No. of Recommendations: 14
Hi Saul,

Thank you for this amazing summary of DDOG's earnings report! I had tentatively dipped my toe in the water with a few shares a couple weeks ago when they really dropped a bit for no reason. But this report gives me a significant boost in confidence for their potential!

Two things stand out in this report for me:

• In October, we announced we are currently “In Process” on the FedRAMP Marketplace, initiating the certification process. Achieving FedRAMP authorization will expand our addressable market, by allowing U.S. federal government departments and agencies to adopt and use our cloud platform.

Having worked at a start-up which had spent a considerable amount of time, effort, and money chasing FedRAMP certification, it's important to note just how difficult this rating can be! My former employer spent more than 7 YEARS chasing FedRAMP certification. It is a long, tedious, and arduous process. And even now, after 9 years, they *still* don't have FedRAMP certification!

So, why have they continued to pour so much time and money into it? Because they believe the amount of future revenue they'll gain as a result of that one certification will make it all worth it! You can not sell into many of the government agencies without this certification! And once you have it, you are often THE ONLY ONE in your category with that certification. This means you have a complete monopoly on all sales into the Federal government for your product category!

It doesn't matter how good, or even how many competitors you have in the overall market. If you're the only one with FedRAMP certification, the vast majority of government agencies CAN NOT buy from your competition even if they want to!

Which leads to the second quote which stands out:

We believe we are at the very early stages of an existential market opportunity,

If they are close to getting the FedRAMP certification, then this is a very true statement. But, more importantly, this statement is indicative of the ideas others have stated. We have not even begun to see the expansion of a SaaS-based world yet. In my previous company my eyes were opened to what SaaS and cloud based applications will look like. The future of software development is completely inverted in the cloud. Everything is possible, and everything is completely decentralized. Gone are the days of a fixed environment in fixed data center. Gone are the days of having an IT staff "own" the data centers and networks and monitoring, etc. In the future, all this will be owned by the developers themselves.

Monitoring is an essential component of running a software platform. And everything that can be monitored and measured should be, otherwise, how do you know where problems lie, or improvements can be made? However, no one *likes* monitoring. It's tedious, it's cumbersome, and it's HARD. And where do you draw the lines? DDOG has solved all of that and provided a flexible, customizable, and robust platform to monitor everything and anything you could ever want for cloud-based SaaS platforms. They've gone viral (as someone earlier stated) because they're that good. You *could* choose lots of alternatives, but none of them are as comprehensive, or as flexible, or even as cheap once you consider the amount of effort required to cobble all the pieces together and the difficulty of integrating all those pieces into your solution.

And since DDOG is essentially a first-mover in this space, AND we haven't even begun to see cloud-based SaaS take off yet, I believe they are right; we *are* sitting at the threshold of an existential market opportunity!

The big question now is: Can they execute and maintain their lead position in order to exploit that opportunity! Only time will tell!

Anyway, thanks a lot for this summary, I really appreciate it!
--
Paul
Print the post Back To Top
No. of Recommendations: 6
Nobody knows exactly where we are. It’s hard to wrap your arms around the whole thing. But it seems that it’s either a single-digit or a low teens percent of the workloads that have moved from legacy IT to public and private cloud. So, with that in mind, we have basically 95% or 90% of the end market still in front of us, which is why we think even for infrastructure, which was our first product, there’s a tremendous amount of runway ahead of us.

Wow. I knew it was early but not THIS early! A lot of SAAS growth ahead!

-AJ
Print the post Back To Top
No. of Recommendations: 2
I'm not a techie but I get the impression that the products that DDOG sells are low switching cost/easy to replace with another company. The fact they don't have any consulting revenue reinforces it. And there are a lot of other competitors out there that could challenge DDOG.

So it's good that DDOG does not have to spend a lot on S&M for their growth as it may not pay off with customer retention rates.

The viral adaption and easy sell is a bonus because it allows DDOG to grow as quickly as it is. But it could be a double edge sword because a competitor that begins offering a worthy alternative could just as easily start taking market share just as quick.

It seems DDOG has the best product at this time but I think it would help to know what the competitors are doing because this is a crowded space after all.

Can anything be done to achieve this other than the Gartner reports and watching the numbers of competition?
Print the post Back To Top
No. of Recommendations: 6
Nobody knows exactly where we are. It’s hard to wrap your arms around the whole thing. But it seems that it’s either a single-digit or a low teens percent of the workloads that have moved from legacy IT to public and private cloud. So, with that in mind, we have basically 95% or 90% of the end market still in front of us, which is why we think even for infrastructure, which was our first product, there’s a tremendous amount of runway ahead of us.


Congratulations, SoonerAJ! You picked out the "S" curve scenario for cloud monitoring technology! At 5 to 10% market penetration it has not even reached the curve in the hockey stick or reached it very, very early. If DataDog truly has no real competition, then it's truly a fabulous opportunity. As I pointed out some time back, I had to write an error monitoring app several years ago and DataDog is providing just that in spades and wholesale.

Denny Schlesinger


PS: Visibility in the cloud is a strange metaphor but that is exactly what some airplane instruments do like the artificial horizon.

The attitude indicator (AI), formerly known as the gyro horizon or artificial horizon, is a flight instrument that informs the pilot of the aircraft orientation relative to Earth's horizon, and gives an immediate indication of the smallest orientation change. The miniature aircraft and horizon bar mimic the relationship of the aircraft relative to the actual horizon.[1][2] It is a primary instrument for flight in instrument meteorological conditions.[3][4]

https://en.wikipedia.org/wiki/Attitude_indicator
Print the post Back To Top
No. of Recommendations: 16
I'm not a techie but I get the impression that the products that DDOG sells are low switching cost/easy to replace with another company. The fact they don't have any consulting revenue reinforces it. And there are a lot of other competitors out there that could challenge DDOG.

You are, of course, right, but there are two sides to this scenario. Complexity is the enemy of adoption and the consequences have been felt here with products that have "longer sales cycles." As you say, simplicity invites competition but why would customers switch? There are reasons for high retention rates. First mover advantage or path dependence is the most important one. If DataDog were a one trick pony your scenario would be reasonable but DataDog is offering a portfolio of monitoring products in a tightly integrated control panel. If the competition uses a different control panel your central monitoring advantage vanishes. This is the reason why DataDog needs an aggressive land and expand sales strategy which the simplicity of the product promotes. This is the reason why one product takes 60% market share and there is a long list of wannabes. One classic example of old was IBM and the Seven dwarves.

Besides IBM, there were lots of players in the build-a-new-computer game for a short while... Digital Equipment, Control Data, General Electric, RCA, Univac, Burroughs, and Honeywell.

https://it.toolbox.com/blogs/shayne-nelson/the-60s-ibm-the-s...

General Electric and RCA were giants in their own right but could not take on IBM in IBM's area of competence. It got to the point where "You can't lose your job by hiring IBM." A screwup with one of the dwarves was career threatening.

My point is that if cloud monitoring were truly a commodity product your argument would be reasonable but, at this stage, cloud monitoring is mission critical and not (yet?) a commodity.

Denny Schlesinger
Print the post Back To Top
No. of Recommendations: 6
Saul,

Reading through your summary of DataDog (DDOG), the following statement stood out to me:

As you all know, a massive IT platforming is underway. Companies are moving from static on-premise architecture to public and private cloud as well as other ephemeral technologies like containers, microservices and serverless computing. These newer technologies allow for increased agility and innovation, but also compound complexity. Developers and IT operations teams which used to be separate must come together in order to manage IT chaos and better collaborate around a shared view of the IT stack.

I see a lot of technical jargon in there, yet my technical/software expertise interprets it in an interesting way as an investor. Here is my take on what this means:

Software is rapidly moving from simple desktop applications to the cloud and other new types of software architectures. This shift is rapidly adding complexity and often a bit of chaos. These new software architectures has grown too big to keep track of what is happening using existing tools.

DataDog fills in a vital missing component: Provide a simple view into what is happening with these increasingly complex software systems while maintaining the ability to link the simple (overview) to the complex (details of individual errors). DataDog creates order from chaos.

On the surface, this is nothing new. Many companies have tried to provide insights into the performance of these increasingly complex software applications. Two obvious companies come to mind, both previously discussed on this forum: New Relic (NEWR) and Splunk (SPLK). However, those companies and other competitors to DDOG provide nowhere near the capabilities I see in DataDog.

This indicates to me that DDOG probably has a significant moat. What they have achieved is probably hard to replicate, as attested to the fact that other companies have tried and fallen short

This also indicates to me that DDOG is providing a type of service that is needed in just about every other type of modern software. This in turn indicates DDOG may have far more room to grow than I initially gave them credit for.

All this reminds me of something I read of Warren Buffett. That he invested in consumer staples. Things everyone needs (or wants). If DDOG can live up to its hype (a very big if in my mind), perhaps they will become a "consumer staple" of future software applications.

I am still very wary of the seemingly high valuation of DDOG and the danger of what seems to be a "technology gone viral" as I stated in a recent post. Yet this gives me an interesting perspective to consider.
Print the post Back To Top
No. of Recommendations: 36
Wow, Thanks for the condensed version Saul. There's a ton of meat in this report. As usual (for me) I'll skip over the financial analysis, I'll just assert it's great. But bear with me while I make a few observations about the technology.

A very little historical perspective might be useful. Let me start with a few quotes:

Our customers can frictionlessly add-up new products or from this end-user interface, powered by a common data model. We win in the market for several reasons. One we are a truly integrated platform allowing us to solve our customers end-to-end problems and innovate rapidly. Two, we were built for the modern dynamic stack offering end-to-end visibility. Three, we are simple but not simplistic, easy to install with no professional services. And Four, we are designed for use in collaboration across development operations and business teams. I'll explain the bolding in a minute.

From the Q&A: The reason for the low rate of use is that these legacy APMs are very, very, very heavy weight and they’re very expensive. It’s very hard actually to deploy them and get value out of them and it ends up being limited to a small set of extremely high value apps, for which you can be convinced to make an investment and get some ROI out of it.

It's easy to skip over those comments without really understanding how incredibly important they are. In the old days (say maybe 10 years ago and longer) application performance monitoring (APM) was the dream of virtually every IT application group but virtually never implemented. The reason for this was in order to monitor the performance of an application, you had to instrument it. The instrumentation was fraught with difficulty, first, exactly what processes do you instrument in order to monitor the application as a whole while insuring that you are able to extract usable information in order to improve the performance, all the while being mindful of the Heisenberg paradox, the instrumentation itself had an adverse impact on performance. In case the term "instrument" is not clear, it means putting extra code in the application mostly in the form of counters and timers that separately reports out performance characteristics such as elapsed time to execute, number of loop iterations, number of database calls and so forth. Lightweight and frictionless - anything but, heavyweight, expensive, invasive and impactful are more fitting descriptive terms. It just didn't get done and when it did get done it was usually in a test environment and then disabled or stripped out of the production code which meant you never truly got useful APM metrics on the code that was actually running. I have no understanding of how Datadog does what they do, or maybe it's just a simpler task with more modern computing environments and languages - I don't know. But lightweight, frictionless APM functionality has a huge market. Hence my bolding of the statement above.

Without going into as much of a detailed explanation I'll simply assert that exactly the same thing holds true for network performance monitoring. And the ability to merge and analyze the data from these monitors is of immense value in problem avoidance in the first place and detection and localization when problems do arise. There's a huge difference between knowing you have a performance problem and knowing where to look in order to repair it.

Skipping to another product that is probably not well understood would be log management. So first, let's understand just what a log is. In short it is a chronological record of every transaction that occurs in a given bounded computing environment. It is almost impossible to read a log and get anything of value out of it as it is painfully detailed and seldom describes a contiguous string of transactions that led to a specific state in that every interrupt, every time trigger, every everything gets recorded. So what good is it? Well, the primary purpose of maintaining a log was that a computer could use it if things got hosed up to retrace and back out every action over a given period of time in order to restore the entire environment to some prior state. This was only done in the most extreme situations because you not only backed out whatever gave rise to the problem, but you also backed out all those transactions and state changes you wished to retain. It is entirely non-selective.

On the other hand, if you could parse a log and sort it into strings of related activities it could be of tremendous value with respect to understanding the factors that are needed for load balancing, resource allocation and even infrastructure purchasing decisions. There's lots of valuable information in the logs, but it's not useful in its native form.

One final observation, and this one is speculative in nature, sort of hidden in the weeds. But the CEO opened his remarks with We exist so that our customers can understand everything that happens in their technology stack. And later there are references to we announced enhancements to our machine learning and AI capabilities. Watchdog, Metric Coalition, Trace Outliers, etc. When I read that it struck me as leading to a powerful security capability. Almost all security breaches have at least one thing in common, that is that they rely on anomalous, unauthorized behavior going undetected. Going back to the Target breach for example. The invaders set up a staging database within Target's own technology stack that they sued to gather and organize the hijacked information before shipping it off to their own servers. This is most often how breaches are planned. It's more secure (for the hijackers) to stage the information on premises than to ship it off one transaction at a time. Making the entire stack transparent and setting off alarms for unusual activity could easily thwart many security attacks.
Print the post Back To Top
No. of Recommendations: 1
Wow, Thanks for the condensed version Saul. There's a ton of meat in this report.

Yes Brittlerock, and thanks for the kind words, there was indeed a lot of useful information for me in the conference call.
Best
Print the post Back To Top
No. of Recommendations: 14
Hi Saul,

Thank you for this amazing summary of DDOG's earnings report! I had tentatively dipped my toe in the water with a few shares a couple weeks ago when they really dropped a bit for no reason. But this report gives me a significant boost in confidence for their potential!

Two things stand out in this report for me:

• In October, we announced we are currently “In Process” on the FedRAMP Marketplace, initiating the certification process. Achieving FedRAMP authorization will expand our addressable market, by allowing U.S. federal government departments and agencies to adopt and use our cloud platform.

Having worked at a start-up which had spent a considerable amount of time, effort, and money chasing FedRAMP certification, it's important to note just how difficult this rating can be! My former employer spent more than 7 YEARS chasing FedRAMP certification. It is a long, tedious, and arduous process. And even now, after 9 years, they *still* don't have FedRAMP certification!

So, why have they continued to pour so much time and money into it? Because they believe the amount of future revenue they'll gain as a result of that one certification will make it all worth it! You can not sell into many of the government agencies without this certification! And once you have it, you are often THE ONLY ONE in your category with that certification. This means you have a complete monopoly on all sales into the Federal government for your product category!

It doesn't matter how good, or even how many competitors you have in the overall market. If you're the only one with FedRAMP certification, the vast majority of government agencies CAN NOT buy from your competition even if they want to!

Which leads to the second quote which stands out:

We believe we are at the very early stages of an existential market opportunity,

If they are close to getting the FedRAMP certification, then this is a very true statement. But, more importantly, this statement is indicative of the ideas others have stated. We have not even begun to see the expansion of a SaaS-based world yet. In my previous company my eyes were opened to what SaaS and cloud based applications will look like. The future of software development is completely inverted in the cloud. Everything is possible, and everything is completely decentralized. Gone are the days of a fixed environment in fixed data center. Gone are the days of having an IT staff "own" the data centers and networks and monitoring, etc. In the future, all this will be owned by the developers themselves.

Monitoring is an essential component of running a software platform. And everything that can be monitored and measured should be, otherwise, how do you know where problems lie, or improvements can be made? However, no one *likes* monitoring. It's tedious, it's cumbersome, and it's HARD. And where do you draw the lines? DDOG has solved all of that and provided a flexible, customizable, and robust platform to monitor everything and anything you could ever want for cloud-based SaaS platforms. They've gone viral (as someone earlier stated) because they're that good. You *could* choose lots of alternatives, but none of them are as comprehensive, or as flexible, or even as cheap once you consider the amount of effort required to cobble all the pieces together and the difficulty of integrating all those pieces into your solution.

And since DDOG is essentially a first-mover in this space, AND we haven't even begun to see cloud-based SaaS take off yet, I believe they are right; we *are* sitting at the threshold of an existential market opportunity!

The big question now is: Can they execute and maintain their lead position in order to exploit that opportunity! Only time will tell!

Anyway, thanks a lot for this summary, I really appreciate it!
--
Paul
Print the post Back To Top
No. of Recommendations: 15
If you're the only one with FedRAMP certification, the vast majority of government agencies CAN NOT buy from your competition even if they want to!

Before we get too excited, most of the main competitors to DataDog. New Relic, Splunk, and Elastic to name a few are fully FedRamp certified and have been for some time. They get a lot of Federal Government business.

I was happy to hear that Datadog was at least getting started with this designation, but a little disappointed that they weren’t a little further along than this at this point.

Darth
Print the post Back To Top
No. of Recommendations: 9
most of the main competitors to DataDog. New Relic, Splunk, and Elastic to name a few are fully FedRamp certified and have been for some time. They get a lot of Federal Government business.

Darth,

Can you point to where you found this information. My cursory search has yielded nothing to that effect.

Splunk apparently went through the GSA PMO for certification and received the Moderate Impact Level Authorization, however they're the only ones.

New Relic (as of 1/9/2018) is "nearing FedRAMP ATO" certification. I can find nothing on their site about having received the ATO, or at what level they are seeking authorization.

Elastic's website merely says "Coming Soon", so presumably they're in the same boat as New Relic, and still waiting...

Also, apparently the sponsoring agency for FedRAMP also matters. For example, DOE supposedly has the toughest requirements for their vendors of all the agencies, therefore, if you meet the DOE's standards for FedRAMP certification, you can sell into any agency because you already meet the most exacting requirements (I learned this being involved in the FedRAMP audits for my previous employer). I believe this is what is known as "High Impact Level" authorization. Whereas, Splunk, as noted above, comformed to GSA's "Moderate Impact Level" authorization. Which means Splunk could sell into any agency at that level but not into agencies like DOE, CIA, FBI, Treasury, etc. who require High Impact Level Authorization.

As I noted earlier, it can take YEARS to get FedRAMP ATO certification. So, the fact that DDOG is only now "initiating" the process is rather disappointing. My hopes were a lot higher based on the earning summary where it was mentioned. Investigation now leads me to believe we'll be waiting for this for many years to come...

--
Paul
Print the post Back To Top
No. of Recommendations: 5
Hey Paul,

My apologies to everyone. It appears I was mistaken. Must have gotten confused in the language.

You can check the FedRamp marketplace for particulars.

https://marketplace.fedramp.gov/#/products

Splunk - Authorized
New Relic - In progress
Datadog- In Progress
Elastic - nada

I guess you can get a lot of Fed business without it.

Darth
Print the post Back To Top
No. of Recommendations: 2
I recall reading Docu and ZS are FedRamp authorized but it has not really taken moved the needle. Couple quarters ago Docu in fact said it will take a long time before you will see much rev.

DDOG seems priced for turbo charged growth. I recall when ZS accelerated to 65% its valuation took off. But with some softer commentary last CC things have really fallen off a cliff. Not saying this will happen with DDOG of course. It is definitely on my watch list. ZM on the other hand is slowing rev growth at about 8% every Q. 2 years ago it was 149% for the year, last year it was 119%, this year will be 92%. If they keep at that rate a year from now they will be <70%.
Print the post Back To Top
No. of Recommendations: 11
DDOG seems priced for turbo charged growth. I recall when ZS accelerated to 65% its valuation took off. But with some softer commentary last CC things have really fallen off a cliff. Not saying this will happen with DDOG of course. It is definitely on my watch list.


Hi Tex Mex,

Zscaler says that they have to sell to C-Level people who can authorize changing a big company's entire security orientation, and that this now means slower sales.

Datadog says that they tell their salespeople not to try for the whole company but make little, no-friction sales to get into the enterprise, and it will spread virally within the enterprise. It's so easy to adopt that they have 100% subscription revenue and no service and hand-holding revenue. They don't need it.

They are entirely different animals.

Saul
Print the post Back To Top
No. of Recommendations: 3
Datadog says that they tell their salespeople not to try for the whole company but make little, no-friction sales to get into the enterprise, and it will spread virally within the enterprise. It's so easy to adopt that they have 100% subscription revenue and no service and hand-holding revenue. They don't need it.


As Bert wrote about DDOG in Sept:

It most recently reported a dollar based net retention rate of 146%, which is about as high as it gets.

Compare to Zscaler which was 118% the last two quarters, because they have to try to sell the whole company up front.

Saul
Print the post Back To Top
No. of Recommendations: 1
Yes, good point about ability to sell Datadog lot more easily than ZS. I suppose my biggest concern with the trio of super growers (Ddog, Zm, Crwd) is that there does not seem to be a whole lot of past history of companies with sustainable 80%+ growth. CRM et al. quickly slowed. So, if these companies slow down into the 60%s over the next 12 months the stock price will hardly move and may even drop.
Print the post Back To Top
No. of Recommendations: 1
The benefits of Fed on ramp go beyond the ability to sell into those agencies that require it. If you achieve on ramp it basically means you are running a really tight ship. For some unique insight see the podcast below.

https://podcasts.apple.com/us/podcast/a16z-podcast/id8428187...
Print the post Back To Top