Q4 2023 Summary
Published Jan 17, 2025, 6:40 PM UTC- Datadog has significant upside potential with existing large enterprise customers who are early in their cloud adoption. As these companies migrate more workloads to the cloud, their spending with Datadog is expected to increase substantially. For example, many Fortune 500 customers currently spend less than $500,000 with Datadog, leaving ample room for expansion. ,
- Customers are showing strong recommitment and entering into longer contracts after completing optimization phases. In Q4, Datadog saw increased bookings with longer average billing and contract durations, indicating customer confidence and setting up for future growth.
- Datadog's diverse and expanding product portfolio is driving growth and larger customer commitments. The broad suite of products not only contributes to direct revenue but also helps in consolidating tools for customers, leading to larger deals and higher adoption across the platform.
- Despite management indicating that optimization headwinds have dissipated, Datadog's revenue growth guidance remains modest at 22% year-over-year for Q1 and 21% for the full fiscal year 2024, which could suggest that growth may not accelerate as expected.
- Management acknowledged that their usage-driven model depends on customer cloud migrations, which they do not control, making it "hard to time" when growth will occur. This uncertainty in customer cloud adoption may impact Datadog's ability to drive near-term revenue growth.
- The competitive landscape remains "pretty much the same" with "no real change," according to management, indicating that Datadog may not have significant new competitive advantages to spur accelerated growth in the near term.
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Future Growth Sources
Q: Where will future growth come from for Datadog?
A: Growth is expected from all customer segments, including digital natives, enterprise, and mid-market customers. Digital natives slowed over the past year but may reaccelerate with AI adoption, while the enterprise and mid-market segments offer significant opportunities as they migrate to the cloud. Notably, 42% of the Fortune 500 are customers, but many spend only a few hundred thousand dollars annually, indicating substantial room for growth. -
Billings Growth and Bookings Performance
Q: Is strong bookings performance due to mega deals or broader demand?
A: The accelerated billings growth of 5 points reflects broader demand, especially from larger customers standardizing on Datadog and committing to longer contracts. Customers are purchasing a more complete suite of products, leading to longer average billing and contract durations in Q4 compared to previous periods. -
Guidance vs. Optimization Dissipation
Q: With optimization headwinds slowing, why is guidance unchanged?
A: Despite signs of optimization dissipating, Datadog maintains conservative guidance by analyzing recent trends and discounting them. The usage-driven model benefits from customers moving to the cloud, but the timing of increased consumption is uncertain. Therefore, they prefer not to speculate and continue with prudent forecasting practices, consistent with their historical approach. -
Penetration and Expansion in Fortune 500
Q: How is Datadog expanding within Fortune 500 customers?
A: Datadog now serves 42% of the Fortune 500, up from 37% last year. However, these customers typically spend less than $500,000, suggesting significant growth potential as they increase cloud adoption. Ultimately, these customers could expand their spending to millions or tens of millions with Datadog over time. -
Impact of AI Workloads on Attach Rates
Q: Will AI workloads increase observability product attach rates?
A: Yes, AI workloads are expected to increase attach rates for observability products. AI adds complexity, creating more components rapidly without full understanding, thus shifting value from building to running, managing, and securing applications. This will drive greater need for observability and security products in the next 3 to 5 years. -
Uptake of Security Products
Q: Who is buying Datadog's security products, and which are most popular?
A: Infrastructure and application security products are typically purchased by DevOps teams with security team involvement, while the cloud SIEM product is bought by security teams. The cloud SIEM, introduced first, has the highest usage, followed by other products. Datadog focuses on product maturity and customer usage, with some customers spending over $1 million annually on security offerings. -
Impact of Generative AI and Positioning
Q: How is Datadog positioned regarding generative AI?
A: Datadog believes it is ideally positioned for generative AI opportunities. They are developing their Bits AI assistant and exploring ways to automate customer workflows. There's significant customer demand for incorporating generative AI into their products, and Datadog sees this as top of mind strategically. -
Competitive Landscape Changes
Q: Has the competitive landscape changed due to industry consolidation?
A: There are no significant changes in the competitive landscape. While some competitors have been acquired, the situation remains stable compared to previous quarters. This consolidation may open more midterm opportunities, but overall, the competition is described as "very boring" with no major shifts. -
Sales Cycles and Pipeline Dynamics
Q: Are larger deals affecting sales cycle lengths?
A: Despite larger opportunities, sales cycles have remained stable, even during tougher years. Datadog's land-and-expand model allows for quick initial adoption, with expansions occurring over time. Large deals are typically growth from existing customers, resulting from successful usage and engagement with new products. Sales cycles for new customers vary but can be as short as one to two quarters for large enterprises. -
Go-to-Market Changes and Investments
Q: Are there changes to the go-to-market strategy or sales investments?
A: No significant changes to the go-to-market strategy are noted. Datadog regularly adjusts product packaging, such as integrating security products into infrastructure and APM offerings with the new DevSecOps tier. They continue to invest in expanding the sales force, increasing capacity last year despite economic slowdown, and plan further expansion this year to capture more market segments and geographies. -
Net Retention Rate and Diversification
Q: How is product diversification contributing to growth?
A: Product diversification beyond the core APM and infrastructure offerings is a significant growth driver, with these additional products growing 75%. While specific net retention rate guidance isn't provided, Datadog notes stabilization and increased ARR additions compared to the prior year. The broad portfolio aids in consolidation deals, strengthening overall customer engagement and revenue potential.