Ladies and gentlemen, thank you for standing by, and welcome to the Datadog Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your speaker today, AJ Ljubich, Director of IR and FP&A. Thank you. Please go ahead.
Thank you, John. Good afternoon, and thank you for joining us today to review Datadog's Third Quarter 2019 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 are 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 fourth quarter and for the full year of 2019, our strategy, benefits of our products, the potential contribution of customers with ARR of $100,000 or greater, R&D and go-to-market investments, expected capital expenditures, and the size of our market opportunity.
The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and 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 affect our actual results, please refer to our prospectus filed with the SEC pursuant to Rule 424(b), dated September 19, 2019, which is available in the investor relations section of our website. A replay of this call will be available there for a limited time.
Additional information will be made available in our quarterly report on Form 10-Q for the quarter ended September 30, 2019, and other filings and reports that we may file from time to time with the SEC. Additionally, 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 those measures to their most directly comparable GAAP financial measures. With that, I'd like to turn the call over to Olivier.
Thank you, AJ Ljubich, and thank you all for joining us today for our Q3 earnings call, which is our first as a public company. My co-founder, Alexis, and I started Datadog about nine years ago with a mission to break down silos between developers and IT operations teams. Today, we are the monitoring and analytics platform for dev, ops, and business users. We provide clarity and actionable insights into software applications and IT infrastructure, all in real time. We exist so that our customers can understand everything that happens in their technology stack, enabling them to deliver greater innovation, provide an exceptional user experience, and achieve faster resolution of performance issues. While we are very proud of the company we have built, we're even more excited for the future and the tremendous opportunity ahead of us.
I would like to start with a quick review of our business and financial results. For the third quarter , revenue was $95.9 million, an 88% increase year-over-year. Non-GAAP operating income was $638,000, or a margin of 0.7%. We ended the quarter with 727 customers with annual run rate revenue or ARR of $100,000 or more, which is a 93% increase from a year ago. We achieved this while maintaining efficient CAC payback. As in past quarters, our dollar-based net retention rate was over 130% as customers increased their usage and adopted our newer products.
We also continued to be capital efficient as our cash provided by operating activities in Q3 was $3.8 million, and year to date, $6.8 million. Since this is our first call as a public company, I would like to spend a few minutes providing an overview of our market opportunity, our product, and our go-to market before I review our third quarter highlights. As you all know, a massive IT replatforming is underway. Companies are moving from static on-premise IT architecture to public and private cloud, as well as other ephemeral technologies like containers, microservices, and serverless computing. These newer technologies allow for increased agility and innovation, but also compound complexity and IT sprawl. Meanwhile, historically separate developers and IT operations teams must come together in order to manage this chaos and better collaborate around a shared view of the IT stack.
As businesses are becoming more and more digital, these challenges are affecting companies across all industries, geographies, and sizes. We believe we are at the very early stages of a substantial market opportunity, which we estimate to be approximately $35 billion based on our bottom-up calculations. From a product perspective, Datadog was founded in 2010 as a real-time data integration platform that turns the chaos from disparate sources into digestible and actionable insights. Our vision was a single platform that would provide DevOps users with a common view across sources, teams, and technologies. In 2012, we launched our initial use case in Infrastructure Monitoring. Starting with infrastructure gave us broad deployment across cloud environments and ubiquity across DevOps users. In other words, we were deployed everywhere and used by everyone.
Since initial launch, we have continued to innovate across more environments, including containers and serverless, as well as on-premise, hybrid, private, and multi-cloud environments. Because problems rarely stop at the boundary between infrastructure and application, we saw a need for full-stack observability, and we launched Datadog Application Performance Management, or APM, in 2017. We quickly added Datadog Log Management in 2018, thus completing what we like to call the three pillars of observability. Earlier this year, we also launched Datadog Synthetics to extend into user experience monitoring by letting our customers simulate user journeys on their web applications and API endpoints. All our products, features, and functionalities are offered within the same tightly integrated platform. Our customers can frictionlessly add up new products all from the same user interface and powered by a common data model.
We believe we win in the market for a few reasons. One, we are a truly integrated platform, allowing us to solve our customers' end-to-end problems and innovate rapidly. Two, we were built for the modern dynamic stack offering end-to-end visibility. Three, we are simple but not simplistic, easy to install with no professional services. Four, we are designed for use in collaboration across development, operations, and business teams. From a business model perspective, we have an efficient operating model, which has enabled us to achieve best-in-class growth and very modest cash burn. Despite significant and ongoing investment in R&D and sales and marketing, we have only burned approximately $30 million in cash since we began. We have a very strong cash payback. This allows us to continue to invest in our product and solve more problems for our customers.
With that background in mind, let's review our third quarter performance. Overall, we are very pleased with our results. Strength was broad-based, driven by both robust new logo additions, as well as continued growth of existing customers. Our platform strategy is clearly resonating, including strong initial uptake of our Synthetics product in the quarter. From the R&D perspective, we continue to invest in our product suite. We announced over 50 new products, features, and functionalities this July at Dash, our annual user conference. One of the products we announced was Network Performance Monitoring to allow customers to visualize the flow of network traffic in both cloud-based and hybrid environments. It is an extremely lightweight solution that is compatible with all major cloud providers and on-premise servers, giving customers the flexibility to monitor network traffic without sacrificing performance.
Another new product was Real User Monitoring, which complements Synthetics for user experience monitoring. It allows customers to analyze the performance of applications as directly experienced by their end users. We also continue to iterate on our existing solutions. For instance, Log Rehydration allows our customers to reload archive logs into the Datadog platform to enable full indexing and analysis. As a reminder, our model allows us to charge for data indexing separate from ingestion. We added service level objectives to our platform, allowing customers to easily track SLOs, which are relevant to both engineers and business users. Additionally, we announced enhancements to our machine learning and AI capabilities. Watchdog, our always-on detection engine, now automatically surfaces anomalies within the infrastructure and APM parts of our platform.
Metric Correlations is another new feature that will analyze any metric exhibiting an unusual trend and actively search for others that are displaying a similar pattern. Trace outliers will automatically analyze all incoming APM traffic, allowing our customers to easily spot meaningful outliers. Last but not least, another exciting development we announced in October is that Datadog is currently in process for FedRAMP certification, and we're very excited by the potential to expand our addressable market to U.S. federal departments and agencies. As a quick note, the products announced at Dash are in beta, and we are not yet charging our customers for them. Now, switching gears to talk about products we already charge for. In Q3, we begin charging for Synthetics, which has gotten off to a very strong start.
This is in line with our track record of new product introductions as our unified SaaS platform allows customers to adopt new products without any friction. In Q3, we saw strong adoption of our newer products from both new and existing customers. As evidence of our strong platform adoption, approximately 50% of our customers were using two or more products at the end of Q3, which is up from 40% last quarter and 15% a year-ago. We point out that our newer products are no more than about two and a half years old. As mentioned before, we have continued to invest in R&D. For the year-to-date period through Q3, non-GAAP R&D expense was 30% of revenue, which is an increase from 27% in the year-ago period.
Given our platform strategy and our proven track record of efficiently developing and selling newer products, we plan to continue to invest meaningfully in R&D. That's it for product. Onto the go-to-market side. In the third quarter , we saw strong new logo additions as well as expansion from existing customers. As of the end of the third quarter , we had approximately 9,500 customers, up from 7,100 a year ago. We ended with 727 customers with an ARR of $100,000 or more, up 93% from a year ago, at an increase of more than 130 in the quarter alone. Given that more than 70% of our ARR is generated from customers over $100,000, we expect this cohort of customers to be a large driver of our future growth.
Now, let's review some of our key wins in the quarter. First, one of our new customers is a multinational telecom provider out of Europe. This customer adopted Datadog to support their e-commerce site ahead of the new iPhone launch. Our platform enabled them to have a successful launch without any major performance issues, while other carriers in the country experienced website outages because of traffic surges. This initial six-figure land includes all three pillars, infrastructure, APM, and logs, as well as synthetics. Second, an established Fortune 500 retailer had a six-figure upsell. This customer adopted infrastructure monitoring in 2017, followed by both APM and logs in 2018, and more recently, synthetics. Over 100 of their internal teams are using Datadog as they adopt Microsoft Azure and container technologies.
This customer's spend with us has grown more than 5x since our initial deal. We believe there is still a lot more room for growth. Next, one of our largest Q3 deals was a 7-figure, three pillars new logo from a higher education software and services company. This mid-market customer with fewer than 5,000 employees demonstrates the spending power of even mid-sized companies as they come to Datadog as a strategic partner to support their digital businesses. Finally, a large Europe-based shipping and logistics company with origins dating back over 100 years had a 6-figure upsell in the quarter. This company was previously using built-in cloud provider monitoring tools, which lacked the ability to correlate front and back-end issues. This is a powerful example of how Datadog enables companies in all regions and industries who are in the middle of their digital transformation.
As we said during the IPO, we continue to invest in go-to-market. This includes growing quota-carrying reps by 70% year-over-year as of the end of Q3. We do experience high returns on our sales and marketing investments, benefiting from our very efficient business model and driven by our land and expand go-to-market. As evidence of our business model efficiency, our CAC payback continues to be approximately one year, and we intend to continue investing meaningfully in our sales and marketing efforts globally. With that, I would like to turn the call over to our Chief Financial Officer, David Obstler. David?
Thanks, Olivier. As mentioned, we are very pleased with our strong third quarter results. Since this is our first earnings call, I would like to begin with a brief overview of our financial model. I will then review our Q3 performance and provide our guidance for the fourth quarter and full year. We generate revenue from the sale of subscriptions to our SaaS platform. Customers have the option to purchase multiple products, including Infrastructure Monitoring, APM and logs, as well as additional SKUs such as containers, custom metric packages, and anomaly detection. Our revenue is all subscription, as professional services are not required to implement our products. Customer contracts typically have either annual or monthly commitments. Additionally, customers are billed for on-demand usage in excess of their committed amount, typically monthly in arrears.
Given the mix of annual and monthly invoicing and the variability in billing, we do not believe that calculated billings is the most useful metric for investors to evaluate our business performance. As in any one period, billings growth can vary substantially from revenue growth. Turning to Q3 results, revenue was $95.9 million, up 88% year-over-year. As Olivier mentioned, the quarter strength was broad-based, driven by new and existing customers, as well as strong platform adoption and initial uptake of synthetics. To provide you with some more context, first, in Q3, we saw strong new logo additions across both sales channels and regions. This is particularly notable in what is typically a seasonally challenging third quarter involving the summer. Additionally, we saw strong continued expansion of existing customers.
In the third quarter , our dollar-based net retention rate was above 130% for the ninth consecutive quarter. Our robust retention rate is driven by increased usage of existing products as well as cross-selling of newer products, including the inclusion of Synthetics for the first time. Once our customers are on the Datadog platform, they can frictionlessly expand with us to increase use of the platform. The cross-selling of newer products is a more recent driver of our net retention rate. We note strength internationally, specifically a strong sales quarter in EMEA. This is particularly impressive given many of the teams in the region are still ramping. Calculated billings, defined as revenue plus a sequential change in deferred revenue, was $112 million, up 132% year-over-year.
As mentioned, we do not believe calculated billings to be a focus metric for our business due to the mix of monthly and annual billing terms among our customers and because billings growth can vary substantially from revenue growth in any one period. Nor do we plan to comment on it on a regular basis going forward. To give you an example of the variance between billings and revenue growth. We wanna add a few comments. First, we had a multi-million dollar deal which was renewed and billed in Q3 2019. This customer was not billed in Q3 last year. In addition, we had one large 2-year prepaid deal in Q3 2017, which was thus not billed in Q3 2018, but was billed again in Q3 2019.
Adjusting for these two customers, normalized calculated billings growth would have been approximately 100%, still very strong and generally reflective of our strong Q3 sales. 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 in our press release. Gross profit in the quarter was $72.9 million, representing a gross margin of 76%. This compares to a gross margin of 77% a year ago and 75% last quarter. As we have discussed previously, we are in the middle of an accelerated innovation cycle of delivering new products, as well as the build-out of cloud data centers in newer geographies. We will, over time, balance investment and optimization to manage our gross margin.
R&D expense was $26.8 million, or 28% of revenue in the Q3, up slightly from 27% a year ago. We continue to benefit from product-led adoption and have made extensive investments in our platform. This is evidenced by the launch of Synthetics earlier in the year and the 15+ product announcements made at Dash. We continue to see a meaningful opportunity to further our innovation and expand our platform, and therefore plan to continue to make meaningful investments in R&D going forward. Sales and marketing expense was $37.3 million, or 39% of revenues, down from 48% in the year ago period. The change in Q3 was more pronounced than usual due to both the outperformance of revenues and the timing of trade show events between 2019 versus 2018.
We note that for the nine months ended September 2019, sales and marketing expense as a percentage of revenue was 41%, down from 43% in the year ago period, showing the development of some leverage in sales and marketing. We continue to see strong returns from our sales and marketing investments and plan to continue to invest to expand our go-to-market globally. G&A expense was $8.2 million, or 9% of revenue, slightly higher than 8% a year ago, given some IPO-related expenses. Operating income was a positive $638 thousand, or a 0.7% operating margin, compared to an operating loss of $3.2 million or negative 6% in the year ago period.
Net income for the quarter was $695,000 or breakeven per share based on 285 million weighted average diluted shares outstanding. We have a highly efficient business model and experienced a high return on our investments in sales and marketing and R&D. While we have operated around breakeven and outperformed on profitability in Q3, we see ample opportunities to continue to invest in the large market opportunity ahead of us. Turning to the balance sheet and cash flow, we ended the quarter with $771 million in cash equivalents, and restricted cash. This includes approximately $709 million net IPO proceeds. Cash flow from operations was a positive $3.8 million for the quarter and a positive $6.8 million year to date.
After taking into consideration capital expenditures and capitalized software, free cash flow was a negative $3.7 million for the quarter and a negative $10.1 million year-to-date. Our capital expenditures consist primarily of real estate build-outs and was slightly elevated due to projects in our New York and Paris offices. The timing of some of the payments for New York and Paris build-outs shifted to Q4, and we therefore expect another quarter of slightly elevated CapEx. Given we are hosted entirely in the cloud, our hosting costs flow through the P&L, not CapEx. I would now like to turn to our outlook for the fourth quarter and the full year of 2019.
Beginning with the fourth quarter , we expect revenue to be in the range of $101 million-$103 million, which represents a year-over-year growth of 65.5% at the midpoint. Non-GAAP operating loss from operations is expected to be in the range of -$6 million to -$8 million. Non-GAAP net loss per share is expected to be in the range of -$0.01 to -$0.02 per share based on approximately 297 million weighted average shares outstanding. A few things to take into account in our guidance. First, in the third quarter , we saw a meaningful growth of existing accounts and billed for Synthetics for the first time. While we have seen meaningful and sustained growth of existing accounts over time and have a history of launching new products, this can be more challenging to predict over short periods.
Second, on profitability. In Q4, we will have the first full quarter of public company costs, particularly D&O insurance, as well as some sizable trade show expenses. For the full year 2019, revenue is expected to be in the range of $350 million-$352 million, which represents 77% year-over-year growth at the midpoint. Non-GAAP loss from operations is expected to be in the range of -$18 million to -$20 million. Non-GAAP net loss per share is expected to be in the range of -$0.11 to -$0.12 per share based on approximately 140 million weighted average shares outstanding. To summarize, we are very pleased with the business performance in the third quarter .
We have built the leading monitoring and analytics platform for the cloud age and are generating growth at scales that few companies can match. We are making continued investments for growth in the foreseeable future. We believe we are at the early stages of a multi-billion-dollar market opportunity, and we feel very good about our ability to build a very large and successful company over time. With that, we will now open the call for questions. Operator, let's begin the Q&A.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you'd like to remove yourself from the queue, please press the pound key. To give way to other participants, please limit yourselves to one question and a follow-up. Thank you. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sanjit Singh from Morgan Stanley. Your line's now open.
Hi. Thank you for taking the questions, congrats to the team on a successful IPO and your first earnings call, and a very strong set of results. Congrats on all fronts there. Olivier, maybe to start off the Q&A, wanted to ask about the quarterly performance this quarter. Did you see strengths coming from competitive displacements? Are you seeing, you know, displacing competitors, or are you continuing to see a lot of the growth coming just from greenfield expansions? I had a follow-up.
Yeah. You know, the business is still mostly greenfield, and it's mostly net new, and it's mostly cloud environments, which by definition are new for our customers. They always have other solutions, especially when you talk about large customers and large enterprise customers. They have existing solutions for their legacy environments, but they make new decisions for their cloud environments. We do see also a few competitive displacement, but that's not the majority of what we do.
Understood. As a follow-up, it seems like you're seeing some strong momentum with new products. Seems like Synthetics is some really good early signs of traction there. You had some additional opportunities in international, and also looks like Fed to be an opportunity for you. Maybe if you could sort of stack rank some of the opportunities in terms of what are the biggest opportunities that you see over the next one to two years? What are some of the more near-term opportunities that you think can drive growth more the near term, whether it's Network Performance Monitoring when that comes off of beta, or it's just continued traction with Synthetics?
Sort of a strength, a stack ranking of the near term and the medium-term opportunities.
Well, near-term, we have our core product, our core Infrastructure product is still growing very, very fast, and is what we, you know, most of our customers use in conjunction with our products, and they still grow a lot with that product. In addition to that, our APM and Log Management product are also very recent, and they're both in hypergrowth, so they drive a lot of our short-term and near-term success. Newer products like Synthetics are nice add, they're, you know, they don't represent the bulk of the outperformance within this quarter, you know.
Right now, you know, it's still the basics, still the three pillars, the products we have in the market and we've been developing over the past few years, that are getting us the bulk of our growth. As we mentioned in the call, we've been very happily surprised by the performance of Synthetics right out of the gate. It's a great sign. It's a great sign, you know, in particular, when we think of all the new products we have in the wings that we haven't started charging for. Again, that's it will be more material in the quarters or even years to come.
Great. Thank you.
Thank you. Next question comes from the line of Sterling Auty from JPMorgan. Your line is now open.
Yeah, thanks. Hi, guys.
Hi.
Wanted to better understand, in terms of the customers that are going with multiple products, both new and existing, how would you characterize how much of that success is coming out of the mid-market versus large enterprise?
It's about the same. We see the same behavior in the in all parts of the market when it comes to that. In fact, you know, the places where we'll see customers not use necessarily us for everything they do is companies that have been earlier into the cloud and that have used other products for a while and then have everything set up that way already.
That's where we don't have an initial opportunity to displace everything at once. When customers are newer to the cloud and they're starting their migration, which is the case of most of the enterprise customers as well as the higher end of the mid-market, there's an immediate opportunity to land on, you know, two or three or four of our products at once.
That makes sense. Then one follow-up question. You know, the market is seeing your pricing that you're using for logging as very disruptive. I think we're starting to see some of the competition make changes to their pricing. Wondering what you're seeing in the competitive dynamics with all of those changes?
We don't see any change in the competitive dynamics yet, you know. I think we've seen some pricing from some other vendors. Ultimately, it hasn't changed the fundamental dynamics for their customers and in the conversation we've had so far.
Okay, great. Thank you.
Thank you. Next question comes from the line of Chris Merwin from Goldman Sachs. Your line's now open.
Okay, thank you very much. Maybe can you just talk a bit about how the ongoing shift to containers is changing the competitive landscape for you at all? Is it, I guess, increasingly important in terms of your ability to monitor these workloads? Is that an increasingly important factor in determining why you win with customers?
Yes. It's definitely When you think of what makes the old guard of tooling and approaches just not work at all, like, containers as one big part of that, you know. We've been monitoring containers at scale for many years now. You know, we've seen our customers run containers in production since, you know, before it was advisable to do it. That's been a big part of our Infrastructure Monitoring product for many years now. We don't have numbers to share on the volumes we see, but I can tell you that, you know, we already see several times the numbers of containers at any point in time as we do, you know, the number of traditional instances or VMs.
Okay, great. As you continue to invest in R&D, maybe can you just talk a bit about some of the main projects there? I mean, look, obviously, you have a very strong and comprehensive suite in the market already, but with the incremental R&D investment, are you looking to go broader in terms of product from here, or is it just maybe more focused on deeper in terms of the functionality, with some of your existing products maybe to help with even further traction in the enterprise?
It's a bit of both, right? We have, as I mentioned earlier, our infrastructure product is still growing very fast, and there's a lot of ground we can still cover to make life easier for our customers there. We are heavily investing in our infrastructure product. Our Log Management and APM products are in hypergrowth, and we're very rapidly innovating there. We're investing heavily. We have a few more products we've announced at Dash that we have to fully bring to market. As I mentioned earlier, most of these products are in beta, and we haven't started charging for them yet, and that's something that you'll see in the next two quarters.
There's a few larger categories we talked about in the IPO roadshow that we think we can enter in the future, but that's a, I would say, mid to long-term plan.
Okay, thank you.
Thank you. Next question comes from the line of Brad Zelnick from Credit Suisse. Your line's now open.
Great. Congrats on a very strong start as a public company. My first question is for Olivier. Olivier, I wanted to ask a question about OpenTelemetry as we head towards the official convergence of OpenCensus and OpenTracing. Obviously, you've supported the project up until now. Looking forward, to the extent the project is successful in standardizing instrumentation for metrics and traces, what sort of impact would you expect it to have on your business model, if any at all?
It's all good for us. You know, I think we've always thought that the data collection on the customer side was not going to be the long-term differentiator, and that's why we've actually open sourced all of our technology that lives on the customer side. You know, our agents, our libraries, our APIs, everything is open source. Supporting OpenTelemetry is another step in that direction. At the end of the day, what matters is to make the product as easy to deploy as possible, as easy to get information in and out of as possible. That's where we invest heavily on the back end of our products.
That makes perfect sense. David, can you update us on how we should expect gross margins to scale as you continue to see strength internationally and need to ramp compute capacity overseas?
I think we gave, in our long-term model, you know, a slight improvement over time. We said that we're in investment mode. Right now we're balancing the investment versus optimization. You see we've been in the range of 75, 76. We said we will, as we get to 75, you know, start to try to balance a little more. That's our approach to that. We're still in investment mode, and we'll still expand, you know, geographically.
Great. Thanks again for taking my questions.
Thanks.
Thank you. Next question comes from the line of Raimo Lenschow from Barclays. Your line's now open.
Hey, thanks. Congrats from me as well. Olivier, like, if I understand you correctly, like, you know, people come to you when they move over to the cloud, you know, because the old tools, the on-premise tools don't work anymore. There, my first question is more a big picture question. Where are we in that cloud migration? It feels very, very early, which basically means that even on infrastructure monitoring, there should be huge opportunity of initial workloads coming over, but then more and more workloads coming in. I just wanted to hear your big picture thinking there.
Yeah. Look, nobody knows exactly where we are. Like, it's hard to wrap your arms around the whole thing. Depending on the, you know, various people you can ask, the various folks who have tried to estimate that, it's either a single-digit % or it's in the low teens, basically, of the workloads that have moved from legacy IT to public and private cloud. With that in mind, you know, we have basically 95 or so or 90% of the end market that hasn't been attributed yet, which is why we think even for infrastructure, which was our first product, there's a tremendous amount of runway ahead of us.
This is also combined by the fact that as companies transform and become digital businesses, the overall impact and footprint of their application and software is going to grow. You know, for the end state, we're not just looking at the transition from whatever it had before, in a data center into something that's more cloudy, but of equal size. We think that the end state is going to be a lot larger. It's hard to quantify. You know, you can read a lot of Gartner reports and things like that. We're confident that this is a very large opportunity, and we are at the very, very, very beginning of it.
Okay. Perfect. Thank you. Then the follow-up was like, as you launch a new product, like, what's your thinking around just marketing or selling this as a platform versus the individual products?
The way we do this is we message around the platform, but we approach customers with the infrastructure first. The infrastructure is the immediate pain that customer feel that needs to be remediated and that we get our foot in the door with, so to speak. We always message with the platform. It's a bit of both. Yeah.
Okay. Perfect. Congrats. Thank you.
Thanks.
Thank you. Next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line's now open.
Hey, guys. I'll offer my congrats as well. Olivier, my question was on APM, and it's sort of a follow-up to Raimo Lenschow. You know, when we talk to folks out there in the industry, a lot of people think that maybe only 5% of apps are being monitored. I'm curious, you know, I guess why is that? You know, five years from now, you know, where do you think we could be at as an industry?
Yeah. That's a quote that's mostly used in conjunction with legacy APM, you know, so the APM that, you know, was used in traditional data center apps. The reason for this low instrumentation rate is that these APMs are very, very, very heavyweight, and they're very expensive. You know, so it's very hard actually to deploy them and get value out of them. It, it ends up being limited to a small set of extremely, you know, high-value applications, for which you can be convinced to make an investment and get some ROI out of it.
When you think of the world we're going into, the world of the cloud, the world of companies that are becoming increasingly software companies, they're going to have many, many, many, many more apps. The solutions we're providing to them are a lot easier to deploy, and it's actually a lot more affordable for each unit of compute they have to deploy solutions. We're going to end up with a market that is significantly larger, and there's gonna be a lot less investment needed to get to see returns.
That's the big difference between this world of the 5% of the apps being monitored with APM, to the world of the future where companies operate mostly digitally, and they will end up instrumenting most of the applications.
That's super helpful. Maybe as a follow-up, congrats on the early success of Synthetics. I imagine a lot of that's greenfield wins, but could you talk a little bit more about the competitive landscape for Synthetics? Thanks.
Yeah. You know, there's a few different aspects to it, and the first one is a number of the APM vendors have a Synthetics capability on top of their APM product. That's I would say the first set of competitors. There are a number of companies that offer pure play Synthetics testing. You know, some of them, I would say fairly low end, you know, some cheap products that you can very easily adopt. There's another part of the industry that, you know, is more into QA replacement and, you know, high-end software testing. That's the overall landscape. Our initial focus was not really to try and compete with any of those specifically.
It was to fill a gap we saw in the way our customers could understand and maintain the performance of the applications. We didn't drive it from an intent to compete head-to-head with those companies. We drove it from what we think the future is going to look like in terms of an integrated platform that covers everything, including simulating user traffic.
Thank you.
Thank you. Next question comes from the line of Brent Thill with Jefferies. Your line's now open.
Yeah, just a quick follow-up on Synthetics. When you mentioned a strong uptake, I was just curious if you could, you know, dive a little deeper into that comment and in terms of, you know, what you're seeing and perhaps, you know, what you think the incremental revenue uplift you're seeing. The second part is, as you continue to expand this product portfolio, which is obviously very, you know, robust, you know, is there an easier way that you can go to market with a, an enterprise license agreement or some type of suite pricing that will make it easier for the sales force to go to customers and engage, as you roll out more and more features. Are you seeing a desire from customers for that, or is it still too early?
Thank you.
Yes, on the first part. Yes, we're very impressed by what we saw, right out of the gate with Synthetics. I think it's, we can say it's a couple % of the overall.
growth rate that comes from Synthetics.
Which is more than we had expected.
I will say, though, that this includes a few months of pent-up demand, you know, as we onboarded customers during the beta. We also didn't start charging for the product right away after the product went GA. When we started charging in Q3, we already had some built-up usage, basically. We Over time, that product, we expect it to grow. We don't know if we'll see the same impact next quarter as we had this quarter, again, because we had some pent-up demands, you know, when we started charging for it. We're bullish. On the pricing and the way to sell multiple products, we already do that in a way.
You know, we let customers commit to a certain amount of spending on Datadog with a rate card basically that lets them buy any of the products and combine them in any way they see fit without having to commit to specific level of use for any of the products. That's something our customers love, you know, because it lets them just negotiate a rate for everything ahead of time and not have to worry about what their teams are going to use or not use. Today, it hasn't been a problem for the sales force to sell that to customers, and that's in great part because the buyers are the same for everything we sell today.
Great. Thank you.
Thank you. Next question comes from the line of Brad Reback from Stifel. Your line's now open.
Great. Thanks very much. If we compare the first nine months of this year to last year, have you seen any difference in customer drawdown rates on existing contracts?
We continue to see the same effect, which is customers are drawing down in both periods more quickly than the pro rata. They're consuming the products both from the usage of infrastructure as well as additional products. We continue to have the same muscle, which is that customers are finding they're using more quickly and sort of come back for more reserved instances, so more fixed capacity. That happened last year, and that's continuing this year.
Great. Thanks very much.
Thank you. Next question coming from the line of Michael Turits with Raymond James. Your line's now open.
Hi, guys. Olivier Pomel and David Obstler, of course, congrats on the IPO and on a great Q1 out of the gate. You guys have pioneered so much in terms of monitoring and looking at this from a multi-siloed approach. There have been some competitive responses from a couple companies in the APM space and the logging space. Do you see any change in sales cycles or decision cycles in response to that broadening of the market and people following your lead?
No, we don't, we don't see any changes. Again, I mean, we do expect that as with our approach of combining the silos and solving the end-to-end problem for our customers is obviously successful. We do expect that it's not lost on our competitors who we, you know, have in high regard. That's we see that as validation of our approach. Today, we haven't seen any changes in the competitive dynamics.
I think as we said that, in Q3, we had a very strong new logo. You can see that in the customer count. You know, even over the summer months. We also have maintained the retention rates with increased usage as well as we talked about earlier, increased adoption of the platform. All of those things are continuing, you know, in that quarter.
Follow-up to David. There's a great beat on EBIT and a nice guide on EBIT for next quarter. If as I model it quickly, it looks like the OpEx that's implied is less than we had originally modeled. Is there any push out of spending into, first of all, either into next quarter or into next year?
Not at all. We're continuing to grow the sales team and the R&D team and invest. Similarly, I think you saw revenues has outperformed, and with our gross margins, that's dropped to the bottom line. We're continuing with the same investment pace that we had when we met during the roadshow.
Great. Thanks, Dave and Olivier. Again, congrats on a great quarter out of the gate.
Thank you.
Thank you. Next question coming from the line of Pat Walravens with JMP Securities. Your line's now open.
Oh, great. Thank you. Let me add my congratulations. One for each of you. Olivier, I'd love to hear your thoughts on where customers are in their journey towards DevOps maturity and maybe how you see it differ by geography or by industry or by size of company.
Yeah. It's interesting because we see, if you think of the transition to DevOps and more broadly to the cloud, the markets in EMEA and in APAC are about two or three years behind what we've seen in the U.S. You know, when we've seen, in particular, large enterprises in the U.S. start going to public and private cloud at scale, two to three years ago, it's something that is just starting to happen in other parts of the world today. We tell you some main comment I would have. Otherwise, you know, we've seen the 1st companies to move to the cloud and to DevOps were the small companies, you know, tech-oriented companies.
After that, you saw the larger enterprise companies that needed to modernize. I think last are going to be the mid-market, more traditional, companies that are starting to mobilize as well. We see all those various parts of the market turn on, you know, one after each other, basically.
Yeah. Is the, like, federal government even behind all those where we...?
Federal government is happening too, but it's, I would say it's a bit of a different beast.
Yeah. Okay. Then, David, congratulations on the ninth consecutive quarter. Just, you know, I would love it if you could set our expectations a little bit in terms of the dollar-based net expansion rate and what we should expect, as we think about it for the future?
Yeah, I think we had set a time at the IPO that we would comment on that relative to 130, and we're continuing to do that. We've seen, you know, no change in the environment relative to what we saw when we went public relative to the drivers of that, increased usage and cross-sell.
Yeah. We know our perspective is 130% is already best in class and, that's the number we're going to use moving forward.
All right. Great. Thank you both.
You're welcome.
Thank you. Next question comes from the line of Jack Andrews with Needham. Your line is now open.
Well, good afternoon and congratulations on the results. I wanted to see if you could drill down a bit more on just trends in terms of the new logos, specifically that you've been landing. Are you seeing, you know, different, perhaps higher ASPs? Are you still predominantly landing with infrastructure or perhaps more multi-product deals? Any more color on the new customer wins you're experiencing would be helpful. Thanks.
Yeah. The trends remains the same as what we've detailed during the IPO. You know, if you still have some of the data in the S-1 or in your roadshow, that all of that remains true, some of that you can extrapolate a little bit and you get a good idea of what is happening today. That's on the new logos and on the ASPs, again, the trends remain the same.
I think we had, you know, they're similar in, I think we said a couple hundred thousand for enterprise and 150, 160 for mid-market continues to grow with the customers and continue to have a meaningful contribution we talked about of customers landing with more than one logo, with more than one pillar. It's very much what we said on the IPO roadshow continuing.
Great. Thanks for taking my question.
Yeah. You're welcome.
Thank you. I'm showing no further questions at this time. I would now like to hand it over the call to Olivier Pomel, CEO, for any closing remarks.
Thank you. Well, in closing, I'd like to repeat that we are incredibly proud of what we've built at Datadog. We believe we're in the early stages of a substantial replatforming opportunity. We are very focused on executing on our growth strategies today, we believe we have the potential to be a substantially larger and profitable company in the long term. I would like to thank all Datadog customers for their trust and, of course, all the Datadog employees for their hard work and dedication. We have accomplished great things so far, I believe the best is yet to come. Thank you.
Thank you, everybody.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.