Q1 2022 Datadog Inc Earnings Call

May 5, 2022

Okay.

Welcome to the data to our first quarter 2022 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask question to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please also note this event is being recorded.

And I would now like to turn the conference over to you could Broderick, who does Investor Relations. Please go ahead.

Thank you Tom Good morning, everyone and thank you for joining us to review <unk> first quarter 2022 financial results, which we announced in our press release issued this morning, joining me on the call today are Olivier Flamel, <unk> co founder and CEO and David <unk> <unk>.

<unk> CFO .

During this call we will make forward looking statements, including statements related to our future financial performance our outlook for the second quarter and the fiscal year 2022, a gross margins and operating margins, including from the impact of R&D go to market Capex increased office activity in marketing our strategy, our product capabilities, our ability to capitalize on market opportunities.

Closing of acquisitions.

I 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 are subject to a variety of risks and uncertainties that could cause actual results to differ materially.

For a discussion of the material risks and other important factors that could affect our actual results. Please refer to our Form 10-K for the year ended December 31st 2021, additional information will be made available in our upcoming Form 10-Q for the quarter ended March 31, 2022, and other filings and reports that we may file with the SEC.

These filings are available on the Investor Relations section of our website along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors that aided us HQ dotcom.

With that I'd like to turn the call over to Olivier.

Thank you Kyle and thank you all for joining us this morning.

I'll start by saying that we are pleased with our execution in Q1, as we continued to drive high revenue growth along with strong profitability and strong cash generation.

To quickly summarize our Q1 financial performance.

Revenue was 363 million, an increase of 83% year over year and above the high end of our guidance range.

We had about 19800 customers up from about 15200 in the year ago quarter.

We ended the quarter with about 2250 customers, which are of 100000 donor or more up from 1406 year ago quarter.

He's got somebody's generic at about 85% or a R.

We are seeing strong efficiencies in our business model with free cash flow of the Huntington $13 million and free cash flow margin of 36%.

And although our base net retention rate continued to be over 130% as customers increase their usage and attitude when you have a product.

At a high level, we saw positive business trends in Q1.

You said school somebody just didn't get some orders were strong and consistent with historical trends as customers continued on their cloud migration and the digital transformation journey and it added up platform continued to expand and deliver more value.

Yeah.

It was very robust and churn remains low and in line with historical rates.

All these factors together led to another strong quarter, where they are at it.

It was in fact, the second best quarter, it'll be our added besides from Q4 2021.

Next our platform strategy continues to resonate in the market.

As of the end of Q1, 81% of customers were using two or more products up.

From 75 per cent forgivable.

75% of customers were using four or more products up from 25% a year ago.

And 12% of our customers were using six or more products up from 4% last year.

We saw strong growth across our products and our platform in Q1 for example.

Infrastructure monitoring continues to grow at a rapid clip and exceed three quarters of a billion dollars and they are in Q1.

Our APM suite and log management product had a strong quarter and are in hyper growth mode.

As a reminder, or a P. M suite includes core M. P. M synthetic series of monitoring and continue to acquire.

We're also very pleased with the growth of our user experience product, which our synthetics and real user monitoring more specifically.

These products together exceeded $200 million and they are in Q1.

In security, we're seeing very rapid growth, it's still early days and we're growing off a smaller base, but we continue to see strong adoption.

The customers getting security coverage is good.

Yeah.

Now, let's move on to correct, an R&D, where our teams delivered another strong quarter of innovation.

Just 12 months after we acquired screen, we're pleased to announce the general availability of application security monitoring last week.

But the applications and API or some of the most common sources or better yet.

He had companies typically have no ways actively detect attacks, but it could be less than four days or weeks.

Some other approaches to application security and to find vulnerabilities before could be just production.

But these solutions offer and slow down development cycle, and overwhelm teams with false positives with no easy way to prioritization.

Is that a dog application security monitoring product leverages, the full execution context of applications running in production. He said those teams to focus on that fact that actually matter and provides an immediately actionable remediation tasks.

Application security monitoring is the 14th products you'd be better off platform and.

This is the fourth product within a cloud security platform alongside that team got hooked on security and cloud security books for management.

That does not provide security insights across metrics traces and logs and we consider these altogether as a version one of our particularly basketball.

Remember that we are still in early stage, even though security effort and have much to do to further build out this product, but we are pleased with our progress so far and they use it we're getting from our customers.

Last month, we also announced that we extended a watchdog AI capabilities to include root cause analysis and logging nobody's addiction.

Good cause 96 automatically identifies causal relationships between different systems across infrastructure and services.

Of course, it's also true in servicing and.

Pinpoint their root cause.

We'll stop also automatically identifies the business impact of any given issue using data from a real user monitoring product.

This means not only identifying which web mobile applications are impacted but also the exact users that are affected.

You still cannot BTT often sold in minutes the problem that would otherwise take hours very by specialist and get some nice organizations.

I'm not going to be the detection on the other hand automatically understands and deadlines normal patterns in logs and proactively discoveries and nobody is such that new patterns meaningful changes nicotine pattern and other arrowhead layers.

By surfacing. This unusual luck patterns look antibody detection helps teams financing issues faster.

In addition to these watch other announcements are engineers really dozens of features and expanded productivity BTG in Q1.

To give a couple of examples.

And really some monitoring we announced the general availability of iOS crashed reports and are tracking.

As well as a number of improvements to help customers analyze and understand that you're just performance.

You've got security posture management, we added support for the Azure platform, enabling customers to understand their passports you across AWS and Azure in one place.

Yeah.

The good news provider, we now support all come under use languages, including C C plus plus Ross PHP and doesn't it.

And across that a dog numerous additional rules that are sourced. These integrations are enabling our customers to solve their problem into NN without leaving the platform.

Finally, this morning, we announced that we signed an agreement to acquire H D.

H D as in application security product, which provides highly accurate vulnerability detection at one time.

First interactive application security testing capabilities, we started we never Btt's exact filing that number isn't the code.

And unlike other solutions in this area.

The rate of false positives is very low.

And customers to focus in the very near our abilities that actually matter.

We believe I used to use capabilities and strong team would be an excellent part of our category platform and we're looking forward to integrating the beating the dead dog estimated acquisition closes when regulatory requirements Amit.

That's it for a product a bit this quarter.

To think all engineering and product teams for their continued hard work. There are so many new features coming out and I can only highlight a few of them in these calls.

Yeah.

Now moving on to sales and marketing.

Sales team continue to execute and have delivered a strong quarter.

Let's discuss some of our wins in Q1.

First we signed an eight figure upsell with a next Gen Fintech company, which was our largest ever deal on a our babies.

This customer is experiencing explosive growth in demand for its products.

And availability and performance of their system is critical to avoid loss of revenue.

He's got the most of it with US three years ago with just infrastructure monitoring.

When you say extension now includes six of our products.

Yes.

Next we had a high six figure upsell with a global shipping company.

This customer is expanding with that dog to have them move forward with their azure migration.

Now you shouldn't using five that at our products. They are not working with all new services team to implement best practices on a number of business initiatives involving treat that adobe adoption.

This customer expects to consolidate 10 be spread monitoring tools as they expand their use of bad at all.

Next we had a seven figure upsell with a U S Federal agency.

We were able to deepen our relationship with this customer after we achieve federate moderate to severe.

Before that a dog is customer outside of infrastructure applications networks database and customer experience monitoring.

If it goes blank spots and long times to resolution.

With this extension they are replacing both homegrown and commercial ability tools and enabling best pickups cultures with a with a visibility across the full stack in a single source of truth.

Next we signed a seven figure upsell with a leading payment company.

Earlier this year these customers open source logging tool went down eating deadline.

But they were able to regain visibility by getting that at a blood management up and running within a few hours that crash.

Not only did discuss them or we can log visibility very quickly. They were also able to use the digital platform to scrub personally identifiable information to meet security and compliance requirements.

And that is they had extended was bad dog they have been able to get the number of engineers maintain homegrown open source solution in house Reassign engineers to other products you've worked in the organization.

I guess when you will get somebody now uses 13 product someday to dog.

Next we had a six figure land with a major U S Hotel company.

This company lost half of its engineering team during Covid and you need to use it staff more efficiently.

At the same time it was embarking on an AWS migration, Mr. Getting tools are not providing the visibility if needed.

By consolidated isn't that a dog is customer expects a future proof as cloud strategy and move towards unified endpoint management, because they're on Prem and it would be great.

Violent.

And finally, we had a seven figure land with a major European car manufacturer.

He's got some it was frustrated with its existing monitoring tool, which left them with limited visibility into incidence, sometimes impacting millions of users globally.

As they were trialing that a dog they were able to solve within minutes issue as it used to take 10 days.

With that dog, he's got them or expect to consolidate multiple commercial and open source tools across AWS and non grain stocks.

That's it for this quarter's highlights.

I want to thank all go to market teams for their hard work in delivering a strong start to 2022 after a very busy end of year.

I also want to give a special shout out to our tech solutions and support teams for making our customers successful.

Getting them to expand with our platform.

Yeah.

Moving on we feel very good about the demand environment.

And as we look over the medium and long term.

Luke hasn't changed.

We remain confident that cloud migration and digital transformation are drivers of our long term opportunities and our multi year transit are still early in their life cycles.

We believe it is increasingly critical for companies to embark on this journey in order to move faster create competitive differentiation enables strategic change and serve their customers.

And we believe we can help customers manage the complexity that comes with Easter inflammation and that is that a dog unified platform is more than ever are critical to understand improve and secure download and stacks and businesses.

With that I will turn the call over to our CFO for a review of our financial performance and guidance David.

Thanks, Olivier and good morning to everyone.

Summarizing we delivered strong financial performance in Q1.

Revenue was $363 million up 83% year over year and up 11% quarter over quarter.

Usage growth with our existing customers was strong once again in this quarter.

And new logo growth was healthy, particularly given the typical slowness that we see in Q1.

Let's go into some more detail.

First growth of existing customers was strong in Q1, and our dollar based net retention remained above 130%.

For the 19th consecutive quarter.

Usage growth was strong across the data to our platform and in line with historical trends.

We also saw strong growth in each geographical region and growth was similar across geographies, including EMEA.

And keep early Q2, we began shutting off service to customers in Russia and Belarus.

We have about 200 customers in these two countries and their contributions to revenue is immaterial.

Our go to market teams delivered another strong quarter.

Total customers grew 30% year over year and customers with $100000 or more of a R. R grew 60% year over year.

In addition, we saw strong growth in million dollar customers.

We are pleased to be serving more customers and believe we are still early in the early stages of our opportunity in worldwide customer acquisition.

New late logo AOR was very robust, particularly given that our sales teams participate in sales kickoff and other planning processes at the beginning of Q1.

Remember that given our usage based revenue model new logo wins generally do not immediately transfer transfer into meaningful revenue.

Our platform strategy continues to resonate with customers with 81% of our customers now using two or more products.

35%, using four or more products and 12% using six or more products.

At the end of Q1.

Finally churn has remained low our dollar base gross retention rate continues to be in the mid to high nineties and was stable quarter to quarter and it's similar across our customer segments and major products.

Billings were $444 million $445 million up 103% year over year.

Billings duration in Q1 was similar to the year ago quarter and within the range we've seen historically.

We closed several large deals in Q1, including the largest deal by a R. R that Olivia just livia discussed earlier, which led to billings growth being higher than revenue growth in Q1.

Remaining performance obligations or our P O was $858 million up 85% year over year and.

And contract duration was similar to the year ago quarter.

Current RPI RP O growth was in the mid eighties year over year. We continue to believe revenue is a better indicator of our business trends than billings for RP O. As those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts.

Now, let's review some key income statement results.

Unless otherwise noted all metrics are non-GAAP .

We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release.

Gross profit in the quarter was $292 million, representing a gross margin of 80%.

This compares to a gross margin of 80% in the last quarter and 77% in the year ago quarter.

We continued to experience efficiencies and cloud costs were reflected in our cost of goods sold this quarter.

In the mid to long term, we continue to expect gross margin to be in the high Seventy's range.

Operating income was $84 million or a 23% operating margin.

Paired to operating income of $20 million or 10% margin in the year ago quarter.

We are experiencing significant business efficiencies on strong revenue growth and in Q1, we had not yet return fully to in person meetings events.

Or fully back in the office.

Turning to the balance sheet and cash flow statements. We ended the quarter with $1.7 billion in cash cash equivalents restricted cash and marketable securities.

Cash flow from operations was $147 million in the quarter.

After taking into consideration capital expenditures and capitalized software.

Free cash flow was $130 million with a free cash flow margin of 36%.

Now for our outlook for the second quarter and the fiscal year 2022.

We remain optimistic about our long term growth opportunities, we continue to see cloud migration and digital transformation at as trends that are still in relatively early stages and.

And we are investing aggressively and are successfully executing against these long term opportunities.

With the usual conservativism applied our outlook is as follows.

For the second quarter, we expect revenue to be in the range of $376 million to $380 million, which represents 62% growth year over year at the midpoint.

non-GAAP operating income is expected to be in the range of $49 million to $53 million and non-GAAP net income per share is.

It is expected to be in the range of 13 to 15 cents per share on an approximately 347 million weighted average diluted shares outstanding.

For the full fiscal year 2022, we expect revenue in the to be in the range of $1.6 billion to $1.62 billion, which represents 56% year over year growth at the midpoint.

non-GAAP operating income is expected to be in the range of $240 million to $260 million and non-GAAP net income per share is expected to be in the range of 70 to 77 per share.

On an approximate 349 million weighted average diluted shares.

Now some notes on our guidance.

First when providing guidance as usual, we use more conservative assumptions than historical performance.

Second our strategic focus remains to invest aggressively in.

In R&D and go to market to optimize for long term growth.

In Q1, we are pleased to have had our best ever quarter of hiring and we plan to continue hiring aggressively throughout 2022.

Our North America, and EMEA applaud employees.

Return to the office at the end of Q1, and our APAC employees are returning to office during Q2.

In addition trade shows and other events are picking up in Q2.

As an as an as an employee drop adds employee travel.

In the past, we have frame the benefit of stopping in person TNA and marketing events during COVID-19.

Three to 400 basis points of margin impact.

We expect a return to office and increased in person marketing events as well as our head count growth to more fully impact margins in Q2 relative to Q1.

And even as we embark on these investments and our return from Covid, we remain solidly profitable as indicated by our guidance.

Next regarding income tax expenses in Q2, we will have a provision of about $3 million related to the screen acquisition as well as our typical provision mainly related to our international entities.

Finally, as we discussed last quarter, we are catching up on office build outs in 2022, and expect Capex as a percent of sales to roughly double compared to 2021.

In conclusion, we are very pleased with our results in Q1, we continue to attract more customers to the <unk> platform. We are broadening our platform's capabilities, an observer ability and we launched application security monitoring in Q1.

We are working very hard to execute against our opportunities and I want to conclude by thanking data dogs worldwide worldwide for their efforts.

With that we'll open the call for questions operator, let's begin the Q&A.

Okay.

We will now begin the question and answer session.

I ask a question you May press Star then one on a touchtone phone.

If youre using a speakerphone please pick up your handset before pressing any keys to.

Withdraw your question. Please press Star then two.

Okay.

We will pause momentarily to assemble the roster.

And the first question comes from Raimo <unk> with Barclays. Please go ahead.

Thank you and congrats from me as well an amazing first quarter.

I wanted to ask a question that I get a lot from investors all of you.

If you think about your <unk>.

Hurts around security.

How do you see that playing out in the long run it against like the pure play security players is that complementary you're kind of moving to same tariff as it is.

Core petition how do we how should we think about that and then second thing is on the ongoing investments into R&D et cetera can you talk a little bit about the benefit youre getting from being just a pure cloud provider and hence your speed of innovation potentially could just move quicker than other players that have to do it.

We're working on premise and on the cloud environment. Thank you very much and congrats.

So unsecure any sleep.

So so first of all the the way we see ourselves in the ecosystem as well.

We don't think we ever wanted to field the other securities.

When he is very wide, there's many different categories and subcategories in there.

Where we want to play a major role E.

In securing the production.

Applications on production environment.

And all of the lifecycle of that related to that in terms of the development operations.

And.

Iterative changes to these environments. So.

So that's where we are studying a we expect to compete with others. There we come from a different place and that will come from having all of the games are very data already being deployed into earn on those systems and having as active users.

The integrated T of the development and operations teams in these companies and we think that.

That's what gives us from there to the other point you brought up around.

The dispute of tuition, we definitely benefited a lot from being cloud native.

And from being a SaaS only we actually get a lot of information about what customers do we go product.

What do you use it and we see immediately was being used or not and with working on Oh. So that helps us to read very fast. We also benefit from having a lot of users that I mentioned that in the first part of my answer, but we're being news every single day by every single developer in those person.

That's a lot more than what you see on the typical security products.

And so that gives you a lot more information, but what you can do and what you can do better but also gives you a lot more leverage when it comes to actually solve an issue at the city level and that's part of the value prop. We are we give to our customers.

Perfect. Thank you congrats.

Thank you.

And the next question comes from cost Rangan with Goldman Sachs. Please go ahead.

Well. Thank you so much and congratulations on a phenomenal quarter Olivia I'm curious to get your take on the Hyperscale or since you won't be broadening product suite. The data dog is undertaking how are these conversations changing with the Hyperscale and one for you David.

The economic environment the outlook for GDP growth continues to be a little bit wobbly with higher rates, how should we think about the defensibility of the theater about consumption business. Thank you so much congrats again.

Thanks, So on the question about Hyperscale.

So we work hand in hand, with upper said as more and more you know so we we cover a lot more of the I would say the management surface.

For customers, who also their customers, we helped their customers be more successful and move to the cloud faster.

And so as such we have junior right. When you put a hyperscale is and that's why these partnerships in the works so well with them.

We keep improving on those partnerships in developing than I think we've been all this quarter some improvements to Azure partnership for example, where.

Well, we know that part of the I would say the Golden pass presented by Mike by Azure for migrating to the cloud.

And we're seeing some some great customers in boarding thanks, a lot Dave.

They didn't want to take the other question sure. Thank.

Yes, Hello, we we believe that digital and cloud projects are still very high priority and and or not.

Being de prioritize we havent seen that we think we're still early on.

So with the data we have so far we think there will be continued strong investment.

There is always some volatility across our customer base, our customer base is very well diversified across industries and we benefited from that over time, so, whereas we're not macro forecasters and there may well be some sensitivity. We believe the long term trends in the digital migration.

And cloud.

We will still be very strong throughout that cycle.

Super Thank you so much.

The next question comes from Fatima <unk> with Citi. Please go ahead.

Good morning, Thank you for taking my questions Oh, Hey, one quick one for you just as it relates to the deeper strict T chek and technical penetration within the SEC Ops Arena I mean, it sounds like your thesis is very much because you have the critical.

Massive data and the data gravity as it relates to your observed with other use cases, you're able to parlay that in a more meaningful way for security and I'm I'm wondering.

Why not partner with some of your peers in that space versus just kind of go at it alone and then a quick follow up pretty good trends.

Yeah. So that's a that's a good questions.

There's two things, we bring to the table and security.

One is we have as you mentioned in the background and were in the path of data for pretty much everything that relates to a customer's infrastructure applications and their own users you know, which is obviously fantastic.

The other thing we're bringing we have were being used all day by everyone in in development in <unk>.

In operations and that's not typically something that the other 60 products or typical 60 products are built for it. So it's actually hard each wanted to partner, it's hard to find appropriate deal for those people. Most security products are purely deal for security teams.

So that's why you know we've been building a lot of ethanol and of course, we still partner with a lot of the other players in the industry, but we we embarked on this journey because we think we have a completely different spot. We think all that's been taken the problem the India and is.

Oh for personal customers a lot more leverage in that actual chance at solving the 60 issues not just throw in Tulsa and resources at it.

To me, it's going to come from.

I appreciate that and David just with respect to that Delta between our.

<unk> reported revenue growth and billings, it's probably one of the bigger delta as we've seen in a in relation to recent quarters.

And given your commentary around our invoicing duration that having stayed pretty stable I believe that would be that would imply seven to eight months I'm still curious as to why you would see such a meaningful acceleration in billings, you know head and shoulders above revenue growth. If you could just unpack that for us a little bit and when do you expect that.

Divergent.

And that's it for me thank you.

And I have to as I mentioned, there as they were bought there is variability in billing and RP O.

Versus revenue based on when our bills go out.

The we still have for the most part in our larger contracts are pretty much annual billing so.

The sending out of a large annual bill might move the duration, a little bit, but not a lot and the strong performance that billing was very strong and indicative of the business. It was complemented by the fact that in this quarter, we set out to be.

Well for some large contracts upfront annual billing and the timing of that causes the variability over the average in over the course of the year that balances out with the timing of the billing and we believe that our billing converges with revenue growth, we remind everybody that.

Revenue growth and implied <unk> growth is a better metric of the progress of the business.

Thanks.

The next question comes from Sanjiv Singh with Morgan Stanley . Please go ahead.

Yeah. Thank you for taking the question Olivier in your script you mentioned.

Fed ramp is what sort of brought on.

I have another topic that we're sort of hearing that from your partners, which is penetration observed ability in some of the Underpenetrated industries from your perspective, if you look at the different.

Industries that data Dr purchase participates in which is the industry or do you see.

Become.

Greater adopters.

Separately versus some of the kind of traditional technology e-commerce verticals.

Well look we've seen pretty much every single industry shows show some signs of moving to the cloud already I think you know the order in which these industries move.

It depends on their their appetite for being at the leading edge of technology changes and their exposure to.

Interacting with their users online do you know so what we see we saw first abuse Lee was the so finance for example, which is ahead.

Ahead in technology in General Oh, you know things like E Commerce online media that sort of thing, but today, we actually see two.

The full range of categories and industries coming to the cloud.

For example, you know we mentioned an auto manufacturer you know Colin mentioned in hotel chain, we mentioned on the previous calls we mentioned no pumping supplies companies.

Pretty much every single part of the of the economies coming there.

Youre right in your comment that some of those I'll, let us it again and others.

And so there's a there's less penetration I would say the more traditional let's just focus that less tech focused parts of the of the industry, but we're confident the neighborhood is coming to the body. It's also the case in regulated industries government in particular.

We're.

Not only the moves a little bit more conservative in terms of technology transitions.

But also these are part of the of the of the industry Awesome more limited in what they can purchase which is what was very important for us.

To get.

Federal 35, which is also why we keep investing.

In more fed ramp and more similar.

Vacation. So we can you can go into more of these particular reason more geography.

It makes total sense and then just one follow up on one of the wins that you guys called out I think with a European manufacturer.

Who.

I think it was sort of engineering talent sort of constrained and then moved up from there.

Y solution and so we take that as a topic more broadly.

Because he would think that the demand for talent demand if anything it's probably going to get worse and so in terms of the DIY DIY absorbability market converting more to more commercial out of the box value like like a tenant I'll provide how much of an opportunity do you think that could be for the business.

Well I think.

Part of ore.

So it wasn't part of opportunity and that's really what makes the value prop even more attractive in the future as you correctly pointed out.

There's not going to be as many software engineers in general as the market will need.

You know theres not this year. It is north Korea, I think it's going to be even less the case you know two years three years five years 10 years from now.

So what our customers will need is a way for their existing staff to be more productive in a way to direct them to what is actually going to be differentiating for them as opposed to new building in differentiating from infrastructure.

So we clearly play.

The trend that benefits us in yen.

The other thing to bring up is that software in general he's definitely discretionary in nature and that's also the case for US we help our customers make more with what they have we help them automate we hope to make people more productive we have been using our infrastructure better we have them.

She projects that help them interact with their own customers better.

So that's a that's where we play.

Okay. Thank you very much.

Yeah.

The next question comes from Brent Thill with Jefferies. Please go ahead.

Hey, David in your guidance.

You mentioned youre, not really see any macro issues, but are you assuming a similar close rate on your pipeline are you taking a more conservative close as it relates to the back half of all of what you're guiding to for the year.

Like always we've talked about and like all of our guidance, we tend to take more conservative close rates I E new logos and more conservative usage than we've experienced historically, so that principle continues with our with our guidance.

And it's consistent with what we've done in the past.

Okay, great and Olivia that that $10 million up so can you just speak to the pipeline of these larger transactions and what you're seeing as your as your customers expand.

But we see many more customers in that in that range right. So our customers.

Customers are writing this adoption curve with us.

Where we saw the bigger and bigger problem for them to use more and more of our products. They move more and more of the infrastructure in the cloud to start with and they themselves are scaling.

So these are all multi players.

And increasing.

Our footprint with them. So we have a healthy pipeline of those we.

I mentioned, we had to take a few you know in every one of those calls but.

But that's different with another in isolated case and and that customer is actually in the tens of millions.

And it's a oh.

Thank you.

And again, we don't expect that to be an isolated case and I think we mentioned you know the strong continued growth of 100000, plus and mentioned, even though we don't give out the million dollar customers every quarter mentioned continued strong growth in millions and that's indicative that we have many customers who are graduating from smaller lands to the 100.

And the 500000 class in the 1 million class and above.

As our model has been all along.

Thank you.

Okay.

Yeah.

Okay.

The next question comes from.

Comes from Camille Meade meals Karthik with William Blair. Please go ahead.

Thank you and good morning, everyone and congrats.

Congrats on a great quarter.

The question on pricing as your largest customer scale and standardize on data dog can you talk about how conversations have changed around pricing and are there any particular modules, where youre still seeing relatively higher levels of pushback on cost.

The rapid growth in data recently and pricing changes are made by some of your competitors in the last two years.

Yes, so the look anytime you somebody's paying tens of millions of hours of your.

There's going to be a conviction about price.

Because this is a line item that would that shows up.

Typically the wood are what's going to be the most negotiated as part of that is the biggest part of the deal which for some customers infrastructure for some others in the P. M for many customers it's logs because that's the one where there I can grow.

In a way that's somewhat the correlated from the size of the accompanying infrastructure or the value of their coding applications.

And our approach there really is to give as much flexibility as possible to customers. So they can align with that there was just like you did get you know when we we shipped in the past many many new features around that to give them more tiers for storing data.

More ways of doing just in time sampling archiving bring back data for my for my guys.

Give them more controls and more levers and we expect to do more of that in the future, but you know it's a it's a very healthy conversation and we do expect that.

You know when customers that fully at scale with us.

The where we get more and more of their wallet share from them, but at the same time the.

The revenue we get one go one cooling earlier was the Devil gives they send us that's natural.

Okay.

That is helpful and if I could just follow up on free cash flow generation has been very strong 36% margin quarter, and I think 28% from last year.

How are you thinking about managing free cash flow margin going forward is a strength just a function of better than expected growth in maybe a tight labor market or do you see high 20, 30% is a sustainable level.

Well I think we've experienced long term free cash flow to be slightly higher than EBIT. So correlate it with our with our EBIT. We have it is indicative of the growth of the business and the efficiency of the business as we mentioned we will be returning we believe in Q2 to more investments.

Whether it be marketing events in the office et cetera, So what where we expect it to continue to evidence the efficiency in the business. It would be as it has been correlated to be slightly higher than the EBIT performance.

Okay. That's helpful. Thanks again.

Welcome.

Yeah.

The next question comes from Matt Hedberg with RBC capital markets. Please go ahead.

Great. Thanks, guys for the questions Ali I wanted to go back to security, you've obviously had a lot of success, there and youre, adding H dip this quarter, how do you see your salesforce evolving over time, and maybe even though the thought of a security overlay team at some point.

Yeah. So we're open to anything there we haven't made any drastic changes to that we still focus right now on getting in front of our existing customers with these products and getting them to adopt the product and writing the metro really cover those products with us to make to make sure. They are as good as applicable as possible before we accelerate on the go to market for them.

And we're very happy with where we are exactly where we want it to be actually we will get them.

Lots of paying customers with a with skin in the game in a lot of eyes into product and a good amount of velocity in terms of development.

We are expecting to test a few things on the go to market side, you know in the I would say in the coming few quarters and then we'll see what he sees us where.

We see some successes to be already without Nevada team, we think it might actually turning a few different things might accelerate things a little bit, but it's too early to tell.

Got it that's Super helpful. And then you guys have always had a very services light model. So so easy to use.

As you continue to scale up and the GTK are there additional steps you can do to maybe even enabled more synergies within GSI community.

Yeah. So there's two things we're doing so one is we're investing in our partnerships with our with our size and with the channel in general so.

We're doing more there and we also saw a product tagging some service offerings that we actually called one out in the in one that would be are there. The customers are really sitting there in the call.

We have a small survey system today that that has a few packaged offerings that mostly revolve around accelerating adoption of their dog and making sure. We we help customers that need that help transform.

Transform their businesses around the where things are running was that a dog. So we're investing on both sides I mean, obviously.

Whatever we package ourselves with our own team.

We'll then be scaled through Uh huh.

Body partners <unk> and others.

Got it congrats on the strong Q1.

Thank you.

Yeah.

The next question comes from Michael <unk> with Keybanc. Please go ahead.

Hey, guys great quarter.

The.

For all of Us first.

You're doing more application security and you've announced some things.

Observe ability in and develop a pipeline can you talk about how far you would be going in terms of a shift left towards more of the development side of things, including possibly around a static code or source code and as I said does that shift left towards developers.

Yeah. So that's a great question that we definitely are doing more and more.

On the ships left in developer side.

Obviously, we've talked about security quite a beat and a big part of that is application security, which is a bit of a known category.

I think it's a little different in how we approach it in a little bit different in the cloud.

But the category has been there before we're also investing in new categories. And then you mentioned the CIC do you observe a beauty.

That's a brand new category that wasn't there before.

And we actually have a product in the market today that we started charging for and we don't have any numbers to share today, but we are actually very very pleased with the way. This product is being received by customers.

So overall, we think will bring in the right direction there.

It'll be anymore will want to do I mean, you brought up new H D.

Which also brings a bit more around.

Because that's the source code and the and so nobody T management things like that.

There's more we'll want to do there, but we don't have anything to announce today.

Okay and can I, just ask I think an expansion or just take two.

To Matt's question in terms of facilitating your.

Broader product line anything in the customer success area that has to be changed or.

Post production engineering, our professional services.

The more broader and more complex offering.

And so it was killing those teams quite a bit and we're constantly also refining the the widows teams of segmented. So they can they can target specific types of customers in some case in some situations.

But many situations with certain types of product.

So we are that's part of scaling the teams on the customer success on the Tech solutions on the support side. So.

So we're investing quite heavily there I gave those seem to shut up because it really doesn't.

They've been doing a fantastic job at helping our customers get them adopt a very broad product portfolio today.

And I think that's because when you're more successes to come back.

Thanks Ali Thanks, David.

Okay.

The next question comes from Brad Reback with Stifel. Please go ahead.

Great. Thanks, very much Ali is the sales force and the marketing team are returned a face to face events any reason to think that.

We shouldn't see some level of acceleration and upsells.

<unk> sells to the to the larger part of the installed base as well as the potential to land, even bigger with new deals. Thanks.

It's possible I mean look we definitely have returned to investment in some some things that we were not doing for the past two years that were doing again and in person events in particular.

I would say, it's too early to tell whether it's a.

It's a it gives us an edge again on that side or whether it's the it just it just upping the table Stakes will everyone saw that but definitely where we're investing was mixed positions of returns on that.

That's great thanks very much.

The next question comes from Gray Powell with BTG. Please go ahead.

Great. Thanks for taking the question and congratulations on the on the strong results.

So yeah, I mean, you've clearly been seeing very good traction moving into larger enterprise and fortune 500 accounts.

How does the competitive environment changed there as you move up market and then do you end up begging off against a different set of vendors or just you know how should we think of that impacting sales cycles.

So I'm, sorry, I'm going to give you the most boring answer ever.

But we see no change.

The situations there is very much the same as it was last quarter and even last year.

We still focus largely on net new and cut environment.

We we learn fast and small mostly and we end up growing quite a lot who those customers are the largest enterprises.

Sometimes but not all the time.

We're going to do a big displacement of usually a suite of tools that makes these homegrown and some of the other players in Lago APM or infrastructure or all of the above.

And these are these tend to be the lateral lengths because the desktop is out loud rather they replace a bunch of existing things.

But do you see the are still not the majority of the.

I'll go to marketing customer acquisition, I think it shows that the product wins.

Uh huh.

All sorts of situations.

But the focus is still on net new and tough environment.

Got it that's helpful. And then just maybe just a quick follow up on the security side. That's okay is there anything more you can just stay on the roadmap in the security space or just like talk about the the most natural capabilities that could be included as you start to move into a diversion to what the security platform and I guess more specifically.

Be a tough one but.

Do you see a scenario, where you could more directly address the endpoint security use case.

Well so endpoint I think is the it's not what we're having to mine today right. I mean, just there's plenty are we want to do at the intersection of Dev ops, a production environment applications.

It's a gigantic problem space and one that's not well handled today. So we definitely are of that.

Thanks for that.

In terms of the of what we can we can do in the roadmap interestingly. There are many things we're doing today. They are not branded security lineup of other products that actually play a big role in security.

And so one of the questions we haven't done lease hold.

Do we actually draw the lines around the security suite versus the rest of the platform.

In a way that doesn't confuse everyone. I mean for example, we mentioned in the law school.

Or sensitive data scanner products.

Actually it's useful figure to use cases.

But he is currently part of all log management product.

Have some similar situation with our network monitoring product, they're also listening to data and use it for security use cases, but he's not part of our security offering.

There are some some blending and packaging and product suite questions that we'd have to instead of I'll say over there.

Understood very helpful. Thank you.

Yeah.

The next question comes from Steve Koenig with F. N B C. Nikko. Please go ahead.

Hey, Thank you for getting me on the call gentlemen, and congrats on the quarter, it's a pleasure to be covering you guys.

I wanted to.

Ask you about pricing.

It's kind of a little different angle and thanks for your color on.

How you help customers manage their cost as they scale out with data dog. That's that's very helpful.

Think about it from a different angle.

Q1 2022 Datadog Inc Earnings Call

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