Sumo Logic, Inc.

Greetings and welcome to Sumo Logic fourth quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Paul Thomas, Vice President of Investor Relations. Please proceed, sir.

Thank you. Good afternoon and welcome to Sumo Logic's fourth quarter and full year fiscal 21 earnings conference call. I'm Paul Thomas, Sumo Logic's Vice President of Investor Relations. Joining me on the call today are Ramin Sayar, President and CEO, and Sydney Carey, Chief Financial Officer. Our format today will include prepared remarks by Ramin and Sydney, followed by a question and answer session. Some of our discussions and responses to your questions will contain forward-looking statements. including statements relating to the expected impact of the COVID-19 pandemic, performance of our business, expectations regarding our platform and solutions, expectations regarding our go-to-market efforts, the anticipated benefits and timing of our proposed acquisition of DF Labs, future financial results and guidance, strategy, and overall future prospects. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, including our risk factors filed with our most recent quarterly report on Form 10-Q and the risk factors that will be included in our Form 10-K that will be filed subsequent to this call. Sumo Logic assumes no obligation and does not intend to update or comment on forward-looking statements made on this call except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results, may be found in our earnings release, which was furnished with our Form 8K filed today with the SEC, and on our investor relations website at investor.sumologic.com. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in our earnings release posted on our investor relations website. With that, let me turn the call over to Ramin.

Thank you, Paul, and thanks, everyone, for joining us today on our fourth quarter and full-year earnings call. We had a strong finish to our year driven by demand for Sumo Logic's continuous intelligence platforms. we see customers of all sizes and maturities choose our platform to enable their cloud and digital transformations. Our multi-tenant cloud architecture delivers rapid time to value, scalability, analytics for all data types, and flexible packaging and licensing. These differentiators position us well in the more than $50 billion addressable market we see in front of us. I'll start with the highlights of the quarter and then go into some more detail. First, We are continuing to successfully navigate a difficult environment and saw strong revenue growth driven by adoption across multiple customer segments, as well as both domestic and international markets. Second, we are seeing early signs of stability and recovery in our customer base. Gross customer ads in the quarter were above the year-ago pre-pandemic levels. Third, we expanded our routes to market investments in our partner ecosystem, helping drive early traction for our observability and security solutions launched in the second half of the year. Fourth, we achieved FedRAMP modern authorization, enabling a significant new route to market. We are one of a select few SaaS observability and analytics companies with this type of authorization. Finally, we continue to expand our platform, launching new integrations and capabilities for both observability and security solutions. Now I'd like to provide some more details on each of these. We saw strong revenue performance with total revenue increasing to $54.2 million, up 22% year over year. Revenue growth was supported by improving momentum in our customer base. This quarter, we landed over 140 new customers, exceeding the gross additions in the year-ago quarter, putting us back above pre-COVID levels. Momentum also continued with our customers who generate more than $100K in annualized recurring revenue, or ARR. These customers increased to 358, up 11% year-over-year, and we added two customers with over a million dollars in ARR the quarter to finish the year with 31. Despite the challenging macroeconomic environment, we continued to win with customers of all sizes and across multiple use cases. This quarter, we again saw more than 30% of our wins land with multi-use cases across DevOps, security, and IT teams. Often, we initially land in one or more use cases and then expand adoption as more users, teams, and organizations leverage our platform and therefore increase their data ingestion analysis. We see the expansion process in action as daily volume ingestion scans and analysis increases. In fact, our average daily ingest grew more than 35% year over year, and we continue to scan over 800 petabytes daily. To put that in perspective, Let me share just a few examples of the land and expand wins driving this growth in the quarter. I'll start with a win in one of the most impacted segments of the market, the hospitality and travel industry. This quarter, we signed a six-figure land with a large global hotel operator to replace their legacy SIM solution with our Cloud Sim Enterprise, or CSE. The legacy solution had become too cumbersome to manage and way too expensive to scale. Our CSE solution won because of our automatic threat hunting and rapid reduced mean time remediation in cloud economics, as well as scalability. This win demonstrates that even impacted industries still need to modernize their analytics tools and automate their security processes as they migrate to the cloud. We have also seen customers accelerate their digital transformation efforts as a result of the pandemic. This quarter, we had a six-figure expansion with a large retailer. The customer initially started with Sumo Logic's platform a year ago in a business intelligence use case. They used our analytics capabilities to give them better visibility into their customers' omnichannel experience. When COVID impacted their business, they shifted to a full digital experience for their customers, which significantly expanded the amount of data they needed to analyze for more comprehensive observability. As a result, they expanded with Sumo Logic, and we have become a core part of the digital transformation strategy. As adoption of Sumo Logic expands, we also looked to cross-sell into other departments with new use cases. This quarter, we had a six-figure cross-sell into a security use case with a large health insurance provider. While we initially landed with the DevOps team a little over a year ago with an AWS observability use case, the security team was also leveraging Sumo. This quarter, they decided to upgrade their legacy SIM and chose our CloudSIM Enterprise. What differentiated us here was our ease of use with comprehensive out-of-the-box analytics and automated threat detection bubbling up only the events that matter, therefore significantly reducing investigation time and mean time to resolution for the security practitioners. Our land and expand sales motion can start with very small transactions as well, for example, via self-service, and expand over time to become a significant customer. This quarter, we had an expansion win with a financial service technology provider who started a $1,000 ARR. After standardizing on our platform and growing their usage as demand for their digital service grew, they are now over $500K in ARR. The digital transformation of financial service industries, both in the U.S. and internationally, continues to provide substantial market opportunity for us. This quarter in the U.K., we had a six-figure land with a bank who's using Sumo Logic to secure their mobile banking platform. The bank has a legacy on-prem security tool, but it could not meet the needs of modern cloud platform they're building. They picked Sumo Logic because of our leading cloud-sim solution powered by cloud-based analytics, our modern multi-tenant architecture, and, of course, our dynamic scale. We continue to see customers adopt new observability capabilities we launched in Q2. As an example, this quarter a healthcare technology customer signed a seven-figure expansion with us that included the adoption of our distributed tracing capabilities in addition to a significant expansion of operational and security use case capacity leveraging our enterprise suite and cloud flex licensing or credit-based licensing. Now, shifting to our ecosystem strategy. We continue to expand our reach with ecosystem partnerships to drive awareness and adoption of our observability and security solutions. In addition to the integrations with our cloud SIM solution and the AWS network firewall, we updated and broadened our third-party integrations for both observability and security. This quarter, we also expanded our software development optimization solution, previously announced with Atlassian and others, to also include Sauce Labs. Sumo Logic enables customers to leverage their test data from Sauce Labs continuous testing cloud to automatically derive actionable insights that help improve the release velocity, quality, reliability, and also security of applications across DevSecOps. We continue to invest in expanding our routes to market. This quarter, we achieved significant milestone of FedRAMP moderate authorization. which further differentiates the security of our platform and opens up significant new public sector opportunities for us at government agencies. We're proud of our team and the hard work it took to achieve this important milestone. Now, I'd like to move on to innovation. This past year was a massive year for innovation at Sumo. We brought in the Sumo Logic Observability Suite with new additions, including our AWS observability solution, which included our new distributed tracing and open source monitoring capabilities. Following on that, this quarter we announced the launch of service maps, providing a holistic view of microservices and their interdependencies, allowing faster root cause troubleshooting for DevOps and site reliability engineers. In addition to service maps, we enhanced our root cause explorer capabilities by including a wide array of applications such as Amazon CloudWatch and Kubernetes for logs, metrics, and tracing to allow engineers to quickly identify the root cause of these service degradations. This was also a transformational year in security for us. We integrated the JASC acquisition into our cloud-native SIM platform, helping us further win significant new business as customers look to secure larger cloud and digital environments while also improving the automation and intelligence of the Security Operations Center, or SOC. To accelerate the viral adoption of our new observability and security features, this quarter we added two new free certifications in Sumo Logic's training program, Observability and Cloud Sim. These were launched at AWS reInvent and add to our multi-level certification program that provides users with the knowledge, skills, and more importantly, competencies to maximize investments in the Sumo Logic platform. Total certifications now exceeded 25,000, increasing 50% year-over-year in the most recent quarter. Building on the success of our cloud sim, we are excited to announce that we have entered into a definitive agreement to acquire DF Labs, a leading provider of security orchestration automation response, or SOAR, capabilities. DF Labs will further enhance our cloud SIM solution by automating the remediation of threats identified by our SIM. We believe adding SOAR to our capabilities will create a great opportunity for us to take further advantage of the momentum we have with our cloud SIM and also provide a great opportunity for our ecosystem of partners. The transaction is subject to customary closing conditions, including certain government approvals, and we anticipate the transaction will close in the second quarter of FY22. In addition to the investments we are making in our platform, we continue to invest in our go-to-market functions. This year, we plan to expand our reach through increased direct sales and growing our ecosystem of partners, including ISVs, distributors, resellers, MSPs, and MSSPs. We intend to enter and grow into new markets like federal and expand our international presence with distribution partners. And we expect to leverage our expanded partnership with AWS, which includes enhanced go-to-market and strategic collaboration programs across field registration, marketplace, target verticals, and other geographies. In summary, we are pleased with the strong performance we demonstrated this quarter and this year. The secular tailwinds of cloud adoption and digital transformation continue to drive demand for our differentiated DevSecOps analytics platform. Putting our expectations for the year in context, we believe the overall demand and market dynamics remain generally similar to the second half of last year. While we see encouraging signs in our customer base, COVID headwinds continue to impact the overall spending environment and create elongated sales cycles. However, The opportunity from cloud migration, application modernization, and security transformation are growing, and we are well positioned to benefit. Customers across industries continue to choose Sumo Logic as a core part of their digital platform. We plan to increase our investments in fiscal year 22 to enhance our ability to capture more of this opportunity, and we anticipate the increase in investment we made over the second half of last year will drive improved growth in the second half of fiscal year 22. With that, I would now like to have Sydney Carey, our Chief Financial Officer, provide more details of our strong financial results in Q4 and our outlook for fiscal year 22.

Thanks, Ramin, and thanks, everyone, for joining the call today. I will provide a brief overview of our fourth quarter financial results and discuss our outlook for fiscal year 22. I'd like to start with a brief summary of the financial highlights for the quarter and year. Customer and channel metrics continue to improve this quarter with wins across market segments and geographies. Next, our operational execution delivered strong top-line revenue growth. And lastly, we demonstrated efficiency with continued improvements in our margins. We are pleased with the continued momentum we are seeing in our customer base, where our enterprise customers make up over 60% of our total ARR. As Ramin highlighted earlier, our growth customer ads and Q4 were up year over year. In fact, gross customer additions were the strongest we have seen in the past four quarters, and we are back to pre-COVID levels. We saw this both in the mid-market and enterprise segments. This quarter, our customers over 100K in ARR increased to 358, up 11% year-over-year, and customers over 1 million in ARR increased to 31, up 24% year-over-year. We ended the year with 2,164 customers, While the total customer count is up only slightly from a year ago, that total does not include over 400 customers who are managed service providers, or MSPs, also deliver Sumo Logic 2. Those MSP end customers have more than doubled year over year. In addition to MSPs, our channel overall wrapped up an excellent year, growing more than 100% in fiscal year 21. We continue to expand our partner ecosystem as well and exited the year with over 300 partners globally. And lastly, we saw a strong finish to the year, both in mid-market and internationally, with the mid-market having the best performance of the last four quarters and EMEA posting the best performance of the last eight quarters. While we continue to operate in an uncertain environment, we are encouraged by the momentum we are seeing in our customer base as we exit the year. Moving to our dollar-based net retention, as we discussed last quarter, we did see a decline in the quarter a few percentage points below 120%. This is the first time in 11 quarters it dropped below 120%. This was primarily driven by the combination of pandemic-related impacts of slower than historical expansion in the install base and higher than expected downgrades and churn driven by two large impacted customers. We do expect headwinds to persist and continue to drive volatility in our net retention, causing it to decrease in the coming quarters. At the same time, we are seeing encouraging signs, as mentioned earlier, that we believe will drive longer-term improvement in our performance. Now I'll provide more details on our fourth quarter and full-year financial performance. We delivered a strong performance in the fourth quarter. Total revenue increased to $54.2 million, up 20% year over year. Fourth quarter revenue, excluding our largest customer, was $50.8 million, up 27% year over year. Recall that we break out our largest customer because of the variability and seasonality that differs from the rest of our business. For the full year, fiscal year 21, total revenue was $202.6 million, up 31% year over year. Calculated billings for the trailing 12-month period totaled $220.7 million, up 24% year over year. Recall that we look at calculated billings over a trailing 12-month period as this metric can fluctuate from quarter to quarter due to the timing of our renewals and billings of duration for large customers. Therefore, we believe the 12-month measurement period best reflects the fundamentals of our business. Our remaining performance obligations, or RPO, increased 41% year-over-year, driven by the size and duration of new and expansion contracts. We are pleased to see customers making larger and longer-term commitments to our platform. In addition, current RPO also increased 24% year-over-year. Now I'll review the income statement in more detail. As a reminder, and unless otherwise noted, all metrics are non-GAAP. A reconciliation of GAAP to non-GAAP financials is included in our earnings release and posted on our website. First, we again saw a significant year-over-year improvement in our operating margin profile this quarter. Recall that in Q3, we were ramping our hiring back after pausing hiring in the prior quarter. In Q4, we continued to hire with a focus on our go-to-market headcount, but overall, we didn't achieve our forecast, which led to lower-than-expected expenses in the quarter. That combined with lower discretionary spend were the key drivers of our improved margins. In Q4, we saw strong gross margins of 77%, up from 70% in the year-ago period. In addition, we also saw full-year gross margins improve to 76%, compared with 73% in the year-ago period. The improvements in the quarter and year were primarily driven by our efforts to improve our platform efficiency over the last year and more favorable AWS expenses year-over-year. Sales and marketing expense was $25 million, or 46% of revenue, compared to 64% of revenue in the year-ago period. Headcount cost as a percentage of revenue declined year-over-year. In addition, we continue to benefit from reduced travel expenses and lower marketing program spend as we shift from in-person events to digital and online. In Q4, we did reach our quota-carrying headcount objectives and continue to hire to drive growth in fiscal year 22. In fact, in Q1, we are on track to hire back at pre-COVID pace across the company. Research and development expense was $14.3 million, or 26% of revenue, compared to 34% of revenue in the year-ago period. The decline in the percentage of revenue was driven primarily by lower headcount costs as a percentage of revenue and reduced discretionary spend. General and administration expense was $8 million, or 15% of revenue, compared to 16% of revenue in the year-ago period. G&A expense includes increased costs associated with operating as a public company. In total, the strong performance in revenue and the improvements we saw in gross margin, sales and marketing, and R&D drove significant improvements in our operating performance. Our operating loss was $5.7 million, or an operating loss of 11%. improving from an operating loss of 45% in the year-ago period. For the full year fiscal year 21, our operating loss of 15% was a 23 percentage point improvement over the prior year. Net loss in the quarter was $6.7 million, or $0.07 per diluted share, based on approximately 101.7 million weighted average diluted shares outstanding. Turning to our balance sheet and cash flow, we ended the period with $404.1 million in cash and equivalents, a decrease of $3.3 million from the prior period. Free cash flow in the quarter was negative $1.8 million, or negative 3% of revenue, compared to negative 46% in the year-ago period. Now I'll move on to guidance. As we enter fiscal year 22, We have not seen a significant change in the macro environment compared with the second half of last year. The timing and pace of the recovery is difficult to predict. However, we believe the opportunity presented by cloud and digital transformation continues to grow. Regardless of when the recovery picks up, we are investing to capture more of the opportunity and believe that as we exit COVID, the pace of digital transformation will accelerate. We anticipate the investments we made in the second half of last year in sales and marketing and new product innovation will drive improved revenue growth in the second half of this year as our sales capacity becomes productive. In addition, in fiscal year 22, we are increasing our investment in go-to-market and innovation to build more routes to market and to broaden our security and observability platform. These investments will result in lower operating margins this year, but will also drive long-term growth. With that, I'll move on to our first quarter guidance. For Q1, we expect total revenue of $53.2 to $54.2 million, or a growth rate of 13% to 15% year-over-year. Revenue excluding our largest customer of $50.5 to $51.5 million. This represents a growth rate of 17% to 19% year-over-year. Non-GAAP operating loss of 11.7 to 11.2 million, or an operating loss of 22 to 21%. Non-GAAP loss per share of 12 cents on approximately 103 million weighted average shares outstanding. For the full fiscal year 22, total revenue of 231 to 235 million, representing a growth rate of 14 to 16%. Revenue excluding our largest customer of 220 to 224 million, representing a growth rate of 17 to 20% year over year. As a reminder, we expect revenue growth to accelerate in the second half of the year. Non-GAAP operating loss of 47.3 to 45.3 million, or an operating loss of 20 to 19%. Non-GAAP loss per share of 50 to 48 cents on approximately 104 million weighted average shares outstanding. In summary, we executed in an uncertain environment and we're pleased with the results of the quarter and the year. We delivered strong revenue growth, positive momentum in our customer base, and improving margins. We plan to invest this year in more platform capabilities and expand our go-to-market reach. We believe we are well positioned for success. With that, Ramin and I are happy to take any of your questions. Operator?

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment as we poll for questions. Our first question comes from Derek Wood with Cowan & Company. Please proceed.

Oh, great. Thanks and congrats on a strong quarter. Maybe a two-parter for Ramin and Sidney. And starting with Sidney, on the billing side, I know you guys talk about kind of volatility quarter to quarter, but it looks like you had a really strong billings quarter at 36% growth. Maybe part of that was from long-term deferred, but even stripping that out, it was 30%. But it doesn't look like that's carried much through into the revenue guidance for fiscal 22. So could you just kind of double-click on that? Maybe, you know, is there anything to call out that skewed the billings in the quarter? And then I'll wait for that for a follow-up.

Sure. Thanks, Derek. So in the quarter, we had pretty consistent billing pattern to what we had seen last fiscal year. Our billings have normalized back to – the bulk of our contracts being annual up front, so we didn't have anything unusual. So as we look at the billings growth, it's tracking to where we thought it would be.

Okay. And then, Ramin, guidance, X large customers, about 20% growth. You know, I understand we're still navigating the slowdown from fiscal 21 and, you know, need to see the growth and better. And I know... What are some of the key initiatives to drive that growth acceleration? I know you hit on that a little bit, but if you could just kind of call out maybe the top two or three things that you think really will move the needle on growth acceleration in the second half. Thank you.

Sure. Hey, Derek. Part of that question got broken up, but I think I got the gist of it. So what are the drivers for the growth in the back half? I mean, I think it's important to remember that we are still predominantly a direct selling model. And we did slow down capacity hiring in the first half of last year and started to pick it up in the back half of this year, and we're continuing to invest in that. The second driver for that tends to be around the expansion of our portfolio. And that has a lot to do with the organic innovation with respect to the observability announcements, as well as our leading cloud SIEM enterprise. The third piece of that growth is stability in some of the international markets as well as in our install base, particularly those customers and impacted industries, as we look to re-approach those.

Okay. Anything you could share in terms of kind of where you stand today on sales capacity growth or where you'd like to get to by the end of the year?

Yeah, the good news there is we're actually ahead of plan on capacity hiring. As we entered the quarter, we were up 20%, correct me if I'm wrong, Cindy, in terms of capacity entering fiscal 22.

Yeah, we were up more than 20% of fully ramped capacity in the enterprise. Overall, capacity was up also entering, but we saw a good improvement in our enterprise capacity for fully ramped reps as we entered fiscal year 22.

Right. Right. That's great to hear. Okay. Thanks, guys. Good to hear you, Derek.

Our next question comes from Matt Hedberg with RBC Capital. Please receive the question.

Hey, guys. Thanks for taking my question. Ramin, we're now several months removed from the SolarWinds sunburst hack. I'm curious, how is your conversation with customers around that front? Because I have to imagine you guys are in a good spot to help folks navigate that situation, but just more broadly, sort of this increased threat landscape as we enter your fiscal 22?

I think, Matt, nothing is much different in terms of the opportunity for security due to that unfortunate circumstance, to be blunt. I think it's risen to The awareness, I would say, at the board level as well as across e-staff and a lot of our customers, and so there's more conversations we're having there. Secondly, we're seeing enhanced need for auditing capabilities. Third, in terms of some of the components of our spec ops and services related to our Cloud Sim to help with augmentation of staff, so to speak, around the Cloud Sim enterprise offering. But by and large, I think, what a lot of the conversations are around is how do they need to assess and look at their own environments and practices and policies and then look for incremental tool spend.

That's great. That's helpful. And then, you know, Sydney, it was really good to see the growth in net customers. I know you guys have had some churn on kind of more of the SMB side of your business. I guess, you know, thinking about the first half versus second half, and the acceleration you're looking towards in the second half. How do you think about, you know, where we're at in that SMB churn? Do you think we're towards the end of that now that we're sort of kind of, you know, we've got vaccines out there and the economy starts to pick up a little bit? Just kind of curious on your thought on churn from here on the SMB side.

So as I look at last year, fiscal year 21, you know, over 85% of our churn in customers was mid-market or below, and the bulk of those were SMB. And so I think we'll still see volatility in that base. But, you know, we were really pleased with the net – I'm sorry, with the growth customer ads in Q4. And in particular, it was both strong in the mid-market as well as the enterprise and getting back to some pre-COVID levels. We also saw that our new logo average deal size was also back to pre-COVID levels. And our average deal size overall was also coming back to pre-COVID levels. And in the enterprise segment, we saw those coming up about 20%. So we actually had some very good customer metrics in the quarter. And so we feel like that's a bit of momentum as we go into the next year.

That's great. I mean, it seems like there's a lot of momentum exiting this year with a little bit of conservatism in the first half, but it seems like trends coming out of Q4 were quite strong. So that's it for me, guys. Thank you. Thank you.

Our next question comes from Sanjit Singh with Morgan Stanley. Please proceed.

Thank you for taking the questions, and congrats on a good Q4. I guess our first question is on the acquisition this morning on the source space. And I guess the question, Ramin, would be, If you think about observability and the ability to instrument and help diagnose the performance of modern apps, plus cloud-based SIM, plus SOAR, talk a little bit about this acquisition and what it sort of brings to the table. And then, ultimately, do we need to get to the endpoint to have sort of a unified security offering across all the elements of apps to endpoints?

Hey, Sanjeev, good to hear your voice again. You know, I think if we look at some of the trends across both observability as well as security, the need for automation analytics, you know, remain the same. And the interesting aspect about this particular acquisition for us, and we've looked at dozens of stores out there in automation tools, is that it's not only applicable to the security use case but much more broadly. So that's rationale one. I think the second point of that in terms of where do we need to continue to invest, to be honest with you, we don't need to go all the way to the endpoint. And there's a reality in a lot of enterprise customers where they have more than one endpoint tool, more than one network firewall service, more than one XYZ. And so we need to be continuing to provide the bridge from the old to the new. And we've been doing that for quite some time, over a decade, in fact. So our strategy remains the same. In terms of why now, why SOAR, we believe strongly that that's not a separate market category. It's an extension of a cloud-native SIM, and frankly, we're the only cloud-native SIM on the market now with an integrated SOAR capability to bring to market. So I think competitively and differentiated offering is really important here. Now, with that said, we still support choice, and we'll still integrate with some of our partners that have their own SOAR tools and the like. but we'll definitely be integrating that very quickly after close the acquisition.

Very interesting. Very interesting. And we'll see how that progresses over the next couple of quarters. My follow up question was more for Sydney and I understand the guidance. I guess my questions around kind of the pace of change in terms of the growth rates in the business. So if I look at, you know, prior to the year you just completed, on an ex-large customer basis, you grew about 42%. When COVID hit, the business growth rates took a step down. For the past three quarters, you sustained revenue growth at sort of the high 20s, and then guidance calls for another incremental leg down to the 17% to 20% range. So, you know, simply I guess the question is around why was the weakness so quick to be reflected in the financials? And then when we talk about some of these green shoots you see in your business, why is that going to take that much longer for that to get reflected in the overall growth rate?

Yes. So, you know, again, as a reminder, we are a capacity-driven model. And so the freezing of hiring really in the first half of fiscal year 21 is impacting our go-to-market and the growth rate. We also saw some larger churn in Q4. We had two large, not churn, but downgrades. We had two larger customers that downgraded. One was in the travel and hospitality space, and the other one was in M&A consolidation. That's definitely impacting growth rates as we look into the next fiscal year. You know, we're seeing a bit slower expansions in our installed base. And we believe that as we start to see a bit more normalization coming out of COVID, that those will also begin to bounce back to better rates that we'd seen in the past.

Understood. Best of luck in fiscal year 22.

Our next question comes from Bhavan Suri with William Blair. Please proceed.

Hi, everyone. This is Camille on for Bhavan. Congrats on the solid end of the year. I have a quick question on competition. Several companies have begun to ramp new security solutions over next year. Have you seen a change in the competitive environment?

Hey there. No, I don't think we've seen any change in either the security or the observability segments of the market that we serve. I think there's still quite a bit of noise given some of the issues with other vendors and the hack that happened, but To be super blunt, we believe that our cloud-native architecture, our long history in security, and the ability to deal with all types of data is what's driving a lot of success for our cloud-sim enterprise. That, coupled with, obviously, the acquisition of the source, continues to set us apart.

That's great to hear. And just as a follow-up, how have customer conversations changed over the past year since you changed your pricing model Are customers using some more Logic products differently than they did one and a half to two years ago?

Yeah, great question. In Q4, we saw the strongest quarter in terms of contribution from the new packaging and licensing, and hence the credit-based licensing. We still have a good portion of the install base at the lower end that's in that transition. as well as the mid to enterprise segments. And as they come up for renewal, those conversations naturally happen. Point two, if you look at the gist of those conversations, it's really about value and transparency. And so they can really understand usage. They can understand the consumption or usage of credits and by use case as well as departments or different teams. And so they can either allocate that out or plan for what they need to spend. So a lot of those conversations are helping them become more proactive versus reactive and getting a surprise shock and build like they do with other vendors in the space.

That's great. Thanks, Ramin.

Our next question comes from Mark Murphy with J.P. Morgan. Please proceed.

Yeah, hi. This is Benjamin sitting on behalf of Mark. Thanks for taking our questions and congrats on the quarter. On that topic of pricing, Ramin, could you update us if, you know, what portion of your customer base is in the credit-based pricing as of today? Have you seen any kind of an average uptick in ARR as they have moved over to the new pricing?

Yeah, we're not disclosing the percentage of install base that's on the new model, but I can say north of 80% of deals last quarter We're all credit-based licensing. So there's indication of strong adoption for both net new as well as upgrades and renewals.

Understood. Okay. And on the competition front, obviously we have seen Splunk kind of shore up their cloud observability suite, albeit through acquisitions. Could you maybe highlight that? What differentiates Sumo's suite versus Splunk's cloud observability or others? And if you have seen any kind of material change in win rates?

Yeah, I mean, first and foremost, we have been organically building that out and integrating it to the core analytics backend of our platform for multiple years. We started back in 2015 with the first unified logs and metrics solution on the market period. Then we added more of not just the basic monitoring, but extending into the application and Kubernetes environments, and then extended that with observability lineup last fall in September with distributed tracing as well as AWS observability, CDN, and much more. So I think you're seeing a continued focus and innovation and delivery organically from us there. And so as a result, you're not left to kind of have different licensing models, different backends, different usage, different UI, different XYZ. So that's generally across the market where a lot of customers unfortunately have to deal with today. Now, with all that said, where we see a majority of practitioners still decide in how they buy, it's still very much a best-of-breed environment out Irrespective of vendors trying to build out their entire suite, claiming they're doing XYZ or expanding to security monitoring and claiming more, the practitioners are smarter than that, and they evaluate technologies and they know what they're getting, and we have a good opportunity to continue to not only attach to our install base the new modules as well as net new logo lands that we talked about earlier in terms of Q4 and go forward.

Understood. Thank you.

Our next question comes from Rob Owens with Piper Sandley. Please feel free.

Great. Thank you guys for taking my question. I'm curious as you look at net retention rate and the fact that it fell below 120 and can continue there, any kind of guide rails or how we should be thinking about that as we transition throughout fiscal 22?

Yeah. You know, as we did guide last quarter that net retention would fall below 120%, we did see that happen. It did drop by a few percentage points. It was really driven by slower than expansion in our install base, and that's due to some contraction in budgets due to the pandemic. We also had some churn. I spoke about the two large downgrades that happened in the period that did also have a bit of impact on it. And then travel and hospitality in general was a headwind for us in fiscal year 21. So I think we're going to see it bounce around a little bit as we enter into fiscal year 22. quarter by quarter. But, you know, we should see improvements in the COVID impacted industries and our mid-market segments. And we expect over time for that to come back above 120%.

And then second, as we look at billings on an annual basis for fiscal 2022, should that pace with revenue growth, ex-large customer, or can you put some parameters around that as we think about our models?

Yeah, I mean, again, we think the best metric for billings is looking at on a trailing 12-month basis, and we should see – Sure, so the annual basis, right. Yeah, on the annual basis, and we see that that should track more closely to our revenue growth rates.

All right. Thank you very much.

Our next question comes from Grave Howard with BTIG. Please proceed.

Great. Thanks a lot, and congratulations on the good Q4 numbers. So, yeah, just maybe a couple of follow-ups to some prior questions. I know you kind of talked about this at a high level, but is it possible to roughly estimate or just sort of like a ballpark number in terms of how much COVID impacted billings growth in fiscal 21? And then just, you know, can you talk about how you feel about your visibility today relative to three to six months ago? And then just, you know, how do you see – how long do you think it takes customer spending patterns to return, you know, fully to pre-pandemic levels? Thanks.

Yeah, I'm not sure we can really talk about the exact impact of billings. I think what Sydney was highlighting earlier around some elongated sales cycles, lower than normal historical expansion, right? as well as some of those impacted industries and customers that you would expect naturally to get more upgrades and cross-sells. Those had obviously an impact that we've talked about. I don't know if you want to.

Yeah, and I'd just like to add, you know, we had in prior quarters in fiscal year 21, we saw a big shift of customers wanting payment terms, customers wanting quarterly, customers not wanting to do the annual upfront. And, you know, we were trying to align and help our customers as they were working through this difficult time and allow for some of that. As we've gotten into, you know, Q3 and Q4, we've actually seen our billing patterns return more back to pre-COVID where the bulk of them are annual up front. And so from that standpoint, you know, again, if we look at our annual billings growth, you know, in 12 months, that's really where you should look at because we will get fluctuations quarter to quarter. If we have a big renewal slip from a period, that can also cause issues with our in-period billing, calculated billings number. So I just really, you know, encourage you to look at the annual billing.

Got it. Thank you. That's helpful. And then just a follow-up. Yeah, just anything on the contract duration side or macro factors or anything from, like, you know, a comparative perspective that could impact the headline billings growth in 2021 that we should be thinking about.

Well, we had a strong year for RPO, up 41%. And, you know, we did see larger and longer-term commitments in the enterprise segment of our business, and we did see our average duration of contract, you know, kind of approach that 24 months. And so we did see some good strength there.

Understood. All right. Thank you very much.

Our next question comes from Kingsley Crane with Berenberg. Please proceed.

Hey, congrats on the quarter. I just want to talk a little bit about the self-service model. If you think about a customer that starts with 1K ARR and grows to 500K, what have you noticed in terms of, you know, the cadence of upsell and the types of products that they're adopting to sort of grow that quickly in that time frame?

So I think this has been something that we've been investing in over the back half of last fiscal year because fundamentally a lot of the marketing activities that were done prior to going in the year were changed, right? Everything moved to digital, and the type of campaigns suddenly changed. As a result, we've been putting a little bit more focus and emphasis on the end-to-end experience from lead to trial to conversion, and you'll see that continue to be an investment for us. But in this particular case, whether it's a self-service or a direct initiated opportunity, we require a customer to create an account. And they go in and set up an account in Sumo and they experience what it is to get data in and grow from there. So I think that sales motion, we're trying to make it as frictionless as possible, one. We're trying to help automate the end-to-end so we can reduce the cycle times, two. And we're investing more in product capabilities as well as marketing on a growth initiative going forward.

Yeah, it's great. I think it's an excellent addition to the go-to-market. So just another one would be on – I thought the mentioning the MSP customers was important. So I guess just to clarify, you know, would most of these new customers be entirely – that new with some of these have converted from – sort of being an existing Sumo customer, and then how would the spend profile of these type of customers compare to maybe the average?

Well, they grew significant year over year, so those are new. We typically, and we have never counted those in our install base. As you know, that's why we've called that out. I think the other important thing here is a lot of cases for these managed service providers, managed detection response type of solutions, they're in a transition from the existing offering to the new SUMO offering. So they already have something that's organically built or third-party coupled and cobbled together, and they're in the midst of that transition. So you're seeing the opportunity for them to more quickly shift their install base to the SUMO platform, and that's what we're trying to enable them by adding a lot more product capabilities as well as commercial agreements to support that.

Yeah, and I'd just like to add we've been making investments in our channel, and we've seen those investments, you know, definitely pay off in fiscal year 21 with the channel contribution doubling year over year. We talked about the MSPs giving us a new route to market. In a lot of cases, we would not be touching those customers. And then really having a focus as we, you know, we're adding channel partners. Last year, we have over 300 channel partners, and we were really focused internationally and how we brought in out the reach as well.

Yeah, I think the traction there is really clear. It's impressive. And that's it for me. Thanks.

Our next question comes from Blair Aponethi with Rosenblatt. Please proceed.

Thanks very much, and nice quarter, guys. I just wanted to dig in a little bit more on the FedRAMP authorization, the moderate authorization, to just give us a sense of sort of how you know, how you're attacking that or what sort of stage you're at now there and, you know, when you can start to see, you know, some good traction in terms of building your pipeline in the Fed market?

Hey, Larry, good question. I think it's really important to point out that we're one of the few SaaS companies to be able to achieve this moderate authorization. There's been a lot of investment, you know, And there's different ways that you can go down FedRAMP in terms of agency sponsorship. You still have to do a RAR followed by either going to the alternative path. But we actually have been working on this for more than a couple of years in terms of the channel partners as well as, more importantly, product capabilities. And the opportunity to your question that that opens up as a result is really to go target not just federal, state, and local government, but also higher ed. And so we've been now ramping the channel and ramping direct sales capacity to be able to go attack that opportunity. It's important to note that the federal budget cycles are a little bit different, so the timing of this will spread across that throughout our fiscal year. as we continue to ramp our partners and our direct sales capacity there.

Great. Thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

With that, we want to thank everyone in attendance. More importantly, to the Sumo employees, our customers, and our partners, for their strong will, their dedication, and hard work to be able to achieve the great results in Q4 and Fiscal 21. And we're excited about the opportunity in Fiscal 22, and we look forward to connecting with you guys again soon.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a great day.