Q2 2021 Dynatrace Inc Earnings Call
[music].
[music], ladies and gentlemen, thank you for standing by and welcome to be guided <unk> fiscal second quarter 2021, <unk> earnings Conference call. Please be advised that todays conference is being recorded I would now like to hand the conference over.
To your speaker today no 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.
Before we get started please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance. These.
These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.
Additional information concerning these factors is contained in Dynatronics is filing with the SEC, including our annual report on form 10-K, and quarterly reports on form 10-Q before.
The forward looking statements included in this call represent the company's view on October 28 2020.
Dan you 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 Van Cyclin John.
Thanks Noel good.
Good morning, everyone and thank you for joining us on our Q2 fiscal 2021 earnings call.
First let me start by sharing how extremely pleased I am with the team's ability to continue to navigate the prolonged remote work environment.
Activity in attitude remained strong.
We continue to add talent to the team at an accelerating rate.
We had another strong quarter of balanced growth and profitability driven by a combination of new logo additions to the dynatronics platform and the continued expansion of existing customers.
They are for the quarter was up 33%.
Year on year and subscription revenue was up 35%, resulting in a non-GAAP earnings of 18 cents per share.
Based on the strength of our Q2 results and visibility into the back half of our fiscal year, we are raising our top and bottom line guidance for fiscal 2021, which Kevin will provide more details on shortly.
As discussed at our Investor Day last month.
There are two macro trends driving our business.
First is the acceleration of digital transformation.
And the second is that dynamic multi clouds are the platform of choice for these digital transformations, especially in the global 15000 account base, we targeted sir.
Digital transformation is taking place around the globe and across every industry.
We recently commissioned a study of 700 CIO is primarily from $1 billion plus enterprise companies.
And almost 90% of them agreed digital transformation has accelerated in the last 12 months and nearly 60% felt it will continue to accelerate into the future.
These are not just the well known technology brand names you would typically consider when talking about digital transformation.
These are retailers financial service providers manufacturing companies public sector agencies, and others, who realize digital transformation is essential to the success of their business is moving forward.
As digital transformation accelerates. So does this scale and complexity of dynamic multi clouds underpinning these programs.
In the same study 86% of CIO goes so they are using modern architectures, which include cloud native technologies and platforms, such as kubernetes Microservices and containers.
As the use of these technologies grow rapidly customers are seeing massive increases in complexity dynamism and frequency of change.
The volume velocity and variety of data produced by these environments is growing exponentially and the importance of these cloud ecosystems and the applications that run on them.
Function flawlessly has never been greater.
And interestingly of the CIO survey, 63% now say that the complexity of their clouds has surpassed the humans ability to manage though.
And 70% said their team is forced to spend too much time doing manual tasks that could be automated.
These trends are rapidly expanding the size of our market.
As I shared at our Investor day.
Our bottoms up Tam for our targeted global 15000 market segment has grown from 20 billion to $32 billion in just the past 18 months and.
And we see no reason why Tam expansion should not continue in the markets and use cases, we support.
With this rapidly expanding market fueled by long term macro trends as a backdrop.
I'd like to make three points. This morning, which I believe will help illustrate the sustainable growth opportunity we see ahead.
First is that our platform approach to modern cloud observe ability is uniquely positioned for the customer segment, we target inserv.
The second is our ongoing investment and advances in go to market and commercial expansion.
And third is the pace scale and effectiveness of our continuous innovation engine.
Let me start with our simple yet powerful all in one platform approach.
As many now know as modern clouds get more dynamic and complex the old approaches to monitoring sales.
This realization has led to the rise of observe ability.
As the new approach to a modern cloud world.
So we are in the early days of this movement, we're seeing three approaches to the observed ability opportunity.
The first is what we call do it yourself.
We see this in a growing number of engagements.
Company realizes the road tooling will not work the.
As we begin to cobble together multiple quote unquote modern tools.
Get an open source database and dashboard in software and throw their best engineers on it to figure out how to regain visibility and control. This.
This seems easy at first but to larger companies with diverse infrastructure needs a growing number of cloud native applications and an increasing number of Dev ops teams innovating more and more frequently scale and complexity quickly proved this manual do it yourself approach to be unsustainable.
Second is a suite approach from a single vendor.
Separate observed mobility tools to gather metrics logs and traces each with their own silo data structure loosely integrated often with not much more than a dashboard you buy an inquiry language to quote unquote unify them.
The fact that all the tooling comes from a single vendor checks the boxes of tool and vendor consolidation, but it holds little advantage over the do it yourself approach.
Customers still manually configure.
Script baseline analyze troubleshoot so on.
All very time consuming resource intensive and unproductive in advancing digital transformations.
The third approaches the one dynatronics describes too.
A unified platform approach in which all data metrics logs traces and in our case a lot more are unified in a common data model with proper context of dependencies and relationships.
We do all this automatically and we do it at massive scale.
And whats most important to note is a data gathering and dash boarding are just to start for us.
Through advanced analytics continuously applied in real time, we.
We at understanding.
Stability.
And Actionability on top.
It's here, where customers regained time and leap ahead inefficiency speed.
Speed innovation and lower cost, it's here, where they transform how they work.
We believe we are currently unique in a unified platform approach with sustainable advantages in automation and intelligence to make digital transformation easier and faster for our growing customer base.
In fact last quarter, we added 133, new logos to the platform, including Quest diagnostics Kohl's Pfizer Universal music in Vail resorts and we continue to see nearly a third of our new land deals with three or more modules. A reason our landing a ARR per customer is CLI.
Timing.
This brings us to nearly 2600 customers on the diamond trees platform and we are confident we can add 300 or more new customers in the second half of our fiscal year.
Along with healthy new logo growth, we expanded hundreds of customers as well as.
Application workloads are expanding in the majority of our customers clouds. Many applications are scaling further than ever before mobile.
Mobile user experience has been exploding for a growing number of customers and the cross sell of our infrastructure module continues to gain momentum.
Not only was our net expansion rate above 120% for the 10th consecutive quarter.
Our our ARPU customer climbed to $234000 up 14% from a year ago.
Our platform strategy in which adding a new module leverages the power of automation advanced analytics and AI built into the core of our platform is gaining traction within our customer base and with our growing cloud partner network.
This brings me to the second topic I'd like to discuss our.
Our commercial expansion, including the expanding role cloud partners and technical alliances.
We've talked about growing our sales organization at 20%, 25% this year and I'm pleased to say we are on track.
We continue to believe that our free trial led direct sales approach is extremely well suited for a modern highly differentiated offering targeted the global 15000 largest companies around the world.
This said we also believe that there is a growing place for regional and global cloud system integrators to provide leverage and reach.
As digital transformation accelerates and more companies moved from early simple cloud infrastructure to dynamic multi cloud environments.
Savvy system integrators are playing a larger role across a much wider set of companies in advising them through their digital transformation journeys.
As we continue to grow in both customer base and market awareness cloud system integrators are embracing dyna trace as a strategic piece in their go to market solutions.
This is a big reason why we have launched our cloud partner competency program to assure the expertise of our partners and the success of mutual customers.
In addition to cloud system integrators, we continue to lean into our cloud technology alliances with the three major Hyperscalers, a ws as Youre and Google cloud platform as well as other key platform players such as Ivy and Red hat, Vmware, Ted Zoo and service now.
Our tight and broad technical integrations with these platforms and co selling relationships broaden our market access by making it easier for customers to find Dana trace and by aligning our joint sales teams to co sell to enterprise clients. In addition, a wses youre and IBM customers can draw.
Down their committed cloud spend to purchase dyna trace removing sales friction and accelerating close cycles.
The Great example of our deepening relationship with these cloud Alliance partners is our recently announced relationship with service now.
With hundreds of customers and a growing set of cloud system integrators in common such as Experian Delta and DXP we've.
We have seen an increasing opportunity to connect our platforms for our expanded customer value.
For over a year, we have worked closely with service now to coordinate our cloud entity mapping.
The Dynatronics smart scape with the service now platform CMDB through.
Through a diner trace service graph connector.
This allows for both smarter service now workflows and change where AI from Dynatronics.
We both see the opportunity to lead in the industry push to autonomous clouds and together, we plan to bring our joint customers and partners and entirely new level of intelligent automation to save time increase efficiency reduce risk and accelerate transformational value.
We believe that this combination of an expanded free trial led direct sales organization combined with increasing leverage from a growing number of cloud partners is powerful.
And will drive solid new logo growth.
And air our per customer expansion well into the future.
This brings me to the third topic I'd like to cover this morning.
The strength of our innovation engine.
As many of you know we do the vast majority of our engineering work in Europe.
Austria, Poland and Spain.
As a preferred employer, we're able to attract and retain fantastic talent and we combine this talent within advanced Dev ops, no ops development process.
Delivering 25 major releases and hundreds of minor releases a year.
The combination is a steady stream of innovation across all modules and platform components continually and with a hybrid SaaS platform tethered into all our customers where their data is maintained in the cloud or behind the customers firewall are.
Our customers adopt a steady stream of innovations and compatibility released as rapidly over 90% of whom run on a release no more than 30 days old with.
With the pace of change in modern cloud environments. This rapid ongoing innovation model is an important advantage for us.
As we've discussed before one of our bigger focuses this year has been the maturing of our infrastructure module.
This past quarter alone we added over 150, new services across a ws as youre in a growing number of GCP services.
We now have the widest hyperscaler service coverage in the market.
And they're all instrumented and gathered automatically no targeting no configuration no scripting.
Truly automatic despite.
This best in class coverage is a big reason for the expansion momentum. This module is gaining in our portfolio.
In addition, we continue to invest and strengthen our leading digital experience monitoring module.
This past quarter, we advance Davis AI to help digital teams automatically detect and understand the source of mobile application errors to speed remediation and enable continuous optimization.
This is especially important as we've seen a 300% increase in mobile traffic over the past year.
Which is heightened sense of pandemic.
Our real user monitoring that visually complete and session replay extensions is not only allowing digital teams to better understand and user experiences and proactively handle customer care use cases, but is expanding into Dev ops feature adoption and user behavior use cases as well.
With over 70% of our customers using our dem module, we see continued steady expansion of this module well into the future as well.
And I'm pleased that our ongoing innovation continues to garner analyst recognition.
This past quarter Dynatronics earned the top spot in I. SGS cloud native observe ability quadrant and we also earned Gartners peer insights customers choice for application performance monitoring.
We are proud of this of course, who is even more important to me is that I consistently hear the same from our customers that our technology leadership in modern cloud markets is strong its advancing and it provides significant value at a critical time in the transformation journeys.
Having covered a lot here, let me summarize.
We have a leadership position in a massive fast growing market.
Given the shift from early cloud environments to dynamic multi clouds, we believe the market is moving toward us.
Our leading unified platform automation and intelligence sets us apart in observed ability today and will be a sustainable advantage for us as companies continue to modernize and advance our cloud platforms.
To take advantage of this technology and value lead we continue to invest aggressively in commercial expansion, including the cloud partner leverage opportunity, we see emerging.
And we continue to advance our differentiation and add to our portfolio through a highly talented highly efficient innovation engine this growing rapidly as well.
We like our organic approach as it enables a tighter more unified platform with quicker time to value lower cost of ownership and easier collaboration than any alternative.
We have multiple pillars, driving sustainable advantage and we're investing aggressively across the board to drive growth and leadership in this exciting market category.
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. Today I plan to review our strong Q2 results and then I will review our increased full year guidance and our outlook for the third quarter.
As John mentioned, we delivered a great quarter on both the top and bottom line delivering what we believe is a best in class combination of growth and profitability at scale. This.
This is consistent with our goal to continue to deliver against the rural 50 annual.
Annual recurring revenue was $638 million at the end of the quarter Thats up 33% year over year, an increase of $158 million or $167 million on an as reported basis.
The two drivers of air growth, our new logo customers at our net expansion rate as we expected we accelerated new logo additions this quarter, adding 133, new logo customers in Q2 to finish the second quarter was 2594, Danny Chase customers.
This puts us on track to achieve our previously shared plan of about 530, new logos by the end of this fiscal year.
We continue to invest aggressively and expanding the functionality of our platform broadening the use cases covered by our existing modules and expanding beyond the modules we offer today. This.
This has led to a consistent net expansion rate, which remained over 120% for the 10th consecutive quarter.
Eric for Dynatronics customer also increased to $234000 up 14% year over year.
Moving on to revenue total revenue for the second quarter was $168.6 million $7.6 million above the high end of our guidance and representing an increase of 30% on a year over year basis.
The strength in total revenue growth is being driven by 35% growth in subscription revenue, partially offset by the expected decline in classic license revenue.
From a top line growth perspective, we are focused on driving subscription revenue, which makes up 94% of total revenue and is reflective of our air growth.
As I mentioned during our Investor day, we fully subscription revenue will increase as a percent of total revenue due to the compounding nature of the model combined with the fact that we anticipate that more services work will be done through our cloud partners. As a result, we continue to be a subscription revenue growth as the most important revenue metric.
With respect to margins, we continue to see an expansion in our gross margins as the subscription revenue mix increases combined with the way, we manage our platform as well as some cost savings related to the macro environment.
Total non-GAAP gross margin for the second quarter was 85% inline with last quarter and up approximately two percentage points from Q2 of last year.
Our non-GAAP operating income for the second quarter was $53.3 million well above the high end of our guidance of $45 million due to the revenue upside gross margin expansion and our overall focus on operating an efficient business.
This led to a non-GAAP operating margin of 32% up nine percentage points from the second quarter of last year.
We are very pleased with this performance as it shows the operating leverage potential inherent in our business. However, we have consistently shared that we believe in a more balanced approach to operating the business.
One that deliver strong performance on both the topline and bottom line.
Last quarter I mentioned that we would begin to put programs in place to ramp our current level spend in targeted areas to support the long term growth of the business.
Many of these initiatives were in place by September, but given the timing of the investments within the quarter the incremental increase in spend will be more prominent in Q3 with an additional step up in Q4. This.
This is reflected in the guidance that I will cover in a minute.
Non-GAAP net income was $52.6 million or 18 cents per share.
As you will see in our press release, there was a tax adjustment of $7.5 million in the second quarter associated with the spin and reorganization.
Excluding this onetime item non-GAAP net income would have been $45.1 million or 16 cents per share six cents above the high end of our guidance.
Turning to the balance sheet as of September Thirtyth, we had $248 million of cash.
As I mentioned during our Investor day, we expect to grow our cash position over the short to midterm.
Corporate to support the scale the business. We are building, while we continued to reduce our debt and de lever the business.
Our long term debt was $481 million at the end of Q2, thats down $30 million sequentially.
The principal repayment that we made early in the quarter.
Following on our commitment to reduce our outstanding debt, we made principal repayments of $30 million during October reducing our debt to about $451 million.
On a trailing 12 month basis, our unlevered free cash flow was $154 million.
As we have mentioned before our cash flows subject to seasonal variability tied to the timing of our bookings and renewals with our strongest cash generation occurring in the last quarter of our fiscal year.
We continue to expect to deliver full year unlevered free cash flow margins of 29% to 30%.
Before I moved the guidance I'd like to call out that all references to growth rates will be in constant currency unless otherwise noted also please note that with our global presence in European R&D footprint, we look at our business as generally hedged from a PML perspective.
Over the last 12 months, we have seen two points of negative impact from currency on top line, we expect the mix of the business to drive an FX tailwind in the second half.
Which will essentially neutralize currency impact on revenue for the year.
Our guidance continues to reflect this changes and should post minimal risk to our outlook.
I'd also like to give a brief update on how COVID-19 is impacting our business. The highly affected industries, we outlined in previous quarters, which represent about 20% of our business and include areas such as transportation hospitality retail and energy continue to hold up well in Q.
Sales as renewals of existing customers remains strong.
Now more than ever customers in all industries recognize the importance of digital transformation and the automation and intelligence Diamond trace can deliver.
One of the great things about our business model is that it is resilient and predictable with these attributes and our visibility into the pipeline, we feel confident about executing our plans as a result, we are raising guidance for fiscal 21.
We are raising our guidance to $721 million to $727 million, representing 25% to 26% growth.
We are raising our total revenue to $668 million to $675 million representing year over year growth of 22% to 24%.
And we are raising our subscription revenue to $624 million to $630 million representing year over year growth of 28% to 29%.
For the full year, we expect non-GAAP operating income to be in a range of $186 million to $191 million.
In our non-GAAP EPS of 55 to 57 cents per share.
As discussed on prior calls and at our Investor Day, We are a growth company with a lot of runway ahead of US. We believe we are well positioned to deliver against our goal of building a multi billion dollar category leader as.
As such we plan to continue to accelerate investments to support ongoing platform innovation and commercial expansion efforts operating margins are expected to be very healthy in the second half of the fiscal year, but lower than Q2, which ran well ahead of our expectations, primarily due to the strength of our revenue.
I would also note that we anticipate tax expense to be in the range of $6 million to $8 million in the back half.
Our full year guidance includes an annual effective cash tax rate of approximately 8% compared to our previous guidance of 11%.
And to reiterate we continue to expect Unlevered free cash flow margins to be approximately 29% to 30%, resulting in $192 million to $200 million of Unlevered free cash flow.
Turning to the third quarter, we expect total revenue to be in a range of $171 million to $173 million representing year over year growth of 18% to 20%.
We expect Q3 subscription revenue to be in a range of $160.5 million to $162 million.
Representing year over year growth of 24% to 25%.
From a profit standpoint in Q3, we expect non-GAAP operating income to be in a range of $43 million to $45 million, 25% to 26% of revenue non-GAAP EPS of 12 to 13 cents per share.
In summary, we are very pleased with our second quarter performance and are committed to operating the business as a rule 50 company. We believe dynatronics its financial profile is highly unique including meaningful scale strong growth healthy profitability and cash flow with a large tam in front of us and a market leading to.
In addition, we believe the company continues to be very well positioned to achieve our goal of becoming a multi billion dollar category leader.
With that we'll take your questions operator.
Thank you at this time I would like to remind everyone. If you would like to ask a question simply press Star then the number one on your telephone keypad well pause for just a moment to compound the Q and a roster.
Yes.
Your first question comes from Dan Farrell with William Blair.
Thanks for taking my questions and congrats.
Really solid set of numbers there I guess I wanted to touch really quickly on two pieces.
One a little more strategic about the Tam. So you obviously talked about the Tam.
John at the Analyst day, but I guess as you look at the complexity. What every company is going through in the different transmission that even mid sized companies going through why not go below that sort of fortune 15000, why not sort of maybe move not to small businesses, but to midsize businesses that may have a service that that may have for the web site and that more than the westside multiple applications.
Wood products, how should we think about the idea of expanding down market to sort of even further increase the Tam that you serve.
I appreciate the question.
So.
Our our focus has been and will remain for some time that global 15000, we believe we build products extremely well for that.
Enterprise customer base into more complex environment.
Digital transformation matters to there.
Survival and it's also where.
The profitability.
Is is as well so.
We're pretty happy with a $32 million tab.
[laughter] I should I should also say today.
There's nothing precludes us from going down market.
There is no there is no.
Product issue there is some pricing issue there's nothing in that in that range, it's more of a focus.
Of the five of the business and usually when you focus you accelerate faster in my experience and Thats. What I think you are seeing in our numbers.
No that's helpful and I appreciate that.
And then I just want to touch a little bit on something you brought up a couple of months. So the digital experience be you talked about some set of customers being attached to it you talked about strength.
In the lumpy just some sense on sort of as the initial customers are the newer customers lending are you seeing them land with multiple products and what is the attach rate is there a pattern the attach rate with some of the newer products the new customers. Thank you.
Another good question and.
Yes, we are seeing the attach rate of multiple modules with with new customers increasing.
So I think at analyst day, we talked about about 30% have new logo customers are landing with three or more modules and I think what side what were seeing and is starting to come through.
In our sales cycles and sales data is that we're starting to see a gradual shift now. It is still early days is still small, but a gradual shift from sort of the ATM landing zone, we've talked about for the past year, two and observe ability landing zone.
And that reserve ability landing zone is almost by definition the platform kind of thinking where customers are looking for on wider footprint of value day one.
And we're very well positioned for it we've been anticipating it and we're starting to see it see it happen again like I said, it's early days.
But a side, but its beginning.
No that's great.
Thanks for the color and thanks gents. Thanks for your question. Please.
Data providers.
And your next question comes from the line of Raimo Lenschow with Barclays.
Hey, Chris.
Thats from me as well.
John can you talk a little bit about you mentioned about the increasing uptake for the infrastructure.
Modules.
In terms of like where do you see customer understanding in terms of that merger will be and kind of crucial and being a potential starting point for you going forward and I had a follow up from Kevin.
Yes sure the.
The infrastructure module as as you know we've been working on for the last you know 18 months to really mature and it's come into its own now.
And thats allowed us to be much more aggressive.
And the expansion.
Side of it.
Well as landing with that module alongside the HCM module and the Denmar Joel.
From a from a like why infrastructure module and log analytics from Diana trace versus someone else usually there is some kind of an incumbent in.
In place of series of tools in place to cover that.
That module all covers but.
When you start to consider that.
All of the data gathering across all those infrastructure services is automatic it's.
It's all.
Given contacts into our topology math smart.
Smart scale, which maintains that math can continually in real time.
And then in AI engine that implies.
Knowledge and algorithms a profit to understand where anomalies are happening that impact the business.
And immediately surface those two folks to take immediate action to proactively handle things before users are impacted you realize that the value of that platform that is as that inherent automation in AI a sense.
Is hugely valuable as you consider most of these enterprise IP teams are pretty much resource traffic. These days in time as and given it back high and given them back resource for more meaningful things like innovation and driving better business outcomes.
This is huge so thats whats driving you know sort of that expansion of that infrastructure module and we.
We are still early yet I.
I would say from driving our our standpoint, but the but the adoption is increasing rapidly within our customer base.
Okay. Okay. Thank you thats very clear and Kevin.
Kevin for you just if you think about the investments you guys are doing and John talked about the increase in sales capacity. How do you think about this going forward because in a way you kind of moving from like 20% core into a 40% grower.
So in theory, there should be like increase in needed hiring as well to kind of drive that further growth. But then also you have obviously productivity gains coming out of that so so you mentioned already like a little bit of the investments, but how do you think about that in the medium to long term here. Thank you.
So I think if you take a look at our business model historically go back at fiscal fly.
Really what we're trying to work on in the next two quarters is to get back to those types of margins that are not at that level. So.
If you look at our operating levels, the operating incomes or sort of a low 20% range 23, 24% range.
We had a step up in the Q1 and Q2 as a result of colitis, some positive investments in travel and things like that but what I will say is in September we made significant progress in terms of hiring both.
Both from an innovation standpoint, any R&D area as well as the sales organization as well, which we never took our foot on the gas. So we're going to get margin is down to that level were.
About that at analyst day, and when we think about it over the longer term what we what we are trying to do is maintain as weve communicated at analyst day air growth North of 25% and continue to grow that topline.
We want to balance that with investments. So as we said we're going to step on the gas a little bit here in Q3 and Q4, because we think the market is there and the products. There is a lot of opportunity.
Okay perfect. Thank you congratulations.
Thank you.
And your next question comes from the line of Matt Hedberg with RBC capital markets.
Hey, guys. Good morning, and offer my Congrats again this is certainly not an easy environment, because you don't well.
John on the call you noted cloud system integrators are becoming more important which is really good to hear and similar to what we've picked up in our checks can you remind us what percentage of the deals are either partner influence or maybe even partner led and perhaps where that mix might go in several years.
Sure so.
Partner influence do still the lion share, which means your direct sales organization is due and sort of the finding and development and then run into with partners that help us sort of move deals longer.
And that sort of thing.
And while we're working on is more more partner source.
Opportunities, which are which are starting to happen.
We've had a partner program as we said at analyst day for years, but is this move from sort of boutique resellers of ATM over to cloud system integrators, who think of a wider platform that really sort of driving these digital transformations for customers that is sort of the new menu.
Opportunity for us.
We're still on that you know 10.
10% of opportunities so to source through partners I, Wouldnt say cloud opportunities sourced through partners, but we see that you are capable of growing considerably.
We see it up year on year consistently right now and when it becomes sort of the big.
Big push as it is for some other billion plus companies.
Well I will start sharing more percentages and sort of what the what if the case is that.
What I wanted to share today is that we are starting to see the movement. We are leaning into it we are getting more aggressive with it and it will become a more meaningful.
To add jobs and on augmentation to our go to market.
That's great and then.
Wanted to see it didnt come up today, but I know it came up at analyst day, but I wanted to circle back on you.
Your intent to enter the application security market.
It makes a lot of sense is I think, especially given smart scape and endure Davis technology.
Can you talk a bit more about this opportunity I assume customers are asking for this from you and maybe remind us again about the timing of the launch here.
Sure, Matt So I figured I'd, probably ought to stick with that with the modules that we have today, rather than sort of preannounce anything, but as we did talk about on Investor Day. We've spent the last 18 to 24 months looking at that security market.
We know we have a phenomenal data platform.
For that environment, especially for the dynamic multi cloud environments that are out there security, where you can't ring fence that you have to build it into the applications themselves.
And so as we get ready to.
To add that capability that module into our portfolio, we'll make sure that we keep everybody abreast obviously go.
Not far away, but it's not ready to be announced.
Got it thanks guys.
Thank you. Our next question comes from the line of Jennifer Lowe and Macleod. Please state your company name.
Thank you Ken Lowe from you've yet.
Great.
To ask a little bit about the demand environment and in particular, John at the outset, you talked about this growing consensus that digital transformation is necessary and only more so in the current environment, but sometimes in our field work, we pick up that companies are conceptually on board, but maybe a little reluctant to commit to that.
Three big transformational projects and uncertain time, so it's on our roadmap, but maybe not actually happening today. It's more next year I'm just curious in that commentary what nuances you're hearing in terms of those projects starting today versus being on the road map that maybe more 2021 business for when things get a little clearer on them.
Chris.
The macro outlook.
Sure Jan.
Well from our standpoint, we're not.
We're not what I would consider a massive digital transformation projects someone's already committed.
The digital transformation and they're trying to figure out how kind of speed it up.
How can I reduce risk.
In the project.
And how can I.
Create greater efficiency lower costs, while I'm doing.
And it's that combination of gaining speed, reducing risk and and.
Driving efficiency that makes this a very practical.
Hi, good choice.
And pay for itself within a 12 month window.
So these are you know.
Projects over three four years, and maybe I'll get my payback over 10 years.
They are much more practical than that and I think that's a secret to our success actually.
That return on that rapid return on investment is quite clear and a number of customers experience and they talk about it with their peers.
Okay.
Maybe one more for me.
We've seen some of the other players around the survivability space.
Adjust their pricing or announced new pricing plan their focus on unplanned that are really designed to make it easier to bring in data at a lower price point and get away from kind of a horse based.
Model I'm curious, if that's something that you're hearing from customers that they are asking for anything you think might be on your roadmap at some point.
No. What we hear is customers will launch at the enterprise level, they want predictability and they won transparency.
They don't want to surprise me is consumption based models, where they are getting hit with Overages month after month after month.
They don't like the idea hey come into sheep, and then all decided not being surprised.
So our pricing model is is built around use cases, the modules you get pretty much everything you need within those modules.
And the value that they look at is not just in collecting data as they are actually with diner trays getting the understanding of the data.
They are getting the predictability.
Where bottlenecks and issues are rising so they can take action.
And they are getting assist them with precision enough for them to actually build auto remediations awesome.
So it's a different kind of value proposition then.
Hey, I'm, just gathering data kind of value propositions and.
And I think that our pricing model, which we adjust all the time by the way.
As the market moves here moves there.
He is working extremely well for our cost our enterprise customers and I don't see really any reason to sort of.
Change in at this point in time.
Okay. Thank you.
Thank you. Your next question comes from the line of Sterling Auty with JP Morgan.
Yes, Thanks, Hi, guys John in your prepared remarks, you kind of touched upon automation. So most advanced capabilities, which brings to mind, hey, iops at least from my thought Im just kind of curious what is the penetration of those advance automation AI capabilities at the moment inside the customer.
Base, and what kind of revenue run rate or spending uplift you get when customers go to that level.
It's a good question Sterling.
Built into the platform is the AI ops capability. So every day to trace customer enjoys it at some level.
How many actually take that from the diner trace platform and extended beyond that.
It is probably I think as we've been looking at sort of different environments, where somewhere in that 10% to 20% range.
Customers extending beyond.
Some of them are pretty obvious ones you like connecting with the service now environments.
Other ones are.
Sort of more much broader where they work on dozens and dozens of additional data sources pulled in to the Davis AI from a much wider payoffs footprint.
The way, we monetize that is we charge for ingestion of third party data.
That doesn't automatically come in via the one agent.
It's not a large amount of our revenue stream, but it's becoming more meaningful overtime.
Well I think as we go you will see us do more and more work in a broader payoffs footprints you.
You saw that we were the number one choice in the eyes G.
Observe ability quadrant that was recently put it together and you're going to see a few other things come up where.
Focus specifically on AI offs, where you'll see US ranked you have quite high and that.
And sort of anticipate some of the moves we're going to make going forward here to be more aggressive when that growing market segment.
And your next question comes from the line of Keith Bachman with Bank of Montreal Montreal.
Hi, Thank you I wanted to try to ask too.
First I want to talk about or ask about the competitive landscape and the small and medium business category in.
Sort of ability has been.
Disrupted over the last.
Probably two years in particular, new relic with David Dog provide.
Providing some disruption I think one of the larger overhangs for your stuff.
Concern around disruption.
And so my question is if the SMB category.
Within observer ability has been.
For faced increased competition.
Hey, what can you say to investors about.
Your spaces. So I think the rock solid leader in enterprise why won't that gets disrupted over the next couple of years and then I have a follow up.
It's already being disrupted.
As Jeff said, we're in a disruptor.
In that space.
We are the ones that have been bringing modern observe ability to that enterprise segment for the last four years.
We are the ones with the full stack platform.
We thought about a thoroughly that it was more than just the data that it was the understanding of the data that predictability a handle that predictive analytics the ability to take action immediately quickly precisely.
Where the disruptor.
In in that space.
And what works in the SMB space, which is sort of a simpler.
Fewer applications less change kind of environment.
Yes, very complicated when you get to the enterprise.
So thats.
That's my feeling there and then as folks try to move from Smbs. The enterprise, it's a pretty different world and we're already there.
Yes.
Okay. Okay.
The second question I had is on AOR growth, so you're guiding a our growth in constant currency for the year of 25 to 26, which is.
Up from your previous guidance or increase I should say from your previous guidance. Your longer term guidance is as you say north of 25% normally you see.
A de sell over time, but what you're suggesting is as you reach a level at the end of this year it holds that but why.
It's just unusual this to not see a D cell sales speaks so.
If you could just speak to or address.
You know why you think you hold at those levels rather than see some perhaps tailing off.
Below 25% longer term.
Sure. So couple of things there. So the first thing I would say is as we discussed again and Investor day, we will be facing and we are currently facing some headwinds on our air growth due to the perpetual runoff of licenses and those as we've discussed over the next four to six quarters will be a headwind into.
Our growth.
That's sort of on the on the negative side and as we come out of fiscal 2002.
Sales those headwinds to air growth will disappear. However, if you think about the investments that we're making today that was that's what makes us very optimistic about the future and our sustainable growth. Our our goal. This year is to grow sales and sales capacity by 25% and we're on track to do that.
Face are going very well from a from a sales standpoint, there were also seeing a nice shift in our sales rep.
Organization as well, we have a lot more mature reps than we did 12 24 months ago. So thats.
Should provide a tailwind as well.
And I'd say the third thing is we've talked about before as we are no longer working on converting our base from classic to the Dynatronics platform.
So that gets frees up additional capacity here, we talked about that probably around the 20% of free capacity that over time should help productivity. So you think about those three things combined sustainable.
Growing sales capacity and maturing the sales organization.
As well as no longer working on conversion programs those should all be at some tailwinds there growth overtime.
Perfect. Thanks.
And your next question comes from the line of Walter Pritchard with Citi.
Hi, Thanks can you hear me.
I hope it.
So I guess starting now just on the on the 133 customers you added in the pipeline you're you're building for the second half can you talk about the trial activity how much of those are coming in through free trial or most coming in through the traditional sales motion where trials are not a big none of it part of it.
Most everything it involves a free trial, whether we stimulate the customer and suggest that they said they investigate that way or whether theyve already investigating done their homework.
Oh man.
That way from from their own investigation before we even touched on.
The free trial accelerates the sales cycle, no matter, which way.
The customer comes in for the prospect comes in.
In fact, I'd also accelerate expansion.
Because it's an easy way for customers to pass onto their colleagues and other departments or other applications facts.
Here's here's some you ought to look at.
And b it.
It accelerates that early investigation stage, so thats why we call it sort of in a a frictionless enterprise.
Kind of program.
Free trial is involved in almost every you know engagement.
Got it.
And then as we think about the 300 that you talked about for the second half. It can you help us understand you talked in the past I think last quarter in two quarters ago about there is some headwind from the macro and so forth how much headwind do you think you still facing in adding somewhat from around 300 customers and do you think you've you've already convert.
Worded or or converted all your sales capacity to be able to add new customers. Do you think about 300 is still kind of work in progress and you'd like to see improvements as you look into next year.
Yes, so a couple of things. So there is no question that.
That you're trying to build relationships with enterprise customers, where it is a more complex sales usually multiple people involved in making decisions it's hard road resume.
Vintages face to face.
At the same time.
We're getting better at it and customers are getting used to it.
So they know they have to advance so they have to figure out a way to make that work and having a having a free trial and then being able to do proof of concepts remotely 100% of remotely is a big advantage for us a number of our competitors still can't do that.
So.
So we've learned a lot customers have learned a lot and we are starting to see the sales cycles move back to a normal.
Cycle range and Thats, what gives us confidence in the second half of the year.
As we go into the future and things sort of normalize back again, I believe our muscle in driving new opportunity will continue to increase our productivity will increase per per sales Rep. You know if you want to think about it that way and then we should see continue to see.
The increases year over year.
And keep it steady sort of percent.
Of our our.
As we go.
In that new accounts, new logo segment.
Got it thanks for that so that's good to hear John.
Thank you.
Our last question comes from the line of TJ Hynes with Canaccord.
Hey, Thanks, guys congrats on the results Joe.
And just just one from me so one of the questions I get from investors as they try and make sense of the competitive landscape is whether it's easier to expand from EM to infrastructure or from infrastructure to ATM right and given your model I know how you answer the question, but maybe you could just talk about.
Why you think Thats the case.
Well so first of all on.
We continue to believe that if that.
The application layer.
He is the strategic layer of value, it's where I team needs to this us.
A CEO doesn't want to talk about infrastructure and they want to talk about.
Business outcomes that are driven by business applications.
So so thats sort of the first thing. The second thing is very few people have figured out how to do.
Automatic application observe ability at scale.
And in the cloud environment that means you have to actually observed everything at once has its all virtualized software.
That's a very difficult challenge there is hundreds and hundreds of compatibility idiosyncrasies with all the frameworks all.
All the layers all the languages et cetera.
So thats always been sort of then difficult barrier.
Otherwise everybody be doing it and you see dozens of people in the upper right quadrant.
Gardner.
Magic quadrant.
So that said our view is infrastructure has its own.
Peculiarities and Uniquenesses.
And it's taken US as I said, you know 18 months and we still have more work to do.
To get our infrastructure module to a mature level.
In that segment, so no segments is easy.
But we view the infrastructure segment as a logical extension.
Then we are fully capable of addressing.
And one that goes hand in glove with the application layer.
When you get into enterprise observe ability and the use cases and extensions thereof.
Yes, yes, okay thats helpful color. Thanks, guys.
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Thanks TJ.
I think where.
Where it sort of out of time.
That was the last question sorry, let me just say thank you.
We believe we have a fantastic opportunity in front of us with a massive market in a well differentiated product.
We have a great balance business as you can see we're going to continue to invest as Kevin said.
In commercial expansion.
And continuous innovation, which has served us well and.
And we look forward to catching up again in late January early February.
To cover our Q3 results. Thank you again enjoy your mornings.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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