Datadog, Inc.

Thank you for standing by and welcome to the Q2 2020 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press R1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. A.J. Lubitsch, the Director of Investor Relations. Please go ahead, sir.

Thank you, Franzi. Good afternoon, and thank you for joining us today to review DataDog's second quarter 2020 financial results, which we announced in a press release issued after the close of market today. Joining me on the call today are Olivier Pomel, Data Elk's co-founder and CEO, and David Obstler, Data Elk's CFO. During this call, we will make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions for the Private Securities Legation Reform Act 1995, including statements related to our future financial performance, including our outlook for the third quarter and for the full year of 2020, our strategy, the potential benefits for our products, R&D and go-to-market investments, Expected capital expenditures, anticipated hiring, the size of and our ability to capitalize on our market opportunity, as well as the impact of the COVID-19 pandemic on our customers, their usage of our products, our market industry trends, and our business and operating results. The words anticipate, believe, continue, estimate, expect, intend, will, and other 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 not as of any subsequent basis. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our actual results, please refer to our quarterly report on Form 10-Q for the quarterly period ended March 31, 2020, filed with the SEC on May 12, 2020. Additional information will be made available in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2020, and other filings and reports that we may file from time to time with the SEC. are available on the Investor Relations section of our website. A replay of the call will be available there for a limited time. Additional information may also be made available in our other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release, which you can find on the Investor Relations portion of our website, for reconciliation of these measures to the most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Olivier.

Thank you, AJ, and thank you all for joining us today. Before discussing the results of the quarter, I want to proudly report that together with our employees, we raised over $1 million for charities supporting COVID relief, as well as organizations working to dismantle the systemic discrimination experienced by Black communities. We are living in unprecedented times for many reasons, and we want to do our part to help. And as always, Datadog is committed to supporting diversity and inclusion within our company and communities. Now turning to Q2 results, we are happy to report another quarter of strong growth and demonstrated financial efficiencies. Execution was strong during challenging times, including robust new logo generation and continued platform adoption. While we are pleased with our execution in the quarter, we did experience some impact to the rate of usage growth of our customers related to the microenvironment. But while this macro uncertainty remains in the near term, We continue to believe that this environment accentuates the need to be digital-first and agile and confirms the cloud as the best path to achieve these outcomes over the long term. And we see evidence of this in growing overall demand in the form of new customers and new use cases of existing customers. To summarize Q2 at a high level, revenue was $114 million, an increase of 68% year-over-year and above the high end of our guidance range. We ended the quarter with 1,015 customers with ARR of $100,000 or more, which is an increase of 71% from last year. These customers generate about 75% of our ARR. We have about 12,100 customers, which represent growth of 37% from about $8,800 last year. We also continue to be capital efficient with free cash flow of $19 million. And as in past quarters, Our dollar-based net retention rate was over 130% as customers increased their usage and adopted our newer products. So we are continuing to deliver high growth at scale. Now, looking at Q2 in more detail, new logo generation was robust in the quarter as new logo ARR grew both from last quarter and year-over-year, and gross new customers' additions matched the record set in Q1. We saw companies of all sizes and geographies Prioritize cloud migration and digital transformation. For instance, in the quarter, we had a few small yet notable new logo wins from two global hotel chains, an amusement park chain, a large U.S. university, and a European airline. These wins showed that even in the face of challenging times for these customers, transforming to ensure business resilience and longevity is a top priority. Next, our platform strategy continues to resonate and win in the markets. As of the end of Q2, 68% of customers are using two or more products, which is up from 40% a year ago. We had another quarter in which approximately 75% of new logos landed with two or more products, and I would add that over 15% of our customers are now using four or more products, while we had zero last year. We are also very pleased with the uptake of our newest products in a short period of time, with Synthetix, Run, NPM, and Security all released over the last year. We are winning in the market because we are cloud native. Our support of cloud and other ephemeral architectures is more important than ever as the rapid change from work from home has demonstrated the limitation of legacy infrastructure. And we believe recent events will accelerate the migration to the cloud as the economy improves. We win because we offer the broadest solution with end-to-end visibility from backend infrastructure all the way through to the end-user experience and now securely as well. and we win because we offer a truly integrated platform for a single point of view into the IT stack. Now, as we mentioned earlier, while execution was strong, the macro environment did have some impact on our top-line results and in particular on growth of existing customers. Our customers continued to grow usage of our platform in Q2, but the rate of this growth was below the trends we saw before the pandemic. This dynamic was primarily seen in our larger customers who already have sizable cloud environments Given macro uncertainty, we saw these customers look to conserve cash while they still could and therefore optimize the consumption of cloud infrastructure. On the flip side, smaller customers and large enterprises that are earlier in their cloud journey continue to see stronger growth. To put it plainly, customers with large cloud deals from AWS, Azure, or GCP look for short-term savings. Note that this is not a new motion, as we see many enterprises go through these optimization exercises on a regular basis. What was unusual this quarter was to see a large number of companies going through it at the same time. I would also note that while these customers are at a greater scale in the cloud, they mostly remain at a low penetration relative to their overall IT environment. Therefore, these customers continue to have a longer way of growth in their cloud adoption over time. Lastly, while we do not want to get into the habit of providing intra-quarter updates, I'd like to provide some commentary on what we saw in July, given the unique macro second census. We saw, over the last month, a notable improvement in usage growth relative to Q2, given by broad-based trends across our customer base. It is, however, too soon to know if this growth will sustain given the macro environment. As a result, and while we are encouraged by this trend, we remain prudently conservative in our outlook for the remainder of the year, which David will speak to. As a reminder, We have both a subscription and usage-based revenue model, and the growth of our revenue is relative to the growth of our customers' cloud footprint and data volume. Finally, to bookend this topic, I am very proud of the performance of our go-to-market teams during the challenging times, as we are executing well against what we came to show, and our teams are delivering record levels of new logos and product cross-sales. Next, on to R&D. We continue to make significant investments to rapidly deliver innovation. We have a proven track record of success in trading new products, and we see many new opportunities to expand our portfolio. For example, we recently announced the general availability of private locations for syntax, which enables dev and ops teams to proactively test internal applications that are not accessible from the public internet. We also acquired Undefined Labs, a provider of observability for dev and test workflows. This will enable Datadog to be injected earlier in the software lifecycle, starting before coding is even committed to a central repository. And this will equip customers with better tracking of continuous integration and deployment workflows and enable them to identify issues before reaching production. Other continuous product innovations include the general availability of the Datadog mobile app to provide engineers with access to their alerts and dashboards on the go, support for Amazon Kinesis Data Firehose to enable streaming logs directly from AWS services to Datadog, and the preview release of the Datadog IoT agent to provide visibility into Internet of Things devices. We have also added and improved a number of integrations, including AWS One Click Deploy, HiveMQ, Apache Ignite and Hazelcast. As we keep investing in R&D, we plan for a continued rapid pace of innovation and we'll be showcasing some of our newer products at our annual user conference, Dash, which is held online next week on August 11th. Switching gears a bit, we recently achieved FedRAMP authorization for low-impact SaaS, and Datadog is now fully available in the FedRAMP marketplace. We continue to build out our public sector go-to-market motion, and while it is likely to take some time, we are excited about this long-term opportunity. Now, let's talk briefly about some of our wins in the quarter. First, we had a seven-figure upsell with a large fintech company. With Datadog, This customer has been able to move from multiple disparate monitoring tools to using a single platform for all three pillars of observability. This allowed them to refocus engineering teams on building new features, and they expect more than a million in savings from consolidating disparate monitoring and logging vendors into Datadog. Another seven-figure expansion came from a European automotive company, which is modernizing and adopting Microsoft Azure. Through adoption of Datadog infrastructure monitoring, APM, and NPM, They are teams that are collaborating on a shared platform and are moving to an increasingly agile development model. Next, we saw a large entertainment platform that has been using more and more of our products, committing to over $10 million in AR. This company has made a decision to increase investment in observability and go to the use of Datadog, both with new products and by scaling up on existing products. I will also mention a high six-figure land deal with the leading asset manager, which is now using us for infrastructure monitoring and payment logs as well as synthetics and early adoption of security. And last, we had a six-figure upsell to a seven-figure ARR with a social networking platform that has seen tremendous growth during the pandemic. At record levels of scale, they can use Datadog to quickly drill down into any failed requests and easily identify outliers. This company is now using all preputors, including synthetic, RAM, and ATM, and has standardized monitoring on Datadog. Now, moving on to our outlook. As we look ahead to the second half of the year, We remain very excited about our market opportunity. Recent events have made one thing very clear. It is more important than ever to be a digital-first business, and the cloud is the best path to achieve this outcome. We continue to believe Datadog is the primary beneficiary of this trend and remains very well positioned to win in the market. In the near term, the macro environment is likely to continue to cause uncertainty, but our focus remains on executing against our strategic priorities, which have not changed. David Osler David Osler David Osler David Osler Thanks, Olivier.