Q1 2021 Dynatrace Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the tiny trace first quarter fiscal year 2021 earnings call.
At this time, all participants are in listen only mode.
I think its presentation there will be a question in nature section.
He would like to ask a question at that time, you May press star one on your telephone keypad.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to me welfare.
Great. Thank you operator, and good morning, everyone with me on the call today are John Van Cyclin, Chief Executive Officer, and Kevin Burns Chief Financial Officer.
Before we get started please note today's comments include forward looking statements, including statements regarding revenue and earnings guidance.
These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results could differ materially from those expressed or implied by such statements.
Additional information concerning these factors is contained in dynatronics its filings with the FCC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
The forward looking statements included in this call represent the company's view on July 29 2020.
Got it trace disclaims any obligation to update these statements to reflect future events or circumstances.
As a reminder, we will be referring to some non-GAAP financial measures during today's call.
A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website and lastly.
References to growth rates will be in constant currency, unless otherwise noted and with that let me turn the call over to our Chief Executive Officer, John Dance, England.
Good morning, everyone and thank you for joining us on our Q1 fiscal 21 earnings call.
Since early May when we last reported earnings the Cobot 19 pandemic has continued to impact families communities and businesses around the world.
Don't have to go far to find friends or family impacted by this unprecedented situation and I truly hope that you and your loved ones.
Name safe and healthy.
Despite the challenging economic backdrop, resulting from the cobot pandemic.
Digital transformation projects continue to be prioritized as essential as companies strive for greater agility efficiency and speed to market.
And diner trace continues to be considered an essential component for sustained digital transformation success.
I'm pleased to report.
A solid business performance, we saw in April continued throughout our fiscal Q1.
The quarter. They are was up 39% year on year and subscription revenue was up 37% year on year.
And once again, some coupled our strong topline growth with strong bottom line results as well.
With a resilient value proposition well suited to the digital transformation backward trends, we see a had kind of predictable subscription business delivering growth and profitability at scale, we continue to be optimistic about our future opportunity and the durability of our business for long term value creation.
Based on the strength of our Q1 results going to grow through the difficult economic backdrop, we've increased our annual guidance for revenue and profitability as Kevin will discuss in a few minutes.
There are three areas like the high like this morning that give us confidence in our ability to achieve our increased guidance for fiscal 2021.
First essential role that Dynatronics plays and the success of our customers digital transformations.
Second with digital transformation, taking place in modern dynamic multi cloud.
Oh diner traces well position to continue growing here are like adding new customers in expanding our platform across our growing base.
And third how we plan to continue investing in both commercial expansion and ongoing innovation to expand market share and take advantage of the larger rapidly growing tab, we have accomplished.
Dozens of companies have embrace digital transformation as a primary way to drive revenue provide services engage customers and collaborate among teams.
For these reasons, we're beginning to see an acceleration of digital transformation projects around the globe.
According to a recent May survey by Fortune magazine.
75% of Ceos anticipate accelerating their digital transformation projects.
Customers tell us that they consider diner trace and essential element of executing a successful digital transformation as they drive towards greater agility efficiency and business effectiveness.
Despite global pandemic continuing to delay some new sales cycles customers' confidence in diner trace and the intelligent observed ability we provide into that dynamic multi cloud ecosystems. Underpinning. These transformations is reflected in our strong first quarter results across all key operating measures.
As we discussed in early May our approach to the pandemic was to immediately focus on our 2400 diner traced customers worldwide to help them through their work from home transitions and shifting cloud workloads.
Sure in customer success in times of challenge help strengthen long term relationships.
An important part about growth strategy.
This approach also helped us maintain a net expansion rate above 120% for the ninth consecutive quarter.
A great example of how digital transformation continues to fuel our expansion efforts within our base is a large brick and mortar retailer with an expanding digital footprint.
This customer first brought dietary sand to bring application observe ability to their cloud modernization project.
During the initial deployment the retailer experienced firsthand, how diner traces rapid automatic rollout and unified AI ops approach to identify service impacting issues, they've been time money and resources across more than just application use cases.
Thank you Tracy since unified data model allow them to tear down silos among teams create more effective collaboration accelerate innovation simplify operations and drive greater online and in store success.
This drove the recent decision to standardize on diner traced across infrastructure monitoring log analytics and digital experience monitoring in addition, JPM.
Solid any multiple disparate tools, while gaining the power of unified observe ability advanced automation and he ice Howard intelligence is a powerful combination of value as more of our customer strive to do more with less.
And especially unified platform value that we believe will allow us to continually expand our 80 or ARPU customer overtime from the $229000 on average we see today to what we believe can be over a million dollars per customer as we did with this retailer.
Well, we increased focus on back to be selling during Q1.
We're also excited to have added some fantastic new enterprise relationships around the globe with organizations like National grid, MGM, Texas Health and human services, Yale University and Banco Sabadell.
Digital transformation continues to happen across all industries, even those currently challenged by Kobin.
Like the U.S. airline.
New logo for Dynatronics this past quarter.
Despite the fact of travelers down dramatically on a year over year basis. This customer came to dyna trace to optimize conversions from initial customer contact booked tickets.
The airline taken a classic multi tool approach to monitoring with different digital teams they bring their own tooling.
This left him with silos of data and blind spots and how users were truly are experiencing the revenue driving booking application.
With mobile usage, increasing rapidly and the need for greater efficiency rising quickly see new their approach had to change.
After demonstrating the power of connecting application infrastructure and user experience observe ability with conversion funnel K P eyes, the airline quickly rolled out diner trace into production.
Within days actionable answers about conversion bottlenecks and optimization opportunities allowed the airline to make high impact improvements to maximize passenger revenue.
After experiencing the speed efficiency and simplicity of the diner trace platform compared to their previous tools customer commented quote you guys are from St bolt and the other guys are simply weekend joggers unquote.
We believe this powerful unification of cloud observe ability data with business value metrics will continue to drive our new logo growth as we penetrate deeper into our target global 15000 account base.
As we enter Q2 with work from home disruptions largely behind us and digital transformation projects continuing to accelerate we see the opportunity to increase the balance of our sales efforts by increasing our focus again on new logos, our pipeline is strong and our differentiation is compelling.
The resulting do much more with much less effort and cost value proposition is powerful, especially now when I T and development organizations feel more and more pressure to move faster and accelerate their digital transformations.
Speaking of market position an opportunity. This brings me to my second point.
Not only is the general macro trend of digital transformation fueling our business.
So what their disruptive trends shaping modern cloud environments as we've said before nearly all our customers use dying to trace for the intelligent observation and optimization of modern cloud workloads.
These clouds maybe public.
Hey, maybe hybrid or what we see more and more often now they are multi cloud.
Multi public with hybrid backends were critical systems of record and many run the business applications still reside.
More often than not kubernetes is used for container orchestration and more and more look to multiple Dev ops teams utilizing the latest cloud native techniques rapidly build to deploy and manage applications and workloads and web scale.
With this combination of complexity dynamism in frequency of change only an automatic AI assisted observed ability platform at work.
Ongoing innovation across our platform continues to put us in a strong position to take advantage of these disruptive shifts in the cloud platform and cloud native application landscape.
Let me give you a quick example of what I'm talking about here.
So solution provider for K through 12 School administration, serving over 12000 educational organizations and 80000 schools.
As this organization approach the renewal date for one of their existing monitoring tools. They brought in dying to trace and another company for three way bake offs.
Well skeptical at first it dynatronics was different.
Three things became clear during the evaluation that may die in a trace the clear choice.
First the automation in AI at the core of our platform showed how they could quickly continuously and intelligently observe in understand their dynamic kubernetes environment, something that was highly manual and left them searching for answers with their current tooling.
Second they realized that with instant and precise answers they could speed product delivery by automating large parts. There devops delivery pipeline. The previously had required manual stops burning precious time and valuable resource.
And third the powered the dying to trace one solution became clear as a customer expanded the scope of the pilot beyond ATM.
That's a further investigated dying to trace for an infrastructure monitoring initiative by leveraging our common data model and unified AI ops approach across both infrastructure and application use cases, they realize they could eliminate silos between their cloud operations and applications games.
Moving collaboration and accelerating innovation.
With I'd see Gardner and other leading industry analysts are predicting the continued expansion of dynamic multi cloud environments as a platform of choice for global enterprises, and the rise in a ops as a requirement for allowing resource scrapped I.T. and development organizations to do much more with much less effort and cost we believe that.
I know treats value proposition and platform differentiation will continue to serve us well, both and gaining new enterprise cloud customers and even expanding a our our per customer overtime.
Now, let me touch on third point investing in growth.
Given the fact that we are fortunate to be an industry category that is well positioned to continue thriving during a difficult economic environment and we have a highly differentiated platform well position. That's right cloud trends ahead, what is wrong reiterate I have no. We are continuing to invest aggressively in gross.
We expanded our global team by over 90 employees in Q1 with over 100 more already signed on to start throughout Q2.
Sales customer success, and R&D continued to be the primary areas of investment for us as we expand our customer base on our platform footprint.
We also recently completed our fed ramp certification at moderate impact level, which gives us broader access to the massive digital transformation effort of the U.S. government.
We've doubled our sales investment in U.S. federal government over the past year and expect to see this business segment continued to grow at an accelerated rate.
On the product front, we are committed to investing in ongoing innovation.
Our largely European based R&D organization continues to expand including a new lab recently opened in Vienna, Austria and.
We continue to expand the capabilities of all five monetizable modules as well as bring greater scale fault tolerance in extensibility to the platform itself.
This past quarter, we extended scalability and fault tolerance for our largest customers, allowing them to extend hybrid clusters across geographically distributed clouds with full fault tolerance in case, one of their cloud operation centers should go down.
For a mini Cooper now these customers, we announced extended AI powered support for advanced observe ability of kubernetes infrastructure container and application workloads.
Now our customers can get a unified across all tiers to better understand manage troubleshoot and optimize their growing they complex kubernetes clusters cloud native applications that run on them.
And the Bakken data sources and middleware. These modern cloud applications depend on to operate effectively.
And we continue to mature our infrastructure monitoring and log analytics module with greater coverage of cloud services, including all 80 of the core is your services.
I think it's important to note and when we add coverage. We don't just at a data feed for service we had one each in automation.
Unified dependency understanding across all cloud dimensions with smart scale.
And am I understanding with Davis to provide ease of ongoing operation and intelligent answers and insights for greater efficiency and lower ongoing cost.
It's gratifying when all this work all or innovation and value is recognized by third parties, what's especially gratifying when the feedback comes from your customers.
During the quarter GE to a leading peer review site had reviewers rank observed mobility platform leaders across several use cases.
I know trace came out number one.
Including number one rankings across cloud infrastructure monitoring.
Hey, Iops platforms.
Application performance monitoring.
Container monitoring digital experience monitoring and session replay categories.
Platform expansion continues to gain traction with our customer base with a number of diner traced customers now using three or more modules a 44%.
Over the past six months.
We are grateful for the support in recognition of our many customers.
I'm pleased our reputation as the modern cloud observe ability leader continues to grow.
So let me summarize as I've covered a fair amount this morning.
Our opportunity is large and growing rapidly.
It is fueled by powerful macro trends of digital transformation and dynamic multi cloud adoption.
We have proven the resilience of our value proposition in times of challenge and the power of our differentiation to both acquire new logos as well as expand rapidly within our base.
This combination along with the investments, we continue to make and commercial expansion and ongoing innovation.
But it's in a strong position in a market segment that we'll continue to sit near the top of the strategic I.T. priority list for some time to come.
With that.
Let me turn it over to Kevin for a deeper look into our financial results and guidance.
Kevin.
Thank you John and good morning, everyone. As John mentioned, we had a strong start to our fiscal 21 with solid growth in a our revenue and earnings there's still a fair amount of uncertainty in the global economy, but our solid first quarter results demonstrate that digital transformation is credit.
Call for business success.
As we look ahead, we continue to be optimistic about her sustainable growth potential.
So let me start with a quick review or the first quarter financial highlights and then move on to our outlook.
Annual recurring revenue continues to be one of the key financial measures to understand the momentum of our business.
Hey are grew to $601 million, that's up 39% year over year, an increase of $164 million on an as reported basis compared to the year ago carrier.
The two drivers of eight our growth, our new logo customers and our Dynatronics net expansion rate.
As we mentioned on our last call over the last few months, we increased our sales focused to help our existing customers establish their work from home and digital transformation efforts.
This contributed to our strong net expansion rate, which remained over 120% for the ninth consecutive quarter.
Hey, our per dining trust customer also increased to $229000.
Over 10% year over year.
We added 85 net new customers in Q1, bringing our total time trees customer count to 2415 customers.
As expected the combination of our increased focus on our installed base.
Public or more challenging business environment.
Led to a moderation and new additions to dine case platform and the first quarter.
We had a solid pipeline of new logos for the second quarter, and we believe new logo ads will be roughly 450 for the remainder of this year.
It would be consistent with the new logo additions for the same cared last year.
Our initial guidance assumption coming into the year based on the resilience of digital transformation projects and the essential role nine the trees plays and ensuring digital transformation success.
Moving to revenue total revenue for the first quarter was $155.5 million $5.5 million above the high end of our guidance and representing an increase of 30% year over year basis.
The strength in total revenue growth is being driven by 37% growth and subscription revenue, partially offset by the expected decline classic license revenue.
Now represents less than 1% of our quarterly revenue.
With respect to margins, we continue to see a healthy expansion in our gross margins as a subscription revenue mix increases total non-GAAP gross margin for the first quarter was 85%.
Two percentage points from last quarter and up three percentage points from Q1 of last year.
We're very pleased with our margin performance, primarily due to the efficient way, we manage our platform coupled with modest cost savings related to the macro shutdown.
Our non-GAAP operating income for the first quarter was $50.8 million above the high end of our guidance of $40 million due to revenue and gross margin upside expansion and lower than expected operating expenses due to prudent expense management as we evaluated the business environment over the course of the.
Corridor.
This led to a non-GAAP operating margin of 33% up 11 percentage points from the first quarter last year.
Well this performance shows the operating leverage potential inherent in our business given the strength of our platform and the growing Tam we operate and we do you intend to accelerate intelligent investments in innovation and commercial expansion as we move forward and physical 21.
As a result.
Consistent with what we communicated last quarter, we do expect margins will come down from Q1 levels as we move throughout the fiscal year.
Non-GAAP net income was $36.9 million or 13 cents per share three cents above the high end of our guidance.
Turning to the balance sheet.
As of June Thirtyth, we had $250 million, a cash and our long term debt was $510 million.
Given the strength of our cash flow and confidence in the business.
Recently re initiated our program to further reduce our outstanding debt as a result, we made a principal repayment of $30 million in early July reducing our debt balance to $480 million.
Since our IPO, we have consistently improved our leverage ratio, which ended the first quarter had 1.6 times, our trailing 12 month adjusted EBITDA.
Our leverage ratio is down over 50% from or post IPO leverage ratio of 3.3 times EBITDA.
As a reminder, our unlevered free cash flow can be lumpy on a quarterly basis with our strongest cast generation occurring in last quarter, the fiscal year falling in the seasonality of gross bookings and renewals.
Therefore, we believe the best way to look at our Unlevered free cash flow is in our full year or trailing 12 month basis.
Smear without the effect of quarterly seasonality.
For the first quarter Unlevered free cash flow was $37 million.
We were very pleased with our Q1 performance, which was nicely above our internal expectations.
On a TTM basis.
Our free cash flow, what's $141 million, which was 24% of revenue.
We continue to expect to deliver full year unlevered free cash flow margins of 29% to 30%.
The last financial measure that I would like to discuss as our remaining performance obligation, which at the ended the quarter was 857 $9 an increase of 40% over Q1 of last year.
Current portion of RPL, which we expect to recognize as revenue over the next 12 months was $503 million, an increase of 42% year over year.
Our healthy RPL expansion has benefited from the move to a subscription business combined with a general increase and the duration of our new subscription agreements.
Now, let's move to guidance.
As a reminder, all references to growth rates will be in constant currency unless noted.
As I mentioned earlier after initial pausing on some expenses as we evaluated the business environment, We do plan to increase investments and the second quarter and the remainder of the fiscal year.
Each will include additional hires to accelerate commercial expansion.
Further expansion in our lives to support innovation and ongoing investments in our customer success initiatives.
As a result, you should expect to see higher operating expenses throughout the remainder of the year, resulting in lower operating margins first Q1.
A trend well ahead of expectations, primarily due to the strength of our revenue.
With that as backdrop for the second quarter, we expect total revenue to be in a range of $159 million to $161 million representing year over year graph of 25% to 26%.
We expect Q2 subscription revenue to be in a range of $149 million to $150.5 million representing year over year growth of 30% to 32%.
From a profit standpoint in Q2, we expect non-GAAP operating income to be in a range of $43 million to $45 million, 27% to 28% of revenue non-GAAP bps of 90 10 cents per share assuming 288 to 289 million shares out.
Morning.
We estimated Q2 cash tax rate of approximately 30%.
At higher state cash taxes in the corner.
For the full year after our guidance is $698 million to $708 million, 23% to 25% growth.
We expect total revenues to be in a range of $646 million to $656 million representing year over year growth of 20% to 22%.
We expect our subscription revenue to be in a range of $603 million to $612 million representing year over year growth of 26% to 27%.
I'd also like to highlight our fiscal 21 expectation with respect to our Dynatronics net expansion rate as John mentioned earlier, and we noted in our earnings release today, we have achieved nine quarters with a net expansion rate above 120 person.
It continues to be a strong part of our business. Our current guidance assumes we'll continue with healthy net expansion rate above 120% for the remainder of the fiscal year.
This compares to our initial guidance assumption of 115%.
And we are comfortable increasing this based on our Q1 performance.
Ongoing conversations with our customer base and the strength of our pipeline in renewals.
For the full here, we expect non-GAAP operating income to be in a range of $166 million to $175 million non-GAAP EPS of 46 to 49 cents per share.
This assumes a tax benefit between $6 million to $8 million and the back half of the year [noise], we still expect our annual effective cash tax rate of approximately 11%.
But we'll have quarterly variability.
And I mentioned this earlier, but just a record again, we continue to expect Unlevered free cash flow margins to be approximately 29% to 30%, resulting in $187 million to $195 million Unlevered free cash flow.
Finally, we expect 288 million to 290 million diluted shares for fiscal 2001.
We feel great about the resilience of the business and are confident that our growth will continue to be driven by healthy balance of existing customer expansion combined with new logo growth.
We are firming up the detailed virtual Investor day for early September and you can expect to release with more specific shortly.
Look forward to share in more details about our business strategy market opportunities product vision and continued investment and the development of new capabilities to fuel future growth with that we'll take your questions operator.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
Again that is star wanting to ask a question.
We will pause for a moment to compile documenting roster.
Your first question comes from the line of Matt Hedberg with RBC capital markets.
Hey, guys.
Thanks for the thanks for the time and John and Pete Congrats on the strong results very impressive.
John you talked about excel accelerated digital transformations post coded, which it's great to hear and really caught my attention can you talk about the level of monitoring some of these customers and I think you called out a large retailer in particular, you know where were they at pre from a monitoring perspective, and where are they at now when they start when they go all in a dinesh race.
No I would say thanks, Matt I appreciated the yes, one way or what were seeing just in general as is.
Somebody's going to spend we had going into the quarter, but no. We of course guide you know cautiously you know case Salesforce unit things, we did and see happening but that.
Throughout the quarter, we saw a much more resilience and you say so I knew tracing essential for digital transformation really playing out.
And.
What.
As companies moving to greater degrees of digital transformation.
Accelerating their cloud insurance, because that's what underpins digital transformation and they move their applications more rapidly from just the lift and shift model to true cloud native application designs and as they do this.
It seems a great with agility and speed, but at the complexity under the Hood goes through the roof.
And in fact complexity that we simplify.
Without instrumentation and sort of back kind of observe ability at scale, which requires advanced degrees of automation and a highest again about the handle that level of complexity when you're talking about billions of dependencies with these microservices floating across multiple multi cloud.
Hi, David trace their starts to shine, even brighter and so what before kobin seem like a we can take our time, maybe we can still do it with our current investments.
Let's just fair tooling quickly because there's no way, we can accelerate digital transformation without making a change in our instrumentation model now serve ability mop you mean, our automation model and so on and so that's what we're seeing is that it's that as digital transformation accelerates the need.
For a dynamic trace class solution unum going south.
And that's somewhere where we saw the beginnings of anything in our in our fiscal Q1, and we continue to see it as we look out into Q2 and beyond with the sales cycles. We're now.
That's great and then Kevin on air or 39% constant currency growth is super impressive, especially when you consider I think last year, you were at 43% growth, but I believe that saw benefit from classic Dyna trace customers that this quarter Didnt see I guess to that point can you remind us roughly what the benefit was last year.
Classic conversion because I think you know if you were to normalize for that you might have even had some where our growth.
That's right associated goes back any maybe take a lot six quarters, our average here our growth on a constant currency basis in a low 40% when you break it out and you just look at new logos and expansion in foreign countries. That's first one on the platform on that growth rate was about 39, 40%.
And again this quarter on constant currency basis.
Great.
Most of the reduction in the are really came as a result.
The fact that we've moved our customer base over the chase platform and ARX <unk> on that.
Super helpful color guys.
Hey.
And your next question comes smelling of Jennifer Lowe with you the yes.
Great. Thank you maybe just quickly on the air our and continuing that train of thought Kevin you mentioned the assumption now has 120% of net new relative to 115 prior but there's also a discussion on the focus on new logo acquisition and not being a big emphasis as we move through the remainder of the Irrs. So can you.
Just parse through you know with the increase of air our guidance is that purely a function of the change in the assumption around that retention or are you also factoring in better new logo acquisition, what are sort of the puts and takes there 'cause. It seems like there was a few different drivers mentioned.
Sure. If you took the synergies that we said that 115% bar in a series of uncertainty three four months ago gigabit strengthen that exists in the first quarter it'd be a combination of new logos on which are stronger than we had expected. When we started the quarter I'd also like housing that expansion.
Great really aren't guides, our guidance I should say going for.
The combination of new logos growth rate or better than we are expecting about 90 days ago and a step up in the net expansion rate. So we're seeing strayed from where we were 90 days ago in both segments. Our business. If you look at the back three quarters were expecting about 450, new logos, which is fairly consistent.
Where we were last year.
Healthy pipeline, there and the dietary that expansion rate you know, we're doing a great job cross selling expanding.
Arming our existing customers obligation.
Okay, maybe just one more for me on that net new logo focus and through the specificity on the target. There did you introduce any changes in the sales compensation to preferentially encouraging a bit more on that new logo or is it more just sort of strategic cadence, where you want you guys. We focus a any color there.
Be helpful. Islam, that's it for me thanks.
Yeah. This is John Thanks, Jennifer that there's no real changes you know year to year on sort of new logo extensive we do have an incentive.
For sales going to continue to drive new logos. When you have such a fantastic platform for for Bill 10 expansion and so we filed for the last couple of years, we've had that new logo sensitive as well.
And the balance seems to be working.
And you know as Kevin said, you know based on sort of pipelines and and what we see in our in our sales cycles, we're quite confident.
In that 10, new loan growth again this year.
Great. Thank you.
And your next call comes from Heather Bellini with Goldman Sachs.
Great. Thank you so much guys for taking my question I just got a couple.
And I know you mentioned that fit in your initial conversations your initial comments about back to basics, but just wondering you know versus the start of the quarter because obviously.
Period, if they have great uncertainty not that were fully out of the ones yet, but what are conversations like today.
And then also from a lead Gen perspective, it gets a little bit following up on kind of what John was asking with new logos, what did you done differently.
In this new environment of no travel to generate new logo demand and in kind of how long the conversation a bulk of meeting our customers, becoming where they weigh more hesitant in the beginning of the quarter and now things are starting to progress back to where you feel like pipeline build is it's kind of on pace with what it was price.
Sure I don't know if he can share any thoughts on those that'd be great. Thank you.
Sure sure. Another so what happened at the beginning of the court and it's not unexpected I mean, I think many of the folks wrote about this maybe yourself as well a bit in in the disruption.
Everybody scrambling to work from home and be scrutiny around which projects, we're going to rice as essential and which ones were going to fall as non essential.
Process took several weeks out about out of the quarter.
And so we anticipated that we pivoted to what makes a ton of sense of course, which is I would take carrier base. So it's back to the base was was that was a key part of our early part of Q1.
Served us extremely well and we generated a number of new logos as well as a very strong new logo pipeline for the balance year.
The conversations you know have have really only change in the discussion around why is this project essential Mr customer or around diner trace is an essential part of your digital transformation, let's discuss how where and how we can expand the value.
A platform or.
So, it's just centered or maybe a little bit.
Differently from the standpoint of it's not just the project, it's an essential project for digital transformation. Some more pointed if that makes us.
On that thank you on the new logo on the new logo from you know what were what we're seeing there again is you know a pretty clear conversation that cuts to the quick you are immediately which is around that sort of essential need.
Sure.
The project, if it's not essential nobody wants to spend time on it it's essential that she moves more effectively are sort of more predictably.
Through the sales cycle, because it had to be blast early by you know the higher up manage Brad that this program would be essential.
So we're seeing that dynamic in into new logos, which is actually very you know very very helpful.
I've said before we have that the blast, we're blessed with being in a category that when times get tough people turn to their applications.
Turning to their digital transformation say turns you see that digital side of their business, where they can get closer to customers. There can be more agile they can save cost and they can drive new revenue streams.
And where were essential for that and that movement had nice place to be.
Thanks, so much.
Your next question comes from Sterling with JP Morgan.
Yeah, Thanks, Doug I actually wanted to circle the way back the Matt Hedberg question. One of the thing that is a frequent topic of conversation with investors is the idea of that Gartner report talking about 5% of applications are are currently monitored and I think investors are trying to get to handle on.
With the digital transformations, where does that percentage go too and obviously based on your qualitative comment the answer is higher but is there any sense as you've seen that shipped to the cloud does that 5% about become 50 or 25 or just you know any qualitative commentary around that would be helpful.
Sure Sterling.
The shift to the cloud is actually has an interesting dynamic with it.
Give me into sort of silo and we're also the data center, where you had different applications on different stacks of hardware.
You know connected by physical that works and now it's all moved to sort of a virtual pool.
Resources, there are many more applications and services that are involved and and you.
You know a busy digital business than ever before so we're seeing customers you don't want to take care sort of application.
You're monitoring and observe ability up into that 60 plus percent of applications.
Oh, all tier one most of tier two and even into some tier three so it's.
So it is increasing like the cloud and it's just in dynamic of how how the cloud sort of operation how the services you know become interconnected.
In the cloud.
Uh huh, so less as companies do digitally transform a there continues to be application expansion for sure.
But I also don't want you to think that the only expansion that we're doing is because of the application buyers were actually starting to get a much stronger in the cross selling across the non application hosts and services.
As well as you know more and more sort of Oh extensions into digital experience and digital business analytics.
And those are those are super valuable I mean, I gave the example of an airline it was really the user experience and that and that connection with digital cable guys. They drove that opportunity from Jeff.
You know why should I Ah why should I replace my encourage you know monitoring systems, just because it wasnt, helping with digital outcomes that were set were critical.
Of course over the last few months.
And so it's that sort of comprehensive platform capability across all these modules and how they work together and unified platform like Dyna trace that really you know it is is a key to why we believe yeah. We can raise that net expansion rate back up to 120% Clos and continue that.
For the foreseeable future.
Very helpful. Thank you.
Okay.
[noise] [noise] and your next question comes from the line of Kash Rangan with D.A.M.L.
Hi, Good morning, Congratulations I was wondering if you could give us some some metrics that would represent the monitoring side of the business versus the if you have site and if the times you need that large and obviously you have the message to prove that.
The you have Nicky logos that youve got to be very positive.
Net expansion rate started quite high win rates and the monitoring space seemed to be quite high.
So why would the company not reconsider raising its longer term growth forecast because you are after all being very successful over their brand new markets.
That is one and secondly, if you can give us more commentary on the replacement of Oh, a legacy monetary letters, what exactly is happening there and why are you ready there that would create thank you so much.
Sure, let me try to parse those those questions a little bit. So the first one just regarding sort of metrics between between your ATM and sort of cross selling I think your last quarter I I talked about a 25% of our customer base are growing customer.
Yeah, using three plus modules.
Which is really sort of those are the platform customers once it it really move themselves from sort of tool banking platform thing.
And.
I just gave you know another staff it over the last six months, it's that's actually increased 44%. So just to share with where the group here you know at our investment community that to cross selling.
That we've been talking about for the last year he is taking off.
And so I think about us maybe as you know where a year ago, we might have been a 80% 80, Adnan yes, 20% you know emerging products think of us as a 70% and 30% emerging products also remember that the base of customers is expanding rapidly as well.
All right. So maybe that gives you a little bit a color and I would expect that trend of course continue you know as we as we drive to sort of more and more you know platform customer usage you overtime.
So I think that aspect that's key the second one as far as you know growth rate, but we're pretty pleased with a growth rate that we have right now if if and when that moves out we'll continue guy, but you're going to find us to be you know relatively conservative.
You know company from a guidance standpoint, we think that's a proper way to automate.
And I'm, sorry proper way to two to guide and.
We just think that says that crude okay.
And well, you're winning other marketing business against the legacy or the modern vendors any color. There that's that should be right right, sorry about that and third piece there.
Yeah, it's a combination of both okay. So it's actually an interesting dynamic.
We're seeing more and more movement to sort of what we've called in the past Greenfield is where are you sort of how to do it yourself approach taking over no real encumbering because as people move to the cloud they realize their their prior investments in Gen. One Gen two tooling no longer.
It works and dynamic multi cloud.
And so so that's been a do it yourself world is starting to actually show up as an observer mobility project World.
Okay. So we're starting to see that that'd be the beginnings of that that trend that's about 40% of what we see you know in the market that's up from about 30% year ago.
We still see an income Ben you know again in our base, we have been clear that we still and on the application layer. Its wherever best known about ATM segment, or what we call our ATM module and and there you know it started the classic gentoo and genuine competitors.
Better better in that space and as time goes on our differentiation becomes much more valuable at our win rates continue to climb against all those competitors.
And as I said have to somebody 60%, 60% of of the engagements yeah, we enter into these days.
Thank you John.
And your next question comes from the line of prevail link show with Barclays.
[laughter] Hey, that's some universal thanks, it carries stay on that subject to if you think about it there kind of initiatives out from a lot of different players around this and everyone is coming from a different angle with your product announcements et cetera, like if you think from your perspective.
What's the the main thing that people that you think where are you kind of have to lead and should kind of kind of continue to strive because like you know you where you see like the logs guy that infrastructure monitoring guys. All all of them coming into the middle ground, which helps a visibility like can you talk a little bit about the fee.
Complexity of what you did over the last couple of years in terms of kind of redoing the product and bring it all together under one umbrella and then I had one follow up.
Sure.
So yeah, let me step by step back just quickly because you are our reinvention of our platform was not simply to bring together give you see observe ability data sources.
Plus some other ones like topology code and some other data elements that was part of it because we knew that the cloud required.
Different kind of observe ability ingest layer by layer by layer you had to see it has turned the homogeneous all a unified all.
But we also believe hit automation that AI.
Which and that differentiation, you know becomes more and more essential ads as I see and development organizations, you know try to move faster with fewer resources that of course, they would like to have.
In order to accomplish all about application and digital transformation easy therapy attached to it.
So it really is a combination of that observe ability.
Plus automation and plus a API that really set us apart.
From a differentiation standpoint, as we attack you have the Mark that then the modern cloud market.
So so so keep that keep keep in mind.
When when we look out in and you know we see.
Sort of there's sufficient world.
Classing use cases, where you know that other players see as well where they might be coming off of infrastructure along.
We still believe that got application layer or not that application thinking that we brain is really pretty vital because its applications, where I see in the business connect.
The underlying plumbing.
They are.
You know cloud Sac, it's interesting to make sure that cloud platforms working properly for the applications that run on it but the connected tissue with business.
Is there and that application layer and so when we think about.
Going forward, we think about not chest that connecting the plumbing with the application. We also think about user experience business case, you guys in the RASK also connecting and so what does that complete.
End to end you know stack of.
Form value components that really make a difference for us and I think you know that when you take that the airline example, or whether you take the retailer for example, or you take the K through 12 example that I gave every one of those required a much more complete set in module.
In order to solve their their training digital transformation efforts, then just observe ability alone.
Okay Yep makes sense, thanks for that and then these.
Congratulations on bringing the leveraged balance and you know you're at the level that is kind of like we well into the kind of the normal range like how do you think about that trajectory going forward. It's because it's going to visit the classic case, obviously soccer doesn't you do a lot of that but then if you do fund intro.
Financial filings, you just kind of realized okay, well actually decent level to carry and it's kind of is also kind of a decent thing.
How do you think about the that going forward.
Sure. So so first of all were Super pleased with the progress we've made good sites yelling and well ahead of plan that actually delivering a company in July as I mentioned in her prepared remarks, we did pay down another 30 million.
Our debt off now about $489 and fairly low interest rate and given our cash generation rating capabilities are not library will be below zero.
Very good future. If we think about sort of cash you should you fix outside of that I'd, probably push that conversation outsourcing, okay and talk about some of their you know areas, where we can explore that cash cash usage and where we can put its work but for now for the next couple of quarters. It certainly just focus on okay.
I mean that leverage ratio down a little bit.
Okay perfect. Congrats thank you.
And your next question comes from the line of Lavanya Sareen.
Hey, guys. Thanks for squeezing me in here at the end and congrats I really nice set of numbers I.
I guess when it took them two quick things one on Salesforce productivity. You know you would had a part of field force passwords or that shift.
Today countries platform and John you've talked about productivity.
Improving and then sort of things can now we have capacity to go drive customer expansion, which again, you did really well to get to 120 or north of 120.
How much do you think about capacity available for these new logo ads and how much you think you have to ramp hiring sort of meet the customer targets. This year, then obviously kind of going into next year.
[noise] Yeah Bob.
The let me let me take that are not in a couple pieces here. So the first one is the sales capacity expansion or really general commercial expansion Bras continues.
And and that hasn't stopped is one of the things that we kept our put on the gas throughout the early coded period, even in there's those types of uncertainty there. So that's that's continued to scale.
Some of that capacity, that's freeing up from conversions as long as being added to the business is helping us drive your pipeline growth and sort of momentum in the business that Kevin talked about and is is you know shared at our in our guidance here.
So you know with some headwinds of course because of economic uncertainty in certain sectors of our business, which are you know more heavily impacted.
As well as certain geographies that have also been a little more impacted I think that capacity growth. You know ISC is right now going to you know just started driving our current growth trajectory inox sort of propelling yet you know one step beyond it.
But I'm still really pleased with where wherever they are from a from a growth standpoint, and as I said you know its reflected on our guidance I think that you know going going forward just from a investment standpoint in the business, we talked about not only commercial expansion, but also continued.
Innovation.
Expansion.
And yeah I've shared some of that success, we're having with cross selling which of course comes that maturing in some of those additional modules.
But I'm really excited to be able to share some of the plans ahead, yeah, when we hit our Investor day in.
In early September and I think you'll also see some of the job.
On the west coming I wouldn't be get to that that point, so stay tuned and excited to share in a couple of us.
Got it one quick one for you or Kevin.
Well, there's something it's starting to come up a little bit more but what did you guys see in 16 around the election, because you obviously put up the new logo count out there, which is new for all of us as a guide.
But you know there's always been is concerned just spending slow down and people postpone decisions, you know kind of going into the election or post election, a little bit depending on result, and I again, you guys went public in 15, but it's a what do you see what do you expect what are you hearing from customers around concerns around that or no concerns on hasn't come up but love to just give some color on on how you're thinking about what.
Plays out again not.
The next few months, but because we get closer in November which is which is actually a few months. So yeah, let's get that thank you.
Sure well, whether its surveys data that we read like the one that we shared up from four Chen or whether it's actually direct conversations with customers digital transformation has a long term trend.
It definitely transcends elections.
And it's not something that's going to you know, but be kept push one way you know where the other.
It's on a long term macro trend trajectory and that's what we're hearing and so that's what gives us confidence.
From a from a government standpoint.
Digital transformation is a critical part again, it's it's a long term trend. It's dion election year, you know kind to spending and so I'm excited about our at opportunity as well, which I highlighted in and in this this earnings call in particular so.
So we don't see a real issue with a with elections. Because this is really is at an exciting long term backward trend.
Bioventus business as you know rebate themselves into digital business.
No I don't know fair enough and congrats on the the fed Rob's into I'll hop off I know, we're running late thanks for taking my questions guys and congrats again.
Great. Thank you appreciate it maybe maybe I should that with that sort of yeah, well now.
We completed one one more question all right more question. Your final question comes from the line of David Hynes with Canaccord.
Hey, Thanks, Thanks, guys I'll keep a quick so.
Kevin maybe this one's for you is I think about the drivers of net expansion what is having a more significant impact or the follow on deals getting larger or are they coming more frequently.
In terms of net expansion. It really is a combination of both right given the different verticals that we operate in where we are seeing expansion footprint expansion pack anymore.
More rapidly than we've seen over the last couple years has talked a little bit headquartered in terms of stop in terms of just so that's always something down a little bit again actually at a healthy net expansion rate during the quarter.
[laughter].
And then the second piece is in terms of the new logos.
I'm sorry, I missed this Mississippi. So your question there no I was just talking about or the follow on deals getting larger are they coming more frequently that nothing about new logos I. I think you hit on it that is a combination. So certainly the lot decipher the deals that are seeing fairly consistent I'd say, they're just becoming a little bit more rapid in terms of solid expansion in our house for.
Sure exactly and then John maybe a quick follow up for you since you mentioned said in the.
Response to bond there is there are common incumbent across the federal environment and just how do you think about the scope of the opportunity there.
If he yes. It it's a good question. It's it's not just similar to the commercial market, where there's a number of an incumbent but then those who are more advanced in there in their cloud transformations are already seeing them all the way. So again, there's two it yourself you know there as well that we reiterate.
You know and provide a platform to simplify that we're all that and eliminate the disparate cooling challenges that have that you run into when you take that kind of what you saw approach. So it's really not that different. It's just sit there big project based as opposed to commercial which moves a little bit faster as well.
Why we hesitate at our investment in U.S. Federal Intel about two years ago, and now we're investing aggressively because we see that the U.S. government being much more active and much more purpose fall.
In their digital transformation efforts.
Perfect and makes sense. Okay. Thanks, guys. Congrats on the continued momentum.
And thank you everybody for for a joining us this morning, a where we're excited about that just as we had a great start to two our year and we look forward to sharing more with you both at our Investor Day, and then again at our next earnings call in October. Thank you very much.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.