Q1 2024 Summary
Published Jan 17, 2025, 6:40 PM UTC- Usage growth is improving, with usage growth from existing customers higher than in previous quarters, and optimization activity reducing in intensity. Datadog's CFO, David Obstler, noted that in Q1, they saw sequential usage growth from existing customers that was higher than in Q4. He stated, "Q1's usage growth was similar to what we experienced in Q2 and Q3 of 2022." Additionally, they are seeing that "optimization activity reduce in intensity," indicating that customers are moving past prior optimization efforts.
- Datadog is well-positioned to benefit from AI adoption and cloud migration, which can accelerate growth over time. CEO Olivier Pomel mentioned that they are "very exposed to the same tailwinds, obviously cloud migration, but also AI adoption." He emphasized that over the longer term, they expect to benefit from these trends as they are "very exposed to the growth trend you will see with the cloud providers."
- Datadog is investing in R&D and sales to capitalize on growth opportunities, including the generative AI market opportunity. They are accelerating hiring in sales, marketing, and R&D to execute on their growth plans. Olivier Pomel highlighted that a big focus internally is recruiting to "grow the engineering and the sales team fast enough for us to go after the gen AI market opportunity we have."
- Continued customer optimization impacting usage growth: Datadog acknowledged that optimization activities among customers are ongoing, which could continue to impact usage growth and revenue.
- Lowering operating margin guidance due to increased investments: Datadog is forecasting a decrease in operating margins from 27% in Q1 to 23% for the full year, as it plans to increase investments in sales and R&D, potentially affecting profitability.
- Sequential decline in deferred revenue and billings larger than normal: The sequential decline in deferred revenue and billings was larger than normal, which might indicate potential slowing in future growth, despite management attributing it to seasonal factors.
-
Revenue Growth & Cloud Providers
Q: How does AI and cloud growth impact your revenue?
A: We are exposed to the same tailwinds as cloud providers, including cloud migration and AI adoption. While we can't map our revenue to theirs precisely quarter by quarter, we expect the correlation to remain. AI workloads like training clusters don't immediately increase our usage; we see more impact when applications go into production and inference workloads scale up. -
Guidance and ARR Expectations
Q: Why does Q2 guidance imply lower net new ARR despite strong Q1?
A: Our guidance methodology remains consistent; we take trends in usage growth and new business and discount them. We maintain conservative assumptions in our guidance, as we've done since going public. -
Sales Capacity Investment
Q: What's your plan for sales capacity as the market recovers?
A: We're ramping up sales capacity, investing more heavily this year after careful spending last year. Recruiting is a major focus; we're hiring faster to ensure we have enough capacity to meet demand. -
Margin Outlook and Investments
Q: What is driving margins lower in your full-year guidance?
A: We are increasing investments in sales and R&D, stepping up from a more conservative posture last year. This includes expanding sales capacity and pursuing high-return product projects. -
Customer Commitments and cRPO Growth
Q: Why is cRPO accelerating while revenue expectations remain steady?
A: Larger customers are committing longer to us, including multiyear deals, which increases cRPO. However, revenue correlates with usage, not just contracts or billings, so we focus on revenue and ARR as key metrics. -
Demand for AI Products
Q: How is demand for your AI-related products like AIOps?
A: We see strong interest in new products, including our Event Management and incident management tools. While some model providers build their own tools, we focus on serving the broader market needing AI observability solutions. -
Acquisition Opportunities
Q: Will you pursue larger acquisitions to accelerate growth?
A: We're actively reviewing multiple deals, and while larger acquisitions are less likely due to our selectivity on economics and fit, we're open to opportunities that accelerate our long-term growth. Our strong cash generation gives us flexibility here. -
International Growth
Q: What's driving stronger international performance versus domestic?
A: International markets are increasing cloud adoption, and we're expanding our footprint there. Examples like Brazil and Korea show increased activity due to both market maturity and our investment in sales capacity. -
New Product Adoption
Q: Are new products resonating across your customer base?
A: Yes, though it varies by product. Offerings like Cloud Cost Management and Database Monitoring have broad appeal to all customers. Some products are more targeted to larger enterprises, like those monitoring physical networks. -
Management Changes
Q: What is the context behind the President stepping down?
A: Amit, our President, chose to stop working as a full-time operator but will remain involved as a Board member. We value his contributions and expect him to stay connected with the company.