Alibaba Group Holding Ltd. (BABA) Q3 2021 Earnings Call Transcript
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Datadog (DDOG -8.48%)
Q1 2022 Earnings Call
May 05, 2022, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Datadog first quarter 2022 financial results conference call. [Operator instructions] Please also note, this event is being recorded. And I would now like to turn the conference over to Yuka Broderick, head of investor relations. Please go ahead.

Yuka BroderickHead of Investor Relations

Thank you, Tom. Good morning, everyone, and thank you for joining us to review Datadog’s first quarter 2022 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog’s co-founder and CEO; and David Obstler, Datadog’s CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the second quarter and the fiscal year 2022, our gross margins and operating margins including from the impact of R&D, go-to-market, capex and increased office activity and marketing, our strategy, our product capabilities, our ability to capitalize on market opportunities and the closing of acquisitions.

The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2021. Additional information will be made available in our upcoming Form 10-Q for the quarter ended March 31, 2022, and other filings and reports that we may file with the SEC.

These filings are available on the Investor Relations section of our website along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com. With that, I’d like to turn the call over to Olivier.

Olivier PomelCo-Founder and Chief Executive Officer

Thanks, Yuka, and thank you all for joining us this morning. I’ll start by saying that we are pleased with our execution in Q1 as we continue to drive high revenue growth, along with strong profitability and strong cash generation. To quickly summarize our Q1 financial performance, revenue was $363 million an increase of 83% year over year and above the high end of our guidance range. We had about 19,800 customers, up from about 15,200 in the year-ago quarter.

We ended the quarter with about 2,250 customers with ARR of $100,000 or more, up from 1,406 in the year-ago quarter. These customers generated about 85% of our ARR. We are seeing strong efficiencies in our business model with free cash flow of $130 million and free cash flow margin of 36%. And our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted our newer products.

At a high level, we saw positive business trends in Q1. Usage growth from existing customers was strong and consistent with historical trends as customers continued on their cloud migration and digital transformation journeys, and the Datadog platform continue to expand and deliver more value. New logo ARR was very robust and churn remained low and in line with historical rates. All these factors together led to another strong quarter of ARR added.

It was, in fact, our second best quarter of ARR added aside from Q4 of 2021. Next, our platform strategy continues to resonate in the market. As of the end of Q1, 81% of customers were using two or more products, up from 75% a year ago. 35% of customers were using four or more products, up from 25% a year ago.

And 12% of our customers were using six or more products, up from 4% last year. We saw strong growth across the products in our platform in Q1. For example, infrastructure monitoring continues to grow at a rapid click and exceeded 3/4 of a billion dollars in ARR in Q1. Our APM suite and log management products had a strong quarter and are in hyper growth mode.

As a reminder, our APM suite includes core APM, synthetic studies on monitoring and continues on hire. We’re also very pleased with the growth of our user experience product, which are Synthetics and Real User Monitoring more specifically. These products together exceeded $100 million in ARR in Q1. And in security, we are seeing very rapid growth.

It’s still early days, and we’re growing off a smaller base, but we continue to see strong adoption with thousands of customers getting security coverage through the Datadog platform. Now let’s move on to products and R&D, where our teams delivered another strong quarter of innovation. Just 12 months after we acquired Sqreen, we are pleased to announce the general availability of application security monitoring last week. Some applications and APIs are some of the most common sources of data breaching, yet companies typically have no ways to effectively detect attacks, so they could be less than code for days or weeks.

Some other approaches to application security aim to find vulnerabilities before code reaches production. But these solutions offer and slow down development cycles and overwhelm teams with force positives with no easy way to prioritize these issues. The Datadog Application security monitoring product leverages the full execution context of applications running e-production. This all those teams to focus on attacks that actually matter and provides an immediately actionable remediation path.

Application security monitoring is the 14th product in the Datadog platform, and this is the fourth product within our cloud security platform alongside Cloud Team, Cloud Workload Security and Cloud Security Posture Management. With this, Datadog now provides security insights across metrics, traces and logs, and we consider these altogether as version one of our Cloud Security platform. Remember that we are still in early stages with our security efforts and have much to do to further build out this product, but we are pleased with our progress so far and the usage we are getting from our customers. Last month, we also announced that we expanded our Watchdog AI capabilities to include Root Cause Analysis and Log Anomaly Detection.

Root Cause Analysis automatically identifies causal relationships between different systems across infrastructure and services — sorry, across infrastructure and services, and pinpoints their root causes. Watchdog also automatically identifies the business impact of any given issue, is in data from a release of data management products. This means not only identifying which mobile applications are impacted, but also the exact users that are affected. This new capability often sold in minutes, the problem that would otherwise take hours [Inaudible] by specialists in customers’ organizations.

Log Anomaly Detection on the other hand automatically understands and baselines novel patterns in logs and proactively discovers anomalies such as new patterns, meaningful changes in negative patterns and other error outliers. By surfacing these unusual log patterns, Log Anomaly Detection have seem fine and fix issues faster. In addition to this Watchdog announcement, our engineers released dozens of features and expanded product capabilities in Q1. To give a couple of examples, in Real User Monitoring, we announced the general availability of iOS crash reports and error tracking, as well as a number of improvements to help customers analyze and understand the users performance.

In Cloud Security Posture Management, we added support for the Azure platform, enabling customers to understand their compliance both across AWS and Azure in one place. In continuous profile, we now support all commonly used languages, including C, C++, RASP, PHP and .NET. And across Datadog, numerous addition of rules, data sources and integrations are enabling our customers to solve their problems from end to end without leaving the Datadog platform. Finally, this morning, we announced that we signed an agreement to acquire Hdiv.

Hdiv is an application security product, which provides a highly accurate vulnerability detection at run-time. It offers interactive application security testing capabilities, which tie vulnerabilities to exact file in line numbers in the code. And unlike other solutions in this area, Hdiv’s rate of false positive is very low, enabling customers to focus on vulnerabilities that actually matter. We believe Hdiv’s capabilities and strong team will be an excellent part of our Cloud Security platform, and we’re looking forward to integrating the capability into Datadog as soon as this acquisition closes when regulatory requirements are met.

Access to our product update this quarter. I want to thank our engineering and product teams for their continued hard work. There are so many new features coming up, and I can only highlight a few of them in this call. Now moving on to sales and marketing, our sales team continued to execute and have delivered a strong quarter.

Let’s discuss some of our wins in Q1. First, we signed an eight-figure upsell with a next-gen fintech company which was our largest ever deal on an ARR basis. This customer is experiencing explosive growth in demand for its products, and availability and performance of their system is critical to avoid loss of revenue. These customers started with us three years ago with just Infrastructure Monitoring, and its expansion now includes 6 of our products.

Next, we had a high six-figure upsell with a global shipping company. This customer is expanding with Datadog to help them move forward with their Azure migration. In addition to using five Datadog products, they are now working with our new services team to help implement best practices on a number of business initiatives that involve increased Datadog adoption. This customer expects to consolidate 10 [Inaudible] monitoring tools as they expand their use of Datadog.

Next, we had a seven-figure upsell with a U.S. Federal entity. We were able to deepen our relationship with this customer after we achieve federal moderate status. Before Datadog, this customer had siloed infrastructures, applications, networks, database and customer experience monitoring this caused blind spots and long time to resolution.

With this expansion, they are replacing both homegrown and commercial observability tools and are enabling DevSecOps cultures with a visibility across the full stack and a single source of truth. Next, we signed a seven-figure upsell with a leading payment company. Earlier this year, these customers open source logging tool went down making them blind, but they were able to regain visibility by getting Datadog log management up and running within a few hours of that crash. Not only did this customer regain log visibility very quickly.

They were also able to use the Datadog platform to scrub personally identifiable information to meet security and compliance requirements. And as they have expanded with Datadog, they have been able to cut the number of engineers who maintain homegrown and print solutions in half and reassign engineers to other products to work in the organization. With this renewal, this customer now uses 13 products from Datadog. Next, we had a six-figure land with a major U.S.

hotel company. This company lost half of its engineering team during COVID and needed to use its staff more efficiently. At the same time, it was embarking on an AWS migration and its existing tools were not providing the visibility it needed. By consolidating Datadog, this customer expects to future-proof its cloud strategy and move toward unified end-to-end management across their on-prem and AWS environment.

And finally, we had a seven-figure land with a major European car manufacturer. This customer was frustrated with its existing monitoring tools, which left them with limited visibility into incidents sometimes impacting millions of users globally. As they were trialing Datadog, they were able to solve within minutes issue that used to take them days. With Datadog, this customer expects to consolidate multiple commercial and open source tools across AWS and on-prem stacks.

That’s it for this quarter’s highlights. I want to thank our go-to-market teams for their hard work in delivering a strong start to 2022 after a very busy end of the year. I also want to give a special shout out to our tech solutions and support teams for making our customers successful and enabling them to expand with our own platform. Moving on, we feel very good about the demand environment.

And as we look over the medium- and long-term, our outlook hasn’t changed. We remain confident that cloud migration and digital transformation are drivers of our long-term opportunities and our multiyear trends that are still early in their life cycles. We believe it is increasingly critical for companies to embark on these journeys in order to move faster create competitive differentiation, enable strategic change and serve their customers. And we believe we can help customers manage the complexity as it comes with this transformation.

And that Datadog unified platform is more than ever critical to understand, improve and secure their modern stacks in businesses. With that, I will turn the call over to our CFO, for a review of our financial performance and guidance. David?

David ObstlerChief Financial Officer

Thanks, Olivier, and good morning to everyone. To summarize, we delivered strong financial performance in Q1. Revenue was $363 million, up 83% year over year and up 11% quarter over quarter. Usage growth with our existing customers was strong once again in this quarter.

And new logo ARR growth was healthy, particularly given the typical slowness that we see in Q1. Let’s go into some more detail. First, growth of existing customers was strong in Q1, and our dollar-based net retention remained above 130% for the 19th consecutive quarter. Usage growth was strong across the Datadog platform and in line with historical trends.

We also saw strong ARR growth in each geographical region, and growth was similar across geographies including EMEA. In early Q2, we began shutting off service to customers in Russia and Belarus. We have about 200 customers in these two countries and their contributions to revenue is immaterial. Our go-to-market teams delivered another strong quarter.

Total customers grew 30% year over year and customers with $100,000 or more of ARR grew 60% year over year. In addition, we saw strong growth in million-dollar customers. We are pleased to be serving more customers and believe we are still early — in the early stages of our opportunity in worldwide customer acquisition. New logo ARR was very robust, particularly given that our sales teams participate in sales kickoff and other planning processes at the beginning of Q1.

Remember that given our usage-based revenue model, new logo wins generally do not immediately transfer into meaningful revenue. Our platform strategy continues to resonate with customers, with 81% of our customers now using 2 or more products, 35% using four or more products, and 12% using 6 or more products at the end of Q1. Finally, churn has remained low. Our dollar-based gross retention rate continues to be in the mid- to high 90s and was stable quarter to quarter.

And it’s similar across our customer segments and major products. Billings were $444 million — $445 million, up 103% year over year. Billings duration in Q1 was similar to the year-ago quarter and within the range we’ve seen historically. We closed several large deals in Q1, including the largest deal by ARR that Olivier discussed earlier, which led to billings growth being higher than revenue growth in Q1.

Remaining performance obligations, or RPO, was $858 million, up 85% year over year, and contract duration was similar to the year-ago quarter. Current RPO growth was in the mid-80s year over year. We continue to believe revenue is a better indicator of our business trends than billings or RPO as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts. Now let’s review some key income statement results.

Unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross profit in the quarter was $292 million, representing a gross margin of 80%. This compares to a gross margin of 80% in the last quarter and 77% in the year-ago quarter.

We continue to experience efficiencies in cloud costs reflected in our cost of goods sold this quarter. In the mid- to long-term, we continue to expect gross margin to be in the high 70s range. Operating income was $84 million or a 23% operating margin compared to operating income of $20 million or a 10% margin in the year-ago quarter. We are experiencing significant business efficiencies on strong revenue growth.

And in Q1, we had not yet returned fully to in-person meetings, events or are fully back in the office. Turning to the balance sheet and cash flow statements, we ended the quarter with $1.7 billion in cash, cash equivalents restricted cash and marketable securities. Cash flow from operations was $147 million in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $130 million with a free cash flow margin of 36%.

Now for our outlook for the second quarter in the fiscal year 2022. We remain optimistic about our long-term growth opportunities. We continue to see cloud migration and digital transformation as trends that are still in relatively early stages, and we are investing aggressively and are successfully executing against these long-term opportunities. With the usual conservatism applied, our outlook is as follows: For the second quarter, we expect revenue to be in the range of $376 million to $380 million which represents 62% growth year over year at the midpoint.

Non-GAAP operating income is expected to be in the range of $49 million to $53 million, and non-GAAP net income per share is expected to be in the range of $0.13 to $0.15 per share on an approximately 347 million weighted average diluted shares outstanding. For the full fiscal year 2022, we expect revenue to be in the range of $1.6 billion to $1.62 billion, which represents 56% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be in the range of $240 million to $260 million and non-GAAP net income per share is expected to be in the range of $0.70 to $0.77 per share on an approximate 349 million weighted average diluted shares. Now some notes on our guidance.

First, when providing guidance, as usual, we use more conservative assumptions than historical performance. Second, our strategic focus remains to invest aggressively in R&D and go-to-market to optimize for long-term growth. In Q1, we are pleased to have had our best-ever quarter of hiring, and we plan to continue hiring aggressively throughout 2022. Our North America and EMEA employees returned to the office at the end of Q1, and our APAC employees are returning to office during Q2.

In addition, trade shows and other events are picking up in Q2, as is employee travel. In the past, we have framed the benefit of stopping in-person T&E and marketing events during COVID as 300 to 400 basis points of margin impact. We expect our return to office and increased in-person marketing events, as well as our headcount growth to more fully impact margins in Q2 relative to Q1. And even as we embark on these investments and our return from COVID, we remain solidly profitable, as indicated by our guidance.

Next, regarding income tax expenses in Q2, we will have a provision of about $3 million related to the Sqreen acquisition as well as our typical provision, mainly related to our international entities. Finally, as we discussed last quarter, we are catching up on office build-outs in 2022 and expect capex as a percent of sales to roughly double compared to 2021. In conclusion, we are very pleased with our results in Q1. We continue to attract more customers to the Datadog platform.

We are broadening our platform’s capabilities and observability and we launched application security monitoring in Q1. We are working very hard to execute against our opportunities, and I want to conclude by thanking Datadog’s worldwide for their efforts. With that, we’ll open the call for questions. Operator, let’s begin the Q&A.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Raimo Lenschow with Barclays.

Raimo LenschowBarclays — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

So on security — So first of all, the way we see ourselves in the ecosystem is we don’t compete with everyone in the field there like security is very wide. There’s many different categories and subcategories in there where we want to play a major role in securing the production, the applications and production environment and all of the life cycles that relate to that in terms of development operations and iterative changes to these environments. So that’s where we’re starting. We expect to compete with others there.

We come from a different place in that we come from having all of the observability data already being deployed end to end on those systems and having active users, the integrality of the development and operations teams in these companies, and we think that’s what gives us strength there. To the other point you brought up around the speed of iteration, we definitely benefit a lot from being cloud-native and from being SaaS-only. We actually get a lot of information about what customers do with our product and we see immediately what’s being used not and what’s working or not. So that helps us iterate very fast.

We also benefit from having a lot of users. I mentioned that in the first part of my answer, but we’re being used every single day by every single developer and person. That’s a lot more than what you see on the typical security products. And so that gives you a lot more information about what you can do and what you can do better.

It also gives you more leverage when it comes to actually solving the issues at the six-year level. And that’s part of the value prop we give to our customers.

Operator

The next question comes from Kash Rangan with Goldman Sachs.

Kash RanganGoldman Sachs — Analyst

Congratulations on a phenomenal quarter. Olivier, I’m curious to get your take on the hyperscalers. And given the broadening product suite that Datadog is undertaking. How are these conversations changing with the hyperscalers? And one for you, David.

As the economic environment and the outlook for GDP growth continues to be a little bit wobbly with higher rates, how should we think about the defensibility of the Datadog consumption business?

Olivier PomelCo-Founder and Chief Executive Officer

So on the question about hyperscalers. So we work hand-in-hand with hyperscalers more and more. So we cover a lot more of the, I would say, the management surface for our customers who are also their customers. We help their customers be more successful and move to the cloud faster.

And so as such, we help generate revenue for the hyperscalers, and that’s why this partnership works so well with them. We keep improving on those partnerships and developing them. I think we’ve announced this quarter some improvements to our Azure partnership, for example, where we are now part of the — I would say, the Golden Pass presented by Azure for migrating to the cloud. And we’re seeing some great customers onboarding, thanks to that.

David, you want to take the other question?

David ObstlerChief Financial Officer

Sure. Thanks, Kash. We believe that digital and cloud projects are still very high priority and are not being deprioritized. We haven’t seen that.

We think we’re still early on. So with the data we have so far, we think there will be continued strong investment. There is always some volatility across our customer base. Our customer base is very well diversified across industries, and we benefited from that over time.

So whereas we’re not macro forecasters, and there may well be some sensitivity. We believe the long-term trends in digital migration and cloud will still be very strong throughout that cycle.

Operator

The next question comes from Fatima Boolani with Citi.

Fatima BoolaniCiti — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Yes. So that’s a good question. So there’s two things we bring to the table in security. One is we have, as you mentioned, the gravity and we’re in the path of data for pretty much everything that relates to our customers infrastructure applications and their own users, which is obviously fantastic.

The other thing we bring is we have — we’re being used all day by everyone in development and in operations. And that’s not typically something that the other security products — or the typical security products are built for. So it’s actually hard if you wanted to partner, it’s hard to find a product that’s built for those people. Most security products are purely built for security teams.

So that’s why we’ve been building a lot of that. Of course, we still partner with a lot of the other players in the industry. But we embarked on this journey because we think we have come from a different spot. We think we have different take on the problem that in the end, is — offers us and our customers a lot more leverage in that actual chance at solving the six day issues, not just throwing software and resources at it.

So this is where we come from.

Fatima BoolaniCiti — Analyst

And, David, just with respect to that delta between reported revenue growth in billings, it’s probably one of the bigger deltas we’ve seen in relation to recent quarters. And given your commentary around invoicing duration having stayed stable. I believe that would be — that would imply seven to eight months. I’m still curious as to why you’d see such a meaningful acceleration in billings head and shoulders above revenue growth.

If you could just unpack that for us a little bit and when you expect that divergence to narrow.

David ObstlerChief Financial Officer

And I have to — as I mentioned, there is variability in billing and RPO versus revenue based on when bills go out. We still have, for the most part, in our larger contracts pretty much annual billing. So the sending out of a large annual bill might move the duration a little bit, but not a lot. And the strong performance, the billing was very strong and indicative of the business.

it was complemented by the fact that in this quarter, we sent out the bill for some large contracts upfront annual billing and the timing of that causes the variability. Over the average and over the course of the year, that balances out with the timing of the billing, and we believe that billing converges with revenue growth. We remind everybody that revenue growth and implied ARR growth is a better metric of the progress of the business.

Operator

The next question comes from Sanjit Singh with Morgan Stanley.

Sanjit SinghMorgan Stanley — Analyst

Olivier, in your script, you mentioned a Fed ramp. I should have brought on kind of another topic that we were sort of hearing about from your partners, which is penetration observability in some of the under-penetrated industries. From your perspective, if you look at the different industries that Datadog participates in, which of the industries do you see can become greater adopters of observability versus some of the kind of traditional technology e-commerce for the [Inaudible].

Olivier PomelCo-Founder and Chief Executive Officer

Well, look, we’ve seen pretty much every single industry shows some signs of moving to the cloud already, I think. The order in which this industry has moved really depends on their appetite for being at the leading edge of technology changes and their exposure to interacting with their users online. So what we see, what we saw first, obviously, was the — so finance, for example, which is ahead in technology in general, or in things like e-commerce, online media, that sort of thing. Today, we actually see the full range of categories in the industries coming to the cloud.

For example, we mentioned an auto manufacturer in [Inaudible], we mentioned in hotel chain, we mentioned in the previous calls, we mentioned plumbing supplies companies, pretty much every single part of the economy is coming there. You’re right, though, in your comment that some of those are late to the game than others. And so there’s less penetration, I would say, in the more traditional less tech focused — less tech-focused parts of the industry, but we’re confident and everybody is coming to that part. It’s also the case in regulated industries, government, in particular, where not only the moves are a little bit more conservative in terms of technology transitions, but also this part of the industry are also more limited in what they can purchase, which is why it was very important for us to get FedRAMP-certified, which is also why we keep investing in more FedRAMP and more similar certifications, so we can go into more of these categories in more geographies.

Sanjit SinghMorgan Stanley — Analyst

Makes total sense. And then just 1 follow-up on one of the wins that you guys called out, I think it was a European manufacturer who I think was sort of engineering talent sort of constrained and they moved off of their DIY solution. And so we take out the topic more broadly, because you think that the demand for talent and as a new talent is probably going to get worse, and so in terms of the DIY observability market converting to more commercial out-of-the-box value like a Datadog provide? How much of an opportunity do you think that could be for the business?

Olivier PomelCo-Founder and Chief Executive Officer

Well, I think that’s part of our — it’s always been part of opportunity, and that’s really what makes the value prop even more attractive in the future. As you correctly pointed out, there’s not going to be as many software engineers in general as the market will need. There’s not this year, there’s not going to be — I think it’s going to be even less the case two years, three years, five years, 10 years from now. So what our customers will need is a way for their existing staff to be more productive and a way to direct them to what is actually going to be differentiating for them as opposed to building and differentiated infrastructure.

So we clearly play — this is a trend that benefits us in the end. The other thing to bring up is that software in general is deflationary in nature. And that’s also the case for us. We help our customers make more with what they have.

We have them automate. We have them make people more productive. We have them [Inaudible] user infrastructure better. We help them ship projects that help them interact with their own customers better.

So that’s where we play.

Operator

Next question comes from Brent Thill with Jefferies.

Brent ThillJefferies — Analyst

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

David ObstlerChief Financial Officer

Like all — as we’ve talked about, like all of our guidance, we tend to take more conservative close rates, i.e., new logos and more conservative usage than we’ve experienced historically. So that principle continues with our guidance and is consistent with what we’ve done in the past.

Brent ThillJefferies — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Well, we see many more customers in that range, right? So customers are writing this adoption curve with us, where we saw the bigger and bigger problem for them, they use more and more of our products. They move more and more of the infrastructure in the cloud to start with, and they themselves are scaling. So these are all multiplayers that end up increasing our footprint with them. So we have a healthy pipeline of those.

We mentioned we hand pick a few in every one of those calls, but that’s definitely not an isolated case. And that customer is actually in the tens of millions and it’s a — I think, we don’t expect that to be an isolated case.

David ObstlerChief Financial Officer

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

Operator

The next question comes from comes from Kamil Mielczarek with William Blair.

Kamil MielczarekWilliam Blair and Company — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Yes. So the — look, any time you — somebody is paying you tens of millions of dollars a year there’s going to be a conversation about price because this is a line item that shows up. Typically, the — what’s going to be the most negotiated as part of that is the biggest part of the deal, which for some customers in infrastructure, for some other APM, for many customers is logs because that’s the one where data can grow in a way that’s somewhat decorrelated from the size of the accompanying infrastructure or the value of the accompanying applications. And our approach there really is to give as much flexibility as possible to customers so they can align with their pay with the value they get.

And we’ve shipped in the past many, many new features around that to give them more tiers for storing data, more ways of doing just in time sampling, archiving, bringing back data from archive, give them more controls, more levers, and we expect to do more of that in the future. But it’s a very healthy conversation. We do expect that when customers at fully at scale with us, the — we get more and more of a wallet share from them. But at the same time, the revenue we get won’t grow linearly with the data volumes they send to us.

That’s natural. That’s healthy.

Kamil MielczarekWilliam Blair and Company — Analyst

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

David ObstlerChief Financial Officer

I think we’ve experienced long-term free cash flow to be slightly higher than EBIT. So correlate it with our EBIT, we have — it is indicative of the growth of the business. and the efficiency of the business. As we mentioned, we will be returning, we believe, in Q2 to more investments, whether it be marketing events in the office, etc.

So where we expect it to continue to evidence the efficiency in the business, it would be as it has been correlated to be slightly higher than the EBIT performance.

Operator

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

Matt HedbergRBC Capital Markets — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Yes. So we’re open to anything there. We haven’t made any drastic changes to that. We’re still focus right now on getting in front of our existing customers with these products and getting them to adopt the products and writing the maturity clause of those products with us to make sure they are as broadly as clickable as possible before we accelerate on the go-to-market for them.

And we’re very happy with where we are. We’re exactly where we want to be. Actually, we get a lot of paying customers with skin in the game and a lot of eyes on the products and a great amount of letters in terms of development. We are expecting to test a few things on the go-to-market side in the — I would say, in the coming few quarters, and then we’ll see what this leaves us.

Where — we see some successes today already with our mobility. We think it might actually try to for different things might accelerate things a little bit, but it’s still early to tell.

Matt HedbergRBC Capital Markets — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Yes. So there’s two things we’re doing. So one is we’re investing in our partnerships with GSI and with the channel in general. So we’re doing more there.

And we also started productizing some service offerings. We actually called one out in one of the customers we see in the call. We have a small services team today that has a few packaged offerings that mostly revolve around accelerating adoption of Datadog and making sure we help customers that need that help, transform their businesses around the way things are running Datadog. So we’re investing on both sides.

I mean, obviously, whatever we package ourselves with our own team, will then be scaled through third-party partners, GSIs and others.

Matt HedbergRBC Capital Markets — Analyst

Congrats on a strong Q1.

Operator

The next question comes from Michael Turits with KeyBanc.

Michael TuritsKeyBanc Capital Markets — Analyst

Great quarter. The — i want it first — to Oli, first, you’re doing more application security and you’ve announced some things for observability in developer pipeline. Can you talk about how far you will be going in terms of a shift left toward more of the development side of things, including possibly around static code or source code. And as I said, just that shift left toward developers?

Olivier PomelCo-Founder and Chief Executive Officer

So that’s a great question. We definitely are doing more and more on the shift left and developer side. Obviously, we’ve talked about security quite a bit, and a big part of that is application security, which is a bit of a known category. So it’s there, I think it’s a little bit different in how we approach it, a little bit different in the cloud.

but the category has been there before. We’re also investing in new categories, and you mentioned the CICD observability. That’s a brand-new category. I wasn’t there before.

And we actually have a product in the market today that we started charging for. And we don’t have any numbers to share today, but we are actually very, very pleased with the way this product is being received by customers. So overall, we think we’re going in the right direction there. There will be any more we’ll want to do.

I mean you brought up Hdiv, which also brings a bit more around closer to the source code and vulnerability management and things like that. There’s more we’ll want to do there, but we don’t have anything to announce today.

Michael TuritsKeyBanc Capital Markets — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Yes. So we’re scaling those teams quite a bit, and we’re constantly also refining the way those teams are segmented so they can target specific types of customers in some situations, not many situations also seen type of product. So we — that’s part of scaling the teams on the customer success on the tech solutions on the support side. So we’re investing quite heavily there.

I gave those teams to shot up because really, they’ve been doing a fantastic job at helping our customers scale and adopt a very broad product portfolio today. And I think there will be more successes to come there.

Operator

The next question comes from Brad Reback with Stifel.

Brad RebackStifel Financial Corp. — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

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

Operator

The next question comes from Gray Powell with BTIG.

Gray PowellBTIG — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

So I’m sorry, I’m going to give you the most boring answer ever, but we see no change. The situation there is very much the same as it was last quarter and even last year. We still focus largely on net new and cloud environments. We land fast and small mostly, and we end up growing quite a lot with those customers at the largest enterprises.

Sometimes, but not all the time, we’re going to do a big displacement of usually a suite of tools that makes it homegrown and some of the other players in log, APM or infrastructure or all of the above. And these are — these tend to be the larger lands because they start they start larger as they replace a bunch of existing things. But this is still not the majority of the go-to-market and customer acquisition. I think it shows that the product wins about all sorts of situations, but our focus is still on net new and cloud environment.

Gray PowellBTIG — Analyst

Got it. That’s helpful. And then just — maybe just a quick follow-up on the security side, if it’s OK. Is there anything more you can just say on the road map in the security space, or just like talk about the most natural capabilities that could be included as you start to move into version two of the security platform.

And I guess more specifically, and this might be a tough one, but — do you see a scenario where you could more directly address the endpoint security use case?

Olivier PomelCo-Founder and Chief Executive Officer

Well, so endpoint, I think, is — it’s not what we have in mind today, right? I mean there’s plenty we want to do at the intersection of DevOps production environment applications. Like it’s a gigantic problem space and one that’s not well handled today. So we definitely are — have that in our sights today. In terms of what we can do in the road map, interestingly, there are many things we’re doing today that are not branded security that are part of other products that actually play a big role in security.

And so one of the questions we have internally, how do we actually draw the line around the security suite versus the rest of the DevOps platform in a way that it doesn’t confuse everyone. I mean, for example, we mentioned in the last call, our sensitive data scanner product, which actually is used for security use cases, but it’s currently part of our log management product. We have some similar situation with our network monitoring product that also listens to data and uses it for security use cases, but it’s not part of our security offering. So there are some branding and packaging and product suite questions that we’ll have to answer ourselves there.

Operator

The next question comes from Steve Koenig with SMBC Nikko.

Steve KoenigSMBC Nikko Securities — Analyst

Congrats on the quarter, it’s a pleasure to be covering you guys. I wanted to ask about pricing, again, with kind of a little different angle. And thanks for your color on how you help customers manage their costs as they scale out with Datadog. That’s very helpful.

If I think about it from a different angle, more from the perspective of how you keep your pricing in check with infrastructure costs as the hyperscalers improve their price performance over time on compute and storage, how does — you have a relatively simple pricing model in the space, which is a good thing. But I’m wondering, does the host-based pricing — do those prices need to change over time as hyperscalers ride their cost curve down? And also in log management as well as your — you do have some data charges. And do those need to come down over time as hyperscalers become more price performance. Congrats again on the quarter.

Olivier PomelCo-Founder and Chief Executive Officer

Thank you. Well, so there’s a few things to consider there. So one is like the type of hosts that our customers buy also is changing over time, that they’re also getting larger and larger instances from the cloud providers that costs more and more, even though the price for the same CPU on two different years is going to maybe get reduced a little bit by the hyperscalers. The other factor to consider is that overall, even with all the improvements from the cloud providers and the, I would say, the software industry at large, our customers’ experience still a dramatic increase in complexity.

And overall, what this means is that a lot of the value gets shifted from actually from running the infrastructure itself to understanding it and managing it, which is what we do. So in the end, we are in a position where we can maintain or even increase prices while still delivering more value for our customers and selling them more money. So that’s the general dynamics here. Now when you look at the things that are tied to very specific units.

So for example, the price per gigabit and things like that, like — of course, price per gigabyte is going to go down over time in some point. Right now, the form it takes is that there are more and more options that we keep giving our customers so they can do different things with different price points. But in the long run, if you fast forward 20 years, of course, you wouldn’t expect to pay the same thing for gigabyte in 20 years than you do to that. But at the same time, I would say you also will have many, many, many others of managing more data at the time.

Operator

The next question comes from Joel Fishbein with Truist Securities.

Joel FishbeinTruist Securities — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

Well, we have plenty of new products in the works, but for that, you’ll have to show up to our events and conferences. We do expect to show more of that in the quarters to come. The areas we’re going after, obviously, we’re still doubling down on observability. We’re early in observability.

There’s a lot more we can do — we want to do a lot more that’s going to bring value for our customers, and it’s a very large market. Obviously, we’ve been very open about the fact that we’re investing massively in security and these costs in particular. So you’ll see more from us on that. We also are pushing toward the developer workflows as we had mentioned, with CICD and some aspects of security and some other things that we might show.

We’re also investing in pushing or extending our user experience products in APM Suite to behavioral and user analytics as well as business analytics. So we keep pushing more and more functionality toward that, and you should expect to see more products from us in that area, which takes us into real-time BI. And then finally, we also are investing in ITSM-minded products started with incident response and incident resolution. And you should expect to see more from us in that area in the future as well.

Again, I can’t give you any more details. We have a lot of both in the year right now, a lot of products in flight. We’re very bullish about the opportunity. We think — we see it at a privileged part of the ecosystem where we have such a large surface of contacts, so customers infrastructure, their application, as well as their teams, their developers and their operations teams and other securities that we can solve an increasingly larger problem for them over time while benefiting from frictionless adoption of our platform, which is what is beautiful free cash flow margins that we’ve talked about today.

So again, very bullish, a lot of products in a lot of things we’re working on, but nothing more to announce today.

Operator

The next question comes from Adam Tindle with Raymond James.

Adam TindleRaymond James — Analyst

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

Olivier PomelCo-Founder and Chief Executive Officer

It focuses on applications. And these are the applications that our customers build as well as the various libraries and dependencies that are brought into the mix as our customers build these applications. So this is — this will find its place on the application side of our cloud security platform. We don’t have much more to share on the way this will be combined from a product perspective.

But we see it as great technology, great product and also great expertise to add to the team and add to our momentum on the security side. And by the way, [Inaudible] as often is the case with security companies, there are some regulatory approvals to get disclosed.

Adam TindleRaymond James — Analyst

I know I’m going to be out of time. David, seasonality has just been a constant topic. It seems like since last quarter. I’m sure you’re answering a bunch of investor questions intra-quarter about it.

And the second half is a little lower as a percent of total than years past based on guidance. Anything for us to consider on seasonality now that you’re a $1 billion-plus organization moving forward?

David ObstlerChief Financial Officer

No. It’s always been — it’s a similar type of thing where — the fourth quarter tends to be strong on customer acquisition. We have had, like every company a little slower and new customer acquisition in Q3 that didn’t hold last year. It was a very, very strong Q3.

And as we mentioned, generally, as you start the year in the first quarter, you have a little bit of slowness in getting going. In this quarter, we didn’t have that as much. So it’s really the same types of seasonality, which is quite minor relative to the previous years.

Operator

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

Olivier PomelCo-Founder and Chief Executive Officer

All right. Thank you all for attending the call. And I want again to thank all Datadog’s and there’s many more of you out there. I should remind everyone that we’ve had our most successful hiring quarter in Q1.

So thank you all, and we’re all excited to be here, and we’ll see you next quarter.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Yuka BroderickHead of Investor Relations

Olivier PomelCo-Founder and Chief Executive Officer

David ObstlerChief Financial Officer

Raimo LenschowBarclays — Analyst

Kash RanganGoldman Sachs — Analyst

Fatima BoolaniCiti — Analyst

Sanjit SinghMorgan Stanley — Analyst

Brent ThillJefferies — Analyst

Kamil MielczarekWilliam Blair and Company — Analyst

Matt HedbergRBC Capital Markets — Analyst

Michael TuritsKeyBanc Capital Markets — Analyst

Brad RebackStifel Financial Corp. — Analyst

Gray PowellBTIG — Analyst

Steve KoenigSMBC Nikko Securities — Analyst

Joel FishbeinTruist Securities — Analyst

Adam TindleRaymond James — Analyst

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