Dynatrace, Inc.

Q1 2022 Earnings Conference Call

7/28/2021

spk07: Hello, and welcome to the Dynatrace Fiscal First Quarter 2022 Earnings Conference Calling Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow a formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Noelle Farris, Vice President, Investor Relations. Please go ahead.
spk01: Thanks, operator. Good morning, everyone, and thank you for joining Dynatrace's first quarter fiscal 22 earnings conference call. With me on the call today are John Van Sicklen, Chief Executive Officer, and Kevin Burns, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, such as statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties, depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these uncertainties and risk factors is contained in Dynatrace's filings with the FCC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's views on July 28, 2021. Dynatrace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial measures during today's call. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website. And with that, let me turn the call over to our Chief Executive Officer, John Van Sicklen.
spk13: Thanks, Noel. Good morning, everyone, and thank you for joining us today. I am pleased to report that we had another strong quarter, once again beating guidance across all our key operating metrics, led by ARR, which was $823 million, up 37% year over year. Along with strong top-line growth, we again delivered healthy profitability in terms of non-GAAP operating income and EPS, which Kevin will elaborate on in a few minutes. And we continue to believe that a smart balance between growth and profitability makes for a more durable business over the long term. Underpinning our consistent year-over-year top line growth above 30% are two key building blocks. Net new logos to the Dynatrace platform and the ongoing expansion of existing customers. I'm pleased to report that we added 135 new digitally transforming customers to the Dynatrace platform in Q1. up over 50% from a year ago. And that our net expansion rate, fueled by growth across all modules, was once again at or over 120%. As we've said, we believe continued execution against these two building blocks will sustain a 30 plus percent growth business at scale for some years to come. With the strength of our Q1 results and positive outlook ahead, we are increasing our guidance for fiscal 2022. which Kevin will provide more details on shortly. This morning, I'd like to discuss three topics that I believe will continue to drive our momentum and success. First, the ongoing market dynamics that continue to drive new logo growth and rapid expansion within our growing base. Second, the progress we are making in commercial expansion to accelerate go-to-market success. And third, The progress we are making in expanding our platform and module strength to address the full $50 billion TAM we see ahead of us. Let me start with the market dynamics that provide us a unique long-term growth opportunity. Even with a protracted pandemic, our value proposition remains resilient. We continue to see digital transformation accelerate in all geographies and all verticals. The pandemic has put everyone on notice how quickly change can happen and how important agility and risk mitigation strategies are to assuring a sustainable business. At the core of digital transformation are three megatrends that are interrelated. The first, that applications are eating the world as all businesses look for innovative ways to transform. The second is that these applications and the platforms they run on are cloud first. In fact, multi-cloud first. And the third, is the rise of automation and AI to ease the complexity, increase the speed, and mitigate the risk of these transformations. Dynatrace's unique combination of multi-cloud observability, unified with powerful AIOps capabilities, is a pure play across all three of these megatrends. And we're still in the early innings of digital transformation and these three megatrends. Digital transformation is not an event, it's a journey. Take our automotive customers who are reimagining the driving experience, including driverless cars, our healthcare customers embracing digital devices for new ways to deliver healthcare, or our energy customers looking to replace carbon fuel with renewable energy for a better tomorrow. These are not short-term efforts. They are long-term transform-the-business strategies, and they all depend on new cloud-native applications, running on multi-cloud platforms, leveraging automation and AI wherever possible for consistency, scale, and lower risk. One of the other market characteristics that defines digital transformation is that digital transformers are the companies that our global economy depends on. They're the multi-billion dollar banks, logistics companies, healthcare companies, energy companies, and government agencies. These organizations almost always have generations of technology to manage and migrate off of, and limited resources and expertise to do it with. Their application portfolios are rich, the transformation challenge is complex, and the urgency to innovate is high. We continue to believe that we have the best platform and expertise fit for these large scale digital transformers. Proof of our superior fit with these digitally transforming customers can be seen in our numbers. As I mentioned earlier, we added 135 new logos to our franchise in Q1. Great companies such as Dell, Rock Central, Blue Cross Blue Shield, and L'Oreal, all digitally transforming in one way or another, all with observability requirements that include hyperscaler platforms, Kubernetes container orchestration, cloud native applications, and modern DevOps practices. Some of these companies are transitioning off outdated monitoring tools, while others have been trying to cobble together their own modern cloud observability solutions and all considered multiple alternatives before selecting Dynatrace as their digital transformation partner. On the expansion front, global leaders such as Travelers Insurance, Lloyds Banking Group, Toyota, Lowe's, and DHL expanded their use of Dynatrace this past quarter and all now use three plus modules of Dynatrace to cover their multi-cloud observability needs. As I've said before, once a customer experiences the ease of scaling, the power of our automation, transformative opportunity provided by our AI capabilities, they quickly look for opportunities to extend Dynatrace further across more application workloads and across broader metric and log use cases. So when we say the market is moving toward us, we mean just that. The macro trends of applications eating the world, digital transformations as multi-cloud first, And the need for automation and AI capabilities on the rise put us in a very strong position for continued new logo and net expansion success going forward. This brings me to my second topic this morning, taking advantage of this fantastic market opportunity we have in front of us. And that's through increased investment in commercial expansion. You'll notice our sales and marketing spend has returned to our target range of 34 to 36% of revenue. combination of three key efforts, Salesforce expansion, partner momentum, and doubling down on market awareness. Our sales engine continues to scale. We grew our quota carriers by nearly 30% this past quarter and expect to continue growing this team in the 30% range throughout fiscal 22. Productivity continues to be healthy, and the talent we are bringing on board has never been stronger. Dynatrace is considered a top company to work for around the globe, and our customer-first culture resonates with sales and go-to-market talent. Helping to lift productivity are the cloud system integrators and strategic tech partners. Our partner community is now influencing over 45% of our transactions globally, and the leverage we are seeing through the hyperscaler marketplaces is growing even more rapidly. In fact, the number of deals closed with hyperscaler partners this quarter increased by more than four times compared to the same period last year. Our reputation for reducing risk and accelerating project success, especially for projects of scale, is catching the eye of more and more partners and their community members. As we've said, our partner program is an important area of focus for us as we scale beyond a billion dollars. Third pillar of our commercial expansion is increasing the brand awareness of Dynatrace. A recent study showed that within our target account base, the global 15,000, we are now known for much more than APM. Our efforts to expand awareness to observability, infrastructure, logs, and AIOps is paying off. We have more to do here for sure, but the awareness trends are scaling in the right direction. To help accelerate these trends, We recently completed a series of 12 one-day Dynatrace sessions around the world. We call these Dynatrace Go events, where customers and prospects hear from peers how they're leveraging Dynatrace to digitally transform faster, smarter, easier, and at lower risk and lower cost. We had over 20,000 registrants across these 12 events, and most exciting to me was a balance between customers and new logo prospects. 70% of the 20,000 were new logo prospects. Like I said, there's more work to be done to be better known for the value advantage we provide to digital transformers, but we are gaining on it every day. The third and final topic I'd like to cover today is the maturing of the depth and breadth of our platform and its growing number of monetizable modules. Our three plus module customer count continues to climb. Today, over 40% of our 3,000-plus customers leverage Dynatrace across three-plus module use cases. And over 45% of our customers now use us beyond full-stack applications for infrastructure and log-only use cases. Our infrastructure module, which includes modern cloud metrics, open ingest, and log analytics, is our fastest-growing module, with ARR growing more than 90% year-over-year. It's now fully featured and robust. and capable of winning against any infralog alternative, and a big reason why we continue to win modern cloud observability business at a steady rate. With over 1,000 engineers now, we continue to advance all modules aggressively, embracing new technologies, extending capabilities, and enhancing use cases. Though there's much to talk about here, let me focus on just one of our new modules, our Cloud App Security module. As we've said, We are still in the early phases of market adoption and product maturity, but the feedback so far is exciting. One of our banking customers who recently trialed the AppSec module told us that people and process limitations have prevented them from scanning more than once a week, even though they're deploying updates two to three times a week. This left them with potential vulnerabilities. With Dynatrace, they realized they could have real-time coverage 24 by 7, and that's huge. Another customer, a government agency recently migrating to Azure, said that as they started rolling out cloud-native applications, their existing security tooling quickly became cumbersome, slowing them down and with output no longer actionable. Amazingly, in just the trial, Dynatrace was able to immediately detect nearly 100 vulnerabilities that needed fixing. They've now deployed this mission-critical app securely, thanks to Dynatrace. It's clear from these and many other examples that our value proposition and timing could not be better. The DevSecOps movement is gaining momentum and there is no good answer for continuous vulnerability detection with intelligent scoring to reduce risks while accelerating ongoing innovation. We continue to see a powerful greenfield opportunity for this new module and are excited with its potential to rapidly scale within our base during the second half of this fiscal year. The need is there. and the deployment is frictionless. With that, let me summarize as I've covered several important topics this morning. We have an incredible long-term market opportunity and we are investing aggressively to seize the advantage. Commercial expansion is increasing and continuous innovation is being delivered across all modules. Our platform continues to mature and we continue to scale well beyond our APM roots. We are gaining new digital transformer logos at a steadily increasing rate and the net expansion of our base across multiple modules continues to be robust. And it's the compounding of these two, new logos to the franchise and maintaining a healthy net expansion rate above 120% that we believe provide us the building blocks to sustain a 30% plus growth business well into the future. Let me now turn it over to Kevin to take us into our financial results and guidance. Kevin.
spk04: Thank you, John, and good morning, everyone. As John mentioned, we delivered another great quarter, setting us up for a strong fiscal 22. The investments we have made in commercial expansion that drive sales productivity are evident across all of our top line metrics with ARR revenue and subscription revenue exceeding our guidance. We believe annual recurring revenue is a key performance metric of the overall strength of the business. ARR for the first quarter was $823 million. That's up $222 million a year over year, 37% growth as reported, and 32% in constant currency. Excluding the perpetual license wind down, which was roughly $25 million, or four percentage points, our adjusted ARR growth was 41% as reported, and 36% on a constant currency basis, all up sequentially from Q4. The building blocks for sustained ARR growth rate remain the same. The new enterprise logo additions to the Dynatrace platform combined with how well we expand existing customer relations as measured by our Dynatrace net expansion rate. As John said, new logo growth in the first quarter was very strong with 135 new logos added in the quarter. And we have been landing our new logos over the past year at a very consistent land ARR of a little over $100,000 per new logo. This new logo growth represents a 52% increase over the 89 new logos we added in Q1 of last year, which is a soft compare due to the COVID environment. We ended Q1 with over 3,000 Dynatrace customers. Consistent with historical trends, once customers see the value of the Dynatrace platform, they're eager to adopt new modules and expand coverage. This is evident in our net expansion rate, which, for the 13th consecutive quarter, was at or above 120%. As a result of this, our ARR for Dynatrace customer continues to increase, and in Q1, it was $271,000 per customer, an increase of 19% over last year. Adding on to that, we continue to see notable strength in both the number of customers with three or more modules and the expansion of the average ARR per customer in this cohort. At the end of Q1, more than 40% of our customers are using three or more modules with an average ARR of nearly $500,000 per customer. We now have over 1,200 customers using three modules, and this cohort increased by well over 400 customers over the last year. Moving on to revenue, total revenue for the first quarter was $210 million, $6 million above the high end of our guidance and representing an increase of 35% year-over-year or 29% in constant currency. Subscription revenue for the first quarter was $197 million, an increase of 36% year-over-year or 30% in constant currency. We are very pleased with the strength of our ARR and associated revenue performance as it further validates our strategy to accelerate investments in sales and marketing. With respect to margins, total non-GAAP gross margin for the first quarter was 85%, in line with last quarter and Q1 of last year, a very healthy margin reflecting the power of the Dietrace platform. From an investment standpoint, we continue to make solid progress investing for growth, Our R&D organization is now 1,000 employees, and we invested $30 million in R&D this quarter. That's up 44% from last year and approaching our targeted investment level of 15% of revenue. On the commercial side, we continue to scale our sales organization, which, as noted earlier, is tracking the 30% sales rep growth. Likewise, our partner organization has grown by over 30% in the last year, and we continue to invest marketing dollars focused on brand and pipeline development. Our sales and marketing investments are up 66% over last year and within our targeted investment zone of 34% to 36% of revenue. With these levels of increased investments, we continue to run a balanced business. Our non-GAAP operating income for the first quarter was $54 million, $3 million above the high end of our guidance range due to the revenue upsides. This led to a non-GAAP operating margin of 26% compared to 33% in the first quarter of last year. Again, keep in mind, we saw significant savings in the first half of last year related to COVID shutdown and our Q1 margin profile was more in line with how we exited fiscal 20. On the bottom line, non-GAAP net income was $45 million or 16 cents per share. This is a penny above the high end of our guidance range, primarily due to the favorable revenue upside. Turning to the balance sheet, as of June 30th, we had $387 million of cash, an increase of $137 million compared to the same period last year. We are pleased with our continued healthy cash generation and believe it puts us in a strong position to consider strategic business investments where there is an opportunity to accelerate our growth in selected areas. Our unlevered free cash flow for Q1 was $81 million, or 39% of revenue. Remember, due to seasonal variability, we believe it's best to view unlevered free cash flow on a full year basis. We're extremely pleased with a strong start to the year, and this achievement puts us in a good position to deliver on our previous guidance of 29 to 30% of revenue. for fiscal 22. The last financial measure that I would like to discuss is our remaining performance obligation, which at the end of the quarter was about $1.3 billion, an increase of 46% over Q1 of last year. The current portion of RPO, which we expect to recognize as revenue over the next four quarters, was $710 million, an increase of 41% year over year. Though RPO may become a more meaningful metric for us in the future, we continue to believe ARR is the best metric to understand the performance of the business because it removes variability associated with billings and contracting changes. Now let me turn to guidance. As I outlined last quarter, we believe the investments we are making in commercial expansion and product innovation will enable us to maintain 120% net expansion and at least 15 to 20% new logo growth over the midterm. These are the core building blocks that lead to sustainable ARR growth rate over 30%. With respect to fiscal 22, we expect ARR to be between 984 and $996 million, up 27 to 29% year over year, or 26 to 28% in constant currency. This is an increase of one percentage point across these growth rates when compared to our previous guidance. Keep in mind, our ARR guidance assumes three to four percentage points of headwind to ARR growth rates in fiscal 22 due to the perpetual license wind down. We expect this headwind in the second and third quarters to be a little over four points, and then it will decline to about three points in Q4 and drop thereafter. Excluding the perpetual license headwind, our full-year adjusted ARR growth rate is expected to be between 29% to 31% year-over-year on a constant currency basis. Wrapping up our ARR discussion and seasonality, as we have outlined in the past, our business continues to have strength in the back half of the year, with Q3 being our strongest quarter, followed by Q4. Moving on to revenue, total revenue for the full year is expected to be $902 to $914 million, up 28 to 30% year over year, and 26 to 28% in constant currency. Underlying that, subscription revenue is expected to be between $848 and $856 million, up 29% to 31% year over year, or 27 to 29% in constant currency. That's an increase of two percentage points for total revenue and subscription revenue growth rates when compared to our previous guidance. And we continue to expect subscription revenue to be 94% of total revenue driven by the size and strength of ARR and associated subscription revenue growth. Moving down to P&L, we expect full year non-GAAP operating income to be between $208 and $218 million. As we continue the message, we are investing for the long-term sustainable growth of the business. We believe the proper levels of investments for sales and marketing to be in a range of 34 to 36% of revenue and R&D to be around 15% of revenue. The result of this is a non-GAAP operating margin of 23 to 24% of revenue for the year, consistent with prior guidance and up from a dollar standpoint to the higher revenue guidance. For the full year, we expect non-GAAP EPS of 60 to 63 cents per share, which is up a penny from our previous guidance. Our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 12%, consistent with prior guidance. At these investment levels, we are able to continue delivering strong, unlevered free cash flow margins. For the year, as I just mentioned, we expect unlevered free cash flow to be 262 to $274 million, or 29 to 30% of revenue. To summarize our full year guidance, it is a continuation of our durable balance of growth and profitability, guiding to a rule of 50 plus business when combining ARR growth and unlever free cash flow margins. Looking at Q2, we expect total revenue to be between 219 and $221 million, up 30 to 31% year over year, or 28 to 29% in constant currency. Subscription revenue is expected to be between 206.5 and $208 million, up 31 to 32% year over year, or 29 to 30% in constant currency. From a profit standpoint, non-GAAP operating income is expected to be between 53 and $55 million, representing 24 to 25% of revenue, and non-GAAP EPS of 15 to 16 cents per share. In summary, we are very pleased with the overall momentum of our first quarter performance with strong AR and top line growth combined with healthy margins. We remain very excited about the high growth opportunity ahead of us. As John mentioned, the ongoing market dynamics continue to drive the market toward us. We are investing in commercial expansion to accelerate go-to-market success and we continue to expand our platform and module strength to address the full $50 billion TAM we see ahead of us. Overall, we believe we are well positioned for sustained and durable growth rates in fiscal 22 and beyond. And with that, we will open the line for questions. Operator?
spk07: Thank you, and I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Kaj Rangan from Goldman Sachs. Your line is now live.
spk11: Hi, thank you very much, and congratulations on the quarter. John, I'm curious to get your thoughts at a high level as you try to scale the business to its true potential, which could be multiples of billions of dollars. How do you think about the broader commercialization of the Dynatrace platform, whereby today you've got a business model that is relatively high ASPs relative to where the industry is operating. At what point do we start to see a thinning out, if you will, of deal landing points? You're able to target a multiple of the 3,000 customers that you have, so you're Generally, infrastructure software companies that are very successful at scale have a customer base of tens of thousands. So as you think about the company's strategy longer term, how do you thin out the landing points and have a commercial sales channel that is able to target a much wider user base, granted that you do extremely well and you have a very high concentration of your modules across 3,000 customers? How do you make this even more mainstream? Thank you so much. Prakash, appreciate it.
spk13: First, there's nothing that precludes our platform from being able to scale down market. We've just decided as a business to stay focused, at least in these first few years, on what we see as the most lucrative side of the business, which is a global 15,000. In fact, about 70% of all IT spend is done by that global 15,000. It's a massive market in and of itself, you know, against this, you know, this huge TAM that we're looking at. So there's plenty of room to continue scaling out in every customer and across, you know, an ever growing, you know, sort of set of modules that we, the six we have today and, you know, more we envision for tomorrow. So, you know, we like where we are. We like the focus. It's paying off. We're really good at, at supporting these high-end, high-scale digital transformers. And you can see it in our numbers. We're just good at it. But like I said, when the time comes to go to the global 25,000 or further, there's nothing that precludes us from being able to expand down market.
spk11: Wonderful. Thank you so much and congrats.
spk07: Thank you. Our next question today is coming from Sterling Alte from J.P. Morgan. Your line is now live.
spk12: Yeah, thanks. Hi, guys. So I wanted to ask about the hiring and the ramp of the new sales reps. With 30% increase, are you seeing very consistent growth and productivity out of the new reps that you're adding quarter over quarter, especially now that you're getting to bigger and bigger numbers? What changes have you had to make you know, to be able to make that possible.
spk13: Great, great question, Sterling. A lot of growing a sales organization like we're doing, you know, comes from anticipating, you know, the scale because you need a superstructure, you know, of management as well as an expansion of your onboarding program sort of to fan it out into the field can't all be done, you know, via headquarters. So we have a combination of things going on But I think the sales management would say that the biggest change over the last 12 months for us is the quality of the talent that we're attracting as a high growth, very successful company, one that's focused on customers and one that's focused on sales success. So a little bit of its culture, drawing in some great talent, And we're doing a better job of developing that talent quickly, I think. And it's shown in the numbers. The last dimension is just the coverage. You know, as you scale a sales organization, you know, each of the sales reps end up with, you know, sort of a portfolio of customers they can actually get to, as opposed to a list, but they can't get to them all. And so it's been, it's also helped us you know, significantly with broader coverage. We go deeper with existing customers. We reach new customers faster. And it's, you know, it's all good. It's all paying off.
spk12: Fantastic. Thank you.
spk07: Thank you. Next question is coming from Bhavan Suri from William Blair. Your line is now live.
spk10: Great. Thanks. Can you hear me okay? We have you, Bhavan. Great, great, and congrats. That was a great RPO and billing numbers all around. I want to touch a little bit initially, John, on the competitive environment here. You know, over the last 18 months, we've seen sort of new products being introduced both by you but by competitors, pricing model changes in some of those competitors. Just some sense of what you've seen competitive front, any change, and then any change in more in terms of the trend around the win rate.
spk13: Now, Bhavan, in some ways, there's been very little change. In other ways, there have been some larger changes. The little change is really around sort of this competitive dynamic everybody seems to worry about in this space. You know, really, from our perspective, it hasn't gotten any more crowded, nor was it really that crowded to begin with. Certainly at the enterprise level, you know, the digital transformer level that we focus on, It's been, you know, it's pretty simple. There's less than a handful of players that can play there, and most of them fall away the minute you get to scale, you know, multi-cloud kind of scale. On the other side, you know, what is happening is there is a marked shift toward observability, which is much more of a platform, you know, sort of concept where customers are tired of, you know, sort of the fragmentation of of all the piece part tooling and they really want to see more of a platform consolidation of their tracing, their metrics, their logs, et cetera. And we anticipated that, as you know, seven years ago when we rebuilt our platform and refocused it. So we've been leading and we've been trying to progress the concept of observability in the market because we think it gives us strength in our landing zone. You know, it's a new and expanded landing zone, and it also sets us up for quicker expansion, which we're also seeing. So, you know, that's probably the other, you know, dimension of this, where there is some change, and, you know, it's change for the good for us.
spk10: Yeah, no, that's helpful, and I think you're right about that shift towards observability, especially with your partnership with telemetry, too. I guess one other one from you really quickly is, is when you look at the net dollar generation rate, it's remained relatively consistent and really, really solid. But as you look at sort of when you're expanding into a company, I'd love to get a little color around the splits between selling into adjacent kind of use cases or departments, right? So maybe going to e-commerce or usability or something like that versus selling more modules into an existing kind of use case. So I've got sort of like the guys doing the data center, and now they want everything measured. So help me think through how that deepening versus broadening plays out to drive NDRR.
spk13: Yeah, you know, that sort of varies by customer in a lot of ways. The very large customers, you know, have more sort of fragmentation between teams of who does what. And so to move from the application layer to the cloud platform, you know, where more of the infrastructure, you know, play is, you know, that's just moving, you know, to a different group that's, you know, adjacent to the first landing zone, but a little bit different, different characteristics, different care abouts. And so that's one. But what we're seeing most of the time honestly, is that we're landing with multiple modules. The vision, even if somebody doesn't buy them all at once, the vision is already planted that they want to expand to multi-module use, provided the landing zone tastes good. I love the fact that we are so consistent with that landing zone. It means that we're not sort of elephant hunting and we're staying focused in our sweet spots. We know the product tastes so good when somebody gets it, and it just expands rapidly. So, you know, I'm really pleased with that. But, you know, the module expansion comes in two different ways. Some of it's super straightforward off of the initial sort of vision we plant with the customer, and other ones take a little more time. The larger customers take a little more time, but obviously they pay off too because the size of those companies can be quite large when they're multibillion-dollar companies. billion dollar businesses. You know, overall, you know, just looking at that growth, the three plus module growth where we have, you know, nearly $500,000 average ARR per customer and growing, you know, year over year, I think we grew it from, you know, maybe about 30% of our customer base to now over 40%. That's just a great, you know, great progress. And, you know, we expect it to continue. You know, I'd be surprised if we weren't picking up another you know, chunk of, you know, percent of our customer base over the next, you know, six to nine months. We're doing well with it and we're excited with the progress.
spk10: Yeah, I know you can see that even that infrastructure growth of 90%. Congrats. I mean, those are great numbers. And thanks for taking my questions, guys. I appreciate it.
spk07: Thank you. Thank you. Next question today is coming from Matt Hedberg from RBC Capital Markets. Your line is now live.
spk09: Hey, guys, thanks for taking my questions, and congrats on the quarter, and also congrats on the two-year mark of the IPO. It seems like two years has gone fast, but I think we have a lot to look forward to in the future here, so congrats on both those milestones. Obviously, the success that you're having, John, you just alluded to customers with three or more modules spending over $500K, and I know historically you've said, I think your overall base monitor is like 15% to 20% of their applications, but as you really move into full-stack monitoring, full-stack observability, is there a different way to think about penetration in these customers beyond just the number of apps monitored?
spk13: Yeah, Matt. So the way we look at it is that pretty much every customer starts in a segment. It's usually their most advanced cloud environment. where they want to bring Dynatrace in. They're the more dynamic, more complex environments where there's lots of blind spots, but there's also a lot of impact if they get it right. But that quickly expands to either other app stacks, cloud app stacks, or hybrid. And so digital transformers, one of their characteristics is that they're moving from something to something. Otherwise, why are you transforming? So they usually have multiple generations. And so we start out, as we've talked about before, in the most advanced cloud environments. And then we come back and sort of sweep through the hybrid elements that supply those modern cloud applications. So that characterizes sort of the way things look to us. And it's hard to sort of peg, oh, you know, our customers are here, or is there a different sort of, you know, expansion? The fact is, you know, digital transformation, as I said, is a journey. People are moving from everything they had before to something brand new on the other end of this. It will take them a long time, and the minute they're there, they're going to continue to evolve. So, you know, I see this as, you know, we're in early innings. It doesn't really matter sort of, you know, exactly what things look like today. They'll continue to evolve and scale rapidly. I mean, just look at the cloud companies and how fast they're all growing at massive, you know, multi-billion dollars worth of revenue. There's just a great opportunity ahead of us, you know, and, you know, we're certainly, you know, lead at the enterprise space, and we expect to continue to do that. And, you know, with that will come, you know, growth across all the modules, you know, as we expand our sort of footprint, our capabilities, you know, and our reach into these customers.
spk09: Got it. Thank you. And then as we start to look forward to the federal year end, you know, it was great to see you were rewarded the AWS Government Competency, along with your prior FedRAMP authorization. Can you remind us of what your exposure is to Fed spending, and how do you think about that into sort of your guidance in terms of what sort of expectations you have on federal this year?
spk13: Yeah, no, we think the federal market is a fantastic opportunity for us to continue expanding in. We're relatively early in that. I think we talked about it about a year ago, in fact. The doubling down that we were doing, we now have quite a good-sized team there. It's up considerably, well over 100% year on year. The progress we're making is significant, but it's still off the small numbers. I think it's going to be more meaningful in fiscal 23 and 24, honestly, as far as an overall piece of the business. But, you know, we're really pleased with the progress that team has made, and we look forward to some great things, you know, from them. With partnerships that we're building, you know, with some of the extensions and some of the new modules we're bringing out, like the AppSec, you know, module, these are things that fit, you know, Fed government extremely well at this moment in time. And so we're looking for great things from them. It's an important task. It's an important thrust.
spk09: Now, it certainly seems like the government needs to digitally transform just as much as the commercial side. So well done, guys. Thank you.
spk07: Thank you. Next question today is coming from Koji Ikeda from Bank of America. Your line is now live.
spk03: Hey, John. Hey, Kevin. Really nice quarter. Congratulations. Thanks for taking my questions. I actually wanted to dig into the prior question on the AWS Government Competency Award. Congratulations on that. Great testament to the platform's capability. I guess I was just wondering, could you talk a little bit about what the process is like for achieving that award? How long does it take? I mean, what goes on with that process of getting awarded that competency award?
spk13: Yeah, that's a competency that is not really about some technical review. It's actually more about success with joint customers that you earn in the field. So that's a little bit more what that one's about. We have a great relationship with the AWS federal community. It's not just AWS themselves, it's the partners and that whole community there. And we have that with the other hyperscalers as well, but You know, we were pleased to get that. It's a great calling card, you know, but it's, you know, winning business, you know, it doesn't just come in the door. You still have to go earn it. And as I just finished, you know, we're leaning into it hard because we see it as a massive opportunity for us. I mean, I think everybody knows the U.S. federal government spends is probably like the sixth country, you know, in the world as far as spend is. IT spend, and they are digitally transforming. Slowly, but hopefully we can help them speed it up.
spk03: Got it, got it. Thank you. And just one follow-up from me. Looking at the results, it really demonstrates the power of the Dynatrace platform and the strong positioning within the overall opportunity. I guess just looking out into the future, what is getting you most excited? Maybe from a product standpoint, or an opportunity standpoint that we should be thinking about. Thank you for taking my questions.
spk13: Sure. Well, I think the thing that excites us, there's two dimensions to it. You know, overall, I mean, of course, the cloud spend continues to skyrocket. So that's sort of the underpinning. But that can float many boats. I think from our perspective, you know, two things. The first one is that apps continue to be the high ground. You don't put a cloud platform in unless you're going to put applications on it and you're not going to be able to digitally transform unless you're driving continuous innovation on top of those platforms. So the apps are where the strategic action is and we're super good at it, you know, and extending then to the full stack cloud stack is, you know, just gravy for us. The other piece is that these clouds are extremely complicated and And everyone needs to de-risk their cloud programs. And as they do that, they're gonna look to automation and AI to help drive consistency, allow their best resources to extend themselves further. And that's perfect for us. I mean, that's part of our reinvention. We're the first to realize that the scale and complexity was gonna outstrip human ability to keep up. And we built analytics at the core some very sophisticated analytics at the core of our platform to handle, you know, that data explosion that's going on, that complexity explosion. So that's the other one is that that's finally starting to resonate, you know, up at the buying community, not just at the technical practitioners. And that's super exciting because it's a big differentiator for us and one that, you know, is certainly helping us, you know, consistently win against all competition, no matter who's there ahead of us.
spk03: Great. Thanks, guys. Thanks for taking my questions. Really, really great quarter. Congratulations again. Thank you. Thank you.
spk07: Thank you. Next question today is coming from Jonathan Rookhaver from Baird. Your line is now live.
spk05: Yes. Well, good morning. I'm wondering if you could talk about pricing. You guys have really been able to command a premium for your products, but just curious on your thoughts on how comfortable you are with that pricing strategy, just in light of the increasing demand number of resource and or consumption-based pricing models we see from various competitors?
spk13: Yeah, well, I think there's a little bit of, you know, sort of too much noise about pricing in the market, honestly. You know, we really haven't seen that much change. Some people try to use pricing as a sort of deflection, you know, for lack of momentum in their business. But, you know, we haven't really seen much change you know, sort of impact their shifts in pricing. You know, it's certainly not at the enterprise or the digital transformer level of the marketplace. You know, we're aggressive where we need to be aggressive. We're, you know, consistent and predictable for enterprise customers. The thing that they hate most is our overages or things that they can't anticipate and all of a sudden they get a bill for it. We live in this space. We know how these folks think. We structure our pricing and packaging appropriately for them. And we don't see sort of any reason to move too far off of what's working for us at this point, nor do we see a moment in time ahead of us where we're sort of worried that all of a sudden something dramatic has changed. So I like where we are. I think we're smart and anticipate where the market is, and we listen to our customers and, you know, make sure that we're predictable and transparent with them.
spk05: That's helpful, John. Thank you. Just a second question I have. It's just, you know, the business Aloytics product, I know it's relatively new, but curious if you're a seeing the emergence of a consistent use case that can drive a more repeatable sales motion, or is it more one-off applications that you're seeing with that product?
spk13: No, it's one of the modules that drive some of the three-plus module expansion that we talk about. When you think about it, nobody really wants to put cloud infrastructure in They don't really want to monitor logs. What they're trying to do is they're trying to expand their business. They're trying to be more agile and more innovative, find new revenue streams, transform the business itself. And so they put all this in in order to accomplish something, but you still need to measure, are you getting the customer experience you're expecting? Are you getting the business outcomes you're expecting? And that's where the business analytics piece and the digital experience pieces come in. They measure exactly what the value is on the output, the business value, so you can understand whether your investments you're making in the cloud platform and the applications are paying off. And if they're not paying off, why not? And what do you have to do to get that kind of return on investment for your IT digital transformation spent. So it's a really important module for us. It'll continue to be. And I do think more and more of the digital transformers are waking up to the fact that it's not just about the infrastructure they're putting in, it's measuring the value at the other end.
spk05: Very helpful. Thanks, John.
spk07: Thank you. Next question today is coming from Raymond Lenshaw from Barclays. Your line is now live.
spk08: Hey, thank you. John, a quick question on the security on AppSec. You talked about the early progress there. How do you see that playing out in terms of the behavior you see from some of the security guys? Because it looks like they are realizing as well that getting data out out of security will be more and more important? I mean, you would seem like more the natural hub, but like, how do you see that evolving over time? And then I have one follow up for Kevin.
spk13: Yeah, well, the reason that we entered, you know, where we did is we see it as a greenfield space. It's very hard to do continuous scanning in production without overhead. You know, we have a fantastic, you know, instrumentation technology you know, out in the, and we see everything. Code level detail, we see entry, every entry and every exit point. So we have a visibility that, you know, is really unprecedented. And the second thing we do is we have the intelligence built in, an AI engine that allows you to actually score, you know, determine what's really a vulnerability and what's not, and then score those vulnerabilities. So you can always keep things prioritized for sort of the limited time your dev team has to spend on the security side of things. So that combination is very unique and while others are trying to figure out just how to scan in production, we're already there and we already, and we have the AI engine to help make it, to simplify that world. So it's a great place to come in. We have plans behind it, of course. But we believe if we stay in that application, that cloud application zone, first of all, it's going to be a rapidly expanding space. It's being disrupted tremendously. And we have a very unique sort of angle in from the observability, the intelligent observability we do. So we're focused more on what we're doing and how to maximize the value of it with the customers we have, rather than worrying too much about what competitors are doing at the moment. And I think that strategy has served us well in the past, and we'll continue to pursue it. And so far, so good. And what we hear back from the hundreds of trials we've been doing is, this is spot on, we need it. How fast can you mature it so we can roll it out in volumes? Exciting place to be.
spk08: Yeah, sounds really exciting. And one for you, Kevin, as we talk more about like RPO going forward, I know you said AR is the most important for you, but RPO will come up more and more. Are there any kind of drivers or trends that we should see? I'm just, if you think short-term versus long-term RPO, so your long-term RPO going faster than short-term, is there like some duration benefits you see from bigger engagement, longer engagement with customers, et cetera? Thank you.
spk04: So as we've moved to a fully subscription business, we have seen a slight uptick in our average contract duration, and right now it's approaching about two years. So that's sort of generally where we are from that standpoint. But the reason we focus investors back on ARR is we've gone out to our customers and we're signing multi-year agreements, but as they rip and replace existing contracts, it sort of resets the RPO numbers and deferred revenue and the Over the next couple of years, as we scale our customer base, as we get them onto three-year agreements and as they grow, it's just going to continue to create some variability in those different metrics, which is why if you really want to cut through all the noise around everything, we think AR is the best metric. It's the leading indicator to subscription revenue growth and the one we certainly focus on internally in our company.
spk08: Okay. Makes sense. Congratulations.
spk07: Thank you. Next question is coming from Tyler Radke from Citigroup. Your line is now live.
spk02: Yeah, hi. Good morning, everybody. So I wanted to ask you first just on the new logos that you're seeing in the market. Obviously, a nice bounce back from T1 a year ago. What are you just seeing in terms of their appetite to take on kind of the full Dynatrace platform? Do you find that, you know, you're landing – you know, with a broader set of solutions, given the investments that you're doing? Just give us a flavor for how those conversations have progressed.
spk13: Yeah, no, I appreciate that. So, you know, it's about a third of the customers, you know, land with a platform approach, you know, a three-plus module kind of approach. And that's up, you know, year on year. It's... So that's maybe one item to take away. That's because, you know, the rise of this observability as a concept, you know, sort of a landing zone. You know, two years ago we talked about the application landing zone. Now we talk about an observability landing zone, which is a little wider. And we see that continuing. You know, I'd be surprised if that isn't, you know, scaling up consistently quarter on quarter now for the next, you know, 12 to 24 months. So that's an important characteristic. And I think that customers are, as they start to move, we're starting to see more do-it-yourself kind of customers that are tired of trying to cobble things together. It's sort of a game that you just can never get on top of. You feel like you're always behind and customers feel that way. And when they find out that we already do all this and it's all automatic and AI to help them really transform the way they work. They're totally willing and happy to give up the do-it-yourself approach. That's the other characteristic I'd say that's important. It means that people have already figured out the cloud's complex. They've already figured out that old tools don't work. That's why they're in this cobbling it together zone. And the more we find customers there, again, I think that multi-module footprint will continue to expand at the landing zone. So those are a couple characteristics of those new logos that we're starting to see and what the dynamics are in those environments. And I think just with the visibility we see ahead of us, we think that the momentum we saw this quarter, maybe it's not a 50%. you know, quarter over quarter, I'm sorry, year over year, you know, uptick. But we do see a good, steady, strong, you know, new logo flow throughout this year. Probably a little bit ahead of our 15 to 20% guidance, long-term guidance we've been giving.
spk02: Great. And just one follow-up. If you think about your, you know, kind of mix of expansion and new deals in APM that are tied to obviously application modernization. How is that mix between, you know, public cloud, you know, kind of cloud, public cloud native applications versus, you know, maybe hybrid cloud or private cloud? Just kind of, obviously you talked about some, you know, really nice momentum with the hyperscalers, but just kind of curious how that mix of where these applications deploy has changed, you know, kind of between the hybrid private versus public cloud.
spk13: Sure. Well, so there's definitely a trend toward more and more public cloud just in general. And people put hybrid clouds in not because they're going to lock down on hybrid. It's that they're transitioning or transforming their environment over time. Every hybrid cloud that we run into has public cloud extensions. It wasn't that way five years ago, but it is today. Over 80% of our customers are observing cloud-native applications in containerized environments. So it's an extremely modern set of tech stacks, but they also reach back into data sources of record that are required just to run their business. You know, an insurance company, it's a risk management system that's probably running on a mainframe somewhere or some other kind of, you know, mid-range systems behind their firewall. They have to reach back to it. Banks, you know, their customer, you know, their customer data, transaction data, et cetera. You know, airlines, you go down the list of the digital transformers, you realize that, you know, there are data sources of record that need to be tapped in order to support you know, the modern cloud front ends and, you know, mobile applications we all use. So, you know, the way we think about it is that over 80% of the customers are in modern cloud environments. And it's, you know, from our perspective, digital transformers will be, you know, hybrid, highly hybrid, you know, for, you know, some years to come. You know, we're extremely well positioned for that world and helping them move from the old to the new.
spk00: Thank you.
spk07: Thank you. Our final question today is coming from Eric Subiger from JMP Securities. Your line is now live.
spk06: Yeah, thanks for taking the question, and congrats. On the AppSec module, now that you've been selling that for a little bit, can you talk a little bit about the competitive environment? Are you seeing the likes of kind of the broad solution providers like at Palo Alto, or is it more startups? And then secondly, you talked a little bit about sales and marketing from the year ago quarter in light of some return to the office. Can you talk a little bit about where you are in terms of your sales organization returning to a more normalized spending level?
spk13: Sure. I'll try to handle these relatively quickly because I know we're sort of at time here. From an AppSec standpoint, As I said, we're still in sort of the maturing and sort of early stages of sales development. But we do know what that competitive environment looks like. And no matter what people have, they have gaps in production. And every one of these customers sort of knows what this landscape looks like. Talk about lots of tools out there. There's plenty of them. But this is a greenfield angle that we're coming in on. There's nobody that's doing what we're doing. It is a hole. And as you guys know from security, if there's a hole somewhere and you're a public company or a government agency, you're going to need to fill it. And so that's what gives us a lot of excitement around the space. You know, our timing is good. The angle we're coming in on is good. It is greenfield. And yes, there's lots of tools out there that people want to talk about when it comes down to, does it work? The answer is there's a big gap in the market. On the sales front, so the sales organization is chomping at the bit to get back to face-to-face with customers. And there's plenty of customers that are looking forward to that as well and already you know, engaging, you know, in fact, you know, I think some of our, you know, travel, you know, is for sales in particular is up, you know, a big jump from, you know, where we were when we were all locked down a year ago. So they're excited about it. But what I'd leave you with is this. We don't have to be face-to-face with customers to be successful. We already checked that box a year ago and we've learned how to win with Zoom. over Zoom, and we can continue to do it. If anything, back to sort of a little more normalcy and face-to-face will be an accelerant for us, both in onboarding new talent as well as, I believe, building relationships with customers that allow us to expand faster. So those are some of the characteristics, but either way it goes, whether it's a protracted pandemic or whether we're back to normal sooner, You know, it's all good from our perspective.
spk06: Very good. Thank you.
spk13: Great. Hey, well, thank you, everyone, you know, for joining us. You know, we're thrilled with the dynamics of the market, you know, moving toward us, as I said, you know, in my prepared remarks. We're excited about, you know, our ability to, you know, invest in growth, both commercial expansion and in innovation. And we believe that as long as we stay focused on our two key metrics, the expansion of new logos and the expansion of our ARR per customer, that we can grow a fantastic business for years to come. So thanks again, and I look forward to catching up a quarter from now. Cheers.
spk07: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Disclaimer

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Q1DT 2022

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