Datadog, Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Mr. A.J. Ljubich Director of IR. Thank you. Please go ahead.

Thank you, Jimmy. Good afternoon and thank you for joining us today to review Datadog's first quarter 2020 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. This is our first time conducting our earnings call from separate locations. So, we appreciate your understanding if we encounter any technical glitches. 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 second quarter and for the full year of 2020, our strategy the potential benefits of our products, the potential contribution of customers with annual run rate or ARR of $100,000 or greater, R&D and go-to-market investments, expected capital expenditures, anticipated hiring the size of our market opportunity, as well as the impact of COVID-19 pandemic on our customers, their usage of our products, our market, and our business, and operating results. 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 the material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K for the year ended December 31st, 2019 filed with the SEC on February 25th, 2020 and current report on Form 8-K filed with the SEC on May 11th, 2020. Additional information will be made available in our quarterly report on Form 10-Q for the quarterly period ended March 31 2020 and other filings and reports that we may file from time to time with the SEC. Our filings with the SEC are available on the Investor Relations section of our website. A replay of this call will also be available there for a limited time. Additional information may also be made available in our 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 table in our earnings release which you can find on the Investor Relations portion of our website for a reconciliation of these measures to the most directly comparable GAAP financial measures. With that, I'd like to turn the call over to Olivier.

Thank you A.J. and thank you all for joining us today. Before reviewing the quarter, I'd like to take some time to address the situation we're all facing with the COVID pandemic and in particular our internal response to the crisis the ways in which the pandemic intersects with our business but also some of the data we've seen in March and April as well as our stance for the year and our perspective on the future. So, starting with our response. We communicated three objectives internally: first to keep our employees safe healthy and sane; second to be good citizens and members of our communities and contribute to our collective health and economic success; and last, but not least, to serve our customers level down innovation and be the best at what we do for challenging times as well as good. In keeping with those objectives, we have mandated work from home since March 12th. In addition to that we have allocated a grant to each of our employees to support their productivity and safety. And at their discretion employees could elect to donate all or a portion of their grant to charities that help with COVID relief. I'm very proud to say that this program has already resulted in $1 million of donations from our employees and reflects the generosity and our commitment to go through this crisis together with the communities in which we operate. I also have to say that I've been extremely impressed with Datadog employees' resilience, continued productivity, and innovation through this time. Our success in pivoting to operate remotely does demonstrate the advantage of being a digital-first cloud-based business. Regarding the way the pandemic may affect Datadog, there are a few important structural points to understand about our business. First, we have a very diverse customer base. We estimate that less than 10% of our ARR comes from categories most negatively impacted by COVID such as hospitality and travel airlines and personal entertainment. On the other hand we also have exposure to categories that have experienced increasing traffic such as streaming media gaming food delivery e-commerce and collaboration. Second, we also have a great diversity of customer sizes. We have low concentration and approximately 75% of our ARR comes from customers that pay us $100,000 or more. Also less than 15% of our ARR comes from a long tail of small businesses. Third, we price according to our customers' infrastructure footprint and not per seat. So, our product usage is not directly affected by reductions in the workforce. Fourth our business model is low-friction land and expand and our platform is adopted bottom up. We often land fast and small as enterprises begin their cloud migration and then we frictionlessly expand from there as more workloads move to the cloud. This makes our sales effort less dependent on physical meetings and makes our model extremely efficient and less reliant on larger front deals. Lastly, we are pure SaaS and require no professional services or hands-on-keyboard implementation. Now, turning to what we've seen in March and April. First of all, the COVID escalation happened late enough in the first quarter to not materially affect our financial results. Throughout the quarter, we saw consumption continue to increase across the platform and growth of the number of hosts, containers metrics traces and logs, for example, have remained consistent with historical trends. We started to see some negative effects in impacted industries such as travel, hospitality and airlines. But we've also seen substantially increased usage from other categories such as streaming media, gaming, food delivery and collaboration, as these customers scaled up their operations in this environment. We also saw a surge of usage and surge in accounts in March in response to COVID that we expect could be more transitory in nature and may normalize over time. In terms of new deals, we did have a strong end of the quarter with limited impact from COVID. Our pipeline is robust and relatively consistent with prior quarters, but it is still too early to know the impact COVID could have on the road. Because of that and given the macro uncertainty, it is prudent to expect delay of some new cloud migration projects as well as some impact on churn. To close on the COVID dynamic, let’s step back and look at our stance for the rest of the year and perspective on the future. While there is a lot more certainty across the industry and the broader economy in the very near term, we believe it is more important than ever for businesses to operate online, and that the trends of digital transformation and cloud migration remain very much intact over the long-term and may even be accelerated or amplified. We believe we are well positioned to be a primary beneficiary of this trend and continue to win in the market. And we also believe that the efficiency of our business, whether it is our unit economics or balance sheet, our ability to innovate will be an advantage in a difficult market. As such our plans remain clear. We are investing across the board. We're investing in the development of existing and new products including aggressive R&D recruiting targets and taking advantage of the opportunity to attract talent that would otherwise not be on the market. We're investing in the growth of our go-to-market team across segments and geographies. We're investing in our relationship with customers as some of them go through difficult times and it is more important than ever for them to operate digitally. And we're investing in our existing employees to keep them safe and sane through this crisis. To conclude on this point, I would say that while I can't promise for macro reasons that we'll see the same incredibly fast return on these investments as we have historically. We are very confident in the mid and long-term opportunity in front of us and in our strategic plan to live up to it. Now on to Q1, we are very pleased with our performance in the quarter. Results were once again driven by broad-based strength across new logos and expansions as well as across customer segments and sales channels. To summarize Q1, revenue was $131 million, an increase of 87% year-over-year. We ended the quarter with 960 customers with ARR of $100,000 or more, which is an increase of 89% from last year. These customers generate approximately 75% of our ARR. We also continue to be capital efficient with free cash flow of $19 million and a tax payback that is still around a year or less. We ended the quarter with about 11,500 customers, which is about 40% growth from 8,200 last year, which means we added about 1,000 net new customers in the quarter, which was twice the number we added last year. And as in past quarters, our dollar-based net retention rate was over 130% as customers increased their usage and adopted our newer products. From an R&D perspective, we continued at a rapid pace of innovation. We recently announced the general availability of our Security Monitoring products to unify visibility across security dev and ops teams. As with all our products, it is available in the same integrated, simple-to-use SaaS platform. We are pleased with the initial response to this product, and it has been the most demanded beta in company history. But I'll remind you that we are just beginning on the journey to break the silos between security dev and ops, and we plan for continued innovation in this category. Additionally, we recently crossed 400 out of the box integrations. And among a number of new and improved, I'd like to call out Tenable, Nessus and VMware Carbon Black, which support our new security use cases. Looking at product usage, our platform strategy continues to resonate with customers. As of the end of Q1, 63% of our customers were using two or more products, up from 58% in Q4 and 32% last year. In Q1, approximately 75% of our new logos landed with two or more products. Our success in both landing and cross-selling our platform has resulted in the number of customers using two or more products nearly tripling year-over-year. We are very pleased with this continued adoption of our platform, which includes strong initial uptake of our newest products, Network Performance Monitoring and Real User Monitoring. And as I mentioned earlier, we do continue to believe we have a significant opportunity to further expand our product portfolio and grow our addressable market. Now, let's move on to the go-to-market. I have been personally very impressed with our continued productivity across teams during this time. Enterprise sales teams, in particular, who are serving companies of more than 5,000 employees, have successfully adapted to selling by phone and video. And as you know, tradeshows and marketing events have been canceled or gone virtual. So, we have been redeploying those investments into online advertising, webinars and other activities. Our own user conference Dash is going virtual likely in Q3. Now, let's review some of our key wins in the quarter. First, we had an exciting seven-figure new logo win from a Fortune 100 pharmaceutical company, embarking on a migration to a container-based hybrid cloud. The incumbent legacy tools didn't keep up with their new dynamic stack and Datadog allows for mass adoption across DevOps and executive teams through a single observability platform that all teams can use every day. Next we signed a six-figure new logo deal to provide monitoring for a large health insurance company, embarking on a multi-cloud migration. What's really interesting about this deal is that it was won through a new partnership with one of the world's largest system integrators. This is a great example of success after we announced Datadog Partner Network in January, though, of course, it is still early days for our channel and alliances go-to-market. By the way, both of the new logo deals I just mentioned were closed at the very end of March. Next we had a sizable upsell to a mid-market on-demand logistics company which now spends more than $1 million a year with us. This company has been a customer since 2018, started with infrastructure monitoring and then adopted both APM and log management in 2019. Today this customer is also using Synthetics, NPM and Security Monitoring. What's really interesting in this case is that this customer partnered with us to build out security products and has quickly found value in scanning logs to detect security threats. It is also worth noting that this logistics company has experienced dramatically increased demand with COVID and it has successfully scaled up its operations, avoided performance issues and enabled all its engineers to collaborate remotely all with support from Datadog. Lastly, I'd note a large six-figure upsell to one of the world's largest global financial institutions. This customer plans to migrate thousands of applications over the coming years, with Datadog being the standard across multiple public and private clouds. This is an interesting customer to single out for both its extremely stringent security requirements and its adoption of our serverless monitoring capabilities. With that, I would like to turn the call over to our Chief Financial Officer, David Obstler. David?

Thanks, Olivier. We are very pleased with our first quarter results. I will now provide a detailed review of the Q1 results. Revenue reached $131.2 million, reflecting an 87% increase year-over-year. The quarter demonstrated widespread strength, fueled by both new and existing customers, success across various segments and sales channels, and ongoing platform adoption. To elaborate, we saw significant new logo additions from different sales channels and regions, along with strong expansion among existing customers. Our dollar-based net retention rate was above 130% for the 11th consecutive quarter, driven mainly by increased usage of existing products and cross-selling to newer ones. We are encouraged by the initial adoption of our latest solutions, NPM and RUM, although they had no material impact on the first quarter results. Additionally, we observed strong performance across segments, with similar growth rates in enterprise, mid-market, and SMB. The broad strength included several large enterprise deals that closed in March, as well as resilience within our SMB customer base. We saw continued robust net and gross retention in each of these segments. Now regarding billings, which totaled $137.9 million, an increase of 55% year-over-year. Two dynamics affected this figure. First, there was a slight decrease in billings duration for some renewals and upsells, as clients shifted to quarterly or semiannual payment terms from annual ones, although this did not reduce the contract length, just the payment terms themselves. This change was due to customers managing their cash flow amidst COVID and our accommodation of their billing preferences, which led to an approximate $10 million impact on billings. We are not reliant on large upfront payments for multi-year deals. The second factor was the timing of an invoice for a large existing customer, which affected our Q1 figures but normalized, adjustments would show a billings growth rate of about 70% year-over-year. At the end of Q1, our Remaining Performance Obligations or RPO stood at $256 million, growing 82% year-over-year. RPO reflects commitments, not billing terms, and the increased RPO suggests growth in longer-term commitments despite altered billing terms. We previously cautioned against using billings as a key growth metric and emphasized that revenue is a better indicator, as it is directly linked to consumption and closely tied to annual recurring revenue. Examining the income statement more closely, gross profit was $105.2 million, representing an 80% gross margin, which improved from 78% last quarter and 73% a year ago, driven by efficient use of our cloud hosting. Our margins may fluctuate quarterly within acceptable ranges due to prioritizing product development, innovation, and expanding cloud data centers in new areas. Research and development expenses totaled $35 million or 27% of revenue, down from 31% a year ago, reflecting our ongoing significant investment in R&D, including increasing engineering headcount. Revenue growth has outstripped these substantial investments, and we see continued opportunities for innovation, which drives our commitment to investing in R&D. Sales and marketing expenses were $42.1 million or 32% of revenues, compared to 42% in the same period last year. Despite experiencing cancellations of marketing events due to COVID, we shifted much of that budget to advertising and other lead generation activities. General and administrative expenses were $12 million or 9% of revenue, slightly down from 10% last year. Operating income reached $16.1 million with a 12% operating margin, improving from an operating loss of $7 million a year ago. Besides the enhancement in gross margin and other discussed factors, reductions in travel and entertainment expenses as well as facility overhead related to COVID slightly contributed to the improvement in operating margin. Net income for the quarter was $18.8 million or $0.06 per share based on 328 million weighted average diluted shares. Our business model is highly efficient, yielding significant returns on our investments in sales, marketing, and R&D. While we have achieved three consecutive quarters of breakeven to positive operating income, our main focus continues to be on top-line growth, and we are committed to additional investments in R&D and market strategies. Turning to the balance sheet and cash flow, we ended the quarter with $799 million in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was a positive $24.3 million for the quarter, and after accounting for capital expenditures and capitalized software, free cash flow was $19.3 million, representing a free cash flow margin of 15%. Now, looking ahead to our outlook for the second quarter and full year 2020. Given our recurring revenue model, we have not yet experienced the full impact of COVID-19 on our top line. It is still early in the quarter, and we anticipate some deal slippage particularly with new logos. Although our net retention rate remains relatively high, we may face some downward pressure on it over the next two quarters. Customer usage surged in March and has adjusted somewhat in April but remains higher than pre-COVID levels. It is premature to predict how usage will trend for the remainder of the quarter, so we believe it is wise to expect some impacts from these factors, likely in Q2 and Q3 and perhaps beyond, which we have factored into our guidance. For Q2, we expect revenue to fall between $134 million and $136 million, representing 62% year-over-year growth at the midpoint. We anticipate a non-GAAP operating income between a loss of $1 million and income of $1 million. The expected non-GAAP net income per share should be breakeven to $0.01 positive per share based on roughly 329 million weighted average diluted shares. For the full year, considering our strong first-quarter performance and the underlying drivers of our business, we feel confident raising our guidance for 2020 based on our current understanding of COVID-19 and the macroeconomic landscape. Revenue for the full year is now expected to be between $525 million and $565 million, indicating 54% year-over-year growth at the midpoint. Non-GAAP operating income is anticipated between breakeven and a positive $10 million. Non-GAAP net income per share is projected in the range of $0.02 to $0.06 positive per share based on 330 million weighted average shares outstanding. While we do not guide to billings and continue to advise against using this as a primary metric, we want to clarify that the impact from shorter billing durations we noted in Q1 will likely persist for the next few quarters as customers adjust their cash flow amid COVID-19. Additionally, while we’ve seen continuous improvements in gross margins, we are approaching the upper limits of our long-term targets, and as we focus on product development and diversifying our cloud hosting partnerships and locations, gross margins may experience fluctuations within our acceptable range. We plan to invest significantly and continue to do so in R&D and sales and marketing, and we have successfully maintained hiring and onboarding practices during COVID. In Q2, we expect a non-cash tax adjustment of approximately $5.5 million related to a payroll tax liability expiration. Similar to Q2 2019, this will benefit GAAP operating income but will be normalized in our non-GAAP results, rendering it neutral to non-GAAP operating income. Regarding interest income, we anticipate around $2 million per quarter throughout 2020 based on our cash and investments, and we do not expect to incur federal taxes but have a tax provision for our international entity, estimated between $700,000 and $1.5 million for the full year. Our share forecasts for Q2 and the full year are diluted since we expect to achieve non-GAAP net income profitability for both periods. Lastly, while we are not providing cash flow guidance, a few points to note are related to our employee stock purchase program—realizing an inflow of about $3 million from cash flow operations in both Q4 and Q1. As the initial program concludes, we anticipate a reduction in cash flow from operations by $6 million, while cash flow from financing activities will increase by a similar amount, resulting in no net cash effect. The new ESPP is expected to generate $2 million to $3 million in positive cash flow from operations in Q2. We foresee potential pressures on billings duration and possibly on Days Sales Outstanding due to COVID, which might lower cash generation in the short term. However, given our efficient model, proven cash flow generation, and substantial cash reserves, this will not affect our liquidity. To conclude, we are very pleased with our business performance in the first quarter. We continue to demonstrate unmatched growth at scale while ensuring efficiency in our operations. Despite the challenges posed by COVID-19 and the broader macroeconomic environment, we believe we are well-positioned for the long term and intend to make continued investments to seize the sizable opportunities ahead. We will now open the call for questions.

Thank you. Our first question comes from Sanjit Singh with Morgan Stanley. Your line is now open.

Thank you for addressing the questions, and congratulations on a successful Q1. I hope everyone at the New York headquarters is doing well, especially given the challenges we've faced over the past few months. It's great to see the Q1 results. I have two questions: one related to the short term and another to the long term for Olivier. First, regarding the short-term question, I'm trying to understand the net impact of what you've observed in March, April, and early May. Specifically, what is the effect on the business from customers who are more affected, particularly those accounting for less than 10% of ARR? What are the spending trends among those customers compared to the increased spending in other sectors? Does this balance out to neutral in terms of your business plans for the year, or are you observing a net positive impact?

I'll answer that. So far in March and April, we have observed growth, with April being particularly strong. Some customers are experiencing slower progress, while others are scaling up. We have questions about which parts of these scale-ups will return to normal, especially since some customers rushed to reorganize their operations late in Q1 and in April, and they may stabilize afterwards. It’s still early to determine the overall outcome. We should be cautious in our estimates for the next couple of quarters. However, what we can see indicates a growing reliance on online solutions and a positive trend in the cloud sector, where companies have successfully scaled their operations. There is increased investment in that area as well. That summarizes the situation so far. Do you have a second question?

Yes. My follow-up is focused on the post-COVID landscape. Looking at your product portfolio, it appears you have maintained a strong pace of innovation. In terms of coverage, it seems you have developed all the necessary products across the four pillars that will drive healthy growth for the long term. I'm trying to understand what the next key buying criteria will be. As we look at observability, will there be an aspect of taking action involved? Beyond just monitoring and alerting, do you have the data available? Will the products be positioned to enable customers to take prescriptive action regarding their environment? More simply, how do you see the product portfolio evolving as we move past COVID?

Yes. We already have a lot on our hands. I want to emphasize that our recent products like APM and logs are experiencing rapid growth. The products we've introduced after those, such as Synthetics, are also growing quickly. We are continuing to invest heavily in all of these products, including our core infrastructure monitoring solutions. We still have much work to do in that area. When it comes to security, we are still in the early stages. We are pleased that our first product is now generally available and gaining traction, but it is still very much in its infancy and has a long roadmap ahead. We plan to build a lot more around it. Concerning the product categories you've mentioned, there are definitely some areas that interest us, and we have several internal developments underway. However, I can't specify when we will present these to customers because we have a lot happening right now.

Fair enough. I’ll leave it there. Congrats on the Q1.

Thank you.

Thank you. And our next question comes from Chris Merwin with Goldman Sachs. Your line is now open.

Okay. Great. Thanks so much for taking the question and congratulations on the phenomenal results. So in the prepared remarks, you talked about some impact from the delay of projects. But I guess at the same time, there's an opportunity for the pace of digital transformation to actually accelerate in a recovery. And perhaps that's particularly true for customers that were unprepared for a remote workforce. So, can you talk a bit about your customer conversations on that particular topic and how you think about how these trends could impact Datadog post COVID and in recovery?

Yes, we observe that our customers are navigating between the digital and physical worlds. They are increasingly investing in digital solutions and seeing rapid growth in those areas. This trend will not slow down; in fact, we believe it will push the entire industry towards greater transformation. However, companies are facing challenges in modernizing and making substantial investments at a time when many are experiencing financial difficulties and must make tough decisions. This issue is not new, as many other companies have also mentioned it recently. Our focus is on managing short-term uncertainties as companies move beyond immediate survival mode, while recognizing that the underlying trends driving digital transformation and cloud adoption will likely accelerate and become more significant as the world begins to recover. This balancing act informs the guidance we have provided.

Got it. I guess as a related question I think one of the themes we've seen in the space is convergence and that was actually true before COVID. So I mean particularly as customers go through a time when they got to think about perhaps consolidating some of the tools that they have are you seeing actually any benefit from that? I mean could there be a tailwind to the cross-sell motion for specific products? Just curious how you think about.

This is definitely – like this was appealing to customers before COVID. It's as appealing if not more to customers now. Some customers might look into ways of rationalizing costs in the short term. So these are all opportunities. At this point none of these – we don't have data on any of these to be – to tell you whether it's going to be a big factor or not over the rest of the year. Look this is our strategy. We've been building towards that. So obviously in the long term we believe in it.

Got it. Thanks so much.

Thank you. And our next question comes from Sterling Auty with JPMorgan. Your line is now open.

Yes, thanks. hi, guys. I'm curious in terms of the net new ARR that you added in the quarter how would you characterize how much of that is coming from kind of high-level CIO large complex transactions versus maybe some more kind of day-to-day orders that you get at a divisional or departmental level?

Well the way we sell in general is always bottom up. Even in large enterprises even when we start the conversation at the CIO level and we end it to the CIO level, the adoption of the product is bottom up. And we start small. Even when we land – I mentioned earlier on the call like some six or seven-figure land deal even when we land those deals these are still a small fraction of what the total opportunity looks like at these customers. And this represent bottom-up adoption and some deals that are going to grow significantly over time. So that's the way it used to work. That's still the way it's working as far as we can tell in Q2.

That makes sense. And then can you give us maybe some qualitative color on the mix of business in terms of you gave us the 75% that landed with two or more products but just give us some color in terms of the strength of infrastructure versus APM versus logging in the quarter.

Well, I mean look they're all growing. Infrastructure alone would be one of the best SaaS companies around APM and logs. So if we single out those products – and look we don't really like to do that because as we like to say there's quite a bit of fungibility between the different products and which you attribute to one you could attribute to another. But the – those products are in hyper growth. They're growing a lot faster than that or used to grow when we were at the scale-up of those products. And that's still the case. That growth hasn't slowed down. Synthetics is still growing much faster than we thought it would. And it's a great product for us. We're pleased with the initial uptake of NPM but it is still not material to our results. We mentioned it earlier but it's a product that has a higher friction than Synthetics for example to get adopted but it has a very long runway. So we're investing in that product. We've seen some adoption of RUM. We started charging in March for some portion of it. So we started charging for a part of it that is – part of our customers' contract is committed as opposed to being usage driven. So it's still also not material to Q1 but we should see more of it in Q2. And the security product we haven't started charging for yet in Q1 we started in Q2. So we don't have anything to say about it yet.

Sterling I think the trends have really continued. The net retentions were very consistent in Q1 to what they had been and also the contribution from usage and new products and cross-sell. So much of what we've been saying in the last two quarters has continued in Q1 with really strong contribution to net retention from both those effects of usage and cross-sell.

Makes sense. Thank you.

Thank you. Our next question comes from Raimo Lenschow with Barclays. Your line is now open.

Thank you. The – if you – you talked about the net retention and the assumptions that you're making as the crisis kind of continues. Can you remind us – if there's going to be more churn then it's probably going to be more in the SMB space. Can you talk a little bit about your exposure there and what you're seeing so far? It's my first question. And then on the billing side, can you remind us David like in terms of what's monthly versus annually versus where the quarterly biannually that you talked about just to get an idea about the mix. Thank you.

Yes. I'll about SMB and maybe David can talk about the billing mix. So we actually – or ARR is as we discussed before is what split evenly between enterprise mid-market and SMB. But even within SMB we – most of that revenue comes from companies that are on the larger side and on very solid footing financially. Some of them are publicly traded and tend to be closer to the 1000-employee limit there. We mentioned on the call that less than 15% of our revenue came from companies that are on the smaller side which is less than 100 employees. If you look at our SMB customers, they're very diverse. And we're actually less exposed on the SMB side to some of the higher-risk categories around COVID. And so far we haven't seen a big change in trends. I mean, we did see a tiny uptick in churn in SMBs, but it's actually consistent with levels we've seen just a few quarters ago. So there's nothing out of the ordinary. And at the same time, we saw an increase in net retention for that same cohort of SMBs. So it has nothing conclusive there. We don't see anything that we didn't see before. Now when we try to guide for the future, we have to try and guess where our exposure is going to be and what can be weaker. We'll have to guess that the SMBs are going to feel more pain and are going to be where we'll see more churn. And so that's what we've incorporated in our guidance. David, do you want to take the billing mix?

Yes. And in billing two-thirds of our – of ARR is associated with annual commitments or greater. And three-quarters, when you add in the usage related to that so three-quarters of our billings are associated with annual commitments or longer. What we said before was, our average length of commitment went out slightly in the quarter resulting in an acceleration of RPO. And our average period of billing duration came in a little bit more resulting in the billings discussion. But about three-quarters are related to annual commitments or more.

Thank you. Our next question comes from Brad Zelnick with Credit Suisse. Your line is now open.

Great. Thanks so much. Congratulations on a strong start to the year. And as well, I hope everybody at Datadog and everyone listening is doing okay these days. My first question I wanted to follow up on what Sanjit has asked and I think Raimo is alluding to as well. Just trying to understand the impact on the business from COVID. Specifically, if I hear your comments about the potential for deal slippage obviously with more pressure on new logo business and the downward pressure that you might see on net expansion to what extent are you seeing it coming versus just preparing for it? And maybe, if you could perhaps can you compare and contrast consumption trends versus pipeline progression and the conversions on that pipeline that you're seeing in March and into April?

Do you want to go first Oli and I'll weigh in?

Yes. Yes. So, yeah. So look it's for the most part we're guessing because it's too early in the quarter to actually have a good sense of what may slip or not. At the end of Q1, we did have a few deals that slipped and that were marked. The reason for slippage was uncertainty around COVID. And several of them have closed right after. And I would say it's not like every quarter there are a few deals that slip. And the number of deals that slipped in Q1 was actually not out of the ordinary compared to previous quarters. So we don't have really anything to quantify the effects we might see but we do anticipate that we will see some. When it comes to usage, again, it's also a little bit more difficult to compare because some of the usage patterns have changed a little bit as companies have scrambled to reorganize. So there's a little bit less predictability in there, which is also why we're baking that into some of our guidance. So overall, look, we do anticipate some uncertainty and some pressure on some fronts in Q2 and Q3. I would be worried, if that didn't happen. But we don't have anything that makes us particularly concerned in front of us right now. David, do you want to add anything?

Yeah. Yeah, I agree. Our pipeline remains consistent. We don't know as Oli said is – what is the harvesting percentage what's going to happen this quarter. So we think that our model given our model of land and expand and usage that were less dependent than other models on going to land in a large three-year deal, but we don't know in new logos particularly what's going to happen as the quarter progresses. The main request we've gotten so far has been some modest can you chunk our builds up a little bit. That's been probably what we've seen a little more. But again, it hasn't been a significant percentage of our ARR either at this point.

Thanks very much. That's both very helpful. If I can follow up with just a quick housekeeping question for you David, RPO up 82% in the period I think is strong by just about any way you look at it. But to just put a finer point, can you give us a duration-adjusted RPO growth or even a current RPO growth?

We don't release that. We're just making comments on the fact that, it was higher than the pro forma billing due to longer contract commitment duration in two and three year deals, but we haven't really commented and broken that up publicly.

Okay, thanks for taking my questions, Dave.

You’re welcome.

Thank you. And our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

Hey guys, thanks for taking my questions. I'll echo the strong results this quarter. Your ability to sell two or more products is obviously impressive. I'm wondering if you can share maybe some examples of how some of your largest G2K customers are adopting APM and logging. And in particular when they do, are you seeing these customers migrate off of other vendors' APM and logging solutions? Or are they often run in parallel for a while?

We have several G2K customers who are starting to use our APM and logs. Initially, we don't replace their existing on-prem solutions as they continue to use them. Their on-premises systems are still distinct from their new cloud environment, which is where we step in. Typically, we land with two or more products and expand our presence in the cloud. Most of these customers are at the early stages of their cloud migration, which is where we establish our presence. We position ourselves to eventually standardize their entire toolset on our solutions as their cloud usage grows, but we haven't reached that point with most of these customers yet.

That's helpful. And then I just wanted to make sure I understood churn a little bit better Oli. You noted earlier that you're not being impacted by workforce reductions. But when we think of higher level churn embedded in your guidance is that assumption that some customers might go out of business on the smaller side? Or might we see some seat-based contraction inside of existing customers at some point?

We do not sell on a per seat basis, and there are no user-driven aspects; this is an account-driven component to one billion. Therefore, that part does not directly impact us. However, we might notice some effects from our customers reducing their infrastructure. In most cases, our customers need to maintain that infrastructure to serve their own clients, and there is a limit to how much they can downsize. So far, we have not experienced that effect. We are uncertain about where churn may originate if it occurs. It is reasonable to assume that some small businesses may close down. We also observe some medium and large businesses facing difficulties and requiring assistance or bailouts to survive. We are aware of this possibility. So we want to remain cautious and mindful that if the overall economy is impacted, some of that will likely affect us, especially considering our diverse customer base.

And this is David. Yes, we mentioned that we are experiencing some new logo accumulation and implying lower retention rates in our guidance. We have not yet observed these changes significantly, but we are being cautious about potential future impacts.

Well done. Thanks guys.

Thank you. And our next question comes from Brent Thill with Jefferies. Your line is now open.

Thanks. I realize the security SKU is brand new, but just if you can just give us any color initially back from the field? And I have just a quick follow-up after that.

We are very pleased with the initial uptake. During the beta phase, we had customers who were eager to purchase, and some have already widely adopted the product, which is encouraging. However, it's important to note that we are still in the early stages regarding the product's features, integrations, and our go-to-market strategy. Therefore, we should anticipate that it will require significant investment and time to achieve meaningful scale for the new products.

And then just as a quick follow-up. Are you changing any of your hiring plans or product plans from here given everything that's gone on? Or are you still tracking to kind of original plan going into the year?

We're mostly following our original plan. We have made some adjustments in areas where hiring didn't make sense, such as organizing local marketing events or office management, especially since we currently don't have an office or the ability to meet people in person. For everything else, we are sticking to the plan and have ambitious goals. We believe this is actually an ideal time to hire and strengthen our team. However, I mentioned earlier that it may take longer for these investments to yield results due to a potentially softer market and increased uncertainty among customers. Still, we view this as an opportunity to build on our strong platform and the efficiency of our business.

Great. Thanks.

Thank you. And our next question comes from Brad Rebeck with Stifel. Your line is now open.

Great. Thanks very much. David, when a customer comes to you and asks, as you said to chunk a payment up in smaller bite-size amounts, do you ask for anything in return, like a longer contract or anything along those lines? Thanks.

We have discussions with our customers to extend contracts or make adjustments regarding our products. Our goal is to grow alongside our clients and ensure they stay with us over time. We engage in these conversations to find ways to extend contracts or explore other options.

Yeah. And I can comment on that. We're doing this on a case-by-case basis really. But we do it in the spirit of partnership with our customers. And that's what I mentioned in the call too, that we're co-investing not only in our product and our team. We're also investing in our customers. We're investing in relationships. We know some of them are going through a very difficult time. And we think there are some two-way partnerships to be built on that.

Excellent, thanks very much.

Thank you. And our last question comes from Robert Majek with Raymond James. Your line is now open.

Hi. Thanks and congrats on the strong results. Can you break out the vertical exposure of your customer base? And perhaps more specifically, what the contribution is from some of the more macro-sensitive sectors, including travel and entertainment? And I have one follow-up question.

Yes. Let me pull up my number. And call back.

We mentioned that about 10% of our exposure is in the most affected areas such as travel, hospitality, and dining. On the other hand, we also have exposure in work-from-home, collaboration, and food delivery sectors. Overall, we are quite diversified. We have consistently stated that our customer base is diverse, and our concentration in the impacted industries does not exceed 10%.

Thanks guys. Just perhaps one more, you touched on it earlier in prior questions. But can you just give us some more qualitative insight, into your conversations with new potential customers, and the willingness of these customers to pursue new modern deployments, in an uncertain macroeconomic environment?

Yes, I can address that. So far, our conversations have not changed significantly. There is, of course, a heightened awareness regarding spending and cash outflows. Everyone is being cautious with their cash in these uncertain times, which is why we have discussed different payment terms for some clients. Interestingly, some customers from heavily impacted industries are reaching out now because they have the time to invest and plan for the future due to reduced day-to-day operations. We’ve observed a few cases of this, although it’s anecdotal and we can’t predict if any of this will materialize before the market recovers. Overall, we are still early in the process and unsure if the effects will be felt in the second or third quarter. We are being prudent in how we set our guidance.

Thanks a lot. I appreciate it.

Thank you. And I'd like to turn the call over to Olivier Pomel for closing remarks.

All right. Well thank you. In closing, I'd like to repeat that we are very pleased with the results for Q1. We continue to invest in our long-term opportunity and we believe we are very well positioned for it. In what has been an unprecedented time for all of us, I want to thank Datadog employees for their dedication and resilience. And of course, I want to thank our customers for their trust in supporting their businesses through a challenging time. Thank you all.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.