Datadog, Inc. Q2 FY2020 Earnings Call

Thank you, Frendi. Good afternoon and thank you for joining us today to review Datadog's second 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. 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 third quarter and for the full-year of 2020, our strategy, the central benefits for products, R&D and go-to-market investments, expected capital expenditures, anticipated hiring, the size of and our ability to capitalize on our market opportunity, as well as the impact of the COVID-19 pandemic on our customers, their usage of our products, our market, industry trends and our business and operating results. The words anticipate, believe, continue, estimate, expect, intend, will and other 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 quarterly report on Form 10-Q for the quarterly period ended March 31, 2020, filed with the SEC on May 12, 2020. Additional information will be made available in our quarterly report on Form 10-Q for the quarterly period ended June 30, 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 the call will 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 tables 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 measure. With that, I'd like to turn the call over to Olivier.

Thank you, AJ, and thank you all for joining us today. Before discussing the results of the quarter, I want to proudly report that together with our employees, we raised over $1 million for charities supporting COVID relief, as well as organizations working to dismantle the systemic discrimination experienced by black communities. We are living in unprecedented times for many reasons, and we want to do our part to help. And as always, Datadog is committed to supporting diversity and inclusion within our company and communities. Now turning to Q2 results, we are happy to report another quarter of strong growth and demonstrated financial efficiencies. Execution was strong during challenging times, including robust new logo generation and continued platform adoption. While we are pleased with our execution in the quarter, we did experience some impact to the rate of usage growth of our customers related to the macro environment. While this macro uncertainty remains in the near term, we continue to believe that this environment accentuates the need to be digital first and agile and confirms the cloud as the best path to achieve these outcomes over the long term. And we see evidence of this in growing overall demand in the form of new customers and new use cases for existing customers. To summarize Q2 at a high level, revenue was $140 million, an increase of 68% year-over-year and above the high end of our guidance range. We ended the quarter with 1,015 customers with ARR of $100,000 or more, which is an increase of 71% from last year. These customers generate about 75% of our ARR. We have about 12,100 customers, which represent growth of 37% from about 8,800 last year. We also continued to be capital efficient with free cash flow of $19 million. And as in past quarters, our dollar-based net retention rate was over 130% as customers increased their usage and adopted newer products. So we are continuing to deliver high growth at scale. Now looking at Q2 in more detail. New logo generation was robust in the quarter as new logo ARR grew both from last quarter and year-over-year and gross new customer additions matched the record set in Q1. We saw companies of all sizes and geographies prioritize cloud migration and digital transformation. For instance, in the quarter, we had a few small yet notable new logo wins from two global auto chains, an amusement park chain, a large US university, and a European airline. These wins showed that even in the face of challenging times for these customers, transforming to ensure business resilience and longevity is a top priority. Next, our platform strategy continues to resonate and win in the market. As of the end of Q2, 68% of customers are using two or more products, which is up from 40% a year ago. We had another quarter in which approximately 75% of new logos landed with two or more products, and I would add that over 15% of our customers are now using four or more products, while we had zero last year. We are also very pleased with the uptake of our newest products in a short period of time, with Synthetics, RUM, NPM, and Security all released over the last year. We are winning in the market because we are cloud-native, our support of cloud and other ephemeral architectures is more important than ever as the rapid change from working from home has demonstrated the limitation of legacy infrastructure. And we believe recent events will accelerate the migration to the cloud as the economy improves. We win because we offer the broader solution with end-to-end visibility from backend infrastructure all the way through to the end-user experience and now security as well. And we win because we offer a truly integrated platform, voicing OpenView into the IT stack. Now, as we mentioned earlier, while execution was strong, the macro environment did have some impact on our top line results, and in particular on growth of existing customers. Our customers continue to grow usage of our platform in Q2, but the rate of this growth was below the trends we saw before the pandemic. This dynamic was primarily seen in our larger customers, who already had sizable cloud environments. Given macro uncertainty, we saw these customers look to conserve cash where they still could and therefore, optimize the consumption of cloud infrastructure. On the flip side, smaller customers and large enterprises that are earlier in their cloud journey continue to see stronger growth. To put it plainly, customers with large cloud deals from AWS, Azure, or GCP looked for short-term savings. Note that this is not a new motion, as we see many enterprises go through optimization exercises on a regular basis. What was unusual this quarter was to see a large number of companies going through it at the same time. I would also note that while these customers have the greatest scale in the cloud, they mostly remain at a low penetration relative to their overall IT environment. Therefore, these customers continue to have a long runway of growth in their cloud adoption over time. Lastly, while we do not want to get into the habit of providing intra-quarter updates, I'd like to provide some commentary on what we saw in July. Given the unique macro circumstances, we saw a notable improvement in usage growth relative to Q2, driven by broad-based strength across our customer base. It is, however, too soon to know if this growth will sustain given the macro environment. As a result, and while we are encouraged by these trends, we remain prudently conservative in our outlook for the remainder of the year, which David will speak to. As a reminder, we have both a subscription and usage-based revenue model and the growth of our revenue is relative to the growth of our customers' cloud footprint and data volume. Finally, to bookend this topic, I'm very proud of the performance of our go-to-market teams during these challenging times. We are executing well against what we can control, and our teams are delivering record levels of new logos and product cross-sell. Next on to R&D, we continue to make significant investments to rapidly deliver innovation. We have a proven track record of success introducing new products, and we see many opportunities to expand our portfolio. For example, we recently announced the general availability of private locations for Synthetics, which enables dev and ops teams to proactively test internal applications that are not accessible from the public Internet. We also acquired Undefined Lab, a provider of observability for dev and test workflows. This will enable Datadog to be injected earlier in the software lifecycle, starting before code is even committed to a central repository. And this will equip customers with better tracking of continuous integration and deployment workflows and enable them to identify issues before reaching production. Other continued product innovations include the general availability of the Datadog mobile app to provide engineers with access to the alerts and dashboards on the go, support for Amazon Kinesis Data Firehose to enable streaming logs directly from AWS services to Datadog; and the preview release of the Datadog IoT agent to provide visibility into Internet of Things devices. We have also added and improved a number of integrations including AWS one-click deploy, HiveMQ, Apache Ignite, and Hazelcast. As we keep investing in R&D, we plan for a continued rapid pace of innovation and we'll be showcasing some of our newer products at our Annual User Conference, Dash, which is held online next week on August 11. Switching gears a bit, we recently achieved FedRAMP authorization for low-impact SaaS, and Datadog is now fully available in the FedRAMP marketplace. We continue to build out our public sector go-to-market motion, and while it is likely to take some time, we are excited about this long-term opportunity. Now, let's talk briefly about several wins in the quarter. First, we had a seven-figure sale with a large FinTech company. With Datadog, this customer has been able to move from multiple disparate monitoring tools to using a single platform for all three pillars of observability. This allowed them to refocus engineering teams on building new features, and they expect more than $1 million in savings from consolidating disparate monitoring logging vendors into Datadog. Another seven-figure expansion came from a European automotive company, which is modernizing and adopting Microsoft Azure. Through the adoption of Datadog Infrastructure Monitoring, APM, and NPM, their teams are now collaborating on a shared platform and are moving to an increasingly agile development model. Next, we saw a large entertainment platform that had been using more and more of our products commit to over $10 million in ARR. This company has made a decision to increase investment in observability and their use of Datadog both with new products and by scaling up on existing products. We also mentioned a high six-figure land deal with a leading asset manager, which is now using us for infrastructure monitoring, APM, and logs as well as Synthetics and early adoption of security. Lastly, we had a six-figure upsell to a seven-figure ARR with a social networking platform that has seen tremendous growth during the pandemic. At record levels of scale, they can use Datadog to quickly drill down into any sale request and easily identify layers; this company is now using all three pillars, including Synthetics, RUM, and NPM, and has standardized monitoring on Datadog. Now, moving on to our outlook. As we look ahead to the second half of the year, we remain very excited about our market opportunity. Recent events have made one thing very clear: it is more important than ever to be a digital-first business, and the cloud is the best path to achieve this outcome. We continue to believe Datadog is the primary beneficiary of these trends and remains very well positioned to win in the market. In the near term, the macro environment is likely to continue to cause uncertainty, but our focus remains on executing against our strategic priorities, which have not changed. First, we are building on our strong track record of innovation by introducing new products, entering new categories, and continuing to improve existing solutions. Second, we continue to hire rapidly in R&D and are pursuing talent that we would not otherwise get in the market. Third, we are aggressively expanding our go-to-market globally and into newer channels. We are very confident that we continue to sustain strong growth both in the near term and over time.

Thanks, Olivier. As mentioned, we delivered strong second quarter top and bottom line results amid a difficult macro backdrop. Revenue was $140 million, up 68% year-over-year, against the challenging compare. Execution was strong with robust new logo generation and continued platform traction. While the macro environment did pressure usage of existing customers. To provide some more context. First, in Q2, we saw strong new logo additions with robust contributions from both enterprise and commercial sales channels and sequential growth of new logo ARR. Execution against our platform has been very strong with 68% of customers now using two or more products versus just 40% a year ago, driven by both lands and cross-selling. In the second quarter, our dollar-based net retention was once again above 130% for the 12th consecutive quarter. We saw continued growth of our existing customers, driven by both increased usage of existing solutions and robust cross-selling to newer solutions. Our net retention rate, which remains best-in-class above 130%, did however decline from Q1. As Olivier discussed, macro factors pressured usage increases. To add some detail, while existing customers did grow, the rate of growth was below pre-pandemic levels, primarily seen from our larger customers with greater scale in the cloud, who experienced business pressures and chose to slow down their consumption for short-term savings. Additionally, while we've seen some customers such as delivery and media companies continue to see elevated demand and therefore have continued to meaningfully grow their Datadog usage, some of our COVID-impacted customers reduced usage. As a reminder, these customers, such as those in hospitality and travel, contribute less than 10% of our ARR and therefore they were a mild track detractor. Lastly, churn was a bit elevated related to the most hard-hit COVID customers, but better than expected. Our dollar-based gross retention rate has remained largely unchanged in the low to mid-90s. The performance of our SMB customer base has been robust, including stable dollar-based churn and continued rapid growth year-over-year. Now turning to billings, which was $160.1 million and up 62% year-over-year, relatively in line with revenue growth. Entering the quarter, as we discussed on the last call, we thought it was possible some customers would seek to renegotiate terms or slow payments, but that did not happen in a material way, pointing to the importance of our solution. Remaining performance obligations or RPO was $287 million, up 53% year-over-year. We did not see a material change in billings durations in Q2. We did see some slight shortening of contract duration year-over-year related to large multiyear contracts closed in the year-ago quarter. We continue to have great success in closing annual committed deals, which remains our strategic focus. As a reminder, billings and RPO can fluctuate versus revenues based on the timing of invoicing and signing of customer contracts while revenue incorporates customer usage. Now let's review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross profit in the quarter was $111.8 million, representing a gross margin of 80%. This compares to a gross margin of 80% also last quarter and 75% in the year-ago period. Year-over-year improvement of gross margin was driven by efficient use in our cloud hosting. Our gross margins may fluctuate quarter-to-quarter within acceptable ranges, as we prioritize product development and innovation as well as the build-out of cloud data centers in newer geographies. R&D expense was $38.3 million or 27% of revenue, compared to 30% in the year-ago quarter. We have continued to invest significantly in R&D, as Olivier mentioned, including high growth of our engineering headcount. However, the growth of revenue continues to outpace even our substantial investments, and we did have some leverage from T&E and overhead savings related to working from home. We continue to see a meaningful opportunity to innovate and expand our platform and therefore plan to continue to make meaningful investments in R&D going forward. Sales and marketing expenses were $45.7 million or 33% of revenue, compared to 42% in the year-ago period. Similar to R&D, we continue to make substantial investments, but the pace of revenue growth has outpaced that investment. This was the first full quarter of no in-person trade shows or marketing events. While we have successfully redeployed much of the event's budget to advertising and other lead-generating activities, it is not so on a one-for-one ratio. G&A expense was $12.5 million or 9% in revenue, in line with the same ratio a year ago quarter. Operating income was $15.3 million or an 11% operating margin, compared to a loss of $5 million and a negative 7% margin in the year-ago period. Beyond the improvement in gross margin and revenues outpacing investments, the reduction in travel, entertainment, and facilities overhead contributed to the operating margin. Non-GAAP net income in the quarter was $17.5 million or $0.05 per share based on 331 million weighted average diluted shares outstanding. Note that our non-GAAP net income does not include the $5.6 million non-cash benefit related to payroll taxes. We have a very efficient business model and experience a high return on our investments in sales and marketing and R&D. While we have delivered four consecutive quarters of breakeven to positive operating income, we note that our priority remains top line growth, and we intend to continue investments aggressively in R&D and go-to-market. Turning to the balance sheet and cash flow, we ended the quarter with $1.5 billion in cash, cash equivalents, restricted cash, and marketable securities, which includes the $641 million of proceeds from our convertible note issuance during the quarter, net of issuance costs and the cap call transaction. Cash flow from operations was $24.7 million in the quarter. After taking into consideration CapEx and capitalized software, free cash flow was $18.6 million in the quarter for a margin of 13%. Free cash flow includes an approximately $4.4 million outflow related to the conclusion of our first employee stock purchase program. I would now like to turn to our outlook for the third quarter and the full-year 2020. We are pleased with our execution and ability to drive new sales in an uncertain macro environment. As discussed, we did see some lower growth in usage from our existing customers in Q2 due to the overall slowing of the economy. As Olivier noted, however, in July, we experienced an improvement in usage trends relative to Q2 that were closer to our pre-pandemic historical levels. However, it is too soon to know if this will prove to be sustainable, and given the lack of clarity of economic trends, we are assuming usage growth of existing customers below pre-COVID growth rates. Additionally, while we have not yet seen a material impact on our new sales, we think it is prudent to expect some impact in the second half given the macro backdrop. Beginning with the third quarter, we expect revenues to be in the range of $143 million to $145 million, which represents a year-over-year growth of 50% at the midpoint. Non-GAAP operating income is expected to be in the range of a loss of $1 million to an income of $1 million. Non-GAAP net income per share is expected to be breakeven to $0.01 per share based on approximately 333 million weighted average diluted shares outstanding. Now for the full-year 2020, revenue is expected to be in the range of $566 million to $572 million, which represents a 57% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $28 million to $34 million, and non-GAAP net income per share is expected to be in the range of $0.11 to $0.13 per share based on approximately 332 million of fully diluted shares. A few things to take into account in our guidance: First, when evaluating our quarterly growth rates, it is important to consider the accelerated growth rates in the second half of 2019 creating more challenging comps. Next, while we see continued improvement in our gross margins, we are running towards the top end of our long-term target. As we prioritize product development and diversifying our cloud hosting vendors and regions, our gross margins may fluctuate within a range of acceptability. Next, as I mentioned earlier, our intention continues to be to invest meaningfully, including aggressive hiring in R&D and sales and marketing, and we have not changed our plans during COVID. Lastly, some notes below operating income: We expect approximately $2.4 million of quarterly non-GAAP other income, which is net including interest income in our cash and marketable securities, less the interest expenses of our convertible debt. We do not expect to be a federal taxpayer but have a tax provision related to our international entities, and we expect a tax provision of approximately $350,000 per quarter. Note that our share count forecast for Q3 and the full-year are diluted given that we expect to be non-GAAP net income breakeven profitable for both periods. To summarize, we are pleased with our execution during a very challenging time. While the macro environment has impacted our topline results in the near term, we believe the current environment will prove to be a catalyst for digital transformation and cloud migration over the long term. We are very well positioned to be a primary beneficiary of those trends. We have a highly efficient business model and are making investments across the organization today in order to capitalize on the large opportunity ahead of us. With that, we will now open the call for questions.

Thank you. Your first question comes from Sanjit Singh of Morgan Stanley. Your line is open.

Hi and thank you for your question. I appreciate all the details you provided about the challenging environment and usage; it's very helpful context. To start, Oli, you mentioned the primary factor being large customers with extensive cloud deployments. That makes sense, as large numbers have a significant impact. What gives you confidence that this pause with those customers is temporary rather than a longer-term issue? Are there any discussions with customers that inform this, or is it more related to the general trend of digital transformation? I would like to understand what supports your confidence that for these large customer groups, this is more of a digestion period following strong growth rather than a prolonged downturn.

Yes. The first point I want to make is that we’ve seen this before. Companies often increase their cloud usage, which leads to higher bills, prompting them to consider optimization. We’ve done the same as a company, and you might have noticed our gross margins improving from last year, which reflects a similar trend. Most companies suddenly start thinking about how to save money at once. This was particularly prevalent during the COVID pandemic, where the uncertainty led to cash conservation measures. The advantage of the cloud is that much of it is operational expenditure, with costs incurred in the next billing cycle, allowing for potential savings if action is taken. As for future developments, it’s challenging to predict what will happen in the short term, but overall, companies continue to migrate to the cloud, including new sectors that hadn’t previously done so. We've witnessed an uptick in businesses like hotel chains and amusement parks beginning to use our services. Analysis of our July and some June data indicates that companies have been optimizing their cloud infrastructures. This doesn’t necessarily mean they called Datadog to reduce their expenses; rather, they are finding areas to shut down or optimize on platforms like Amazon, Google, or Azure. While we have observed some reductions in data volume or infrastructure over a few weeks, we typically notice that companies bounce back as their teams continue building, deploying, and serving customers. This trend isn’t surprising or new, but what stands out now is the simultaneous response among many companies.

Understood. That makes total sense. And then David, thinking about the guidance, we have 68% growth this quarter, and for Q3, the high-end is around 50%, and Q4 is approximately 40%, at least based on my calculations. It would be helpful to understand the assumptions behind that guidance, especially regarding the usage trends. There was a significant number of customers overspending relative to their committed usage before COVID. If you could provide information on the pre-COVID usage levels and any way to quantify that, it would help us understand the assumptions behind your guidance. I believe your guidance suggests that some of the weaker usage trends will continue into the second half, so framing that would assist in understanding the guidance better.

Yes, I think that's right. We have our guidance throughout our history as a public company been fairly prudent and our forward-looking usage and implicit net retention and we're particularly cognizant of that given COVID, most of our guidance has conservative assumptions in that and we continue to do that. I think as we said, we had strong cross-sell. And so we see continued adoption of the platform, which is a good sign, and as far as the usage. The more variable usage we saw, as Oli just mentioned some constraints. So we tried to use conservative assumptions going forward in our guidance.

Understood. I'll leave the floor. Thank you very much.

Thank you.

Your next question comes from the line of Chris Merwin of Goldman Sachs. Your line is open.

Okay, thanks very much for taking my questions. For Olivier, I wanted to ask about your thoughts on pricing, particularly in light of the convergence that we're seeing going on within the observability space. I remember with your log product when you launched it, you had a pretty disruptive pricing strategy where you were charging at very low price for ingestion and you're letting the customers pay just for the logs that they actually want to index. And now we're seeing other players in the space give away entire aspects of their platform for free and creating free tiers. So I guess the question is how do you see your pricing model evolving, if at all, in time, and as you keep up the industry-leading pace of innovation, do you see the ability to even raise prices as you deliver more value to your customers? Thanks.

Yes. We are very careful about our pricing strategy. We encourage maximum deployments among our customers, which is why we don’t charge per user; we want everyone to use our platform. We also ensure that customers can align their spending with the value they receive from Datadog. This involves having different pricing for various components of our platform, as not all data sent to us has the same value or requires the same processing. Currently, we are satisfied with our pricing model; it works well in the market and provides flexibility for customers. However, we have seen our pricing model evolve over time, and it is likely to continue evolving in the future. We are confident in our ability to succeed in the market and believe that as we provide more value, we will have the capacity to adjust our prices accordingly. Relying solely on price competition is generally a sign of trouble; it suggests that quality alone cannot win in the market.

Understood. Thank you. And maybe just follow-up for David, would you be able to share some more detail about some of the trends that you saw by customer segment during the quarter, as it relates to net expansion or good churn or any metrics you could share, I guess across SMB and mid-market and our enterprise customers? Thank you.

Yes, that was one of the surprises we had. Very stable gross churn, dollar-based gross churn, very similar to what we have discussed in the last call that all of our metrics and growths are in the 90s with enterprise tending to be towards the upper part of that range and SMB towards the lower, but all of them strong and in the 90s. We really didn't see very much disruption from that. And similarly, we saw net retention rates come down. We said a little more at the larger end because of this concentration on costs. But all within the same type of bands we've had since we've become a public company.

Great, thanks very much.

Yes.

Your next question comes from the line of Sterling Auty of JP Morgan. Your line is open.

Yes, thanks. Hi guys. So in terms of the macro impacts and the slowing of usage of existing customers. Is there any evidence that you've seen of some of those customers slowing the usage of your tools, but supplementing it with maybe the cloud platform tools or something else, or are they're just slowing the usage and that's it?

No, I think what we've seen mostly is they're slowing the usage of the cloud infrastructure, that's directly related to how we recognize new revenue. So that's what we thought. To put in other terms, they use fewer Amazon instances or containers or less Azure instances and containers, and that would end up moving the needle for us. I should say, this is something that we used to see it in the other way; we used to see, like the way we sell it, we send to customers that are still early in their cloud transition, and we grow with them as they grow. What happened this quarter is that their growth slowed overall during the quarter. They still grew, and they're still going to grow. And what we said in the call is that in July, so towards the June, we saw some acceleration of the growth again. But we want to remain prudent considering all the uncertainties there is right now in terms of how long the COVID crisis is going to last and what's going to be the impact in various parts of the economy. We remain prudent in what we think is going to happen in the near-term.

Understood. And then one follow-up: how would you characterize the ramping of the new sales resources that you've hired over the last couple of quarters? Are they ramping at the same pace that you've traditionally seen, are they ramping faster, slower?

We haven't seen any changes in that area. Everything within the sales team's control has performed quite well. As we noted during the call, we've achieved a record number of new logos in terms of both quantity and revenue. Additionally, we've seen a record level of new product attachment, which occupies the sales team's focus. Customer growth, once they are onboarded, has only partially correlated with external factors that we can't fully control. This uncertainty is why we initially set our expectations around net retention at 130%, as we don't have complete control over that metric. Much of this is driven by the pace of migration to the cloud and how quickly customers are scaling in that direction. We are still in the early stages of this transition, and customers will continue to adapt for a significant period. They are eager to scale further now that they recognize the impact of COVID on their businesses and the necessity for transformation. However, on a quarter-to-quarter basis, the short-term direction remains uncertain.

Understood. Thank you.

Your next question comes from the line of Brad Zelnick of Credit Suisse. Your line is open.

Hi. Sorry about that. This is Ray McDonough on behalf of Brad Zelnick. Thank you for taking my questions. I wanted to ask if you could provide more clarity on the relative size or recent attach rates of your APM and log management solutions, both of which you mentioned last quarter as growing faster than the overall business. Is that still true in this recent quarter?

Yes. So they are both in hyper-growth. So the picture hasn't changed a lot since the last time we talked. The infrastructure iPhone would still be a great public company, logs and APM are still in hyper-growth, not growing much faster than Datadog grows at this scale. And the other products that are smaller and earlier are also growing extremely fast right now. So we are fairly happy with those.

And the attach rates and their contribution to net retention have been very similar to the trends that we've talked about last time. So we continue to have an increasing number of customers using the platform, and what they're spending on the additional components of the platform continues to grow in hyper-growth.

Yes, it's important to recognize that there are strong signs of active demand, whether it's from new clients or new products. This growth rate is actually higher than it has been in the past, and it continues to expand over time, which is very encouraging. However, one factor that has been a drawback this quarter is the passive consumption. I hesitate to use the term passive because it implies a lack of activity, both on our part and from our customers, but it refers to something that's not directly associated with the customers we are actively engaging with today.

Thanks, that's helpful. Building on Chris's earlier question and recognizing that most of your lands are Greenfield, how do you believe one of your competitor's recent changes in pricing and packaging will affect your ability to cross-sell APM to your customers? Additionally, what are your thoughts on the medium or long-term effects on your business, especially since this particular competitor seems to be focusing on a more aggressive strategy regarding price and total cost of ownership?

Yes, so for this kind of changes, we always have to keep an open mind while we see what can work and not work. At the same time, look, we don't see that having a major impact on us, because we don't actually, our business, as you said, is mostly Greenfield. And you saw today on the strength of our individual product that gets tied together in a platform. And there is no problem with our customers adopting our products, little by little. Like they can adapt as little as they want as APM, as little as they want as log, or as little as they want Synthetics, that's not an issue, that's already something we have. We actually give them differentiated pricing that tells that is more tailored to the value they agreed to get for each of those products. So I don't see anything very disruptive there or anything very different. So again, from our end, there will be no change.

All right. Thank you for the color.

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.

Thank you. I have a quick question. You mentioned a decline in usage in the public cloud. One advantage we have is that Azure and AWS report their numbers before you. It seems like your performance is somewhat tied to theirs, and given the slowdown in AWS and Azure growth, I'm curious if this is something you are considering as well, because there appears to be a correlation.

There is definitely a correlation, although we don't align exactly with them because they have different product portfolios. Some of their offerings are linked to what we provide to our customers. However, we understand the dynamics that have affected these leading providers. We've observed that their customers are trying to save for future deals, as every million dollars is significant for large companies right now. Before they ascertain pricing, they want to ensure they take all necessary actions. Currently, we are growing much faster than the cloud providers because we continue to introduce more products and are still underpenetrated in the market. Our growth rate surpasses theirs, and we are continuing to see this trend in more recent quarters.

Yes, that's correct. The other question I had relates to this topic. In theory, one of the offsetting factors is consumption usage, which is somewhat beyond our control. However, you mentioned some statistics about product uptake. Have you implemented any changes or incentivized the sales team to focus more on up-selling and cross-selling other products? Are we just riding this out since COVID affects everyone, or have you taken additional actions given the positive trends seen in July?

No, we didn't change anything. The sales incentives remain the same. Our sales approach and teams are unchanged. We believe our current strategy is effective. We previously mentioned that we successfully acquired new clients and improved product cross-selling, which continues to be our focus. Additionally, growth in usage will naturally follow as businesses transition to digital solutions and the cloud.

Yes, it makes sense. Perfect, thank you.

Your next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is now open.

It's Dan Bergstrom for Hedberg. Thanks for taking our question. Wondering about linearity in the quarter, given call-outs around the macro and then large enterprise. You provided some color in July. That was helpful, but anything else from a linearity perspective in the quarter to note or maybe different than what you expected?

Yes. This quarter was consistent with previous ones, although the scope differed slightly. From early July, we observed growth similar to what we experienced in Q1, with positive behavior regarding our new logos, which continued throughout the quarter. However, we noted lower growth towards the end of April and throughout May, before a recovery began in June, which continued into July. Overall, this quarter was noisier than we’re accustomed to, as we typically see stable month-over-month numbers. It's uncertain whether we will revert to our previous stability soon or experience ongoing fluctuations influenced by the economic climate and other factors affecting our customers' sentiments.

Great thanks helpful. And then Security Monitoring that's been generally available here for a little over three months. Just curious of initial reception from customers and security engineers. I know it's a strong demand in beta. And then maybe where should we think about you heading with security? Certainly, a long runway left there?

Yes, it's still very early for us. The product is in its initial stages and focuses on specific use cases for targeted customers. We're pleased with the initial customer interest and willingness to pay, but it remains very early in the development process. We anticipate discussing this further in the future when it becomes more significant and we have additional products to showcase. While we are excited about the progress, there is still a lot of work ahead.

Thank you.

Your next question comes from the line of Brad Rebeck from Stifel. Your line is now open.

David, I know you don't guide to billings. But I believe looking through my notes next quarter, you had some difficult comps with pretty significant contracts that paid up last 3Q, any color on that would be super helpful. Thank you.

We didn't present the pro forma because it wasn't as impactful. We mentioned that in RPOs we had multi-year contracts, and a quarter ago, those were more concentrated than what we had in creating RPO, but it didn't significantly affect the billings numbers. Therefore, there was nothing noteworthy to address.

Okay, and no issue for 3Q as we look forward?

Yes, we don't have anything to highlight on this call. There is nothing specific we wanted to mention.

Okay, thanks very much.

Yes.

Your next question comes from the line of Jack Andrews from Needham. Your line is now open.

Good afternoon, thank you for taking my question. I want to follow up on the go-to-market strategy. You mentioned that there haven’t been any significant changes, but I’m curious if, as you continue to innovate and introduce new products, you are encountering new buyers or different personas within organizations. How should we consider the implications of that? Do you think it might lead to the need for increased investments or adjustments to your strategy over time?

Yes, you're absolutely right. For most of our product portfolio, we still engage with buyers in the same way, especially regarding observability. However, in terms of security, we are beginning to encounter different buyers in some instances. Currently, we are selling as we always have, focusing our security product on specific customer segments, which is effective. We are, however, keeping an eye on this situation. Changes to our approach may occur in the future based on the data we gather and how both the product and customers evolve as we broaden the target audience. This is something we are aware of and actively monitoring.

Okay, great. Just as a follow-up, could you elaborate on how you're thinking about the opportunity for the private locations for Synthetic Monitoring product? I mean is this essentially a new way to leverage your technology for employee use? Or how do you think about the opportunity around that?

Yes, I believe it mainly pertains to the internal services being made accessible. Companies lacking a web safety user interface can greatly benefit from it, as it enables customers to automatically test and verify their APIs and web applications. Additionally, it allows them to install probes in networks they manage or that their employees use, such as at cable or cloud providers that Datadog is not hosted on, but they wish to monitor directly. This creates a wide range of possibilities for them.

Great. Well, thank you.

Your next question comes from the line of Bhavan Suri of William Blair. Your line is now open.

Hi. This is on behalf of Bhavan Suri. You announced the launch of your formal Partner Network in January, which expands support for partners through go-to-market collateral, self-training for implementation, opportunity registration, and partner locator listings. Can you discuss the early interest across partner categories in your near and medium-term channel strategy? How significant do you anticipate this channel being as a growth driver over time? Additionally, can you qualitatively address how it has been affected by the macro environment? Thank you.

Thank you. Yes, since this program is fairly new for us, we've seen strong interest and have signed up more partners than we initially anticipated. I won't disclose the exact number today, but the start has been promising. We're focusing on establishing the right processes to support and develop our partners. It's important to differentiate between levels of partnership, each having different expectations regarding what they provide to us and what we offer in return. We're currently promoting partners at various levels and have already seen some interesting outcomes. We've successfully closed significant deals through partners much sooner than expected, across several regions. While our partner network is still in its early stages and growing rapidly, we haven't observed a specific impact from COVID. We're concentrating on partners who are eager to grow and have immediate opportunities, rather than just maintaining our existing partner base. Early signs are positive, but there's still much work ahead.

That's very helpful. Thank you. And can you talk a little bit more on your international performance this quarter? Are there any specific regions where you're seeing particular strength? And additionally, could you talk about your plans for international investment this year and where you maybe see the most opportunity? Thanks.

Yes. We are continuing as we have talked about before to build out regions either when we get to critical mass and have a successful sales team or when we're landing in new territories. So we'll continue the same plan we had, which is to build out Asia complete the build out of EMEA, as well as to expand in some areas like Latin America. We saw good performance, as we've talked about before in the second quarter in EMEA on the back of the build outs we had done. And as we said all along, we're earlier in Asia, building out teams and filling out teams for the first time. So we'll continue that as part of our plan in the remainder of the year.

One interesting aspect is that the pandemic is affecting different regions at various times. Consequently, it's likely for us to experience fluctuations in performance at different intervals, which we've observed throughout the second quarter. Once again, it remains uncertain what will transpire in the third quarter regarding this.

Okay, that's great, thanks for the call.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Thanks. This is Parthiv on for Brent. Hey, Oliver, I wanted to ask about the Undefined acquisition. Can you help us frame the opportunity for observability in the application testing spaces? I guess, how should we think about the usage patterns in development environments relative to production environments?

Yes, what's interesting about Undefined is their focus on the process developers go through when they first check their code on their own machines before transitioning to the Naxi ITD process, culminating in deployment in production. This is a new area for us, as we haven't typically engaged with developers in their coding phase prior to sharing. This change brings us closer to both developers and clients, providing us with valuable information about the journey from code commitment to production release. We are very excited about this development because the company has created an impressive product in a short time, and we look forward to collaborating on a unified product. Currently, we are working to sunset the current platform and rebuild the data platform for better integration, and our team is diligently focused on this effort.

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is now open.

Thank you for including me. Oli, I'd like to ask you the same question I posed last quarter. You've been in this for 20 years and have witnessed several economic slowdowns. How does this situation compare? Last time, you mentioned that one thing you've learned is that you can't really know where it's headed until it's all over. Do you still believe that, or have you gained new insights?

Yes, we anticipated that we wouldn't know exactly what would happen. We had some expectations, and while some predictions came true, others unfolded differently. When we looked ahead to Q2 during Q1, we thought we might experience elevated churn and that specific segments of our customer base would be more impacted than others. However, that wasn't the case. Instead of the expected churn, we observed a broader slowdown among some of our largest customers. In hindsight, it's easy to understand and explain the behavior we've seen. However, predicting it beforehand was challenging. Today, we feel very confident about our position and the performance of our products in the market. Our core customers are adopting and developing various components, and they are growing with us. The only area where we are being more cautious is in our understanding of what might happen in the coming months and quarters as we hope to transition out of the pandemic.

Your next question comes from the line of Gregg Moskowitz from Mizuho. Your line is now open.

Hey, thanks very much. Hi guys, and thanks for taking the questions. For Olivier, the increased level of cloud optimization among larger customers that you saw this quarter, do you think that this will have any impact on the pace of multi-cloud adoption going forward?

I don't think so, because when customers are adopting multi-cloud, like they typically have one cloud of scale. You know, the smaller one in addition to that. So I think it is going to impact mostly their cloud of scale first. That's my guess. And maybe what we've seen in some cases, but we'll see what happens. Again, it's a little bit harder to tell, so that's my guess.

Okay, thanks. And then just for David, your growth in RPO on a year-over-year basis did decelerate quite a bit this quarter. I think you said that your annual contract billing has remained strong, and that you were coming up against some longer duration contracts from a year ago. And I know you don't break out current RPO. Just wondering if you have any commentary on duration adjusted RPO growth or just how we should be thinking about that?

Yes, you're correct. The current RPO is experiencing growth similar to the billings, and it is much closer to the revenues in the 60s. The distinction lies in the timing of multi-year contracts from the second quarter of last year. The billing period you observe did not change, but the contract duration decreased slightly because those contracts are being utilized. That's why our current RPO aligns more closely with the billings and the revenue.

Okay, very clear. Very helpful, thank you.

Yes.

And right now, I would like to turn it over to Mr. Olivier Pomel. Please continue.

Thank you. All right. So to close this call, I would like to repeat that we are very pleased with our execution in Q2 against what has been a challenging backdrop. And while the macro environment has presented near-term uncertainties, the situation has made it more imperative than ever for businesses to be digital first and in the cloud. We believe Datadog is ideally positioned to be a primary beneficiary of these long-term trends, and we continue to invest to capture that opportunity. So, I want to thank you all for attending the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.