Datadog, Inc. Q1 FY2022 Earnings Call

Thank you, Tom. Good morning, everyone, and thank you for joining us to review Datadog's first quarter 2022 financial results, which we announced in our press release issued this morning. 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 forward-looking statements, including statements related to our future financial performance, our outlook for the second quarter and the fiscal year 2022, our gross margins and operating margins including from the impact of R&D, go-to-market, CapEx and increased office activity and marketing, our strategy, our product capabilities, our ability to capitalize on market opportunities and the closing of acquisitions. 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 are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2021. Additional information will be made available in our upcoming Form 10-Q for the quarter ended March 31, 2022, and other filings and reports that we may file with the SEC. These filings are available on the Investor Relations section of our website along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com.

Thanks, Yuka, and thank you all for joining us this morning. I'll start by saying that we are pleased with our execution in Q1 as we continue to drive high revenue growth, along with strong profitability and strong cash generation. To quickly summarize our Q1 financial performance, revenue was $363 million, an increase of 83% year-over-year and above the high end of our guidance range. We had about 19,800 customers, up from about 15,200 in the year-ago quarter. We ended the quarter with about 2,250 customers with ARR of $100,000 or more, up from 1,406 in the year-ago quarter. These customers generated about 85% of our ARR. We are seeing strong efficiencies in our business model with free cash flow of $130 million and a free cash flow margin of 36%. Our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted our newer products. At a high level, we saw positive business trends in Q1. Usage growth from existing customers was strong and consistent with historical trends as customers continued on their cloud migration and digital transformation journeys, and the Datadog platform continued to expand and deliver more value. New logo ARR was very robust and churn remained low and in line with historical rates. All these factors together led to another strong quarter of ARR added. It was, in fact, our second best quarter of ARR added beside from Q4 of 2021. Next, our platform strategy continues to resonate in the market. As of the end of Q1, 81% of customers were using two or more products, up from 75% a year ago. 35% of customers were using four or more products, up from 25% a year ago. And 12% of our customers were using six or more products, up from 4% last year. We saw strong growth across the products in our platform in Q1. For example, infrastructure monitoring continues to grow at a rapid clip and exceeded three-quarters of a billion dollars in ARR in Q1. Our APM suite and log management products had a strong quarter and are in hyper growth mode. As a reminder, our APM suite includes core APM, synthetic studies on monitoring and continues on hire. We are also very pleased with the growth of our user experience product, which are synthetic and relays our monitoring more specifically. These products together exceeded $100 million in ARR in Q1. In security, we are seeing very rapid growth. It's still early days, and we're growing off a smaller base, but we continue to see strong adoption with thousands of customers getting security coverage through the Datadog platform. Now let's move on to products and R&D, where our teams delivered another strong quarter of innovation. Just 12 months after we acquired Sqreen, we are pleased to announce the general availability of application security monitoring last week. Some applications and APIs are some of the most common sources of data breaching, yet companies typically have no ways to effectively detect attacks, so they could be less than good for days or weeks. Some other approaches to application security aim to find vulnerability before code is in production. But these solutions offer and slow down development cycles and overwhelm teams with false positives with no easy way to prioritize these issues. The Datadog Application Security Monitoring product leverages the full execution context of applications running in production. This allows teams to focus on attacks that actually matter and provides an immediately actionable remediation path. Application security monitoring is the 14th product in the Datadog platform, and this is the fourth product within our Cloud Security platform alongside Cloud Team, Cloud Workload Security, and Cloud Security Posture Management. With this, Datadog now provides security insights across metrics, traces and logs, and we consider these altogether as version 1 of our Cloud Security platform. Remember that we are still in the early stages with our security efforts and have much to do to further build out this product, but we are pleased with our progress so far and the usage we are getting from our customers. Last month, we also announced that we expanded our Watchdog AI capabilities to include root cause analysis and log anomalies detection. Root cause analysis automatically identifies cause relationships between different systems across infrastructure and services and pinpoints their root causes. Watchdog also automatically identifies the business impact of any given issue using data from our range of monitoring products. This means not only identifying which mobile applications are impacted, but also the exact users that are affected. This new capability often solves in minutes, the problem that would otherwise take hours by specialists in customers' organizations. Log Anomaly Detection, on the other hand, automatically understands and baselines normal patterns in logs and proactively discovers anomalies such as new patterns, meaningful changes in negative patterns, and other outliers. By surfacing these unusual log patterns, Log Anomaly Detection helps teams find and fix issues faster. In addition to this Watchdog announcement, our engineers released dozens of features and expanded product capabilities in Q1. To give a couple of examples, in Real User Monitoring, we announced the general availability of iOS crash reports and error tracking, as well as a number of improvements to help customers analyze and understand the users’ performance. In Cloud Security Posture management, we added support for the Azure platform, enabling customers to understand their compliance posture across AWS and Azure in one place. In Continuous Profiler, we now support all commonly used languages, including C, C++, RUST, PHP, and .Net. And across Datadog, numerous additions of rules, data sources, and integrations are enabling our customers to solve their problems from end to end without leaving the Datadog platform. Finally, this morning, we announced that we signed an agreement to acquire Hdiv. Hdiv is an application security product, which provides a highly accurate vulnerability detection at runtime. It offers interactive application security testing capabilities, which tie vulnerabilities to exact file and line numbers in the code. Unlike other solutions in this area, Hdiv’s rate of false positives is very low, enabling customers to focus on vulnerabilities that actually matter. We believe Hdiv’s capabilities and strong team will be an excellent part of our Cloud Security platform, and we're looking forward to integrating the capability into Datadog as soon as this acquisition closes when regulatory requirements are met. Now moving on to sales and marketing, our sales team continued to execute and have delivered a strong quarter. Let's discuss some of our wins in Q1. First, we signed an eight-figure upsell with a next-gen fintech company, which was our largest ever deal on an ARR basis. This customer is experiencing explosive growth in demand for its products, and availability and performance of their system is critical to avoid loss of revenue. These customers started with us three years ago with just infrastructure monitoring, and its expansion now includes six of our products. Next, we had a high six-figure upsell with a global shipping company. This customer is expanding with Datadog to help them move forward with their Azure migration. In addition to using five Datadog products, they are now working with our new services team to help implement best practices on a number of business initiatives that involve increased Datadog adoption. This customer expects to consolidate ten disparate monitoring tools as they expand their use of Datadog. Next, we had a seven-figure upsell with a U.S. federal entity. We were able to deepen our relationship with this customer after we achieved FedRAMP Moderate status. Before Datadog, this customer had siloed infrastructures, applications, networks, database and customer experience monitoring, which caused blind spots and long times to resolution. With this expansion, they are replacing both homegrown and commercial observability tools and enabling DevSecOps cultures with visibility across the full stack and a single source of truth. Next, we signed a seven-figure upsell with a leading payment company. Earlier this year, this customer’s open-source logging tool went down, making them blind, but they were able to regain visibility by getting Datadog Log Management up and running within a few hours of that crash. Not only did this customer regain log visibility very quickly, but they were also able to use the Datadog platform to scrub personally identifiable information to meet security and compliance requirements. As they expanded with Datadog, they have been able to cut the number of engineers who maintain homegrown and print solutions in-house and reassign engineers to other aspects of work in the organization. With this renewal, this customer now uses thirteen products from Datadog. Next, we had a six-figure land with a major U.S. hotel company. This company lost half of its engineering team during COVID and needed to use its staff more efficiently. At the same time, it was embarking on an AWS migration and its existing tools were not providing the visibility it needed. By consolidating Datadog, this customer expects to future-proof its cloud strategy and move towards unified end-to-end management across their on-prem and AWS environment. Finally, we had a seven-figure land with a major European car manufacturer. This customer was frustrated with its existing monitoring tools, which left them with limited visibility into incidents that sometimes impacted millions of users globally. As they were trialing Datadog, they were able to solve within minutes an issue that used to take them days. With Datadog, this customer expects to consolidate multiple commercial and open-source tools across AWS and on-prem stacks. That's it for this quarter's highlights. I want to thank our go-to-market teams for their hard work in delivering a strong start to 2022 after a very busy end of the year. I also want to give a special shout-out to our tech solutions and support teams for making our customers successful and enabling them to expand with our own platform. Moving on, we feel very good about the demand environment. And as we look over the medium and long term, our outlook hasn't changed. We remain confident that cloud migration and digital transformation are drivers of our long-term opportunities and our multiyear trends that are still early in their life cycles. We believe it is increasingly critical for companies to embark on these journeys in order to move faster, create competitive differentiation, enable strategic change and serve their customers. We believe we can help customers manage the complexity that comes with this transformation, and that Datadog's unified platform is more than ever critical to understand, improve, and secure their modern stacks and businesses.

Thanks, Olivier, and good morning to everyone. To summarize, we delivered strong financial performance in Q1. Revenue was $363 million, up 83% year-over-year and up 11% quarter-over-quarter. Usage growth with our existing customers was strong once again in this quarter. And new logo ARR growth was healthy, particularly given the typical slowness that we see in Q1. Let's go into some more detail. First, growth of existing customers was strong in Q1, and our dollar-based net retention remained above 130% for the 19th consecutive quarter. Usage growth was strong across the Datadog platform and in line with historical trends. We also saw strong ARR growth in each geographical region, and growth was similar across geographies including EMEA. In early Q2, we began shutting off service to customers in Russia and Belarus. We have about 200 customers in these two countries and their contributions to revenue is immaterial. Our go-to-market teams delivered another strong quarter. Total customers grew 30% year-over-year and customers with $100,000 or more of ARR grew 60% year-over-year. In addition, we saw strong growth in million-dollar customers. We are pleased to be serving more customers and believe we are still in the early stages of our opportunity in worldwide customer acquisition. New logo ARR was very robust, particularly given that our sales teams participate in sales kick-off and other planning processes at the beginning of Q1. Remember that given our usage-based revenue model, new logo wins generally do not immediately transfer into meaningful revenue. Our platform strategy continues to resonate with customers, with 81% of our customers now using two or more products, 35% using four or more products, and 12% using six or more products at the end of Q1. Finally, churn has remained low. Our dollar-based gross retention rate continues to be in the mid to high 90s and was stable quarter-to-quarter. It is similar across our customer segments and major products. Billings were $445 million, up 103% year-over-year. Billings duration in Q1 was similar to the year-ago quarter and within the range we've seen historically. We closed several large deals in Q1, including the largest deal by ARR that Olivier discussed earlier, which led to billings growth being higher than revenue growth in Q1. Remaining performance obligations, or RPO, was $858 million, up 85% year-over-year, and contract duration was similar to the year-ago quarter. Current RPO growth was in the mid-80s year-over-year. We continue to believe revenue is a better indicator of our business trends than billings or RPO as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts. Now let's review some key income statement results. 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 $292 million, representing a gross margin of 80%. This compares to a gross margin of 80% in the last quarter and 77% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold this quarter. In the mid to long term, we continue to expect gross margin to be in the high 70s range. Operating income was $84 million or a 23% operating margin compared to operating income of $20 million or a 10% margin in the year-ago quarter. We are experiencing significant business efficiencies on strong revenue growth. In Q1, we had not yet returned fully to in-person meetings, events or are fully back in the office. Turning to the balance sheet and cash flow statements, we ended the quarter with $1.7 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $147 million in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $130 million with a free cash flow margin of 36%. Now for our outlook for the second quarter in the fiscal year 2022. We remain optimistic about our long-term growth opportunities. We continue to see cloud migration and digital transformation as trends that are still in relatively early stages, and we are investing aggressively and are successfully executing against these long-term opportunities. With the usual conservatism applied, our outlook is as follows: For the second quarter, we expect revenue to be in the range of $376 million to $380 million, which represents 62% growth year-over-year at the midpoint. Non-GAAP operating income is expected to be in the range of $49 million to $53 million, and non-GAAP net income per share is expected to be in the range of $0.13 to $0.15 per share on an approximately 347 million weighted average diluted shares outstanding. For the full fiscal year 2022, we expect revenue to be in the range of $1.6 billion to $1.62 billion, which represents 56% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $240 million to $260 million, and non-GAAP net income per share is expected to be in the range of $0.70 to $0.77 per share on an approximate 349 million weighted average diluted shares. Now some notes on our guidance. First, when providing guidance, as usual, we use more conservative assumptions than historical performance. Second, our strategic focus remains to invest aggressively in R&D and go-to-market to optimize for long-term growth. In Q1, we are pleased to have had our best-ever quarter of hiring, and we plan to continue hiring aggressively throughout 2022. Our North America and EMEA employees returned to the office at the end of Q1, and our APAC employees are returning to the office during Q2. In addition, trade shows and other events are picking up in Q2, as is employee travel. In the past, we have framed the benefit of stopping in-person T&E and marketing events during COVID as 300 to 400 basis points of margin impact. We expect our return to office and increased in-person marketing events, as well as our headcount growth to more fully impact margins in Q2 relative to Q1. Even as we embark on these investments and our return from COVID, we remain solidly profitable, as indicated by our guidance. Next, regarding income tax expenses in Q2, we will have a provision of about $3 million related to the Sqreen acquisition as well as our typical provision, mainly related to our international entities. Finally, as we discussed last quarter, we are catching up on office build-outs in 2022 and expect CapEx as a percent of sales to roughly double compared to 2021. In conclusion, we are very pleased with our results in Q1. We continue to attract more customers to the Datadog platform. We are broadening our platform's capabilities in observability, and we launched application security monitoring in Q1. We are working very hard to execute against our opportunities, and I want to conclude by thanking Datadogs worldwide for their efforts. With that, we'll open the call for questions.

The first question comes from Raimo Lenschow with Barclays.

Congrats as well, an amazing first quarter. I wanted to ask a question that I get a lot from investors, Olivier. If you think about your efforts around security, how do you see that playing out in the long run against the pure-play security players? Is that complementary? Are you kind of moving to the same turf? Is it like competition? How should we think about that? And then second thing is on the ongoing investments into R&D, et cetera. Can you talk a little bit about the benefit you're getting from being just a pure cloud provider and hence, your speed of innovation potentially could just move quicker than other players that have to work in on-premise and on the cloud environment?

On security, so first of all, the way we see ourselves in the ecosystem is we don't compete with everyone in the field there, like security is very wide. There are many different categories and subcategories in there where we want to play a major role in securing production, the applications in production environment and all of the life cycles that relate to that in terms of development operations and iterative changes to these environments. So that's where we're starting. We expect to compete with others there. We come from a different place in that we come from having all of the observability data already being deployed end-to-end on those systems and having active users, the integrality of the development and operations teams in these companies, and we think that's what gives us strength there. To the other point you brought up around the speed of iteration, we definitely benefit a lot from being cloud-native and from being SaaS only. We actually get a lot of information about what customers do with our product and how they use it, and we see immediately what's being used, not what’s working, or not. So that helps us iterate very fast. We also benefit from having a lot of users. I mentioned that in the first part of my answer, but we're being used every single day by every single developer and operations person. That's a lot more than what you see on the typical security products. And so that gives you a lot more information about what you can do and what you can do better. It also gives you more leverage when it comes to actually solving the issues at the secure level. And that's part of the value prop we give to our customers.

The next question comes from Kash Rangan with Goldman Sachs.

Congratulations on a phenomenal quarter. Maybe I'm curious to get your take on the hyperscalers. Given the broadening product suite that Datadog is undertaking, how are these conversations changing with the hyperscalers? And one for you, David. As the economic environment and the outlook for GDP growth continue to be a little wobbly with higher rates, how should we think about the defensibility of the Datadog consumption business?

On the question about hyperscalers. We work hand-in-hand with hyperscalers more and more. We cover a lot more of the management surface for our customers who are also their customers. We help their customers be more successful and move to the cloud faster. As such, we help generate revenue for the hyperscalers, and that's why this partnership works so well with them. We keep improving on those partnerships and developing them. I think we've announced this quarter some improvements to our Azure partnership, for example, where we are now part of the Golden Pass presented by Azure for migrating to the cloud. We're seeing some great customers onboarding, thanks to that. David, would you like to take the other question?

Sure, thanks, Kash. We believe that digital and cloud projects are still very high priority and are not being deprioritized. We haven't seen that. We think we're still early on. So with the data we have so far, we think there will be continued strong investment. There is always some volatility across our customer base. Our customer base is very well diversified across industries, and we benefited from that over time. So whereas we're not macro forecasters, and there may well be some sensitivity, we believe the long-term trends in digital migration and cloud will still be very strong throughout that cycle.

The next question comes from Fatima Boolani with Citi.

One quick one for you, just as it relates to the deeper strategic and technical penetration within the DevSecOps arena. I mean, it sounds like your thesis is very much because you have the critical mass of data and the data gravity as it relates to your observability use cases, you're able to parlay that in a more meaningful way for security. I'm wondering why not partner with some of your peers in that space versus kind of go at it alone? And then a quick follow-up for David, please.

Yes, that's a great question. We contribute two key aspects to security. First, we have the data gravity, being in the flow of information for nearly everything tied to our customers’ infrastructure, applications, and users, which is a significant advantage. Second, our platform is actively used by everyone in development and operations throughout the day. This level of usage is not something most typical security products cater to, as most are designed solely for security teams. Finding a product tailored for developers and operators is challenging. This is why we've focused on developing these capabilities. While we do collaborate with many other companies in the industry, we believe we approach the problem from a unique angle that provides us and our customers with greater leverage in addressing security challenges.

David, regarding the difference between your reported revenue growth and billings, it's likely one of the largest differences we've encountered in recent quarters. Considering your comments about invoicing duration remaining relatively stable, I would assume it to be around 7 to 8 months. I'm still interested in understanding why there is such a significant acceleration in billings compared to revenue growth. Could you explain that for us and share when you expect this gap to close?

As I mentioned, there is variability in billing and RPO versus revenue based on when bills go out. We still have, for the most part, in our larger contracts pretty much annual billing. The sending out of a large annual bill might move the duration a little bit, but not a lot. The strong performance of billing was very strong and indicative of the business. It was complemented by the fact that in this quarter, we sent out the bill for some large contracts upfront annual billing and the timing of that causes the variability. Over the average and over the course of the year, that balances out with the timing of the billing, and we believe that billing converges with revenue growth. We remind everybody that revenue growth and implied ARR growth is a better metric of the progress of the business.

The next question comes from Sanjit Singh with Morgan Stanley.

Olivier, you mentioned FedRAMP in your script. I should have introduced another topic we've been hearing from your partners, which is penetration observability in some underpenetrated industries. From your perspective, looking at the various industries Datadog is involved in, which ones do you believe could become greater adopters of observability compared to some of the more traditional technology and e-commerce sectors?

We've observed that nearly every industry shows signs of shifting to the cloud. The pace at which they adopt this technology largely depends on their willingness to embrace technological changes and how often they interact with users online. Initially, we saw sectors like finance, which generally leads in technology, along with e-commerce and online media, taking the lead. Today, we are witnessing a broad spectrum of industries migrating to the cloud. For instance, we've highlighted an automotive manufacturer and a hotel chain among our clients, as well as companies that supply plumbing. Essentially, every facet of the economy is moving in this direction. However, it's important to note that some industries are adopting later than others. There is less cloud penetration in traditional sectors that are not as technology-driven, but we remain optimistic about their eventual participation. Regulated industries, particularly government, tend to adopt technology more conservatively, and their purchasing options are often limited. This is why achieving FedRAMP certification is crucial for us, and we continue to invest in obtaining more certifications like FedRAMP to expand into additional categories across different regions.

And then just one follow-up on one of the wins that you guys called out, I think it was a European manufacturer who I think was engineering talent constrained and they moved off of their DIY solution. If we take out the topic more broadly, you’d think that the demand for talent is probably going to get worse. In terms of the DIY observability market converting to more commercial out-of-the-box value like Datadog provides, how much of an opportunity do you think that could be for the business?

I believe this has always been part of our opportunity, and it enhances the attractiveness of our value proposition for the future. As you noted, there will be fewer software engineers available than what the market requires, and this will likely worsen over the next few years. Our customers will need solutions that help their current staff become more efficient and guide them toward what really differentiates their offerings, rather than focusing on building and managing various infrastructures. This trend ultimately benefits us. Additionally, software tends to decrease in cost over time, and we fit into that narrative. We assist our customers in maximizing their resources, automating tasks, improving productivity, and optimizing their infrastructure. We enable them to deliver projects that enhance their interactions with their customers. That's where our strengths lie.

Next question comes from Brent Thill with Jefferies.

David, in your guidance, I know you mentioned you're not really seeing the macro issues, but are you assuming a similar close rate on your pipeline? Are you taking a more conservative close as it relates to the back half of what you're guiding to for the year?

Like we mentioned earlier, we tend to adopt more conservative estimates for close rates, which means new customers and more cautious usage compared to our historical figures. This approach remains consistent with our guidance and aligns with our past practices.

Olivier, that $10 million upsell, can you just speak to the pipeline of these larger transactions, what you're seeing as your customers expand?

We see many more customers in that range, right? Customers are riding this adoption curve with us, where we solve bigger and bigger problems for them, they use more and more of our products. They move more and more of their infrastructure to the cloud to start with, and they themselves are scaling. These are all multipliers, increasing our footprint with them. So we have a healthy pipeline of those. We mentioned we handpick a few in every one of those calls, but that's definitely not an isolated case. That customer is actually in the tens of millions, and we don't expect that to be an isolated case.

I think we mentioned the strong continued growth of $100,000-plus and mentioned even though we don't give out the 1 million customers every quarter, mentioned continued strong growth in million-dollar customers. That's indicative of that. We have many customers who are graduating from smaller lands to the $100,000, the 500,000 class, and the million class and above as our model has been all along.

The next question comes from Kamil Mielczarek with William Blair.

Congrats on the great quarter. A question on pricing, as your largest customers scale and standardize on Datadog. Can you talk about how conversations have changed around pricing? Are there any particular modules where you're seeing relatively higher levels of pushback on cost given the rapid growth in data recently and the pricing changes made by some of your competitors in the last two years?

Any time you have someone paying you tens of millions of dollars a year, there's going to be a conversation about price. Typically, what's going to be the most negotiated as part of that is the biggest part of the deal, which for some customers is infrastructure, for some others it's APM, and for many customers, it's logs because that's the area where data can grow in a way that's somewhat decorrelated from the size of the company infrastructure or the value of the company applications. Our approach there really is to give as much flexibility as possible to customers, so they can align their pay with the value they receive. We’ve shipped in the past many new features around that to give them more tiers for storing data, more ways of doing just-in-time sampling, archiving, and bringing back data from archives, and provide more controls and more levers, and we expect to do more of that in the future. It’s a very healthy conversation. We do expect that when customers are fully at scale with us, we’ll gain more and more of a wallet share from them. At the same time, the revenue we get won't grow linearly with the data volumes they send us; that's natural, and that’s healthy.

And if I could just follow up on free cash flow, generation has been very strong, 36% margin in the quarter, and I think, 28% for last year. How are you thinking about managing free cash flow margin going forward? Is the strength just a function of better-than-expected growth and maybe a tight labor market? Or do you see high 20s, 30% as a sustainable level?

I believe our long-term free cash flow has been slightly higher than EBIT. This reflects the growth and efficiency of our business. As we indicated, we plan to return to more investments in Q2, whether that be in marketing events or office improvements. We expect this to demonstrate continued efficiency in the business, which has historically correlated with performance slightly exceeding EBIT.

The next question comes from Matt Hedberg with RBC Capital Markets.

Oli, I wanted to go back to security. You've obviously had a lot of success there, and you're adding Hdiv this quarter. How do you see your sales force evolving over time? And maybe even the thought of a security overlay team at some point?

Yes, so we're open to anything there. We haven't made any drastic changes to that. We're still focused right now on getting in front of our existing customers with these products and getting them to adopt the products and writing the maturity of those products with us to make sure they are as broadly applicable as possible before we accelerate on the go-to-market for them. We're very happy with where we are. We're exactly where we want to be. Actually, we get a lot of paying customers with skin in the game and a great amount of veracity in terms of development. We are expecting to test a few things on the go-to-market side in the coming few quarters, and then we'll see where this leaves us.

And then you guys have always had a very services-light model, so easy to use. As you continue to scale up in the G2K, are there additional steps you can do to maybe even enable more synergies within a GSI community?

Yes, so there's two things we're doing. One is we're investing in our partnerships with SIs and with the channel in general. So we're doing more there. We have also started productizing some service offerings. We actually called one out in one of the customers we released in the call. We have a small services team today that has a few packaged offerings that mostly revolve around accelerating adoption of Datadog and making sure we help customers that need that help transform their businesses around the way things are running with Datadog. So we're investing on both sides. Whatever we package ourselves with our own team will then be scaled through third-party partners, GSIs, and others.

The next question comes from Michael Turits with KeyBanc.

You're doing more application security, and you've announced some things for observability in the developer pipeline. Can you talk about how far you will be going in terms of a shift left towards more of the development side of things, including possibly around static code or source code? And as I said, just that shift left towards developers?

That's a great question. We definitely are doing more and more on the shift left and developer side. Obviously, we've talked about security quite a bit, and a big part of that is application security, which is a bit of a known category, so it’s there, I think it's a little bit different in how we approach it, a little bit different in the cloud, but the category has been there before. We're also investing in new categories, and you mentioned the CI/CD observability. That's a brand-new category that we actually have a product in the market today that we started charging for. We don't have any numbers to share today, but we are actually very, very pleased with the way this product is being received by customers. Overall, we think we're going in the right direction there. There will be more we want to do. I mean you brought up Hdiv, which also brings a bit more around closer to the source code and vulnerability management and things like that. We're planning more to do there, but we don't have anything to announce today.

And can I just ask, I think an expansion, or take to Matt's question in terms of facilitating your broader product line. Anything in the customer success area that has to be changed or post-production engineering or professional services as you have a broader and more complex offering?

Yes, we are significantly expanding those teams and continuously improving how they are organized to better target specific customer segments. In certain cases, we are also developing products tailored to those segments. This is part of our efforts to enhance the customer success, tech solutions, and support teams, in which we are making substantial investments. I want to acknowledge these teams for their excellent work in helping our customers leverage a wide range of our products. I believe we will see more successes in this area moving forward.

The next question comes from Brad Reback with Stifel.

Oli, as the sales force and the marketing team return to face-to-face events, any reason to think that we shouldn't see some level of acceleration in upsells to the larger part of the installed base as well as the potential to land even bigger with new deals?

It's possible. We definitely have return to investment in some things that we were not doing for the past 2 years but are doing again in in-person events, in particular. I would say it's too early to tell whether it gives us an edge again on that side or whether it's just upping the table stakes for everyone for that. But definitely, we're investing with the expectations of returns on that.

The next question comes from Gray Powell with BTIG.

Congratulations on the strong results. So yes, I mean you've clearly been seeing very good traction moving into larger enterprise and Fortune 500 accounts. How does the competitive environment change as you move up market? Do you end up competing against a different set of vendors? Or how should we think of that impacting sales cycles?

I'm sorry, I'm going to give you the most boring answer ever, but we see no change. The situation there is very much the same as it was last quarter and even last year. We still focus largely on net new and cloud environments. We land fast and small mostly, and we end up growing quite a lot with those customers at the largest enterprises. Sometimes, but not all the time, we're going to do a big displacement of usually a suite of tools that makes this homegrown and some of the other players in log or APM or all of the above. These tend to be the larger lands because they start larger as they replace existing tools. This is still not the majority of the go-to-market and customer acquisition. I think it shows that the product wins about all sorts of situations, but our focus is still on net new and cloud environments.

I have a quick follow-up regarding security. Can you provide any updates on the security roadmap, particularly about the key features you plan to implement as you transition to Version 2 of the security platform? Specifically, do you think there is a possibility to more directly tackle the endpoint security use case?

Endpoint security is not what we have in mind today. There are many things we want to do at the intersection of DevOps, production environment, applications. It's a gigantic problem space that's not well handled today. We definitely have that in our sights. In terms of what we can do in the roadmap, interestingly, there are many things we're doing today that are not branded security that are part of other products that play a big role in security. One of the questions we have internally is how we actually draw the line around the security suite versus the rest of the developed platform in a way that it doesn't confuse everyone. We mentioned in the last call our sensitive data scanner product, which is actually used for security use cases but is currently part of our log management product. We have some similar situations with our network monitoring product that also listens to data and uses it for security use cases but is not part of our security offering. There are branding and packaging and product suite questions that we'll have to answer ourselves there.

The next question comes from Steve Koenig with SMBC Nikko.

Congratulations on the quarter, it's great to be covering your team. I wanted to ask about pricing from a different perspective. I appreciate your insights on how you assist customers in managing their costs as they scale with Datadog. If I consider it from another angle, particularly regarding how you maintain your pricing relative to infrastructure costs as hyperscalers enhance their price performance over time for compute and storage, I see that you have a straightforward pricing model, which is positive. However, I am curious if host-based pricing needs to adapt as hyperscalers reduce their costs. Additionally, with log management, will those prices also need to decrease as hyperscalers improve their price performance?

There are a few things to consider. The type of hosts that our customers buy is also changing over time; they're getting larger and larger instances from the cloud providers that cost more. Even though the price for the same CPU on two different years may reduce a little bit by the hyperscalers, overall, even with all the improvements from the cloud providers and the software industry at large, our customers still experience a dramatic increase in complexity. This means that a lot of the value gets shifted from running the infrastructure itself to understanding it and managing it, which is what we do. So in the end, we are in a position where we can maintain or even increase prices while still delivering more value for our customers and saving them money. When you look at things that are tied to very specific units, like the price per gigabit, the price per gigabyte will likely go down over time. Right now, the form it takes is that there are more options we provide to customers to do different things with different price points. But in the long run, if you fast forward 20 years, you wouldn't expect to pay the same thing for a gigabyte in 20 years than you do today. At the same time, you'll have many others managing more data at that time.

The next question comes from Joel Fishbein with Truist Securities.

Olivier, you spoke a lot about several different potential products in the pipeline as you guys are developing internally. I'm hoping you might give us a little bit more color about the mid- and longer-term plans with regard to maybe areas that you plan to address with new products.

We have many new products in development, and you will need to attend our events and conferences to learn more about them. We expect to showcase more in the upcoming quarters. We are continuing to focus on observability, where we still have significant opportunities to enhance our offerings and deliver value to our customers in a substantial market. Furthermore, we are making significant investments in security, which will become evident in our upcoming initiatives. We are also advancing developer workflows, particularly with CI/CD and various security features. Additionally, we are enhancing our user experience products in the APM Suite to include behavioral and user analytics, as well as business analytics, with more functionality anticipated in the real-time BI space. We are also investing in IT service management products, beginning with incident response and resolution, and you can expect further updates in this area as well. While I can't provide additional specifics at this time, we have numerous goals for the year and many products in progress. We are optimistic about the opportunities ahead, as we have extensive contact points within our customers' infrastructure, applications, and teams, allowing us to address larger challenges over time while facilitating seamless adoption of our platform, which has been contributing to our consistent free cash flow margins. We are excited about the products we are developing, but there are no new announcements to share today.

The next question comes from Adam Tindle with Raymond James.

Olivier, I just want to start on Hdiv. The acquisition announced today with a vulnerability focus. Could you help us categorize where this competes in the stack? Specifically, are we focused on the endpoint like CrowdStrike with the spotlight product or critical assets like server and data center where VM players like Tenable, Qualys and Rapid7 fit? Where does this fit within the stack and vulnerability, and talk about the competitive advantage that they'll bring?

It focuses on applications. These are the applications that our customers build as well as the various libraries and dependencies that are brought into the mix as our customers build these applications. This will find its right place on the application side of our cloud security platform. We don't have much more to share on how this will be combined from a product perspective. We see it as great technology, a great product, and also great expertise to add to the team and add to our momentum on the security side. Also, it does have typical regulatory approvals to get disclosed.

Seasonality has just been a constant topic. It seems like since last quarter, I’m sure you’re answering a bunch of investor questions intra-quarter about it. The second half is a little lower as a percent of total than years past based on guidance. Anything for us to consider on seasonality now that you’re a billion-dollar-plus organization moving forward? It's always been a similar situation. The fourth quarter typically shows a strong performance in customer acquisition. Like many companies, we experienced a slight slowdown in new customer acquisition in Q3, although it was a very strong quarter overall. Generally, the beginning of the year tends to be a bit sluggish in terms of getting started, but this quarter didn't see as much of that. The same seasonal trends are in play, though they are relatively minor compared to previous years.

This concludes our question-and-answer session. I'll hand the conference back over to CEO, Olivier Pomel, for any closing remarks.

All right. Thank you all for attending the call. I want to again thank all Datadogs, and remind everyone that we've had our most successful hiring quarter in Q1. So thank you all, and we're all excited to be here, and we'll see you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.