Datadog, Inc.

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Good day, and thank you for standing by. Welcome to the fourth quarter Data Dog Earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. 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. Please go ahead.

Yuka Broderick Thank you, Kathryn. Good morning, and thank you for joining us to review Datadog's fourth quarter and fiscal year 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 Obstler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the first quarter and fiscal year 2023, and related notes and assumptions, our gross 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 forward-looking 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 discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended September 30, 2022. Additional information will be made available in our upcoming Form 10-K for the fiscal year ended December 31, 2022, and other filings with the SEC. This 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.digidoghq.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 had a solid Q4 to end a strong fiscal year 2022. We delivered significant new innovations for our customers, we saw increasing adoption of our product, and we attracted thousands of new customers to our platform. Meanwhile, we delivered stronger revenue growth, margins, non-GAAP operating profit, and we generated more than $350 million in free cash flow. Let me start with a review of our Q4 financial performance. In Q4, revenue was $469 million, an increase of 44% year over year, 8% quarter over quarter, and above the high end of our guidance range. We had about 23,200 customers, up from about 18,800 last year. We ended the quarter with about 2,780 customers with ARR of $100,000 or more, up from about 2,010 last year. These customers generated about 85% of our ARR. And we had 317 customers with ARR of $1 million or more compared to the 216 we had at the end of last year. We generated free cash flow of $96 million with a free cash flow margin of 21%. And our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted more products. Our platform strategy continues to resonate in the market. As of the end of Q4, 81% of customers were using two or more products, up from 78% a year ago. 42% of customers were using four or more products, up from 33% a year ago. and 18% of our customers were using six or more products, up from 10% last year. Now, moving on to this quarter's business drivers. Overall, we observed slower usage growth with existing customers while continuing to scale our new logo acquisition and new product cross sales. Starting with usage, usage growth of existing customers in Q4 was overall slightly lower than what we observed in Q2 and Q3. which we attribute first to a continuation of cloud cost optimization by our larger spending customers, and second to a seasonal annual slowdown in the second half of December that was more pronounced than in previous years. As in Q2 and Q3, we continue to see more optimization from customers with a larger cloud footprint, while our smaller spending customers are exhibiting higher growth. From a product perspective, We didn't see meaningful differences among our major products, as they all experienced floated growth, albeit decelerating on a year-over-year basis. In contrast to this deceleration in usage growth for existing customers, we continued to execute on new logo lands and multi-product adoption, and we also continued to see stable, very strong growth retention trends. First, we had our strongest new logo quarter to date, with a record level of new logo ARR bookings. Our sales pipeline remains healthy, as our pipeline of new logo and cross-sales is scaling above the levels of the past years, and we see demand growing along with our investments in go-to-market. I'd also like to point out that although we have made steady progress, we still see significant opportunities to grow our penetration and total spend amounts with larger customers. As a data point, as of January 2023, 37% of the Fortune 500 are Datadog customers, up from 30% last year. For these customers, the median Datadog ARR is in the hundreds of thousands of dollars. This leaves a very large opportunity for us to go with these customers as they continue to move towards the cloud and modern DevOps. We are also pleased with the initial take-up of some of our newest products, including cloud cost management, for which we already added a mid-60s commitment last month from a global fast food chain. And finally, churn has remained low, with gross revenue retention steady in the mid to high 90s. We believe this high retention number is indicative of the business criticality of Datadog for our customers. Now, let's move on to R&D. During the quarter, we released our latest product to general availability, Universal Service Monitoring, which detects all microservices across an organization's environment and provides instant visibility into their health and dependencies, all without any code changes. Universal service monitoring bridges our existing infrastructure monitoring and application performance monitoring capabilities and enables end-to-end observability with minimal deployment friction. Now let's take a moment to review the R&D team's accomplishments in 2022. We ended the year with 17 generally available products, up from 13 at the end of 2021. And we greatly expanded the capabilities of our existing products. Overall, in 2022, we have meaningfully broadened our observability capabilities and pushed forward in making each product best of breed. Meanwhile, we have made meaningful progress, but remain in early days in the new areas of cloud security and developer experience. In observability, we continue to expand our end-to-end unified platform. We now have more than 600 integrations, including all the latest products on AWS, GCP, and Azure. We launched new AI capabilities such as watchdog logs and media detection to have customers separate signal from noise in their log data and watchdog root cause analysis to identify the root cause of issues and quantify their impact on customers. We launched cloud cost management to have customers take control of their infrastructure costs. We announced service catalog to manage service ownership at scale. We made observability pipelines generally available, enabling customers to collect and transform data from any source to any destination all at petabyte scale. We launched audit trail to help customers achieve their compliance and governance goals. We extended sensitive data scanner beyond logs to inspect APM and run data flows. And we now collect data from SNMP traps to provide greater visibility into physical network equipment. In cloud security, we kept building out our platform. We launched cloud security management or rich context-aware CNAP platform. We launched application security management building on our acquisition of screen in 2021. And we announced the beta of native protection to block malicious actors directly within the Datadog platform. In developer experience, we are expanding on our CI visibility product. We introduced continuous testing to bring efficient and reliable testing within CI CD pipelines. And we launched a beta of intelligent test runners, which significantly reduces the time and cost of running tests. And last but not least, We delivered on a number of platform-wide initiatives. We achieved FedRAMP moderate authorization and have since landed a number of government agencies as customers. Our customers today can also use CodeScreen for collaboration, incident response, pair programming, and debugging less than a year after the acquisition. And we continue to expand on the HIPAA and PCI compliance of our product. As you can tell, we've been busy, and I want to thank the R&D team for a very productive year. Looking ahead to 2023, our teams are continuing to push forward as beta products from 2022 include Data Streams Monitoring, Workflow Automation, Event Correlation, Heat Maps, Dynamic Instrumentation, Workload Security Profiling, Resource Catalog, and Native Protection, among others. We also continue to integrate our 2022 acquisitions, CoScreen, HDIV, Secret, and CloudCraft into the Datalog platform, and we are excited for their potential. In summary, We're looking forward to delivering many more capabilities to help our customers in 2023. Now let's move on to sales and marketing. Our go-to-market teams continue to execute very well into the end of 2022, in particular on new logo lands. So let's go over a few of our wins this quarter. First, we signed a seven-figure land with a Fortune 500 industrial group. This company was using multiple open source and built-in cloud monitoring tools, which led to relief delays and consumer-facing outages. In addition to our metrics, traces, and logs, this company will rely on our ability to integrate open telemetry data sources to deliver immediate value. This customer's initial deal includes 13 products across our observability, security, and developer experience categories. Next, we signed a seven-figure land with a Fortune 500 financial services company. This customer is moving hundreds of applications from on-prem to the cloud and multiple legacy tools were creating gaps in visibility and post PCI compliance problems. His customer today is looking at savings of roughly $1 million in the first year of using Datadog and a meaningful reduction in mean time to resolution. This deal will start with infrastructure monitoring and replace three disparate tools with plans to expand to other Datadog products in the future. Next, we signed a seven-figure land deal with a major federal government agency. This agency was looking to reduce tool sprawl and aimed at a rapid rollout to hundreds of different programs, while saving money on engineering and issue resolution. This agency is among a number of new government customers in 2022, following our federal moderate authorization. And this deal is expected to displace at least eight commercial legacy monitoring tools. Next, we signed a seven-figure land deal with a leading Japanese system integrator. This company has been a very successful hardware system integrator and is looking to grow its digital and cloud transformation business. This customer plans to adopt 15 Datadog products in order to support its ambitious growth plans. And last for today, we signed a multimillion-dollar expansion with one of the world's leading insurance companies, Prior to using Datadog, this company was using more than 30 tools across nine business units. By consolidating onto Datadog, the customer estimates it achieved roughly 115% ROI all within a year, while reducing average mean time to resolution from one and a half hours to 15 minutes. With this renewal, this company is adding database monitoring, cloud security management, and application security management, and is now using 12 Datadog products. That is for this quarter's customer highlights. And again, I'd like to thank our go-to-market teams for their great execution in Q4 and throughout 2022. Now let me speak to our longer-term outlook and my thoughts on 2023. Although we are seeing customers be more cautious with their cloud usage expansion in the near term, we see no change to the long-term trends towards digital transformation and cloud migration. We think it's healthy for customers to optimize and we believe that the ability to correct course and continually align the nature and scale of their applications with their business needs is one of the key benefits of cloud transformation. At Datadog, we have always organized our products and our business around helping customers gain agility and reduce costs, and we do it by enabling stronger business performance and efficient use of their engineering and infrastructure spend. Regardless of near-term macro pressure, We believe it is still early days, and we expect that companies worldwide will continue to grow their NextGen IT footprint to deliver value to their customers. Given the large opportunities we see in front of us, we plan to keep building and innovating. We have already made progress in observability, but we still have much to do to deliver more value and solve more problems for our customers. And we are excited about our opportunities in cloud security, developer experience, as well as our early efforts in areas around ITSM and real-time business intelligence. As we have since we founded Datadog, we are also balancing long-term investment against maintaining the discipline to ensure our continual financial performance. We recognize that the macro environment remains uncertain. So while we continue to focus on scaling and investing, we are growing those investments in a disciplined fashion in 2023. And David will discuss this in more detail. We remain confident in our long-term opportunities, and we are continuing to invest in our strategic priorities to catch up them. With that, I will turn the call over to our CFO for a review of our financial performance and guidance. David?

Thanks, Olivier. In Q4, we continued to execute well and delivered value to our customers. Revenue was $469 million, up 44% year over year, and up 8% quarter over quarter. To dive into some of the drivers of our Q4 performance, first, we saw existing customer usage growth in October and November at a similar level to what we saw in Q2 and Q3. In the month of December, we saw a slower growth dynamic, as the typical slowdown we see at the end of December was more pronounced than in previous years. As a result, the growth rate in usage by existing customers was lower in Q4 than in Q2 and Q3. Next, similar to Q2 and Q3, we saw larger spending customers grow slower than smaller spending customers. As with Q2 and Q3, we saw relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce and food delivery. Geographically, we saw solid and relatively similar growth across all regions. As Olivier discussed, we experienced strong new logo ARR growth and low churn again in this quarter. We had a record level of new logo bookings in the quarter across customer sizes. Our dollar net base net retention remained a strong levels above 130% for the 22nd consecutive quarter. And gross revenue retention has remained unchanged over the last several quarters and remained steady in the mid to high 90s. We believe this high and steady gross retention points to the mission critical nature of the Datadog platform for our customers. Now, moving on to our financial results. Billings in the quarter were $536 million, up 31% year over year. Billings duration was slightly lower year over year. Remaining performance obligations, or RPO, was $1.06 billion, up 30% year over year. and RPO duration declined on a year-over-year basis. And we note that current RPO growth was in the high 30s year-over-year. We continue to believe revenue is a better indication of our business trend than billings 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 some of the key income statement results. 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 $378 million, representing a gross margin of 81%. This compares to a gross margin of 80% last quarter and also 80% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold in this quarter. In the mid to long term, we continue to expect gross margin to be in the high 70s range. Our Q4 non-GAAP OPEX grew 54% year-over-year as we continue to grow our headcount in R&D and go-to-market. Q4 operating income was $83 million, or an 18% operating margin, compared to an operating income of $71 million, or a 22% operating margin in the year-ago quarter. As a reminder, the year-ago operating margin benefited from lack of in-person office, travel, and event costs due to our COVID policies during the pandemic. Turning to the balance sheet and cash flow statements, we ended the quarter with $1.9 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $114 million in the quarter. And after taking into consideration capital expenditures and capitalized software, free cash flow was $96 million for a free cash flow margin of 21%. Now for our outlook for the first quarter and the fiscal year 2023. In forming our guidance, we continue to use conservative assumptions as to the organic growth of our customers compared to historical periods. And as usual, we are basing our near-term guidance on recent activity we see with our customers. We are incorporating an expectation for seasonally weaker growth in the first quarter due to the subdued growth in the month of December that creates a lower growth trajectory to start the first quarter. While our customers are continuing to expand with us, we are assuming in our guidance that cloud optimization continues to affect our expansion rate in 2023. For the first quarter, we expect revenue to be in the range of $466 to $470 million, which represents a 28% to 29% year-over-year growth. Non-GAAP operating income is expected to be in the range of $68 to $72 million, or an operating margin of 15%. Non-GAAP net income per share is expected to be in the range of $22 to 24 cents per share, based on approximately 348 million weighted average diluted shares outstanding. For the full fiscal year 2023, we expect revenue to be in the range of 2.07 to 2.09 billion dollars, which represents a 24 to 25% year-over-year growth. Non-GAAP operating income is expected to be in the range of 300 to $320 million for a margin of 15% at the midpoint. Non-GAAP net income per share is expected to be in the range of $1.02 to $1.09 per share based on approximately 351 million weighted average diluted shares outstanding. Now some additional notes on the guidance. Regarding our fiscal year 2023 investments, we continue to balance near-term financial strength with investment in our large long-term opportunities. Our non-GAAP operating income guidance reflects this discipline. We will continue to grow our R&D and go-to-market teams as we broaden our platform in service of our customer needs, albeit at a slower pace than in previous years. As a result, we are planning to grow our operating expenses, including COGS, in the fiscal year 2023 in the low 30% range year-over-year. We plan to grow our headcount in fiscal year 2023 in the mid-20% range year-over-year. This compares to fiscal 2022 headcount growth of approximately 50% year-over-year. Next, as interest rates have risen, our interest income has increased and become more meaningful. We expect net interest and other income for the fiscal year 2023 to be approximately $75 million. We expect tax expense in fiscal year 2023 to be $11 to $13 million. And finally, we expect capital expenditures and capitalized software together to be in the range of 4% to 5% of revenues in fiscal year 2023. To reiterate Olivier's comments, we see no change to our long-term opportunities as our customers embark and expand on their cloud migration and digital transformation plans. We remain strongly positioned to help our existing and prospective customers with these journeys. I want to thank Datadogs worldwide for their efforts in 2022, and I'm excited about our plans for the next year. With that, we will open the call for questions. Operator, let's begin the Q&A.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Mark Murphy with JP Morgan. Your line is open.

Oh, thank you very much. Olivier, I was wondering if you can comment on the AWS infrastructure monitoring portion of the business specifically. Do you see that trending above or below the 25% rate of the total business this year. And I'm wondering if you perhaps see some of the other hyperscalers, Azure, Google, et cetera, gaining any share of that mix during this year, then have a quick follow-up.

Yeah, so look, obviously we see, we get data from our customers using those cloud providers.

We also listen to the commentary the cloud providers provide in terms of their own growth. There's not a one-to-one mapping between what happens on the revenue side for the cloud providers and what we see on the infrastructure side on our end. But we are seeing some of the same trends, you know, where their growth slowed down through our Q4, and we've been listening to their comments when they gave guidance for what their growth might look like in the near future, which also informed our own guidance. In terms of the mix shift, you know, we don't see anything that differs from the trends we saw throughout the last year. I think the story there is they're also seeing optimization from some of their customers, at least the largest customers. And on our end, we expect that optimization to continue throughout the year. That's what we built into our guidance.

Okay, understood. And then, David, I believe you mentioned record new logo ARR. bookings in the quarter. Great to hear. I think we're wondering what you attribute that to, just given the environment is so challenging. There was mention of several of these companies landing with eight or 10 or 15 Datadog products and replacing legacy tools or replacing open source. Do you see an increase in those kinds of consolidation opportunities and maybe just a broadening where we're this landscape is viewing Datadog as the converged observability leader and wanting to consolidate in that direction?

Yeah, in Q4, and I think going forward, we continue to see Greenfield and new projects, new workloads being the majority of the driver, but have seen over the quarters, and we talked about some of them in our prepared remarks. consolidation opportunities. When a client is already in their cloud journey and has workloads and is looking to get a platform, create efficiencies, et cetera, they have increasingly been consolidating on Datadog and we see continued opportunities for that.

And to add to that, we see demand scaling, basically. We're still early in cloud migration and digital transformation. And we see no slowdown from companies going from legacy IT to this new world. That's why we get more and more new logos and more and more volume there. The part of the business we see going slower is the larger customers that are further along in this cloud transformation that have large workloads trying to optimize because that's where they can meaningfully set costs.

Thank you very much. Thank you.

Thank you. One moment for our next question. We have a question from Sajit Singh from Morgan Stanley. Your line is open.

Yeah, thank you for taking the question. I only wanted to ask about the product innovation. And in some sense, you guys have had a pretty impeccable track record of releasing a lot of product that sort of benefited your customers over the last couple of years. But given sort of the environment that exists today, do you feel that in some sense, Datadog gets viewed by customers as sort of a Lamborghini-type observability solution, meaning that customers may not need all of the bells and whistles that a 17 product portfolio can provide. Any thoughts there on whether Datadog may be potentially over-engineered in terms of customers um, willingness to spend in the current environment.

Yeah. So, um, so I definitely don't think we'd position ourselves as the Lamborghini. You know, we are not, the Lamborghini doesn't have a glove box and, uh, and needs to go to the shop every two weeks. That's definitely not us. Um, what, uh, we, we have been investing heavily in, in product innovation. We have a lot of products today, um, that thanks to this acceleration of product innovation, over the past few years are early in their life cycle. What we see in the current environment is that it is actually helping us get to these consolidation deals that were mentioned a little bit earlier because we can cover more of what our customers need to do and drive more efficiencies. Again, it's still early in that because many of those products are early in their life cycle, so they might not be applicable to every single type of customer in every single type of situation. But I think this is validating our destination there, and it shows we need to do more of that, not less. At a time where larger customers are very, very careful about their spend, it might be more difficult for some of those products to gain a lot of adoption with any particular customer at a very high level of spend. So we're focusing today on getting a maximum number of those customers to adopt those products and plant the seeds of future growth as they further consolidate and move to the cloud.

Understood. And just to follow up on those larger customers who are seeing their usage trends slow more than smaller customers, relative to the commitment, how are you guys sort of handling that? Are you in a situation where you're rolling over credits? Are you sort of enforcing sort of the take or pay aspect of the contract? Any color there on how you're working with those larger customers in terms of where they stand relative to their commitments?

We always want to partner with customers and build a long-term relationship with them. We've had some customers that have run into very significant business headwinds where their own businesses have contracted quite a bit. And in those situations, we always work with them to structure the contract and make sure we get to a better outcome. We've done that with one of our major customers over the past quarter. And we've had similar conditions with some other customers as well. So that's part of what we do with customers. It's also part of the guidance we're giving for the year.

And I just want to add that because we tend, as you know, to go land and expand, and our customers tend to undercommit relative to what they eventually get to, we haven't seen across the customer base a very meaningful increase of sort of unused commitments. And so that's something about our go-to-market that creates flexibility with clients to commit as they see usage.

Better said.

Appreciate the thoughts, Holly and David.

Thank you.

And one moment. Our next question comes from Brad Ryback from Stifo. Your line is open.

Great. Thanks very much. Just one real quick one, David. I know billings isn't necessarily the best metric to sort of focus on, but 1Q is a really monstrous comp. So maybe any color you can provide as we should think about billing, especially with changes in duration and calendar 23 and maybe lower commits up front from customers on renewal.

Yeah, I think, again, I think it is really driven by the ARR and, you know, linearity of that. So, you know, I don't think we plan for billings, etc. We essentially have had billings, as you know, go above and below the revenue based on, you know, the billings in that period. And so we don't see really any change in that type of pattern, but again, bring everyone back to ARR and revenues as the major economic driver.

That's great. And then, Ali, real quickly, if you look back at your business historically, there's been a fairly tight linkage between your growth rate and the hyperscalers with a multiple on it. As we sort of look forward, what types of things need to happen to expand that multiplier? Thanks.

Well, I mean, look, we're covering more and more of the – we're starting a bigger and bigger problem for our customers, which means we're expanding our time, and so we can have a larger and larger multiplier over time. That's why we're investing in new categories. That's why we keep building up observability, and that's why we're doing all these investments. That's where we're going. I think you're right, though, that the underlying wave that has been a tailwind throughout the history of the company was cloud migration and digital transformation. I think that wave might be a bit more of a headwind over the next few quarters, but we strongly believe that it will become a tailwind again in the future. We just can't tell you when exactly. We've listened to the calls of the hyperscalers. They can't tell you when either. We're in the same boat there. So what we're doing today is we're focusing on the drivers of future success, which are covering more of the customer landscape, so getting into more new logos, more geographies, more segments, and also developing our products and getting those products adopted by more of these customers, which is how we're going to have accelerating growth in the future.

Perfect. Thanks very much.

Thank you. Our next question comes from Fred Lee with Credit Suisse. Your line is open.

Hey, good morning. Thank you for taking my question. I'm curious about, you know, product expansion and what will help Datadog gain shares as a percent of hyperscalers spend. A little bit related to Brad's question a second or two minutes ago. I was wondering if we could get an update on which products are gaining the most traction and have the greatest potential in 2023.

Well, so we have a lot of products that are early in their life cycle. Some of them are large categories where we are seeing larger and larger revenue and we have very ambitious plans such as security. Some others are newer but might be a bit more topical in 2023 such as cloud cost management. So I think really it's going to be a mix. We see some interesting early signs with cloud cost management, which is still only build to a handful of customers at this point, but already seeing very large commitments from some of these customers. We call that on the call. So we think it might be, you know, if you think of anything that might have more of an impact in the short-term, that might be one of those. But really the way we think about all those products is how do we turn them all into major products, you know, two, three, four years out? How do we win these additional categories? And how do we become the... platform of choice for consolidation in the long term. That's what we're driving towards.

And just a quick follow-up on the security portion. So with regards to the uptake of your security solutions, how would that compare? How does that compare to the adoption patterns of Infra and APM?

Well, it's a bit difficult to compare to Infra because it was the very first thing we did in the early days of the company. It's actually pretty comparable to what we've seen with APM, where it's a domain with a lot of investment required. We also have a very ambitious and very differentiated approach to it, which requires quite a bit of a build-out and quite a few things to figure out with customers. But we're also seeing continuous adoption and growth, thousands of customers using the platform. We see it being adopted. at a very large scale by very large customers, some of which we also mentioned on the call today. So we're not completely there yet. There's still a lot of work to do, but we think it's tracking well with respect to what we can expect in our plans.

Great. Thank you very much.

One moment. Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Great. Good morning, everyone. So thank you for taking the questions. I want to ask about the usage patterns of large customers versus small customers. I know you said the smaller customers were not seeing as much of a slowdown in usage, but what gives you confidence that those smaller customers just haven't reached or reacted to the slowing macro yet, and we may see maybe a slowdown in that segment going forward?

So, well, it's hard to tell what's going to happen in the future, right? So we don't really have a crystal ball there. What we see, though, is that customers save money where it matters, which tends to be the very large line items, which for customers that are fairly far along into the cloud is going to be first their cloud provider bills that are, again, one or two orders of magnitude larger than their observability bills. And then we're going to be affected by that and maybe with some optimization more specific to observability as well. So that's what we see there. That's why we see mostly the large customers do that. On the smaller side, I'll point out that many of our smaller customers are actually very large companies that just are fairly new into the cloud and are still growing into the cloud. So they are seeing exactly the same thing as their peers who are spending a lot more on us. It's just the part of their business where the spend is growing as opposed to where the spend is today and needs to be controlled. The last thing I will say is on the very low end of our customer base, we do see impact of the macro environment. We have a little bit more churn at the very, very low end, which is what you see, where you see our customer count not going up as much despite us having very strong new local quarters. That's more focused at the very, very low end of the customer base and is not moving the numbers at all in terms of growth retention, which remains very high.

Okay, that's great. Thank you for the color there. I was also wondering if your gross margin was surprisingly strong in the quarter, and I'm wondering if there's anything you can do on pricing, given these large customers focus on cost optimization.

Well, we work with the large customers, obviously, to make sure that they get the value they need. You know, we're optimizing gross margin, obviously. We're doing quite a bit on our end on the engineering side to do that. At our level, you know, 1% of gross margin is making a very large difference for the business, and we can reinvest that in future growth. Changing prices by 1% based on that doesn't make a big difference for customers. I think when they... The real way to address their concerns as they keep scaling and generating much more data and sending more observability data to us is to give them more options to process that data so that they can align what they pay to us with the value they get. And we've been also building that on the product side. So it's not really a pricing question. It's more of a product and structure question.

And I just want to, now that we're on costs, I just want to add a little clarification. I think we talked about the trends of gross margin and what we expect for the future, and we gave some guidance as to operating expenses in 2023. I believe I might have misspoken. The operating expense guidance in 2023 in the low 30s range excludes COGS. We gave the COGS guidance separately as far as our comments on that, just to clarify.

Super. Thank you, guys.

Our next question comes from Koji Aikida with Bank of America. Your line is open.

Oh, great. Hey, Olivia. Hey, David. Thanks for taking the questions. I wanted to ask you a question on the guidance and maybe a compare and contrast here. So I was wondering if you could talk about maybe how to think about the levels of conservatism embedded in the full year 2023 Ready Guide today versus when you first gave guidance last year for 2022?

I think we've continued to use the same approach, which is to look at the history and discount the major assumptions, which are the organic growth or the expansion of existing customers and new logo You know, I think the difference in the actual results were in the periods of times where we saw more than pro rata or more than historical adoption and growth of existing customers, the ratio between, you know, that discount and where it ended up in actuals ended up larger. But the intent and the strategy of providing this guidance on conservative assumptions relative to that has not changed.

Got it. Just one quick follow-up.

To be clear, our guidance doesn't assume that the optimization stops. What we've seen over the past two quarters, basically in the second half of 2022, we assume it's going to continue. We know it's going to end at some point, but we don't know when exactly, so we're not building that into our guidance.

Got it. That's helpful. Thank you. And just one follow-up here, a question on Sales capacity, you know, just thinking about hiring plans there. You mentioned in the prepared remarks, you know, overall headcount to grow in the mid-20s, but continuing to grow to market teams at a slower pace. So just, you know, is that mid-20s the right way to think about sales capacity hiring this year, too?

Yes, yes, I think that's right. We are growing our investments in go-to-market and sales capacity approximately plus or minus that the guidance we gave in headcount growth.

And again, the reason for that is we still have a ground to cover. We still have segment and geographies to cover. And also, as we mentioned earlier, we're having actually great success when it comes to landing new logos and new products with customers. So our sales interactions are productive. Our return on investment is there. So we need to keep doing that. Again, these are the seeds of future success we're planting, and we don't intend to stop.

I would clarify that because of the ramping nature of salespeople, the growth rate that we had, which was in excess of that 25% in 2022, means that the coming online of that ramp capacity is at a rate higher than that in 2023 as we begin to harvest the investment from that.

Got it. Got it. Thanks, guys. Thanks for taking the questions. Thanks.

Thank you. Our next question comes from Matt Hedberg with RBC. Your line is open.

Great. Thanks, guys. Ali, for you, any data points around product splits? I know in the past you've talked about APM and logs. I think it's been a couple quarters since we had an update on the size of those businesses, but any sort of rough magnitude of those, and are they still in hypergrowth?

No. I mean, we see fairly, like you think of the products that are at major scale today, which are, you know, APM logs and infrastructure monitoring, those are seeing about the same trends in terms of growth in Q4. And I think that's sparked because some of the optimization we see from customers happens across the stack because it happens upstream from us at the cloud provider level, you know, and that's why we'll see slightly slower growth of host monitored on the cloud providers or on APM. and also a bit less logs. Some of it happens more directly at the observability level. You know, logs in particular or some aspects of APM that are transaction-based, where we see customers optimizing there and making sure they get the best value and cut the noise. But as a result, we see fairly similar trends across the product. So that's why we didn't call out anything specific in there. In the future, I'm sure we'll share more about the relative sizes, but again, The growth rates are not that different in Q4, so there was nothing to call out.

Okay, thanks. And then maybe just, David, on the guide, obviously with kind of a mid-20s revenue guide, you talked in the preparator marks about having an NRR above 130 for almost two years. You know, presumably that dips below 130. Any sort of commentary on how that might progress through the year?

Yeah, I think you're right. Implicit in that guide is below 130. We'll report to everybody as we have that. We've seen it relate to the decel, I would say, on that, that given the change in the organic growth rate that we've been talking about starting in the middle of Q2 last year, It's getting past that to the extent that it changes that changes that net retention plus or minus, given the net retention is comparison against the year-on-year customers. So you do have headwinds in the compare. um through the time that we had the the change of the organic which we had said was in the middle of q2 last year of last year got it thanks okay one moment our next question comes from fred havmeyer with macquarie your line is open

Hey, thank you. I wanted to ask, with respect to the slowdowns that you've been seeing within certain customers, have you seen anything to suggest that these could be related to layoffs in tech, either because, say, DevOps seats have been directly impacted, or just because of general disruption to DevOps and engineering teams?

No, we think it's mostly because they can save money on their cloud bills. Again, one of the great things about the cloud is that the It's an ongoing expense. You can adjust it over time. You can restructure the way you run your applications. So there are some knobs you can use to optimize, which you can't if you're running everything on-prem, as all the costs are sunk already and defined to the future. So we mostly see that. I mean, there's a little bit more noise and and predictability with some customers because they're having checkups, you know, and so you need to talk to different people and, you know, they need to reorganize a little bit, you know, so it can add a little bit of noise in some of the conversations. But really, the dominant motion is they're optimizing their cloud infrastructure, their cloud build, and that's especially the case if they're spending a lot there. The vast majority of our products are charged per infrastructure usage. or data volumes not per seat. So we're not directly impacted by layoffs. Thank you for that.

And then just a quick follow-up would be actually the prepared remarks. Thank you for that context in cloud cost management. Can you perhaps more generally talk about your customer's interest in FinOps and how Datadog is positioned to be able to help customers better understand both where they're spending, how they're spending, and what sort of ROI they're seeing?

Yes, our customers are definitely interested in FinOps. The larger they are, the more they are interested, and that directly relates to the work they're doing in cloud optimization. It's a very nascent category today. It's a nascent practice for most of our customers. And we also have a lot of experience internally running ourselves a very large cloud operation across all of the large cloud providers. So that's why we believe we can build something that is fairly differentiated there. Our product there is having a great reception from customers, even though it's still early. I mentioned earlier, you know, we signed a mid-60-year deal, annual deal, with a large restaurant chain, and we see more of that coming our way. So we think it's one way in which we can also help our customers as they need to to optimize and be more efficient in the in the short and mid term thank you our next question comes from camille with william and blair your line is open good morning uh thanks for taking my question

I want to clarify one of David's comments that you're incorporating seasonally weaker growth in the first quarter due to subdued growth in the month of December. Can you expand on how demand and customer conversations have trended in the first few weeks of 23 and whether that's changed since 22 year end?

Yeah, I think you have two different avenues. I think we said in new logos we had a strong quarter. We continue, as we mentioned, to have a strong pipeline, meaning that for new projects, new workloads, we continue to see a solid demand environment. In terms of the organic, when you have, and this happens in most years, when you have people going on vacation and sort of reducing the amount of logs or work they're doing you tend to see a rebound of that in January. We did see a bit of that, but given the volatility in the market, we want to be cautious in reading too much into that, and we'll let everybody know how that plays out.

Mathematically, Q4 was more front-loaded than back-loaded in terms of how we organized revenues, so we entered... Q1 at a lower level. So that's why we also have this sequential that is a little bit lower there. In terms of the trends, I'll just second what David said. While that seasonality was higher than we had seen in previous years, and we can explain that in different ways, and basically if customers are trying to save money, they're a lot more careful about turning off the lights when they leave on vacation, basically. But What we've seen early 2023 so far is consistent with what we've seen in Q4 in the second half of 2022 in general. So it's too early really to pass judgment, but it really factors into our guidance, which is that we We don't believe that the optimization has stopped. We assume it's going to continue. We don't know yet when it's going to stop. We know it's going to happen at some point, but we're not planning it for this year in our guidance.

That's helpful. Thank you. And just as a quick follow-up, it's nice to see the large wins on the federal side. I realize it's still early, but can you update us on how big of a contribution that could be in 23, and how important are additional authorizations for expanding to that market, or does FedRAMP moderate allow you to address most of these, Tam?

So, I mean, I can't give you specific numbers there. I know we're seeing wins. We're seeing engagements from the government agencies and the companies that serve them, so all that is very good. We still have some building to do on the go-to-market teams for that, and we also still have some things to build on the product side. There's more levels of certification we want to get to reach more of those customers. So we still build. What I'd say is we're getting the proof points that we're a fit and that customers can use us in those environments and that there is a real market for us there. That's helpful. Thanks again.

Thank you. Our next question.

Our next question comes from Sterling Audie with SVB Moffitt Nathanson. Your line is open.

Yeah, thanks. Hi, guys. Ali, I'm curious if you have any sense, you know, working and talking with customers as to when they started an optimization project, how long it actually takes them to get –

to that that new level obviously it can change if the economy gets worse but is this something where they start it and it takes them a month a quarter two quarters any sense would be would be helpful yeah so it's a it's a little bit hard to give an answer that fits all types of customers because they're also all going through uh they organize a little bit differently they have there are different scales in there and they're going through uh um different phases with their businesses in the economy. We've seen customers having multiple rounds of layoffs, for example, or having to adjust multiple times with their business. But what we see in general is that the fastest thing they can do to have an impact on their bill is to adjust some of the data they send in logs or in APM. And after that, you'll see them do a little bit more at the cloud provider level, which is higher impact in terms of their own saving, but also takes a little bit more time because they need to reorganize some of their workloads and invest more engineering time in doing that. So we've seen that happen with some of our customers. For a number of our customers, we saw it happen and we think they're done and we see them start growing again, but it's too early to call it for the rest of the customer base. Again, they're all going through fairly different things and at different scales.

Understood.

Thank you.

And we have a question from Alex Zukin with Wolf Research.

Your line is open.

Hey, guys. Thanks for taking the question. I guess, Olly, if you think about the trends that you saw in the second half of last year and what you're seeing year to date, When you think about optimizations versus timeline to spin up new workloads and the effect that that has on the NRR as it progresses, when you look at the timeline that you think that takes and the anniversary of these headwinds, particularly with the larger customers, how does that look from a linearity perspective over the course of the year?

So right now, you know, in North Carolina, we're assuming that we're seeing the same trends of growth of existing customers throughout the year. Like, we're not assuming any inflection. We're assuming a continuation of that with some level of conservatism compared to the actual result last year. That's what we're building in. Again, we believe that there's going to be some acceleration at some point, as the optimization has run its course. But given the level of macro uncertainty, I think it's too difficult to or we can't actually tell you when. Again, we've listened to the call of the card provider. They also can't tell you when. And so we're being prudent with the guidance there.

Perfect. And then, David, maybe just one for you around cash and cash conversion, free cash flow. As we look at the year, just curious if there's any kind of different flexibility in payment terms or even just the assumption for the cash conversion from operating income to cash flow for the full guidance for fiscal 23.

We've always said that our free cash flow has been around the higher Then our EBIT margin, if you look back, you'll see that it's in some quarters a little above and some quarters a little below. We have not seen any changes of material changes in payment terms or the flows of cash. So there's nothing we've seen so far that would cause us to change our views about cash flow conversion for the company.

Perfect. Thank you, guys.

Thank you.

That's all the time we have for questions. I'd like to turn the call back over to Olivier Pomel for closing remarks.

Thank you all. So I just want to take a minute to first thank our customers for trusting us with their business and partnering with us. I know some of them are going through difficult times last year and also early this year. And so we're working with them to make sure we all come out of it stronger. I also want to thank our employees, Datadogs, everywhere around the world for actually delivering a fantastic year in 2022 from all of the metrics we control ourselves. We saw some slowdown in consumption with some customers, but we also delivered a lot of value for customers. We scaled our go-to-market teams. We did great in terms of landing new logos, attaching new products, shipping products that solve more problems for our customers. And we think that this bodes very well for the future. So I'm very optimistic. I'm looking forward to a fantastic year in 2023 with everyone. And on this, I close the call.

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Welcome to the fourth quarter Data Dog Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yuka Boderick, Vice President of Investor Relations. Please go ahead.

Thank you, Catherine. Good morning, and thank you for joining us to review Datadog's fourth quarter and fiscal year 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 Oaksler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the first quarter and fiscal year 2023 and related notes and assumptions, our gross 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 forward-looking 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 discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended September 30, 2022. Additional information will be made available in our upcoming Form 10-K for the fiscal year ended December 31, 2022 and other filings with the SEC. This 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.digidoghq.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 had a solid Q4 to end a strong fiscal year 2022. We delivered significant new innovations for our customers, we saw increasing adoption of our product, and we attracted thousands of new customers to our platform. Meanwhile, we delivered strong revenue growth, margins, non-gap operating profit, and we generated more than $350 million in free cash flow. Let me start with a review of our Q4 financial performance. In Q4, revenue was $469 million, an increase of 44% year-over-year, 8% quarter-over-quarter, and above the high end of our guidance range. We had about 23,200 customers, up from about 18,800 last year. We ended the quarter with about 2,780 customers with ARR of $100,000 or more, up from about 2010 last year. These customers generated about 85% of our ARR. And we had 317 customers with ARR of $1 million or more compared to the 216 we had at the end of last year. We generated free cash flow of $96 million with a free cash flow margin of 21%. And our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted more products. Our platform strategy continues to resonate in the market. As of the end of Q4, 81% of customers were using two or more products, up from 78% a year ago. 42% of customers were using four or more products, up from 33% a year ago. And 18% of our customers were using six or more products, up from 10% last year. Now, moving on to this quarter's business drivers. Overall, we observed slower usage growth with existing customers while continuing to scale our new logo acquisition and new product cross sales. Starting with usage, usage growth of existing customers in Q4 was overall slightly lower than what we observed in Q2 and Q3, which we attribute first to a continuation of cloud cost optimization by our larger spending customers, and second to a seasonal annual slowdown in the second half of December that was more pronounced than in previous years. As in Q2 and Q3, we continued to see more optimization from customers with a larger cloud footprint, while our smaller spending customers are exhibiting higher growth. From a product perspective, we didn't see meaningful differences among our major products, as they all experienced solid growth, albeit decelerating on a year-over-year basis. In contrast to this deceleration in usage growth for existing customers, we continued to execute a new logo lens and multi-product adoption. and we also continue to see stable, very strong growth retention trends. First, we had our strongest new logo quarter to date with a record level of new logo ARR bookings. Second, our sales pipeline remains healthy as our pipeline of new logo and cross sales is scaling above the levels of the past years and we see demand growing along with our investments in go-to-market. I'd also like to point out that although we have made steady progress, we still see significant opportunities to grow our penetration and total spend amounts with larger customers. As a data point, as of January 2023, 37% of the Fortune 500 are Datadog customers, up from 30% last year. For these customers, the median Datadog ARR is in the hundreds of thousands of dollars. This leaves a very large opportunity for us to go with these customers as they continue to move towards the cloud and modern DevOps. We are also pleased with the initial take-up of some of our newest products, including cloud cost management, for which we already added a mid-60s commitment last month from a global fast food chain. And finally, churn has remained low, with gross revenue retention steady in the mid to high 90s. We believe this high retention number is indicative of the business criticality of Datadog for our customers. Now, let's move on to R&D. During the quarter, we released our latest product to general availability, Universal Service Monitoring, which detects all microservices across an organization's environment and provides instant visibility into their health and dependencies, all without any code changes. Universal Service Monitoring bridges our existing infrastructure monitoring and application performance monitoring capabilities and enables end-to-end observability with minimal deployment friction. Now, let's take a moment to review the R&D team's accomplishments in 2022. We ended the year with 17 generally available products, up from 13 at the end of 2021. And we greatly expanded the capabilities of our existing products. Overall, in 2022, we have meaningfully broadened our observability capabilities and pushed forward in making each product best of breed. Meanwhile, we have made meaningful progress, but remain in early days in the new areas of cloud security and developer experience. In observability, we continue to expand our end-to-end unified platform. We now have more than 600 integrations, including all the latest products on AWS, GCP, and Azure. We launch new AI capabilities, such as watchdog logs and media detection to have customers separate signal from noise in their log data, and watchdog root cause analysis to identify the root cause of issues and quantify their impact on customers. We launched Cloud Cost Management to help customers take control of their infrastructure costs. We announced Service Catalog to manage service ownership at scale. We made observability pipelines generally available, enabling customers to collect and transform data from any source to any destination all at petabyte scale. We launched Audit Trail to help customers achieve their compliance and governance goals. We extended Sensitive Data Scanner beyond logs to inspect APM and RAM data flows. And we now collect data from SNMP traps to provide greater visibility into physical network equipment. In Cloud Security, we kept building out our platform. We launched Cloud Security Management, or rich context-aware CNAP platform. We launched Application Security Management, building on our acquisition of Screen in 2021. And we announced the beta of Native Protection, to block malicious actors directly within the Datadog platform. In developer experience, we are expanding on our CI visibility product. We introduced continuous testing to bring efficient and reliable testing within CI CD pipelines. And we launched a beta of intelligent test runners, which significantly reduces the time and cost of running tests. And last but not least, we delivered on a number of platform-wide initiatives. We achieved FedRAMP moderate authorization and have since landed a number of government agencies as customers. Our customers today can also use CodeScreen for collaboration, incident response, pair programming, and debugging less than a year after the acquisition. And we continue to expand on the HIPAA and PCI compliance of our product. As you can tell, we've been busy, and I want to thank the R&D team for a very productive year. Looking ahead to 2023, our teams are continuing to push forward as beta products from 2022 include data streams monitoring, workflow automation, event correlation, heat maps, dynamic instrumentation, workload security profiling, resource catalog, and native protection, among others. We also continue to integrate our 2022 acquisitions, CoScreen, HDiv, Secret, and CloudCraft into the Datalog platform, and we are excited for their potential. In summary, we're looking forward to delivering many more capabilities to help our customers in 2023. Now let's move on to sales and marketing. Our go-to-market teams continue to execute very well into the end of 2022, in particular on new logo lands. So let's go over a few of our wins this quarter. First, we signed a seven-figure land with a Fortune 500 industrial group. This company was using multiple open source and built-in cloud monitoring tools, which led to release delays and consumer-facing outages. In addition to our metrics, traces, and logs, this company will rely on our ability to integrate open telemetry data sources to deliver immediate value. This customer's initial deal includes 13 products across our observability, security, and developer experience categories. Next, we signed a seven-figure land with a Fortune 500 financial services company. This customer is moving hundreds of applications from on-prem to the cloud. and multiple legacy tools were creating gaps in visibility and posed PCI compliance problems. His customer today is looking at savings of roughly $1 million in the first year of using Datadog and a meaningful reduction in mean time to resolution. This deal will start with infrastructure monitoring and replace three disparate tools with plans to expand to other Datadog products in the future. Next, we signed a seven-figure land deal with a major federal government agency This agency was looking to reduce tool sprawl and aimed at a rapid rollout to hundreds of different programs while saving money on engineering and issue resolution. This agency is among a number of new government customers in 2022, following our federal moderate authorization. And this deal is expected to displace at least eight commercial legacy monitoring tools. We signed a seven-figure land deal with a leading Japanese system integrator. This company has been a very successful hardware system integrator and is looking to grow its digital and cloud transformation business. This customer plans to adopt 15 Datadog products in order to support its ambitious growth plans. And last for today, we signed a multimillion-dollar expansion with one of the world's leading insurance companies. Prior to using Datadog, this company was using more than 30 tools across nine business units. By consolidating onto Datadog, the customer estimates it achieved roughly 115% ROI all within a year, while reducing average mean time to resolution from one and a half hours to 15 minutes. With this renewal, this company is adding database monitoring, cloud security management, and application security management, and is now using 12 Datadog products. That is for this quarter's customer highlights. And again, I'd like to thank our go-to-market teams for their great execution in Q4 and throughout 2022. Now let me speak to our longer-term outlook and my thoughts on 2023. Although we are seeing customers be more cautious with their cloud usage expansion in the near term, we see no change to the long-term trends towards digital transformation and cloud migration. We think it's healthy for customers to optimize, And we believe that the ability to correct course and continually align the nature and scale of their applications with their business needs is one of the key benefits of cloud transformation. At Datadog, we have always organized our products and our business around helping customers gain agility and reduce costs. And we do it by enabling stronger business performance and efficient use of their engineering and infrastructure spend. Regardless of near-term macro pressure, We believe it is still early days, and we expect that companies worldwide will continue to grow their NextGen IT footprint to deliver value to their customers. Given the large opportunities we see in front of us, we plan to keep building and innovating. We have already made progress in observability, but we still have much to do to deliver more value and solve more problems for our customers. And we are excited about our opportunities in cloud security, developer experience, as well as our early efforts in areas around ITSM and real-time business intelligence. As we have since we founded Datadog, we are also balancing long-term investment against maintaining the discipline to ensure our continual financial performance. We recognize that the macro environment remains uncertain. So while we continue to focus on scaling and investing, we are growing those investments in a disciplined fashion in 2023. And David will discuss this in more detail. We remain confident in our long-term opportunities, and we are continuing to invest in our strategic priorities to catch up them. With that, I will turn the call over to our CFO for a review of our financial performance and guidance. David?

Thanks, Olivier. In Q4, we continued to execute well and delivered value to our customers. Revenue was $469 million, up 44% year over year, and up 8% quarter over quarter. To dive into some of the drivers of our Q4 performance, first, we saw existing customer usage growth in October and November at a similar level to what we saw in Q2 and Q3. In the month of December, we saw a slower growth dynamic, as the typical slowdown we see at the end of December was more pronounced than in previous years. As a result, the growth rate in usage by existing customers was lower in Q4 than in Q2 and Q3. Next, similar to Q2 and Q3, we saw larger spending customers grow slower than smaller spending customers. As with Q2 and Q3, we saw relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce and food delivery. Geographically, we saw solid and relatively similar growth across all regions. As Olivier discussed, we experienced strong new logo ARR growth and low churn again in this quarter. We had a record level of new logo bookings in the quarter across customer sizes. Our dollar net base net retention remained at strong levels above 130% for the 22nd consecutive quarter. And gross revenue retention has remained unchanged over the last several quarters and remained steady in the mid to high 90s. We believe this high and steady gross retention points to the mission critical nature of the Datadog platform for our customers. Now, moving on to our financial results. Billings in the quarter were $536 million, up 31% year over year. Billings duration was slightly lower year over year. Remaining performance obligations, or RPO, was $1.06 billion, up 30% year over year. and RPO duration declined on a year-over-year basis. And we note that current RPO growth was in the high 30s year-over-year. We continue to believe revenue is a better indication of our business trends than billings 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 some of the key income statement results. 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 $378 million, representing a gross margin of 81%. This compares to a gross margin of 80% last quarter and also 80% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold in this quarter. In the mid to long term, we continue to expect gross margin to be in the high 70s range. Our Q4 non-GAAP OPEX grew 54% year-over-year as we continue to grow our headcount in R&D and go-to-market. Q4 operating income was $83 million, or an 18% operating margin, compared to an operating income of $71 million, or a 22% operating margin in the year-ago quarter. As a reminder, the year-ago operating margin benefited from lack of in-person office, travel, and event costs due to our COVID policies during the pandemic. Turning to the balance sheet and cash flow statements, we ended the quarter with $1.9 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $114 million in the quarter. And after taking into consideration capital expenditures and capitalized software, free cash flow was $96 million for a free cash flow margin of 21%. Now for our outlook for the first quarter and the fiscal year 2023. In forming our guidance, we continue to use conservative assumptions as to the organic growth of our customers compared to historical periods. And as usual, we are basing our near-term guidance on recent activity we see with our customers. We are incorporating an expectation for seasonally weaker growth in the first quarter due to the subdued growth in the month of December that creates a lower growth trajectory to start the first quarter. While our customers are continuing to expand with us, we are assuming in our guidance that cloud optimization continues to affect our expansion rate in 2023. For the first quarter, we expect revenue to be in the range of $466 to $470 million, which represents a 28% to 29% year-over-year growth. Non-GAAP operating income is expected to be in the range of $68 to $72 million, or an operating margin of 15%. Non-GAAP net income per share is expected to be in the range of $22 to 24 cents per share, based on approximately 348 million weighted average diluted shares outstanding. For the full fiscal year 2023, we expect revenue to be in the range of 2.07 to 2.09 billion dollars, which represents a 24 to 25% year-over-year growth. Non-GAAP operating income is expected to be in the range of 300 to $320 million for a margin of 15% at the midpoint. Non-GAAP net income per share is expected to be in the range of $1.02 to $1.09 per share based on approximately 351 million weighted average diluted shares outstanding. Now, some additional notes on the guidance. First, Regarding our fiscal year 2023 investments, we continue to balance near-term financial strength with investment in our large long-term opportunities. Our non-GAAP operating income guidance reflects this discipline. We will continue to grow our R&D and go-to-market teams as we broaden our platform in service of our customer needs, albeit at a slower pace than in previous years. As a result, we are planning to grow our operating expenses, including COGS, in the fiscal year 2023 in the low 30% range year-over-year. We plan to grow our headcount in fiscal year 2023 in the mid-20% range year-over-year. This compares to fiscal 2022 headcount growth of approximately 50% year-over-year. Next, as interest rates have risen, our interest income has increased and become more meaningful. We expect net interest and other income for the fiscal year 2023 to be approximately $75 million. We expect tax expense in fiscal year 2023 to be $11 to $13 million. And finally, we expect capital expenditures and capitalized software together to be in the range of 4% to 5% of revenues in fiscal year 2023. To reiterate Olivier's comments, we see no change to our long-term opportunities as our customers embark and expand on their cloud migration and digital transformation plans. We remain strongly positioned to help our existing and prospective customers with these journeys. I want to thank Datadogs worldwide for their efforts in 2022, and I'm excited about our plans for the next year. With that, we will open the call for questions. Operator, let's begin the Q&A.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Mark Murphy with JP Morgan. Your line is open.

Oh, thank you very much. Olivier, I was wondering if you can comment on the AWS infrastructure monitoring portion of the business specifically. Do you see that trending above or below the 25% rate of the total businesses here? And I'm wondering if you perhaps see some of the other hyperscalers Azure, Google, et cetera, gaining any share of that mix during this year? Then I have a quick follow-up.

Yeah, so look, obviously we see, we get data from our customers using those cloud providers. We also listen to the commentary the cloud providers provide in terms of their own growth. There's not a one-to-one mapping between what happens on the revenue side for the cloud providers and what we see on the infrastructure side on our end, but we are seeing some of the same trends, you know, where their growth slowed down through Q4, and we've been listening to their comments when they get guidance for what their growth might look like in the near future, which also informed our own guidance. In terms of the mix shift, you know, we don't see anything that differs from the trends we saw throughout the last year. I think the story there is they're also seeing optimization from some of their customers, at least the largest customers. And on our end, we expect that optimization to continue throughout the year. That's what we built into our guidance.

Okay, understood. And then, David, I believe you mentioned record new logo ARR. bookings in the quarter, great to hear. I think we're wondering what you attribute that to, just given the environment is so challenging. There was mention of several of these companies landing with eight or 10 or 15 Datadog products and replacing legacy tools or replacing open source. Do you see an increase in those kinds of consolidation opportunities and maybe just a broadening where... this landscape is viewing Datadog as the converged observability leader and wanting to consolidate in that direction?

Yeah, in Q4, and I think going forward, we continue to see Greenfield and new projects, new workloads being the majority of the driver, but have seen over the quarters, and we talked about some of them in our prepared remarks, consolidation opportunities. When a client is already in their cloud journey and has workloads and is looking to get a platform, create efficiencies, et cetera, they have increasingly been consolidating on Datadog and we see continued opportunities for that.

And to add to that, we see demand scaling, basically. We're still early in cloud migration and digital transformation. and we see no slowdown from companies going from legacy IT to this new world. That's why we get more and more new logos and more and more volume there. The part of the business we see going slower is the larger customers that are further along in this cloud transformation that have large workloads trying to optimize because that's where they can meaningfully set costs.

Thank you very much.

Thank you. One moment for our next question. We have a question from Sajit Singh from Morgan Stanley. Your line is open.

Yeah, thank you for taking the question. I wanted to ask about the product innovation. And in some sense, you guys have had a pretty impeccable track record of releasing a lot of product that sort of benefited your customers over the last couple of years. But given sort of the environment that exists today, do you feel that in some sense, Datadog gets viewed by customers as sort of a Lamborghini-type observability solution, meaning that customers may not need all of the bells and whistles that a 17-product portfolio can provide. Any thoughts there on whether Datadog may be potentially over-engineered in terms of customers' willingness to spend in the current environment?

Yeah, so I definitely don't think we position ourselves as the Lamborghini. The Lamborghini doesn't have a glove box and needs to go to the shop every two weeks. That's definitely not us. We have been investing heavily in product innovation. We have a lot of products today that, thanks to this acceleration of product innovation over the past few years, are early in their life cycle. What we see in the current environment is that It is actually helping us get to these consolidation deals that were mentioned a little bit earlier because we can cover more of what our customers need to do and drive more efficiencies. Again, it's still early in that because many of those products are early in their life cycle, so they might not be applicable to every single type of customer in every single type of situation. But I think this is validating our destination there, and it shows we need to do more of that, not less. At a time where larger customers are very, very careful about their spend, it might be more difficult for some of those products to gain a lot of adoption with any particular customer at a very high level of spend. So we're focusing today on getting a maximum number of those customers to adopt those products and plant the seeds of future growth as they further consolidate and move to the cloud.

Understood. And just to follow up on those larger customers who are seeing their usage trends slow more than smaller customers. Relative to the commitment, how are you guys sort of handling that? Are you in a situation where you're rolling over credits? Are you sort of enforcing sort of the take or pay aspect of the contract? Any color there on how you're working with those larger customers in terms of where they stand relative to their commitment?

We are. So we always want to partner with customers and build a long-term relationship with them. We've had some customers that have run into very significant business headwinds where their own businesses have contract quite a bit. And in those situations, we always work with them to structure the contract and make sure we get to a better outcome. We've done that with one of our major customers over the past quarter. And, you know, we've had similar conditions with some other customers as well. So that's part of it. What we do with customers is also part of the guidance we're giving for the year.

And I just want to add that because we tend, as you know, to go land and expand, and our customers tend to undercommit relative to what they eventually get to, we haven't seen across the customer base a very meaningful increase of sort of unused commitments. And so that's something about our go-to-market that creates flexibility with clients to commit as they see usage.

I appreciate the thoughts, Holly and David.

Thank you.

And one moment. Our next question comes from Brad Ryback from Stifo. Your line is open.

Great. Thanks very much. Just one real quick one, David. I know billings isn't necessarily the best metric to sort of focus on, but 1Q is a really monstrous comp. So maybe any color you can provide as we should think about billings, especially with changes in duration and calendar 23 and maybe lower commits up front from customers on renewal.

Yeah, I think, again, I think it is really driven by the ARR and, you know, linearity of that. So, you know, I don't think we plan for billings, etc. We essentially have had billings, as you know, go above and below the revenue based on, you know, the billings in that period. And so we don't see really any change in that type of pattern, but again, bring everyone back to ARR and revenues as the major economic driver.

That's great. And then, Ali, real quickly, if you look back at your business historically, there's been a fairly tight linkage between your growth rate and the hyperscalers with a multiple on it. As we sort of look forward, what types of things need to happen to expand that multiplier? Thanks.

Well, I mean, look, we're covering more and more of the – we're starting a bigger and bigger problem for our customers, which means we're expanding our time, and so we can have a larger and larger multiplier over time. That's why we're investing in new categories. That's why we keep building up observability, and that's why we're doing all these investments. That's where we're going. I think you're right, though, that the underlying wave that has been a tailwind throughout the history of the company was cloud migration and digital transformation. I think that wave might be a bit more of a headwind over the next few quarters, but we strongly believe that it will become a tailwind again in the future. We just can't tell you when exactly. We've listened to the cause of the hyperscalers. They can't tell you when either. We're in the same boat there. So what we're doing today is we're focusing on the drivers of future success, which are covering more of the customer landscape, so getting into more new logos, more geographies, more segments, and also developing our products and getting those products adopted by more of these customers, which is how we're going to have accelerating growth in the future.

Perfect. Thanks very much.

Thank you. Our next question comes from Fred Lee with Credit Suisse. Your line is open.

Hey, good morning. Thank you for taking my question. I'm curious about, you know, product expansion and what will help Datadog gain shares as a percent of hyperscalers spend. A little bit related to Brad's question a second question a minute ago. I was wondering if we could get an update on which products are gaining the most traction and have the greatest potential in 2023.

Well, so we have a lot of products that are early in their life cycle. Some of them are large categories where we are seeing larger and larger revenue and we have very ambitious plans such as security. Some others are newer but might be a bit more topical in 2023 such as cloud cost management. So I think really it's going to be a mix. We see some interesting early signs with cloud cost management which is still only build to a handful of customers at this point, but already seeing very large commitments from some of these customers. We call that on the call. So we think it might be, you know, if you think of anything that might have more of an impact in the short-term, that might be one of those. But really the way we think about all those products is how do we turn them all into major products, you know, two, three, four years out? How do we win these additional categories? And how do we become the... platform of choice for consolidation in the long term. That's what we're driving towards.

And just a quick follow-up on the security portion. So with regards to the uptake of your security solutions, how would that compare? How does that compare to the adoption patterns of Infra and APM?

Well, it's a bit difficult to compare to Infra because it was the very first thing we did in the early days of the company. It's actually pretty comparable to what we've seen with APM, where it's a domain with a lot of investment required. We also have a very ambitious and very differentiated approach to it, which requires quite a bit of a build-out and quite a few things to figure out with customers. But we also see continuous adoption and growth, thousands of customers using the platform. We see it being adopted. at a very large scale by very large customers, some of which we also mentioned on the call today. So we're not completely there yet. There's still a lot of work to do, but we think it's tracking well with respect to what we can expect in our plans.

Great. Thank you very much.

One moment. Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Great. Good morning, everyone. So thank you for taking the questions. I want to ask about the usage patterns of large customers versus small customers. I know you said the smaller customers were not seeing as much of a slowdown in usage, but what gives you confidence that those smaller customers just haven't reached or reacted to the slowing macro yet, and we may see maybe a slowdown in that segment going forward?

So, well, it's hard to tell what's going to happen in the future, right? So we don't really have a crystal ball there. What we see, though, is that customers save money where it matters, which tends to be the very large line items, which for customers that are fairly far along into the cloud is going to be first their cloud provider bills that are, again, one or two orders of magnitude larger than their observability bills. And then we're going to be affected by that and maybe with some optimization more specific to observability as well. So that's what we see there. That's why we see mostly the large customers do that. On the smaller side, I'll point out that many of our smaller customers are actually very large companies that just are fairly new into the cloud and are still growing into the cloud. So they are seeing exactly the same thing as their peers who are spending a lot more on us. It's just the part of their business where the spend is growing as opposed to where the spend is today and needs to be controlled. The last thing I will say is on the very low end of our customer base, we do see impact of the macro environment. We have a little bit more churn at the very, very low end, which is what you see, where you see our customer count not going up as much despite us having very strong new local quarters. That's more focused at the very, very low end of the customer base and is not moving the numbers at all in terms of growth retention, which remains very high.

Okay, that's great. Thank you for the color there. I was also wondering if your gross margin was surprisingly strong in the quarter, and I'm wondering if there's anything you can do on pricing, given these large customers focus on cost optimization.

Well, we work with the large customers, obviously, to make sure that they get the value they need. You know, we're optimizing gross margin, obviously. We're doing quite a bit on our end on the engineering side to do that. At our level, you know, 1% of gross margin is making a very large difference for the business, and we can reinvest that in future growth. Changing prices by 1% based on that doesn't make a big difference for customers. I think when they... The real way to address their concerns as they keep scaling and generating much more data and sending more observability data to us is to give them more options to process that data so that they can align what they pay to us with the value they get. And we've been also building that on the product side. So it's not really a pricing question. It's more of a product and structure question.

And I just want to, now that we're on costs, I just want to add a little clarification. I think we talked about the trends of gross margin and what we expect for the future, and we gave some guidance as to operating expenses in 2023. I believe I might have misspoken. The operating expense guidance in 2023 in the low 30s range excludes COGS. We gave the COGS guidance separately as far as our comments on that, just to clarify.

Super. Thank you, guys.

Our next question comes from Koji Aikida with Bank of America. Your line is open.

Oh, great. Hey, Olivia. Hey, David. Thanks for taking the questions. I wanted to ask you a question on the guidance and maybe a compare and contrast here. So I was wondering if you could talk about maybe how to think about the levels of conservatism embedded in the full year 2023 Ready Guide today versus when you first gave guidance last year for 2022?

I think we've continued to use the same approach, which is to look at the history and discount the major assumptions, which are the organic growth or the expansion of existing customers and new logo I think the difference in the actual results were In the periods of times where we saw more than pro rata or more than historical adoption and growth of existing customers, the ratio between that discount and where it ended up in actuals ended up larger. But the intent and the strategy of providing this guidance on conservative assumptions relative to that has not changed.

Got it. One quick follow-up.

To be clear, our guidance doesn't assume that the optimization stops. What we've seen over the past two quarters, basically in the second half of 2022, we assume it's going to continue. We know it's going to end at some point, but we don't know when exactly, so we're not building that into our guidance.

Got it. Got it. That's helpful. Thank you. And just one follow-up here, a question on sales capacity you know, just thinking about hiring plans there, you mentioned in the prepared remarks, you know, overall headcount to grow in the mid twenties, but continuing to grow in the go to go to market teams at a slower pace. So just, you know, is that mid twenties the right way to think about sales capacity hiring this year too?

Yes, yes, I think that's right. We are growing our investments in go-to-market and sales capacity approximately plus or minus at the guidance we gave in headcount growth.

And again, the reason for that is we still have ground to cover. We still have segment and geographies to cover. And also, as we mentioned earlier, we're having actually great success when it comes to landing new logos and new products with customers. So our sales interactions are productive. Our return on investment is there. So we need to keep doing that. Again, these are the seeds of future success we're planting, and we don't intend to stop.

I would clarify that because of the ramping nature of salespeople, the growth rate that we had, which was in excess of that 25% in 2022, means that the coming online of that ramp capacity is at a rate higher than that in 2023 as we begin to harvest the investment from that.

Got it. Got it. Thanks, guys. Thanks for taking the questions. Thanks.

Thank you. Our next question comes from Matt Hedberg with RBC. Your line is open.

Great. Thanks, guys. Ali, for you, any data points around product splits? I know in the past you've talked about APM and logs. I think it's been a couple quarters since we had an update on the size of those businesses, but any sort of rough magnitude of those, and are they still in hypergrowth?

No. I mean, we see fairly, like you think of the products that are at major scale today, which are, you know, APM logs and infrastructure monitoring, those are seeing about the same trend in terms of growth in Q4. And I think that's sparked because some of the optimization we see from customers happens across the stack because it happens upstream from us at the cloud provider level, you know, and that's why we'll see slightly slower growth of host monitored on the cloud providers or on APM. and also a bit less logs. Some of it happens more directly at the observability level, you know, logs in particular or some aspects of APM that are transaction-based where we see customers optimizing there and making sure they get the best value and cut the noise. But as a result, we see fairly similar trends across the products, so that's why we didn't call out anything specific in there. In the future, I'm sure we'll share more about the relative sizes, but again, The growth rates are not that different in Q4, so there was nothing to call out.

Okay, thanks. And then maybe just, David, on the guide, obviously with kind of a mid-20s revenue guide, you talked in the prepared remarks about having an NRR above 130 for almost two years. You know, presumably that dips below 130. Any sort of commentary on how that might progress through the year?

I think you're right. Implicit in that guide is below 130. We'll report to everybody as we have that. We've seen it relate to the decel, I would say, on that, that given the change in the organic growth rate that we've been talking about, starting in the middle of Q2 last year, it's getting past that to the extent that it changes, that changes that net retention plus or minus, given the net retention is comparison against the year-on-year customers. So you do have headwinds in the compare, um through the time that we had the the change of the organic which we had said was in the middle of q2 last year of last year got it thanks okay one moment our next question comes from fred havmeyer with macquarie your line is open

Hey, thank you. I wanted to ask, with respect to the slowdowns that you've been seeing within certain customers, have you seen anything to suggest that these could be related to layoffs in tech, either because, say, DevOps seats have been directly impacted, or just because of general disruption to DevOps and engineering teams?

No, we think it's mostly because they can save money on their cloud bills. Again, one of the great things about the cloud is that the It's an ongoing expense. You can adjust it over time. You can restructure the way you run your applications. So there are some knobs you can use to optimize if you're running everything on-prem as all the costs are sunk already and defined to the future. So we mostly see that. I mean, there's a little bit more noise and and predictability with some customers because they're having checkups, you know, and so you need to talk to different people and, you know, they need to reorganize a little bit, you know, so it can add a little bit of noise in some of the conversations. But really, the dominant motion is they're optimizing their cloud infrastructure, their cloud build, and that's especially the case if they're spending a lot there. The vast majority of our products are charged per infrastructure usage. or data volumes not proceed. So we're not directly impacted by layoffs. Thank you for that.

And then just a quick follow-up would be, um, you know, actually the prepared remarks, uh, thank you for that context and cloud costs, cost management, um, perhaps more generally talk about your customer's interest in FinOps and how Datadog is positioned to be able to help customers better understand both where they're spending, how they're spending and what sort of ROI they're seeing.

Yes, our customers are definitely interested in FinOps. The larger they are, the more they are interested, and that directly relates to the work they're doing in cloud optimization. It's a very nascent category today. It's a nascent practice for most of our customers. And we also have a lot of experience internally running ourselves a very large cloud operation across all of the large cloud providers. So that's why we believe we can build something that is fairly differentiated there. Our product there is having a great reception from customers, even though it's still early. I mentioned earlier, you know, we signed a mid-six-year deal, annual deal, with a large restaurant chain, and we see more of that coming our way. So we think it's one way in which we can also help our customers as they need to to optimize and be more efficient in the in the short and mid term thank you our next question comes from camille with william and blair your line is open good morning uh thanks for taking my question

I want to clarify one of David's comments that you're incorporating seasonally weaker growth in the first quarter due to subdued growth in the month of December. Can you expand on how demand and customer conversations have trended in the first few weeks of 23 and whether that's changed since 22 year end?

Yeah, I think you have two different avenues. I think we said in new logos we had a strong quarter. We continue, as we mentioned, to have a strong pipeline, meaning that for new projects, new workloads, we continue to see a solid demand environment. In terms of the organic, when you have, and this happens in most years, when you have people going on vacation and sort of reducing the amount of logs or work they're doing, you tend to see a rebound of that in January. We did see a bit of that, but given the volatility in the market, we want to be cautious in reading too much into that, and we'll let everybody know how that plays out.

Mathematically, Q4 was more front-loaded than back-loaded in terms of how we organized revenues, so we entered Q1 at a lower level. So that's why we also have this sequential that is a little bit lower there. In terms of the trends, I'll just second what David said. While that seasonality was higher than we had seen in previous years, and we can explain that in different ways, and basically if customers are trying to save money, they're a lot more careful about turning off the lights when they leave on vacation, basically. But What we see in early 2023 so far is consistent with what we've seen in Q4 in the second half of 2022 in general. So it's too early really to pass judgment, but it really factors into our guidance, which is that we We don't believe that the optimization has stopped. We assume it's going to continue. We don't know yet when it's going to stop. We know it's going to happen at some point, but we're not planning it for this year in our guidance.

That's helpful. Thank you. And just as a quick follow-up, it's nice to see the large wins on the federal side. I realize it's still early, but can you update us on how big of a contribution that could be in 23, and how important are additional authorizations for expanding to that market? Or does FedRAMP moderate allow you to address most of these, Tam?

So I mean, I can't give you specific numbers there. I know we're seeing wins. We're seeing engagements from the government agencies and the committee that serve them. So all that is very good. We still have some building to do on the go-to-market teams for that, and we also still have some things to build on the product side. There's more levels of certification we want to get to reach more of those customers. So we still build. What I'd say is we're getting the proof points that we're a fit and that customers can use us in those environments and that there is a real market for us there. That's helpful. Thanks again.

Thank you. Our next question.

Our next question comes from Sterling Audie with SVB Moffitt Nathanson. Your line is open.

Yeah, thanks. Hi, guys. Ali, I'm curious if you have any sense, you know, working and talking with customers as to when they started an optimization project, how long it actually takes them to get –

to that that new level obviously it can change if the economy gets worse but is this something where they start it and it takes them a month a quarter two quarters any sense would be would be helpful yeah so it's a it's a little bit hard to give an answer that fits all types of customers because they're also all going through uh they organize a little bit differently they have there are different scales in there and they're going through uh um different phases with their businesses in the economy. We've seen customers having multiple rounds of layoffs, for example, or having to adjust multiple times what they're doing with their business. But what we see in general is that the fastest thing they can do to have an impact on their bill is to adjust some of the data they send in logs or in APM. And after that, you'll see them do a little bit more at the cloud provider level, which is higher impact in terms of their own saving, but also takes a little bit more time because they need to reorganize some of their workloads and invest more engineering time in doing that. So we've seen that happen with some of our customers. For a number of our customers, we saw it happen and we think they're done and we see them start growing again, but it's too early to call it for the rest of the customer base. Again, they're all going through fairly different things and at different scales.

Understood.

Thank you.

And we have a question from Alex Zukin with Wolf Research.

Your line is open.

Hey, guys. Thanks for taking the question. I guess, Olly, if you think about the trends that you saw in the second half of last year and what you're seeing year to date, when you think about optimizations versus timeline to spin up new workloads and the effect that that has on the NRR as it progresses, when you look at the timeline that you think that takes and the anniversary of these headwinds, particularly with the larger customers, how does that look from a linearity perspective over the course of the year?

So right now, Again, we're assuming that we're seeing the same trends of growth of existing customers throughout the year. We're not assuming any inflection. We're assuming a continuation of that with some level of conservatism compared to the actual we saw last year. That's what we're building in. Again, we believe that there's going to be some acceleration at some point as the optimization has run its course, but given the level of macro uncertainty, I think it's too difficult to or we can't actually tell you when. Again, we've listened to the call of the card provider. They also can't tell you when. And so we're being prudent with the guidance there.

Perfect. And then, David, maybe just one for you around cash and cash conversion, free cash flow. As we look at the year, just curious if there's any kind of different flexibility in payment terms or even just the assumption for the cash conversion from operating income to cash flow for the full guidance for fiscal 23?

We've always said that our free cash flow has been around the higher Then our EBIT margin, if you look back, you'll see that it's in some quarters a little above and some quarters a little below. We have not seen any changes of material changes in payment terms or the flows of cash. So there's nothing we've seen so far that would cause us to change our views about cash flow conversion for the company.

Perfect. Thank you, guys.

Thank you.

That's all the time we have for questions. I'd like to turn the call back over to Olivier Pomel for closing remarks.

Thank you all. So I just want to take a minute to first thank our customers for trusting us with their business and partnering with us. I know some of them are going through difficult times last year and also early this year. And so we're working with them to make sure we all come out of it stronger. I also want to thank our employees, Datadogs, everywhere around the world for actually delivering a fantastic year in 2022 from all of the metrics we control ourselves. We saw some slowdown in consumption with some customers, but we also delivered a lot of value for customers. We scaled our go-to-market teams. We did great in terms of landing new logos, attaching new products, shipping products that solve more problems for our customers. And we think that this bodes very well for the future. So I'm very optimistic. I'm looking forward to a fantastic year in 2023 with everyone. And on this, I close the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.