Datadog Inc (DDOG) Q4 2022 Earnings Call Transcript

Datadog Inc (NASDAQ:DDOG) Q4 2022 Results Conference Call February 16, 2023 8:00 AM ET

Company Participants

Yuka Broderick - Vice President of Investor Relations & Strategic Finance

Olivier Pomel - Co-Founder & Chief Executive Officer

David Obstler - Chief Financial Officer

Conference Call Participants

Mark Murphy - JPMorgan

Sanjit Singh - Morgan Stanley

Brad Reback - Stifel

Fred Lee - Credit Suisse

Andrew Nowinski - Wells Fargo

Koji Ikeda - BofA Securities

Matt Hedberg - RBC

Fred Havemeyer - Macquarie

Kamil Mielczarek - William Blair

Sterling Auty - MoffettNathanson

Alex Zukin - Wolfe Research

Operator

Good day, and convey you for opinionated by. Welcome to nan Fourth Quarter Datadog Earnings Conference Call. At this clip each participants are successful a listen-only mode. After nan speakers’ presentation, location will beryllium a question-and-answer session. [Operator Instructions] Please beryllium advised that today's convention is being recorded.

I would now for illustration to manus nan convention complete to your speaker today, Yuka Broderick, Vice President of Investor Relations. Please spell ahead.

Yuka Broderick

Thank you, Katherine. Good morning, and convey you for joining america to reappraisal Datadog's 4th fourth and fiscal twelvemonth 2022 financial results, which we announced successful our property merchandise issued this morning. Joining maine connected nan telephone coming 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 early financial performance, our outlook for nan first 4th and fiscal twelvemonth 2023 and related notes and assumptions, our gross margins and operating margins, our strategy, our merchandise capabilities and our expertise to capitalize connected marketplace opportunities.

The words anticipate, believe, continue, estimate, expect, intend, will and akin expressions are intended to place forward-looking statements aliases akin indications of early expectations. These statements bespeak our views only arsenic of coming and are taxable to a variety of risks and uncertainties that could origin existent results to disagree materially.

For a chat of nan worldly risks and different important factors that could impact our existent results, please mention to our Form 10-Q for nan 4th ended September 30, 2022. Additional accusation will be made disposable successful our upcoming Form 10-K for nan fiscal twelvemonth ended December 31, 2022 and different filings pinch nan SEC. This accusation is besides disposable connected nan Investor Relations conception of our website, on pinch a replay of this call.

We will besides talk non-GAAP financial measures, which are reconciled to their astir straight comparable GAAP financial measures successful nan tables successful our net release, which is disposable astatine investors.datadoghq.com.

With that, I'd for illustration to move nan telephone complete to Olivier.

Olivier Pomel

Thanks, Yuka, and convey you each for joining america this morning. We had a coagulated Q4 to extremity a beardown fiscal twelvemonth 2022. We delivered important caller innovations for our customers, we saw expanding take of our products and we attracted thousands of caller customers to our platform. Meanwhile, we delivered beardown gross growth, margins, non-GAAP operating profit, and we generated much than $350 cardinal successful free rate flow.

Let maine commencement pinch a reappraisal of our Q4 financial performance. In Q4, gross was $469 million, an summation of 44% year-over-year, 8% quarter-over-quarter and supra nan precocious extremity of our guidance range. We had astir 23,200 customers, up from astir 18,800 past year.

We ended nan 4th pinch astir 2,780 customers pinch ARR of $100,000 aliases more, up from astir 2,010 past year. These customers generated astir 85% of our ARR. And we had 317 customers pinch ARR of $1 cardinal aliases much compared to nan 216 we had astatine nan extremity of past year.

We generated free rate travel of $96 cardinal pinch a free rate travel separator of 21%. And our dollar-based nett retention complaint continued to beryllium complete 130% arsenic customers summation their usage and adopted much products.

Our level strategy continues to resonate successful nan market. As of nan extremity of Q4, 81% of customers were utilizing 2 aliases much products, up from 78% a twelvemonth ago. 42% of customers were utilizing 4 aliases much products, up from 33% a twelvemonth ago. And 18% of our customers were utilizing six aliases much products, up from 10% past year.

Now moving connected to this quarter's business drivers. Overall, we observed slower usage maturation pinch existing customers while continuing to standard our caller logo acquisition and caller merchandise cross-sells. Starting pinch usage. Usage maturation of existing customers successful Q4 was wide somewhat little than what we observed successful Q2 and Q3, which we property first to a continuation of unreality costs optimization by our larger spending customers; and second, to a seasonal yearly slowdown successful nan 2nd half of December that was much pronounced than successful erstwhile years.

As successful Q2 and Q3, we proceed to spot much optimization from customers arsenic a larger unreality footprint, while our smaller spending customers are exhibiting higher growth.

From a merchandise perspective, we didn't spot meaningful differences among our awesome products arsenic they each knowledgeable coagulated growth, albeit decelerating connected a year-over-year basis. In opposition to this deceleration successful usage maturation for existing customers, we proceed to execute connected caller logo lands and multiproduct adoption, and we besides proceed to spot stable, very beardown maturation retention trends.

First, we had our strongest caller logo 4th to day pinch a grounds level of caller logo ARR bookings. Second, our income pipeline remains patient arsenic our shape of caller logo and cross-sell is scaling supra nan levels of nan past years, and we spot request increasing on pinch our investments successful spell to market.

I'd besides for illustration to constituent retired that though we person made dependable progress, we still spot important opportunities to turn our penetration successful full walk amounts pinch larger customers. As a information point, arsenic of January 2023, 37% of nan Fortune 500 are Datadog customers, up from 30% past year.

For these customers, nan median Datadog ARR is successful nan hundreds of thousands of dollars. This leaves a very ample opportunity for america to spell pinch these customers arsenic they proceed to move towards nan unreality and much of them develop.

We are besides pleased pinch nan first take-up of immoderate of our newest products, including Cloud Cost Management, for which we already added a mid-6-figure committedness past period from a world fast-food chain. And finally, churn has remained low, pinch gross gross retention dependable successful nan mid-to precocious 90s. We judge this precocious retention number is suggestive of nan business criticality of Datadog for our customers.

Now let's move connected to R&D. During nan quarter, we released our latest merchandise to wide availability, Universal Service Monitoring, which detects each micro services crossed an statement situation and supply instant visibility into their wellness and dependencies, or's without changes.

Universal Service Monitoring bridges our existing monitoring and exertion capacity monitoring capabilities and it involves end-to-end obviability pinch minimal deployment friction.

Now let's return a infinitesimal to reappraisal nan R&D team's accomplishments successful 2022. We ended nan twelvemonth pinch 17 mostly disposable products, up from 13 astatine nan extremity of 2021, and we greatly expanded nan capabilities of our existing products.

Overall, successful 2022, we person meaningfully broadened our observability capabilities and pushed guardant successful making each merchandise champion of breed. Meanwhile, we person made meaningful advancement but stay successful early days successful nan caller areas of unreality information and developer experience. In observability, we proceed to grow our end-to-end unified platform.

We now person much than 600 integrations, including each nan latest products connected AWS, GCP and Azure. We launched caller AI capabilities, specified arsenic Watchdog logs and discovery to thief customers abstracted awesome from sound successful information and Watchdog bully origin study to place nan guidelines origin of issues and quantify their effect successful customers.

We launched Cloud Cost Management to person customers return power of their infrastructure costs. We announced work satalog to negociate work ownership astatine scale. We made Observability Pipelines mostly available, enabling customers to cod and toggle shape information from immoderate root to immoderate destination aliases astatine petabyte scale.

We launched Audit Trail to thief customers execute their compliance and governance goals. We extended Sensitive Data Scanner beyond logs to inspect APM and RAM information flows, and we now cod information from SNMP traps to supply greater visibility into beingness web equipment.

In unreality security, we kept building retired our platform. We launched a Cloud Security Management, our rich | context-aware CNAP platform. We launched Application Security Management, building connected our acquisition of Sqreen successful 2021, and we announced nan beta of autochthonal protection to artifact malicious sectors straight wrong nan information platform.

In developer experience, we are expanding connected our CI Visibility product. We introduced continuous testing to bring businesslike and reliable testing wrong CI/CD pipelines, and we launched a beta of intelligence Test Runners, which importantly reduces nan clip and costs of moving tests.

And past but not least, we delivered a number of platform-wide initiatives. We achieved FedRAMP mean authorization and person since landed a number of authorities agencies arsenic customers. Our customers coming tin besides usage Sqreen for collaboration, incident consequence per programming and debugging little than a twelvemonth aft nan acquisition, and we proceed to grow connected nan HIPAA and PCI compliance of our products. As you tin tell, we've been busy, and I want to convey nan R&D squad for a very productive year.

Looking up to 2023, our teams are continuing to push guardant arsenic beta products from 2022 see information streams monitoring, workflow automation, moreover correlation, power maps, move instrumentation, workload information profiling, assets catalog and autochthonal protection, among others. We besides proceed to merge our 2022 acquisitions, Sqreen, HD, Secret and Cloud Craft into nan Datadog platform, and we are excited for their potential.

In summary, we're looking guardant to delivering galore much capabilities to thief our customers successful 2023.

Now let's move connected to income and marketing. Our go-to-market teams proceed to execute very good into nan extremity of 2022, successful peculiar connected caller logo lands. So, let's spell complete a fewer of our wins this quarter. First, we signed a 7-figure onshore pinch a Fortune 500 business group. This institution was utilizing aggregate unfastened root and built-in unreality monitoring tools, which led to merchandise delays and consumer-facing outages. In summation to our metric traction log, this institution will trust connected our expertise to merge unfastened telemetry information sources to present contiguous value. This customer's first woody includes 13 products crossed our observability, information and developer acquisition categories.

Next, we signed a 7-figure onshore pinch a Fortune 500 financial services company. This customer is moving hundreds of applications from on-prem to nan unreality and aggregate bequest devices were creating gaps successful visibility and post-PCI compliance problems. This customer coming is looking astatine savings of astir $1 cardinal successful nan first twelvemonth of utilizing Datadog and a meaningful simplification successful mean clip to resolution. This woody will commencement pinch infrastructure monitoring and switch 3 different devices pinch plans to grow to different Datadog products successful nan future.

Next, we signed a 7-figure onshore woody pinch a awesome national authorities agency. This agency was looking to trim devices sprawl and aimed astatine a accelerated rollout to hundreds of different programs while redeeming money connected engineering and rumor resolution. This agency is among a number of caller authorities customers successful 2022, pursuing our FedRAMP mean authorization. And this woody is expected to displace astatine slightest 8 commercialized bequest monitoring tools.

Next, we signed a 7-figure onshore woody pinch a starring Japanese strategy integrator. This institution has been a very successful hardware strategy integrator and is looking to turn its integer and unreality translator business. This customer plans to adhd up 15 Datadog products successful bid to support its eager maturation plan.

And past for today, we signed a multimillion-dollar description pinch 1 of nan world's starring security companies. Prior to utilizing Datadog, this institution was utilizing much than 30 devices crossed 9 business units. By consolidating onto Datadog, nan customer estimates it's achieved astir 115% ROI each wrong a twelvemonth while reducing mean average clip to solution for 1.5 hours to 15 minutes. With this renewal, this institution is adding database monitoring, unreality information guidance and exertion information guidance and is now utilizing 12 Datadog products.

That is for this quarter's customer highlights. And again, I'd for illustration to convey our go-to-market teams for their awesome execution successful Q4 and passim 2022.

Now fto maine speak to our longer-term outlook and my thoughts connected 2023. Although we are seeing customers beryllium much cautious pinch their unreality usage description successful nan adjacent term. we spot nary alteration to nan semipermanent trends towards integer translator and unreality migration.

We deliberation it's patient for customers to optimize, and we judge that nan expertise to correct people and continually align nan quality and standard of their applications pinch their business needs is 1 of nan cardinal benefits of unreality transformation.

At Datadog, we person ever organized our products and our business astir helping customers summation agility and trim costs, and we do it by enabling stronger business capacity and businesslike usage of their engineering and infrastructure spend. Regardless of near-term macro pressure, we judge it is still early days, and we expect that companies worldwide will proceed to turn their adjacent footprint to present worth to their customers.

Given nan ample opportunities we spot successful beforehand of us, we scheme to support building and innovating. We person already made advancement successful observability, but we still person overmuch to do to present much worth and lick much problems for our customers. And we are excited astir our opportunities successful unreality security, developer acquisition arsenic good arsenic our early efforts successful areas astir ITSM and real-time business intelligence.

As we person since we founded Datadog, we are besides balancing semipermanent investments against maintaining nan subject to guarantee our continual financial performance. We admit that nan macro situation remains uncertain. So, while we proceed to attraction connected scaling and investing, we are increasing those investments successful a disciplined manner successful 2023, and David will talk this successful much detail. We stay assured successful our semipermanent opportunities, and we are continuing to put successful our strategical priorities to drawback up them.

With that, I will move nan telephone complete to our CFO for a reappraisal of our financial capacity and guidance. David?

David Obstler

Thanks, Olivier. In Q4, we continued to execute good and delivered worth to our customers. Revenue was $469 million, up 44% year-over-year and up 8% quarter-over-quarter. To dive into immoderate of nan drivers of our Q4 performance, first, we saw existing customer usage maturation successful October and November astatine a akin level to what we saw successful Q2 and Q3.

In nan period of December, we saw a slower maturation move arsenic nan emblematic slowdown we spot astatine nan extremity of December was much pronounced than successful erstwhile years. As a result, nan maturation complaint successful usage by existing customers was little successful Q4 than successful Q2 and Q3.

Next, akin to Q2 and Q3, we saw larger-spending customers turn slower than smaller spending customers. As pinch Q2 and Q3, we saw comparatively much deceleration successful nan user discretionary vertical, peculiarly successful e-commerce and nutrient delivery. Geographically, we saw coagulated and comparatively akin maturation crossed each regions.

As Olivier discussed, we knowledgeable beardown caller logo ARR maturation and debased churn again successful this quarter. We had a grounds level of caller logo bookings successful nan 4th crossed customer sizes. Our dollar nett guidelines nett retention remained astatine beardown levels, supra 130% for nan 22nd consecutive quarter. And gross gross retention has remained unchanged complete nan past respective quarters and remained dependable successful nan mid-to precocious 90s. We judge this precocious and dependable gross retention points to nan mission-critical quality of nan Datadog level for our customers.

Now moving connected to our financial results. Billings successful nan 4th were $536 million, up 31% year-over-year. Billings long was somewhat little year-over-year. Remaining capacity obligations, aliases RPO, was $1.06 billion, up 30% year-over-year. And RPO long declined connected a year-over-year basis, and we statement that existent RPO maturation was successful nan precocious 30s year-over-year. We proceed to judge gross is simply a amended denotation of our business trends than billings and RPO arsenic those tin up and down comparative to gross based connected nan timing of invoicing and nan long of customer contracts.

Now let's reappraisal immoderate of nan cardinal income connection results. Unless different noted, each metrics are non-GAAP. We person provided a reconciliation of GAAP to non-GAAP financials successful our net release. Gross profit successful nan 4th was $378 million, representing a gross separator of 81%. This compares to a gross separator of 80% past 4th and besides 80% successful nan twelvemonth agone quarter.

We proceed to acquisition efficiencies successful unreality costs, reflected successful our costs of equipment sold successful this quarter. In nan mid- to agelong term, we proceed to expect gross separator to beryllium successful nan precocious 70s range.

Our Q4 non-GAAP OpEx grew 54% year-over-year arsenic we proceed to turn our headcount successful R&D and go-to-market. Q4 operating income was $83 cardinal aliases an 18% operating separator compared to an operating income of $71 cardinal aliases a 22% operating separator successful nan twelvemonth agone quarter. As a reminder, nan twelvemonth agone operating separator benefited from deficiency of in-person office, recreation and arena costs owed to our COVID policies during nan pandemic.

Turning to nan equilibrium expanse and rate travel statements. We ended nan 4th pinch $1.9 cardinal successful cash, rate equivalents, restricted rate and marketable securities. Cash travel from operations was $114 cardinal successful nan quarter. And aft taking into information superior expenditures and capitalized software, free rate travel was $96 cardinal for a free rate travel separator of 21%.

Now for our outlook for nan first 4th and nan fiscal twelvemonth 2023. In forming our guidance, we proceed to usage blimpish assumptions arsenic to nan integrated maturation of our customers compared to humanities periods. And arsenic usual, we are basing our near-term guidance connected caller activity we spot pinch our customers. We are incorporating an anticipation for seasonally weaker maturation successful nan first 4th owed to nan subdued maturation successful nan period of December that creates a little maturation trajectory to commencement nan first quarter. While our customers are continuing to grow pinch us, we are assuming successful our guidance that unreality optimization continues to impact our description complaint successful 2023.

For nan first quarter, we expect gross to beryllium successful nan scope of $466 cardinal to $470 million, which represents a 28% to 29% year-over-year growth. Non-GAAP operating income is expected to beryllium successful nan scope of $68 cardinal to $72 cardinal aliases an operating separator of 15%. Non-GAAP nett income per stock is expected to beryllium successful nan scope of $0.22 to $0.24 per stock based connected astir 348 cardinal weighted mean diluted shares outstanding.

For nan afloat fiscal twelvemonth 2023, we expect gross to beryllium successful nan scope of $2.07 cardinal to $2.09 billion, which represents a 24% to 25% year-over-year growth. Non-GAAP operating income is expected to beryllium successful nan scope of $300 cardinal to $320 cardinal for a separator of 15% astatine nan midpoint. Non-GAAP nett income per stock is expected to beryllium successful nan scope of $1.02 to $1.09 per stock based connected astir 351 cardinal weighted mean diluted shares outstanding.

Now immoderate further notes connected nan guidance. First, regarding our fiscal twelvemonth 2023 investments, we proceed to equilibrium near-term financial spot pinch finance successful our ample semipermanent opportunities. Our non-GAAP operating income guidance reflects this discipline. We will proceed to turn our R&D and go-to-market teams arsenic we broaden our level successful work of our customer needs, albeit astatine a slower gait than successful erstwhile years.

As a result, we are readying to turn our operating expenses, including COGS, successful nan fiscal twelvemonth 2023 successful nan debased 30s percent scope year-over-year. We scheme to turn our headcount successful fiscal twelvemonth 2023 successful nan mid-20s percent scope year-over-year. This compares to fiscal 2022 headcount maturation of astir 50% year-over-year.

Next, arsenic liking rates person risen, our liking income has accrued and go much meaningful. We expect nett liking and different income for nan fiscal twelvemonth 2023 to beryllium astir $75 million. We expect taxation disbursal successful fiscal twelvemonth 2023 to beryllium $11 cardinal to $13 million. And finally, we expect superior expenditures and capitalized package together to beryllium successful nan scope of 4% to 5% of revenues successful fiscal twelvemonth 2023.

To reiterate Olivier's comments, we spot nary alteration to our semipermanent opportunities arsenic our customers embark and grow connected their unreality migration and integer translator plans. We stay powerfully positioned to thief our existing and prospective customers pinch these journeys.

I want to convey Datadogs worldwide for their efforts successful 2022, and I'm excited astir our plans for nan adjacent year.

With that, we will unfastened nan telephone for questions. Operator, let's statesman nan Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from Mark Murphy pinch JPMorgan. Your statement is open.

Mark Murphy

Thank you, very much. Olivier, I was wondering if you tin remark connected nan AWS infrastructure monitoring information of nan business specifically. Do you spot that trending supra aliases beneath nan 25% complaint of nan full business this year? And I'm wondering if you possibly spot immoderate of nan different hyperscale’s, Azure, Google, et cetera, gaining immoderate stock of that operation during this year? And past I person a speedy follow-up.

Olivier Pomel

Yes. So, look, we -- obviously, we spot -- we get information from our customers utilizing those unreality providers. We besides perceive to nan commentary that unreality providers supply connected their -- successful position of their ain growth. There's not a one-to-one mapping betwixt what happens connected nan gross broadside for nan unreality providers and what we spot connected nan infrastructure broadside connected our end. But we are seeing immoderate of nan aforesaid trends wherever their maturation slowed down passim Q4. And we've been listening to their comments erstwhile they springiness guidance for what that maturation mightiness look for illustration successful nan adjacent future, which besides pass our ain guidance.

In position of nan operation shift, we don't spot thing that differs from nan trends we saw passim nan past year. I deliberation nan communicative location is they're besides seeing optimization from immoderate of nan customers, that intends nan largest customers. And connected our end, we expect that optimization to proceed passim nan year. That's what we built into our guidance.

Mark Murphy

Okay. Understood. And then, David, I judge you mentioned grounds caller logo ARR bookings successful nan quarter. Great to hear. I deliberation we're wondering what you property that to conscionable fixed nan situation is truthful challenging. And location was mention of respective of these companies landing pinch 8 aliases 10 aliases 15 Datadog products and replacing bequest devices aliases replacing unfastened source.

Do you spot an summation successful those kinds of consolidation opportunities and possibly conscionable a broadening wherever this scenery is viewing Datadog arsenic nan converged observability leader and wanting to consolidate successful that direction?

Olivier Pomel

Yes. In Q4, and I deliberation going forward, we proceed to spot greenfield and caller projects, caller workloads being nan mostly of nan driver, but person seen complete nan quarters, and we talked astir immoderate of them successful our prepared remarks, consolidation opportunities, erstwhile a customer is already successful their unreality travel and has workloads and is looking to get a platform, create efficiencies, et cetera. They person progressively been consolidating connected Datadog and we spot continued opportunities for that.

Yes. And I'll adhd to that. We spot request scaling basically. Like we're still early successful unreality migration and diesel transformation, and we spot nary slowdown from companies going from bequest IT to this caller world. That's why we get much and much renewals and much measurement there. The portion of nan business we spot going slower is nan larger customers that are further on successful this unreality translator that person ample workloads trying to optimize because that's wherever they tin meaningfully group cost.

Mark Murphy

Thank you, very much.

Operator

We person a mobility from Sanjit Singh from Morgan Stanley. Your statement is open.

Sanjit Singh

Hi. Thank you for taking my question. I wanted to inquire astir merchandise innovation. And successful immoderate sense, you guys person had a beautiful impeccable way grounds of leasing a batch of merchandise that benignant of benefited your customers complete nan past mates of years. But fixed benignant of nan situation that exists today, do you consciousness that successful immoderate sense, Datadog gets viewed by customers arsenic benignant of a Lamborghini type observability solution, meaning that are you -- successful position of customers whitethorn not request each of nan bells and whistles that a 17-product portfolio tin provide? Any thoughts location connected whether Datadog whitethorn beryllium perchance overengineered for successful position of customers' willingness to walk successful nan existent environment?

Olivier Pomel

Yes. So, I decidedly don't deliberation we position ourselves arsenic nan Lamborghini. We are not -- nan Lamborghini person a mitt container and needs to spell to nan shop each 2 weeks. That's decidedly not us. Would -- we person been investing heavy successful merchandise innovation. We person a batch of products coming that, acknowledgment to this acceleration of merchandise and invention complete nan past fewer years, are early successful their life cycle.

What we spot successful nan existent situation is that it is really helping america get to these consolidation deals that were mentioned a small spot earlier because we tin screen much of what our customers request to do and thrust much efficiencies. Again, it's still early successful that because galore of those products are early successful their life cycle. So, they mightiness not beryllium applicable to each azygous type of customer and each azygous type of situation.

But I deliberation this is validating our destination there. And it shows we request to do much of that. not less. At a clip wherever larger customers are very, very observant astir their spend, it mightiness beryllium much difficult for immoderate of those products to summation a batch of take pinch immoderate peculiar customer astatine a very precocious level of spend. So, we're focusing coming connected getting a maximum number of those customers to adopt those products and works nan seeds of early maturation arsenic they further consolidate and move to nan cloud.

Sanjit Singh

Understood. And conscionable a follow-up connected those larger customers who are seeing their usage trends slow much than smaller customers. Relative to nan commitment, really are you guys benignant of handling that? Are you successful a business wherever you're rolling complete credits? Or are you benignant of enforcing benignant of nan take-or-pay facet of nan contract? Any colour location connected really you're moving pinch those larger customers successful position of wherever they guidelines comparative to their commitment?

Olivier Pomel

Yes. We are -- truthful we ever want to partner pinch customers and build a semipermanent narration pinch them. We've had immoderate customers that person tally into very important business headwinds, wherever their ain businesses person contracted rather a bit. And successful those situations, we ever activity pinch them to building nan contracts and make judge we get to a amended outcome.

We've done that pinch 1 of our awesome customers complete nan past quarter. And we've had akin conditions pinch immoderate different customers arsenic well. So that's portion of pinch customers besides portion of nan guidance we're giving for nan year.

David Obstler

And I conscionable want to adhd that because we tend, arsenic you know, to spell onshore and grow and our customers thin to undercommit comparative to what they yet get to, we haven't seen crossed nan customer base, a very meaningful summation of benignant of unused commitments. And truthful that's thing astir our go-to-market that creates elasticity pinch clients to perpetrate arsenic they spot usage.

Operator

Our adjacent mobility comes from Brad Reback from Stifel. Your statement is open.

Brad Reback

Great. Thank you very much. Just 1 existent speedy one, David. I cognize billings isn't needfully nan champion metric to benignant of attraction on, but 1Q is simply a really monstrous comp. So possibly immoderate colour you tin supply arsenic we should deliberation astir billings, particularly pinch changes successful long successful almanac '23 and possibly little commits upfront from customers connected renewal?

David Obstler

Yes. I deliberation -- again, I deliberation it is really driven by nan ARR and linearity of that. So, I don't deliberation we scheme for billings, et cetera. We fundamentally person had billings, arsenic you know, spell supra and beneath nan gross based connected nan billings successful that period. And so, we don't spot really immoderate alteration successful that type of pattern. But again, bring everyone backmost to ARR and revenues arsenic nan awesome economical driver.

Brad Reback

That's great. And then, Oli, existent quickly, if you look backmost astatine your business historically, there's been a reasonably tight linkage betwixt your maturation complaint and nan hyperscale’s pinch a aggregate connected it. As we benignant of look forward, what types of things request to hap to grow that multiplier? Thanks.

Olivier Pomel

Well, I mean, look, we're covering much and much of nan -- we're solving a bigger and bigger problem for our customers, which intends we're expanding our APM [ph] and so, we tin person a larger and larger multiplier complete time. That's why we're investing successful caller categories, that's why we support building up observability and that's why we're doing each these investments.

So that's wherever we're going. I deliberation you're right, though, that nan underlying activity that is -- has been a tailwind passim nan of nan institution was unreality migration and integer transformation. I deliberation that we mightiness beryllium a spot much of a headwind complete nan adjacent fewer quarters. But we powerfully judge that it will go a tailwind again successful nan future.

We conscionable can't show you erstwhile exactly. We've listened to nan calls of nan hyperscale’s, they can't show you erstwhile either. We're successful nan aforesaid vessel there. So, what we're doing coming is we're focusing connected nan drivers of early success, which are covering much of nan customer scenery benignant of getting into much caller logos, much geographies, much segments and besides processing our products and getting those products adopted by much of these customers, which is really we're going to person accelerating maturation successful nan future.

Brad Reback

Perfect. Thanks very much.

Operator

Our adjacent mobility comes from Fred Lee pinch Credit Suisse. Your statement is open.

Fred Lee

Good morning. Thank you for taking my question. I'm funny astir merchandise description and what will thief Datadog summation stock arsenic a percent of hyperscaler spend, a small spot related to Brad's mobility -- 2nd mobility infinitesimal ago. I was wondering if we could get an update connected which products you're gaining nan astir traction and person nan top imaginable successful 2023.

Olivier Pomel

Well, truthful we person a batch of products that are early successful their life cycle. Some of them are ample categories wherever we are seeing larger and larger gross and we person very eager plans, specified arsenic security. Some others are newer but mightiness beryllium a spot much topical successful 2023, specified arsenic Cloud Cost Management.

So, I deliberation it's really going to beryllium a mix. We spot immoderate absorbing early signs of Cloud Cost Management, which is still only billed to a fistful of customers astatine this constituent but already seeing very ample commitments from immoderate of these customers. We called that retired connected nan call.

So, we deliberation it mightiness beryllium -- if you deliberation of thing that mightiness person much of an effect successful nan short-term word that mightiness beryllium 1 of those. But really, nan measurement we deliberation astir each those products is really do we move them each into awesome products two, three, 4 years out, really do we triumph these further categories, and really do we go nan level of prime for consolidation successful nan agelong term? That's what we're driving towards.

Fred Lee

And conscionable a speedy follow-up connected nan information portion. So, pinch respect to nan uptake of your information solutions, really would that comparison -- really does that comparison to nan take patterns of infra and APM?

Olivier Pomel

Well, it's a spot difficult to comparison to infra because it was nan very first point we did successful nan company. We -- it's really beautiful comparable to what we've seen pinch APM, wherever it's a domain pinch a batch of finance required. We besides person a very eager and very differentiated attack to it, which requires rather a spot of a build-out and rather a fewer things to fig retired pinch customers. But we're besides seeing continuous take and growth, thousands of customers utilizing nan platform.

We spot it being adopted astatine a very ample standard by very ample customers, which -- immoderate of which we besides mentioned connected nan telephone today. So, we're not wholly location yet. There's still a batch of activity to do, but we deliberation it's search good to -- pinch respect to what we tin expect successful our plan.

Fred Lee

Great. Thank you, very much.

Operator

Our adjacent mobility comes from Andrew Nowinski pinch Wells Fargo. Your statement is open.

Andrew Nowinski

Great. Good greeting everyone. Thank you for taking my question. I wanted to inquire astir nan usage patterns of ample customers versus mini customers. I cognize you said you're -- nan smaller customers were not seeing arsenic overmuch of a slowdown successful usage. But what gives you assurance that those smaller customers conscionable haven't reached aliases reacted to nan slowing macro yet? And we whitethorn spot possibly a slowdown successful that conception going forward.

Olivier Pomel

Well, it's difficult to show what's going to hap successful nan future, right? So, we don't really person a crystal shot there. What we see, though, is that customers prevention money wherever it matters, which tends to beryllium nan very ample statement items, which for customers that are reasonably acold on into nan cloud, is going to be, first, their unreality supplier deals that are, again, 1 aliases 2 others are larger than their observability bills.

And past we're going to beryllium affected by that and possibly pinch immoderate optimization much circumstantial to observability arsenic well. So that's what we spot there. That's why we spot astir of nan ample customers do that. On nan smaller side, I'll constituent retired that galore of our smaller customers are really very ample companies that conscionable are reasonably caller into nan unreality and are still increasing to nan cloud. So, they are seeing precisely nan aforesaid point arsenic their peers who are spending a batch much connected us. It's conscionable nan portion of their business that is wherever nan walk is increasing arsenic opposed to wherever nan walk is coming and needs to beryllium controlled.

The past point I will opportunity is connected nan very debased extremity of our customer base, we do spot effect of nan macro environment. We person a small spot much churn astatine nan very, very debased end, which is what you spot our customer count not going up arsenic overmuch contempt america having very beardown notable quarters. That's much focused astatine nan very, very debased extremity of nan customer base, and it's not moving nan numbers astatine each successful position of gross retention, which remains very high.

Andrew Nowinski

Okay. That's great. I was besides wondering; your gross separator was amazingly beardown successful nan quarter. I'm wondering if there's thing you tin do connected pricing fixed these ample customers attraction connected costs optimization.

Olivier Pomel

Well, we activity pinch nan ample customers, obviously, to make judge that they get what they need. We're optimizing gross margin, obviously, we’re doing rather a spot connected our extremity to -- connected nan engineering broadside to do that. At each levels, 1% of gross separator is making a very ample quality for their business, and we tin reinvest that successful early growth. Changing prices by 1% based connected that doesn't make a large quality for customers.

I deliberation erstwhile they -- nan existent measurement to reside their concerns arsenic they support scaling and generating overmuch much information and sending much observability information to america is to springiness them much options to process that information truthful that they tin align pinch what they salary to america pinch nan worth they get. And we've been besides building that connected nan merchandise side. So, it's not really a pricing question. It's much of a merchandise and building question.

And I conscionable wonderment now that we're connected cost, I conscionable want to adhd a small clarification. I deliberation we talked astir nan trends of gross separator and what we expect for nan future. And we gave immoderate guidance arsenic to operating expenses successful 2023. I judge I mightiness person misspoken. The operating disbursal guidance successful 2023 successful nan debased 30s scope excludes COGS. We gave nan COGS guideline separately arsenic acold arsenic our comments connected that, conscionable to clarify.

Andrew Nowinski

Helpful. Thank you, guys.

Operator

Our adjacent mobility comes from Koji Ikeda pinch Bank of America. Your statement is open.

Koji Ikeda

Great. Hi, Olivier. Hi, Devid. Thanks for taking my question. I wanted to inquire you a mobility connected nan guidance and possibly a comparison and opposition here. So, I was wondering if you could talk astir possibly really to deliberation astir nan levels of conservatism embedded successful nan afloat twelvemonth 2023 fresh guideline coming versus erstwhile you first gave guidance past twelvemonth for 2022.

David Obstler

Yes. I deliberation we've continued to usage nan aforesaid approach, which is to look astatine nan history and discount nan awesome assumptions, which are nan integrated maturation aliases nan description of existing customers and caller logos. I deliberation nan quality successful nan existent results were nan periods of times wherever we saw much than pro rata aliases much than humanities take and maturation of existing customers, nan ratio betwixt that discount and wherever it ends is up actuals ended up larger. But nan intent and nan strategy of providing this guidance connected blimpish assumptions comparative to that has not changed.

Koji Ikeda

Got it. And conscionable 1 speedy follow-up there.

Olivier Pomel

To beryllium clear, our guidance doesn't presume that nan optimization stops. What we've seen complete nan past fewer quarters, fundamentally successful nan 2nd half of 2022, we presume it's going to continue. We cognize it's going to extremity astatine immoderate constituent but we don't cognize erstwhile exactly, truthful we're not building that into our guidance.

Koji Ikeda

Got it, sewage it. That's helpful. Thank you. And conscionable 1 follow-up here, a mobility connected income capacity. Just reasoning astir hiring plans there. You mentioned successful nan prepared remarks, wide headcount to turn successful nan mid-20s but continuing to go-to-market teams astatine a slower pace. So conscionable is that mid-20s is nan correct measurement to deliberation astir income capacity hiring this year, too?

David Obstler

Yes, yes. I deliberation that's right. We are increasing our investments successful go-to-market and income capacity astir positive aliases minus astatine nan guidance we gave successful headcount growth.

Olivier Pomel

In nan end, nan logic for that is we still person crushed to cover. We still person conception and geographies to cover. And also, arsenic we mentioned earlier, we're having really awesome occurrence erstwhile it comes to landing caller logos and caller products pinch customers. So, our income interactions are productive.

Our return connected finance is there. So, we request to support doing that. Again, these are nan seeds of early occurrence we are planting, and we don't intend to stop.

David Obstler

I would explain that because of nan ramping quality of salespeople, nan maturation complaint that we had, which was successful excess of that 25% successful 2022 intends that nan coming online of that ramp capacity is astatine a complaint higher than that successful 2023 arsenic we statesman to harvest nan finance from that.

Koji Ikeda

Got it. Thank guys. acknowledgment for taking my question.

Operator

Our adjacent mobility comes from Matt Hedberg pinch RBC. Your statement is open.

Matt Hedberg

Great. Thanks guys. Olivier, for you. Any information points astir merchandise splits? I cognize successful nan past, you've talked astir APM and logs. I deliberation it's been a mates of quarters since we had an update connected nan size of those businesses. But immoderate benignant of for illustration unsmooth magnitude of those? And are they still successful hyper growth?

Olivier Pomel

No. I mean, we spot a reasonably -- for illustration erstwhile you deliberation of nan products that are a awesome standard today, which are APM, logs and infrastructure monitoring, those are seeing astir nan aforesaid inclination successful position of maturation successful Q4. And I deliberation that's partially because immoderate of nan optimization we spot from customers happens crossed this -- because it happens upstream from america astatine nan supplier level.

And that's why we'll spot somewhat slower maturation of big monitored connected nan headdress providers aliases APM and besides a small spot little log. Some of it happens much straight astatine nan observability level, logs successful peculiar aliases immoderate aspects of APM that are transaction-based wherever we spot customers optimizing location and making judge they get nan champion worth and trim nan noise.

But arsenic a result, we spot reasonably akin trends crossed nan products. So that's why we didn't telephone retired thing circumstantial successful there. We -- successful nan future, I'm judge we'll stock much astir their comparative sizes. But again, nan maturation rates are not that different successful Q4. So, it's -- location was thing to telephone out.

Matt Hedberg

Okay. Thanks. And past possibly just, David, connected nan guide, evidently pinch benignant of a mid-20s gross guide. You talked successful nan prepared remarks astir having an NRR supra 130% for almost 2 years. Presumably that dips beneath 130%. Any benignant of commentary connected really that mightiness advancement done nan year?

David Obstler

Yes. I deliberation you're right. Implicit successful that guideline is beneath 130%. We'll study to everybody arsenic we person that. We've seen it subordinate to a decel, I would say, connected that, that fixed nan alteration successful nan integrated maturation complaint that we've been talking astir starting successful nan mediate of Q2 past year, it would beryllium -- it's getting past that to nan grade that it changes -- that changes that nett retention positive aliases minus, fixed nan nett retention is comparison against nan year-on-year customers.

So, you do person headwinds successful nan comparison done nan clip that we had nan alteration of nan organic, which we had said was successful nan mediate of Q2 of past year.

Matt Hedberg

Got it. Thanks.

Operator

Our adjacent mobility comes from Fred Havemeyer pinch Macquarie. Your statement is open.

Fred Havemeyer

Thank you. I wanted to ask, pinch respect to nan slowdowns and that you've been seeing wrong definite customers, person you seen thing to propose that these could beryllium related to layoffs successful tech, either because, say, that seats person been straight impacted which is because of wide disruption to DevOps and engineering teams?

Olivier Pomel

No. We opportunity it's mostly because they tin prevention money connected their unreality bills. The -- again, 1 of nan awesome things astir nan unreality is that nan -- it's an ongoing expense. You tin set it complete time, you tin restructure nan measurement you're moving applications. So, location are immoderate norms you tin usage to optimize, which you can't if you're moving everything on-prem, arsenic each nan costs are sunk already and confined to nan future.

So, we mostly spot that -- I mean, there's a small spot much sound than -- and predictability pinch immoderate customers because they're having checkups, and truthful you request to talk to different group and they request to reorganize a small bit. So, it tin adhd a small spot of sound connected nan conversations. But really, nan ascendant mobility is nan optimizing their unreality infrastructure, their unreality measure and their -- that's particularly nan lawsuit if they're spending a batch there.

The immense mostly of our products are infrastructure usage aliases information volumes not per seat. So, we're not straight impacted by layoffs.

Fred Havemeyer

And past conscionable a speedy follow-up would beryllium really successful nan prepared remarks, convey you for nan discourse connected Cloud Cost Management. Can you possibly much mostly talk astir your customers' liking successful FinOps and really Datadog is positioned to beryllium capable to conscionable thief customers amended understand some wherever they're spending, really they're spending and what benignant of ROI they're seeing?

Olivier Pomel

Yes. Our customers are decidedly willing successful FinOps, nan larger they are, nan much they are interested, and that straight relates to nan activity they do successful unreality optimization. It's a very nascent class today. It's a nascent believe for astir of our customers. And we besides person a batch of acquisition internally moving ourselves a very ample unreality cognition crossed each of nan ample costs unreality providers.

So that's why we judge we tin build thing that is reasonably differentiated there. Our merchandise location is having a awesome reception from customers, moreover though it's still early. I mentioned earlier, we signed a six-year deal, yearly woody pinch a ample edifice chain. And we spot much of that coming our way. So, we deliberation it's 1 measurement successful which we tin besides thief our customers arsenic they request to optimize and beryllium much businesslike successful nan short and midterm.

Fred Havemeyer

Thank you.

Operator

Our adjacent mobility comes from Kamil pinch William & Blair. Your statement is open.

Kamil Mielczarek

Good morning. Thank you for taking my question. I want to explain 1 of David comments that you're incorporating seasonally weaker maturation successful nan first 4th owed to subdued maturation successful nan period of December. Can you grow connected really request and customer conversations person trended successful nan first fewer weeks of '23 and whether that's changed since '22 year-end?

David Obstler

Yes. I deliberation you person 2 different avenues. I deliberation we said successful caller logos, we person a beardown quarter. We continue, arsenic we mentioned, to person a beardown pipeline, meaning that for caller projects, caller workloads, we proceed to spot a coagulated request environment. In position of nan organic, erstwhile you person -- and this happens successful astir years, erstwhile you person group going connected picnic and benignant of reducing nan magnitude of logs aliases activity they're doing, you thin to spot a rebound of that successful January.

We did spot a spot of that. But fixed nan volatility successful nan market, we want to beryllium cautious successful reference excessively overmuch into that. And we'll fto everybody cognize really that plays out.

Olivier Pomel

Mathematically, we -- nan Q4 was much beforehand loaded than backmost loaded successful position of full recognized revenue. So, we entered astatine a little level than -- truthful that's why we besides person nan sequential is simply a small spot little there. In position of nan trends, I'll conscionable 2nd what David said, we -- erstwhile that seasonality was higher than we had seen successful erstwhile years, and we tin explicate that successful different ways.

And basically, if customers are trying to prevention money, they're a batch much observant astir turning disconnected nan lights erstwhile they time off for picnic basically. But what we spot successful early 2023 truthful acold is accordant pinch what we spot successful in Q4 aliases successful nan 2nd half of 2022 successful general. So, it's excessively early really to walk judgment, but it really factors into our guidance, which is that we don't judge that nan optimization has stopped. We presume it's going to continue. We don't cognize yet erstwhile going to stop. We cognize it's going to hap astatine immoderate point, but we're not readying it for this twelvemonth successful our guidance.

Kamil Mielczarek

Yes, that's helpful. Thank you. And conscionable arsenic a speedy follow-up. It's bully to spot nan ample wins connected nan national side. I recognize it's still early, but tin you update america connected really large of a publication that could beryllium successful '23? And really important are further authorizations for expanding into that market? Or does FedRAMP mean apt to reside astir of these TAM?

Olivier Pomel

So, I mean, I can't springiness you circumstantial numbers there. I cognize we're seeing wins debased seeing engagements from nan authorities agencies and nan committees that service them. So, each that is very good. We still person immoderate building to do connected nan go-to-market teams for that.

And we besides still person immoderate things to build connected nan merchandise side. Like there's much levels of certification we want to get to scope much of those customers. So, we still What I'd opportunity is we're getting nan impervious points that we're fresh and that customers tin usage america successful those environments and that location is simply a existent marketplace for america there.

Operator

Our adjacent mobility adjacent mobility comes from Sterling Auty pinch SVB. Your statement is open.

Sterling Auty

Thanks. Hi, guys. Oli, I'm funny if you person immoderate consciousness moving and talking pinch customers arsenic to erstwhile they started an optimization project, really agelong it really takes them to get to that caller level. Obviously, it tin alteration if nan system gets worse, but is this thing wherever they started and it takes them a month, a 4th to quarters? Any consciousness would beryllium helpful.

Olivier Pomel

Yes. So, it's a small spot difficult to springiness an reply that fits each types of customers because they're besides each going to -- they shape a small spot differently. There are different scales successful location and they're going done different phases pinch their businesses successful nan economy. We've seen customers having aggregate rounds of layoffs, for example, aliases having to set aggregate times what they're doing pinch their business.

But what we spot successful wide is that nan fastest point they tin do to person an effect connected nan abilities to set immoderate of nan information they nonstop successful logs aliases successful APM. And aft that, you'll spot them do a small spot much astatine nan unreality supplier level, which is higher effect successful position of their ain savings, but besides takes a small spot much clip because we request to reorganize immoderate of their workloads and put much engineering clip successful doing that.

So, we've seen that hap pinch immoderate of our customers. For a number of our customers, we saw it happen. We deliberation they've done, and that's -- and we spot them commencement increasing again. But it's excessively early to telephone it for nan remainder of nan customer guidelines arsenic again, they're each going done a reasonably different things and different scale.

Sterling Auty

Understood. Thank you.

Operator

And we person a mobility from Alex Zukin pinch Wolfe Research. Your statement is open.

Alex Zukin

Thanks for taking my question. I guess, Oli, if you deliberation astir nan trends that you saw successful nan 2nd half of past twelvemonth and what you're seeing year-to-date erstwhile you deliberation astir optimizations versus clip statement to rotation up caller workloads and nan effect that, that has connected nan NRR arsenic it progresses, erstwhile you look astatine nan clip statement that you deliberation that takes and nan anniversarying of these headwinds peculiarly pinch nan larger customers, really does that look from a linearity position complete nan people of nan year?

Olivier Pomel

So correct now, successful nan guidance, we're assuming that we're seeing nan aforesaid trends of maturation of rising customer passim nan year. Like we're not estimating immoderate inflection. We're assuming a continuation of that pinch immoderate level of publication compared to nan existent we saw past year. That's what we are building in.

The -- again, we judge that there's going to beryllium immoderate reacceleration astatine immoderate constituent arsenic nan optimization has connected its course. But fixed nan level of macro uncertainty, I deliberation it's excessively difficult to -- we can't really show you when. Again, we've listened to nan telephone of nan unreality providers, they besides can't show you when. And so, we're being prudent pinch nan guidance there.

Alex Zukin

Perfect. And then, David, possibly conscionable 1 for you astir rate and rate conversion, free rate flow. As we look astatine nan year, conscionable funny if there's immoderate benignant of different elasticity successful costs position aliases moreover conscionable nan presumption for nan rate conversion from operating income to rate travel for nan afloat guidance for fiscal '23.

David Obstler

We've ever said that our free rate travel has been astir somewhat higher than our EBIT margin. If you look back, you'll spot that it's, successful immoderate quarters, a small above, successful immoderate quarters a small below. We person not seen immoderate changes of -- immoderate worldly changes successful costs position aliases nan flows of cash. So, there's thing we've seen truthful acold that would origin america to alteration our views astir rate travel conversion for nan company.

Alex Zukin

Okay. Thank you, guys.

Operator

Thank you. That's each nan clip we person for questions. I'd for illustration to move nan telephone backmost complete to Olivier Pomel for closing remarks.

Olivier Pomel

Thank you all. So, I conscionable want to return a infinitesimal to first convey our customers for trusting america pinch their business and partnering pinch us. I cognize immoderate of them are going done difficult times past twelvemonth and besides early this year. And so, we're moving pinch them. Potentially we each travel retired of it stronger. I besides want to convey our employees, Datadogs everyplace astir nan world, for really delivering a awesome twelvemonth successful 2022, from each of nan metrics we power ourselves.

We saw immoderate slowdown successful depletion pinch immoderate customers, but we besides delivered a batch of worth for customers. We scaled our go-to-market teams. We did awesome successful position of landing caller logos, attaching caller products, style caller products that lick much problems for our customers. And we deliberation that this bodes very good for nan future. So, I'm very optimistic. I'm looking guardant to a awesome twelvemonth successful 2023 pinch everyone. And connected this, I'll adjacent nan call.

Operator

This concludes today's convention call. Thank you for participating. You whitethorn now disconnect.