Datadog, Inc.

their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com. With that, I'd like to turn the call over to Olivier.

Thanks, Yuka, and thank you all for joining us this morning. We are pleased to report strong results in Q2 as we executed well and we extended our category leadership. Let me start off with a review of our Q2 financial performance. In Q2, revenue was $406 million, an increase of 74% year-over-year and above the high end of our guidance range. We had about 21,200 customers, up from about 16,400 in the year-over-quarter. We ended the quarter with about 2,420 customers with ARR of $100,000 or more, up from 1,570 in the year-over-quarter. These customers generated about 85% of our ARR. We generated free cash flow of $60 million and a free cash flow margin of 15%. And our dollar-based net retention rate continues to be over 130% as customers increased their usage and adopted more products. Now, moving on to this quarter's business drivers. In Q2, while we overall saw strong customer growth dynamics, we have seen some viability in growth among our customers. We saw larger spending customers continue to grow, but at a rate that was slower than historical levels. Its effect was more pronounced in certain industries, particularly in consumer discretionary, which includes e-commerce and food and delivery customers, and affected more specifically our products with a strong volume-based component, such as log management and ABM suite. Note that we did not see this with our SMB and lower spending customers, who continued growing with us as they have in the past. While these noisy growth data points and the current microclimate are leading us to be prudent with our short-term outlook, we remain very bullish about our opportunities and confident in our execution as we continue to see positive trends underpinning our business. First, the number of hosts and containers being monitored by our customers is growing steadily, which points to continued momentum of cloud migration and digital transformation projects. Second, we had strong execution on the new logo side, as new logo AR was robust, as we added a record 1,400 new customers in the quarter, including the impact of turning off about 200 customers in Russia and Belarus in Q2. And we closed a number of sizable six to seven-figure new logo deals during the quarter with diverse customers, including a media conglomerate, a metal ore mining company, a U.S. government agency, a SaaS business, and a hyperscaler. Third, our pipeline of large new logos and new product cross-sells going into the second half of the year is strong, And fourth, churn remains low with gross revenue retention steady in the mid to high 90s. Moving on to our products. We are pleased with the continued adoption and expansion of our products to our customers. The three pillars of observability, which are infrastructure, APM, and log management, all grew strongly in Q2. Our APM suite and log management now exceed three quarters of a billion dollars of ARR, As a reminder, we define APM Suite as including core APM, synthetic, RAM, and continuous provider. In addition to that, infrastructure monitoring continues to grow strongly on par with recent quarters. We're also pleased with the adoption of our newer products. Our newer products, including infrastructure monitoring, APM Suite, and log management, continue to grow ARR more than 100% year over year. And we've seen a strong start with our CI visibility products, which were announced at DASH last year, and started charging for just a few months ago. CI visibility already has more than 1,000 paying customers, including some product-specific new logos. Our platform strategy also continues to resonate in the market. As of the end of Q2, 79% of customers were using two or more products from 75% a year ago. 37% of customers were using four or more products from 28% a year ago. and 14% of our customers were using six or more products from 6% a year ago. Now let's move on to product and R&D, where our teams delivered another strong quarter of innovation. In June, Gartner published the 2022 Magic Quadrant for application performance monitoring and observability. Datadog has once again been named a leader, and we have improved from last year on our scores and ranking in all dimensions. We attribute this first to our unified platform experience, covering dev, ops, security, and all the personas in one place. But we also see it as a recognition of the continued evolution of watchdog or AI engine, which takes over the complexity of monitoring cloud native architectures and provides proactive alerts, guided troubleshooting, and fully automated root cause analysis. We are very pleased that our APM product went from GA to best of breed in just five years. And I want again to congratulate our teams for this achievement. In June, we announced the general availability of Observability Pipeline, the 15th product in the Datadog platform. As a reminder, this is based on our 2021 acquisition of Timber, the company behind a very popular open source project named Vector. As organizations scale their application, the volume of telemetry data grows exponentially. Engineers must manage large volumes of metrics, traces, and logs, and route them from many sources to many destinations. And this complexity leads to vendor locking, poor data quality, risks of sensitive data leaks, and an increase in overall management costs. By using Datadog Authority Pipeline, customers can control the cost and volume of data, decouple data sources from their destination, standardize and improve on data quality, and redact sensitive data to help maintain compliance. Next, we announced the general availability of Audit Trail in June, helping businesses safely adopt the Datadog platform while maintaining compliance, enforcing governance, and building greater transparency. And this week, we announced the general availability of service catalog. With cloud architectures, customers are often creating hundreds or thousands of interconnected services, which are owned and developed by globally distributed teams. This large network of services often makes root cause analysis difficult, and it can be challenging to understand what to do to eliminate issues or who to call for help. Our service catalog inventory services defines team partnerships, and displays configurations and dependencies very similarly to what CMDBs might do. But where CMDBs are typically manually populated, our service catalog can identify this information automatically, as it was specifically designed for the cloud edge. Finally, this morning, we announced that we acquired Secret, which is spelled S-E-E-K-R-E-T. Secret's API observability platform gives engineering teams the control they need to better manage their private, public, and third-party sets of APIs. with Secret, who will accelerate on our path to bring customers' visibility into their APIs, and over time, unlock new exciting capabilities for our APM Suite and our security platform. That's it for our product update this quarter. And needless to say, we're all very grateful to our engineering and product teams for their continued hard work. Now, moving on to sales and marketing, let's discuss some of our wins in Q2. First, we signed a seven-figure upsell with a global services and audit company. This customer is going through a large-scale digital transformation, including migrating from on-prem data centers to multiple clouds, and in particular, Azure. They are consolidating nine disparate legacy and open-source tools to Datadog as their strategic platform, and purchased all of our products, as well as our premier support and technical account management services. Next, we had a seven-figure upsell with a managed service provider in Asia that is a top AWS partner in their region. This customer transitioned from their legacy monitoring tool to Datadog and adopted the entire Datadog platform. They are experiencing rapid growth as they sell their MSP services to AWS and CDN customers, and they are expanding their opportunity as well as ours in APAC. Next, we had a seven-figure land with a multinational media company. This customer has aggressive expansion plans for its streaming service, including in international markets. But they found that their current mix of open source and legacy solutions wasn't meeting their needs. They calculated data that would pay for itself simply by accelerating the resolution of just one of their major incidents and avoiding loss of revenue. These customers started with infrastructure, APM, and log management, with the opportunity to expand to more usage and products as the company scales. Next, we had a 60-year land with a Fortune 500 logistics company. Three years ago, this customer chose legacy monitoring providers and homegrown solutions over Datadog. Now, our platform has come a long way since then. Meanwhile, incumbents were unable to meet this customer's needs, particularly around their Kubernetes adoption, leading to dozens of high-profile incidents a year with a high time-to-resolution. Additionally, this customer expects to save nearly $3 million in developer resources by consolidating multiple products to Datadog. Finally, who had a six-figure land with a gaming division at a hyperscaler. Previously, this company was primarily using open source and its own hyperscaler native tooling. But despite deep technical expertise, ongoing solutions were lacking granularity and consumed critical engineering resources. By using Datadog, this customer unlocked a prescriptive way to visualize, alert, and maintain their cloud gaming services. In addition to these wins, we also had a number of sizable six- and seven-figure new logo and expansion wins with companies that have recently experienced business contraction and announced staff reductions. These customers are looking to streamline their operations, save on engineering costs, or consolidate multiple vendors on a strategic platform. We believe that software is a deflationary force, and we are confident in our ability to help our customers do more with less should economic conditions worsen. That's it for this quarter's customer highlights. I'd like to thank our go-to-market teams for their efforts and continued execution. Now, let me speak to our longer-term outlook. We recognize the macro environment is uncertain as we look into the back half of 2022. But we also see no change to the long-term trends towards cloud-based services and modern DevOps environments, and observability remains critical to that journey. We continue to drive market leadership and offer our customers value, efficiency, and cost savings to solve their complex monitoring problems. As a result, we continue to feel very confident in our opportunities. We believe cloud migration and digital transformation are drivers of our long-term growth and our multi-year trends that are still early in their life cycle. And we believe it is increasingly critical for companies to embark on these journeys in order to move faster, serve their customers better, and in times like these, become more efficient with their infrastructure and engineering investments. So we plan to continue to invest in our strategic priorities to execute on these long-term opportunities. At the same time, We will continue to closely monitor the demand environment and recalibrate further if necessary to balance our long-term investments with financial strength. Before I hand it over to David, I wanted to make a couple of announcements. First, we are holding Dash 2022, our user conference, on October 18th and 19th at the Javits Center in New York City. This is an occasion for us to showcase our latest product innovations, and we're excited to show everyone what we've been up to. We also will organize an investor meeting at Dash and we'll share more details with you shortly. And last but not least, we are pleased to welcome Titi Cole to our Board of Directors. Titi is CEO of Legacy Franchises at Citigroup and brings over 25 years of experience in senior global leadership roles in the financial services industry. Her perspective and experience will be incredibly valuable as we continue to grow on scale. With that, I will turn the call over to our CFO, for a review of potential performance and guidance. David?

Thanks, Olivier. We delivered strong financial performance in Q2. Revenue was $406 million, up 74% year over year, and up 12% quarter over quarter. As Olivier described, we executed strongly with robust new logo ARR growth, continued low churn, and continued strong platform traction. But we did see some customers beginning to manage costs in response to macroeconomic concerns, which impacted our usage growth with some of our existing customers. Looking at our growth with existing customers, our dollar-based net retention was above 130 percent for the 20th consecutive quarter, remaining strong as we continue to see customers use more existing products and adopt new products on the Datadog platform. We saw usage growth with some existing customers decelerating Q2, and that deceleration was concentrated in our larger spending customers as opposed to our lesser spending customers, where growth remained steady year over year. Amongst our industries, we saw relative deceleration in consumer discretionary customers, which represents low teens percent of our ARR. As a reminder, we are highly diversified in industries and segments. And we saw lower expansion rate weighted towards areas of our platform that have volume-based components, like certain aspects of log management and APM. infrastructure monitoring AR growth was relatively steady year over year. On the other hand, our gross retention remained unchanged and steady in the mid to high 90s. We believe that our gross retention has reached and is sustaining these levels because of the stickiness of our product and the criticality of our platform to our clients. And as Ali mentioned, on new logos, we saw strong continued new logo acquisition and ARR growth broadly by geography and across industries and company sizes. Finally, our platform strategy continues to resonate with customers, with 79% of our customers now using two or more products, 37% using four or more products, and 14% using six or more products in the Datadog platform as of the end of Q2. Moving on to our financial results, billings were $397 million, up 47% year-over-year. As in previous quarters, we had some differences in the timing of billings of a few large customers, which were billed in Q2 last year, but were billed in Q1 this year. And pro forma for those adjustments, billing's growth year-over-year was in the mid-50s. Remaining performance obligations, or RPO, was $881 million, up 51% year-over-year. Current RPO growth was in the mid-50s year-over-year, and contract duration was slightly lower than the year-ago quarter. In addition, we observed that some customers aren't changing their level of usage growth, but are being more conservative in their commitments, which impacts billings and RPO growth, but not revenue growth. As we said in previous quarters, billings and RPO growth can fluctuate significantly and vary from revenue growth, whether higher or lower due to the timing of invoicing and duration of customer contracts. To illustrate this, we note that billings growth for the first half of the year of 2022 was 72 percent year over year. Now, let's review some key income statement results. Unless otherwise noted, all metrics are non-GAAP, and we have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross profit in the quarter was $328 million, representing a gross margin of 81 percent. This compares to a gross margin of 80% last quarter and 76% in the year ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of sales this quarter. In the medium to long term, we continue to expect gross margins to be in the high 70s range. Given our success in increasing our investments in R&D and go-to-market, Our non-GAAP Q2 OPEX grew 65% year-over-year versus 56% year-over-year in Q1. This included our return to in-person office travel and events, which contributed $11 million to the sequential growth of OPEX. Operating income in Q2 was $85 million for a 21% operating margin. compared to operating income of 31 million or 13% operating margin in the year-ago quarter. Now, turning to the balance sheet and cash flow statements, we ended the quarter with $1.7 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $73 million in the quarter. After taking into consideration capital expenditures, and capitalized software, free cash flow was $60 million with a free cash flow margin of 15%. Our free cash flow margin in the first half of 2022 was 25%. Now for our outlook for the third quarter and the fiscal year 2022. First, informing our guidance, we are using conservative assumptions as to the organic growth of customers, taking into account the macroeconomic uncertainty and recent variability of the growth amongst certain customers. As Olivier mentioned, we see healthy trends in the hosts and containers monitored and strong execution in our business, but we recognize customers may have less visibility into their own businesses due to the macroeconomic environment. So, for the third quarter, we expect revenues to be in the range of $410 to $414 million, which represents 52% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $51 to $55 million, and non-GAAP net income per share is expected to be in the 15 to 17 cents per share range based on approximately 347 million weighted average diluted shares outstanding. For the full year fiscal year 2022, we expect revenue to be in the range of 1.61 to 1.63 billion dollars, which represents 57% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of 255 to $275 million. Non-GAAP net income per share is expected to be in the range of 74 to 81 cents per share, based on approximately 347 million weighted average diluted shares outstanding. Now, as regards to our margin guidance, I wanted to point out first, gross margins have recently been at the top of our historical range. In operating expense, we have returned to in-office attendance, travel, and events. We estimate that this was a 300 basis point sequential margin impact in Q2, and we expect an additional 100 basis point sequential margin impact in Q3. As Ali mentioned, in Q4, we will hold our DASH user conference, and we will participate in the AWS reInvent, our largest trade show event of the year. The cost of these events will be approximately 400 basis points of margin impact. We're back to fully in-person events this year, and we're excited to get in front of customers and showcase our many product innovations. Next, we have been successful in making R&D and sales and marketing investments, and we believe these will pay off in the future. While we plan to continue to invest, we will remain judicious and disciplined in our cost structure given macro uncertainties. As indicated by the guidance, we expect non-GAAP operating margins in the second half of 2022 to be in the low double digits. We are hopefully profitable on a non-GAAP basis and are free cash flow generative. And we have built a highly efficient frictionless business model. while driving high ROI on our investments over time. Our efficiency and financial strength affords us options in times of macro uncertainty that other market participants will not have, and we intend to make the best of this opportunity to drive our long-term growth. But of course, we are mindful of the environment and are closely monitoring our costs carefully, and we will calibrate further if necessary to maintain our financial strength. In conclusion, while we recognize there is greater uncertainty in the macro environment right now, we see no change in the importance of cloud migration and digital transformation, which are critical to our customers' competitive advantage. We believe we are well positioned to help our customers embark on these journeys, and we are investing aggressively into our long-term opportunities while maintaining our financial strength. I want to thank Data Dogs worldwide for their efforts. And with that, we will open the call for questions. Operator, let's begin the Q&A.