Datadog, Inc. (DDOG) Q2 2023 Earnings Call Aug. 08, 2023

Here is a summary of the DDOG earnings call.

Olivier Pomel - Co-Founder & CEO

Datadog displayed robust performance in Q2.
Thousands attended the DASH’s conference, marking continued dedication to new product innovations and securing substantial new logo bookings.

Q2 financial outcomes were strong.
Revenue reached $509 million, marking a 25% YoY increase and surpassing guidance predictions.
Customers increased to 26,100 from 21,200 the previous year.
Customers contributing to an Annual Recurring Revenue (ARR) of $100,000 or more grew from 2,420 to 2,990.
These customers made up about 85% of ARR.
The quarter also yielded a free cash flow of $142 million and a margin of 28%.

Several factors influenced the quarter.
Q2 saw lower usage growth from existing customers compared to past quarters.
While cloud optimization is expected to reduce, strong new logo bookings marked the quarter.
Cloud optimization seemed to subside, indicated by stabilized user growth and increasing usage growth in July.

While Q2 saw some customers scrutinize costs, the cloud optimization across Datadog's clientele seemed to subside.
Notably, bookings remained robust, especially new logo and new product bookings.
Q2 recorded the highest new logo bookings, second only to Q4 2022.

The platform's market resonance remains steady.
By the end of Q2, 82% of users engaged with two or more products, a rise from the previous year's 79%.
Additionally, 45% utilized four or more products, and 21% employed six or more.

Several new products launched since 2021 saw a 30% adoption rate.
This includes CI visibility, cloud security management, and cloud craft. By Q2, over 5,000 customers adopted security products, with 79 spending above $100,000 and a few surpassing $1 million on Datadog Security.

On the R&D front, the DASH User Conference revealed several exciting products and features.
These included the LLM observability product and Bits AI, which offers insights across the Datadog platform.
Additionally, 15 new integrations were unveiled, and Q2 saw AI clients contribute about 2% of ARR.
The company also showcased capabilities in the observability space, AI technologies for digital experiences, and innovations in cloud security.

In sales and marketing, Q2 witnessed strong new logo bookings and substantial expansion opportunities with existing customers.
Deals were made with a significant American video games company, a major broadcaster, a leading Japanese toys and media firm, one of the world's largest tech companies, and one of the world's largest financial institutions.

Outlook: despite current challenges, Datadog remains optimistic about its long-term growth potential.
This is attributed to ongoing trends in cloud migration, digital transformation, and continued product innovation.
The focus remains on assisting customers in their transition to modern technologies like the cloud and AI.

David Obstler - CFO

• Q2 revenues reached $509 million.

  • Represents a 25% increase year-over-year.

  • 6% increase quarter-over-quarter.

• Usage growth trends:

  • Solid execution but with pressure on growth from existing customers.

  • Positive but slower usage growth this quarter.

  • July showed improved usage growth, similar to Q1 trends.

  • More pressure observed on cloud-native businesses compared to traditional enterprise customers.

  • More moderate growth consistent across all customer sizes.

  • Larger customers showed more pressure on usage growth rates.

• Customer insights:

  • Total customer count rose to 26,100 from 25,500 in the previous quarter.

  • Includes a one-time cleanup: 200 customers moved to the free tier.

  • Strong gross customer additions, especially among larger customers.

  • Some churn among smaller customers.

  • Gross revenue retention rate in the mid to high 90s.

  • Strong new logo bookings, with second-largest new logo bookings quarter recorded for Q2.

• Financial insights:

  • Billings totalled $520 million.

    • 31% increase year-over-year.

  • Remaining Performance Obligations (RPO) stood at $1.25 billion.

    • 42% increase year-over-year.

  • Gross profit amounted to $414 million, a gross margin of 81.3%.

  • Operating costs grew 26% year-over-year.

  • Operating income at $106 million, a margin of 21%.

• Balance sheet and cash flow:

  • $2.2 billion in cash, cash equivalents, and marketable securities.

  • Cash from operations: $153 million.

  • Free cash flow: $142 million.

• Outlook for Q3 and fiscal year 2023:

  • Q3 revenue forecasted between $521 million and $525 million.

    • Represents 19% to 20% year-over-year growth.

  • Non-GAAP operating income projected between $98 million and $102 million.

  • Non-GAAP net income per share between $0.33 and $0.35.

  • For 2023, revenue anticipated between $2.05 billion and $2.06 billion.

    • Equates to 22% to 23% year-over-year growth.

  • Non-GAAP operating income between $390 million and $400 million.

  • Non-GAAP net income per share between $1.30 and $1.34.

• Additional guidance notes:

  • Plans to invest efficiently while maintaining financial strength.

  • Net interest and other income for 2023 expected around $85 million.

  • Tax expense projected at $14 million to $16 million for 2023.

  • Capital expenditures and capitalized software anticipated to be around 4% of 2023 revenues.

A Q&A session followed.

Anne Chapman

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