NASDAQ:DDOG Datadog Q3 2023 Earnings Report $135.60 -4.38 (-3.13%) Closing price 08/1/2025 04:00 PM EasternExtended Trading$135.25 -0.35 (-0.26%) As of 08/1/2025 07:59 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. ProfileEarnings HistoryForecast Datadog EPS ResultsActual EPS$0.07Consensus EPS $0.01Beat/MissBeat by +$0.06One Year Ago EPSN/ADatadog Revenue ResultsActual Revenue$547.54 millionExpected Revenue$523.30 millionBeat/MissBeat by +$24.24 millionYoY Revenue GrowthN/ADatadog Announcement DetailsQuarterQ3 2023Date11/7/2023TimeN/AConference Call DateTuesday, November 7, 2023Conference Call Time8:00AM ETUpcoming EarningsDatadog's Q2 2025 earnings is scheduled for Thursday, August 7, 2025, with a conference call scheduled at 8:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q2 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfilePowered by Datadog Q3 2023 Earnings Call TranscriptProvided by QuartrNovember 7, 2023 ShareLink copied to clipboard.Key Takeaways Record Q3 revenue: Datadog reported $548 M in revenue (up 25% YoY) and $138 M in free cash flow (25% margin), surpassing the high end of guidance. Broad platform adoption: Customer count reached 26,800; 82% use two or more products, 46% use four or more, and 21% use six or more, driving deeper expansion. Key ARR milestones: Infrastructure monitoring ARR exceeded $1 B, while APM and log management each surpassed $500 M in ARR, underscoring balanced platform value. New DevSecOps packages: Introduced Infrastructure DevSecOps and APM DevSecOps bundles to unify observability and security with simpler pricing and a single agent. Q4 & FY2023 guidance: Q4 revenue is projected at $564–568 M (20–21% YoY growth); full-year 2023 revenue is guided to $2.103–2.107 B (26% growth), reflecting conservative assumptions. AI Generated. May Contain Errors.Conference Call Audio Live Call not available Earnings Conference CallDatadog Q3 202300:00 / 00:00Speed:1x1.25x1.5x2xThere are 11 speakers on the call. Operator00:00:00Good day and thank you for standing by. Welcome to the Third Quarter 2023 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Juka Broderick, Vice President of Investor Relations. Operator00:00:41Please go ahead. Speaker 100:00:44Thank you, Didi. Good morning and thank you for joining us to review Datadog's Q3 2023 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 Ochsler, Datadog's CFO. During this call, we will make forward looking statements, including statements related to our future financial performance, our outlook for the 4th The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. Speaker 100:01:35For 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, 2023. Additional information will be made available in our upcoming Form 10 Q for the fiscal quarter ended September 30, 2023 and other filings with the SEC. This information is also available on the Investor Relations section of our website along with a replay of this call. We will also discuss non GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors. Datadoghq.com. Speaker 100:02:10With that, I'd like to turn the call over to Olivier. Speaker 200:02:13Thanks, Luca, and thank you all for joining us this morning. We are pleased with our execution in Q3. We delivered another quarter of profitable growth and robust new logo bookings and we continue to broaden our platform to have customers become and grow digital businesses. Let me start with a review of our Q3 financial performance. Revenue was $548,000,000 an increase of 25% year over year and above the high end of our guidance range. Speaker 200:02:41We ended with about 26,800 customers, up from about $22,200 last year. We ended the quarter with about 3,130 customers an ARR of $100,000 or more, up from about $2,600 last year. And these customers generated about 86% of our ARR. And we generated free cash flow of $138,000,000 with a free cash flow margin of 25%. Turning to platform adoption. Speaker 200:03:13Our platform strategy continues to resonate in the market. As of the end of Q3, 82% of customers were using 2 or more products, up from 80% a year ago. 46% of customers were using 4 or more products, up from 40% a year ago and 21% of our customers were using 6 more products, up from 16 last year. Now let's discuss this quarter's business drivers. In Q3, we saw usage growth of magazine customers improve compared to Q2. Speaker 200:03:44Overall growth in Q3 was relatively consistent throughout the quarter and comparable to levels we've seen in Q1. We are seeing signs that the cost optimization activity from some of our customers may be moderating. As a reminder, last quarter, we discussed a cohort of customers who began optimizing about a year ago and we said that they appear to stabilize their users growth at the end of Q2. That trend has held for the past several months with that cohort usage remaining stable throughout Q3. Overall, we continue to see impact from optimization in our business, But we believe that the intensity and breadth of optimization we've experienced in recent quarters is moderating. Speaker 200:04:23Meanwhile, our new logo activity has remained robust. New logo bookings continue to scale and grow year over year. And for the Q2 in a row, we closed a record number of new deals with more than $100,000 in annual With our land and expand model, we expect new logos to turn into much larger customers over time as they lean into the cloud and add up more of our products. Finally, regarding customer growth, we are pleased with the new logos, new workloads and new product patches we added this quarter. We added a number of exciting new customers in Q3 and I'll discuss a couple of examples later. Speaker 200:04:59Note that our total customer count is largely driven by our long tail of very small customers, while our sales motions are more targeted to the middle and high end of our prospects. And as a reflection of our team's strong execution, our net adds of customers over $100,000 saw an increase in Q3 compared to Q2. Despite a more cost conscious demand environment over the past year, our business has continued to grow across product lines And we are very proud to achieve several key milestones. First, our infrastructure monitoring ARR exceeded $1,000,000,000 Today, our infrastructure products cover monitoring the performance of hosts, networks, containers, Kubernetes deployments, Several functions and other aspects of infrastructure in the cloud as well as a full set of AI and machine learning tools to help our customers separate signal from noise. 2nd, our APM suite, which includes core APM, Synthetics, our 3 user monitoring and continuous profiler exceeded $500,000,000 in ARR and we continue to expand our capabilities in APM, most recently with single step instrumentation, allows a single engineer to enable APM across all applications without code changes and we shift advances in mobile app monitoring, including mobile application testing and mobile session replay. Speaker 200:06:213rd, our log management product exceeded $500,000,000 We also continue to expand our capabilities in log management. And with FlexLogs, customers can easily scale storage and compute separately, allowing for new with very high volume logging use cases in a cost effective manner. From the very beginning, my co founder Alexei and I had a vision to create a unified platform that serve end to end use cases across datasets, products and team boundaries. We believe that these ARR milestones and their balance across the 3 pillars of the variability demonstrate that Datadog is unique within the industry in establishing true platform value for customers. And of course, even though these products have become significant in size, we are only just getting started. Speaker 200:07:10We will continue to innovate to deliver more solutions for our customers across observability and beyond. I will add that we have empathy for our customers and their pain points, In part, because we are ourselves users of cloud and next gen technologies at a meaningful scale and we extensively deploy and use our own solution, which is appropriately known as dogfooding. As an example, we have extensively relied on our cloud cost management product as we expanded its capabilities this past year. And the use of our product has played a large role in delivering cost, performance and efficiency improvements, optimizing our own cloud usage and ultimately resulting in expansion of our gross margins in recent quarters. We also continue to innovate in the DevSecOps space. Speaker 200:07:58Our recent expansions in cloud security include Cloud SIEM Investigator, where customers can visualize logs over long periods of time to conduct security investigations. And within our Cloud Security Management product, we have introduced Cloud Infrastructure Entirement Management or CIEM to help customers prevent identity and access management security issues. For a few years now, the industry has been talking about the idea of DevSecOps, the breaking down of silos among development, operations and security teams. And we entered the security space on the premise that DevOps and security teams should share the same data in the same platform. So starting this month, we are making the practice of DevSecOps easy to adopt for all customers by bringing together All the components needed to fully monitor and secure their entire stack with 2 simple packages. Speaker 200:08:471st, with Infrastructure DevSecOps, our customers can observe and secure their entire cloud environment in one package. With a simple payroll price and a single agent deployed, Customers get end to end visibility into performance, availability and security issues in one place. And from that one place, Teams can also quickly remediate problems using built in workflows and without any code or configuration changes. 2nd, With APM DevSecOps, we take this one step further. Customers can instrument cloud applications for both performance and vulnerability issues in one single package, enabled with the same unified agent used for infrastructure DevSecOps. Speaker 200:09:25APM DevSecOps complements infrastructure DevSecOps by surfacing open source and code level security vulnerabilities alongside performance issues. Finally, we continue to be excited about the opportunity in generative AI and large language models. First, We believe adopting NextGen AI would require the use of cloud and other modern technologies and drive additional growth in cloud workloads. So we are continuing to invest by integrating with more components at every layer of the new AI stack and by developing our own LLM observability products. And while we see signs of AI adoption across large parts of our customer base, in the near term, we continue to see AI related usage manifest itself most accurately with next gen AR native customers, who contributed about 2.5% of ARR this quarter. Speaker 200:10:18In the mid to long term, we expect customers of all industries and sizes to keep adding value to their products using AI and to get their early exploration to get from early exploration to development and into production, thus driving larger cloud and observability usage across our customer base. Besides observing the AI stack, we also expect to keep adding value to our own platform using AI. Datadog's unified platform and purely SaaS model combined with strong multi product adoption by our customers generates a large amount of deep and precise observability data. We believe combining AI capabilities with this broad dataset will allow us to deliver differentiated value to customers. And we are working to productively differentiate value through recently announced capabilities such as our bit AI assistant, AI generated synthetic test and AI led error analysis and resolution. Speaker 200:11:12And we expect to deliver many more related innovation to customers over time. Let's move on to sales and marketing, where we continue to execute on both new logos and existing customers. So let's discuss some of our wins. First, we founded 7 figure land over 5 years with a leading provider of dental care. This company's legacy monitoring just didn't cut and it contributed to delays with their migration to Azure. Speaker 200:11:40What concerning to them was that customers noticed poor application performance and were complaining publicly on social media. By adopting 6 Datadog products, They expect to find and fix the vast majority of incidents internally before their customers are affected. And in signing a 5 year deal, this customer showed and we have seen Datadog as a long term partner in their migration. Next, we signed a 7 figure land with a South American Fintech company By moving from basic built in cloud monitoring, legacy tooling and open source tools to Datadog, this customer expects to significantly reduce costs by spending less on tooling, reducing time to resolution and giving time back to engineers to innovate on their own products. Next, We signed an 8 figure renewal over 3 years with a major American chain of convenience stores. Speaker 200:12:31With this expansion, Datadog will bring all aspects of this customer's tech systems into one platform, including their applications, hybrid clouds, network, in store IoT technology, point of sale systems, self serve kiosks, fuel pumps and corporate infrastructure. This will free up employee time to focus on customer service with expectations to save 1,000,000 of dollars annually. This customer plans to use 6 pallet of products replacing 3 commercial delivery tools. Next, we signed a 7 figure expansion with a major U. S. Speaker 200:13:05Federal agency. When we first started working with this customer a year ago, Datadog was approved for a limited subset of programs. But as we have demonstrated value and gained internal adoption, this customer is now deploying Datadog across the entire agency. They have adopted 6 Datadog products and by doing so consolidated out of 7 tools. Next, we signed a 7 figure expansion with a Fortune 500 industrial company. Speaker 200:13:31Customer was concerned with out of control costs with its legacy log management products and was using a dozen different tools. And when they began using Datadog, they noticed far fewer support tickets submitted to their reliability team. By growing usage with Datadog expanding to 7 products, this customer expects to deliver better service while saving time and reducing costs. And last, we signed a 7 figure expansion with a software business that is part of a tech hyperscaler. This long time customer has used Datadog for infrastructure metrics and will now expand to adopt 7 Datadog products. Speaker 200:14:08Datadog will be replacing its commercial APM tool, was well adopted by its engineers and led to inefficient troubleshooting, outages and revenue impact. Our support of OpenTelemetry in particular was key to their decision to expand with Datadog as it makes it possible for APM tracing to be democratized and used across their entire DevOps team. And that's it for this quarter's highlights. I'd like to thank our go to market teams for their strong execution in Q3. Before I turn it over to David for a financial review, let me reiterate our longer term outlook. Speaker 200:14:42As we have said throughout this period of cloud optimization and macro uncertainty, our long term plans have remained unchanged. We continue to believe digital transformation and cloud migration are long term secular growth drivers of our business and critical motions for every company to deliver value Competitive Advantage. So we continue to invest aggressively to broaden our platform And we aim to be our customers' mission critical partners as they move to cloud and to modern DevSecOps. With that, I will turn it over to our CFO, David. Thanks, Olivier. Speaker 300:15:20Q3 revenue was $548,000,000 up 25% year over year and up 7% quarter over quarter. To dive into some of the drivers of this Q3 performance, first regarding usage growth. We saw an improvement in usage growth in Q3 versus Q2. The Q3 usage growth was more similar to Q1 and relatively steady throughout the quarter. We had a very healthy start to Q4 in October. Speaker 300:15:55While it is too early in the quarter to know for sure what will happen in the next couple of months, The trends we see in early Q4 are stronger than they've been for the past year. Regarding usage growth by customer size, we continue to see larger spending customer growth at a slower rate than smaller spending customers, but usage growth improved for all customer sizes in Q3 relative to Q2. And as Olivier discussed, we believe there are signs that the optimization activity we've been seeing is moderating. Last quarter, we discussed the cohort of customers who started optimizing about a year ago. This cohort's usage has been stable was stable throughout Q3. Speaker 300:16:47As we look at our overall customer activity, We continue to see customers optimizing, but with less impact than we experienced in Q2, contributing to our usage growth with existing customers improving in Q3 relative to Q2. While we expect cost management to continue, We believe we are seeing moderation that is still present, but that but a moderation that is still present, but is less intense and less widespread than we experienced in recent quarters. Geographically, we experienced similar sequential revenue growth in North America and in our international markets. And finally, as regard to retention metrics, our trailing 12 month net revenue retention was in line with our expectations and came in slightly below 120% in Q3. Our trailing 12 month gross revenue retention continues to be stable in the mid to high 90s, a sign of the mission critical nature of our platform for our customers. Speaker 300:17:56Moving on to our financial results. Billings were $607,000,000 up 30% year over year. Billings duration increased slightly year over year. Remaining performance obligations or RPO was $1,450,000,000 up 54% year over year. Current RPO growth was about 30% year over year. Speaker 300:18:23Over the past couple of quarters, we have seen an increasing preference from our customers to sign multiyear deals, and our weighted average booking duration was up sequentially and year over year. We see continued interest in multiyear duration deals in our pipeline as customers seek longer term strategic partnerships with us. We continue to believe that revenue is a better indicator of our business trends than billings and RPO as those can fluctuate relative to revenues based on the timing of invoice and the duration of customer contracts. Now let's review some of the key income statement results. Unless otherwise noted, all metrics are non GAAP. Speaker 300:19:08We have provided a reconciliation of GAAP to non GAAP financials in our earnings release. Gross Profit in the quarter was $451,000,000 representing a gross margin of 82.3%. This compares to a gross margin of 81.3 percent last quarter and 79.7% in the year ago quarter. As Olivier mentioned, we continue to experience efficiencies in cloud costs reflected in our cost of goods sold in the quarter as our engineering teams pursue cost savings and efficiency products projects. Our Q3 OpEx grew 17% year over year. Speaker 300:19:52This is a decline from 26% year over year growth last quarter. We continue to execute on controlling costs given the uncertain environment. And Q3 operating income was $131,000,000 for a 24% operating margin, up from 21% last quarter and above the 17% in the year ago quarter. Our margins were higher than we expected in Q3 as our organic growth was higher than in Q2, while our internal optimization and cost management efforts were successful. Turning to the balance sheet and cash flow statements. Speaker 300:20:32We ended the quarter with $2,300,000,000 in cash, cash equivalents and marketable securities. And cash flow from operations was $153,000,000 in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $138,000,000 for a free cash flow margin of 25%. And now for our outlook for the Q4 and for the full fiscal year 2023. A reminder, Our guidance philosophy remains unchanged. Speaker 300:21:11We base our guidance on trends observed in recent months and apply conservatism on these growth trends. For the Q4, we expect Revenues in the range of $564,000,000 to $568,000,000 which represents about 20% to 21% growth year over year. Non GAAP operating income is expected to be in the range of $129,000,000 to $133,000,000 And non GAAP net income per share is expected to be $0.42 to $0.44 per share based on approximately 355,000,000 weighted average diluted shares outstanding. For fiscal year 2023, we expect revenues to be in the range of $2,103,000,000 to $2,107,000,000 which represents 26% year over year growth. Non GAAP operating income is expected to be in the range of $453,000,000 to $457,000,000 and non GAAP net income per share is expected to be in the range of $1.52 to $1.54 per share based on approximately 351,000,000 weighted average diluted shares outstanding. Speaker 300:22:32Some additional notes for our guidance. First, we expect net interest income and net interest and other income for fiscal 2023 to be approximately $95,000,000 We expect tax expense in the fiscal year to be $12,000,000 to $14,000,000 And finally, we expect capital expenditures and capitalized software together to be in the 3% to 4% of revenue range in fiscal 2023. And now regarding 2024. It is too early for us to speak to 2024 revenue growth. We will digest the information we see over the next several months and give you our 2024 revenue guidance next quarter. Speaker 300:23:19As it relates to non GAAP profitability, Our operating income and margins were a little higher in Q3 than we targeted as usage growth improved from Q2 levels and we were successful with our cost efficiencies. We expect continued strong execution on profitability in Q4. At the same time, we continue to be excited by our numerous long term growth opportunities and we have no shortage of investments to make and are confident in our ability to execute to strong ROI on those investments. As a result, While we are not providing 2024 margin guidance at this point, as always, we will balance our investments in long term growth with margin discipline. And we will update you on that in more detail next quarter. Speaker 300:24:15With that, we will open the call for questions. Operator, let's begin the Q and A. Thank Operator00:24:33Please standby while we compile the Q and A roster. And one moment for our first question. Our first question comes from Mark Murphy of JPMorgan. Speaker 400:24:54Thank you very much and congratulations on a very strong performance. Olivier, I'm interested in your mention of 2.5% of ARR being driven by the native AI providers. Should we think of that mostly consisting of OpenAI, Llama, Anthropic, Coherent, etcetera? Or are you meaning that as a slightly different reference? And can you just help us understand, is that Up from close to 0 a year ago, then I have a quick follow-up. Speaker 200:25:27Yes. So it's a number of companies That without naming anyone, so they tend to be mobile providers, but not just on the language side, mobile providers on the language, image side, like there's a number of different Video side, there's a number of different types of companies there or even some code copilot type companies. These customers all had revenue 1 year ago, but they've been growing a little bit faster than the rest of the customer base recently. The reason we included that in the script is we today, we see The usage growth related directly to AI coming mostly for these customers that provide models to others. Well, as we see broad usage of AI functionality across the customer base, but at low volumes and it corresponds to the fact that for most customers or most enterprises really, They're still in the early stages of developing and shipping applications. Speaker 200:26:27So for now the usage is concentrated among the model providers. Speaker 400:26:32Okay. Yes, that makes sense. And Olivier, as a quick follow-up, you mentioned that log management is cost $500,000,000 in ARR. It's quite a milestone. You also mentioned the replacement of some legacy products. Speaker 400:26:46I'm curious if you see The acquisition of Splunk or any other acquisition activity in that market as a beneficial development. Just wondering If small customers or other companies Speaker 200:27:01that have Speaker 400:27:01been provided that have been acquired Might be looking for any alternatives out there that are more modern and a more converged platform and if you're seeing that in the pipeline? Speaker 200:27:13I mean, we've seen that for a while now that customers were looking for more integrated platforms, more motor offerings, things that were more cloud first. And that's been one of the reasons of our success in landing largely in brand new Applications for new environment, brand new cloud initiatives and then over time consolidating our customers away from whatever they were using in the legacy. We don't think that it is going to change with the various acquisitions in tech privates that we've seen over the past quarter. So we think we'll just see more of that over time. One interesting thing, Pablo, on your first question, one interesting tidbit, if you I know many of you are trying to understand what the AI landscape is made of. Speaker 200:28:01Interestingly enough, When we look at our cohort of customers that are that we consider to be AI native and build largely on AI and all AI providers, They tend to be on different clouds. What we see is that the majority of these companies actually have a lot of their usage on AWS. Today, the larger part of the usage, the larger of these customers are on Azure. So we see really several different adoption trends there that I think are interesting to the broader market. Speaker 400:28:37Thank you for that insight. Appreciate it. Operator00:28:41Thank you. One moment for our next question. And our next question comes from Sanjit Singh of Morgan Stanley. Speaker 500:29:00Thank you for taking the questions. Olivier, the company has been innovating throughout this downturn quite aggressively across Core observability, security, as well as AI. As we look into 2024 and we think about Like a potential new product cycle for Datadog, what parts of the portfolio do you think could be contributors Either in 2024 later in 2024 and 2025, what are the things that you think the customers will be most receptive to? Just wanted to get a sense of where you think where these the sort of the timing of some of Speaker 200:29:37the new products that you've Speaker 500:29:38been delivering over the past couple of years? Speaker 200:29:42Well, mathematically, the products that we contribute the most to the growth next year are going to be the products that have been here the longest and the core visibility products. We mentioned $1,000,000,000 in infrastructure, dollars 500,000,000 in APM, dollars 500,000,000 in logs. This is great, but still a small fraction of these products can be FGL and we are primarily going after that. There's a number of other things we've been investing in and growing and we're fairly happy with the way things are going in security, as I mentioned on the call. With some new packaging, we've also rolled out. Speaker 200:30:16And some of the new initiatives that stand, I would say, a little bit left All right. What we've been doing, observe the equity. This year, as you mentioned, was a year of innovation for us. As it was also a year of Cost optimization for customers, it's not necessarily the best year to get products to very quick Extremely quick revenue growth, but we've planted a lot of seeds that we think are going to deliver in the next couple of years. Speaker 500:30:47Yes, that's great. And I had a sort of follow-up question on the sort of new packaging for the desktop, the 2 new package. Was wondering if you could just give us a little bit of color around why you sort of went with the packaging approach and what you're trying to solve for? Is it sort of Time to adopt the capabilities in a single integrated capability? Or is it also about sort of consolidated pricing, paying potentially one SKU price to consume all these capabilities. Speaker 500:31:17So just love some Detail around on the motivation for these new packages? Speaker 200:31:24Yes. A couple of things. So the first one is we Our security products have reached a certain level of maturity and so we think they can be brought into the conversation with A larger set of our customers as opposed to being something that our customers sell select to, which is how we started and how we start with most products really. But also we're trying to bring those products in the same conversation as the initial adoption of DevOps Basically, as opposed to having to branch that conversation into, oh, hey, you're doing operations and applications and Can I interest you in some security with that, which would be a different conversation? So we so far the signs for this are encouraging. Speaker 200:32:09And again, we think it goes With the broader market trends, the adoption of DevSecOps and what customers actually want to do and we think is going to help them deliver Better outcomes in security, but obviously, it's still I mean, we just rolled that out. So it's still too early to tell whether we got it right or whether we still need to tweak it a little bit. Speaker 500:32:31Appreciate the thoughts. Okay. Thank you. Operator00:32:33Thank you. One moment for our next question. And our next question comes from Raimo Lenschow of Barclays. Speaker 600:32:52Hey, thank you. Congrats from me as well. Olivier, like we're almost a year into this kind of current situation and you saw Q2, Obviously, saw the digital natives that you commented just kind of having extra savings, but we're now back to kind of Q1 usage patterns. What do you see in terms of changing behavior on customers, not thinking end to end, but more like how do you think about observability and how that potentially would change the world as we think about 2024, 2025 coming out of this in terms of kind of vendor consolidation, How it's kind of build observability, etcetera? And then I have one follow-up for David. Speaker 600:33:31Thank you. Speaker 200:33:33So we think the trends of vendor The consolidation will continue. So basically customers are getting more sophisticated, more mature in their needs. They're getting further into the cloud and they are as part of that, They will want to act less as integrators and if they can use one platform instead of 12 different products, that's something that They all reacted very positively too and we see that again and again as we expand into our customers. In terms of the broader trend, I think we it's too early to tell exactly what the next couple of quarters are going to be made of. We said It looks like we've hit an inflection point. Speaker 200:34:15It looks like there's a lot less overhang now in terms of what to be optimized or could be optimized by customers. It looks like also optimization is more It's less intense and less widespread across the customer base, so all that is positive. Now there's Still quite a bit of uncertainty in the macro environment. So I don't think we should get ahead of ourselves either and declare that it's the end of it for the foreseeable future. So we feel positive about things, but it's still hard to know exactly what's going to happen in a couple of quarters from From a buying behavior perspective, we've never seen customers really slow down in their Intent to move to the cloud and direct adoption of new Observatory platforms and new products from us. Speaker 200:35:12We've done well. We scaled the new logo acquisition. We scaled the new product patches. So that has been a constant throughout this optimization phase. In terms of the usage growth and customers scaling new workloads, I don't think we're back to the exuberant times of 2021, But maybe we are reverting back to the meaning of what was happening before that. Speaker 600:35:36Okay. Makes sense. And if I can squeeze one quick one. And David, We talked about OpEx and OpEx growth and this quarter was lower than others. Should I read your comments about next And clearly, there is a big investment opportunity that OpEx growth like maybe wasn't quite where you wanted it to be. Speaker 600:35:55Just any comments there? I know you can't, right? Speaker 300:35:59Yes, I think as we talked about, the movement of the top line because of consumption moves more quickly than we can adjust Resources, so we've taken more of a optimization and cost prioritization this year, but we offset of that, we do think there's a very large opportunity. So we are Expecting to increase the level of investment, but as we say that we've always been looking at the balance between maximizing the top line growth with producing profit and are going to continue to operate on that Taking advantage of long term opportunities. Speaker 200:36:41Okay, perfect. Thank you. Thanks. Operator00:36:44Thank you. One moment for our next question. And our next question comes from Karl Keirstead of UBS. Speaker 700:37:04Thanks so much. Maybe David, I'll direct this to you. I was intrigued by your comment that the Q4 or the month of October was off to a Healthy start, understanding that that's just a month. But just curious if you could unpack that a little bit, largely because Investors on this call, we are picking up signals from other tech firms that would suggest a still Very tough macro environment or maybe even slightly tougher. So I'm just curious where you might be seeing pockets of strength, if you could add a little more color. Speaker 700:37:36Thanks so much. Speaker 300:37:38Yes, I think it's just essentially what we tried to do in the last couple of quarters is to caution everybody that we still expect that there will be Continued optimization and cost management, but give everyone a flavor for the direction. And what we're seeing, as I think Olivier and I mentioned, We're seeing the continuation of that, but at a more moderated level, and that was across the customer base. So we're seeing essentially Clients leaning a little more into growth, again, early in the quarter, too early to call it, but The trend seemed to be a moderation of the previous cost management and optimization, although it's still continuing. Speaker 200:38:20Yes. And just to add color on the so yes, we had a healthy start to Q4. We see trends that are as strong as they've been for the past year in terms of what happened not in the quarter. That being said, Q4 is a tough Quarter to call because it has fairly high seasonality. There is typically a drop of usage in the at the very end of the quarter with the holidays. Speaker 200:38:45And that drop in different years has been can be more or less pronounced. Last year in particular, it was very pronounced. So We've given guidance with all that in mind basically and Let Speaker 300:38:58me just add because this question has been talked about. Like last quarter, we didn't take the strength of October into account. We took the exact same guidance approach, which was to take The weighted average historical trends and discount apply conservatism. So like last quarter, we had said that the first Quarter looked a little more stable. We didn't take that into consideration in our guidance and we have stuck to the exact same guidance methodology, which is to act with that conservatism. Speaker 300:39:29One other thing too, just to comment on the because I know a lot of you are trying to Speaker 200:39:35Understand how we fit with respect to the large cloud providers and who our trends correspond to theirs. Remember that we While our trends are similar in the long run, we in the short term, there can be differences of timing in terms of when we're going to see certain effects, where they're going to see them. We'll have a different mix. Well, the mix of cloud providers is not exactly the same as the broader market and a different mix of customers and geographies than the individual cloud providers as well. So things are not exactly one to 1 there. Speaker 700:40:04Okay, very helpful and congrats on the nice results. Operator00:40:09Thank you. One moment for our next question. And our next question comes from Matt Hedberg of RBC. Speaker 800:40:26Great. Thanks for taking my question guys and I'll offer my congrats as well. Ali, I wanted to double click on some of the improved usage trends. Can you provide us with an overview on how some of your large sort of I guess I'm wondering, Have IT executives from your perspective changed their view on the level of monitoring needed with new levels of workload? Speaker 200:41:00No, so they didn't change their view on the level of monitoring needed. I think they tried to save money wherever they could save it. By far, the biggest area they can save in their Infrastructure is there, the cloud bill itself. As a reminder, when customers pay $1 to us, They pay $10 or $20 to their cloud provider. So there's a lot more savings to be had there, but these savings flow down to us. Speaker 200:41:25We charge commensurate to the size of our customer's infrastructure. They also try to save what they could in the deliverability specifically. And usually, there's always a bit of fat you can cut. You can always Sample certain things a bit more, you can retain your logs a bit less, you can remove some of the debug logging, things like that, that can drive your cost up, but don't necessarily generate a ton of value. And that's the behavior by the way that is we see all the time. Speaker 200:41:52Like we see it For most customers, once a year, maybe twice a year, sometimes, usually before contract negotiation and things like that, where they try understand what it is they're going to need for the next 2 or 3 years. The big difference over the past year has been that everybody's been doing that at once And multiple times. It was really an environment where everyone was feeling very uncertain about the economy and needed to save money very quickly. So we expect optimization to continue as part of this macro trend in the near future. And in perpetuity after that, we'll have that continuous cycle of customers optimizing, reducing where they can reduce And then growing workload and maybe creating a little bit more mess over time as well and then optimizing again on a regular basis, so not everyone at the same time. Speaker 800:42:49Thanks a lot guys. Great color, Alex. Congrats again. Operator00:42:54Thank you. One moment for our next question. And our next question comes from Fatima Boolani of Citi. Speaker 900:43:13Good morning. Thank you for taking my questions. One for Ali and one for Dave, if I may. Olivier, the packaging and pricing motions that you discussed for the DevSecOps solution set, I wanted to zoom out generally a little bit in knowing what you know about how buying behavior and procurement behavior for a lot of your customers has changed over the course of this past year. I was wondering if you can kind of shed light on how you're thinking about an ELA or EAA type selling motion. Speaker 900:43:46I know it's something that historically you've been averse to, but I'm curious how you're thinking about it in sort of the current day and age, if you will, in terms of how your Customers have changed the way they're buying and deploying. And then for David, just wanted to get a sense of What expectations on net retention rates are built into your guidance? And in other words, should this be the quarter that we see a trough in expansion rates or net retention rates as you're thinking about it in the guidance? Thank you. Speaker 200:44:19Yes. So on the ELS, So, in general, look, we're always very open to new approaches in packaging. We try to see All things are consumed from the customer side and what makes the most sense to them. Now ELS and things like that are very difficult for Very inappropriate for a business like ours. 1, because we are fully SaaS based and there's a very, very large volume dimension to absolutely everything we do for our customers. Speaker 200:44:47So it's very, very hard to provide a one price fit all for them. We also philosophically, We like to have to get signal from what customers are willing or not willing to pay for and that drives a lot of our product innovation. We get a lot of good news this way because customers want to buy products and they scale them a lot. We also get bad news. We get customers who don't find there is enough value in a given product or think it should be doing more or think it should be doing things differently or think that the packaging doesn't make sense. Speaker 200:45:22And we'd like to have that. The reason why we simplified the pricing there and we created those new SKUs is really to try and change the motion a little bit and integrate further the observability in the security side And make it easier to break security into the conversation for these customers. But yet so far, we have some early evidence that It seems to resonate, but it's way, way, way too early to call it. We need 2, 3 quarters of that to understand the implications of the new packaging. Speaker 300:46:01Yes. And as it relates to net retention, we do not provide guidance, but just the way that we think about Some of the drivers, we don't provide guidance, sorry, on net retention per se. But essentially, what we said was That Q3 organic growth was similar to what it was in Q1. And we have said previously that in Q2 and Q3 of last year, We had lower than before, but higher than that were Q1 Q4, Q1 and now Q3. So it really is a matter of lapping Those comps, the comps have gotten increasingly easy to lap and we will let everybody know if We do produce an organic growth that's higher this Q4 than it was in Q4 last year. Speaker 300:46:58We will have in this period trough in net retention and it will begin to head up. So that's sort of how we think about it. In terms of our guidance, that's a different story. As we said, we provide Conservativism, so what's implicit in the guidance is something worse than we're experiencing, which would apply a lower organic growth. But in terms of the business trends themselves, it's really a matter of do we lap the Q4 and produce the higher organic growth in this in the Q4 coming up than we had in the Q4 last year. Speaker 900:47:40Thank you. I appreciate the detail. Operator00:47:44Thank you. One moment for the next question. And our next question comes from Brent Thill of Jefferies. Speaker 300:48:00Good morning. David, I was curious if you could focus on the enterprise traction and what you're seeing maybe for Olivier. And David, I guess on the customer add, you're 700, that's lower than your normal cruise altitude of 1,000 plus per quarter. Can you just Talk about is that number being misled because the enterprise traction is higher and that number is therefore going to be lower. Could you just drive into that a little bit? Speaker 300:48:25Thanks. Yes. As a reminder, we have a broad range of customers, the long tail and similar to what we discussed last quarter, the gross number of So the accumulation and in the enterprise, it was quite strong, was very similar to what we've experienced. And we have a very small tail that has a larger attrition rate, but doesn't have a lot of dollars Attached to it. So the trends continue, which is very strong as Olivier mentioned. Speaker 300:48:56New logo accumulation, both in terms of number of new logos And ARR, and that was true when Olivier can talk about the enterprise side of it, offset by this tail that has very little dollars associated with it. Speaker 200:49:09Yes. And just to comment on that, remember the bottom half of our customer is represent around 1% of our revenue. And the lower increase in customer number comes from the very, very low end, which is customers that pay us in The tens of dollars a month and those customers we're getting a little bit less of those to start with. I think that's part of the economic environment And the churn is a little bit higher than it used to be there too. So that's why this number is Speaker 800:49:38a bit depressed right now. Speaker 200:49:40That being said, we had a record number of New logos over $100,000 We're doing very well in the enterprise. We're doing very well in the main market also. We're also doing very well at the high end of the SMB. So We are very happy with all of the segments we are targeting with our sales and marketing motions today. On the enterprise side, we actually mentioned a few of those very exciting contracts on the call. Speaker 200:50:05We get really, really excited when we see Very traditional enterprises moving to the cloud and adopting us and consolidating on us in a world to world. David is we can't see it in the room David smiling because he's excited when he sees the dental care companies, he's excited when he sees The network of convenience stores where we even instrument the fuel pump. So these are great developments for us and We're leaning hard into Speaker 500:50:38that. Operator00:50:41Thank you. One moment for our next question. And our next question comes from Kash Rangan of Goldman Sachs. Speaker 800:51:02Hello. Thank you very much. Good to see, I'm sure that you're all Two things. 1 is with respect to LLM monitoring, which was demoed at the DASH conference, which was I thought Absolutely fascinating. I know you quantified, Ali, 2.5 percentage points of growth coming from generative AI workloads. Speaker 800:51:22How do we think about the revenue opportunity for LML monitoring that it's at an early stage? And I also have a second question, slightly more controversial, When and if we run into customers that think they're spending their bills for Datadog are getting to Speaker 200:51:38be a little bit on Speaker 800:51:39the larger side, That is a sign of success, but how do you ensure that that success does not work against the company that it opens up the door for price competition from others, Wapna? Thank you so much and congrats. Speaker 200:51:51Yes. So on the LDMOP side, I think it's too early to tell how much revenue opportunity there is in the Tooling specific to LM ops, dear. When you think of the whole spectrum of tools, The closer you get to the developer side, the harder it is to monetize and the further you get towards operations and infrastructure, the easier it is to monetize. You can shift things that are very useful and very creative to your platform because they get you a lot of users, a lot of attention and a lot of stickiness that are harder to monetize. So we'll see where on the spectrum that is. Speaker 200:52:28What we know though is that the broader generative AI Up and down the stack from the components themselves, the GPUs all the way up to the models and the various things that are used to All of that is going to generate a lot of opportunity for us. We said right now it's considered among the AI native largely model providers, but we see that it's going to broaden and concern a lot more of our customers down the road. And your second So when we grow a lot, we are very successful with some customers, how do we not create a long term issue, where they spend a lot of money and that gets a commission. Look, it's a great situation to be in to have customers spend a lot of money on you and have to justify that value over time. I think it's very healthy. Speaker 200:53:21I think that again that's what drives innovation and great product development. And our role there is to make sure we have healthy partnership with customers every single step of the way. And we again, we charge them Another magnitude less than what they spend for their cloud infrastructure, maybe 2 orders of magnitude less than what they spend on their R and D. And so we think we should be in a position of leverage where if we do our jobs right, we show a lot of value for customers. We send them a lot of money. Speaker 200:53:54We make them a lot And we have them generate a lot more revenue. So that's how we see things and how we hold ourselves to. Operator00:54:07Thank you. One moment for our next question. And our next question comes from Alex Zukin of Wolfe Research. Speaker 800:54:28Hey, guys. Thanks for taking the question and congrats on a great quarter. Maybe just a quick one for me. Libby, you mentioned the federal opportunity or you mentioned the federal activity in the quarter with a deal that was pretty interesting. That's something that we picked up as an area of excitement for you guys. Speaker 800:54:48Can you maybe just talk about what the opportunity there is over the next 12 months and beyond Maybe stock rank it as a priority for you guys and then I've got to put a call up. Speaker 200:55:00So I missed the domain you're talking about, sorry, that Okay. So that's definitely a dynamic of investment for us. It's to look, we're Happy with 2 things. Happy with the fact that we're moving further and further into the right level of certifications needed. We're happy with the early success with some agencies where we are spreading and assisting those government agencies and Now getting to go some of those world to world. Speaker 200:55:30But we are only scratching the surface of what we can do inside and there's a lot more we need to do. Some of it on the certification side and the product side and some of it on the go to market side and making sure we have all of the parts of the motion working. So we I expect that to be one of the main areas of investment on the go to market side next year in terms of new markets we're going after. Speaker 800:55:57Perfect. And then maybe on the back on the AI question. I guess maybe just can you drill a little bit deeper within those AI native companies, the criticality of their Datadog uses, meaning Are you seeing something different where in a world where these applications become more prevalent, there's the opportunity to kind of expand wallet share as observability becomes even more important. And how should we think about the growth opportunities from those types of workloads In either 2024 or 2025. Speaker 200:56:33Yes. So in general, the more complexity there is, The more useful observability is the more you see value from writing code Actually understanding it and observing it. So to caricature, like if you only if you spend the whole year writing 5 lines of code That are really, really deep. You actually know those timelines really well. Maybe you don't need to observe it before it because you'll see you understand exactly how they work and what's going on with them. Speaker 200:57:00On the other hand, if thanks to all the major advances of technology and all of the various open source and AI and you can just Very quickly generate thousands of lines of code, ship them and start operating them, you actually have no idea how these work would they do. And you'll need a lot of tooling and observability to actually understand that and keep tracking that and secure it and do everything you need to do with it over time. So we think that Overall, this increases in productivity are going to favor observability. In terms of the Future growth of AI, look, I think like everyone, we're trying to guess how transformative it's going to be. Looks like it's going to be pretty much if you judge from just internally, how much of that technology we are adopting and How much is it of a productivity impact it seems to be having? Speaker 200:58:06So again, Today, we only see a tiny, tiny bit of it, which is early adoption by model providers and a lot of companies that Trying to scale up and experiment and figure out who it applies to their businesses and what they can ship to use the technology. But we think it's going to drive a lot of growth in the years to come. Speaker 800:58:32Okay. Thank you, guys. Operator00:58:35Thank you. One moment for our next question. And our next question comes from Jake Roper of William Blair. Speaker 1000:58:52Hey, thanks for taking the questions and I'll echo my congrats on the great results. Olivia, you called out the 2.5 points from AI native customers a few times, Speaker 500:59:01but you've also said that Speaker 1000:59:02the broader customer base should start adding AI work When do you think that actually takes place and the broader customer base starts to impact that AI growth in more earnest? Speaker 200:59:14We don't know. And I think it's too early to tell. For one part, there's so much uncertainty in terms of these customers having to figure out what it is they're going to ship to their own customers. I think everybody is trying to learn that right now and experimenting. But the other part is also that right now the Innovation is largely concentrated among the mobile providers. Speaker 200:59:36And so it's rational right now for most customers to rely on those Instead of deploying their own infrastructure. Again, we think it's likely going to change. We see a lot of demand in interest in Other ways to host models and run models and custom models and things like that. But today that's the these are the trends of the market today basically. Speaker 1000:59:58Okay, helpful. And then just a follow-up on the optimization front. It sounds like the early optimizers took about a year to complete those initiatives. What type of timelines are you seeing from kind of the second or third layer of customers that started their optimizations later in the game? Have those also started to stabilize given they weren't as large as the early optimizers? Speaker 1001:00:17Just trying to kind of parse out the customer base there. Speaker 201:00:20Yes. So we don't really know for sure. That's also why we are careful not to go and enter this forever. The I would say that For customers that are not part of this initial cohort, there's less of an overhang. So the customers that were the early optimizers and that had the most acute optimization They need to be cloud native, so all in on the cloud, very heavy on IT spend in general and the Substantially all of their IT being in the cloud. Speaker 201:00:51These tended to be also companies that were fairly high growth, but low profitability that needed to pivot Financials over a fairly short amount of time. I think if you look at the rest of the customer base, they're mostly not in that situation. So we expect the behavior to be different. Operator01:01:11Thank you. This concludes the question and answer session. I would now like to turn it back to CEO, Olivier Pomel for closing remarks. Speaker 201:01:21Thank you very much. I want to thank everyone for attending the call today. I also want to take a minute to thank our customers for their trust. We know these are trying times with all the macro uncertainty and We thank them for their trust. I also want to thank our employees, all the Datadog for a quarter of hard work and great successes. Speaker 201:01:43And on these good words, we'll all get back to work and get busy for the end of the year. So thank you very much. Operator01:01:52This concludes today's conference call. Thank you for participating and you may now disconnect.Read morePowered by Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) Datadog Earnings HeadlinesNext Technology (NASDAQ:NXTT) and Datadog (NASDAQ:DDOG) Financial ReviewAugust 1 at 2:23 AM | americanbankingnews.comDatadog, Palo Alto Networks, Sprout Social, Monday.com, and Braze Shares Are Falling, What You Need To KnowJuly 31 at 5:22 PM | msn.comBuffett to put 90% of his money in this one stock?CPA and CFA says you have WAY too many stocks - just buy these 3 After years working at the biggest accounting firms like Deloitte and KPMG, Joel Litman (who’s also a member of the Global CFA Institute) figured out a unique, less-risky way to grow rich in the stock market. Litman says you don’t need dozens of investments, overpriced advisers, or hedge funds. 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The company's products comprise infrastructure and application performance monitoring, log management, digital experience monitoring, continuous profiler, database monitoring, data streams and universal service monitoring, network monitoring, incident management, workflow automation, observability pipelines, cloud cost and cloud security management, application security management, cloud SIEM, sensitive data scanner, and CI visibility. 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There are 11 speakers on the call. Operator00:00:00Good day and thank you for standing by. Welcome to the Third Quarter 2023 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Juka Broderick, Vice President of Investor Relations. Operator00:00:41Please go ahead. Speaker 100:00:44Thank you, Didi. Good morning and thank you for joining us to review Datadog's Q3 2023 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 Ochsler, Datadog's CFO. During this call, we will make forward looking statements, including statements related to our future financial performance, our outlook for the 4th The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. Speaker 100:01:35For 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, 2023. Additional information will be made available in our upcoming Form 10 Q for the fiscal quarter ended September 30, 2023 and other filings with the SEC. This information is also available on the Investor Relations section of our website along with a replay of this call. We will also discuss non GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors. Datadoghq.com. Speaker 100:02:10With that, I'd like to turn the call over to Olivier. Speaker 200:02:13Thanks, Luca, and thank you all for joining us this morning. We are pleased with our execution in Q3. We delivered another quarter of profitable growth and robust new logo bookings and we continue to broaden our platform to have customers become and grow digital businesses. Let me start with a review of our Q3 financial performance. Revenue was $548,000,000 an increase of 25% year over year and above the high end of our guidance range. Speaker 200:02:41We ended with about 26,800 customers, up from about $22,200 last year. We ended the quarter with about 3,130 customers an ARR of $100,000 or more, up from about $2,600 last year. And these customers generated about 86% of our ARR. And we generated free cash flow of $138,000,000 with a free cash flow margin of 25%. Turning to platform adoption. Speaker 200:03:13Our platform strategy continues to resonate in the market. As of the end of Q3, 82% of customers were using 2 or more products, up from 80% a year ago. 46% of customers were using 4 or more products, up from 40% a year ago and 21% of our customers were using 6 more products, up from 16 last year. Now let's discuss this quarter's business drivers. In Q3, we saw usage growth of magazine customers improve compared to Q2. Speaker 200:03:44Overall growth in Q3 was relatively consistent throughout the quarter and comparable to levels we've seen in Q1. We are seeing signs that the cost optimization activity from some of our customers may be moderating. As a reminder, last quarter, we discussed a cohort of customers who began optimizing about a year ago and we said that they appear to stabilize their users growth at the end of Q2. That trend has held for the past several months with that cohort usage remaining stable throughout Q3. Overall, we continue to see impact from optimization in our business, But we believe that the intensity and breadth of optimization we've experienced in recent quarters is moderating. Speaker 200:04:23Meanwhile, our new logo activity has remained robust. New logo bookings continue to scale and grow year over year. And for the Q2 in a row, we closed a record number of new deals with more than $100,000 in annual With our land and expand model, we expect new logos to turn into much larger customers over time as they lean into the cloud and add up more of our products. Finally, regarding customer growth, we are pleased with the new logos, new workloads and new product patches we added this quarter. We added a number of exciting new customers in Q3 and I'll discuss a couple of examples later. Speaker 200:04:59Note that our total customer count is largely driven by our long tail of very small customers, while our sales motions are more targeted to the middle and high end of our prospects. And as a reflection of our team's strong execution, our net adds of customers over $100,000 saw an increase in Q3 compared to Q2. Despite a more cost conscious demand environment over the past year, our business has continued to grow across product lines And we are very proud to achieve several key milestones. First, our infrastructure monitoring ARR exceeded $1,000,000,000 Today, our infrastructure products cover monitoring the performance of hosts, networks, containers, Kubernetes deployments, Several functions and other aspects of infrastructure in the cloud as well as a full set of AI and machine learning tools to help our customers separate signal from noise. 2nd, our APM suite, which includes core APM, Synthetics, our 3 user monitoring and continuous profiler exceeded $500,000,000 in ARR and we continue to expand our capabilities in APM, most recently with single step instrumentation, allows a single engineer to enable APM across all applications without code changes and we shift advances in mobile app monitoring, including mobile application testing and mobile session replay. Speaker 200:06:213rd, our log management product exceeded $500,000,000 We also continue to expand our capabilities in log management. And with FlexLogs, customers can easily scale storage and compute separately, allowing for new with very high volume logging use cases in a cost effective manner. From the very beginning, my co founder Alexei and I had a vision to create a unified platform that serve end to end use cases across datasets, products and team boundaries. We believe that these ARR milestones and their balance across the 3 pillars of the variability demonstrate that Datadog is unique within the industry in establishing true platform value for customers. And of course, even though these products have become significant in size, we are only just getting started. Speaker 200:07:10We will continue to innovate to deliver more solutions for our customers across observability and beyond. I will add that we have empathy for our customers and their pain points, In part, because we are ourselves users of cloud and next gen technologies at a meaningful scale and we extensively deploy and use our own solution, which is appropriately known as dogfooding. As an example, we have extensively relied on our cloud cost management product as we expanded its capabilities this past year. And the use of our product has played a large role in delivering cost, performance and efficiency improvements, optimizing our own cloud usage and ultimately resulting in expansion of our gross margins in recent quarters. We also continue to innovate in the DevSecOps space. Speaker 200:07:58Our recent expansions in cloud security include Cloud SIEM Investigator, where customers can visualize logs over long periods of time to conduct security investigations. And within our Cloud Security Management product, we have introduced Cloud Infrastructure Entirement Management or CIEM to help customers prevent identity and access management security issues. For a few years now, the industry has been talking about the idea of DevSecOps, the breaking down of silos among development, operations and security teams. And we entered the security space on the premise that DevOps and security teams should share the same data in the same platform. So starting this month, we are making the practice of DevSecOps easy to adopt for all customers by bringing together All the components needed to fully monitor and secure their entire stack with 2 simple packages. Speaker 200:08:471st, with Infrastructure DevSecOps, our customers can observe and secure their entire cloud environment in one package. With a simple payroll price and a single agent deployed, Customers get end to end visibility into performance, availability and security issues in one place. And from that one place, Teams can also quickly remediate problems using built in workflows and without any code or configuration changes. 2nd, With APM DevSecOps, we take this one step further. Customers can instrument cloud applications for both performance and vulnerability issues in one single package, enabled with the same unified agent used for infrastructure DevSecOps. Speaker 200:09:25APM DevSecOps complements infrastructure DevSecOps by surfacing open source and code level security vulnerabilities alongside performance issues. Finally, we continue to be excited about the opportunity in generative AI and large language models. First, We believe adopting NextGen AI would require the use of cloud and other modern technologies and drive additional growth in cloud workloads. So we are continuing to invest by integrating with more components at every layer of the new AI stack and by developing our own LLM observability products. And while we see signs of AI adoption across large parts of our customer base, in the near term, we continue to see AI related usage manifest itself most accurately with next gen AR native customers, who contributed about 2.5% of ARR this quarter. Speaker 200:10:18In the mid to long term, we expect customers of all industries and sizes to keep adding value to their products using AI and to get their early exploration to get from early exploration to development and into production, thus driving larger cloud and observability usage across our customer base. Besides observing the AI stack, we also expect to keep adding value to our own platform using AI. Datadog's unified platform and purely SaaS model combined with strong multi product adoption by our customers generates a large amount of deep and precise observability data. We believe combining AI capabilities with this broad dataset will allow us to deliver differentiated value to customers. And we are working to productively differentiate value through recently announced capabilities such as our bit AI assistant, AI generated synthetic test and AI led error analysis and resolution. Speaker 200:11:12And we expect to deliver many more related innovation to customers over time. Let's move on to sales and marketing, where we continue to execute on both new logos and existing customers. So let's discuss some of our wins. First, we founded 7 figure land over 5 years with a leading provider of dental care. This company's legacy monitoring just didn't cut and it contributed to delays with their migration to Azure. Speaker 200:11:40What concerning to them was that customers noticed poor application performance and were complaining publicly on social media. By adopting 6 Datadog products, They expect to find and fix the vast majority of incidents internally before their customers are affected. And in signing a 5 year deal, this customer showed and we have seen Datadog as a long term partner in their migration. Next, we signed a 7 figure land with a South American Fintech company By moving from basic built in cloud monitoring, legacy tooling and open source tools to Datadog, this customer expects to significantly reduce costs by spending less on tooling, reducing time to resolution and giving time back to engineers to innovate on their own products. Next, We signed an 8 figure renewal over 3 years with a major American chain of convenience stores. Speaker 200:12:31With this expansion, Datadog will bring all aspects of this customer's tech systems into one platform, including their applications, hybrid clouds, network, in store IoT technology, point of sale systems, self serve kiosks, fuel pumps and corporate infrastructure. This will free up employee time to focus on customer service with expectations to save 1,000,000 of dollars annually. This customer plans to use 6 pallet of products replacing 3 commercial delivery tools. Next, we signed a 7 figure expansion with a major U. S. Speaker 200:13:05Federal agency. When we first started working with this customer a year ago, Datadog was approved for a limited subset of programs. But as we have demonstrated value and gained internal adoption, this customer is now deploying Datadog across the entire agency. They have adopted 6 Datadog products and by doing so consolidated out of 7 tools. Next, we signed a 7 figure expansion with a Fortune 500 industrial company. Speaker 200:13:31Customer was concerned with out of control costs with its legacy log management products and was using a dozen different tools. And when they began using Datadog, they noticed far fewer support tickets submitted to their reliability team. By growing usage with Datadog expanding to 7 products, this customer expects to deliver better service while saving time and reducing costs. And last, we signed a 7 figure expansion with a software business that is part of a tech hyperscaler. This long time customer has used Datadog for infrastructure metrics and will now expand to adopt 7 Datadog products. Speaker 200:14:08Datadog will be replacing its commercial APM tool, was well adopted by its engineers and led to inefficient troubleshooting, outages and revenue impact. Our support of OpenTelemetry in particular was key to their decision to expand with Datadog as it makes it possible for APM tracing to be democratized and used across their entire DevOps team. And that's it for this quarter's highlights. I'd like to thank our go to market teams for their strong execution in Q3. Before I turn it over to David for a financial review, let me reiterate our longer term outlook. Speaker 200:14:42As we have said throughout this period of cloud optimization and macro uncertainty, our long term plans have remained unchanged. We continue to believe digital transformation and cloud migration are long term secular growth drivers of our business and critical motions for every company to deliver value Competitive Advantage. So we continue to invest aggressively to broaden our platform And we aim to be our customers' mission critical partners as they move to cloud and to modern DevSecOps. With that, I will turn it over to our CFO, David. Thanks, Olivier. Speaker 300:15:20Q3 revenue was $548,000,000 up 25% year over year and up 7% quarter over quarter. To dive into some of the drivers of this Q3 performance, first regarding usage growth. We saw an improvement in usage growth in Q3 versus Q2. The Q3 usage growth was more similar to Q1 and relatively steady throughout the quarter. We had a very healthy start to Q4 in October. Speaker 300:15:55While it is too early in the quarter to know for sure what will happen in the next couple of months, The trends we see in early Q4 are stronger than they've been for the past year. Regarding usage growth by customer size, we continue to see larger spending customer growth at a slower rate than smaller spending customers, but usage growth improved for all customer sizes in Q3 relative to Q2. And as Olivier discussed, we believe there are signs that the optimization activity we've been seeing is moderating. Last quarter, we discussed the cohort of customers who started optimizing about a year ago. This cohort's usage has been stable was stable throughout Q3. Speaker 300:16:47As we look at our overall customer activity, We continue to see customers optimizing, but with less impact than we experienced in Q2, contributing to our usage growth with existing customers improving in Q3 relative to Q2. While we expect cost management to continue, We believe we are seeing moderation that is still present, but that but a moderation that is still present, but is less intense and less widespread than we experienced in recent quarters. Geographically, we experienced similar sequential revenue growth in North America and in our international markets. And finally, as regard to retention metrics, our trailing 12 month net revenue retention was in line with our expectations and came in slightly below 120% in Q3. Our trailing 12 month gross revenue retention continues to be stable in the mid to high 90s, a sign of the mission critical nature of our platform for our customers. Speaker 300:17:56Moving on to our financial results. Billings were $607,000,000 up 30% year over year. Billings duration increased slightly year over year. Remaining performance obligations or RPO was $1,450,000,000 up 54% year over year. Current RPO growth was about 30% year over year. Speaker 300:18:23Over the past couple of quarters, we have seen an increasing preference from our customers to sign multiyear deals, and our weighted average booking duration was up sequentially and year over year. We see continued interest in multiyear duration deals in our pipeline as customers seek longer term strategic partnerships with us. We continue to believe that revenue is a better indicator of our business trends than billings and RPO as those can fluctuate relative to revenues based on the timing of invoice and the duration of customer contracts. Now let's review some of the key income statement results. Unless otherwise noted, all metrics are non GAAP. Speaker 300:19:08We have provided a reconciliation of GAAP to non GAAP financials in our earnings release. Gross Profit in the quarter was $451,000,000 representing a gross margin of 82.3%. This compares to a gross margin of 81.3 percent last quarter and 79.7% in the year ago quarter. As Olivier mentioned, we continue to experience efficiencies in cloud costs reflected in our cost of goods sold in the quarter as our engineering teams pursue cost savings and efficiency products projects. Our Q3 OpEx grew 17% year over year. Speaker 300:19:52This is a decline from 26% year over year growth last quarter. We continue to execute on controlling costs given the uncertain environment. And Q3 operating income was $131,000,000 for a 24% operating margin, up from 21% last quarter and above the 17% in the year ago quarter. Our margins were higher than we expected in Q3 as our organic growth was higher than in Q2, while our internal optimization and cost management efforts were successful. Turning to the balance sheet and cash flow statements. Speaker 300:20:32We ended the quarter with $2,300,000,000 in cash, cash equivalents and marketable securities. And cash flow from operations was $153,000,000 in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $138,000,000 for a free cash flow margin of 25%. And now for our outlook for the Q4 and for the full fiscal year 2023. A reminder, Our guidance philosophy remains unchanged. Speaker 300:21:11We base our guidance on trends observed in recent months and apply conservatism on these growth trends. For the Q4, we expect Revenues in the range of $564,000,000 to $568,000,000 which represents about 20% to 21% growth year over year. Non GAAP operating income is expected to be in the range of $129,000,000 to $133,000,000 And non GAAP net income per share is expected to be $0.42 to $0.44 per share based on approximately 355,000,000 weighted average diluted shares outstanding. For fiscal year 2023, we expect revenues to be in the range of $2,103,000,000 to $2,107,000,000 which represents 26% year over year growth. Non GAAP operating income is expected to be in the range of $453,000,000 to $457,000,000 and non GAAP net income per share is expected to be in the range of $1.52 to $1.54 per share based on approximately 351,000,000 weighted average diluted shares outstanding. Speaker 300:22:32Some additional notes for our guidance. First, we expect net interest income and net interest and other income for fiscal 2023 to be approximately $95,000,000 We expect tax expense in the fiscal year to be $12,000,000 to $14,000,000 And finally, we expect capital expenditures and capitalized software together to be in the 3% to 4% of revenue range in fiscal 2023. And now regarding 2024. It is too early for us to speak to 2024 revenue growth. We will digest the information we see over the next several months and give you our 2024 revenue guidance next quarter. Speaker 300:23:19As it relates to non GAAP profitability, Our operating income and margins were a little higher in Q3 than we targeted as usage growth improved from Q2 levels and we were successful with our cost efficiencies. We expect continued strong execution on profitability in Q4. At the same time, we continue to be excited by our numerous long term growth opportunities and we have no shortage of investments to make and are confident in our ability to execute to strong ROI on those investments. As a result, While we are not providing 2024 margin guidance at this point, as always, we will balance our investments in long term growth with margin discipline. And we will update you on that in more detail next quarter. Speaker 300:24:15With that, we will open the call for questions. Operator, let's begin the Q and A. Thank Operator00:24:33Please standby while we compile the Q and A roster. And one moment for our first question. Our first question comes from Mark Murphy of JPMorgan. Speaker 400:24:54Thank you very much and congratulations on a very strong performance. Olivier, I'm interested in your mention of 2.5% of ARR being driven by the native AI providers. Should we think of that mostly consisting of OpenAI, Llama, Anthropic, Coherent, etcetera? Or are you meaning that as a slightly different reference? And can you just help us understand, is that Up from close to 0 a year ago, then I have a quick follow-up. Speaker 200:25:27Yes. So it's a number of companies That without naming anyone, so they tend to be mobile providers, but not just on the language side, mobile providers on the language, image side, like there's a number of different Video side, there's a number of different types of companies there or even some code copilot type companies. These customers all had revenue 1 year ago, but they've been growing a little bit faster than the rest of the customer base recently. The reason we included that in the script is we today, we see The usage growth related directly to AI coming mostly for these customers that provide models to others. Well, as we see broad usage of AI functionality across the customer base, but at low volumes and it corresponds to the fact that for most customers or most enterprises really, They're still in the early stages of developing and shipping applications. Speaker 200:26:27So for now the usage is concentrated among the model providers. Speaker 400:26:32Okay. Yes, that makes sense. And Olivier, as a quick follow-up, you mentioned that log management is cost $500,000,000 in ARR. It's quite a milestone. You also mentioned the replacement of some legacy products. Speaker 400:26:46I'm curious if you see The acquisition of Splunk or any other acquisition activity in that market as a beneficial development. Just wondering If small customers or other companies Speaker 200:27:01that have Speaker 400:27:01been provided that have been acquired Might be looking for any alternatives out there that are more modern and a more converged platform and if you're seeing that in the pipeline? Speaker 200:27:13I mean, we've seen that for a while now that customers were looking for more integrated platforms, more motor offerings, things that were more cloud first. And that's been one of the reasons of our success in landing largely in brand new Applications for new environment, brand new cloud initiatives and then over time consolidating our customers away from whatever they were using in the legacy. We don't think that it is going to change with the various acquisitions in tech privates that we've seen over the past quarter. So we think we'll just see more of that over time. One interesting thing, Pablo, on your first question, one interesting tidbit, if you I know many of you are trying to understand what the AI landscape is made of. Speaker 200:28:01Interestingly enough, When we look at our cohort of customers that are that we consider to be AI native and build largely on AI and all AI providers, They tend to be on different clouds. What we see is that the majority of these companies actually have a lot of their usage on AWS. Today, the larger part of the usage, the larger of these customers are on Azure. So we see really several different adoption trends there that I think are interesting to the broader market. Speaker 400:28:37Thank you for that insight. Appreciate it. Operator00:28:41Thank you. One moment for our next question. And our next question comes from Sanjit Singh of Morgan Stanley. Speaker 500:29:00Thank you for taking the questions. Olivier, the company has been innovating throughout this downturn quite aggressively across Core observability, security, as well as AI. As we look into 2024 and we think about Like a potential new product cycle for Datadog, what parts of the portfolio do you think could be contributors Either in 2024 later in 2024 and 2025, what are the things that you think the customers will be most receptive to? Just wanted to get a sense of where you think where these the sort of the timing of some of Speaker 200:29:37the new products that you've Speaker 500:29:38been delivering over the past couple of years? Speaker 200:29:42Well, mathematically, the products that we contribute the most to the growth next year are going to be the products that have been here the longest and the core visibility products. We mentioned $1,000,000,000 in infrastructure, dollars 500,000,000 in APM, dollars 500,000,000 in logs. This is great, but still a small fraction of these products can be FGL and we are primarily going after that. There's a number of other things we've been investing in and growing and we're fairly happy with the way things are going in security, as I mentioned on the call. With some new packaging, we've also rolled out. Speaker 200:30:16And some of the new initiatives that stand, I would say, a little bit left All right. What we've been doing, observe the equity. This year, as you mentioned, was a year of innovation for us. As it was also a year of Cost optimization for customers, it's not necessarily the best year to get products to very quick Extremely quick revenue growth, but we've planted a lot of seeds that we think are going to deliver in the next couple of years. Speaker 500:30:47Yes, that's great. And I had a sort of follow-up question on the sort of new packaging for the desktop, the 2 new package. Was wondering if you could just give us a little bit of color around why you sort of went with the packaging approach and what you're trying to solve for? Is it sort of Time to adopt the capabilities in a single integrated capability? Or is it also about sort of consolidated pricing, paying potentially one SKU price to consume all these capabilities. Speaker 500:31:17So just love some Detail around on the motivation for these new packages? Speaker 200:31:24Yes. A couple of things. So the first one is we Our security products have reached a certain level of maturity and so we think they can be brought into the conversation with A larger set of our customers as opposed to being something that our customers sell select to, which is how we started and how we start with most products really. But also we're trying to bring those products in the same conversation as the initial adoption of DevOps Basically, as opposed to having to branch that conversation into, oh, hey, you're doing operations and applications and Can I interest you in some security with that, which would be a different conversation? So we so far the signs for this are encouraging. Speaker 200:32:09And again, we think it goes With the broader market trends, the adoption of DevSecOps and what customers actually want to do and we think is going to help them deliver Better outcomes in security, but obviously, it's still I mean, we just rolled that out. So it's still too early to tell whether we got it right or whether we still need to tweak it a little bit. Speaker 500:32:31Appreciate the thoughts. Okay. Thank you. Operator00:32:33Thank you. One moment for our next question. And our next question comes from Raimo Lenschow of Barclays. Speaker 600:32:52Hey, thank you. Congrats from me as well. Olivier, like we're almost a year into this kind of current situation and you saw Q2, Obviously, saw the digital natives that you commented just kind of having extra savings, but we're now back to kind of Q1 usage patterns. What do you see in terms of changing behavior on customers, not thinking end to end, but more like how do you think about observability and how that potentially would change the world as we think about 2024, 2025 coming out of this in terms of kind of vendor consolidation, How it's kind of build observability, etcetera? And then I have one follow-up for David. Speaker 600:33:31Thank you. Speaker 200:33:33So we think the trends of vendor The consolidation will continue. So basically customers are getting more sophisticated, more mature in their needs. They're getting further into the cloud and they are as part of that, They will want to act less as integrators and if they can use one platform instead of 12 different products, that's something that They all reacted very positively too and we see that again and again as we expand into our customers. In terms of the broader trend, I think we it's too early to tell exactly what the next couple of quarters are going to be made of. We said It looks like we've hit an inflection point. Speaker 200:34:15It looks like there's a lot less overhang now in terms of what to be optimized or could be optimized by customers. It looks like also optimization is more It's less intense and less widespread across the customer base, so all that is positive. Now there's Still quite a bit of uncertainty in the macro environment. So I don't think we should get ahead of ourselves either and declare that it's the end of it for the foreseeable future. So we feel positive about things, but it's still hard to know exactly what's going to happen in a couple of quarters from From a buying behavior perspective, we've never seen customers really slow down in their Intent to move to the cloud and direct adoption of new Observatory platforms and new products from us. Speaker 200:35:12We've done well. We scaled the new logo acquisition. We scaled the new product patches. So that has been a constant throughout this optimization phase. In terms of the usage growth and customers scaling new workloads, I don't think we're back to the exuberant times of 2021, But maybe we are reverting back to the meaning of what was happening before that. Speaker 600:35:36Okay. Makes sense. And if I can squeeze one quick one. And David, We talked about OpEx and OpEx growth and this quarter was lower than others. Should I read your comments about next And clearly, there is a big investment opportunity that OpEx growth like maybe wasn't quite where you wanted it to be. Speaker 600:35:55Just any comments there? I know you can't, right? Speaker 300:35:59Yes, I think as we talked about, the movement of the top line because of consumption moves more quickly than we can adjust Resources, so we've taken more of a optimization and cost prioritization this year, but we offset of that, we do think there's a very large opportunity. So we are Expecting to increase the level of investment, but as we say that we've always been looking at the balance between maximizing the top line growth with producing profit and are going to continue to operate on that Taking advantage of long term opportunities. Speaker 200:36:41Okay, perfect. Thank you. Thanks. Operator00:36:44Thank you. One moment for our next question. And our next question comes from Karl Keirstead of UBS. Speaker 700:37:04Thanks so much. Maybe David, I'll direct this to you. I was intrigued by your comment that the Q4 or the month of October was off to a Healthy start, understanding that that's just a month. But just curious if you could unpack that a little bit, largely because Investors on this call, we are picking up signals from other tech firms that would suggest a still Very tough macro environment or maybe even slightly tougher. So I'm just curious where you might be seeing pockets of strength, if you could add a little more color. Speaker 700:37:36Thanks so much. Speaker 300:37:38Yes, I think it's just essentially what we tried to do in the last couple of quarters is to caution everybody that we still expect that there will be Continued optimization and cost management, but give everyone a flavor for the direction. And what we're seeing, as I think Olivier and I mentioned, We're seeing the continuation of that, but at a more moderated level, and that was across the customer base. So we're seeing essentially Clients leaning a little more into growth, again, early in the quarter, too early to call it, but The trend seemed to be a moderation of the previous cost management and optimization, although it's still continuing. Speaker 200:38:20Yes. And just to add color on the so yes, we had a healthy start to Q4. We see trends that are as strong as they've been for the past year in terms of what happened not in the quarter. That being said, Q4 is a tough Quarter to call because it has fairly high seasonality. There is typically a drop of usage in the at the very end of the quarter with the holidays. Speaker 200:38:45And that drop in different years has been can be more or less pronounced. Last year in particular, it was very pronounced. So We've given guidance with all that in mind basically and Let Speaker 300:38:58me just add because this question has been talked about. Like last quarter, we didn't take the strength of October into account. We took the exact same guidance approach, which was to take The weighted average historical trends and discount apply conservatism. So like last quarter, we had said that the first Quarter looked a little more stable. We didn't take that into consideration in our guidance and we have stuck to the exact same guidance methodology, which is to act with that conservatism. Speaker 300:39:29One other thing too, just to comment on the because I know a lot of you are trying to Speaker 200:39:35Understand how we fit with respect to the large cloud providers and who our trends correspond to theirs. Remember that we While our trends are similar in the long run, we in the short term, there can be differences of timing in terms of when we're going to see certain effects, where they're going to see them. We'll have a different mix. Well, the mix of cloud providers is not exactly the same as the broader market and a different mix of customers and geographies than the individual cloud providers as well. So things are not exactly one to 1 there. Speaker 700:40:04Okay, very helpful and congrats on the nice results. Operator00:40:09Thank you. One moment for our next question. And our next question comes from Matt Hedberg of RBC. Speaker 800:40:26Great. Thanks for taking my question guys and I'll offer my congrats as well. Ali, I wanted to double click on some of the improved usage trends. Can you provide us with an overview on how some of your large sort of I guess I'm wondering, Have IT executives from your perspective changed their view on the level of monitoring needed with new levels of workload? Speaker 200:41:00No, so they didn't change their view on the level of monitoring needed. I think they tried to save money wherever they could save it. By far, the biggest area they can save in their Infrastructure is there, the cloud bill itself. As a reminder, when customers pay $1 to us, They pay $10 or $20 to their cloud provider. So there's a lot more savings to be had there, but these savings flow down to us. Speaker 200:41:25We charge commensurate to the size of our customer's infrastructure. They also try to save what they could in the deliverability specifically. And usually, there's always a bit of fat you can cut. You can always Sample certain things a bit more, you can retain your logs a bit less, you can remove some of the debug logging, things like that, that can drive your cost up, but don't necessarily generate a ton of value. And that's the behavior by the way that is we see all the time. Speaker 200:41:52Like we see it For most customers, once a year, maybe twice a year, sometimes, usually before contract negotiation and things like that, where they try understand what it is they're going to need for the next 2 or 3 years. The big difference over the past year has been that everybody's been doing that at once And multiple times. It was really an environment where everyone was feeling very uncertain about the economy and needed to save money very quickly. So we expect optimization to continue as part of this macro trend in the near future. And in perpetuity after that, we'll have that continuous cycle of customers optimizing, reducing where they can reduce And then growing workload and maybe creating a little bit more mess over time as well and then optimizing again on a regular basis, so not everyone at the same time. Speaker 800:42:49Thanks a lot guys. Great color, Alex. Congrats again. Operator00:42:54Thank you. One moment for our next question. And our next question comes from Fatima Boolani of Citi. Speaker 900:43:13Good morning. Thank you for taking my questions. One for Ali and one for Dave, if I may. Olivier, the packaging and pricing motions that you discussed for the DevSecOps solution set, I wanted to zoom out generally a little bit in knowing what you know about how buying behavior and procurement behavior for a lot of your customers has changed over the course of this past year. I was wondering if you can kind of shed light on how you're thinking about an ELA or EAA type selling motion. Speaker 900:43:46I know it's something that historically you've been averse to, but I'm curious how you're thinking about it in sort of the current day and age, if you will, in terms of how your Customers have changed the way they're buying and deploying. And then for David, just wanted to get a sense of What expectations on net retention rates are built into your guidance? And in other words, should this be the quarter that we see a trough in expansion rates or net retention rates as you're thinking about it in the guidance? Thank you. Speaker 200:44:19Yes. So on the ELS, So, in general, look, we're always very open to new approaches in packaging. We try to see All things are consumed from the customer side and what makes the most sense to them. Now ELS and things like that are very difficult for Very inappropriate for a business like ours. 1, because we are fully SaaS based and there's a very, very large volume dimension to absolutely everything we do for our customers. Speaker 200:44:47So it's very, very hard to provide a one price fit all for them. We also philosophically, We like to have to get signal from what customers are willing or not willing to pay for and that drives a lot of our product innovation. We get a lot of good news this way because customers want to buy products and they scale them a lot. We also get bad news. We get customers who don't find there is enough value in a given product or think it should be doing more or think it should be doing things differently or think that the packaging doesn't make sense. Speaker 200:45:22And we'd like to have that. The reason why we simplified the pricing there and we created those new SKUs is really to try and change the motion a little bit and integrate further the observability in the security side And make it easier to break security into the conversation for these customers. But yet so far, we have some early evidence that It seems to resonate, but it's way, way, way too early to call it. We need 2, 3 quarters of that to understand the implications of the new packaging. Speaker 300:46:01Yes. And as it relates to net retention, we do not provide guidance, but just the way that we think about Some of the drivers, we don't provide guidance, sorry, on net retention per se. But essentially, what we said was That Q3 organic growth was similar to what it was in Q1. And we have said previously that in Q2 and Q3 of last year, We had lower than before, but higher than that were Q1 Q4, Q1 and now Q3. So it really is a matter of lapping Those comps, the comps have gotten increasingly easy to lap and we will let everybody know if We do produce an organic growth that's higher this Q4 than it was in Q4 last year. Speaker 300:46:58We will have in this period trough in net retention and it will begin to head up. So that's sort of how we think about it. In terms of our guidance, that's a different story. As we said, we provide Conservativism, so what's implicit in the guidance is something worse than we're experiencing, which would apply a lower organic growth. But in terms of the business trends themselves, it's really a matter of do we lap the Q4 and produce the higher organic growth in this in the Q4 coming up than we had in the Q4 last year. Speaker 900:47:40Thank you. I appreciate the detail. Operator00:47:44Thank you. One moment for the next question. And our next question comes from Brent Thill of Jefferies. Speaker 300:48:00Good morning. David, I was curious if you could focus on the enterprise traction and what you're seeing maybe for Olivier. And David, I guess on the customer add, you're 700, that's lower than your normal cruise altitude of 1,000 plus per quarter. Can you just Talk about is that number being misled because the enterprise traction is higher and that number is therefore going to be lower. Could you just drive into that a little bit? Speaker 300:48:25Thanks. Yes. As a reminder, we have a broad range of customers, the long tail and similar to what we discussed last quarter, the gross number of So the accumulation and in the enterprise, it was quite strong, was very similar to what we've experienced. And we have a very small tail that has a larger attrition rate, but doesn't have a lot of dollars Attached to it. So the trends continue, which is very strong as Olivier mentioned. Speaker 300:48:56New logo accumulation, both in terms of number of new logos And ARR, and that was true when Olivier can talk about the enterprise side of it, offset by this tail that has very little dollars associated with it. Speaker 200:49:09Yes. And just to comment on that, remember the bottom half of our customer is represent around 1% of our revenue. And the lower increase in customer number comes from the very, very low end, which is customers that pay us in The tens of dollars a month and those customers we're getting a little bit less of those to start with. I think that's part of the economic environment And the churn is a little bit higher than it used to be there too. So that's why this number is Speaker 800:49:38a bit depressed right now. Speaker 200:49:40That being said, we had a record number of New logos over $100,000 We're doing very well in the enterprise. We're doing very well in the main market also. We're also doing very well at the high end of the SMB. So We are very happy with all of the segments we are targeting with our sales and marketing motions today. On the enterprise side, we actually mentioned a few of those very exciting contracts on the call. Speaker 200:50:05We get really, really excited when we see Very traditional enterprises moving to the cloud and adopting us and consolidating on us in a world to world. David is we can't see it in the room David smiling because he's excited when he sees the dental care companies, he's excited when he sees The network of convenience stores where we even instrument the fuel pump. So these are great developments for us and We're leaning hard into Speaker 500:50:38that. Operator00:50:41Thank you. One moment for our next question. And our next question comes from Kash Rangan of Goldman Sachs. Speaker 800:51:02Hello. Thank you very much. Good to see, I'm sure that you're all Two things. 1 is with respect to LLM monitoring, which was demoed at the DASH conference, which was I thought Absolutely fascinating. I know you quantified, Ali, 2.5 percentage points of growth coming from generative AI workloads. Speaker 800:51:22How do we think about the revenue opportunity for LML monitoring that it's at an early stage? And I also have a second question, slightly more controversial, When and if we run into customers that think they're spending their bills for Datadog are getting to Speaker 200:51:38be a little bit on Speaker 800:51:39the larger side, That is a sign of success, but how do you ensure that that success does not work against the company that it opens up the door for price competition from others, Wapna? Thank you so much and congrats. Speaker 200:51:51Yes. So on the LDMOP side, I think it's too early to tell how much revenue opportunity there is in the Tooling specific to LM ops, dear. When you think of the whole spectrum of tools, The closer you get to the developer side, the harder it is to monetize and the further you get towards operations and infrastructure, the easier it is to monetize. You can shift things that are very useful and very creative to your platform because they get you a lot of users, a lot of attention and a lot of stickiness that are harder to monetize. So we'll see where on the spectrum that is. Speaker 200:52:28What we know though is that the broader generative AI Up and down the stack from the components themselves, the GPUs all the way up to the models and the various things that are used to All of that is going to generate a lot of opportunity for us. We said right now it's considered among the AI native largely model providers, but we see that it's going to broaden and concern a lot more of our customers down the road. And your second So when we grow a lot, we are very successful with some customers, how do we not create a long term issue, where they spend a lot of money and that gets a commission. Look, it's a great situation to be in to have customers spend a lot of money on you and have to justify that value over time. I think it's very healthy. Speaker 200:53:21I think that again that's what drives innovation and great product development. And our role there is to make sure we have healthy partnership with customers every single step of the way. And we again, we charge them Another magnitude less than what they spend for their cloud infrastructure, maybe 2 orders of magnitude less than what they spend on their R and D. And so we think we should be in a position of leverage where if we do our jobs right, we show a lot of value for customers. We send them a lot of money. Speaker 200:53:54We make them a lot And we have them generate a lot more revenue. So that's how we see things and how we hold ourselves to. Operator00:54:07Thank you. One moment for our next question. And our next question comes from Alex Zukin of Wolfe Research. Speaker 800:54:28Hey, guys. Thanks for taking the question and congrats on a great quarter. Maybe just a quick one for me. Libby, you mentioned the federal opportunity or you mentioned the federal activity in the quarter with a deal that was pretty interesting. That's something that we picked up as an area of excitement for you guys. Speaker 800:54:48Can you maybe just talk about what the opportunity there is over the next 12 months and beyond Maybe stock rank it as a priority for you guys and then I've got to put a call up. Speaker 200:55:00So I missed the domain you're talking about, sorry, that Okay. So that's definitely a dynamic of investment for us. It's to look, we're Happy with 2 things. Happy with the fact that we're moving further and further into the right level of certifications needed. We're happy with the early success with some agencies where we are spreading and assisting those government agencies and Now getting to go some of those world to world. Speaker 200:55:30But we are only scratching the surface of what we can do inside and there's a lot more we need to do. Some of it on the certification side and the product side and some of it on the go to market side and making sure we have all of the parts of the motion working. So we I expect that to be one of the main areas of investment on the go to market side next year in terms of new markets we're going after. Speaker 800:55:57Perfect. And then maybe on the back on the AI question. I guess maybe just can you drill a little bit deeper within those AI native companies, the criticality of their Datadog uses, meaning Are you seeing something different where in a world where these applications become more prevalent, there's the opportunity to kind of expand wallet share as observability becomes even more important. And how should we think about the growth opportunities from those types of workloads In either 2024 or 2025. Speaker 200:56:33Yes. So in general, the more complexity there is, The more useful observability is the more you see value from writing code Actually understanding it and observing it. So to caricature, like if you only if you spend the whole year writing 5 lines of code That are really, really deep. You actually know those timelines really well. Maybe you don't need to observe it before it because you'll see you understand exactly how they work and what's going on with them. Speaker 200:57:00On the other hand, if thanks to all the major advances of technology and all of the various open source and AI and you can just Very quickly generate thousands of lines of code, ship them and start operating them, you actually have no idea how these work would they do. And you'll need a lot of tooling and observability to actually understand that and keep tracking that and secure it and do everything you need to do with it over time. So we think that Overall, this increases in productivity are going to favor observability. In terms of the Future growth of AI, look, I think like everyone, we're trying to guess how transformative it's going to be. Looks like it's going to be pretty much if you judge from just internally, how much of that technology we are adopting and How much is it of a productivity impact it seems to be having? Speaker 200:58:06So again, Today, we only see a tiny, tiny bit of it, which is early adoption by model providers and a lot of companies that Trying to scale up and experiment and figure out who it applies to their businesses and what they can ship to use the technology. But we think it's going to drive a lot of growth in the years to come. Speaker 800:58:32Okay. Thank you, guys. Operator00:58:35Thank you. One moment for our next question. And our next question comes from Jake Roper of William Blair. Speaker 1000:58:52Hey, thanks for taking the questions and I'll echo my congrats on the great results. Olivia, you called out the 2.5 points from AI native customers a few times, Speaker 500:59:01but you've also said that Speaker 1000:59:02the broader customer base should start adding AI work When do you think that actually takes place and the broader customer base starts to impact that AI growth in more earnest? Speaker 200:59:14We don't know. And I think it's too early to tell. For one part, there's so much uncertainty in terms of these customers having to figure out what it is they're going to ship to their own customers. I think everybody is trying to learn that right now and experimenting. But the other part is also that right now the Innovation is largely concentrated among the mobile providers. Speaker 200:59:36And so it's rational right now for most customers to rely on those Instead of deploying their own infrastructure. Again, we think it's likely going to change. We see a lot of demand in interest in Other ways to host models and run models and custom models and things like that. But today that's the these are the trends of the market today basically. Speaker 1000:59:58Okay, helpful. And then just a follow-up on the optimization front. It sounds like the early optimizers took about a year to complete those initiatives. What type of timelines are you seeing from kind of the second or third layer of customers that started their optimizations later in the game? Have those also started to stabilize given they weren't as large as the early optimizers? Speaker 1001:00:17Just trying to kind of parse out the customer base there. Speaker 201:00:20Yes. So we don't really know for sure. That's also why we are careful not to go and enter this forever. The I would say that For customers that are not part of this initial cohort, there's less of an overhang. So the customers that were the early optimizers and that had the most acute optimization They need to be cloud native, so all in on the cloud, very heavy on IT spend in general and the Substantially all of their IT being in the cloud. Speaker 201:00:51These tended to be also companies that were fairly high growth, but low profitability that needed to pivot Financials over a fairly short amount of time. I think if you look at the rest of the customer base, they're mostly not in that situation. So we expect the behavior to be different. Operator01:01:11Thank you. This concludes the question and answer session. I would now like to turn it back to CEO, Olivier Pomel for closing remarks. Speaker 201:01:21Thank you very much. I want to thank everyone for attending the call today. I also want to take a minute to thank our customers for their trust. We know these are trying times with all the macro uncertainty and We thank them for their trust. I also want to thank our employees, all the Datadog for a quarter of hard work and great successes. Speaker 201:01:43And on these good words, we'll all get back to work and get busy for the end of the year. So thank you very much. Operator01:01:52This concludes today's conference call. Thank you for participating and you may now disconnect.Read morePowered by