Q3 2020 Datadog Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the David on third quarter 2020 earnings calls.
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I'd now like to hand, the conference over to your host today Mr. Atria Lubitsch director of Investor Relations. Please go ahead Sir.
Thank you good afternoon, and thank you for joining us today to review.
Third quarter 2020 financial results, which we announced in our press release issued after the close today joining me on the call today for ligand male figure all open hernia CEO.
Okay.
Yes.
During this call may seem it's really gets where business that are forward looking.
I think as long and made pursuant to the Safe Harbor provision the private Securities Litigation Reform Act.
Greetings statements related to our future.
Including our outlook for the fourth quarter for the full year 2020 strategy to check a beneficial products partnerships and investments because we had hiring our ability to capitalize on our market opportunity and the impact of the COVID-19.
Customer usage.
Industry trends as well as our ability to benefit from these trends.
If people can you estimate expect intent will and.
And similar expressions are intended to identify forward looking statements or similar indications of future expectations. These things reflect our views only as of today no as of any subsequent date you.
These statements are subject to a variety of risks and uncertainties that could cause actual results could differ materially from expectations.
Certain material risks and other important factors that could cause actual results to differ please refer to <unk> quarterly report on form 10-Q for the quarterly period ended June 32020 out of the city on August 10 2020.
All information will be made available in our quarterly report on form 10-Q for the quarterly period ended September Thirtyth 2020, and other filings and reports that we may file from time to time with the FCC.
Our findings with yes. If you are available on the Investor Relations section of the 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 recent restructuring finally investor relations portion of our website for reconciliation of these measures for the most directly comparable GAAP financial measure with that let turn the call over to Bolivia.
Thank you Jay and thank you all for joining us today.
We are very pleased with Oklahoma in Q3, which showed continued high growth at scale and demonstrate efficiencies.
It was an exciting quarter, which would make you know I've been a secure part of getting married starting with the new products and features not announce a dash annual user conference.
We are building on our strong track record of innovation and extending our lead as the most complete clarity into an accepted to keep that.
With the majority of our employees continuing to work from home.
Truly impressed by your print TV.
Our engineers continue to build and sheep nobody solutions.
Well 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 it's important it's a big digital first and the job is more pronounced than ever.
Companies everywhere like continuing to migrate to the cloud and secondary digital operations, especially dotcom.
And that's a market opportunity present by multipurpose wondering if that migration has become clearer. During these times, so has our ability to execute against it.
Now onto 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 1107 customers with a aren't aren't but when you're talking about or more up from 727 last year.
These customers generates about 75% of our yard.
We have about 13100 customers up from about 9500 last year.
Which means adding about 1000 customers in the quarter.
<unk> Board and the 600 that in Q2.
We also continued to be capital efficient use free cash flow of $29 million.
And I think Buck waters or dollar based retention rate was up a 130% as customers increase their usage and attitude on your product.
Now to review Q3 in more detail.
Throughout the quarter, you said its goal of existing customers was robust which was a return to more normalized levels. After a slower you said, especially in Q2.
To be more specific the basic users close in Q3 was broadly in line with preclinical historical levels.
As a result, we feel comfortable that some of the rationalized sluggish more lots of customer that weve seen in Q2 was transitory as many of those customers have not returned to stayed equal multiple consecutive month.
<unk> was also broad based across customers a different side you see within different industries.
In addition to that you don't go generation continued to be robust whose customers at each of the lines because he levels and trying to remain consistent with historical rates for.
Taking all of this into account total <unk> aren't aren't exiting the quarter was a new record for the company they can be very successful quarter.
Next Oh got some strategy continues to resonate we see the market.
As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year.
Absolutely 20% of customers are using four or more products, which is up from only seven person that year ago.
Another quarter in which approximately 75% of new logos landed with two or more products. We continue to be pleased with the uptick on U.S. products, including synthetics, Ron <unk> and security.
I would point out that synthetics has not become commercially available for about a year and today. It is used by thousands of customers has reached eight figures are and continues to be in high school.
Adoption of synthetic has exceeded our expectations, which I would attribute to the keeping in mind that the strength of the product itself into Perabo platform.
As a reminder, which unless adoption the key value proposition of our platform, which we expect with any physical level product.
To conclude my review of the quarter, our ability to book that an extended <unk> had been a time of uncertainty demonstrates that a dozen important asking but he's a hole sizes and across all industries. Even in the most challenged sectors are turning that usual permission as most strategically important segment of their business.
Now onto our indeed.
We haven't broken and long track record of innovation, you know team lead up to that started in Q3 with the introduction of a new product major features a dash.
Those items might include de production that that out of the marketplace to enable technology partners to be other applications on top of our platform.
Did you know that visibility up could you Mr fighter to measure could level performance to an always on and low overhead solution.
Expanding synthetics to continuous integration deployment pipeline, which and they said earlier the development process.
The introduction of mobile user monitoring for both Android and iOS.
The general availability of our trucking to aggregate treaty I should probably read that something application errors.
The beta launch of incident management, they love it and security teams.
But I don't have compliance monitoring, which extends our security solutions to productivity Lucky fight on these configurations to complain straight math.
Lastly, the beta launch of recommended monitors a suite of Preconfigured trade and just to make the borders.
Additionally, we recently announced a strategic partnership with Microsoft currently public preview, we shouldn't I Gotta look we've been able to purchase implemented use directly from the other council and as your intended access teams when increased collaboration focus at each enterprise clients.
Today, We also announced an extension that will started you partnership with Google Cloud platform, which extends our GDP presence into new regions and enhance well go to market collaboration sales alignment between data W. GCP.
We believe this partnership along with our existing alliance with into the U.S. demonstrate their leadership and got environments has been at the collaborative nature of our relationship to the public thought vendors.
These are just a few of the new features and enhancements we should these quarters.
Rather than listing demo I was confident R&D was two main take away.
First I am very proud the continued productivity of our teams.
Together, we have not allowed to continue can work from home to southern Oklahoma.
We have also been able to successfully hired and on board at scale.
Good times.
Second we continued to deliver the most complete and clarity into an obsolete platform and yet we are only getting started.
Now onto a sales and marketing.
As you know.
Quarter, we hosted Dash annual user conference.
This was a first time hosting Eaton and well get show format. This enabled us to reach a broader audience of over 7000 attendees.
She is more than five times last year's count.
That was a great success, bringing together customers prospects and partners to sort of follow up data dog and many of the new products that east coast on here.
And I want to give a special thank you to our event you can read the team's excellent execution either quickly shifting environment.
Now lets discuss some of a weak this quarter.
First I'd highlight three notable upsells that demonstrate the broad move to digital channels that have been catalyzed by dependent eek into our ability to rapidly scale with all customers.
First the seven figure up sell it was a large Latin America ecommerce company that had been handling record level of orders he.
These company brought on titles and now has hundreds of use isn't that a dog clutching around the sheds you up yet he stuck.
Next a European on demand that is a company that has seen its business more than doubled from last year and has gone is that look usage more than four times there.
The company has standardized monitoring and data dog with a seven figure deal could shrink all seven of our custom products, including security to enhance real time threat detection.
And last a U.S. getting company that have seen material growth in their platform and now has a tendency to commit to that at all.
In addition to use in all three of our Peters, yeah using data to support yourself on its architecture. The Honeywell machine learning to detect in the money before they occur and they also report on key business metrics to finance that the Titan team.
We also had good success with customers some traditional industries that use pencil.
We had a six figure new local we come a 150 years old postal service in Europe.
Somebody there should aim to deliver more digital so digital services to its customers what undergoing a transition to a multi cloud and continue to rise and Barnett.
Using full product that is intended to monitor back to salt and cross both on cloud and on premise environments.
Next we had a sizable upsells to European financial services institution after joining as it gets them not just about a year ago. Just keeping you increase spend what is four times for the considered and good morning, everyone Teradata to exceed $1 billion. They are.
Finally, what didn't Upsells with a 100 year old Global shipping company, which we mentioned on last year's call for Q3.
And then just customer with spending mid six figures instead of talking to prospects are monitoring.
Today these customers they aren't has cooked into seven figured using a traditional monitoring EM log synthetic rubber and P.M. and security.
This is a great example of not only how companies. Okay gene are undergoing digital transformation, but also about powerful cross selling motion as we introduce new products to market.
Now moving onto our occupancy.
As we look ahead to the final quarter of 2020.
We continue to be excited about the mechanical sheet you head of it and we are confident in our ability to execute given continued strong performance potential times.
After some of the rationalize cloud usage between Q2, we've seen a clear every turn to them unless you just cool.
It is apparent that cut integration is not only resilient in the current environment, but maybe even go stronger longer term could.
Companies globally and across all industries are prioritizing get you to operations like never before.
And the cloud is a clear strategic winner so we never quit tragedy to innovation.
We continue to believe that a dog is a primary beneficiary of these trends that we remain very well positioned to win in the market.
In other words, what the near term macro environment remains uncertain and could cause bumps along the way we are very confident in the long term opportunity you know positioning.
And we believe that we can keep sustained strong growth both in the near term and over time.
With that I would like to turn the call of <unk>, Chief Financial Officer digital color David.
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As mentioned, we delivered strong third quarter top and bottom line results amid a difficult macro backdrop rep.
Revenue was $154.7 million up 61% year over year.
Use the trends were robust and return to more normalized growth after the pressure that we saw in Q2.
Meanwhile, platform traction continued to be strong.
New logo generation.
And.
And churn was in line with historical norms.
To provide some more context first.
On usage usage from the existing customers from his robots and our third quarter dollar based retention rate remained above 130%.
The 13th consecutive quarter.
After some pressure seen in Q2, driven by optimization efforts from larger customers that scale in the cloud.
Q3 was characterized by a decisive return to more normalized Roe 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.
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 called bid 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 boat usage growth of existing products as well as the cross selling to our newer solutions.
Next in the third quarter, 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 run we run rate quarter over quarter.
I note that many of them such as ROM NPM and security are still early and therefore small contributions to results in the quarter.
Next new logo results were solid with.
Customer addition, inline with pre called bid levels and strength across sales channels and regions.
And 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 ninetys.
Now turning to billings, which were $155.9 million up 39% year over year again, an exceptionally difficult compare.
We have said that we would provide a pro forma to more clearly a line billings growth with the economics and growth of the business.
And in Q3, there were a number of timing and duration differences that affected the gross billings in the quarter.
First.
On last year's Q3 call. We had disclosed that there was an invoice tiny 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 dollar impact to billing and deferred revenue.
From a few long term large customers, which moved from annual billing.
Yeah, I know were shorter duration upon their renewals.
Notably all of these customers continue to commit on an annual basis, you're simply breaking up their belt as we talked about on the last call into smaller increments.
If we pro forma for these timing effect.
Q3, 20, billings, what had been $166.9 million.
So now comparing the pro forma billings of 166.9 to the year ago apples to apples of 106.4.
Growth is 57% relatively in line with revenue growth.
Remaining performance obligations or RPL was $316 million up 50.
Per year.
Current RPR growth was similar to pro forma billings growth.
As a reminder, billings and RPL can fluctuate as we've just discussed versus revenue based on the timing of invoicing and signing of customer contracts well 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 financial.
Please.
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 years ago period.
Year over year improvement in gross margin was driven by more fashion efficient use of cloud infrastructure.
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 expenses in the quarter was 45.8 million or 30% of revenue.
Compared to 28% a year ago <unk>.
We've continued to invest significantly in R&D, including high growth ever engineering headcount, we've been able to attract talent.
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 and therefore plan to continue to make meaningful investments in R&D.
Sales and marketing expenses for the quarter was $49.7 million or 32% of revenue compared to 39% in the year ago period.
And what our 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 one 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 base ratio.
<unk> expenses were $12.1 million or 8% of revenue.
The lower than the 9% in the year ago quarter.
And operating income was 13.8 million or 9% operating margin compared to operating income of $726000 or 1% in the year ago period.
In addition to the improvement in gross margin the continued reduction in marketing events travel and entertainment and facilities overhead due to cold it contributed to operating margin.
Count growth was approximately in line with revenue growth in the quarter.
Non-GAAP net income for the quarter was $16 million or five cents 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 well.
While we have delivered five consecutive quarters of breakeven 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.
Thats equivalents restricted cash and marketable securities cash.
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 margin of 19%.
Cash collection cash collections have been very strong the medco bid a testament to the importance of our solution to our customers.
Now I would like to turn to our outlook for the fourth quarter and the full year 2020.
While we saw usage growth in Q3 that was consistent with pre packed pandemic historical levels. The pandemic is still ongoing and uncertainty remains.
Therefore, 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 fourth quarter, we expect revenue to be in the range of $160 million to $264 million, which represents year over year growth a 43% at the midpoint.
Non-GAAP operating income is expected to be in the range of three.
$3 million to $5 million and non-GAAP net income per share is expected to be in the one cents per share positive to two cents per share based on approximately 335 million weighted average diluted shares outstanding.
And for the full year 2020 revenue was expected to be in the range of 500 and E.
$590 million, which represent 62% year over year growth at the midpoint.
Non-GAAP operating income is expected to be in the range of $48.5 million to $50.5 million and non-GAAP net income per share is expected to be in the range of 17 cents 80 cents per share based on approximately 332 million weighted average diluted shares.
In 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 our convertible debt.
And we do not expect to be a federal tax payer again, but have a tax provision related to our international entity, which we estimate to be approximately $450000 in Q4.
To summarize we are pleased with the results for the quarter.
USIS growth was strong as companies are prioritizing cloud migration and digital transformation more than ever.
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.
Flow uncertainty related to the macro environment remains we feel very well positioned to capture what is a large and growing long term market opportunity.
And now with that we will open the call for questions operator, let's begin the <unk>.
Ladies and gentlemen, if youd 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, and thank you for taking the questions and congratulations on the Q3 results I'm, David maybe just to start with you.
I think the message I heard off that's that was a pretty insightics view from your guidance perspective is that the club rushing that you saw I'm certainly improved they became became less of the issue expansion trends look like they've gone back to to pre could levels. If you could just rich for us.
You know the the slower revenue growth sort of in the low sixtys versus.
The eightys, but at the same time I think you mentioned I think Ali mentioned a record you enter our quarter and if I look at kind of the RPL based bookings it seems like there's an acceleration there if you can sort of just.
You know help us understand how the those those three metrics sort of tied 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 and.
And we continue to have new sales in line. It's the combination of the two that contributed to the record air our growth and and so those are the main factors. The organic is always the majority of the growth in the quarter complemented by the new business.
Yes.
And then you know just to go pretty much on that she's or leave you you. If you compare to last year. So one thing to remember is we have a reticles has model so.
The the growth before we'd feel going in Q2 is going to be we listened to your to your compares for a bit.
Last year at the same time, we had an acceleration also which makes it for a tougher compare.
And you know he's going to decreasing our only show up in revenue you know when Dave when you actually encouraging D into usage. So it depends on when we added during the quarter and also with the figures that we'll see T. If they are willing to Q2, so basically be seasonal you breach the record they are.
We'd be at revenue as it went up record.
Okay understood that makes sense and then Olivier on the partnership.
Well, we started a follow on partnership with Google Cloud that you know today and then try to find another strategic partnership with Asher sort of intra quarter only ask your front can you sort of frame out what the opportunity is here to give us a sense of what actually represents that's part of the business today and with the ability of customers. So there's a sort of.
Drilling down on their out your credits I'm using data dog, how much of an opportunity is this in terms of sustaining revenue growth or potentially accelerating revenue growth with with this as your partnership just sort of frame up the opportunity for us that would be great.
Yep.
Only to she said we already have customers not kept provider is we've been working with better before you know so today or customer distribution for those who did the arrival of the couple of writers you know so we still have many more customers and more revenue volume on any progress for example that we do it I'm sure.
We what's interesting with this new partnership is that we get more tightly integrated into younger console headsets and get rid of freeze vendor to do that.
What's interesting very the user base for azure or tends to be a bit more homogeneous well used to be a bit more homogeneous, particularly to use mostly from Microsoft and so the ability to be more integrated with the Microsoft we really can reduce friction and hemp onboard new customers onto our platform. So we see that.
As a as a great you know.
Bushy teach you to get more customers more users from Azure as editor itself is growing and that's their customers' ever signed there.
Hi Tech stack.
I should say that to.
You know she's only went up to collect providers, who were working with we have wacky when all of the other platforms enough. Another past a partnership with DCP today, we have no. One we did do a U.S.
To be seen as you know the depletion of the Revolution. So your point also well customers can use their their eyes are credits and.
[music].
Just going to be some cost getting involved with the Microsoft teams were excited about the different go to market. There. One last thing to remember is that he's Stephen preview Oh, so the Oh, 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 know there appreciate it.
Our next question comes from Sterling Auty with JP Morgan Your line is now open.
Yeah. Thanks, Hi, guys Ali you kind of answered it with your last comment there, but I just want to make sure that we level set [noise] excuse me in terms of the timing of the ramp of the partnerships not only for as your but also what you announced with Google as well how should we think of the.
The timing of that flowing into revenue.
It's not going to be made yet right. So.
The Azure one he's he's just a preview right now huckleberry live yet or do you see partnership involves a number of a new technical things when you could happen, but also some new go to market machines were putting in place because there's not going to be getting back up but you know, we see that as being potentially many who can show.
Greetings and they need to long term.
That makes that makes perfect sense and 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 and usually the infrastructure, but the.
As we as we mentioned earlier in the call it 75% of the case easy Copa comes in with another product. So we see that really does it get way into the platform and then a way for us to to have customers use all three or four products India.
Got it thank you.
Our next question comes from Chris Merwin with Goldman Sachs. Your line is now open.
Great. Thanks, very much for taking my question I.
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 this pretty broad based I guess within the enterprise segment, specifically are you starting to see more standard standardization around the data Doug platform not just with infrastructure, obviously, but you know the log ATM and of course this much much broader suite of products.
That's you know Walker.
Yes, that's definitely what we see I mean, we see.
I think it's very useful customers that they.
They need they need to integrate various parts of the obs everybody together.
And then having all that on top of the simplest form you desired outcome. So we see we see more and more of that but it's not specific to the enterprise and see that happening over all segments at this point.
Great and maybe just a follow up you know in terms of usage stepping back up it's very encouraging to hear yeah. She talked to customers is there any push back on pricing I mean, I I would take not there given that you are saying you switched back up here, but just curious yeah, what would those conversations have been like and how.
How you're thinking about.
Pricing model from here or is there something that really works well for your customer base as it is and there was unlikely to be any evolution of that thanks.
Yeah look the.
One thing I should say and you can you you charged customers come billions of dollars.
They're going to ask questions about the price you know, we see a whole department in enterprise. He does that I feel just for that.
That being said of the day, what matters is how much better you can delever for that price and I think for that where we're doing a pretty good job.
I think the one thing everybody's grappling with is as more and more applications moving to cloud and their dedication to generate more and more data what's the best way to align nobody's that I'd be news from 72 reasons for security reasons or other reasons.
Well lined up the way it was relative to value was that the prices being paid.
And you know when you look at the product offering and what would be an area. That's why I read all of these new skews to really unbundle, what we're doing with the data. So I guess im asking really by what the lines due to <unk>. They have just for example, we announced more recently a tricky thing without limits, you know, which is a wet sand I'm extremely large amounts of data.
To an end, but on the retail into parts of it that actually makes sense to customers and then once weekend long term. We've done the same thing we lucked before we do something we went across extra product Ah you thought the way we look at summit in control. So they can learn would be if it was just like 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 trying to think about the growth algorithm for data dog 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 but.
I'd be curious to know how internally from a planning perspective, how you all think about this and and although I get you're not going to 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 and along with that how would you characterize the ability to hire in this environment yeah, yeah. Good.
Question. So on revenue, we said that over about 60% of our revenue growth comes from existing customers. So we start with the land and expand and and look at those cohorts and organic and I think we referred to looking.
Looking at pre pandemic and historical trends. So that's at the sort of Lynch pen, making the business you know relatively predictable even in uncertain times and then we look at the market size, the opportunity, which isn't tends not to be a limit.
And so what what it is it's the execution how many salespeople we get in how we can wrap them et cetera, and we then essentially have some experience and understanding ramp and understanding productivity and those are the algorithm. We use in looking you know at growth I think we feel when we said this over and over.
Again that Theres, a very big market and <unk> and we're very early on so 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 are a lot of successful territories, where we have to put more feet on the street. So we tend to build that from a bottom up.
Set with sales head count and that's resulted in you know sales and and and capacity as we've talked about in the 60 to 70, 70% growth and we see that and we see that opportunity and based on our success in bringing people in and getting that productive as already mentioned, we have been successful in covidien hiring and yeah. It.
And it hasn't really held us back weve seen a lot of good opportunity to continue to do that.
About the pandemic.
Yeah.
That means that you sort of just complement that's on the on the growth side and right now were sorely Newport's you need to see that the way we think about the way we grow team he's been directly related to the way we think about the costs are going to get next year.
We really think of it in terms of how fast we can grow them, but well optimizing for both short term and long term goals. So we're going to see that stuff is we can basically and we think this you know pushing me to justify it and that's true both on the R&D side and on the on the seven marketing side.
Which is why you didn't see a slowdown at all during the the Delta.
The hottest could beat in Q2, we mentioned on hiring and we were very convinced that people can tease there just to put that into a.
To frame that a little bit we're growing a lot faster than new cloud providers as a whole or we should be the plenty plenty of market for us to get.
Thank you for that maybe just a follow up and perhaps put a finer point on this you know correlation.
Correlation of sales head count growth with topline growth just as the portfolio continues to expand especially more recently with dash all the new product announcement announcement, how should we think about the evolution of the sales force to drive efficient cross selling and special specialization that might be.
Required in order to hit all the different.
Buyers and cover all of the product capabilities within the customer base are there do you envision having to make.
Any significant changes in the go to market.
You know, it's it's very possible that every every company that which is a large scale and grows.
At some point start specializing does sales force, we haven't had to do that at this point and I would say, we're optimistic that for the UBS everybody to keep costs of the of the stack a discourse with.
It would be very specific to that as well.
How do you want to keep or.
Yeah that.
I think the issue might come pretty quick so put it then you can take a read we're entering such as security with the buyers might be that would be different.
There again these products, our new enough and the customer bases for these products can be I would say, yeah, the customers who wishes product how much right now.
No no.
Just wondering of group targeted enough group that.
We don't need, especially like this after you get that this is 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.
Congrats from me as well only like what are you seeing in terms all competitors done I'll make so we have like some one wonder in your space and the broader space is kind of bring pricing down like crazy and it's getting a lot of free stuff.
Hi, So just trying to broaden the portfolio coming out when you call products, just sort of just a <unk>.
A word on what are you seeing in that space.
So really that just no change you know the space is very much the same as it's been for the past few years and we don't see anything different day to day with customers, we don't see anything different than the adoption cycle.
We have a lot of the body to around or any time.
[laughter], that's that's about it.
Okay.
Okay perfect. Thank you and then as you think about like.
Look at the lending motioning to expand more than lending motion with all your customers have you seen like a change in terms of what people are taking off the you mentioned at the beginning of the call you know a couple of extra stops around how many module to tetra, but did you see a change of nature in terms of people understand.
Okay, because if he better and kind of going from more than just infrastructure and just kind of thinking more about this whole thing holistically what are your observations. Thank you.
Yeah, that's definitely what customers expect to send it to get to do more with whatever you see them.
Then just infrastructure I would say.
The the field these is understanding what he's needs better there.
At the same time, when we land, which customers, we who the balancing act between having having to use more products on day, one but.
But also slowing down the the lending which is why the number should be pretty simple around 75% of the lands that are intended to a more product I think that corresponds to the right balance right now between lending fastened bandy with more than one product.
Again any cost is critical I think it's a very important part of our business and we'd be basic that's what I was on classics what products in particular.
Okay. Thank you congrats.
Our next question comes from Matt Hedberg with RBC capital markets. Your line is now open.
Oh, great guys. Thanks for taking my question.
Gosh It was really good to hear the the application marketplace going GA.
You know really seems to open up a nice halo effect for 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 from developers and ultimately you know that you're not alone in software vendors doing this well how do you think about monetizing this or is it more of just you know trying to build up more awareness for a dish.
No features that you don't deliver his first party features yourself.
Well, it's a it's a collection of all of these right I think we're still Super early ended at.
At this point, we're working with or no very first two partners to make sure that we would you find there would give up department do it its not something in a way that's helpful to them.
And we think if we make them successful unit that doesn't make a successful in the long run no. So as far as the monetization comes in.
We worry about them more than we were about to 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 or do you go in the future, but we have many many more quarters of the innovation to come on these two or to put it that even under these.
That's great and then maybe just one for David Your your explanation of Billings was Super helpful. You tried to trying to think about that on a normalized basis given all the nuances from Q3 of last year I guess Im curious, though when we look at deferred revenue this quarter and you know maybe there is an obvious answer to this but it looked like you know kind of sequentially flat.
Was there anything that that impact the deferred this quarter, you know not necessarily looking on a year over year basis, but just sequentially from.
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 we.
Had would have been in 100% in billing, which worked chunked up anywhere from semi annual to monthly billing. So the way to look at that and do the apples to apples would be at that same 11 million.
This reflects the economics and you'll see that deferred revenue in the mid fiftys like the other metrics that we talked about.
Hi, guys. So really just a relic of what happened last year, then repeating itself this year exactly at renewals.
It deal that renewed annually and grow and we said last time that we're trying to work with our clients keep the commitment. These are these are some very long term large customers, who are staying with us but to accommodate them in this environment and their requests to try.
Got Phil that's what it is.
Got it it makes a lot of sense. Thanks, guys. Thank.
Thank you.
Our next it's Peter just to comment on that we will see more of that literature. I mean, the beauty of our model is because of the efficiency of over to market. We don't actually carries customers a balanced approach we want to align with them on that and then so we're I'm pretty sure we'll see more of that as we 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 that the normalization comment you mentioned from Q2 to Q3 out a little more detail in terms of just overall customer behavior and I'm curious if you could also just drill down on the security initiative, what you're seeing there and what what metric.
ER standing out to you from from from that Oh that business unit. Thank you.
Yeah, Let me let me just go over some of the metrics around organic growth and then Ali to FERC to security. So what we said in Q2 was that we had some of the larger customers.
Rationalize so therefore, the slow down of organic was concentrated first in the larger customers and that about 10% of our customer base in EMR wasn't impacted industries, where there was some pressure and what we saw in Q3 was sort of return.
To normalcy in those meaning the larger customers continued to now after that optimization grow and pre pandemic ray.
And we also saw that the cobot impacted the impact with taking the medicine was taken and they also continued to be stable to slightly up so essentially it was across enterprise mid market and SMB and it was a cross also the large customer to the small custom.
Or that exhibited a similar type of organic growth, which is what we've seen over the long period in the company, but saw a different effect in Q2 Ali on security.
Yeah on security that they yeah, but it's too early to to have a lot to share their you know, but the the question is growing very nicely. We're.
We are getting great adoption stories from customers, but it's growing very quickly from a very small number so and it's still very early in its the inside cycle. So we fleshed out the offering a little bit that dash. You know was a compliance product Ah. There's a lot more we working on both of the existing base and all new Batesville security.
So it takes too long lead.
And you know just to to reset windows somebody would they be credit on the growth. We're we're very happy with the growth. We've seen in Q3, you know it really show the Oh.
Reversion to normal 44 of them off from what goes I mean, if you look at the the.
Most of the growth and they are any of them off Q3, Lucky you could afford to do them off into either Q3 or Q4, sorry, Q4 Q1 of their <unk> IDE. There. So I think it's not like we're very happy with what we've seen at the same time you know we are we feel very comfortable about because we don't even.
Given the macro backdrop, you know, we still not quite sure what can happen towards the end of Q4.
Thank you.
Yeah.
Our next question comes from Robert Magic with Raymond James Your line is now open.
Great. Thanks, that's part of the continual shift to a more multi style approach I'm curious if you could elaborate on the experience for results you've had as of late penetrating further into the law partner in color.
[noise] into their love monitoring you said.
That's correct yeah.
Yeah, I mean look.
Good luck product using a hyper growth right and it's a very exciting and also a challenging one for customers because it's one of the products will reach its the easiest to generate a lot of fairly use lives data and how to pay for it which is why a lot of the innovations. We've made initially on that product were around.
Giving customers more control to align to the.
What would they pay was decide you they get so we've done quite a bit of that as.
As we keep growing that product, we're getting into situations where customers on those standardizing on us for all of the Arabs ever be encouraging logs.
And we've been Vicki pooled.
Enterprise customers to as a lot of the enterprise features do we'd expect from a a platform to defend all of their extremely confidential data into.
So that's that's a lot to do what we've been doing more recently.
And then I know, we're just three months out a dash, but how was customer feedback been so far at some of the new announced products and features what what's resonated the most with customers.
It's interesting because it's a one off many new products and the.
The old quick quite a bit of attention I would say.
Got quite a few eyes on the did you you said it management product, which is the only thing that Oh, we got a lot of excitement for the profile of the product.
So there's a number of different things that customers are excited about you know some dash I think we've seen have you mean all of those cases, it's still early for those products. So we still have to really bring them to market well most of them with you have to talk to them and we have to be if you work with our customers to make sure that the these products could you deliver on their promises to know vision.
But that's the way we deal right do we build these.
We do with all customers, we put the products he their hands to make sure they see the value or.
We make sure they have the controls you know speaking the language they would they pay everybody gets a and they would go to those customers on the on the spot.
Great. Thanks.
Our next question comes from Brad Reback with Stifel. Your line is now open.
Great. Thanks, very much Holly 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.
Oh sure today, we we we don't think so there's no reason to think we're going to get from the weather we've had so far we.
We might still see some fluctuations mostly because.
The the back and forth between you know building more products and optimizing or use of infrastructure.
Engineers to do both.
And also because of our extension can you <unk> geographies and we did have some different things like that and that which might you know put your numbers up and down we do it.
But there's no there's no reason to believe that where we didn't two different Zip code there.
Let's not do that.
Great. Thanks very much.
Our next question comes from Jack Andrews with Needham. Your line is now open.
Great. Thanks, and congratulations on the results I was wondering if you could just perhaps frame for us what percentage of your deals today, our 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 he's partner source and Ah. So one of the partnerships with disgust, they're basically all upside for us.
And that's why we're investing in in a little bit like we think that there's a number of people who can get thanks to these partners and where we're investing in India. The partner organizations. You know you know we launched <unk> partner program are you ready to your it's starting to see the amount of success, but its still a small part of the business.
Okay. Thanks, and then.
If I could ask if there's quite 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 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, So where we started building a team called that right and we are as you know we have a number of things in process for and well fed rapid et cetera.
We.
We think it's going to be similar in many ways to the way, we sell to other customers and different and a few other ways.
[music].
In terms of the importance of the business.
We think it can be a big part of the reason that the meat you look at Oh, the kingpin easy Comparables faces like you seem to be thought of their business, but a couple of quarters or so.
Other vendors and security or visibility.
So we believe that there's really a real opportunity there well get into Tdrs all upside for us.
Got it Thats your perspective, and thanks for taking my questions.
Our next question comes from Keetac Kidron with Oppenheimer. Your line is now open.
Thanks Ali I'll start with you on the on the cloud partnerships with your starts to run mentioned before can.
Can you highlight what's.
Unique core it first of all is there anything exclusive in those relationships number one and number two in what way will it be either easy or difficult for some of your competitors to replicate it or do you.
The quality of the relationship with the death of the relationship with those condos.
Well I think that there's nothing really in most of these relationships right.
But in many ways in many situations like the way they are implemented and would actually anticipate that are any different.
And they also different depending on a couple of <unk> squeeze you know so for example, they're willing to great we're going to integrate with a either a blip therapy to their console and know what she's not because some of the other providers. So that's something that's interesting there in terms of what all those could or could not do I know, it's hard for me to comment I mean, I believe her that you.
Software and we'll see if we can do it all this might be able to do it I think what we've proven time and time again is that because of the overall structure of about product because of the the social customer base and I'll go to market, we end up having a product that he's a lot easier and has left us friction to adopt and ends up being.
Well wouldn't be adopted by our customers and most of this when Dan and I think that's what we that's what guide basically.
The way we run all those partnerships no. So what attracted us and yet your partnership with JBT to reduce friction there and that's that's why we decided to invest in that first.
That's great and then David a question for you kind of sorry going back to the duration on the large customers they live in Midland [noise].
Can you just confirm that those customers have expanded that youre roughly your dollar expenses right is it.
I'm just trying to make sure that this isn't just taking the billing splitting about half what he was taking a bigger be olin splitting goodbye.
Yeah, I know they've been customers that have grown substantially you know one of them is a customer that more than doubled over the last a year or so so this is this is merely.
That we have changed the billing terms, but they are all customers that are been growing with us over the last few years.
Got it and then lastly on your underlying assumption for some softness in usage and in your Fourq Guide.
Pretty much into the quarter or it doesn't sound like there has been any unusual usage softness in ducs month, and a half correct me if I'm wrong [laughter]. So aren't you just being a little bit too conservative here or I mean, what is it the scenario that truly Where's your was so little time left in the quarter.
See I think just overall, we tended to be conservative in our guidance to incorporate usage growth rates that are lower than what we have seen.
New logo accumulation, that's lower and I think we said last time that given that philosophy and the fact that you know in the pandemic and we can't predict what might happen around the world. We want it's continued to roll back conservativism forward. So it's really bad at the core of the guidance rather than anything that in particular.
We've seen that's different than what we said on the call with me.
Very good good luck guys Yep.
Yep.
Our next question comes from Bob I'm, Sorry, with William Blair. Your line is now open.
Hey, guys. Thanks for taking my question alleviate I guess I'll touch on a first a little bit about the technology architecture and this comes up a lot even we're talking investors, maybe a little help in understanding. So today when you look at sort of even the infrastructure monitoring space and the way did all works and the sampling model on wood logs you know this which data makes sense for itself.
But because this idea that with sampling and getting all the data and some of the vendors.
In other markets to saying, we can absorb all the data how do you think about that and would it be difficult for you to absorb all the data is that too much data Oh, we don't give how has the data that we.
We totally absorbed a lot of data absolutely [laughter]. There's no sampling sampling is something customers can choose to do if they if they don't want to retain everything in store everything.
But.
But he's absolutely we take all the data is actually one thing we announced recently, we though our.
Ah tracing they don't leave me products, Yeah actually allows us to be with you only want to actually say absolutely one of them for some of the data center infrastructure and available in the winter time, even in extremely high volume environments, and then you have to environments, where the 60 trucks have millions and millions of request for second.
Who we do that and it's not something the other vendors will do.
So when there's no simply required simply is just.
The way for customers to decide hey, the millions and millions of the bug logs. It might developers are sending I only saudi to keep some person of them to see what's going on as they returned that intellectual it all the time in 26.
We don't have to pay for that.
Oh, great I appreciate the clarity and my second is kind of a more longer term question, but it's about the machine learning you know so somebody other vendors a marketing heavily the focal point of machine learning and I love to understand sort of how you think about that these are the competition and sort of what is funny thing NPM customer, especially leverage the watchdog automatic anomaly detection services.
Just maybe move as last year 12 month ago slowing us down a little bit of the thought process there.
Yeah, So couple of ways to make it. So the first one is we actually think it's a.
Because of our model and we are fully staffed.
Machine learning is a strength of ours, because we we actually see all of the data, we can train or algorithms and all but one of the data we can pick and choose.
The the problems and the use cases that we won't control with machine learning.
First is the ones that we don't.
So it's actually a strategy for long term structural strands for for what we do.
That being said or we don't like to lead the promise the promise of an AI the sixes everything for you.
Because we think in general those communities undergoing lever.
Great and the demo, but then you know number of 60 [laughter], you'll bring to find them to do for short.
That's not what we want and that's who have you know pretty much all the products you see there today so.
So our approach is to basically under promise over deliver and we think we have long term social sensing data because of the way. We're hopeful that can do that I wouldn't but we see which is not something that's most of it. So could you just can do Uh huh.
No in terms of the adoption, we see we think personally so that you can go to our situation in the used cases, we filled with what Doc today, we see we see without being.
You play with customers in real situations and they rely on it and that's something that we keep hearing a phone.
Not a lot of things like color, congrats and thanks for the commentary billing.
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 on the billings I understand the you know the larger customers were drawing a pre pandemic levels and your cold weather impacted companies are are slightly up so it sounds like the environment in the usage the cloud usage significantly improved from Q2 to Q3.
Ah, but I'm wondering you know if you look at your billings on a sequential basis. After even after normalizing for that is only up 6 million sequentially. Despite that significant improvement in the environment. So 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 has to do with wind build that out but the what the the advice is to take the revenue for the quarter, and then and multiply that by 34, 35% or something and that the.
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 profit with billings are despite the fact, we don't ride is we're trying to clean away some of the noise.
When a bill went out this quarter versus that quarter, which isn't germane to the top line growth of the business. So.
I would say urging everyone back toward.
The air our approximation and the top line and we're just basically giving pro formas here, which all are sort of in the 50% and RPR et cetera, which is more in line with revenue growth.
Okay, and then I'm just wondering if just could you touch on the competitive landscape both for the the ATM space as well as log management. Thank you.
Oh, yes, we'd like to do on the computer space I mean, it's very much the same as it used to be it.
Fortunately or unfortunately, the boring.
To you, but the question on the company's basically.
Well have you seen any sort of.
Win rate improvement now that you're a cloudy. So just certainly getting better I'm. Just wondering if your win rates have improved versus competitors like Splunk inelastic analog management's belief space are dying to trace new relic because they've they get older.
Different pricing changes you know.
Most of all the business is not replacements right most of that business isn't that you.
So the.
We we do see some replacements from time to time, but that's a small minority of the Dia counseling.
The World is moving to the cloud most companies on used to cloud most companies on used to these environments and get some stability and you don't have anything yet index of environment, even if they haven't brand and they start using it for that.
I don't have the win rate improvement to report, but I'm also not unhappy about win rates actually don't even loop that often we'd rights because that's not what drives most of the Lincoln acquisition for us.
Yeah.
Okay. Thanks.
That concludes today's question and answer session I'd like to turn the call back to Olivier <unk> for closing remarks.
[noise]. Thank you [noise].
One second.
[noise] by at least one year old who was just barging and that's what you do when you get to working from home in any case in closing I'd like to.
Great to read that we are very pleased of performance in the third quarter.
I'm very pleased and proud of our execution and I went to cyclical we score just from productivity that they're showing during the quarter.
We recently extended window 10 years anniversary this summer.
I wouldn't say I'm incredibly incredibly proud of the culture, we created I think pretty proud of the work we have completion of the value we deliver to customers, but I'm, even more excited about our future, but just curious about you made about the magnitude of opportunity. So in other words.
And they said she should get on these calls that we're just getting started.
And it was a great competitive body. Thank you off what ending.
Thanks.
Ladies and gentlemen, this concludes today.
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