Q1 2022 Dynatrace Inc Earnings Call
Hello, and welcome to the diner Tracy fiscal first quarter 'twenty 'twenty 2 earnings conference call and webcast. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session.
She will follow the formal presentation as a reminder, this conference is being recorded.
My pleasure to turn the call over to Noel Ferrous Vice President Investor Relations. Please go ahead.
Thanks, operator, good morning, everyone and thank you for joining <unk> first quarter fiscal 'twenty 2 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 statements such as statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties depending.
Depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements additional information.
Information concerning these uncertainties and risk factors is contained in <unk> filings with the SEC, including our annual report on form 10-K and quarterly report.
For <unk> and form 10-Q.
The forward looking statements included in this call represent the company's views on July 28, 2021 diner trace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some.
Non-GAAP financial measures during today's call.
Detailed reconciliations 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 Stick 1 John.
Thanks Noel.
Well good morning, everyone and thank you for joining us today I.
I am pleased to report that we had another strong quarter once again, beating guidance across all our key operating metrics led by a R. R, which was $823 million up 37% year over year.
Along with strong top line.
We again delivered healthy profitability in terms of non-GAAP operating income and EPS, which Kevin will elaborate on in a few minutes and we continue to believe that a smart balance between growth and profitability. It makes for a more durable business over the long term.
Underpinning our consistent year over year top line growth.
About 30% are 2 key building blocks net.
Net new logos to the diner trace platform and the ongoing expansion of existing customers.
I'm pleased to report that we added 135, new digitally transforming customers for the diner traits platform in Q1.
Up over 50% from a year ago.
And that our net expansion rate fueled by growth across all modules was once again at or over 120%.
As we've said we believe continued execution against these 2 building blocks will sustain a 30 plus percent growth business at scale for some years to come.
With the <unk>.
Our Q1 results and positive outlook ahead, we are increasing our guidance for fiscal 2022, which Kevin will provide more details on shortly.
This morning, I'd like to discuss 3 topics that I believe will continue to drive our momentum and success.
First the ongoing market.
<unk> that continue to drive new logo growth and rapid expansion within our growing base.
Second the progress we are making in commercial expansion to accelerate go to market success and third.
The progress, we're making in expanding our platform and module strength to address the full $50 billion Tam.
Strength that we see ahead of us.
Let me start with the market dynamics that provide us a unique long term growth opportunity.
Even with a protracted pandemic our value proposition remains resilient with.
We continue to see digital transformation accelerate in all geographies and all verticals.
Pandemic.
Nick has put everyone on notice how quickly change can happen and how important agility and risk mitigation strategies are to assuring a sustainable business at.
At the core of digital transformation or 3 mega trends that are interrelated.
The first that applications are eating the world as all businesses.
Look for innovative ways to transform.
The second is that these applications in the platforms. They run on our cloud first in fact multi cloud first.
And the third is the rise of automation and AI to ease the complexity increase the speed and mitigate the risk of these.
Formations.
Dino traces unique combination of multi cloud absorbability unified with powerful AI ops capabilities as a pure play across all 3 of these mega trends.
And we're still in the early innings of digital transformation and these 3 mega trends.
Digital transformation.
These trends is not an event it's a journey.
Take our automotive customers, who are re imagining the driving experience, including driverless cars, our health care customers embracing digital devices for new ways to deliver health care or our energy customers looking to replace carbon fuel with renewable energy.
Asian better tomorrow.
These are not short term efforts they are long term transformed the business strategies and they all depend on new cloud native applications running on multi cloud platforms.
<unk> automation and AI wherever possible for consistency scale and lower.
For.
1 of the other market characteristics that define digital transformation is a digital transformers are the companies that are global economy depends on.
They are in the multibillion dollar banks logistics companies health care companies energy companies and government agencies.
These organizations.
It's almost always have generations of technology to manage and migrate off of unlimited resources and expertise to do it with.
Their application portfolio has a rich the transformation challenge is complex and the urgency to innovate is high.
We continue to believe that we have the best platform and expertise.
For rest yet for these large scale digital transformers.
Proof of our superior fit with these digitally transforming customers can be seen in our numbers as.
As I mentioned earlier, we added 135, new logos to our franchise in Q1.
Great companies, such as Dell rock Central Blue Cross Blue Shield.
And l'oreal, all digitally transforming in 1 way or another.
All with observe ability requirements that include hyperscale or platforms kubernetes container orchestration cloud native applications and modern Dev ops practices.
Some of these companies are transitioning off outdated monitoring tools while.
<unk> been trying to cobble together their own modern cloud Absorbability solutions.
And all considered multiple alternatives before selecting diner trace as their digital transformation partner.
On the expansion front global leaders, such as travelers insurance Lloyds banking group Toyota lows.
While other DHL expanded their use of diner trace this past quarter and I'll now use 3 plus modules of diner trace to cover their multi cloud observe ability needs as I've said before once a customer experiences the ease of scaling the power of our automation transformative opportunity provided by our AI capabilities. They quickly.
Those up for opportunities to extend diner trace further across more application workloads and across broader metric and log use cases.
So when we say the market is moving toward us.
Just that the.
The macro trends of applications eating the world digital transformations is multi cloud first and the need for auto.
And AI capabilities on the rise put us in a very strong position for continued new logo and net expansion success going forward.
This brings me to my second topic. This morning, taking advantage of this fantastic market opportunity, we have in front of us and that's through increased investment income.
In commercial expansion.
You'll notice our sales and marketing spend is returned to our target range of 34% to 36% of revenue.
Combination of 3 key efforts sales force expansion partner momentum and doubling down on market awareness.
Our sales engine continues to scale we grew.
Grew our quota carriers by nearly 30% this past quarter and expect to continue growing this team and the 30% range throughout fiscal 'twenty 2.
Productivity continues to be healthy and the talent, we're bringing on board has never been stronger.
Daina traces considered a top company to work for around the globe and our customer first culture.
Sure resonates with sales and go to market talent.
Helping to lift productivity are the cloud system integrators and strategic Tech partners.
Our partner community is now influencing over 45% of our transactions globally and the leverage we are seeing through the hyperscale or marketplaces is growing even more rapidly.
In fact, the number of deals closed with Hyperscale partners. This quarter increased by more than 4 times compared to the same period last year.
Our reputation for reducing risk and accelerating project success, especially for projects at scale is catching the eye of more and more partners and their community members.
As we've said our partner program is an important area of focus for us as we scale beyond $1 billion.
Third pillar of our commercial expansion is increasing the brand awareness of diner trace.
A recent study showed that within our target account base Global 15000, we are now known.
Much more than a P M.
Our efforts to expand awareness to observe ability infrastructure logs and AI ops is paying off.
We have more to do here for sure, but the awareness trends are scaling in the right direction.
To help accelerate these trends we recently completed a series of 12.1 day.
Known for Mitre sessions around the World We call. These diner trades go events, where customers and prospects here from peers, how they're leveraging diner trace to digitally transform faster smarter easier and a lower risk and lower cost.
We had over 20000 registrants across these.
Day dialed events and most exciting to me was a balance between customers and new logo prospects.
70% of the 20000 for new logo prospects.
Like I said, there's more work to be done to be better known for the value advantage, we provide to digital transformers, but we're gaining on it every.
Every day.
The third and final topic I'd like to cover today is the maturing of the depth and breadth of our platform and its growing number of monetize modules.
Our 3 plus module customer count continues to climb.
Today over 40% of our 3000 plus customers.
Leverage diner trace across 3 plus module use cases.
And over 45% of our customers now use us beyond full stack applications for infrastructure and log only use cases.
Our infrastructure module, which includes modern cloud metrics opened ingesting log analytics is our fastest growing module.
With <unk> growing more than 90% year over year.
It is now fully featured and robust and capable of winning against any in for log alternative and a big reason why we continue to win modern cloud observe ability business at a steady rate.
With over 1000 engineers now we continue.
Against all modules aggressively.
Bracing, new technologies, extending capabilities and enhancing use cases.
So there is much to talk about here, let me focus on just 1 of our new modules are cloud App security module.
As we've said we are still in the early phases of market adoption and product maturity.
But the feedback so far is exciting.
1 of our banking customers, who recently trial, the <unk> module pulled us that people and process limitations have prevented them from scanning more than once a week, even though theyre deploying updates 2 to 3 times a week.
This left them with potential vulnerabilities with dining trace.
And they realize they could have real time coverage 24 by 7 and.
And that's huge.
Another customer for government agency recently migrating towards your so that as they started rolling out cloud native applications their existing security tooling quickly became cumbersome slowing them down.
And without put no longer actionable.
Amazingly Ingests the trial Dino trace was able to immediately detect nearly a 100 vulnerabilities that needed fixing they've now deployed this mission critical apps securely thanks for the diner trace.
It's clear from these and many other examples that our value proposition and timing.
Could not be better.
<unk> movement is gaining momentum and there is no good answer for continuous vulnerability detection with intelligence, scoring to reduce risks while accelerating ongoing innovation.
We continue to see a powerful greenfield opportunity for this new module and are excited with its potential to rapidly scale.
Scale within our base during the second half for this fiscal year.
The need is there and the deployment is frictionless.
With that let me summarize as I've covered several important topics. This morning.
We have an incredible long term market opportunity and we are investing aggressively to seize the advantage.
Commercial expansion is increasing and continuous innovation is being delivered across all modules.
Our platform continues to mature and we.
We continue to scale well beyond our ATM routes.
We are gaining new digital transformer logos at a steadily increasing rate.
And the net expansion of our base across multiple module.
Continues to be robust.
And it's the compounding of these 2 new logos to the franchise and maintaining a healthy net expansion rate above 120 per cent that we believe provide us the building blocks to sustain a 30% plus growth business well into the future.
Let me now 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 setting us up for a strong fiscal 'twenty to the investments we have made in commercial expansion that drive sales productivity are evident.
<unk> across all of our top line metrics with our revenue and subscription revenue exceeding our guidance.
We believe annual recurring revenue as a key performance metric of the overall strength of the business.
For the first quarter was $823 million, that's up $222 million a year.
Evidence here, 37% growth as reported and 32% in constant currency.
Excluding the perpetual license wind down, which was roughly $25 million or 4 percentage points. Our adjusted air growth was 41 per cent as reported and 36% on a constant currency basis.
Year over year, all up sequentially from Q4.
The building blocks for sustained air growth rate remained the same the new enterprise logo additions to the dietary platform combined with how well we expand existing customer relations as measured by our dinitrate net expansion rate.
As John said new logo growth in.
This quarter was very strong with 135, new logos added in the quarter and we have been landing or do you love those over the past year at a very consistent land a are of a little over $100000 per new logo.
New logo growth represents a 52% increase over the 89, new logos we added.
In Q1 of last year.
Which is a soft compare due to the COVID-19 environment we.
We ended Q1 with over 3000 <unk> customers.
Consistent with historical trends once customers see the value of the <unk> platform. They are eager to adopt new modules and expand coverage. This is evident in our net <unk>.
The first 1 right, which for the 13th consecutive quarter was at or above 120 per cent.
As a result of this our E. R. R per diner trace customer continues to increase and in Q1, it was $271000 per customer an increase of 19% over last year.
Adding on to that we continue to see notable strength in both the number of customers with 3 or more modules and the expansion of the average error per customer in this cohort at.
At the end of Q1 more than 40% of our customers are using 3 or more modules with an average of nearly $500000 per.
Spansion merger.
We now have over 1200 customers using 3 modules and this cohort increased by well over 400 customers over the last year.
Moving on to revenue total revenue for the first quarter was $210 million $6 million above the high end of our guidance and representing an.
An increase of 35 per cent year over year for 29% in constant currency.
Subscription revenue for the first quarter was $197 million, an increase of 36 per cent year over year or 30% in constant currency.
We are very pleased with the strength of our air art and associated revenue.
Performance has it further validates our strategy to accelerate investments in sales and marketing.
With respect to margins total non-GAAP gross margin for the first quarter was 85% in line with last quarter in Q1 of last year, a very healthy margin, reflecting the power of the dining choice platform.
From an investment standpoint, we continue to make solid progress investing for growth.
Our R&D organization is now 1000 employees and we invested $30 million in R&D. This quarter, that's up 44 per cent from last year and approaching our targeted investment level of 15 per cent of revenue.
On.
Total side, we continue to scale, our sales organization, which as noted earlier is tracking to 30% sales rep growth.
Likewise, our partner organization has grown by over 30% in the last year and we continue to invest marketing dollars focus on brand and pipeline development or.
Our sales and marketing investments are.
<unk> are up 66% over last year and within our targeted investment zone of 34 to 36 per cent of revenue.
With these levels of increased investments, we continue to run a balanced business. Our non-GAAP operating income for the first quarter was $54 million $3 million above the high end of our guidance.
This range due to the revenue upside.
Led to a non-GAAP operating margin of 26 per cent compared to 33% in the first quarter of last year.
Again keep in mind, we saw significant savings in the first half of last year related to Covid shut down and our Q1 margin profile was more in line with how we.
We exited fiscal 'twenty.
On the bottom line non-GAAP net income was $45 million or <unk> 16 per share. This is a penny above the high end of our guidance range, primarily due to the favorable revenue upside.
Turning to the balance sheet as of.
June 30th we had $387 million of cash.
An increase of $137 million compared to the same period last year.
We're pleased with our continued healthy cash generation and believe it puts us in a strong position to consider strategic business investments.
There is an opportunity to accelerate our growth in selected areas.
Our unlevered.
Levered free cash flow for Q1 was $81 million or <unk> 39 per cent of revenue.
Remember due to seasonal variability, we believe it's best to view Unlevered free cash flow on a full year basis. We're extremely pleased with the strong start to the year and this achievement puts us in a good position to deliver on our previous.
This guidance of 29% to 30% of revenue for fiscal 'twenty 2.
The last financial measure that I would like to discuss is our remaining performance obligation, which at the end of the quarter was about $1.3 billion, an increase of 46% over Q1 of last year.
Current portion.
C O, which we expect to recognize as revenue over the next 4 quarters for $710 million, an increase of 41% year over year.
No RPM, maybe becoming more meaningful metric for us in the future. We continue to believe a R. R is the best metric to understand the performance of the business.
[noise] of RP, because it removes variability associated with billings and contracting changes.
Now, let me turn to guidance as I outlined last quarter, we believe the investments, we're making in commercial expansion and product innovation will enable us to maintain 120% net expansion and at least 15 to.
This present, new logo growth over the midterm.
These are the core building blocks that lead to sustainable <unk>.
Growth rate over 30%.
With respect to fiscal 'twenty, 2 we expect <unk> to be between 900, and maybe for and $996 million up 27% to 29%.
20 per year or 26% to 28% in constant currency. This is an increase of 1 percentage point across these growth rates when compared to our previous guidance.
Keep in mind, our air guidance assumes 3 to 4 percentage points of headwind to air growth rates in fiscal 'twenty 2 due to the perpetual.
Europe license wind down we expect this headwind in the second and third quarters to be a little over 4 points and then it will decline to about 3 points in Q4 and drop thereafter.
Excluding the perpetual license headwind, our full year adjusted air growth rate is expected to be.
Between 29% to 31% year over year on a constant currency basis.
Wrapping up our air discussion and seasonality as we have outlined in the past our business continues to add strength in the back half of the year with Q3 being our strongest quarter followed by Q4.
Petrovietnam to revenue total revenue for the full year is expected to be non.
$902 million to $914 million up 28% to 30% year over year, and 26% to 28% in constant currency.
Underlying that subscription revenue is expected to be between 848 and 800.
Maybe $6 million up 29% to 31% year over year or 27% to 29% in constant currency.
That's an increase of 2 percentage points for total revenue and subscription revenue growth rates when compared to our previous guidance.
And we continue to expect subscription revenue to be 90.
Hundred and for percent 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 200, and neat and $218 million.
As we continue the message we are investing.
90 for long term sustainable growth of the business. We believe the proper levels of investments for sales and marketing to be in a range of 34 to 36 per cent of revenue and R&D to be around 15 per cent of revenue.
The result of this is a non-GAAP operating margin of 23 to 24 per cent of revenue.
For the year consistent with prior guidance and up from a dollar standpoint to the higher revenue guidance.
For the full year, we expect non-GAAP EPS of 60 to 63 cents per share, which is up a penny from our previous guidance.
Our non-GAAP net income and non-GAAP EPS calculations assume a.
Non-GAAP effective cash tax rate of 12% consistent with prior guidance.
At these investment levels, we are able to continue delivering strong unlevered free cash flow margins for the year as I just mentioned, we expect unlevered free cash flow to be 262 to 274 million.
Our 29 to 30 per cent of revenue too.
To summarize our for all your guidance. It is a continuation of our durable balance of growth and profitability guiding to a rule of 50 plus business when combining air our growth and Unlevered free cash flow margins.
Looking at Q2, we.
Expect total revenue to be between 219 in $221 million of $30.31 per cent year over year or 28% to 29% in constant currency subscription.
<unk> revenue is expected to be between $206, 5 and $208 million up 31% to 32% and year over year.
29 to 30 per cent in constant currency.
From a profit standpoint, non-GAAP operating income is expected to be between 53 and $55 million, representing 24 to 25 per cent of revenue and non-GAAP EPS of 15 to 16 cents per share.
In summary, we are very pleased with the overall momentum of our first quarter performance was strong a are in top line growth combined with healthy margins.
We remain very excited about the high growth opportunity ahead of us as John mentioned, the ongoing market dynamics continue to drive the market toward us we are investing.
Commercial expansion to accelerate go to market success, and we continue to expand our platform and module strength to address the full $50 billion Tam we see ahead of us.
Overall, we believe we are well positioned for sustained and durable growth rates in fiscal 'twenty, 2 and beyond and.
And with that we'll open the line.
You mentioned operator.
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Please what would you poll for questions.
Our first question today is coming from car shrunken from Goldman Sachs for why it isn't a lot.
Alright, Thank you very much and congratulations on the quarter, John I'm curious to get your thoughts at a high.
So just trying to scale the business to do its true potential which could be multiples for billions of dollars. How do you think about the broader commercialization of the diamond for a smartphone whereby today, you've got a business model that are relatively high asp's relative to where the industry is operating at what point do we start to see a thinning out if you will.
The level of Beall landing point, so you're able to target a multiple of the 3000 customers that you have sort of generally infrastructure software companies that are very successful net scale have a customer base.
Tens of thousands.
Think about the company's strategy longer term, how do you thin out the landing points and have a commercial sales channel that.
Well the target a much wider user base granted that you do extremely well.
And your Uh Huh very high concentration of your modules across a dozen customers. How do you make this even more mainstream thank you so much.
The cash I appreciate it.
So first you know theres nothing that precludes.
You know our platform from being able to scale down market.
We've just decided as a business to stay focused at least in these first few years on what we see as the most sort of lucrative side of the business, which is a global 15000.
Do you know about.
70% of all IP spend is done by that global 15000, So it's a massive market in and of itself. You know against this you know this huge Tam that we're looking at.
So there's plenty of room to continue scaling out.
In every customer and across you know an ever growing.
Boeing sort of set of modules.
Debt, we the 6 we have today and you know more we envision for tomorrow.
So we like where we are we like the focus is paying off we're really good at supporting you know these these high end high scaled digital transfer.
Commerce and you can see it in our numbers, where we're just good at it but like I said you know when the time comes to go to the global 25000 or further.
Nothing that precludes us from being able to expand.
Down down market.
Wonderful. Thank you so much and congrats.
Thank you. Your next question today is coming from Sterling Auty from Jpmorgan. Your line is now live.
Yeah. Thanks, Hi, guys. So I wanted to ask about the hiring and the ramp of the new sales reps with 30 per cent increase are you seeing very.
Consistent growth.
Fans for and productivity out of the new reps that you're adding quarter over quarter, especially now that you're getting to bigger and bigger numbers. What changes have you had to make to be able to make that possible.
Great Great question Sterling.
A lot of a lot of growing our sales organization.
Growth like we're doing it comes from anticipating the scale because you need a super structure of management as well as an expansion of your Onboarding program sort of fan it out into the field can't all be done via a headquarters. So we have a combination of things going on.
But I.
And like you know the sales management would would say that the biggest change over the last 12 months for US is the quality of the talent that we're attracting.
That is a high growth very successful.
Company, 1 that's focused on customers and 1 that is focused on.
Thank <unk> success.
You know a little bit of its culture, drawing in some great talent.
And we're doing a better job of developing that talent quickly I think and it's showing in the it's shown in the numbers.
The last dimension is just the coverage.
It was just a scale a sales organization.
You know session you know each of the sales reps end up with sort of a portfolio of customers. They can actually get to as opposed to a list, but they can't get to them all.
And so it's been it's also helped us significantly with a broader coverage we go deeper with existing.
Customers, we reach new customers faster and it's you know it's all good it's all paying off.
Fantastic. Thank you.
The next question is coming from Bob on Suri from William Blair. Your line is not a lot.
Great. Thanks can you hear me okay.
We have your book.
Great and congrats it was a great RPM in billings.
Numbers all around I wanted to touch a little bit initially John on the competitive environment here.
Over the last 18 months, we've seen sort of new products being introduced both by you, but by competitors pricing model changes and some of them deals and some of those are competitive.
Competitors, just some sense of what you're seeing in competitive from any change.
I mean any change in more in terms of the trend around win rates.
Number 1.
And in some ways theres been very little change in other ways there been some some larger changes.
The little change is really around sort of this competitive dynamic everybody seems to worry about in this space.
Really from our perspective, it hasn't gotten any more crowded nor was it really that crowded to begin with certainly at the enterprise level. The digital transformer level that that we focus on.
It's been it's pretty simple there's less than a handful of players that can play there.
And most of them fall away the minute you get to scale multi cloud kind of scale.
On the other side.
What is happening is there.
There is a marked shift toward.
Observe ability, which is much more of a platform.
Concept, where customers are tired of.
The fragmentation.
Of all the piece parts tooling and they really want to see more of a platform consolidation of their of their.
Tracing their metrics their logs.
<unk> et cetera, and we anticipated that as you know 7 years ago.
Rebuilt our platform and refocused it so we've been leading and we've been trying to.
Progress the concept of observe ability in the market because we think it gives us strength in our landing zone.
It's a new and expanded landing zone.
And it also sets us up for quicker expansion, which are which we're also seeing so that's probably the other dimension of this.
Where there is some change and change for the good for us.
Yeah, No that's helpful and I think you're right about that shift.
Towards the sort of ability, especially with your partnership with telemetry too I guess.
1 other 1 for me really quickly.
Is when you when you when you look at the net retention rate, which remained relatively consistent and really really solid.
If you look at sort of.
When you're expanding intercompany I'd love to get a little color around the splits between selling.
Selling into adjacent kind of use cases or departments right. So maybe going to e-commerce or usability or something like that versus selling more modules into an existing kind of use case, because ive got sort of like the guy who's doing the data center and now they want everything measure. So help me think through how that debt.
Deepening versus.
Versus broadening plays out to drive N D. R. R.
Yeah.
Yeah, that's a that's a.
Sort of varies by customer in a lot of ways. There is the very large customers have more sort of fragmentation between teams of who does what.
And so to move from.
The application layer to the cloud platform, where more of the infrastructure play is.
That's that's just moving you know.
To a different group.
Adjacent to the to the first landing zone, but a little bit different different characteristics different care.
And so that's that's 1 but what we're seeing most of the time honestly is that you know we're landing with multiple modules division, even if somebody doesn't buy them. All at once division has already planted that they wanted to expand into multi module.
<unk> provided the landing zone tastes good.
I Love. The fact that we are so consistent with that landing zone. It means that we're not sort of elephant hunting.
And we're staying focused in our sweet spot, we know the product tastes. So good when somebody gets it and it just expands rapidly so.
Draw your arms I'm really pleased with that but you know that the module expansion comes in 2 different ways. Some of it's super straightforward off of the initial sort of vision, we plant with the customer and other ones take a little more time that the larger customers take a little more time, but obviously they pay off too because.
The size of those companies can be quite large when they're multibillion dollar billion.
Businesses.
Overall.
Just just looking at that growth for 3 plus module growth, where we have nearly $500000 average <unk> per customer and growing year over year I think we grew it from.
Maybe about 30% of our customer base to now over 40%.
That's just a great.
Great progress and we expect it to continue.
Apprised, if we werent picking up in other.
Chunk of per cent of our customer base over the next 6 to 9 months.
But if we're doing well with it and we're excited with the progress.
Yeah.
You can see that even that infrastructure growth with 90%.
Congrats I mean other than those are great numbers and thanks for taking my questions guys I appreciate it.
Thank you.
Thank you next question today is coming from Matt Hedberg from RBC capital markets. Your line is now.
<unk>.
Oh, Hey, guys. Thanks for taking my questions and congrats on the quarter and also congrats on the 2 year Mark of the IPO. It seems like 2 years is gone fast, but I think we have a lot to look forward to in future years. So congrats on both of those milestones.
Uh huh.
Obviously, you know the success that you're having John you just alluded.
2 customers with 3 or more module is spending over 500, K and I know historically, you've said I think your overall base monitors like 15% to 20% of other applications, but as you're really moving to whole stack monitoring full stack observer ability is there a different way to think about penetration in these customers beyond just the number of apps monitor.
Yeah, Matt.
So.
I the way we look at it is that pretty much every customer.
Arts and in a segment, it's usually their most advanced cloud environment, where they want to bring dine in trace and they are the more dynamic more calm.
<unk> acts environments, where theres lots of blind spots, but theres also a lot of impact if.
If they get it right.
But that quickly expands to them too.
Either other app stacks cloud app stacks or hybrid and.
And so you know digital Transformers, 1 of their characteristics.
Is that they're moving from something to something otherwise why are you transforming so they usually have multiple generations and so we start out as we've talked about before in the most advanced cloud environments, and then we come back and sort of sweep through the hybrid elements that debt supply.
Those modern cloud applications.
That characterize as sort of the way things look to us and it's hard to sort of peg Oh, you know our customers are here or is there a different sort of expansion. The fact is digital.
Digital transformation as I said is a journey people are moving from everything they had before to something brand new on the other end of this it will take them a long time and the minute, they're there they're going to continue to evolve.
So I see this as you know we're in early innings, it doesn't really matter sort of.
Exactly what things look like today, they'll continue to evolve and scale rapidly.
I mean, just look at the cloud the cloud companies and how fast they're all growing at some at massive multibillion dollars worth of revenue. There is just a great opportunity ahead of us.
And you know.
Where we.
We're we're certainly lead at the enterprise space and we expect to continue to do that and you know with that will come you know growth across all the modules.
You know as we as we expand our sort of footprint or capabilities, you know and our and our reach into these customers.
Got it thank you and then.
As we start to look forward to the federal year end. It was great to see you are rewarded the AWS government competency along with your prior fed ramp authorization can you remind us of what's your exposure is to fed spending and how do you think about that into into sort of your your guidance in terms of like what sort of expectations you have on federal.
Federal this year.
Yeah, No I think we think the federal market is a fantastic opportunity for us to continue expanding in we were relatively early.
In that I think we've talked about it about a year ago in fact.
The doubling down our debt.
We now have quite you know quite a good sized team there.
Considerably well over 100% year on year, the progress, we're making is significant but it's still off a small numbers.
I think it's going to be more meaningful in fiscal 'twenty, 3 and 'twenty for honestly.
We were doing.
As far as a overall piece of the business but.
We're really pleased with the progress that team has made and we look forward to some great things.
From them with partnerships that we're building with with some of the extensions and some of the new module.
<unk>, we're bringing out like the App Sac module. These are things that fit you know fed government extremely well at this moment in time and so we're looking for great things from them.
It's an important it's an important.
As an important thrust.
It certainly seems like the the government needs.
<unk> really transformed.
Such as the commercial side, so well done guys.
Thank you.
Your next question today is coming from Koji Ikeda from Bank of America. Your line is that right.
Hey, John Hey, Kevin really nice quarter, congratulations thanks for taking my questions.
Actually.
So there isn't a day into the prior question on that are the AWS government Competency award congratulations on that Great Testament to the platform's capability.
I guess I was just wondering could you talk a little bit about what the process is like for and achieving that award how long does it take.
What what goes on with that process of getting awarded that.
I actually wanted to award.
Yes, that's a competency that is not really about some technical review, it's actually more about our success with with joint customers that you earn in the field.
So that's that's a little bit more.
More of what that was about we have a great relationship with the AWS federal.
No.
Community, it's not just AWS themselves as the partners in that whole community there.
And we have that with the other hyper scaler as well, but we were pleased to get that it is.
<unk> is a great calling card.
It's winning winning business you know it doesn't just come in the door you still have to go earn it.
And as I as I just finished.
Leaning into it hard because we see it as a as a massive opportunity for us I mean, I think everybody knows the U S. Federal government spends is.
It's like the sixth country in the world as far as spend.
It spend and it and they are digitally transforming.
Slowly, but hopefully we can help them speed it up.
Got it got it thank you and just 1 follow up for me.
Looking at the results.
It's probably really demonstrates the power of the <unk> platform and the strong positioning within the overall opportunity I guess, just looking out into the future.
It is getting you most excited maybe from a product standpoint, or an opportunity standpoint that we should be thinking about and thank you for taking my questions.
Sure.
Well.
I think the thing that excites us there there's 2 dimensions to it overall I mean of course, the cloud spend continues to skyrocket.
Sort of the under underpinning, but that can float many boats I think from our perspective 2 things. The first 1 is that apps continue to be the high ground.
You don't put a cloud platform and unless you're going to put applications on it and you're not going to be able to digitally transform unless you're driving continuous innovation on top of those platforms. So the the apps or where the strategic action is and we're super good at it you know nx and extending them to the full stack.
<unk> cloud stack is.
Just gravy for us the other piece is that these clouds are extremely complicated and everyone needs to de risk their their cloud programs and as they do that they're going to look to automation and AI to help drive consistency.
Allow their best resources to extend themselves further.
And and that's perfect for Us I mean, thats part of our reinvention. We are the first to realize that the scale and complexity was going to outstrip human ability to keep up and.
And we built analytics at the core some very sophisticated analytics.
<unk> is at the core of our platform to handle that data explosion, that's going on in that complexity explosion. So that's the other 1 is that that's finally starting to resonate.
Up at the buying community not just at the technical practitioners and that's super exciting because it is a big difference.
Differentiator for us and 1 that is <unk>.
Certainly, helping us consistently win against all competition no matter who's there ahead of us.
Great. Thanks, guys. Thanks for taking my questions really really great quarter. Congratulations again, thank you.
Thank you.
Thank you next question today is coming from Jonathan will cover.
River from Baird. Your line is that life.
Yes, Hello, good morning.
I'm wondering if you could talk about pricing you guys have really been able to command a premium for your products, but just curious on your thoughts.
On how comfortable you are with that pricing strategy just in light of the increasing.
Of resource indoor consumption based pricing model as we see from various competitors.
Yeah, well I think there is a little bit and sort of too much noise about pricing in the market honestly.
No, we really haven't seen that much change some people try to use pricing as as Ed.
Number deflection.
For lack of momentum in their business.
But we haven't really seen much.
Sort of impact there shifts in pricing.
<unk>.
It's certainly not at the enterprise or the digital transformer level of the marketplace.
You know we're aggressive.
Aggressive where we need to be aggressive where were consistent and predictable for enterprise customers.
They the thing that they hate most is our overages or things that they can anticipate and all of a sudden they get a bill for it.
We live in this space, we know how these folks think we structure our pricing and.
You start getting appropriately for them.
You know, we don't see sort of any reason to move too far off of that.
What's what's working for us at this point, nor do we see you know a moment in time ahead of us where we're sort of worried that all of a sudden something dramatic has changed.
So I like where we are I think where we're smart and anticipate where the market is and we listen to our customers and make sure that we're predictable and transparent with them.
That's helpful. John Thank you.
Second question I have is just you know.
Business analytics product I know, it's relatively new but curious if you are.
<unk> seen any the emergence of other consists of use cases that can drive a more repeatable sales motion or is it more 1 off applications that youre seeing with that product.
No. It's 1 of our it's 1 of the modules that are that drives.
Some of the 3 plus.
Expansion that we talk about.
When you think about it nobody really wants to put.
Cloud infrastructure and they don't really want to monitor logs. They don't want what theyre trying to do is they're trying to expand their business there.
We're trying to be more agile.
Joel and more innovative find new revenue streams.
Transform the business itself.
So they put all of this in.
Order to accomplish something but you still need to measure are you getting the.
The customer experience you're expecting.
Are you getting the business outcomes, you're expecting and that's where the business analytics piece and the digital experience pieces come in.
They measure exactly.
What the value is on the output the business value. So you can understand whether your investments you're making in the cloud platform.
And the applications are paying off.
And if they're not paying off why not and what do you have to do to get that kind of return on investment for your I T.
You know it digital transformation spend.
So it's a it's a really important you know module for us it'll continue to be.
And I do think more and more of the digital Transformers are waking up to the fact that it's not just about the infrastructure that we're putting in it's measuring the value at the other end.
Very helpful. Thanks, John.
Yeah.
Thank you next question today is coming from Raimo <unk> from Barclays. Your line is now live.
Thank you.
John a quick question on the security on <unk>, you talked about the early progress.
Progress there how do you see that playing out in terms of the behavior you see from some of the security guys because it looks like they are realizing is rolette.
You know getting data out of security will be more and more important I mean, you seem like more of a natural hot but like how do you see that evolving over time, and then I have 1 follow up for Kevin.
Yeah, well the reason that we entered.
Where we did is we see it as a greenfield space, it's very hard to do continue.
Continuous scanning.
In in production without without overhead.
We have a fantastic instrumentation technology, you know out in the end we see everything.
Code level detail, we see entry in every entry in every exit point.
So we have a visibility that you know is really unprecedented and the second thing. We do is we have the intelligence built in and AI engine that allows you to actually score.
Determine what's really a vulnerability and what's not and then score those vulnerabilities. So you can always keep.
Things prioritize for sort of that you know that the limited time your Dev team has to spend on this on the security side of things.
So that combination is very unique and you know while others are trying to figure out just how to scan in.
In production.
Option, we're already there and we already and we have the AI engine to help make it to simplify that that world. So it's a great place to come in we have plans behind it of course, but we believe if we stay in that application that cloud application zone first of all it's going to be a rapidly expanding.
<unk> space is being disrupted tremendously and we have a very unique.
Sort of angle in from the observe ability the intelligent observer ability we do.
So we're focused more on what we're doing and how to maximize the value of it with our with the customers we have.
Rather than we are.
In too much about what competitors are doing at the moment.
And I think that strategy has served us well in the past and will continue to pursue it.
So far so good and what we hear back from the hundreds of trials. We've been doing is this is spot on we need it how.
Can you you mature it so we can we can roll it out in volume.
Perfect ideal place to be.
Yeah, It sounds really exciting.
1 for you Kevin as we talk more about like are people are going for it I know what you said here are the most important for you, but our P O will come up more and more than other any kind of drivers or.
Trends that we should see I'm, just lifting from short term for us long term RPM or sort of your long term <unk> growing faster than short term is there like some duration benefits you see from bigger engagement longer and longer and engage with customers et cetera. Thank you.
So as hey, Raimo, so as we've moved to a fully subscription business we.
Fast and a slight uptick in our average contract duration and right now its approaching about 2 years. So that's sort of generally where we are for them from that standpoint, but the reason we focus investors back on air.
<unk> gone out for our customers and we're signing multiyear agreements, but as they rip and replace existing contracts et.
Sort of resets, the RPM numbers and deferred revenue and the billings numbers as well so over the next couple of years as we scale our customer base as we get them on 2 or 3 year agreements and as they grow it's just going to continue to create some variability in those different metrics, which is why if you really want to cut through all the noise.
We have seen everything we think is the best metric. It's you know, it's the leading indicator to subscription revenue growth and the 1 we certainly focus on internally in our company.
Okay make thing makes sense makes sense Congress.
Thank you next question is coming from Tyler Radke from Citigroup.
It's around on us a lot.
Yes, hi, good morning, everybody. So wanted to ask you first just on the new logos that you are seeing in the market, obviously, a nice bounce back from Q1 a year ago.
What are you seeing in terms of their appetite to take on kind of the full <unk>.
Platform do you find that.
Youre landing.
With a broader set of solutions given the investments that you're doing just give us a flavor for how those conversations have helped propel.
Yes.
Yeah, no I appreciate that.
So.
It's about a third of the customers land with.
With with a platform approach.
3 plus module kind of approach.
And that's up year on year.
<unk>.
So that's that's maybe 1.1 item to takeaway that's because the rise of this observer ability as a as a concept.
Concept.
Our landing zone.
For 2 years ago, we talked about the application landing zone that we talked about an observer ability landing zone, which is a little wider.
And we see that continuing and I'd be surprised if that isn't scaling up consistently quarter on quarter now for the next 12 to 24 months.
So that's that's an important characteristic.
And I think that.
Customers are as they start to move we starting to see more do it yourself.
Customers that are tired of trying to cobble things together, it's sort of a.
A game that you just can never get on top.
<unk>, you feel like Youre always behind and customers feel that way and when they find out that we already do all this and it's all automatic and.
AI to help them really transform the way they work.
They're totally willing and happy to give up the do it yourself approach that.
That's the other characteristic I'd say, that's that's important it means that people have already figured out the clouds complex they've already figured out that old tools don't work that's why they're in this cobbling together zone.
And the more we find customers there again, I think that debt multi module footprint.
Foot print will continue to expand at the landing zone. So so those are those are a couple of characteristics of those new logos that we're starting to see and what the dynamics are in those environments.
And you know I think just with the visibility we see ahead of US we think that the momentum we saw this quarter.
Or maybe it's not a 50% a quarter.
Quarter over quarter, I'm, sorry year over year.
Optic, but we do see as good steady strong new logo flow throughout this year, probably a little bit ahead of our 15% to 20% guidance long term guidance, we've been giving.
Okay.
And just 1 follow up if you think about your.
Kind of a mix of <unk>.
Mansion in new deals and in APM that are tied to <unk>.
Obviously application modernization, how is that mix between hub.
Public cloud.
Public cloud native applications.
Versus maybe hybrid cloud or private cloud just kind of obviously you talked about some really nice momentum with the Hyperscale is but just kind of curious how that mix of where these applications a day.
Applauded has changed.
You know kind of between the hybrid private versus public cloud.
<unk> sure well, so there's there's definitely a trend toward more and more public cloud just in general and people put hybrid clouds and not because theyre going to lockdown on hybrid debt theyre transitioning or transforming.
They're they're environment over time every.
Every hybrid cloud that we run into has public cloud extensions.
It wasn't that way 5 years ago, but it is today over 80% of our customers.
Or are you.
Observing cloud native applications in containerized environments.
So it's.
It's extremely modern set.
Of of Tech stacks, but they also reach back into data sources of record debt.
That are required just to run their business.
An insurance company, it's a risk management system, that's probably running on a mainframe somewhere or some other kind of.
Mid range systems behind their firewall.
They have to reach back to our banks you know their customer you know.
Their customer data transaction data et cetera.
You know airlines you go down the list for the digital Transformers, you realize that there.
There are data sources.
A record that need to be tapped in order to support the modern cloud front ends and mobile applications, we all use.
So the way we think about it is there.
Net over 80 per cent of the customers are modern cloud environments and its from from our perspective digital Transformers.
We will be hybrid highly hybrid.
For some years to come.
We're extremely well positioned for that world in helping to move from the old for the new.
Thank you.
Thank you our final question today.
He is coming from Eric temperature from JMP Securities. Your line is now live.
Yeah. Thanks for taking my question and congrats.
On the <unk> module now that you've been.
For selling that for a little bit can you talk a little bit about the competitive environment are you seeing the likes of.
<unk> kind of the broad solution providers like Palo Alto or for some more startups and then secondly, you talked a little bit about sales and marketing up.
From the year ago quarter in light of.
Some return to the office can you talk a little bit about where you are in terms of your sales organization returning.
Turning to a more normalized spending level.
Sure I'll try to handle these relatively quickly because I know, we're sort of a time here.
From from an App stack standpoint.
You know as I said, we're still in sort of there.
<unk> maturing in sort.
The early stages of sales development.
But we do know what that competitive environment looks like.
And no matter what people have they have gaps in production.
And every 1 of these customers you know sort of knows what this landscape looks like.
Talk about you know lots of tools out there are there's plenty of them, but this is a greenfield angle that were coming in on there's nobody that's doing what we're doing it as a whole and as you guys know from security if theres a whole somewhere in Europe public company or a government agency.
It's you're going to need to fill it.
And so that's what gives us a lot of excitement around this space. Our timing is good the angle are coming in on is good. It is greenfield and yes, there's lots of tools out there that people want to talk about where and when it comes down to does it work.
The answer is there's a big gap in the market.
On the on the sales front.
So you know the sales organization's chomping at the bit to get back.
To to a face to face with customers and there's plenty of customers that debt are looking forward to that as well and already.
Engaging in fact, I think some of our you know travel.
Is is for sales in particular is up you know a big jump from where we were when we were all locked down a year ago.
So they're excited about it but what I'd leave you with is this we.
We don't have to be.
<unk> face to face with customers to be successful, we already checked that box a year ago, and we've learned how to win with zoom over zoom.
And we can continue to do it.
If anything.
Back to sort of a little more normalcy in face to face will be.
Tolerance for us both in Onboarding, new talent as well as I believe building relationships with customers that allow us to expand faster.
So those are some of the characteristics, but you know either way it goes whether it's a protracted pandemic or whether we're back to normal sooner.
You know it's all good.
From our perspective.
Very good thank you.
Great Hey, well. Thank you everyone for joining US you know, we're we're we're thrilled with the with the dynamics of the market moving toward us as I said.
In my prepared remarks, we're excited about.
And accept our ability to.
Best in in growth, both commercial expansion and in innovation and we believe that as long as we stay focused on our 2 key metrics.
The expansion of new logos.
And the expansion of our E. R. R.
Our <unk> per customer that we can grow a fantastic business for years to come. So thanks, again, and I look forward to catching up a quarter from now chairs.
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.
And today.