Datadog - Q2 2023
August 8, 2023
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the Q 2023 Datadog 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yuki OGawa Broda, Vice President of Investor Relations. Please go ahead.
Yuka Broderick (VP of Investor Relations and Strategic Finance)
Thank you, Gigi. Good morning, thank you for joining us to review Datadog's second quarter 2023 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO, and David Obstler, Datadog's CFO. During this 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 assumptions, our growth margins and operating margins, our product capabilities, our ability to capitalize on market opportunities and usage optimization trends. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions, are intended to identify forward-looking statements or similar indications of future expectations.
These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended March 31, 2023. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended June 30, 2023, 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.datadoghq.com. With that, I'd like to turn the call over to Olivier.
Olivier Pomel (CEO)
Thanks, Yuka, and thank you all for joining us this morning. Our team continued to execute well in Q2 as we welcomed thousands of attendees at our DASH conference last week. We continue to deliver a large number of new product innovations, and we recorded strong new logo bookings throughout the quarter. Let me start with a review of our Q2 financial performance. Revenue was $509 million, an increase of 25% year-over-year and above the high end of our guidance range. We ended with about 26,100 customers, up from about 21,200 last year. We ended the quarter with about 2,990 customer with ARR of $100,000 or more, up from about 2,420 last year.
These customers generated about 85% of our ARR, and we generated free cash flow of $142 million, with a free cash flow margin of 28%. Now let's discuss this quarter's business drivers. At a high level, first, we saw Q2 usage growth 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. Third, we continued scaling our sales with strong new logo bookings in Q2. Going one level deeper, in Q2, we saw usage growth for existing customers that was a bit lower than it had been in previous quarters. We continued to see customers, particularly some larger spending customers, scrutinize costs and optimize their cloud and observability usage during Q2.
We are reflecting this lower growth in our updated guidance for 2023, David will provide more commentary 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 their users' growth at the end of Q2, as indicated by their recent activity and their latest commitments with us. We saw usage growth in aggregate rebound in July to levels that are more similar to what we see in Q1. While it is too early to call an end to cloud optimization and a significant level of macro uncertainty remains, these new trends, along with the tenor of our customer interactions, are encouraging. Lastly, our bookings were strong in Q2.
Our new logo and new product bookings and deal cycles haven't been impacted by the period of cloud optimization, 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, 2022. We also closed a record number of new business deals larger than $100,000 in annual commitment. With our land expand model, we expect new logos to turn into much larger customers over time as they lean into the cloud and add up more of our products. As a conclusion, while we do apply conservatism to our guidance, recent 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 21% of our customers were using six or more products, up from 14% a year ago. This strong multi-product adoption include expansion into our newest products. About 30% of our customers have already adopted at least one of our products launched since 2021, including CI Visibility, Database Monitoring, Cloud Security Management, Sensitive Data Scanner, Cloudcraft, and others. We expect more opportunities to expand adoption of these products as we continue to broaden their capabilities over time. In security, we mentioned last quarter that over 5,000 customers have adopted security products.
While many of these 5,000 are just getting started with Datadog Security, we are seeing opportunities to help customers secure their clouds at scale. As of Q2, 79 of our customers spent more than $100,000 on Datadog Security. A handful are now spending more than $1 million. Now let's move on to R&D. Last week, we had our DASH user conference and introduced a number of exciting new products and features for our users. To kick off our keynote, we launched our first innovation for generative AI and large language model. We showcased our LLM Observability product, enabling ML engineers to safely deploy and manage their models in production.
These include the Model Catalog, a centralized place to view and manage every model in every state of our customer development pipeline, analysis and insight on model performance, which allows all engineers to identify and address performance and quality issue with the model themselves, and help identify model drift, the performance, sorry, the performance degradation that happens over time as model interacts with real-world data. We also introduced Bits AI. Bits AI understands natural language and provides insights from across the Datadog platform, as well as from our customers' collaboration and documentation tools. Among its many features, Bits AI can act as an incident management copilot, identifying and suggesting fixes, generating synthetic tests, and triggering workflows to automatically remediate critical issues. We announced 15 new integrations across the next-generation AI stack, from GPU infrastructure providers to vector databases, model vendors, and AI orchestration frameworks.
As we said last quarter, we are excited about these new AI technologies, and we believe Datadog is uniquely positioned to both help our customers make the best of them, as well as to incorporate them into our product alongside our data and workflows. Although it's early days for everyone in this space, we are getting traction with AI customers, and in Q2, our next-gen AI customers contributed about 2% of ARR. Moving on from AI, we showcased a number of new capabilities in the observability space. We introduced Flex Logs for log management, allowing customers to flexibly choose retention periods and query performance separately to make new, high-volume login use cases cost-effective. We are simplifying APM onboarding for large organizations, so engineers can enable APM across all applications without any code changes.
With APM trace querying, our customers can now understand the complete impact of any localized issue. We introduced our Error Tracking Assistant, which marries AI capabilities with our live observability data to automatically explain, solve, and test for production errors. In digital experience, we're also applying next-gen AI technologies to help customers automatically generate synthetic tests from their live traffic data. We've expanded our mobile monitoring features, bringing a 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, correlating thousands of technical insights and reducing them to a smaller number of actionable tasks. We can now detect more infrastructure vulnerabilities, whether they are in applications, container images, or hosts.
With Custom Code Vulnerability Detection, we extended our detection capabilities beyond open-source libraries and into customers' own codes, identifying the exact vulnerable code snippet with remediation details. With Cloud SIEM Investigator, our customers can visually map an attacker's behavior going back more than a year, leading to faster investigation and remediation. Shifting left, we're delivering more solutions to developers with Static Analysis. Customers can scan code for quality issues directly within Datadog, and we're introducing Quality Gates, so engineers can set rules and prevent insecure, buggy, or slow code from deploying in production. Finally, we announced new capabilities to help customers spend on cloud resources more efficiently. Our Container Resource Utilization functionality makes it clear which applications are under or overprovisioned. With Cloud Cost Recommendations, we're adding to our Cloud Cost Management product to automatically discover saving opportunities and act on them.
Those were just some of the many announcements we made at DASH. Our investor relations website includes a link to the DASH keynote, and I encourage you to watch it to learn more. Before I step away for more innovations, I'm also pleased to note that for the third year in a row, Datadog has been named a leader in the 2023 Gartner Magic Quadrant for Application Performance Monitoring and Observability. We believe this validates our approach to deliver a unified platform, which breaks down silos across teams and to focus intensely on product innovation. Now let's move on to sales and marketing. As I said earlier, we recorded 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.
This customer's previous fast observability vendor was not delivering on critical capabilities, such as correlated alerting and collaborative incident management. A recent pricing change motivated the customer to consider other vendors. By moving to Datadog, this customer expects to get higher value out of their monitoring, reduce alert fatigue, and eliminate silos among users. As they achieve better results, they expect to save over $1 million annually by shifting to Datadog from their previous vendor. Next, we signed a seven-figure land with a major broadcaster. This customer is moving to AWS and serverless. Its fragmented legacy and open source tools meant long incident resolution times and confusion among teams. This customer is adopting seven Datadog products, consolidating five tools, and has already ramped Datadog 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 observability vendor alongside smaller tools and homegrown capabilities. With the adoption of 5 Datadog products, they have full visibility into their applications. They can save time on low-value busy work and focus on delivering great experiences for their customers. Next, we signed a 7-figure expansion with one of the world's largest tech companies. This customer is seeing massive adoption of its new generative AI product and needs to scale their GPU fleet to meet increasing demand for AI workloads. Using their homegrown tool was slowing them down and put at risk critical product launches. With Datadog, this team is able to programmatically manage new environments as they come online, track and alert on their service level objectives, and provide real-time visibility for initiatives.
Last but not least, we signed an expansion with one of the world's largest financial institutions, taking this customer to 8-figure ARR. This customer operates at massive scale, supporting thousands of applications run by tens of thousands of developers, and they have a strategic initiative to move aggressively to the public cloud this year. They chose Datadog as their preferred observability platform for cloud application. As their business units modernize, they are expanding to 10 Datadog products and replacing a number of legacy commercial tools. That's it for this quarter's highlights. I'd like to thank our go-to-market teams for their execution in Q2 and for helping our customers make the most out of DASH last week. Before I turn it over to David for a financial review, let me speak to our longer-term outlook.
Despite the recent trends of cloud optimization 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 a rapid pace of innovation to serve customers in observability and beyond. We think our strong new logo and product adoption trends this quarter are indicative of the continued large and growing opportunity for Datadog. 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 modern technologies. With that, I will turn it over to our CFO. David?
David Obstler (CFO)
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, though we also continued to see pressure on the usage growth of existing customers. 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, though 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 Datadog, though 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 26,100 from 25,500 last quarter. This quarter's total paying customer count includes a one-time cleanup of about 200 financially immaterial customers at the very low end, who were moved to our free tier. Our growth customer additions have remained strong, especially with larger customers. Meanwhile, we are 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 90s, 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 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 on to our trailing twelve-month dollar-based net retention rate, or NRR. NRR was over 120% in Q2 as customers increased their usage and adopted more products. As we expected, and as we discussed on last quarter's call, our trailing twelve-month NRR declined, but was above 120% in Q2, as existing customers continued to scrutinize their tech stack costs and make efficiency improvements. If our growth trajectory continues at current levels, we expect our trailing twelve-month NRR to decline 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, or RPO, was $1.25 billion, up 42% year-over-year. Current RPO growth was about up 30% year-over-year.
We signed some larger multiyear 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 than billings and RPO, 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 80.5% last quarter and 80.8% in the year-ago quarter. We continue to experience efficiencies in cloud costs, reflected in our cost of goods sold this quarter.
As a result, we are experiencing a gross margin, which is in excess of our target in the high seventies. Our Q2 OpEx grew 26% year-over-year, and this was a decline from 45% year-over-year growth last quarter. 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, after taking into consideration capital expenditures and capitalized software, free cash flow was $142 million, for a free cash flow margin of 28%. 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-$525 million, which represents a 19%-20% year-over-year growth.
Non-GAAP operating income is expected to be in the range of $98 million-$102 million, and non-GAAP net income per share is expected to be in the range of $0.33-$0.35 per share, based on approximately 354 million weighted average diluted shares outstanding. For the full fiscal year 2023, we expect revenue to be in the range of $2.05 billion-$2.06 billion, which represents 22%-23% year-over-year growth. Non-GAAP operating income is expected to be in the range of $390 million-$400 million. Non-GAAP net income per share is expected to be in the range of $1.30-$1.34 per share, and based on approximately 351 million diluted shares outstanding.
Now finally, for some additional notes on the guidance. We have continued to balance near-term financial strength 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-$16 million. Finally, we expect capital expenditures and capitalized software together to be about 4% of revenues in fiscal year 2023. To reiterate, reiterate Olivier's comments, we remain excited about our long-term growth opportunities, and we're continuing to execute against those opportunities. I want to thank our Datadogs worldwide for our efforts in this quarter. With that, we will open the call for questions. Operator, let's begin the Q&A.
Operator (participant)
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 stand by while we compile the Q&A roster. Our first question comes from the line of Raimo Lenschow from Barclays.
Raimo Lenschow (Senior Equity Research Analyst)
Hey, thank you. Olivier, on the, if you think about the nature, can you discuss a little bit the nature of the optimizations that you see when you compare a little bit what you saw at the early parts of the, you know, recession or the cycle, you know, late last year versus what you see now? Does the, does the nature has changed, has changed there in terms of what you're seeing there? Then I had one follow-up, David.
Olivier Pomel (CEO)
No, we don't see a big change in the nature of the optimization. It's a mix of optimization of the cloud workloads themselves, and a little bit also on the observability side, so the observability product that have volumes that can be separate from the cloud workloads, such as logs or custom metrics and things like that. I would say the... This quarter, we did see a little bit more growth, as we said in the comments, across the board from existing customers, which suggests that the customers that started optimizing earlier were not done yet, and some others have started later, and they're all across in the middle there.
We, we did see, however, that some of the customers, in the course of customers in particular, that started optimizing a year ago and that were on the larger side and on the cloud-native side, have stabilized in their growth. We feel a lot more confident now that, you know, they're, they're done at least as far as they know. As we've seen some of these customers start committing long-term forward again with us, and that levels that are at or above their current levels of usage, you know, which suggests that they have a good idea of where they're going next, which is what inspired also, or part of what inspired our comments about the fact that we think we see some signs that this, this period might end.
Still too early to call it, but we seem to be on more solid ground there.
Raimo Lenschow (Senior Equity Research Analyst)
Yeah. Okay. Then the, just linking that up with the guidance, because that's where I get a lot of the questions. Think about your Q3 and then Q4 and pipe guidance, given, given that you have full year, there's obviously still headwinds on growth that are kind of coming there. Like, how much of that Q3, Q4 is kind of a lagging effect of, what we've seen before, versus kind of maybe other factors like conservatism, et cetera? Thank you.
David Obstler (CFO)
Yeah, it's both. 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. Then on top of that, we, in our guidance philosophy, we discount the most recent performance, particularly around usage growth, but also in new logos. It's a combination of both of that, those flowing through in our financial results for the year.
Raimo Lenschow (Senior Equity Research Analyst)
Okay, perfect. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Sanjit Singh from Morgan Stanley.
Sanjit Singh (Senior Equity Analyst)
Thanks, guys, for taking the questions. I think I understand the comments around slower usage growth trends, particularly compared to Q1. I just want to, you know, dig into any sort of issues around competition. David, you mentioned sort of higher churn at the low end. We see total customer account growth slow down this, this quarter. We think about, you know, either commercial competition, competition with open source or DIY, or maybe even customers gravitating to hyperscaler native solutions. Have you seen any sort of pick up there? Is that a potential, you know, as part of the mix of why we're seeing slower usage trends this quarter?
Olivier Pomel (CEO)
Sanjit, 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 health of what happens to tiny, tiny businesses that use us for small amounts and that themselves might disappear, go out of business, or stop having need all together. We did have a one-time cleanup also this quarter, as we, you know, on an ongoing basis, we downgrade some customers if they are not super active in the platform or if their bills are not up to or paid up to date.
We changed some of the criteria around that, which ended up with a one-time cleanup of 200 customers, which changed the number there a bit. Beyond that, we do see a little bit higher churn at the very, very low end. The numbers there are small in terms of revenue. They're actually completely immaterial, and the overall growth retention remains unchanged and in the mid to high 90s in aggregate.
David Obstler (CFO)
I think we said that, I think on the other side of it, we said that, in dollars, we had, you know, strong new logo, booking and, also cross-sell. A lot of that, as I, I said in my comments, or portion of that tends to be consolidation onto the platform, which has been going on for some time.
Olivier Pomel (CEO)
Yeah, and beyond that, I think it's a good point, David. We do see, we're actually very happy with what we see on the new products and new logo side of the business. We're landing record numbers of new customers at off scale, and we're also seeing more and more consolidations onto us. If nothing else, the competitive dynamics seems to turn more into our favor as time goes by there, independently from what we see in terms of churn or growth at the very low end.
Sanjit Singh (Senior Equity Analyst)
I, I appreciate the color. David and Olivier, you made some sort of, I guess, preliminary comments on 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 hasn't optimized, any sort of color, how large that is? You know, what percentage of the customer base hasn't yet optimized, but potentially could going forward?
Olivier Pomel (CEO)
We, we can't really give you a, a percentage there, you know, but the, the, the cohort we mentioned on the, on the call, you know, the one we, we were looking at for getting a sense of stabilization in the, optimization, was the cohort that started optimizing the first, that was typically large in volume, very cloud-native in nature, and that we consider to be the highest risk one. The one that weighed on our, growth numbers the most over the past 2 quarters, and that's the one we based some of our comments on. In addition to, you know, the, the other trends that David mentioned earlier, on the side, in aggregate, we saw a, a growth of existing customers pick up, first late in, in Q2 and then in, in July.
Sanjit Singh (Senior Equity Analyst)
I appreciate that, Olivier. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Mark Murphy from JP Morgan.
Mark Murphy (Analyst)
Yes, thank you very much. Once the larger customers have compressed their spending, and obviously there's a limit to how much they can compress that, then, you know, they're, they're gonna need to grow that, that spending again. At some point, you're gonna have growth, you know, ramping pretty materially in security. It sounds like that has started. All of the LLM Observability, and then you're gonna have easier comparisons as we head into 2024. Is it reasonable to think that, you know, optimizations could be further subsiding as we're entering 2024, based on your comments?
You know, for all these reasons, should we be optimistic on, on growth picking up, just relative to how it's gonna exit in Q4 of this year, which I think is around the mid-teens? I know it's hard to answer because you haven't, you know, guided on that yet. Or would you be imagining, David, that, you know, we might kind of just drag across that 15% into 2024 as a starting point? If you can't, you know, answer it numerically, maybe you could just kind of speak to some of these time frames qualitatively. Thank you.
David Obstler (CFO)
Yeah. I think we haven't provided guidance for next year. We've cited that, that given the amount of our revenue growth that's embedded in our existing customer base, the timing of the lapsing of optimization is critical to that. We said we see green shoots, has been said, but it's too early to call that, so that's the biggest factor. In addition, we said that our new logo performance, in terms of assigning new customers who then ramp, is another green shoot that could, could do that, but it's, you know, we, we haven't provided guidance on specific numbers for next year, so really can't go further.
Olivier Pomel (CEO)
Look, I mean, we're obviously, we're, in general, we're optimistic. Like, we're, we're still very early in a, in a big tech transition. Short term, we don't really control the growth of existing customers and how much they optimize their cloud environment and things like that. For everything that we control and we execute on, which is new products, the quality of the products, the, and the new customers and the attach of these new products with customers, everything we see seems to be working, and we see great results from that. These are, these are obviously great trends for the future.
The one thing I would add is that, in our conversation with our customers at a conference, just last week, most of the conversations were around how we're going to get our customers to implement new use cases, adopt new products, scale up, consolidate onto our platform. There was still a little bit of customers talking about co- cost control, optimization, things like that, but we also see less of it over time. 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, you know, because we know sometimes our customers don't know everything themselves. They might face more difficulties as they go. We're very optimistic about the mid-long term, obviously.
Mark Murphy (Analyst)
Olivier, thank, thank you for that. Just as a quick follow-up, you know, you mentioned strong new logo bookings, and I think we don't see that in the new customer count. You rattled off a handful of seven and eight-figure wins, which I, I believe each and every one of those sounded like a consolidation play on, onto other vendor- off of other vendors, and displacing those onto Datadog. Am I interpreting it accurately to think that maybe you're, you're, you're seeing a pretty big shift there, where 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, in the competitive landscape to Datadog's advantage?
Olivier Pomel (CEO)
Yeah, well, in general, we see it, and we see. We, by nature, these consolidation deals tend to be the ones that have the biggest, you know, headline number when we close them, as opposed to just a continuation of the existing run rate we have with those customers. That's, you know, what causes those step functions there, and that's why we call them out on the earnings call. We, in general, you know, we had a record number of new business deals across above $100,000. What you don't see in the overall number of customers is the spread between smaller, medium, and larger.
There's quite a bit of noise at the low end of that customer count, which makes the number ebb and flow a little bit. For the part that we target with our sales force, which are the middle and the high end of it, we actually see those numbers grow nicely and commensurately with our sales force. We're very happy about that.
David Obstler (CFO)
Just, just to clarify the customer count. On growth additions, in number, very, very consistent with what we've seen in previous quarters. As Olivier mentioned, more larger deals resulted in, in a higher average land. That's what produced the record Q2. The net, the weight on the net is, we mentioned the cleanup, but, but, on the, a very low end, customers that are on the border between, very, very slight usage and free trial. The growth add- the growth addition, activities, were consistent and strong. In fact, I think as you mentioned, in, as you get to the larger deals, you have more consolidation impet- impetus within those, wins.
Mark Murphy (Analyst)
Thank you very much.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Kash Rangan from Goldman Sachs.
Anisha (Analyst)
Hey, this is Anisha on for Kash. Two quick questions. One may be on usage growth slowdown. Is that coming from particular end markets or segments or verticals that you can highlight? Second, maybe on hiring. While you're seeing green shoots in new logo growth, and we had a great number of announcements from the DASH conference, what would give you conviction to ramp up hiring, since you've moderated on your go-to-market motion right now? Thank you.
Olivier Pomel (CEO)
On the, so first on the, on the growth, slowdown. This is the, I would say, across the board, we see optimization, but it, it is a, a lot more pronounced with cloud-native businesses than with traditional enterprises. The, the reasons for that are that, you know, cloud-native businesses, have a lot, a lot more of their spending on the cloud, and a lot more of an emphasis on selling there than the, larger enterprises that are a lot earlier in their cloud migration, and that still have most of their IT spend or majority of their IT spend that is, outside of cloud. This, this is where we've seen the most optimization.
It's still where we see the most optimization, though, as we said in the call, the, we saw that the, the earlier cohorts of cloud-native customers that started optimizing a year ago, are showing, are showing some stabilization and some higher commitment with us, in, in, in, in the past couple of months. In terms of hiring, I think we're still growing the company, and we're still investing. What we've done is we've moderated the rate of growth, to align on the on what we've seen on the market, but we, we still consider we are very, very early in terms of the, our product journey. We still have a lot to build in observability. We have a lot to build in security. We have a lot to build in developer workflow, developer experience.
We have a lot to build in ICS, and there's many, many, unique use cases we're going after, including AI. We're not going to stop hiring, and we're not going to stop innovating there. Last thing I'll mention is that we've also been growing our go-to-market teams, and the reason for that is though those investments in go-to-market are yielding incremental growth on the new logo and new product side. We said in the call, that part of the business has been working very well, and we're very satisfied with the output there. We'll keep growing the team while being mindful of the margins we need to protect.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Jake Roberge, from William Blair.
Jake Roberge (Research Analyst)
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 with just maybe a near-term wall in IT spending until broader AI plans are finalized? Or was the updated guide mainly just driven by the optimizations you've been calling out?
Olivier Pomel (CEO)
We don't, we don't really see that trend at play. I would say that the, the one thing I would say is, our, our AI customers fall into two camps right now. There are the ones that have been working on it for the past two, three years, that are providers of AI themselves or businesses that were completely built on AI. We see those business reaching scale, in some cases, very large scale right now. 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 it's probably going to take a number of quarters, even years in some cases, for those use cases and those customers to reach full scale. Again, much larger number of customers, but, but quite early.
We have those two trends at play when you look at our AI penetration and the AI adoption.
Jake Roberge (Research Analyst)
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've started to see any of the, the newer generative AI-focused companies that are creating these LLMs start to actually layer into your, your model from a customer perspective.
Olivier Pomel (CEO)
Right. I, I'm, I missed part of your question. You, can you, can you, repeat? You were
Jake Roberge (Research Analyst)
Yeah.
Olivier Pomel (CEO)
You were a little bit-
Jake Roberge (Research Analyst)
The first part
Olivier Pomel (CEO)
The volume was a little bit low.
Jake Roberge (Research Analyst)
Yeah, the, the first part was just around the strong new logo bookings, and just if there was any commonalities between those customers from a size or an industry perspective.
Olivier Pomel (CEO)
Well, the, the new logo bookings are, you know, in terms of value, like, they're this Q at mid-market 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. In some situations, we have new business units of existing customers that were with us for a while, but that also started new business units around AI that, that started adopting our product more recently. We'll have one of those also in the core comments from a very large customer.
Jake Roberge (Research Analyst)
Great. Thanks for taking my questions.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Brent Thill from Jefferies.
Brent Thill (Senior Equity Research Analyst)
On sales and marketing in Q2, you've never been down sequentially. Are you holding back on quota-carrying rep hiring to get the reps productive? Are you gonna be adding on that side? A quick follow-up.
David Obstler (CFO)
The biggest factor there was, the, the, the sales kickoff that would be in the first quarter and not in the second quarter. The, the, the change has more to do with the timing of events. Be that as it may, as Oli mentioned, we're continuing to invest in sales quota capacity, but we are growing that at a lower rate than we did last year. The major factor in the sequential was, was a seasonal thing around events.
Brent Thill (Senior Equity Research Analyst)
Okay. Real quick, just some of the large customer adds in 80, your cadence was pushing 130 to 170. Is something competitively going on there? Or is it just you're equally seeing the SMB and enterprise act the same way in terms of their conservatism?
David Obstler (CFO)
I didn't understand what... I didn't understand the question.
Olivier Pomel (CEO)
Brent, you're talking about the net adds of a $100,000 plus customers?
Brent Thill (Senior Equity Research Analyst)
Correct. It was 80 versus 130-170 the last 4 quarters.
David Obstler (CFO)
Yeah, the... I would say that we've said that the number of customers has been relatively steady, although it's decelerated. We have gotten, I would say, in that range in land, the average land has been larger. Of those that are landing, a smaller end when net retention goes down, because the major source of customers going into that would be from customers below 100,000. The bigger factor would be that it takes longer for those customers to evolve into that 100,000, and that's the biggest factor in that.
Olivier Pomel (CEO)
Yeah, and, and just to reiterate what I was saying, we're very happy with the addition of customers on the medium and large side. These, these numbers are, are going up, you know, across the board in terms of new new customers and new products and, and, so we, we feel very good about that. If nothing else, the things are improving there.
Brent Thill (Senior Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Michael Turits from KeyBanc.
Michael Turits (Senior Analyst, Enterprise Software)
Hey, guys. 2 questions. First, can you finish up on 1? Can you just talk about how usage trended month-by-month? April, May, June, and if there any logic around that? My second question is just, Olivier, you'd said that there was a difference between or that those 2 factors in terms of optimism.
Olivier Pomel (CEO)
I didn't hear your second question. You, you're breaking up a little bit. The first question, and, and the sort of first question to start, maybe you was on the linearity during the quarter, I guess?
Michael Turits (Senior Analyst, Enterprise Software)
Yeah, that's correct.
Olivier Pomel (CEO)
Yeah, yeah. Linearity was not completely, you know, out of the ordinary for us. Though I will say, you know, we had a low in May. I would say in late April and May, we started having a low, and then things improved in June and improved some more in July, which is after the end of the quarter. That being said, you know, as we form more guidance for the rest of the year, we base that on what we saw throughout the quarter, and we discount it, and we try to avoid looking too much at what we saw, the partial quarters we got after that. That's been our philosophy throughout, and we stick to that today.
Michael Turits (Senior Analyst, Enterprise Software)
Thanks. Then the second question was the optimization that was particular to observability. Was there any difference across your major product categories of, say, APM versus logs versus infrastructure?
Olivier Pomel (CEO)
The ones that are the most sensitive to that are logs. Some parts of infrastructure, which is custom metrics, and some part of APM, which is, you know, additional large volume transactions that customers might sell in addition to what they get included with the every single host they deploy APM on. We've, we've seen some optimization on that that's been specific to observability. I would say it does go hand in hand with the, the overall cloud optimization our customers are doing, though the timing might not always be exactly the same. You know, which is also why we're careful about the the the trends that we're forecasting based on the some of the improvement we've seen recently.
Michael Turits (Senior Analyst, Enterprise Software)
Okay, thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Andrew Nowinski from Wells Fargo.
Andrew Nowinski (Senior Research Analyst)
Okay. Thank you. Good morning, everyone. I wanted to start with a clarification. Did you, did you actually lower 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?
David Obstler (CFO)
Yeah, we would essentially discount the most recent assumptions. If the most recent assumptions were lower, we said they were lower in Q2, then we would be lowering those, that, in the guidance assumptions going forward.
Andrew Nowinski (Senior Research Analyst)
Right. It wasn't just the, you know, the organic growth rate being lower, your actual discount rate was lower, too?
David Obstler (CFO)
Well, I don't know what ... sorry, I don't understand your question. We do our guidance based on taking the assumptions and then discounting. I, I don't know. You'd have to clarify what you mean by the discount rate.
Olivier Pomel (CEO)
We, we, we don't have a discount rate card for guidance.
David Obstler (CFO)
Yeah.
Olivier Pomel (CEO)
We, but we do discount the historical as we give guidance for the future.
Andrew Nowinski (Senior Research Analyst)
Okay, fair enough. Then I just had a question on that large deal, the eight-figure deal. Is that large enough that we should normalize it when we think about our estimates for next year? Do you have enough of those eight-figure deals in the pipeline that it'll blend out?
Olivier Pomel (CEO)
I don't think you need to normalize for it.
Andrew Nowinski (Senior Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question goes on the line of Taz Koujalgi from Wedbush.
Taz Koujalgi (Equity Research Analyst)
Hey, guys, thanks for taking my question. I have a question on the new logo bookings that you, that you mentioned. What is the average duration of, of new bookings or new logo bookings, and how has that trended so far?
David Obstler (CFO)
We haven't, we haven't discussed the duration of new bookings versus existing bookings. Our durations in terms of contract have tended to be just under 1 year, 9 to 10 months, but we haven't given information on the difference between new bookings. I would say the larger, the larger, if you're getting to the RPO, because most of the revenues are existing customers, if you're 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.
Taz Koujalgi (Equity Research Analyst)
Just to clarify, the duration for new customers was consistent with the prior quarter or was higher?
David Obstler (CFO)
The duration increased, so we said that the RPO total was higher than the current RPO, and that the reason was that duration had gone up slightly from previous periods. Duration increased in contracts.
Taz Koujalgi (Equity Research Analyst)
Yep, very helpful. Just 1 follow-up.
David Obstler (CFO)
Yeah.
Taz Koujalgi (Equity Research Analyst)
You mentioned 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.
David Obstler (CFO)
Mm-hmm.
Taz Koujalgi (Equity Research Analyst)
Is that a consistent metric, or was that higher or lower than what you usually see?
Gregg Moskowitz (Senior Enterprise Software Analyst)
Yeah, we report that in our, in our Q's. That's the 40% has is higher than it had been. That's mathematically true when net retention goes down. With more consistency of new, you would have a higher percent. The 10 points, so the 10 points of growth or of our growth would be something that would be more consistent and not as dependent on the net retention.
Patrick Walravens (Director of Technology Research)
Got it. Thank you very much.
Gregg Moskowitz (Senior Enterprise Software Analyst)
Yeah.
Operator (participant)
Thank you. One moment for our next question. Our next question comes on the line of Koji Ikeda from Bank of America Securities.
Koji Ikeda (Director, Enterprise Software Equity Research)
Hey, Olivier and David, thanks for taking the questions. Just, just one from me here in the interest of time. Olivier, in your prepared remarks, you, you called out 2% of ARR being generated from next gen AI customers. I wanted to dig into that a little bit more. How should we be thinking about how you define what a next gen AI customer is? Is that an existing customer with very specific AI initiatives, or is that a next gen AI specific customer, say, like an LLM vendor? And then what was that contribution during 1 Q? Thanks, guys.
Olivier Pomel (CEO)
It's a, you can think of it as the customers that are either selling AI themselves, you know, so that would be LLM vendors and, and the likes, or customers whose whole business is built on differentiated AI technology. And we've been fairly selective in terms of who we put in that category, because, you know, companies everywhere are very eager to say that they differentiate with AI today. This is an illustration, basically, of the new kinds of businesses we've seen emerge, I would say, in the past year, year and a half, two years. In some cases, this might be divisions of existing larger companies, but in most situations, these are fairly recent and newer companies. We don't, we didn't give a comparable for the number.
This is the first time we disclose this, and we probably won't discuss it, disclose it on a regular basis. This is just to give more color to what we see in the market today.
Koji Ikeda (Director, Enterprise Software Equity Research)
Got it. Got it. That's super helpful. Thank you very much for taking the question.
Operator (participant)
Thank you. One moment for our next question. Our next question comes on the line of Patrick Walravens from JMP Securities.
Patrick Walravens (Director of Technology Research)
Oh, great. Thank you. I, I'd love to hear what you thought about the attendance at Datadog Dash in San Francisco versus your expectations, and then, you know, more broadly, about the, so your thoughts around the return to in-person events like this.
Olivier Pomel (CEO)
Overall, we were actually very happily surprised. We had decided to go to DASH, to put DASH in San Francisco this year, so we'd switch things up a little bit and maybe see different customers than the ones we see when we do it on the East Coast. We're a little bit worried, to be honest, because we did it in the summer in San Francisco, and we had heard horror stories about how hard it was to get people in San Francisco to show up. We've been very, very happily surprised. We got great attendance, actually higher than we had modeled, you know, which forced us to scramble the first day to add some chairs in the keynote rooms. Overall, the attendance was very good. The conference was very productive.
It was very, very good. In terms of the return to in-person events, across the board, we see them happen, whether that's our own conference or the other industry or vendor conferences that we exhibit at. We see a lot of success with those again, since customers are very eager to connect and, and come to these events. Definitely something that's happening this year that was maybe not happening as much the years before.
Patrick Walravens (Director of Technology Research)
Okay. Thanks, Oli.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Gregg Moskowitz from Mizuho.
Gregg Moskowitz (Senior Enterprise Software Analyst)
Okay, thank you for taking the questions. First for Olivier, and then I have a follow-up. You know, 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 consumption business models that have recently reported. I'm just wondering if you have any thoughts as to why the usage growth for existing customers may have downticked this quarter? Anything anecdotally that you might have come across.
Olivier Pomel (CEO)
Yeah. Well, I think look, at the end of the day, it's, we have a slightly different customer mix than some of the other folks. There are some optimizations that are specific to them, with others that are specific to the cloud, that maybe it's also specific to different clouds, of which we have a different mix than the rest of the industry. When you combine all of that, you know, you might see some different timing effects in terms of how various optimization might, you know, hit us versus others. 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.
You know, the, the, the other participants are also quite careful about not calling an immediate end to all of the optimization. So are we, even though from the behavior we see from our who we think are the, our customers who are the most at risk of optimization, we, we feel better about the, the, the path we see them take and the usage trends we see of late.
Gregg Moskowitz (Senior Enterprise Software Analyst)
Okay, thanks, Ali. I wanted to ask on the security side, because you mentioned 79 customers now over 100K, including a handful spending more than $1 million. For those largest customers in particular, can you give us a flavor for which Datadog Security products they're most frequently using? Also, how much of this, again, for those largest wins, how much of this is greenfield as opposed to displacement? Thanks.
Olivier Pomel (CEO)
The, the, the, the largest customers there tend to use almost all of our security products today. Sometimes there are some exceptions. These are customers that tend to be on the tech forward, mid-market, higher end of the market side, that deploy us wall-to-wall in the organization. Typically, the customers that have us in the six figures or above tend to be can be enterprise or mid-market, but the ones that are 1 million or above tend to be mid-market and more tech forward. I would say overall, the, the adoption tracks the adoption in the industry of a unified DevSecOps as a practice. Again, to be to zoom out a little bit, we believe that this is where the whole industry is going, and we're building a product.
We're completely ready, and we have a fully mature end-to-end solution that is relevant to every single possible customer, so that by the time this becomes a generic practice in the industry, we're, we're the no-brainer de facto choice for a lot of those customers. So far, we're, we're pleased with what we're doing there.
Gregg Moskowitz (Senior Enterprise Software Analyst)
Very helpful. Thank you.
Operator (participant)
Thank you. At this time, I would now like to turn the conference back over to Olivier Pomel, CEO of Datadog, for closing remarks.
Olivier Pomel (CEO)
Thank you. First of all, thank you all for attending the call today. I also want to thank all of our employees, and all the Datadog around the world for a Q2 that was very well executed. I want to thank all of our customers, for making DASH last week such a vibrant conference and making it so productive in terms of the conversations we've had with them. On these good words, thank you all.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconect