Sumo Logic, Inc.

Greetings and welcome to the Sumo Logic first quarter fiscal 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Brian Liberator, Director of Investor Relations. Thank you, Brian. You may begin.

Thank you, good afternoon, and welcome to Sumo Logic's first quarter fiscal 2023 earnings conference call. Joining me on the call today are Ramin Sayar, President and CEO, and Stuart Grierson, Chief Financial Officer. Our format today will include prepared remarks by Ramin and Stuart, 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 performance of our business, expectations regarding our platform and solutions, expectations regarding our go-to-market efforts and investments, future financial results and guidance, our strategy and market opportunity, and the potential impact of the macroeconomic environment and overall future prospects. These statements are subject to risk and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risk 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 annual report on Form 10-K and the risk factors that will be included in our Form 10-Q 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 8-K filed today with the SEC on our Investor Relations website at investor.semologic.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.

Thanks, everyone, for joining us today on our first quarter earnings call. We are pleased with a strong start to our fiscal year as we once again exceeded the high end of all our guided metrics. In Q1, we delivered 25% year-over-year revenue growth and 27% ARR growth. We also delivered strong growth across fillings and customers greater than 100K. We feel the sales teams have settled into the new pursuit and expansion roles with the earliest traction being with expansion teams given the shorter sales cycles. In the markets we serve, digital transformation, cloud migrations, and security modernization initiatives remain a high priority. As customers embark on their cloud journeys, our leading SaaS analytics platform helps address the challenges and needs for reliable and secure cloud native applications, which ultimately helps their broader DevSecOps requirements for both observability and security. These initiatives were key drivers of the strength and contribution we saw across our customer base this quarter. Turning to financial highlights, total revenue of 67.9 million came in above the high end of our guidance range. We continue to see wins across our customer base with our largest customers continuing to increase their adoption and usage of our platform. We ended the quarter with 469 customers with more than 100K in ARR. representing a year-over-year increase of 25%. As we previously stated, our vision is to make the world's digital experiences both reliable and secure. Our cloud-native platform uniquely helps customers do three things. First, ensure application reliability. Second, secure and protect against modern security threats. And third, gain insights into cloud infrastructure. In addition to selecting Sumo for our leading cloud-scale log analytics platform, customers are increasingly utilizing Sumo due to the breadth of both our observability and security suites. More specifically, our observability suite helps customers monitor application and cloud infrastructure, troubleshoot and diagnose issues rapidly, and improve software quality release and cycle times. In addition, our security suite helps customers with cloud infrastructure and security monitoring, application workload protection, industry and regulatory audit and compliance, threat detection and investigation, and lastly, security automation and orchestration. Now, I'd like to provide some examples of how customers are using our platform as part of our key wins for the quarter. Many of these wins that I'll highlight are tech-centric companies, who are disrupting traditional industries with new thinking, often pushing the limits and using new technology and complex architectures to do so. We are proud that Sumo Logic is being selected by these types of four-leaning, digitally disruptive organizations. The first one I'll highlight is a multimillion-dollar new logo deal in the APAC region with a hyper-growth online media company moving to the cloud. Their digital services are being used by over 300 million users, and they were struggling to understand when transactions failed, which was leading to lost revenue. Previously, they were using a do-it-yourself open source solution, which just wasn't able to ensure the reliability of their applications or capable of handling modern use cases, let alone the data volumes they require, which is upwards of 25 terabytes a day. our full-stack observability suite solution is being used to not only keep their app running, but also reliable, which is leading to improved customer experience and revenue retention. Next, we're able to land a new Greenfield logo that was a six-figure deal for both observability and security for a well-known retail company with many physical locations across the U.S. Their CIO has strategically mandated their shift to the cloud in order to grow their online e-commerce as they strive to become more digital. This technical evaluation decision was led by both the development and security team, and they selected Sumo because we helped them ensure the digital applications and cloud infrastructure was reliable, protect their application workloads as they modernize and migrate them to the cloud, and lastly, enable their teams to more effectively manage costs given our flexible credits-based licensing model. We're also continuing to see customers expand their adoption of our platform as they recognize the benefits of using our platform for additional teams and use cases. For example, we had a large six-figure cross-sell with a U.S. subsidiary of a Fortune 500 financial services fund. This customer started several years ago with a log analytics use case for observability. and have now expanded to our cloud SIM for security. Like many companies, they are struggling to attract and retain top security talent. As a result, their current security team was suffering from alert fatigue. They required a next generation SIM that could alleviate some of the pressure by automating the correlation and response to such threats. This is a great representation of many such organizations that are beginning their security transformation efforts, but struggle because of people, process, and technology challenges, which Sumo is well-positioned to help to address. Additionally, our customers continue to expand their existing use cases as they increase their adoption of our platform. We had a couple of million-dollar upgrades with some of our largest customers that increased their commitment and, more importantly, strategic business and technology partnership with us. One of those million dollar wins came from a company that is disrupting the way people travel in APAC. They recently had a Log4j incident and selected our security analytics solution as they needed to analyze tens of additional terabytes of data per day. Our solution quickly identified potential threats that they were unable to immediately remediate, gaining the trust of the security team and CIO. Ultimately, ensuring their customers' confidential data remains secure. Lastly, I'd like to mention that we continue to see strong traction with our channel partners, and in particular, our MSSP partners. MSSP's continue to be an important part of our strategy, and we are focused on becoming the easiest vendor for them to partner with. Looking at our service providers as a whole, they now provide Sumo Logic as a service to over 700 customers, which are not included in our total customer count. Customers of all sizes are continuing to outsource the security needs to third parties, as the level and frequency of sophisticated attacks are increasingly coupled with a shortage of security experts. MSSPs select Sumo because of our scalable, fast platform ingests any type of data, and intelligently helps them create actionable security insights while also providing best-in-class cloud economics. While we had many other exciting wins during the quarter, it's important to note that our cloud-native platform is purpose-built to help our customers deliver reliable and secure customer-facing applications, and therefore is differentiated by the fact that it's a unified and fully integrated SaaS platform for full stack observability and security. Second, it's built on a cloud-native microservices architecture that delivers resilience and unparalleled scale that can handle data volumes that modern digital applications generate. Third, it's powered by patented analytics and proprietary machine learning for any type of data, including structured, semi-structured, and in particular, unstructured, which is the majority of data output by modern applications. Additionally, our platform is one of the most audited and certified platforms for industry regulations. And lastly, but definitely not least, we enable cloud-scale economics and value, as our tiered data architecture, supplemented by our flexible credit-based licensing model, allows our customers to economically analyze the exponential growth of machine data in the cloud. Now, turning to some of the product highlights from last quarter, many of which focused on enhancements tailored to developers and open source support. We're excited to announce the availability of our Open Telemetry Distro Collector, or OT Distro. The OT Distro Collector is designed to simplify and democratize the collection of logs, metrics, traces, and metadata for modern cloud applications. We are further embracing open source and establishing open telemetry as it's future standard to collect all machine data, breaking from the legacy model of using proprietary agents to gather critical application and infrastructure telemetry. We also released the sensor integration catalog, which is now available on GitHub. The integration catalog is an open self-service marketplace featuring over 40 turnkey integrations, built to speed production-ready infrastructure and application monitoring. We strongly believe that open source support and interoperability remains critical to the developer community. Lastly, we continue to advance our partnership with AWS as we announce support for the AWS for Games initiative for Amazon Web Services, or AWS, to accelerate digital gaming experiences at scale. With Sumo Logic, game developers can ensure great player experiences, safeguard sensitive data, and accelerate game releases. Next, I wanted to walk through some of the business updates over the last quarter. At the beginning of our fiscal year, we rolled out new changes to our go-to-market model intended to help us focus, scale, and drive more efficient growth. We're a quarter into this new model and feel the teams have settled into their new roles, leading to better alignment internally, between teams, as well as externally with customers, prospects, and partners. We're also seeing early traction in our pipeline generation in all areas in business. We've hired some amazing leaders across our sales organization, including our global channels and alliances, America's sales, and APAC Theater. We also hired a new leader of sales strategy and operations to implement the rigor and discipline in our sales motion, enablement, and hiring to build a best-in-class go-to-market organization. In addition to these strong leadership hires in our go-to-market organization, led by Lynn Doherty, our president at Worldwide Field Ops, we also hired Sophie Kitson, our chief human resources officer, and Tej Redkar as our chief product officer. Sophie brings a strong track record of building talent-centric organizations and the operational systems that allow them to scale. Tej brings a great domain knowledge and is deeply versed in observability, analytics, cloud computing, SaaS, DevOps, and autonomous infrastructure. In summary, escalating security threats and continued focus on securing customers' digital experiences, coupled with a shortage of security and IT professionals, has created durable demand for our analytics platform. Our comprehensive solution automates and correlates security events, threats, and reliability issues with troubleshooting and diagnosis. Further, our tiered analytics supplemented by our flexible credits-based licensing model provides customers with best-in-class data economics. Netting it all out, our differentiated single platform for reliability and security continues to resonate with our customers, ensuring they are able to deliver the best possible experience for their end users. I'm pleased with our strong start to the year as both revenue and ARR have exceeded 25% growth, and we again exceeded our guidance for the quarter. With that, it's my pleasure to now have Stuart Gerson, our Chief Financial Officer, who will provide more details on our financial results in Q1 and our outlook for Q2.

Thanks, Ramin, and thanks, everyone, for joining us on the call. I would like to start with a brief summary of the financial highlights for the quarter. and then go into more detail on each topic. First, as Ramin mentioned, we had a strong performance to start our fiscal 2023 with year-over-year revenue growth of 25% and ARR growth of 27%. Our Q1 revenue and ARR growth was driven by continued traction with our customers that spend more than 100K a year with us, as these customers grew 25% year-over-year. As highlighted by the customer use cases we shared, We are winning new customers in both the security and observability markets, while also successfully cross-selling the benefits of our entire cloud analytics platform as we enable our customers to deliver reliable and secure cloud applications. As mentioned on our last call, we believe ARR is the best leading indicator of growth in a SaaS business. We ended the quarter with ARR of $273.3 million, representing 27% year-over-year growth. This is a significant improvement from Q1 of last year when ARR growth was 16%. While we expect to continue to drive meaningful ARR growth this year, the acceleration of our growth in the back half of last year makes for a tougher comparison the further we get into this year. Accordingly, we expect our year-ending ARR percentage growth will be a few percentage points less than the Q1 levels. To assist with your modeling, we will make the prior year quarterly ARR and dollar-based net retention data available on our investor relations website. Last quarter, we changed the way we calculate dollar-based net retention to a simple trailing four-quarter methodology to better align this metric with our ARR reporting and provide better visibility into current trends in our business. Our dollar-based net retention was 115% for the quarter, As part of the sales resegmentation, we've seen the strongest early traction in the expansion teams combined with a continued improvement in customer retention. Both these factors have contributed to the improved net retention rate quarter over quarter. We believe over time the realignment of our go-to-market team will result in a relatively higher focus on new customer acquisition. As a result, we expect it will take several quarters before we start to see a sustained improvement in our dollar-based net retention rate. Turning to billings, calculated billings for the trailing 12-month period was $288.7 billion, up 22% 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 duration for larger customers. Moving to remaining performance obligation, or RPO, we are continuing to see our customers make larger and long-term commitments due to our differentiated multi-use case platform and flexible licensing model. This quarter's RPO increased 25% year over year to $349.9 million, driven by the size and duration of new and expansion contracts. 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 measures is included in our earnings release and posted on our website. As previously stated, total Q1 revenue increased to $67.9 million, up 25% year-over-year. Q1 gross margin was 70% compared to 72% in the prior quarter. Our data consumption has continued to grow more than 50% year-over-year, which is consistent with our strategy of encouraging customers to ingest more data onto our platform. I want to remind everyone that we do not have a consumption license model. Our customers can take advantage of our flexible credit licensing model, which includes data tiers to capture and store data as they see fit for their business. As they consume more data, they utilize more credits. However, the benefit of revenue trails the near-term impact on cost of sales. We've also released a lot of new functionality over the last few quarters, including metrics and traces, which has created a full stack observability offering for our unified analytics platform. New features and geos take time to optimize and in the near term create some downward pressure on our gross margins. We believe all of the additional functionality and data tiers is a unique differentiator that will allow us to continue to drive our growth in the future. Looking forward, we expect gross margins to remain in the low 70% range as we continue to execute on this strategy in order to drive further adoption of our platform. Moving on to operating expenses. Sales and marketing expense was $32.1 million, or 47% of revenue, which was slightly better than the year-ago period. Given the opportunities ahead, we plan to continue investing in our go-to-market team, focusing on enablement and productivity to drive more efficient growth in the future. In the near term, we expect a moderate increase in sales and marketing expense as a percentage of revenue in FY23. Research and development expense was $19.4 million, or 29% of revenue, the same as it was in the year-ago period. While we continue to invest in our differentiated platform for observability and security, we do expect a slight improvement in R&D as a percentage of revenue this year. G&A expense was $11.5 million, or 17% of revenue, the same as it was in the year-ago period. In FY23, we will continue to make investments required to operate as a public company while focusing on building the foundation for more operating leverage in the future. Our Q1 operating margin was negative 23%, which was several points better than the high end of our guidance range, driven partially by revenue outperformance in the quarter and carefully managing our costs. Net loss in the quarter was negative 15.3 million, or negative 13 cents per diluted share, based on approximately 114.3 million weighted average diluted shares outstanding. This was several cents ahead of the high end of our guidance. Turning to our balance sheet and cash flow. We are well capitalized as we enter the period with 358.9 billion in cash and marketable securities. Free cash flow in the quarter was negative 2 million, or negative 3% of revenue. We do not expect improvements in free cash flow to be linear, as there can be variability from quarter to quarter based on collections and timing of payments. We recommend looking at free cash flow and free cash flow margin on an annual basis. We believe that free cash flow is a leading indicator of leverage and profitability, and as we continue to focus on driving more efficient growth, we expect to deliver meaningful improvements in free cash flow margin from last fiscal year. Turning to guidance, as a reminder, we believe that it is more relevant to measure the growth of our business on a full year basis, given potential volatility from quarter to quarter. We are marginally increasing the midpoint of our annual revenue guidance based on our strong start to the year, while remaining cognizant of the number of changes we've made in our go-to-market team. We continue to evaluate our expense structure to identify opportunities to drive more efficient growth, and accordingly are decreasing our prior annual operating loss guidance. For the full fiscal year 2023, we expect total revenue of $289 million to $292 million, representing 19% to 21% year-over-year growth, non-GAAP operating margin of negative 25% to negative 24%, and non-GAAP loss per share of negative 64 cents to negative 62 cents on approximately 116.5 million weighted average shares outstanding. For the second quarter, we expect total revenue of 71 to 72 million, representing 21 to 22% year-over-year growth, non-GAAP operating margin of negative 24% to negative 23%, and non-GAAP loss per share of negative 15 cents on approximately 116 million weighted average shares outstanding. In summary, We are pleased with a strong start to this fiscal year. Our unified platform for reliability and security continues to resonate with our customers, and we believe we are well positioned for the large market opportunity driven by digital transformations, cloud migration, and security modernization. With that, Ramin and I are happy to take any of your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask the question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand step before pressing the star key. One moment please while we poll for questions.

Thank you.

Our first question comes from Camille Mielbserk with William Blair.

Please proceed with your question. Thank you and congrats on a solid quarter.

Ramin, you're clearly seeing acceleration of business and we've seen pockets of weakness in the broader tech industry. As you look out over the next year or so, if we do see a more severe macroeconomic downturn, how are you thinking about the decision to preserve cash versus leaning into the recent strength and maybe even coming out stronger on the other end? And how does your experience leading Sumo through the pandemic inform this decision?

Yeah, Camille, thanks for joining us. Obviously, we feel like a lot of the investments we made last year in product and IP setting us up to really execute operationally on the go-to-market side. Many of those changes, which have already transpired. So we're going to continue to measure our business on a quarter-by-quarter basis and look for areas of constant investment where we're getting return, as well as efficiencies. And we've proven that in Q1, and we'll continue to do that throughout the back half of this year.

That's helpful.

And just quickly, if I could follow up on your international business. You've delivered very strong growth over the last few quarters. Can you just update us on the investments you're making there and what are some of the next steps to driving expansion?

Yeah, I mean, I think it's obvious to all of us now that the macro trends around digital transformation, cloud migration, and security modernization is not just a regional thing. It's a global thing. And With all the uncertainties in the macroeconomic environment, the great news is that Sumo helps customers save a lot of money, deliver a lot of value, and we're seeing that in terms of our success, not in just our major markets, but also our minor markets. APAC for us is becoming more of a major market. We're going to continue to invest and go to market around channel, alliances, and direct capacity.

That's good to hear. Thanks again, Ramit. Thank you.

Our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Yeah, thank you. This is actually Matt Swanson. I'm from Matt, and I'll add my congratulations on the quarter. So maybe picking up where you left off on that last question about the realigned go-to-market strategy and where investments still need to be made. You know, it's great to hear the traction. You're seeing expansions around the channel side with the MSFPs. But as far as actually changes you still need to make versus waiting to kind of see the fruits of your labor, where do we stand to that point? Are there still ongoing restructurings that need to happen?

Yeah, so obviously the biggest structural change was the bifurcation of hunters and farmers, which took place the first week of last quarter. And that transition is well underway. I think ongoing, it's about where do we continue to invest incremental capacity versus make sure we're hitting the right productivity metrics, and new markets and emerging markets versus established markets and balancing that investment strategically over the course of this year. So think of it as the major change has been done, and it's about where we continue to pour fuel on the fire where we're seeing the return and where we slow back a bit to make sure we drive the right productivity as well as growth with respect to the investments we've already made.

That's really helpful. And I feel almost a little silly asking this because you certainly don't sound like a company that's seeing any macro headwinds. But just given all the different things that are going on in the market right now, are you seeing anything from, you know, between the war in Ukraine, inflation, input prices, supply chain, just kind of a lot of moving parts. And then maybe kind of on that, you know, we talk every quarter about the differentiation of the flexible credit-based model and the tiered data. if there's any other additional comments on your pricing model and how it may be more resilient in macro challenges, that'd be helpful as well.

Okay, sure. So first and foremost, with respect to the demand environment, it's important to point out that we provide mission-critical service for all companies that are trying to become more digital as they need to deliver reliable and secure experiences. And so In doing so, there's always a transformation aspect, a growth aspect, as well as a cost and return aspect. And so good news for our platform, given the second part of your question around the licensing, we provide that agility, that transformation, as well as the transparency in value and cost that they don't get from any other providers. So as we look down the pipe, you know, we're going to continue to help make sure customers get all their data into our platform. be able to analyze that, and be able to not drive just reliability, but also security of these mission-critical services that may need to run their businesses.

All right. Thank you. Appreciate the time.

Thank you. Our next question comes from Derek Wood with Cowan & Company. Please proceed with your question.

Hey, guys, thanks for taking my question, and nice job on the quarter. Ramin, could you just comment on, you know, as you look at the security and the observability markets, the health of those two markets, the trends you're seeing where maybe there's greater demand, and then just, you know, as you're thinking about this year, the ability to do more cross-selling of the two, how much focus is that in the new go-to-market structure?

Yeah.

Sure. So the trend is pretty similar to what we've seen the last few quarters, where about 40 plus percent of our business has come from security and the remainder from observability. This past quarter, we saw some strong wins in expansion slash cross-sell, as well as new logo business around observability. A lot to do with the enhancements that we provided last year that we've spoken about. Now, as we look forward, we've always talked about these being two distinct markets, different buying centers and budgets, and the fact that we have one single platform that allows those teams to kind of work better together uniquely positions us for the differentiated platform we have. So we don't walk in and try to push both agendas at once. We try to land and expand in either of the organizations and then look to cross-sell. Now, to the second point of your question, that's exactly why we made these go-to-market efficiencies and changes around hunters and farmers to be able to go capitalize on that cross-selem expansion versus that new business hunting aspect. So we will tend to see more fruits of the labor from the expansion just because of sheer focus, and similarly around new logo lands and that viral selling model that we've seen in that mid-market portion of our business, which contributed strong last quarter as well.

Okay, that's helpful. Stuart, you guys did 27% ARR growth in Q1, up from 24% in Q4. And I think you're saying that you want to end the year maybe back around 24%, which is quite healthy. But the revenue guidance kind of implies maybe 19% revenue growth in the second half of the year. So there seems to be kind of a disconnect between those two measures, those two growth rates. Can you just kind of help us bridge the difference between the two?

Sure, Derek. I think the way, and I think what we said on the call was, and the way you need to think about this is really look at our growth on an annual basis. Excuse me. And so, you know, we are guiding, if you think about the big point of our revenue guidance, we're guiding to 20% growth in FY23, which is an acceleration over FY22. But just to your point, I think, you know, we started to reaccelerate the business at the beginning of last year. And so the first half of the year for us is a slightly easier compare when you look at the acceleration to the last half of last year. So that's the dynamic that you're referencing.

Does that help? Okay. Got it. Thanks.

Thank you. Our next question is from Mark Murphy with JP Morgan. Please proceed with your question.

Hey, guys. This is already on for Mark Murphy. Thanks for taking the question and congrats on the quarter. First off, kind of thinking on the security side, are the events kind of going around Ukraine and the general continued concern about ransomware attacks and whether some state actors or others kind of putting greater emphasis and providing some tailwind on the security side?

Yeah, I think the supply chain attacks and ransomware has always been top of mind for a lot of companies that are moving to the cloud and transforming their operational organizational needs. I think for us, what we've seen uniquely is the ability for us to have the security side of our opportunities, whether that be new or existing, help champion us in to the line of business and dev teams and vice versa. because we're one of the only platforms that provides reliable and secure analytics. And so I think we're well positioned there. I don't necessarily think that that's necessarily given us some tailwinds yet. I think we'll see probably how that plays out throughout this year. We'll continue to execute on these distinct markets and working through the channel partners as such in the security side and more of a direct sale on the observability side.

Got it. Thank you. And then just kind of double-clicking on the go-to-market sales motion and Hunter Gatherer, you guys are already seeing some progress there, particularly on the expansion side. Can you guys just talk about what is driving that kind of more specifically in terms of what levers are being pulled for that? And then, too, are there kind of other benefits that, you know, are probably going to be seen a little bit farther down the line, maybe towards the end of the year? Thanks.

Sure. I mean, I think first and foremost, we're committed to driving efficient and profitable growth. And at this size and scale, typically you started earlier to bifurcate your sales teams into hunters and farmers. And it allows focus, it allows simplicity, and allows a lot more value to the channel partners and prospects and customers. And so it's obvious that those are in expansion roles or farming roles who have install-based set of accounts. makes it a little bit easier for them to go in and drive a cross-sell and align within and across the organizations that are hunting for new logos. And so we accordingly split up the organization to drive the commitment to that efficient growth, but also drive the right profile of reps in each one of those segments and to drive the velocity engine as well as the cross-sell engine.

Got it. Thank you. Thank you.

Our next question will come from Sanjit Singh with Morgan Stanley. Please proceed with your question.

Thank you for taking the questions and really nice Q1. I was wondering if you could talk a little bit about the opportunity in observability. You had a really nice win where you were replacing sort of a homegrown DIY solution. Any way to sort of frame in your view how much DIY is out there the catalyst to move to a more commercial out-of-the-box solution, and how much of an opportunity that represents for Sumo versus maybe displacing an existing commercial solution?

Sanjit, I think you share the same sentiment I do around that answer, which is the market is predominantly greenfield still, right? If you look at the number of workloads that have been migrated to the cloud, those that are being monitored end-to-end, right, let alone the workloads that are still shackled and stuck in the data center or not yet built and migrated, gives a huge opportunity for all the observability vendors, including Sumo, to go take advantage of that. What we see oftentimes is in the early development of new microservices-based architected apps, there's very much a do-it-yourself and a set of tools used to initially build and release that. And the moment you start to scale and want reliability, let alone security, you start to shift to add in commercial products to supplement a lot of open source. And that is exactly what happened in that win, similarly to what we've seen in the last two quarters, in fact. So the second part of your question in terms of the broader opportunity, we feel that we're well positioned, particularly because of the portfolio enhancements that we made last year and into Q1, centered our commitment to open source, open telemetry, to really reduce the cost for customers and the value for customers. Long gone are the days of charging too much money for proprietary agents that collect memory, disk, CPU latency. Those should be basic metrics. And as such, OpenTelemetry brings logs, metrics, traces, metadata together to make it easier to collect that information. And ultimately, the value gets placed in the analytics side of the platform to be able to provide those insights that Sumo provides.

Makes total sense. And then, Stuart, I wanted to make sure I understand some of your comments around free cash flow. Sounds like we're going to have an improvement in recent free cash flow margin. Any line of sight on when you expect the business to get to that sustainably positive free cash flow position? I know the go-to-market organization is still in transition and has a couple of phases left to it, but any sort of milepost that we should expect in terms of getting to the other side on the free cash flow positive journey?

Sure, Sanjit. We haven't established a timeframe for that yet, but obviously, as I indicated, we're going to make a meaningful improvement this year, going from the roughly negative 14% of revenue free cash flow margin last year this year. And so we will continue to progress that. As Ramin iterated, we are very focused on driving efficient growth. As we start nearing towards break-even, we'll give you more clarity, but we haven't established a specific timeframe at this point.

Understood.

Thank you very much. Thank you. Our next question is from Gray Powell with BTIG. Please proceed with your question.

Hi. This is Janet Zhang for Gray Powell. Thank you so much for taking the question. I was wondering if you could talk about linearity in the quarter. Did you see any changes in customer buying patterns and is there any color you might be able to give us on how May is tracking so far?

I won't talk about May and tracking forward, but I will give you some color on obviously Q1. We started pretty strong and month one into month two. You know, I think as we look at our segments now in each region, we're looking at effectively what our pipe or our coverage and then what our linearity is and making sure we're making the right trade-offs investments to continue to accelerate that.

Got it. Thank you so much.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Ramin Sayar for any closing comments.

Thank you, operator. We are continuing to deliver on our commitment to accelerating revenue and have started off the year with a strong performance, exceeding, again, the high end of our guidance. We delivered 25% revenue growth and 27% ARR growth in the first quarter. Additionally, as we've already mentioned, we're committed to driving meaningful growth while showing improvements in both operating margin and free cash flow for the full year. Our cloud-native platform, we believe, is very uniquely positioned to help customers reliably and securely manage their mission-critical applications. As such, we are steadfast in our belief that we have a differentiated product that resonates with our customers and believe that we're still in the very early innings of digital transformation, cloud migration, obviously, security modernization initiatives. I'm very pleased with the operational and organizational changes that are already underway and the large and growing market opportunity ahead of us. With that, thank you for joining us today on our first earnings call, and we look forward to speaking with you soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.