Q3 2020 Earnings Call
This time all participants are in the lesson only mode. After the speakers presentation, there will be a question and answer session.
The questions during the session you when you press star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to their difficult friends over to your moderate or today, Michael from Investor Relations. Please go ahead.
Thank you operator, good morning, and thank you for joining us today to review dying to trace the third quarter fiscal 2020 financial results.
On the call today, or John Dan Cyclin, Chief Executive Officer, and Kevin Burns Chief Financial Officer. After prepared remarks, we will open up the call for question and answer session.
Before we start I'd like to draw your attention to the Safe Harbor statement, including in today's press release.
During this call will make statements related to our businesses maybe considered forward looking within the meaning of section 27 eight of the Securities Exchange Act at 933 as amended and section 20 of the Securities Exchange Act of 1934 as amended.
Statements other than statements of historical facts are forward looking statements, including statements regarding management's expectations of future financial and operational performance.
And operational expenditures expected growth and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2020.
Forward looking statements reflect our views only as of today.
Except as required by law, we undertake no obligation to update or revise these forward looking statements.
Please refer to the cautionary language in today's press release into our latest Form 10-Q , which was filed with the FCC on November 4th 2019, and our other FCC filings for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
During the course of today's call will refer to certain non-GAAP financial measures as defined by regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed at a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found.
And within our third fiscal quarter 2020 earnings press release in the Investor Relations section of our web site at Dynatronics Dot com.
With that I'd like to turn the call over to our Chief Executive Officer, John Vinh sick when John Thanks, Michael.
Like to start by thanking all of you for joining us today.
Once again, we're very pleased with the company's quarterly performance, which resulted in third quarter financial results that were better than both our topline and bottom line guidance.
I'm, especially pleased that here are once again increased by 44% year on year.
$534 million with our new diner trace platform now, making up 87% of total here are up from 61% from a year ago.
Fueled by the continued growth in a our our subscription plus services revenue, what we see as the best measure of revenue growth on our P. Adele increased by 36% year over year.
As we look ahead, we remain optimistic about the business as our new dignitaries platform continues to be adopted by a growing number of new enterprise cloud customers and each quarter you are proving our ability to expand rapidly within this growing customer base.
Our optimism is reflected in the increase topline guidance the cabin will detail in a few minutes were also proud that our solid growth is complemented by strong operating margins, we run an efficient business with gross margins at 84% and a non-GAAP operating margin of 26% for the third quarter.
We continue to be cash flow positive on an operating basis, while investing across the board and gross.
As we've said before we believe in running a balanced business a powerful combination of growth and profitability at scale.
We believe this balance combined with our focus on investing aggressively in commercial expansion and continuous innovation provides dyna trace with attractive durability over the long term.
Now, let me turn to four major advancements made in our fiscal Q3.
New logo expansion.
Customer net expansion once they're on our new diner trace platform.
Continued progress moving classic customers to Dana trace and finally innovation highlights around platform expansion and differentiation.
I will take each of these in order starting with business from new customers.
This past quarter, we saw a sizable uptick in new customers on the dining trace platform.
880, new customers joined the Dynatronics platform family in Q3, bringing our total diner trace platform customer count.
2208.
Nearly doubled from year ago.
Q3 was a strong conversion quarter for us with twice as many customers converting as we converted a year ago and even with the strong conversion uptick half the customer growth added to our Dynatronics platform came from customers that are new logos the franchise.
Nearly every new customer win where their net new were converted is participated by the realization that their cloud program is disrupting their ability to keep up with the accelerating complexity of the ecosystem supporting their digital transformation.
More and more run the business applications are being deployed into their enterprise cloud, while visibility and situational awareness are declining.
Sure gain control and bridge the complexity gap more and more enterprises are turning to Dynatronics.
For example, a large U.S. bank recently became a dying to trace customer after concluding that its current ATM solution cannot keep up with the dynamic nature and scale of its microservices based environment.
Prior to dying to trace the bank experienced successive service disruptions in applications running in their ADW, s. cloud, which negatively impacted the banks business and put their brand loyalty at risk.
Like most of our customers.
Thank ran a trial dyna trace to prove ease of use scalability and the value of our advanced automation.
The bank was immediately impressed by the Davis say I imagine at the core of our platform and its ability to automatically map the entire full stack topology of their hybrid cloud and precisely identify problems and the root cause in real time right out of the box at the conclusion up their trial the bank became a seven figure a our CFO .
Customer with plenty of room for expansion overtime.
I should also mentioned that shortly after starting with dying to trace the bank begin to use our digital business analytics module announced in October I understand in reverse its drop in conversion rates were bringing new customers to the bank.
This is a great example of the power of our all in one approach with end to end observed ability from user experience through infrastructure put in business context to drive better digital business outcomes.
As we've said once customers are on the new dynasties platform, we see rapid expansion, which is evidenced by the solid growth in our air are that I referenced earlier.
Once again in Q3 or net expansion rate exceeded 120%.
This is a seventh straight quarter, we've exceeded this mark.
As were still in the early innings of Dynatronics adoption.
Most of our expansion is driven by customers deploying our platform into new application sacks, you automatic continuous discovery and instrumentation.
Self adjusting baselines, the automatic problem determination prioritized by business impact all contribute to rapid rollout and the high value for low effort economics, our customers enjoy.
In addition, we're also beginning to see increased adoption of additional platform modules as customers recognize the power of our broader platform capabilities.
Let me share. An example of one of the many meaningful customer expansions during the quarter.
A U.S. based SaaS company, the standardized on the Dynatronics platform and within two quarters completely replace their previous Gen. Two supplier Miss the market transition to the enterprise cloud.
Earlier this year the SaaS company was struggling to effectively manage their four different data centers with their previous solution and for saw even greater issues with her evolution to a kubernetes orchestrated cloud.
After a successful trial last summer the company decided to start by switching to diner trace in one of their data centers.
Based on the rapid deployment of diner trace and successfully achieved as a result of gaining real time answers and insights into performance degradations and anomalies things to Davis.
He decided to expand their dignitaries footprint and make diner trace the company's standard for both the remaining datacenter migrations as well as your upcoming moved to a dynamic web scale cloud. This expansion came after only two quarters from the initial land deal with Dynatronics turning to our continued progress on the conversion front.
Which is the movement of our classic ATM customer base to the broader diner Treaty software intelligence platform.
Classic Air our has now declined to $69 billion.
That's down $25 million from a quarter ago, and now represents only 13% of total company a ARR.
As we've discussed we started this conversion program in there and a seven quarters ago with approximately 200 million than they are our to convert.
We've been successful in moving our classic customer base to the new diner trace platform because virtually every company has new enterprise cloud initiatives.
We're not simply upgrading from one product set to a new version our conversions typically involve a shift from legacy stacks to new stack cloud environments.
Well it takes more time to find new stack buyers yields a much more valuable customer in the strategic go forward growth segment of their business their enterprise cloud.
As an example of a converting customer this past quarter, a large U.S. based airline converted from our classic tooling to the dying to trace software intelligence platform.
As the airline transformed from legacy systems to a modern multi cloud architecture, they realize that the disparate monitoring tools, both commercial and open source that they had acquired over the years were costing them precious time money in resource. This led to access the manual configuration the need to stitch together data from multiple sources and.
Operating more rooms to get the answers they needed.
As part of that initiative to gain observe ability into their entire environment, including all airport terminal kiosk. The airline began trial of the all in one dietary software intelligence platform.
Again, he was advanced automation and full stack observe ability at scale across a wide array of I guess.
Yes, and container technologies, there were the key factors in the successful displacement of competing tools.
Our all in one platform provides the airline both the modern observer ability it requires and the real time precise answer is required to address degradations and performance and business impacting anomalies.
After a successful trial the airline converted from our classic tooling to the new diner trees platform in the larger footprint led to an expanded seven figure a our our contract.
We are excited to be well along the way with the conversion process and look forward to wrapping this up over the next few quarters.
As I've said before this is particularly exciting for us for two reasons.
First we've proven our ability to expand rapidly with customers. Once they are on the broader dynatronics platform and second we believe the completion of this process will further improve the productivity of our sales organization as a conversion distraction ends and they focused 100% of their efforts on landing new customers and expanding them across.
More applications and modules.
Let me finish by highlighting several of the innovations we announced recently.
Which we believe will further improve our ability to win new customers expand with existing customers and its set remaining classic customers to convert to dynatronics.
In early December we announced the extension of our software intelligence platform to support ADW West hybrid clouds to provide seamless support across all age ws public regions and outposts.
Due to regulatory or data security requirements, many enterprise customers want flexibility with regard to where their observe ability data resides with a flexible deployment model Dynatronics offers a single platform built on cloud native architecture. The seamlessly supports any configuration of vws hybrid cloud environment, including both.
More cloud on a ws outposts in the AAMC native variant about posts penetrates eight of U.S. customers would benefit from the regular automatic updates and automated administration of the diner trees platform, while still meeting the strict governance security and latency requirements of on premise workloads.
This reduces the complexity costs and risk associated with alternative cloud observe ability approaches that do not support the flexible deployment modes of age of U.S. and the other major I guess and past providers.
During Q3, we also announced captain and open source Pluggable control plane to advance the industry's movement towards autonomous clouds.
Captain is an outcome of the knowledge and expertise gained as David trace adopted I know ops environment itself internally.
In talking with CIO isn't CTO is of many of our enterprise customers.
Become clear that advance levels of automation intelligence are required to bridge the growing gap between limited I T resources and the exponentially increase in scaling complexity of dynamic enterprise clouds, and the growing cloud native workloads now being deployed.
We purpose built our new diner trace platform with a powerful explainable AI engine that the core to identify anomalies and degradations with precyse root cause to trigger automatic self healing actions, but what's been missing has been a simple repeatable way harnesses potential and leverage it for a true no ops approach.
Captain provides the automation and orchestration of the processes and tools needed for continuous delivery and automated operations for cloud native environments, and we have a growing number of customers now engaged and leveraging captain and dynatronics expertise to advance no ops within their enterprise cloud environments. Finally.
Just two to three weeks ago, we announced that we've been collaborating with Google Microsoft and other industry leaders on the open telemetry project to shape. The future of open standard base observed ability, having been a leader in distributor transaction tracing at scale for years Dyna traces contributing know how men tower in this area too.
The project has opened telemetry gains momentum open tell data will serve as an additional data source that further extends the breadth of our cloud observed ability, which in turn feeds Davis, our AI engine, providing our customers with richer insights and automatic actions across a wider landscape as dynamic multi clouds continue to evolve and scale.
Yes.
We see this open source standard as a benefit to the market and another potential accelerant to the adoption and expansion of Dynatronics.
In summary, our innovation engine continues to differentiate our solutions and expand our market opportunity.
Our dania trace customer base continues to increase as dynamic multi cloud workloads expand and scale new logos are being added an existing customers are converting and expanding on the new platform. Both at a healthy pace and our execution across our key performance indicators remain strong.
With that let me turn the call over to Kevin Burns for deeper review of our financials.
Seven.
Thank you John and good morning, everyone I'll start by providing a more detailed review of our third quarter performance and I will finish with our outlook for the fourth quarter and our increased full year guidance.
Following my remarks, we will open the call for questions are key financial metric focused on business momentum its annual recurring revenue as John said, Hey arc $534.5 million at the ended the third quarter, an increase of 44% or 162 million dollar.
Collars compared to the year ago period.
The 44% growth year over year five percentage points of the annual growth was due to customer expansion at the time, our customers converted from our classic product the dying to trace.
Balance of 39 percentage points of growth came from new logos and expansion in our customer base on the Dyna traced platform.
As a reference point this compares to 44% growth last quarter on a year over year basis of which six percentage points of growth was due to expansion at the time, that's conversion and 38 percentage points from new logo and diamond traced platform expansion.
The dining trees platform continues to increase as a percent of total air our and was approximately $466 million at the end of December or 87% of our total they are.
The remaining 13% of our a our relates to our classic offerings.
This compares to a mix of 80% 90 trees and 20% classic at the end of last quarter.
We continue to track to plan I'm conversions and expect to be substantially complete with moving their customers to our new platform over the next three quarters.
As you May recall, we started the conversion program with our sales organization seven quarters ago and to date, we had converted nearly two thirds of the classic base.
We are actively working with the remaining customers on conversion timelines and continue to have a very good line of sight to completion.
Were very pleased with the success of the program and the benefits that had been realized by our customers. Once they are on our new platform.
By the end of our fiscal Q4, we expect classic air will be below 10% of total they are marking a major milestone for the company.
Circling back to totally are there to air growth drivers in our business.
The first is new logo customers and the second is our dine trees that expansion rate. If we quickly take down these key growth drivers during the quarter. We added 380, net new dining chase customers ending the quarter with a little over 2200 dining trace customers consistent with recent quarters new customer.
Mercenary healthy balance of adding new logos to the franchise as well as classic customers moving to the Dynatronics platform.
Over the last 12 months, 54% of our Dynatronics customer count growth has been the result of new logos to the company.
In addition to a steady flow net new customers are dynatronics net expansion rate remained at or above the 120% threshold for the seventh consecutive quarter.
As a quick reminder, are a our growth is not a result of our customer base converting from classic products to the Dynatronics platform as we do not charging conversion fee.
Our air expansion is driven primarily by footprint and product expansion in our customer base.
We had been very focused on moving our customers to the dime trees platform because from there are customers can expand their use cases and footprint in ways that were not possible with our classic products.
As noted earlier only five percentage points of our 44% error growth occurred at the time that conversion and an our view even those five percentage points are true customer expansion.
Our current Dynatronics air our per customer remains north of $200000 for the fourth consecutive quarter and we continue to believe that there is a large opportunity for further expansion in our existing customer base.
The majority of our applications that our customers still lack instrumentation, we continue to expand our value proposition and use cases, and our enterprise customers continue to expand their portfolio of cloud based applications as they digitally transform their business.
Let's now turn to revenue.
Total revenue was $143.3 million $5.3 million above the high end of our guidance and an increase of 25% on a year over year basis.
Total revenue growth was driven by strong growth in subscription revenue, which was $128.5 million in that third quarter, an increase of 40% year over year.
For the quarter Classic license revenue was $3.9 million down from $12.1 million and a year ago period.
As John indicated from a piano perspective, we believe the best measure and reflection of our ongoing revenue growth profile is the combination of subscription and services revenue, which was $139.4 million in the quarter, representing 97% of total revenue an increase of 36 per se.
On a year over year basis.
Before moving to our profitability metrics I would like to point out that we'll be discussing non-GAAP results going forward as outlined in the tables in the earnings press release.
Our non-GAAP gross margin was 84% for the third quarter and increased from 82% in the third quarter fiscal 19.
We continue to see healthy increase in our subscription gross margin percentage as we realized the benefits of winding down the classic product stack.
And more importantly, the benefits the diamond trace platform, which has one code base and over 90% of our customers on a version release within the last 30 days and extremely efficient product.
Our non-GAAP op income for the third quarter was $37.5 million well above the high end of our guidance of $31 million.
So a combination of revenue and associated gross margin upside and to a much smaller extent some investments that moved to the fourth quarter.
This led to a non-GAAP operating margin of 26% up from 21% in the third quarter 2019.
Were very pleased with a strong profitability performance for the quarter.
However, as discussed before we remain focused on investing for long term growth and plan to reinvest some of the upside we realized during the quarter back into the business, which is reflected in our Q4 in full year guidance.
non-GAAP net income was $26.7 million or 10 cents per share. This was above our guidance of six to seven cents per share.
For the quarter, we had 280.2 million diluted weighted average shares outstanding.
Turning to the balance sheet as of December 31st we had cash cash equivalents of $189 million and our long term debt was $540 million after taking into account a $30 million principal payment in Q3.
Our leverage ratio was 2.7 times, our trailing 12 month adjusted EBITDA of $130 million.
This is down from a leverage ratio of 8.9 times at quarter end prior to our IPO.
He'd been inline with our program to consistently reduce debt. We made another debt payment of $30 million in January and our gross debt is now approximately $510 million.
While on that topic I would like to let you know that later today, we planned to launch a repricing of our debt facility. We anticipate that there will be some modest cost in the fourth quarter and our guidance excludes any potential impact.
During fiscal 21, we expect to realize a modest benefit related to reducing our interest expense, but it is not material to our overall results and we will provide more color on next quarter's call.
Moving back to our key metrics Unlevered free cash flow for Q3 was $13.3 million and it was $161.9 million or 32% of revenue on a trailing 12 month basis.
As we've discussed quarterly cash flows can vary due to seasonality combined with the fact that as we convert our customers from classic to dine trades, you can impact the timing of when we invoiced our customers.
The last financial measure that I would like to discuss is our remaining performance obligation, which at the ended the quarter was $800 million an increase of 74% over Q3 of last year.
The current portion of our PEO, which we expect to recognize as revenue over the next 12 months, what's $456 million, an increase of 66% year over year.
Our healthy RPL expansion has benefited from our move to a subscription business combined with an increase in the duration of our new subscription agreements.
We have consistently stated that we do not you calculated billings as a meaningful business metric in the near term mainly due to the variability created by the timing of our customer conversions and our ongoing shift from perpetual license to a subscription offering.
We're very pleased with the success that we've had and move in our business to a subscription model.
This shift has no impact on air and that actually has a positive impact of the long term given it's a renewable source.
Keep in mind, however that the shipped to subscription has and will continue to put pressure on our long term deferred revenue balance and annual invoicing for subscriptions is lower than the upfront invoicing for perpetual licenses that are recognized over three years.
Moreover, the ship subscription has happened even faster than expected this year, which we believe as a great thing for our business.
It's for these reasons that we have focused on our air are from the time of our IPO as we believe it is the most relevant leading indicator of our business momentum and we'll continue to be the case until we complete our revenue model transition.
Now, let me cover our guidance, which has increased due to the strength of our third quarter results combined with our continued positive outlook and the momentum of our business.
For the fiscal year, we're increasing our air guidance to a range of $563 million to $566 million representing year over year growth of 40% and an increase from our prior guidance of $550 million to $555 million.
Total revenue is now expected to be in a range of $542.2 million to $543.2 million, an increase from our prior guidance of $533 million to $535 million.
We expect our non-GAAP op income to be in the range of $127.5 million to $128.5 million up from our prior guidance of $119 million to $121 million and representing a non-GAAP operating margin of 24% at the midpoint of the range.
non-GAAP net income per share is now expected to be 28 cents per share assuming approximately 272 million weighted average diluted shares for the year.
For the fourth quarter, we expect total revenue to be in a range of $147 million to $148 million representing year over year growth of 27%.
It is worth pointing out that we expect the combination of subscription and services to once again grew over 30% in the fourth quarter.
We expect fourth quarter non-GAAP op income to be in the range of $33.5 million to $34.5 million and non-GAAP EPS of eight cents per share assuming 284 million diluted weighted average shares outstanding for the fourth quarter.
In summary, we're very pleased with our third quarter performance and our optimism about the future as reflected in our increased guidance for the year.
With a large and growing Tam in front of us in a market leading position, we believe that dynatronics is well positioned for the long term.
Most important for our shareholders is that we continued to show financial profile that we believe is highly unique including meaningful scale strong growth healthy profitability and cash flow.
With that we'll open up the call for questions operator.
At this time, if you'd like to ask the question Press Star then on your telephone to which I question pressed for time. Please follow the composite Kenny roster. Thank you.
Your first question comes from the line of Sterling, having with Jpmorgan. Please go ahead.
Hey, guys. This is Matt on for Sterling. Thanks for taking my question. So looking at the significant upside in air our versus what you did in subscription revenue.
Wondering if you could comment on the linearity in bookings during the quarter. Thanks.
Yeah. Thanks.
Question. So we obviously track linearity on monthly basis on what I will say is for December or calendar year, and where we typically see a larger percentage of our book you commented that and month grade. So yes, yes, it's a little bit higher this quarter, but its consistent starwood collapsed.
Two years.
So no real outliers in terms of the flow business.
[laughter].
Great. Thanks, guys.
Your next question comes on line of Matt Hedberg with RBC capital markets. Please go ahead.
Oh, Hey, guys. Thanks for the question Great quarter. In addition to the 44% error growth new customer adds it was really impressive to to us and I think you added 130 more than you did in the year ago quarter as well as last quarter.
Can you talk a bit more detail of why new customer adds were so strong and it has something changed competitively.
Perhaps could there be some acceleration in a competitive replacements.
Yeah, So a couple of things.
First of all it was a big conversion quarter.
And.
You know, we've said that we've been stimulating the base now for a while there were seven quarters into that the program and we ended the year, it's always a forcing function for many banks and this just happened to be a big order for moving the base.
Over the Diamond trace so that's a big part of it but even with that you know about half of that growth is still in that new logos onto the franchise and that's really coming because the market is now moving much harder rationally multi cloud.
Environment is sort of web scale environments, including on the modern workloads Microserver space workloads kubernetes orchestrated environments and really leave the Gen. One gen two tooling behind.
And so our reinvention five six years ago is now really you know playing well market and so there is a competitive tailwind for us well.
That's that's great and then and then maybe when you look at your your customer base. John can you estimate what percentage of of see an average customers are monitoring cloud based out or infrastructure.
Versus say, an on premise SAP or infrastructure and how do you think that differs versus sort of the broader competitive landscape.
So from our standpoint, when we talk a little bit of were looking back into it and it's about it seemed that 70% to 75% range, our modern cloud workloads and modern cloud environments Ah. That's a new platform is is monitoring.
And the way we go to market as we look for those of you know modern cloud teams and stacks and then as they get to hang of how tightly trace works and the automation and intelligence still Ted creating much greater efficiencies more there you know sort of limited resources. They started bringing it back yeah further.
Back into their sort of legacy or classic environments, but it's actually as that's a pretty high ratio and I'd say relative obviously relative to each had water gen. Two to hang out there it's much more into the into that modern cloud environments.
So Ah so we think it's a good spot to be I think over time, and we'll see that percentage continue to climb because we are uniquely position in that those environments.
A great color wells on August .
Thank you [noise].
Your next question comes phone line of Heather Bellini Goldman Sachs. Please go ahead.
Great. Thank you very much I mean, it's obviously you guys you're doing a great job converting the installed base. Then I know you mentioned that you look to be done with the conversion over the next couple of quarters.
And you've had some some very good success on new customer Atlanta, but can you give us a sense you made a comment on the call that.
In getting the salespeople.
Focused on conversions and focusing on new land will help improve productivity. It are there any changes to the incentives that you're paying the salesforce as you as you move towards the next fiscal year in the conversion become even smaller and I guess, they the second part would be when you're going after new customers how did the size.
Those initial land compare the size of the initial conversion deals right. I know you don't charge for the conversion, but that's kind of what what you're getting from those when they convert in terms of the uplift. So sorry for a complicated question, but any thoughts would be very helpful.
Yes. So first of all we haven't tests that are sales you know plans for the following the following year Thats in discussion now, but you know our approach is then I have to try to move as much of the pace across the line you don't convert say five years.
Adam this fiscal year, so that we can free up sales.
And you know really.
The work sales incentive plan, so that they can focused 100% of their time on new logo opportunities and expansion of the base, especially cross selling some of the new modules into the base. So that's still our that's still our our program we still have to work through some of the details.
But those are thoughts of his time no relative to our land diverse has expanded the deal.
The the land.
Deals have been very consistent in a 95 K high mid range I think if you look.
We've been talking about 92 to 100 K sort of in that room night 90 to 97 case or in that range for the last three quarters. So that's very consistent and the expansion deals based they vary a little bit by time here Q3 happens to be very strong expansion.
Harder and sodas Q4.
So that was times a year or the expansion deals can be a track a little bit larger on an ASP basis, and then they come down to global I'll run rate range in Q1 in Q2 for us in fiscal year.
But overall, there's not a huge difference between the two where our transaction oriented business, we're not a big deal oriented business and I think that that helps us manage you know a a more effective a business over the long term.
Great. Thank you.
Your next question comes from the line of Walter Pritchard with Citi. Please go ahead.
Hi, Thanks, a question for John Im on for Kevin.
John just looking at the expansion on that you've seen I'm curious product wise getting into things like digital experience monitoring infrastructure monitoring versus just.
App expansion into new apps, what's been has really been a trend there in terms of product versus sort of footprint expansion as you've continued to.
Put up the NR number.
So we're still I feel like we're still in the early innings and cross selling.
Most of that expansion still comes from more more applications being instrumentation.
Anyway, because we have such a highly automated way of instrumentation sort of a soft discovery very automatic so we can break that all barrier that you said you know hinder prior application performance monitoring.
Products in about a 5% about our range you know we were well owner that a with a majority of our customers.
But we are seeing an uptick in the cost salads. We started to focus on there is more digital experiences line. They were pretty used to positioning so that one by now runs a little bit ahead, but we're seeing a nice up tick in UK structure side as well.
I think that that's really driven by the fact that you know folks and realize that all had all tooling really falls away. When you got to dynamic enterprise cloud. So when we of course I have we have a lot of we're.
I have a lot optimism in our ability to scale that out.
We go into next year and that's one other things were going to focus on as we sort of wind down conversions and wind up cross selling you know as we go into our fiscal 21.
And Kevin can you just talked about on the investment side.
She is we look in to 21 sort of where in Q4 in particular, you're investing in the business and then how that pertains to how you're thinking about investing in a in 2021.
Yes, I think it.
Yes.
Hey, guys well, it's continued focus on innovation brand building out our R&D organization. So we can maintain RV.
Products and.
Very low.
Last couple of years, that's one area that we will continue.
Very good investment will again will be continued investments in commercial expansion.
A lot has lost a marketing program. So these are two things that we've been doing very well over a lot worse than last year, and you'll see a little bit more of that here in Q4 and that trend should continue as we as we try and continued to grow this business I don't really nice.
Great. Thanks for the color.
Okay.
Your next question comes from a lot of Bob I'm, sorry, with William Blair and company. Please go ahead.
Hey, Good morning. This is David your economic or bond thanks for taking the questions.
To fight could first just so last quarter, you called out pretty encouraging early interest and the new digital business analytics module I was wondering if you could does give us an update on the level of interest that you're seeing from customers there and maybe just talk a little bit about how the early partnership conversations with the traditional b. I vendors are progressing.
Sure well still still early going it takes a sales organization direct sales organization, otherwise I'll pick up sort of new capability. You said you know introduce into their accounts the accounts trial and ER and then start to adopt a but I did talk about one at a one of the customers in.
My prepared remarks about one that sort of picked it up right away.
And challenge is.
Some of their new applications and bringing.
Our new customers online.
Bank and said you fell right in place for that was timely announcement was something they need it and dropped right yeah.
So those kinds of examples you know sort of find their way through the sales organization I expect overtime that and the business analytics are going to come out really key piece out.
Our go forward or.
Hi, along with customers and opportunity market show. So I'm pleased with where we are right now, but it is early innings of course.
As far as aside how this works we saw together you know analytics players.
In the market, mainly those is focused on digital business teams as opposed to the operations teams. We're seeing is that they relationships really are driving the opportunity, but the fact that we complement.
Those other analytic tools out there you know white collar, saying adobe analytics and be able to light up the entire your tech stack underneath.
ER or some of these environments. So it's not just about hey, what's what's happening with conversion rates, what's happening with with that with revenue why is there a drop off or why I can't really what do we need to do to optimize we provide the visibility back into the SAP as to exact.
I'd like to do you know to attack somebody saying, so it's a great.
Great addition for the folks that use those kind of analytics tools to be able to team went to development teams under operation seems much more effectively to optimize their or their digital go to markets.
Got it that's helpful and then.
Wanted to talk about one other recent announcements so into summer you announced a new autonomous cloud enablement practice that I guess the goal is to provide things like best practices hands on expertise and automation services to help customers kind of make the transition autonomous cloud operations, which certainly sounds interesting in an area of need.
Can you talk in a little bit more detailed just about the practice kind of how that's different from what you've been doing on the services side previously and then maybe whether there's any margin implications associated with that.
Sure Yeah the.
Focus of our of our service organization has always said and making sure that customers get the most out of our software platform.
As a customers will tell you and I believe as well nobody really wants to buy software, they're trying to solve a problem or they're trying to get sort of on some kind of a lead in the market.
And our services organization has said fantastic and helping customers drive adoption I explore new use cases et cetera.
With this new announced said.
And this new practice, what we want to do is be sort of little bit more proactive.
And help customers do what we've done ourselves, which has moved there sort of reactive.
He organizations reactive to issues no into a proactive highly automatic or automated space and so this practice.
Led by a team that said very close to some of the work we've done with our are open source control plane captain.
And then thinking behind that.
They are now taking that to a number of customers has been asking us for you know more and more best practices and expertise in this area and so rather than just try to coach them along the way, we're actually building out a program to help them and they help enable down.
And help to some of the work for them to make sure that they can accelerate their their directions in their drive to Tom's pilots, which is really the inevitable you know place for for every customer building web scale clouds, nobody really wants to have locker humans running around trying to manage them.
And deal with them and optimize them and deal with the issues on them.
So we're just at front end front edge in to steer on that one for the marketplace a great place for us D. and we had a very platform to enable us all.
Great. That's helpful. Thank you for taking the questions and congrats on a solid quarter.
Thank you.
Your next question comes on line of Richard Davis with Canaccord. Please go ahead.
Hey, guys. This is look on for Richard.
So we've been talking with the number of interesting vendors and end the Dev ops space and it seems like they finally gain some mainstream momentum. Our question for you guys would be how do you guys think about the space and do you do you envision extending into that ecosystem, presumably on the upside.
Thanks.
Thanks.
Sure well, we already are in the Devops World, We've always thought Oh performance and cloud application optimization as something that used to go upstream you know continuous development I'm, sorry continuous deployment all the way back into <unk>.
Great.
So we already do do this and the value we provide in those stores environments are fairly straightforward.
People have lots of capabilities to drive new function, but very few capabilities to make sure that they had their architectures maintain and the ability to scale. You know is built into those continuous integration continued alignment.
Models, and as we see more and more I'm a from a guess standpoint wanting to understand what their new code is doing in production. So visibility actually you know into sort of the early production releases and whether they are married releases or AB testing and that kind of thing we see.
A broader opportunity to be able to help those Dev ops teams, you know optimize code drive better quality.
And those early stage as prior to when things get out into production.
The last thing I'll say about introduce Aratana Saab program actually starts where it's something we call unbreakable pipelines and yeah. We start there because it's it's more straightforward with the Dallas to put all this together with the with the open source Oh go back.
And that we don't captain.
And so we'll be bringing even more started focus and to be asking the Dev ops side of things you know as we go forward.
That's very helpful. Thanks.
Your next question comes on line of Jennifer Lowe, Yes. Please go ahead.
Great Good morning.
But first question for me so it the commentary runny improving conversion outlets I thought, particularly interesting and I wanted to parse through that a little bit more can you talk about how much of that with a function of market I.E. you know as companies move to sees more complex environments. It's just a more pressing issue to.
Modernize our ATM and observe ability practices versus things that maybe you were doing differently from a sales process perspective versus anything you're seeing differently from a competitive perspective, where maybe your win rates for a bit better in the quarter than they've been if you could just sort of give a little more granularity that be awesome.
Yes, so I don't think it's anything that we're doing differently. It's just a culmination of a lot of work TTOT over the last six seven quarters.
It takes customers a little while two to digest something that's due.
We're not to put a like for like you know this product for that product you know kind of Oh thing, we're actually taking multiple tools and where we're now providing a platform and the multiple tools were all targeted into gamma for all stack environments are sort of classic stack environments and the.
New platform is targeted that you sat cloud environments and job, which means started a new buyer. So it takes a while it's a sales process as I said, we believe that extend worth all the effort.
It's going to pay off because we're now in.
The main stream go forward heart.
All these all these customers businesses their enterprise Klaus.
And this just happens to be a quarter that sort of culminated into a lot of things happening at once a which is great.
It's a pea.
Quarter for us on by the next three quarters will be strong, but not as not as large as this offline.
But I think it's just a culmination of a number of things that we've been doing well.
And customers as you said started realizing that enterprise cloud is a growing part of their portfolios and will become the lions share of the REIT portfolios here over the next 12 to 24 months.
Okay, and maybe just to follow up on that so if we look at you know pipelines versus conversions is it reasonable to think that the pipeline trajectory has been more steady and now the delta is really just converting on that pipeline more effectively or are you seeing pipelines expand as well.
Obviously had both pipelines expand as well as you know conversions you know remains strong across the board. So that you know both are both bode well plus as Kevin pointed out a couple times, we've been expanding our sales organization as well. So we're we're on track.
Back for that 25%, increasing our sales rep capacity this year and.
I look forward to as they ramp in you know, they're having some impact and they'll have greater impact.
Sure.
Great. Thank you.
Your next question comes on of Keith Bachman with BMO. Please go ahead.
Hi, Thank you very much I had two questions as well the first as it relates to an earlier question, but as you look out and you see your conversion.
Legacy being zero or close to zero.
Does that help hurt or neutral to youre, a our growth.
It's a great question that and yeah. This is sort of you need to perfect Crystal ball pass to answer. It. So you know three quarters are now we'll be able to have that little bit of hindsight, but the way. We look at is is this it's it's great that were re shifting a customer base.
The costs, but it's taking a fair amount of sales bandwidth to do it because as I said is it's really like a new sale.
Because we don't just talk to the the team that had or old tooling, we have to find a whole new team on the other side to make should pay.
Fine the value of data trace off where there for their cloud programs.
So we estimate that's anywhere from about 20% of sales you know effort, maybe a little bit higher given various quarters like this past quarter.
But.
Going forward, where the conversions write off and we have 100% sales focus and and the full capacity of the sales organization focused on new logos and expansion.
You know that should give us you know sort of the tailwind from a productivity standpoint in that regard.
So you know how neutral does that do those two sides of the equation work you know time will tell what we think it won't be a relatively neutral.
One other comment attitude.
Our growth over last 12 months as things actually grew 44%.
<unk> percentage point to that came at the time Oh customers is that convert I know conversion, they're expanding their footprint now that if you look at that on a net expansion rate that is below 120% net expansion rate for that customer base. So we always talk what I have trade spend north.
20% like.
Are you referring back once they are on that new platform and we do believe it a little scanners and much more rapidly hey, I'm directories.
Okay. Thank you for that my follow up question relates to.
As your expansion capabilities or I should say your your expansion your portfolio within the context of BPM continues to improve.
So the pipeline as you mentioned this is getting richer. Your conversion rates are good are you seeing any different changes in attach rates of the infrastructure side.
[noise] either from a from a standpoint, a cross selling and what we consider expansion as we said before we we land from a position of strength as you would expect in our swim Lane, which is the application or sonatrach focused on the cloud workloads.
And the expansion is increasing attach rate of infrastructure as well as digital experience are increasing.
Its not something that we disclose at the moment and what does that look like as far as you know portfolio of emerging products relative to the ATM module itself.
But going forward you know we're looking at a you know when how we do that maybe at.
The end of our fiscal year, beginning in the coming fiscal year.
Many thanks, that's it for me.
Your next question comes on line of fresh <unk> light child with Barclays. Please go ahead.
Hey, Thanks for taking my question.
[noise] more on a bigger picture one can you talk about like open telemetry, if that's kind of course out.
More and more vendors are doing it but then some of the gym to crag, it's almost kind of very openly around how does that help you in terms of being out in the markets with a more and more than solution.
Great question, you know open telemetry radius is a great standards is why we've gotten involved in it with Google Microsoft and some of the other industry leaders.
Because we've always thought bed gathering data.
You know is it's not really where the differentiation our values when it come yet.
This is why when we built rebuilt our platform we thought about it with advanced automation and then they I enjoy a core because that's where we really see you know the advanced sensor and the opportunity to drive value.
That's where you know that's where it's more about what you do weapon data and it is about gathering.
Open tell allows us to gather data all grow much wider sets of environments serverless environments mesh environments, you know a number of different areas.
It's very hard to figure out how you might instruments.
Discover that and so yes.
He has had a footprint on me since you've got to need a highly scalable engine that can process and analyzed lots of data to make sense for that.
Allow sort of Dot I gave you the limited I teams to do more and more you know as these environments and much larger more complex. So we see that's a great opportunity to to sort of thought shine a light.
On our automation intelligence differentiation, and we think it's going to be a great sort of a tailwind for us as we as we go forward in the business.
Okay perfect. Thank you and then one quick one for Kevin can you just remind us on you kind of you mentioned to that situation on the on the prepared remarks, what's the what's the ultimate what's your long term target her own that's leverage et cetera. Thank you.
And well them, yes, so our yes as I mentioned on the call that now, let Greg trailing 12 2.7 times EBITDA.
We believe we're trying to manage its we're trying to maintain cash around 150 200 million dollar Mark which means we're going to be paying down on a quarterly.
Cash are using excess cash they may have been so in January $30 million.
He said given our cash generating capabilities.
You know we can reduce this site.
There's a debt over the next couple of years very nicely. So we're going to pay down you know consistently on quarterly basis before actually.
Lastly courses.
Thank you.
Okay.
Your next question comes on line of French filled with Jefferies. Please go ahead.
Hey, guys. Thanks. This is part of on for Brent just just a follow up on the net new assets this quarter on the half of it but the half of them that as that were new to the franchise anything you'd call. It from a vertical or a geo perspective relative to the best quarters.
Yes, so nothing unusual on any of those funds really you know that their digital transformation is really across all industries. So there's really no nothing I can point to that says Oh. This industry is all set an accelerating or this one's decelerating or some shifts.
And the same thing from a from a geographic basis.
I mean, even the world sort of flatten these days it used to be a you know in Asia Pacific you might think of is two years behind that you asked or something was a lot or level. You know now so theres no real shifts in geographic mix I wouldn't say, there's any shift in industries I. It's.
It's just more a mass movement of digital transformation and then the realization that it's going to be cloud first.
And that the clouds are no longer sort of static yeah. We're exploratory they really are enterprise class multi cloud dynamic workloads, I mean, where were not a sophistication level and scale level that we anticipated five or six years ago, but you know really starting to.
They hit the mainstream you know the enterprise market now, which I think again gets a little better tailwinds.
Yeah makes sense, okay and.
You know as a follow up just when you look at the it'll be us integration, but you guys have just done how when she doesn't measure the opportunity.
For host expansion with that integration over time in a relative to what you're seeing up into hybrid cloud versus what you've seen the non traditional long from environments.
Sure. So so you know the age of U.S. moved to outposts is yeah. It's an interesting move because it wasn't religion. You know two three years ago that everything was going to come to public clouds, and it's a bit of a realization that hybrid environments can be route for a pretty long.
On time.
We have we built a unique SAS a platform that allows us to run the same software cluster technology, whether it's in the cloud or whether it's behind People's firewalls.
Back, saying code base as Kevin pointed out a number of times, but we're able to to use that exact same software to handle sort out of both workload environments are both at the same time for us for hybrid cloud customers.
So the fact that age of you asked is now distributed their cloud so that you could actually bond outposts behind the firewall.
You know aligns with the model we've had for the last four years in enterprise.
Sort of volume production.
So it is perfect for us and it's very hard for somebody with a SaaS only platform to be able to cover all the workloads because of regulatory issues that caused that.
The sovereignty or data security issues and so when we look at it we think of our tab as default payout of enterprise customers and their workloads as opposed to only the ones that will allow for four telemetry data to go to a class.
So we think that moved from where they have you asked is actually going to accelerate sort of our penetration into the age of years enterprise portfolio.
Its early days, but.
Well, we think it's a it's a great move and we're well positioned to take advantage that like whether it's the age of U.S. Barrick Bryant.
Or whether it's the BM, where you know very.
That's helpful. Thanks, guys and congrats.
Thanks, Mike.
Your next question comes on line of Sarah family with Macquarie. Please go ahead.
Yes, hi, congratulations great quarter quick question for you following up on four on on a few of my peers you know the international opportunity as we discussed it sounds like there's still plenty of room for you guys to go there. So my first question is really how are you thinking.
About on expanding in international, especially with the growth will help you just <unk>.
[noise]. So we've always had very strong international presence in our business is in a 60%, 55% to 60% North America and.
The balance international and we've had that footprint for quite awhile. So one of that one of the advantages for US is we don't have to build out that X sales support marketing infrastructure on a global basis the already habit.
So when we talk about sales rep expansion, we think about it as pretty much although there's a little bit more in North America awesome. That's the front end up the enterprise cloud, but in general you can think about it as when we say, 25%, maybe 25% pretty much in each of four.
Our major geographies, we think about would be about North America, we think about AMEA, Okay, which is Europe Middle East Africa, We think that Latin America, and when we think of Asia.
So from that standpoint, you think about master standard of all sort of relatively similarly, and they all have fantastic opportunity for us and we're doing well in all of the street geographic sectors.
Okay. Thank you very much that was really helpful and as opposed to up I was wondering if me listing ship I know you're seeing a lot more protection of cloud native as you're moving along but either way you can help us to trying to think about the magnitude of ships are seeing from on crime.
<unk> to a comprehensive cloud applications of all the time.
So we don't really thinking about it and Theres a shift from on premise to cloud, we think about him as a shift from monolithic you know to two.
To cloud or cloud native environments, containerized environment is thinking about that way.
Because these hybrid clouds, well run that are built with cloud technologies, where everything Virtualized networks, Virtualized infrastructure, Virtualized absent virtualized and and Kubernetes, which is now at about 85% of our customer base you'd always is being used.
Straight across all these various environments. So workloads can literally run on premise or in the cloud or multiple clouds and staying at across all of those environments.
So this is a world that there were in which as you know this blurring between the old on proud of and color cloud environments. So that's why we talk about him as enterprise cloud because it's sort of everything all sort of melded together with a with an underpinning a cloud technologies.
And.
Approaches.
And from that standpoint, there is a gradual migration to public clouds for sure.
But there's so many data sources.
And at environments on premise that are required in order for these applications to actually you know work properly I mean, just think of an insurance company, Jeff Your risk management system in your customers system onsite, you're not going to put those data sets in the cloud, but yet all the application all the mobile.
Yes, and somebody other touch points are all sort of maybe running in a public cloud. So that creates this hybrid environment, which were extremely well season.
Sure.
Listen thank you congratulations on great corridor.
Okay. Thank you very much I think just any interest in time are probably going to have to cut off the questions. You know I'm sorry about that thank you all for your interest.
We're thrilled with our third quarter out as a public company and I look forward to talk with all of you again, you know in May when we add wouldn't or a back with the end of our fiscal year as funny.
So thank you very much at a good morning, and take I will talk soon.
This concludes today's conference call you may now disconnect.
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