Dynatrace, Inc.

Greetings.

Welcome to the Dynatrace Fiscal First Quarter 2025 earnings call. At this time, all participants are on a listen-only mode. A -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. Please note this conference is being recorded. I'll now turn the conference over to your host, Noelle Farris, the Vice President of Investing Relations. You may begin.

Good morning, and thank you for joining Dynatrace's First Quarter Fiscal 2025 earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer, and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, such as statements regarding revenue, earnings guidance, and economic conditions. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10Q that we filed earlier today. The forward-looking statements contained in this call represent the company's views on August 7th, 2024. We assume no obligation to update these statements as a result of new information, future events, or circumstances. Unless otherwise noted, the growth rates we discussed today are non-GAAP, reflecting constant currency growth, and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the financial results section of our IR website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Thanks, Noel, and good morning, everyone. Thank you for joining us for today's call. Our first quarter results are a compelling example of our team's disciplined execution and dedicated focus on delivering exceptional customer value. ARR grew 20% -over-year in constant currency. Subscription revenue increased 21% -over-year in constant currency. And free cash flow was 30% of revenue on a trailing 12-month basis. These results continue to demonstrate our ability to deliver a powerful combination of top-line growth and profitability. Now more than ever, given recent industry-wide outages that have impacted billions of end users globally, observability software has become mandatory in helping organizations minimize impact. The strength of our -to-end observability platform resonates with our customers as they look to maximize software availability and deliver mission-critical business resilience. Jim will share more details about our Q1 performance in a moment. In the meantime, I'd like to share my thoughts on the evolution of the market and why I believe we are well positioned to win. To start, the observability market is large and growing, fueled by the tailwinds of cloud migration and the promise of AI. The tamp of the observability and application security market is estimated to be $50 billion and growing. And IDC expects businesses to spend more than half a trillion dollars on AI over the next three years. CIOs continue to prioritize IT budgets toward digital transformation efforts as organizations seek new ways to build competitive advantage. But as they drive cloud modernization and generative AI initiatives, organizations often confront significant challenges. These efforts create an explosion of data and massive increase in complexity, often resulting in a lack of proper visibility into application performance problems, user experience issues, and cybersecurity threats. Observability solutions are needed to provide the required visibility to manage cloud environments effectively. Moreover, we continue to see customers looking to consolidate siloed monitoring tools and standardize on an -to-end observability platform. The advantages of such an approach typically include increased productivity, reduced cost, improved security, and a more consistent user experience. I often get asked, why does Dynatrace win? And my response is twofold. First is the power of our -to-end platform. And second is our relentless commitment to delivering extraordinary customer value. Regarding our platform, customers frequently choose Dynatrace for delivering a combination of contextual analytics, AI leadership, and data-driven automation. We uniquely leverage a fully integrated data store we call GRAIL that captures all observability data types in context, allowing for powerful analytics in near real time. We then apply our power of three approach to AI, leveraging predictive, causal, and generative AI techniques to provide precise answers, enabling not only rapid incident correction, but also predictive action and automated response. At the same time, these differentiators facilitate not only successful digital transformation, but they also help our customers drive better business outcomes such as increased revenue, improved cost efficiencies, and higher productivity. We are driven by a continuous focus on innovation. Last quarter, for example, we extended our platform with the launch of Site Reliability Guardian, Davis Anomaly Detection, and the Vulnerabilities app. And we expanded our existing security capabilities with the addition of Kubernetes Security Posture Management. Over the coming months, there is much more to come. Our financial strength affords us the flexibility to invest purposefully in ongoing R&D to strengthen these capabilities and maintain our leadership position. With respect to value delivery, we win because of our proven commitment to customer success with tangible ROI. The recent worldwide outages are a stark reminder of the world's reliance on software and how critical it is that software works as intended. Our vision has been unwavering over the years in enabling a world where software works perfectly, just as we all expect. These major outages further highlight the criticality of deploying an -to-end observability platform that helps customers achieve substantially greater business resiliency. Customers leveraging our platform during these incidents were able to quickly identify where issues arose in their ecosystem and prioritize remediation to those areas with the greatest business impact. More data is not the solution. The critical need is the ability to pinpoint root cause, identify and prioritize actions, and remediate rapidly. Manual processes do not scale. Our AI capabilities provide the critical information needed to deliver this value, and they set us apart from our competitors. Many customers reached out following the CrowdStrike outage to thank us for the insights we provided that helped them quickly prioritize the recovery work needed to stabilize their environments. A US-based healthcare company told us that Dynatrace was an integral part of their overall recovery process. Leveraging Grail and notebook features, they were able to identify potential issues within their infrastructure stack, enabling them to provide high availability and a positive outcome. A major US airline leveraged logs on Grail as well as the Dynatrace query language to identify which airport kiosks were affected, enabling the team to focus their recovery efforts and get their customers back in the air quickly. An insurance provider was impacted indirectly through its third-party ticketing system. Davis AI determined the root cause on the vendor side hours before the third party announced that they were impacted. This advance warning allowed the provider to execute a contingency plan much earlier than if they had waited for the third party to notify them of the problem. And the IT directors at one of the world's largest biotech companies said Dynatrace was a key piece of the recovery effort of their most critical systems. This customer had over 3,500 hosts initially unavailable. With Dynatrace, they were able to recover all of those hosts in less than 12 hours. This leads to the next question, which is given the strength of our platform and our commitment to innovation and customer success, what are we doing to ensure that we have the optimal -to-market strategy to capture this opportunity? Last quarter, I provided an update on -to-market changes, including three focal areas. While still earlier in the year, we are pleased with our progress, along with the leadership team driving. First is customer segmentation. We continue to target the global 15,000 overall. At the beginning of our fiscal year, we increased the focus of our sales force on the global 500 and strategic enterprise accounts to drive the highest productivity with the accounts that have the largest potential ARR. Territory and account coverage changes were completed in April, and we are executing accordingly. We also increased investment and customer success to align these resources to our segmentation mapping for successful deployment, adoption and expansion. Second, we continue to emphasize the criticality of partners. Partners already influence more than two-thirds of our ARR, but we believe we can scale them to deliver far more deal origination than they do today. We are especially focused on our highest priority and most impactful partners, including GSIs and hyperscalers, and we are making strategic investments to make it easier to go to market with us across all partners. These investments include an expanded partner enablement engine, as well as a simplified economic model to remove friction and drive closer collaboration. Finally, in our -to-market strategy, we have aligned around a focused set of use cases. Additionally, we have had tremendous success with our land and expand sales motion, where we lead with application performance engagements and expand across our customers' workloads. This is an extremely effective approach and one we continue to rely on today. At the same time, the market is evolving, and we have broadened our approach to include -to-end observability opportunities for customers looking to reduce tool sprawl as well as gain actionable insights. This enables organizations to resolve incidents faster, if not prevent them from happening in the first place. And we are targeting cloud modernization efforts, in which platform engineers and DevOps teams are increasingly responsible for how their organization's development and release of software requires complete visibility of data at scale. Before I turn the call over to Jim, I wanted to take a moment to recognize an important milestone for Dynatrace. Last week marked the five-year anniversary of our IPO. Over the past five years, we have achieved several important milestones. We have empowered over 4,000 organizations in their digital transformation initiatives. We are one of only 8% of public software companies that have exceeded $1 billion in revenue, generating cumulative revenue of now more than $5 billion, along with cumulative free cash flow of more than $1 billion. I am truly proud of our team and the successes that we have collectively achieved today on behalf of our customers, partners, shareholders, and Dynatracers worldwide. In closing, we are off to a great start to the year. And I'm highly enthusiastic about the balance of FY25 and beyond. We really do believe that our time is now. We believe the market is increasingly playing to our strengths in moving toward fewer solutions with a need for actionable insights, leading to rapid incident resolution and prevention. And we believe the strength of our AI-powered -to-end observability platform makes all the difference. Jim, over to you.

Thank you, Rick, and good morning, everyone. Q1 was indeed a strong start to fiscal 2025. Once again, we surpassed the high end of our top-line growth and profitability guidance metrics. Our continued ability to successfully execute in this dynamic macro environment is a testament to the growing criticality of observability and application security in the market, our product and platform differentiation, the value proposition we provide to customers, and the ongoing durability of our business model that continues to deliver a balance of strong growth and profitability. Now let's review the first quarter results in more detail. Please note the growth rates mentioned will be year over year and in constant currency, unless otherwise stated. Annual recurring revenue, or ARR, was $1.54 billion, up 20% year over year. This is an increase of $247 million compared to the same period last year. Q1 net new ARR on a constant currency basis was $46 million, up 23% year over year. In Q1, we added 162 new logos to the Dynatrace platform, up 5% from the year-ago quarter. We continue to target quality new logos that have a greater propensity to expand. In Q1, average ARR per new logo came in at roughly $140,000 on a trailing 12-month basis and consistent with Q4. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or commercial tooling solutions. They are seeking business value and tool consolidation and coming to Dynatrace for the depth, breadth and automation of our -to-end observability platform. Once customers experience the benefits of the Dynatrace platform, they are quick to expand their usage. Our average ARR per customer continues to increase and is approaching $400,000, highlighting the mission-critical value we provide to customers. Churn continues to be low, with gross retention rates stable in the mid-90s, best in class in our industry, while net retention rate came in at 112% in the first quarter, a slight improvement from Q4. Our DPS licensing model continues to see strong traction. We closed roughly 200 DPS deals globally in Q1, bringing total DPS customers to over 900, representing more than 20% of our customer base and over 40% of our ARR. As we have shared in the past, we believe our simplified cross-platform DPS licensing model will further contribute to NRR over time, as customers can immediately access newer solutions, encounter less friction in the buying process, and enjoy more flexible, predictable and transparent pricing, all of which should lead to more consumption of capabilities on the platform and deliver more business value to customers. One example of DPS leading to broader platform adoption is with the Fortune 500 International Hotel brand. The flexibility of DPS licensing provided them with the opportunity to trial Logs on Grail and compare it to their existing legacy log management solutions. The value provided by our log analytics resulted in a seven-figure DPS expansion deal in Q1, displacing the incumbent log monitoring provider. Moving on to revenue, total revenue for the first quarter was $399 million, and subscription revenue for the quarter was $382 million, both up 21% year over year and exceeding the high end of our guidance by $6 million. Shifting to margins, non-GAAP gross margin for the first quarter was 85%, up slightly from the prior quarter and prior year. Non-GAAP income from operations for the first quarter was $114 million, $6 million above the high end of our guidance range, driven by the top line upside. This resulted in a non-GAAP operating margin of 29%, exceeding the top end of the guidance range by roughly 100 basis points. Non-GAAP net income was $99 million, or 33 cents per diluted share. This was three cents above the high end of our guidance range, primarily driven by the revenue upside and higher interest income. We generated $227 million of free cash flow in the first quarter, representing more than 50% of our full year guidance. Q1 cash flow was particularly robust from strong collections associated with elevated Q4 renewal and growth bookings. Due to seasonality and variability in billings quarter to quarter, we believe it is best to view free cash flow over a trailing 12 month period. On a trailing 12 month basis, free cash flow was $450 million or 30% of revenue. As a reminder, this includes 600 basis points of impact related to cash taxes. Pre-tax free cash flow on a trailing 12 month basis was 36% of revenue, and up 55% year over year. Finally, a brief update on our $500 million share repurchase program. In Q1, we repurchased roughly 1.1 million shares for approximately $50 million. We plan to continue to buy back shares opportunistically based on market conditions, underscoring our confidence in the business, our conviction in the significant long-term opportunities ahead, and commitment to delivering shareholder value. Moving now to guidance, the demand environment and pipeline remain healthy. Our -to-end platform and broad set of capabilities differentiate us and put us in a strong competitive position. Our teams continue to execute well. However, as we shared on our last earnings call, we are taking a prudent approach to guidance due to three factors. First, the dynamic macro environment and current market choppiness. Second, the growing trend of a larger observability architecture and vendor consolidation deals come with an increased level of timing variability. And third, the evolution of our -to-market strategy will take time to settle in and mature. On our last earnings call in May, we indicated that we would update our full year ARR guidance on our second quarter earnings call in November. That remains our current plan. We believe this prudent approach makes sense through the historical seasonality of our business, where typically less than 20% of net new ARR is booked in the first quarter and 60% is booked in the second half of the fiscal year. Waiting until the Q2 earnings call gives us time to have a better sense of the traction we are getting with the -to-market changes we discussed last quarter and assess any potential impact on IT spending from recent economic uncertainty. As such, we are maintaining our full year fiscal 25 guidance for ARR, revenue, non-GAAP operating margin, EPS and free cash flow. There are a few underlying elements of color I'd like to share for modeling purposes. On the seasonality of ARR, we continue to expect roughly 40% of net new ARR to land in the first half of fiscal 2025 and roughly 60% to land in the back half. Based on foreign exchange rates as of July 31st, we expect the full year foreign exchange headwind to be roughly $12 million on ARR and approximately $10 million on revenue, representing an incremental headwind of approximately $2 million to ARR and no change to revenue compared to our prior guidance. And for free cash flow, as we shared on our May earnings call, we expect significantly lower free cash flow in the second and third quarters and lower than prior year levels due to expected seasonality in billings and the timing of cash tax payments. We are, however, maintaining our full year guidance for free cash flow. Looking at Q2, we expect total revenue to be between $404 and $407 million. Subscription revenue is expected to be between $388 to $390 million. From a profit standpoint, non-GAAP income from operations is expected to be $113 to $116 million, or 28 to .5% of revenue. Non-GAAP EPS is expected to be $0.32 to $0.33 per diluted share. In summary, we are pleased with our first quarter fiscal 2025 performance. We have a proven track record of consistent execution. While we are taking a prudent approach to the near-term outlook, we remain optimistic about the fiscal 2025 growth opportunity in front of us and our ongoing ability to manage the business with discipline. And with that, we will open the line for questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. And in the interest of time, we also ask those who are in the queue to please limit yourself to only one question. One moment, please, while we poll for questions. Our first question comes from the line of Patrick Colville with SchoolShipBank. Please proceed with your question.

Good morning, David. Congrats on a really good set of results. I guess I want to ask about the commentary at the top of the call, Rick and Jim, about the CrowdStrike incident. You know, very helpful color you provided as to kind of how Dynatrace was critical for your customers in remediating that major issue. But, you know, this is on the line, I'm sure, be thinking, will this possibly drive incremental business? And if so, would you like to talk about the levels there? Thank you so much.

Thanks, Patrick. It's Rick. I'll take that. The short form is, I mean, it's premature to attribute any future ARR growth to CrowdStrike in the incident. But what I would say is the feedback from customers was overwhelmingly positive. It's clear that we wouldn't have helped avoid the incident for customers, given the nature of this particular incident. But we absolutely did materially accelerate getting customers back online rapidly by enabling them to prioritize their software workloads and what needed to be brought up most rapidly. And this was very consistent feedback across the board, which is why I wanted to share it in our prepared remarks. Last point on this, I would say, is simply that these outages are just further evidence of the mission criticality and observability software. In cases where it took customers, even customers of ours, longer to get on board or back up to speed and running with their software workloads, what we typically found was that they weren't using us end to end. And so some of the workloads were not captured in their analytics. And when we did have customers that were looking at observability end to end across a complete data flow, that's where we saw the best results.

Thank

you. Thank you. Our next question comes from the line of Angelin Borough with JP Morgan. Please proceed with your question.

Great. Thank you so much. Congrats on the quarter. Jim, one question for you. The 112 percent NRR seems to suggest that maybe the in-quarter retention rate likely improved quite a bit sequentially. So wondering if you can talk about the drivers of that. Have you seen any change in the pace of new workloads or kind of pace of adoption of some of the newer modules? Is the inclusion of the DPS customers added a year ago helping that metric? Any color would be great. Thank you so much.

Sure. It's a good question, Angelin. I'd start with it was a modest improvement from Q4. So we're pleased with 112. But to be very frank, it's effectively going from kind of 111 and change to kind of something that rounds up to 112. So while we're pleased, you know, I don't want to suggest that we think this means that we're going to now start to see NRR improve in future quarters. And obviously our guide does not suggest that. Having said that, we had a very strong expansion quarter. And one of the things we talked about in the prepared remarks is we continue to see the DPS customers and see customer interest in our DPS contracting vehicle, which now represents over 40 percent of our ARR. And those customers are consuming more of the platform at a much more significant rate than non-DPS customers. So we're starting to see it manifest itself in consumption. And if the consumption trends for growth continue, we should be able to see one, a stabilization in NRR. And then hopefully if the thesis proves out, we will start to see an acceleration in NRR. So I say early days were pleased with the Q1 performance. It wasn't any particular module. I did specifically talk about logs as being kind of one case with a large hotel chain. And I think it's just a great example. The reason I shared it is it's a great example of customers when they're on DPS, they can try something. In that case, they tried our log solution and it ultimately landed a very, very significant expansion. And so I'd say it's effectively across the board, but we are starting to see interest in the newer solutions and customers starting to expand even further.

Thank you very much.

Thank you. Our next question comes from the line of Willpower with Baird. Please proceed with your question.

Okay, great. Thank you. Congratulations on the results. Hey, Jim, I just want to circle back on full-year guidance just in light of the nice Q1 upside, Q2 guidance looks good. And it sounds like it's principally probably prudence given early in the year and you've had some of the sales changes. But I just wonder if you could comment on anything you're seeing in terms of any changes you're seeing with respect to macro, large deal timing. I mean, some of that's I think you've already started to bake in some questions on timing and macro impacts. Have there been any changes in the last three months, I guess, since you last reported with respect to some of those trends that might be

impacting guidance? Thanks for the question, Will. And actually, it's a good question. Nothing has changed from three months ago. You know, what we had shared three months ago was we said, hey, the first quarter is less than 20% of our year from a net new ARR. That's certainly the driver of our business across all of our metrics. We said secondly, hey, the market from a macro perspective, certainly we don't believe it's going to change. We said it's going to get worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and worse and we're just trying to be measured given that it's early in the year. We felt that it made more sense to see another quarter of traction on the -to-market side. We'll have certainly much better visibility to the back half of the year. So I wouldn't read anything into the guide being maintained other than building in a just a continued lead to a better visibility to the back half of the year. So I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point.

I think that's a good point. I think that's a good point.

I think that's a good point. I think that's a good point.

I think that's a good point. I guess for either of you, just double clicking on the -to-market changes, I guess, have you been able to hire, and I guess internally promote all the sales executives you've intended to better target the global 500? And I guess how do you think about the risk to close rates as the year progresses for some of those accounts that may have been reassigned as a result of the -to-market changes?

Do you want to take that? So I would say the changes that we made are complete. So we have effectively assigned all the accounts. So while we'll continue to do hiring of sales reps, I'd say the hiring is going to happen more more substantively in the back half of the year. So I think we're in a good place as far as the accounts settling in with reps. And just to remind you, I think we talked about it last quarter, but even though there's been a reassignment of reps, and in particular on the very large call strategic I.T. 500 accounts, in most cases, those were not accounts that we had significant either traction in from an ARR perspective or significant pipeline in. So from our perspective, there wasn't a huge risk in moving some of these accounts from reps. We had talked about those those accounts or those that kind of customer segmentation had eight to 10 accounts. Now they have four to five accounts. So the accounts that moved were accounts that have a significant propensity to spend, but they were not accounts that we had huge traction in. So we're not worried about there being disruption of accounts moving from one rep to the other. We're actually encouraged that we now have an ability for new reps to spend more time with those accounts, go deeper with those accounts. And, you know, given the sales cycles are kind of six to nine months where our expectation is you'll see that manifest itself in traction in the back half of the year.

I would just add, Matt, very, very excited about our our sales and marketing leadership teams. They they are ready for prime time and ready to take the company to the next level of scale. So that's that's exciting. And to Jim's point on risk, I think that's I think that's very much manageable based upon the parameters that we set forth as part of the go to market changes.

Super helpful, guys. Thanks a lot. Best of luck.

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.

Yeah, thank you for taking the questions and congrats on another quarter of the net. I wanted to come back to sort of the DPS update that you guys provided now counting for 40 percent of revenue. Is there any sort of pattern in terms of the the capabilities that customers are turning on upon moving to DPS? I imagine Logs on Grill is pretty popular, but it would be interesting to see if there's any other sort of any any other sort of capabilities or modules that are becoming more popular. And sort of in addition to that, from a sales perspective, are you as a team sort of being opinionated on how customers sort of turn on capabilities or is a sales motion or a playbook that you guys prefer that customers go down or you sort of just leave that up to the customer?

I'll take that. That's a two good question. So on the DPS traction, we're very pleased with where we're at. It's becoming more and more the norm for customers to move to that. In particular, new logos, you know, call it roughly 70 percent of our new logos continue to land on DPS and we continue to get existing customers moving relative to modules. It does vary. But I would say that there's been significant interest in logs and there's been significant interest in application security. Obviously, they're looking at their full stack of workloads and they're trying to assess where do they want to move relative to observability. So certainly there is there's a fair amount of that that they probably look at that first and foremost. What's the growth that we want to see with existing workloads, new workloads and then, oh, by the way, what new capabilities might we want to take advantage of? So every customer varies a bit based on the pain point that they're currently dealing with. But I'd say certainly significant interest in logs in particular and also application security. And relative to the go to market playbook, one of the things we talked about last quarter, it's not unique to DPS necessarily, although DPS does benefit, is that we've become much more precise in the playbook. The playbook before was largely a land and expand model with applications. So you try to find an application owner, you'd land for application observability after a POC and you'd expand from there. That the sales leadership is now defined three plays, that being one, which is still a very effective play. The other is a play around end to end observability because we started to see more traction in that area, more interested in that area. So there are plays that we're running on end to end observability. And then there's plays that we're running on cloud modernization, looking at new personas in customers environments that maybe you're not leveraging Dynatrace. You know, we tend to be heavy in the IT ops area and maybe getting more into the developer personas. So there's very precise plays. Those plays do play to the strengths, a bit of DPS. You get customers on a DPS contract vehicle and they have a significant flexibility to leverage what they want, trial what they want. And so, you know, we're very pleased with the traction we're getting in that area. And actually, we're very pleased with what I would say is a growing level of sophistication in the way sales is going to market.

That's super helpful Jim, I appreciate the thoughts.

Thank you. Our next question comes from the line of Remo Lincha with BlackLates. Please proceed with your question.

Hey, congrats from me as well. Rick, or maybe Jim as well, the question from me is around the partner ecosystem. You talked about how partners are a lot more involved on, I think it's two thirds of the ARR. If you think about the partner evolution in terms of how they're dealing with you and what they want to do with you, is that still on the kind of ATM infrastructure, etc.? Or do you see the partners also positioning themselves more broad into that whole observability space and hence it becomes more of a strategic decision that they can drive towards you? Thank you.

Hi there Remo, I'll take that. I would say that it depends on the partner. If you're looking at hyperscalers, that tends to be more opportunistic contract vehicle with some origination built in. If you're looking at GSIs, they're looking at -to-end observability deals, typically larger transactions, and they're focused on services deployment, process reengineering, cloud migration, cloud native movement, and other elements. And then we have various partners in between ranging from managed services providers to others. So it depends on the partners, but I would say that generally you heard a theme in ARR call this morning around -to-end observability. This is where we believe that we deliver the most value to customers. And this is where we're promoting the most partner access because the services loads and the services increment that they can provide is material in helping organizations structure for success around -to-end observability deployments.

Okay, perfect. Thank you.

Thank you. Our next question comes from the line of Mike Fecals with Needham and Company. Please proceed with your question.

Hey guys, thanks for taking the questions here. And I just want to continue that theme on the partners here following Remo's question, but a bit of a two-porter. The first, can you help us think about have we seen any noticeable changes since you guys have changed or overhauled the partner economic model as far as deals originating with partners at this point, or is there still, are we still hanging out around 30% or so? And then the second point is in relation to that changed partner economic model, are you seeing an acceleration potentially in the number of partners that are now entering the Dynatrace ecosystem? Any color on either of those items would be beneficial. Thank you so much.

I'll take that, Mike. So I will say, you know, on the partner economic model side that we only put that in place at the beginning of our fiscal year. So we're kind of 90 days in, as you can imagine. You probably had a bunch of deals that were already in flight. So I'd probably, it's probably be insincere to say that we're getting significant traction because of the partner economic model. I would say qualitatively, customers are very happy with the change in the economic model. It provides much more certainty for them around how and what they're going to get paid. So in that regard qualitatively, there is significant customer, partner satisfaction with the changes we've made. We did see an uptick in deal origination above the 30% level that we've historically had in the quarter. It is our seasonally lightest quarter of the year. So I hate to call that a trend. I think it's promising in the sense that I do think we've removed some friction in some of the changes that we made on the partner front. We've removed friction for our direct reps wanting to leverage partners than what we had in the past. I think we now have this partner economic model that provides more certainty in what they're going to get paid. And then I'd say there is other work that the new partner leader is driving around developing teaming agreements for partners and actually having very specific plans for partners. I'd say our approach to partners before was a bit of one size fits all. And I think we've navigated to a much better place that partners are different. How you manage and work with GSIs are different than how you work with hyperscalers and different than how you work with regional partners. So I'd say we've made a lot of changes. And I'd say the early proof points are that we are getting traction, but I think we need a little bit more time to see whether or not that this continues to play out. Thank you very much.

Thank you. Our next question comes from the line of Jake Roberg with William Blair. Please proceed with your question.

Thanks for taking the question and congrats on the results. Great to hear the example of the large expansion for that Grail, the Logs on Grail customer. I know most of the customers are landing with logs or just moving new workloads over to Dynatrace but for that type of subset of customers that are actually starting to rip and replace competing solutions, how large is that uplift for the platform and how long does that typical migration process take to get fully up and running?

So I'll take that. I think it varies. I think we've talked before in particular for logs that there's usually a journey with logs where it starts with the POC, then assuming that's successful, it starts with lighter workloads in production and bigger workloads in production and then you're moving existing. I think it varies based on customer and the pain point they're having with their existing log supplier. And so you can ramp up pretty quickly. So there's no scaling challenge on our part being able to do that. I think it's just the customer's ability to move and desire to move. So it varies by customer. What's great about, as I mentioned, our DPS contracting vehicle, it just allows customers to trial a bunch of things. And in that case, they were able to trial it before because they were a DPS customer. And for that particular customer, I don't recall how long they were trialing our log solution, but they can ramp up pretty quickly when they do that. And I'd say the more and more we can get customers on vehicles like that, you can then leverage our customer success team and our services teams in helping customers in the journey around the different offerings we have.

Jake, I would just add to the answer to say that our logs consumption continues to grow very nicely. It's well above 100% year over year in terms of consumption growth. So that's an exciting metric to watch. And we do see the kind of traction that we're expecting on the logs front out of grads.

Very helpful. Thanks for taking the question.

Thank you. Our next question comes from the line of Fatima Bulani with Citi. Please proceed with your question.

Good morning. Thank you for taking my question. This is for both Rick and Jen. I wanted to zero in on the new logo acquisition in the quarter. So that was at 5% year on year, I believe. And I think that snaps trends we've seen in the last couple of quarters where we've had new logo growth down. I wanted to get your sense of what has been the contributing force for that sort of return to growth, especially in the first quarter. And what are some of the specific and maybe more deliberate efforts and initiatives you're seeking to continue to rehabilitate new logo growth? Thank you.

Thank you for the question. Yeah, we are very pleased with our new logo traction. I think we've mentioned before that new logo units are going to vary a bit from quarter to quarter. Just the nature of pipeline. But we were pleased. We had roughly 162, I think, new logos in the quarter. You're right up 5%. And I'd say more notably is we really are focusing, and I said this on multiple calls, we're really focusing on the quality of the new logo lands. We have found that if you land north of $100,000 on average, those customers expand at a much more rapid eclipse. It isn't just a number of new logos, even though we're pleased with the number. It's also we want to make sure we're landing them at the right size. That's equally important. And so I'd say there are certainly plays. The plays that I outlined before that the sales team is running is they're very similar. In many cases, you could be landing with an application owner and you do a POC and they have a need for a particular workload being monitored. In other cases, it's a customer that we mentioned last quarter, a very large global airline that we want a new logo for that was not a Dynatrace customer. And literally we landed a tool consolidation. We weren't even one of the vendors. And so it does vary, which is why I talk a little bit about while I'm happy with the number of units, I'm actually more focused on the quality of the units. And it's part of the sales plays. We still expect for team or about 30% of our net new ARR to come from new logos and about 70% from expansions, give or take a point or two. So I think what we want is we want a motion that continues to attract new customers. We have over 4,000 customers today. However, we've targeted the top 15,000 global companies. We have a lot of runway to go as well. So it's a motion that we're going to continue to refine. I think some of the partner work that we're doing, once we see that manifest itself with additional traction, you're going to be able to have partners drive more logos, new logos for us as well. Thank

you.

Just to connect the dots, Fatima, I would say that we see new logo lands in each of the sales use cases that I discussed in the prepared remarks. We see it in land and expand. We see it in -to-end observability. We see it in cloud modernization. And these are the sales use cases or -to-market use cases that we have the team focused on.

Thank

you. Thank you. Our next question comes from the line of Adam Tindal with Raymond James. Please proceed with your question.

Okay. Thanks. Good morning. I wanted to ask a question on net new ARR. Looking at the financial data table, it grew over 20% in Q1. And congrats on that. For the rest of the year, I understand you're not updating today. And that makes sense. So it's on us to set expectations. But as I try to level set for rest of the year on net new ARR, if we were to maintain this, we'd be tracking down double digits year over year in the remaining quarters. Curious why that would be a reasonable assumption for now. And I'm asking because I understand the sales changes are potentially impacting you, it sounds like you made those or those were done in April. Would there be something that would cause more impact from here on that? And secondly, maybe you could touch on the state of the pipeline. I'm wondering if maybe some large deals are reflected here in Q1 that may have impacted the rest of the year from a pipeline perspective. Thanks and congrats.

So Adam, it's a very fair question. I wouldn't read anything into the guide for the remainder of the year. You're absolutely right. We had a very solid start to the year. Net new ARR in constant currency was up 23%. So no doubt, good start to the year. And then your comment is fair if you just do kind of the math. What does that imply that we're worried about the back half of the year? And the answer is no. We just, for simplicity, we said we're not going to increase the guidance this quarter. You know, that is called 18% of the way through the year. We certainly are, we said we're going to maintain it. I think we tried to convey qualitatively in our remarks that we are bullish on the opportunities in front of us, but we want to maintain a level of prudence in our approach here that it still is a choppy market. And, you know, we want to make sure that, you know, we don't want to get ahead of ourselves. And so that's, I wouldn't read any more into it other than that. And I would say we are quite bullish though on the opportunities that are in front of us. The pipeline still remains healthy. The Miami environment remains healthy. To Rick's point, I think the recent outages are a reminder to customers that they need to have an ability to detect issues and hopefully prevent issues. Our solution is purpose-built for that and the enterprise. So we're very optimistic about the opportunities. I'd say we're just guarded a little bit that we want to make sure we're prudent in the near term.

That's

fair. Thank you.

Thank you. Our next question comes from the line of Akash Rangan with Goldman Sachs. Please proceed with your question.

Hi, thank you very much, Latma. Congratulations as well. So when you look at the old formula of new customer growth, existing customer growth, I think it was 15 to 20 percent each, potentially 30 to 40 percent. That was kind of the aspirational target. As you look at the improvements in DPS and the changes to -to-market coverage and expanded product footprint, Rick, when do you think we could get back to the old formula of adding that 15 to 20 points each from new customers and existing customers, the passive reacceleration? What does that look like? Thank you so much.

Thanks, Kash. Thanks for getting up early on the West Coast for us. In terms of long-term guidance, I'm not going to provide any update on that. What I would simply say is that our expectation during the course of the year is that we stabilize ARR growth for this year and then we increase it into the future, which we expect elements like -to-market changes such as customer segmentation, partner lean-in, some of the other elements around use cases, the movement toward -to-end observability. We believe all of these elements contribute to acceleration both in new logos as well as in ARR. The expectation is that we are leaning in. We have a market that is coming our way. The -to-end observability opportunity is substantial. We believe that our platform plays better to that than any other competitors in our industry. We're focused on doing precisely what we suggested in an effort to drive toward the objectives that you outlined of increased growth.

Thank you. Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Hey, guys. Thanks for taking the questions. I wanted to circle back to AppSec and Logs. The question is around how did it go with AppSec and Logs as contributors to growth in the fiscal first quarter? Any update to the consumption trends with these two emerging solutions? Did the consumption come in as expected? Maybe better than expected? Do you realize this $100 million milestone for those two products are somewhat of a moving target, but did it move much after this quarter? Thank you.

Yeah, I'd say that, again, we had very good consumption in Q1 in both Logs and Application Security. Logs is growing faster than Application Security, which is not surprising, given the nature of Logs and how customers leverage Logs, given the journey that I mentioned. But we're very pleased with the growth rates that we ended Q4 in and that we continued with in Q1. So I'd say no real change in those particular areas. Those, you know, those areas continue to grow at a very rapid rate.

Thank you. Our next question comes from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Hi. Thank you very much. I first wanted to acknowledge that DB&R certainly was better than we were thinking, even if it was only up modestly. And I did want to drill down on that a bit. And so I know, Rick, you mentioned your target is 70-30 in terms of existing versus new logo. If we superimpose, you know, the net retention rate for the last fiscal year on the new AR, it looked like it was closer to 60% was existing customers, if not a little bit below. And I'm just trying to understand, while the net retention rate was certainly better than we were thinking, it still is a relatively subdued number if we think about the breadth of software. And so I'm just thinking about is, A, is it more reflection of market dynamics in that customers in the markets you serve are prioritizing other areas, you know, even at a 112, or there be specific factors impacting Dynatrace. And so something asked about last quarter, if you could talk a little bit about price, is there share leakage for open source solutions for more commodity workloads, or anything on the competitive dynamics more broadly that's impacting that 112 number? That would be great. I guess just to finish the thought is, you mentioned that, I think you said, Jim, that you thought it, you know, net retention rate could be, you know, flattish from these levels. I just want to confirm that I heard that correctly. And you know, what would be helping or hurting is, as we should think about over the next couple quarters. I know that's a lot. Thanks very much.

Yeah, I'll start and then maybe Rick can comment. So I didn't mean to imply that I thought it would be flat from the current levels, you know, actually, if you look at the guide, the guy would actually suggest that it will moderate from here. So I do want to be clear on that. My point is, I do think our goal is to stabilize NRR this year. And we think that DPS as a contracting vehicle is a great way to have customers leverage more of the platform, which will be a kind of a one of the catalysts for that. Obviously, you have to have the products, which we think we do to be able to fuel that. So just to clarify on that. But, you know, your observation is fair. I would say where we're at is, you know, there has been a moderation in NRR over time. You got to stabilize before you accelerate. I would say, relative to the demand environment, the demand environment is healthy. However, when you look at existing customers, maybe versus new logos, but does its existing customers tend to do an expansion close to a renewal period? That's just the nature of how customers operate. And so expansions tend to coincide very closely with a renewal or close to a renewal. So there's going to be a level of variability of when expansions happen. And because we don't have a huge renewal component in the first quarter, you know, that I say there's only, you know, even if you have significant expansion for those customers in the quarter, it's not going to move the metric in a material way, because you don't have the volume of renewal activity. So I'd say more in the back half of the year, we have a much more substantive set of renewal activity in Q3 and Q4 that our expectation is if we continue to see traction and consumption grow with these trends, that we could be in a good position for expansion. Again, we're being cautious, but hopefully that provides a little bit of color. And Rick, I don't know if you had anything else to offer. Just

on the open source point, Keith, I would say we haven't really seen any price pressure to speak of from open source at this juncture.

Just Rick, more broadly, is there pricing pressure on incremental pricing pressure on the markets you serve, whether it's APM, infra, what have you?

No, I would say generally not, Keith. It is obviously in a deal specific, on a deal specific basis, you can periodically see it. But in a broader sense, I would say no.

Okay, many thanks.

Yep. So just to close out our call, all great start to FY25 with Q1. We're very enthusiastic about the balance of the year. And in particular, as we look to the opportunity to land these go to market changes and drive toward the second half of the year, we absolutely believe the market is playing to our strengths in end to end observability and the benefits that it provides in terms of productivity, cost containment, and user experience. And we look forward to speaking with you all on the road this quarter. Thanks very much for joining.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.