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RBC Capital Markets Global Technology, Internet, Media, Telecommunications Conference

Nov 14, 2023

Moderator

For showing up here after lunch. We got a nice-sized group here. So I will work through some questions, and we'll certainly allow some time for Q&A. And with a group like this, like, we might get a question or two.

David Obstler
CFO, Datadog

Oh, that'd be great.

Moderator

Well, we'll see.

David Obstler
CFO, Datadog

Yes.

Moderator

Get your questions ready now.

David Obstler
CFO, Datadog

Ask questions.

Moderator

Yeah, please.

David Obstler
CFO, Datadog

Right.

Moderator

So yeah, Q them up, get them ready.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

We will, we will get to that, eventually. So yeah, with us in this afternoon slot, we've got-

David Obstler
CFO, Datadog

Mm

Moderator

... David Obstler, CFO of Datadog, Yuka Broderick, IR, down in front. Thank you, Yuka, for coming as well. So I guess, David, for you, you know, you guys came off a really strong- There was a lot of concern going into your print, and you guys had really, really nice results.

David Obstler
CFO, Datadog

Yeah.

Moderator

Yeah, how do you feel about the macro trends that you saw?

David Obstler
CFO, Datadog

Mm.

Moderator

You talked about them kind of post the quarter-

David Obstler
CFO, Datadog

Mm

Moderator

... into October. You know, maybe, bring us through the year, because-

David Obstler
CFO, Datadog

Yeah

Moderator

... it's been a little bit of an uneven year.

David Obstler
CFO, Datadog

Yeah.

Moderator

Talk about what you said through October.

David Obstler
CFO, Datadog

Yeah, well, we have a cloud-based consumption model. Our revenues are associated with monitoring cloud workloads, and that means that we're correlated broadly to the workloads that are through the hyperscalers, as well as how clients use the platform-

Moderator

Yep

David Obstler
CFO, Datadog

... and all the tools. And we've been for well over a year in a cost management environment-

Moderator

Yep

David Obstler
CFO, Datadog

... Fed, raising rates-

Moderator

Yep

David Obstler
CFO, Datadog

... and things like that. We've been talking for the last year plus about the O word, optimization, and clients managing their cost structure, are not surprising. There was some very caffeinated growth in the period from 2021 into 2022. And many of those companies that were cloud-native and had expanded the most rapidly have taken a crack at their cost structure.

Moderator

Yep.

David Obstler
CFO, Datadog

That's because of the changes in their business, that's because of all of you people moving from growth at all costs-

Moderator

Yeah, yeah

David Obstler
CFO, Datadog

... to a balance.

Moderator

Yeah. Thank you.

David Obstler
CFO, Datadog

It was gonna happen. And so that resulted in some pressure on our existing customers' use of the platform. I think we talked over a year ago about a cohort of cloud native, rapidly scaled, and some affected industries, and that group had moderated their usage. And what we said last quarter was that we started to see signs of some stabilization.

Moderator

Yep, yep

David Obstler
CFO, Datadog

... in that cohort. And in this quarter, we said that happened.

Moderator

Yep.

David Obstler
CFO, Datadog

So, the most intense period of the optimization that we've seen to date was in the middle of Q2.

Moderator

Yep.

David Obstler
CFO, Datadog

And that relieved itself a little bit. And then we said, across the whole customer base, there is an overall cost management, so there's more focus on cost. And while the rest of the customer base, even, you know, down to the SMB, hasn't been affected as much, there was an overall sort of management, reducing the rate of growth of consumption of the platform. So, we said on the earnings call that, we're not declaring the end of this period.

Moderator

Yeah.

David Obstler
CFO, Datadog

We think there'll still be optimization there, you know, always is, but that some of the most intense areas had abated, and some of them have even began to grow a little bit.

Moderator

Mm.

David Obstler
CFO, Datadog

So that's sort of updating-

Moderator

Yeah

David Obstler
CFO, Datadog

... everybody on what we've been through.

Moderator

I just-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... we had had a keynote, and we talked about-

David Obstler
CFO, Datadog

Yeah

Moderator

... some of these trends. I think, you know, the term that we talked about at lunch was being cloud smart.

David Obstler
CFO, Datadog

Smart. Mm-hmm. Yeah, absolutely.

Moderator

You know, and as you talk to, you know-

David Obstler
CFO, Datadog

Yeah

Moderator

... sort of customers, I mean, is-

David Obstler
CFO, Datadog

Yeah

Moderator

... it's a journey, right? But, like-

David Obstler
CFO, Datadog

Yeah

Moderator

... I mean, you said, like, this period of most intense optimization-

David Obstler
CFO, Datadog

Mm

Moderator

... has at least settled out a little bit here.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

You know, when you talk, is there a way to sort of quantitatively think about, you know, if I was spending X, now I'm doing this?

David Obstler
CFO, Datadog

Mm

Moderator

... and, like, this is the new baseline? Or, like, is there an opportunity, do you think, for sort of getting smarter, even with cloud spend?

David Obstler
CFO, Datadog

Yeah, yeah, definitely. And that happens all the time. So we've said that cloud allows you one of the benefits of putting your applications on the cloud is that you can control burst up and burst down.

Moderator

Yep.

David Obstler
CFO, Datadog

You can manage capacity, and it's much more flexible than a data center model, where you're invested in CapEx, or in some ways, a CapEx model. And so, that's definitely one of the benefits. We find that our customers are always, we're always looking for optimization projects. It's just that in that period of emphasis on growth and not on smart cloud-

Moderator

Yeah

David Obstler
CFO, Datadog

... a lot of the world emphasized speed and putting capacity on, and didn't emphasize what they had done all along, which was optimizing that and looking at, as you say, cloud smart.

Moderator

Yeah.

David Obstler
CFO, Datadog

The world before that was cloud smart, you know, for the most part. It looks like, you know, it's returning to that.

Moderator

Yeah.

David Obstler
CFO, Datadog

I think the companies that had put an emphasis on their operations all along were cloud smart.

Moderator

Yeah. Interesting.

David Obstler
CFO, Datadog

Yeah.

Moderator

You said... So I think you made a comment a second ago, or I know you made it-

David Obstler
CFO, Datadog

Mm

Moderator

... on the earnings call-

David Obstler
CFO, Datadog

Yeah

Moderator

... about some of the most heavily impacted-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... customers-

David Obstler
CFO, Datadog

Yeah

Moderator

... are actually starting to, you know, maybe even do a little bit better-

David Obstler
CFO, Datadog

Mm

Moderator

... and show some, like, I don't know, or if you said acceleration, but even better trends there. Maybe talk about, was that because, do you think they optimized almost too much, and now they're kinda coming back? Or what was the dynamic there?

David Obstler
CFO, Datadog

Well, yeah, the behavior they're evidencing is they right-sized. Many of them, and we talked about signing contracts, commitments with us-

Moderator

Yep

David Obstler
CFO, Datadog

... and longer term. Many of them found the right equilibrium. One of the great things about our product is it's sort of a must-have utility. So, for the vast, vast majority, and you can see it in the gross retentions, it's not a matter of turning it off, switching-

Moderator

Yep

David Obstler
CFO, Datadog

... insourcing. It's a matter of calibrating the cost. And so we saw that activity... and then we saw a period of more commitment in there, and then I think we said we saw, you know, some modest growth in that group.

Moderator

Yeah.

David Obstler
CFO, Datadog

We don't know. We don't know what's gonna happen next, but that likely means that for this cohort, which was the most impacted, the weight down-

Moderator

Yeah

David Obstler
CFO, Datadog

... the decel, and maybe even-

Moderator

Yeah

David Obstler
CFO, Datadog

... to cutting their costs, probably is easing.

Moderator

Hmm.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

You know, one of the things that we look at for you guys, and other consumption-

David Obstler
CFO, Datadog

Yeah

Moderator

... models, everybody, you know, you know, we're on the edge of our chairs when-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... AWS, Azure, GCP prints.

David Obstler
CFO, Datadog

Yeah.

Moderator

You know, when you look at your numbers internally versus-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... what those guys say-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... how correlated is... What kind of a correlation do you see? Like, you know, in other words, are you surprised when, I don't know, pick GCP, you know, pick a hyperscaler, when they say they're-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... you know, sort of, like, more positive or sort of more-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... negative comments, or is-

David Obstler
CFO, Datadog

Well, I would say we're correlated long term, because we're correlated to-

Moderator

Cloud growth

David Obstler
CFO, Datadog

... cloud workloads.

Moderator

Yep.

David Obstler
CFO, Datadog

Okay. We're correlated to modern DevOps and cloud workloads. Lift and shift, picking monolithic legacy applications, isn't what Datadog does.

Moderator

Yep.

David Obstler
CFO, Datadog

So I would make three comments. One, long term, we're correlated. Two, the cloud, the hyperscalers have a much broader business than these modern workloads.

Moderator

Yep.

David Obstler
CFO, Datadog

Most likely, AWS has you know, more of their business in these type of workloads. When you see some others... They announce it, they say there are lots of other things in here. There's Microsoft Office, there's G Suite, et cetera, and we're not correlated to that. So I think it's not perfect, it's directional. Then the other thing is it's not timed perfectly, because the vast majority of the expense is in the cloud-

Moderator

Yep

David Obstler
CFO, Datadog

... it's many times, and what they do on their monitoring and the other parts of it that aren't host-based pricing, can have different timing. So directionally and long-term, it is correlated.

Moderator

Yep.

David Obstler
CFO, Datadog

And I know all of yous are trying to get daily correlation-

Moderator

Yeah

David Obstler
CFO, Datadog

... and it's not gonna be that perfect, 'cause the cloud providers don't give you the numbers and be able to do that, and it's not, you know, a one-for-one minute correlation.

Moderator

Excellent. Um-

David Obstler
CFO, Datadog

Sorry about that.

Moderator

No, that's good. No, that's, we're always trying to look for those little incremental nuggets.

David Obstler
CFO, Datadog

Yeah.

Moderator

Last quarter, you talked about larger customers growing at a slower rate than smaller customers.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

Yeah, maybe talk a little bit about that and, you know, how this long tail of smaller-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... customer spending may have impacted-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... you know, kind of net customer additions.

David Obstler
CFO, Datadog

Yeah, definitely. So let's go to that first, because that's not a dollar number, that's a net customer.

Moderator

Customer.

David Obstler
CFO, Datadog

And then we'll go to-

Moderator

Yeah

David Obstler
CFO, Datadog

... what we call the paying customers.

Moderator

Yes.

David Obstler
CFO, Datadog

So essentially, yes, we've had a very... We report net. We've had very similar and consistent gross, and the gross has been at a little bit higher of an average land. We'll talk about that in a second. So underneath of this gross, the net, the gross has been really solid throughout this period. We have a freemium to very low use model, bottoms up, and we have a very long tail, $5 a month-

Moderator

Yep

David Obstler
CFO, Datadog

... et cetera. So what we experienced since the economic difficulty is this very long tail isn't. There's some of them that drop out. I think we said in Q2 that that group accounted for $50,000 of total revenue.

Moderator

Yeah.

David Obstler
CFO, Datadog

So this is about getting users to use the product. Yes, they're free, and if they get a certain number of hosts, they flip over into paid, then they might flip. So that's really the gross net story. The low end and everything is something we would watch, but it's more marketing expense.

Moderator

Sure

David Obstler
CFO, Datadog

... trying to get people to use it. Then in terms of size of customer, we've always had the highest net retention and in smaller customers and then in ramping customers, and we've always had net retention in SMB that's been. We said, it's much the same as enterprise. And it has to do 'cause it's workload-related, and that's most likely because as customers are ramping their workloads in a new product, they're growing faster, and it tends to be net-net. You know, if they're smaller, they're not as ramped and they grow faster. So that's what's been in the company from day one. Everything in this I mentioned, there was the most affected, and then all the cohorts notched down because of cost management, but they maintained their hierarchy and-

Moderator

Hmm

David Obstler
CFO, Datadog

... in spend, meaning the smallest customers and SMB growing the most on a net retention basis. Now, that's... So that's sort of what happened, everything notched down.

Moderator

Excellent. Um-

David Obstler
CFO, Datadog

Yeah

Moderator

... you know, and I guess given that consumption pricing model-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... do you find, and, and obviously we're seeing more and more-

David Obstler
CFO, Datadog

Yeah

Moderator

... companies adopt that.

David Obstler
CFO, Datadog

Yeah.

Moderator

And it feels like that's kind of...

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... accelerate from a new software model perspective. Does that help onboarding, and does that help your onboarding initiative?

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... when you're sort of paying for ROI from that perspective?

David Obstler
CFO, Datadog

Definitely. There's no question that land and expand, and essentially we start out always with a free trial, which takes no time to set up, so our clients are using our product, and then they decide, after they run their reports, if they wanna use it, because of the way the platform's set up to not have any implementation. So having that ability to get on really quickly and then manage your commitment flexibly, is one of the great things about cloud. It's not just Datadog, it's also the hyperscalers-

Moderator

Yep

David Obstler
CFO, Datadog

... et cetera. So essentially, they're able to commit conservatively, because these are newer workloads, see how those workloads scale, everybody. We do, you operate with some on-demand for flexibility up and down, and then once you see your workloads, you can recommit. And that's what happens with the hyperscalers in Datadog. It's a very flexible model, and also a model that has been very important to our customers. We also operate in the same thing as the hyperscalers on a commitment, meaning you choose which products, but you can use the platform, so you can essentially switch between products. It's really one product. And you can also decide between reserve instances and flexible.

Moderator

Yep.

David Obstler
CFO, Datadog

And so this, again, we didn't invent it, it was the hyperscaler, and it's the way our customers buy. But it provides a lot of flexibility so you don't have to go all the way and build a big data center, you don't have to commit to seats that you may or may not use, and that's how the product gets adopted ubiquitously, and been at the core of Datadog's success.

Moderator

So you started out the year, I believe your revenue guidance.

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... was 25%, and then you lowered it to 23%, and now it's back to 26%-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... right above where you, I think, initially started.

David Obstler
CFO, Datadog

Yeah.

Moderator

Talk a little bit about your guidance philosophy. I know it hasn't changed-

David Obstler
CFO, Datadog

Yeah

Moderator

... but just, you know, help us think about-

David Obstler
CFO, Datadog

Yeah

Moderator

... how you build your guidance-

David Obstler
CFO, Datadog

Yeah

Moderator

... and sort of the assumptions built into Q4.

David Obstler
CFO, Datadog

Yeah. Yeah. I mean, a couple things. One, as you progress more in the year, more of the year is baked, and so your variability, once you get to-

Moderator

It's more, yep.

David Obstler
CFO, Datadog

... to Q4, is only about Q4. So you've already have all that. So naturally, if the trends have proven that you're at a 25 or, you know, 26, there's not that much that can happen in the fourth quarter to change that very much.

Moderator

Yep.

David Obstler
CFO, Datadog

So that's one thing. So that'll always happen. In terms of guidance, we basically looked at the data sets and the environment, and we haven't changed. We've basically discount the major drivers, which are the net retention or organic growth rate, or usage growth, and the new logos. And we look at the environment and try to take a... It's a risk management exercise.

Moderator

Yep

David Obstler
CFO, Datadog

... try to create a risk-adjusted revenue number. And if the world is better than that, and even better than we had planned for that risk adjustment, then the beat is better than that. And then in Q2, we said we had lower organic or lower usage growth than we had previously, and that would... We'd take that information and say, "Since we don't control this completely, we're gonna risk manage that down," and that will result in guidance getting lowered. It's a risk management exercise-

Moderator

Yeah

David Obstler
CFO, Datadog

... to try to maintain, you know, the cushion.

Moderator

So, I think you said you put more weighting on some of the more recent data points.

David Obstler
CFO, Datadog

Mm

Moderator

... than you did previous, you know, earlier data. You know, I'm curious, when you get into the 2024 budgeting cycle-

David Obstler
CFO, Datadog

Mm, mm-hmm

Moderator

... how long will you maintain that Q2 data point as part of your, sort of your thinking? Because, like, Q-

David Obstler
CFO, Datadog

Well, we're looking at the... So, of course, we're not gonna provide guidance off of the COVID period.

Moderator

Sure

David Obstler
CFO, Datadog

... because it isn't as relevant. So we're trying to determine through analytics, through looking at slicing and dicing our customer base by size, by cohort, by cloud native, by product, and looking at the data, we get a report every morning. So we're just basically every week aggregating that and trying to see what we think is the state of play. It can't be perfect. We don't control it, but there's not a formula. We're essentially risk managing what we think is the environment, and so we'll use not just... As we said, we're not using October or September, we're using all of it, a data set. I don't know how to answer the question because it changes over time, whether that's four quarters or five quarters or three quarters. It has to do with how trends are moving.

Moderator

I-

David Obstler
CFO, Datadog

Mm.

Moderator

Okay, so that's... I guess, yeah, that's a help.

David Obstler
CFO, Datadog

I'm trying not to disintermediate myself and lose a job. If we can create an AI CFO-

Moderator

Yeah

David Obstler
CFO, Datadog

... I'm gone.

Moderator

Yeah.

David Obstler
CFO, Datadog

I'm trying to, you know-

Moderator

Yeah, there's a human element to this.

David Obstler
CFO, Datadog

... put a little human element to this.

Moderator

Sure, of course.

David Obstler
CFO, Datadog

But I might do that for a while.

Moderator

Yeah.

David Obstler
CFO, Datadog

Yeah.

Moderator

So I guess the point of...

David Obstler
CFO, Datadog

Yeah.

Moderator

That, yeah, well, I'm sure there's somebody working on that.

David Obstler
CFO, Datadog

Yeah, probably.

Moderator

Yeah.

David Obstler
CFO, Datadog

That'd be great, yeah.

Moderator

Yeah.

David Obstler
CFO, Datadog

I won't tell, you know, I have it, but I won't tell anybody-

Moderator

Right

David Obstler
CFO, Datadog

... for a while, and then, yeah.

Moderator

So I guess I

David Obstler
CFO, Datadog

Yeah.

Moderator

You know, I mean, 'cause when I think about that Q2 data point-

David Obstler
CFO, Datadog

Yeah, yeah

Moderator

... obviously there was some negativity in that quarter.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

I guess the question is, like, you know, does, that's, it feels like it's gonna be part of your thought process-

David Obstler
CFO, Datadog

Mm

Moderator

... for some time.

David Obstler
CFO, Datadog

Mm.

Moderator

At some point, it's gonna be some so far-

David Obstler
CFO, Datadog

Yeah

Moderator

... removed, that you'll be like, "Okay, you know"-

David Obstler
CFO, Datadog

It's whether that was an aberration, a bottom related to... and you only know that as your time series develops.

Moderator

Yeah.

David Obstler
CFO, Datadog

At that point, this is part of our philosophy. We said, "The world's uncertain. This could be the trend, right, going forward." So we took down our guidance, assuming that.

Moderator

Yeah.

David Obstler
CFO, Datadog

Now, what we do next year will be based on have we had enough of a time series and the analytics around customer base and usage to feel confident that we have sort of a stable or increasing set of metrics-

Moderator

Sure

David Obstler
CFO, Datadog

... and then we'll discount from there.

Moderator

I see.

David Obstler
CFO, Datadog

That's what we're doing.

Moderator

Okay.

David Obstler
CFO, Datadog

Yeah.

Moderator

From-

David Obstler
CFO, Datadog

Mm.

Moderator

That's helpful.

David Obstler
CFO, Datadog

Yeah.

Moderator

From a Q4 perspective, let's just say-

David Obstler
CFO, Datadog

Yeah

Moderator

... things just kind of stay status quo.

David Obstler
CFO, Datadog

Yeah.

Moderator

That still implies... I mean, based off of your discounted assumption-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... that's, that's still a beat scenario, if, if-

David Obstler
CFO, Datadog

Well, everything- so basically what we would do is we always take the status quo-

Moderator

Yeah

David Obstler
CFO, Datadog

... and discount it.

Moderator

Discount it, yeah.

David Obstler
CFO, Datadog

That's what I mean, you know, let's call it risk management, rather than be. You know? But basically, that's what we're doing. We're basically taking the assumptions that we see in the business, and we're building in conservatism, which if things don't change, if they stay where they are, builds in a beat.

Moderator

Yeah. Okay.

David Obstler
CFO, Datadog

Yeah.

Moderator

Bigger beat if things get better.

David Obstler
CFO, Datadog

Worse beat if they don't.

Moderator

Yeah.

David Obstler
CFO, Datadog

Yeah.

Moderator

Yeah.

David Obstler
CFO, Datadog

Yeah.

Moderator

Well, let's keep focused on things getting better.

David Obstler
CFO, Datadog

I have to do that for you. I have to basically- ... I have to look at her and go, "Some that," you know, kind of thing, but-

Moderator

All right. No, that's a helpful perspective.

David Obstler
CFO, Datadog

Yeah, yeah.

Moderator

you recently announced two new, DevSecOps packages-

David Obstler
CFO, Datadog

Mm-hmm, mm-hmm

Moderator

... which I thought was really interesting.

David Obstler
CFO, Datadog

Yeah.

Moderator

How do you think about... I mean, it, the-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... it's, they're just brand new, so it's probably-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... you don't have much data on it yet.

David Obstler
CFO, Datadog

Yeah.

Moderator

Like, how do you think about things like that driving the model?

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

Like, how do you-

David Obstler
CFO, Datadog

Yeah

Moderator

... how do you think about that as a driver?

David Obstler
CFO, Datadog

Yeah. So essentially, thinking back, if you look at, on the website, you'll see that the philosophy of pricing of Datadog is to use the nomenclature, host, test, data, and to put functionality on top. So for instance, if you're buying infrastructure and you want something that has more containers, or you want, network, or if you're buying APM and you want, code profiling, or you want... You know, so that, that is the way our customers buy. And they like that because they basically can think, "I'm buying infrastructure." It's really infrastructure, APM, and logs, right? "But I'm getting this functionality." So, in the past couple years we've been sort of building this product line and getting to the point where we could do, more than put it out there and having certain customers use it.

This is a mark that we are confident enough to bundle it, still focused, in this case, on DevSecOps. But the way they buy and the way we've conditioned them is to buy as this host fee plus incremental amounts.

Moderator

Yeah, yeah.

David Obstler
CFO, Datadog

And so it's still too early. We have some good, you know, feedback, and we talk to clients about it, but essentially this is a packaging that is consistent with the way we've packaged the customer base, made possible by the number of use cases covered, having extended, so it can be more broadly-

Moderator

Okay

David Obstler
CFO, Datadog

... sold through.

Moderator

Yeah, that makes sense.

David Obstler
CFO, Datadog

What it does to the sales, we obviously did it because we thought it was a good move to enhance the sales pace. We'll have to see.

Moderator

Yeah.

David Obstler
CFO, Datadog

Too early.

Moderator

Yeah, yeah.

David Obstler
CFO, Datadog

Yeah.

Moderator

One other... I wanna go back to pricing-

David Obstler
CFO, Datadog

Yeah

Moderator

... 'cause I forgot-

David Obstler
CFO, Datadog

Yeah

Moderator

... to ask it to you. There's a real tie to ROI with what you guys do.

David Obstler
CFO, Datadog

Mm-hmm. Yeah.

Moderator

You know, a lot of us, you know, we'll talk to customers and they'll say, "Well, I love Datadog-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... but, gee, it gets, it's like my Datadog spend just gets really big.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

How do you think about, like, thinking about those strategic customers?

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... do you wanna provide... I mean, it's not shelfware , right?

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

So, like, how are those conversations with customers that all of a sudden starts-

David Obstler
CFO, Datadog

Yeah

Moderator

... spending $5-$10 million a year with you guys, and like, I, you know-

David Obstler
CFO, Datadog

Yeah

Moderator

... "I love it, but I don't want it to go to 20"-

David Obstler
CFO, Datadog

Yeah

Moderator

... right? Or for what, pick a number. But, like, how are those conversations?

David Obstler
CFO, Datadog

We do it in so many ways, and we've always done it. So basically, we wanna price transparently. We have a CS group and a technical account management group that have always worked with clients to help them use the product. We've developed additional SKUs where TAM where we essentially go in and we help a client use it correctly. Much of the ramping unintended is due to user error or not setting it right. So we try to help clients get to the right spend. We also have pricing that's based on volume, reserve, and term.

Moderator

Yep.

David Obstler
CFO, Datadog

We also have a whole group, like you're saying, that goes in and helps the client understand the return on investment. We do analysis versus other vendors, open source, and you know, and having slower remediation. I think in our script, we had, you know, a number of things-

Moderator

Yeah

David Obstler
CFO, Datadog

... that where we said, "You know, the return on this is quite high.

Moderator

Yeah.

David Obstler
CFO, Datadog

So we've always... And we've gotten better at it, helping clients understand how to get return, and also how to use our expanding product set to get the most return. So it's, helping our clients long-term is why we have that gross retention rate-

Moderator

Yeah, sure

David Obstler
CFO, Datadog

... in the very high 90s, and why essentially clients, you know, don't generally leave us. They generally work on trying to use the platform more.

Moderator

Yeah

David Obstler
CFO, Datadog

efficiently.

Moderator

The other nugget that I think... I think it was a new nugget for Q3.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

You said 2%, 2.5% of your ARR-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... was from gen AI companies.

David Obstler
CFO, Datadog

Yeah.

Moderator

You know, talk a little bit more about that, 'cause I think it's a great number.

David Obstler
CFO, Datadog

Yeah.

Moderator

But also, you know, for companies that aren't like, you know, a bank like RBC-

David Obstler
CFO, Datadog

Right

Moderator

... you know, how are we, you know, thinking about Datadog?

David Obstler
CFO, Datadog

Yeah

Moderator

... from a gen AI perspective-

David Obstler
CFO, Datadog

Yeah

Moderator

... as well?

David Obstler
CFO, Datadog

So, I think we gave the metric for the first time last time, when we announced, you know, at our product line at DASH. So there's three things. The first and most immediate is there are a number of modern software companies that are developing tools in the AI stack. You know, a number of them, and they are essentially delivering software and services to clients, and that's one of our expertise area, is in monitoring-

Moderator

Mm. Yeah

David Obstler
CFO, Datadog

... client-facing, modern development software. So those would be the technology companies. That's the 2.5.

Moderator

Yes.

David Obstler
CFO, Datadog

Okay? That's been growing very rapidly, so it's always nice to have sectors-

Moderator

Yes

David Obstler
CFO, Datadog

... where your product fit is really, really good, and the way you, you model, and so that's one. The second thing would be that we have developed, we, we've announced and are building out a number of LLM monitoring modules in our platform, and we're building integrations. And that's where, you know, and RBC or something, if, if and when they are injecting-... AI into client-facing, real-time software. It's not about the marketing department-

Moderator

Yeah

David Obstler
CFO, Datadog

-generating, you know, collateral. That's, that's not what we really are.

Moderator

Yeah.

David Obstler
CFO, Datadog

But that is looking like very early that there are use of these integrations, that's model-level monitoring and how it interacts with the software. And that, we think, although it's too early to give you a number, is going to result in an increase in workloads that we're monitoring. So we're building the platform for that. So that's number two. I don't think there's, as Oli would say, "It's too early.

Moderator

Yeah.

David Obstler
CFO, Datadog

It does not having-

Moderator

Sure

David Obstler
CFO, Datadog

... a major effect on our numbers right now. And the third would be in the platform itself, to introduce more AI capabilities, including our chatbot, our-

Moderator

Yep

David Obstler
CFO, Datadog

... you know, Bits.

Moderator

Yep.

David Obstler
CFO, Datadog

As well as things like, self-remediation or auto-remediation. That is platform which we have, as we've done this over the years, gotten broader adoption on the platform, you know, more client retention, and more market share in the market as we've done that. So those are the three ways we think we can monetize this opportunity.

Moderator

Sure.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

When you think about... You didn't guide to 2024, and I don't- you're not gonna give-

David Obstler
CFO, Datadog

Yeah

Moderator

... guidance today. But if you were thinking about building blocks-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... or sitting in our shoes-

David Obstler
CFO, Datadog

Yeah

Moderator

... how do we think about sort of like, the major drivers to next year? Obviously, we're all looking at maybe, you know, if cloud consumption has bottomed-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... and maybe starts to improve.

David Obstler
CFO, Datadog

Yeah.

Moderator

That obviously is a good thing. But how would you suggest we think about modeling-

David Obstler
CFO, Datadog

Mm-hmm

Moderator

... without guiding us?

David Obstler
CFO, Datadog

Yeah, I mean, it's basically, it's basically a Net Retention, plus the layering in of new customers, and modeling out, the as they come up to speed.

Moderator

Yep.

David Obstler
CFO, Datadog

I think we have numbers, you know, in our disclosure. I think this time in our queue, it was 60%-65% of revenue growth comes from existing customers, and 35. So it's a model that would then vary the net retention, resulting in that 65% moving, and then developing your own view on logos-

Moderator

Yep

David Obstler
CFO, Datadog

... and what the average size of that from what you've seen, and that would be the way we would build a model, and then have many cases off that.

Moderator

Sure.

David Obstler
CFO, Datadog

Yeah.

Moderator

Helpful. I'm gonna pause here a second.

David Obstler
CFO, Datadog

Sure.

Moderator

Is there a question out there? Yeah, go ahead.

Matthew Hedberg
Managing Director, Software Equity Research, RBC Capital Markets

Where do you view the Datadog in the... 'Cause we're seeing, like, cybersecurity-

David Obstler
CFO, Datadog

Mm-hmm

Matthew Hedberg
Managing Director, Software Equity Research, RBC Capital Markets

... coming to the space with CrowdStrike.

David Obstler
CFO, Datadog

Mm-hmm.

Matthew Hedberg
Managing Director, Software Equity Research, RBC Capital Markets

We're also seeing, like, ITSM with ServiceNow.

David Obstler
CFO, Datadog

Mm-hmm.

Matthew Hedberg
Managing Director, Software Equity Research, RBC Capital Markets

This morning, there was GitHub saying they also wanna get in, into observability.

David Obstler
CFO, Datadog

Yeah.

Matthew Hedberg
Managing Director, Software Equity Research, RBC Capital Markets

So where do you see Datadog fitting into this space?

David Obstler
CFO, Datadog

Yeah, I think it's question is do, what do they mean by it? Like, we say ITSM, we're not trying to get into caseload or human capital. ITSM, for us, is the ability—it's DevOps, and it's the ability to use our product to more efficiently. So that's what we say. Like, if we just said, "ITSM," you would say, "Oh, you're gonna go in the ServiceNow." I'm just being very, like, black and white with you, and I think that's what a lot of other companies don't do. Because in our end market, which is essentially monitoring real-time, customer-facing applications that are run on the cloud using DevOps, most of these other companies mean something else, and they're not in the market. In security, we also don't mean, we also don't mean, endpoint, we don't mean network, we don't mean so many.

We mean essentially using security signals in building and putting software in production for our DevOps, so DevSecOps. So a lot of others mean something else. So I think it's really getting under and understanding what is your end market, and what are you trying to do, and are you successful at it? The rest of it, we could do, like, it would be much the same thing. Like, "Okay, let's just go into ServiceNow's market." Yeah, of course, we could. We could create a company, add 10,000 employees, or build from scratch, but we're not doing that. And most of those others aren't doing it either, what they're saying. They're just using a lot of words. Okay.

Moderator

Maybe just on that-

David Obstler
CFO, Datadog

Yeah

Moderator

... competitive question, there's $4 billion-

David Obstler
CFO, Datadog

Yeah

Moderator

... of Splunk ARR that, you know-

David Obstler
CFO, Datadog

Yep

Moderator

... who knows what-

David Obstler
CFO, Datadog

Yeah

Moderator

... what's gonna happen to that in the future? How do you, what do you guys think about that, in terms of, like, how that, how their customer base aligns-

David Obstler
CFO, Datadog

Mm

Moderator

... with yours-

David Obstler
CFO, Datadog

Yeah

Moderator

... and how big of an opportunity that could be?

David Obstler
CFO, Datadog

We're not in their market, their vast majority market. We're not in that centralized security SIEM.

Moderator

Yep.

David Obstler
CFO, Datadog

We're not in that market. It's a complete different architecture. Because our architecture is to be able to be in real time and, and be, have access and use, and they're, they're not. So they have, you know, some business that we compete with them on, where they've gone into, into Cloud SIEM, but, And it's not whether they deliver their security SIEM in the cloud or on-premise. The vast majority of their market is not our end market. Some of it is, and we've been, you know, winning in that part, you know, for a while. So, it's, it's mainly a different market.

Moderator

Okay.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

Maybe in the last 30 seconds here-

David Obstler
CFO, Datadog

Yeah

Moderator

... that went, that went quick. You know, we're gonna we're sitting here next year.

David Obstler
CFO, Datadog

Mm-hmm.

Moderator

Let's fast-forward a year. What are we gonna be talking about next? Like, what are some of the most important trends that we should watch when we're sitting here, this point next year, and we're like, you know, asking you questions about?

David Obstler
CFO, Datadog

Yeah, yeah. So it would be, number one would be the growth of cloud workloads, modern cloud workloads, as an underpinning for the business. That's the most important. Number two would be our market share in the platform, and our ability to continue to win the full platform. So our ability to consolidate and win.

Moderator

Mm.

David Obstler
CFO, Datadog

Number three, let's say, would be what's happened with AI.

Moderator

Yeah.

David Obstler
CFO, Datadog

You know, how real is it? And lastly, would be the success of DevSecOps.

Moderator

Yeah.

David Obstler
CFO, Datadog

Those would be the things-

Moderator

A lot of drivers.

David Obstler
CFO, Datadog

Yeah.

Moderator

Those are the drivers.

David Obstler
CFO, Datadog

Yeah.

Moderator

Excellent.

David Obstler
CFO, Datadog

Yeah.

Moderator

Well, that was too quick. I have-

David Obstler
CFO, Datadog

Yeah

Moderator

... intended more questions, but-

David Obstler
CFO, Datadog

Okay, no problem.

Moderator

... we could keep going.

David Obstler
CFO, Datadog

Thanks a lot.

Moderator

Paul from RBC, David, thank you.

David Obstler
CFO, Datadog

Thank you.

Moderator

Appreciate it.

David Obstler
CFO, Datadog

Thank you.

Moderator

Thank you.

David Obstler
CFO, Datadog

Thanks a lot.

Moderator

Thanks for-

David Obstler
CFO, Datadog

Thanks for great questions. Thank you, everybody.

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