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What's 🔥 in Enterprise IT/VC #329
Where will best in class Net $ Retention land in 2023?
Datadog is one of the best executing software infrastructure companies having grown 63% YoY to $1.68B of Revenue in 2022. Q4 was also strong clocking in at $469.4M of Revenue but a YoY growth rate of 44%. While these numbers are fantastic, the decelerating growth in Q4 is certainly an area of concern. Such that management guided down its 2023 growth forecast to 23% - yes 23% YoY to $2.07B. Folks that’s a steep drop from 63% growth and reflective of the IT spending environment we live in today. Let’s dig deeper.
Here’s Olivier Pomel, Co-Founder and CEO
And our dollar-based net retention rate continued to be over 130% as customers increased their usage and adopted more product. Our platform strategy continues to resonate in the market. As of the end of Q4, 81% of customers were using two or more products, up from 78% a year ago; 42% percent of customers were using four or more products, up from 33% a year ago; and 18% of our customers were using six or more products, up from 10% last year. Now, moving on to this quarter's business drivers.
Overall, we observed slower user growth with existing customers, while continuing to scale on new logo acquisition and new product cross-sales. Starting with usage. Usage growth of existing customers in Q4 was overall slightly lower than what we observed in Q2 and Q3, which we attribute, first, to a continuation of cloud cost optimization by our larger-spending customers; and second, to a seasonal annual slowdown in the second half of December that was more pronounced than in previous years. As in Q2 and Q3, we continue to see more optimization from customers with a larger cloud footprint, while our smaller-spending customers are exhibiting higher growth.
It’s clear that Datadog’s multi-product portfolio has been keeping the NDR >130% but there are signs of this not lasting as customer usage 📉. It’s been an absolute rule for the last couple of years that the BEST enterprise software companies have a Net $ Retention > 130%. It’s been the case for the last two years, and many still consider that to be a universal truth. In fact it is one of the most amazing and efficient growth engines as you can see from this chart from Iconiq - as companies scale, the breakdown of New ARR from expansion of existing customers is close to 50% for companies >$50M ARR. While Datadog does not explicitly discuss NDR numbers for its lower growth forecast, it’s pretty clear that’s a huge reason for the forecasted lower growth in 2023.
When finally asked directly about NDR, here’s Dave Obstler‘s (CFO) answer:
Implicit in that guide is below 130% NDR.
Matt Hedberg -- RBC Capital Markets -- Analyst
OK. Thanks. And then, maybe just, David, on the guide, obviously with kind of a mid 20s revenue guide. You talked in the prepared remarks about having an NRR above 130% for almost two years.
You know, presumably that dips below 130%. Any sort of commentary on how that might progress through the year?
David Obstler -- Chief Financial Officer
Yes. I think you're right. Implicit in that guide is below 130%. We'll report to everybody as we have that.
You know, we've seen it relate to a decel, I would say, on that, that given the change in the organic growth rate that we've been talking about starting in the middle of Q2 last year. It would be -- it's getting past that to the extent that it changes -- that changes that net retention, plus or minus, given the net retention is comparison against the year-on-year customers. So, you do have headwinds in the compare through the time that we had the change of the organic, which we had said was in the middle of Q2 of last year.
While Datadog is just one data point on infrastructure, it’s an important one given its market share, success, and breadth of products. While not an infra company, here’s Monday.com trending lower as well.
As you plan your sales models and forecasts for 2023, I’d take a harder look at what NDR numbers you’re benchmarking against as it seems to me that while Datadog hit it’s 130% NDR number, it’s going to fall this year, and it’s just the beginning of a new normal for best in class which will likely land in the 115-120% range, save a few outliers. As a startup who is modeling against some of these public comps, don’t fret as these public cos are reporting a few months behind, and I can promise you that the >130%+ NDR days are over. You are probably still best in class when the dust settles in the next few months. Just keep building, fighting the good fight, and protect that customer base.
As always, 🙏🏼 for reading and please share with your friends and colleagues.
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