Datadog, Inc.

Good day, and thank you for standing by. Welcome to the first quarter 2024 Data Dog Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, You will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. 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 first speaker today, Yuka Bodrick, Vice President of El Paso Relations. Please go ahead.

Thank you, Marvin. Good morning, and thank you for joining us to review Datadog's first quarter 2024 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 second quarter and fiscal year 2024, 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-K for the year ended December 31, 2023. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended March 31, 2024 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 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.datadoghq.com. With that, I'd like to turn the call over to Olivier.

Thank you, Kat, and thank you all for joining us this morning. We are pleased with our execution at the start of 2024. First, we have continued to broaden our platform across observability, cloud security, software delivery, as well as closing the loop with cloud service management. We also kept supporting our customers' adoption of new technologies, including next-gen AI and large language models. And we have continued to add new customers and to see existing customers increase their usage growth and product adoption. Let me start with a review of our Q1 financial performance. Revenue was $611 million, an increase of 27% year-over-year and above the high end of our guidance range. We ended the quarter with about 28,000 customers, up from about 25,500 last year. We had about 3,340 customers with an ARR of $100,000 or more, up from about 2,910 last year. These customers generated about 87% of our ARR. And we generated free cash flow of $187 million, with a free cash flow margin of 31%. Turning to platform adoption, our platform strategy continues to resonate in the market. As of the end of Q1, 82% of customers were using two or more products, up from 81% a year ago. 47% of customers were using four or more products, up from 43% a year ago. 23% of our customers were using six or more products, up from 19% a year ago. And 10% of our customers were using eight or more products, up from 7% last year. We continue to see robust growth in our three pillars of observability, infrastructure monitoring, APM, and log management. but we also have many younger products that are becoming more meaningful contributors to our business over time. For example, our products outside of infrastructure monitoring, APM Suite, and log management exceeded 200 million in AR in Q1. And as a reminder, within the APM Suite, we include Core APM, Synthetix, ROM, and Continuous Profiler. And as we look at the 12 products that we launched between 2020 and 2022, Those now contribute about 11% to our ARR. Of those 12 products, 8 are over $10 million in ARR, which is a nice milestone for these relatively new additions. And we are seeing some products grow faster than we initially expected. For example, database monitoring is already 1% of our revenue, with strong and growing product penetration across our customer base. so we are very pleased with the progress of our newer products even though we know we have much further to go with them now let's discuss this quarter's business drivers in q1 we saw usage growth from existing customers that was higher than in q4 and this user's growth in q1 was similar to what we experienced in q2 and q3 of 2022. as a reminder That was the period when we started to see a normalization of usage following the accelerated growth we had experienced in 2021. Overall, we saw healthy growth across our product lines. And as usual, our newer products grew at a faster rate from a smaller base. While some of our customers are continuing to be cost-conscious, we are seeing optimization activity reduce in intensity. As an illustration, the optimizing cohort we identified several quarters ago did grow sequentially again this quarter. We also see that customers are adopting more products and increasing usage with us. We think this shows that they are moving forward with their cloud migration and digital transformation plans, and that we are executing on opportunities to consolidate point solutions into our platform. And finally, churn continues to be low with growth revenue retention stable in the mid to high 90s, highlighting the mission-critical nature of our platform for our customers. Moving on to R&D, we had another very productive quarter. In the next-gen AI space, we announced general availability of BITs AI for incident management. By using BITs AI for incident management, incident responders get auto-generated incident summaries to quickly understand the context and scope of a complex incident. And users can also query BITs AI to ask about related incidents and perform tasks on the fly from incident creation to resolution. We're also continuing to see more interest in AI from our customers. As a data point, ARR from our next-gen AI customers was about 3.5% of our total, a strong sign of the growing ecosystem of companies in this area. To have customers understand AI technologies and bring them into production applications, our AI integrations allow customers to pull their AI data into the Datalog platform. And today, about 2,000 of our customers are using one or more of these AI integrations. And we've continued to keep up with a rapid innovation in this space. For example, adding a new integration in Q1 with the NVIDIA Triton Israel server. In the cloud service management area, we released event management in a general availability. Our customers face increasing complexity at scale, causing the volume of alerts and events to explode. which makes it difficult for teams to identify, prioritize, summarize, and route issues to the right responders. Event management addresses this challenge by automatically reducing a massive volume of events and alerts into actionable insights. These are then used to generate tickets, call an incident, or trigger an automated remediation. And by combining event management with Watchdog, Bits.ai, and workflow automations, Datadog now provides a full AI solution that helps teams automate remediation, proactively prevent outages, and reduce the impact of incidents. In the observability space, our log management product continues to expand in capability. In March, we made error tracking for logs generally available. Error tracking intelligently combines millions of errors from logs into a manageable number of issues for customers. And beyond error tracking, We are delivering new features to allow our customers to do more with their logs within the Datadog platform, starting with new query capabilities such as enhanced full-text search and support for advanced sub-queries, both highly desired by our customers. We also continue to make progress with FlexLogs. As a reminder, FlexLogs allow customers to easily scale storage and compute separately, which in turn allows for new, very high-volume use cases in a cost-effective manner. While FlexLogs remains in limited availability, we are seeing a high level of interest from customers, many of whom want to retain logs for long-term purposes such as audit, security, and compliance. And we're pleased to see that with only a limited set of customers so far, FlexLogs already exceed $10 million in AR today. In the digital experience area, we launch mobile app testing in general availability. giving access to fast, no-code, reliable testing on real mobile devices, which was a big challenge for customers given the wide range of devices and operating systems in use by consumers. And in cloud cost management, we've added full support for Google Cloud, so FinOps and DevOps teams can optimize their cloud spend across their AWS, Azure, and GCP footprints. Cloud cost management is another of our newer products that exceeds the $10 million ARR milestone. And we believe there's significantly more opportunity for us to have our customers there. As usual, I'd like to thank our product and engineering teams for the quarter. And I'm looking forward to the many announcements we'll make at our DashZero conference in late June here in New York. Now let's move on to sales and marketing. We've been pleased to once again add some exciting new customers and expand with many more. So let's go through a few examples. We signed a three-year, seven-figure expansion with a leading online grocery business. This customer has used Datadog as their platform of choice for several years now. And as they migrate to Azure, they are looking to ensure reliability and security as they deploy at scale. With this renewal, they are adding cloud security management, application security management, and cloud theme to enable a shift to a DevSecOps culture in their organization. And this customer expects to add seven products for a total of 14 across the DataLog platform. Next, in two deals over the past six months, we had a seven-figure expansion with a medical device company. This customer was primarily using our infrastructure monitoring in APM Suite, but its legacy logging solution was becoming cost prohibitive, while a lack of correlation across siloed teams was causing frustration and higher times to resolution. With this expansion, The customer plans to adopt nine products and consolidate its log management tool as well as four other commercial and cloud-native tools into Datadog. Next, we signed a high six-figure expansion with an athletic apparel company. This company had a dozen disparate monitoring tools, which wasted time and would impact the operations, revenue, and customer experience. With this expansion, the company plans to consolidate out of four commercial and open-source point solutions They also expect to save millions of dollars over the next several years while providing a great consumer experience. Next, we signed a high six-figure expansion with a European division of one of the world's largest car makers. This customer has chosen Datadog as its observability vendor in many business units globally. And in Europe, they currently monitor about a quarter of their applications with us and are migrating hundreds of applications to fully move to Datadog in the next two years. With this expansion, This customer is using eight products in the Datalog platform. Next, we signed a six-figure land with a division of a Fortune 500 industrial company. The company is moving its e-commerce applications to Google Cloud. They felt that using on-prem monitoring tools would not transition well to the cloud and are starting with three of our products as they are confident in Datalog's ability to keep innovating in modern cloud and serverless environments. Finally, we signed a six-figure land with one of the world's largest communication infrastructure companies. This company started a cloud migration a couple of years ago and found itself limited by fragmented tooling and lack of data correlation. In contrast, the Datadog service catalog gives them a single view for performance, ownership, security, SLOs, and KPIs, which its customer believes is a unique capability among the vendors it considers and which aligns with their goal of delivering centralized observability across the business. And this customer is adopting seven data products initially and consolidating out of four tools. And that's it for another productive quarter for mobile-to-market teams. Let me now say a few words on our longer-term outlook. Overall, we continue to see no change in a multi-year trend towards digital transformation and cloud migration. We are seeing improved usage growth with less impact from optimization than we had seen in the last few quarters. For those customers who are remaining cost-focused, we are very happy to help them get value from their observability solutions and consolidate into the Datadog platform to achieve time and cost savings. Meanwhile, we are seeing continued experimentation with new technologies, including a growing adoption of AI, which we believe will be an accelerator of technical innovation and cloud migration over time. And we're working every day to innovate and help our customers adopt new technologies with confidence and become better businesses in the process. With that, I will turn it over to our CFO.