Q2 2025 Datadog Inc Earnings Call
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Good day and thank you for standing by welcome to the Q2 'twenty 'twenty five date, a dog earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will 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 your hand, just raised to withdraw your question. Please press star. 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 could broadridge SVP of Investor Relations. Please go ahead.
Thank you D D.
And thank you for joining us to review <unk> second quarter 2025 financial results, which we announced in our press release issued this morning, joining me on the call today are Olivier Flamel did it all just co founder and CEO and David <unk> David CFO.
During this call we will make forward looking statements, including statements related to our future financial performance our outlook for the third quarter of the fiscal year 'twenty 'twenty, five and really didn't know some assumptions, our gross margins and operating margins, our product capability and our ability to capitalize on market opportunities.
They anticipate believe continue estimate expect intend will and similar expressions are intended to identify forward looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially.
For a discussion of the material risks and other important factors that could affect our actual results. Please refer to our Form 10-Q for the quarter ended March 31st study 35 additional information will be made their upcoming Form 10-Q for the fiscal quarter ended June 30 players like <unk> and other filings with the SEC. This information is also available on the Investor Relations section of our website along with it.
They had this call we will discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial.
Learn easily because available at Investor update a dog HD dot com.
With that I'd like to turn the call over to Olivier.
And thank you all for joining US this morning to go through our results for Q2.
Let me begin with this quarter's business drivers.
Overall, we saw trends for usage growth from existing customers in Q2 that were higher than our expectations.
We experienced strong growth.
Cohort.
A number of you I know you've got some areas are growing meaningfully with us as they see rapid user growth with their products.
Meanwhile, we saw consistent and steady growth in the rest of the business.
We continue to see the overall demand environment and fill it with an ongoing healthy pace of that migration and digital transformation.
And churn has remained low with gross revenue retention stable in the mid to high nineties, highlighting the mission critical nature of our platform for our customers.
Regarding our Q2 financial performance and key metrics.
Revenue was $827 million.
He's a 28% year over year and above the high end of our guidance range.
We ended Q2 with about 31400 customers.
From about 28700, a year ago.
This includes about 150, new customers from our April admit upland applications.
We ended Q2 with about 3850 customers with an 800000 or more.
From about 3390, a year ago.
That's emerging and Richard about 89% of our E R.
And we generated free cash flow of $165 million.
Free cash flow margin of 20%.
Turning to cut some adoption.
Our platform strategy continues to resonate in the market.
At the end of Q2, 83% of customers were using two or more product to sell that last year.
52% of customers, who are using four or more products.
From 49% a year ago.
29% of our customers were using six or more products.
25% a year ago.
14% of our customers were using eight or more product.
From 11% a year ago.
So our customers continue to add more products, including our security offerings.
Reminder, or security customers can identify manage with <unk>, We've got security got security insensitive that scanner and they can detect and protect from attacks with app and it'd be a protection worker protection and cloud team.
We are pleased that our security suite of products now generate over $100 million and they are and it's growing mid 40% year over year.
While we are pleased to achieve this milestone we are still just getting started and solving customer problems in this area with new innovations such as our AI security noise.
Yeah.
Moving on to R&D, we had our dash user conference in June where we announced about 125 exciting new products and features for our users.
So let's go through some of the announcements.
First we don't fully autonomous AI agent, including beat AI is all reagent to investigate alerts and coordinate in Sydney based bombs.
Hi, David.
High powered coding assistant to proactively fix production issues and beta AI security analyst to triangulate it a cloud Siem signal.
To further accelerate our user of incident response, we announced AI voice agent for incident response, so users can quickly get up to speed and start taking action on their phone.
Also announced handoff certification that make it easy to jump straight into the relevant context and quickly communicate with our responders instead.
And it started pages.
To enable automatic updates for customers and Doug where it is here.
Second.
We delivered a series of products to have customers, she better software with confidence.
We said that our internal developer portal there.
Operator can cheap better and faster by gaining a real time view into their software systems and API with the subsidy catalog by provisioning infrastructure scaffolding, new services and managing co changes and deployment with self service actions and by following engineering and readiness standards, we scorecard.
We launched that about MCP, Sir to enable AI agent to access telemetry from their dog and to act as a bridge between data dog in MTBE compatible agents like opening I codecs cursor and code code for my topic.
We work together with <unk> to integrate our MCP server within the opening iconic C&I.
And that of course, our expansion now gives developers access to dialogue to have an absurdity data directly within the course of I D.
Third we are really imagining of their ability to meet our customers increasingly complex needs.
Our APM latency investigator formulate and explorers hypotheses in the background, helping teams to quickly isolate root causes and understand impact with our combi into large amounts of data.
Proactive African mendacious help users stay ahead of growing system complexity.
Analyzing APM data to detect issues and proposed stickseed before they become problems.
We announced a flex present here so customers can keep log and fully managed storage for up to seven years and be able to search without data movement or hydration.
Archived search now enables teams to quarry archive logs directly in clubs storage mechanical into three buckets are in the flex wasn't here.
And then it up now supports advanced analytics features within those books.
Okay.
Fourth or.
Our security products cover new AI attack vectors across the application model and others.
At the AI data layer sensitive data scanner can now prevent the leakage of sensitive data and training data as well as airline prompts and responses.
At the muddle layer, we have secure against supply chain attacks and open source models and prevent modal hijacking attacks.
At the application layer, we have prevented proper injection attacks and there are poisoning and run time.
And finally, we showcased our new end to end AI and data observe ability capabilities.
Engineers and machine learning teams can use GPU monitoring to gain visibility into GPU fleets across cloud on Prem and GPU as a service platform such as <unk> and Lambda labs.
With AI agent console enterprises can monitor the behavior on interactions of any AI agent used by our teams.
We now offer let them absorbability experiments to help understand what changes to prompt models providers influenced application dot com.
We added a new agent explosion irrigation to lam's ability to capture and understand the decision path Okay agent.
And last but not least and accelerated by our recent acquisition that met our plan.
<unk> now offers a complete approach to that our ability across the entire data lifecycle from edition to transformation to downstream use it.
So we continue to relentlessly innovate to solve more problems for customers.
In doing so we are being rightfully recognized by independent research and we're pleased that for the fifth year in a row.
<unk> has been named as a leader in the 2025, Gartner Magic quadrant for Observatory platforms.
We believe that this validates our approach to deliver a unified platform, which break down silos across teams.
Now, let's move on to sales and marketing.
We had a number of great new logo wins and customer expansions this quarter.
So let's go through a few of those.
First we signed a seven figure annualized expansion.
Three year contract worth more than $60 million with one of the world's largest banks.
This company believe getting to the cloud is exciting as essential so.
So they can use AI on their extremely rich dataset to improve how they manage risk and serve their customers.
They are using <unk> as their strategic clubs IBD platform and they continue to migrate more applications to the cloud.
This customer is expanding to 21 delta product with thousands of users who logged into the data platform every month.
Next we signed a seven figure expansion to an eight figure annualized contract with a leading U S insurance company.
There are no longer supporting discussed efforts to consolidate absorbability tools and expand their cloud based products.
I don't think that a dog they are experiencing fewer and less severe incidents.
With estimated savings of over $9 million per year and incident response costs.
And improving more than 100000 customer transactions that would otherwise be impacted every year.
With this expansion is customer will adopt 19 desktop products and will consolidate a couple of dozen tools across multiple business units.
Next we signed a nearly seven figure annualized expansion with a leading American media conglomerate.
This customer has about 100 and observe ability tools.
Across more than 300 business units and.
And these two fragmentation as resulted in inefficiencies in extra costs and loss of engineering time.
They are expanding into 'twenty, one that our products, including all of our security products and replacing their paging solution with encore and incident management.
Next we landed a seven figure annualized deal with a leading Brazilian e-commerce companies.
These customers previous Absorbability vendor was unable to support them as they move to newer software platforms and modern cloud infrastructure.
By replacing these store with better dog the company was able to gain full visibility to it takes that and saw significant improvements in application stability and incident resolution times.
So it will start with <unk> products, including backlog.
Next we landed a seven figure annualized deal with the delivery App of a major American retailer.
This customer funnel run and our tracking products can be immediately valuable funding an issue on the first day of that added up trial that they havent identified after months of searching with the old tool.
Bye.
Sorry.
By adopting data dog with certain products to start discussing that will consolidate hospitals and tools, while meeting their PCI compliance requirements.
Yes.
Finally.
Welcome back a leading U S mortgage company in a nearly seven figure annualized Gail.
Please go thorough had moved to using a dozen upon source disconnected tools, which led to fragmented visibility alert fatigue and poor customer experience.
In returning to that a dog they plan to add up six products, including replacing their paging system with <unk>.
And that's it for another productive quarter from a go to market teams.
I'll now very hard at work on the beat in Q3.
Yes.
Before I turn it over to David for a financial review.
I want to say a few words on our longer term model.
There's no change to our overall view that digital transformation and cloud migration.
Long term secular growth drivers of our business.
As we think about AI, we are incredibly excited about opportunities.
First is.
As a tailwind for desktop as increased cloud consumption drive more usage of our platform.
Today, we see these primarily you know AI native group of customers, who are monitoring their cloud native applications with us.
There are hundreds of customers and his group.
They include more than a dozen that are spending over $1 billion, a year with us and more than 80, who are spending more than $100000.
And they include eight of the top.
10, leading AI companies.
While we know there's a lot of attention on this cohort, we primarily seat as an indication of what's to come as companies of every size and every single industry incorporate AI into their car applications.
And we continue to see rising customer interest for nextgen areas of ability and analysis.
Today over 4500 customers use one or more dialogue AI integrations.
Second.
Next NII introduces new complexity and new Absorbability challenging.
Or AI ops are really key products help our customers gaining visibility and therefore with confidence across their entire AI stack, including GPU monitoring at the levels that ability.
Hey, Jacobs visibility and data.
And we will of course keep innovating at the AI landscape develops further.
Okay.
Third we are incorporating AI into the data platform to deliver more value to our customers.
As I discussed earlier, we launched beats AI, if our agent David yet and security again.
We are seeing very good results with those with more improvement and new capabilities to come.
Finally, as a SaaS platform focused on our customers' critical workflows, we have a large volume of rich clear and detailed data, which allows us to conduct Rudbeckia research.
A great example of that is our total for national model potentially re forecasting.
Which show a state of the outperformance on all benchmarks, even going well beyond specialize absurdity use cases.
And you should expect to see more from us on that front in the future as.
As well as taking novel research approaches and models straight into our products to improve customer outcomes.
So we're extremely excited about our progress so far.
Against what we expect to be a generational growth opportunity.
In other words, we're just getting started.
And with that I will turn it over to our CFO David.
Thanks Olivier.
Q2 revenue was $827 million up 28% year over year and up 9% quarter over quarter.
Now to dive into some of the drivers of this Q2 revenue growth first.
Overall, we saw trends for usage growth from existing customers in Q2 that were higher than our expectations.
This included strong growth in our AI native cohort as well as usage growth from the rest of the business that was consistent with recent quarters.
It's a healthy and steady cloud migration environment.
We saw a continued rise in contribution from AI native customers in the quarter, who represented about 11% of Q2 revenues up from 8% of revenues in the last quarter and about 4% of revenues in the year ago quarter.
<unk> native customers contributed about 10 points of year over year revenue growth in Q2 versus about six points last quarter and about two points in the year ago quarter.
Now as previously discussed we do see revenue concentration in this cohort in recent quarters.
But if we look at our revenue without the largest customer in the AI native cohort are year over year revenue growth in Q2 was stable relative to Q1.
We remain mindful that we may see volatility in our revenue growth on the backdrop of long term volume growth from this cohort as customers renew with us on different terms and as they may choose to optimize cloud an observer ability usage over time.
As you heard from Ali we continue to believe that adoption of AI will benefit data dog in the long term.
And we believe that the growth of this AI native customer group is an indication of the opportunity to come as AI is adopted more broadly and customers outside the AI Native group begin to operate AI workloads in production.
Now regarding usage growth by customer segment.
In Q2, our year over year usage growth was fairly similar across segments.
Relative to previous quarters, as SMB and mid market usage growth improved in Q2, while enterprise customer usage growth remain roughly stable.
Note that we are excluding the AI native cohort for the purposes of this commentary.
And as a reminder, we define enterprise as customers with 5000 or more employees mid market as customers with 1000 to 5000 employees in SMB as customers with less than 1000 employees.
Regarding our retention metrics are 12 month trailing net retention percentage was about 120 higher than the five one turns last quarter.
And our trailing 12 month gross revenue retention percentage remains in the mid to high Ninety's.
Now moving onto our financial results.
First billings were $852 million up 20% year over year and.
And remaining performance obligations or RP O was 243 billion up 35% year over year.
Our current RPI growth was in the low thirty's year over year, and our RP O duration was up slightly year over year.
As previously mentioned, we continue to believe that revenue is a better indication of our business trends than billings and RP O. As those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts.
And 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.
First gross profit in the quarter was $669 million for a gross margin of 89%. This.
This compares to a gross margin of 83% last quarter and 82, 1% in the year ago quarter.
As we've discussed in our last call, we saw an increasing impact of our engineers cost savings efforts throughout this quarter as they delivered on cloud efficiency projects and we are continuing our focus on cloud efficiency and believe that we have further opportunity for growth.
Margin improvement in the second half of the year.
Our Q2, Opex grew 30% year over year up from 29% last quarter.
As we've communicated over the past year, we plan to grow our investments to pursue our long term growth opportunities in this opex growth is an indication of our execution on our hiring plans.
Q2, operating income was $164 million for a 20% operating margin compared to 22% last quarter and 24% in the year ago quarter within that as we've noted we held our dash user conference in June.
And as expected the of that cost $13 million.
We also experience a rising impact from the weaker dollar and absorbed $6 million of negative FX impact during Q2.
Excluding those expenses operating income would have been 22% in Q2.
Or two.
Hundred basis points higher.
And now turning to the balance sheet and cash flow statements. We ended the quarter with $3 $9 billion in cash cash equivalents and marketable securities.
And our cash flow from operations was $200 million in the quarter.
After taking into consideration capital expenditures and capitalized software free cash flow was $165 million for free cash flow margin of 20%.
And now for our outlook for the third quarter.
And the remainder of fiscal 2025.
First our guidance philosophy overall remains unchanged.
As a reminder, we base our guidance on recent trends observed observed and apply conservatism on these growth trends.
For the third quarter, we expect revenues to be in the range of $847 million to $851 million, which represents a 23% year over year growth.
non-GAAP operating income is expected to be in the range of $176 million to $180 million, which implies an operating margin of 21%.
And non-GAAP net income per share is expected to be 44 to <unk> 46 per share based on approximately 364 million weighted average diluted shares outstanding.
For fiscal 2025, we expect revenue to be in the range of $3 312 to 3.322 billion, which represents a 23% to 24% Europe year growth.
Non operating GAAP operating income is expected to be in the range of $684 million to $694 million.
Which implies an operating margin of 21%.
non-GAAP net income per share is expected to be in the range of $1 80 to $1 83 per share based on approximately $364 million average diluted shares.
Some additional notes on our guidance, we expect net interest and other income for fiscal 2025 to be approximately $150 million.
And due to the impact of the recent federal tax legislation, we now expect cash taxes for 2025 to be about $10 million to $20 million.
We continue to apply a 21% non-GAAP tax rates for 2025 and going forward.
And finally, we expect capital expenditures and capitalized software together to be 4% to 5% of revenues in fiscal year 2025.
To summarize.
We are pleased with our execution in Q2, including the many products and features we launched dash.
We are well positioned to help our existing and prospective customers with their cloud migration and digital transformation journeys <unk>.
Including their adoption of AI.
I want to thank all.
All data dogs worldwide for their efforts.
And with that we'll open the call for questions. Operator lets begin our Q&A. Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
And our first question comes from Raimo <unk> of Barclays. Your line is open.
Perfect. Thank you two quick questions from me and all of you like you talked about.
AI contribution then to slowly broadening out how should we think about it in terms of when does it goes much broader into inference et cetera. So does that everyone like Barclays Jpmorgan et cetera, They all kind of need to do more on Oxford, but a television crews they do I'm going to do more infringed etcetera. So so so in a way like open AI et cetera is just setting the <unk>.
<unk> for our future and why do you think about the market opportunity there and then David.
In the second half of last year, you hired a lot of extra <unk> guys can you talk a little bit about that ramp and where they are in their productivity curve. Thank you.
Yeah on the <unk>.
<unk> opportunity so there's really multiple layers to it first of all year long.
Lastly, where we sit today, which is.
Giving you that are running there in for <unk> and application around it and cloud environment.
So that's the case of the modem makers.
The companies that are out there, including agent and things like that that is what we see today and it looks a lot like normal.
So you have.
No more machine Cpus some gpus.
Quite a few other components no diabetes web servers and things like that so that's the bulk of what we see today and they're going to be more of it as the applications come into production.
More specialized.
Inference workloads anywhere training work with in some situations.
That rely on instrument in Gpus and for that we have a new product out there that the GPU monitoring that we announced at that.
But all of that I would call the infrastructure layer of AI.
And then on top of that there is new problems in terms of understanding with the applications themselves are doing and the applications are largely non deterministic anymore. They're either are run by a model that is non deterministic by nature or theyre running the code that was not as carefully written as it.
It used to be it's not recorded dividend by humans is largely written by our AI agent.
As a result, you also need to spend more time understanding what equity is working and that largely happened in production. So that's all brand new array out of flexibility, which is how would you deal with applications that have not been completely.
Defined in development and that has to be evaluated in production and what we think is the whole market is going there.
Just to add.
And it gives the entities are definitely doing that today both.
They're running on model and code that has been largely returned by agent.
But the rest of the market is growing there.
The proof points you see all of that is very very broad adoption today both of the.
API Jade.
<unk> modeled and of the decoding agents, which you see in every single large enterprise it.
Okay. Thank you, yes as to sales capacity.
We are have been successful in increasing both the number of salespeople and our.
Ramp sales capacity, we started that as you said in the last part of 2025.
And.
We are seeing evidence of that through our new logo production in our pipeline.
We need to as we talked about previously.
Go through the ramping of that but in looking at the size and productivity.
And performance.
We see some good signs that that quota capacity is becoming productive.
Mccarthy.
Okay.
Thank you.
Our next question comes from Cheng Cheng.
Morgan Stanley Your line is open.
Thank you for taking my questions. Congrats on the really stellar results this quarter, David when I look at the guidance I mean, this is probably one of the more impressive guidance coming out of Q2 that I've seen.
And a couple of years I square that against the commentary that you guys made on the I need a cohort that look there could be volatility from this cohort.
I put those two together the guidance is really strong and so when I think about that potential risk.
Is it fair to assume that it's not something that youre seeing right now and May come into play later on down the road because of the guidance seems really strong it does it seem to at least on.
On the face it doesn't seem to anticipate that much volatility from AI native cohorts.
Yeah, I think we gave metrics, indicating that based on what we saw in the quarter and we're seeing now that the AI cohort continues to grow quite rapidly and we're winning a good market share in that.
And so how.
How we incorporate that into the guidance.
As we discussed previously.
We know that there might be volatility and usage or and as we as we negotiate contracts and unit rates and so therefore, we adopt conservative assumptions as to that performance in the remainder of the year.
It's not something as you can tell from the growth metrics that we see in our yet in our results, but as we learned in the previous cycle of cloud native there can be volatility and we want to make sure we incorporate that in our guidance.
Perfect and then Olivier what's the new security disclosures, congrats on crossing the $100 million threshold.
Is there any sort of change in the buying behavior, there's been consolidation in industry industry. You guys had been advancing our portfolio quite significantly you guys have fully autonomous security agents, what's your prospect for this pool of the visitor to this part of the business to drive growth.
For the balance of the year and going into 2026.
Yes, so we have a very good product set and we are.
We mentioned about three different products in there.
A couple of those products that are really.
I would say, reaching an inflection point in terms of what they're doing on their on the customer side.
Well I think what were we successful today in security reverse successful at getting broad adoption.
Like a large number of customers a few customers that are spending spending a million plus on security with us. So.
So the good with the property was the proof points, we have there.
What we haven't done very well yet you're.
Getting standardized adopt.
Adoption wall-to-wall in large enterprises and Thats. The next focus for us on the security side.
Some of that is product work, but a lot of it is the fucus musicians to go to market. There. So we get better at selling enterprise wide security top down which is not something we have done a lot of work in the past. So that's sort of where we are with the product.
So happy with where we are a.
A lot of groundwork has been done on the product side.
It's quite a bit more work to be done in a ton more opportunity in front of us. So we're that's why we're focusing on.
Appreciate the thoughts thank you.
Thank you.
Yeah.
And our next question comes from Kash Rangan of Goldman Sachs. Your line is open.
Hey, Thanks for taking my question. This is Matt <unk> on for Kash Rangan, David you called out enterprise consumption volatility of last quarter. It sounds like that may have been consistent this time around well SMB continues to improve so could you perhaps characterize any discernible trends between these two customer demographic demographics.
Right relative to your expectations heading into <unk> and really how that informs your second half guidance. Thanks, a lot that's it for me.
Yes, I think broadly, we're calling out that the usage trends across the segments where roughly.
Consistent with the previous quarters.
We said we did see some more concentrated this is not a comment about AI this coming about enterprise.
Hum.
A taped out less and less consumption relative to a spike, but we saw that stabilize and we've seen small but gradual improvement of the SMB as a results of their usage of our products.
Okay.
Thank you.
Okay.
And our next question comes from Mark Murphy of Jpmorgan. Your line is open.
Okay. Thank you I'll add my congrats.
I actually wanted to ask you about kudo and premium.
There's announcements it looks like youre, bringing very serious AI research space.
Rates, where it is it is applicable.
And opening it up very broadly the size of the dataset is vast.
I'm curious what type of response do you expect to see here and just help us understand maybe how that can sustain growth in future years and I have a quick follow up for David.
I mean look we think there's so much opportunity in automation with autonomous I got agents.
Like we really broke it broke it out in three different categories. So far and one is the sorry.
Sorry, and responding to alerts and investing in alerts and media to remit hitting those two issues. One is coding fixing issues that we signed new code that happened in production in very fine just the sixties ourselves.
And last one on the security on investigating security signals on our own so that customers don't have to do that themselves.
There's so much that needs and that can happen there a lot of it is going to depend on great research and which is why we built the reserve seating, which is why we developed and released with open weight risk models already.
Of course of the next step after releasing these research models to incorporate them into the product. So that is also what youre working on right now, but there's just so much opportunity in front of us there.
That we are at this point, we're happy we got a great start we've got Fantastic result in your first release.
And as a.
Research output.
He's really packs instead of the up more on that.
Beats every single automotive category that has seen quite a bit of action about a years time series forecasting you there.
Very wide applicability in a lot of different domains.
So I think we showed that we can perform at the highest level there and I think it's a great sign of things to come in terms of automation and AI agent.
Okay. Thank you and then and then David them, we keep pointing out the data dogs and one of the only software company, that's investing seriously and head count growth.
And it feels like that is paying a topline dividends pretty tremendously today, we noticed the R&D spending is up noticeably in Q2, just wondering what are the mechanics that are driving that on the R&D line and then the.
The flip side is what's allowing you to guide operating income so much higher in Q3 than you had guided that for Q2.
Yes, and R&D as we talked about we had a.
And aggressive investment plan and.
We've been able to execute and I think our recruitment credit to our recruitment team, we've been able to get people in the door the right people earlier in the year.
There are some things within that around.
Facts that way a little bit on it because as you know we do have a significant R&D center in Paris, but I think the overall trend is.
Is the execution and recur and recruiting.
We talked about some of the.
Factors in Q2 that caused the operating income to increase greater to increase at a rate of 36% and some of those are things like the timing of dash, we talked about $13 million.
The the FX and you know and I think that.
We have good line of sight on the drivers in R&D, both in terms of as.
As we talked about and some of the operating expenses or have some seasonality in it.
One thing I would add which is that we also are spending more on AI training and inference.
R&D well if you compare to two passengers in R&D. The output of that is I think such a total or the next versions of it that we're training right now.
Experiments, we're running two to train agents.
Run simulations different agents that things like that.
You shouldn't expect the overall picture of our R&D investment to change in the future. Although I think we expect the same envelope to be what we use moving forward.
I'll add that and really callout to our R&D team and our fin ops that we said last quarter that we were going to focus on how we use cloud that applies to both the gross margin as you know we dog food, we use a lot of our applications internally.
And we were quite successful in Q2 and that run rate, we expect to continue forward and and optimizing our cloud usage, which is will have an effect on.
The margins and the Opex growth rates as we proceed through the year.
Thank you very much.
Thank you.
Yes.
And our next question comes from Koji Ikeda of Bank of America. Your line is open.
Yeah, Hey, guys. Thanks, so much for taking the question.
We all see that the second quarter was it was really really strong guidance for 2025 looks really really great and so I wanted to ask you about contract visibility.
How are you feeling about contract visibility specifically with your large AI data customers I have to imagine you're very close to these customers and having lots of conversations with them and so I know there is some concern about there and David you mentioned potential volatility. So I really wanted to ask about how you're feeling about contracted facility.
I mean look we cant really speak about.
Any specific customers as a reminder, any individual customer can do whatever they want they are the heroes of the inventory then we can't really speak for them.
I would say we have strong product engagement from our top customers in general.
We are working on making it all making data do very best platform flavor convenient any any scale introduce gather have never been seen before.
And companies with high growth.
<unk>.
I would say its about it when we when you look at the way we forecast the business.
Remember that we are overall.
Premier high retention.
Product.
For most customers is not rational to do it themselves build their own solutions. We have many customers, who did turn to build themselves who come back afterwards, and we named run into on the call today.
So we feel confident about.
The way, we forecast the business and the.
The need to not come there.
Of course, as we renegotiate with customers as the increased volume et cetera et cetera. What typically happens is we see a short term drops and long term growth.
That associated with them and Thats the way it was appointed.
Thanks, So much and I did have a follow up on security and so.
I mean, great to hear about the milestone of $100 million growing 40% and so.
Thinking about the products that are you thinking about expanding the capabilities from here are you focused on more organic inorganic and maybe an update here your M&A philosophy, I mean I get that.
And here is are you willing to go much bigger to supplement your security strategy. Thank you.
Cool.
Look we were looking at a number of you can think of it as agree that there is.
There's a lot of companies out there there's a lot of our product areas. We cover already in Rutherford more product areas, we can cover.
It's also a space, where you need to cover a lot of the we call them.
Boring must have.
Table Stakes feature of the one end, but also there's quite a bit of investment into the future was the way to wholesales being disrupted with AI.
It's quite a bit of work to be done there.
They expect us to do more M&A around that as.
As we do in the rest of the business as there is a lot of assets out there and there's a lot of opportunities to grow.
Thank you so much.
Thank you.
And our next question comes from Karl Keirstead of UBS. Your line is open.
Okay, great. Thanks, maybe I'll direct this to David.
Link the AI native exposure to margins, so David now that the natives or 11% of data dogs revenue mix I think it's fair to ask whether the revenues from that cohort are coming at similar margins as the rest of the business or do you think that.
This could be even short term a modest source of margin pressure. Thank you.
Yes, I would say like we talked about last quarter.
This isn't about the AI and margin at the agco are diverse in that.
Cohorts, we price based on volume and on term so to the extent you would have an AI customer who is doing much the same things as our other customers in the use of the product has similar volumes and similar terms to the non AI. It would be similar margins to the extent that we have.
A larger customer and their given our price grids that customer would get.
Better desk out that's the way we've always priced so it really is related to customer size, rather than AI named AIA native or non AI native.
Nevertheless, the with an antibody in commercial.
So we did we did see as we mentioned last quarter. We were seeing gross margin is going down on the need for further than we would like them to.
So what happened is we task orange entering team with optimizing technologies, which goes across all of our customer base.
We did return to our own product, we turned to our cloud cost management products and are providing product largely.
And then we in a matter of months.
We really turn up next are substantial improvements.
Savings on OBL and improvements in performance and efficiency of our systems. While we were still shipping new features and that's something that we're working right now to bring to all of our customers. So they can get the same effect and they can see their margins go up as well.
Got it and maybe the natural follow up there is David you mentioned that you're optimistic about gross margins in the second half is that because of what Olivier just mentioned or are there. Some other drivers you have in mind.
No it's because of what Olivier mentioned, so we said we were engaging in these efforts and as we were more successful in the quarter, we will be carrying that run rate forward, which wasn't fully in Q2 as well as using whatever Olivier mentioned using cloud cost management and our projects.
To have further opportunities going forward. So it's really about our progress and pace, which has been successful in our in our cloud efficiency going forward got it. Thank you both.
Thank you.
And our next question comes from Mike <unk> with Needham Your line is open.
Hey, guys. Thanks for taking the question here.
I just wanted to double back on the enterprise segment and just this is for Ali, but if I'm thinking about it.
I know that we have the enterprise demonstrating this stable growth.
Is it fair to assume.
It gives the analogy for enterprises, who are more traditional using CPU versus the AI native companies are.
Our growing investment in Gpus is it analogous to like 15 years ago, where we saw hey on Prem continues to see investment but.
But maybe more dollars are going towards cloud.
Like a fair analogy when we think about what sort of behavior as exhibited by these different customers and where data dog is headed.
I don't know if you can convince you can see it exactly this way because at the time to on Prem versus cloud has tended to be different customers.
Whereas today, they tended to be the same customers, whereas today.
And it is in the enterprise are different different continues altogether.
I think the the main difference is the irony of the businesses that are growing very very fast and infrastructure that are growing very very fast and fail, whereas.
Enterprises are still going through Controle migration from on Prem into the cloud and the rate there is more limited by their bandwidth to undergo that migration as opposed to being driven by an explosion of traffic on the demand side for them.
If I look at our.
Enterprise segment in general, we see great trends in terms of the bookings in terms of new products attach new customers things that our customers are buying from us down at noon.
But we see that the usage growth is a bit more moderated more to it than the.
And that at this point and I think that speaks to the the bandwidth on there and just to move the workloads into an integral part of their debt related in part to the fact that a lot of attention expense on figuring out what AI technology, they're going to adopt in the or they're going to ship. These AI applications into production.
Overall, we see that rate is stable. So we think we think this is healthy.
But we think this is.
We think we will see more growth from these.
Our enterprise customers.
They actually get into production with the AI applications in the future.
Understood. Thank you for that.
Congrats on the security I didn't want to leave hanging I I don't know if we got commentary on it pretty quickly an update on flex logs I know it was a shining star if I go back a quarter ago, but just wanted to see how progress is tracking on the flex log side of the house.
Yes, all of the all of the big deals with enterprise customers now involves black box in some form.
And that's a that's a story that resonates very well.
When we especially when we.
Have customers that want to migrate from legacy solutions from logs.
So there's a number of things that we're working on with them and in particular, making the migration.
Painless for them that there is a number of things that we're investing in that side, but flex log as it is a big draw for them.
It does.
Really changes the picture economically and the predictability of the neo because everything cost for them, which is a.
A major concern or.
<unk> here.
That enters the possibility such that longer.
Great. Thank you guys.
Thank you.
Yeah.
And our next question comes from Jay <unk> of William Blair. Your line is open.
Yeah, Thanks for taking the questions.
There's obviously been a lot of talk about AI natives around the business I know you've talked about the potential for optimization for several quarters, but we continue to see really strong growth in that segment. So if you were to see optimization. When would you expect that to happen and as you get a wider swath of customers and that AI Native cohort do you think you are at the place where you.
Could it actually digest and optimization by one or two of those customers.
Well I mean look if I knew when it was going to happen I would tell you.
The nature of our customers is the.
They grow they have their own businesses to run they have their own constraints, we hope we'd have to have them.
And then he heard our services and that's what we work on every single day now every now and then there is a renegotiation or renewal.
Owner cadence book customers to figure out what they need to optimize the way they need to do for the future.
But we never know.
We're not going to happen this quarter next quarter and people are over the next year or whenever that.
That's really hard to tell.
Okay. That's helpful. And then could you also talk about the uptake and feedback that you're getting for your own AI solutions like bits AI are the new observer ability agents and when do you think those could really start layering into the model.
Yeah. So the initial response to our to the agents as really pretty positive.
<unk>.
Sorry, actually it works surprisingly well.
If you think of whole farm technology has grown in a number of a couple of years and so right now we're busy basically shipping into as many customers as we can in Midland familiar with it.
And that's a big area of focus in the business as well I think it was developed by a fairly small team the actual product that we ship and that would be just getting that topic. We can so we can sell those customers that's the.
Our focus on the hospital.
Initial response is very positive.
Customers purchase.
And we expect Q4, it pretty quickly and they're in that trial and so we feel very good about it.
Very helpful. Thanks for taking the questions and congrats on the great results.
Yeah.
Thank you.
And our next question comes from Brent Thill of Jefferies. Your line is open.
Good morning, David just on the quota carrying rep capacity and I know you've been investing aggressively ahead of ahead of the curve, but when you think about 2025 or are you accelerating that count based on the great results, you've seen or you're digesting that count given those reps are on board just give us a sense in flavor of what that revenue.
Quota rep count looks like through the rest of the year and if you can shape.
That looks versus 24.
Yeah, what we're doing is we're executing the plan. We previously we entered the year with we knew I think we said that we had underinvested and go to and go to market and looked at that with the with the white space et cetera and.
I'd say were successfully executing that the plan was.
A little more front weighted given our appetite for taking advantage of that opportunity, but we're executing that and we will look at the AD towards the end of the year as we plan for next year on the metrics around that and tried to calibrate how we.
We we look at that growth next year.
Okay.
And Olivia I am just curious many Ceos are either holding head count flat or down we've seen better had cut down from two years ago, Microsoft head count flat.
Others talents here, saying, they're going to shrink headcount in <unk> revenue do you believe you can become more efficient with fewer or do you think that that model doesn't apply that youre seeing with other software companies.
I mean look.
Theres necessarily to the Spanish shifting a little bit on the generic side as I said with compute weird.
Yeah.
Since you more AI AI training and unite in France.
And so that's definitely it's engineered because the balance between what you have humans do and what you would you estimate the gpus.
That being said, we feel capitally constrained by the amount of product we can put out there.
There's a ton of opportunity in every single direction, we look whether that's on the automation.
Whether it's on the security side, whether thats in the new area to start that eligibility or experimentation that we're going after and so for US. It grew just very strong ROI in our in the ads that we are that we're making at the moment.
Great. Thanks.
Thank you.
Yeah.
And our next question comes from Andrew <unk> of BNP Paribas. Your line is open.
Thanks for taking my question first on the.
The ramp up in terms of sales capacity.
Would you say that's been broad based in terms of productivity across both international and domestic.
As we've talked about previously.
Have a.
A less developed international footprint.
And so our growth rate.
Internationally is is running higher we have markets, we've talked about before like Brazil, and India and in parts of a P. J.
In middle East that we.
Have opportunities to grow our footprint. So we are executing in that way we are doing a bottoms up as always we're looking at the accounts. We're looking at the Tam and we're looking at how much we're covering it. So that produces a result of a little more investment intensity internationally versus in North America, but there are lots of opportunities in north.
America as well.
Okay. That's helpful and then on the enterprise side I mean, given some of these reps are obviously on the ground should we expect a number of the cabinet.
Hatch rates since we set the three or four more products per customer sort of accelerated at this level I know there'd been picking up about a point every quarter. Just wondering if that's something we should be seeing.
Well I think broadly we expect.
Lens that we've seen of landing with <unk>.
Some of the core products and the pillars and then expanding to continue.
We've.
As the as the platform has expanded we've tended to land with more products, but those trends we that we evidenced in the script, we expect to continue.
And the geography and keep in mind a lot of the.
What do you want to feel it's always easy upsell a customer into many new customer and a lot of the work we do in territory management.
In comp planning for the for the sales team is really to make sure. There is enough of an incentive to go and look for new customers. So we keep driving the number of new customers as well. So there is this balance always between your direct sales force that upset anything customers or any new customers.
Thank you.
Thank you.
And our next question comes from Patrick Colville of Scotiabank. Your line is open.
Alright. Thank you for squeezing me in and I guess I just wanted to say before I ask my question. Congrats on the S&P 500 index inclusion I mean, it's already much milestone pool.
For you guys.
The question, we get consistently from investors is on competition I mean, you referred to your views on competition kind of tend to generally.
In other kind of ounces, but maybe more.
Specifically I mean, what are you seeing.
Competitively in observer ability and the one we get asked about a wall versus Couponer courseware.
Yes, I mean look there's always been competition in the field.
No as I like to say, we knew when that first fundraise for for their dog.
The World was coming back to me every single time with every single New I was getting from <unk>.
Crowded space.
And so throughout the life of their company they've been not only.
<unk> that we've mostly been.
We're in the market now, but also a steady stream of.
New entrants that we also have year after year.
Have bid on in the market.
There is.
Always new companies always new new new.
<unk> that are building new things in the beauty I think it's very attractive for engineers to build that I Wouldnt know, we can do something about it.
Generally speaking.
This landscape hasn't changed much.
The past 10 to 15 years, so about the same.
The way we win and we.
We will keep winning is by offering.
An integrated platform that solves that made progress possible for our customers end to end.
So we saw we don't just focus on one although we don't just focus on one day lessor once visited Britain that our customers might want to use we solve the whole problem for them into them.
And then in the long run we win by being more innovative by having.
An economic model that lets us invest more in R&D to develop more products deals of existing products into the future of pass or anybody else can do and cover more adjacencies pattern. He asked anybody else can do so we can have the broadest platform. So that's the reason we win and if you look at all of the countries. You mentioned none of them are in a position to do the same and so that's where we're going to end up.
Yeah.
And I think Thats I think.
At the end of the call so that would be the last question.
And just to close out I.
I want to thank our customers.
For working with us to bring all of those great new products to market. So we had a lot on our plate this year.
You've seen that a dash.
It's amazing and by the way to see all these customers within a dash and see the reception, we get 40, new products and so I want to thank them and I know, we're working with many of them are on how these products are going to be adopted and what's going to happen.
Q3 and Q4.
So again, thank you and I will see you next quarter.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
[music].
Yes.