Q4 2022 Datadog Inc Earnings Call
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Good day, and thank you for standing by and welcome to the fourth quarter data Dog earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising you. Your hand is raised to withdraw your question. Please press star one one again, please be advised that today's conference.
Is being recorded I would now.
I'd like to hand, the conference over to your Speaker today, you could butterick Vice President of Investor Relations. Please go ahead.
Thank you Catherine.
And thank you for joining us to review data dogs fourth quarter and fiscal year 2022 financial results, which we announced in our press release issued this morning, joining me on the call today are Olivier Flamel did it Alex co founder and CEO and David Oakes Slur, Peter Dog CFO . During this call we will make forward looking statements, including statements related to our future financial performance are up.
Look for the first quarter and fiscal year, 2023, and related notes and assumptions, our gross margins and operating margins our strategy, our product capabilities and our ability to capitalize on market opportunities. The words anticipate believe continue estimate expect intend will and similar expressions are intended to identify forward looking statements or similar indications of future expectations.
These statements reflect our views only as of today and 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 September 32022.
Additional information will be made available in our upcoming Form 10-K for the fiscal year ended December 31, 2022, and other filings with the SEC.
This information is also available on the Investor Relations section of our website along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors outdated at HQ Dot com.
With that I'd like to turn the call over to Olivier.
Thanks, Kyle and thank you all for joining us this morning.
We had a solid Q4 and a strong fiscal year 2022.
We delivered significant new innovations for our customers, we saw increasing adoption of our product and we attract thousands of new customers to our platform.
Meanwhile, we delivered strong revenue growth margins non-GAAP operating profit and we generated more than $350 million in free cash flow.
Let me start with a review of our Q4 financial performance.
In Q4 revenue was $469 million, an increase of 44% year over year, 8% quarter over quarter and above the high end of our guidance range.
We had about 23200 customers from about 18800 last year.
We ended the quarter with about 2780 customers with E R or $100000 or more up from about 2010 last year.
These customers generated about 85% of R. R.
And we had 317 customers with <unk> of $1 million or more compared to the 216, we hired at the end of last year.
We generated free cash flow of $96 million with a free cash flow margin of 21%.
And our dollar based net retention rate continued to be over 130% as customers increase their usage and adapted more product.
Okay.
Our platform strategy continues to resonate in the market.
At the end of Q4, 81% of customers were using two or more product.
78% a year ago.
42% of customers were using four or more products up from 33% a year ago.
And 18% of our customers were using six or more products up from 10% last year.
Now moving onto this quarter's business drivers.
Overall, we observe slower usage growth with existing customers, while continuing to scale, our new logo acquisition and you put a cross sells.
Starting with usage.
He said growth of existing customers in Q4 was overall slightly lower than what we observed in Q2, and Q3, which we attribute first to a continuation of cost optimization by our larger spending customers and second to seasonal annual slowdown in the second half of December there was more pronounced than in previous years.
As in Q2, and Q3, we continued to see more optimization from customers. The larger craft footprint what are smaller spending customers are exhibiting higher growth.
From a product perspective, we didn't see meaningful differences among our major products as they all experienced solid growth, albeit decelerating on a year over year basis.
In contrast to this deceleration and usage growth what are you seeing customers. We continued to execute our new logo lands and multi product adoption and we also continue to see stable very strong gross retention trends.
First we had a strong new logo quarter to date with a record level of new logo in our bookings.
Second our sales pipeline remains healthy as a pattern of new logo and cross sells is scaling above the levels of the past years, and we see demand growing along with our investments in go to market.
I'd also like to point out that although we have made steady progress we still see significant opportunities to grow our penetration in total spend amounts with larger customers.
As a data point as of January 2023, 37% of the Fortune 500 customers up from 30% last year.
For these customers the median.
Or is in the hundreds of thousands of dollars. This leaves a very large opportunity for us to grow with these customers as they continue to move towards the cloud and modern develops.
We are also pleased with the initial take up of some of our newest products, including cloud cost management for which we already added a mid six figure commitment last month from a global fast food chain.
And finally churn has remained low with gross revenue retention steady in the mid to high nineties.
We believe this high retention number is indicative of the business criticality of their dog for our customers.
Now, let's move on to R&D.
During the quarter.
<unk> is our latest products to general availability Universal service monitoring, which detects all micro services across an organization's environment and provide instant visibility to their house and dependencies, all without any code changes.
Universal service monitoring bridges, all existing and function monitoring and application performance monitoring capabilities and enables end to end ability with minimal deployment friction.
Now, let's take a moment to review the R&D team's accomplishments in 2022.
We ended the year with 17 generally available products up from 13 at the end of 2021.
And we greatly expanded the capabilities of our existing products.
Overall in 2022, we have meaningfully broaden arms have ability capabilities and push forward in making each product best of breed.
Meanwhile, we have made meaningful progress, but remain early days in the new areas of cloud security and developer experience.
And is this ability we continue to expand our end to end unified platform.
We now have more than 600 integrations, including all the latest products on anybody with DCP in Azure.
We launched new AI capabilities, such as world of logs and limited detection to have customers separate signal from noise in the allo data and what's a good course analysis to identify the root cause of issues and quantify the impact on customers.
We launched cloud cost management do you have customers take control of their infrastructure costs.
We announced service catalog to managed service ownership at scale.
We made several key pipelines generally available enabling customers to collect and transform data from any source to any destination or at petabyte scale.
We launched audit trail to help customers achieve their compliance and governance calls.
We extended sensitive that scanner being logs to inspect a P M and Ram data flows.
And we now collect data from SNMP traps to perfect to provide greater visibility into physical network equipment.
You got securities, we kept building out a platform.
We launched cloud security management or rich context aware C&I platform.
We don't application security management building on the acquisition of <unk> created in 2021.
And we announced the beta of native protection to block malicious actors directly within that platform.
In developer experience, we are expanding on RCI visibility product.
We introduced continuous testing to bring efficient and reliable testing, we didn't see ICD pipelines.
And we launched the beta of intelligence test runners, which significantly reduces the time and cost of running tests.
And last but not least we delivered a number of platform wide initiative.
We achieved federal moderate authorization and have since learned a number of government agencies as customers.
Okay similar as two days.
And also use CT screening for collaboration incident response pair programming and debugging less than a year after the acquisition.
And we continue to expand on the HIPAA and PCI compliance of our product.
As you can tell we've been busy and I want to thank the R&D team for a very productive year.
Looking ahead to 2023, our teams are continuing to push forward as beta products from 2022 include the restrooms monitoring workflow automation, even correlation heat map dynamic instrumentation workload security profiling resource catalog and native protection among others.
We also continued to integrate our 2022 acquisitions co screen HD secret in Cracraft into the digital platform and we are excited for the potential.
In summary, we're looking forward to delivering many more capabilities to help our customers in 2023.
Now, let's move on to sales and marketing.
Our go to market teams continued to execute very well into the end of 2022 in particular on new logo lands.
So let's go over a few of our wins this quarter.
First we signed a seven figure land with a fortune 500 industrial group.
This company was using multiple open source and building cloud monitoring tools, which led to release delays in consumer facing outages.
In addition to our metrics traces and logs. This company would rely on our ability to integrate open telemetry data sources to deliver immediate value.
These customers. The initial deal includes 13 products across our visibility security and developer experience deteriorate.
Next we signed a seven figure land with a fortune 500 financial services company.
This customer is moving hundreds of applications from on Prem to the cloud and multiple legacy tools, we're creating gaps with visibility and post PCI compliance problems.
He's got some are today is looking at savings of roughly $1 million in the first year of using data dog in a meaningful reduction in mean time to resolution.
This deal will start we'll start with infrastructure monitoring and replace a three different disparate tools with plans to expand to other products in the future.
Next we signed a seven figure land deal with a major federal government agency.
Is the agency was looking to reduce to <unk> pro and aimed at the rapid rollout to hundreds of different programs.
Having money on engineering and issue resolution.
These agencies among a number of new government customers in 2022, following a federal moderate authorization.
And this deal is expected to displace at least eight commercial legacy monitoring tools.
Next we signed that we signed a seven figure land deal with a leading Japanese system integrator.
This company has been a very successful hardware system integrator and is looking to grow its digital and cloud transformation business.
This customer plans to add up 15 products in order to support its ambitious growth plans.
And lastly, today, we signed a multimillion dollar expansion with one of the worlds leading insurance companies.
Prior to using data dog. This company was using more than 30 tools across nine business units.
By consolidated onto onto that a dog the customer estimates change roughly 115% IRI all within a year, while reducing average mean time to resolution for one and a half hours to 15 minutes.
With this renewal this company's adding database monitoring cloud security management and application security management and is now using 12 that adult products.
That's it for this quarter is give some highlights and again I'd like to thank our go to market teams for their great execution in Q4 and throughout 2022.
Now, let me speak to our longer term outlook and my thoughts on 2023.
Although we are seeing customers being more cautious with their cloud user expansion in the near term, we see no change to the long term trends towards digital transformation and cloud migration.
We think it's healthy for consumers to optimize and we believe that the ability to correct course and continually aligned in nature and scale of their applications with their business needs is one of the key benefits of our transformation.
At the dog will have always organize our products and our business around helping customers gain agility and reduce costs and we do it by enabling stronger business performance and efficient use of their engineering and infrastructure spend.
Regardless of near term macro pressure, we believe it is still early days and we expect the company's worldwide will continue to grow an extra 90 footprint to deliver value to their customers.
Given the large opportunities we see in front of US we plan to keep building and innovating.
We have already made progress in the deliverability, but we still have much to do to deliver more value and solve more problems for our customers.
And we are excited about the opportunities in cloud security developer experience as well as our early efforts in areas around <unk> salmon real time business intelligence.
Yeah.
As we have since we founded data dog. We are also balancing long term investments against maintaining the discipline to ensure continued financial performance.
We recognize that the macro environment remains uncertain.
So why do we continue to focus on scaling and investing we are growing those investments in a disciplined fashion in 2023, and David will discuss this in more detail.
We remain confident in our long term opportunities and we are continuing to invest in our strategic priorities to catch up then.
With that I will turn Nicola over to our CFO for a review of our financial performance and guidance David.
Thanks Olivier.
In Q4, we continued to execute well and delivered value to our customers.
Revenue was $469 million up 44% year over year and up 8% quarter over quarter.
To dive into some of the drivers of our Q4 performance first we saw existing customer usage growth in October and November at a similar level to what we saw in Q2 and Q3.
In the month of December we saw a slower growth dynamic as the typical slowdown we see at the end of December was more pronounced than in previous years.
As a result, the growth rate in usage by existing customers was lower in Q4 than in Q2 and Q.
Q3.
Next similar to Q2 and Q3, we saw larger spending customers grow slower than smaller spending customers.
As with Q2 and Q3, we saw relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce and food delivery.
Geographically, we saw solid and relatively similar growth across all regions.
As Olivier discussed we experienced strong new logo growth and low churn again in this quarter.
We had a record level of new logo bookings in the quarter across customer sizes.
Our dollar based net retention remained strong levels above 130% for the 22nd consecutive quarter.
And gross revenue retention has remained unchanged over the last several quarters and remain steady in the mid to high nineties.
We believe this high and steady gross retention points to the mission critical nature of the data platform for our customers.
Now moving onto our financial results.
Billings in the quarter were $536 million up 31% year over year.
Billings duration was slightly lower year over year.
Remaining performance obligations or <unk> was one point or $6 billion up 30% year over year in.
In RP O duration declined on a year over year basis.
And we note that current RPI growth was in the high <unk> year over year.
We continue to believe revenue is a better indication of our business trends and billings and RP O as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts.
Now, let's review some of the key income statement results unless otherwise noted all metrics are non-GAAP . We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release.
Gross profit in the corner quarter was $378 million, representing a gross margin of 81%. This compares to a gross margin of 80% last quarter and also 80% in the year ago quarter, we continued to experience efficiencies in cloud costs.
It's reflected in our cost of goods sold in this quarter.
In the mid to long term, we continue to expect gross margin to be in the high Seventy's range.
Our Q4, non-GAAP Opex grew 54% year over year, and we can as we continue to grow our head count in R&D and go to market.
Q4, operating income was $83 million or an 18% operating margin compared to an operating income of $71 million or 22% operating margin in the year ago quarter.
As a reminder, the year ago operating margin benefited from lack of in.
In person office travel and event costs due to our COVID-19 policies during the pandemic.
Turning to the balance sheet and cash flow statements. We ended the quarter with $1 $9 billion in cash cash equivalents restricted cash and marketable securities.
Cash flow from operations was $114 million in the quarter and after taking into consideration capital expenditures and capitalized software free cash flow was $96 million for our free cash flow margin of 21%.
Now for our outlook for the first quarter and the fiscal year 2023.
In forming our guidance, we continue to use conservative assumptions as to the organic growth of our customers compared to historical periods.
And as usual we are basing our near term guidance on recent activity, we see with our customers.
We are incorporating an expectation for seasonally weaker growth in the first quarter due to the subdued.
<unk> growth in the month of December that creates a lower growth trajectory to start the first quarter.
While our customers are continuing to expand with US we are assuming in our guidance that cloud optimization continues to affect our expansion rate in 2023.
For the first quarter, we expect revenue to be in the range of $466 million to $470 million, which represents a 28% to 29% year over year growth.
non-GAAP operating income is expected to be in the range of 68 set to $72 million or an operating margin of 15%.
non-GAAP net income per share is expected to be in the range of 22 to <unk> 24 per share based on approximately 348 million weighted average diluted shares outstanding.
For the full fiscal year 2023, we expect revenue to be in the range of two point or seven to two point on $9 billion, which represents a 24% to 25% year over year growth.
non-GAAP operating income is expected to be in the range of $300 million to $328 million for a margin of 15% at the mid point.
non-GAAP net income per share is expected to be in the range of $1 <unk>.
To $1 90 per share based on approximately 351 million weighted average diluted shares outstanding.
Now some additional notes on the guidance.
First regarding our fiscal year 2023 investments, we continued to balance near term financial strength with investment in our large long term opportunities.
Our non-GAAP operating income guidance reflects this discipline.
We will continue to grow our R&D and go to market teams as we broadened our platform.
And in service of our customer needs, albeit at a slower pace than in previous years.
As a result, we are planning to grow our operating expenses, including Cogs.
In the fiscal year 2023 in the low 30% range year over year.
We plan to grow our head count in fiscal year 2023 in the mid 20% range year over year. This compares to fiscal 2022 head count growth of approximately 50% year over year.
Next.
As interest rates have risen our interest income has increased and become more meaningful we expect net interest and other income for the fiscal year 2023 to be approximately $75 million.
We expect tax expense in fiscal year, 2023 to be $11 million to $13 million and finally, we expect capital expenditures and capitalized software together to be in the range of 4% to 5% of revenues in fiscal year 2023.
To reiterate Olivier as comments, we've seen no change to our long term opportunities as our customers embark and expand on their cloud migration and digital transformation plans.
We remain strongly positioned to help our existing and prospective customers with these journeys.
I want to thank data dogs worldwide for their efforts in 2022 and I'm excited about our plans for the next year.
With that we will open the call for questions operator, let's begin the Q&A.
Thank you as a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question Press Star One one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Mark Murphy with J P. Morgan Your line is open.
Well, thank you very much.
Olivier I was wondering if you can comment on the AWS infrastructure monitoring.
The business, specifically do you see that trending above or below the 25% rate of the total business. This year and I'm wondering if you perhaps see some of the other hyper scaler Azure, Google et cetera are gaining any share of that mixed. During this year, then I have a quick follow up.
Yes, so look we obviously we see.
We get data from our from our customers using the site providers and we also listen to the commentary to help providers provide on there in terms of their own growth.
Theres not a one to one mapping between what happens.
On the revenue side for the cloud providers and what we see on the infrastructure side on our end.
But we are seeing some of the same trend to nowhere.
The growth slowed down throughout Q4, and we've been listening to their comments.
Get guidance for what that growth might look like in the near future, which also informed on guidance in.
In terms of the mix shift.
We don't see anything that differs from the trends we saw throughout the last year I think the story there is they're also seeing.
Optimization from some of their customers that is the largest customers.
And on our end.
We expect that optimization to continue throughout the year, that's what we built into our guidance.
Okay understood and then David I believe you mentioned record new logo bookings.
Bookings in the quarter great to hear.
I think we're wondering what.
What do you attribute that to just given the environment is still challenging.
As mentioned.
Several of these companies landing with eight or 10, or 15 data dark products and replacing legacy tools are replacing open source do you see an increase in those kinds of consolidation opportunities in <unk>.
Maybe just a broadening where.
This landscape is viewing data dog.
Converged observe ability leader in wanting to consolidate in that direction.
Yes in Q4, and I think going forward, we continue to see greenfield in new projects, new workloads being.
The majority of the driver, but have seen over the quarters and we talked about some of them in our prepared remarks.
Consolidation opportunities.
When it went up a client is already in their cloud journey and has workloads and is looking.
To get a platform create efficiencies et cetera.
They have increasingly been consolidated on data dog and we see continued opportunities for that.
To that.
We see demand scaling basically like we're still early in cloud migration and digital transformation.
And we see no slowdown from companies.
Going from legacy to these to this new world, that's why we get more and more new logos and one more volume there.
The part of the business, we see growing Florida is the larger customers that are further along in this transformation to have large workloads trying to optimize secret that's where it can meaningfully set cost.
Thank you very much.
Thank you one moment for our next question.
Okay.
We have a question from Celgene.
<unk> from Morgan Stanley Your line is open.
Yes, Thank you for taking the question.
I wanted to ask about the.
Product innovation and in some sense you guys have had a pretty impeccable track record of leasing.
A lot of product.
That sort of benefit of your customers over the last couple of years, but given sort of the environment that exists today do you feel that in some sense, David I'll get C&I customers.
A lamborghini type observer ability solution, meaning that our U.
And such.
Customers may or may not need all of the bells.
Bells, and whistles that that a 17.
Portfolio can provide any thoughts there on weather.
Doug maybe.
Potentially over engineered for in terms of customers.
Willingness to spend in the current environment.
Yes so.
Definitely I don't think we position ourselves as the Lamborghini or not.
Have a glove box and <unk>.
It needs to go to the shop every two weeks is definitely not.
Wood.
We have been investing heavily in production innovation, we have a lot of products today.
Thanks to this acceleration of product innovation.
Over the past few years are early in their lifecycle.
What we see in the current environment is that it is actually helping us get to these consolidation deals that were mentioned in a little bit earlier, because we can cover more of what our customers need to do and drive more efficiencies again, it's still early in that because many of those products early in their lifecycle. So there might not be applicable to every single type of case mrna every single type of course.
Situation.
But I think this is validating our destination there and it shows we need to do more of that not less.
At a time, where larger customers are very very careful about their spend it might be more difficult for some of those products to get a lot of adoption rate with any particular customer at a very high level of spend.
So we're focusing today on getting a maximum number of those customers to either of those products and plan to seeds of future growth as they further consolidate and move to the cloud.
Understood and just a follow up on those larger customers, who are seeing who are seeing their usage trends slow more than the smaller customers.
Relative to their commitment how how are you guys sort of handle that are you in a situation where youre rolling over of credits or are you sort of enforcing sort of the take or pay aspect of the contract any color. There on how you're working with those larger customers in terms of where they stand relative to their commitment.
Yes, we are so we always want to partner with customers and build a long term relationship with them.
We've had some customers.
<unk>.
Have run into very significant business headwinds, where their own businesses have contract quite a bit.
In those situations, we always work with them to a structure of the contracts and make sure we get to a better outcome, we've done that with one of our major customers over the past quarter and we.
We've had some real connection with some of our customers as well so thats part of the.
But it was customers fulfill part of the guidance, we're giving for the year and I just wanted to add that because we tend as you know land to go land and expand and our customers tend to.
Under commit relative to what they eventually get to.
We haven't seen across the customer base, a very meaningful increase of sort of unused commitments.
And so and so that's something about our our go to market that creates flexibility with clients to commit as they see usage.
Understood I appreciate the thoughts David.
Yes.
Thank you.
And.
One moment our next question comes from.
Brad Reback from Stifel. Your line is open.
Great. Thanks very much.
Just one real quick one David I know you I know billings isn't necessarily the best metric to sort of focus on but <unk> is a really monster it's comp.
So maybe any color you can provide as we should think about billing, especially with changes in duration in calendar 'twenty, three and maybe lower commit upfront from customers on renewal.
Yes, I think again I think it is really driven by the the IRR and linearity of that.
So.
Don't think we plan for billings et cetera.
We essentially have had billings as you know go above and below the revenue based on the billings in that period.
And so we don't see really any change in that type of pattern, but again bring everyone back to <unk> and revenues as the major economic driver.
That's great and then real quickly if you look back at your business. Historically, there has been a fairly tight linkage between your growth rate.
For Hyperscale.
With a multiple on it.
We sort of look forward what types of things need to happen to expand that that multiplier.
Okay.
Well, I mean look where we're covering more and more of the.
We're starting a bigger and bigger problem for our customers, which means we are expanding all the time.
And so we can have a larger and larger multi player over time, that's why we're investing in new categories. That's why we keep building out some stability.
And that's why we're doing all these investments.
So that that's where we're going I think youre right, though that the underlying wave.
That is.
It has been.
Yeah.
A tailwind throughout the history of the company.
Cloud migration and digital transformation.
That where it might be a bit more of a headwind.
Over the next few quarters.
But we strongly believe that it will become a tailwind again in the future, which I can tell you when exactly.
We've listened to the course of the Hyperscale is they can tell you when either we're in December there.
So what we're doing today is we're focusing on the drivers of future success, which are.
Covering more of the customer landscape sort of getting into more new logo was more geographically more segment.
And also developing our products and getting those products adopted by more of these customers, which is where we're going to have.
Accelerating growth in the future.
Perfect. Thanks very much.
Okay.
Thank you.
Our next question comes from Fred Lee with Credit Suisse. Your line is open.
Hey, good morning, Thank you for taking my question.
I'm curious about.
Product expansion and what will help data dog gained share as a percent of hyperscale or spend a little bit related to Brad's question second question a minute ago. I was wondering if we could get an update on which products are gaining the most traction and has the greatest potential in 2023.
Well, so we have a lot of products that are early in their lifecycle.
Some of them are large categories, where we are seeing larger and larger revenue and.
We have very ambitious plans such as security.
Some others, some others on newer but might be a bit more tactical in 2023, such as smart cost management.
So I think it's really it's going to be a mix.
We see some interesting early signs with cost management, which is still only build to a handful of customers at this point, we're already seeing very launch.
Fitments from some of these customers, we called that out on the call.
So we think it might be if you think of anything that might have more of an impact in the in the short to mid term that might be one of those.
But really the way we think about all of those products is how do we turn them all into major products 234 years out.
We win these additional categories and how do we be how do we become the.
Platform of choice for consolidation in the long term debt.
Moving towards.
And just a quick follow up on the security portion so with regards to the uptake of your security solutions, how would that compare how does that compare to the adoption patterns of it.
In front of an ATM.
Difficult to compare to two infra because.
He was the very first thing we did in the mid <unk>.
Early days of the company.
It's actually pretty comparable to what we've seen with APM, where it's a domain with a lot of investment required. We also have a very ambitious and very differentiated approach to it which requires quite a bit of a build out and quite a few things to figure out with customers.
But we're also seeing continuous adoption growth thousands of customers using the platform, we see it being adopted.
A very large scale by.
Very large customers in which some of which we call. We also mentioned on the call today.
So we are we're not completely there yet they still have work to do but we think it is tracking well too.
We expect to have what we can expect in our plan.
Great. Thank you very much.
Mhm.
One moment. Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.
Great. Good morning, everyone. So thank you for taking the questions.
I wanted to ask you about the.
Usage patterns of large customers versus small customers I know you said your smaller customers, we're not seeing as much of a slowdown in usage, but what gives you confidence that those smaller customers just haven't reached or reacted.
So the slowing macro yet and we may see maybe a slowdown in that segment going forward.
Hello.
All right.
It's hard to tell what's going to happen in the future right. So we are.
We don't really have a crystal ball there what we see though is that.
Customers save money, where it matters, which tends to be the very large line items, which for customers that are fairly far along into the cloud.
He is going to be first.
Their cloud provider deals that are again, one of the one or two orders of magnitude larger than their visibility bills and then we're going to be affected by that and maybe with some optimization and more strategic to observe LT as well. So that's what we see there that's why we see most of the large customers do that.
On the smaller side I'll point out that many of our smaller customers are actually very large companies.
<unk> are fairly new into the cloud and are seeing growing to the cloud. So they are seeing exactly the same thing as the.
Their peers, who are spending a lot more on us.
It's just the part of their business that is <unk>.
<unk> is growing as opposed to where the spend is today and it needs to be controlled.
The last thing I will say on the on the very low end of our customer base, we do see <unk>.
Impact of the macro environment and that we have a little bit more churn and at very very low end, which is what you see when you see our customer count.
Going up as much disk.
As having very strong year over quarters.
Our focus at this very very low end of your customer base is not moving the numbers at all in terms of gross retention, which remained very high.
Okay. That's great. Thank you for the color there.
So I'm wondering if your gross margin was surprisingly strong in the quarter and Im wondering if theres anything you can do on pricing.
Even.
These large customers focus on cost optimization.
Well, we work with the large customers.
Obviously to make sure that they get.
The 30 day need.
We are optimizing gross margin obviously.
We were doing quite a bit on our end too.
On the engineering side.
To do that.
At all levels and a 1% of gross margin is making a very large difference for the business and we can reinvest that in future growth.
Changing prices by one person based on that doesn't make a big difference for customers I think when there.
The real way to to address.
Their concerns as it keeps scaling and generating much more data.
And any more ability data to us is to give them more options to process that data so that day.
They can align with that.
Will they pay to ask with the value they get.
Also building that on the product side. So it's not really a pricing question, it's more of a product and structure question and.
And I just wanted to know that were on costs I just want to add a little clarification I think we talked about the trends of gross margin.
And what we expect for the future and we gave some.
Guidance as to our operating expenses in 2023, I believe I might have misspoken, the operating expense guidance.
In 2023 in the low Thirty's range excludes Cogs, we gave the guidance guided separately as far as our comments on that just to clarify.
Super Thank you guys.
Our next question comes from Koji Aikido with Bank of America. Your line is open.
Oh, Great, Hey, Olivia Hey, David Thanks for taking the questions.
I wanted to ask you a question on the guidance, maybe a compare and contrast year.
I was wondering if you could talk about maybe how to think about the levels of conservatism.
Bedded in the full year 2023 ratified today versus when you first gave guidance last year for 2022.
Yes, I think we've continued to.
Use the same approach which is to look at.
The history and discount the major assumptions, which are the organic growth or the expansion of existing customers and new logo.
I think the difference and ask the actual results wise or in the periods of times, where we saw.
More than pro rata or more than historical.
Adoption and growth of existing customers the ratio between that discount and where it ended up in actuals ended up larger, but the intent and the strategy of providing this guidance on conservative assumptions relative to that has not changed.
Got it got it.
<unk>.
One quick follow clearly.
To be clear our guidance doesn't assume that the optimization stopped what we've seen over the past few quarters basically the second half of <unk>.
2022, we assume it's going to continue we know it's going to end at some point, but we don't know when exactly so we don't were not building that into our plan.
Got it got it that's helpful. Thank you and just one follow up here question on sales capacity just thinking about hiring plans. There you mentioned in the prepared remarks overall head count to grow in the mid <unk>, but continuing to grow in the go to market teams at a slower pace. So just as that mid <unk> the right way to think about sales capacity.
City hiring this year too.
Yes, yes, I think thats right.
Our.
Growing our investments and go to market and sales capacity, approximately plus or minus at the guidance, we gave and head count growth.
And the reason for that is we.
We still have ground to cover.
<unk> segment and geographies to cover.
Also as we mentioned earlier, we're having actually great success when it comes to landing new logos and new products with customers. So our sales interactions are productive a return on investment.
Australia.
Is there.
So we need to keep doing that again. These are the seeds of future success, we're planting.
<unk>.
We don't intend to stop I would clarify that because of the ramping nature of salespeople the growth rate that we had which was in excess of that 25% in.
In 2022 means that the coming online of that ramp capacity is at a rate higher than that in 2023, as we begin to harvest the investment from that.
Got it got it thanks, guys. Thanks for taking the questions.
Thanks.
Thank you.
Our next question comes from Matt Hedberg with RBC. Your line is open.
Great. Thanks, guys Ali for you.
Any data points around around product splits I know in the past you've talked about APM and logs I think it's been a couple of quarters. Since we had an update on the size of those businesses, but any any sort of like rough magnitude of those and are they still in hyper growth.
No I mean, we see fairly.
I think of the.
Products that aren't measured scale today, which APM logs and infrastructure monitoring.
Those are staying about the same trend in terms of growth in Q4.
And I think thats part because.
Some of the.
Optimization with telecom customers happens across the stack because it happens upstream from us at the provider level and Thats why we will see.
Slightly slower growth of course monitored on the cloud providers or on APM and also little bit less logs.
Some of it happens more directly at the ideal delivery T level logs in particular are some aspects of APM that are transaction based.
Where we see customers optimizing there and making sure they get the best value and get the noise.
But as a result, we see fairly similar trends across our products. So that's why we didn't call out anything specific in there.
In the future I'm sure, we will share more about the relative sizes, but again.
The growth rates are not that different in the in Q4. So it there was nothing to call out.
Okay. Thanks, and then maybe just David.
On the guide obviously with kind of a mid Twenty's revenue guide you talked in the prepared remarks about having an IRR above 134.
Almost two years.
Presumably that dips below 130 in any sort of commentary on how that might progress through the year.
Yes, I think youre right. If the implicit in that guide is below 130, <unk> will report to everybody as we have that we've seen.
It relate to the <unk> I would say on that on that that given the change in the organic growth rate that we've been talking about starting in the middle of Q2 last year.
It would be it's getting past that to the extent that it changes that changes that net retention plus or minus and given then that retention is comparison against the year end of year on year customers. So you do have headwinds in the compare.
Sure.
And through that time that we had the change of the organic which we had said was in the middle of Q2 last year.
Last year.
Got it got it thanks.
Okay. One moment. Our next question comes from Fred have Meyer with Macquarie. Your line is open.
Hey, Thank you I wanted to ask with respect to the slowdowns in that you've been seeing within certain customers have you seen anything to suggest that these can be related to layoffs and tech either because say that op seats have been directly impacted where just because of the general disruption to Dev ops and engineering teams.
No.
It's mostly because they can save money on their cloud deals.
Again, it's one of the great things about the cloud is that.
It's an ongoing expense you can adjust it over time, you can restructure the way you're running applications.
So there is there are some numbers you can use to optimize no issue if youre running everything on Prem.
As all the other costs are sunk already in.
Referring to the future.
So we mostly see that I mean, there's a little bit more noise and predictability with some customers because theyre, having checkups and so you need to talk to different people and they need to reorganize a little bit. So it can add a little bit of noise in some of the conversations but really the dominant motion is they're optimizing their client.
Sure Bill.
And there.
That's especially the case if they are spending a lot there.
The vast majority of our products are Josh Baer infra.
The success of our usage or data volumes not proceed so were not directly impacted by layoffs.
Thank you for that and then just quick follow up would be actually in the prepared remarks. Thank.
Thank you for that context, and cloud cost and cost management.
Perhaps more generally talk about your customers' interest in fin ops, and how dated August positioned to be able to help customers better understand both where they're spending how they're spending and what sort of ROI. They are seeing.
Our customers are definitely interested in picking up the larger the automotive are interested and that directly relates to the work they're doing route optimization.
Very nascent category today, it's a nascent practice for most of our customers.
And we also have a lot of experience internally running ourselves as very large cloud operation across all of the lost cost for cloud providers.
So that's why we believe we can we can build something that is fairly differentiated there.
Our product there is having a great reception from customers, even though it's still early.
I mentioned earlier, we sign a mid 60.
Your deal and you'll deal.
With a large restaurant chain.
And we see more of that coming our way.
So we think it's a it's one way in which we can.
Also a handful of customers.
They need to to optimize and be more efficient in the in the short and midterm.
Thank you.
Our next question comes from Camille with William Blair. Your line is open.
Okay.
Good morning, Thanks for taking my question.
I want to clarify one of David's comments that youre, incorporating seasonally weaker growth in the first quarter due to subdued growth in the month of December can you expand on how demand and customer conversations have trended in the first few weeks of 'twenty, three and whether thats changed since 22 years.
Yes, I think you've got you have two different avenues I think we set a new logos, we we had a strong quarter.
Continue as we mentioned to have a strong pipeline, meaning that for new projects, New workloads, we continue to see a solid demand environment.
In terms of the organic.
When you have and this happens in most years when you have people going on vacation and sort of reducing the amount of logs or or work they're doing.
You tend to see a rebound of that in January we did see a better that but given the volatility in the market. We wanted to be we want to be cautious in reading too much into that and we'll let everybody know how that plays out.
Somatic Lee.
We.
Q4 was more front loaded than back loaded in terms of all recognize revenue. So we entered.
Uh huh.
Q1.
At a lower lower levels.
So thats why we also had sequential there is a little bit.
Lower there.
In terms of the trends I've, just sticking with David.
We want that seasonality with <unk>.
Higher than we had seen in fiduciary and we can explain that in different ways and basically if customers are trying to save money, they're a lot more careful about turning off the lights went live in vacation basically.
But.
What we've seen early 2023, so far is consistent with what we've seen in Q4 in the second half of 'twenty to 2022, and so it's still it's too early really to pass judgment, but it really factors into our <unk>.
Our guidance, which is that we we don't believe that their optimization has stopped we assume it's going to continue we don't know yet when it's going to when it's going to start we know it's going to happen at some point, but we are planning for this years guidance.
Yeah. That's helpful. Thank you and just as a quick follow up it's nice to see the large wins on the federal side I realize it's still early but can you update us on how big of a contribution that could be in 'twenty three and how important are additional authorizations for expanding into that market or just fed ramp moderate alight address most of the timber.
So I mean I can't give you specific numbers there I know, we're seeing we're seeing wins, we're seeing engagements from the.
From the.
From the government agencies and the activities that serve them.
All right very good.
We still have some building to do on the go to market teams for that and we also still have some things to build on the product side I guess more levels.
Certification, we want to get to where to reach more of those customers so as to build.
What I'd say is we.
We're getting the proof points that we're fit and that customers.
Can use us in those environments and that there is a real market was down.
That's helpful. Thanks again.
Thank you our next question.
Our next question comes from Sterling Auty with SCB Moffett Nathanson Your line is open.
Yeah. Thanks, Hi, guys I'm curious if you have any sense.
Working and talking with customers as to when they started an optimization project how long it actually takes them to get to that new level. Obviously it can change if the economy gets worse, but is this something where they started and it takes them a month a quarter two quarters.
Any sense would be would be helpful.
So it's a little bit hard to give you an answer that fits all types of customers. Because we also are going through the.
<unk> organized a little differently to how they are different scales in there.
They're going through.
Different phases with their business is in the in the economy, we have seen customers, having multiple rounds of layoffs for example, or having to address multiple times with data and with their business.
But what we see in general is that the fastest thing they can do to have an impact on the ideal is to.
Adjust some of the data at ASN in logs are are in APM and after that youll be youll see them do a little bit more there at the provider level, which is higher impact in terms of their own saving but also takes a little bit more time, because they need to reorganize their workloads and invest more engineering time in doing that so we've seen.
That happened with some of our customers.
For a number of our customers we saw it happen, we think they're done and thats when we see them start growing again, but it's too early to call. It for the rest of the customer base that again, they are all going through a fairly different things in a different scale.
Understood. Thank you.
And we have a question from Alex Zukin with Wolfe Research Your line is open.
Hey, guys. Thanks for taking the question I guess.
Ali if you think about the <unk>.
Trends that you saw in the second half of last year, and what you're seeing year to date.
When you think about optimizations versus timeline too.
To spin up new workloads and the effect that that has on.
DNR as it progresses when you look at the timeline that you think that takes in there.
Anniversarying of these headwinds.
Particularly with the larger customers how does that look from a linearity perspective over the course of the year.
Okay.
So so right now.
No again, it's we're assuming that we are seeing the same.
Trends of growth are you seeing customers throughout the year like we're not we're not estimating an inflection we are assuming a continuation of that with some level of conservatism compared to actual we saw last year. That's what we're building in.
Again, we believe that there is going to be some re acceleration at some point.
As the optimization has run its course.
But given the level of macro uncertainty I think.
<unk>.
Too difficult to come up actually tell you when.
Again, we've listened to the call of the of the cloud providers. They also can tell you when.
And so we're we're being prudent with our guidance there.
Perfect and then.
David maybe just one for you around cash and cash conversion free cash flow.
As we look at the year.
Just curious if theres any kind of different flexibility in payment terms or even just the assumption for the cash conversion from operating income.
Two to cash flow for the full guidance in fiscal 'twenty three.
We've always said that our free cash flow is been around the slightly higher than our EBIT margin.
If you look back you'll see that in some quarters, a little above and some quarters a little below.
We have not seen any changes of any material changes in payment terms or or the flows of cash. So there's nothing we've seen so far that would cause us to change our views about cash flow conversion for the company.
Perfect. Thank you guys.
Thank you.
So that's all the time, we have for questions I would like to turn the call back over to Olivier <unk> for closing remarks.
Thank you all so.
I just wanted to take a minute to first.
Thank our customers for trusting us with their business and partnering with US I know some of them are going through difficult times.
Last year and also early this year.
So we're working with them actually we all come out of it stronger.
I also want to thank our employees that are dogs everywhere around the world.
For actually delivering a fantastic year in 2022 from all of the metrics, we control ourselves we saw some slowdown in consumption with some customers, but we also delivered a lot of value for customers. We scale. Our go to market teams. We did great in terms of lending Euro goes attaching new products heating products that solve more problems for our customers.
<unk>.
And we think that this bodes very well for the future. So I'm very optimistic I am looking forward to a fantastic year in 2023 with everyone and on the psychological.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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