Datadog Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

Key Takeaways

  • Revenue beat expectations at $611 M, up 27% YoY, with free cash flow of $187 M (31% margin) exceeding guidance.
  • Customer count rose to ~28,000 (from 25,500), including 3,340 customers with >$100K ARR—these larger accounts now represent 87% of ARR.
  • Platform stickiness remains high—82% of customers use ≥2 products and newer product families outside core observability surpassed $200 M ARR in Q1.
  • Innovation push continues with GA launches of AI-driven incident management and Event Management; AI integrations are in use at ~2,000 customers, contributing ~3.5% of ARR.
  • Gross margins held at 83%, but full-year operating margin guidance of 23% factors in stepped-up R&D and sales investments, including an ~$11 M DASH conference spend.
AI Generated. May Contain Errors.
Earnings Conference Call
Datadog Q1 2024
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the First Quarter 20 24 Datadog Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I'd now like to hand the conference over to your first speaker today, Yuka Bodrick, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Marvin. Good morning and thank you for joining us to review Datadog's Q1 2024 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 Q2 fiscal year 2024 and related notes and assumptions, our gross margins and operating margins, our product capabilities, our ability to capitalize on market opportunities and usage optimization trends. 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.

Speaker 1

These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10 ks for the year ended December 31, 2023. Additional information will be made available in our upcoming Form 10 Q for the fiscal quarter ended March 31, 2024 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 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.

Speaker 1

Datadoghq.com. With that, I'd like to turn the call over to Olivier.

Speaker 2

Thank you, Kukar, and thank you all for joining us this morning. We are pleased with our execution at the start of 2024. First, we have continued to broaden our platform across observability, cloud security, software delivery, as well as closing the loop with cloud service management. We also kept supporting our customers' adoption of new technologies, including NextGen AI and large language models. And we have continued to add new customers and to see existing customers increase our usage growth and product adoption.

Speaker 2

Let me start with a review of our Q1 financial performance. Revenue was $611,000,000 an increase of 27% year over year and above the high end of our guidance range. We ended the quarter with about 28,000 customers, up from about 25,500 last year. We had about 3,340 customers with an ARR of $100,000 or more, up from about 2,910 last year. These customers generated about 87 percent of our ARR.

Speaker 2

And we generated free cash flow of $187,000,000 with a free cash flow margin of 31%. Turning to platform adoption. Our platform strategy continues to resonate in the market. As of the end of Q1, 82% of customers were using 2 or more products, up from 81% a year ago. 47% of customers were using 4 or more products, up from 43% a year ago 23% of our customers were using 6 or more products, up from 19% a year ago and 10% of our customers were using 8 or more products, up from 7% last year.

Speaker 2

We continue to see robust growth in our 3 pillars of observability in infrastructure monitoring, APM and log management. But we also have many younger products that are becoming more meaningful contributors to our business over time. For example, our products outside of Infrastructure Monitoring, APM Suite and Log Management exceeded €200,000,000 in ARR in Q1. And as a reminder, within the APM suite, we include core APM, Synthetics, Rum and Continuous Profiler. And as we look at the 12 products that we launched between 2020 2022, those now contribute about 11% to our ARR.

Speaker 2

Of those 12 products, 8 are over 10,000,000 in ARR, which is a nice milestone for these relatively new additions. And we are seeing some products grow faster than we initially expected. For example, database monitoring is already 1% of our revenue with strong and growing product penetration across our customer base. So we are very pleased with the progress of our newer products, even though we know we have much further to go with them. Now let's discuss this quarter's business drivers.

Speaker 2

In Q1, we saw usage growth from existing customers that was higher than in Q4. And this usage growth in Q1 was similar to what we experienced in Q2 and Q3 of 2022. As a reminder, that was a period when we started to see a normalization of usage following the accelerated growth we had experienced in 2021. Overall, we saw healthy growth across our product lines. And as usual, our newer products grew at a faster rate from a smaller base.

Speaker 2

While some of our customers are continuing to be cost conscious, we are seeing optimization activity reduce in intensity. As an illustration, the optimizing cohort we identified several quarters ago did grow sequentially again this quarter. We also see that customers are adopting more products and increasing usage with us. We think this shows that they are moving forward with their cloud migration and digital transformation plans and that we are executing on opportunities to consolidate point solutions into our platform. And finally, churn continues to be low with gross revenue retention stable in the mid to high 90s, highlighting the mission critical nature of our platform for our customers.

Speaker 2

Moving on to R and D. We had another very productive quarter. In the Next Gen AI space, we announced general availability of bit AI for incident management. By using bit AI for incident management, incident responders get auto generated incident summaries to quickly understand the context and scope of a complex incident. And users can also acquire Beats AI to ask about related incidents and perform tasks on the fly from incident creation to resolution.

Speaker 2

We're also continuing to see more interest in AI for more customers. As a data point, ARR for more next gen AI customers was about 3.5% of our total, a strong sign of the growing ecosystem of companies in this area. To have customers understand AI technologies and bring them into production applications, our AI integrations allow customers to pull their AI data into the Datadog platform. And today, about 2,000 of our customers are using 1 or more of these AI integrations. And we've continued to keep up with the rapid innovation in this space.

Speaker 2

For example, adding a new integration in Q1 with the NVIDIA Triton Advanced Server. In the Cloud Service Management area, we released Event Management in general availability. Our customers face increasing complexity at scale causing the volume of alerts and events to explode, which makes it difficult for teams to identify, prioritize, summarize and route issues to the right responders. Event Management addresses this challenge by automatically reducing a massive volume of events and alerts into actionable insights. These are then used to generate tickets, call an incident or trigger an automated radiation.

Speaker 2

And by combining Event Management with Watchdog, Beats AI and workflow automations, Datadog now provides a full AI op solution that helps teams automate remediation, proactively prevent outages and reduce the impact of incidents. In the observability space, our Log Management product continues to expand capability. In March, we made error tracking for logs generally available. Error tracking intelligently combines millions of errors from logs into a manageable number of issues for customers. And beyond error tracking, we are delivering new features to allow our customers to do more with their logs within the Datadog platform, starting with new query capabilities such as enhanced full text search and support for advanced subqueries, both highly desired by our customers.

Speaker 2

We also continue to make progress with FlexLogs. As a reminder, FlexLogs allow customers to easily scale storage and compute separately, which in turn allows for new very high volume use cases in a cost effective manner. While Flexlov remains in limited availability, we are seeing a high level of interest from customers, many of whom want to regain logs for long term purposes such as audit, security and compliance. And we are pleased to see that with only a limited set of customers so far, FlexLog already exceed $10,000,000 in ARR today. In the digital experience area, we launched mobile app testing and general availability, giving access to fast, no code, reliable testing on their mobile devices, which was a big challenge for customers given the wide range of devices and operating systems in use by consumers.

Speaker 2

And in Cloud Cost Management, we've added full support for Google Cloud, so FinOps and DevOps teams can optimize their cloud spend across their AWS, Azure and GCP footprint. Cloud Cost Management is another of our newer products that exceeds the $10,000,000 ARR milestone, and we believe there's significantly more opportunity for us to help our customers there. As usual, I'd like to thank our product and engineering teams for the quarter, and I'm looking forward to the many announcements we'll make at our DASH the conference in late June here in New York. Now let's move on to sales and marketing. We've been pleased to once again add some exciting new customers and expand with many more.

Speaker 2

So let's go through a few examples. 1st, we signed a 3 year 7 figure expansion with a leading online grocery business. This customer has used Datadog as their platform of choice for several years now. And as they migrate to Azure, they are looking to ensure reliability and security as they deploy at scale. With this renewal, they are adding cloud security management, application security management and cloud theme to enable a shift to a DevSecOps culture in their organization.

Speaker 2

And this customer expects to add 7 products for a total of 14 across the Datadog platform. Next, in 2 deals over the past 6 months, we had a 7 figure expansion with a medical device company. This customer was primarily using our infrastructure monitoring in APM Suite, but its legacy logging solution was becoming cost prohibitive, while the lack of correlation across silo teams was causing frustration and higher time to resolution. With this expansion, the customer plans to adopt 9 products and consolidate its log management tool as well as 4 other commercial and cloud native tools into Datadol. Next, we signed a high 6 figure expansion with an athletic apparel company.

Speaker 2

This company had a dozen disparate monitoring tools, which wasted time and was impacted operations, revenue and customer experience. With this expansion, the company plans to consolidate out of 4 commercial and open source point solutions. They also expect to save 1,000,000 of dollars over the next several years while providing a great consumer experience. Next, we signed a high 6 figure expansion with a European division of 1 of the world's largest carmakers. This customer has chosen Datadog as its observability vendor in many business units globally.

Speaker 2

And in Europe, they currently monitor about a quarter of their applications with us and are migrating hundreds of applications to fully move to Datadog in the next 2 years. With this expansion, this customer is using 8 products in the Datadog platform. Next, we signed a 6 figure land with a division of a Fortune 500 industrial company. The company is moving its e commerce applications to Google Cloud. They felt that listing on prem monitoring tools would not transition well to the cloud and are starting with 3 of our products as they are confident in that Log's ability keep innovating in modern cloud and serverless environments.

Speaker 2

Finally, we signed a 6 figure land with 1 of the world's largest communication infrastructure companies. This company started a cloud migration a couple of years ago and found itself limited by fragmented tooling and lack of data correlation. In contrast, the Datadog service catalog gives them a single view for performance, ownership, security, SLOs and KPIs, which its customer believes is a unique capability among the vendors it consider and which aligns with their goal of delivering centralized observability across the business. And this customer is adopting 7 data products initially and consolidating out of 4 tools. And that's it for another productive quarter from mobile to market teams.

Speaker 2

Let me now say a few words on our longer term outlook. Overall, we continue to see no change in a multiyear trend towards digital transformation and cloud migration. We are seeing improved usage growth with less impact from optimization than we had seen in the last few quarters. For those customers who are remaining cost focused, we are very happy to help them get value from their observability solutions and consolidate into the Datadog platform to achieve time and cost savings. Meanwhile, we are seeing continued experimentation with new technologies, including a growing adoption of AI, which we believe will be an accelerator of technical innovation and cloud migration over time.

Speaker 2

And we're working every day to innovate and help our customers adopt new technologies with confidence and become better businesses in the process. With that, I will turn it over

Speaker 3

to our CFO. David? Thanks, Olivier. Q1 revenue was $611,000,000 up 27% year over year and up 4% quarter over quarter. To dive into some of the drivers of the Q1 performance, First, regarding usage growth.

Speaker 3

In Q1, we saw sequential usage growth from existing customers that was higher than the usage growth in Q4. Q1's usage growth was similar to what we experienced in Q2 and Q3 of 2022. And given this growth and off a larger base, our sequential ARR dollars added was the highest since Q4 2021. During Q1, we experienced a linearity pattern that was very typical for us, which included usage growth in March that was higher than January February. Regarding usage growth by customer size in Q1, we saw usage growth accelerate across our larger customers, those with $100,000 of annual spend or higher.

Speaker 3

And we saw particularly strong usage growth with our largest customers who spend multiple 1,000,000 of dollars with us annually. Geographically, we experienced stronger year over year revenue growth in international markets than in North America. And finally, for our retention metrics, our trailing 12 month net revenue retention was in the mid-100s in Q1 sorry, in the mid-100s in Q1, similar to last quarter. Our trailing 12 month gross revenue retention continues to be stable in the mid to high 90s. Now moving on to our financial results.

Speaker 3

Billings were $618,000,000 up 21% year over year. Billings duration increased year over year. Sequential billings growth was seasonally lower as it was in Q1 2023. Remaining performance obligations or RPO was $1,730,000,000 up 52% year over year And current RPO growth was in the low 40s percent growth year over year. RPO duration increased year over year but was down quarter over quarter as we saw fewer multi year deals relative to last quarter.

Speaker 3

In general, we are continuing to see an increasing interest with our larger customers in multi year commitments, which results in longer RPO duration in both total and current RPO. As a reminder, our RPO has been and continues to be lumpy, an effect that may be amplified as our customers move towards multi year deals. We continue to believe revenue is a better indication of our business trends than billings and RPO as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts. Now let's review some key income statement results. Unless otherwise noted, all metrics are non GAAP.

Speaker 3

We have provided a reconciliation of GAAP to non GAAP financials in our earnings release. 1st, gross profit in the quarter was $509,000,000 representing a gross margin of 83.3%. This compares to a gross margin of 83.4% last quarter and 80.5% in the year ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold as our engineering teams pursue cost savings and efficiency projects. Our Q1 OpEx grew 14% year over year and increased from 10% year over year growth last quarter.

Speaker 3

As discussed last quarter, we intend to invest in headcount in 2024 and we have accelerated hiring in sales and marketing and R and D to execute on our growth plans. Q1 operating income was 100 and $64,000,000 or 27 percent operating margin compared to 28% last quarter and 18% in the year ago quarter. And now turning to the balance sheet and cash flow statements. We ended the quarter with $2,800,000,000 in cash, cash equivalents and marketable securities. Cash flow from operations was $212,000,000 in the quarter.

Speaker 3

After taking into consideration capital expenditures and capitalized software, free cash flow was $187,000,000 for a free cash flow margin of 31%. Now for our outlook for the Q2 and the fiscal year 2024. Our guidance philosophy remains unchanged. As a reminder, we base our guidance on trends observed in recent months and apply conservatism on these growth trends. So for the Q2, we expect revenue to be in the range of 6 $20,000,000 to $624,000,000 which represents a 22% year over year growth.

Speaker 3

Non GAAP operating income is expected to be in the range of $134,000,000 to $138,000,000 which implies an operating margin of 22%. In Q2, we will be holding our DASH user conference, which we estimate to cost about $11,000,000 Our operating income guidance reflects this event. Non GAAP net income per share is expected to be $0.34 to $0.36 per share based on approximately 360,000,000 dollars weighted average diluted shares outstanding. For fiscal year 2024, we expect revenue to be in the range of $2,590,000,000 to $2,610,000,000 which represents 22% to 23% year over year growth. Non GAAP operating income is expected to be in the range of $585,000,000

Speaker 2

to $605,000,000

Speaker 3

which implies an operating margin of 23 percent and non GAAP net income per share is expected to be in the range of $1.51 to $1.57 per share based on approximately 361,000,000 weighted average diluted shares outstanding. Now for some additional notes on our guidance. First, we expect net interest income and other income together for fiscal 2024 to be approximately $110,000,000 Next, we expect cash taxes in 2024 to be in the $20,000,000 to $25,000,000 range and we continue to apply a 21% non GAAP tax rate for 2024 and going forward. And finally, we continue to expect capital expenditures and capitalized software together to be 3% to 4% of revenues in fiscal 2024. To summarize, we are pleased with how we started 2024.

Speaker 3

And I want to thank Datadog's worldwide for their efforts. And now with that, we will open the call for

Operator

Our first question comes from the line of Sanjit Singh of Morgan Stanley. Your line is now open.

Speaker 4

Thank you for taking the questions. It was encouraging to see that usage trends continue to improve at least sequentially Q1 over Q4. I wanted to see if you could put like the usage trends you're seeing in your business in context of like the broader cloud landscape. And we're seeing some really nice result out of the hyperscalers. Obviously, those are much larger businesses and in different can be in different product areas.

Speaker 4

But when we think about the tailwinds of like cloud migrations, and also AI workload starting to come on board, How is that playing out in Datadog's business versus what we may be seeing from like the hyperscalers who are who seem to be accelerating to a higher degree?

Speaker 2

Yes. Hi Sanjay, this is Olivier. So I think in general, it's hard to be to draw precise quarter by quarter, 1 to 1 mapping between the revenue and the cloud providers and our revenue. I think you pointed out there are things in their products that don't relate to us directly or things that enter the revenue that don't relate to us directly. We have products that don't tie 1 to 1 with infrastructure on their end.

Speaker 2

But in general, over the longer term, we are very exposed to the growth trend you will see with the cloud providers and the correlation you've seen in the past between our businesses we expect will remain in some form in the future. We're also very exposed to the same tailwinds of obviously cloud migration, but also AI adoption. We'll say also on AI adoption that some of the revenue jumps you might see from the cloud providers might relate to supply of GPUs coming online and a lot of training closer being provisioned. And those typically won't generate a lot of new usage for us. We tend to be more correlated with the live applications, production applications and inference workloads that tend to follow after that and that are more tied to all of these applications going into production.

Speaker 2

So these are the things to factor. But overall, same trends, just not a one to one timing.

Speaker 4

Makes complete sense. And I was wondering if you had any comments on how usage trends coming out of March would seem to be stronger than in the beginning of Q1, how that sort of played out in April?

Speaker 3

Sure. Hey, Sanjit, how are you? It's David here. As we always say, we try to look into the next month, but that's a small time set. In this case, the April trends continue to exhibit higher sequential growth rates than the year ago quarter.

Speaker 3

But we caution everybody that 1 month does not a quarter make and we'll continue to update that next quarter as we report.

Speaker 2

And the season 2019 Q1 was very usual. Every year there's a drop around the holidays in Q1 and January starts slowly and then it accelerates into March and we've seen that pretty much everything else so far and we've seen it this year as well.

Speaker 4

I appreciate the color. Thanks Olivier. Thanks David.

Operator

Thank you. One more for our next question. Our next question comes from the line of Mark Murphy of JPMorgan. Your line is now open.

Speaker 5

Thank you so much and congratulations on the revenue acceleration during quarter. Olivier, I'm wondering how commonly are customers in your GenAI cohort using Datadog to monitor for bias and hallucinations within their AI models as opposed to just keeping the systems running? And also, do you see more concentration of customers within that cohort? Or is there actually more diversity as more of the models move beyond the training stage and into the inferencing stage?

Speaker 2

Yes. So we have product for monitoring not just the infrastructure, but what the LMs are doing. Those products are still not in GS. We're working with a smaller number of design partners for that. As I think not only these products are maturing, but also the industry around us is maturing and more of these applications are getting into production.

Speaker 2

You should expect to hear more from us on that topic in the near future. The customers we have that are the most scaled on AI workloads are the model providers themselves and they tend to have their own infrastructure for monitoring the quality of the models. But we think there are good bellwether in terms of what the adoption of AI is going to be from all the other companies and we definitely see a trend where customers start with an API driven or API accessible model, build applications and then offload some of that application to other models that typically come from the open source and they might train fine tune themselves to get to a lower cost and lower time to respond.

Speaker 5

I understand. Okay. And then, David, you had mentioned, I think last quarter that the cloud native spending had rebounded. It was outpacing the broader business. And just to clarify, are you saying that the traditional large enterprise business during Q1 you picked up in terms of the cloud migration activity as the hyperscalers might have suggested.

Speaker 5

Was that just wondering if you could double click on that comment and whether there was something really noticeable intangible there among the large enterprise more traditional businesses? Yes.

Speaker 3

We saw, we said we saw growth accelerate in our larger customers, including the larger cloud natives and enterprise. So we did see more normal activity, including new workloads in both of those cohorts.

Speaker 6

Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Kash

Speaker 7

open. So good to go right after, Mark. Congratulations to the team on very good results here. Olivier, I was wondering if you could talk about the consolidation trend that you're talking about. It looks like the pace of consolidation and also the intensity of lands and expanse seems to be a bit more remarkable at the starting point of these categories.

Speaker 7

So if you could expand on that a little bit. And one for you, David, our CRPO has been accelerating. I think it's low 20s to 30s to 40s over the last few quarters. But revenue expectations have not edged up pretty significantly. So can you just talk about the lead lag effect, granted that you always try to tell us that revenue is the best indicator.

Speaker 7

But nonetheless, it's hard to dismiss the CRPO acceleration we've seen off of the last few quarters. Thank you so much.

Speaker 2

Yes. So I'll let David speak about the CRPO dynamics. But the we so look, we've seen over the past couple of years really, but really the past quarters, more consolidation than we've seen in the past, in part driven by customers wanting to being cost conscious wanting to save money, but in part also by customers getting a little bit further into their cloud migration and rationalizing what they're using as they do that. So we keep saying that we've mentioned a number of those deals in the examples we've given. That's a large part of what our enterprise business is doing in particular.

Speaker 2

There's no particular change in Q1 compared to what we've seen in Q4 before. Q1 is we typically do a lot of larger deals in Q1 compared to Q1 seasonally in general. To the point you made earlier, we do see typically a bit of a lag between these big consolidation deals and the moment where we see our revenue recognized. Typically, when we consolidate products, what we'll see is we'll assume the ramp time for moving usage from other products to our platform over what can be a number of quarters or even years sometimes. And it might take some time for those deals to for those numbers to materialize in the revenue.

Speaker 2

On the flip side, we also have a number of deals where customers are growing very quickly to their usage and we capture new commitments with them that might lag a little bit their consumption and the revenue we recognize. So we see a little bit of both. David, do you want to speak a

Speaker 3

little bit more? Sure. Similar to what we said last time, we are seeing our customers, particularly our larger customers, commit longer to us, that can be multiyear deals or even out towards the weighted average towards annual deals as opposed to shorter term deals. So basically, it is a positive in that it does connote that clients are committing to Datadog more as their core platform. It is a trend that we're seeing particularly in larger customers.

Speaker 3

But we repeat what we said that really how we contract and bill is not necessarily 1 to 1 correlated with our revenues. Our revenues are correlated with our usage. So, it's a positive, but I think that we want to keep everybody grounded on our revenues as the most important metric and then secondarily our ARR as predicting future revenue growth. Wonderful. Thank you so much and congrats.

Speaker 3

Yes.

Operator

Thank you. One moment for next question. Our next question comes from the line of Raimo Lenschow of Barclays. Your line is now open.

Speaker 2

Thank you.

Speaker 6

Going back to the workload migration that seems to be kicking back in again from listening to the hyperscalers and you talked about the timing difference there. I want to kind of ask on a different aspect here and that's kind of your sales capacity and the ramp in sales capacity that we should think about it. Like can you speak about like where you are at the moment in terms of capacity? And then as the market reaccelerates, like what sort of investment should we think about there? Thank you.

Speaker 2

So we're growing self capacity. We've been growing it for the past few years. We grew it a little bit slower, more slowly last year as we were careful about profitability and not getting too far ahead of ourselves would look like a tough market, but we're definitely growing sales capacity. And there's a ramp model that is associated with that. So the capacity typically lags a little bit the growth in terms of headcount.

Speaker 2

It takes time for people to be productive. But we're investing, we're growing.

Speaker 3

Yes, long term sales capacity is very much calibrated to revenue and UAR growth. As Ali mentioned, there are periods where it will move a higher than that as we make investments and there's periods where we might optimize. I think last year was a period where we digested previous investments, optimized a bit. And we said this year we're leaning into expansion of our sales capacity and investment. But long term it correlates with revenue.

Speaker 3

And we look at that. We look at do we have enough sales capacity relative to what we see as the demand in the market, the territories and the expected ARR growth.

Operator

To give you just a tiny

Speaker 2

bit more color, like one of the big areas of focus inside the company is ramping up recruiting again. So we're recruiting a lot faster, a lot more than we were last year. And so we had to rev up that recruiting engine again. I won't I think they're listening to us. I want to congratulate our business recruiting team there for doing a fantastic job really bringing that engine back up.

Speaker 6

Perfect. Hey, thank you. That's very encouraging.

Operator

Thank you. One moment for next question. Our next question comes from the line of Matt Hedberg of RBC. Your line is now open.

Speaker 6

Great. Thanks for taking

Speaker 3

my questions, guys. Ali, you mentioned newer products continue to do really, really well. You gave some interesting data on database monitoring, for instance. I'm wondering, are these newer products resonating up and down your customer base? Or are these some of these cross sell statistics stronger with some of your bigger customers?

Speaker 2

Yes. So it really depends

Speaker 4

on the

Speaker 2

product. Some products are extremely broad based in terms of their appeal and some others are really more directed at certain types of customers. For example, our products that have to do with monitoring physical networks, They tend to be more appealing to larger older enterprises because they are the ones with large physical footprints, whereas products like cloud cost management for example or even database monitoring have very, very broad appeal because every single customer cares about their cloud cost and every single customer is using databases that are at the center of their applications and that are absolutely critical to understand. And we mentioned those products because really like we see that as the our efforts paying off in terms of broadening the offering and investing in R and D and these are green shoots that we expect to grow into the future. Some of those products we have extremely high expectations for because they correspond to very large categories which we can think can be very meaningful to the business in the long run.

Speaker 2

Some others are surprising us a little bit. That's why we mentioned database monitoring. We were not sure if it was going to be a huge category in cloud environment, but it turns out not only is there a very big problem our customers need us to solve there, but also this product hit that problem on their head from day 1 really and we expect now we expect a lot more from it.

Speaker 3

Got it. Thanks a lot. Congrats on the results guys.

Operator

Thank you. One moment for next question.

Speaker 8

David, you David, you explicitly mentioned that the international book of business and activity was stronger than domestic. So I wanted to better understand some of the more intrinsic and maybe extrinsic dynamics that are driving that divergence in terms of geographic theater performance. And if you could sort of help us understand if it's an end market, a product based or a budgetary based set of distinctions that would be very helpful. Thank you.

Speaker 3

Yes. It's very similar to what we've been saying over time. The international markets have been more immature as to their cloud migrations and their deployment of digital applications than the North American markets and we've been more immature in terms of our footprint. So we've talked about some examples in Investor Day and otherwise of places like Brazil and Korea to name just a couple where we are seeing an increase of activity as well as an increase of our deployment of our capacity, which has resulted in an uptick of international demand over time.

Speaker 2

Yes. For us to be successful, there are 2 factors that are needed. So first one is cloud adoption needs to happen because we can't run it really. And the second one is we need to deploy sales capacity and grow sales capacity and that's really the combination of the 2. In most markets today, cloud adoption is happening.

Speaker 2

There still may be a few holdouts that are a little bit slower. And but we're not yet deploying enough sales capacity everywhere and that's one of our bigger areas of focus as I mentioned earlier.

Speaker 1

Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Brent Thill of Jefferies. Your line is now open.

Speaker 6

Good morning, David. Good margins, 27%, but you're guiding the full year to 23%. I know you mentioned you're stepping on the sales investments, but anything else that's coming into the investment mix this year that is different than we've seen in the past years to drive that margin lower throughout the year?

Speaker 3

Yes, sales and R and D investment, we are we have both the sales capacity and the whole ecosystem that we've been talking about. And as Ali often says, we have more high return product projects than we always have capacity and are attempting to make the appropriate investments. So it's really that we are layering in. We all said all along that this can't be changed, headcount can't be changed as quickly as revenues. So we have periods where we're investing more than revenue growth or less.

Speaker 3

And this year is the one where we're coming from a more conservative posture of last year into more investment in both R and D and sales and marketing. There's nothing one time or special. It relates to both sales capacity and R and D projects. Ali, anything else?

Speaker 2

Yes. Again, I mean, I bring it back to what I was saying earlier. A big focus internally is recruiting and making sure that we go fast enough there. I would say one more thing. Last year when the market was slowing down, most of our peers have laid off their recruiting teams and we didn't do that because we knew we need to our successful depend on revving the recruiting engine backup and growing the engineering and sales team fast enough for us to go after the generated market opportunity we have.

Speaker 2

So we are very happy we haven't done that, but we still have a lot of work to do to record enough with the right people fast enough.

Speaker 3

I'd add this, we always have said that we have a very efficient scalable business and we control the pace of our investments. And we at the same time that we're investing, we've been investing in efficiency projects like we talked about in the cloud to balance those things to deliver a strong profitability posture with strong investment.

Speaker 6

David, can I just ask a quick clarification on commitment overage and usage? I think you had a roughly 75%, twenty 5% split across commit coverage and usage. Is that still in the same ballpark? Yes.

Speaker 3

I think we've said it's been in the range of sort of upper teens to mid-20s over time. That type of posture of clients under committing and evolving into their usage hasn't changed over time. So, that is still in the range that we've talked about since we went public.

Speaker 2

Great. Thanks. Thanks.

Operator

Thank you. We'll move for next question. Our next question comes from the line of Jake Roberts of William Blair. Your line is now open.

Speaker 9

Hey, thanks for taking the questions and great to hear that AI native customers represented 3.5% of AR. I'm curious though what you're seeing on the demand front for your own AI products like AIOps and Cloud service management? And then you mentioned that the model providers have built their own tools to monitor the training of their models. As you start to roll out your own LLM observability solutions, do you see that trend changing? And is that something that customers have been asking you to build?

Speaker 2

So on the first question, so we look, we see a lot of interest in the new products. These are new products. So we just announced in GA the event management product, which is the main missing building that we had for full AI ops platform. And we also just released into GA based on incident management. So there's a lot of demand for it.

Speaker 2

The products actually, I will say, for bids for if the management is a joy to use, so that's great. But you should also expect to hear more from us on that topic in the next couple of months. So this is all very exciting. On the tooling, I would say there's a handful of players that have been building that tooling for a few years for in a way that's very specialized to what they do internally. They're not necessarily very representative of the bulk of the market.

Speaker 2

So in those situations, we're always careful about overfitting products to a group that might not be the right target customer group in the end. In the same way that building infrastructure monitoring for the cloud providers to use internally might be might not be an exact fit for what the rest of the world needs. That being said, I mean, look, we work a lot with those companies and they have a number of needs that some of them they can meet internally and some of them they don't. And if I go back to the example of hyperscalers, we actually have teams at the hyperscalers that use us for application or infrastructure or logs internally even though they've built a lot of that tooling themselves. So I think everything is possible in the long run.

Speaker 2

But our focus is really on the vast majority of the customer base that's going to either use those API based products or tune and run their own models.

Operator

Thank you. One moment for next question. Our next question comes from the line of Karl Keirstead of UBS. Your line is now open.

Speaker 5

Okay, great. Maybe to Olivia, could you give a little context to the President stepping down into the Board seat? He's obviously been there a long time and it's been a big part of the Datadog story. And then for David, you've done a great job over the years, dissuading us from over indexing on Doctor and billings. But as you actually pointed out, the sequential decline in Doctor and billings was quite a bit larger than normal.

Speaker 5

I'm just curious if there's a story there. Thank you.

Speaker 2

So I'll start with Amit Topresidents. So Amit wanted to stop working as a full time operator, but wants to stay close to the company and we want to stay close to him too. I mean, it's been, as you pointed out, a big part of Datadog's story and we definitely want to keep him involved in the company and keep working with him. So the plan is for him to join the Board. You should expect him to maybe reappear at some point as a VC investor, something that's less operational than what he's doing today.

Speaker 2

And we expect him to be a part of the company for the future as well. I've always said, I will miss him every day in the office. David, do you want to comment on the Yes.

Speaker 3

Now to the more mundane topic of billings. So yes, I think that we did see a decel. We had a very strong Q4 in terms of commitments to us, which manifests in billings. We talked about the larger customers committing to multiyear deals and committing to us. We do have a sequential factor, not in our revenues, which are based on usages must, but basically in our billings and operations like that, usually in Q1 as clients sort of commit.

Speaker 3

So, in some ways, we don't have the seasonality to speak of in the revenues, but like we talked about in billings and RPO, we do have variations in billings. We're not reading that much into it, in that overall weighted, it's going to vary and we point everyone back towards ARR and revenues, but acknowledge that that seasonality may have been a little more pronounced in this cycle than in the previous one.

Speaker 2

Got it. Thank you both.

Operator

Thank you. One moment for next question. Our next question comes from the line of Brad Rygma of Stifel. Your line is now open.

Speaker 10

Great. Thanks very much. Ali, one of the fastest ways to recruit quickly is via larger acquisitions. So maybe give us your thoughts on potentially going a little bigger here given that you're generating close to $1,000,000,000 of OCS a year right now? Thanks.

Speaker 2

Yes. So look, everything's on the table for us. Like we're very busy on the M and A side. We have a team that is at any point in time reviewing multiple deals and everything is possible. I would say the larger the acquisition, the less like it is to happen, because we're extremely selective in terms of not only the economics of any deal, but also the fit and whether we think it's truly going to accelerate us in the mid to long term, but everything is possible.

Speaker 2

We are very fortunate to have a very efficient business. As you pointed out, Dave, generating quite a bit of cash now and that opens a number of doors for us and we fully intend to use that if we have the right opportunity.

Speaker 10

Great. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Koji Ikeda of Bank of America Securities. Your line is now open.

Speaker 3

Hey, guys. Thank you so much for the question here. I wanted to ask a question on AI. You mentioned in the prepared remarks about 3.5 percent of ARR, last quarter about 3%. So it looks like the trend is about plus fifty basis points a quarter over quarter right now.

Speaker 3

So really great to see the ongoing expansion there. So from a big picture perspective, in your view, what needs to happen for this metric to start expanding, say, 1, 2, 3 points a quarter?

Speaker 2

I mean look it's so first of all, I'm not sure this is a metric we'll keep bringing up. I mean it was interesting for us to look at this small group of early AI native companies to get a sense of what might come next in the world of AI. But I think as we as time goes by and as AI adoption broadens, I think it becomes less and less relevant. But the one thing I will say is, we so we try to compare our exposure to AI to what we see from the hyperscalers, because they are upstream from us in that respect. The hyperscaler that is the most open about is or transparent about in terms of numbers is Microsoft as they disclose how much of their growth comes from AI more specifically.

Speaker 2

And I will say that if you compare our business to theirs, the Azure parts of our business is growing faster than Azure itself and the AI driven part of our Azure business itself is also growing faster than what you see on the overall Azure numbers. So we think we have similar exposure and we track to the same trends broadly. The other top providers are not as forthcoming with metrics, so it's harder to do a direct comparison, but in the longer term, we expect the same trends to apply.

Speaker 4

Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Peter M. Wei of Bernstein. Your line is now open.

Speaker 11

Thank you very much. One of the things that jumped out at me is you saw some improvement in net new customer adds quarter over quarter kind of for the first time maybe over the last year or so, which is pretty exciting. Obviously, I know there's a long tail effect with this, but as you look at that, do you see that as kind of a reflection of momentum in kind of the larger enterprise or rebound in kind of the digital native venture backed community perhaps from that born in AI? And if you think about pipeline going forward, should we anticipate kind of this bottoming in strength to continue and maybe accelerate?

Speaker 2

So, I mean, yes, the number of customers going up faster than it was in the past few quarters. I would say it's hard to read too much into it because we have a large number of smaller customers and there's more viability into the number of those smaller customers we get and we lose at any point in time without really having a very large impact on the business. So I wouldn't read too much into that. I will say that the trends are rolling in customer acquisitions and retention are good. Another number we reported on, which I think is worth mentioning is we saw also a higher number of customers above CAD 100,000 across that mark, basically close the mark of CAD 100,000 in revenue.

Speaker 2

And that's a return to the mean of what we had seen before. I think last quarter number was a little bit lower. And it really shows what we're seeing last quarter, which is that customers are growing on that revenue curve. And sometimes there are little peaks and valleys in that distribution of customers across the revenue curve for us. But overall, the motion is still the same.

Speaker 2

Customers are blending with us small and they're growing and they're getting bigger. And as a result, we're getting a larger and larger number of customers above $100,000 above the $1,000,000 and driving the better way to our revenue.

Speaker 5

Thank you.

Operator

Thank you. We'll move for next question. Our next question comes from the line of Eric Heath of KeyBanc. Your line is now open.

Speaker 5

Hey, thank you. In your prepared remarks, I don't think you talked too much on security and just given we're out here at RSA this week. I was curious if you could talk about traction you're seeing there? And then maybe any feedback on adoption trends following the new packaging you rolled out a couple of quarters ago?

Speaker 2

Yes. So far, the news are pretty good on these new packages. Again, we want to wait to have seen them in the market for a few quarters before we comment too much on those, but the uptake is good. They seem to bring that well with customers, correspond to the right need and they're fairly easy to insert into the sales process. So all that are good news so far.

Speaker 2

I realized we didn't put too much in the script on security. We have we actually have a few things coming up as RSA this week in San Francisco and our team in there is there to meet with customers. 1 of the new piece of functionality we've announced last week was the agent led scanning for Infosys and Security products, which we think is going to help a lot of customers deploy our product much more broadly, much more quickly. So we're very excited about that. It's in beta right now.

Speaker 2

And yes, and overall, the same trends we commented on last quarter are still true, thousands of customers voting on security, revenue growth, growth on a number of different pillars at the same time, which is very exciting and really speaks to our platform approach for security as well. Thanks, Alan.

Operator

Thank you. One moment for next question. Our next question comes from the line of Andrew Nowinski of Wells Fargo. Your line is now open.

Speaker 6

Okay. I had a question on guidance for Q2. You had strong net new ARR in Q1 and you said you're seeing improved usage growth pretty significantly. I guess, did you have some deals that pulled into Q1? And pretty significantly.

Speaker 6

I guess, did you have some deals that pulled into Q1? And if not, why would net new ARR in Q2 be down year over year?

Speaker 3

No. I mean, we it's the same thing that we've said in every quarter that our guidance is taking the trends both in terms of usage growth and new business accumulation and it discounts them. And that's exactly the same as we said since we've been a public company. So that's what we do in providing the guidance and continue to do that in this quarter.

Speaker 6

All right. And I'm wondering if you're seeing any sort of uptick in consolidation in the log management and SIEM markets given the M and A activity in that

Speaker 2

space? Yes, there are definitely opportunities there. And so we spoke on the I think in the script on the about some of the advanced query functionalities we're adding to logs, we spoke about FlexLog. So those are all geared towards going after this opportunity. And we think also there's more specifically an opportunity around SIEM workloads, which is why we're investing heavily in our cloud SIEM product.

Speaker 2

And so we think there's definitely a lot of opportunity there and the teams are very focused on that. I don't expect these opportunities to make a big dent in our numbers in the next couple of quarters, but in the next in Europe, so definitely we expect to see more.

Speaker 6

Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Mike Sicos of Needham. Your line is now open.

Speaker 6

Hey, thanks for getting me on the call here guys. Just one topic, a bit of a 2 quarter here, but I think in the prepared remarks, management incited improving trends for the number of or the cohort of customers who are moving past optimization sequentially. So I guess the question is really can you help us think about the rate or pace of customers that are moving into this cohort is the first piece of the question. And then the second piece, what kind of assumptions do you have for sustained improvement or additional customers entering that cohort as we think about the guidance that we have here today? I'm wondering how much needs to happen on that front for you guys to get more comfortable with the guidance or are you guys assuming steady state here and anything else is kind of really just upside?

Speaker 6

Thank you. Yes.

Speaker 3

No, we said that we don't provide guidance on the percentage of customers that are in this cohort. We just are commenting that the trends that we mentioned last quarter of the abatement of optimization in this cohort manifested itself again and they continue to grow. Like always, our guidance provides it takes conservative assumptions and looks across the trends in the business and assumes that there would be more conservative drivers of the business than we've had in the last quarters. So we continue with that methodology.

Speaker 2

And look, we mentioned that cohort because we thought it was a bad weather, right? We thought they were the first to really optimize and they felt they are they exhibited all the highest needs, I would say, for a quick turnaround on their own financial profile. But there are other pockets of optimization in the business. There are other customers that are going through that later. Our customers are still going through it.

Speaker 2

It's an ongoing it's going to be an ongoing phenomenon. It's been throughout the history of the company. So as we get further and further from the macro situation last year, I think this quarter will lose in relevance in terms of its we can read into it for the rest of the business.

Speaker 6

Understood. Thank you for the additional color guys.

Speaker 2

Thank you.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to CEO, Olivier Pomel for closing remarks.

Speaker 2

All right. Thank you. So again, I want to thank the whole team for it was a great quarter. And I know many of our customers and users are listening to the earnings call. So I want to make sure everybody knows we're having our DASH conference in June in New York.

Speaker 2

You can go to dashcon. Io and we really look forward to seeing you there. So thank you all. Thank you.

Operator

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

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