Ladies and gentlemen, thank you for standing by and welcome to the Datadog Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I will now like to hand the conference over to your speaker today AJ Ljubich, Director of IR and FP&A. Thank you. Please go ahead.

Thank you, John. Good afternoon and thank you for joining us today to review Datadog’s third quarter of 2019 financial results, which we announced in our press release issued after the close of market today. Joining me on the call today are Olivier Pomel, Datadog’s Co-Founder and CEO; and David Obstler, Datadog’s CFO. During this call, we will make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including statements related to our future financial performance, including our outlook for the fourth quarter and for the full year of 2019, our strategy, benefits of our products, the potential contribution of customers with ARR of 100,000 or greater, R&D and go to market investments, expected capital expenditures and the size of our market opportunity. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and not as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our perspectives filed with the SEC pursuant to Rule 424(b) dated September 19, 2019, which is available in the Investor Relations section of our website. A replay of this call will be available there for a limited time. Additional information will be made available in our quarterly report on Form 10-Q for the quarter ended September 30, 2019 and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release, which you can find on the Investor Relations portion of our website for reconciliation of those measures to their most directly comparable GAAP financial measures. With that, I’d like to turn the call over to Olivier.

Thank you, AJ, and thank you all for joining us today for our Q3 earnings call, which is our first as a public company. My co-founder, Alexis and I started Datadog about nine years ago with a mission to break down silos between developers and IT operations teams. Today, we are the monitoring and analytics platform for dev, ops and business users. We provide clarity and actionable insights into software applications and IT infrastructure all in real time. We exist so that our customers can understand everything that happens in their technology stack enabling them to deliver greater innovation, provide an exceptional user experience and achieve faster resolution of performance issues. While we are very proud of the company we have built, we’re even more excited for the future and a tremendous opportunity ahead of us. I would like to start with a quick review of our business and financial results. For the third quarter, revenue was $95.9 million, an 88% increase year-over-year. Non-GAAP operating income was $638,000, or a margin of 0.7%. We ended the quarter with 727 customers with annual run rate revenue, or ARR, of $100,000 or more, which is a 93% increase from a year ago. We achieved this while maintaining an efficient tax payback. As in past quarter, our dollar-based net retention rate was over 130% as customers increased our usage and adopted our new products. And we also continue to be capital efficient as our cash provided by operating activities in Q3 was $3.8 million and year-to-date $6.8 million. Since, this is our first call as a public company, I would like to spend a few minutes providing an overview of our market opportunity, our product, and our go-to-market, before I review our third quarter highlights. As you all know, a massive IT platforming…

Thanks Olivier. As mentioned, we are very pleased with our strong third quarter results. Since this is our first earnings call, I would like to begin with a brief overview of our financial model. I will then review our Q3 performance and provide our guidance for the fourth quarter and full year. We generate revenue from the sale of subscriptions to our SaaS platform. Customers have the option to purchase multiple products including infrastructure monitoring, APM and logs as well as additional SKUs such as containers, custom metric packages, and anomaly detection. Our revenue is all subscription as professional services are not required to implement our products. Customer contracts typically have either annual or monthly commitments. Additionally, customers are billed for on-demand usage in excess of their committed amount, typically monthly in arrears. Given the mix of annual and monthly invoicing and the variability in billing, we do not believe that calculated billings is the most useful metric for investors to evaluate our business performance. As in any one period, billings growth can vary substantially from revenue growth. Turning to Q3 results, revenue was $95.9 million, up 88% year-over-year. As Olivier mentioned, the quarter strength was broad based, driven by new and existing customers as well as strong platform adoption and initial uptake of Synthetics. To provide you with some more context; first, in Q3, we saw strong new logo additions across both sales channels and regions. This is particularly notable in what is typically a seasonally challenging third quarter, involving the summer. Additionally, we saw strong continued expansion of existing customers. In the third quarter, our dollar-based net retention rate was above 130% for the ninth consecutive quarter. A robust retention rate is driven by increased usage of existing products as well as cross-selling of newer products, including the…

[Operator Instructions] Your first question comes from the line of Sanjit Singh from Morgan Stanley. Your line is now open.

Hi, thank you for taking the questions and congrats to the team on a successful IPO and your first earnings call and a very strong set of results. So congrats on all fronts there. Olivier, maybe to start off the Q&A, wanted to ask about the quarterly performance this quarter. Did you see strengths coming from competitive displacements? Are you seeing displacing competitors or are you continuing to see a lot of the growth coming just from Greenfield expansions and then I had a follow-up.

Yes. So the business is still mostly Greenfield and it’s mostly net new and it’s mostly cloud environments, which by definition are new for our customers. They all went have other solutions, especially, when you talk about large customers and large enterprise customers, they have existing solutions for their legacy environments, but they make new decisions for the cloud environment. We do see also a few competitive displacement, but that’s not the majority of what we do.

Understood. And then as a follow-up, it seems like you’re seeing some strong momentum with new products, it seems like Synthetics is some really good early signs of tractions there. And you had some additional opportunities in international and also looks like said to be an opportunity for you. So maybe if you could sort of stack rank some of the opportunities in terms of what are the biggest opportunities that you see over the next one or two years. And what are the some of the more near-term opportunities that you think can drive growth more than near-term, whether it’s Network Performance Monitoring, or that comes off of beta or it’s just continued traction with Synthetics? Sort of stack ranking of the near-term and the medium-term opportunities?

Well, near-term we have – our core product – our core infrastructure product is figuring very, very fast and is what we know most of our customers use in conjunction with other products and still grow a lot with that product. In addition to that our APM and log management products are also very recent and they’re in both in hyper-growth. So they drive a lot of our short-term and near-term success. Newer products like Synthetics are nice add, but don’t represent a bulk of the outperformance within this quarter. Right now, it’s still the basic, still the three pillars the products we have in the market and we’ve been developing over the past few years that are getting us the bulk of our growth. As we mentioned in the call, we’ve been very happily surprised by the performance of Synthetics right out of the gate. It’s a great sign. It’s a great sign, in particular, when we think of all the new products we have in the Wink that we haven’t started charging for. But again, that’s – it will be more material in the quarters or in years to come.

Great. Thank you.

Thank you. Next question comes from the line of Sterling Auty from JPMorgan. Your line is now open.

Yes. Thanks. Hi, guys. I wanted to better understand in terms of the customers that are going with multiple products, both new and existing. How would you characterize how much of that success is coming out of the mid market versus large enterprise?

It’s about the same. We see the same behavior in all parts of the market when it comes to that. In fact, the places where we’ll see customers not using us for everything they do is companies that have been earlier into the cloud and that has used other products for a while and then have everything set up, that will vary. That’s where we don’t have any initial opportunity to displace everything at once. When customers are newer to the cloud and they’re starting their migration, which is the case of most of the enterprise customers as well as the higher end of the mid market there’s an immediate opportunity to land on two or three or four of our products at once.

That makes sense. And then one follow-up question. The market has seen your pricing that you’re using for logging as very disruptive. And I think we’re starting to see some of the competition make changes to their pricing. Wondering what you’re seeing in the competitive dynamics with all of those changes.

We don’t see any change in the competitive dynamics yet. I think we’ve seen some pricing from some other vendors. But ultimately it hasn’t changed the central dynamics for their customers and in the conversations we’ve had so far.

Okay, great. Thank you.

Thank you. Next question comes from the line of Chris Merwin from Goldman Sachs. Your line is now open.

Okay. Thank you very much. Maybe can you just talk a bit about how the ongoing shift to containers has changed the competitive landscape for you at all? Is it, I guess, increasingly important in terms of your ability to monitor these workloads? Is that an increasingly important factor in determining why you win with customers?

Yes. So it’s definitely – when you think of what makes the old guard of tooling and approaches just not work at all, like containers as one big part of that. And we’ve been monitoring containers at scale for many years now. We’ve had – we’ve seen our customers run containers in production since before it was advisable to do it. And that’s been a big part of our in-production monitoring product for many years now. We don’t have numbers to share on the volumes we see. But I can tell you that, we already see several times the numbers of containers at any point in time as we do the number of traditional instance OEM.

Okay, great. And then as you continue to invest in R&D, maybe can you just talk a bit about some of the main projects there? I mean, I look obviously, you have a very strong and comprehensive suite in the market already, but with the incremental R&D investment, are you looking to go broader in terms of product from here? Or is it just maybe more focused on deeper in terms of functionality with some of your existing products maybe to help with even further traction in the enterprise?

Well, it’s a bit of both, right? So we have, as I mentioned earlier, our infrastructure product is still growing very fast. And there’s a lot of ground, we can still cover it to make life easier for customers there. So we are heavily investing in our partnership product, on log management and APM products are in hyper growth and we’re very rapidly innovating there. So we’re investing heavily. We’ll have a few more products we’ve announced at Dash that we have to fully bring to market. As I mentioned earlier, most of these products are in beta and we haven’t started charging for them yet. And that’s something that you’ll see in the next few quarters. And then there were few larger categories we talked about in the IPO road show that we think we can enter in the future. But that’s I would say mid to long term plan.

Okay. Thank you.

Thank you. Next question comes from the line of Brad Zelnick from Credit Suisse. Your line is now open.

Great. Congrats on a very strong start as a public company. My first question is for Olivia. Olivia, I wanted to ask a question about open telemetry as we head towards the official convergence of open census and open tracing. And obviously, you’ve supported the project up until now, but looking forward to the extent the project is successful in standardizing instrumentation for metrics and traces. What sort of impact would you expect it to have on your business model, if any at all?

It’s always for us. I think we’ve always thought that the data collection in the customer side was not going to be the long term differentiator. And that’s why we’ve actually opened source all of our technology that leaves on the customer side, our agents, our libraries, our APIs everything is open source. Supporting open telemetry is not a step in that direction. At the end of the day, what matters is to make the product as easy to deploy as possible, as easy to get information in and out as possible. And that’s where we invest heavily on the backend of our products.

That makes perfect sense. And David, can you update us on how we should expect gross margins to scale as you continue to see strength internationally and need to ramp compute capacity overseas?

I think we gave in our long term model, a slight improvement over time. We said that, we’re in investment mode. So right now, we’re balancing the investment versus optimization. You see we’ve been in the range of 75%, 76%. We said we will – as we get to 75% start to try to balance a little more. So that’s our approach to that. But we’re still in investment mode and we’ll still expand geographically.

Great. Thanks again for taking my questions.

Thank you. Next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.

Hey, thanks. Congrats from me as well. Olivier like, if I understand you correctly, like people come to you when they move over to the cloud, because the old tools, the on-premise tools don’t work anymore. And there my first question is more big picture question. Where are we in that cloud migration? It feels very, very early that’s beating this and even on infrastructure monitoring, there should be huge opportunity of initial workloads coming over, but then more and more workloads come in. Well, I just want to hear your big picture thinking there.

Yes. So look, nobody knows exactly where we are. Like it’s a – it’s hard to wrap your arms around the whole thing. But depending on the device people, you can ask device folks, who have tried to APM at that, it’s either a single-digit percent or it’s in a low teens basically of the workloads that have moved from legacy IT to public and private cloud. So, with that in mind, we have basically 95% or so 90% of the end market that is – that hasn’t been attributed yet, which is why we think even for infrastructure, which was our first product, there’s a tremendous amount of runway ahead of us. This is also combated by the fact that, as companies transform and become digital businesses, the overall impact and footprint of their application and software is going to grow. So, the end state, we’re not just looking at the transition from whatever had before data center into something that’s more cloudy, but of equal size. We think that the end state is going to be a lot larger. Again, it’s hard to quantify. You can lead with a lot of kind of report and things like that, but we were confident that this is a very large opportunity and we are the very, very, very beginning of it.

Okay, perfect, team. thank you. And then the follow-up was like, as you launch a new product, like what’s your thinking around just marketing or selling this as a platform versus the individual product.

So, Raimo, the way we do this is we message around the platform. But we approach customers with the infrastructure first and the infrastructure is the immediate pain that customer feel that needs to be remediated that we get our foot in the doorway so to speak. But we always miss it with the platform. So, it’s a bit of both. Yes.

Okay. Perfect, team. congrats. Thank you.

Thanks.

Thank you. Next question comes from the line of Matt Henry from RBC Capital Markets. Your line is now open.

Hey guys, I’ll offer my congrats as well. Olivier, my question is on APM and it’s sort of a follow-up to Raimo’s. When we talked to folks out there in the industry, a lot of people think that maybe, only 5% of apps are being monitored. I’m curious, I guess why is that? And five years from now, where do you think we could be at as an industry?

Yes. So – and that’s a product mostly used in conjunction with legacy APM. So, the APM that was used in the traditional data center apps. And the reason for the slow instrumentation rate is that these APMs are very, very, very heavy weight and they’re very expensive. So, it’s very hard actually to deploy them and get value out of them and it ends up being limited to a small set of extremely high value applications, for which you can be convinced to make an investment and get some ROI out of it. When you think of the – what we’re going into the world of the cloud, the world of companies that are becoming increasingly software companies, they’re going to have many, many, many, many more apps. And the solutions we’re providing to them are a lot easier to deploy and it’s actually a lot more affordable for each unit of compute they have to deploy our solutions. So, we’re going to end up with a market that is significantly larger and there’s going to be a lot less investment needed to get to see returns. So, that’s the big difference between the – this world of the 5% of the apps being monitored with APM to the wall of the future, where companies will try mostly digitally and they will end up instrumenting most of the applications.

That’s super helpful. And then maybe as a follow-up, congrats on the early successes of synthetics, I imagine a lot of that greenfield wins, but could you talk a little bit more about the competitive landscape for synthetics? Thanks.

Yes. So, there’s a few different aspect to it. And the first one is a number of the APM vendors have a Synthetics capability on top of their APM product. So that’s, I would say, the first set of competitors. And then there are a number of companies that offer a pure player Synthetics testing. Some of them I would say fairly low-end, so some cheap products that you can very easily adopt. And then there’s another part of the industry that is more in 2Q replacement in a high-end software testing. That’s the overall landscape. our initial focus was not really to try and compete with any of those specifically. It was to fill a gap we saw in the world customers could understand and maintain the performance of the applications. So, we didn’t drive it from an intent to compete head-to-head with those companies. We drove it from what we think the future is going to look like in terms of an integrated platform that covers everything including simulating user traffic.

Thank you.

Thank you. Next question comes from the line of Brent Thill with Jefferies. Your line is now open.

Yes. Just a quick follow-up in Synthetics. You mentioned a strong uptake, I was just curious if you could you dive a little deeper into that comment and in terms of what you’re seeing and perhaps what you think the incremental revenue uplifts you’re seeing. And the second part is you continue to expand this product portfolio, which is obviously very – you have robust, is there an easier way that you can go to market with an enterprise license agreement or some type of suite pricing that will make it easier for the sales force to go to customers and engage as you roll up more and more features? Are you seeing desire from customers for that or is it still too early? Thank you.

Yes. On the first part, so look, yes, we’re very impressed by what we feel right out of the gate with Synthetics. I think it’s we can set, it’s a couple percent of the overall growth rate that comes from Synthetics, which was more than we had expected. I will say though that this includes a few months of pent-up demand. As we – onboard customers do the beta, we – also you didn’t start charging for the product right away after the product. So, when we started charging Q3, we already had some buildup usage basically. We, over time, that product, we expect it to grow. We don’t know if we’ll see the same impacts next quarter as we had this quarter again, because we had some pent-up demands when we started charging for it. But we’re bullish. on the pricing and the way to sell multiple products, we already do that in a way, we let customers commit to a certain amount of spending on Datadog with rate card less than by any of the products and combine them in any way they see fit without having to commit to specific level of use for any of the products. And that’s something our products, our customers love, because it lets them just negotiate a rate for everything ahead of time and not have to worry about what their teams are going to use or not use. And today hasn’t been a problem for the sales force to sell that to customers, and that in great part because the buyers are the same for everything we sell today.

Great. Thank you.

Thank you. Next question comes from the line of Brad Rebeck from Stifel. Your line is now open.

Great. Thanks very much. If we compare the first time on to this year to last year, have you seen any difference in customer draw down rates on existing contracts?

Well, we continue to see the same effect, which is customers are drawing down in both periods more quickly than the pro rata, so they’re consuming the products both from the uses of infrastructure as well as additional product. So we continue to have the same muscle, which is that customers are finding there. They’re using more quickly and sort of come back for more reserved instances, some more fixed capacity that happened last year and that’s continuing this year.

Great. Thanks very much.

Thank you. Next question is coming from the line of Michael Turits with Raymond James. Your line is now open.

Hi, guys. Hello, David. Congrats on the IPO and on a great first quarter out of the gate. You guys have pioneered so much in terms of monitoring and looking at this from a multi-siloed approach, there have been some competitive responses from a couple of companies in the APM space and the log space. Do you see any change in sales cycles or decision cycles in response to that broadening of the marketing people following your lead?

No, we don’t see any changes. And again, I mean, we did it. We do expect that as what our approach of combining the silos and solving the end-to-end problem for our customers is obviously successful. We do expect that it’s not lost on our competitors who we are having high regard. So, that’s – we see that as that validation of our approach, but today we haven’t seen any changes in the competitor dynamics. And I think as we said, in Q3, we had a very strong new logo, you can see that in the customer account. So even over the summer months and then we also have had maintained the retention rates with increased usage as well as, as we talked about earlier an increased adoption of the platform, so all of those things are continuing in that quarter.

And then follow-up for David, great feed EBIT and a nice guide on EBIT for next quarter. If I model it quickly, it looks like the OpEx that’s implied is less than we had originally modeling. Is there any push out of spending into very small either in the next quarter or into next year?

Not at all, we’re continuing to grow the sales team and the R&D team and invest. Similarly I think you saw revenues has outperformed and with our gross margins that’s dropped to the bottom line. But we’re continuing with the same investment pace that we had when we met during the roadshow.

Great. Thanks, David and Olivier. Again, congrats on a great quarter Olivier.

Thank you.

Thank you. Next question coming from the line of Pat Walravens with JMP Securities. Your line is now open.

Great. Thank you. And let me add my congratulations. So one for each of you, Olivier, I’d love to hear your thoughts on where customers are in their journey towards DevOps maturity and maybe how you see it differ by geography or by industry or by size of company?

Yes, so it’s interesting because we see – so if you think of the transition to DevOps and mold related to cloud, the markets in EMEA and APAC are about two or three years behind what was seen in the U.S. So when we’ve seen in particular large enterprises in the U.S. start going to public and private cloud at scale two to three years ago. It’s something that is just starting to happen in other parts of the world today. So we’ll just add a main comment I will have otherwise, we’ve seen the first companies to move to the cloud and to DevOps where the small companies, there is no tech oriented companies. After that you still do the larger enterprise companies that need to modernize and I think last are going to be the mid market, more traditional companies that are trying to mobilize as well. So we see all those various parts of the market turn on one after each other basically.

Yes. And is the – like federal government even behind all those where we…

Federal government is having to – I would say it’s a bit of a different beast.

Yes. Okay. And then David, congratulations on the ninth consecutive quarter. Just I would love it if you could set our expectations a little bit in terms of the dollar base net expansion rate and what we should expect as we think about it from the future?

Yes. I think we had set as time with the IPO that we would comment on that relative to 130. And we’re continuing to do that. We’ve seen no change in the environment relative to what we saw when we went public relative to the drivers of that, increase usage and cross-sell.

Yes. And we – in our perspective 130% is already best-in-class and that’s the number we’re going to use moving forward.

All right. Great. Thank you both.

You’re welcome.

Thank you. The next question comes from the line of Jack Andrews with Needham. Your line is now open.

Well good afternoon and congratulations on the results. I wanted to see if you could drill down a little bit more on just trends in terms of the new logos, specifically that you’ve been landing. Are you seeing different – perhaps higher ASPs? Are you still predominantly landing with infrastructure or perhaps form multi-product deals? Any more color on the new customer wins you’re experiencing would be helpful? Thanks.

Yes. So the trends remains the same as what we’ve detailed during the IPO. If you still have some of the data in the S1 or in the road show that all of that remains true and some of that you can extrapolate a little bit and you get the good idea of what is happening today. On the – that’s on the new logos and on the ASPs again, the trends remain the same.

I think we had – they’re similar and I think we’ve said a couple hundred thousand for enterprise and 150, 160 for mid-market continues to grow with the customers and continue to have a meaningful contribution. We talked about of customers landing with more than one logo – with more than one pillar and so it’s very much what we said on the IPO road show continuing.

Great. Thanks for taking my question.

Yes.

Thank you. I am showing no further questions at this time. I would now like to hand it over the call to Olivier Pomel, CEO for any closing remarks.

Thank you. Well in closing I’d like to repeat that we are incredibly proud of what we built the Datadog. We believe we’re in the early stage use of a substantial re-platforming opportunity. We are very focused on executing on our growth strategy today and we believe we have the potential to be essentially larger and profitable company in the long-term. And I would like to thank all Datadog customers for their trusts and of course all Datadog employees for their hard work and dedication. We have a complete great thing so far and I believe the best is yet to come. So thank you.

Thank you everybody.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.