Business Description
Datadog, Inc. (DDOG) is a company that provides an observability and security platform for cloud applications. Their Software-as-a-Service (SaaS) platform integrates and automates capabilities such as infrastructure monitoring, application performance monitoring, log management, user experience monitoring, and cloud security. Datadog generates revenue primarily through the sale of subscriptions to its cloud-based platform, which are typically monthly or annual, allowing customers to purchase additional products and expand their usage over time .
- Infrastructure Monitoring - Offers real-time monitoring of cloud infrastructure, enabling users to track and manage their IT resources effectively .
- Application Performance Monitoring (APM) - Provides tools to monitor and optimize the performance of applications, helping to identify and resolve performance issues quickly .
- Log Management - Facilitates the collection, search, and analysis of log data from various sources to enhance operational efficiency and security .
- User Experience Monitoring - Tracks and analyzes user interactions with applications to improve user satisfaction and application performance .
- Cloud Security - Delivers security solutions to protect cloud applications and infrastructure from threats and vulnerabilities .
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Q3 2024 Summary
What went well
- Datadog's new service management product, Datadog OnCall, is experiencing strong customer demand even in its preview stage, with customers eager to adopt it as part of their deals, signaling potential for significant future growth in this area. ,
- Datadog's mature Cloud SIEM product is well-positioned to capture significant opportunities in the cloud security market, with the company making a strong push and seeing exciting opportunities due to its ability to compete with best-of-breed solutions.
- Datadog is expanding its sales and engineering capacity to capture growth opportunities, including focusing on underpenetrated markets like India, demonstrating confidence in future demand and market potential. ,
What went wrong
- Decelerating RPO growth raises concerns about future revenue growth and visibility. An analyst pointed out that RPO has been decelerating, expressing concern about its trajectory. Management acknowledged the volatility in RPO and billings due to variability in contract durations and renewals but suggested focusing on revenue as a better indicator. This deceleration may indicate potential challenges in sustaining growth momentum.
- Uncertainty in predicting customer usage and spending patterns for 2025, which could lead to revenue unpredictability. Management noted that it's very hard to guess usage ahead of time because customers' intentions can differ from actual usage, emphasizing the difficulty in providing forward guidance for 2025. This unpredictability may pose risks to future revenue projections.
- AI experimentation may be diverting resources from traditional cloud workloads, potentially impacting Datadog's growth. Management acknowledged that some workload growth might be invested in AI experimentation and model training, creating a bit of a decorrelation between Datadog's numbers and those of the hyperscalers. This shift could potentially slow down the growth of traditional workloads that benefit Datadog.
Q&A Summary
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AI Contribution and Future Growth
Q: Is AI driving future growth for Datadog?
A: Datadog's AI contributions surged to about 6% of ARR this quarter. CEO Olivier Pomel noted they see customers moving AI applications into production, using their LLM observability products with real volumes and workloads. He expects AI workloads to diversify and grow over time as companies customize their models. -
RPO Deceleration and Pipeline
Q: Can you explain the RPO deceleration?
A: CFO David Obstler explained that RPO deceleration is due to the timing of multiyear deals, not indicative of pipeline weakness. They had a surge in longer-term contracts last year that didn't repeat this year. He emphasized that revenue is a better indicator, and the pipeline remains strong for Q4. -
Customer Spending Trends
Q: How are customer spending intentions changing?
A: Olivier stated that while consolidation remains a theme, customers are increasingly focusing on innovation and investing in AI and cloud, bringing Datadog along. They see room for more consolidation and are excited about AI applications moving into production. -
Gross Margin Impact
Q: Are AI workloads affecting gross margins?
A: Olivier mentioned they are happy with current gross margins. New products do not significantly impact margins, and they continue to optimize costs while investing in new functionalities. They aim to keep margins within a satisfactory zone. -
Sales Capacity and Investments
Q: What's your plan for sales capacity?
A: They plan to grow sales capacity roughly in line with top-line growth. Olivier highlighted opportunities in underpenetrated markets like India. They are building capacity to capture growth, balancing strategic investments with execution. -
2025 Outlook
Q: Any thoughts on 2025 guidance?
A: Olivier said they are investing heavily in engineering and building sales capacity. While not providing specific 2025 guidance, they expect these investments to be reflected in next year's numbers. David added they see stability and upward trends in usage, with clients launching digital applications driving growth. -
Product Expansion
Q: Which products may reach $100 million revenue next?
A: Olivier highlighted that database monitoring is growing very fast and headed for revenue north of $50 million. He mentioned products across security and user experience expected to reach $50 million soon. They feel confident many products will surpass $50 million, with some reaching $100 million or even $1 billion. -
GPU Workloads Monetization
Q: How do you monetize GPU instances?
A: Currently, Datadog does not monetize GPU instances significantly differently from CPU instances. GPUs cost many times more than CPUs, but they charge the same amount. Olivier mentioned this might change if they offer more value in GPU optimization. -
Federal Government Opportunities
Q: What is the opportunity within the federal government?
A: Olivier stated the federal government is a huge opportunity, though currently a small part of their business. They have exciting successes with large agencies and see plenty of upside. They're investing in capacity building and working on FedRAMP compliance and other certifications to fully capture this market. -
Datadog OnCall Potential
Q: Can Datadog OnCall replace products like PagerDuty?
A: Olivier explained that Datadog OnCall was initially built to provide an integrated experience within their ecosystem. Due to strong customer demand, they're considering integrating with other sources and incident resolution loops. While not explicitly aiming to replace products like PagerDuty, they see significant opportunity in automating incident resolution.
Key Metrics
Revenue by Geography - in Millions of USD | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
North America | 341.0 | 355.97 | 381.2 | 409.13 | 1,487.3 | - | 448.0 | 484.53 | ||||||||||||||||||
- United States | - | - | 361.3 | - | 1,411.0 | - | 426.6 | 462.40 | ||||||||||||||||||
International | 140.7 | 153.50 | 166.3 | 180.5 | 641.0 | 183.4 | 197.3 | 205.48 | ||||||||||||||||||
Total Revenue | 481.7 | 509.46 | 547.5 | 589.74 | 2,128.4 | 611.3 | 645.3 | 690.02 | ||||||||||||||||||
KPIs - Metric (Unit) | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
% Using >1 Product | 81% | 82% | 82% | 83% | - | 82% | 83% | 83% | ||||||||||||||||||
% Using >4 Products | 43% | 45% | 46% | 47% | - | 47% | 49% | 49% | ||||||||||||||||||
% Using >6 Products | 19% | 21% | 21% | 22% | - | 23% | 25% | 26% | ||||||||||||||||||
% Using >8 Products | - | - | 9% | 9% | - | 10% | 11% | 12% | ||||||||||||||||||
Customers with ARR ≥ $100k | 2,910 | 2,990 | 3,130 | 3,190 | - | 3,340 | 3,390 | 3,490 |
Executive Team
Questions to Ask Management
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Given that AI native customers accounted for 6% of your ARR and contributed 4 percentage points to your year-over-year growth, how are you planning to manage the potential revenue volatility from these customers as they optimize their usage and seek better terms?
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Your remaining performance obligations (RPO) growth has decelerated, and billings growth is affected by timing differences; can you provide more clarity on how these trends impact your long-term revenue visibility and what steps you're taking to address investor concerns about the trajectory?
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With the introduction of your OnCall product potentially competing with established players like PagerDuty, how do you plan to differentiate your offering, and what is your strategy to gain market share in the incident response and automation space?
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As you expand into security and service management with products like cloud SIEM and OnCall, how are you balancing investment in these newer areas with the need to maintain strong growth and margins in your core observability business?
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While enterprise customers are showing stronger usage growth, some customers remain cost-conscious and are seeking efficiencies; how are these dynamics affecting your net revenue retention rates, and what strategies are you employing to drive expansion within your existing customer base?