July 9, 2024

A Multi-Product Case Study 3

Datadog's Multi-Product Platform Strategy

Over the last 10 years, Datadog has grown its sales from ~$0 to $2.4B today, an incredible, genuine 99th percentile feat of business growth and development.

Datadog's Incredible Growth (Sales Growth Since 2019)

To understand how Datadog has achieved this level of growth, let's invoke the principles articulated in LAS' foundational investment frameworks. We will build towards a discussion on its multi-product platform later on.

Specifically, Datadog's incredible success is attributable to its exemplification of LAS' first and third foundational investment frameworks, both of which convey the value of being a multi-product platform.

I will share them with you below and intersperse commentary to enhance your understanding.

  • Vertically integrated product capturing market share in stagnant mature industry: LAS focuses on businesses that are creating or have created a vertically integrated product or platform, often within a fragmented, low NPS, and mature industry (though this is not always necessary). With the seven points of multi-product value in mind, these businesses capture market share in these industries via the benefits conferred to them due to their multi-product orientation and via their materially better product relative to suboptimal incumbent solutions.

In a recent review of Datadog, I shared with you a vignette that detailed exactly what Datadog does for its customers.

In bygone eras, companies like WaWa, whom I used for the purposes of the vignette, would enlist the aid of a variety of software vendors who would provide the necessary tools to manage and monitor their sprawling digital infrastructure footprint nationally or internationally.

It's interesting to note there's been a gradual evolution from totally analogue systems running chains like WaWa to, today, entirely digital systems running these chains.

Through this period, there has also been a gradual evolution in which new digital technologies were added alongside pre-existing analogue systems; then, a series of digital technologies were patched together; today, Datadog, in the vein of our first foundational investment framework, has vertically integrated all of these digital technologies such that WaWa can manage, monitor, and remediate its entire digital ecosystem all from a central dashboard, i.e., from Datadog's vertically integrated platform.

"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."

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call

"Next, in two deals over the past six months, we had a seven-figure expansion with a medical device company. This customer was primarily using our infrastructure monitoring and APM suite, but its legacy logging solution was becoming cost-prohibitive, while the lack of correlation across siloed teams was causing frustration and higher times to resolution. With this expansion, the customer plans to adopt nine products and consolidate its log management tool as well as four other commercial and cloud-native tools into Datadog."

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call

"Next, we signed a high six-figure expansion with an athletic apparel company. 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 four commercial and open-source point solutions. They also expect to save millions of dollars over the next several years while providing a great consumer experience."

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call

Without belaboring the point, this evolution can be seen when considering a number of companies LAS covers and/or rates, e.g., Snowflake, Adyen, or Crowdstrike. Each has vertically integrated large portions of the industries in which they operate, resulting in better user experiences, as a result of "mopping up" the various disparate point solutions that were formerly patched together to create an enterprise's workflows.

These patched together point solutions, though, were necessary in bridging the gap between analogue and digital enterprises, and, in some sense, lots of LAS' work is in service of highlighting the companies that are furthering this evolutionary process.

We can see Datadog's vertical integration of its digital infrastructure management industry in the chart below:

Datadog's Vertical Integration Depicted: Each Tier Represents A New Product Or Service That's Been Vertically Integrated Onto The Datadog Platform

Q1 2024 Datadog Earnings Presentation

Datadog's Vertical Integration Of Various Products Onto One Platform Depicted

Q1 2024 Datadog Earnings Presentation

Turning to looking at Datadog through the lens of LAS' third foundational investment framework, Datadog could not create a vertically integrated platform without the ability to organically create new products.

Luckily, as the charts above depict, Datadog is a master of organic product development; arguably the best company on earth in terms of product roadmap execution velocity.

Let's now read LAS' third foundational investment framework:

  • Quality cultures that breed innovation within the larger conglomerate: This framework details a company's ability to build and field new products organically, without the need for acquisition. The companies that master this ability go on to become the largest and most profitable companies on earth. Examples include Microsoft, Apple, Nvidia, and Amazon.

We can see Datadog's incredible, 99th percentile product development in the chart below:

Q1 2024 Datadog Earnings Presentation

Apart from the value Datadog creates via product development feeding into vertical integration whereby it creates ease-of-use and consumer surplus for its customers, being a multi-product business is itself very valuable.

For those reading the series, you've already read these seven points; however, for those reading this installment in a vacuum, I shared them again below.

Seven Points Of Multi-Product Value

  1. Enables a company to spend more aggressively on sales & marketing because CLTV (customer lifetime value) is now larger in the equation of LTV/CAC (customer acquisition cost), and this serves to push competitors out of their various markets, as oftentimes these competitors simply cannot keep up with the sales and marketing spend, especially if they themselves struggled to go multi-product. As time passes, consistent, high quality marketing and the elevated spend buttressing it create brand equity, and, as I noted on a recent podcast, a brand most is the highest form of an economic moat. That is, once a users' identity/self-preservation becomes associated with a brand, they will go to great lengths before they decide to part with that brand, and, in some ideological brand situations, they may even sacrifice their lives. It's a powerful moat!
  2. Diversifies the sources from which a company generates sales; which thereby reduces the risk of the business. Imagine you have one income in a volatile industry. Then imagine you had five different sources of income in a variety of industries. Which would you believe to be the riskier situation? Of course, having a diversified set of incomes leads to reduced risk for the entity to which the revenue accrues. Because risk = return, and return is a function of starting valuations (where higher valuation = lower return = lower risk), a more diversified company should naturally command a higher valuation, which provides benefits such as allowing the company to leverage its equity value as currency for employee compensation and/or future acquisitions.
  3. Expands a company's total addressable market, which serves to expand a company's runway for growth. Instead of having a revenue generation ceiling of $1B with one product, with five likewise commercially viable products, a company's revenue generation ceiling could be $5B, which obviously would result in a higher future free cash flow per share, an, by extension, share price. Going multi-product creates an snowball of compounding growth for a company via a series of multi-hundred million or multi-billion dollar revenue businesses, as has been the case for Crowdstrike, Adyen, Salesforce, SentinelOne, and many other companies L.A. Stevens shares with you.
  4. Expands a company's avenues to go to market. This is very important to note in that a company can be more efficient with its marketing spend. This is often not discussed, but it's very much worth noting that, with five or ten avenues to go to market, a company can adjust its marketing in such a way that it capitalizes on the avenue through which it gets the highest ROI on its marketing spend in any given month or quarter or year. Moreover, because the business is multi-product, it knows that it can wedge into a customers' wallet with one of its five or ten products, then gradually upsell over time after engendering trust via its quality products with the customer that it captured through one of its avenues to go to market. With only one avenue, marketing spend is less efficient, and there's less opportunity to "wedge" into a customer's wallet.
  5. Creates the opportunity to vertically integrate, which can create greater consumer surplus. Enterprises have sprawling tech stacks, with hundreds of software vendors comprising those tech stacks. While no enterprise will go all in on one software vendor, many will want to do more business with the best ones, so having a vertically or horizontally integrated platform can create greater consumer surplus for these buyer personas.
  6. Expands the LTV of a customer through upsells and cross-sells. I've shared it often in the past, but it certainly bears repeating: Remember the Splunk case study in which the company added essentially no new logos over three years, but still 2-3x'd its ARR (annual recurring revenue) in that period. This demonstrates the value of having multiple products to sell to an existing installed base.
  7. Lastly, a multi-product platform increases a business' switching costs, or embedding, moat. For instance, if I, as a CISO (Chief Information Security Officer) or IT director, chose SentinelOne's end point security product to augment my company's security posture, the decision to "rip and replace" this offering later on might be difficult, but it wouldn't be too much of a reversal of course. But, if I chose S1's end point, cloud, identity, AI, threat intel, and SIEM products, bundling them into a platform, and essentially going "all in" on S1, 1) it would be more technologically difficult to rip and replace S1, and 2) it would represent a public mistake on my part, as the CISO or IT director, to choose to bet so big on S1. In short, going multi-product creates a switching costs, or embedding, moat for a company, and this makes "point three" of equity value much stronger, i.e., a stronger embedding moat makes a company's free cash flow more durable, which makes it more valuable to us as investors.

"Finally, we signed a six-figure land with one 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 this customer believes is a unique capability among the vendors it considered and which aligns with their goal of delivering centralized observability across the business.

And this customer is adopting seven Datadog products initially and consolidating out of four tools."

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call

In short, Datadog has created a vertically integrated, multi-product platform business that is highly attractive for a variety of reasons, with the principal reason being that this orientation poises Datadog to grow at elevated rates profitably for many years to come.

Datadog's Customers Often Adopt More Than One Product

Q1 2024 Datadog Earnings Presentation

"Turning to platform adoption. Our platform strategy continues to resonate in the market. As of the end of Q1, 82% of customers were using two or more products, up from 81% a year ago; 47% of customers were using four or more products, up from 43% a year ago; 23% of our customers were using six or more products, up from 19% a year ago; and 10% of our customers were using eight or more products, up from 7% last year."

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call

"We continue to see robust growth in our three pillars of observability, 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 million 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 and 2022, those now contribute about 11% to our ARR. Of those 12 products, eight are over $10 million 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"

Olivier Pomel, CEO, Q1 2024 Datadog Earnings Call


L.A. Stevens has not rated Datadog.

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