Ladies and gentlemen, thank you for standing by and welcome to the Datadog Q3 2020 Earnings Call. At this time, all participant lines are in listen only mode. If you require operator assistance, please press star zero. 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 one. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. AJ Ljubich, Director of Investor Relations. Please go ahead, sir.
Thank you, Liz. Good afternoon, thank you for joining us today to review Datadog's Q3 20 financial results, which we announced in our press release issued after the close of market today. Joining me on the call today are Olivier Pomel, Datadog's Co-founder and CEO, and David Obstler, Datadog's CFO.
During this call, we will make statements related to our business that are forward-looking under federal securities laws and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the Q4 for the full year of 2020, our strategy, the potential benefits of our products, partnerships and investments, anticipated hiring, our ability to capitalize on our market opportunity and the impact of the COVID-19 pandemic on our customers' use of our platform and industry trends as well as our ability to benefit from these 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 reviews only as of today, not as of any subsequent date.
These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could have caused actual results to differ, please refer to the quarterly report on Form 10-Q for the quarterly period ended June 30, 2020, filed with the SEC on August 10, 2020. Additional information will be made available on our quarterly report on Form 10-Q for the quarterly period ended September 30, 2020, and other filings and reports that we may file from time to time with the SEC. Our filings with the SEC are available on the investor relations section of our website. A replay of this call will be available there for a limited time. Non-GAAP financial measures will be discussed on this conference call.
Please refer to the tables in our earnings release, which you can find on the investor relations portion of our website for a reconciliation of these measures to the most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Olivier.
Thank you, AJ Ljubich, and thank you all for joining us today. We are very pleased with our performance in Q3, which showed continued high growth at scale and demonstrated efficiencies. It was an exciting quarter in which we maintained a high velocity of product delivery, starting with the new products and features announced at Dash, our annual user conference. We are building on our strong track record of innovation and extending our lead as the most complete and cloud-native end-to-end observability platform. With the majority of our employees continuing to work from home, I am extremely impressed by our productivity. Our engineers continue to build and ship innovative solutions. Our go-to-market teams continue to efficiently deliver value to our customers. We continue to hire rapidly across R&D and sales and marketing to best position ourselves for the future.
We are strategic partners to our customers like never before, as the importance of being digital first and agile is more pronounced than ever. Companies everywhere are continuing to migrate to the cloud and invest in their digital operations to achieve these outcomes. As our market opportunity driven by multi-cloud platforming and cloud migration has become clearer during this time, so has our ability to execute against it. On to a review of Q3 results. To summarize Q3 at a high level, revenue was $155 million, an increase of 61% year-over-year and above the high end of our guidance range. We ended the quarter with 1,107 customers with ARR of $100,000 or more, up from 727 last year. These customers generate about 75% of our ARR.
We have about 13,100 customers, up from about 9,500 last year, which means we added about 1,000 customers in the quarter, meaningfully more than the 600 added in Q2. We also continued to be capital efficient with free cash flow of $29 million. As in past quarters, our dollar-based net retention rate was over 130% as customers increased their usage and adopted our newer products. Now to review Q3 in more detail. Throughout the quarter, usage growth of existing customers was robust, which was a return to more normalized levels after slower usage expansion in Q2. To be more specific, the pace of usage growth seen in Q3 was broadly in line with pre-COVID-19 historical levels.
We feel comfortable that some of the rationalized cloud usage from our larger customers that we've seen in Q2 was transitory, as many of those customers have now returned to steady growth for multiple consecutive months. Strength was also broad-based across customers of different sizes and within different industries. New logo generation continued to be robust with customers' additions in line with pre-COVID-19 levels, and churn remained consistent with historical rates. Total ARR added in the quarter was a new record for the company, making this a very successful quarter. Our platform strategy continues to resonate and win in the market. As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year.
Approximately 20% of customers are using four or more products, which is up from only 7% a year ago. We had another quarter in which approximately 75% of new logos landed with two or more products, and we continue to be pleased with the uptake of our newest products, including Synthetics, RUM, NPM, and Security . I will point out that Synthetics has now been commercially available for about a year, and today it is used by thousands of customers, has reached eight figures of ARR, and continues to be in hypergrowth. Adoption of Synthetics has exceeded our expectations, which I will attribute to the combination of the strength of the product itself and the power of our platform. As a reminder, frictionless adoption is a key value proposition of our platform, which we expect will benefit all of our products.
To conclude my review of the quarter, our ability to both land and expand during what has been a time of uncertainty demonstrates Datadog's importance as companies of all sizes and across all industries, even in the most challenged sectors, are turning to their digital operation as the most strategically important segment of their business. Now on to R&D. We have a proven and long track record of innovation, and our team lived up to that standard in Q3 with the introduction of eight new products and major features at Dash. Those announcements include the introduction of the Datadog Marketplace to enable technology partners to build applications on top of our platform. The general availability of Continuous Profiler to measure code-level performance to an always-on and low-overhead solution. Expanding Synthetics to continuous integration deployment pipelines, which embed testing earlier in the development process.
The introduction of mobile Real User Monitoring for both Android and iOS. The general availability of error tracking to aggregate triage and prioritize front-end application errors. The beta launch of incident management for DevOps and security teams. The beta launch of compliance monitoring, which extends our security solutions to proactively notify on misconfigurations and compliance drift. Lastly, the beta launch of recommended monitors, a suite of pre-configured, curated, and customizable alerts. Additionally, we recently announced a strategic partnership with Microsoft, currently in public preview, which will make Datadog available to purchase, implement, and use directly from the Azure console. Azure and Datadog sales teams will increase collaboration for co-selling to enterprise clients. Today, we also announced an expansion of our strategic partnership with Google Cloud Platform, which extends our GCP presence into new regions and enhance our go-to-market collaboration and sales alignment between Datadog and GCP.
We believe this partnership, along with our existing alliance with AWS, demonstrate our leadership in cloud environments as well as the collaborative nature of our relationships with the public cloud vendors. These are just a few of the new features and enhancements we shipped this quarter. Rather than listing them all, I'll conclude on R&D with two main takeaways. First, I am very proud of the continued productivity of our teams. Together, we have not allowed the pandemic and work from home to slow down our roadmap. We have also been able to successfully hire and onboard at scale throughout these challenging times. Second, we continue to deliver the most complete and cloud-native end-to-end observability platform, yet we are only getting started. Now on to sales and marketing. As you know, this quarter we hosted Dash, our annual user conference.
While this was our first time hosting it in an all-virtual format, this enabled us to reach a broader audience of over 7,000 attendees, which is more than five times last year's count. Dash was a great success, bringing together our customers, prospects, and partners to show the power of Datadog and many of the new products discussed earlier. I want to give a special thank you to our event and community teams for excellent execution in a quickly shifting environment. Let's discuss some of our wins this quarter. I'll highlight three notable upsells that demonstrate the broad move to digital channels that has been catalyzed by this pandemic and our ability to rapidly scale with our customers. The 7-figure upsell was a large Latin America e-commerce company that has been handling record level of orders. This company brought down silos and now has hundreds of users in Datadog collaborating around the share view of the IT stack.
Next, a European on-demand delivery company that has seen its business more than double from last year and has grown its Datadog usage more than four times. This company broke down silos and now has hundreds of users in Datadog collaborating around a shared view of the IT stack. The company has standardized monitoring on Datadog with a $7-figure deal featuring all seven of our platform products, including Security to enhance real-time threat detection. A U.S. gaming company that has seen material growth in their platform and now has a $7-figure commitment to Datadog. In addition to using all three of our pillars, they are using Datadog to support their serverless architecture, they harness our machine learning to detect anomalies before they occur, and they also report on key business metrics to finance and advertising teams.
We also had good success with customers from traditional industries that need to transform. We had a six-figure new logo win from a 150-year-old postal service in Europe. This organization aims to deliver more digital services to its customers while undergoing a transition to a multi-cloud and containerized environment. They are using four products, including Synthetics, to monitor back to front-end across both on-cloud and on-premise environments. Next, we had a sizable upsell to a European financial service institution. After joining as a customer just over a year ago, this company increased spend more than four times with further consolidating monitoring on Datadog to now exceed $1 million in ARR. Finally, we had an upsell with a 100-year-old global shipping company, which we mentioned on last year's call for Q3.
Back then, this customer was spending mid-six figures on Datadog infrastructure monitoring. Today, this customer's ARR has grown to seven figures using infrastructure monitoring, APM, logs, Synthetics, RUM, NPM, and Security. This is a great example of not only how companies of all stages are undergoing digital transformation, but also of a powerful cross-selling motion as we introduce new products to market. Now moving on to our outlook. As we look ahead to the final quarter of 2020, we continue to be excited about the market opportunity ahead of us, and we are confident in our ability to execute given continued strong performance through challenging times. After some of the rationalized cloud usage we saw in Q2, we've seen a clear return to normalized usage growth.
It is apparent that cloud migration is not only resilient in the current environment, but may even grow stronger longer term. Companies globally and across all industries are prioritizing digital operations like never before, and the cloud is a clear strategic winner to enable greater agility and innovation. We continue to believe Datadog is a primary beneficiary of these trends and that we remain very well positioned to win in the market. In other words, while the near-term macro environment remains uncertain and could cause bumps along the way, we are very confident in the long-term opportunity and in our positioning. We believe that we can continue to sustain strong growth both in the near term and over time. With that, I would like to turn the call over to our Chief Financial Officer, David Obstler. David?
Thanks, Olivier. As mentioned, we delivered strong Q3 top and bottom line results amid a difficult macro backdrop. Revenue was $154.7 million, up 61% year-over-year. Usage trends were robust and returned to more normalized growth after the pressure that we saw in Q2. Meanwhile, platform traction continued to be strong, new logo generation was robust, and churn was in line with historical norms. To provide some more context, first, on usage from existing customers was robust, and our third-quarter dollar-based net retention rate remained above 130% for the 13th consecutive quarter. After some pressure seen in Q2, driven by optimization efforts from larger customers at scale in the cloud, Q3 was characterized by a decisive return to more normalized growth from our existing customers.
Throughout the quarter, we saw usage growth that was more in line with pre-pandemic historical levels. The trend was broad-based and sustained throughout the quarter. This provides us with confidence that what we experienced in Q2 was a transitory optimization effort that were related to the challenging macro environment. While further optimization may happen periodically, as we've talked about previously, we feel confident that cloud migration is very much intact and perhaps even strengthening longer term. Recall that we have a ratable SaaS model. Therefore, while Q3 usage growth was back to pre-COVID levels, the pressure experienced in Q2 can still be seen in our year-over-year comparisons for a number of quarters. Our powerful land and expand model continues to be driven by both usage growth of existing products as well as the cross-selling to our newer solutions.
Next, in the Q3, we saw continued strength in our platform strategy, with over 70% of our customers using two or more products, and about 20% of our customers now using four or more products, up from only 7% a year ago. Continued product traction is being driven by adoption in the initial land as well as strong cross-selling. The newest products continue to perform well, growing run rate quarter-over-quarter. I note that many of them, such as RUM, NPM, and security, are still early and therefore small contributions to results in the quarter. Next, new logo results were solid, with customer additions in line with pre-COVID-19 levels and strength across sales channels and regions. Lastly, churn was stable, in line with historical levels and improved from the slight elevation seen in Q2.
Our dollar-based gross retention rate has remained largely unchanged in the low to mid-nineties. Turning to billings, which were $155.9 million, up 39% year-over-year against an exceptionally difficult compare. In Q3, there were a number of timing and duration differences that affected the growth of billings in the quarter. On last year's Q3 call, we had disclosed that there was an invoice timing difference, which increased billings by $6 million. Pro forma, excluding that bill, billings would have been $106.4 million.
Next, in the quarter, we had an $11 million impact to billings and deferred revenue from a few long-term large customers which moved from annual billing to semi-annual or shorter durations upon their renewals. Notably, all of these customers continue to commit on an annual basis. They're simply breaking up their bills, as we talked about on the last call, into smaller increments. If we pro forma for these timing effects, Q3 2020 billings would have been $166.9 million. Now comparing the pro forma billings of $166.9 million to the year ago, apples to apples, of $106.4 million, the growth is 57%, relatively in line with revenue growth. Remaining performance obligations, or RPO, was $316 million, up 50% per year.
Current RPO growth was similar to pro forma billings growth. As a reminder, billings and RPO can fluctuate, as we've just discussed versus revenue, based on the timing of invoicing and signing of customer contracts, while revenue incorporates customer usage. Now let's review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials release. Gross profit in the quarter was $121.5 million, representing a gross margin of 79%. This compares to a gross margin of 80% last quarter and 76% in the year-ago period. Year-over-year improvement in gross margin was driven by more efficient use of cloud infrastructure. The slight decrease in gross margin sequentially was due to minor inefficiencies created from our investments in product and platform innovation, as we have discussed.
As a reminder, our gross margins may fluctuate quarter to quarter within an acceptable range as we prioritize product development and innovation, as well as the build-out of cloud data centers in newer geographies. R&D expense in the quarter was $45.8 million, or 30% of revenue, compared to 28% a year-ago. We've continued to invest significantly in R&D, including high growth of our engineering headcount. We've been able to attract talent and execute on hiring and onboarding, enabling us to deliver multiple record quarters of engineering headcount additions. We continue to see a meaningful opportunity to innovate and expand our platform, therefore plan to continue to make meaningful investments in R&D. Sales and marketing expense for the quarter was $49.7 million, or 32% of revenue, compared to 39% in the year-ago period.
Similar to R&D, we continue to make substantial investments in sales and marketing, but the pace of revenue growth continues to outpace that investment. This was another quarter of no in-person trade shows or marketing events. While we have successfully redeployed much of the events budget to advertising and other lead-generating activities, it was not on a one-for-one ratio. G&A expense was $12.1 million or 8% of revenue, slightly lower than the 9% in the year-ago quarter. Operating income was $13.8 million or a 9% operating margin compared to operating income of $726,000 or 1% in the year-ago period. In addition to the improvement in gross margin, the continued reduction in market events, travel and entertainment, and facilities overhead due to COVID contributed to operating margin.
Headcount growth was approximately in line with revenue growth in the quarter. Non-GAAP net income for the quarter was $16 million or $0.05 a share on 333 million weighted average diluted shares. We have a very efficient business model and have experienced a high return on our investments in sales and marketing and R&D. While we have delivered 5 consecutive quarters of break-even to positive operating income, we note that our priority remains top-line growth, and we intend to continue aggressive investments in R&D and go-to-market. Finally, turning to the balance sheet and cash flow. We ended the quarter with $1.5 billion in cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $36.3 million in the quarter.
After taking into consideration CapEx and capitalized software, free cash flow was $28.6 million in the quarter or a margin of 19%. Cash collections have been very strong amid COVID, a testament to the importance of our solution to our customers. I would like to turn to our outlook for the Q4 and the full year 2020. While we saw usage growth in Q3 that was consistent with pre-pandemic historical levels, the pandemic is still ongoing and uncertainty remains. We are being prudent by factoring into our guidance usage growth trends below what we have seen in Q3 and conservative new business assumptions, as well as continued strong investment in R&D and sales and marketing.
Beginning with the Q4, we expect revenue to be in the range of $162 -164 million, which represents year-over-year growth of 43% at the midpoint. Non-GAAP operating income is expected to be in the range of $3 -5 million, Non-GAAP net income per share is expected to be in the $0.01 per share positive to $0.02 per share based on an approximately 335 million weighted average diluted shares outstanding. For the full year 2020, revenue is expected to be in the range of $588 -590 million, which represents 62% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $48.5 -50.5 million.
Non-GAAP net income per share is expected to be in the range of $0.17-$0.18 per share based on approximately 332 million weighted average diluted shares. Some notes below operating income. We expect approximately $1.9 million of quarterly non-GAAP other income, which is net including the interest income on our cash and marketable securities, less the interest expense on a convertible debt. We do not expect to be a federal taxpayer again, but have a tax provision related to our international entity, which we estimate to be approximately $450,000 in Q4. To summarize, we are pleased with the results for the quarter. Usage growth was strong as companies are prioritizing cloud migration and digital transformation more than ever, and we continue to execute at a high level.
We delivered an impressive velocity of product innovation in the quarter and are investing to continue that track record. While uncertainty related to the macro environment remains, we feel very well positioned to capture what is a large and growing long-term market opportunity. Now, with that, we will open the call for questions. Operator, let's begin the Q&A.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Sanjit Singh with Morgan Stanley. Your line is now open.
Hi, thank you for taking the questions, and congrats on the Q3 results. David, maybe just to start with you. I think the message that I heard off the script was a pretty emphatic view from your guys' perspective that the cloud rationing that you saw certainly improved. It became less of an issue.
Expansion trends look like they've gone back to pre-COVID levels. If you could just bridge for us, you know, the slower revenue growth sort of in the low 60s versus the 80s. At the same time, I think you mentioned, or I think Oli mentioned a record new ARR quarter. If I look at kind of the RPO-based bookings, it seems like there's an acceleration there. If you could sort of just, you know, help us understand how those three metrics sort of tie together and give us a sense of whether the business is truly, you know, rebounding versus what seems like slower revenue growth.
Yeah, we had, as you mentioned, organic growth is a very strong contributor, and that rebounded, particularly in the larger customers, to more historical trends. We continued to have new sales in line. It's the combination of the two that contributed to the record ARR growth. Those are the main factors. The organic is always the majority of the growth in a quarter, complemented by the new business.
You know, just to complement on that, this is Olivier. You know, if you compare it to last year, one thing to remember is we have a ratable SaaS model, you know, the growth we did forego in Q2 is going to be with us in the year-to-year compares for a bit. Last year, at the same time, we had an acceleration also, which makes it for a tougher compare. You know, the increases in ARR only show up in revenue, you know, when they, when they're actually incurred in the usage. It depends on when we added those in the quarter and also what the exit velocity of ARR was in Q2.
Basically, this is how you bridge the record ARR with the revenue adds that were not record.
Okay. I understood. That makes sense. Olivier, on the partnership front, you signed a follow-on partnership with Google Cloud that you announced today, and then you signed another strategic partnership with Azure sort of intra-quarter. On the Azure front, can you sort of frame out what the opportunity is here? Give us a sense of what Azure represents as part of the business today and with the ability of customers to draw down on their Azure credits, using Datadog. How much of an opportunity is this in terms of sustaining revenue growth or potentially accelerating revenue growth, with this Azure partnership? If you could just sort of frame out the opportunity for us, that would be great.
Yeah. I should say we already have customers in multiple providers. We've been working with Azure before, you know. Today, our customer distribution follows a little bit the arrival of the top providers, you know. We still have many more customers and more revenue volume on AWS, for example, than we do on Azure. What's interesting with this new partnership is that we get more tightly integrated into the Azure console itself, and we're the first vendor to do that. What's interesting there is the user base for Azure tends to be a bit more homogeneous or used to be a bit more homogeneous in the technology they use, mostly from Microsoft.
The ability to be more integrated with the Microsoft really can reduce friction and help onboard new customers onto our platform. We see that as a great, you know, possibility to get more customers and more usage from Azure as Azure itself is growing and as their customers are diversifying their tech stack. I should say that, you know, this is only one of the cloud providers that we're working with. We are active on all of the other platforms. We announced another class partnership with GCP today. We have another one with AWS. This is, you know, an evolution, not revolution.
To your point also, our customers can use their Azure credits, and there's going to be some co-selling involved with the Microsoft team, so we're excited about the lift and go-to-market there. One last thing to remember is that this is still in preview. We don't expect any significant volume for that in the near term. That's something that's going to kick in over the next few quarters.
Understood. Thank you, Olivier. Appreciate it.
Our next question comes from Sterling Auty with JPMorgan. Your line is now open.
Yeah, thanks. Hi, guys. Oli , you kind of answered it with your last comment there, but I just wanna make sure that we level set, excuse me, in terms of the timing of the ramp of the partnerships, not only for Azure, but also what you announced with Google as well. How should we think of the timing of that flowing into revenue?
It's not going to be immediate, all right? The Azure one is just in preview right now. It's not completely live yet. The GCP partnership involves a number of new technical things that need to happen, but also some new go-to-market motions we're putting in place. There's not going to be an immediate impact. You know, we see that as being potentially meaningful contributor in the mid to long term.
That makes perfect sense. Just one follow-on to that. Are we looking at across the three pillars or just specifically for infrastructure on both of these partnerships?
Well, you know, the entry point for most of our customers is usually infrastructure. You know, as we, as we mentioned earlier in the call, like in 75% of the cases, it also comes in with another of our products. We see that really as a gateway into the platform, and then a way for us to have customers use all three or four products in the end.
Got it. Thank you.
Our next question comes from Chris Merwin with Goldman Sachs.
Okay. Thanks very much for taking my question. I was hoping you could talk a bit about what you saw across the customer segments in the quarter. I think you mentioned that the strength was pretty broad-based, but I guess within the enterprise segment specifically, are you starting to see more standardization around the Datadog platform? Not just with infrastructure obviously, but, you know, the log, APM, and of course this, you know, much broader suite of products that you now offer.
Yes, that's definitely what we see. I mean, we see I think it's very obvious for customers that they need to integrate various parts of the observability together, then having all that on top of the same platform is a desired outcome. We see more and more of that. It's not specific to the enterprise. We see that happening over all segments at this point.
Great. Maybe just a follow-up. You know, in terms of usage stepping back up, it's very encouraging to hear. You know, as you talk to customers, you know, is there any pushback on pricing? I mean, I would think not, you know, given that you're seeing usage step back up here. Just curious, you know, what those conversations have been like and, yeah, how you're thinking about, you know, the pricing model from here, or is this something that really works well for your customer base, as it is, and there's unlikely to be any evolution of that? Thanks.
Yeah. I mean, look, the one thing I should say is, you know, anytime you charge customers for millions of dollars, they're going to ask questions about the price. You know, it's a whole department in enterprises that are built just for that. That being said, at the end of the day, you know, what matters is how much value you deliver for that price, and I think for that we're doing a pretty good job.
I think, you know, one thing everybody's grappling with is as more and more applications move into the cloud, and those applications generate more and more data, what's the best way to align, you know, how this data is being used for observability reasons, for security reasons, and other reasons, how to align that with the value with the price being paid. When you look at our product, offering and what we've been adding, that's why we've added all of these new SKUs to really unbundle, what we're doing with the data so customers can really buy what aligns with the needs they have.
Just for example, we announced more recently, Tracing without Limits, you know, which is a way to send extremely large amounts of data to our APM, but only retain the parts of it that actually make sense to customers and they want to retain long term. We've done the same thing with logs before. We're doing the same thing with our infrastructure products. These are the way we basically put our customers in control, so they can align what they pay with the value they get.
Great. Thank you.
Our next question comes from Brad Zelnick with Credit Suisse. Your line is now open.
Great. Thanks so much, and congrats on another strong quarter, and really nice to see usage growth returning to more normal levels. David, as investors try to think about the growth algorithm for Datadog in the years to come, clearly you're levered to digital transformations and cloud migration, and we can look to many proxies for this opportunity. Perhaps the growth rates of the large public clouds themselves, which by the way, great to see the deeper partnerships-
with Microsoft and Google. I'd be curious to know how internally, from a planning perspective, how you all think about this. Although I get you're not gonna give us guidance right now for next year, how should we think about how you're framing it and the rate of investment against that opportunity? Along with that, how would you characterize the ability to hire in this environment?
Yeah, good question. On revenue, we said that over about 60% of our revenue growth comes from existing customers. We start with the land and expand and look at those cohorts and organic, and I think we referred to looking at pre-pandemic and historical trends. That's at the sort of linchpin, making the business, you know, relatively predictable even in uncertain times. We look at the market size, the opportunity, which tends not to be a limit. What is it the execution, how many salespeople we get in, how we can ramp them, et cetera. We then essentially have some experience in understanding ramp and understanding productivity, and those are the algorithms we use in looking, you know, at growth.
I think we feel, and we said this over and over again, that there's a very big market and we're very early on. Both in terms of product investment, but also in go-to market, there's a lot of areas that we are still building out. There are a lot of opportunities. There are a lot of successful territories where we have to put more feet on the street. We tend to build that from a bottom up with sales headcount, and that's resulted in, you know, sales and capacities we've talked about in the 60%-70% growth. We see that, and we see that opportunity and based on our success in bringing people in and getting them productive.
As Oli mentioned, we have been successful in COVID in hiring, and it hasn't really held us back. We've seen a lot of good opportunity and continue to do that throughout the pandemic.
Yeah, I'll compliment that. Sorry, I'll just compliment that on the growth side. I mean, right now we're surely in the opportunity that the way we think about the way we grow our team is indirectly related to the way we think about the growth we're going to get next year. You know, we really think of it in terms of how fast we can grow them while optimizing for both short-term and long-term growth. We're going to invest as fast as we can, basically, and we think there's enough opportunity to justify it. That's true both on the R&D side and on the sales marketing side. Which is why you didn't see us slow down at all during the heart of COVID in Q2.
We maintained our hiring and we're very convinced that the opportunity is there. Just to frame that a little bit, we're growing a lot faster than the cloud providers as a whole, which means there's plenty of market for us to get.
Thank you for that. Maybe just to follow up and perhaps put a finer point on this, you know, correlation of sales headcount growth with top line growth. Just as the portfolio continues to expand, especially more, you know, recently with Dash, all the new product announcements. How should we think about the evolution of the sales force to drive efficient cross-selling and specialization that might be required in order to hit all the different buyers and cover all of the product capabilities within the customer base? Do you envision having to make any significant changes in the go-to market?
You know, it's very possible that, you know, every company that reaches a large scale and grows, at some point starts visualizing their sales force. We haven't had to do that at this point. I would say we're optimistic that for the observability parts of the stack, at this point, we're we've been very successful at having one sales team sell that. I think the issue might come first when it's for the new categories we're entering, such as security, where the buyers might be a little bit different.
There again, these products are new enough and the customer base is for these products and the, I would say the customers for which these products are mature enough are, you know, a small enough group, targeted enough group, that we don't need to specialize the sales team yet, but that's definitely something that's on our minds for the future.
Excellent. Thanks so much for the thorough explanations, guys. Congrats again.
Thank you.
Our next question comes from Raimo Lenschow with Barclays. Your line is now open.
Thanks. Two quick questions, and congrats from me as well. Olivier, like, what are you seeing in terms of competitive dynamics? We had, like, some one vendor in the broader space is kind of bringing pricing down like crazy, and it's doing a lot of free stuff. Other guys are just trying to broaden the portfolio, coming up with new cloud products. Just a word on what are you seeing in that space.
Broadly, there's no change. You know, the space is very much the same as it's been for the past few years. We don't see anything different day-to-day with customers. We don't see anything different in the adoption cycle. We hear a lot about it, though, around earnings time. That's about it. No big changes.
Okay. Perfect. Thank you. Then, as you think about, as you kind of look at the landing motion and expand more the landing motion with all your new customers, have you seen a change in terms of what people are taking up? You mentioned at the beginning of the call, a couple of extra stats around how many modules, et cetera. Do you see a change in nature in terms of people understanding observability better and kind of going for more than just infrastructure and just kind of thinking more about this whole thing holistically? What are your observations there? Thank you.
Yeah. There's definitely, like, customers expect to do more with observability than just infrastructure. I would say the field is understanding what it needs better there. At the same time, you know, when we land with customers, the balancing act is between having them use more products from day 1, but also slowing down the landing. You know, which is why the number has been pretty stable around 75% of the land that include two or more product. I think that corresponds to the right balance right now between landing fast and landing with more than 1 product. Again, landing fast is critical. Like, it's a very important part of our business, and we've been very successful at it with our infrastructure products in particular.
Okay. Perfect. Thank you. Congrats.
Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.
Great, guys. Thanks for taking my question. You know, at Dash, it was really good to hear the Datadog Marketplace going GA. You know, really seems to open up a nice halo effect for developers to build application on your platform. Can you talk a little bit more about, you know, what sort of interest you're having from developers and ultimately, you know, you're not alone in software vendors doing this? You know, how do you think about monetizing this, or is it more of just, you know, trying to build up more awareness for additional features that you don't deliver as first party features yourself?
Well, it's a collection of all of these, right? I think, we're still super early in this. At this point, we're working with our, you know, very first few partners to make sure that we develop the platform in a way that's helpful to them. We think if we make them successful, you know, they'll make us successful in the long run. You know, as far as monetization comes in, we worry about them more than we worry about us at this point, just to make sure they're successful and they get what they want out of it. Super early. We think it's important.
We think it's going to play a big role in the future, but we have many, many more quarters of innovation to come on these two, you know, fully deliver on the business.
That's great. Then maybe just one for David. Your explanation of billings was super helpful, you know, trying to think about that on a normalized basis, given all the nuances from Q3 of last year. I guess I'm curious though, when we look at deferred revenue this quarter and, you know, maybe there's an obvious answer to this, but it looked, you know, kind of sequentially flat.
Was there anything that impacted deferred this quarter? You know, not necessarily looking on a year-over-year basis, but just sequentially, from Q2 to Q3?
Yes. It's the same factor that resulted in the pro forma analysis. There were $11 million of billings from some large customers that would have been in 100% in billing, which were chunked up anywhere from semi-annual to monthly billing. The way to look at that and do the apples to apples would be at that same $11 million, which reflects the economics, and you'll see the deferred revenue in the mid-50s like the other metrics that we talked about.
I got it. Really just a relic of what happened last year then, repeating itself this year.
Exactly.
In terms of the renewals.
It's deals that renewed annually and grew. We said last time that we're trying to work with our clients, keep the commitment. These are some very long-term, large customers who are staying with us. To accommodate them in this environment and their requests to chunk up bills, that's what it is.
Got it. Makes a lot of sense. Thanks, guys.
Thank you.
Our next question.
You know, just to comment on that, we will see more of that in the future, right? I mean, the beauty of our model is because of the efficiency of go-to-market, we don't actually care if customers pay us upfront. We want to align with them on that. I'm pretty sure we'll see more of that as we grow.
Our next question comes from Brent Thill with Jefferies. Your line is now open.
David, I'm curious if you could just expand on the normalization comment you mentioned from Q2 to Q3, add a little more detail in terms of just overall customer behavior. I'm curious if you could also just drill down on the security initiative, what you're seeing there and what metrics are standing out to you from that business unit. Thank you.
Yeah, let me just go over some of the metrics around organic growth and then Oli, to security. What we said in Q2 was that we had some of the larger customers rationalize. Therefore, the slowdown of organic was concentrated first in the larger customers, and that about 10% of our customer base in ARR was in impacted industries where there was some pressure. What we saw in Q3 was a sort of return to normalcy in those, meaning the larger customers continued to now, after that optimization, grow in pre-pandemic rates. We also saw that the COVID-impacted, the impact was taken, the medicine was taken, and they also continued to be stable to slightly up.
Essentially, it was across enterprise, mid-market, and SMB, and it was across also the large customer to the small customer that exhibited similar types of organic growth, which is what we've seen over the long period in the company, but saw a different effect in Q2. Olivier Pomel, on security?
On security, I think it's too early to have a lot to share there, you know, but the product is growing very nicely. We're getting great, you know, adoption stories from customers, but it's growing very quickly from a very small number. And it's still very early in its life cycle. We fleshed out the offering a little bit at Dash, you know, with the compliance product. There's a lot more we're working on, both of the existing bits and on new bits for security. I'd say it's still early. You know, just to re-say, you know, some of what David said on the growth, we're very happy with the growth we've seen in Q3.
You know, it really showed a reversion to normal for the month-to-month growth. I mean, if you look at the monthly growth in ARR and year of the month Q3, like it could have slowed it this month in Q3 or Q4, sorry, in Q4 or Q1, they would have fit right there. I think it's not like we're very happy with what we've seen. At the same time, you know, we're still very careful about because given the macro backdrop, you know, we're still not quite sure what can happen towards the end of Q4.
Thank you.
Our next question comes from Robert Majek with Raymond James. Your line is now open.
Great, thanks. As part of the continual shift to a more multi-silo approach, curious if you could elaborate on the experience or results you've had as of late penetrating further into the log monitoring pillar?
Into the log management, you said?
That's correct.
Yeah. I mean, look, the log product is in hypergrowth, right? It's a very exciting and also a challenging one for customers because it's one of the products for which it's the easiest to generate a lot of fairly useless data and have to pay for it, you know, which is why a lot of the innovations we've made initially on that product were around giving customers more control to align the what they pay with the value they get. We've done quite a bit of that. As we keep growing that product, we're getting into situations where customers are now standardizing on us for all of their observability, including logs.
We've been basically pulled by our enterprise customers to add a lot of the enterprise features that they would expect from a platform that they send all of their extremely confidential data into. That's a lot of the work we've been doing more recently.
I know we're just three months out of Dash, but how has customer feedback been so far on some of the new announced products and features? What's resonated the most with customers?
It's interesting because we've announced many new products and they all quite a bit of attention. I would say we got quite a few eyes on the new incident management product, which is, you know, only in beta. We got a lot of excitement for the Continuous Profiler product. There's a number of different things that customers are excited about, you know, from Dash. I think we still have, you know, in all of those cases, it's still early for those products. We still have to fully bring them to market. For most of them, we still have to charge for them. We have to basically work with our customers to make sure that these products fully deliver on their promise and on our vision.
That's the way we build, right? The way we build is we build with our customers, we put the products in their hands, we make sure they see the value, we make sure they have the controls, you know, so they can align what they, what they pay with the value they get. Then we grow those customers on those products.
Great. Thanks.
Our next question comes from Brad Reback with Stifel. Your line is now open.
Oh, great. Thanks very much. Olivier Pomel, as your product set continues to diversify and the revenue stream with it, do you think that has any impact on gross margin longer term? Thanks.
To date, we don't think so. There's no reason to think we're going to deviate from the model we've had so far. We might still see some fluctuations, mostly because of the back and forth between, you know, building more products and optimizing our use of the infrastructure because we have the same engineers that do both. Also because of our expansion to new, you know, geographies and new data centers and things like that, you know, which might, you know, push the numbers up and down a little bit. There's no, there's no reason to believe that we're heading to a completely different, ZIP Code there. At least not today.
Great. Thanks very much.
Our next question comes from Jack Andrews with Needham. Your line is now open.
Great. Thanks. Congratulations on the results. I was wondering if you could just perhaps frame for us, you know, what % of your deals today are partner sourced, and just how we should be thinking about, you know, new logos that could be generated from your partnership ecosystem, given the launch of your Partner Network, I think in January of this year.
Today, it's a very small part of our business that is partner sourced. All of the partnerships we've discussed are basically all upside for us. That's why we're investing in all of those. Like, we think there's a number of things we can get thanks to these partners, and we're investing in the partner organization in general. You know, we launched our partner program earlier this year. It's starting to see a great amount of success, it's still a small part of the business.
Okay, thanks. If I could ask a quick follow-up, could you describe some of the if you need to make some go-to-market changes, in particular to scale your federal business, and how we should be thinking about how big this business could become relative to some of your other vertical markets?
Yeah. We started building a team for that, right? We're, you know, as you know, we have a number of things in process for and for FedRAMP and et cetera. We think it's going to be similar in many ways to the way we sell to all our customers and different in a few other ways. In terms of the importance of the business, we think it can be a big part of the business. If you look at other companies in comparable spaces, like it is a big part of their business, whether it's cloud providers or, you know, other vendors in security or observability. We believe that there's really a real opportunity there. Again, this is all upside for us.
Got it. Thanks for your perspective and thanks for taking my questions.
Our next question comes from Ittai Kidron with Oppenheimer. Your line is now open.
Thanks. Olivier Pomel, I'll start with you on the cloud partnerships that you've talked about and mentioned before. Can you highlight what's unique or, first of all, is there anything exclusive in those relationships, number one? Number two, in what way will it be either easy or difficult for some of your competitors to replicate, either the quality of the relationship or the depth of the relationship with those cloud guys?
Well, I mean, there's nothing exclusive in most of these relationships, right? In many situations, like the way they are implemented and what they actually entail is a little bit different. They're also different depending on the cloud provider we work with. You know, so for example, the way we're going to integrate with Azure plugs directly to their console, you know, which is not the case with some of the other cloud providers. That's something that's interesting there. You know, in terms of what others could or could not do, I You know, it's hard for me to comment. I mean, I'm a believer that, you know, it's software, you know. If we can do it, others might be able to do it.
I think what we've proven, time and time again is that because of the overall structure of our, of our products, because of the structure of our customer base and our go-to market, we end up having a product that is a lot easier and has a lot less friction to adopt and ends up being more widely adopted by our customers and more successful in the end. I think that's what guides basically the way we run all those partnerships. You know, what attracted us to the Azure partnership was the ability to reduce friction there. That's, that's why we decided to invest in that first.
That's great. David, a question for you again. Sorry, going back to that duration on that large customers, the 11 million.
Yeah.
Can you at least confirm that those customers have expanded at your, roughly your, net dollar expansion rate? Is it just trying to make sure that this isn't just taking a bill and splitting it by half, but it was taking a bigger bill and splitting it by half.
Yeah, no, they've been customers that have grown substantially. You know, one of them is a customer that's more than doubled over the last year or so. This is merely that we have changed the billing terms, but they are all customers that have been growing with us over the last few years.
Got it. Lastly, on your underlying assumption for some softness in usage in your Q4 guide, half pretty much into the quarter, it doesn't sound like there has been any unusual usage softness in that month and a half. Correct me if I'm wrong. Aren't you just being a little bit too conservative here? I mean, what is it, the scenario that truly worries you with so little time left in the quarter?
Yeah, I think just overall, we've tended to be conservative in our guidance to incorporate usage growth rates that are lower than what we have seen and new logo accumulation that's lower. I think we said last time that given that philosophy and the fact that, you know, we're in the pandemic and we can't predict what might happen around the world, we wanted to continue to roll that conservativism forward. It's really that at the core of the guidance, rather than anything that in particular that we've seen that's different than what we said on the call today.
Very good. Good luck, guys.
Yep.
Our next question comes from Bhavan Suri with William Blair. Your line is now open.
Hey, gents. Thanks for taking my question. Olivier, I guess I'll touch on first a little bit about the technology architecture. This comes up a lot even when talking to investors. Maybe a little help in understanding. Today, when you look at sort of even the infrastructure monitoring space and the way it all works and the sampling model, with logs, you know, which data makes sense, which doesn't. There's this idea that with sampling, you're not getting all the data, and some of the vendors in other markets are saying we can absorb all the data. How do you think about that? Would it be difficult for you to absorb all the data? Is that too much data? How do you plan that?
We totally absorb all the data.
Sorry.
Absolutely. There's no sampling. Sampling is something customers can choose to do if they don't want to retain everything and store everything. But it's absolutely we take all the data. Actually, one thing we announced recently with our Tracing without Limits product.
Yeah.
It actually allows us We're the only ones to actually take absolutely 100% of the data into our infrastructure and available in real time, even in extremely high volume environments. I mean, when you talk to environments where, you know, they're keeping track of millions and millions of requests per second. We do that, and it's not something the other vendors don't do.
Right.
There's no sampling required. Sampling is just a way for customers to decide, hey, the millions and millions of debug logs that my developers are sending, I only need to keep 10% of them to see what's going on as I retain that in storage for a longer time in [inaudible] , without having to pay for that.
Oh, great. I appreciate the clarity. My second one's kind of a more longer term question, but it's about the machine learning. You know, some of the other vendors are marketing heavily the focal point of machine learning. I'd love to understand sort of how you think about that vis-a-vis competition and sort of what extent are you seeing APM customers especially leverage the Watchdog automatic anomaly detection service you introduced maybe new as last year, 12 months ago. I'd love to understand a little bit of the thought process there.
There's a couple of ways to look at it. The first one is we actually think it's a Because of our model and the fact that we're fully SaaS, machine learning is a strength of ours because we actually see all of the data. We can train our algorithms on all of the data, and we can pick and choose the problems and the use cases that we want to solve with machine learning versus the ones that we don't. It's actually a strength, and it's a long-term structural strength for what we do. That being said, we don't like to lead with the promise of an AI that fixes everything for you because we think in general, those promises underdeliver.
You know, they look great in the demo, you know, in a number of specific use cases, you're going to find them to fall short. That's not what we want. That's true of, you know, pretty much all the products you see today.
Our approach is to basically underpromise, overdeliver, and we think we have long-term structural strength in there because of the way we run our products and the data volumes that we see, which is not something that most of our competitors can do or have. Now in terms of the adoption we see, we've been purposefully selective in the situation use cases we saw with Watchdog today. We see Watchdog being used by our customers in real situations, and they rely on it, and that's something that we keep building upon.
Got it. Thanks for the color. Congrats, and thanks for the commentary on billings.
Thank you.
Our last question comes from the line of Andrew Nowinski with D.A. Davidson. Your line is now open.
All right. Thank you for squeezing me in. Just a quick clarification on the billings. I understand the, you know, the larger customers.
Yeah
are growing at pre-pandemic levels. Your COVID-impacted companies are slightly up. It sounds like the environment and the usage, the cloud usage significantly improved from Q2 to Q3. I'm wondering, you know, if you look at your billings on a sequential basis even after normalizing for that, it's only up $6 million sequentially despite that significant improvement in the environment. I'm wondering, is there any other factors there that we should consider given that the billings only went up $6 million?
No, we said all along that billings have to do with when bills, you know, went out. The advice is to take the revenues for the quarter and then multiply that by 34%, 35% or something, and that's And then times 12, and that's sort of the linearity, and that's what drives the business. What we're doing with billings, despite the fact we don't run, is we're trying to clean away some of the noise of when a bill went out this quarter versus that quarter, which isn't germane to the top-line growth of the business.
I would say urging everyone back towards, you know, the ARR approximation and the top line, and we're just basically giving pro formas here, which all are sort of in the 50s%, cRPO, et cetera, which is more in line with revenue growth.
Okay. Then I'm just wondering, could you touch on the competitive landscape both for the APM space as well as log management? Thank you.
Yeah. We'd like to know on the competitive space. I mean, it's very much the same as it used to be. It's, fortunately or unfortunately, a little bit boring. Any particular question on the competitive space?
Well, have you seen any sort of win rate improvement now that your, you know, your cloud usage is certainly getting better? I'm just wondering if your win rates have improved versus competitors like Splunk and Elastic in the log management space or Dynatrace and New Relic because they've had a ton of different pricing changes.
You know, most of our business is not replacements, right? Most of our business is net new. We do see some replacements from time to time, that's a small minority of the accounts we win. The world is moving to the cloud. Most companies are used to the cloud. Most companies are new to these environments and get observability, they don't have anything yet in their cloud environment, even if they have on-prem, they start using us for that. I don't have a win rate improvement to report, I'm also not unhappy about win rates. I actually don't even look that often at win rates because that's not what drives most of the acquisition for us.
Okay, thanks.
That concludes today's question and answer session. I'd like to turn the call back to Olivier Pomel for closing remarks.
Thank you. One second. I apologize for that. I have a 1-year-old who was just barging in. That's what you get for working from home. In any case, in closing, I'd like to reiterate that we are very pleased with our performance in the Q3. I'm very proud of our execution, I want to thank our employees for the strong productivity that they've shown during the quarter. We recently celebrated our 10-year anniversary this summer, I wanna say I'm incredibly proud of the culture we created. I'm incredibly proud of the work we are completing, of the value we deliver to our customers. I'm even more excited about our future, about the strength of our team and about the magnitude of opportunity.
In other words, the message you should get from this call is that we're just getting started, and we're all super excited about it. Thank you all for attending.