Datadog, Inc.

Good day and thank you for standing by. Welcome to the third quarter 2023 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 will need to press star 11 on your telephone. 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, Didi. Good morning, and thank you for joining us to review Datadog's third quarter 2023 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pamel, 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 fourth quarter in the fiscal year 2023, and related notes and assumptions, our gross 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 June 30, 2023. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended September 30, 2023 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.data.hq.com. With that, I'd like to turn the call over to Olivier.

Thanks, Yuka, and thank you all for joining us this morning. We are pleased with our execution in Q3. We delivered another quarter of profitable growth and robust new level bookings and we continue to broaden our platform to have customers become and grow digital businesses. Let me start with a review of our Q3 financial performance. Revenue was $548 million, an increase of 25% year-over-year and above the high end of our guidance range. We ended with about 26,800 customers, up from about 22,200 last year. We ended the quarter with about 3,130 customers with an ARR of $100,000 or more, up from about 2,600 last year. And these customers generated about 86% of our ARR. And we generated free cash flow of $138 million, with a free cash flow margin of 25%. Turning to platform adoption, our platform strategy continues to resonate in the market. As of the end of Q3, 82% of customers were using two or more products, up from 80% a year ago. 46% of customers were using four or more products, up from 40% a year ago. And 21% of our customers were using six or more products, up from 16% last year. Now let's discuss this quarter's business drivers. In Q3, we saw usage growth from existing customers improve compared to Q2. Overall growth in Q3 was relatively consistent throughout the quarter and comparable to levels we've seen in Q1. We are seeing signs that the cloud optimization activity from some of our customers may be moderating. As a reminder, last quarter we discussed a cohort of customers who began optimizing about a year ago, and we said that they appear to stabilize their usage growth at the end of Q2. That trend has held for the past several months, with that cohort's usage remaining stable throughout Q3. Overall, we continue to see impact from optimization in our business, but we believe that the intensity and breadth of optimization we've experienced in recent quarters is moderating. Meanwhile, our new logo activity has remained robust. New logo bookings continue to scale and grow year over year. And for the second quarter in a row, we closed a record number of new deals with more than $100,000 in annual commitments. With our land and expand model, we expect new logos to turn into much larger customers over time as they lean into the cloud and add up more and more products. Finally, regarding customer growth, we are pleased with the new logos, new workloads, and new product dashes we added this quarter. We added a number of exciting new customers in Q3, and I'll discuss a couple examples later. Note that our total customer count is largely driven by our long tail of very small customers, while our sales motions are more targeted to the middle and high end of our prospects. And as a reflection of our team's strong execution, our net ads of customers over $100,000 saw an increase in Q3 compared to Q2. Despite a more cost-conscious demand environment over the past year, our business has continued to grow across product lines, and we are very proud to achieve several key milestones. First, Our infrastructure monitoring ARR exceeded $1 billion. Today, our infrastructure products cover monitoring the performance of hosts, networks, containers, Kubernetes deployments, serverless functions, and other aspects of infrastructure in the cloud, as well as a full set of AI and machine learning tools to help our customers separate signal from noise. Second, our APM suite, which includes Core APM, Synthetix, Free User Monitoring, and Continuous Profiler, exceeded 500 million in ARR. And we continue to expand our capabilities in APM, most recently with single-step instrumentation, which allows a single engineer to enable APM across all applications without code changes. And we ship advances in mobile app monitoring, including mobile application testing and mobile session replay. Our log management product exceeded 500 million in AR. We also continue to expand our capabilities in log management. And with FlexLogs, customers can easily scale storage and compute separately, allowing for new, very high-volume logging use cases in a cost-effective manner. From the very beginning, my co-founder Alexei and I had a vision to create a unified platform that serves end-to-end use cases across data sets, products, and team boundaries. We believe that these ARR milestones and their balance across the three pillars of observability demonstrate that Datadog is unique within the industry in establishing true platform value for customers. And of course, even though these products have become significant in size, we are only just getting started. We will continue to innovate to deliver more solutions for our customers across observability and beyond. I will add that we have empathy for our customers and their pain points, in part because we are ourselves users of cloud and next-gen technologies at a meaningful scale. And we extensively deploy and use our own solution, which is appropriately known as dogfooding. As an example, we have extensively relied on our cloud cost management product as we expanded its capabilities this past year. And the use of our product has played a large role in delivering cost, performance, and efficiency improvements optimizing our own cloud usage, and ultimately resulting in expansion of our gross margins in recent quarters. We also continue to innovate in the DevSecOps space. Our recent expansions in cloud security include Cloud Scene Investigator, where customers can visualize logs over long periods of time to conduct security investigations. And within our Cloud Security Management product, we have introduced Cloud Infrastructure Entitlement Management, or CIEM, to help customers prevent identity and access management security issues. For a few years now, the industry has been talking about the idea of DevSecOps, the breaking down of silos among development, operations, and security teams. And we entered the security space on the premise that DevOps and security teams should share the same data in the same platform. So starting this month, We are making the practice of DevSecOps easy to adopt for all customers by bringing together all the components needed to fully monitor and secure their entire stack with two simple packages. First, within FastFacture DevSecOps, our customers can observe and secure their entire cloud environment in one package. With a simple per-host price and a single agent deployed, customers get end-to-end visibility into performance, availability, and security issues in one place. And from that one place, teams can also quickly remediate problems using built-in workflows and without any code or configuration changes. Second, with APM DevSecOps, we take this one step further. Customers can instrument cloud applications for both performance and vulnerability issues in one single package, enabled with the same unified agent used for infrastructure DevSecOps. APM DevSecOps complements infrastructure DevSecOps by surfacing open source and code-level security vulnerabilities alongside performance issues. Finally, we continue to be excited about the opportunity in generative AI and large language models. First, we believe adopting next-gen AI will require the use of cloud and other modern technologies and drive additional growth in cloud workloads. So we are continuing to invest by integrating with more components at every layer of the new AI stack and by developing our own LLM observability products. And while we see signs of AI adoption across large parts of our customer base, in the near term, we continue to see AI-related usage manifest itself most accurately with next-gen AI-native customers who contributed about 2.5% of our ARR this quarter. In the mid to long term, we expect customers of all industries and sizes to keep adding value to their products using AI and to get from early exploration to development and into production, thus driving larger cloud and observability usage across our customer base. Besides observing the AI stack, we also expect to keep adding value to our own platform using AI. Adadog's unified platform and purely SaaS model, combined with strong multi-product adoption by our customers, generates a large amount of deep and precise observability data. We believe combining AI capabilities with this broad data set will allow us to deliver differentiated value to customers. And we are working to productize this differentiated value through recently announced capabilities such as our Bits AI Assistant, AI-generated synthetic tests, and AI-led error analysis and resolution. And we expect to deliver many more related innovations to customers over time. Let's move on to sales and marketing, where we continue to execute on both new logos and existing customers. So let's discuss some of our wins. First, we signed a seven-figure land over five years with a leading provider of dental care. This company's legacy monitoring just didn't cut, and it contributed to delays with their migration to Azure. What was concerning to them was that customers noticed poor application performance and were complaining publicly on social media. By adopting six Datadog products, they expect to find and fix the vast majority of incidents internally before their customers are affected. And in signing a five-year deal, this customer showed its confidence in Datadog as a long-term partner in their migration. Next, we signed a seven-figure land with a South American fintech company. By moving from basic, built-in cloud monitoring, legacy tooling, and open-source tools to Datadog, this customer expects to significantly reduce costs by spending less on tooling, reducing time to resolution, and giving time back to engineers to innovate on their own products. Next, we signed an eight-figure running rule over three years with a major American chain of convenience stores. With this expansion, Datadog will bring all aspects of this customer's tech system into one platform. including their applications, hybrid clouds, networks, in-store IoT technology, point-of-sale systems, self-serve kiosks, fuel pumps, and corporate infrastructure. This will free up employee time to focus on customer service, with expectations to save millions of dollars annually. This customer plans to use 6,000 products, replacing three commercial deliverability tools. Next, we signed a seven-figure expansion with a major U.S. federal agency. When we first started working with this customer a year ago, Datadog was approved for a limited subset of programs. But as we have demonstrated value and gained internal adoption, this customer is now deploying Datadog across the entire agency. They have adopted six Datadog products, and by doing so, consolidated out of seven tools. Next, we signed a seven-figure expansion with a Fortune 500 industrial company. This customer was concerned with out-of-control costs with its legacy log management products. and was using a dozen different tools. And when they began using Datadog, they noticed far fewer support tickets submitted to their reliability team. By growing usage with Datadog and expanding to seven products, this customer expects to deliver better service while saving time and reducing cost. And last, we signed a seven-figure expansion with a software business that is part of a tech hyperscaler. This long-time customer has used Datadog for infrastructure metrics and will now expand to adopt seven Datadog products. Datadog will be replacing its commercial APM tool, which wasn't well adopted by its engineers and led to inefficient troubleshooting, outages, and revenue impact. Our support of open telemetry, in particular, was key to their decision to expand with Datadog, as it makes it possible for APM tracing to be democratized and used across their entire DevOps team. And that's it for this quarter's highlights. I'd like to thank our go-to-market teams for their strong execution in Q3. Before I turn it over to David for a financial review, let me reiterate our longer-term outlook. As we have said throughout this period of cloud optimization and macro uncertainty, our long-term plans have remained unchanged. We continue to believe digital transformation and cloud migration are long-term secular growth drivers of our business and critical motions for every company to deliver value and competitive advantage. So we continue to invest aggressively to broaden our platform, and we aim And we aim to be our customers' mission-critical partners as they move to cloud and to modern DevSecOps. With that, I will turn it over to our CFO, David.