Welcome to our next session. We were just debating if we talk one more time about cloud optimization or if we brought it up. And then we decided we might do some cloud optimization once again. But.
I rejected the artist state, Alabama. In fact, he doesn't even know what it is.
Yeah.
But he said he would talk about UEFA Champions League football too.
Yep.
We could do that.
We could do that as well.
Yeah.
But like, yeah, let's do a little bit of data.
We'll do a little optimization.
Yeah.
Yeah.
I mean, and I apologize to start like that.
No problem.
What happened? You know, when, you know, we were talking earlier, it's almost not fair, like, when the on-site guys reported.
Yeah
You know, everyone was super scared, and.
Yeah
And now the off-site guys are in the middle of reporting season, and there everyone is like, "Oh, my God, yeah, it's gonna be-
Yeah
... better." Like, when you report your results, I mean, you know, we had a nice share price reaction.
Yeah.
Like, what were the highlights from you for Q3 to get everyone back on page?
Yeah.
And then we can take it from there.
Yeah, the themes are similar to what we've been discussing, which was first optimization. We had said that starting in Q2 of last year, we had the effects of optimization. The most intense was around highly ramp cloud natives, certain affected industries. In Q2, we said too early to call, but we had seen some signs of stabilization in that most affected group.
Yeah.
Then in Q3, we mentioned that, and indeed, the signs were more robust, that there had been stabilization. In fact, that cohort, which was the most affected, had, in many cases, committed to longer-term contracts and were growing quickly.
Yeah.
We also said, on staying on the theme of optimization, that even though we still were in a cost-conscious environment, that the cohorts other than that had improved somewhat.
Yeah.
We used the word moderation, you know.
Yeah
Or less intensity. There's lots of words that we were, we were using. So that was, that was one thing that, you know, everybody was very concerned about. What's gonna happen next? You know, we said that in October, we had a relatively strong month. That one month does not a quarter make, but, you know, we updated everybody, and we don't want to update further after we speak then.
Okay.
But we said essentially that as of our earnings call, we had seen the continuation of less intense optimization.
Okay.
That was number one. Number two was new logos and all the effects around that. And what we said was on that, we had had, you know, pretty strong trends throughout this whole period, and we could talk later, but indicating that newer workloads and higher priority projects were being more maintained, that was more stable than the optimization of existing workloads. And we reminded everybody that we had been a net consolidator. We had been winning share, and what we said was that that continued. The next, I would say the other two topics that we talked about were. Tell me if you wanna handle these in later questions.
Yeah, we'll probably.
But the AI.
Yeah
And then the security packaging. If you wanna wait on that, we can do that.
Yeah, yeah.
Those are the things.
Yeah, you touched all of my subjects already.
Yeah
But like, that was a preview. Okay, so now the real.
What do you think about that?
Yeah, yeah.
I mean.
It's a shame, yeah.
Yeah.
I'm waiting for my first daughter to get a university place here, and then I'll tell you which school I support.
Yeah.
But anyway.
Yeah, okay.
So, yeah, like, you talked about the new logo.
Mm-hmm
A little bit. Like, what did we see.
Yeah.
What, like, throughout the last quarters, when times were really tougher, and I'm not going.
Yeah.
To mention optimizations again, but.
Yeah.
How is the new logo the whole time?
Yeah, yeah. Let's say that it's been essentially a very stable gross new logos at slightly higher lands, resulting in some record quarters-
Yeah.
... of new logos, and I think we said that in the last two or three quarters. We gave examples in the script of a number of larger enterprises, and a number of them were traditional industries.
Mm
Who either in a land or in a consolidation, had gone with Datadog.
Yeah.
We've seen that trend sustain. Now, it's likely that had we not had this type of economic environment, that trend would be better.
Yeah.
But they had a lot less variability or volatility. And the learning from that is that either the consolidation or the new workloads and projects, particularly for larger enterprises, has continued to be prioritized.
Yeah.
Even when there's other cost efforts going on.
Do you see the new logo, like for... No, two.
Mm-hmm.
Let me start it this way. Because, you know, we had optimization in installed base, et cetera.
Mm-hmm.
Did you lean in on new logo by just having the sales force kind of?
Mm-hmm
Repurposed a little bit more, just kind of go out and go hunting more rather than farming more? Did you do anything there, or was it just naturally happened?
No, we always do that.
Yeah, yeah.
I mean, we're always building our sales team both in terms of the major new logo centers, which would be in the commercial mid-market and a portion of the enterprise. So we continue doing that. Our commission plans for enterprise essentially are based on net ARR. So we do all that work in terms of assignment of accounts.
Yeah.
But we didn't change in what we're doing. I think we are getting better in consolidation selling in terms of looking at both value and the cost side.
Yeah.
We found in a lot of places that our customers do wanna go to a platform. They do not want point solutions. We have the products in the platform, and we're able to essentially both create greater utility and save them money, and also lowering the mean time to resolution in a consolidation, and we've gotten better and better at doing that.
And then the is part of that higher ASP that you've worked on the new logo side, it's probably your platform is broader, so you have-
Yes.
a lot more to do there, correct?
Yes, exactly.
Yeah.
Exactly. That, and then we always said was most of it is greenfield and land and expand, but as you have more existing workloads that are being consolidated, from other vendors on the Datadog, you do have a lot of deals.
If we look at your space, I remember, like, a few years back, I wrote these big reports about the observability war, and everyone-
Mm-hmm.
was coming from a different angle.
Yeah.
Et cetera. Now, it’s funny how much the market has consolidated away.
Yeah.
Like, in theory, we have, like, two public companies left.
Yeah.
Splunk was the last one, it got acquired.
Yeah.
You see it changed in the market.
Yeah.
In terms of, like, how competitive certain vendors are. If it's getting easier for you, with, like, just winning deals or kind of at least competing with some of those guys.
Yeah, I would say this is the trend has been going on for a while.
Okay.
When we went public, you know, we were far down the league table in observability, and now according to Gartner and others, we're number one in terms of the revenue. That trend has been going on for a while.
Yeah.
I think it has mainly to do with the product. It has to do with the fact that we started with infrastructure. We then did a very good job of building up the other products, so the objections where another vendor got there first, might not have the product priority were overcome, and the benefits of the platform. Whether that... So that's been going on. Whether that will be further, we get this asked a lot, will be further enhanced by the going privates and acquisitions. Too early to tell.
Yeah.
But certainly, give everyone a sense of what's going on, but it isn't new that we've been winning the market share from those vendors.
Yeah, anyway.
Along the way.
Yeah, yeah. Anyway, yeah.
Yeah.
And then, if you think about it, like, your product set is much broader now.
Mm-hmm.
So you remember, like, you know, IPO with a lot of infrastructure monitoring.
Mm-hmm.
You guys have been doing crazy amounts of R&D.
Mm-hmm
And I don't know how much product. How is that helping you on the land?
Yeah.
Does that give you more landing spots?
Mm-hmm.
And then do you have any stats there, like how, you know, like how the other products are doing?
Yeah, I mean, we basically, the cross-sell stuff where over 80% are linked to.
Yeah.
Then if you look at what we reported in our script, you see all of those, you know, trending up. I mean, when you go back to two, if you're in the 80s, you know, you can't go to infinity.
Yeah.
There's some leveling out of that.
Yeah.
But that has definitely been affected both the land. The more important factor has been the expansion, where in the net retention, you know, about a third of the expansion is products that the client didn't have a year before.
Mm.
So that is, you know, the most important factor, but certainly in landing as well, that's been a factor. We talked on the call that we gave some metrics. You know, we said that Infra had passed through $1 billion.
Mm-hmm.
Both APM and Logs, and the families, we define them, had passed through $500 million. If, as you said, when we went public, we had some of the other products, but much smaller.
Yeah.
So that is a very good, I would think, you know, sort of metric, because if you add up the other two, it's double the Infra, and we've always said that it's two to three.
Yeah.
So that, we're seeing that directly in the numbers we reported.
Yeah. And I'm still trying to avoid optimization-
Yeah
So I'm gonna play on you.
We can go back out there, fine.
If you think about... Like, how do you think about your customer, your addressable customers? Like, you know, if you think, you know, w. just had the keynote now, and they were very like Global 2000-
Mm-hmm
Et cetera. You guys were always broader.
Mm-hmm.
Is there some sort of target customer base that you're kind of defining slightly more than you used to do, or like?
Well, we do define them as SMB, that's 1,000 employees or lower.
Yeah.
Mid-market, that's 1,000-5,000. That's a quasi enterprise sale. I mean, Datadog now has 55,000 employees.
Yeah.
And then you have 5,000 and above. And, so we are broad, and we're broad, I think, and we can be largely because of the way the platform's designed.
Mm-hmm.
The platform is simple but not simplistic, extensible professional services.
Yeah.
So it's all back to the product, and that it can be consumed by a broader group of customers, potentially, you know, different strategy than a ServiceNow. Be that as it may, there are different ways to go to market. For instance, when you're talking large enterprises, you're talking about a multi-division type of sale, potentially a multi-constituency. So we've organized our sales team in that way, and much more what you would know as enterprise selling. And then when you get down to the SMB, it's more of evolving them from frictionless self-service over time, and they know the product to, you know, a contract. So it definitely varies, but our product, because of the architecture, is able to be appropriate for that broad base.
Yeah. And then last question on this is like.
Yeah
Last quarter, you talked about some of the very low tiers into three.
Mm-hmm.
Like, can we talk about like... Because, like, some people still model on.
Yeah.
Number of customers added, but then if you-
Yeah.
Get someone to three, that's kind of the model go wrong.
Well, it's hard. It's hard to do that because... And that's why we basically gave some inkling to growth, because at the very low end, these are self-service companies.
Yeah.
So there's no sales concern. They will go back and forth between their credit card company. So they will move, and I think we said last quarter that difference, the delta in that movement, like 400 or 500 was $50,000. So that's why the, you know, that's why that metric can be confusing. We have not seen what others have talked about, which has been a fallout of SMB. We've seen actually, the SMB has always grown on a weighted average basis faster than the other segments, continues to do so. It's just we've seen that very low end, very little revenue dollars. I would even say it's a turn, maybe they just went from X down to the level that's very rare.
Yeah, yeah, yeah. But this has nothing to do with your de-emphasizing because you have more success. This upper market is just basically a natural.
No, there's the... That's separate from the sales enabled channels, which would be S group. So what, this group of customers are not in any sales channel, they're self-service.
Yeah, yeah. So it doesn't.
Yeah.
Yeah. Okay. Yeah, makes sense.
Mm-hmm.
Shifting gear a little bit to the install base, like you mentioned the... How do you, how do you guys call them? The digital heavy.
Cloud native.
Yeah.
Yeah.
So, it got better in Q3. Do you have any visibility that we've done? Do you think they're done yet, or do we like, I mean, a couple of them had, like, corporate events.
Yeah.
Where they needed to do. Any visibility for you, or, like, it's good for now?
Well, there's visibility. First of all, now and observability is always going through.
Yeah.
So it's never not. You basically put new workloads, and then you see how they work, et cetera. We study this. We're studying many different cohorts. I think what we said so far is we see some stabilization, but given all the risk factors in the market, we're not comfortable saying it's over. It's not over. It's just that it's less intense.
Yeah. Yeah, yeah. Okay. And then, when I talk to the hyperscalers, the one thing that, and, don't. Correct me if I'm wrong, but I, I would say that you guys suffered in the hyperscalers. Was that the, the motion of moving workloads from on-premise and classic to cloud has been a little bit delayed. People kind of staying on-prem for a little bit longer, and.
Yeah
. Like, and you're still achieving the numbers with kind of that headwind in a way, it's not even the optimization. Is that a factor that you kind of consider, or was it just the hyperscalers kind of thinking they could grow more?
I think the biggest factor in the sort of picture that wasn't a straight line.
Yeah.
But scripted was zero interest rates, a lot of capital deployed, capital markets that were emphasizing growth versus profitability, and therefore, a number of cloud natives banned very, very fast.
Mm.
That was probably, like, pull forward or, you know, not as well thought out-
Yeah.
... planning. And so the biggest factor has been sort of the deflation of that bubble. It's like the whole world, right?
Yeah.
Essentially, there's been inflation, a deflation. The rest of the trends, although there is more cost consciousness out there, as I talked about, the new logos, the movement of workloads, the consolidation, the new logos, all of those have been much more through the process.
Yeah.
So I like to think of it as, sort of if you draw a line through this and you sort of do normalization, potentially, at least I think that gives you a better sense of what really is sort of-
Right.
... the path is greater. That's the biggest factor that's happened-
Yeah.
...in the last year. We haven't seen, and in particular, the slowdown of new workloads. Potentially, it may have been a bit more if we weren't in this environment. But there could well be some other factors that have allowed us to make up, which could have been our winning our market share capture.
Yeah.
Our expansion of our product. You know, all the things may have overcome the factors that are out there that could have weighed that down further.
Yeah, yeah. And then, I don't know, like, it's, it's a finance guy asking a CFO.
Mm-hmm.
If you don't wanna go there, I'm happy as well. But, like, how does AI come up for you guys?
Yeah, definitely. No, I mean, you can't, you can't do this without talking about that. So there's AIs, one we're seeing, which is that, Datadog's customer base, you know, one of the strengths of it is in modern software companies who are delivering their products to their clients. And of course, most of the stack of AI is being delivered right now through, through, APIs and other things. And so that group, that was a 2.5% group.
Mm.
And that is, you know, been a high growth for us. You know, it's not a large part of the business, so that's serving companies that are providing AI products. We also announced a number of product releases or Dash, and broadly, they go into three areas. One, we're building integrations with all of those tool sets. That's what we do. We're basically data dogs. All the data is in there. So as clients develop applications and put them in production, we can monitor. That's just like in beta and being launched, but we see some activity.
Mm.
And that will help us get more volume, and that's what we've seen in types of similar situations. And then platform investments, where we're trying to put more AI and large language models in our platform. That could be things like auto remediation-
Hmm.
or quicker resolution of cases or Bits, you know? So all, all of those are opportunities. Probably the biggest opportunity would be the workload itself.
Yeah.
We are doing that ourselves in our platform, but we are a second degree effect after clients develop applications and put them in our check.
Yeah.
I was just listening to the previous speaker go through some discussion of discussions with their clients about, essentially, software companies, and banks even are doing, which is not largely in production, but a lot of it. They're thinking through options, and.
Yeah.
We won't see the effect materially until those applications are.
Yeah, yeah.
Yeah.
I mean, what's the thing for you, like, with observability, you guys did AI, like, you know, not generative AI.
Yeah.
Like, you know, you guys been working on AI for a while with anomaly detection, et cetera.
Definitely. I mean, the AI was not born, you know, six months ago. The Datadog is essentially taking a lot of data and building correlations and fact patterns using machine learning and metric correlations to predict what's going wrong and to be optimized.
Hmm.
Of course, if you can create models that do that faster or are more predictive, that'll improve the utility. And I think the same thing can be said about a lot of software products-
Hmm.
... where, it's not the AI itself, it's what can that do for a client-
Yeah.
to help them use the software product better.
Yeah. And then, being on new things, like, there's still ongoing lots of innovation coming out of you-
Mm-hmm.
-around security-
Yeah.
-DevOps, uh-
Yeah.
DevSecOps, et cetera.
Yeah.
Like, maybe less you, but me Olivier—more Olivier.
Hmm. Yeah.
Like, what, what's the stuff that he's getting really excited about?
Yeah. Well, to go back, so half of our R&D investment is platform.
Yeah.
I think that's one of the way using this data about, for example.
Yeah.
When you think about platform, you're thinking about what you mentioned.
Mm-hmm.
Large language model, machine learning, the auto remediation, ITSM, that would be alerting and case management. CoScreen, which is the video collaboration. We just bought a little company to keep Excel-type spreadsheets in the platform longer and not being downloaded. That is a very important part, and that is, you know, half of R&D group.
Yeah.
It may not be as exciting to everybody here, but that's at the very core of what's making our Datadog. So we're all very excited about that. In fact, a number of our acquisitions about trying to enhance that platform. Then the biggest things in terms of where we go are, as mentioned, incremental security, and I'll get to that, and the shift left.
Hmm.
But even in the APM, even in APM, there's a lot of great investments. Here's an example: when we launched our APM product, because it's, I would say, less, less, frictionless.
Hmm.
To instrument applications, we launched it, but still there was more work to do in making the instrumentation of applications as frictionless as interesting.
Hmm.
So we have projects on that. That's to make APM even easier to use and detect.
Yeah.
And then on security, one of the interesting things we talked about was, we've always talked about DevSecOps and DevOps using it, as opposed to centralized CISO cases.
Yeah.
That's where Datadog has its most competitive advantage. That's where Datadog has the data for infrastructure and logs, and applications. And what we announced in terms of packaging was essentially, getting to a point with a product in infrastructure or cloud security, and AppSec was developed at Datadog that we could proactively attach. That's a very big opportunity in, you know, that's aligned with not only the product build, but also, the world of DevSecOps, which is engineering, security, we're learning this, but upfront when you're developing and deploying in production-
Yeah.
rather than as a detection and remediation effort.
Okay. Yeah.
Okay?
Makes sense, yeah. I've got a planted question here.
Yeah.
I'm not trying to get 2025 guidance or 2024 guidance out of you.
Mm-hmm.
But, as we think about next year, and, you know, as you think about next year.
Yeah.
How would you think the ranking is in terms of what's driving revenue, if it's.
Right.
Revenue is changing next year, how would you kind of, kind of put the stack list up?
The biggest factor is the usage growth rate of our customers.
Yeah.
That's been, you know, somewhere between, depending upon 55%-80% of our revenue growth.
Yeah.
That is, that is the biggest, and that comes, I mentioned, two-thirds from the same product, 1/3 from cross-sell.
Yeah.
No matter what, in the new products, the biggest opportunity is in new credibility.
Yeah, yeah.
When you think about how big the market is, how we have a very significant number of customers who aren't using all the pillars, the attach rate. So that is, in terms of product, the biggest. And then there's some things on top of that, our security, Cloud Cost Management, Incident Management, a number of other products.
Yeah.
That aren't in that $1 billion or $500 million, but are attaching nicely and can be better.
How do you think about part of that, some of your, you know, other guys in your industry talking about like, "Oh, we need to start thinking about, like, if things get better, I need to start investing again.
Mm-hmm.
“A little bit more.” How do you think about that kind of profitability versus.
Yeah.
Hope, as you, as you kind of look for next year?
Well, one thing, unlike some others, we never, we never went crazy.
Right.
And we never didn't invest.
Yeah. Yeah.
We, you know, we've been able to modulate that. So even in this year, when the pace has been less, we still invested significantly. So, we have a list of prioritized projects, and I can go into in R&D and in sales and marketing. We have been trying for some time to accelerate a bit there.
Mm.
I think we mentioned that, in the last quarter, we overshot on margins.
Yeah.
Again.
Yeah.
Again.
Yeah.
In that case, both the top line was better than we had thought based on the Q2, and we had been very good at optimization. And so we're trying long term to balance, you compound the free cash flow, which is a product of revenue growth, the most important.
Yeah.
And doing that at a good margin, and I think we gave the guidance on margin back when we went public, 20-25. We called it long term. We got there faster than that.
Yeah.
I think we've been able to prove over and over again that we have a model that is able to be calibrated in attractive ways.
It's very likely to think about, like, as you grow as an organization, you'll need to think about, like, changing maybe processes or like, things need to kind of change and evolve to kind of.
Yeah.
The greater scale. Like, is there anything coming up from your perspective, or is it just, it's a very natural evolution in terms of how you kind of?
So, when you think about R&D, I'll start that first. We essentially, we've always been pretty good-
Yeah.
-at having projects and executing effectively. So I think in that way, I think we're getting better about, where we hire geographically, doing this in a more methodical way. In go-to-market, I think that's where you probably have more mature markets and emerging markets.
Mm.
Then, Asia, where we already are, but you're doing this, you're creating leadership that is a bit more decentralized, so you're making sure you have great heads of EMEA, great heads of APAC. There's a number of markets, including Fed, where panels are really important, so we're investing more in that. I think essentially diversifying our marketing, in that we were very digital and event-based, and I think we're evolving our events to be more spread out geographically.
Mm.
But also getting into account-based marketing and others.
Yeah.
So I think there's a lot of things we're doing in maturing in the go-to-market. Because we know these are good markets, it's the timing and investment, and we've had good payback.
Yeah.
That's some good examples of how we've been, I would say, growing what we're doing and not just rinsing and repeating.
Yeah. And then, we've got a minute left.
Yeah.
Last quick question: usage of cash, like, how do you think about that?
Mm-hmm.
Because you have a cash flow positive.
Yeah.
Good cash position, like, what's the thinking there?
Well, I like the 5% return right now.
Yeah.
I like that. I think that, we are essentially have wanted to have enough cash, so it never holds us back. We've done a good job of that. We're kind of at the point now where we're saying in any way that we're into stock buybacks or etcetera. But we know that as we accumulate cash-
Mm.
and we don't find a use to it, that our, you know, our job is not to accumulate on the balance sheet. And, you know, we study it. It's not. Now's not the right time, but we do look at that and could do that in the future.
Yeah. Perfect.
Yeah.
Great finishing statement.
Thank you very much.
Thanks.
Thank you.
Thanks, David. Thank you.
Good.