Datadog Inc Q2 2024 Earnings Call Transcript

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

Question: Sanjit Singh - Morgan Stanley - Analyst : Yes, thank you for taking the questions and congrats on Q2. I wanted to get your assessment of the demand environment, the spend environment, and your description of how the usage trends played out by end market and in-market versus enterprise was super helpful. Microsoft had noted that they saw some weaker usage trends in June. I just want to get a sense of if you look across your geographies, or even across some of your key verticals, anything that stood out sort of positive or negative in June going into July in terms of the usage trends? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call

Question: Sanjit Singh - Morgan Stanley - Analyst : Understood. Then Oli, maybe for you, I know at the investor day, you sort of outlined the thoughts and strategy on M&A and identified the criteria. It sounds like your corp-dev team sees a lot of opportunity but the bar was pretty high, was the message from investor day a couple of months ago. I wanted to double-check your latest thinking on the M&A strategy with respect to potentially being--looking at more strategic or transformational, larger size deals. Has anything changed in the way you view M&A as part of the Datadog growth strategy?

Question: Sanjit Singh - Morgan Stanley - Analyst : Understood, thank you Oli.

Question: Raimo Lenschow - Barclays - Analyst : Perfect, thank you. Has there been any impact, or what are you seeing in terms of a reaction from customers around the Cloudstrike outage, because that's obviously an event that impacted the whole industry. You guys, I'm sure, saw some of the ramifications there. Just talk a little bit about how that impacted you in the quarter, but also what it means to customer conversations. Thank you.

Question: Raimo Lenschow - Barclays - Analyst : Okay, perfect. Then maybe it was just me, but it did feel like you mentioned logs quite a bit on this earnings call. Do you see any like, your product is getting more mature and the innovation that is coming through is obviously very visible, but do you see a change in the market with recent movements in terms of vendors, that that kind of opens up a little bit more from your perspective? Thank you, and congrats from me as well.

Question: Raimo Lenschow - Barclays - Analyst : Perfect, thank you.

Question: Mark Murphy - JP Morgan - Analyst : Thank you so much, and I'll add my congrats. Olivier, it's great to see the announcement of LLM Observability reaching GA. I think we're all looking at this tremendous wave of hyperscaler commitments that are going to be ramping in the second half of this year, and it's all for training of these next-gen AI models. Since you're more exposed to the--excuse me, since you're less exposed to that training and you're more driven by the inferencing, I'm wondering if you can just help us understand how the spending pattern or activity changes as the AI models go live and reach the inferencing stage. I'm basically looking for any way to assess how much spending is ultimately going to develop into the inferencing, where you have an opportunity. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call

Question: Mark Murphy - JP Morgan - Analyst : Okay, and then as a quick follow-up, maybe for David, a couple of the consumption model software companies had recently commented that in June and July, they were seeing more cloud cost control or optimization, specifically among the digital natives, and so your results are solid. I don't think you mentioned that, but could you just comment on how the optimization activity is trending now between the digital natives and the enterprises heading into the back half?

Question: Mark Murphy - JP Morgan - Analyst : Thank you very much.

Question: Kash Rangan - Goldman Sachs - Analyst : Hello, thank you very much. Oli, you've mentioned I think between--on the call, there's been repeated instance of enterprise growing faster than SMB. I'm curious why is that the case, and is this something of a change in the trend? Have you seen SMBs actually showing better usage trends in the past, and what could cause the SMBs to start to pick up consumption? What are the things that are holding back their consumption, and what could be the unlocks from (inaudible), because the enterprise is doing well, so obviously the product portfolio is being well received, so what's stopping the SMBs? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call Thank you so much once again.

Question: Kash Rangan - Goldman Sachs - Analyst : Got it, and one for David, if I could. How strong is the delta between enterprise consumption growth versus SMB? Are we talking orders of magnitude or meaningful percentage, or a big percentage?

Question: Kash Rangan - Goldman Sachs - Analyst : Thank you so much.

Question: Kirk Materne - Evercore ISI - Analyst : Yes, thanks very much, and I'll add my congrats on the quarter. Olivier, I was wondering if you could just talk a little bit more about the LLM Observability product that Mark referenced. When people are thinking about bringing on LLMs into their organization, do they want the observability product in place already, or are they testing out LLMs and then bringing you on after the fact? I'm just wondering, it's sort of a chicken and egg question, I'm wondering if you're someone they want to talk to before they start moving things into production, or it's after they get something going, they bring you in after the fact?

Question: Kirk Materne - Evercore ISI - Analyst : That's helpful. Then David, we can kind of infer your implied (inaudible) 4Q. I was just wondering, some of the elections in Europe have come up on a couple other calls in terms of (inaudible) that have been distractions. I was just wondering if you had any thoughts on how you think the U.S. election might impact usage, if at all, or if you have any thoughts on that. I realize you guys were a lot smaller last time we had a presidential election.

Question: Kirk Materne - Evercore ISI - Analyst : We would appreciate that! Thank you. Thanks guys. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call

Question: Fatima Boolani - Citi - Analyst : Good morning. Thank you for taking my question. Oli, I wanted to start with you. You and David both talked about improving usage trends, but I wanted to take a step back and ask you, have you seen the quality of the usage improve by virtue or by extension of your introduction of the cloud cost management SKUs - you talked about the Kubernetes with the Autoscaling, and then the original cloud cost management SKU. I'm wondering if it's maybe a spurious correlation now that customers have that much more visibility into the mechanics of what they're spending with you, they're actually more inclined to drive usage because it's higher fidelity. Just any commentary on that would be helpful, and then I have a follow-up for David, please.

Question: Fatima Boolani - Citi - Analyst : I appreciate that. David, as you all kind of roll out more, what I would call resource-intensive or compute-intensive SKUs, like logs, Flex Logs, logs workspaces, I'm wondering if you can shed a little bit of light on some of the gross margin characteristics differ by product pillar. I'm just looking at some of the sequential compression in gross margin, so just wanted to get a better understanding of what are some of the more resource-intensive products that you're anticipating scaling, that could keep a lid on gross margins in the next couple of quarters. Thank you.

Question: Fatima Boolani - Citi - Analyst : Thank you so much.

Question: Matt Hedberg - RBC - Analyst : Great, thanks guys. Oli, in your prepared remarks, you talked a lot about security and noted data security as a new growth engine from a product perspective. I'm curious, can you talk about how customers might leverage that offering versus maybe other traditional data security offerings in maybe, like, DLP for instance?

Question: Matt Hedberg - RBC - Analyst : Got it, super helpful. Then as we get into 3Q and the U.S. Fed spending quarter, what are your thoughts on federal spending just in general might play out in Q3 relative to your assumptions? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call

Question: Matt Hedberg - RBC - Analyst : Got it. Thanks a lot, guys. Well done.

Question: Jake Roberge - William Blair - Analyst : Thanks for taking the questions. I just want to follow up on the enterprise strength that you saw in the quarter. Are you starting to see enterprises re-engage with their cloud migration efforts which is helping drive that growth, or is the strength more related to just general platform usage and expansion?

Question: Jake Roberge - William Blair - Analyst : Okay, very helpful. Then you've talked a decent amount about the demand you're seeing from AI native customers, but how are you thinking about driving growth with your own AI solutions, like Bits AI and LLM Observability, and when do you think those start to layer more meaningfully into the model? Thanks.

Question: Koji Ikeda - Bank of America - Analyst : Yes, great. Thanks guys. Thanks for taking the questions. Just one from me. I wanted to ask on the usage growth trends. In the prepared remarks, you said a lot about trends exiting this quarter versus 2Q of last quarter, and the first half of this year being better than the first half of last year. But the question here is, how did Q2 this year compare to Q1 this year? Thank you.

Question: Koji Ikeda - Bank of America - Analyst : Got it, David. One quick follow-up, if I may here. The follow-up would be, I know in the Q, you give a net new revenue growth split between existing and new. I was wondering if we could get that mix now, or maybe at least some color in that mix - last quarter was 70% coming from net new from existing. Was it higher or lower this quarter from that 70% mark?

Question: Koji Ikeda - Bank of America - Analyst : Great, thank you very much. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 08, 2024 / 12:00PM, DDOG.OQ - Q2 2024 Datadog Inc Earnings Call

Question: Yi Fu Lee - Cantor Fitzgerald - Analyst : Thank you so much for taking my question, and congrats on the quarter. In terms of the new products that were launched at DASH, a lot of stuff going on in LLM, AI apps, etc. Olivier and David, which one are you most bullish near term, and then longer term?

Question: Yi Fu Lee - Cantor Fitzgerald - Analyst : Excellent, Oli. Just a quick follow-up for David - NRR is at the mid 110 level. What needs to happen in order for Datadog to go back to above the 120 level? I mean, it sounds like the trends are very, very healthy month to month, quarter over quarter, so just some commentary around (inaudible) for me, thank you.

Question: Yi Fu Lee - Cantor Fitzgerald - Analyst : Thank you very much.

Question: Patrick Colville - Scotiabank - Analyst : All right, terrific. Thank you so much for having me on. (inaudible), David, one of the themes you've talked about in the past is competitive dynamics in observability. There have been a lot of corporate transactions in the space over the past year, so I guess how are you seeing competition versus your open source peers, platform peers, peers that are private versus a couple quarters ago?

Question: Patrick Colville - Scotiabank - Analyst : Okay, very helpful. I guess David, looking at the 3Q revenue guidance, it looks like the kind of buoyant trend you saw this quarter will continue. Can you just put a fine pin, if possible, on the trend we saw through July and thus far in August?

Question: Patrick Colville - Scotiabank - Analyst : Terrific, thank you so much.

Question: Taz Koujalgi - Wedbush Securities - Analyst : Hey guys, thanks for taking my question. I have a question for David on your sequential revenue growth this quarter. I'm trying to reconcile the comments you made about the usage growth in this quarter being better than last year, because if you look at the revenue growth sequentially, that's slowed down. I think it's the lowest Q2 sequential growth in the longest time. One more question was, if you look at the sequential growth for the last three, four quarters, it's really accelerating since your optimization trends, and that trend kind of, I guess, it buckled this quarter because the Q-over-Q growth in Q2 was lower than what you had last year, so just trying to reconcile the commentary about usage growth being strong but then the revenue growth sequentially looks a little bit lighter than last year.

Question: Taz Koujalgi - Wedbush Securities - Analyst : Got it, and just one follow-up question. David, you mentioned that revenue is the best metric for your business, we shouldn't be looking at billings and RPO bookings. But I'm just wondering, any color your can provide on the first half bookings growth this year? It's been flat year-over-year but you're recent increasing it. That's, I think, the lowest bookings growth again in any first half of your year. Any more commentary beyond what you already provided? Is the renewal base lighter in the first half? Should we expect an acceleration in the second half? Any more color on the bookings momentum?

Question: Taz Koujalgi - Wedbush Securities - Analyst : Thank you.