Q2 2022 Datadog Inc Earnings Call

Good morning, and walk them through the Q2 2022 data dog earnings call. My name is Cheryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you ever question. Please press zero one.

On your Touchtone phone I will now turn the call over to Yucca Broderick you may begin.

Thank you Michele good morning, and thank you for joining us today and he did at our second quarter 2020 financial results, which we announced in our press release issued this morning.

With me on the call today are Larry.

Oh, <unk> co founder and CEO and David <unk>.

<unk> CFO .

During the call we will make forward looking statements, including statements related to our future financial performance our outlook for the third quarter and fiscal year 2022, a gross margins and operating margins our strategy, our product capability and our ability to capitalize on market opportunities.

Words anticipate believe continue estimate expect intend will and similar expressions are intended to identify forward looking statements or similar indications of future expectations. These statements reflect our views only as of today and 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-Q for the quarter ended March 31, 2022, additional information will be made available in our upcoming Form 10-Q for the quarter ended June 32022, and other filings with the SEC. This information is also available on the Investor Relations section of our.

Web site, 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 you did on <unk> Dot com.

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

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

We are pleased to report strong results in Q2, as we executed well and we maybe don't get to do a leadership.

Let me start off with a review of our Q2 financial performance.

In Q2.

The new with $406 million, an increase of 74% year over year and above the high end of our guidance range.

We had about 21200 customers up from about 16400, and the yoga quarter.

We ended the quarter with about 2420 customers.

More of a 100000, a little bit more.

From 1570 in the year ago quarter.

These customers generated about 85%, although a R.

We generated free cash flow of $60 million.

Free cash flow margin of 15%.

And our dollar based net retention rate continued to be over 130%.

<unk> increased their usage and other people more products.

Now moving onto this quarter's business drivers.

In Q2, while we overall saw strong customer growth dynamics, we have seen some viability and growth of our customers.

We saw a larger spending customers continue to grow but at a rate that was slower than historical levels.

Its effect was more pronounced in certain industries, particularly in consumer discretionary which includes e-commerce and food delivery customers.

And more specifically our products with a strong volume based component such as wealth management and APM suite.

Note that we did not see these with our F&B and lower spending customers continued growing with us as they have in the past.

While these nausea growth data points and the current macroclimate are leading us to be prudent with our short term outlook.

We remain very bullish about the opportunity and confident in our execution as we continue to see positive trends underpinning our business.

First the number of hosts who containers being monitored by our customers is growing steadily.

Which points to continued momentum of <unk> migration and digital transformation projects.

Second we had strong execution on the new logo side at <unk> with Robert as we added a record 1400 net new customers in the quarter, including the impact of turning off about 200 customers in Russia and Belarus in Q2.

And we closed a number of sizable six to seven figure new logo deal during the quarter with diverse customers, including a major conglomerates metal ore mining company for U S government agency with that business in the Hyperscale.

Third our pipeline of large new logos and new product cross sales going into the second half of the year is strong.

And fourth churn remains low with gross revenue retention steady in the mid to high <unk> 19.

Moving onto our products.

We're pleased with the continued adoption and expansion of our products to our customers.

The three pillars of observer, BTT, which are infrastructure APM and log management all grew strongly in Q2.

Our APM suite and log management now exceed three quarters of a billion dollars of there or.

As a reminder, we define APM suite is including core APM synthetics run and continue to provide us.

In addition to that its products are monitoring continue to grow strongly on par with recent quarters.

We're also pleased with the adoption of our newer products.

Our newer products, including infrastructure monitoring APM seats, and log management continued to grow our more than 100% year over year.

And we've seen a strong start with our CIBC beauty products, which were not at that last year and started charging for just a few months ago.

Cib's ability already has more than 1000 paying customers, including some product specific new logos.

Our platform strategy also continues to resonate in the market.

As at the end of Q2, 79% of customers were using two or more products up from 75% a year ago.

37% of customers are using four or more products up from 28% a year ago.

14% of our customers were using six or more products up from 6% a year ago.

Yeah.

Now, let's move on to product and R&D, where our team delivered another strong quarter of innovation.

In June Gartner published a 2022 magic quadrant for application equipment monitoring and observe ability.

Doug has once again been named a leader in.

We will have improved from last year on a scores and ranking in all dimensions.

We attribute this to first to our unified platform experience covering Dev App security and audit pursuant everyone. Please.

But we also see that the recognition of the continued evolution of watchdog or AI engine, which takes away the complexity of monitoring cloud native architectures and provide proactive alerts Gary troubleshooting and fully automated with good medicine.

We are very pleased that our APM product went from GE to best of breed in just five years and I want again to congratulate our teams for its achievement.

In June we announced the general availability of severity pipeline, the 15th product and a better platform.

As a reminder, this is based on our 2021 acquisition of timber.

Company behind a very popular places project and Victor.

As the organization scaled application the volume of telemetry data grows exponentially.

Engineers must manage large volumes of metrics traces and logs and Rob them from many sources Committee definition.

This complexity leads to vendor lock in broader liquidity risk sensitive data and an increase in the raw management call.

Are you seeing better with a rich pipeline customers can control the cost and volume of data. The couple of debt. It forces from the origination to standardize and improve their quality and redact sensitive data to help maintain compliance.

Yeah.

Next we announced the general availability of audit trail in June .

<unk> business is safely Adobe digital platform, while maintaining compliance enforcing governance building vertical currency.

And this week, we announced general availability of service catalog.

With cloud architectures customers are open creating hundreds of thousands of interconnected services, which are owned and developed by globally distributed teams.

This large network of services of a mix wood cost analysis difficult it can be challenging to understand what to do to eliminate issues or who to call for him.

Our service catalog inventory services defense team ownership and displays configurations independency very similarly to what <unk> might do.

But where <unk> typically manual populated cities get look and identify this information, but domestically as it was specifically designed for the product.

Finally, this morning, we announced that we acquired secrets, which is spelled S E.

<unk>.

Secret API Observatory platform engineering teams the control they need to better manage a private public and third party set of API.

With secret, who will accelerate on a path to bring customers visibility into the API and over time unlock new exciting capabilities for APM suite and our security platform.

Thats it for productivity this quarter.

Needless to say, we're all very grateful to our engineering and product teams for their continued hard work.

Now moving on to sales and marketing, let's discuss some of our wins in Q2.

First we signed a seven figure upsell with a global services company.

This customer is going through a large scale digital transformation.

Putting migrating from on Prem data centers to multiple clouds in particular azure.

We are consolidating nine disparate legacy Ocwen was to have the data at their strategic platform.

And purchased all of our products as well as a premier support and technical account management services.

Next we had a seven figure upsell with a managed service provider in Asia. There is a top edwards partner in the region.

This customer transition from their legacy monitoring tool to date, a dog and adopted the entire delta platform.

They are experiencing rapid growth.

<unk> MST services to AWS, and CDN customers and they are expanding the opportunity as well as our feedback.

Sure.

Next we had a seven figure land with a multinational media company.

This customer has aggregate expansion plan for streaming services, including in international markets.

But they found that their current mix of open source and legacy solution wasn't meeting their needs.

We calculated delta would pay for itself simply by accelerating the resolution of just one of the major incident and avoiding loss of revenue.

These customers, starting with infrastructure APM and log management with the opportunity to expand.

Two more usage and products of the company scale.

Next we had a six figure land was a fortune 500 logistics company.

Three years ago. This customer chose legacy monitoring providers in Homegoods solutions over there at all.

Now our platform has come a long way since then.

Meanwhile, incumbents were unable to meet these customers' needs, particularly around the commodity production leading to thousands of high profile incidents a year with a high time to resolution.

Additionally, this customer expects to save nearly $3 million in developer resources, a consolidate and multiple products that they adopt.

Finally, we had a six figure land with a gaming division to Hyperscale.

Previously the company was primarily using open source and its own hyperscale entity pooling.

But despite deep technical expertise homegrown solutions, we're lacking granularity and consume critical engineering resources.

By using data dog discuss them are unlocked a prescriptive way to visualize alert and maintain the cloud gaming services.

In addition to these wins, we also had a number of sizable six and seven figure new logo and expansion wins with companies and have recently experienced business contraction and announced staff reductions.

These customers are looking to streamline the operation.

Engineering costs or consolidate multiple vendors on a strategic platform.

We believe that software it's deflationary for US we are confident in our ability to help our customers do more with less should economic conditions worsen.

That's it for this quarter as customer highlights I'd like to thank our go to market teams for their efforts and continued execution.

Now, let me speak to our longer term outlook.

We recognize the macro environment is uncertain as we look into the back half of 2022.

But we also see no change to the long term trends towards cloud based services and modern developed environment and Absorbability remains critical to the journey.

We continue to drive market leadership, and a focus on value efficiency and cost savings to solve their complex monitoring covenants.

As a result, we continue to feel very confident in the opportunities.

We believe <unk> migration and digital transformation are drivers of our long term growth.

Multiyear trends that are still early in their lifecycle.

And we believe it is increasingly critical for companies to embark on this journey in order to move faster.

Or better in times like these become more efficient with our infrastructure and engineering investments.

So we plan to continue to invest in our strategic priorities to execute on these long term opportunities.

At the same time, we'll continue to we'll continue to closely monitor the demand environment and we calibrate further if necessary.

To balance our long term investment with financial strength.

Before I hand, it over to David I wanted to make a couple of announcements.

First we are holding that 2020 to our user conference on October 18th and 19th at the Javits Center in New York City.

This is an occasion for us to showcase our latest product innovation and we're excited to show everyone that we've been up to.

We also will organize an investor meeting a dash and we'll share more details of mutual group.

And last but not least we are pleased to welcome <unk> to our board of directors.

GP CEO of legacy franchises at Citigroup and brings over 25 years of experience in senior.

Global leadership role in essential services industry.

Our perspective and experience will be incredibly valuable as we continue to grow in scale.

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

Thanks Olivier.

We delivered strong financial performance in Q2.

Revenue was $406 million up 74% year over year and up 12% quarter over quarter.

As Olivier described we executed strongly with robust new logo AOR growth continued low churn and continued strong platform traction.

But we did see some customers beginning to manage costs in response to macroeconomic concerns, which impact our usage growth with some of our existing customers.

Looking at our growth with existing customers. Our dollar based net retention was above 130% for the 20th consecutive quarter remaining strong as we continue to see customers use more existing products and adopt new products on the <unk> platform.

We saw usage growth with some existing customers decelerate in Q2 and that deceleration was concentrated in our larger spending customers as opposed to our lesser spending customers where growth remained steady year over year.

Amongst our industries, we saw relative deceleration in consumer discretionary customers, which represents low teens percent of our IRR.

As a reminder, we are highly diversified and industries and segments.

And we saw lower expansion rate way.

<unk> towards areas of our platform that have volume based components like certain aspects of log management and APM.

Infrastructure monitoring our growth was relatively steady year over year.

On the other hand, our gross retention remained unchanged.

And steady in the mid to high Ninety's.

We believe that our gross retention.

Has reached end of sustaining these levels because of the stickiness of our product and the criticality of our platform to our clients.

And as already mentioned, our new logos, we saw strong continued new logo acquisition and <unk> growth.

By geography and across industries and company sizes.

Finally, our platform strategy continues to resonate with customers with 79% of our customers now using two or more products, 37% using four or more products and 14% using six or more products in the data to our platform as of the end of Q.

Two.

Moving on to our financial results.

Billings were $397 million up 47% year over year.

As in previous quarters, we had we had some differences in the timing of billings.

A few large customers, which were bill in Q2 last year, but were billed in Q1 this year and.

And pro forma for those adjustments billings growth year over year was in the mid fifties.

Remaining performance obligations, our RPI was $881 million up 51% year over year.

Current RPI growth was in the mid $50 year over year and contract duration was slightly lower than the year ago quarter.

In addition, we observed that some customers.

Arent changing their level of usage grow but are being more conservative in their commitments, which impacted billings in our PEO growth, but not revenue growth.

As we said in previous quarters.

Billings in RPM growth can fluctuate significantly and vary from revenue growth, whether higher or lower.

Timing of invoicing and duration of customer contracts.

To illustrate this we note that billings growth for the first half of the year of 2022 was 72% year over year.

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

Unless otherwise noted all metrics are non-GAAP .

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

Gross profit in the quarter was $328 million, representing a gross margin of 81%.

This compares to a gross margin of 80% last quarter and 76% in the year ago quarter.

We continue to experience efficiencies and cloud costs reflected in our cost of sales.

This quarter in the medium to long term, we continue to expect gross margins to be in the high 70% range.

Given our success in increasing our investments in R&D and go to market. Our non-GAAP Q2, Opex grew 65% year over year versus 56% year over year in Q1.

This included our return to in person office travel and events.

Which contributed $11 million to the sequential growth of Opex.

Operating income in Q2 was $85 million or 21% operating margin compared to operating income of $31 million or 13% operating margin in the year ago quarter.

Now 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 $73 million in the quarter.

After taking into consideration capital expenditures and capitalized software free cash flow was $60 million with a free cash flow margin of 15%.

Our free cash flow margin in the first half of 2022 was 25%.

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

First in forming our guidance, we are using conservative assumptions as to the organic growth of customers.

Taking into account the <unk>.

Macroeconomic uncertainty and recent variability of the growth amongst certain customers.

As Olivier mentioned, we see healthy trends in the host and containers monitored and strong execution in our business.

But we recognize customers may have less visibility into their own businesses due to the macroeconomic environment.

So for the third quarter, we expect revenues to be in the range of $410 million to $414 million, which represents 52% year over year growth at the midpoint.

non-GAAP operating income is expected to be in the range of $51 million to $55 million.

non-GAAP net income per share is expected to be in the 15 to 17 per share range based on approximately 347 million weighted average diluted shares outstanding.

For the full year fiscal year 2022, we expect revenue to be in the range of $1 61 to $1 63 billion.

Which represents 57% year over year growth at the midpoint.

non-GAAP operating income is expected to be in the range of $255 million to $275 million.

non-GAAP net income per share is expected to be in the range of 74 to 81 per share based on approximately 347 million weighted average diluted shares outstanding.

Now as regards to our margin guidance I wanted to point out first.

Margins have recently been at the top of our historical range range.

And operating expense.

We have return to in office.

In office attendance travel and events.

We estimate that this was a 300 basis points sequential margin impact in Q2, and we expect expect an additional 100 basis point sequential margin impact in Q3.

As Ali mentioned in Q4, we will hold our dash user conference and we will participate in the AWS reinvent our largest trade show event of the year.

The cost of these events will be approximately.

400 basis points of margin impact.

We're back to fully in person events. This year and we're excited to get in front of customers and showcase our many product innovations.

Next.

We have been successful in making R&D and sales and marketing investments and we believe this will pay off in the future.

While we plan to continue to invest we will remain judicious and disciplined in our cost structure given macro uncertainties.

As indicated by the guidance, we expect non-GAAP operating margins in the second half of 2022 to be in the low double digits.

We are hopefully profitable on a non-GAAP basis, and our free cash flow generative.

And we have built a highly efficient frictionless business model, while driving higher ROI on our investments over time.

Our efficiency and financial strength.

Thats options in times of macro uncertainty that other market participants will not have and we intend to make the best of this opportunity to drive our long term growth.

But of course, we are mindful of the environment and are closely monitoring our costs carefully and we will calibrate further if necessary to maintain our financial strength.

In conclusion, while we recognize there is greater uncertainty in the macro environment right now we.

We see no change in the importance of cloud migration and digital transformation.

Which are critical to our customers competitive advantage.

We believe we are well positioned to help our customers embark on this journey.

And we are investing aggressively into our long term opportunities, while maintaining our financial strength.

I want to thank David <unk> worldwide for their efforts and with that we will open the call for questions operator, let's begin the Q&A.

Thank you we will now begin the question and answer session.

If you'd like to ask a question you can do so by pressing zero one on your Touchtone phone once again, if you'd like to ask a question. Please press star zero one.

On your Touchtone phone.

First question comes from Sanjay <unk> from Morgan Stanley . Your line is now open.

Yes, Thank you for taking the question.

Really impressive Q2 results with 74% growth I wanted to talk a little bit about some of the trends youre seeing in the business and particularly with respect.

Two the guide I guess the first question is as the quarter progressed. When did you start to see some of the slower usage trends and some of these verticals.

Give a comment on that and then David in terms of the guidance in terms of how you were framing yet could you give us a sense of what you're sort of assuming in the back half with respect to Q3 and Q4 is it some of the trends that youre seeing in July does that improve or stabilize or worsen just to give you.

Give us some sort of context on how you are framing the guidance for the back half that would be super helpful.

Okay.

Start maybe with the drilling.

So linearity in.

We did see the.

No.

The variability in unit growth that we mentioned we see we saw that start really in late in April may and June .

So as we go deeper into the quarter.

I should say that this is if you were thinking of what happened in the middle of Covid.

Another sharp pullback as we have seen at that time.

Just for some customers still growth, but slower growth for certain types of customers and others.

And then what we would have seen historically.

I should say that.

While we did see that for some of our product, especially the ones that have.

More of a volume component in Atlanta in some parts of the ATM.

We did see continued healthy growth.

In hosts and.

Or I should say cloud instances in containers.

Which really are indicators of the fact that the <unk>.

The migration is proceeding as it was before.

To fully answer the question also I think you maybe havent getting ahead of what David when you spoke about it will be but in July we did see an improvement on those trends.

But we still remain conservative in our outlook for the short term.

Because of the noisy ness of the data we're seeing there.

There's a few more of our issues a bit more noise.

All of that is underpinned by some macro uncertainty.

We want to Derisk, the guide a little bit and beautiful careful David do you want to comment on that yeah on.

On guidance as you know.

We have always been conservative in our guidance by using lower organic.

Growth and other metrics that we've seen historically and continued to maintain that philosophy.

I would note that.

If you look at the.

The raise here.

And the percentage of the beat that was passed through into the raise from Q2 is lower more conservative than we have done in previous quarters and the reason for that is the macro uncertainty where.

We can't we can't be as confident about what happens.

And given the macro uncertainty so I would say there if you if you want to take that there were some incremental conservative is.

Put into this but I would remind everybody that we've always been quite conservative in using.

Assumptions that are lower than the past when we give guidance.

That's super helpful. I appreciate all the context and one more if I could sneak in one quick question well, let me comment on.

On with sort of products may be seeing.

Lightly lower usage fully understand like the volume based on products like logs that that makes that makes complete sense with.

With APM, though.

I'm a little confused why you might see some firm.

Some deceleration there.

Correct me, if I'm wrong I think that's primarily based on host based pricing. So any comments on like APM side versus <unk> side in terms of.

How customer some of the trends youre seeing in terms of usage across those two.

Portfolio.

That's a good question.

So for the APM, there is actually a positive and that looks like logs, which is.

APM is part of it is a whole space and part of it is strategic bids if you want to analytics and longer retention on certain parts of the European data basically be hit backlog.

And Thats, the part one which we've seen some.

Some slower growth, it's still growing but both are actually still growing healthily.

But I would say slower than they were in recent quarters for these types of customers and.

And you can do the same thing with the deployment that you can a little bit more a little bit more you can reduce retention and these other deliveries because some of it has to control the spend there.

It makes total sense I got it thank you very much.

Thank you. Our next question comes from Robyn <unk> from Barclays. Your line is now open.

Thank you.

My name is key.

Yes.

Can I stay on that subject to all of you.

So as you think.

Is there a different pattern of how people work with you and use you. If you say infrastructure volumes are our infrastructure is not as much impacted or not impacted.

The lock in APM part.

Are you more important on that type of course, like if I'm thinking like.

I need to.

Monitor my my applications as much as I wanted to my infrastructure. So I'm just.

Maybe help us understand a little bit.

Differences, there and then I have one follow up.

No. It's just that these are.

You'll have more of like short term levers to actually.

Optimize a little bit in the.

In logs and APM and anything that volume base.

When we think customers do.

I mean really if we were to get invesco somewhere that would bring that break them into three buckets.

One bucket is the customers that.

<unk> spent a lot with us how those go to building their business not seeing their business slow down.

And that's what we mentioned in consumer discretionary and food delivery for example.

In those cases naturally with customers our sales are growing and you would think preceding 30% to 50% and they're using us everywhere already equivalent to what we've been this natural.

But that's only a small part of our customers are very diversified and we also have a very small part of a customer that uses to pay.

Well at this point the.

The second bucket I would say is customers that have a significant spend with us.

And they were just seeing a little bit more uncertainty in the future. So the business is may not be challenged today.

Pretty much every see it globally, whereas a mandate to look more closely at our expenses.

And what we see those Dewey theyre looking for optimization, we're looking for maybe to find some leaky faucet to conclude.

And you can typically find some of those in La for example, and this is not something new I mean, we've discussed it before.

Customer goes through cycles, where the ultimate is a little bit.

Then they grow again and then the optimize again.

What happens in times like that is that you see a customer's bunched in the same quarter do we need all at the same time because they all go into the same.

My appointment.

We're seeing it we're seeing some of that there.

And again this is not comparable in breath.

What we've seen it being recorded but still in the we see that in the data. So we wanted to call it out on the call.

Yes.

Okay.

At 23 buckets, we'll deliver you the three.

The third bucket is just under that.

A lesser spend.

In this case, we mean lays in front of it.

Our year on us.

Basically growing as they were before they are actually growing more slowly than the larger ones that do not the ones that slow down a little bit.

101000, I just want to clarify when you. If you look after the call on our website youll see that in APM.

Host based pricing, but there are other there's other parts that are like logs as Ali mentioned that our data related better related to ingestion and indexing and so what we're saying is that that the infrastructure part both with the.

Infrastructure in the APM didn't experience as much variability, but the ability to tweak the use of the data through both ingestion and indexing.

Which is more of a part of logs, but also a part of the ATM was where we saw that variability.

Okay perfect.

Follow up if you think about and I'm sure you have all the problems as you thought about the implications for the second half.

Discretionary it sounds like the first thing that in the kind of downturn gets impacted.

Also mentioned food delivery is a little bit which is kind of it seems more like to the newer tech companies.

Is that something that you kind of anticipate to go through the supply chain. So CPG comes next week.

Brito complex, how do you think about it or how did you think about that when you ramp up rate for the second half. Thank you.

Yes.

We're very diversified.

No particular part of the industry actually cover the last part of our revenue and also I would say.

In terms of those of our customers.

Following in their cloud migration or the club maybe to start with we actually probably have more of them in the consumer discretionary than in other verticals that we have.

So that that all that came into consideration when we looked at the guidance.

Okay perfect. Thank you.

Thank you. Our next question comes from Kash Rangan from Goldman Sachs. Your line is now open.

Yes, I can pronounce ramos named perfectly well so thank you. Thanks, thanks for.

To ask a question here. So I'm curious when you look at the AWS and Azure.

It's much larger businesses. They had a good bookings I think backlog growth whatever you want to call that but it can help us reconcile your <unk> growth.

I'm sure the company specific things that pertained to how <unk> growth on a year over year basis sequential growth basis.

How do we.

Look at that in the context of what's happening with the Hyperscale orders and they are caught up given during an uncertain time tremendous backlog growth whatnot. So is there something specific to data dog, maybe it's 18% or so high teens percentage exposure because you got a discretionary maybe if you parse that out there is a different way to look at the rest of the business and if you could if you could quantify how the rest of the business.

Relative to.

The hyperscale as we're able to kind of backlog. So I'm trying to just bridge the performance versus the public cloud at an aggregate level. If you don't mind. Thank you so much.

Yes, so I'll start on the on the credit trends within Hyperscale them they may be.

David can give you more color on that.

Bookings.

B.

So in Q2, we did look better than the Hyperscale. There. So we're doing a lot faster in northern combine.

They have decelerated actually.

We've done it in retrofit.

So we actually feel good about the two the ratio that we are commanding a larger portion of the the cloud revenue than we were last quarter.

In terms of the.

The go forward. So I don't think the Hyperscale have to guide specifically for that but we.

The typical business when we see that all of the leading indicators of success are looking good for us and as I've mentioned it on the call that.

We're seeing great action with new logos, we're seeing great success with new products that you.

The pipeline going into the second half of the year are very good.

<unk> done very well with the with the <unk>.

We've added and the hiring and.

Everything that's a predictor for your success that you are looking good.

Don't have necessarily in terms of the guidance for the future.

We have a little bit.

More noise in the data in terms of growth, which gives us a bit more conservative.

David you want to give more color on the booking part of it definitely so.

And everybody that with our land and expand where we start getting used by clients. They scale up the growth and when they get to a certain point through this has been going on for the whole business model. They go to a an increased commit.

Because of that there is variability in the billings and <unk>.

That net net over time on average go towards the IRR growth again remember, we mentioned that the AOR growth is the best metric and the way to look at that is that you look at the revenues you take you use the linearity, which is 34% 35% of that and multiply that times 12 and that.

Is.

Pure because it doesn't.

Get altered by when a bill goes out either in timing or whether the bill is a previous commitment plus an on demand or new commitments. So it's always going to be noisy with us we understand that <unk>.

Investors and analysts look at it so we try to give some color on that but remind everybody that that is very variable and only over time.

Gets and come back to the revenue growth. So just to remind everybody and I think we said it we basically put in there that in the first half of the year the growth of this wasn't a 70.

Pretty pretty close to revenues why because there was some timing of billing in the first quarter relative to the second quarter that moved the first quarter up in the second quarter down, but it really doesn't have much effect on the drivers of our business and just to.

Be very clear about this like geographically, we don't actually manage the business.

Two 2 billion and that's because it aligns us with our customers. So we manage it to usage, which in.

Turning to revenue pretty directly from.

With this means is.

Very heavily extending.

When when we land, we typically means more to that.

Typically a small impact on billings.

And when we expand.

Whether we actually do with the expansion this quarter and explore it doesn't really matter because it doesn't really change to usage of customers haven't really changed our growth profile doesn't really change the.

Due to the revenue that we're going to see from them and so we see some noise there and we don't manage the business through it.

Thank you Ali and David I appreciate it.

Thank you.

Thank you. Our next question comes from Brent <unk> from Citi. Your line is now open.

Good morning, Thank you for taking my questions and only one for you and one for David as well please.

I'll, let you talk about some of the wins.

<unk>, an open source displacements in your prepared remarks, but I suppose.

More challenged or uncertain macroeconomic backdrop, the free or if it Ain't broke.

<unk> type model is potentially more attractive so I'm curious if you can give us some.

Color commentary on how you expect to sort of effectively compete with quote unquote free open source alternatives, especially for some of your volume based solution and then I'll follow up separately.

Yes, so pleased actually the most expensive typically because you have to build it yourself and <unk>.

Turns out people in.

Tend to be the most expensive thing for customers.

We mentioned in the script earlier that we actually had a number of sizable wins with customers there.

<unk> had announced layoffs shortly before they actually bought from US for the first time or a big expenditures with us and Thats because we.

Ben we have them be more efficient we have been.

Concentrated airports, where it actually adds to their business as opposed to in reinventing the wheel and a more extensive investigation with himself.

I appreciate that and David just for you I think historically, you've characterized that roughly three quarters of the business is tied to committed.

In rate card committed type contracts and I think you were very categorical in mentioning that RPM allo levels are moderating.

Some of your customers moderate their commitment levels. So I was curious to get your perspective on sort of the next six to 12 month impact on increased conservatism around the commit levels as well as how that translates into the quarter of your business that is very much usage in overage oriented.

If you could just frame that for us in more of a six to 12 months trained fronts here.

Thats It from me. Thank yes, we haven't seen yes. Thanks for the question, we haven't seen any change in those numbers, we still have the land commit us grow get into on demand recommit, but we did say that in the level of conservativism that was introduced to some clients that they.

That they they may they may have stayed more into their previous commit plus on demand.

Because of that that doesn't for that situation affect the revenues.

Because they are still consuming the same but they may want to retain more optionality. This is really sort of in and looking at financial management with a level of uncertainty you generally would pay a higher price. If you stayed that way, but you'll be trading off the higher unit priced marginally higher unit price for the more.

<unk> and we did see some of that we.

We don't know what's going to happen next but we would think that if we continue to have macro uncertainty there will be some customers that will opt for that type of pattern relative to the commitments.

We're fine with that by the way we designed the business that way, we don't offer large discounts for very large Tam commitment and that's again, that's by design that we actually want to align.

Our success with <unk> customers and we.

We were happy to be that way in terms of like that because we pay them.

Thank you.

Thank you. Our next question comes from Matt Hedberg from RBC capital markets. Your line is now open.

Oh, Hey, great. Thanks for taking my question guys, maybe David a follow up I think really to Ramos question earlier.

In your guidance philosophy did you assume other verticals beyond consumer discretionary slow their usage and maybe what are the assumptions from smaller customers. It sounded like they actually were fairly strong this quarter.

Yes to take the second part.

I think we saw that in our smaller customers, we had very consistent net and gross retention.

We always do that so our guidance always takes the drivers which would be the.

The organic or usage growth and other new logos. It always takes it down so we do that in every quarter I think.

That from following us and in this quarter.

I mentioned that by passing through less of the.

Pete.

Inject.

Incremental level of conservativism, but overall the philosophy of basically taking all of those things down.

<unk>.

It remains at the core of our philosophy of providing guidance.

Got it Okay, and then was there a geographic element to any of the kind of the slowdown in consumption.

European element.

This broad based geographic.

There was not.

<unk> did not see that it was not geographic as we mentioned it tended to be more either.

Large.

Spend or industry base, but we did not see that geographic law.

Got it thanks a lot.

Right.

Thank you. Our next question comes from Kumar <unk> from William Blair. Your line is now open.

Good morning, everyone. Thanks for taking my question one for Louise.

First of all congrats on the acquisition of secret cases, historically done a great job of rapidly integrating these products in Washington, with New solutions I think at that you mentioned that's a typical turnaround is one year for these products to become a standalone Ddos solution.

However, given the upward trend in cash generation and your cash and equivalents are now approaching 2 billion have your thoughts changed around potentially making a more transformative acquisition, especially given the decline in market valuations today.

It's possible we everything is open and we've looked at some of those in the past when you see the $1 higher.

What other businesses like that.

We're really looking at valuations coming down and some of them some opportunities.

Presenting themselves with their so everything's possible.

But in general we're very active on the M&A side, I think will only be more active.

As markets temporarily on right now.

But there's not much more I can say.

Great and just as a follow up earlier this year, we felt that they talk building on its recruiting engine and accelerated investments into sales and marketing again this quarter I think even after adjusting for <unk> can you update us on where do you think until investments are focused in given the macro environment. How do you think about the balance between preserving margin versus continuing to.

Higher maybe more aggressively and come out stronger on the other ones. Thank you.

But right now we are.

We're aggressively recruiting we're building capacity, we're successful at it and I really see it.

Predictor of future success.

We're in this interesting situation because.

As a company.

We are very efficient.

We we've been very disciplined from the funding of the company.

For those of Us with Florida chemical in time, we burned less than $30 million on our way to IPO.

A lot more cash than that since then.

New disciplines built into that.

Company.

We also built.

The business.

Around model that is frictionless and extremely efficient and we've shown this efficiency.

I would say over the past few quarters by growing very fast.

Being profitable.

Profitable.

So we did no doubt minds about the long term profitability profile of the company. So were deemed does is that it affords us opportunities to invest in times like this that the rest of the market will not have.

Blatter, everybody put investment we need to spend money didnt matter.

This year I think it's a little bit different so we really see that as an opportunity to read from that that even further.

<unk>.

Build sales capacity and all those things obviously as I said earlier discipline is in the DNA of the company.

We will always.

Looking at.

With our margins are.

The macro environment.

And we are we have all the levers we need to adjust so we can maintain profitability in the yields in the future. David you want to comment on <unk> I just wanted to add that what we said all along was we try to maintain a steady investment profile, which is focused on R&D and in sales and marketing.

It's <unk>.

And its banded by what we can execute what we feel we can hire.

Integrate et cetera, and in periods, where there are is an acceleration and we said this many times on the top line.

We can't we can't invest as fast as that when the top line went up to 80, so youre going to have margin expansion that was exaggerated because there were some some costs that didn't happen in COVID-19 that are part of our normal business operations. So we try to maintain a steady profile of investment and the variability is.

What there is acceleration of the top line you might see that because it flows through at a high marginal rate and then if you see a deceleration you might see less of that margin expansion. So that's our philosophy, but it's always to invest and take advantage of the long term opportunity.

Lastly, I would say, we feel great about the opportunity in general we feel great about the.

I mentioned earlier, the leading indicators of success, whether it's new logos potentially.

For our pipeline and our ability to ship it as well as the background, we see of customers that are.

Interpreter who's with us for four new products or just brand new deployment. So we feel great about all that in.

It makes us very confident into our investment.

What's possible, though is that if the demand environment is a bit more challenged.

It will be a little bit of a longer time for us to show around these investments, but we're fine with that.

That's very helpful color.

Thank you. Our next question comes from Brent Thill from Jefferies. Your line is now open.

Good morning, David I think everyone's still a little confused.

Confused youre seeing in version with what's happening with SMB and large enterprise. Many companies are calling out weakness in SME SMB not in large can you explain why you think youre seeing this conversion in <unk>.

Are you embedding a more conservative view in the back half.

Yes, not not an inversion I think what we said was.

We did not see what you are saying, which is SMB and smaller customers did not.

Act differently than they had what we said was.

Whether it's an enterprise mid market or SMB, what happened was in certain segments consumer et cetera.

Had a more conservative or a more of a cost mentality.

And two irregardless of where it was in the number of SMB for US is a thousand employees or less mid market, 1% to 5000 enterprise 5000, it up that in the larger areas, where they had been substantial expansion.

We saw a look at that cost.

So those were the determinations numbers for us it wasn't Europe . It wasn't that SMB fell out it was those things.

And in terms of the second half of the year.

We don't know, but in what we guide always we assume lower organic growth in all the sectors than we have historically and that we might expect so I think inversions the round thing because what this what happened was the driver of the cost.

Look was not whether it was an SMB mid market or enterprise, but what the level of spend and the industry.

What would you say to cities.

Yes.

Critical to our customers, which are critically important we deliver value be more efficient.

So in general and whether it's whatever the size of the customer is we are not on the chopping block.

But.

The market. Some are spent enough theyre going to look for savings, where they're spending money.

And they're going to see that I do not have levels of spend with us and as.

As mentioned earlier, there is always a little bit you can optimize especially with some devoting based products and by way of gross retention stayed the same at all the different levels of SMB mid market and enterprise. So when youre talking about do you have the solution and are you continuing to solution. We saw no change in the gross retention across all of our customer sizes.

Thanks for clarifying.

Thank you. Our next question comes from Gregg Moskowitz from Mizuho. Your line is now open.

Okay. Thank you for taking the questions.

Ali you are frequently speaking to a lot of data to our customers anecdotally speaking are they raising more questions about your pricing levels in this environment any commentary on that would be it would be helpful.

So we are actually very optimistic from a conversion with customers because they are the more and more of them. They want to buy more product. They want to use more of a product they want us to so it would be a problem for them.

Everybody wants a better deal, but I think thats always been true and that's what we're going to be true and it's even tour in situations like this where the CFO of a mandate.

To be more conservative too.

Anecdotally from what we see with customers we are very bullish.

Okay got it and then you touched on some interesting example in your script, but if you were to look back over the past six months or so I'm wondering whether or not there has been any change to the trajectory of customer consolidation or standardization on David.

So we keep seeing more and more of it it is still not the majority of what we do.

But we think again its too.

If there is prolonged.

Macro issues in the market like we might see more consolidation customers might want to really.

Two seven year legacy software, but considered abnormal so we.

We definitely see that as a possibility again, that's not the majority of what we do today, that's what we base annual report if you want but thats something that we think might happen.

Okay. That's helpful. Thank you.

Thank you. Our next question comes from Mike. He goes from Needham <unk> Company. Your line is now open.

Hey, Thanks for taking the questions here guys I did just want to come back to that that other point previously regarding the SMB versus enterprise and really is it fair to characterize.

Some of the.

I guess.

Movements Youre seeing with these larger deals is it is it may be less of an impact to you at the SMB level, either because you're right. It's a bigger wallet share when they are looking to pay out their vendors or is it possible that those SMB organizations just have less exposure to your more usage based products.

They haven't been exposure to simply the differences.

What's your time too.

$10000.

Probably not.

Moving to a much larger customers, it's worth your time to sell a new $500000.

And that's what we see with <unk>.

We feel the optimization.

Understood and then the follow up I had for you is if I look at the trends for multi product adoption from your customers. I think this is the first time we've seen.

Two plus.

Product module adoption actually declined sequentially from 81% to 79%.

The implication there that your customers are starting smaller now or or deciding to pay we'll take another product for you at a later date.

Okay.

Again, if you could help me parse out that metric that would be helpful.

Well, it's just mechanical is because we know we.

We said, 75% of all new logos on anything with two or more products.

And we had more new logos.

And so this pushes the number down a little bit.

Theres nothing were $81 79 of these are all just I.

No there is nothing no change in trend.

Got it thank you guys.

Thank you. Our next question comes from Peter <unk> from Bernstein. Your line is now open.

Thank you for taking my question.

<unk>.

I'm interested in the customers that are doing some cost rationalization and tried to unpack is that something thats targeted directly at data dog or is it actually as part of our broader cloud rationalization that you see going on there just happens to be that data dollar gets pulled into that.

It may even just see splash on effect.

Customers are.

Managing their overall cloud.

Topology and.

And with the pricing that pulls down data dog.

Help me unpack those two things whether or not it's dated all focused or more of a broader cloud focus.

It's just it is to focus on their cost structure.

The lineup their expenses and by decreasing in decreasing order in the heat of it when it listen to see what they can do to optimize and again a number are you seeing the number of customers.

Had layoffs, so theyre going after the cost structure of the harsco structures are there.

Their workforce.

<unk>.

Part of that I think thats.

It's a good thing because.

<unk> been a lot of us were very critical one of the top vendors.

That means for those of them, who use us both we'll look we arent twist mixing tied to their own trajectory.

Yeah.

Okay. So you are saying that this is very focused on dated August as a line item and doctors to splash on effect necessarily.

I am seeing is focused in with this.

I am seeing that slow growth mode, they're spending money on.

For some of the other thing nothing monumental just putting more money into cloud and there are guaranteed <unk>.

Willing to spend money on that and we know that a couple of.

Providers are also working with customers who have been with you. Soon I think everybody is aligned in trying to move their customers successful there and we actually have been involving efforts, where we work with our providers and these customers to help them make the most of what they have.

And in times like these we want to be and instead of our customers. We want to help they want to have them get the most who depend on us. So we can have a long term successful relationship with them, but given the stickiness and what we did is monitoring of real time applications for their clients we feel that.

Our experience has been that.

Is less focused on other things and David but.

But when Youre looking at your cost structure. There are opportunities as you said to rationalize across but generally if you look at the gross retention you look at how important data dog is to the businesses.

And you read the newspapers you see that its focus on other things more.

Yeah, Yeah, no no that makes sense.

And one other last question if you may.

I think you alluded to some.

Timings of some contracts over quarters in this type of thing and that there may have even been some improvements in July .

And some of the momentum of closing contracts.

Can you comment on some of those improvements and how you see them kind of juxtaposed with some of the other caution that you're talking about in half two.

So I think the improvement in July we're not about putting controlling the ones I mentioned were about the usage trends.

Which is early for us to sell its force from the.

Closings in the contracts and everything else.

We also again great.

And we're very happy with what we're seeing in sales had in July .

Which we commented about.

The usage.

Yes, I think there always as I always I think we've been on calls over time every call.

There is some timing differences to the positive.

Billing was in this quarter, we try to point it out because when the bill goes out or when that commitment is not is not as correlated to the revenues as IRR is so.

We said that on every arent almost every earnings call and we just remind everybody all the time that because of the land expand model that youre going to have variability plus and minus and when it's plus we want to remind everybody not to read anything into it and when it's lastly, one of them around everybody, but that's not the major metric that drives the top line growth of the company.

Sure, but I mean, if you've got utilization it should turn into additional revenue in future periods, and I think youre mentioning kind of a positive trajectory.

Trajectory.

Excellent resources.

When you either.

Usage actually is revenue in the same period, the two others one of the same.

Given the delay between those two.

Yes.

We will and the other was billings.

Yes, and I guess, what I'm getting at is if you see that positive trajectory in July it will turn into.

Revenue in the period, yes.

Seeing that going forward, we're making marginal yes, we're telling you that we're telling the saying that unlike in covered there was that we had strong usage growth.

We had usage growth a lot of places and on average in the second quarter. What we're saying is that in July we saw pockets, where there was a little better usage growth, but we're not we're not calling the market here, where basically reporting what we see and what we hope is the most helpful. In our Formula works. So yes.

Okay. Thank you.

Thank you. This has concluded the question and answer session I will now turn the call back over to CEO Olivier <unk> for closing comments.

Alright, Thank you I want to thank everyone for St.

Anytime with us Nicole and I again want to thank all of <unk> employees for a great quarter and for continuing to be the thing that the company until front into our customers. So thank you all and we'll see you next quarter.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.

Okay.

Okay.

[music].

[music].

Good morning, and walk them through the Q2 2022 data dog earnings call. My name is Cheryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you ever question. Please.

Zero one on your Touchtone phone.

I will now turn the call over to you kept Roderick you may begin.

Thank you Michele good morning, and thank you for joining us to review <unk> second quarter, 2020, Q2 financial results, which we announced in our press release issued this morning, joining me on the call today are Olivier Hello, <unk> co founder and CEO and David <unk> <unk> CFO .

During the call we will make forward looking statements, including statements related to our future financial performance our outlook for the third quarter and fiscal year 2022, a gross margins and operating margins our strategy, our product capability and our ability to capitalize on market opportunities. The words anticipate believe continue estimate expect intend will and similar expressions are intended to do.

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-Q for the quarter ended March 31, 2022, additional information will be made available in our upcoming Form 10-Q for the quarter ended June 32020, Q and other filings with the SEC. This information is also available on the Investor Relations section of our <unk>.

Web site, 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 updated on <unk> Dot com.

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

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

We are pleased to report strong results in Q2, as we executed well and we expect we don't get to do a leadership.

Let me start off with a review of our Q2 financial performance.

In Q2.

<unk> was $406 million, an increase of 74% year over year and above the high end of our guidance range.

We had about 21200 customers up from about 16400, the yoga quarter.

We ended the quarter with about 2420 customers with over 100000 barrel or more.

Up from 1570 in the year ago quarter.

These customers generated about 85%, although a R.

We generated free cash flow of $60 million and our free cash flow margin of 15%.

And our dollar based net retention rate continued to be over 130% as customers increase their usage and other people more product.

Now moving onto this quarter's business drivers.

In Q2.

Overall saw strong customer growth dynamics, we have seen some viability and growth in loyal customers.

We saw a larger spending customers continue to grow but at a rate that was slower than historical levels.

Its effect was more pronounced in certain industries, particularly in consumer discretionary which include e-commerce and food and delivery customers.

More specifically our products with a strong volume based component such as wealth management and APM suite.

Note that we did not see this with our F&B and lower spending customers continue growing with us as they had in the past.

While these nausea growth at points in the current microclimate are leading us to be prudent with our Falcon My book.

We remain very bullish about the opportunity and confident in our execution as we continue to see positive trends underpinning our business.

First the number of hosts who containers being monitored by our customers is growing steadily which points to continued momentum of that migration and digital transformation projects.

Second we had strong execution on the new logo side at <unk> with Robert as we added a record 1400, new customers in the quarter, including the impact of turning off about 200 customers in Russia and Belarus in Q2.

And we closed a number of sizable six to seven figure new logo deal during the quarter with diverse customers, including a major conglomerate the middle ore mining company, our U S government agency besides business in Hyperscale.

Third.

Pipeline of large new logos and new product cross sales going into the second half of the year is strong.

And fourth churn remains low with gross revenue retention steady in the mid to high <unk> 19.

Moving onto our products.

We're pleased with the continued adoption and expansion of our products to our customers.

The three pillars of observer, PDT, which are infrastructure APM and log management all grew strongly in Q2.

Our APM suite and load management now exceed three quarter of a billion dollars of they are.

As a reminder, we define APM suite is including core APM synthetics run and continue to provide us.

In addition to that its products are monitoring continue to grow strongly on par with recent quarters.

We're also pleased with the adoption of our newer products.

Our newer products, including infrastructure monitoring APM seats, and log management continued to grow our more than 100% year over year.

And we've seen a strong start with our <unk> product, which we announced at that last year and started charging for just a few months ago.

CIBC ability already has more than 1000 paying customers, including some product specific new logos.

Yes.

Our platform strategy also continues to resonate in the market.

As at the end of Q2, 79% of customers were using two or more products up from 75% a year ago.

So 57% of customers are using four or more products up from 28% a year ago.

14% of our customers were using six or more products up from 6% a year ago.

Now, let's move onto product and R&D, where our team delivered another strong quarter of innovation.

In June Gartner published a 2022 magic quadrant for application performance monitoring and observe ability.

Doug has once again been named a leader in it.

Have improved from last year on a scores and rankings in all dimensions.

We attribute this to first to our unified platform experience covering Dev App security in order to pursue an AD in one place.

But we also see it as a recognition of the continued evolution of watchdog, our AI engine, which takes away the complexity of monitoring cloud native architectures and provides proactive alerts Gary troubleshooting and fully automated with good medicine.

We are very pleased that our APM product went from GE to best of breed in just five years.

I want again to congratulate our teams for this achievement.

In June we announced the general availability of diverse pipeline.

15th product and a better platform.

As a reminder, this is based on our 2021 acquisition of timber the company behind it very popular open source project and Victor.

As the organization scaled application the volume of telling me if there are growth exponentially engineers.

Engineers, mismanage large volumes of metrics traces and logs and Rob them from many sources to many destination.

So we plan to continue to invest in our strategic priorities to execute on these long term opportunities.

At the same time, we will continue to contribute will continue to closely monitor the demand environment and will calibrate further if necessary to.

To balance our long term investments with financial strength.

Before I hand, it over to David I wanted to make a couple of announcements.

First we are holding back to 2020 to our user conference on October 18th and 19th at the Javits Center in New York City.

This is an occasion for us to showcase our latest product innovation and we're excited to show everyone that we've been up to.

We also will organize an investor meeting a dash and we shall monetize mutual group.

And last but not least we are pleased to welcome <unk> to our board of directors.

GTE CEO of legacy franchises at Citigroup and brings over 25 years of experience in senior global leadership role in essential services industry.

Our perspective and experience will be incredibly valuable as we continue to grow in scale.

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

Thanks Olivier.

We delivered strong financial performance in Q2.

Revenue was $406 million up 74% year over year and up 12% quarter over quarter.

As Olivier described we executed strongly with robust new logo.

Growth continued low churn and continued strong platform traction.

But we did see some customers beginning to manage costs in response to macroeconomic concerns, which impacted our usage growth with some of our existing customers.

Looking at our growth with existing customers. Our dollar based net retention was above 130% for the 20th consecutive quarter.

Remaining strong as we continue to see customers use more existing products and adopt new products on the <unk> platform.

We saw usage growth with some existing customers decelerate in Q2 and that deceleration was concentrated in our larger spending customers as opposed to our lesser spending customers, where our growth remained steady year over year.

Amongst our industries, we saw relative deceleration in consumer discretionary customers, which represents low teens percent of our IRR.

As a reminder, we are highly diversified and industries and segments.

And we saw lower expansion rate.

Weighted towards areas of our platform that have volume based components.

Certain aspects of log management and APM.

Infrastructure monitoring air growth was relatively steady year over year.

On the other hand, our gross retention remained unchanged.

And steady in the mid to high Ninety's.

We believe that our gross retention.

Has reached and a sustaining these levels because of the stickiness of our product and the criticality of our platform to our clients.

And as already mentioned, our new logos, we saw strong continued new logo acquisition and growth.

By geography and across industry and company sizes.

Finally, our platform strategy continues to resonate with customers with 79% of our customers now using two or more products, 37% using four or more products and 14% using six or more products and the data to our platform as of the end of Q.

Two.

Moving on to our financial results.

Billings were $397 million up 47% year over year.

As in previous quarters, we had we had some differences in the timing of billings.

A few large customers, which were built in Q2 last year, but were billed in Q1 this year and.

And pro forma for those adjustments billings growth year over year was in the mid fifties.

Remaining performance obligations, our RPI was $881 million up 51% year over year.

Current RPI growth was in the mid fifties year over year and contract duration was slightly lower than the year ago quarter.

In addition, we observed that some customers.

Arent changing their level of usage grow but are being more conservative in their commitments, which impacted billings in our PEO growth, but not revenue growth.

As we said in previous quarters.

Billings in RPM growth can fluctuate significantly and vary from revenue growth, whether higher or lower.

Timing of invoicing and duration of customer contracts.

To illustrate this we note that billings growth for the first half of the year of 2022 was 72% year over year.

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

Unless otherwise noted all metrics are non-GAAP and.

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

Gross profit in the quarter was $328 million.

Representing a gross margin of 81%.

This compares to a gross margin of 80% last quarter and 76% in the year ago quarter.

We continue to experience efficiencies and cloud costs reflected in our cost of sales.

This quarter in the medium to long term, we continue to expect gross margins to be in the high 70% range.

Given our success in increasing our investments in R&D and go to market. Our non-GAAP Q2, Opex grew 65% year over year versus 56% year over year in Q1.

This included our return to in person office travel and events, which contributed $11 million to the sequential growth of Opex.

Operating income in Q2 was $85 million or 21% operating margin compared to operating income of $31 million or 13% operating margin in the year ago quarter.

Now 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 $73 million in the quarter.

After taking into consideration capital expenditures and capitalized software free cash flow was $60 million with a free cash flow margin of 15%.

Our free cash flow margin in the first half of 2022 was 25%.

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

First in forming our guidance, we are using conservative assumptions as to the organic growth of customers.

Taking into account the macroeconomic uncertainty and recent variability of the growth among certain customers.

As Olivier mentioned, we see healthy trends in the host and containers monitored and strong execution in our business.

But we recognize customers may have less visibility into their own businesses due to the macroeconomic environment.

So for the third quarter, we expect revenues to be in the range of $410 million to $414 million, which represents 52% year over year growth at the midpoint.

non-GAAP operating income is expected to be in the range of $51 million to $55 million.

non-GAAP net income per share is expected to be in the 15 to 17 per share range based on approximately 347 million weighted average diluted shares outstanding.

For the full year fiscal year 2022, we expect revenue to be in the range of $1 six one to $1 $63 billion.

Which represents 57% year over year growth at the midpoint.

non-GAAP operating income is expected to be in the range of $255 million to $275 million.

non-GAAP net income per share is expected to be in the range of 74 to 81 per share based on approximately 347 million weighted average diluted shares outstanding.

Now as regards to our margin guidance I wanted to point out first.

Give us some sort of context on how you are framing the guidance for the back half that would be super helpful.

Okay.

I thought maybe it was the.

So linearity in.

We did see the.

<unk>.

The variability in unit growth that we mentioned, we see we saw that.

Really in late April May and June .

So as we go deeper into the quarter.

I should say that.

If you show is thinking of what happened in <unk>.

It is not the sharp pullback as we have seen at that time.

What we saw is just for some customers still growth, but slower growth for certain types of customers and others.

Then what we would have seen historically.

I should say that.

While we did see that for some of our product, especially the ones that I have.

More of a volume component net loans in some parts of the ATM.

We did see continued healthy growth.

In hosts and.

I should say cloud instances in containers.

Which really are indicated by the fact that the migration is proceeding as it was before.

To fully answer the question also I think you maybe havent getting ahead of what Dave is going to talk about a little bit but in July we did see an improvement on those trends.

But we still remain conservative in our outlook for the short term.

Because of the noise units of the data we're seeing there.

There's a few more of our issuance of a bit more noise and all of that is underpinned by some macro uncertainty so.

So we want to do is to get a little bit and beautiful careful David do you want to comment on that yeah on.

On guidance as you know.

We have always been conservative in our guidance by using lower org.

Organic growth and the other metrics that we've seen historically and continued to maintain that philosophy I would note that.

If you look at the <unk>.

The raise here.

And the percentage of the beat that was passed through into the raise from Q2 is lower more conservative than we have done in previous quarters and the reason for that is the macro uncertainty where.

We can't we can't be as confident about what happens.

And given the macro uncertainty so I would say there if you if you want to take that there were some incremental conservative is.

Put into this but I would remind everybody that we've always been quite conservative in using.

Assumptions that are lower than the past when we give guidance.

That's super helpful. I appreciate all the context and one more if I could sneak in one quick question well, let me comment on.

<unk>.

On with sort of products may be seeing slightly lower usage fully understand like the volume based on products like locks at that makes that makes complete sense.

With APM, though.

I'm a little confused why you might see some firm.

Some deceleration there.

Correct me, if I'm wrong I think that's primarily based on host based pricing. So any comments on like the APM side versus <unk> side in terms of.

How customers some of the trends youre seeing in terms of the usage across those two.

Portfolio.

That's a good question.

So for the APM is actually a positive and that looks like logs, which is.

The APM is part of it is a whole space and part of it is strategic bids if you want to run analytics in a longer retention on certain parts of the European data basically behaved backlog.

And thats, the part on which we've seen some.

Some slower growth you see growing that both are actually still growing healthily.

But I would say slower than they were in recent quarters for these types of customers and you can do the same thing would be to accumulate a little bit more a little bit more you can reduce retention and these other levers customers have to control the spend there.

Makes total sense I got it thank you very much.

Thank you. Our next question comes from <unk> Shao from Barclays. Your line is now open.

Thank you.

My name is Greg.

Yes.

Can I stay on that subject.

Sure.

Is there a different pattern of how people work with you and use you. If you see infrastructure volumes are our infrastructure is not as much impacted or is not impacted at the lock in APM part.

Are you more important on that type of course, like if I'm thinking like.

I need to.

Monitor my my applications as much as I need to monitor my infrastructure. So I'm just like.

Maybe help us understand a little bit.

Differences, there and then I have one follow up.

No. It's just that these are.

You'll have more of like short term levers to actually.

Optimize a little bit.

In logs and APM and anything that volume base.

When we think customers do.

I mean really if we were to cardiovascular sooner that would break them into three buckets.

One bucket is the customers that.

<unk> spent a lot with us have us <unk> in their business and not seeing their business slow down.

And that's what we mentioned in consumer discretionary and food delivery for example.

In those cases naturally with customers. Our sales are growing and you think there is any sort of 50, 50% and they're using us everywhere already equivalent to where we've been this natural.

But that's only a small part of our customers are very diversified and we also have a very small part of a customer that uses <unk>.

Just want to go at this point the.

The second bucket I would say is customers that have a significant spend with us.

And just seeing a little bit more uncertainty in the future of their businesses may be challenged today.

Pretty much every CFO everywhere has a mandate to look more closely at our expenses.

And we see those do is they're looking for innovation, they're looking for maybe to find some leaky faucet to conclude.

And you can typically find some of those in La for example, and this is not something new I mean, we've discussed it before.

Customer go through cycles, where the optimize a little bit.

Then Nick will again, and then the optimize again.

What happens in terms of like that is that you see a customer's bunched in the same quarter do we need all at the same time because they all go into the same.

Microwave and so we're seeing we're seeing some of that there.

And again this is not comparable in breath or in magnitude to what we've seen at the being of Covid, but still we see that in the data. So we wanted to call it out on the call.

Yes.

Okay.

At 23 buckets, we'll deliver you the three.

The third bucket is just under that.

Lesser spend.

In this case, we mean lessons from it.

Our year on us.

Basically growing as they were before they are actually growing more slowly than the larger ones that do not want to slow down a little bit.

Just one on ones haven't just want to clarify when you. If you look after the call on our website youll see that in APM is host based pricing, but there are other there's other parts that are like logs as Ali mentioned that our data related better related to ingestion and indexing and so what we're saying is that that.

The infrastructure part both with the.

Infrastructure in the APM didn't experience as much variability, but the ability to tweak the use of the data through both ingestion and indexing, which is more of a part of logs, but also a part of the ATM was where we saw that variability.

Okay perfect.

Follow up if you think about.

I'm sure you have all the pilots as you thought about the implications for the second half consumer discretionary it sounds like the first thing that in the.

Kind of downturn gets impacted.

You also mentioned food delivery, a little bit which is kind of seems more like the newer tech companies.

Is that something that you kind of anticipated through the supply chain. So CPG comes next Clark Britta comes next how do you think about it or how do you think about that when you ramp up rate for the second half. Thank you.

Yes, so we're very diversified.

No particular part of the industry actually cover the last part of the revenue of our revenue and also I would say.

In terms of those of our customers.

Following in their cloud migration or the club needed to start with we actually probably have more of them in the consumer discretionary than in other verticals that we have.

So that that all that came into consideration when we looked at the guidance.

Okay perfect. Thank you.

Thank you. Our next question comes from Kash Rangan from Goldman Sachs. Your line is now open.

Yes, I can pronounce ramos named perfectly well so thank you. Thanks, thanks for.

To ask a question here. So I'm curious when you look at AWS and Azure.

A much larger business they had a good.

Good bookings I think backlog growth whatever you want to call that if.

It can help us reconcile your <unk> growth.

Im sure the company specific things that pertained to how <unk> growth on a year over year basis sequential growth basis.

How do we look at that in the context of what's happening with the Hyperscale.

They are caught up even during an uncertain time tremendous backlog growth whatnot. So is there something specific to data dock, maybe it's 18% or so high teens percentage exposure to consumer discretionary maybe if you parse that out there is a different way to look at the rest of the business and if you could if you could quantify how the rest of the business did relative to.

How does the hyperscale as we're able to kind of backlog. So we're trying to just bridge the performance versus the public cloud at an aggregate level. If you don't mind. Thank you so much.

So I'll start on the on the credit trends within Hyperscale. It and then maybe David can give you more color on the.

Bookings.

The.

So in Q2, we did look better than the Hyperscale. There. So we're doing a lot faster than northern combined.

They've decelerated actually.

We've done it and retrofitted.

So we actually feel good about the.

Two the ratio that we are commanding a larger portion of.

The cloud revenue than we were last quarter.

In terms of the.

To go forward. So I don't think the Hyperscale have to guide specifically for that but we.

The typical business when we see that all of the leading indicators of success are looking good for us and as I've mentioned it on the call that.

We're seeing great action with new logos, we're seeing great success, we do put it attaches.

The pipeline going into the second half of the year are very good.

<unk> done very well with the <unk>.

He was with added in the hiring and.

Everything Thats a precursor for your success that you are looking good.

Don't have necessarily in terms of the guesswork for the future.

We have a little bit more noise in the data in terms of growth, which gives us a bit more conservative division.

David you want to give more color on the booking part of it definitely so.

And everybody that with our land and expand where we start getting used by clients. They scale up the growth and when they get to a certain point through this has been going on for the whole business model. They go to a an increased commit.

Because of that there is variability in the billings and RPM. So that net net over time on average go towards the IRR growth again remember we mentioned that the <unk> growth is the best metric and the way to look at that is that you look at the revenues you take.

We use the linearity was $34, 35% of that and multiply that times 12 and that is.

Pure because it doesn't.

Get altered by when a bill goes out either in timing or whether the bill is a previous commitment plus an on demand or new commitments. So it's always going to be noisy with us we understand that.

Investors and analysts look at it so we try to give some color on that but remind everybody that that is very viable and only over time.

Gets and it comes back.

Back to the revenue growth so just to remind everybody and I think we said it we basically put in there that in the first half of the year the growth of this wasn't the 70.

Pretty pretty close to revenues why because there was some timing of billing in the first quarter relative to the second quarter that moved the first quarter up in the second quarter down, but it really doesn't have much effect on the drivers of our business and just to.

Be very clear about this like geographically, we don't actually manage the business.

Two billings and that's because it aligns us with our customers. So we manage it to usage, which in.

Turning to revenue pretty directly from.

What this means is.

Very heavily and extending it.

When when we land we typically means more so that has a typically a small impact on billings.

When we expand.

Whether we actually do have the extension this quarter and explore it doesn't really matter because it doesn't really change their usage of customers different reaching a growth profile doesn't really change the.

Do the revenue that we're going to see from them and so we see some noise there and we don't manage the business to it.

Thank you Ali and David I appreciate it.

Thank you.

Thank you. Our next question comes from Brett <unk> from Citi. Your line is now open.

Good morning, Thank you for taking my questions and only one for you and one for David as well please.

Ali you talk about some of the wins.

<unk> an open source displacements in your prepared remarks, but I suppose in March.

<unk> challenged or uncertain macroeconomic backdrop, the free or if it Ain't broke don't fix it type model is potentially more attractive. So I'm curious if you can give us some.

Color commentary on how you expect to sort of effectively compete with quote unquote free open source alternatives, especially for some of your volume based installation and then I'll follow up forgive me.

Yes, so pleased actually the most expensive typically because you have to build it yourself.

And it turns out people in.

Tend to be the most expensive thing for our customers.

We mentioned in the script earlier that we actually had a number of sizable wins with customers.

That had announced layoffs shortly before they actually bought from US for the first time or a big extension with us and Thats because we have been we have them be more efficient we have been.

Controlled airports, where it actually adds to their business as opposed to in a reinventing the way in a more extensive investigation with himself.

I appreciate that and David just for you I think historically, you've characterized that roughly.

Three quarters of the business is tied to committed.

Rate card committed type contract and I think you were very categorical in mentioning that RPM allo levels are moderating as some of your customers moderate their commitment levels. So I was just curious to get your perspective on sort of the next six to 12 month impact on increased conservatism.

Around the commit levels as well as how that translates into the quarter of your business that is very much usage in overage oriented if you could just frame that for us in more of a six to 12 month frame, France here and there.

Thats. It for me. Thank you we haven't seen yes. Thanks for the question, we haven't seen any change in those numbers, we still have the land commit us grow get into on demand recommit, but we did say that in the level of conservativism that was introduced to some clients that they.

That they they may they may have stayed more into their previous commit plus on demand.

Because of that that doesn't for that situation affect the revenues.

They are still consuming the same but they may want to retain more optionality. This is really sort of in and looking at financial management with a level of uncertainty you generally would pay a higher price. If you stayed that way, but you would be trading off the higher unit priced that marginally higher unit price for the more option.

<unk> and we did see some of that.

We don't know what's going to happen next but we would think that if we continue to have macro uncertainty there will be some customers that will opt for that type of <unk>.

Pattern relative to the commitments and we're fine with that by the way.

We designed the business that way, we don't offer large discounts for very large commitments in that.

Again, that's by design that we actually want to align.

Our success with <unk> customers.

We were happy to keep it that way in terms of like that because it was pay down.

Thank you.

Thank you. Our next question comes from Matt Hedberg from RBC capital markets. Your line is now open.

Hey, great. Thanks for taking my question guys, maybe David a follow up I think really don't to Ramos question earlier.

In your guidance philosophy did you assume other verticals beyond consumer discretionary slow their usage and maybe what are the assumptions from smaller customers. It sounded like they actually were fairly strong this quarter.

Yes to take the second part.

I think we saw that in our smaller customers, we had very consistent net and gross retention.

We always do that so our guidance always takes the drivers which would be the.

The organic or usage growth and the new logos. It always takes it down so we do that in every quarter I think.

That from following us and in this quarter.

I mentioned that by passing through less of the.

Pete.

Inject.

Incremental level of conservativism, but overall the philosophy of basically taking all of those things down.

<unk>.

It remains at the core of our philosophy of providing guidance.

Got it Okay, and then was there a geographic element to any of the kind of the slowdown in consumption.

European element.

This broad based geographic.

There was not.

Did not see that it was not geographic as we mentioned it tended to be more either.

A large.

Spend or industry base that we did not see that geographic law.

Got it thanks a lot.

Right.

Thank you. Our next question comes from <unk> from William Blair. Your line is now open.

Good morning, everyone. Thanks for taking my question one for Olivier maybe.

First of all congrats on the acquisition of secret cases, historically has done a great job of rapidly integrating these products in Washington, with New solutions that you mentioned, that's a typical turnaround is one year for these products to become a standalone Ddos solution.

However, given the upward trend in cash generation and your cash and equivalents are now approaching 2 billion have your thoughts changed around potentially making a more transformative acquisition, especially given the decline in market valuations today.

It's possible we everything is open we've looked at some of those in the past when you see the $1 higher.

What other businesses like that but.

We're really looking at valuations coming down and some of them some opportunities.

Presenting themselves with there so everything is possible.

But in general we're very active on the M&A side I think it will only be more active.

As markets temporarily on right now.

But there's not much more I can say.

Great and just as a follow up earlier this year, we spoke about there to talk building out its recruiting engine actually accelerated investments into sales and marketing again this quarter I think even after adjusting for <unk> can you update us on where these incremental investments are focused in given the macro environment. How do you think about the balance between preserving margin versus continuing to.

Higher maybe more aggressively and coming out stronger on the other ones. Thank you.

But right now we are.

We are aggressively aggressively recruiting we're building capacity, we're successful at it and I really see it as a.

Predictor of future success.

When it's interesting situation because.

As a company.

We.

We are very efficient.

<unk>.

We've been very disciplined from the funding of the company.

For those of you in slip followed us for a long time, we burned less than $30 million on our way to IPO.

A lot more cash than that since then.

Discipline is built into the DNA of the.

We also built.

The business around model that is friction less an extremely efficient and we've shown this efficiency.

I would say over the past few quarters by growing very fast.

Being profitable.

Profitable.

So we have no doubt in our minds about the long term profitability profile of the company. So were deemed does is that it affords us opportunities to invest in times like this that the rest of the market will not have.

Blatter, everybody to investigate even spend money didn't matter.

This year I think it's a little bit different so we really see that as an opportunity to break from the back even further.

<unk>.

Build sales capacity and all those things obviously as I said earlier disciplines in the DNA of the company.

We're always looking.

Looking at.

With our margin dollars.

Macro environment is.

And we are we have all the levers we need to adjust so we can maintain profitability in the future. David you want to comment some more yes, I just want to add that what we said all along was we.

Try to maintain a steady investment profile, which is focused on R&D and in sales and marketing investments.

And its banded by what we can execute what we feel we can hire integrate et cetera and in periods, where there are is an acceleration and we said this many times on the topline we can't we can't invest as fast as that when the top line went up to 80, so youre.

Going to have margin expansion that was exaggerated because there were some some costs that didn't happen in COVID-19 that are part of our normal business operations. So we try to maintain a steady profile of investment and the variability is.

This acceleration of the top line you might see that because it flows through at a high marginal rate and then if you see a deceleration you might see less of that margin expansion. So that's our philosophy, but it's always to invest and take advantage of the long term opportunity.

And lastly, I'd say, we feel great about the opportunity in general we feel great about the as I mentioned earlier, the leading indicators of success, whether it's new logos, broda, kashif or product pipeline and our ability to ship it as well as the background, we see of customers that are.

And sales processes with us for new products or just run your deployment. So we feel great about all that and it makes us very confident into our investments.

It's possible, though is that if the demand environment is a bit more challenged it.

There will be a little bit of a longer time for for us due to our own estimates, but we're fine with that.

That's very helpful color.

Thank you. Our next question comes from Brent Thill from Jefferies. Your line is now open.

Good morning, David I think everyone's still a little confused.

Confused but youre seeing in version with what's happening with SMB and large enterprise. Many companies are calling out weakness in SME SMB not in large can you explain why you think youre seeing this conversion and are you embedding a more conservative view in the back half.

Yes, not not an inversion I think what we said was.

We did not see what you are saying, which is SMB and smaller customers did not.

Act differently than they had what we said was.

Whether it's an enterprise mid market or SMB, what happened was in certain segments.

Consumer et cetera, we had a more conservative or a more of a cost mentality.

And two it regardless of where it was in the number of SMB for US is a thousand employees or less mid market, 1% to 5000 enterprise 5000, and up that in the larger areas, where they had been substantial expansion.

We saw a I look at that cost.

So those were the determinations numbers for us it wasn't Europe . It wasn't that SMB fell out it was those things.

And in terms of the second half of the year.

We don't know, but and what we guide always we assume lower organic growth in all of the sectors than we have historically and that we might expect so I think conversion is the wrong thing because what this what happened was the driver of the cost.

Look was not whether it was an SMB mid market or enterprise, but what the level of spend and the industry.

What would you say to cities.

Critical to our customers, which are critically important we deliver value have been more be more efficient.

So in general whether it's whatever the size of the customer is we are not on the chopping block.

But.

The more customers spent enough theyre going to look for savings, where they're spending money.

And they are going to see that I do not have levels of spend with us and as.

As mentioned earlier, there is always a little bit you can optimize especially with some of the loading based products and by way of gross retention stayed the same at all the different levels SMB mid market and enterprise. So when youre talking about do you have the solution and are you continuing to solution. We saw no change in the gross retention across all of our customer sizes.

Thanks for clarifying.

Thank you. Our next question comes from Gregg Moskowitz from Mizuho. Your line is now open.

Okay. Thank you for taking the questions.

Ali you are frequently speaking to a lot of data to our customers anecdotally speaking are they raising more questions about your pricing levels in this environment any commentary on that would be it would be helpful.

So we are actually very optimistic from a conversion with customers because theyre more and more of them. They want to buy more product they want to use more of our products. They want us to solve a bigger problem for them.

Everybody wants a better deal, but I think thats always.

Been true and that's always going to be true and it's even tour in situations like this where the CFO of a mandate.

To be more conservative.

Anecdotally from what we see with customers we are very bullish.

Okay got it and then you touched on some interesting examples in your script, but if you were to look back over the past six months or so I'm wondering whether or not there has been any change to.