Datadog, Inc.

You will then hear an automated message advising 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.

Thank you, Gigi. Good morning, and thank you for joining us to review Datadog's second quarter 2023 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 Opsler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the third quarter and the fiscal year 2023, and related notes and assumptions, our growth margins and operating margins, our product capabilities, our ability to capitalize on market opportunities, and usage optimization trends. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a 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 March 31, 2023. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended June 30, 2023 and other filings for 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.

Thank you, Gab, and thank you all for joining us this morning. Our team continues to execute well in Q2, as we welcomed thousands of attendees at our Dash User Conference last week, We continue to deliver a large number of new product innovations, and we recorded strong new logo bookings throughout the quarter. Let me start with the review of our Q2 financial performance. Revenue was $509 million, an increase of 25% year-over-year and above the high end of our guidance range. We ended with about 26,100 customers, up from about 21,200 last year. We ended the quarter with about 2,990 customers with ARR of $100,000 or more, up from about 2,420 last year. These customers generated about 85% of our ARR. And we generated free cash flow of $142 million, with a free cash flow margin of 28%. Now let's discuss this quarter's business drivers. At the high level, First, we saw Q2 usage growth for existing customers that was a bit lower than it had been in previous quarters. Second, we do see signs that cloud optimization may start to subside. And third, we continue scaling our sales with strong new logo bookings in Q2. Going one level deeper, in Q2, we saw usage growth for existing customers that was a bit lower than it had been in previous quarters. We continue to see customers, particularly some larger spending customers, scrutinize costs and optimize their cloud and observability usage during Q2. We are reflecting this lower growth in our updated guidance for 2023, and David will provide more commentary regarding our guidance philosophy. On the other hand, we are seeing signs that the cloud optimization across our customer base may start to subside. The cohort of customers who began optimizing about a year ago appear to have stabilized their users' growth at the end of Q2, as indicated by their recent activity and their latest commitments with us. And we saw users' growth in aggregate rebound in July to levels that are most similar to what we see in Q1. When it is too early to call an end to cloud optimization and a significant level of macro uncertainty remains, these new trends, along with the tenor of our customer interactions, are encouraging. Lastly, our bookings were strong in Q2. Our new logo and new product bookings and deal cycles haven't been impacted by the period of product optimization, and we continue to see healthy growth on the sales side. From a new logo bookings perspective, we had our largest Q2 and second largest quarter ever, only behind the seasonally larger Q4 2022. We also closed a record number of new business deals larger than $100,000 in annual commitment. And with our land-next-time model, we expect new logos to turn into much larger customers over time as they lean into the cloud and add up more of our products. So as a conclusion, while we do apply conservatism to our guidance, recent usage trends as well as strong new logo activity and customer ramp-ups are positive signs for our future goals. Now, turning to platform adoption, Q2 metrics show that our platform strategy continues to resonate in the market. As of the end of Q2, 82% of customers were using two or more products, up from 79% a year ago. 45% of customers were using four or more products, up from 37% a year ago. And 21% of our customers were using six or more products, up from 14% a year ago. This strong multi-product adoption includes expansion into our newest products. About 30% of our customers have already adopted at least one of our products launched since 2021, including CI visibility, database monitoring, cloud security management, sensitive data scanner, Cloud Craft, and others. We expect more opportunities to expand adoption of these products as we continue to broaden their capabilities over time. In security, we mentioned last quarter that over 5,000 customers have adopted security products. While many of these 5,000 are just getting started with Datadog security, we are seeing opportunities to help customers secure their clouds at scale. As of Q2, 79 of our customers spent more than $100,000 on Datadog security, and a handful are now spending more than $1 million. Now let's move on to R&D. Last week, we had our Dash user conference. and introduce a number of exciting new products and features for our users. To kick off our keynote, we launch our first innovation for generative AI and large language model. We showcase our LLM observability product, enabling ML engineers to safely deploy and manage their models in production. These include the model catalog, centralized place to view and manage every model in every state of our customer development pipeline, analysis and insight on model performance, which allows all engineers to identify and address performance and quality issues with the model themselves, and helps identify model drift, the performance degradation that happens over time as models interact with real-world data. We also introduced BIT AI. BIT understands natural language and provides insights from across the data platform, as well as from our customers' collaboration and documentation tools. Among its many features, this AI can act as an incident management copilot, identifying and suggesting fixes, generating synthetic tests, and triggering workflows to automatically remediate critical issues. And we announced 15 new integrations across the next-generation AI stack, from GPU infrastructure providers to vector databases, model vendors, and AI orchestration frameworks. As we said last quarter, we are excited about these new AI technologies, and we believe Datadog is uniquely positioned to both help our customers make the best of them, as well as to incorporate them into our product alongside our data and workflows. And although it's early days for everyone in this space, we are getting traction with AI customers, and in Q2, our next-gen AI customers contributed about 2% of ARR. Moving on from AI, we showcase a number of new capabilities in the observability space. We introduce flex logs for log management, allowing customers to flexibly choose retention periods and query performance separately to make new, high-volume login use cases cost-effective. We are simplifying APM onboarding for large organizations so engineers can enable APM across all applications without any code changes. With APM trace querying, our customers can now understand the complete impact of any localized issues We introduce our error tracking assistant, which marries AI capabilities with our live observability data to automatically explain, solve, and test for production errors. In digital experience, we're also applying next-gen AI technologies to help customers automatically generate synthetic tests from their live traffic data. And we've expanded our mobile monitoring features, bringing a first-class experience for mobile developer teams with mobile session replay and mobile application testing. We also announced several innovations in cloud security. Our new security inbox surfaces the most pressing security issues, correlating thousands of technical insights and reducing them to a smaller number of actionable tasks. We can now detect more infrastructure vulnerabilities, whether they are in applications, container images, or hosts. With custom code vulnerability detection, we extended our detection capabilities beyond open source libraries and into customers' own codes, identifying the exact vulnerable code snippets with remediation details. And with Cloud Theme Investigator, our customers can visually map an attacker's behavior going back more than a year, leading to faster investigation and remediation. Shifting left, we're delivering more solutions to developers With static analysis, customers can scan code for quality issues directly within Datadog. And we're introducing quality gates so engineers can set rules and prevent insecure, buggy, or slow code from deploying in production. Finally, we announced new capabilities to help customers spend on cloud resources more efficiently. Our container resource utilization functionality makes it clear which applications are under or over-provisioned. And with cloud cost recommendations, We're adding to our cloud cost management product to automatically discover saving opportunities and act on them. Those were just some of the many announcements we made at Dash. Our investor relations website includes a link to the Dash keynote, and I encourage you to watch it to learn more. Before I step away for more innovations, I'm also pleased to note that for the third year in a row, Datadog has been named the leader in the 2023 Gartner Magic Quadrant for Application Performance Monitoring and Observability. We believe this validates our approach to deliver a unified platform which breaks down silos across teams and to focus intensely on product innovation. Now let's move on to sales and marketing. As I said earlier, we recorded strong new logo bookings and we continue to see significant expansion opportunities with existing customers. So let's discuss some of our wins. First, we signed an eight-figure deal over three years with a major American video games company. This customer's previous fast observability vendor was not delivering on critical capabilities such as quality alerting and collaborative incident management. And a recent pricing change motivated the customer to consider other vendors. By moving to Datadog, this customer expects to get higher value out of their monitoring, reduce alert fatigue, and eliminate silos among users. And as they achieve better results, They expect to save over a million dollars annually by shifting to Datadog from their previous vendor. Next, we signed a seven-figure land with a major broadcaster. This customer is moving to AWS and serverless, and its fragmented legacy and open-source tools meant long incident resolution times and confusion among teams. This customer is adopting seven Datadog products, consolidating five tools, and has already ramped Datadog to over 500 users. Next, we signed a seven-figure land with a leading Japanese toys and media company. This company has been using a competitive observability vendor alongside smaller tools and home-grown capabilities. With the adoption of five dialogue products, they have full visibility into their applications. They can save time on low-value busy work and focus on delivering great experiences for their customers. Next, we signed a seven-figure expansion with one of the world's largest tech companies, This customer is seeing massive adoption of its new generative AI product and needs to scale their GPU fleet to meet increasing demand for AI workloads. Using their homegrown tools, we're slowing them down and put at risk critical product launches. With Datadog, this team is able to programmatically manage new environments as they come online, track and alert on their service-level objectives, and provide real-time visibility for executives. Last but not least, we found an expansion with one of the world's largest financial institutions, taking this customer to HCQ ARR. This customer operates at massive scale, supporting thousands of applications run by tens of thousands of developers, and they have a strategic initiative to move aggressively to the public cloud this year. They chose Datadog as their preferred observability platform for cloud applications. And as their business units modernize, they are expanding to 10 Datadog products. and replacing a number of legacy commercial tools. And that's it for this quarter's highlights. I'd like to thank our go-to-market teams for their execution in Q2 and for helping our customers make the most out of Dash last week. Before I turn it over to David for a financial review, let me speak to our longer-term outlook. Despite the recent trends of fraud optimization and continued macro uncertainty, our posture remains the same. We are confident in our long-term growth opportunities, driven by the secular trends of cloud migration and digital transformation, as well as a rapid pace of innovation to set customers in observability and beyond. And we think our strong new logo and product adoption trends this quarter are indicative of the continued large and growing opportunity for Datadog. So our long-term plans have not changed. We are continuing to invest to serve our customers as they move to the cloud, AI, and other modern technologies. With that, can we turn it over to our CFO? David? Thanks, Olivier.