Good day, and thank you for standing by. Welcome to the Q3 2022 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Yuka Broderick, Vice President of Investor Relations and Strategic Finance. Please go ahead.

Thank you, Lauren. Good morning, and thank you for joining us to review Datadog’s third-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 fourth quarter and the fiscal year 2022, our gross margins and operating margins, our strategies, our product capabilities, and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intent, 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-Q for the quarter ended June 30, 2022. Additional information will be made available in our upcoming Form 10-Q for the quarter ended September 30, 2022, and other filings with the SEC. This information is also available on the Investor Relations section of our website along with the 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. With that, I’d like to turn the call over to Olivier.

Thanks, Yuka, and thank you all for joining us this morning. We are pleased to report strong results in Q3 as we continued to execute on our platform vision. Let me start with a review of our financial performance. In Q3, revenue was $437 million, an increase of 61% year-over-year and above the high end of our guidance range. We had about 22,200 customers, up from about 17,500 in the year-ago quarter. We ended the quarter with about 2,600 customers with ARR of $100,000 or more, up from about 1,800 in the year-ago quarter. These customers generated about 85% of our ARR. We generated free cash flow of $67 million, with a free cash flow margin of 15%. And our dollar-based net retention rates continued to be over 130% as customers increased their usage and adopted more products. Next, our platform strategy continues to resonate in the market. At the end of Q3, 80% of customers were using two or more products, up from 77% a year ago; 40% of customers were using four or more products, up from 31% a year ago; and 16% of our customers were using six or more products, up from 8% a year ago. We continued to be pleased with this ongoing adoption of multiple products in our platform, which indicates the additional value we are bringing to our customers. We continue to see strong ARR growth with our newer offerings and our products introduced since 2019, which excludes infrastructure monitoring, core ATM and wealth management remain in hyper growth mode. I also want to highlight a couple of our newer products, Database Monitoring and CI Visibility. We started charging for these products three and two quarters ago, respectively, and each has already exceeded 8 figure in ARR and more than 1,000 customers. As we further develop them, we are confident these products will lead to a broader set of use cases for a larger group of customers over time. Now moving on to the core business drivers. At a high level, Q3 was overall very similar to Q2 with strong performance in new logos and new product attachment activities tempered by growth of users from existing customers that further healthy was below our long-term historical average. This summed up to sequential net ARR added that was similar to Q2. To give you a bit more color, first on the usage trend. As we said, user growth was overall solid, but consistent with Q2 trends. From a product perspective, user growth was more homogeneous among our major products than it had been in Q2. Looking at industry verticals, similar to last quarter, we continue to see a more pronounced effect in consumer discretionary and particularly with our customers that are fully scaled into public cloud. Note that the consumer discretionary vertical represents low-teens percent of our ARR and includes e-commerce, as well as food and delivery. All that said, we are pleased with our Q3 strong performance. Revenue in Q3 grew 61% year-over-year and 7% quarter-over-quarter, with all of our products meaningfully outperforming the growth of the large cloud providers. While the macroeconomic environment is likely to remain a headwind in the near term, we continue to see positive trends underpinning our business and remain bullish about the long-term opportunities, and aggressive with our investment plan. First, we continue to see strong growth in new logo ARR, including some large wins in traditional industries. We'll talk about some of those in a bit. Second, our sales pipeline is strong heading into Q4 for both new logos and new products. We see great opportunities across customer sizes, geography, and industry. Alongside our strength in new logo ARR, which gives us confidence that visual transformation and cloud migration remain a top priority. It’s perhaps even more critical in difficult times when businesses need to be more agile and do more with less. Remember that given our usage-specific models, new logo wins generally do not immediately translate into meaningful revenue, but they are very important to us as new customers expand their usage in subsequent quarters and years. Third, we are seeing continued expansion on our platform as indicated by customers adopting more of our products. Finally, churn remains low and hasn't changed with gross revenue retention steady in the mid to high 90s. We believe this high-gross revenue retention is indicative of our business criticality to our customers. Now let's move on to product and R&D. A few weeks ago, we had our Dash user conference, which was an occasion to showcase the expansion of our products and the results of our R&D investments. Let me go through some of these starting with visibility before moving on to security, developer experience; and finally, the ability to take action within Datadog. First, we are doubling down on our investments in visibility, starting with two new products, Data Stream Monitoring and Cloud Cost Management, both addressing growing needs and strong demand from our customers. We also extended our APM fleet to offer mobile app testing, user heat maps and distributed tracing. On the network side, we added 70 traps and Metro monitoring to our products. On the logging side, we announced log management, which coupled with live archives and the visibility pipeline, are at the center of our customers' better management. Responding to customer demand, we also expanded our sensitive data scanner beyond logs to identify sensitive data across APM and log management. And across the platform, we've announced expanded support for open telemetry, PCI compliance for APM and Log, as well as GDPR compliance across most of Datadog. Second, we are extending our security platform, and we announced cloud security management, which brings together cloud workload security, cloud security posture management and resource catalog as a frictionless, reach and context-aware, cloud-native application protection platform or CNAP. We launched massive protection for application security management to enable blocking attacks in real time directly within Datadog platform and we now provide vulnerability monitoring to give our users a high-fidelity picture of all application production as well as the dependencies, vulnerabilities, and attack vectors. Third, we followed through with our recent entry into developer experience. We announced continuous testing to facilitate end-to-end testing as soon as the code is developed, which increases quality and velocity at the same time. And we showcased intelligent test runner using our rich APM and profiling data to automatically keep unit tests and drastically reduce time and money spent on CI/CD. Fourth and last but not least, we announced new product areas that take our platform for observability to allowing our users to take action and respond all within Datadog. We announced our asset management products to allow our users to correlate and summarize alerts, events and issues, merging associated data in order to resolve problems directly from the Datadog area of concern. We also announced Datadog workflows, which allow customers to develop and run automated DevOps or security remediation using a no-code editor and already more than 200 integrations with services they use. We announced lease availability for hosting the collaboration meeting tool that we acquired last year, RUM's real-time screen sharing installation point in Datadog. Finally, we kept on expanding the scope of our watchdog AI, further automating the detection and guiding the resolution of application and cost problems. As for dominance from NASH, as you can tell, the team has been hard at work, and I'm extremely proud of our innovation velocity and focus on our customers. Lastly on products, as we announced in the press release issued this morning, we acquired Cloud Craft, a planning design tool used by tens of thousands of cloud architects to create visualizations, including real-time health, configuration and cost data, and we are very excited for their team to bring to Datadog. Now moving on to sales and marketing. Let's discuss some of our wins in Q2. First, we signed a 7-figure land with a large grocery chain. This company was migrating to Azure but was held back by their open-source solution. Our extensive data center and assertive compliance filled that gap and were differentiators for Datadog in giving this opportunity. Next, we signed a 7-figure land with a major multinational restaurant chain; this company had a legacy availability solution that wasn't able to scale with their vision of subunits and severe environments. They also needed an end-to-end view of their customer journey, and we will now use our products, including Synthetics and RUM to drive customer experience improvements. Next, we signed a 7-figure land with a social networking app. This company was previously a Datadog customer but had moved several years ago to a competitor as they felt that certain languages where our APM product wasn't going to work well at the time. Today, our APM not only matches the abilities of the solution but presents significant advantages in terms of ease of deployment, alerting, and anomaly detection. We also plan to take advantage of our new service catalog, placing Datadog at the center of the operation. Next, we had a seven-figure upsell with a large Asia-based technology conglomerate. This company has many business units including consumer electronics and IoT. The use of Datadog has grown rapidly with the number of devices we are managing. We had several benefits from using Datadog, including lowering the amount of downtime by 25% and increasing time to resolution by 50%. With this new contract, this customer has now adopted 14 Datadog products. Next, we had an eight-figure multi-year upsell with a large e-commerce company. This customer had been primarily using infrastructure monitoring and APM with Datadog but was also operating an open-source solution. Using Datadog led to significant efficiencies, including reducing customer-impacting incidents by close to two-thirds and the number of employees required to address each incident by one-third. With this renewal, they are adopting Datadog Log Management and RUM, consolidating multiple homegrown tools and a commercial competitor. That's it for this quarter's customer highlights, and I'd like to thank our go-to-market team for their effort in delivering another strong quarter. Now let me speak to our longer-term outlook. We recognize the macro environment remains uncertain. However, we continue to see no change to the multi-year trend towards digital transformation and cloud migration. We remain confident that we can help our customers with their efforts to reduce costs, drive engineering efficiency, and take advantage of the benefits of cloud and other next-gen technologies. Thus, we are continuing to invest in our strategic priorities to capture our long-term opportunity. We remain laser-focused on bringing value to our customers as we manage through this challenging economic environment. With that, I will turn the call over to our CFO for a review of our financial performance and guidance. David?

Thanks, Olivier. In Q3, we continued to execute well and support our customers. Revenue was $437 million, up 61% year-over-year and up 7% quarter-over-quarter. To dive into some of the drivers. First, we experienced strong new logo ARR growth and continued low churn again this quarter. We saw existing customer usage growth remain at levels similar to Q2 as customers continue to be more cost-conscious as they manage their businesses. As Olivier noted, we saw a roughly similar sequential growth in ARR dollars added in Q3 as in Q2. We saw a relatively homogeneous usage growth amongst our major products during Q3. As with Q2, we saw relatively more deceleration in the consumer discretionary vertical, particularly in e-commerce and food and delivery. We saw similar growth across geographies. As a reminder, we bill all of our revenue in US dollars, and we do not price in local currencies. Our dollar-based net retention remained at strong levels above 130% for the 21st consecutive quarter. Our land and expand model, aggressive product innovation and our customers' move to the cloud continue to drive expansion opportunities with our existing customer base. Overall, the customer usage growth we're seeing remains higher than the trough growth we experienced at the beginning of COVID in 2020, and we're pleased with our 61% year-over-year and 7% quarter-on-quarter revenue growth this quarter. Meanwhile, gross revenue retention was unchanged and steady in the mid to high 90s. Regardless of the macroeconomic environment, our customers still need to serve their clients, and moving to the cloud enables better service and cost savings against people-intensive or on-prem technology-based offerings. We believe our high and steady gross retention indicates that Datadog is critical to our customers' ability to deliver services to their clients digitally. As Oli mentioned, on new logos, we saw continued strong new logo ARR growth across geographies, industries, and company sizes, and we have a strong pipeline of opportunities in Q4. Finally, our platform strategy continues to resonate with customers with 80% of our customers using two or more products, 40% using four or more products, and 16% using six or more products as of the end of Q3. Moving on to our financial statements, billings were $467 million, up 51% year-over-year. Billings duration was slightly lower year-over-year. Remaining Performance Obligations, or RPO, were $941 million, up 31% year-over-year. Current RPO growth was in the mid-40s year-over-year. As a reminder, we signed several large multiyear renewals in Q3 2021, which may make current RPO a more useful indicator as it excludes the multiyear duration impact. We also had challenging comparables for that metric as Q3 of last year, current RPO growth was about 100%. We continue to believe revenue is a better indication of our business trends than billings or RPO, as those can fluctuate relative to revenue based on the timing of invoices 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. First, gross profit in the quarter was $348 million, representing a gross margin of 80%. This compares to a gross margin of 81% last quarter and 78% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold this quarter. In the medium to long term, we continue to expect gross margin to be in the high 70s range. Our Q3 non-GAAP OpEx grew 65% year-over-year as we continue to grow our headcount in R&D and go-to-market. Q3 operating income was $75 million, or a 17% operating margin, compared to an operating income of $44 million, or a 16% operating margin in the year-ago quarter. Then turning to the balance sheet and cash flow statements. We ended the quarter with $1.8 billion in cash, cash equivalents, restricted cash, and marketable securities. Cash flow from operations was $84 million in the quarter after taking into consideration capital expenditures, and capitalized software, free cash flow was $67 million for a free cash flow margin of 15%. Now for our outlook for the fourth quarter and fiscal year 2022. First, informing our guidance, we continue to use conservative assumptions regarding the organic growth of our customers. As usual, we are basing our guidance on current economic conditions, which includes slower than historical growth in usage among existing customers, as we have seen in Q2 and Q3. For the fourth quarter, we expect revenue to be in the range of $445 million to $449 million, which represents 37% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $56 million to $60 million. Non-GAAP net income per share is expected to be in the $0.18 to $0.20 per share range based on an approximate 347 million weighted average diluted shares outstanding. For fiscal year 2022, we expect revenue to be in the range of $1.65 billion to $1.654 billion, which represents 61% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $300 million to $304 million, with non-GAAP net income per share expected to be in the range of $0.90 to $0.92 per share, again, based on an approximate 346 million weighted average annual diluted shares. Now some notes on guidance. As we discussed last quarter, Q4 includes some large in-person events, including our Dash user conference, which was held 2 weeks ago, and AWS Reinvent, our largest trade show event of the year. The cost of those events will result in an approximate 300 to 400 basis points effect on margins. As it relates to our capital expenditures, we are adding more office space around the world as we continue to return to office. We expect CapEx of about $15 million in Q4. In conclusion, while we recognize macroeconomic uncertainty continued into Q3, we see no change in the importance of cloud migration and digital transformation, which are critical to our customers' competitive advantage. We believe we are well positioned to help our customers embark on these journeys and we are investing aggressively into our long-term opportunities while maintaining our financial stability. I want to thank Datadog’s worldwide team for their participation in these efforts. And with that, we will open the call for questions. Operator, let's begin the Q&A.

Thank you. Our first question comes from the line of Raimo Lenschow with Barclays. Raimo, your line is live.

Thank you. Congrats on a great Q3. Olivier, I have a quick question for you. The first one is on, if you compare the current situation and the current environment with what you saw in the pandemic, back then, the hyperscalers kind of talked about cost optimization and customers pulling back a little bit. It does seem it's slightly different now. Could you maybe talk a bit about some of the factors that you're seeing out there? And then I have one follow-up for David.

The current situation is quite different from what we experienced during COVID. Firstly, demand is strong and widespread, with everyone looking to save money quickly, which contrasts with past trends. We're observing a few key points. Direct transactions with customers, whether they involve new clients or products, are performing well, and the demand we notice is robust. In terms of usage related to cost optimization, there are two narratives. Some customers are fully cloud-native and generally do well in tougher environments. They are planning to save money, as their growth is often influenced by wider macroeconomic factors. In contrast, customers who are still early in their cloud migration are not slowing down and show a strong desire to continue scaling and moving to the cloud, which represents significant opportunities for us. Comparing ourselves to hyperscalers, we observe that while they're experiencing certain expenses related to optimization, it's challenging to make a direct comparison with their numbers, as their figures cover a broader scope beyond infrastructure. We operate not only in the public cloud but also extensively in private environments. We're noticing some similar trends concerning optimization; however, we are somewhat less impacted due to our unique positioning, which tends to focus on more critical systems compared to those around hyperscalers. Overall, all our products have significantly outperformed the growth rates of hyperscalers.

Okay, perfect. Thank you. And then David, in these uncertain times, a lot of the time you have negotiations or a vendor negotiating with customers around billing, billings terms, etc. Have you seen anything that is impacting you or that you can note? Thank you.

No, we really haven't seen any difference in billing terms or days sales outstanding for that matter. So on that side, given the mission-critical nature of the product, we haven't seen any material changes in that.

And again, that is different from COVID. COVID was really a cash crunch that we were worried about. That was businesses trying to prevent money from going out the door right away. In this case, it's more about preparing for an environment where they might want to watch profitability a bit more. When customers negotiate on these difficult contracts, they are particularly cautious in terms of how long they can be locked in for and how much they can pay during a period of time when they are unsure of their own growth rates.

Thank you. Our next question comes from Fred Lee with Credit Suisse. Fred, your line is now open.

Hey, good morning, and thank you for taking my question. I was wondering if you could comment a little bit on your traction in security. What segments are you seeing the most traction? And also, bigger picture, what you're seeing in the wake of the silos breaking down between DevOps overall?

Yes. Bigger picture, we see fairly good traction. I mean, everybody is talking about it. I could imagine they're the only ones speaking about, they need to bring security to DevOps, and have given up their responsibility in that. And we're confident that this is developing in a way that's quite similar to what we saw with DevOps about a decade ago. This gives us that confidence. In terms of our traction, we're happy with where we are. We have mentioned earlier, thousands of customers using the products, the customer business is growing fast, and the revenue is growing fast. But it's not just growth for growth's sake. Typically, this product is developing very rapidly. We also see a lot of market interest. There's a lot of customer demand for us to be there, and there's a lot of product investments we've seen with the recent Dash conference, and there's a lot more coming. So it's working as planned at this point.

Thank you. Great quarter.

Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Mark, your line is open.

Yes. Thank you very much, and I will add my congratulations on a nice performance. So Olivier, many customers have said that your Cloud Cost Management Solution is extremely well-timed. They're saying that because they're seeing interest in cost optimizations that didn't exist about six months ago. I'm wondering if that aligns with your view, and does that feel like a product to you that can get off to a pretty fast start in this environment? And then I have a quick follow-up.

You are right that cost management is on a lot of people's minds right now. But I would say it was a significant use case six months ago and even a year ago. Any company fully scaled into the cloud cares about their efficiency, and they see they often have quite a bit of leverage in terms of cost improvement if they get it right with the right tool. So we think it's a product that, yes, is well-timed, but we also believe it has the potential to be very adaptive and very useful for a very long time, even after we come out of this challenging macro environment.

Okay, understood. And then, David, just as a quick follow-up. Looking at the sequential growth in Q3, which is around 7%, and the way it appears in guidance for Q4, just thinking about your cadence, that would seem to compound out to a year-over-year growth rate around 30% going forward. Is that type of cadence a fair way to try to conceptualize the glide path into next year, just figuring somewhere around 30% if we want to de-risk the models? Or do you think that Q3 and Q4 are maybe not so representative of where we should be heading?

As a reminder, we provide guidance in a consistent way. We essentially look at the environment, performance, and given the usage model, we put conservative assumptions on top of that. We employed that for the guidance we gave here in Q4. For next year, we'll provide guidance when we report Q4 and plan to update everybody at that time.

Keep in mind that different aspects drive this. Part of it is driven by new logos, which we're getting from customers. Part of it is driven by the growth of existing customers. The one we actually get is tougher to grow customers very fast when they're growing with us a lot over the past few years. When customers grew in the 80% year-over-year or 30% year-over-year through all these years, they may see a slowdown after that. But in turn, it might give us an easier comparison for the future.

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit, your line is now open.

Sanjit, we can't hear you. Can you please get near to your mic?

Sorry about that. Appreciate you guys taking the question. My question is really around competitive displacements and potentially observability consolidation within your customer base? To what extent are you seeing customers either consolidate open source or other commercial tools and standardize on Datadog, not just to benefit from innovation that you're seeing from the Datadog's platform, but also to lower their overall observability monitoring spend as they go into next year?

We do see a little bit of both. I think it's interesting what we've seen in the past. There's no new trend there, but we see that happening across our customers. We also think that this is going to become more compelling when customers also bring us more of their security use cases and user analytics use cases. So far, these have required different copies of the data to different vendors, and that tends to be the most expensive part of their cost structure that scales with the other vendors. We believe that we make a very compelling long-term proposition with these customers.

That makes a lot of sense. And then I think, Olivier, in your script, you called out a customer that's using 14 different products, which is pretty incredible to think about. For customers that are adopting that many different product capabilities, how is that contract structured? And how does that adoption happen? Is it through some broader, flexible credit system, or are these products being sold or priced individually? Can you just give us a sense for a customer that gets up to that level of adoption, how does the contracting work for that type of customer?

The majority of those contracts for large customer view of products are made on what we call the drawdown, which is basically setting a committed amount of credit that customers can use. In relation to that, they get a rate card for the values that they will consume. Those rate cards can also be negotiated if some customers use very large amounts of certain products, allowing them to get better rates for those specific products as well. I think that’s where it gets a little bit taller on that specific use case in the business.

And not to add, that's what we've been talking about with the frictionless adoption where the client is using the platform. Given this drawdown with a rate card, they can use the products in a frictionless way as they expand their use of the Datadog platform.

The benefit for them is just — they usually don't know how much of each of the products they're going to consume ahead of time. Overall, that helps them gain flexibility. Again, this is another reason to bring in more tooling of the platform as they don't have to pre-commit everything within separate buckets.

Best of luck, and thank you for the color.

Thank you. One moment for the next question. Our next question comes from the line of Koji Ikeda with BofA Securities. Koji, your line is open.

Hey, Olivier. Hey, David. Thanks for taking the question. I just wanted to dig in here on the consumer discretionary. I appreciate all the comments you had in the prepared remarks. But was really wondering how much of that vertical is international? Just thinking about FX and the potential effects of FX if the USD strength persists in the future? Thanks guys.

On FX, sorry, David, if I'm stealing your thoughts here. We charge in dollars everywhere, so we don't have any formal FX risk. We don't provide any adjusted numbers for FX or anything like that. However, our customers who buy our products from Europe and from Japan may have their budgets translated back into either Japanese yen or euros. So we think that the strong dollar is a headwind for us. We don't see dramatic differences in growth rates between Europe, Americas, and APAC. So we think we might see higher growth in APAC and Europe, which are smaller parts of our revenues and less mature, if the dollar was weaker. It is conjecture. We can't actually quantify that because we're charging dollars everywhere, but it's something that we keep in mind.

Just to add, in that sector, we commented that the predominant effect would be what's happening in their business, in their sector rather than geographical location of the company and its customers.

Got it. Great guys. Thanks so much for that. Just one follow-up, if I may, here on the Cloudcraft acquisition. Just any color on how big this company is? The press release says hundreds of thousands of engineers. So how does that equate to maybe customer overlap? And does Cloudcraft open the door to maybe new personas to sell into within organizations? Thanks so much guys for taking my questions.

Cloudcraft is very interesting because it's a very good product. There are lots of opportunities in terms of integrating product with ours. There’s also interesting opportunities with some part of this product that may stand alone. It’s a product that works very well for planning and for cloud architects in general to start their planning document in cloud migration. It's also interesting for us from a distribution perspective because it has a broad reach. It’s also very easy to embed on third-party sites. So there are several opportunities we’re excited about with Cloudcraft. You'll see more as we integrate and pursue these opportunities. We're very excited about the opportunity that we've been tracking for a while.

Just to make sure it's clear, it's a small company. It's an acqui-hire like we've done, meaning we are bringing on board the engineers. It does come with a customer base, but it's an immaterial amount of revenues relative to our total. As Oli mentioned, it provides an extension of the platform, as well as potentially some leads and generation in the customers and personas.

Thanks Oli. Thanks David. Thanks so much.

Thank you. One moment for the next question. Our next question comes from Matt Hedberg with RBC. Matt, your line is now open.

Great. Thanks guys. David, for you. Last quarter, you talked about a stronger July versus June. I'm wondering if you could comment a little bit on how the linearity of the quarter played out, and also how did October trend relative to September?

For linearity, it was very similar linearity to what we've had. There was no difference. We saw a pro-rata type of quarter. We normally have a strong October in terms of the flow of our customers and what they're doing in the platform before freezes. We're pleased with what we have seen so far, but still recognize that October is usually strong for us. It's only the beginning of the quarter. Oli, anything else you want to add?

No, I think the one thing you’re trying to get through the over time during the quarter, we exited the quarter pretty much at where we entered it. There's no change there. Again, as David said, we're happy with what we see there. Q4 has a bit more seasonality in other quarters, in particular, December tends to be a little bit weaker as a lot of our customers take time off and shut down their development environments and things. It has been also a little bit harder to forecast in recent years with the pandemic and the changed vacation behavior since then. So we are a little bit careful with that, and that's all incorporated in our guidance.

And remind everybody that we said the Q3 performance was very similar in its drivers to Q2. So that's further evidence that the conditions we ended Q2 will continue throughout Q3.

Thanks for the color, guys. Appreciate it.

Thank you. One moment for the next question. Our next question comes from Brent Thill with Jefferies. Brent, your line is now open.

David, I have a question about your investment philosophy. Before the pandemic, you continued with an 11% growth. Are you approaching your investment strategy differently in this cycle? Also, can you update us on quota-carrying representatives? Are you still on track to hire as initially planned this year, or are you scaling back due to the current macroeconomic concerns?

I think as we remind everybody, we've always lived within our means and been limited more by our ability to integrate in a responsible way quota-carrying reps or R&D for that matter into our company. We really have not made changes. We had a prudent plan and continued. We think there’s a very long-term opportunity, and we’re investing behind that. We are cognizant that there's more volatility in microeconomic conditions, and we’re looking at everything, but we didn’t overextend our plans, to begin with. This allows us given our model and the way we run the company to continue that investment systematically.

Just to restate, we did make changes; we're investing from an R&D perspective. This is early. There’s so much we want to do and we have great traction on the products, and we keep investing there. From a go-to-market perspective, as I mentioned on the call, we have a very strong pipeline and the conversion with customers is going right in terms of new logos and new products. There is value in growing the customer base and there is both short-term and long-term value there. So we keep doing that. Finally, we generated a lot more cash since then, and we have efficiency that's a core part of our culture. That's how we run the business, and we built it. We believe we've built a model of frictionless expansion and other forms of our products. We'll use our levers to ensure we have the right profitability as well.

Just a quick follow-up on the CRP. I know David you mentioned that, it is continuing to decelerate. Is that just a function of the large comps? Are you seeing larger enterprise customers and a slower cadence of large deals coming in? Can you give us your take on that?

I believe the comparisons for this quarter are quite substantial. In the third quarter of the previous year, we secured some significant multi-year contracts. Just to clarify, we do not intentionally focus on landing multi-year deals from clients, which is why the current situation likely shifts over time. If you examine the averages, longer-term trends tend to align with revenues, but there is a lot of variability in this figure. We direct everyone to focus on revenues and the detailed analysis we've provided on converting revenues into annual recurring revenue.

One big driver for this is our early customers we knew because they tried to get ahead of growth and secure better economics. In times of uncertainty like this one, customers tend to wait and see more. Sometimes, we see slightly worse economics, but there have been many options, and this is why those numbers moved quite a bit. Again, the best predictor of what's going to happen next year is the revenue ramp on which we are. Everything else is a little bit historic.

Thank you. One moment for the next question. Our next question comes from Kamil with William Blair. Kamil, your line is open.

Thank you and congrats on a strong quarter. It sounds like international demand has remained relatively unchanged from June. Was that consistent across regions? And what do you think is unique about Datadog that makes your sales in Europe more resilient than some of your peers?

We see them everywhere. We're growing our teams everywhere. We're going to see on the right relative basis faster growth in Europe and APAC than we are in the US. We're also developing teams in Latin America, which is also doing very well for us. From where we stand, we are seeing growth in all regions, though Europe and Asia are a little bit behind the Americas in maturity of cloud migration. However, they are scaling, just like it happened in the past. From a competitive perspective, the situation is about the same everywhere, and it hasn't changed notably over the past year, I would say. So there's nothing shocking to report.

That's helpful. And if I could just follow-up. You called out some vendor displacements in your prepared remarks. Can you maybe comment on how much of your new customer wins are coming from competitive displacements versus greenfield opportunities? And between the two, are you seeing any difference in the macro impact that are companies using competitors may be revisiting alternative solutions to optimize pricing, or is the mix shift predictable?

It's still a small minority of the deals. It tends to be the ones that are very large because our customers already had something. They already have a large footprint, and we need to migrate over. These are the large deals that don’t matter as much as the small deals matter. The last thing we want to matter is small growth over time. We still train our sales team to land as many new logos and new products as possible. The focus is better for them to do 10 smaller deals than one larger one. Those 10 smaller deals will each be as big as the one in the end. So that's instead of dollar achieved through dollar spent on sales activity being most productive.

That's helpful. Thanks again.

Thank you. One moment for the next question. Our next question comes from Fatima Boolani with Citi. Fatima, your line is now open.

Hey good morning. Thank you for taking my questions. Oli, I've got one for you and one for you, David. Oli, on your commentary on the usage moderation persisting in the consumer discretionary vertical. I know this is a hard question, but what are some of the signs or signals from that vertical that would lead you to conclude that maybe there's more moderation to come? And I'm thinking about this in the context of big tech in the realm of digital advertising and all of the larger companies just beyond and outside of the CDP vertical. So just any signals or signs that would lead you to conclude one way or the other is the worst of the moderation on the platform expansion is behind us? And then a quick follow-up for David, please.

We mostly see what we expect from customers that are fully in the cloud. We should expect their cloud bank to grow at the same rate of their top line in the end. When their top line parts are slowing down a bit, they try to slow expenses as well, which is what we've seen. I think what we can tell is whether the top line will slowdown and start narrowing a little bit or if they're facing an economic downturn is beyond our business. We try not to predict that. What we see from much of those customers is a pretty good idea of where they stand, as we see what their projected spend growth is when it relates to the relative growth of the business.

Thank you. David, last quarter, you mentioned that a lot of customers and prospects are thinking about reduced commitment levels out of the gate. So I'm curious about how that's trending this quarter and what your expectations are with what you're seeing with new customers in terms of commitment levels out the gate. And within this quarter, how much of that austerity, if you will, around commitment levels? How much of that austerity contributed to maybe an upside beyond the commitment levels this quarter, just given the strength in the quarter? Thank you.

To clarify, that’s not exactly correct what you said. Essentially, most of our customers are sort of a land and expand model and then commit and then grow their usage over time. That’s been going on in the whole model. What we said last time was it’s not related to people cutting their commitments but rather when there is an overt demand whether they decide to make a new commitment immediately or stay on demand longer to get greater visibility. The comment from last quarter was really more about billing and metrics than about customer usage. We continue to observe that customer usage has been lower than historical trends, but not as low as it was in COVID.

And I'll just add one thing to your first question. In terms of how do we know things are going to get better or worse in the future? I remind you that we have a usage technology for revenue, and we don't have to wait until the next renewal to give us news on whether this is better or worse. The news is good or bad; we hear it early. A good example of that is that while broadly we see Q3 being worse at a macro level than Q2, as far as our business is concerned, Q3 is very much in line with Q2 and any step function adjustments there from changing growth rates happened in Q2 already and didn't change in Q3. We are fairly confident that whatever happens with CPC this year.

Thank you. One moment for our next question. Our next question comes from Ittai Kidron with Oppenheimer and Co. Ittai, your line is open.

Thank you. Congrats guys, great quarter. David, I just want to have one question for you on the net dollar expansion rate, great to see it well above 130. But I was hoping if you could give a little bit more color on that, specifically directionally, did it go down quarter-over-quarter? And perhaps, is there a way for you to break down the mix of existing solution expansion in that mix versus new solution adoption? I'm just wondering, maybe not in absolute terms, but perhaps on a relative basis how that mix has changed over the last two, three quarters?

We don't provide more pointed net retention, but it is a fact that if the organic expanding rate of customers is lower than it was in previous periods, we have said that the rate is lower than at the peak but not as low as it was at the lows in COVID, which would indicate that net retention would be going down mathematically. We don't give more information than that. As far as the mix between expansion of existing solutions and new as clients adopt more of the solution in their lands, which we said is happening. What happens mathematically is that the percentage of the net retention from existing products goes up despite the fact that we have very strong adoption of additional products. But we also have very strong momentum in clients landing with more products, which affects that number directionally, if that makes sense.

That's helpful. And then maybe, Oli, for you, on the database monitoring. It seems like you're off to a good start there. Just from a persona standpoint, does this expand the personas that you're touching? I mean, do you need to be engaged more with DBAs in order to sell this product, or I'm just trying to think from a go-to-market standpoint, what is needed to keep driving progress here?

From a go-to-market perspective, it expands nicely on top of the rest of what we deliver. You’re correct that we're touching some individuals more specialized functions around DBAs and people like that. However, we also have users who are not trained as DBAs that manage to solve the issues regarding database monitoring. So we see that there’s a little bit of a difference there. I think today, because of the great business we reported, it’s more pronounced than it might be in the future when we start supporting the adoption universally.

Very good. Thanks.

Thank you. Our final question will come from the line of Michael Turits with KeyBanc. Michael, your line is live.

Hey, so two quick questions. I think you talked about the growth rates of a number of hosts monitored last quarter is an indication that you really weren't seeing any slowing in the underlying capacity of what needed to be monitored. Is that growth rate still the same?

If you examine the growth by product this time, it's relatively close, with some quarter-to-quarter variations, but the growth rates are largely similar. APM has improved slightly, but there's nothing significantly meaningful to highlight. We may see some expected effects from the hyperscalers in the infrastructure area, but it's not very noticeable. Therefore, we can't provide further comments on this.

Okay. And then David, just on the CapEx that you called out that was having to do with headquarters, $15 million extra, I believe you said in this quarter. So I know you're not giving guidance for next year, but is that a one-quarter phenomenon, a multiyear phenomenon, how big an impact longer term on CapEx?

Just to clarify, that wasn't extra. That's just the total amount, not the delta for the quarters. We haven't provided that type of guidance. We are expanding and building out offices. Again, when we provide guidance for next year, we'll endeavor to provide some guidance that will help in the modeling.

Okay. Great guys. Thank you very much.

Thank you. At this time, I would like to turn it back to Olivier Pomel for any further comments.

Thank you. Thank you all for listening. I also want to thank all Datadogs around the world for working so hard this quarter and for delivering another great quarter. I want to thank our customers for trusting us with their business and for joining us at Dash, also for a great event. Thank you all, and we'll speak again in Q4.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.