Datadog, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, press star 0. Thank you. I would now like to hand the call over to your speaker today. Mr. A.J. Lubisch, please go ahead.

Thank you, Sheena. Good afternoon, and thank you for joining us today to review DataDog's fourth quarter and full year 2020 financial results, which we announced in our press release issued after the closing 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 securities laws that are made pursuant to the Safe Hard Work provisions of the Private Security Delegation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the first quarter and for the full year of 2021, our strategy, the potential benefits of our products, partnerships, and investments in R&D and go-to-market, our ability to capitalize on our market opportunity, and the impact of the COVID-19 pandemic on our customers' usage of our platform and industry trends, as well as the ability to benefit from these trends. 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 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 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 September 30, 2020, filed with the SEC on November 12, 2020. Additional information will be made available in our annual report on Form 10-K for the period ended December 31, 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 also be made 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 Q4, which once again showed high growth at scale and demonstrated efficiencies. Despite the unique challenges presented by COVID, we continued in 2020 to introduce new products at a high velocity, grow our top line at a rapid rate, and demonstrate strong operating efficiencies. We are in particular very proud of the way our teams have handled the pandemic, as well as the year's others and precedented challenges. We ended the year with 2,185 employees globally, a 56% increase year-over-year, with high growth about both our go-to-market and R&D teams. One of our strategic decisions at the beginning of the pandemic was to keep on hiring, and we have been able to interview, hire, and onboard remotely while maintaining high employee engagement and productivity. Throughout the year, we have worked to keep our employees safe and productive and to be good citizens of our communities as they face significant challenges. We are very proud of the exceptional grants we have awarded to our employees in Q2 and Q4, both to support them individually and to allow them to donate nearly $1 million to charities focused on COVID relief, as well as social and racial justice efforts. Last, but certainly not least, we have maintained our relentless focus on delivering value to our customers. And while the pandemic has been a source of challenges to businesses this year, we believe it will prove to be an accelerator of cloud migration and digital transformation over time. In other words, We learned a lot this year, including our ability to execute in the face of challenges, as well as confirmation of a very large and growing market opportunity. Now on to a review of the quarter. To summarize Q4 at the high level, revenue was $178 million, an increase of 56% year-over-year and above the high end of our guidance range. We also ended the year with 97 customers with an ARR of $1 million or more, Almost double the 50 last year and more than three times the 29 we had just two years ago. We ended the year with 1,253 customers with an ARR of $100,000 or more, up from 858 last year. These customers generate over 75% of our ARR. We have about 14,200 customers, up from about 10,500 last year, which means we added about 1,100 customers in the quarter. making it another strong quarter of ads after the 1,000 we added in Q3. We also continue to be capital efficient with free cash flow of $70 million. As in past quarters, our dollar-based net retention rate was over 130% as customers increased their usage and adopted our newer products. For the full year, we generated revenue of $603 million, a 66% increase year-over-year, which was above the high end of our guidance. and Free Cash Flow was $83 million, or a margin of 14% for the year. Now to review Q4 in more detail. Execution was very strong, with outstanding sales performance, particularly against the macro backdrop. Ulogo generation was very strong, including a new record of Ulogo ARR added that was significantly above last year's number. Very strong performance across the board from commercial and enterprise sales channel, as well as a record number of million-dollar-plus new logo customers. Growth of existing customers was robust, as customers of all sizes continued to grow their usage of Datadog to both increase consumption and cross-selling, and Q4's growth of existing customers was broadly in line with pre-COVID trends. Lastly, churn remained very low and consistent with pre-pandemic historical rates. Next, our platform strategy continues to resonate and win in the market. As of the end of Q4, 72% of customers are using two or more products, which is up from 58% last year. Additionally, 22% of customers are using four or more products, which is up from only 10% a year ago. And we have another quarter in which approximately 75% of new logos landed with two or more products. We are very happy with our platform traction, including uptake of the newest products, NPM, RUN, and Security, Each of which has reached hundreds or thousands of customers in a short amount of time. As a reminder, our newer products are often adopted first by self-setting customers at small scale before our land and expand model enables greater adoption over time. And frictionless adoption from our single integrated platform is a key value proposition for our customers. Overall, our ability to both land and expand in a very challenging time speaks to our strong execution, to our leading product, and to our status as a strategic partner to our customers as they prioritize their digital operations. Now on to product and R&D. Today, we announced two acquisitions. First, we announced an agreement to acquire Screen, a SaaS-based security platform that enables enterprises to detect, block, and respond to application-level attacks. Screen's technology provides runtime application self-protection, or RAF, and in-app web application firewall, also known as WAF, and is already used by hundreds of companies today. Security issues in the application layer are complex to solve because application security causes lines of responsibility between dev, ops and security teams. As a result, we believe this will be a powerful combination for customers using APM or syntax. Next, we also announced the acquisition of Timber Technologies, the developers of Vector, a vendor agnostic and high-performance observability data pipeline. With Vector, Customers can collect, enrich, and transform logs and other signals across multiple tools and data sources in both on-premise and cloud environments, and then route this data to the destination of their choice. We expect this technology to further empower our customers to control their observability data while providing broader points of entry to our platform. I speak for everyone at Datadog in saying that we are extremely excited for the teams of both companies to join us in our quest to break down silos. Beyond the acquisitions, we had a number of new developments in Q4. We launched a general availability of incident management, which allows users to declare incidents, investigate root cause, and collaborate without leaving Datadog. And we also delivered more than 60 other new capabilities and features across our products, including new and enhanced integrations, such as Snowflake, Oracle Cloud, or vulnerability analysis, marrying Snyk with our brand new continuous profiler. Now, taking a step back, we exit 2020 with nine generally available products. To put this in context, just four years ago, we had only one product. And we have been able to build the most complete, integrated, and cloud-native observability platform because of our funding as an integration platform that is extensible to new use cases. Looking forward to 2021, we continue to feel that we're just getting started. We are doubling down on building out our platform for observability. This core market alone is a very large opportunity and is growing quickly with the replatforming to cloud architectures. We're still early in this transition and are aggressively adding functionality to both the new SKUs as well as the more mature products. Second, we are just getting started in security with our first product launch in 2020. We consider security a very large opportunity with a long runway of planned product development and we envision the silos between dev, sec and ops breaking down in a similar way to what we have seen between dev and ops. Third, we are investing in the platform and ecosystem. In addition to building up the Datadog marketplace, we now have strategic partnerships with all of the major cloud vendors. For example, we announced the expansion of our partnership with Azure and GCP last quarter, which should be in the market in 2021. We are also introducing new cloud instances and regions such as GovCloud. Our goal is to gain distribution across vendors and regions and meet customers where they are to lower friction to adoption and to lower time to value. And as we think longer term beyond 2021, we do believe there may be more use cases we can solve for our customers beyond current reach of our platform. Let's move on to the second market. As I mentioned earlier, I'm very pleased with the continuous productivity of our go-to-market teams.