This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: the conference will begin shortly to raise your hand during q a you can dial star one one good day and thank you for standing by welcome to the q3 2022 data dog earnings conference call
spk11: 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yuka Broderick, Vice President of Investor Relations and Strategic Finance. Please go ahead.
spk15: Thank you, Lauren. Good morning, and thank you for joining us to review Datadog's third quarter 2022 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pommel, Datadog's co-founder and CEO, and David Oatesler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the fourth quarter and fiscal year 2022, our growth margins and operating margins, our strategy, our product capabilities, and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify board mission statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risk and other important factors that could affect our actual results, please refer to our form 10-Q for the quarter end of June 30, 2022. Additional information will be made available in our upcoming form 10-Q for the quarter end of September 30, 2022, and that is filing for the SEC. The information is also available on the investor relations section of our website, along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoguideq.com. With that, I'd like to turn the call over to Olivier.
spk06: Thanks Luca, and thank you all for joining us this morning. We are pleased to report strong results in Q3 as we continue to execute on our platform vision. Let me start with a review of our financial performance. In Q3, revenue was $437 million, an increase of 61% year-over-year and above the high end of our guidance range. We had about 22,200 customers, up from about 17,500 in the year-over-quarter, We ended the quarter with about 2,600 customers with ARR of $100,000 or more, up from about 1,800 in the year-ago quarter. These customers generated about 85% of our ARR. We generated free cash flow of $67 million, with a free cash flow margin of 15%. And our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted more products. Next, our platform strategy continues to resonate in the market. At the end of 2003, 80% of customers were using two or more products, up from 77% a year ago. 40% of customers were using four or more products, up from 31% a year ago. And 16% of our customers were using six or more products, up from 8% a year ago. We continue to be pleased with this continued adoption of multiple products in our platform. which indicates the additional value we are bringing to our customers. We continue to see strong ARR growth with our newer offerings, and our products introduced since 2019, which exclude infrastructure monitoring, core APM, and log management, remain in hyper-growth mode. I also want to highlight a couple of our newer products, database monitoring and CI visibility. We started charging for these products three and two quarters of the global expectations. and each has already exceeded eight figures in ARR and more than 1,000 customers. And as we are further developing them, we are confident these products will lead to a broader set of use cases for a larger set of customers over time. Now, moving on to Discord's business drivers. At the high level, Q3 was overall very similar to Q2, with strong performance in new logos and new product and patch activities, tempered by growth of usage from existing customers that although healthy, was below our long-term historical averages. This added up to sequential net ARR added that was similar to Q2. To give a bit more color, first on the usage trend. As we said, usage growth was overall solid, but consistent with Q2 trends. From the product perspective, Crossred was more homogeneous among our major products than it had been in Q2. Looking at industry verticals similar to last quarter, we continue to see a more pronounced effect in consumer discretionary and in particular with our customers that are cloud native and fully scaled into public cloud. Note that the consumer discretionary vertical represents low teens percent of our ARR and includes e-commerce as well as food and delivery. All that said, we are pleased with our continued strong performance. With the new EQ3 grew 61% year-over-year and 7% quarter-over-quarter. with all of our products meaningfully outperforming the growth of the large-class providers. While the macroeconomic environment is likely to remain a headwind in the near term, we continue to see positive trends underpinning our business and remain bullish about our long-term opportunities and aggressive with our investment plans. First, we continue to see strong growth in new logo ARR, including some large wins in traditional industries. We'll talk about some of those in a bit. Our sales pipeline is strong heading into Q4 for both new logos and new products, and we're seeing great opportunities across customer sizes, geographies, and industries. Alongside our strength in new logo AR, this gives us confidence that digital transformation and cloud migration remain a top priority. It is perhaps even more critical in difficult times when businesses need to be more agile and do more with less. Remember that given our usage space of any model, New logo wins generally do not immediately translate into meaningful revenue, but they are very important to us as new customers expand their usage in subsequent quarters and subsequent years. Third, we are seeing continued expansion on our platform, as indicated by customers adopting more of our products. And finally, churn remains low and hasn't changed, with gross revenue retention steady in the mid to high 90s. We believe this high growth revenue attention is indicative of the business criticality of Datadog for our customers. Now let's move on to product and R&D. Two weeks ago, we had our Dash user conference, which was an occasion to showcase the extension of our products and the results of our R&D investment. Let me go through some of these, starting with observability before moving on to security, developer experience, and finally, the ability to take action within Datadog. First, We are doubling down on our investments in observability, starting with two new products, Data Stream Monitoring and Cloud Cost Management, both addressing growing needs and strong demand for more customers. We also extended our APM suite to offer mobile app testing, user heatmaps, and dynamic instrumentation. On the network side, we added ascendancy traps and network monitoring to our product. On the logging side, we announced Log Forwarding, which coupled with live archives and observability pipelines places us at the center of our customers' data management. Responding to customer demand, we also extended our sensitive data scanner beyond logs to identify sensitive data across APM and RAM. And across the platform, we've announced extended support for OpenTelemetry, PCI compliance for APM and logs, as well as HIPAA compliance across most of Datadog. Second, we are expanding our security platform, and we announced cloud security management which brings together Cloud Workload Security, Cloud Security Posture Management, and Results Catalog as a frictionless, rich, and context-aware cloud-native application protection platform, or CNAP. We launched native protection for application security management to enable blocking attacks in real time, directly within the Datadog platform. And we now provide vulnerability monitoring to give our users a high-fidelity picture of all applications in production, as well as their dependencies, vulnerabilities, and the attacks they face. Third, we followed through with our recent entry in developer experience. We announced continuous testing to facilitate end-to-end testing as soon as the code is developed, which increases quality and velocity at the same time. And we showcase intelligent test runner using more rich APM and profiling data to automatically skip unmuted tests and drastically reduce time and money spent on CI-CD. Fourth, And last but not least, we announced new product areas that take our platform from observing to allowing our users to take action and respond all within Datadog. We announced our event management products to allow users to correlate and summarize alerts, events, and issues in a variety of sources in order to resolve problems directly from the Datadog AIOps console. We also announced Datadog workflows which allows customers to develop and run automated DevOps or security remediation using a no-code editor, and there will be more than 200 integrations to service the APIs they use. We announced limited availability for co-screen, the collaboration meeting tool that we acquired last year, and that allows real-time screen sharing and collaborative problem solving within Datadog. And finally, we kept on extending the scope of our watchdog AI-MIMG, further automating the detection and guiding the resolution of applications and infrastructure problems. That's it for the mini-announcement from Dash. And as you can tell, the team has been hard at work and I'm extremely proud of our innovation validity and focus on our customers. One last thing on product. As announced in the press release issued this morning, we acquired CloudCraft, a planning and design tool used by tens of thousands of cloud architects to create live diagrams of data infrastructure, including real-time health, configuration, and cost data. And we're very excited for that team to join Derrida. Now, moving on to sales and marketing, let's discuss some of our wins in Q3. First, we found a seven-figure land with a Fortune 100 grocery chain. This company was migrating to Azure, but was held back by their open-source solution. And because this grocery chain has pharmacies inside stores, they needed better controls around personally and data-favorable information. Our sensitive data scanner and our HIPAA compliance filled that gap and were differentiators for Datadog to win this opportunity. Next, we signed a seven-figure land with a major multinational restaurant chain. This company had a legacy of availability solution that wasn't able to scale with their vision of a Kubernetes and serverless environment. They also needed an end-to-end view of their customer journey and will now use six pair of products, including Synthetix and RUN, to drive customer experience improvement. Next, we signed a seven-figure land with a social networking app This company was previously a Datadog customer, but had moved several years ago to a competitor as they needed certain languages or APN products to support well at the time. Today, our APN not only matched the capabilities of the IoT solution, but presented significant advantages in terms of ease of deployment, alerting, and anodity detection. And they also plan to take advantage of our new service catalog, taking Datadog at the center of the operation. Next. we had a seven-figure upsell with a large Asia-based technology conglomerate. This company's many business units include consumer electronics and IoT, and their use of Datadog has grown rapidly with the number of devices we are managing. They have seen a number of benefits from using Datadog, including lowering the amount of buckets by 25% and mean time to resolution by 50%. They have also seen a significant time savings in incident response activities by cold engineers, from 20 hours to only two hours per week. With this renewal, this customer has now adopted 14 Datadog products. Next, we had an eight-figure multi-year up-sale with a large e-commerce company. This customer had been using primarily infrastructure monitoring and ATM with Datadog and was also operating an open-source login tool. Using Datadog led to significant efficiency, including setting customer-impacting incidents by close to two-thirds and reducing the number of employees required to address each incident by one-third. With this renewal, they are adopting Datadog log management and ROM, and consolidating multiple homebrewed and cloud-native tools, as well as a commercial competitor. That's it for this quarter's customer highlights, and I'd like to thank our go-to-market team for their hard work and for delivering another strong quarter. Now, let me speak to our longer-term outlook. We recognize the macro environment remains uncertain, but we continue to see no change to the multi-year trend towards digital transformation and cloud migration. And we remain confident that we can help our customers with their efforts to save on costs, drive greater engineering efficiency, and take advantage of the benefits of cloud and other next-gen technologies. So we are continuing to invest in our strategic priorities to capture our long-term opportunities. And we remain laser-focused on bringing value to our customers as they manage through a more challenging economic environment. With that, I will turn the call over to our CFO for a review of our financial performance and guidance. David?
spk05: Thanks, Olivier. In Q3, we continued to execute well and support our customers. Revenue was $437 million, up 61% year over year, and up 7% quarter over quarter. To dive into some of the drivers, First, we experienced strong new logo ARR growth and continued low churn again this quarter. We saw existing customer usage growth remain at levels similar to Q2 as customers continue to be more cost-conscious as they manage their businesses. As Olivier noted, we saw a roughly similar sequential growth in ARR dollars added in Q2 as in Q3 as in Q2. And we saw relatively homogenous usage growth amongst our major products during Q3. As with Q2, we saw relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce, including delivery. And we saw similar growth across geographies. As a reminder, We bill all of our revenue in US dollars, and we do not price in local currencies. Our dollar-based net retention remained at strong levels above 130% for the 21st consecutive quarter. Our land and expand model, aggressive product innovation, and our customers' motion to the cloud continue to drive expansion opportunities with our existing customer base. Overall, the customer usage growth we're seeing remains higher than the trust growth we experienced at the beginning of COVID in 2020. And we're pleased with our 61% year-over-year and 7% quarter-on-quarter revenue growth this quarter. Meanwhile, gross revenue retention was unchanged and steady in the mid-to-high 90s. Regardless of the macroeconomic environment, Our customers still need to serve their clients, and moving to the cloud enables better service and cost savings against people-intensive or on-prem technology-based offerings. We believe our high and steady growth retention indicates that Datadog is critical to our customers' ability to deliver services to their clients digitally. And as Ali mentioned on new logos, we saw continued strong new logo ARR growth across geographies, industries, and company sizes. And we have a strong pipeline of opportunities in Q4. Finally, our platform strategy continues to resonate with customers, with 80% of our customers using two or more products, 40% using four or more products, and 16% using six or more products as of the end of Q3. Moving on to our financial statements. Billings were $467 million, up 51% year over year. Billings duration was slightly lower year over year. Remaining performance obligations or RPO was $941 million, up 31% year over year. Current RPO growth was in the mid-40s year-over-year. As a reminder, we signed several large multi-year renewals in Q3 2021, which may make current RPO a more useful indicator as it excludes the multi-year duration impact. We also had a challenging comparable of that metric as Q3 of last year Current RPR growth was about 100%. We continue to believe revenue is a better indication of our business trends than billings or RPO, as those can fluctuate relative to revenue based on the timing of invoices and the duration of customer contracts. Now let's review some key income statement results. Unless otherwise noted, all metrics are non-GAAP. we have provided a reconciliation of gap to non-gap financials in our earnings reliefs. First, gross profit in the quarter was $348 million, representing a gross margin of 80%. This compares to a gross margin of 81% last quarter and 78% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold this quarter. In the medium to long term, we continue to expect gross margin to be in the high 70s range. Our Q3 non-GAAP OPEX grew 65% year over year as we continue to grow our headcount in R&D and go-to-market. Q3 operating income was $75 million, or a 17% operating margin, compared to an operating income of $44 million or 16% operating margin in the year-ago quarter. Then turning to the balance sheet and cash flow statements, we ended the quarter with $1.8 billion in cash, cash equivalents, restricted cash, and marketable security. Cash flow from operations was $84 million in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $67 million for a free cash flow margin of 15%. Now for our outlook for the fourth quarter and fiscal year 2022. First, informing our guidance, we continue to use conservative assumptions as to the organic growth of our customers. And as usual, we are basing our guidance on current economic conditions, which includes slower than historical growth in usage among existing customers as we have seen in q2 and q3 for the fourth quarter we expect revenue to be in the range of 445 to 449 million dollars which represents 37 year-over-year growth at the midpoint non-gap operating income is expected to be in the range of 56 to 60 million dollars. And non-GAAP net income per share is expected to be in the 18 to 20 cents per share range based on an approximate 347 million weighted average diluted shares outstanding. For fiscal year 2022, we expect revenue to be in the range of 1.65 to 1.654 billion dollars which represents 61% year-over-year growth at the midpoint. And non-GAAP operating income is expected to be in the range of $300 to $304 million, with non-GAAP net income per share expected to be in the range of $0.90 to $0.92 per share, again based on an approximate 346 million weighted average annual diluted shares. Now some notes on guidance. As we discussed last quarter, Q4 includes some large in-person events, including our Dash User Conference, which was held two weeks ago, and AWS reInvent, our largest trade show event of the year. The cost of those events will result in an approximate 300 to 400 basis point effect on margins. As relates to our capital expenditures, we are adding more office space around the world as we continue to return to office. We expect CapEx of about $15 million in Q4. In conclusion, while we recognize macroeconomic uncertainty continued into Q3, 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 Datadogs worldwide for their participation in these efforts. And with that, we will open the call for questions. Operator, let's begin the Q&A.
spk11: Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ramo Lenshow with Barclays. Ramo, your line is live.
spk08: Thank you. Congrats on a great Q3. Olivier, quick question for me. The first one is if you compare the current situation and the current environment with what you saw in the pandemic, back then the hyperscalers kind of talked about cost optimization and customers calling back a little bit. It does seem it's slightly different now. Could you maybe talk a bit about some of the factors that you're seeing out there? And I had one follow-up for David.
spk06: Yeah, the situation is fairly different now from what we saw in COVID. First of all, in COVID, we saw very brutal, very broad. Everyone was crumbling to save money as quickly as possible, which is not what we're seeing today. What we're seeing today is a mix of things, actually. First of all, everything that is related to direct transactions with customers, whether it's new logos on new products, All of that is actually working great. The demand we can see there is as strong as you've seen it. When you look at the usage and where you might see cost optimization, I think there are two different stories there. There's the customers that are largely cloud-native and largely fully scale on the cloud environment, so they have cloud end-to-end and public cloud, that are definitely trying to save money. And these are companies that, in general, also tend to have their own growth rates affected or probably affected in the future by the macro trend, so that's why they're doing that. But when you look at the other customers, the ones that are earlier in their cloud migration, they're actually not slowing down and we see the same urgency and eagerness for them to keep scaling and keep moving into the cloud. And that's also where the bulk of all opportunities is. When you compare us to the hyperscalers, we are seeing some of the expenses they see. And by the way, I should say, it's always hard to do a direct comparison between the numbers of the asset scalers and hours. There's day numbers, including a bunch of other things beyond infrastructure. And we're also not just in public labs, we're also quite a bit of a private environment as well. But we're seeing some of what they're seeing in terms of optimization. We're a little bit less sensitive to it because we We tend to, because of what we do, we tend to skew towards more critical environments than everything that might come in the hyperscaler. And overall, all of our products meaningfully outperform the growth of the hyperscalers.
spk08: Okay, perfect. Thank you. And indeed, you know, in these kind of uncertain times, a lot of the time you have negotiations or a vendor has negotiations with customers around fillings, fillings terms, et cetera. Have you seen anything that is impacting you or that you can notice? Thank you.
spk05: No, we really haven't seen any difference in billing terms or DSOs, for that matter. So on that side, given the mission-critical nature of the product, we haven't seen any material changes in that.
spk06: And again, that's different from COVID in that COVID was really a cash crunch that most communities were worried about. And so they were trying to prevent money from going out of the door right away. Whereas in this case, it is more preparing for an environment where they might want to watch a possibility of stability a bit more. And customers, when they negotiate, especially the ones that are fully scaled, the one thing they look for is more optionality in terms of how long they commit for and how much they commit for long periods of time, especially when they're a little bit unsure of their own growth rates.
spk08: Okay, perfect. Thank you, Congress.
spk11: Thank you. One moment while we compile the next question. Our next question comes from Fred Lee with Credit Suisse. Fred, your line is now open.
spk12: Hey, good morning, Anne. Thank you for taking my question. I was wondering if you could comment a little bit on your traction and security, what segments you're seeing the most traction, and also bigger picture, what you're seeing in the rate of the silos breaking down between SEC and DevOps. Overall.
spk06: Um, yeah, so, so bigger picture, we, I mean, several, uh, everybody's talking about it and like, we're not really the only ones to talk about, um, the need to bring security to, uh, uh, to Devon up and have developed their, uh, a lot of responsibility in that. So, and the confidence that this is, we see that developing in a way that's very similar to what we see with DevOps about a decade ago. Um, so this gives us confidence. terms of attraction we're happy with is where we are like we see we have a we mentioned earlier thousands of customers using our security products um the customer is going fast the revenue is going fast but it's not worth the growing the uh traffic area of this product pretty fast and what we we feel is a lot of market pool of attraction with it um there's a lot of customers want us to be here and there's a lot of product investments we still need to do some of that in um and there's a lot more coming. So it's working as planned, I would say, at this point.
spk10: Thank you. Great quarter. Thank you.
spk11: Our next question comes from the line of Mark Murphy with J.P. Morgan. Mark, your line is open.
spk16: Yes, thank you very much, and I will add my congratulations on a nice performance. So, Olivier, many customers had said that your cloud cost management solution is extremely well-timed, and they're saying that because they're seeing interest in cost optimizations that didn't exist about six months ago. I'm wondering if that aligns with your view, and does that feel like a product to you that can get off to a pretty fast start in this environment? And then have a quick follow-up.
spk06: I mean, you're right that cost management is on a lot of people's minds right now. But I would say that was already the case six months ago and, you know, even a year ago. I think any company that is fully scaled into the cloud cares about their efficiency and it turns out they have quite a bit of leverage, you know, in terms of cost improvement and if they get it the right way with the right tooling. So we think it's a product that, yes, it's well-timed, but we think it's a product that has the potential of being widely adopted and very useful for a very long time, even after we come out of this challenging macro environment.
spk16: Okay, understood. And then, David, just as a quick follow-up, looking at the sequential growth in Q3 is around 7%, and the way it appears in guidance for Q4 is just thinking about your cadence That would seem to compound out at a year-over-year growth rate around 30%. The, you know, thinking forward, is that type of cadence a fair way to try to conceptualize the glide path into next year, just figuring somewhere around 30% if we want to kind of de-risk the models? Or do you think that Q3 and Q4 are maybe, not so representative of where the puck is going to be heading here.
spk05: Yeah, as a reminder, we provide guidance in a consistent way. We essentially look at the environment, the performance, and given the usage model, we put conservative assumptions on top of that. We employ that for the guidance we gave here in Q4.
spk06: um for next year we'll provide guidance when we report q4 and you know plan to update everybody at that time thank you keep in mind there's different aspects that there's a part of it is driven by the new logos where we're getting from customers part of it is driven by the growth of mixing customers um and the one way to the gate also is it's a It's tougher to go to customers very fast when they're going with us a lot over the past few years. When customers are going to spend 80% over your, or 70% over your four or three years, they might go a little bit slower after that. But in turn, it might give us an easier compare for the future.
spk16: Thank you, Olivier.
spk11: Thank you. One moment, please. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit, your line is now open.
spk15: Hey, Sanjit, we can't hear you. Can you please get near to your mic?
spk13: Sorry about that. I appreciate you guys taking the question. My question is really around... Competitive displacements and potentially observability consolidation within your customer base. To what extent are you seeing customers either consolidate open source or other sort of commercial tools and standardize on Datadog, not just to benefit from the innovation that you're seeing from the Datadog platform, but also to lower their overall observability monitoring spend as they go into next year?
spk06: Well, we do see a little bit of both, but I think it's confusing what we've seen in the past. There's no completely new trend there, but we see that happen across our customers. We think also in the future, this will only become more compelling when customers also bring to us more of their security use cases, more of their user analytics use cases, or behavior analytics use cases, because these so far have required different copies of the data to be sent to different vendors, and these tend to be the most expensive part of the product structure that scales with each of these vendors. So we think we make a very competitive long-term proposition there with these customers.
spk13: That makes a lot of sense. And then I think, Olivier, in your script, you called out a customer that's using 14 different products, which is pretty incredible to think about. For customers that's adopting that many different product capabilities, how is that contract sort of structured and how does that adoption sort of happen? Is it through some broader flexible sort of credit system or are these products being sold or priced individually? Just give us a sense for a customer that gets up to that level of adoption How does the sort of contracting work for that type of customer?
spk06: Yeah, so the majority of those contracts for large customers with a lot of products are made on what we call a drawdown, which is basically a set and committed amount of credits that customers can use. In addition to that, they get a red card for all the various cues they're going to consume. And those red cards can also be negotiated. Some customers use... very large amounts of certain products, we can get a better rate of those specific products as well as we negotiate that. I think that's where it gets a little bit tailored to the specific use cases and specific needs.
spk05: And to add, you know, that's what we've been talking about, the frictionless adoption where the client is using the platform and given this drawdown with a rate card, they can use the products in a frictionless way as they expand their use of the Datadog platform.
spk06: The benefit for them is they usually don't know how much of each of the products they're going to consume ahead of time. They don't know overall what the shape of their or the size of their environment is going to be, but they also don't know within this environment how much APN traces they will need versus logs versus metric versus really use a monitoring, is there anything else that we produce So it gives them the flexibility there. And again, that's another reason to bring into Solida more tools on our platform because they don't have to pre-commit to everything in separate buckets, basically.
spk13: Thanks, Toto. Thank you for the call.
spk11: Thank you. One moment for the next question. Our next question comes from the line of Koji Ikeda with B of A Securities. Koji, your line is open.
spk02: Hey, Olivier. Hey, David. Thanks for taking the questions. I just kind of wanted to dig in here on the consumer discretionary and appreciate all the comments you had in the prepared remarks, but I was really kind of wondering, you know, how much of that vertical is international? You know, just thinking about FX and the potential effects of FX there if the USD strength persists in the future. Thanks, guys.
spk06: Yeah, so in FX, sorry, David, if I'm kidding you. We charge in dollars everywhere, right? So we don't have any formal FX risk. We don't provide any adjusted numbers for FX, any of that. We do, however, like our customers who buy our products from Europe and from, say, Japan, their budgets are still in Japanese yen or in euros. And so we do think that the strong dollar is a headwind for us. We don't see very dramatically different growth rates between Europe, America's in APAC, but we think we might see higher growth in APAC in Europe, which are smaller parts of our revenues and less mature if the dollar was weaker. It is conjecture. We don't actually quantify that because we're charging dollars everywhere, but that's something that we're aware of.
spk05: But in that, just to add, in that sector we commented on, the predominant effect would be what's happening in their business, in their sector, rather than the geographical location of the company and its customers.
spk02: Got it. Great, guys. Thanks so much for that. And just one follow-up, if I may, here on the Cloud Craft acquisition. Just any color on how big this company is, you know, the press release did say hundreds of thousands of engineers. So, you know, how does that equate to maybe customer overlap? And does this cloud craft open the door to maybe new personas to sell into within organizations? You know, thanks so much for guys for taking my questions.
spk06: Yeah. So it's very interesting because it's a great product. Um, there are lots of opportunities in terms of integrating product with ours. There are opportunities also with some part of these products, many standalone. It's a product that works very well for planning and for cloud architects in general to start their planning, their documenting, their cloud migration. It's also interesting for us from a distribution perspective because it has a lot of different users today. It has a very broad reach. It's also very easy to embed on third-party sites. So there are a number of opportunities we're excited about with CloudCraft. We'll see more as we integrate and as we pursue these opportunities, but We're very excited. It's a company that we have been tracking for a while.
spk05: Just to make sure it's clear, it's a small company. It's an acqui-hire, like we've done, meaning we are bringing on board the engineers. It does come with a customer base. It's an immaterial amount of revenues relative to our total, and as Ali mentioned, provides an extension of the platform, as well as potentially some leads, some lead generation in the customers and personas.
spk02: Thanks, Lily. Thanks, David. Thanks so much.
spk11: Thank you. One moment for the next question. Our next question comes from Matt Hedberg with RBC. Matt, your line is now open.
spk03: Great. Thanks, guys. David, for you, you know, last quarter you talked about a stronger July versus June. I'm wondering if you could comment a little bit on how the linearity of the quarter played out and then maybe also Yeah, how did October trend relative to September?
spk05: Yeah, so for linearity, it was very similar, linearity to what we've had. There was no difference. And so we saw, unlike last quarter a bit, we saw pretty much of a prorated type of quarter. And we normally have a strong October trend in terms of the flow of our customers and what they're doing in the platform before code freezes. We're pleased with what we have seen so far, but still recognize that October is usually a strong for us. And, you know, it's only the beginning of the quarter. Ali, anything else you want to add to that?
spk06: No, I mean, I think once you're trying to get through the whole training over time during the quarter, We exited the quarter pretty much the way we entered it. There's no change there. And again, as David said, we're happy with what we see in October, but we're also usually happy with October. Q4 has a bit more seasonality than other quarters. In particular, December tends to be a little bit weaker as a lot of our customers take time off and shut down their development environments and things like that. It's also been a little bit harder to forecast in recent years with the pandemic and the behaviors that, you know, the vacation behaviors that changed after the pandemic. So we really need to be careful with that, and that's all incorporated in our guidance.
spk05: And remind everybody what we said in the script was that the Q3 performance was very similar in its drivers to Q2. So that's further evidence of, as Ali said, that the conditions that we ended Q2 with continued throughout Q3.
spk03: Thanks for the call, guys. Appreciate it.
spk11: Thank you. One moment for the next question. Our next question comes from Brent Phil with Jefferies. Brent, your line is now open.
spk09: David, a question on investment philosophy. Going into the pandemic, you didn't really pull the throttle back. You had it at 11. Going into these times, are you thinking differently about your investment philosophy in this cycle? And can you talk about, you know, quota carrying reps in terms of Are you on pace to hire what you thought at the beginning of the year? Are you pulling back a little bit, given some of the current macro jitters?
spk05: Yeah, I think as we remind everybody, we've always lived within our means and been limited more by our ability to integrate in a responsible way quota-carrying reps, or R&D for that matter, into our company. And we really have not made changes. We had a sort of a prudent plan and continued. As a reminder to everybody, we think there's a very long-term opportunity, and we're investing behind that. We are cognizant that there's more volatility in microeconomic conditions. And, you know, we're looking at everything, but we didn't get out over our skis uh, to begin with in our plan. So it allows us given our model and the way we run the company, um, to, you know, continue that, that investment in a systematic way.
spk06: Just to reset that, you know, we're, so we didn't make changes. We are investing from an R and D perspective. There's so early, there's so much we want to do and we have, we have great traction on the products. So we keep investing there from a go to market perspective. Uh, as I mentioned on the call, We actually have a very strong pipeline, and the conversion risk customers are going great in terms of new logos and new products. And so there is value in growing the CRC, and there is short-term and long-term value there, so we keep doing that. And the last thing I'd say, and remember I keep repeating, but we burnt only $30 million from inception to taking the company public, which generated a lot more cash since then. We have efficiency. that's uh one of the core part of our culture that's where we run the buildings where we built it and that's for the model we've built in terms of friction lights extension and electronic products um so we we trust that we have the uh the the the levers and the way we thought we use them to uh to make sure we have the right profitability as well and just a quick follow-up uh on the crpio david you mentioned say focus on that um it is continuing to decelerate i guess is that just
spk09: a function of the large comps? Are you seeing larger enterprise customers? You've seen the slower cadence of large deals come in. Can you give us your take on that?
spk05: Yeah, I think we had the comps are very significant in this quarter. In Q3 of last year, and I think we said this at the time, we had some large multi-year deals. A reminder, we don't try to target multi-year deals. We had from the client side So that's why the current probably is more over time correlated. This also moves, so if you look at sort of the average of this, it tends over the longer time to correlate with revenues, but there's a lot of noise in this number, so we steer everyone back to revenues and then the computation we've given everybody on how to convert revenues into ARR.
spk06: One big change again is, you know, we can, one big driver for this is, or early customers renew because they try to get ahead of their growth and secure better economics. And in times that are internally like this one, customers tend to wait and see more. And sometimes they'll have slightly worse economies for a little bit, but they have been maintaining some optionality. And so this is why those numbers move quite a bit. And again, the best predictor of what's going to happen next is the revenue rank on which we are. Everything else is sort of Thank you.
spk11: Thank you. One moment for the next question. Our next question comes from Camille with William Blair. Camille, your line is open.
spk04: Thank you and congrats on the strong quarter. It sounds like international demand has remained relatively unchanged from June. Was that consistent across regions? And what do you think is unique about Datadog that has made your sales in Europe more resilient than some of your peers?
spk06: I mean, look, we see demand everywhere. We're growing the teams everywhere. We're growing the teams on a relative basis faster in Europe and in AFAC than we are in the U.S. We're also doing the teams in Latin America, which is doing very well for us. So from what we see, we see them in everywhere. We see Europe and Asia are still a little bit behind the Americas in terms of maturity of their cross-migration, but they are scaling, and it's happening there the same way it's happening in the Pax. From a competitive perspective, the situation is about the same everywhere, and it hasn't changed in any notable way over the past year, I would say. So, you know, there's nothing sharp to say there.
spk04: That's helpful. And if I could just follow up, you called out some vendor displacements in your prepared remarks. Can you maybe comment on how much of your new customer wins are coming from competitive displacements versus greenfield opportunities? And between the two, are you seeing any difference in the macro impact? Are companies that are using competitors maybe revisiting alternative solutions to optimize pricing or is the mix shift pretty consistent?
spk06: It's still a small minority of the deals we make. It tends to be the only ones that are very large because our customers already had something, they already have a large footprint and they need to migrate it over. So these are deals that are large from day one, which is not the best majority of the deals. The best majority of the deals we make are small and they grow from there. These are the ones we tend to mention because these are the ones that are most interesting to look at from day one. But this is still a small minority of what we do. We also don't particularly seek those deals. We train our sales team to land as many new logos and new products as possible. And it's better for them to do 10 smaller ones than one larger one. As those 10 smaller ones will each be as big as the one large one in the end. So that's, you know, in terms of dollar we make for dollar of service activities expense, that's most productive. That's helpful. Thanks again.
spk11: Thank you. One moment for the next question. Our next question comes from Fatima Boulani with Citi. Fatima, your line is now open.
spk01: Hey, good morning. Thank you for taking my questions. Ali, I've got one for you and one for you, David. Ali, to your commentary on the usage moderation persisting in the consumer discretionary vertical, So I know this is a hard question, but what are some of the signs or signals from that vertical that would lead you to suggest or lead you to conclude that maybe there's more moderation to come? And I'm thinking about this in the context of sort of, you know, big tech, right, in the realm of digital advertising and all of the larger companies just beyond and outside of CDP, the CDP vertical. So just any signals or signs that would lead you to conclude one way or the other is sort of the worst of the moderation on the platform expansion is behind us. And then a quick follow-up for David, please.
spk06: Well, I think the question is, and it's mostly, what we see the most is in the customers that are fully in the cloud, fully scared in the cloud. And they're basically the, you should expect their cloud spend to grow at the same rate of their top line in the end. And so when their top line it's slowing down a bit or what they fear is going to slow down a bit, they try and slow their expenses as well, which is what we've seen. I think what we can't tell yet is whether their top line will, you know, will just slow down and stagnate a little bit or, you know, it's going to be compressed. I think it all depends on how big of an economic downturn we face, if any. We're not really in the business of predicting that. But what we see for which of those customers, we get a pretty good idea of where they stand because we see with their projected spend growth even relates to the growth of their business.
spk01: Thank you. David, last quarter you sort of mentioned to us that a lot of customers and prospects or thinking about reduced commitment levels out the gate, right? So I'm curious about how that's trending this quarter and what your expectations are with what you're seeing with new customers in terms of commitment levels out the gate. And within this quarter, how much of that austerity, if you will, around commitment levels, how much of that austerity contributed to maybe usage upside beyond the commitment levels
spk05: this quarter just kind of given the strength in the quarter thank you just to clarify um that's um you know um that that's that's not exactly correct what you said so it is so essentially most of our customers are um essentially land and expand and then commit and then grow their usage over time and that has been going on in the whole model of the company what we said last time was This is not related to their cutting their commitment. This is related to when they are in overage or on demand, whether they decide to do a new commitment or stay on demand longer and to be able to get greater visibility. the comment from last quarter was really more about billing and those metrics than about customer usage. We said that customer usage has been lower than historical trends, but not as low as it was in COVID. So that's another effect. And what we talked about last quarter was more about the billing effect. So we continue to see that customers are, as we talked about, cautious, but that really only has a marginal effect in the billing. And actually, when a client decides that and stays on demand, it has a positive effect on the revenue side in that micro decision.
spk06: I just add one thing to your first question, which is that in terms of, part of the question is, How do we know things are going to get better or worse in the future? I remind you that we have a usage test model for revenue, and we don't have to wait until the next renewal to get the news from customers on whether the growth is better or worse. Whether the news is good or bad, we get it early, and an example of that is that while Broadly in the world, we see Q3 being worse at the macro level than Q2. As far as our business is concerned, Q3 is very, very much in line with Q2. And whatever step function there was in terms of changing the growth rate for some customers happened in Q2 already and didn't change in Q3. So we are very confident that whatever happens, we keep it early.
spk10: Thank you. One moment for our next question.
spk11: Our next question comes from Itai Kidron with OpenEimer & Co. Itai, your line is open.
spk07: Thanks, Yukon. Congrats, guys. Great quarter. David, I just want to have one question for you on the dead dollar expansion rate. Great to see it stay well above 130. But I was hoping to give a little bit more color on that specifically. Directionally, did it go down quarter over quarter? And perhaps, is there a way for you to break down the mix of existing solution expansion in that mix versus new solution adoption? I'm just wondering, maybe not in absolute terms, but perhaps on a relative basis, how that mix has changed over the last two, three quarters.
spk05: Sure. So we don't give more pointed net retention options. But it is a fact that if the organic rate of expanding rate of customers is lower than it was in previous periods, and we said that the rate is lower than it was at the, you know, peak, but not as low as it was at the low in COVID in the middle, that that would indicate that net retention would be going down mathematically, but we don't give more information than that. As far as the, and I think we said a little bit about this in the past, as far as the mix between expansion of existing solutions and new, as clients adopt more of the solution in their land, which we said is happening, What happens, again, mathematically, is that the percentage of the net retention from existing products goes up, despite the fact that, as we said, we have very strong adoption of additional products, but we also have very strong momentum in clients landing with more products, which affects that number directionally, if that makes sense. Got it.
spk07: Thanks. That's helpful. And then maybe, Ali, for you on the database monitoring, it seems like you're off for a good start there. Just from a persona standpoint, does this expand the personas that you're touching? I mean, do you need to be engaged more with database admins in order to sell this product? Or I'm just trying to think from a go-to-market standpoint, what is needed to keep driving progress here?
spk06: In terms of, from a go-to-market perspective, it works the same way as the rest of what we do. It expands nicely on top of the rest of the platform. You're right, though, that we're reaching to some of the more specialized functions around DBAs and people like that. But we also have people who are not trained as DBAs, solve these issues, and grow their DBA skills in a way. So you're right that there's a little bit of a difference there. Today, because of the database we support today, it's not as pronounced as it might be in the future when we start supporting databases like Oracle, for example, where the profession of DBA is more formalized, I would say. Very good. Thanks.
spk11: Thank you. Our final question will come from the line of Michael Turrett, with KeyBank. Michael, your line is live.
spk14: Hey, guys. So two quick quantitative questions. I think you talked about the growth rates of number of hosts monitored last quarter as an indication that you really weren't seeing any slowing in the underlying capacity of what needed to be monitoring. Is that growth rate still the same?
spk06: If you look at the growth by product this time, it's a little bit closer than it needs to be, you know, There's some variation quarter to quarter. A lot is about the same in growth, right? APMs are a bit better. Infrastructure is a bit down. But there's nothing really meaningful there. I think some of the effects you might expect from what you heard from the hyper-serial, we see maybe some of that in the infrastructure, but it's not extremely pronounced. So that's why we need to comment on it.
spk14: Okay. And then, David, just on the CapEx that you called out that was having to do with headquarters, 15 million extra, I believe you said, in this quarter. So, you know, I know you're not giving guns for next year, but is that a one-quarter phenomenon, a multi-quarter phenomenon? How big an impact longer term on CapEx?
spk05: Yeah, to clarify, that wasn't extra. That's just the total amount, not the delta between the quarters. You know, we haven't provided that type of guidance. We are you know, expanding and building out offices. And again, when we provide guidance for next year, we'll endeavor to provide, you know, some guidance that will help in the modeling. Thanks.
spk14: Okay. Great, guys. Thank you very much.
spk11: Thank you. At this time, I would like to turn it back to Olivier Pommel for any further comments.
spk06: Thank you. Thank you all for listening. I also want to thank, obviously, all Datadogs around the world for working so hard this quarter and delivering another great quarter. And I want to thank our customers for trusting us with their business and joining us at Dash at Ubiquity for the great event. So thank you all, and we'll speak again in two, four.
spk11: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
spk01: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
Disclaimer