Datadog, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Datadog third quarter 2020 earnings call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. A.J. Lubitsch, Director of Investor Relations. Please go ahead, sir.

Thank you, Liz. Good afternoon, and thank you for joining us today to review Datadog's third quarter 2020 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. During this call, we will make statements related to our business that are forward-looking under federal security laws and made pursuant to the state public provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the fourth quarter and for the full year of 2020, our strategy to tackle benefits for our products, partnerships and investments, anticipated hiring, our ability to capitalize on our market opportunity, and the impact of the COVID-19 pandemic on our customers' use of our platform, and industry trends, as well as our ability to benefit from these trends. The words anticipate, believe, and continue as they may 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, not as of any subsequent date. 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 serial risks and other reporting factors that could have caused actual results to differ, please refer to the quarterly report on Form 10-Q for the quarterly period ended June 30, 2020, followed with the FCC on August 10, 2020. Additional information will be made available on our quarterly report on Form 10-Q for the quarterly period ended September 30, 2020, and other filings and reports that we may file from time to time with the SEC. Our filings with the SEC are available on the Investor Relations section of our website. A replay of this call will be available there for a limited time. 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. We are very pleased with our performance in Q3, which showed continued high growth at scale and demonstrated efficiencies. It was an exciting quarter in which we maintained our high velocity of product delivery, starting with the new products and features announced at DASH, our annual user conference. We are building on our strong track record of innovation and extending our lead at the most complete and cloud-native end-to-end observability platforms. With the majority of our employees continuing to work from home, I am extremely impressed by our productivity. Our engineers continue to build and ship innovative solutions. Our go-to-market teams continue to efficiently deliver value to our customers, and we continue to hire rapidly across R&D and sales and marketing to best position ourselves for the future. We are strategic partners to our customers like never before, as the importance of being digital-first and agile is more pronounced than ever. Companies everywhere are continuing to migrate to the cloud and invest in their digital operations to achieve these outcomes. And as our market opportunity, driven by multiple platforming and cloud migration, has become clearer during this time, so has our ability to execute against it. Now on to a review of Q3 results. To summarize Q3 at a high level, revenue was $155 million, an increase of 61% year-over-year and above the high end of our guidance range. We ended the quarter with 1,107 customers with ARR of $100,000 or more, up from 727 last year. These customers generate about 75% of our ARR. We have about 13,100 customers, up from about 9,500 last year, which means we added about 1,000 customers in the quarter, meaningfully more than the 600 that is in Q2. We also continue to be capital efficient with a free cash flow of $29 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. Now to review Q3 in more detail. Throughout the quarter, usage growth of existing customers was robust, which was a return to more normalized levels after slower usage expansion in Q2. To be more specific, the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels. As a result, We feel comfortable that some of the rationalized cloud usage from our larger customers that we've seen in Q2 was transitory, as many of those customers have now returned to steady growth from multiple consecutive months. Strengths were also broad-based across customers of different sizes and within different industries. In addition to that, new local generation continued to be robust with customers' additions in mind with pre-COVID levels, and in turn remained consistent with historical rates. Taking all of this into account, Total ARR added in the quarter was a new record for the company, making this a very successful quarter. Next, our platform strategy continues to resonate and win in the market. As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products, which is up from only 7% a year ago. We had another quarter in which approximately 75% of new logos landed with two or more products, and we continue to be pleased with the uptake of our newest products including synthetics from NPM and security. I will point out that synthetics has not been commercially available for about a year and today it is used by thousands of customers, has reached eight figures of ARR and continues to be in hyperclose. Adoption of synthetics has exceeded our expectations which I will attribute to the combination of the strength of the product itself and the power of our platform. As a reminder, Frictionless adoption is a key value proposition of our platform, which we expect will benefit all of our products. To conclude my review of the quarter, our ability to both land and expand during what has been a time of uncertainty demonstrates that adoption is important as companies of all sizes and across all industries, even in the most challenged sectors, are turning to their digital operations as the most strategically important segment of their business. Now, on to R&D. We have a problem and long track record of innovation. and our team lived up to that standard in Q3 with the introduction of eight new products and major features at Dash. Those announcements include the introduction of the Datadog Marketplace to enable technology partners to build applications on top of our platform, the general availability of continuous provider to measure code-level performance through an always-on and low-overhead solution, expanding Synthetix to continuous integration deployment pipelines, which embed testing earlier in the development process, The introduction of mobile real-user monitoring for both Android and iOS. The general availability of error tracking to aggregate, triage, and priority task content application errors. The beta launch of incident management for DevOps and security teams. The beta launch of compliance monitoring, which extends our security solutions to proactively notify from misconfigurations and compliance drift. And lastly, the beta launch of recommended monitors, a suite of pre-configured, curated, and customizable alerts. Additionally, We recently announced a strategic partnership with Microsoft, currently in public preview, which will make Datadog available to purchase, implement, and use directly from the Azure console. And Azure and Datadog sales teams will increase collaboration for co-selling to enterprise clients. Today, we also announced an expansion of our strategic partnership with Google Cloud Platform, which extends our GCP presence into new regions and enhance our go-to-market collaboration and sales alignment between Datadog and GCP. We believe this partnership along with our existing alliance with AWS demonstrate our leadership in cloud environments as well as the collaborative nature of our relationships with the public cloud vendors. These are just a few of the new features and enhancements we ship these quarters. Rather than listing them all, I conclude on R&D with two main takeaways. First, I am very proud of the continued productivity of our teams. Together, we have not allowed the pandemic and work from home to slow down our roadmap. and we have also been able to successfully hire and onboard at scale throughout the challenging times. Second, we continue to deliver the most complete and cloud-native end-to-end observability platform and yet we are only getting started. Now on to sales and marketing. As you know, this quarter we hosted DASH, our annual user conference. While this was our first time hosting it in an all-virtual format, this enabled us to reach a broader audience of over 7,000 attendees. which was more than five times last year's count. That was a great success, bringing together our customers, prospects, and partners to show the power of Datadog and many of the new products discussed earlier. And I want to give a special thank you to our events and community teams for excellent execution in a quickly shifting environment.