Datadog, Inc.

Welcome to the Q2 2021 Data Dog Earnings Conference Call. My name is John. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press further than one on your touch-tone phone. And now I'll turn the call over to Yuka Broderick, Head of Investor Relations. Yuka, you may begin.

Thank you, John. Good morning and thank you for joining us today to review Datadog's second quarter 2021 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivia 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 and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the third 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, and our ability to capitalize on our market opportunity. 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 the quarterly report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 7, 2021. Additional information will be made available in our quarterly report on Form 10-2 for the quarterly period end of June 30, 2021, and other filings and reports that we may file from time to time with the SEC. Our filings through the SEC are available on the Investor Relations section of our website. A replay of this call will also 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 their most directly comparable GAAP financial measures. With that, I'd like to turn the call over to Olivier.

Thanks, Yuka, and thank you all for joining us for our morning call today. We are very pleased with our performance in Q2, which was stronger than expected on robust growth with existing customers as well as strong new customer sales. We saw real strength both across product lines and across customer segments. For a quick review of the quarter, revenue was $234 million, an increase of 67% year-over-year and 18% quarter-over-quarter, and above the high end of our guidance range. We ended the quarter with 1,610 customers with an ARR of $100,000 or more, up from 1,016 in the year-over-quarter. Those customers generate about 80% of our ARR. We have about 16,400 customers, which is up from about 12,100 last year. We also continue to be capital efficient with free cash flow of $42 million. And our dollar-based net retention rates continue to be over 130% as customers increase their usage and add up to their newer products. We are pleased that positive business trends from recent quarters continued in Q2. First, business growth from existing customers remained very robust. Among other factors, we continue to see the impact of our strong new logo growth in the past several quarters as those new customers grow into their commitment. Second, new logo ARR is again strong as we continue to execute against our go-to-market strategy. Current continues to remain low and in line with historical rates. Taking all these factors into account, we had a very strong quarter of AR added, with over $100 million of AR added for the second consecutive quarter. Next, our platform strategy continues to resonate in the market. As of the end of Q2, 75% of customers are using two or more products, up from 68% a year ago. Additionally, 28% of customers are now using four or more products, which is up from 15% last year. And this quarter, approximately 70% of new logos landed with two or more products. Our platform saw strong growth in the second quarter, which included another record of ARR added for infrastructure monitoring in a single quarter. This product is still early in its half cycle. Meanwhile, we continue to see very strong performance with other products in our platform. Our APN suite, including ROM and synthetics, and log management together, reached over $400 million in ARR. The APN suite and log management also remain in hypergrowth mode, while our newer, other products are growing even faster. As a result, we are very pleased with the customer uptake of our end-to-end observability platform, as well as the beginnings of our cloud security platform. Now, let's move on to products and R&D. Our teams continue to innovate and solve customer pain points. We announced 73 new features in Q2 and have continued to shape in Q3. To discuss just a few of these, we announced the general availability of two new security products, cloud security for share management and cloud workload security, which targets security issues around infrastructure and Cloud Security Posture Management runs continuous configuration audits so customers can track conformance to industry benchmarks and regulatory standards. And Cloud Workload Security performs real-time threat detection directly within the workloads themselves, within hosts and containers. These are our second and third GDF products in security, alongside Security Monitoring, which performs threat detection on event and login data streams. With these offerings, The first building blocks of our cloud security platform are coming together, and we can start delivering on our vision to break down silos between dev, ops, and security teams. And with the addition of these two products, we now have 11 GA products on the Datadog platform. We are also at the beginning of our opportunity to bring observability to the CI CD space, and we announced the beta of our CI visibility products in late July. CI-CD is a combined practice of continuous integration and continuous delivery, allowing software to be consistently written, tested, and released to production. The problem is that developers often don't have visibility into their CI-CD pipelines. They have a hard time figuring out what tests are failing and why, and where in their CI-CD pipeline they are experiencing bottlenecks and issues. Our CI visibility product, based on our acquisition of Undefined Labs last August, helps customers gain visibility into their testing pipelines with the goal of lowering costs and increasing efficiency for their developer teams. So we're excited about those announcements, but we're not standing still on our existing products, and we continue to expand features to make each and every one best of breed. In Synthetix, we have enabled cross-browser testing, and our customers can now test on Microsoft Edge and Firefox in addition to Chrome. In mobile ROM, we now support Android, iOS, and cross-platform frameworks like React Messages. Our run product now covers a whole user space, including web applications on desktop, mobile, and tablet, as well as mobile apps. And finally, we continue to improve the AI ML capabilities of our platform with our most recent additions, including automatic detection of faulty deployments in APM and anomaly detection in security monitoring. These are complemented by the continued extension of Watchdog Insights, the recommendation engine we are embedding directly into our users' workflows, across our platform. As you can see, our end-to-end observability platform continues to broaden and deepen. Meanwhile, we are beginning to see, to move forward in our cloud security, and we are in the early days of CI-CD use cases. As always, I want to thank our engineering and product teams for their creativity, their productivity, and their continued ability to deliver the right solutions to our customers' problems. Moving on to sales and marketing. As hinted by our customer growth this quarter, our go-to-market teams continue to be very productive. So let's discuss some more Q2 wins. First, we had an eight-figure upsell with a next-gen financial services company, which is experiencing a surge of traffic in their core applications. They rely on backlog log management as a platform across the organization to find a good cause of issues. They saw a significant increase in usage of their existing products and recently added our continuous profiler to better understand their code performance and production. Next, we had a seven-figure upsell with a European e-commerce company. They were using multiple commercial observability tools, and one of them, 2021 strategic initiative, was to consolidate and reduce costs. By standardizing on Datadog, they satisfied that goal while improving their team's collaboration and communication. Next, we have a seven-figure upsell with a large global accounting firm. This company is experiencing rapid growth with their online products, and its teams were forced to jump from tool to tool to try and mitigate problems. With Datadog, as their chosen solution for infrastructure monitoring, APM, and synthetic, they are able to decrease mean time to resolution and free up internal resources. Next, we had a six-figure upsell with a 30-year-old analytics software company. This company is moving more workloads to Azure, and with this new upsell, they standardized their data for their log management needs. Without logging without limits functionality, this company will lower costs by an order of magnitude for log management without sacrificing any of their log data. And finally, we had a seven-figure land with a large back-office software company. This company is growing rapidly, and is planning a move to hybrid cloud, but their previous monitoring adoption rate was very low, which made it difficult for their teams to collaborate. With Datadog, their entire team now has a single platform for all their observability needs, and they recognize Datadog's impact on improving adoption and alignment across teams. So as you can tell, we are incredibly proud of the performance of our go-to-market teams this quarter, and I want to thank them for their hard work and for partnering with our customers to deliver another quarter of strong results. Now, moving on to our longer-term outlook, we see businesses now moving forward with their longer-term digital strategies. Businesses must increasingly be digital-first. IT platforming remains in its early stages, and we believe we are in a great position to help our customers with our unified observability platform. Meanwhile, we are making progress on our long-term vision to break down silos between DevOps and security teams. As a result, we are extremely excited about the opportunities we see to democratize data and help customers increase visibility and manage complexity. And we're confident in our long-term plans and continue to work hard to execute on our strategy. Before turning the call over to David, I want to mention that our teams are busy preparing for Dash 2021, our user conference, which will be held in late October this year. Every year at Dash, we showcase our latest product innovations We are excited to show everyone what we've been up to this year. We also expect to hold an investor session at Dash, so please look out for that announcement in the poll. With that, I would like to turn the call over to our Chief Financial Officer. David?

Thanks, Olivier. In summary, we had a very strong Q2. Revenue was $233.5 million, up 67% year-over-year. and up 18% quarter over quarter. Usage trends were strong and showed broad-based growth. New logo generation was also strong, and customers continued to adopt more products across the platform. To provide some more context, first, growth of existing customers was again robust in Q2, and our dollar-based net retention rate remained above 130%. for the 16th consecutive quarter. Usage growth was strong, driven by customers' expanded usage of existing products and the adoption of new products. Our customers are continuing to pursue their cloud migrations, and as we expand with our customers, we see opportunities for them to standardize on us and consolidate their observability tool vendors. Next, we saw the second consecutive quarter of ARR ads over $100 million with broad strength across product lines, including our newer products, and strength across our regions. New logos were also very strong. We had a record number of both gross and net new logo additions in the quarter. Both our enterprise and commercial sales teams executed strongly in the quarter, and we continue to see broad opportunities across industries and customer size. Remember that given our usage-based revenue model, new logo wins generally do not immediately translate into meaningful revenue, but do so over time. Next, our platform strategy continues to resonate with customers, and 70% of our customers are now using two or more products and 28% of our customers are now using four or more of our products. Lastly, churn remain low in line with historical levels. Our dollar-based growth retention rates remain unchanged in the mid-'90s, and they are similar across our customer segments and products. Billings were $270 million, up 69% year over year. and there were no pro forma impacts in the quarter. Remaining performance obligations, or RPO, was $583 million, up 103% year-over-year, driven by strong sales activity and increased contract duration. The increase in contract duration was driven by a higher mix of annual and multi-year commitments relative to the year-ago quarter. As a reminder, multi-year commitments are billed annually, and we do not incentivize our sales force towards multi-year deals. Current RPO growth was also strong at over 80% year over year. I should note that we continue to believe revenue is a better indicator of our business trends than billing and RPO, as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts. Now let's review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross profit in the quarter was $178 million, representing a gross margin of 76 percent. This compares to a gross margin of 77 percent last quarter and 80 percent in the year-ago quarter. The year-over-year decrease in gross margin was due to investments in our product and platform innovation. We expect gross margin in the mid to long term to be consistent with our historical performance. R&D expense was $71 million, or 30% of revenue, compared to 27% in the year-ago quarter. We continue to invest significantly in R&D including high growth of our engineering headcount. We're pleased that we are successfully executing on our hiring and onboarding plans in R&D. Sales and marketing expense was $61 million, or 26% of revenue, compared to 33% in the year-ago quarter. We continue to make substantial investments in sales and marketing, but revenue growth has outpaced our investment growth, We had only a few in-person events in Q2, but we continue to plan for increased travel and event costs later in this year, of course, depending on local health and travel guidelines. G&A expense was $16 million, or 7% of revenue, down from 9% in the year-ago quarter. Operating income was $31 million, or a 13% operating margin, compared to the operating income of $15 million or an 11% operating margin in the year-ago quarter. Although strong in the quarter, we are not optimizing for near-term margins as we see a large and dynamic market opportunity in front of us, and we are striving to invest heavily against that opportunity. But Q2, of course, demonstrates the efficiencies of our business model. Non-GAAP net income in the quarter was $32 million, or 9 cents per share, on 342 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $1.4 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $52 million in the quarter, After taking into consideration capital expenditures and capitalized software, free cash flow was $42 million with a free cash flow margin of 18%. Now for our outlook for the third quarter and the full year 2021. We are optimistic about our long-term opportunities and believe we will deliver high growth for the foreseeable future. we are addressing a very large market and are executing well against that opportunity. Taking this into account, with the usual conservatism applied, we are updating our guidance as follows. For the third quarter, we expect revenues to be in the range of $246 to $248 million, which represents 60% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $18 to $20 million. And non-GAAP net income per share is expected to be in the range of 5 cents to 6 cents per share, based on approximately 344 million weighted average diluted shares outstanding. And then for the full year 2021, Revenue is expected to be in the range of $938 to $944 million, which represents a 56% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $87 to $93 million. Non-GAAP net income per share is expected to be in the range of $0.26 to $0.28 per share based on an approximate 344 million weighted average diluted chairs outstanding. Now some notes on our guidance. First, while usage growth was strong in Q2, when providing guidance, as usual, we used more conservative assumptions. Second, our strategic focus remains on investing to optimize for long-term growth. We are planning for continued aggressive investments in R&D and go-to-market through the remainder of 2021. And next, our model assumes a return to the office and the resumption of travel and in-person events during Q3. That said, we will remain flexible depending upon local regulations, and our highest priority is protecting the health of our employees. Regarding items below the operating income line, first, we expect approximately 0.9 million of Q3 non-GAAP net interest and other income, which includes the interest income on our cash and marketable securities and the interest expense on our convertible debt. We do not expect to be a federal taxpayer in Q3, but have a tax provision related to our international entity And as a result, we expect a tax provision of approximately $600,000 in Q3 and $2 million for the full year. To summarize, we are very pleased with our results this quarter. Customers continue to consume more Datadog, both using more of their existing products and choosing to begin using new products. We added two new products this quarter and now have 11 products to offer to our customers. Our execution against our R&D and go-to-market goals remain strong. And our ability to help customers to manage through their cloud migrations and digital transformation effects continues to grow. And with that, we will open the call for questions. Operator, let's begin the Q&A.

Thank you, and I'll begin the question and answer session. If you do have a question, Press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, press star then 1 on your touchtone phone. And our first question is from Brent Still from Jefferies.

Good morning. If you could maybe provide a little more color on the large customer group of the last two quarters, you had exceptional results in that segment. Maybe you can just give us a little more color on what you're seeing as these larger enterprises are standardizing on your platform.

Yeah, so we're still seeing some of those. I mean, I think some of the ones we mentioned in the call fit in that category where Customers were using something else before, a collection of different things, and they're standardizing on our platform, which creates a larger lens for us. But that's still not the vast majority of our customer acquisition. By and large, we're still starting small with customers and going with them, and then they standardize with us their own as they're further down the road in their migration to cloud environments. So we see some of that in a proportion that is comparable to what we've seen in different quarters. but we don't see any particular trend there yet.

And David, just in terms of the sales hiring plan that you have in the second half versus the first half, can you give us some color to your quote carrying capacity and what you're expecting to add by half of the year?

Yeah, as we said previously, we're trying to grow our ramp quota approximately in line with revenues. And we had, as we said, throughout COVID last year and this year, we have aggressive hiring plans, which we are executing on. And we haven't changed our sort of goals for hiring and quota expansion throughout the last couple of years.

Just to rebound on what David just said, unlike many companies that have stopped and started, we kept hiring steadily, which put us in a great position today. I think right now is an interesting time for hiring because the job market is very hot and there's also many people taking some time off. So it's a lot of effort to grow at the level at which we want, but we're happy with the place we're in and we're very happy we made the choice to keep steadily recruiting throughout the pandemic.

Thank you. Our next question is from Sanjit Singh from Morgan Stanley.

Thank you for taking the questions and congrats on the impressive Q2 results. Olivia, I wanted to see if I could get a little more understanding of a comment you made in your script around infrastructure monitoring still being in its early days. From your perspective, What drives that sort of sentiment around infrastructure monitoring? It's been your core product that was sort of the foundation of the company, and you're saying that there's still a long runway ahead. Just expand upon that line of thinking a little bit.

Yeah, I think there's two aspects to it. One is in terms of penetration, I think the intersection of what we have and what's in the cloud in the next year is still a small fraction of what there is in the market total, so there's a lot more we can get from that. The second aspect is that the world is transforming visually, so the market, the size of the infrastructure that will have to be monitored five years from now is a lot bigger than what had to be monitored five years ago. So in most cases, those two things, there's a lot more ground to cover in terms of market penetration and how much stuff we can cover with infrastructure monitoring. In parallel to that, it's a field that is still evolving. The name of the game in the cloud is that there are ways of innovation and new ways of running workloads. You know, and we've been through a few of those with Datadog. You know, we started with cloud instances and then containers and now serverless. We don't expect that to stop there. We think there's going to be new modalities for running infrastructure. And so we're investing heavily in our products to be at the forefront of all that.

Makes total sense. And as a follow-up, I think one of the words that I heard multiple times is, in your script was standardization. And what we've been hearing from customers is that APM has really come into its own. How much of a driver has that been? And where would you put sort of the log analytics solution in terms of its maturity? It came out a year or two later after APM. Where does that capability and product stand from your perspective if we use APM as an analogy?

Well, I love all my children the same. You know, the APM and logs are neck and neck in terms of the adoption across our customer base, and I would say the level of maturity. Both products, we, in situations where we're starting with those products in the base of a grid kind of set up by customers, and they both can serve as the second leg of this tool in addition to infrastructure. to be the basis for standardization for customers. And so what we see today, we've proven at meaningful scale is that customers aren't standardizing on our offering. They buy into the platform. And the three main lines of that tool are going to be APN, logs, and infrastructure monitoring. All right. Great to hear. Thank you so much for this.

Our next question is from Sterling Audie from JP Morgan.

Yeah, thanks. Hi, guys. Given the number of comments that you talked about usage in the prepared remarks as helping drive strength, can maybe you spend a quick minute talking through, remember we had the overages item in kind of the first half of last year. How is this different, and how is the kind of usage and consumption growing now?

I'll take that. I think what we said was we had a flattening and an optimization in Q2 of last year. And since that time, which is now Q3 of last year through now, we've had a return to more normal or consistent with the long-term trends. And we continue to see that in Q2, a very – strong and similar quarter to what we've seen in the last three or four quarters and very consistent with the company's long-term positions in that. And that is reflective, we feel, of a return to normal in the rolling out of cloud migrations and digital projects. And so, like we said in previous quarters, the usage growth was very widespread, balanced in products and in types of customers, very similar to what we've seen in the history of the company.

All right, great. And then one quick follow-up. In terms of the investment in go-to-market, when you gave guidance for this quarter, I think similar items, obviously sales and marketing came in well below what I think ours and most forecasts had. Can you help give us a sense how much of the sequential increase that is baked into the guidance is from headcount versus, as you pointed out, the return to office and the travel?

Yeah, let me start with that. So we said all along that we have two drivers. One is In terms of sort of percentage of revenue in the marketing and sort of travel, sort of 3% or so, 3% plus is sort of a benefit from not having that travel and the event. That does have some volatility depending upon whether you're in a quarter where you have reInvent and Dash, which is what we're having in queue for. Next, I think we performed, as you can see, in the revenue line sort of above where we were planning. So essentially we had a positive surprise in the revenues, and that sort of drops down to the bottom line. And lastly, as Ali mentioned, we have very aggressive hiring plans. we are essentially, you know, trying to get that done this year. It takes a while to get that done in this market. And so we expect that growth to accelerate, that sort of people side of things to accelerate in the second half of the year. And we're already seeing that in our hiring numbers. But we have over the last couple of years sort of ramped up into our hiring during the course of the year.

Understood. Thank you.

Our next question is from Ash Rangan from Goldman Sachs.

Congratulations on extraordinary results. Really awesome to see this, Ollie and David. My question is, as you really start to experience the benefits of standardization, what are the sales cycles looking like and how do we expect the kind of hiring that you do to prosecute these opportunities that are showing up in the pipeline? And if you could as a result, talk about how this gets Datadog into the upper end of the enterprise market as things evolve over the next couple of years. That would be great. And also, if you do have the time to answer this, as the economy, if the economy opens up, your results are fantastic as they are. What could be the incremental benefit of the opening up of the economy and we get to travel and get out there? Thank you so much and congrats. Thank you. So I

I'll start with the standardization. At this point, it doesn't change our sales cycles too much because the way we do it is we mostly start small and we grow with customers. And then by the time we standardize, we have a solid foothold that customers and their engineers are using us all the time. And it gets increasingly easier to make the careful standardization. Obviously, there's going to be some changes over time as we cover more and more of the globe with our sales force and as we have customers that have spent more and more years with us. I do expect to make some changes over time to the way we operate, but at this point, there's no major tweaks to the sales process or the time it takes. The standardization does inform our roadmap from a product perspective. because we are investing more and more in technologies that are not necessarily cloud-centric, and we're doing that in order to help our customers who standardize bring some of their legacy IT or on-prem IT back under the same roof as their cloud technology. So this is something really that informs that part of our development. And it will also, in all likelihood, inform some of our efforts around professional services and spending more time bringing those customers across. On the question on the opening of the economy, I mean, look, what's interesting to us is that it looks like we're back to the way the world was moving to the cloud more or less before the pandemic. And we don't know if things can go any faster. There seems to be some... there was a very steady historical trend for us there and we're back to that steady historical trend so we're happy with that the main thing that we're working on right now to maintain long term growth is make sure that we keep building on the platform so we can add more products cover the full problem or an increasingly large product problem for our customers while at the same time scaling the go to market teams so we can be in all of the conversations everywhere in the world for our customer segments and we still have quite a bit of work to do in order to achieve that.

Thanks a lot, Ali and David.

Our next question is from Tyler Radke from Citi.

Thanks for taking my question. I wanted to ask you just about the pricing environment broadly. Obviously, a year ago, kind of in the depths of COVID, you saw some... you know, customers rationalize spend. Obviously it didn't seem like that was an issue this quarter, but just how do you feel kind of longer term about, you know, your pricing strategy and as you continue to innovate and build out new features, do you feel like you could potentially, you know, have that pricing power to charge even more over time? Thanks.

Yeah, so I think there's three parts to that answer. The first one is What we saw last year was not price pressure. What we saw last year was customers reducing their price footprint with Amazon and Azure and the others. And these were the customers with the largest deals because that's where they could still save money when they were facing a lot of uncertainty around cash. And that re-polled to us. That's one. Two, when you think long-term, it's almost a given. that there will need to be a different way of charging for capturing some of the value provided to customers that can't just be attached to the straight volumes of data that are being exchanged because those volumes of data are exploding exponentially while customers' revenues are not going to explode exponentially. And so that's one thing that we're working on with all of our products. We have this denomination for all of our products that is without limits, which is basically a way to align the value customers get with the price they pay. and give them leverage for that and make sure that we keep unbundling things on our end so we give them the power to do that. The third answer to that question is that all the time we've made the choice to add new functionality largely in the form of new SKUs when they solve new classes of problems for our customers, which is a way basically to maintain price and increase price as we grow. And as we see the functionality, we like the fact that it also gives a very good signal in terms of the value these products provide and helps drive the roadmap for those products.

Thanks. And just to follow up on the competitive environment, Ali, I think you talked about just how customers are consolidating observability tools or maybe you kind of see that opportunity. Just as you've seen more of that, and obviously the deal sizes have been really, really healthy this quarter, especially around the RPO growth. Are you seeing more legacy observability solution replacements? Just help us understand as those deal sizes grow what that means competitively for you guys. Thank you.

It's similar to what we've seen before. And the motion is really on primal legacy that is being consolidated into the cloud. That's what we see. So we see the same trend that we've seen in the past. There's no other very interesting comment to make about that today, but this is what we still see.

Our next question is from Matt Hedberg from RBC Capital.

Hi, guys. Congrats on the quarter. Thanks for taking my questions. You know, Ali, you know, obviously, you know, you talked a little bit in your script about really a building security portfolio of solutions. Obviously, a little different buyer than sort of your core infrastructure or even logging products for that matter. Can you talk about sort of, you know, how you're building out the sales motion there, you know, and really how you see additional leverage there?

Yeah, so the sales motion there is very much built on, for now, what we had with observability. And as we're building those products, we're leaning on those customers that are already bought into the Datadog platform and that, you know, can self-select to start adopting smaller security products. That's step one. Step two will be, you know, as more and more boost products with GA and which we some initial critical mass to actually start pushing them more directly through the Salesforce. I think for that we're actually learning quite a bit from the screen acquisition we've done recently and we expect that we'll have some interesting things to do in the future. We don't have anything specific to share today though.

Got it. Okay. And then David, one for you. you noted in the call that you had a higher level of multi-year commitments. And obviously, you know, we realize you don't necessarily push for that. Just wondering, you know, what were some of the customer conversations that drove that behavior?

I think it has correlation to larger customers who are investing more in Datadog as their standardized observability tool. and want to commit long term, it generally is pulled from the client rather than we go out. Remember, when land and expand, we often see the motion of growing over time and amending contracts with more commitment. So this is really more of a factor of enterprise customers and larger cloud natives committing to Datadog as a core platform and wanting that commitment to be longer term.

Got it. Super helpful, guys. Thank you.

Yeah, thanks.

Our next question is from Camille Starzik from William Blair.

Hi. Thank you for taking my question, and congrats on the incredible quarter. So it's great to hear about the platform expansion. So you've added two offerings. You have Datadog Dash coming up in a few months. and yet research and development expense, I believe, is up 84% year-to-date. Can you give us more detail around the decision to accelerate the level of R&D spend, and how should we think about the pace of new product introductions, and given the increasing diversity of your offerings, what changes do you need to make to the sales organization to support the sale of these new solutions?

Yes, we're investing as aggressively as we can in France, you know, so we When we have opportunities to accelerate the investment in R&D, which we've done through a few acquisitions also, and these actually largely show up in our R&D extensive on an ongoing basis. So we're doing it. We still think we're very early in what's a very, very, very large opportunity across observability, security, and we mentioned today also some of the developer use cases around CICD. But also, later on, there's a lot of things we can do in real-time BI, maybe in AKSN. There's a lot of different things we can touch on. So we intend to keep investing heavily in R&D for a very long time. In terms of the impact on the go-to-market, really where we'll see the first need for some changes on the go-to-market side is as we start pushing the sell side of the security product more aggressively. It hasn't happened yet. It's not something that we're doing today. Those products just barely reached GA for a few of them, but it's something that we'll certainly do in the future. So nothing to share today on that, but it's definitely something that we're working on.

That's great to hear. And quickly, can you just give me an update on the competitive backdrop? Is there any change in who you're seeing on deals, and have win rates improved, and how might that vary by product? Thank you.

So it's very boring. We see the same thing as before. From where we stand, the community landscape hasn't changed. And our focus is still mostly greenfield, new environments, clean environments, teams that are going to start smoking with us and are going to grow with us until they standardize on us for just about everything they do. That's the motion. It hasn't changed. And the landscape around us hasn't changed that much either.

Sounds good. Thanks and congrats again.

Our next question is from Brad Reback from the... Great.

Thanks very much. As we think about new customer growth on the platform, is the recent cohort of new ads growing into their commitments faster? So are they ramping faster than customers a couple of years ago?

So it's a... It depends a little bit because we also have some larger commitments on day one than we used to. We mentioned that on the first few calls. So overall, the cohorts are larger. They start larger. The ASPs are going up over time, generally. But the growth we see is very commensurate with what we've seen in the past in terms of growth and usage from the first month they're with us to the six months and 12 months and everything. So it's two parts of the answer.

Broadly speaking, when you look at the consistency of the net retention and the longevity of it, it's still very similar in the land expand with cohorts expanding, similar to previous periods, and very importantly, expanding for a long time. So the cohort expansion continues on for quite a long time, which is very consistent with what we've seen in previous periods.

That's great. Thanks very much, guys.

Yeah. Our next question is from Zach Andrews from Needham.

Good morning, and congratulations on the results. Ali, I was wondering, as you continue to push more into security, what are the lessons learned from the previous conversions of the dev and ops personas that could be applied to gaining traction in DevSecOps? And how is this convergence of security perhaps different than when dev and ops merged that you need to account for?

Yeah, so great question. And there's a lot of commonality in that a lot of it is about reducing friction and making things that otherwise require a lot of effort and a lot of different people involved, a lot of different departments involved, to be very easy and that you can do on your own. And so we know how to do that. That's what we've done throughout the history of the company. And so that's the first part. The second part, though, is that the buyer is a little bit different. And in some cases, a buyer might need to be addressed a little bit differently. And that's something a few other of the questions touched upon earlier. So I won't repeat myself too much there. But it's still something that we're working on in terms of how we add that to the motion we have for setting the platform.

Thanks for that. And just as a quick follow-up, again, when we think about the broadening portfolio of your solutions, Could you just update us in terms of just how you're keeping your Salesforce and your partner ecosystem just up to speed with their ability to understand the value propositions and the nuances of everything that you are offering these days?

Yeah, so it's a major effort. It's actually one of the areas, Adam, who joined us as a chief operating officer recently. It's one of the major areas of focus today to make sure that we We scale the team that does enablement and that teaches everyone on the sales team and all the go-to-market teams what the product offering is and how it works and who to bring in into every single deal so that we're understanding that you automate the right product to the right customer. So that's one of these major areas of focus. So we're investing in that. Thanks very much.

Our next question is from, it's a Kidron, from Oppenheimer.

Yeah, hey guys, great quarter. Ali, I want to follow up on the security questions and really talk about the two new announcements you've made, the posture management and workload protection. There isn't a security vendor at this point that doesn't have those solutions available as well. So even though the market is early, it seems like everybody's chasing this. Maybe you can help me think about what differentiation you can bring into the security space from your perspective. And also, I know it's still early, but perhaps maybe you could talk about the ARR contribution of your cloud security platform at this point.

Yeah, so on the second one, I mean, we don't have anything to share just yet. We're actually, you know, the only thing I can say is we're very happy with the way it's trending and the way it's growing and We'll probably share some more at some point, but we don't have anything to say today. On the differentiation, what we bring to those categories, we already are instrumenting all those workloads. We are present on those machines. Our agents are running there. The logs are being collected by us already. We already connect to all those cloud configurations. So there's nothing else to be done, really, by our customers to turn on security. And that's a major, major differentiator. And we also have all the developers and all the ops people that are watching what we do all day. And they can consume the security signals as well. They can be part of the solution as opposed to leaving a separate silo for the security teams that are tasked with securing those workloads. So when you combine those two things, I think we have something that's very powerful, very different, and I would say almost impossible for the competition that comes solely from... instrumenting the workload from a security perspective to replicate.

Very good. Good luck.

Our next question is from Michael Tortoise from KeyBank.

Hey, guys. First of the great quarter, the pricing discussion. So you talked, Ali, a little bit about the need to change pricing at some point. There has been in the market already some changes from some of the competitors in their pricing, which does seem aimed at commoditizing usage of data in particular. Has that had any kind of impact in terms of competition? And how does that relate to some of your thoughts about what you would do with pricing long term?

Well, we've seen some of that in the market, but it hasn't had any impact on us directly. But I should say that we are investing, and we have been investing a lot in new models for challenging customers and putting it in control of their spend, making sure that we align with the value, not just with the raw data volumes they're producing. And that's a lot of what our without-limits offerings are doing. We started with that for logs. We're also doing more and more for APN and infrastructure. And that's something that our customers subscribe to when they when they standardize on us. And we've mentioned that on the call. Some of our customers are able to slash their spending on logs in particular because they can spend on what matters to them. They can get over there. They can archive over there. They can retain it. They can only index some of it for some of the very specific purposes they need. They can make the right queryable on demand if they want it. They can do anything they want. We give them all the leverage and all the flexibility for that. so that their build doesn't grow linearly with their data volume. So that's something we've already been investing in. So it's not a big change for us, just a continuation of what we've been doing.

And then, Oli, you made an interesting... You made an interesting point about legacy, investment in R&D for legacy replacement. I mean, you've done some of that in the past. So what do you need to do from an R&D or product perspective to enable that? And are we at the point where that could unlock an upgrade cycle that would be very important to you?

I mean, right now we're still early in that too. I mean, we're connecting to all sorts of non-cloud equipment So network equipment, physical network equipment, power distribution units, that sort of stuff. And we'll do more and more of it until we reach the point where the significant part of the market is mature enough in the cloud that it's time for them to standardize. Today, I would say that the customers that standardize and bring their legacy IT into the cloud are still the ones that are at the forefront of the cloud migration to start with. They're leading it. So there are a ton of things to come. Not that we're at that threshold just yet.

Okay. Thanks, Ali. Thanks, David.

Our next question is from Greg Moskovitz from Mizzou.

All right, thank you, and I'll echo my congratulations on a very strong quarter. I guess the first question, just regarding the cloud security platform, in addition to a la carte, is the plan to offer CSPM, CWS, security monitoring, and app security as a suite as well?

Oh, there will likely be a few pricing options there. I mean, we haven't communicated on any of that yet, but, you know, we're thinking hard about the various ways these products can be packaged.

Okay, and then Ali, one of your competitors recently spoke about a large uplift in the number of deals closed with their hyperscaler partners such as AWS and Azure. Can you update us on your cloud partnerships and the go-to-market activity that you're seeing there?

So we see continuity as we've been doing before, so we're getting more and more from those cloud partnerships, and all of those cloud partnerships are developing more and more. We really see it on the GCP marketplace recently in a way that makes it easier for customers to deploy. Our partnership with Azure has taken another step forward recently also as we've been integrated directly into the console. There's still a few parts of that partnership that need to be implemented, so we're still not completely done yet, but we're still making progress on that. And we're also working on deeper partnerships with AWS. So it's happening across the board, and things are trending in the right direction. And at this point, you know, this is not a major part of our success. I would say it's more of a potential upside for the future.

All right. That's great. Thank you.

And our next question. is from Romeo Lenschkow, Lenschkow from Barclays.

Thank you. Can you hear me okay? Yeah. Yeah, okay. Hey, perfect. Hey, thanks for squeezing me in, and congrats from me as well. Olivier, can you talk, going towards CICD now, it's obviously like it's a whole new market, but not many people have really come there before. Like, can you talk a little bit about, like, how this will play out for you, how big the opportunity is, how important it is. In theory, that's where everything starts, but I never thought about it from a monitor or observability perspective. Thank you.

Yeah, so it's interesting. It's very early. We know the product space is very big because engineers spend a lot of time wrestling with testing and deploying. And so we know it's a jagged amount of time and spending involved there. It's interesting to us because it pushes the boundary of where we operate also and get closer and more closely embedded into the developer workflows and what happens on their laptop when they're writing code and in the break and test loops on their own environments before they reach even development or staging environments. So it's very interesting to us for that reason. It's more of a nascent category in terms of observing and optimizing those environments. So we'll have to see exactly what the market opportunity is there, but we know the problem space is very large.

Yeah, okay, perfect. And then one question for David. You know your 130 NRR number. Do you remember last year when the number kind of came down a little bit, you mentioned it? Just, and I know you're not going to give me a number, but, like, trend-wise, is the number trending higher now? Is there a lack effect? Or, like, how do we think about it? I know you're not going to give me a number, but just directionally within that 130 above, what are you seeing?

Yeah, we won't give you a number, but help you a little bit in trends. Yeah, I think that we said the combination of the strong sales and the continued uptick from both. use of more products on the usage side and adoption of products combined with the compare from the flattening in the second quarter has resulted in the point-in-time metrics there increasing in the quarter.

Perfect. Congrats. Great news. Yep.

And I'll now turn the call back over to Olivier for closing comments.

All right. Thank you. And just to close this call, I just want to reiterate that we are very, very pleased with our performance this quarter. And I also want to thank again all of Datadogs worldwide for their very hard work and for a job really, really well done. So thank you all.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.