this cohort, which is essentially the most impacted, the load down the decal and perhaps even to slicing their prices most likely is easing.
Matthew George
Even one of many issues that we have a look at for you guys and different consumption mannequin, everyone – we’re on the sting of our chairs on AWS, Azure, GCP prints. Once you have a look at your numbers internally versus what these guys say and the way correlated is – what sort of a correlation do you see? Like others, are you stunned when, I don’t know, choose GCP – choose a hyperscaler – once they say they’re form of like extra constructive or form of extra adverse feedback or is [indiscernible]
David Obstler
Nicely, I might say, we’re correlated long-term as a result of we’re correlated to cloud work. That’s okay. And we’re correlated to fashionable DevOps and cloud workloads. So elevate and shift, selecting monolithic legacy purposes. Lifting isn’t a Datadog – isn’t what Datadog does. So I might make 3 feedback. One, long-term, we’re correlated; two, the cloud – the hyperscalers have a wider enterprise than these fashionable workloads and more than likely, AWS has extra of their enterprise in these sort of workloads. And once you see some others and so they announce it, they are saying there are many different issues in right here. There’s Microsoft Workplace, there’s G-Suite, etcetera. And we’re not correlated to that. So I believe it’s not excellent. It’s directional. After which the opposite factor is it’s not timed completely as a result of the overwhelming majority of the expense is within the cloud, it’s many occasions. And what they do on their monitoring and the opposite components of it that aren’t host-based pricing can have completely different timing. So directionally in long-term, it’s correlated. And I do know all of yous try to get every day correlation, and it’s not going to be that excellent as a result of the cloud suppliers don’t provide the numbers and be capable to try this. And it’s not a one-for-one minute correlation.
Matthew George
Wonderful.
David Obstler
Sorry about that.
Matthew George
No, that’s a great – no, that’s – we’re all the time attempting to search for these little incremental nuggets. Final quarter, you talked about bigger prospects rising at a slower price than smaller prospects. Perhaps discuss a bit bit about that and the way this lengthy tail of small buyer spending might have impacted type of internet buyer additions.
David Obstler
Sure, undoubtedly. So let’s go to that first as a result of that’s not a greenback quantity, that’s a internet buyer. After which we’ll go to what we name the paying prospects. So basically, sure, we’ve had very – we report internet. Now we have very – we’ve had very comparable and constant gross. And the gross has been at a bit bit greater of a mean land. We’ll speak about that in a second. So beneath of this internet, the gross has been actually strong all through this era. Now we have a freemium to very low-use mannequin bottoms-up. And we have now a really lengthy tail, $5 a month, etcetera. So what we skilled because the financial problem is that this very lengthy tail isn’t – there are a few of them that drop out. I believe we stated in Q2 that, that group accounted for $50,000 of complete income. So that is simply – we simply need – that is about getting customers to make use of the product.
Sure, they’re free and in the event that they get a sure variety of hosts, they flip over into pay, then they could flip. In order that’s actually the gross internet story. The low finish and all the things is one thing we might watch, however it’s extra advertising expense, attempting to get folks to make use of it. Then when it comes to dimension of buyer, we’ve all the time had the best internet retention and – in smaller prospects after which in ramping prospects. And we’ve all the time had internet retention in SMB that’s been – that we stated is far the identical as enterprise. And it has to do as a result of it’s workload-related. So – and that’s more than likely as a result of as prospects are ramping their workloads in a brand new product, they’re rising quicker. And it tends to be net-net. In the event that they’re smaller, they’re not as ramped and so they develop quicker. In order that’s what’s been within the firm from day 1.
Every little thing – and as I discussed, there was essentially the most affected after which all of the cohorts notch down due to price administration, however they keep their hierarchy in spend, which means the smallest prospects and SMB rising essentially the most on a internet retention foundation. Now that’s – in order that’s form of what occurred, all the things not sham.
Matthew George
Wonderful. And I suppose on condition that consumption pricing mannequin, do you discover – and clearly, we’re seeing increasingly corporations undertake that. And it seems like that’s going to type of speed up from a brand new software program mannequin perspective. Does that assist onboarding? And does that assist your onboarding initiative once you’re form of paying for ROI from that perspective?
David Obstler
Positively, there’s no query that land and increase. And basically, we begin out all the time with a free trial, which takes no time to arrange. So our shoppers are utilizing our product. After which they resolve after they run their experiences in the event that they need to use it due to the way in which the platform is about as much as not have any implementation. So having that potential to get on actually rapidly after which handle your dedication flexibly has been – is among the nice issues about cloud. It’s not simply Datadog, it’s additionally the hyperscalers, etcetera.
So basically, they’re in a position to commit conservatively as a result of these are newer workloads, see how these workloads scale. Everyone we do, you use with some on demand for flexibility up and down. After which when you see your workloads, you possibly can recommit. And that’s what occurs with the hyperscalers and Datadog. It’s a really versatile mannequin and in addition a mannequin that has been essential to our prospects. We additionally function in a – similar factor because the hyperscalers on a dedication, which means you select which merchandise, however you need to use the platform so you possibly can basically swap between merchandise. It’s actually one product. And you may also resolve between reserve companies and versatile.
And so this, once more, we didn’t invent it. It was the hyperscaler, and it’s the way in which our prospects purchase. Nevertheless it gives a whole lot of flexibility. So that you don’t need to go all the way in which and construct a giant information heart. You don’t need to decide to seats that you could be or might not use, and that’s how the product will get adopted ubiquitously and been on the core of Datadog’s success.
Matthew George
You – so that you began out the yr, I imagine your income steering was 25%, and then you definately lowered it to 23%. And now it’s again to 26%, above the place you, I believe, initially began. Discuss a bit bit about your steering philosophy. I do know it hasn’t modified. however simply assist us take into consideration the way you construct your steering form of the assumptions constructed into This fall?
David Obstler
Sure. I imply a few issues. One, as you progress extra within the yr, extra of the yr is baked, and so your variability when you get to This fall is simply about This fall. So that you’ve have already got all that. So naturally, if the tendencies have confirmed that you simply’re at 25% or 26%, there’s not that a lot that may occur within the fourth quarter to vary that very a lot. That’s one factor. So that can all the time occur. By way of steering, we mainly appeared on the information units and the setting. And we haven’t modified. We’ve mainly low cost the main drivers, that are the online retention natural development price or utilization development and the brand new logos. And we have a look at the setting and attempt to take a – it’s a danger administration train, attempt to create a risk-adjusted income quantity.
And if the world is best than that and even higher than we had deliberate for that danger adjustment, then the beat is best than that. After which in Q2, we had – we stated we had decrease natural or decrease utilization development than we had beforehand. And that may – we take that info and say, since we don’t management this utterly, we’re going to risk-manage that down, and that can lead to steering getting decrease. It’s a danger administration train to attempt to keep the cushion.
Matthew George
So I believe you stated you set extra weighting on a number of the more moderen information factors than you probably did earlier – in your earlier information. I’m curious, once you get into the ‘24 budgeting cycle, how lengthy will you keep that Q2 information level as a part of your form of your pondering…
David Obstler
We’re trying on the – so in fact, we’re not going to offer steering off of the COVID interval as a result of it isn’t as related. So we’re attempting to find out via analytics, via taking a look at slicing and dicing our buyer base by dimension, by cohort, by cloud-native, by product and searching on the information we get a report each morning. So we’re simply mainly each week aggregating that and attempting to see what we expect is the state of play. It will possibly’t be excellent. We don’t management it, however there’s not a formulation. We’re basically risk-managing what we expect is the setting. And so we’ll use not simply – as we stated, we’re not utilizing October or September. We’re utilizing all of it, a knowledge set. I don’t know learn how to reply the query as a result of it adjustments over time. Whether or not that’s 4 quarters or 5 quarters or three quarters, it has to do with how tendencies are transferring.
Matthew George
Okay. In order that’s – I suppose, sure, that’s a…
David Obstler
We’re attempting – I’m attempting to not disintermediate myself and lose a job. If we will create an AI CFO, I’m gone. So I’m attempting to – there’s a human aspect in that, in fact. I would try this for some time, sure.
Matthew George
So I suppose the – properly, I’m positive there’s any person engaged on that.
David Obstler
Sure, most likely, and that ought to be nice. I gained’t inform – you all have it, however I gained’t inform everyone for some time after which, sure.
Matthew George
So I suppose – so I imply – as a result of once I take into consideration that Q2 information level, clearly, there was some negativity in that quarter. I suppose the query is like that – it feels prefer it’s going to be a part of your thought course of for a while. Sooner or later, it’s going to be to date eliminated that you simply be like okay…
David Obstler
It’s whether or not that was an aberration, a backside associated to – and also you solely know that as your time sequence developed. So at that time, that is a part of our philosophy. We stated the world is unsure. This could possibly be the development, proper, going ahead. So we took down our steering assuming that. Now what we do subsequent yr will likely be based mostly on have we had sufficient of a time sequence and the analytics round buyer base and utilization to really feel assured that we have now form of a steady or growing set of metrics, after which we’ll low cost from that. That’s what we’re doing.
Matthew George
Okay. That’s useful. from a This fall perspective, let’s simply say issues simply type of keep establishment. That also implies – I imply, based mostly off of your discounted assumption, that’s nonetheless a beat state of affairs…
David Obstler
Nicely, all the things. So mainly, what we might do is we all the time take the established order and focus on it. That’s what – I imply let’s name it danger administration reasonably than beat. However mainly, that’s what we’re doing. We’re mainly taking the assumptions that we see within the enterprise, and we’re constructing a conservatism, which if issues don’t change, in the event that they keep the place they’re, builds in a beat.
Matthew George
Sure. Okay. Larger beat if issues get higher?
David Obstler
Extra pace in the event that they don’t. Sure, sure.
Matthew George
Sure. Sure. Nicely, let’s hold specializing in issues getting higher…
David Obstler
I’ve to try this for you. I’ve to mainly have a look at her and go – so Matt. However…
Matthew George
Alright. That’s useful perspective. You lately introduced two new DevSecOps packages, which I believed was actually fascinating. How do you concentrate on – I imply they’re simply model new, so it’s most likely – you don’t have a lot information on it. However like how do you concentrate on issues like that driving the mannequin? Like how do you concentrate on that as a driver?
David Obstler
Sure. So basically, pondering again, when you have a look at on the web site, you’ll see that the philosophy of pricing of Datadog is to make use of the nomenclature, host, check, information and to place performance on prime. So as an example, when you’re shopping for infrastructure and also you need one thing that has extra containers otherwise you need community or when you’re shopping for APM and also you desire a code profiling otherwise you need – so that’s the approach our prospects purchase. And so they like that as a result of they mainly can assume I’m shopping for infrastructure is basically infrastructure, APM and logs, proper? However I’m getting this performance. So up to now couple of years, we’ve been form of constructing this product line and attending to the purpose the place we might do greater than put it on the market and having sure prospects use it. So this can be a mark that we’re assured sufficient to bundle it, nonetheless centered on this case on DevSecOps.
However the way in which they purchase and the way in which we’ve conditioned them is to purchase as this publish price plus incremental quantity. And so it’s nonetheless too early. Now we have some good suggestions and we discuss to shoppers about it. However basically, this can be a packaging that’s in line with the way in which we package deal to our buyer base, made attainable by the variety of use instances coated having prolonged, so it may be extra broadly bought via.
Matthew George
Sure, that is smart.
David Obstler
What it does to the gross sales, we clearly did it as a result of we thought it was a great transfer to reinforce the gross sales tempo. We should see. It’s too early, sure.
Matthew George
One different – I might need to return to pricing as a result of I bought to ask it, too. There’s a actual tie to ROI with what you guys do. Plenty of us will discuss to prospects, and they’ll say, properly, I like Datadog, Gee, it’s like my Datadog spend simply will get actually huge. How do you concentrate on like – fascinated about these strategic prospects? Do you need to present – I imply it’s not shelf-ware, proper? So, like how are these conversations with prospects that impulsively begins to make $5 million, $10 million a yr with you guys? And like I like it, however I don’t need it to go to $20 million for what, choose a quantity. However like how are these conversations?
David Obstler
We do it in so some ways, and we have now all the time completed it. So mainly, we need to worth transparently. Now we have a CS group and a technical account administration group which have all the time labored with shoppers to assist them use the product. Now we have developed extra SKUs the place – TAM, the place we basically go in, and we assist a consumer use it accurately. A lot of the ramping unintended is because of person error or not setting it proper. So, we attempt to assist shoppers get to the best spend. We even have pricing that’s based mostly on quantity, reserve and time period. We even have a complete group, like you might be saying, that goes in and helps the consumer perceive the return on funding. We do evaluation versus different distributors, open supply and having slower remediation. And I believe in our script, we had numerous issues that the place we stated the return on that is fairly excessive. So, we have now all the time, and we have now gotten higher at it, serving to shoppers perceive learn how to get return and in addition learn how to use our increasing product set to get essentially the most return. So, it’s serving to our shoppers long-term is why we have now that gross retention price within the very high-90s and why basically shoppers don’t typically depart us. They typically work on attempting to make use of the platform extra effectively.
Matthew George
The opposite nugget that I believe – I believe it was a brand new nugget for Q3, you stated 2.5% of your ARR was from Gen AI corporations. Discuss a bit bit extra about that as a result of I believe it’s a fantastic quantity. But additionally for corporations that aren’t like a financial institution like RBC, how are we fascinated about Datadog from a Gen AI perspective as properly?
David Obstler
Sure. So, I believe we gave the metric for the primary time final time after we introduced our product line at Sprint. So, there’s three issues. The primary and most speedy is there are a variety of contemporary software program corporations which can be creating instruments within the AI stack, numerous them. And that’s – and they’re basically delivering software program and providers to shoppers. And that’s one among our experience space is in monitoring, client-facing, fashionable improvement software program. So, these could be the expertise corporations. That’s 2.5%, okay. That’s been rising very quickly. So, it’s all the time good to have sectors the place your product match is basically, actually good and the way in which you mannequin. And in order that’s one. The second factor could be that we have now developed – we have now introduced and are constructing out numerous LLM monitoring modules in our platform, and we’re constructing integrations. And that’s the place an RBC or one thing, if and when they’re injecting AI into client-facing real-time software program, it’s not in regards to the advertising division producing collateral, that’s not what we actually is. However – and that’s trying like very early that there are use of those integrations that’s model-level monitoring and the way it interacts with the software program. And that, we expect though it’s too early to present you a quantity, goes to lead to a rise in workloads that we’re monitoring. So, we’re constructing the platform for that. So, that’s quantity two. I don’t assume there’s – as Oliver say, it’s too early. That’s not having but a significant impact on our numbers proper now. And the third could be within the platform itself to make – to introduce extra AI capabilities, together with our ChatBot, our Bits in addition to issues like self-remediation or auto remediation. That’s platform, which we have now, as we have now completed this through the years, gotten broader adoption on the platform, extra consumer retention and extra market share available in the market as we have now completed that. So, these are the 3 ways we expect we will monetize this chance.
Matthew George
Positive. When you concentrate on – you didn’t information to ‘24, and I do know you aren’t going to present steering at present. However when you had been fascinated about constructing blocks, you might be sitting in our footwear, how will we take into consideration form of like the main drivers to subsequent yr? Clearly, we’re all taking a look at perhaps cloud consumption has bottomed and perhaps begins to enhance, that clearly is an effective factor. However how would you recommend we take into consideration modeling with out guiding us?
David Obstler
Sure. I imply it’s mainly internet retention plus the layering in of recent prospects and modeling out as they arrive in control. And I believe we have now numbers in our disclosure. I believe this time in our Q, it was 60%, 65% of income development comes from present prospects and 35%. So, it’s a mannequin that may then fluctuate the online retention, leading to that 65% transferring after which creating your individual view on logos and what the common dimension of that from what you’ve gotten seen. And that may be the way in which we might construct a mannequin after which have many instances off that.
Matthew George
Positive. Useful. I’m going to pause right here a second. Is there any – is there a query on the market? Sure, go forward.
Unidentified Analyst
The place do you view the Datadog within the – as a result of we’re seeing like cybersecurity coming to the area with CrowdStrike. We’re additionally seeing like ITSM with ServiceNow. This morning, there was GitHub saying additionally they need to get into observability. So, the place do you see Datadog becoming into this area?
David Obstler
Sure. I believe its query is what do they imply by it. Like we are saying ITSM, we’re not attempting to get into caseload or human capital. ITSM for us is the flexibility of its DevOps and it’s the flexibility that they use our product to – extra effectively. So, that’s what we are saying. Like if we simply stated ITSM, you’d say, oh, you’re going to go into ServiceNow. I’m simply being very like black and white with you. And I believe that’s what a whole lot of different corporations don’t do, as a result of in our finish market, which is basically monitoring real-time, customer-facing purposes which can be working within the cloud utilizing DevOps, most of those different corporations want one thing else, and they don’t seem to be available in the market. In safety, we additionally don’t imply endpoint, we don’t imply community, we don’t imply so many. We imply basically utilizing safety alerts in constructing and placing software program in manufacturing for our DevOps, so DevSecOps. So, a whole lot of others imply one thing else. So, I believe it’s actually getting below and understanding which is your finish market and what are you attempting to do? And are you profitable at it. The remainder of it, we might do – like it could be a lot the identical factor. Like, okay, let’s simply go into ServiceNow’s market. Sure, in fact, we might. We might create an organization, add 10,000 staff, we’re constructed from scratch, however we’re not doing that. And most of these others aren’t doing it both. What they’re saying. They’re simply utilizing – they’re utilizing a whole lot of phrases, okay.
Matthew George
Perhaps simply on that aggressive query, the – there’s $4 billion of Splunk ARR that – who is aware of what’s going to occur to that sooner or later. How do you – what do you guys take into consideration that when it comes to like how their buyer base aligns with yours and the way huge of a chance that could possibly be?
David Obstler
We’re not of their market. They’re within the overwhelming majority market, we’re not in, that centralized safety SIEM. We’re not in that market. It’s a very completely different structure as a result of our structure is to have the ability to be in actual time and have entry and use, and they don’t seem to be. So, they’ve some enterprise that we compete with them on the place they’ve gone into cloud SIEM. However – and it’s not whether or not they ship their safety SIEM within the cloud or on-premise. The overwhelming majority of their market shouldn’t be our finish market. A few of it’s, and we have now been profitable in that half for some time. So, it’s primarily a distinct market.
Matthew George
Okay. Perhaps within the final 30 seconds right here, that went fast. We’re going to – we’re sitting right here subsequent yr. Quick ahead a yr, what are we going to be speaking about? Like what are a number of the most vital tendencies that we must always watch after we are sitting right here at this level subsequent yr, and we’re like asking you a questions on…
David Obstler
Sure. So, it could be – primary could be the expansion of cloud workloads, fashionable cloud workloads as an underpinning for the enterprise. That’s an important. Quantity two could be our market share within the platform and our potential to proceed to win the complete platform, so our potential to consolidate and win. Quantity three, let’s say, could be what’s occurred with AI, how actual is it. And lastly could be the success of DevSecOps. These could be the issues…
Matthew George
Sure. Lot of drivers.
David Obstler
These are the drivers, sure.
Matthew George
Wonderful. Nicely, that was too fast. I’ve supposed extra questions, however saved going…
David Obstler
Go forward.
Matthew George
David.
David Obstler
Okay. No downside. Thanks.
Matthew George
Recognize it.
David Obstler
Thanks. Thanks loads. Thanks for the good questions. Thanks everyone.
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