Q3 2021 Dynatrace Inc Earnings Call
Greetings and welcome to the Diamond trades at fiscal third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode. It for.
Once you require operator assistance. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
On my pleasure to turn the call over to the Welfarist Vice President of Investor Relations. Please go ahead.
Great. Thank you operator, and good morning, everyone with me on the call today are John Van <unk>, Chief Executive Officer, and Kevin Burns Chief Financial Officer before we get started please note that 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 to differ materially from those expressed or implied by such statements.
Additional information concerning these factors is contained on diner traces filings with the SEC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
Forward looking statements included in this call represent the company's view on February 3rd 2021 day.
<unk> disclaims any obligation to update these statements to reflect future events or circumstances.
As a reminder, we will be referring to some non-GAAP financial measures during today's call. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website and with that let me turn the call over to our Chief Executive Officer, John Van Sakhalin John.
Thanks Noel.
Morning, everyone and thank you for joining us on our Q3 fiscal 'twenty 'twenty one earnings call.
I am pleased to report that we had another strong quarter across all of our key operating metrics.
For our with $722 million up 35% year over year.
Subscription revenue was $170 million up 33% year over year.
And on Levered free cash flow was $74 million, bringing year to date, unlevered free cash flow to $151 million or 30% of revenue.
These strong results were driven by a solid combination of.
New logo additions to the <unk> platform.
Continued expansion of existing customers.
On an inherently efficient business model.
Based on the strength of our Q3 results, we are raising our guidance across the board for fiscal 2021, which Kevin will provide more details on shortly.
There are three main factors driving our success in the market and ultimately, resulting in our strong financial performance.
The first is strong long term market trends.
Second the investments, we're making on go to market and commercial expansion are paying off.
Third our commitment to continuous innovation is solving a wider range of problems for our customers and keeping us well ahead of competition.
I'll walk you through each of these factors and share why we believe they position us for sustained growth well into the future.
First long term market trends continue to be in our favor.
Companies around the globe and in every industry are undergoing digital transformations at an accelerated pace and these transformations are happening and dynamic multi clouds, which leverage continuously changing container and micro service architectures.
We saw many examples of this during last quarter.
Such as the large energy provider in the U S digitally transforming to a can do hybrid cloud platform. The stop coal use and reduce C. O two emissions by 70% over the next 10 years.
All while delivering smart home energy services.
There are millions of consumers.
A large brick and mortar retailer rapidly transforming to an open ship kubernetes platform.
To drive Omni channel engagement.
New curbside services, and new revenue streams, like accepting and processing Amazon returns.
And state governments in pharmacy chains, using Dev ops and cloud native application platforms to rapidly rollout online vaccine information scheduling and tracking services.
All of these and more are powered by diner traits.
To enable greater speed agility and efficiency.
<unk> M C T OS today as modern cloud complexity and scale stretches beyond their team's ability to keep pace.
Automation and intelligence to cane, this complexity free up resources and speed transformation on.
Becoming requirements.
One of our banking customers recently told me the diner trace there's been the quote killer App unquote behind their digital transformation, adding value on automation across a wide variety of bank services applications and use cases.
Yeah.
We heard from a new health care customer, who had been struggling to get a gen. Two absorbability solution deployed the diner trace has been quote a knockout unquote deployed over a weekend providing value across their cloud environment immediately.
And a large government customer recently integrated us with service now and as reported dramatically reduced incident response times for several recurring issues cutting them from ours.
The seconds.
We invested early in automation and intelligence capabilities to allow digital transformers to do more with less for game time for innovation and business advantage and those investments continue to give us a well differentiated advantage as market trends moving in our favor.
Having a well differentiated solution and a rapidly growing market brings me to the second factor driving our success and strong financial performance.
That is our step up in strategic go to market and commercial expansion investments.
We're doubling down in several key areas to take advantage of the market momentum and opportunity we have.
Talked about growing our sales organization at 20% to 25% this year.
In Q3 results showed that these investments are paying off.
We added a 189, new logos this past quarter back above pre pandemic levels.
New logo wins were across a diverse set of industries geographies and government agencies, including Hyundai.
Edward Jones <unk> company.
Texas Department of health.
Echostar and Denmark radio.
The value advantages enabled by the advanced automation and intelligence of our platform are resonating with customers.
Whether they are replacing a P M solutions.
<unk> to observe ability platforms.
We're challenged with a tool fatigue of do it yourself approaches we are winning new logos in all scenarios.
In addition, we maintained a net expansion rate above 120% for the 11th consecutive quarter.
Expansion deals were equally diverse including enterprises, such as Santander Bank Publix supermarkets, three M and the department of works on pension in the U K.
Upselling, our market, leading a P M module to support more applications and workloads continues to fuel the majority of our expansions.
At the same time cross selling continues to gain strength.
With 33% of our customers now using three plus modules up from 24% a year ago.
And nearly 40% are now using our infrastructure module for non full stack workloads that support their cloud operations.
Such as directories firewalls load balancers and more.
We are seeing a steady rise in customers leveraging the value of our platform for new and expanded use cases and automation.
As they digitally transform.
Given the solid execution of our sales team and momentum in the market.
Now planning to accelerate the growth rate of primary quota carrying reps into the 25% to 30% range.
We've kept our foot on the gas throughout the pandemic and are now scaling up commercial expansion to capture greater share and drive continued strong growth.
And while our direct sales force is responsible for a majority of our business. Today. We know there is an opportunity to grow faster by expanding our leverage and reach through cloud partners.
Over the past couple of quarters, we have been focused on expanding our tech alliances with the three major hyperscale or AWS, Microsoft and Google.
As you know we've had a long standing and close relationship with AWS is a premier park and continue to scale the south.
And I am pleased with the progress we've made to advance our Google cloud platform and Microsoft Azure are relationships.
First with Google Cloud platform, we have expanded our strategic partnership to include go to market collaboration with joint marketing efforts and a unified go to market motion with sales incentives for both teams.
In addition, we have streamlined contract and procurement processes by allowing diner trace purchases to flow through the G. C P marketplace and be applied against G. C. P pre committed spend.
Second we have enhanced our partnership with Microsoft Azure as well.
Two our long standing relationship with AWS and in line with our expanded relationship with Google.
We have expanded our collective go to market motion and co selling arrangements and we are actively enhancing our frictionless buying experience through Microsoft Azure Wars.
Console integration.
We are very pleased that these strength and strategic cloud partnerships and today. We believe we are the only observe ability platform.
Whose customers can use their committed spend through private offers in all three marketplaces.
Private offerings in the marketplaces are the preferred cloud buying mechanism for many enterprises and this allows our customers the flexibility to choose where to deploy diner trace and do it easily and efficiently.
Before I leave go to market investments, let me add a comment on our annual user conference perform which is coming up next week.
This year, we are expecting over 20000 registered attendees, that's 10 times more than we had for the physical event last year.
Certainly the shift to a virtual event is driving attendance up but so is the awareness of diner trace in the market.
And the unique benefits of our platform.
We're excited to be reaching such a broad global audience, many of whom are prospective customers within our target global 15000 enterprise accounts.
Now to the third factor driving our success and strong financial performance and that is our continuous innovation.
Our highly talented product team listens intently to our customers and turns these insights into a continuous stream of innovation to advance our differentiation and increase our value advantage.
Last quarter, we released the fourth generation of our patented pure path distributed tracing technology.
Your path for now provides the deepest most complete and fully automatic distributed tracing for modern cloud environments, including those extended with open telemetry and open trace.
As modern cloud applications become more dynamic increase in scale and exploding complexity advanced levels of distributed tracing are required so precise understanding and immediate action ability for troubleshooting optimization and proactive remediation use cases.
In December we announced our entry into the cloud application security market.
As we did with cloud observe ability.
We are leveraging the disruptive forces of modern dynamic clouds to enter this market targeting where the puck is going.
As modern cloud Dev ops processes accelerate innovation and change and cloud native applications for all across multi clouds.
Growing friction between the speed of innovation and traditional security approaches.
Leveraging the power and intelligence of our platform, our new offering solves this challenge to advance Dev SEC ops for kubernetes orchestrated cloud native applications.
As we said when announced it will take time for customers to test and validate this new offering for the E. R. R impact will be slow at first but we believe this new offering has the potential to expand our Tam by $18 billion over time, bringing our total addressable market opportunity.
Over $50 billion.
Both pure path for and cloud application security are exciting advances for us and with our annual perform conference around the corner you can expect more innovation announcements to come.
Before I summarize I'd like to take a minute to touch on the maturing of diner trace as an independent public company.
As we look forward to our next phase of growth, we continue to enhance our board and board leadership.
I am very pleased to announce that Joe Ward has been appointed chair of the diner trace board.
Joe has been a strong voice of leadership on our board since 2019 and.
And brings extensive knowledge and experience from her work at a number of remarkable companies.
For more details please refer to the press release, we issued earlier today.
Now, let me summarize as I've covered a lot this morning.
As I said at the outset, we're very pleased with our performance this quarter and it sets us up to finish fiscal 'twenty 'twenty one quite strong.
I want to thank our global team of almost 2700 employees for all their hard work and contributions in helping us achieve this success.
We continue to prove that we are well positioned in a growth market and that our innovation engine can consistently differentiate our solutions and expand our market opportunity.
Likewise, we continue to see returns on our investments in go to market and commercial expansion, which are driving pipeline momentum and growth.
Sales execution is strong our partner engine is revving up and.
And we are investing.
Add to this the growing awareness of and interest in diner trace with a reputation for world class product and expertise for modern cloud based digital transformations and we believe we have the ingredients for strong and sustained growth.
With that let.
Let me turn the call over to Kevin for a deeper review of our financials.
John.
Thank you John Good morning, everyone and thank you for joining us on our Q3 earnings call.
As John mentioned, we delivered a great quarter across the board driven by strong a or our performance, which was well above our internal expectations.
We believe <unk> is a key performance indicator of the overall strength and health of the business.
Or are in the third quarter was $722 million, that's up $188 million, representing 35% year over year growth or 32% in constant currency.
We are extremely pleased with the rate and pace of our air our growth and it is even more impressive when you take into account the headwinds related to the perpetual license roll off and Covid related impacts.
With respect to the perpetual license headwind and as a reminder, when we sold a diamond trades perpetual license, we would recognize the license revenue ratably over three years.
About two years ago, we remove perpetual license agreements from our price book and they were sold on an exception basis only.
As a result, we have begun to see the wind down of these perpetual license agreements, which negatively impacted <unk> by roughly $8 million in the third quarter, representing a little more than one and a half percentage points of headwind to the our growth rate in the quarter.
So excluding the purple license headwind, our adjusted <unk> grew 37% on an as reported basis and 33% on a constant currency basis.
Additionally, roughly 20% of our air is with enterprise customers, we consider to be in industries that are facing headwinds due to the COVID-19 crisis, such as travel hospitality and automotive.
And while we haven't seen these customers churn from the platform their net expansion rates are below the average net expansion rate for the business as a whole.
We're starting to see the net expansion rates for this cohort ticked back up in the third quarter with expansion deals in retail automotive and oil and gas verticals.
This is a promising sign resulting in an error or headwind that was roughly half that three to 400 basis point headwind that we experienced last quarter.
As we have discussed the building blocks for air growth are new logos and net expansion rate.
As John mentioned, we continue to see an acceleration in new customers, adding 189, new logos in Q3.
This is nine percentage points higher than the 170 for new logos, we added in Q3 of last year.
We expect that growth rate to accelerate further in Q4, putting us on track to overachieve. Our previously share plan of roughly 530, new logos by the end of the fiscal year.
As a reminder, we had 145 new logos in Q4 of last year, we exited the third quarter with 2790 for Dino trace customers.
Our net expansion rate was above 120 per cent for the 11th consecutive quarter and our Arab for Diamond trace customer increased approximately 20% year over year to $251000.
Our average <unk> per customer with three or more modules continues to increase as well as John mentioned this cohort represented 33% of our customers in the third quarter.
Up from 24% last year with an average error of more than $400000.
As more and more customers adopt the platform approach. We continue to believe the average error per enterprise customer could be north of $1 million.
Moving on to revenue total revenue for the third quarter was $183 million $10 million above the high end of our guidance and representing an increase of 28% on a year over year basis or 25% in constant currency.
Strength in total revenue growth is being driven by 33% growth in subscription revenue from 30% in constant currency.
Overall revenue came in well above our guidance due to some FX tailwind, but more importantly, we saw strength in all areas, including new bookings strong linearity and solid retention rates that drove revenue and air outperformance.
With respect to margins total non-GAAP gross margin for the third quarter was 85% in line with last quarter and up over one percentage point from Q3 of last year.
Our non-GAAP operating income for the third quarter was $53 million $8 million above the high end of our guidance due to the revenue and associated gross margin upside.
This led to a non-GAAP operating margin of 29% up three percentage points from the third 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 shared that we believe in a balance approach to operating the business one that delivers strong and durable performance on both the topline and bottom line.
Last quarter, I mentioned, our strategy to accelerate investments in targeted areas to support the long term growth of the business.
Many of these initiatives were in place in Q3, resulting in a sequential increase of $12 million and non-GAAP operating expense with R&D, increasing 5% and sales and marketing increasing 16% sequentially.
Looking forward, we expect another step up in investments in the fourth quarter and this is reflected in the guidance that I will cover in a moment.
From a profit standpoint, non-GAAP net income was $48 million or <unk> 17 per share.
Turning to the balance sheet as of December 31, we had $300 million of cash an increase of $111 million compared to the same period last year.
Our ability to generate cash while investing in the business remains strong.
Our long term debt was $451 million at the end of Q3, that's down $89 million over the third quarter of last year and $30 million sequentially due to a principal repayment that we made early in the quarter.
As we have shared in the past, we are committed to reducing our outstanding debt and improving our leverage ratio.
At the end of the third quarter, our leverage ratio was well below one times trailing 12 month adjusted EBITDA.
We made an additional repayment of $60 million during the month of January further, reducing our debt balance to approximately $391 million.
Through January of 'twenty, one our principal repayments have totaled $120 million in the current fiscal year.
Our unlevered free cash flow for Q3 was very healthy at $74 million on.
Trailing 12 month basis, our Unlevered free cash flow was $215 million or 33% of the trailing 12 month revenue.
This margin level is above our previous annual guidance of 29% to 30% due.
Due to a combination of the health of the top line Covid related cost savings and a tax refund that was more favorable than our original estimates.
Turning to our guidance.
Are they expected to be between 756, and $760 million up 32% to 33% year over year or 29% in constant currency.
Our our guidance assumes approximately $16 million in perpetual license roll off for roughly three percentage points of headwind to growth.
Excluding the perpetual license headwind our adjusted are our growth rate is expected to be roughly 32% year over year on a constant currency basis.
For the fourth quarter, we expect total revenue to be between 190 $192 million.
<unk>, 26% to 28% year over year on.
<unk>, 23% to 24% in constant currency subscription.
Revenue is expected to be between 178, and $180 million up 32% to 33% year over year or 28% to 29% in constant currency.
From a profit standpoint, non-GAAP operating income is expected to be between 44 and $46 million 23 to 24 per cent of revenue and non-GAAP EPS of 13 to 14 <unk> per share.
This EPS guidance assumes cash taxes paid of $3 million in the fourth quarter, resulting in an annual effective cash tax rate of approximately 7% for this fiscal year in line with previous guidance.
Yeah.
Total revenue for the full year is expected to be $697 million to $699 million up 28% year over year, 27% in constant currency.
Underlying that subscription revenue is expected to be between 650, and $652 million up 33% to 34% year over year or 32% in constant currency.
Moving down the P&L, we expect full year non-GAAP operating income to be between $200 million to $204 million.
And non-GAAP EPS of <unk> 61 to 62 per share.
We are raising our unlevered free cash flow margin guidance to approximately 32% of fiscal 'twenty one on revenue.
That's two percentage points above the high end of our previous guidance.
Due to the top line strength of the business from.
Bind with Covid related cost savings as well as the favorable tax refund of approximately $10 million first our original guidance.
This full year guidance assumes operating margin leverage of roughly five points compared to last year due to our strong business performance and the Covid related cost savings as I mentioned at our Investor Day and since then we are committed to investing for the long term, we expect to increase our sales and marketing.
And R&D spend as a percentage of revenue as.
As a result of these strategic investments coupled with a return to a more normal level of employees spend we expect operating margins will return to pre pandemic levels over the next year.
In summary, we are very pleased with our third quarter performance with strong air and top line growth.
<unk> profitability and a proven ability to generate strong cash margins.
We believe our unique platform approach will continue to drive new customers to the <unk> platform and our innovation engine will continue to power our net expansion rate.
These building blocks provide us with the confidence for sustained growth as we move forward.
And with that John and I would be happy to take your questions operator.
Thank you another conducting a question and answer session, if you'd like to be placed on the question queue. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question. Hugh You May Press star two if he'd like true moving your question from the queue for participants using speaker equipment may be necessary to pick up on.
Handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Matt Hedberg from RBC capital markets. Your line is not a lot of.
Oh, Hey, great guys. Thanks for taking my questions and really strong third.
Third quarter here.
John I wanted to ask you about the expanded G. C. P partnership obviously.
You guys had a press release a little bit ago.
But I'm sort of curious can you talk about lessons learned from from AWS. Obviously, they were sort of a bigger partner earlier, how did that partnership progressed I'm just sort of trying to get a sense for how it might impact <unk> and then could you talk about the importance of really being the only observe ability platform with a private offering in all three public cloud marketplaces.
Sure Matt I appreciate your comments.
So the GCB partnership.
Is that in the past we've been focused on sort of the technical relationships, making sure our products are automatic and simple to deploy in each of the various cloud environments.
But we've seen over the last year a growing opportunity.
To enhance the go to market side with the hyperscale or as they start to draw more enterprise spend.
Toward them with these pre commit.
And that's provided an opportunity for us to be more aggressive in this area and we see that the <unk> opportunity is a great. One for some number of our customers are either moving for.
From another cloud to DCP or adding juice TCP as yet another cloud in their portfolio.
They that they want to to leverage for various workloads. So as we've seen that in as as the.
Google Cloud platform folks are.
To get more and more aggressive you know in the market. We saw an opportunity to jump ahead of competition and put this go to market relationship together in a meaningful way.
And so with that you know we've had a great relationship with AWS of course, and then as well with Microsoft.
The DCP addition, you'll really does allow our customers now have the flexibility to deploy anywhere.
Run anywhere and do it easily smoothly and efficiently.
As well as leveraging pre commit spans to do so.
So we're excited about the combination for sure.
That's super helpful and then Kevin I.
Really do appreciate you calling out the $8 million perpetual runoff headwind in Q3, and the 16 million expectation for Q4 I'm sort of curious obviously this week was this will continue on into next year and you haven't guided full year next year, but can you talk about sort of the cadence of that run off.
As we progress through fiscal 'twenty two.
Sure. So for the last couple of quarters, meaning Q2, it was about a point and a half little bit more than a point and a half of headwind to air growth.
And then in Q4, our guidance was about 227 points of headwind growth and I think we'll see that that trend would continue for the course of fiscal 'twenty. Two it will move up a little bit more on top of where we guided for Q4, So think a little bit over three point and then Theres a pretty big class at the end of fiscal 'twenty two.
There's not going to be a large percent of our remaining as perpetual license and.
It will be de Minimis for physical.
Fiscal 'twenty three so the headwinds will diminish as we go out through the course of fiscal 'twenty two.
Super helpful. Thanks, a lot guys.
Thank you. Our next question today is coming from Jennifer Lowe from UBS. Your line is now live.
Thank you and maybe just to continue on that last question. If I look at the guidance for Q4 and there are a lot of puts and takes there around currency.
And the headwinds, but from the model run off.
But if I back those out it seems like the guidance implies very little deceleration to air growth.
On a constant currency adjusted basis relative to what we saw in Q3. So if I put that in context should we assume that that sort of reflects easier comparisons versus the impact of COVID-19 kicking in March of last year or are you sort of getting more optimistic about the growth in the business outside of those impacted industries, just any more context there.
It would be helpful.
Sure I'll start John for and then John wants to add any can and I think youre right. If you look at the numbers the guidance implies 32% constant currency growth, excluding the perpetual license headwind, which is fairly consistent actually with Q3, where we ended at 33% and I think theres a lot of day.
Factors that are giving us optimism.
As we move forward and if there's if you look at the sales organization, we've been talking about growing that 2025 per side, we're gonna be stepping that up for seeing some step ups in productivity as people as we've talked about over the last year or so wind down on that conversion activity and focus on new logos and expansion and we're seeing a nice for charity in the sales organization.
As well and then you layer on top of that investments, we're making in marketing and lead Gen go to market there combined with the innovation.
The comments, we've made through the course of the year.
All of those different factors stepped up in the quarter that resulted in really healthy new logo numbers that healthy net expansion rate and we think those trends can continue on as we move forward.
Yeah, I think I think that's well said Kevin.
The only thing I might add to that is we do continue to see it at the enterprise level. The you know the $1 billion plus company level that the market is moving toward us.
And we're seeing more and more evidence that.
The difference that we bring to the market with advanced automation and intelligence being becoming requirements for the highly complex and.
And high scale environments at these large companies have.
It is really starting to resonate.
And payoffs and so.
So that's another factor that I would add but.
And I would say, yes, we're we're we're feeling optimistic about the business strong Q3 sets us up well for.
For going forward.
Great and maybe just one more from me.
You commented that 40% of customers were using the our infrastructure only module and I'm curious.
You get in the door with that offering how broad do customers typically go on the infrastructure side or are they I mean in theory, you could cover 100 per cent of the enterprise on infrastructure are you seeing those sort of wall to wall deployments, yet or is it still sort of more contained around.
Environments are related to where they're using a P. M could you add some more context on on how broad that can go at this point.
Sure.
Yes, so first just on just to clarify on.
All of the sort of APM module customers, which is still the majority.
That includes the infrastructure capabilities.
But there are extensions that don't require those kind of application workloads as I as I pointed out in the prepared remarks.
We are seeing customers go wall to wall, it's not a high percentage yet.
So the vast majority of plenty more infrastructure expansion they can do.
But we're getting better at it and customers are understanding the value of of having sort of a single source of truth across a much wider footprint.
And the automation and intelligence you know leverage that gives their their digital teams.
So you know again.
Not not only are more customers using that capability on exploring that capability, but they're also rolling it out in a broader and broader way as we go which is evidenced in our net expansion rate continuing to stay above 120%.
Great. Thanks, guys.
Thank you Jim. Thank you. Your next question today is coming from Sterling Auty from Jpmorgan. Your line is is that a lot.
Yeah. Thanks, guys.
Just one question from my side just back on the on the partnerships I think from the Outsider's view from the investors view, it's kind of hard to delineate and differentiate some of the announcements that we've seen coming out of data dog in yourselves is there a way to differentiate the partnerships that you've established within these public cloud.
<unk> providers, and perhaps what kind of impact you expect to see from them on.
Revenue vis vis what else you've seen announced in the market.
That's it can be a little bit difficult to parse of course, you know each of these hyperscale or is there going to play a little bit of Switzerland. So you know that the advantages anyone appears to have.
Is is relatively fleeting I would say, but I think the important thing to take away is this the diner trace has deep relationships with all three.
We're a premium.
Partner with all three.
We have not only early access to technology to enable customers to benefit from tighter and tighter integrations.
And with the marketplaces and various offerings, but also that the go to market, which is becoming as I said earlier, a bigger and bigger piece of these relationships.
As as these hyper scaler aggregate enterprise spend.
These are these are things that are you know Dino traces at the front door.
And our customers expect us to be and the value that they receive from them as you know greater efficiency and confidence that they are there.
We're there with the most advanced services that these hyperscale is offer at the time they offer them and I think that's really the key takeaway.
Is that we.
We have the same relationships are better than anybody else in this marketplace.
Thank you.
Thank you for your next question today is coming from above on Suri from William Blair. Your line is now live.
Hey, guys. Thanks for taking my question, let me Echo my congrats on solid results and hope for snow isn't too much of a disruption for you guys out there.
We we already had our share in Chicago so.
I guess, let me follow up on <unk> question on partnerships, but not the not the web scale partnerships.
But you've got a lot of other partnerships and on surface now.
You've got for some integrated partnerships things like that I guess, John maybe help us think through the strategy of doubling down on sales visa visa using the leverage or leveraging the partnerships to drive growth into new our existing accounts for new accounts, how should we think about those investments and is it. So early that you're just going to double down on everything across the board on some.
When do we see the leverage on the partnerships play out where we don't need to add sales headcount to do that how have you guys thought about that.
Great Great question at the enterprise level, its a little bit different than maybe in the mid market.
At the enterprise level, especially when you have a platform that's that's quite different and.
And its characteristics like the <unk> platform is it's not just observe ability. If it includes the automation and AI to provide understand ability predictability and action ability you know all in one.
We believe that a sales organization is required to do that but.
But at the same time, we definitely pick up the acceleration in ramp time, and <unk> and an acceleration to full productivity by having these kinds of partnerships.
And that's what's giving us sort of the combination of of wrapping up the partnership seeing the return there at the same time.
Seeing the productivity improvements in sales has given us the confidence that we ought to continue to tap the gas on that sales front and step it up from the $20 to 25%, where we've been to the 25% to 30%, which is where we're headed.
Right now so so.
So we're excited about the combination we think it is that combination that at the enterprise level.
Sets us apart and will help accelerate you know as as Kevin and I have talked about R. R.
On a our growth and continued momentum in the business.
Got it got it got it helpful. And then just just staying on the sales question for a second any particular regions or verticals that you're adding on are you seeing increased adoption and I think you've talked about sort of retail coming back and hospitality coming back a little bit sorry, oil and gas coming back a little bit.
You know sort of post, whereas we get we see the Lady on the tunnel for for Covid, but as you think about adding the sales head count on the specific areas.
Whether it's like maybe crypto providers I don't know that you are seeing greater demand in for understanding and monitoring observer ability et cetera.
It's really not any specific area of Gabon, it's a it really is across the board. It's just said digital transformation around the globe continues to accelerate.
Everybody is turning into a software company.
Everybody needs to make sure they manage that software extremely well flawlessly.
If they can.
And we just happened to have a phenomenal platform for those large more complex environments.
So it really isn't anything on that front.
On the on and let me add you know maybe a couple of thoughts as well and that is that we are getting to the size of the business, where we are starting to vertical lives in certain areas, which I think also has a little bit of.
Opportunity to accelerate and at.
Certain geographies certain verticals.
The second thing is we are seeing an uptick.
Especially in North America in state and Federal government business, you know as we spend more time and invest more heavily in those areas as well, which we talked about earlier this year.
Got it got it Super helpful. Thanks, guys I appreciate you taking the questions.
Thank you for this question is coming from Mohit <unk> from Barclays. Your line is alive.
Hey, guys. Thanks for taking my question and I would love for them on congrats on a really solid quarter as well.
My first question John So I was just wondering if you can.
Help us understand the drivers for it in the maybe the relative proportion of Ah.
Sort of like what will drive the per customer from a quarter of a million dollars right now to a million dollars that you have mentioned right. Obviously, that's the long term, but as you go on that project. Please do you think that it's going to be more about <unk>.
Obviously your penetration with new P. M. So you've talked about application monitoring coverage on a doubling your expenses can double over the next few years at the analyst day last year right is that gonna be a bigger driver or do you reckon that you're aiming for.
Jim wondering your load application security module, they're going to mature enough M. B a driver for London band motion as much that that'll be a good quantity of euro per.
For customer growth. So just wondering if you can help us give them more color there.
Sure Love to.
So first of all.
It's important to know that for three plus module.
Our ASP or average <unk> per customer is.
You know we substantially.
Higher than the average average is around 250 K a M.
And the three.
<unk> three plus module.
Cohort is well over 400 K.
So that's the first thing make sure that your cross sell.
The second thing is that none of our customers are fully saturated on the application side not even our very very largest ones.
So either the applications continue to grow or they continue to add to them.
All of that is consumption based where you have a consumption based model.
And that means expansion on that that application front.
Alone is massive.
And then you add to it entering new markets I mean, we're super early in the in the cloud App security space, but I don't think anybody questions, how valuable that is and how much it's being disrupted by disrupted by the cloud.
You know, we're pretty good at getting the right listening to customers figuring it out as we as we go into a market. We've proven it multiple times now and I think youre going to see it again in the cloud App security space.
So you put those three together of continued upsell opportunity with applications, great cross sell opportunity with existing modules, and then adding new capabilities, new new modules to.
For the platform and.
It gives us a lot of confidence in running room to.
To continue to drive solid sustainable growth for the long term.
Great. Thanks for the color my.
My follow up question is for Kevin.
So great to see that you guys are feeling confident enough to raise the.
The expectations that on how much the sales capacity is going to growth, but Kevin if I. If I go back to your sort of like the mid to long term.
Our growth sort of like what can you give us late.
<unk> 25 per cent I'm wondering if you can flow quantitatively on M Street.
If that moves as well given that the sales capacity sort of like a higher sales capacity I just wait.
When most companies talk about that they.
They would like to see self sufficiency and leveraging the model still so if going to for only 5% capacity.
On higher do do.
Are you still for like baking in some expectations on on the growth on the mid to long term that's it from my side. Thank you.
No. Okay. If you think about the business and the building blocks for the business over time, you know, obviously and sort of the inputs to that the first is sales productivity and I think under underpinning. Some of those are not just the 25% to 30% sales capacity growth that John talked about but it's also the fact that we.
We do believe over time, we can get higher productivity out of our sales organization as they mature and as there are no longer working on the conversion.
So those are sort of underlying that and then we talked about the building blocks to our growth rate in those two it's pretty straightforward right. The first day.
Number of new logos that we can add to the franchise.
Q3, we grew that 10% year over year Q4, we said that getting that growth rate will accelerate and we've also talked about a 15% to 20% of new logo growth as we move the business for the couple that with 120% net expansion rate you can do the math.
That number is above that 25% long term target that we talked about so but we're on.
We're very optimistic about the business a lot of things moved a lot of across the board in the right direction this quarter everything sort of stepped up.
We're optimistic that that can continue as we move forward into the fourth quarter.
We're not going to come off of our long term numbers at this point, but we look forward to updating you. After our Q4 numbers and talk about the trajectory of the business on into 'twenty two loans.
Thanks, guys.
Thank you for next question is coming from Andrew Nowinski from D. A Davidson your line is now live.
Great. Thank you for taking the question and a nice quarter I wanted to ask about the cloud application security solution. If you could just give us.
Any color on what you what do you see as the competitive landscape in that market and also is that a different buyer that might be buying that solution. When you go into an enterprise to cross sell it.
Great great questions.
So.
What are what we found when we were doing our due diligence.
Before we even brought that product to market is just playing out you know as we talk to more and more customers now and additional proof of concepts that are underway there say.
First of all the folks with the pain or.
Are the same cloud application folks that we talk to today.
They're the ones that are being throttled by the security teams and probably rightly so because of security teams need to make sure everything is locked down secure that.
That did that runs on sprawls across these clouds.
The common way of doing this is to try to do code scan after code scan.
The preproduction of course before things are deployed.
And then periodically.
Not continuous by periodic and in production.
And what the results are our long list of false positives.
Only a few like very small number of actual vulnerabilities, but these development teams have to go through everything and triple check them.
So that slows innovation.
And it's not really what the development teams want to do they want to innovate.
And so we sort of we solve that friction between the security requirements and the speed you know what.
Dev ops.
By providing not only preproduction scanning, but continuous production scanning for vulnerabilities.
And we have the intelligence on our platform that eliminates the false positives.
I mean reduces the noise dramatically.
The development team is much more efficient now and obviously the speed of innovation on deployment much greater so that's what's playing out we think it's a you know we have a great opportunity you know the feedback has been super positive.
But like anything that's enterprise grade, especially if it's.
I'm going to go through the security, John let's going to take a little bit of time to to validate and verify but we're optimistic and excited about the the first 90 days here or.
For 60 days and we'll be talking more about it of course as we go in the future.
That's great. Thank you and then maybe just a follow up for that as well you had an integration with I believe snacks, along the same Dev ops line, which you'll stick just call. It a very high valuation on their last round. So I'm curious as to your views on on.
On where do you think that partnership can go in and how that helps you on the Dev ops market.
Yeah with with sneak in the in the <unk> space.
Yes.
Yes.
Well you know.
They have a phenomenal vulnerability database.
They also happen to have a.
Very good information for developers as to exactly how to remediate an issue.
So the combination.
Of our continuous intelligent.
Sort of vulnerability detection combined with their their database.
Which is what we leverage as well as their information for developers is like a perfect combination.
For Dev ops acceleration.
So you know they've been they've been a great partner to work with.
We're you know we're excited to have our have our systems sort of integrated you know together, we give them run time.
Sort of view on value and they give us some fantastic behind the scenes data for leverage.
Thank you.
Thank you. Our next question today is coming from David Hynes from Canaccord. Your line is now live.
Hey, Thanks, guys and congrats on the results.
Maybe I want to follow up on the last question on the on the security front a little bit.
Look I realize how early it is and I'm sure there is.
Net of price discovery happening in the market now but.
If you think like looking forward, how much of an uplift to spend could be adoption of security be right. I mean, if you have the average customer spending 250 Grand with you is.
Is it a 10% uplift 'twenty like more like any frame of reference there would be helpful. As we think about the opportunity.
Well so.
We have our plans include multiple different kinds of capabilities in the in the debit.
For this module.
This first capabilities vulnerability detection.
Think is.
10% to 20% uplift.
But theres no reason that based on the plans we have on what we think we can bring to market that are app security.
Our module can't be a dollar for dollar with the APM module.
I mean, the value significant obviously, you know and it's the kind of solution that gets rolled out in a very broad way.
You know not not in a piecemeal way once it's proven.
So anyway. That's those are some of the thoughts behind why invest in this versus something else.
Not only is it great disruptive moment, but it's also something we think we can continue to build on and really have a significant.
<unk> impact overtime.
Yes, it makes sense.
And then maybe just a higher level question that kind of gets at the triggers for expansion I think.
Looking backwards right over the last couple of years like the migration to the new platform was a great opportunity for you guys to get in there and get bigger right now that we're past that like what's typically the catalysts for expansion in the base rate is it is it just the digital transformation initiatives that youre seeing is it is it.
New products triggered a conversation as it does it just happen at renewals like help us like what's the process and speak to that maybe in the context of sustainability of that.
120, plus net dollar expansion.
Sure well. So you know it really is a couple of different motions. The first one you know land and expand motion.
The landing zone Hasnt changed much.
But what's happening is more and more companies are hitting what we call the micro services wall.
Where the dynamic complexity at the application level guests, so great and the blind spots are on.
Bass and sort of massive gaps in in.
And observe ability when it comes to sort of multi app.
Portfolios in large scale environments and.
There's nothing like you know daina trace and in those environments and in more and more companies are finding that their alternative solutions, whether they were a gen. Two APM solution, whether they thought they could do or with some with on infrastructure.
Our approach and maybe that would be enough or whether they're trying to throw a bag of tools at it.
Open source tools added I mean, all those are.
Our falling falling short at the enterprise level. So so that's helping us land new logos faster.
As well as bring new reps up to speed more quickly on the expansion front.
Like I said, everybody is putting more workloads on these clouds.
As fast as they can rewrite the old apps or add new apps everyone's doing it.
<unk> is a fantastic thing because companies can move faster at the same time lots of new workloads in services going out in production that need to be observed.
Observed on.
Good.
Trouble shot optimized et cetera.
And then the cross sell is just natural for our customers once they get the hang of how our platform works.
That's earlier days, you know as we've talked about but it's catching on people are getting the hang of Gee, if I have automation and intelligence why wouldnt I want more of it across the broader footprint of my my infrastructure and services. So I think it's really the combination of all three of those that day.
Driving the momentum and you know and.
That's what you know why we're stepping things up whether it's on the partner front or that the sales the sales front.
Okay makes sense, thanks and congrats.
Yeah.
Thank you for our final question today is coming from Walter Pritchard from Citi. Your line is now live.
Hi, Thanks, just a follow up on life on a couple of these questions here around the sales organization I mean, you are taking on.
More partners, you've got the security go to market, which was a little bit of a different buyer and then your you continue to rapidly expand the size of the sales force stepping up that hiring rate as you talked about can you help us understand as we move into fiscal 'twenty two.
Any structural changes or any sort of evolutions youre, making to the sales force just to enable you to sort of keep up this pace of growth in these new initiatives that you've articulated.
Yes, no great question Walter.
We plan our sales superstructure.
You know pretty well ahead.
So I think on the direct sales, but we're in pretty good shape nothing too dramatic I mentioned.
A little bit around some vertical focus is.
We're doubling down in.
State and federal you know in North America, a couple of things like that that are that are obvious and smart expansions I think.
We are expanding our partner.
<unk> team.
Both on the Tech Alliance side and on the cloud system integrators. So that that continues under the Hood, we talked about that a little bit.
Before and then.
You know, we've really stepped up our marketing efforts you don't talk about that.
Quite as much.
But the entire organizational structure, there and sort of program.
Program and program management, there toward digital as opposed to physical you know has been a big shift for US you know over the last 12 months.
So all those pieces are in place and we're really just stepping up on.
On what's what's in place and an expanding across a number of areas, but nothing sort of dramatic that we have to do that we have to prove out.
It's just more a step on the gas and build on what we have going right now.
It's a lot easier got it great from.
Yeah.
And then just in terms of where Youre getting salespeople is as you look towards that acceleration is there any sort of sort of bend youre, making in types of people you're hiring as you look at the.
The future versus the last couple of years.
Not not a lot of changes I think if anything where we're spending more time sort of going to adjacent infrastructure spaces as opposed to try to find people with with performance.
Or or.
Performance or infrastructure monitoring kinds of backgrounds.
We find there are some bad habits. There. So we are we like to train folks new and we're doing a really good job now I think of finding better talent people not looking for work, but having a reputation for being a fantastic company to work for.
Especially on the sales front and I think that that's that's helping us with talent acquisition.
Reducing turnover and as Kevin said, it's a little bit of sort of the secret sauce under the Hood with sales right. Now is that the maturity is increasing quickly with a lot more reps having been here for two plus years and they really get the hang of how <unk> is different.
We defined them and how to articulate our value advantage.
Got it great. Thanks, Thanks for that comparison.
Hey.
Thanks Walter.
Maybe I can just maybe I can just add real quickly I know people are going to have to hop a quick thank you for joining us.
Tell Q3 was a great quarter for us sets us up for a great finish in 2021, we think.
And we're pleased with how the market's moving how our go to market is paying off the innovation engine alive and well.
And we're looking forward to giving you guys on update in May.
Two Q4 results and and.
And in the year as well as the FY 'twenty two guidance so with that we're back to execution. Thank you very much and have a great day tiers.
Thank you that does conclude today's teleconference. Webinar you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.