Q2 2023 Datadog Inc Earnings Call

Press Star one one on your telephone you will then hear an automated message advisor. 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 like to hand, the conference over to your Speaker today, you go Broderick Vice President of Investor Relations.

Please go ahead.

Thank you Jamie good morning, and thank you for joining us to review data data second quarter 2023 financial results, which we announced in our press release issued this morning, joining me on the call today are Olivier Hello, David as co founder and CEO and David <unk> <unk> CFO during.

During the call we will make forward looking statements, including statements related to our future financial performance our outlook for the third quarter and the fiscal year 2023 and related notes and assumption, our gross margins and operating margins our product capability, our ability to capitalize on market opportunities. When you get to the optimization trend. The word anticipate believe continue estimate expect intend will and sell.

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.

A discussion of the material that's another important factors that could affect our actual results. Please refer to our Form 10-Q for the quarter ended March 31st 2023, additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended June 32023, 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.

<unk> Dot com.

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

And thank you all for joining us this morning.

Our team continued to get ready in Q2, as we welcomed thousands of attendees at our user conference last week.

We continue to deliver a large number of new product innovation.

We recorded strong bookings throughout the quarter.

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

Revenue was $5 9 million, an increase of 25% year over year and above the high end of our guidance range.

We ended with about 26100 customers up from about 21200 last year.

We ended the quarter with about 2990 customer with.

$100000 or more.

Up from about 2420 last year.

These customers generated about 85%.

Sure.

And we generated free cash flow of $142 million with a free cash flow margin of 28%.

Now, let me call it this quarter the business drivers.

At a high level.

We feel Q2, you guys quote for existing customers that was a bit lower than it had been in previous quarters.

Second we do see signs that cloud optimization may start to subside.

And third we continued scaling ourselves with strong new logo bookings each you too.

Going one level deeper.

In Q2, we saw your sales growth for existing customers that was a bit lower than it had been in previous quarters.

We continue to see customers, particularly some larger spending customers scrutinize costs and optimize their cloud visibility you've hedged during Q2.

We are reflecting this lower growth updated guidance for 2023, and David will provide more conventionally regarding our guidance philosophy.

On the other hand, we are seeing signs that the cloud optimization across our customer base may start to subside.

The cohort of customers, who began optimizing about a year ago appear to have stabilized the user growth at the end of Q2 as indicated by our recent activity and the related commitments with us.

And we saw this growth in aggregate rebound in July to levels that are more similar to what we've seen in Q1.

While it is too early to call an end to call optimization and a significant level of macro uncertainty remains.

New trends along with a tenure of our customer interactions are encouraging.

Lastly, our bookings were strong in Q2.

Our new logo and new product bookings and deal cycles hasnt been impacted by the period of product innovation and we continue to see healthy growth on the sales side.

From a new logo bookings perspective, we had our largest Q2 and second largest quarter ever only behind the seasonally larger Q4 of 2022.

We also closed a record number of new business deals larger than $100000 in annual commitment.

And read our land and expand model, we expect new logos to turn into much larger customers over time as the leading to the cloud and added more of our product.

So as a conclusion, while we do apply conservatism to our guidance.

Usage trends as well as strong new logo activity and customer ramp ups are positive signs for our future growth.

Now turning to platform adoption.

Q2 metrics show that our platform strategy continues to resonate in the market.

As of the end of Q2, 82% of customers were using two or more products up from 79% a year ago.

45% of customers were using four or more products up from 37% a year ago and.

And 21% of our customers were using six or more products up from 14% a year ago.

These strong multi product adoption increased expansion into our newest product.

About 30% of our customers have already adopted at least one of our products launched since 2021.

Including CIBC ability database monitoring cloud security management sensitive that is counter craft craft and others.

We expect more opportunities to expand adoption of these products as we continue to build on the capabilities over time.

In security, we mentioned last quarter that over 5000 customers have adopted security products.

While many of these factors are not just getting started with cellular security.

We are seeing opportunities to help customers secure their cloud at scale.

Q2, 79 of our customers spent more than $100000 in debt securities.

Handful on outstanding more than $1 million.

Now, let's move on to R&D.

Last week, we had our dash at the conference and introduce a number of exciting new products and features for our users.

To kick Us Latinos will show first innovation Fortinet TDI and last one quick model.

A showcase our enemy of stability product, enabling engineers to safely deploy and manage commodity production.

These include the modal catalog centralized place to view and manage every model in every state of our customer development pipeline.

And then it is and in fact on model performance, which allows all engineers to identify and address performance liquidity issue with the model of himself.

And help identify modal drift.

The performance.

Okay.

A degradation that happens over time as more of a interact with real world data.

We also introduced <unk> AI.

Beat understands natural language and provide insights from across the dental platform as well as from our customers collaboration and recommendation tool.

Among its many features.

I can act as an incident management Capella energy findings, suggesting <unk> generating synthetic test and triggering workflows to automatically limit yet critical issues.

And we announced 15, new integrations across the next generation AI stack from GPU infrastructure providers to Victor diabetes module vendors and al contractually frameworks.

As we said last quarter. We are excited about these new AI capability and we believe that Adobe is uniquely positioned to help customers make the best of them as well as to incorporate them into our product alongside our data and workflows.

And although it's early days for everyone. In this space, we are getting traction with customers and in Q2 or Nexgen AI customers contributed about 2% of Anr.

Moving on from AI, we showcased a number of new capabilities in the <unk> space.

We introduced flex logs for log management.

Summers to flexibly choose retention periods inquiry performance separately to make new high volume use cases cost effective.

We are simplifying APM onboarding for that organization. So engineers can enable APM across all applications without any code changes.

With APM trade squaring, our customers can now understand the complete impact of any localized issue.

We introduce Eric tracking assistant, which marries AI capabilities as a license deal with data to automatically explained so and test for productive production areas.

In digital experience. We're also applying nexgen AI technologies to help customers automatically generate synthetic test from their live traffic data.

And we've expanded our mobile monitoring features.

The first class experience for mobile developer teams with mobile session replay and mobile application testing.

We also announced several innovations in cloud security.

Our new security inbox surfaces, the most pressing security issues.

And thousands of technical insight and reducing them to a smaller number of actionable tasks.

We can now detect more infrastructure vulnerabilities, whether they are in applications container images almost.

With custom code generically detection, we extended our detection capabilities be order parts of February and into customers <unk> added.

Finally, the exact renewables could mixed feedback with some additional detail.

And with cloud Siem investigator or customers can visually map and attackers behavior going back more than a year into faster investigation and remediation.

Shifting left with delivering more solutions developers with static analysis customers can scan scan code for quality issues directly with embedded arm.

And we're actually seeing quality gate for engineered can set rules and prevent you secure buggy code from deploying in production.

Finally, we announced new capabilities to have customer spend on cloud resources more efficiently.

Our contingent resource utilization functionality makes it clear which applications are under over provisioned.

And with cloud costs recommendations, we're adding two o'clock cost management product to automatically discover saving opportunities and have come in.

Those were just some of the many announcements we made a dash for Investor Relations website, the link to the dash keynote and I encourage you to watch it to learn more.

Before I step away from more innovation.

Im also pleased to note that for the third year in a row that <unk> has been named a leader in the 2023 Gartner Magic quadrant for application both from a quantity and observe ability.

We believe this validates our approach to deliver a unified platform, which breaks down silos across teams to focus intensely on product innovation.

Now, let's move on to sales and marketing.

As I said earlier.

Call It strong new logo bookings and we continue to see significant expansion opportunities with existing customers.

So, let's discuss some of our wins.

First we signed an eight figure deal over three years with a major American video games company.

These customers previous SaaS apps that our belief was that ability vendor was not delivering on critical capabilities, such as corrugated alerting and collaborate TV management.

And our recent pricing change motivated to kiss enriched considering other vendors.

By moving to data, Doug discussed and are expect to get higher value out of their monitoring produced solid fatigue and eliminate silos among users.

And as they achieve better results they expect to save over $1 million annually by shifting to data from their previous vendor.

Next we signed a seven figure land with a major broadcaster.

This customer is moving to AWS and several life and it's fragmented legacy and open source tools mental long incident resolution time and confusion among teams.

As customary that athene seven builder products consolidating five tools and has already ramped up to over 500 users.

Next we signed a seven figure land with a leading Japanese toys and media company.

This company has been using a competitive ability vendor alongside smaller tools and homegrown capabilities.

With the adoption of <unk> added a product they have full visibility to the applications. They can save time on low very busy work and focus on delivering great experiences for their customers.

Next we signed a seven figure expansion with one of the world's largest tech companies.

As customary seen massive adoption of its new generative AI product.

And Mr scale that GPU fleet to meet increasing demand for AI workload.

Do you think the homegrown tool, we're scaling them down and put at risk critical product launches.

Is that a dog. This team is able to programmatically manage new environments as they come online tracking alerts on their service level objectives and provide real time visibility for <unk>.

Last but not least we signed an extension with one of the world's largest financial institutions, taking this customer to HCP.

This customer operates at massive scale supporting thousands of applications run by tens of thousands of developers.

We have a strategic initiative to move aggressively to the public cloud this year.

That was that a dog as their preferred of the ABC platform for cloud application.

And as their business units modernize their it spending to tender at a product and replacing a number of legacy commercial tool.

And that's it for this quarters highlights.

I'd like to thank our go to market team for their dedication in Q2 and for helping our customers make the most of the staff last week.

Before I turn it over to David for a financial review, let me speak to our longer term outlook.

Despite the recent trend of product innovation and continued macro uncertainty.

Our posture remains the same.

We are confident in our long term growth opportunities driven by the secular trends of cloud migration and digital transformation as well as our rapid pace of innovation to serve customers in availability and beyond.

And we think our strong new logo and product adoption trends. This quarter are indicative of the continued large and growing opportunity for Canada.

So our long term plans have not changed.

We are continuing to invest to serve our customers as they move to the cloud AI and other more than technology.

With that we'll turn it over to our CFO David.

Thanks Olivier.

Q2 revenues was $509 million up 25% year over year and up 6% quarter over quarter. In Q2, we continued to execute solidly, but we also continued to see pressure on the.

Usage growth of existing customers.

Due to dive into some of the drivers of Q2 performance.

First as to usage growth of existing customers. We saw positive usage growth this quarter, the lower than in recent quarters with broadly similar trends across our product lines.

While too early to draw broad conclusions existing customer usage growth improved in July and was more similar to Q1 than that of Q2.

We saw more pressure on cloud native businesses than traditional enterprise customers similar to previous quarters.

Regarding customers by spending size.

The more moderate growth trends were consistent across the customer base with relatively more pressure on usage growth rates with larger customers as Olivier discussed the cohort of customers, who began optimizing about a year ago.

Appear to have stabilized their usage growth with data Doc that we recognize that the growth rates of these optimizing customers may remain muted and other customers could optimize.

Regarding total customers our customer count increased to 26100 from 25500 last quarter.

This quarter as total paying customer count includes a onetime cleanup of about 200 financially immaterial customers at the very low end, who were moved to our free tier.

Our gross customer additions have remained strong, especially with larger customers need.

Meanwhile, we're seeing some churn of smaller customers, who have limited impact on our revenues.

As a result, our gross revenue retention rate remains unchanged in the mid to high 90, indicating the stickiness of our product and the importance of our product to our customers' operations.

We are executing on strong new logo bookings and new customers contributing meaningfully to our growth as they ramp up as.

As Olivier mentioned, we had our second largest new logo bookings quarter and a record for Q2.

We expect these customers to become more meaningful as they expand with us.

In Q2 about 40% of our year over year revenue growth or 10 points of growth was attributable to growth from these new customers that were acquired in the past year.

Finally, we continue to see consolidation opportunities, particularly in larger deals consolidation allows our customers to improve functionality by getting all of their data into one platform, while saving money at the same time.

Moving onto our trailing 12 month dollar based net retention rate or NRI NRI.

<unk> was over 120% in Q2 as customers increase their usage and adapted more products.

As we expected and as we discussed on last quarter's call. Our trailing 12 months NRI decline that was above 120 in Q2 as existing customers continue to scrutinize their.

Ex Tac cost and make efficiency improvements.

If our growth trajectory continues at current levels, we expect our trailing 12 month MLR declined to below 120 in Q3.

Moving on to our financial results billings were $520 million in the quarter up 31% year over year.

Billings duration increased slightly year over year.

Remaining performance obligations, our RP O was 125 billion up 42% year over year.

Current RPI growth was about up 30% year over year.

We signed some larger multi year deals in the quarter, which drove an increase in the duration year over year.

As we've mentioned before we continue to believe revenue is a better indicator 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 key income statement results unless otherwise noted all metrics are non-GAAP . We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release.

Gross profit in the quarter was $414 million, representing a gross margin of 81, 3%.

This compares to a gross margin of 85% last quarter and 88 in the year ago quarter.

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

As a result, we are experiencing in gross margin, which is in excess of our target in the high Seventy's.

Our Q2, Opex grew 26% year over year.

And this was a decline from 45% year over year growth last quarter we.

We moderated our hiring pace and executed on controlling costs given the macro uncertainties.

Q2, operating income was $106 million or a 21% operating margin up from 18% last quarter and flat to 21% in the year ago quarter.

We are pleased with our execution on cost control and disciplined investment in this quarter.

Turning to the balance sheet and cash flow statements. We ended the quarter with $2 $2 billion in cash cash equivalents and marketable securities cash from operations was $153 million in the quarter.

And after taking into consideration capital expenditures and capitalized software free cash flow was $142 million for free cash flow margin of 28%.

Now turning to our outlook for the third quarter and the fiscal year 2023.

In forming our guidance, we continue to use conservative assumptions as to the usage growth of our existing customers.

As a reminder, our guidance philosophy is to carry forward trends observed in recent quarters discounted with additional conservatism.

For the third quarter, we expect revenue to be in the range of $521 million to $525 million, which represents a 19% to 20% year over year growth.

non-GAAP operating income is expected to be in the range of $98 million to $102 million.

And non-GAAP net income per share is expected to be in the range of 33 to <unk> 35 per share based on approximately 354 weighted average diluted shares outstanding.

And for the full fiscal year 2023, we expect revenue to be in the range of two five to $2 <unk> billion, which represents 22% to 23% year over year growth.

non-GAAP operating income is expected to be in the range of $390 million to $400 million.

non-GAAP net income per share is expected to be in the range of $1 30 to $1 34 per share.

And based on approximately 351 million average share our diluted shares outstanding.

Now finally for some additional notes on the guidance we.

We have continued to balance near term financial strategy with investment in our large long term opportunities and we are executing well on our plans to invest efficiently.

Next we expect net interest and other income for fiscal year 2023 to be approximately $85 million and we expect our tax expense for the full year to be $14 million to $16 million.

Finally, we expect capital expenditures and capitalized software together to be about 4% of revenues in fiscal year 2023.

To reiterate really alleviates comments, we remain excited about our long term growth opportunities and we're continuing to execute against those opportunities.

I want to thank our data dogs worldwide for our efforts in this quarter.

And 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. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Raimo <unk> from Barclays.

Hey, Thank you.

Olivier on the if you think about the nature can you discuss a little bit the nature of the optimizations that youll see when you compare a little bit what you saw at the early parts of the.

After recession cycle.

Late last year versus what you see now with just the nature has changed.

<unk> in terms of what you're seeing there and then I had one follow up David.

No we don't see a big change in the nature of the optimization if the mix of our.

Accumulation of their cloud workloads in parallel in a little bit also on the observer desire for the products that have volumes that can be separate from the.

Cloud workloads, such as large buckets of metrics and data.

I would say.

So this quarter, we did see.

Eliminate lower growth as we said in the comments across the board from existing customers, which suggest that the customer that started.

Optimizing earlier, we're not done yet and some others have started later and they all across from the mill there.

We did see however that some other customers in the course of customers in particular, the state optimizing a year ago and that were on the larger side and on the coronary side.

Stabilized in that growth.

And we feel.

A lot more confident now that they have done at least as far as Daniel.

As we've seen some of these customers start committing long term forward again with us and at levels that are at or above their current levels of usage, which suggest that you have a good idea of where they're going next which is what inspired also part of what your final comments about the.

The fact that we think we might we see some signs that.

These periods of my end still too early to call it but we.

We see some we seem to be on most of the growth there.

Yes, Okay and then the.

Just linking that with the guidance, where I get a lot of questions here thinking about your Q3 and in Q4 implied guidance can you can given that you have full year, because obviously still headwinds from growth that are kind of coming due or like how much of that is Q3 Q4 is kind of a lagging effect of what we've seen before versus kind of maybe other factors like concern.

Participants thank you.

Yes, it's about because our growth was a little lower than in Q2 than it had been in the previous quarters.

We have that effect moving forward given our recurring revenue model and then on top of that we in our guidance philosophy, we discount the most recent performance, particularly around usage growth, but also in new logo. So it's a combination of both of that.

<unk> flowing through in our financial results for the year.

Okay. Thank you.

Thank you one moment far next question.

Our next question comes from the line of Sanjay <unk> Zhang from Morgan Stanley .

Thanks, guys for taking the questions.

Understand the comments around slower usage questions, particularly compared to Q1 I just wanted to dig into.

And sort of issues around competition on David.

Sure of higher churn.

And we see total customer account growth.

Slow down.

So we think.

Either.

Competition competition with open source or DIY customer.

Customers gravitating to hyper scaler needed solution.

Any sort of pick up there and is that a potential.

As part of the mix of why we're seeing slower usage trends this quarter.

With since you're breaking up a little bit so I hope I answer your question appropriately.

We do see slightly higher churn at the very very low end.

This is more related to the.

So what happens to tiny tiny business. He does that use us for smaller mountain <unk> sales might be a good business or somehow to needle together.

We didn't have a onetime cleanup also this quarter as we on an ongoing basis.

We don't grids some customers if they are not super active in the platform or if they are built to date of today, we changed some of the criteria is around that which ended up with a one time cleanup.

Clean up of 200 customers, which changed a number there.

Beyond that we do see a little bit higher churn at a very very low and.

The numbers they are small in terms of revenue not actually going to be material.

Overall gross retention remains unchanged.

Mid to high nineties.

In aggregate.

So as we said I think on the other side of it.

<unk> said that.

In dollars we had.

Strong new logo bookings and.

Also cross sell and a lot of that as I said in my comments.

A portion of that tends to be consolidation onto the platform, which has been going on.

And beyond that I think it's a good point David.

We do see we're actually very happy with what we see in the on the new products and new logo side of the business.

We are lending record numbers of new customers at a scale.

Sure.

Are you seeing more and more consolidations onto us.

If nothing else the acuity of dynamics seems to turn more into our favor as time goes by there independently from what we see in terms of the.

Churn or gross of the vineland.

I appreciate the color and then David.

Olivier.

You made some sort of I guess preliminary colorants potentially seeing some green shoots on the optimization headwinds that we've seen over the last several quarters in terms of the percentage of the base that has an optimized any sort of color of how large that is what percentage of.

All of the customer base, hasnt, yet optimized, but potentially could going forward.

We can't really give you a percentage there.

The cohort we mentioned on the call. The one week, we were looking at for getting a sensor stabilization and optimization.

Optimization was a cohort thats titled optimizing refers that was typically large in volume very cloud native in nature and that we consider to be the highest risk one four so the one that weighed on our growth numbers. The most over the past few quarters.

And that's the one we paid some of our comments on in addition to the other.

The trends that David mentioned earlier, they are undecided in aggregate we feel.

Growth of existing customers kick up.

Firstly in Q2 and then in July .

I appreciate it thank you.

Thank you one moment for our next question.

Our next question comes from the line of Mark Murphy from Jpmorgan.

Yes, thank you very much.

Once the larger customers have compressed their spending and obviously there is a limit to how much they can compress that.

And then.

They're going to need to grow that spending again.

At some point youre going to have growth.

You know ramping pretty materially and security it sounds like that.

It has started.

And all of the LLM observer ability and then youre going to have easier comparisons as we head into 2024.

Is it reasonable to think.

That optimizations could be further subsiding as they're entering 2024 based on your comments and then.

For all these reasons should we be optimistic on on growth picking up.

Relative to how it's going to exit in Q4 of this year, which I think is around which I think is around the mid teens.

And I know, it's hard to answer because you haven't guided on that yet or.

Would you be imagining David that.

<unk>.

Just drag across that 15%.

2024, as a starting point and if you can't answer it.

Numerically, maybe you could just kind of speak to some of these timeframes qualitatively. Thank you.

Yes, I think we haven't provided guidance for next year, we cited that.

That given the amount of our revenue growth.

Embedded in our existing customer base.

Timing of the lapsing of the optimization is critical to that we.

We said, we see green shoots as Ben said, but it's too early to call that so thats.

The biggest factor. In addition, we said that our new logo performance in terms of signing new customers who've been ramp is another green shoot that could do that but it's.

We havent provided guidance on specific numbers for next year. So I really can't go further but look I mean, we're obviously.

We are optimistic that we have.

We're still very early in the transition.

Short term, we don't really control the growth of existing customers in.

Homogeny optimize their cloud environment and things like that.

But for everything that we control and revisit you Don which is new.

The quality of their products.

The new customers and the attach of these new products as customers.

Everything we see seems to be working and we see great results from that and.

And these are these are we see great trends for the future to do I think I would add that in our conversation with our customers at a conference.

Just last week.

Most of the conversations are around.

Who are going to get our customers to implement new use cases.

New products.

Scale up consolidated onto our platform.

There was a little bit tough customers thinking about.

Cost control communication and things like that but we also see less of it over time so.

When that kicks in in terms of.

The overall growth in aggregate as David said, it's too early to tell and we want to be careful there because we know sometimes our customers will know everything themselves and I say, it's more difficulties as they go.

But we're very optimistic about the year.

Long term obviously.

Olivia Thank you for that just as a quick follow up.

You mentioned strong new logo bookings and I think we don't see that in the new customer counts.

But you rattled off a handful of seven and eight figure wins, which I believe each and every one of those sounded like a consolidation play on other vendor off of other vendors and displacing this onto data dog.

Am I interpreting it.

Accurately to think that maybe youre seeing a pretty big shift there.

Maybe in terms of just win rates competitive displacements.

Kind of kind of seeing this vision of the consolidated platform really really putting a dent in the competitive landscape today the dogs advantage.

Yes.

We see it and we see.

So by nature of these contribute consolidation deals tend to be the ones that have the biggest headline number when we close them as opposed to just a continuation of their existing run rate, we have with those customers. So that was.

The step functions, there and that's why we called them out on the earnings call, but in general we had a record number.

New business deals.

Across above $1000.

Don't see in the overall number of customers.

The spread between small medium and larger.

Yes, quite a bit of noise at the low end of that customer count.

Next a number ebb and flow a little bit but for the part that we target with a payer for us which are the middle to high end of it.

We actually see those numbers go nicely in.

Commensurately with our sales force. So we are very happy about that just to clarify the customer accounts.

Gross additions.

A number of very consistent with what we've seen in previous quarters, but as Olivier mentioned.

More larger deals resulted in a higher average land that's what produced the record Q2.

And the net the weight on the net is we mentioned the cleanup, but on the very low end customers that are on the border between very very slight usage and free trial.

So the gross the gross addition.

Activities were consistent and strong and in fact, I think as you mentioned.

You get to the larger deals you have more consolidation and impetus within those wins.

Thank you very much.

Thank you one moment for our next question.

Our next question comes from the line of Kash Rangan from Goldman Sachs.

Hey, this is a nisha on for cash.

Two quick questions. One maybe on usage growth slowdown is that coming from particular end markets or segments or verticals that you can highlight.

Maybe on hiring.

Are you seeing green shoots in new logo growth and we had a great number of announcements from the Dash conference. What gives you conviction to ramp up hiring since you've moderated.

Your go to market motion right now thank you.

So first one on the growth.

Go down.

This is.

I would say across the board we shipped utilization.

But it is not.

More pronounced.

Cloud native businesses than with traditional enterprises.

And the reasons for that are that new cloud native business is.

Hi.

They are spending on our cloud and more of an emphasis on setting there and then.

I'll now turn of enterprises that are earlier in their cloud migration and that still have most of their it spend on a majority of the R&D spend that is.

Outside of cloud.

So this is where we've seen most of the ammunition to do what we see the most optimization.

As we said in the call we saw that the earlier cohorts are cloud native customers excited optimizing a year ago.

Actually showing some stabilization in some.

Higher commitments with us.

In the past couple of months.

In terms of hiring I think we were still.

Growing the company and we're still investing.

Done is we've moved over to director of growth.

To align on the on what we've seen on the market, but we still consider that we are very very early in terms of the ore.

Oh.

Product journey.

We still have a lot to build and the visibility we have a look to build in security we have a lot to build in there.

Look our workflows and developer experience will have a look to be offended many many.

Use cases, we're going after including AI and so we are not going to start hiring and we're not going to stop.

Innovating there the last thing I'll mention is that.

We've also been growing our go to market teams.

And the reason for that is to.

Those investments in the go to market are yielding incremental growth on the new logo and new product side as.

As we said in the call that part of the business has been working very well and we're very satisfied with the outputs. There. So we'll keep going to team while being mindful of the margins we need to protect.

Thank you one moment far next question.

Our next question comes from the line of Jacob <unk> from William Blair.

Hey, Thanks for taking my questions.

Obviously AI is something that a lot of customers are excited about but we're hearing that it may be delaying purchasing decisions in other parts of that tech stack until customers kind of figure out how they want to incorporate AI into their broader organization and just how much that will cost do you feel like that dynamic impacted Q2 at all or just maybe a near term law.

<unk> spending until broader AI plans are finalized or is the updated guide mainly just driven by the optimizations <unk> been caught out.

We don't we won't really see that translate.

The one thing I will say.

Or are customers fully into two camps right now there are other ones that have been working on it for about two or three years that are providers of any item sales or business that were completely built on AI and we see those business reaching scale in some cases very large scale right now.

And but it's a relatively small number of customers. There's a much larger number of customers that are starting to embrace AI.

But those are still early and its probably going to take a number of quarters even years in some cases for.

Those use cases and those customers to reach full scale. So again much larger number of customers, but quite early so we have those two trends at play when you look at our penetration and the adoption.

<unk> adoption.

Okay helpful.

And then you called out the strong new logo bookings quite a few times there are there any commonalities between those customers from just a size or maybe an industry perspective, and I'm curious if you're starting to see any of the newer generative AI focused companies.

That are creating these <unk> start to actually layer into your that your model from a customer perspective.

And as part of your question you can you can you repeat.

Yes, we're a little bit.

B Lowe.

Yeah. The first part was just around the strong new logo bookings and just if there was any commonality between those customers from a size or an industry perspective.

The new logo bookings are.

Sure.

In terms of the value that's there.

Q Midmarket and enterprise so on the larger side and on the more traditional side.

We we have a number of companies or customers that are also the providers of AI, but some of those have been customers for for some time already and in some situations, we have new business units of existing customers.

That were with us for a while but that also started new.

You can actually need to run AI that decided to obtain our product more recently will have one of those also in the in the KOL comments from a very large customer.

Great. Thanks for taking my questions.

Thank you one moment far next question.

Okay.

Our next question comes from the line of Brent sale from Jefferies.

On sales and marketing in Q2, you've never been down sequentially or are you.

Holding back on quota carrying rep hiring to get the reps productive.

Are you going to be adding on that side and a quick follow up.

The biggest factor there was.

The sales kick off that would be in the first quarter and not in the second quarter. So that the change has more to do with the timing of events would be that as it may as Ali mentioned, we're continuing to invest and sales quota capacity.

But we are growing that at a lower rate than we did last year, but the major factor in the sequential was.

Was a seasonal thing around events.

Okay and real quick just on the large customer adds and Amy Youre.

Cadence was pushing $1 30 to 170 so.

Is something competitively going on there.

Or is it just youre equally seeing that.

SMB and Enterprise Act the same way in terms of in terms of their conservatism.

I didn't understand what I didn't understand the question, Brian Youre talking about the net adds of $100000 plus customers.

Correct.

It was 80% versus 130 to 170 of the last four quarters.

Yes.

Say that <unk>.

We've said that the number of customers.

<unk> been relatively.

Steady.

Although.

It's T cells.

And.

We have gotten I would say in that range and land the average land thats been larger so.

Of those that are landing.

Smaller and when net retention goes down because the major source of customers going into that would be from customers below a 100 and the bigger factor would be that it takes longer for those customers to evolve into a 100000 and thats the biggest factor in that.

And just to reiterate what I was saying, we're very happy with the addition of customers on the medium and large size.

These numbers are going up across the board in terms of new customers and new products in.

So we feel very good about that and if nothing else the things are improving there.

Thank you.

Thank you one moment for our next question.

Yes.

Our next question comes from the line of Michael <unk> from Keybanc.

Hey, guys.

Two questions first can you just finished.

Can you just talk about how usage trended month by month.

April May June .

The logic around that and then my second question is just.

Olivia you had said.

The difference between those two factors in terms of adoption.

So I didn't hear your second question.

You're breaking up a little bit.

The first question. So the first question to start maybe it was on the linearity during the quarter I guess.

Yes, yes, yes.

So <unk> was not completely out of.

The ordinary for us, though I will say, we see we had a low in may and within Lithia Portland, Maine.

Having a lull and then things improved.

In June and improved some more in July which is after the end of the quarter.

That being said.

As we.

As we.

From our guidance for the rest of the year, we baked that in what we saw throughout the quarter and we discount it and we're trying to avoid looking too much with the partial quarters. We go after that.

That's been our philosophy throughout and we stick to that today.

Thanks, and then the second question was the optimization those particular to observe ability.

Was there any difference across your major product categories of CA APM versus logs versus infrastructure.

So the ones that are the most sensitive to that or.

Logs, some part of infrastructure, which has kept some metrics and some part of the ATM, which is.

Additional land volume transactions that get sooner as Mike said in addition to.

Would they get included with every single cost to deploy the ATM on and we've seen some optimization on that debt.

It's been strategic to observe ability.

I would say it does go hand in hand with the overall color to mutation our customers are doing with the timing might not always be exactly the same we should also why we are careful about.

The.

The trends that we're forecasting based on the.

Some of the improvement we've seen recently.

Okay. Thanks.

Okay.

Thank you one moment for our next question.

Our next question comes from the line of Andrew Nowinski from Wells Fargo.

Okay. Thank you and good morning, everyone. So I wanted to start with a clarification did.

Did you did you actually.

<unk> your discount rate that you apply to your organic growth relative to your annual outlook or when you when you put that together this quarter.

Yes, we went out and essentially discount the most recent.

Assumptions. So if the most recent assumptions were lower we said they were lower in Q2, then we would be lowering that.

In the in the in the guidance assumptions going forward.

Right. So it wasn't just the.

The organic growth rate being lower than your actual discount rate was lower too.

Well I don't know Im sorry, I don't understand your question, we do our guidance based on.

Taking the assumptions and then discounting.

I don't know you'd have to clarify what you mean by the discount rate.

We don't have a discount rate card for guidance.

But we do discount.

Dave cycles.

As we give guidance as to the future.

Okay fair enough.

And then I just had a question on that large deal eight figure deal is that large enough.

That we should normalize it when we think about our estimates for next year or do you have enough of those eight figure deals in our pipeline that it'll blend out.

I don't think you did normalize for it.

Okay. Thank you.

Thank you one moment far next question.

Our next question comes from the line of.

Chris <unk> from Wedbush.

Hey, guys. Thanks for taking my questions I have a question on the new logo bookings that you did you mentioned what is the average duration of new bookings, our new logo bookings and how has that trended.

So far.

We haven't we.

We haven't discussed the duration of new bookings versus existing bookings our durations in terms of contracted tended to be.

<unk>.

Just under a year nine to 10 months, but we havent given information on the difference between.

New bookings I would say the larger the larger if youre getting too.

Because.

Most of the revenues are existing customers.

If youre talking about renewals or new contracts on existing customers that would have the larger effect on contract duration. As we said there was a trend towards longer term deals which extended the duration.

In terms of our existing customers.

So just to clarify.

Duration for new customers was consistent with prior quarters.

Higher <unk>.

<unk> increased so we said that the RP O.

Total.

<unk> was higher than the current Rps and that the reason was that duration it had gone up.

Slightly from previous periods duration increased in contracts.

Yes, very helpful. Just one follow up that 40% of the new I guess revenue growth came from new customers or 10 points of the revenue growth came from new.

Customers, who signed up in the last I guess year.

<unk>.

Is that a consistent metric or is that higher or lower than what you usually see.

Yes, we report that in our in our Qs.

That's the 40% has.

Is higher than it had been.

Thats mathematically true when net retention goes down with more consistency of new.

You would have a higher percent than 10 points. So the 10 points of growth or.

<unk> of our growth would be something that would be more consistent and not as dependent on the net retention.

Got it thank you very much.

Yes.

Thank you one moment for our next question.

Yeah.

Our next question comes from the line of Koji Ikeda from Banc of America Securities.

Hey, Olivier and David Thanks for taking the questions just one for me here in the interest of time.

Olivier in your prepared remarks, you called out 2% of <unk> being generated from Nexgen AI customers I wanted to dig into that a little bit more.

How should we be thinking about how you define what a nexgen AI customer is is that an existing customer with very specific AI initiatives.

Or is that a nexgen AI specific customers say like an <unk> vendor and then what was that contribution during when Keith Thanks, guys.

So it's a.

You can think of it as a customer.

That are either.

Selling AI themselves, so that we'd be inland vendors and the likes.

Core customers, whose whole business is full is built.

On differentiated technology.

And we've been fairly selective in terms of who we are.

We put in that category.

Everywhere are very eager to say that.

To differentiate <unk> today.

This is an illustration basically of the new Kansas businesses, we've seen emerge I would say in the past year year and a half two years in some cases it might be divisions of exiting the larger companies, but in most situations is a fairly recent and the oil companies.

We don't want we didn't give a comparable for the numbers. This is the first time, we disclosed this.

It probably won't be schedule dominated disclosures on the regular basis, just to give more color to what we've seen the market today.

Sure.

Got it got it that's super helpful. Thank you very much for taking the question.

Thank you one moment for our next question.

Our next question comes from the line of Patrick <unk> from JMP Securities.

Oh, great. Thank you.

I'd love to hear what you thought about the attendance that data dog cash in San Francisco versus your expectations and then more broadly.

About the.

Sorry, your thoughts around the return to in person events like this.

So overall, we are actually very happy too surprised.

We have decided to go to dash to production some of his colleagues here. So we they're switching switch things up a little bit then maybe see different customers and the ones. We see when we do it on the east coast.

We are a little bit worried to be on that because we did it in December in San Francisco, and we had heard horror stories about who it was.

Get people into Mexico to show up and we've been very very happy to surprise, we got great attendance is actually higher than we had modeled which forced us to scramble to first day to add some chairs in there.

Keynote rooms.

And.

So overall definitely a very good conference was very productive.

Very good.

In terms of the return to in person events across the board.

We see them happen, whether that's one conference or the other industry or <unk> conference that we exited at.

We see a lot of success with do it again and see.

Customers are very eager to connect and compute so.

It's something that's happening this year that was maybe not that's happening as much figures before.

Okay.

Ali.

Thank you one moment for our next question.

Our next question comes from the line of Gregg Moskowitz from Mizuho.

Okay. Thank you for taking the questions Firstly Olivier and then I had a follow up so given the slight improvement in usage trends that you cited in the first quarter. It was a bit surprising to hear that Q2 usage growth for existing customers was a little lower than prior quarters, because we haven't really been hearing this from other <unk>.

Inception business models that have recently reported and I'm. Just wondering if you have any thoughts as to why the usage growth for existing customers may have downtick. This quarter anything that's the only anecdotal data you might have come across.

Yes, well I think it's we look at.

At the end of the day, so we have a slightly different customer mix than some of the other folks.

Some optimizations that are strategic to very few others that are specific to the cloud that maybe there's also specific different clouds of which we have a different mix than the rest of the industry. So when you combine our love that you might have you might see some different timing effects in terms of all of our <unk> optimization.

He had us versus others.

So I wouldn't read too much into that I think the trends are broadly the same as what you see anywhere else in the industry.

And.

The other participants also quite careful about not putting an immediate and to all of the optimization. So are we even though from the behavior, we see from our who with nickel or customers who had the most at risk.

Optimization, we feel better about the path, we see them tech can be done.

Is this trend we see of late.

Okay. Thanks Ali and then I wanted to ask on the security side, because you mentioned 79 customers now over 100, K, including a handful spending more than $1 billion. So for those largest customers. In particular can you just give us a flavor for which data to our security products. They are most frequently using also how much of this is Lee.

<unk> wins, how much of this is greenfield as opposed to displacement. Thanks.

The largest customers there tend to use.

Almost all of our <unk> III products today.

Sometimes there are some exceptions.

And these are customers that tend to be on the.

Forward mid market higher end up in the end market side that could play out.

One tool in their organizations.

Typically the customers that have it.

Subsidiaries on above.

Tend to be can be enterprise or mid market, but the ones that are above tend to be mid market and more tech forward.

And I would say overall.

The adoption tracks.

The adoption in the industry of unified that pickup.

As a practice.

And again.

To zoom out a little bit we believe that this is where the whole industry is growing and we are building a product. So we are completely ready and we have a fully mature end to end solution that is relevant to every.

Every single possible customer so that by the time this becomes.

Generic processing industry, where we're the no brainer de facto choice for local customers and so far we are pleased with what we're doing there.

Very helpful. Thank you.

Thank you at this time I would now like to turn the conference back over to Olivier Pomo CEO of data dog for closing remarks.

Thank you. So first of all thank you all for attending our call today I also want to thank all of our employees.

And all the data that was around the world for Q2 that was very well executed and I want to thank all of our customers.

For making dash last week, such a vibrant comprehends and making some products here in terms of the conversations we've had with them.

And then these good words.

You all.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.