Datadog, Inc. (DDOG) Q3 2023 Earnings Call Nov. 07, 2023

Here is a summary of the earnings call.

Olivier Pomel - Co-Founder & CEO

Q3 Overview:

• Revenue in Q3: $548 million, up 25% YoY, exceeding guidance.

• Total customers: Approximately 26,800 (up from 22,200 last year).

• Customers with ARR of $100,000 or more: About 3,130 (up from about 2,600 last year), accounting for 86% of ARR.

• Free cash flow: $138 million with a 25% margin.

Platform Adoption:

• 82% of customers using two or more products.

• 46% of customers using four or more products.

• 21% of customers using six or more products.

Business Drivers in Q3:

• Usage growth of existing customers improved compared to Q2.

• Cloud optimization activity from some customers may be moderating.

• Robust new logo bookings with a record number of deals over $100,000 in annual commitments.

• Expect new logos to grow into larger customers over time.

• Strong execution in adding new customers, especially those with ARR over $100,000.

Milestones and Product Achievements:

• Infrastructure monitoring ARR exceeded $1 billion.

• APM suite ARR exceeded $500 million.

• Log management product ARR exceeded $500 million.

• Introduced single-step instrumentation for APM, mobile app monitoring, and Flex logs for log management.

• Vision to create a unified platform across datasets, products, and team boundaries.

AI and DevSecOps Innovations:

• Expect AI adoption to drive growth in cloud workloads.

• Making DevSecOps easy to adopt with Infrastructure DevSecOps and APM DevSecOps packages.

• Integrating AI capabilities for error analysis and resolution, AI-generated synthetic tests, and more.

• Emphasizing empathy for customers' pain points through "dogfooding" (using their own product).

Sales and Marketing Success:

• Signed significant deals with leading dental care, South American FinTech, American chain of convenience stores, major US federal agency, Fortune 500 industrial company, and software business part of a tech hyperscaler.

• Customers switching from legacy monitoring, reducing costs, and improving efficiency.

• Strong execution by go-to-market teams.

Longer-Term Outlook:

• Belief in digital transformation and cloud migration as long-term secular growth drivers.

• Aggressive investment to broaden the platform and become mission-critical partners for customers in cloud and modern DevSecOps.

David Obstler - CFO

Q3 Financial Metrics:

• Q3 revenue: $548 million, up 25% YoY and 7% QoQ.

• Healthy start to Q4 in October with stronger trends than the past year.

• Usage growth improved in Q3, resembling Q1 and consistent throughout the quarter.

• Larger spending customer growth lagging behind smaller spending customers.

• Signs of cloud optimization activity moderating.

Retention Metrics:

• Trailing 12-month net revenue retention slightly below 120% in Q3.

• Trailing 12-month gross revenue retention stable in the mid to high 90s.

• Indicates the mission-critical nature of Datadog's platform for customers.

Financial Results:

• Billings: $607 million, up 30% YoY.

• Remaining Performance Obligations (RPO): $1.45 billion, up 54% YoY.

• Increasing preference from customers for multi-year deals.

• Weighted average booking duration up sequentially and YoY.

• Emphasis on revenue as a better indicator of business trends than billings and RPO.

Income Statement Metrics:

• Gross profit: $451 million, gross margin 82.3%.

• OpEx growth: 17% YoY, reflecting cost control in uncertain environment.

• Operating income: $131 million, operating margin 24%, up from 21% last quarter and 17% YoY.

• Higher margins in Q3 due to successful cost management and higher organic growth.

Balance Sheet and Cash Flow:

• Ended Q3 with $2.3 billion in cash, cash equivalents, and marketable securities.

• Cash flow from operations: $153 million.

• Free cash flow: $138 million, free cash flow margin 25%.

Outlook for Q4 and FY 2023:

• Q4 revenue guidance: $564 million to $568 million (20% to 21% YoY growth).

• Non-GAAP operating income guidance: $129 million to $133 million.

• Non-GAAP net income per share guidance: $0.42 to $0.44.

• FY 2023 revenue guidance: $2.103 billion to $2.107 billion (26% YoY growth).

• Non-GAAP operating income guidance: $453 million to $457 million.

• Non-GAAP net income per share guidance: $1.52 to $1.54.

• Fiscal 2023 additional notes: Net interest income, tax expense, and capital expenditures expectations.

• No 2024 revenue growth guidance provided yet, focusing on long-term growth opportunities.

• Balancing investments in long-term growth with margin discipline to be discussed next quarter.

Q&A followed.

Anne Chapman

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