Q4 2021 Dynatrace Inc Earnings Call
Hello, and welcome to the diner trace of fourth quarter and fiscal year.
2021 earnings call and webcast at this time, all participants are any listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded if so my pleasure to turn the call over to new Welfarist.
Vice President of Investor Relations. Please go ahead.
Great operator, good morning, everyone and thank you for joining Dana traces fourth quarter and fiscal year 2021 earnings conference call 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.
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 in dining traces.
<unk> 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 views on May 12, 2021 penetration 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 Sick one John.
Good morning, everyone and thank you for joining us today.
I am pleased to report that we had another quarter of strong execution, beating guidance across all our key operating metrics.
<unk> was $774 million up 35% year over year.
Subscription revenue was $183 million, an increase of 35% year over year.
And Unlevered free cash flow was $86 million for the quarter.
Bringing full year unlevered free cash flow to $237 million for 34 per cent of revenue.
These continued strong results were driven by the ongoing combination.
Solid new logo additions to the <unk> platform.
The ongoing expansion of existing customers and.
And then inherently efficient business model, allowing us to deliver a sustained balance of growth and profitability.
Encouragingly, we're starting to see signs of stabilization in the vertical markets most heavily impacted by the pandemic.
He was previously challenge verticals are once again investing in their digital transformation journey.
Our ability to successfully navigate through this past year is a testament to the resilience of our value proposition our commitment to customer success and our incredible team.
I want to take a moment to thank them are 2800 employees worldwide for their focus diligence and teamwork throughout this past fiscal year.
Their talent attitude and customer first mindset are key for what makes <unk>, such a unique and strong company.
With the strength of our Q4 and year end results as a baseline.
And solid outlook and fundamentals to build on as we go forward.
We will be setting guidance for fiscal 'twenty, 'twenty, two which Kevin will provide more detail on shortly.
This morning, I'd like to discuss for topics that I believe provide a proper backdrop for continued success in fiscal 'twenty two and beyond.
First a brief reflection on our past two years as a public company and the track record we built.
Second.
The powerful combination of new logos and consistent expansion across our customer base are building blocks for sustained growth at scale.
Third.
Our progress in go to market and commercial expansion initiatives underpinning these building blocks for growth.
And force the acceleration of our continuous innovation for sustained competitive differentiation and value.
This evolving market.
Let me start with a brief look back over these past two years as a public company.
Two years ago, we said, we transitioned our customer base smoothly and efficiently from what we call a classic product set the new diner trade platform.
Today <unk>.
99% of a R is on the new platform.
We said, we transitioned to a predictable high growth subscription business today.
Today, 93% of our revenue is subscription with strong growth in the mid 30% range year over year.
We set our platform was highly differentiate it.
A combination of best in class Absorbability infused with AI ops automation capabilities ideally suited to dynamic modern cloud use cases.
The addition of nearly 1200, new logos to the franchise over the past two years is proof that these capabilities and our unique value proposition are resonating with customers.
And we said, we would sustain a durable balance of growth and profitability.
And in fact, we've done that.
Our rule of 60 for the last three years, including the last two as a public company when combining a or our growth and unlevered free cash flow margin.
It's been a solid start.
We believe we delivered on our promises and built a predictable track record of success.
$774 million, a or our business today with line of sight to a billion dollar business in the not too distant future.
With a solid foundation in place.
This leads me to the second topic our.
Our building blocks for sustainable success.
The powerful compounding effect of new logos and net expansion across our customer base.
During fiscal 2021, we increased our dania trace customer base by over 20% and a R R per customer by over 15%.
The compounding effect of these two resulted in total AOR growth of 35% year over year.
It's just consistent addition of new logos.
At the same time, increasing our per customer that we believe provides dino trace the opportunity to maintain 30 plus percent growth.
Over the long term.
Specifically in Q4, we added 173, new logos to the franchise up 19% year over year new.
New logo lands included a Mika insurance Pan Airlines Frontier Communications and Harrods limited.
We continue to see cloud burst digital transformation to accelerate globally and across all industries and governments as software and applications become critical to how services are provided and revenue is driven.
As we've said underpinning digital transformation, our dynamic multi clouds.
These environments can seem simple at first.
But when cloud native workloads hit the cloud platform.
As dynamic container orchestration kicks in at scale and.
And as Dev ops teams accelerate the frequency of change.
Complexity in suits and.
And at some point this complexity becomes overwhelming and intelligent automation becomes essential.
It's this complexity wall at some of our customers referred to it that enables dana traced to enter any modern cloud environment and add significant value.
Ease of scaling faster innovation lower risk and consistent success is cloud reach and impact increases at scale.
On the expansion front in Q4, we once again achieved a net expansion rate of over 120% debt.
12 consecutive quarter, we've achieved this result.
Customers such as J P. Morgan Chase by serve the European Commission, Cigna, and DHL expanded their diner treats footprints to simplify and accelerate their digital transformations.
We continue to believe most of our customers are still in the 15% to 20 per cent range of instrumented applications with three to four times more applications targeted for full stack observer ability.
This alone provides us plenty of opportunity to continue expanding in tier one and two applications, our bread and butter.
And add to this the significant cross sell opportunity across water now five additional modules beyond full stack a T M. With the recent addition of cloud automation and cloud App security.
And you can see why we believe we can achieve an average IRR per customer of greater than $1 billion over time in fact customers who are using three plus modules today have an average IRR of nearly $500000 almost two times, our customer average of $260000.
This brings me to the third topic for this morning.
Commercial expansion.
Given the powerful market trends are high value differentiation and an expanding platform with multiple monetize book modules commercial expansion continues to be a huge focus for us.
I'm very pleased to see our progress back to healthy sales and marketing spend levels again in the mid thirties as a percentage of revenue.
As we've discussed we are investing in a combination of direct sales team expansion cloud.
Cloud partner ecosystem expansion and marketing driven opportunity generation.
I'm pleased to report that over the last 12 months, we were able to increase our quota carrying sales reps by 25% year over year and are targeting new step up quota carrier expansion. So the 30% range here in fiscal Q1 and for the balance of the year.
In addition, we continue to fuel our cloud partnerships, both cloud our size and strategic tech partner alliances.
Cloud ESI influence is now up to over 40% of our transactions worldwide.
These are regional and global cloud S size responsible for ecosystem integration of cloud platforms, such as AWS Azure and G. C P.
With container orchestration from I B M open shaft or Vmware Tien Xu.
China's traces intelligent automation wide and deep observer ability coverage and prebuilt extensions for easier implementation make it an ideal platform for these cloud of size to leverage for any combination of modern cloud transformation.
Also in Q4, we continued our go to market progress with the three big Hyperscale or AWS, Microsoft and Google.
During the quarter dozens of joint customers transacted with us through marketplace offers across these three hyperscale is as they look to leverage cloud spend and simplify their procurement processes.
And as we continue building strong go to market relationships. We're also expanding our technical fit into new areas. For example, with AWS. We recently added AI ops competency credentials to our containers Dev ops and cloud migration competencies, we believe being the first and only observed ability for them to have a.
AI ops credentials will help us to continue to differentiate our offerings in the minds of the ever expanding AWS community.
In addition.
Our marketing progress should not be overlooked it's.
It is the fuel for brand awareness and opportunity generation and we've intensified our investment here over the past several quarters.
Having 28000 registered attendees for our February user conference perform 40% more than I projected at the end of January was a massive hit.
Expect to see ongoing investments in marketing to fuel sales and partner expansion as we go forward.
This brings me to the fourth and final topic I wanted to cover today, the sustainability of our innovation engine.
As many of you have witnessed this is a dynamic market.
Ever changing always evolving littered with companies could not see around the corner and keep up.
I am proud to say diner trace has stood the test of time and not only succeeded when others have faltered, but it's actually thrived on disruptive change.
We believe gardeners recent 2021 eight P. M Magic quadrant is a perfect example.
A P. M is the high ground for any Absorbability conversation, it's where the business meets I T.
In this critical area penetration has been a leader 11 consecutive times and once again this year, we lead in both completeness of vision and ability to execute.
Through multiple market shifts and changing competitive dynamics diner traces adapted anticipated and thrived.
There are several recent examples of this innovation engine and action.
In February we announced a new cloud automation module to our platform.
The cloud automation module enables Dev ops teams to continuously deliver high quality code and innovation faster with more consistency and greater efficiency.
This module brings intelligent automatic closed loop remediation.
Critical Dev ops processes and important step.
Toward autonomous cloud operation.
Also in February we announced enhanced log analytics support with discovery and analysis of cloud platform logs from AWS Azure, Google in kubernetes as well as open source logs, such as fluid and log stash now customers can extend visibility and cloud native environments.
And begin consolidating their log use cases and spend into diner trace gaming.
Gaining both efficiency and lower costs.
And this past quarter, we announced advanced G. D. P. R functionality and session replay for mobile to our digital experience module.
These capabilities provide important global and technical expansion to drive them adoption further and faster across more customer applications than ever before.
Leveraging a combination of our proven approach a highly talented R&D team and the rapid growth in engineering talent that mirrors the pace of growth for the company itself.
We're confident our innovation engine will continue to drive high value highly differentiated capabilities across both platform and modules well into the future.
With that let me summarize.
These past two years have been fantastic capped off with a great Q4 and year end to our fiscal 2021.
We've invested in the building blocks for sustained high growth to drive the compounding combination of new logos and continuous a our expansion across a growing base.
We've proven our ability to execute through challenging times and in a rapidly evolving market.
And we have delivered on our promise of a balanced approach to growth and profitability sustaining a rule of 60 business for.
For the past three years.
With that let me turn it over to Kevin to take us into our financial results and guidance Kevin.
Thank you John and good morning, everyone as John mentioned, we delivered another great quarter across the board driven by strong performance well above our guidance range.
<unk> team has done a tremendous job executing in a challenging year.
As you know we believe <unk> is a key performance metric of the overall strength and health of the business.
A R. R was up $201 million over last year, ending the fiscal year at $774 million.
This represents 35 per cent year over year growth or 32% in constant currency.
Excluding the perpetual license headwind, which negatively impacted by $19 million or three percentage points. Our adjusted are our growth rate was 38% on an as reported basis and 35% on a constant currency basis.
As we have communicated the building blocks for air growth continued to be the combination of new logos and our net expansion rate. We continued to see momentum in new logo additions exceeding our expectations from a few quarters ago, and well above the 9% growth rate last quarter.
We added 173, new logos in the fourth quarter, representing 19% growth over the 145, new logos, we added in Q4 of last year.
We ended the year with more than 2909, new trade customers.
Our net expansion rate was above 120 per cent for the 12th consecutive quarter and our air per diner trace customer increased to $260000 up 17% year over year.
Our average error for customer with three or more modules continues to increase.
This cohort represented 35% of our customers in the fourth quarter.
Up from 27% last year.
As a result, we now have over 1000 customers with three or more modules, an increase of almost 400 customers over last year.
And it is noteworthy that these customers have an average <unk> of nearly $500000 per customer.
As John said, we believe that it's more and more customers adopt new modules and expand coverage. The average error per enterprise customer can be north of $1 million.
Moving on to revenue total revenue for the fourth quarter was $197 million $5 million above the high end of our guidance and representing an increase of 31% on a year over year basis or 27% in constant currency.
The strength in total revenue growth is being driven by 35% growth in subscription revenue for 32% in constant currency.
Overall revenue came in nicely above guidance due to the strength in new logos and a solid net expansion rate, both driven by better sales productivity.
With respect to margins total non-GAAP gross margin for the fourth quarter was 85% in line with last quarter and up two percentage points from Q4 of last year we.
We saw an expansion in our gross margin driven by cost savings related to the pandemic combined with the benefits of our efficient diner traced platform.
Our non-GAAP operating income for the fourth quarter was 49 million $3 million above the high end of our guidance due to the revenue upside and associated gross margin expansion.
Led to a non-GAAP operating margin of 25% up one percentage point from the fourth quarter of last year.
Non-GAAP net income was $43 million or <unk> 15 per share.
This is a penny above the high end of our guidance due to the favorable revenue upside.
Turning to a quick summary of the financial results for the full year total revenue was $704 million $5 million above our guidance range and up 29% year over year or 28 per cent in constant currency.
Total revenue growth is being driven by the underlying growth in subscription revenue, which was 655 million $3 million above the high end of our guidance, representing an increase of 34% year over year and 33% in constant currency.
Non-GAAP operating income for the year was $207 million above the high end of our guidance, resulting in a non-GAAP operating margin of 29%.
Up from 24% in fiscal 'twenty.
As we've mentioned in the past we believe in a balanced approach to operating the business one that delivers strong and durable performance on both the topline and bottom line and as John mentioned earlier, our strategy to invest in strategic areas to support the long term growth of the business is the right one.
We ended fiscal 'twenty, one with 500 basis points of non-GAAP operating margin leverage compared to fiscal 'twenty.
Large portion of the leverage was driven by COVID-19 related savings that we worked prudently throughout the course of fiscal 'twenty, one to reinvest back into the business to further support growth.
Turning to the balance sheet as of March 31, we had $325 million of cash an increase of $112 million so for last year.
Our long term debt was $392 million at the end of Q4.
Our gross debt was down $120 million over last year and down $60 million sequentially due to a principal repayment that we made earlier in the fourth quarter.
In addition, we made another repayment of $30 million during the month of April for.
Other reducing our debt balance to about $362 million.
We are extremely pleased with our ability to generate cash while at the same kinds significantly increasing our investment levels in the business.
As we have shared in the past, we committed to reducing our outstanding debt and improving our leverage ratio and I'm pleased to report that we have delivered.
Our unlevered free cash flow for Q4 was solid at $86 million for the full year, our unlevered free cash flow was $237 million or 34% of revenue.
This margin level is above our previous unlevered free cash flow margin guidance of 32% of revenue.
The combination of strength of they are stronger collections and some other working capital improvements.
The last financial measure that I would like to mention is our remaining performance obligation, which at the end of the quarter was approximately $1 $2 billion, an increase of 38% over Q4 of last year.
The current portion of our P O, which we expect to recognize as revenue over the next four quarters was $684 million.
Also an increase of 38% year over year.
As I had mentioned in the past we believe <unk> is the best metric to remove billings and contracting noise, but we do provide our P. O as we believe over time, it will be coming more meaningful metric.
Now, let me turn to guidance.
Again, our key financial metric to understanding the business momentum is a R. R and the building blocks to a our growth are new logos and our net expansion rate.
We believe the investments we are making in commercial expansion and product innovation will enable us to sustain 15% to 20% new logo growth and maintained 120% net net expansion rate for fiscal 'twenty two.
From a guidance standpoint.
For our is expected to be between 975, and $919 million up 26% to 28% year over year or 25% to 27% in constant currency.
Our air guidance assumes three to four percentage points of headwind to our growth in fiscal 'twenty two due to the headwind associated with the perpetual license wind down.
We expect it will be at the higher end of that range for the first three quarters, and then drop to 3% in Q4.
At the end of the year, we believe perpetual license will be down to 1% to 1.5% of total error.
Which will essentially and the perpetual license transition and associated air headwind.
Excluding the perpetual license headwind our full year adjusted air growth rate is expected to be between 28% to 30% year over year on a constant currency basis.
Wrapping up our air discussion as we've outlined in the past our business is not linear from quarter to quarter with a fair amount of seasonal strength in the back half a day here with Q3 being our strongest quarter followed by Q4.
We do expect quarterly air expansion seasonality to be consistent with what we saw last year.
Total revenue for the full year is expected to be $885 million to $900 million of.
26% to 28% year over year or 24% to 26% in constant currency.
Underlying that subscription revenue is expected to be between 834, and $848 million up 27%, 29% year over year or 25% to 27% in constant currency.
As discussed we expect subscription revenue to be 94% of total revenue driven by the size and strength of a R and associated subscription revenue growth.
Moving down the P&L.
We expect full year non-GAAP operating income to be between 203 and $216 million.
From an investment standpoint, we are focused on the long term growth of the business. We believe the proper levels of spend for sales and marketing to be in a range of 34% to 36% of revenue.
R&D to be around 15% of revenue.
This result is a non-GAAP operating margin of 23% to 24% for the year.
For the full year, we expect non-GAAP EPS of $59 62 per share based on 292 to 293 million diluted shares outstanding.
Our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 12%.
We believe utilizing an annual non-GAAP effective cash tax rate reduces quarterly variability.
Recast of the first three quarters of our fiscal 'twenty. One quarterly results is available in the financial tables in today's press release and also reflects a non-GAAP effective cash tax rate of approximately 8%, which was used throughout fiscal 'twenty.
These investment levels, we are able to deliver very solid unlevered free cash flow margins for the year, we expect unlevered free cash flow margin to be approximately 29% to 30% of revenue, which is $256 million to $268 million.
Looking at Q1, we expect total revenue to be between 202, and $204 million up 30% to 31% year over year of 25% to 26% in constant currency.
Ascription revenue is expected to be between 195 and $192 million up 32 to 33 per cent year over year or 27% to 28% on a constant currency basis.
From a profit standpoint, non-GAAP operating income is expected to be between 49 and $51 million, 24% to 25% of revenue and non-GAAP EPS of 14 to 15 cents per share.
In summary, we're very pleased with our fourth quarter and fiscal 'twenty, one performance, where we saw strong air and topline growth combined with healthy margins.
We remain excited about the growth opportunity with a line of sight to $1 billion and they are.
This is another important milestone and further enhanced by being one of few software companies operating at a rule of 50 plus.
To wrap up we have a solid position in the growing market strong product differentiation and a compelling value proposition that we believe will help us maintain topline growth well into the future at.
At the same time, we also have a consistent track record of making the right strategic investments to maintain healthy margins and cash flow.
Overall, we believe we are well positioned for sustained and durable growth in fiscal 'twenty two and beyond.
With that we'll open the line for questions operator.
Thank you went up for conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up for handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from <unk> Suri from William Blair. Your line is now live.
Thank you for everybody and congratulations I was just a strong strong finish there I guess.
I want to touch a little on the sales of investments and the partner investments.
And maybe this is for John here, but but as you think about accelerating sales investments to 30% growth in head count you're increasing the partner investment.
I'd love to understand how you're balancing that to cause because obviously, one sales more profitable than the other one other partners doobie pushing from a sales process and you brought it in kind of at the end and then the second piece is how does that Jive because that to me 30% growth in sales plus partners mainland.
Potentially it could grow well north of 30% so loved us and how you think about that.
Sure Bob.
And thank you for the comments there.
So the combination of investments they really do go hand in hand.
We don't look at partners as necessarily a separate channel we see it as an augmentation.
Two our go to market approach, whether they're the ones that you know source an opportunity or we do we work hand in hand to make sure that we do sort of the right thing for our customer base.
Remember our customer base are the largest companies on the planet billion plus companies. So they pretty much always have someone in there helping them with their digital transformation.
So we see it sort of hand in glove.
And the combination actually driving greater momentum and productivity for our sales organization.
And you're right in that you know if we do our job right and we execute well that we have an accelerant you know ahead of us.
It's yet to get to.
Pay off in that manner, but we're working hard at it and see some great opportunity ahead.
Understood and appreciated by COVID-19.
Oh, I'm, sorry, Brian just to jump in right in terms of the tailwind to productivity as we think about the next couple of years as you mentioned, there's the 30% quota capacity, there's the partner program, which we're investing in which is great.
We've also came off the conversion program and I think this is the first credit or where we saw some tangible results there and also something we've talked about historically as well as the maturing of the sales organization and we've seen a nice improvement over the last 12 18 24 months of rap.
<unk> been here for a longer period of time, which we believe can hire you can can deliver higher productivity over time. So all of those we believe are good tailwind for the business and.
Consistent support long term sustainable growth.
That's really helpful. I wanted to follow up on that.
Question for.
So you guys about new services.
Sure the productivity improvements that would be great.
But I do other folks in service now service now where you've had a great partnership and obviously you do a ton of work for Bill Mcdermott Other company when it was previously.
We're gonna instrumental in supporting that they enter the observable each day. So I'll just I'll give your thoughts on sort of does that change. The relationship. How are you thinking about that what does that mean because that was a great sort of somewhat unique partnership you have from service now.
Yeah, no. It's a it's a good question in the end share timely question on People's minds.
Our relationship with service now has really been in the field with joint customers.
And those joint customers.
Need our platforms to work extremely well together.
And that's where our focus has been and that's what sort of pulled us pulled us together.
The fact that they've added a little bit of sort of observe ability of.
Sort of a future piece part tool.
It makes sense for them.
To be relevant inside clouds, there outside looking in at the moment.
So it makes sense that they would try to you know.
Get into a conversation they are not in yet.
But as far as you know our relationship our platform is much larger.
And much more strategic to customers than sort of a piece part add on so.
So I don't really see any change to the relationship.
With service now in the field as we go forward.
Great Great. Thank you gentlemen, congrats again solid results.
Thank you.
Thank you. Our next question today is coming from remove himself from Barclays. Your line is alive.
Thank you and congrats from me as well.
On a slightly as symbol that topic, John you mentioned, the magic quadrant, and it's really nice to see how you guys kind of moving more into the top right and that kind of distinct from the other guys.
But you also someone like some of the new entrants kind of coming up there can you just for our benefit.
Help us understand a little bit.
They might be putting words that you're playing in that broader space to get a little bit of differentiation to me from our checks. It seems more you kind of winning the enterprise and someone comes from more one low end, but like just help me understand that a little bit better. Thank you.
That's it that's that's the right observation.
We've been clear since you know sort of IPO and actually you know years before that that we were going to focus ourselves on what are more challenging customers are bigger and more scalable you no problem set.
Which we excel at so we focus on that global 15000, and we consistently win in that world.
There are other entrants debt inter sort of in the departmental for SMB markets.
Some excelling you know when those in those markets, but that's really quite a different different market space.
In our world that the combination of observe ability with automation and AI assistance.
It's a critical intersection.
There is no way to deal with the volume velocity and variety of data explosion.
The dynamic.
Orchestration of these multi cloud environments. The frequency of change you know multiple Dev ops teams without some level in fact sophisticated levels of automation.
And so that's really setting us apart, giving us for you all you can see it in our numbers you can see it in the new logo growth expansion growth debt debt that combination resonates with these large enterprise class customers.
So we're happy with where we are where we appreciate you know gardeners.
Support for the unique value proposition that we bring to the market.
And we see a lot of great opportunity ahead with this combination and then continuing to fuel it.
As I said in my prepared remarks with the continuous innovation engine that we have that's just rolling along like Crazy right now.
Okay perfect. Thank you.
One follow on M <unk>.
For Kevin maybe as we start the new year like and your investments are increasing on the sales and marketing side et cetera, and anything we should be aware of in terms of C O field structure as the new.
Your starts to kind of get more of the logo driven or.
Sales for us a little bit anything on that side. Thank you.
So we've been doing some some minor adjustments along the way, but at the end of the day, we're an enterprise sales organization with our named account strategy and that will be complemented by our partner program as well so.
Our goal is just making sure we're hiring at all levels of the organizations from the V piece have you already done the account account executives in scaling these things out globally. So no no no fundamental changes it's more of the same albeit as a bidder.
New faster clip hopefully going into fiscal 'twenty two here.
Perfect perfect.
Thank you.
The next question today is coming from Gray Powell from BTG. Your line is now live.
Great. Thanks for taking the question and congratulations on the strong results.
Thank you. So let me maybe starting off with just sort of the obvious side. I mean, you all had a very good fiscal 'twenty. One I think you beat your initial <unk> guidance by over 10%.
At the same time, you talked about how 15% to 20% of your business was from highly exposed industries. So is it possible to quantify what you think was the headwind from COVID-19, even if it's just a ballpark number last year and then and then how should we think about the slope of recovery.
Within those debt.
That impacted customer cohort. Thanks.
Sure Kevin why don't I start and if you want to put any you know a little bit of quant on it because we have quantified a little bit during the year.
So from a.
The challenged verticals, you know where they.
They were they were more challenged in the first half in the second half and as I and as I said in my remarks, we're starting to see.
A recovery of those verticals as they prepare for.
You know sort of re.
<unk>, you know into a into growth verticals going forward and.
With that software is one of the first things everyone invests and to make sure that the most efficient most agile and most scalable. They can be last thing. They want is a is a fumble on there you sort of reemergence from from the pandemic. So that's what we're starting to see is very encouraging.
And we look forward to having a full set of global verticals and governments investing in digital transformation in 'twenty two and beyond.
Kevin any quant you want ads.
Yeah, just in terms of our results. This year, obviously as John mentioned Q2 was the strongest quarter.
Quarter, where were most heavily impacted from a COVID-19 headwind and that was about three to four points is the way we sort of frame that at the time and then going into Q3 that number got cut in half and going into Q4, it reduced as well. So there still is a little bit of a headwind, but as John says companies are starting to ramp back.
Up and making those investments and we sort of think of it at this point, it's somewhat immaterial in terms of a headwind to the business as well, which is why we're not breaking it out as one of those tailwind or headwinds to growth going forward.
Understood that makes a lot of sense. Okay. Thank you very much.
Yes.
Thank you for this question is coming from David Hynes from Canaccord. Your line is alive.
Hey, Thanks, guys congrats on the strong results.
John I wanted to ask a look obviously the plans are in place for accelerated sales investment that's awesome.
Gonna be greedy I'm going to ask why not more right. I mean, do you think the market could support faster sales investments and I'd be curious to get your thoughts on kind of the gating factors. There so just about operationalized.
Operationalized, a larger team or is there more to it.
No. It's a great question, we ask ourselves out of all the time as well.
Right.
I've talked about this before in order to operationalize sales expansion.
It takes a superstructure it takes onboarding takes operations.
For sort of measurement productivity improvement assurance that you know the body's you're adding are actually turning into quota capacity.
And so we've stepped up from the 20% range to 25, we're now 25 to 30.
We are we see line of sight to be able to do that with the investments we've made in the sales structure and as well as the partnerships because that's pretty key as well same thing with marketing operation opportunity development.
So we have the building blocks in place that we didn't have maybe a year ago to be able to step up to 30% and you know once we hit 30, and we're doing well and scale and that will be we'll be talking about 35.
So it is a prudent approach I think to to scaling the sales operation.
That makes sense.
And maybe I can follow up with a different competitive question you've asked about service now I want to ask you about Splunk I know you've talked about having lots of joint customers in the past I'm curious what you're hearing there as they expand into Absorbability I mean look obviously lots of work for them to do in terms of new.
Moving the product together, but I'm curious how you see that playing out I mean, do you think they'll try and be price disruptive.
I know, they're not a core competitor today, but would love any thoughts.
Yeah. So we really haven't seen a change in the in the market environment or any other conversations with our customers over the last really two years since they've been.
Acquiring companies.
And.
I think their recent announcements of.
They're they're observe ability cloud is just sort of a repackaging of what they've already been talking about so not sure what's what's going on over there and sort of how they're putting things together, but I will say that the customers that we talk to and as you point out many are sort of.
Have have sprung platforms in as well.
They really value the automation and AI assistance that we bring.
Because they know they have a real time massively scalable cloud challenge in front of them.
And a suite of tools is not going to cut it.
Mhm, So you know I like our differentiation.
You know when whenever.
<unk> gets sort of their focus together, you know who knows but like I said I think the market's moving more toward us and away from just a simple observed observe ability play certainly at the enterprise level.
Very helpful. Thanks, guys and congrats again thank.
Thank you.
Thank you.
Thank you. My next question today is coming from Matt Hedberg from RBC. Your line is that life.
Oh, Hey, guys. Thanks for taking my questions.
Hey, John hearing you talk about maintaining 30% growth over the long time is certainly impressive.
And I guess part of that thesis I think is continuing to kind of diversify away from APM and last quarter. I think he noted for 40% of your customers for maybe nearly 40% we're using of a structure.
Non full staff workloads I'm wondering can you comment on how that might trend this year.
And then I guess sort of importantly, why have you been so successful cross selling outside of it outside of a P. M.
Well so there's there's several things going on at day at the same time that are actually helping us, giving us a bit of a tailwind.
One of them is that the conversations that we're having with customers are less about a P M less about a layer.
And more about the whole full stack observe ability.
<unk>, which.
Which is perfect for us because that's what we do.
<unk> rebuilt and reinvented our platform around a full stack approach.
M logs metrics user experience topology et cetera. So it's M. So it's perfect for us perfect conversation and I think that that's accelerating.
The multi module.
<unk>.
And we will continue to do that this year I mean, the fact that we have 35% of our customers now with three plus modules.
Is something that I see us continuing to penetrate that customer base.
Whether we take it to 45% or 50% not sure this year, but is certainly.
A key part of our focus.
I think the other part of this is that once we relieve the sales organization of conversions, we were able to you know really step them up and focus them on cross selling.
And I think you'll see that.
In the numbers this year I mean, obviously, we're maintaining great and healthy net expansion rate.
And I see that continuing as well.
And with the innovation engine, adding a few more modules to the portfolio are you know that's that's all goodness as well for a for that multi module cross selling.
So I think youre going to see more of the same the sales organization is doing a great job of absorbing.
The additional functionality and customers are looking forward to it.
The debt.
The censoring of our platform around AI ops capabilities really unifies all these modules into a very powerful combination.
So yeah, we look we look forward to 'twenty, two and beyond we really do.
Feel like we're in a good place and you know where we're writing a lot of great.
Market momentum at this moment so.
We will keep it out net spreads certainly seem to certainly seems evident to us as well and I guess Kevin.
You always do a good job of outlining sort of some of your building blocks assumptions for for <unk> and Theres been a lot of focus on on <unk> and obviously on your comment your quota capacity adds this year, but I think you added about 20%.
Through your customer base by about 20% last year, I guess I'm wondering sort of.
Within your <unk> guide what is sort of your assumption on customer assets here or do you think it might.
<unk> pro that base, even more than more than needed luster.
So and so I'd break it into two components. One is when we just look at the new logo additions.
Last year, we added about 580 for new logos.
For the business.
And what we talked about in the in the call is adding another 15% to 20% and frankly, we're hopeful internally that we can overachieve that so that that would be on the on the positive side to adding to the 2900 customer base.
From a churn standpoint, we still have a couple of hundred customers, who are single module very small customers that came over over the last couple of years from from some of the COVID-19 primarily from some of the conversion programs that we did and if you. If you add up those customers I think it's that.
Total number is around 300 customers of the 2900 customers. It represents less than $10 million of they are you know I think it's in that $7 million to $8 million range or so.
Thank you will see some of that churn, we will certainly try to make sure that those some of those customers become platform customers, but if they don't that we're going to we're going to turn those out and frankly, just sort of refocus our energies on more what we believe would be more strategic opportunities. So long way of saying you take the 2900.
The new logos that we're going to come in or over the next day.
12 months, and then there will be some churn component related to that single module non.
Non strategic customer base that has a very low error component to it.
So for the whole for that so yeah no. That's super helpful. Congrats Congrats from me as well and the result is very strong.
Alright, Thank you Matt.
Thank you. Our next question today is coming from Andrew Nowinski from D. A Davidson your line is now live.
Great. Thank you for a couple of questions. I think you mentioned that the <unk> per customer increased to 260000 in Q4 can you just talk about maybe more specifically, which modules might be driving that increase and in.
Then I have a follow up thanks.
Sure well, we don't break it out every quarter all the different pieces, but.
Obviously, we land.
On a full stack a P M mode in the modern clouds, because you need that that application infrastructure network logs metrics trace topology kind of combination in order to really understand how the apps are working in dynamic multi clouds.
So that's still the landing zone.
But from an expansion standpoint, it's still a combination of the infrastructure only like extending.
The the diner trace platform beyond the full stack.
Host unit environments, you know tried to get that additional visibility and an AI assistance across a wider footprint. So that's you know continuing to expand within our customer base and the digital experience elements as well.
Where customers there the pandemic really forced a lot of our customers to understand their remote customer pace better because they couldn't interact with them in any other way.
So our digital experience business, especially the mobile application monitoring.
It took a big tick up over last year, and we don't see that slowing down at all so those are probably the two primary and then we are seeing more and more.
Metric ingestion.
Areas whether there.
Business metrics with our business analytics or whether there are additional data elements into our AI engine.
Which are starting to fuel.
Some of the ingestion metrics as well so it's actually a combination I mean, everything's working pretty well, but.
I think the infrastructure extension and the digital experience are the two primary drivers of additional modules.
Super Thanks, John and then I know the cloud application security module is very new but I was wondering if you could just comment on how customer adoption was of that solution. All last quarter and do you think that has enough features in it to see a fairly significant increase in adoption. This year or this coming fiscal year here or is there more work to be done before it starts to contribute.
Sure.
So first of all we're super excited the feedback we're getting.
Now as you know.
It supports our thesis we're entering the right place, it's a greenfield space and Theres, a little more work to do in order to to fill out the product for it to be enterprise ready.
And you've got to remember that our customer base of $1 billion plus companies.
They're very very picky.
And they expect a pretty wide footprint of coverage.
For they're willing to you know add something else to their security portfolio, but that said.
We've touched about 10% of our customer base.
Everyone pretty much to the to the company as thrilled that we're getting into this space that this is a great entry point the day.
Ops teams are particularly excited as they sort of pick up the Dev ops.
Our approach.
So it's early as we said we knew we were had a you know what.
And in early product that was going to need to fill out in the first half of this year, but I think it's going to start to make an impact in the second half and definitely be a a R driver for us in fiscal 'twenty three just as we had hoped.
That's great keep up the good work.
Thank you.
Thanks for your next question today is coming from Sterling Auty from J P. Morgan Your line is now live.
Yeah. Thanks, Hi, guys. So you talked about you know a little bit of stability in the hardest hit industries, but I wanted to go the other way, which industries are contributing the most at this point and how do you see that evolving through the rest of this fiscal year.
Yeah.
Well I'd have to go down and sort of a you know sort of a list here and there and sort of compare Sterling. What are you know which ones have have have actually ticked up as a percent.
And I don't think we'd notice a big up tick up for ticked down from some of the stronger verticals.
But there is one that sort of sticks out for us.
Which I will mention and that is the governments.
And these are governments around the world as well as the state governments in the U S.
The pandemic really changed the dynamic for government.
Interaction with citizens.
And it's put a lot of pressure on sort of older system approaches that need to modernize quickly to modern cloud.
And we've seen an uptick you know across state and and you know.
National governments around the world and upgrading and digitally transforming faster.
Their environments.
And so we've been investing some of our sales resources and expansion has been going into that you know that space around the world and we see that that is a new augmentation. If you will I mean, it's hard to call. It a vertical but it is it is something relatively new for us.
Debt gives.
It gives us great promise and continued expansion.
In the government business.
That's great and then one follow up Kevin for you can you at least qualitatively give us a bridge of how.
We go from the operating margin in fiscal 'twenty, one to that in 'twenty. Two so in other words, how much of this is coming from.
Return to business travel some of the pickup and tell me how much is coming from sales and marketing expansion as you talked about versus other just so we can kind of understand the puts and takes.
Yeah.
So as I'm sure you can see over the course of fiscal 'twenty. One early earlier in the year, we had quite a quite a big cost savings on the P&L that flow through to op income and we are prudent about how we put additional money to work over the course of Q3 and Q4 and I think you'll see the result of that.
Coming through the P&L and those investments were and in more R&D resources for getting that spend back up to 15% ish.
And then getting net sales and marketing to 30 for 36% and those investments in sales marketing at this point are primarily the people in and around the partner programs and some of the marketing programs that John talked about as well going forward. So when we think about fiscal 'twenty two.
There's going to be more of the same of that right, making sure. We keep R&D at 15% primarily through making sure we're tracking and hiring the right people, which we've been doing a bit above.
Sales and marketing is going to be it's gonna be quota, it's gonna be direct sales organization or direct salespeople more investments in the partner program and we do expect travel to come back online more so in the Q3 Q4 timeframe, but.
Given the strength of the P&L and the AAR and the topline growth, we can absorb that without without sacrificing frankly, the investments that we're making in and quota capacity right and driving higher quota capacity over time. So we do expect a rebound a little bit in terms of COVID-19. Some of the stuff, we safe from COVID-19, but it's.
Don't also don't think it's going to get back to normal so.
We're pleased that those investments we're making this year are really really about the people right engineers and people in the sales organization and marketing organization to drive durable growth.
Understood. Thank you.
Thank you. Our next question is coming from Jack Andrews from Needham and company. Your line is not a lot.
Hi, good morning, Thanks for taking the question I was wondering if you could just describe how your view on the.
What the opportunity is for your cloud automation module and whether you think this is largely a greenfield or displacement opportunity and how should we be thinking about the potential.
Uplift or contribution of this module relative to some of the other issue in your portfolio.
Yeah, Great question, no, we actually see it you know as as a as a greenfield opportunity.
And Anna.
And a continuation of an effort that we've had in place for a couple of years, it's actually maybe more of a formalization into our product module of an effort. We've had it's been mainly a services approach to date, but we'd been product type thing.
The the module as a product position of some of that early services work.
It's targeted first debt at the Dev ops.
Continuous deployment or debt.
M environments.
And bringing auto remediation.
And automated.
You know quality steps along the way.
To ensure greater code quality.
Consistency and efficiency as I said.
So it's it's we've always been involved in the Dev ops processes because of our code level detail that we provide but this actually adds significant intelligent automation to the process.
That said this is the beginning.
Of the autonomous cloud approach and so what we then do is we take the same approach that we're taking right now in the Dev ops and extended into cloud operations. The production operation environment again, driving you know automatic.
Remediation.
For for the elimination of run books.
And so anyway, it's a journey for us as a first step.
We see the opportunity for you know say you know if you if you want to quantify think of it as a 20.
On the on the E. P. M dollar kind of addition, and as we go this module will become more and more valuable similar to what we're doing with the security module as we add capabilities and additional use cases.
Uh huh.
It will become more valuable as I said within the portfolio for our customers. So it's.
It's fairly early in its evolution, but we're getting some great resonance with customers who have been along the services journey with us and had been looking for this level of product innovation. So they can really scale it out within their organizations.
That's really helpful commentary, thanks, Linda congratulations on the results.
Thank you. Our next question is coming from Eric for picture from JMP Securities. Your line is alive.
Yeah. Thanks for taking the question and congrats on a very solid quarter. Most of the questions have been asked but I'm just curious on the infrastructure module can you speak to the.
The competitive dynamics with with day to dog can you talk a little bit about whether you've seen any change in terms of.
The efforts that they're making to to compete and I presume that they are incumbent in many of the accounts that you're you're talking to talk a little bit about.
How the displacements have gone with the with some of those accounts.
Well I don't have you know lots that we haven't seen a lot of change in our sort of competitive dynamic with with day to dog.
It's a massive market and so our overlap is still quite light, but what we are seeing is that.
With our infrastructure module, we're competing more with with a do it yourself approach and what I mean by that is companies with many different products different tools, you know trying to measure telemetry from all different angles and.
And just running into a massive challenge, it's sort of a tool fatigue, if you will.
Where you know its every every man and woman for themselves and no consistent.
Sort of source of truth across a wide footprint, which everyone's looking for.
These modern clouds and so when when we extend.
We consolidate tooling and provide a single source of automated truth for multiple different teams throughout the digital transformation and <unk>.
Process. So so.
So that's why we don't really think about competing against the day to dog I mean, they they may be there may be there you know others. You know open source tools may be there.
But we solve a different problem a bigger problem.
That is much more.
Urgent for the larger customers.
Where they really really need.
Fewer platforms, maybe theyre not going to go to one but fewer platforms to deal with this runaway complexity that they're experiencing in their dynamic multi clouds today.
So that's really the dynamic and that's what drives and fuels our expansion and that's really the dynamic we see in the market and we're well positioned for it.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Yeah, Let me just let me just say thank you again for everybody who joined US. This morning, we were coming off a fantastic fiscal 'twenty one great momentum into 22 market is continuing to to.
Market trends are continuing to be in our favor our investments are paying off as I think you've seen in the results and hopefully going forward in the results and I look forward to reporting in July and updating everybody on our first step in fiscal 'twenty two.
Thank you very much thank.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yes.