Welcome to Hard Mode! Top founders, VCs, and investors subscribe for insights and analysis to successfully compete and invest in the Enterprise SaaS market. If you haven’t subscribed yet, we love to make new friends 👇
We’re doing something a bit different today:
Announcing SaaS 101 Live! Francis Odum (@InvestiAnalyst) and I are working on a series of education workshops combining an in-depth overview of an industry/technology/company and how to model the different drivers on the financial statements. We’re launching in beta with a free a 2-hour workshop covering Datadog.
Breaking DDOG Transcript. The latest full Datadog transcript was 9,000 words. Mine is 1,500 and you can read in <10 minutes. Thinking of doing these more regularly. Let me know what you think! (P.S. reading the transcript will help you in our workshop 😉)
SaaS 101 Live (Beta launch)
ROUGH SCHEDULE:
Track 1 (~45 Mins): Francis Odum (@InvestiAnalyst) walks through an easy framework for understanding the complex world of cybersecurity and observability. Building on this, he does a walkthrough of Datadog’s technology, business model and GTM strategy.
Track 2 (~45 Mins): Thomas Robb (@BreakingSaaS) walks through how to model ARR, think about risks, research market multiples, and apply them to your own forecasts. Participants will be sent a google sheet to work through together live! (Note: We’ve only got 45 mins so this will be very 101 level)
Track 3 (~30 Mins): Q&A
Disclosures: All information is presented for educational purposes only and may not reflect the opinions of the authors or their respective employers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.
Ready to start modeling? Read the latest management commentary in <10 minutes below 👇
Breaking Datadog Q4 Transcript
Designed to cut out the fluff and only include incremental information not found in the press release or financial statements. Want the whole thing? Full Transcript
Q4 TL;DR
Strongest new logo quarter to date with the support of a healthy pipeline.
Ended the year with 17 generally available products, up from 13 at the end of 2021. The product suite included broadened observability capabilities and the company remains early days in cloud security and developer experience.
Experienced larger than normal seasonal headwind finishing December, driving headwind to Q1 growth.
FY23 Guidance assumes spending optimization of large customers continues through 2023. Management expects tailwinds to subside, but is unsure when.
Guidance assumes NRR falls below 130% in FY23
Getting early interest in Cloud Cost Management (signed 6-figure commit). Datadog has a lot of experience running a very large cloud operation internally and believes it can build something ambitious and differentiated.
Usage Trends & Logo Growth
Q4 usage vs. Q2/Q3. Existing customer usage growth was overall slightly lower than Q2 and Q3. Driven by the continuation of cloud cost optimization by larger spending customers
December usage vs. Oct/Nov. Saw existing customer usage growth in October and November at a similar level to trends in Q2 and Q3. December experienced more pronounced seasonal slowdown than in previous years.
Large vs. Small growth. Similar to Q2 and Q3, larger-spending customers growing slower than smaller-spending customers.
Headwinds in ECom and Food Delivery. As with Q2 and Q3, relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce and food delivery.
New Logos. Strongest new logo quarter. Record level of new logo ARR bookings. Sales pipeline remains healthy. Demand growing along with investments in go-to market.
Large customer penetration. As of January 2023, 37% of the Fortune 500 are Datadog customers, up from 30% last year. Median deal is 100’s of thousands = large opportunity to grow
Q4 Financial Results Commentary
Billings/RPO
Billings. $536 million, up 31% YoY. Billings duration was slightly lower year-over-year.
RPO. $1.06 billion, up 30% year-over-year, and RPO duration declined on a year-over-year basis. Current RPO growth was in the high 30s year-over-year.
Income Statement
Q4 Gross Margin. Drove efficiencies in cloud costs. In the mid- to long-term, continue to expect gross margin to be in the high 70s range.
Q4 OpEx. Continue to grow headcount in R&D and go-to-market.
YoY Op Income. Year ago operating margin benefited from lack of in-person office, travel and event costs due to COVID policies during the pandemic.
FY23 Guidance Commentary
Key Guidance Considerations:
Conservative organic growth assumptions compared to historical periods
Basing near-term guidance on recent customer activity
Incorporating seasonally weaker Q1 growth due to subdued December growth creating a lower growth trajectory to start Q1
Assuming cloud optimization continues to affect expansion rate in 2023
Q1 Guidance
Q1 Revenue. $466 million to $470 million
Q1 Non-GAAP EBIT. $68 million to $72 million
Q1 Non-GAAP EPS. $0.22 to $0.24
Q1 DWAC. ~348M
FY23 Outlook
FY23 Revenue. $2.07 billion to $2.09 billion
Non-GAAP EBIT. $300 million to $320 million
Non-GAAP EPS. $1.02 to $1.09
DWAC. ~351 million
Grow R&D and GTM, but slower than in previous years.
OpEx (Ex. COGS). low 30s percent range year-over-year.
HC. mid-20s percent range year-over-year vs. ~50% last year
Net Interest/Other Income. ~$75 million.
Tax expense. $11 million to $13 million.
CapEx/CapSW. 4% to 5% of revenue
Q&A
AWS monitoring & relative growth between hyperscalers.
Not one for one with what happens on infrastructure vs. revenue growth.
Seeing some of the same trends where their growth slowed down throughout Q4.
In terms of the mix shift, don't see anything that differs from the trends from prior year.
They are also seeing optimization from their largest customers
Expect optimization to continue in FY23 and is included in guidance
Drivers of new logos.
Seeing greenfield/new projects/new workloads opportunity for replacing legacy and open-source tools.
Also seeing consolidation. Customers moving to Datadog for platform efficiencies
Still early in cloud migration and digital transformation. Not seeing a slowdown in shift to cloud.
Larger customers that are further along in this cloud transformation that have large workloads trying to optimize because that's where they can meaningfully save cost
Product Innovation. Strategy of complicated suite vs. point solutions.
Lots of products are early in life cycle and helping win larger consolidation deals and drive more efficiencies. Need to move further to suite, not less.
In times of budget tightening, might be difficult to gain high level traction so working to maximize number of customers and grow ARR later
Contract enforcement. Rolling over credit, enforcing commitments, take or pay aspects
Always work to build long-term relationship. Work to structure contracts to make a better outcome with companies facing business hardships.
Customers tend to undercommit relative to what they eventually get to, so minimal unused commitments.
Q1 Billings comp.
Billings can move above revenue, but not planning for billings. ARR is the main economic driver.
Growth vs. hyperscalers.
Continuing to solve bigger and bigger problems for customers = expanding TAM
Cloud migration/digital transformation might be a bit more of a headwind over the next few quarters, but strongly believe that it will become a tailwind again in the future.
Growth by product.
Interesting early signs of Cloud Cost Management, which is still only billed to a handful of customers at this point but already seeing very large commitments from some of these customers.
More focused on major products 2-4 years out and becoming a platform.
Security adoptions vs. Infra/APM.
Not comparable to infra.
Similar to APM – required high investment and have an ambition/differentiated approach.
Seeing adoption by a very large customers, but still a lot of work to do
Confidence in small customer usage patterns.
On large customer side, cloud spending is 1-2x more than observability so focus is on bigger spend
On the smaller side, customers tend to be large customers that are fairly new to cloud adoption.
On the very low end of customer base, see impact of the macro environment. Little more churn, which is driving down customer adds. Very small impact on overall GRR
Gross margin Strength. Pricing?
Optimizing hosting spend on the engineering side.
Changing prices by 1% based on that doesn't make a big difference for customers.
Goal is to address scaling with products that provide more options to process data and align pricing with value.
2023 guidance conservatism vs. 2022.
Continue to use same approach.
Historically, faster existing customer growth drove better performance vs. guidance
Assume optimization seen in last few quarters continues.
Sales capacity.
Growing GTM capacity in-line with overall headcount growth guidance
Still have segments and geographies to cover. Sales interactions are productive and drives ROI.
GTM HC growth of >25% in 2022 drives capacity growth in Fy23 due to ramping.
Product splits.
APM, logs and infrastructure monitoring at major scale today and seeing similar growth in Q4
Some optimization happen at cloud provider level. Seeing some aspects of APM that are transaction-based being optimized
Implied NRR dip below 130% in guidance.
Guidance implies dip below 130%
Having headwinds in YoY NRR comps starting in Q2 driven by lower organic growth rates.
Layoffs impacting growth.
Not seeing layoffs as a key driver of weakness. Easier to save money on cloud bills. Multiple knobs you can use to optimize
If you’re running everything on-prem as all the costs are sunk already and confined to the future.
Vast majority of products infrastructure usage or data volumes, not per seat. Not directly impacted by layoffs.
Cloud Cost Management/FinOps.
The larger the customer, the more they’re interested in FinOps.
Directly relates to the work they do in cloud optimization.
Still a very nascent category today.
Datadog a lot of experience internally running a very large cloud operation across all of the large cost cloud providers. Believe they can build something that is fairly differentiated there.
Early 2023 Commentary.
December slowdown happens in most years, people go on vacation and reduce logs. Tends to rebound in January. Seeing a bit of that, but cautions reading into that given the market volatility
Q4 was more front-loaded in terms of rev rec. Entered Q1 at a lower level driving slower sequential growth.
Slow down has been seasonally higher.
Early 2023 is so far consistent with 2H22/Q4.
Already factored into guidance, assuming optimization has not stopped
FedRAMP.
Can't give specific numbers there. Seeing wins and engagements from government agencies.
Still need to build out GTM and the product side. More levels of certification to reach.
proof points that DDOG has product-market fit and there is a real market
Normal optimization timeline.
Not one size fits all
Have seen customers having multiple rounds of layoffs having to adjust multiple times
Fastest thing they can do to have an impact on their bills is to adjust some of the data they send in logs or in APM.
Cloud has higher $ impact, but also takes a little bit more time because they need to reorganize some of their workloads and invest more engineering time in doing that.
Some customers have gone through the process and started to grow again
Linearity of headwinds.
Not including any inflection in guidance. Assuming same contribution vs. actual of last year
Would expect a reacceleration but given macro uncertainty, can’t tell when.
Cash Flow/Payment Terms.
FCF usually slightly higher than EBIT.
not seen any material changes in payment terms
With Blessings of Strong NRR,
Thomas