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    Datadog Inc (DDOG)

    Q3 2024 Summary

    Published Jan 6, 2025, 8:15 PM UTC
    Initial Price$129.04July 1, 2024
    Final Price$113.98October 1, 2024
    Price Change$-15.06
    % Change-11.67%

    What went well

    • Datadog is investing in scaling its sales and R&D capacity, indicating confidence in growth opportunities ahead.
    • Datadog is expanding its global sales capacity, targeting underpenetrated markets like India, to capture significant growth opportunities.
    • Datadog's new products, especially cloud SIEM and OnCall, are gaining strong customer traction, indicating potential for additional revenue growth.

    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

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

    6. 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.

    7. 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.

    8. 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.

    9. 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.

    10. 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.

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