Datadog Inc at Goldman Sachs Communacopia + Technology Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : David, how would you describe what -- so if you came back to Goldman Conference, 2027, 5 years from now, what does -- what would you want? What would you and Oli want Datadog to look like? What are your most audacious goals. It doesn't have to be a revenue target because nobody knows where the revenue is going to be in 2027. What do you want Datadog to be 5 years from now? And how do you get there?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. And I remember this when I met with Oli, I think you dialed in via Zoom initially, right? So you described the problem statement is just imagine the cloud is the next mainframe and all the things that you people did for the networking, systems management, Database Monitoring. It was in the small little contained world, but then you blow it up and it's the cloud, and that's a problem statement. And I heard them describe it that way. It just changed my perspective. The bigger the problem, the bigger, the solution, the bigger the company, right? So how do you guys think about what are the other problems or issues that customers face as they do this cloud thing that are opportunities? I mean maybe it's a product, maybe it's not a product, we don't know. But what is the angle of that lens that you're looking at? What are the other things outside of the purview of those 14 products?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. The unit of work becomes a not a virtual machine as in the past or a unit of compute, but it's a micro service container. Then the whole world changes and you redraw all the boundaries all over. And so you mentioned the service -- video service monitor. Are you making a bit of a baby step into ITSM?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. I want to help us -- want you to help us understand what is exactly consumption about your only consumption business model. If you just give a little primer. How much of it is fixed versus variable? Does it vary by product, vary by size of customer, number of nodes? Can you just give us a bit of a primer?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. So if a customer does not use the product all year long. I don't know why that would be the case so just hypothetically. Do you recognize all of the revenue in the last day of the year or you go back in (inaudible), how does that work? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 14, 2022 / 10:45PM, DDOG.OQ - Datadog Inc at Goldman Sachs Communacopia + Technology Conference

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Wow, bounty.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. So in an economic environment like the one we're going through, a lot of companies, I know Snowflake's business model is very different than yours model. Maybe very different than yours model. But -- but hypothetically, if somebody entered into a contract and their business was going through a bit of a tough time. But then their business started to pick up. The revenue recognition would be more volatile on your part, right?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : By the course of the year. If economic activity starts to pick up, then things look, there will be a positively variable outcome to the yearly contracts.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. Yes. So not like COVID. We're talking about a slowdown. I think quite a few software companies that have gone through the cycle of, oh my God, to slippage, what not have come up with a more reliable forecast, maybe lower close rates, better pipeline and are sounding better coming out of that quarter when they reforecast, they sound more confident. How are you -- how did you approach the process of forecasting. Everybody REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 14, 2022 / 10:45PM, DDOG.OQ - Datadog Inc at Goldman Sachs Communacopia + Technology Conference got conservative with their forecast. What are some of the assumptions that you've made in your forecast for Q2? You didn't raise guidance, which was fantastic. But what were your assumptions versus close rates, pipeline build, et cetera?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. Yes, exactly. So I suppose you sort of answered my impact of the economic environment. [Quantitatively] speaking, rates yesterday was a bad shock with inflation. And I know that you and I spoke after the quarter, and we talked about how some customers decided that they're going to hold on to their pocket but have not sign a longer-term contract, the RPO growth slowed down and that revenue growth was actually pretty fantastic. After the call, I wondered to my myself is that customer is really worried about inflation. They should be doing the longer-term contracts, but they didn't. And so as they realize the cost of capital is going in the option of costs of holding on to your money is just really, really bad tradeoff. Do you think -- not just Datadog, the industry could see resurgence as these people say, let me sign these long-term contracts. You know what I don't want to take the risk of some variability, pickup in consumption or price increase, whatnot. Why are customers thinking exactly the flip side of how they should be thinking?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : On-demand is like consumption, right?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. Yes. So you're not alone because we had Snowflake and MongoDB that also were subject to barrage of consumption questions. Although Frank Slootman got away with it because he was -- his fireside was done by our CEO. So we didn't get too deep to consumption, it was very high level. But so let's say Datadog is compute, MongoDB is transactions, Snowflake is analytics. Would you say you're more leveraged to compute and lesser transactions and analytics like the other guys? Is there a way to think about the layer of that stack compute transactions analytics, one way compute is more stable than transaction, maybe less stable analytics secondary level.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. I'm not going to name a company, but you mentioned APM. So we had an APM company here that said when we asked, how do you differentiate your products and the answer was you guys do dashboards, which are very pretty to look at or as they offer solutions. Do you -- would you agree with that, that you're just a dashboard that this other unnamed APM company actually offers resolution and this is what our AI engine does and therefore, would fix the problem?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Tell us more about this.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. I want to talk about TAM and get your thoughts. So the CRM market in 2003, 2004, the famous, not to be named industry funded very well recognized brand name said, it's $0 in TAM. And then several years later, they came out and said when ServiceNow has gone public, ITSM maybe $1 billion. And subsequently, everybody started to revise their TAM assessment, oh CRM, oh yes of course, it runs in the cloud. Why would you buy anything that does not run on the cloud. Where are we with the TAM assessment in your core markets today?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : It's outpacing cloud growth.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : And that is your growth strategy.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. So the question I should be asking is then somebody puts up cloud growth rate effects. What is the growth rate of your transformational workloads versus migrational workloads. The migration slows down the transformation picks up, we should not be concerned. We should be -- I mean on concerned on Datadog's (inaudible).

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : The inside of the data, the inside our -- that's exactly...

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : David, do you have a rough feel for what percentage of cloud workloads are transformational versus migration. I mean I've heard some statistics from people, but I just wonder if you have a perspective?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Like 15%, 20% is transformational and the rest is migration. So if that's true, then the transformation stuff is probably outpacing in...

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : You recently called out APM, log management is exceeding [$0.75 billion] in ARR. Those are some big numbers. They've been around just 4 or 5 years. What is driving success?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : I remember we caught up maybe a few quarters back, and you made the -- I said, how is your cost of customer acquisition so low? And why is it that your sales and marketing is so low relative to -- and you said because the products are so good, they sell themselves on their own, right? What is it about development in France that is so more productive than what we get here? Is there some secret sauce?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Is it the Burgundy wine or...?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : That's great. Shift left, if you shift left, there are others that you're going to encounter like GitLab, GitHub, there's a whole chain of SDOC companies that are waiting there and their view is that moving left is really, really hard, whereas for us to move right into ops is not that hard. You would content otherwise. Who's right here? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 14, 2022 / 10:45PM, DDOG.OQ - Datadog Inc at Goldman Sachs Communacopia + Technology Conference

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Got it. Any -- I know you're a CFO, but you've been at the company long enough, and you're in the technology industry. So the competitive differentiation relative to the others in the space, we sort of touched upon the consumption model, the architecture, but it does look like everybody wants to be an Observability company. Everybody is an Observability company for wanting to be (inaudible). Do you hear that from customers, are customers coming back and saying, Oh, yes, I got to switch from 3 other companies. They're also Observability, you're also Observability. So I'm confused here. Do you ever get that? And if you do, how do you proactively tell customers how and why you're so different from every other half a dozen Observability companies?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : I was wondering if you are the Chief Product Officer, Chief Marketing Officer and Chief Financial Officer, all rolled into one.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : You're getting into it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 14, 2022 / 10:45PM, DDOG.OQ - Datadog Inc at Goldman Sachs Communacopia + Technology Conference

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. I have just 1 more question before I turn it over to our clients. Maybe they're too exhausted at the end of the day to ask a question, I don't know. But 1 thing that we have seen is logging is not a finite market. Practically every Observability company that came through the Goldman conference, has been talking about how surprise they are -- that logging is, it's like you're driving on this highway. You think you'd get to the end of the horizon and then opens up again. So logging is bigger and bigger. What are your observations on the logging market?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Exactly. Anybody has a question feel free to raise -- wow, we got questions. You got answers?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Okay. Okay. We'll go to the gentleman in the light blue sweater first, if you don't mind, and then Sorry... Unidentified Participant Thanks very much for the time.

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : We have time for perhaps 1 more question, 1 final question. If not, I'm going to jump in, we're out of time, minus 1, minus 2, minus 3. Okay. So maybe I'll ask 1. Long term, what drives the free cash flow profile, operating margin profile I know you don't -- you've not given long-term guidance. But what are the things we should be looking for that are good guides to the potential -- free cash flow potential of the company?

Question: Kasthuri Gopalan Rangan - Goldman Sachs Group, Inc., Research Division - Analyst : Wonderful. That's spot on. Perfect. Thank you so much, David. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 14, 2022 / 10:45PM, DDOG.OQ - Datadog Inc at Goldman Sachs Communacopia + Technology Conference