Q2 2022 Dynatrace Inc Earnings Call
Hello, and welcome to the diner trace second quarter fiscal 2022 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad as a reminder, this conference.
Is being recorded its now my pleasure to turn the call over to know Welfarist Vice President of Investor Relations. Please go ahead.
Thanks, operator, good morning, everyone and thank you for joining diner traces second quarter fiscal 'twenty two earnings conference call with me on the call today are John Van pick one 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 on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements additional.
Information concerning these uncertainties and risk factors is contained in <unk> filing with the SEC, including our annual report on Form 10-K, and quarterly reports on Form 10-Q.
The forward looking statements included in this call represent the company's views on October 27th 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. 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.
Thanks, Noel and good morning, everyone and thank you for joining us today.
First let me start by sharing how extremely proud I am with the team's performance this quarter once again, beating guidance across all our key operating metrics.
Our or was $864 million up 35% year over year and subscription revenue was $213 million also up 35% year over year.
Once again, the balance sheet strong topline metrics with solid bottom line performance as well, which Kevin will elaborate on a few minutes.
Continue to believe that a smart balance between growth and profitability. It makes for a more durable business.
Underpinning our consistent year over year topline AOR growth above 30% are two key building blocks net new logos to the diner trace platform and the ongoing expansion of existing customers.
I'm pleased to report that we added 160, new logo customers to the Diamond trade platform in Q2 up 20% from a year ago and that our net expansion rate fueled by growth across all modules was once again at or above 120%.
The consistent execution against these two building blocks, we believe will sustain a 30 plus percent growth business at scale for some years to come.
With the strength of our Q2 results and positive outlook ahead, we are increasing our guidance for fiscal 2022, which Kevin will provide more detail on shortly.
This morning, I'd like to provide an update on the three topics that I believe will continue to drive diner traces momentum and success.
First the ongoing market dynamics that continue to drive new logo growth and rapid expansion within our growing customer base.
Second the progress, we're making in commercial expansion to accelerate go to market success.
Third the progress we are making in expanding our platform and module strength to address the full $50 billion Tam we see ahead of us.
Let me start with the market dynamics.
We sit in a rapidly growing market, it's being driven by digital transformation across every geography and vertical.
IDC predicts digital transformation investments will exceed seven trillion dollars by.
By 2023.
And the pandemic, whether protracted are short lived has little effect on this movement.
At the core of digital transformation of our three mega trends that are interrelated.
The first is it applications are eating the world as businesses look for innovative ways to transform.
The second is that these applications and the platforms. They run on our cloud first in fact, multi cloud first and the third is the rise of automation and AI to simplify the complexity increase the speed and mitigate the risk of these transformations.
Diana traced his unique combination of multi cloud observer ability and application security unified with powerful AI ops capabilities position us to benefit nicely from all three of these mega trends.
Digital transformation is not an event, it's a journey and we are in the early innings of digital transformation and these three mega trends.
One of our brick and mortar retail customers, who are shifting more business online increasing customer loyalty and optimizing supply chains, all while reducing their real estate footprint dramatically.
Leveraging digital channels at scale will be a long term imperative for increasing profitability, while reducing business risk for years to come.
Another example, one of our media entertainment customers, who is digitizing their entire library of video assets extending their online licensing capabilities and leveraging public clouds for scale and flexibility.
New digital partnerships, new revenue streams, and powerful new branding opportunities will fuel their business well into the future.
Or one of our U S federal customers, who is on a multiyear journey.
Great hundreds of applications from legacy data centers to a modern multi cloud platform for greater agility efficiency and security.
Application effectiveness and responsiveness needs to be maintained while scale increases functionality advances and mobile access becomes the primary channel of engagement.
These are just a few of the thousands of customers down to trace this helping to modernize and transform.
Modern cloud native application stacks multi cloud platforms.
I ops enabled for ease and efficiency.
Our numbers are proof of our superior fit for these digital Transformers as I mentioned earlier, we added 160, new logos to our franchise in Q2 up from 135 last quarter and up 20% year over year right.
Great companies and agencies, such as H C. A Victoria secrets P. G a knee and the S. A a all digitally transforming in one way or another all with Absorbability requirements had include hyperscale or platforms kubernetes container orchestration cloud native applications and modern Dev ops practices.
These accounts are transforming off outdated monitoring tools, while others have been trying to cobble together their own modern cloud observe ability solutions and all considered multiple alternatives before selecting diner trace as their digital transformation partner.
On the expansion front once customers experienced the value of the <unk> platform. They are eager to expand module usage and increased coverage this quarter global leaders, such as Hertz, Mastercard Bell, Canada American Airlines and U S Department of veteran affairs expanded their use of diner trace.
And I'll now use three plus modules or die to trace to cover their multi cloud absorbability needs as <unk>.
Digital transformations expand its applications drive more and more value for the business as scale and complexity and accelerate faster than human expertise the diner trace value advantage gets stronger and stronger.
As you've heard us say in the past we believe the market is moving towards the macro trends of applications eating the world digital transformations as cloud first and the need for automation and AI ops capabilities on the rise, but it's been a very strong position for continued new logo and net expansion success going forward.
Yeah.
This brings me to my second topic this morning.
Increasing investment in commercial expansion to capture the powerful market opportunity in front of US we continue to invest aggressively to grow our sales force expand our partner relationships and increase awareness of the diner Straits brand in the market.
Our ability to attract talent to diner Tracy has never been stronger we grew our quota carriers by over 30% this past quarter and expect to continue growing this team at or above 30% for the foreseeable future.
Our market is strong our products are well differentiated our customers are happy and there's plenty of room for expansion a great combination if you're an experienced seller.
One of the most exciting market expansion opportunities we have underway is our doubling down in the U S federal market.
This is a huge market with U S government projected spend over $7 billion. This year alone on cloud platforms.
Over the past 12 months, our U S. Federal a R has more than doubled as we win new agencies and expand across our growing number of U S. Federal customers, though still early in our penetration of this massive market our investments are paying off.
Helping to accelerate our success with both government agencies and commercial accounts is our growing portfolio of partners we.
We continue to invest in cloud system integrators, and strategic Tech partner alliances and the results are strong.
Our partner community is now influencing nearly 50% of our transactions globally and the leverage we are seeing through the Hyperscale and marketplaces continues to grow even more rapidly in fact, the growth in <unk> through Hyperscale and marketplaces has more than doubled year over year.
Our reputation for reducing risk and accelerating project success, especially for projects of scale continues to catch the eye of more and more partners and their community members and exciting opportunity for us as we scale beyond $1 billion business.
Marketing and brand awareness continues to be an important component of our sales and partner go to market efforts, we often leveraged the voice of the customer or third party experts to tell our story.
With this approach in Q2 I S. G named diner trace the leader in cloud native observe ability.
Giga Om named Dino trace leader, an outperformer for AI ops solutions, and Gartner rated diner trace highest for application performance monitoring and their 2021 peer insights review the.
The recognition by these experts for leadership across various dimensions of modern cloud observe ability is gratifying.
And it helps clarify our value advantage for the market.
The third and final topic I'd like to cover today is a continuous investment in innovation in both the <unk> platform and its growing number of monetized modules as observed ability becomes a primary market requirement are three plus module customer count continues to climb now over 40% of our growing base.
We're landing and expanding with full stack for apps and micro services.
Plus infrastructure for hyper scalar platform metrics and logs.
Digital experience for mobile more and more often.
Our landing of your Ars gradually increasing.
Our average <unk> for three plus module customers is nearly $500000.
With App stack and cloud automation modules kicking in over the next few quarters, we see a great opportunity to both increase the value of our landing zone as well as expand our per customer materially.
Behind these advances is an extremely strong organic innovation engine. This team anticipated the massive disruption modern dynamic clouds would have on the I T ops software development and digital business landscapes, and they continue to lead in the cloud automation causal AI and data.
Analytics, the global 15000 need for continued digital transformation success.
To augment this team and accelerate our innovation roadmap, we may do technology tuck in acquisitions from time to time.
Our recent acquisition of spec decks, which closed in September is a great example of strong technology set and team set to accelerate our value and differentiation across both platform and modules.
Our high performance parsing and analytics engine.
<unk> will continue to accelerate the convergence of observe ability and security use cases as the cloud continues to disrupt classic approaches.
Going forward, where the fit is strong and roadmaps can be meaningfully accelerated we continue to augment our organic innovation engine in a smart way.
With that let me summarize as I've covered several important topics. This morning.
It's an exciting time for Dino trace as we fire on all cylinders.
We have an incredible long term market opportunity and we are investing aggressively to seize the advantage.
Commercial expansion is strong and our product differentiation is increasing.
We're gaining new digital transformer logos had a steadily increasing rate and the net expansion of our base across multiple modules continues to be robust.
We are building a long term category leader with the building blocks to sustain a 30% plus growth business well into the future.
Now, 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 on both the top and bottom line setting us up for a stronger fiscal 'twenty two.
The investments we have made in sales productivity and commercial expansion are evident across all of our top line metrics with a are above our internal expectations and revenue and subscription revenue exceeding our guidance.
For the second quarter was $864 million, that's up $226 million year over year, representing 35% growth or 34% in constant currency.
Excluding the perpetual license headwind, which was roughly $25 million, our adjusted air growth rate was 39% on an as reported basis and 38% on a constant currency basis, that's up 200 basis points sequentially from Q1.
Please keep in mind, our air as reported was impacted by currency movements and I will cover that component when I review the full year <unk> guidance.
The building blocks for sustained air growth remain the same. The addition of new logos to the <unk> platform combined with the ability to expand existing customer relationships as measured by our net expansion rate.
As John discussed new logo growth continues to be strong and it was up 33% for the first half to 295, new logos. We continued to see positive traction across all of our regions with notable strength in EMEA and North America.
We ended the quarter with more than 3190 <unk> customers.
At the same time existing customers continue to see the value of the <unk> platform adopting new modules and expanding coverage. This is evident in our net expansion rate, which for the 14th consecutive quarter was at or above 120%.
As a result, our air <unk> customer continues to increase and in Q2, it was $277000 an increase of 19% year over year.
In addition, we continued to see strong momentum in the number of customers that are leveraging the <unk> platform for full scale absorbability defined as customers using three or more modules.
The end of Q2 more than 40% of our customers are using three or more modules with an average <unk> of nearly $500000.
We now have over 1300 customers using three modules in this cohort has increased by well over 400 customers over the past year.
Moving on to revenue total revenue for the second quarter was $226 million $5 million above the high end of our guidance and representing an increase of 34% on a year over year basis or 33% in constant currency.
Subscription revenue for the second quarter was $213 million $5 million above the high end of our guidance, representing an increase of 35% on a year over year basis or 33% in constant currency.
With respect to margins total non-GAAP gross margin for the second quarter was 85% in line with last quarter and Q2 of last year.
As we have said before a very healthy margin, reflecting the value and efficiency of the Dynegy platform.
Overall, we are extremely pleased with the strength of both our air growth and revenue performance. We believe this further validates that our strategy to continue to increase investments to grow our top line is the right path and you'll continue to see us lean in to both commercial expansion and technology innovation to capture the large and growing.
Good opportunity ahead of us.
As a result, we invested $32 million in R&D. This quarter, that's up over 33% from last year and approaching our targeted R&D investment level of 15% of revenue on the commercial side, we invested $76 million in sales and marketing this quarter up 52% over last year and within our.
<unk> investment zoned for sales and marketing of 34% to 36% of revenue.
Even with these levels of increased investments, we continue to run a balanced business. Our non-GAAP operating income for the second quarter was $61 million $6 million above the high end of our guidance range due primarily to the revenue upside that flowed through to the bottom line. This.
This resulted in a non-GAAP operating margin of 27% compared to 32% in the second quarter of last year again keep in mind, we saw significant savings in the first half of last year related to the Covid shutdown and we continue to invest for growth and innovation.
On the bottom line non-GAAP net income was $52 million or <unk> 18 per share.
Turning to the balance sheet as of September 30th we had $370 million of cash an increase of $122 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, where theres an opportunity to accelerate our growth in select areas as we did with Spectre X this past quarter.
Year to date, our Unlevered free cash flow was $93 million up 20% compared to the same period last year as a reminder, due to seasonal variability. We believe it's best to view Unlevered free cash flow on a full year basis.
On a trailing 12 month basis, our unlevered free cash flow was $252 million or 31% of revenue.
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 3 billion, an increase of 42% over Q2 of last year.
The current portion of our Po, which we expect to recognize as revenue over the next four quarters was $719 million, an increase of 38% year over year.
Who are maybe becoming more meaningful metric for us in the future. We continue to believe a or is the best metric to understand the performance of the business.
Is it removes variability associated with billings and contract.
Moving on 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 20% new logo growth over the midterm. These are the core building blocks that support our growth of 30.
<unk> plus.
With respect to fiscal 'twenty two as.
As reported is expected to be between 986, and $996 million up 27% to 29% year over year as I mentioned at the beginning of the call. Our as reported are our guidance was impacted by currency movement to be specific there was about $15 million or roughly 200.
<unk> points of headwind to our as reported are our guidance when comparing to previous guidance.
To eliminate the FX impacts I think investors should focus on our constant currency guidance, which we are increasing to 29% to 30% year over year.
This is an increase from 250 basis points at the midpoint of the range.
Also keep in mind, our air guidance assumes roughly 300 basis points of headwind to air growth rates in fiscal 'twenty two due to the perpetual license wind down we expect the third quarter to be roughly 450 basis points of headwind and then it will decline to about 300 basis points in Q4.
And continue to decline thereafter.
Excluding the perpetual license headwind our full year adjusted air growth rate is expected to be between 32% to 33% year over year on a constant currency basis. This is also an increase of 250 basis points compared to what we communicated last quarter.
Moving onto revenue similar to <unk>, but not quite as pronounced currency had a $7 million negative impact to our previous as reported revenue to subscription revenue guidance. Despite that headwind based on the strength of a R. We are raising our revenue guidance for the full year, we expect total revenue to be between 900.
$13 million to $919 million up $30 to 31% year over year or 29% to 30% in constant currency.
We're raising our subscription revenue guidance now expected to be between 857, five and $862 5 million up 31%, 32% year over year or 30% to 31% in constant currency.
That's also an increase of 250 basis points at the midpoint of the guidance range for both metrics when compared to our previous guidance.
We continue to expect subscription revenue to be 94% of total revenue driven by the size and strength of they are and the associated subscription revenue growth.
Moving down the P&L, we expect full year non-GAAP operating income to be between 219 in $226 million as we have been communicating we are investing for durable growth of the business. We believe the proper levels of investment for sales and marketing to be in a range of 34% to 36% of revenue and <unk>.
R&D to be around 15% of revenue the.
The result of which is a non-GAAP operating margin of 24 to 24, 5% of revenue for the year up roughly one point when compared to our prior guidance and up from a dollar standpoint due to the higher revenue guidance.
For the full year, we expect non-GAAP EPS of <unk> 63 to 65 per share up two cents on the high end of our previous guidance due to our revenue over performance, our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 12% consistent with prior guidance.
These investment levels, we are able to continue delivering strong unlevered free cash flow margins for the year, we are raising her unlevered free cash flow slightly to be between $263 million to $275 million or approximately 29% to 30% of revenue.
To summarize our full year guidance is a continuation of our durable balance of growth and profitability guiding to a rule of 50 plus business when combining air growth.
Free cash flow margin.
Quickly looking at Q3, we expect total revenue to be between 233, and $235 million up 27% to 28% year over year or 28% to 29% in constant currency.
Subscription revenue is expected to be between $219, five and $221 million up 29% to 30% year over year or 30% to 31% in constant currency.
From a profit standpoint, non-GAAP operating income is expected to be between 54% and $56 million, resulting in an operating margin of 23% to 24% of revenue as we continue to execute on our investment strategy.
Finally, we expect non-GAAP EPS to be <unk> 16 per share.
In summary, we are very pleased with the overall momentum of our second quarter performance with strong air and topline growth combined with healthy margins.
John mentioned, we have an incredible long term market opportunity ahead of us and we are investing aggressively in commercial expansion to accelerate go to market success and in our platform to further strengthen our already robust module offerings. Overall, we are well positioned for sustained and durable growth in fiscal 'twenty, two and beyond and with that.
We will open the line for questions operator.
Thank you well now be conducting a question and answer session in the interest of time, we ask you. Please limit yourself to one question and one follow up then return to the queue, 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 your handset before pressing star one and as a reminder, please limit yourself to one question and one follow up in the interest of time. Our first question today is coming from Matt Hedberg from RBC capital markets. Your line is now live.
Great. Thanks, guys for taking my questions congrats on the quarter.
Adjusted currency.
Acceleration on a sequential basis or a super impressive.
John I guess.
As you mentioned in your script one of the biggest drivers seems to be the growth in just cloud applications and workload and I Wonder if you could talk about that dynamic a bit more really in the scope of the hyper scale sort of size and scale.
All of this is net new workload I guess the question also is what does this mean for the percentage of deals that are really greenfield today.
What I think a lot of people see as a more competitive market for observer ability solutions.
Yeah, well, thank you, Matt and good question.
Youre right in that we're seeing.
Seeing the Greenfield space increase for us.
As.
As this market expands and shifts from sort of a.
Tool layered market into an observer ability market.
The dynamic cloud environments that our customers find themselves and now they realize that old tooling isn't something that they can live with it actually fails they actually fail and so theres a scramble for four new tooling.
Many of the customers start with just trying to cobble things together themselves and where and when we show up it's a pretty.
Open opportunity for us to provide a platform approach that accelerates their ability to regain control over their environment, which gives them the kind of visibility they need to scale faster and at lower risk. So we're seeing that that greenfield.
Open up.
For us from what we saw when we first IPO a couple of years ago and it is accelerating growth in a number of areas.
That is the.
Super Helpful and then maybe as a follow up.
You continue to add new sales rep at a rapid pace I guess I'm wondering what is the plan for sales reps getting back on the road face to face meetings.
And if they do so to a greater extent do you think that could have start to have a positive sort of incremental benefit to pipeline generation.
Well, we're already back on the road actually.
And they are around the world.
And the sales organization's been pretty pretty.
Sort of thoughtful but aggressive that.
Re engaging both customers as well as prospect opportunities and I do believe with our direct approach to the global 15000.
Especially since we call on sort of director level and above in organizations that that the direct face to face will help accelerate pipelines, especially in the new logo area.
Thank you. Our next question is coming from Raimo <unk> from Barclays. Your line is now live.
Thank you.
Congrats from me as well can I stay on that topic, a little bit strong.
If you think about the sales expansion and the new functionalities Youre getting there like how do you think about that.
That motion around field expansion in terms of overly kind of specialize on the new modules versus kind of guys that kind of stuff.
The whole portfolio.
And then if I could pull up for Kevin There was like you expanded that since about 40% whats the notion or what's the situation on the sales productivity how is that tracking for you. Thank you.
Sure.
Well, so most of our sellers.
All the direct sellers handle the entire portfolio. So there's no confusion over who is calling on what accounts are how we manage agreements with customers.
There is no friction at the point of customer.
And that's we think that that's very important there are.
Most products are actually very similar in that they are complemented various dimensions of observe ability the only outlier.
Is the <unk> module, which does have a separate overlay team to help with some of the specialized.
Selling skills around security, especially with the <unk>.
So that's the only only one but we're getting great cross sell now.
A year and a half ago, we talked about hey, when we're done with our conversion program will lean into cross sell and we built quite quite strong muscle there and you can see those in the numbers. The fact that three plus modules continue to climb every quarter at a at a steady pace.
And that's without really sort of <unk> and the new cloud automation module kicking in yet.
So we just see that that said.
Our motion is strong the.
The sales organization and partner organizations have embraced it.
And we're executing well to that multi module strategy.
There, we talked about two years ago and are now executing against today.
Hi, Raimo, it's Kevin just to follow up on your question around productivity. So first of all it it's been great over the last couple of years as you know we've been stepping on the gas in terms of the sales acceleration growing growing that organization 28, 25% in this past quarter growing 30 plus percent so super excited there.
I'd also say you know what that's noteworthy is we're doing a great job given the company's brand visibility awareness of attracting great talent across the organization and we've invested a lot at onboarding and bringing those people up to speed as well so that whole commercial engine is working extremely well, we obviously keep an eye on productivity I think generally our view.
A lot of productivity is if we start to see it creep it up too much then what we want to do is probably go out and lay around a few more sales reps.
To keep productivity relatively flat you know our goal is not to lean on.
Certain part of the organization to have the way, we want everybody to be productive and when do we sort of head productivity levels, we step on the gas a little bit more.
Okay perfect. Thank you well done.
Thank you next question today is coming from DJ Hynes from Canaccord Genuity. Your line is now live.
Hey, Thanks, guys and congrats also on the quarter.
John is the partner influenced deals continue to increase as a part of the mix right be it through the size of the Hyperscale or is there any notable difference in the typical profile of those deals versus what you're attracting and closing directly.
D J no not not really there.
We've had this partner operation for quite a while now and it does take a little while to get them up to speed and gain momentum, but but they really become quite a strong augmentation to our sales are direct sales engine and so the type of deals are relatively similar.
What is a little bit different is that the global size sink.
Think of so.
They're more general contractors. So their deals will include five 610 different piece parts of our entire cloud transformation project that ecosystem and will be a piece of it. So from that standpoint, you might say oh, well, that's that's different in how they how they move and how what they are.
Or what their motion is in the market, but the kind of you know.
And use cases, and so on that day that they.
They bring <unk> in for very similar to the kinds of deals we do directly yeah. Okay. That's helpful and then Kevin as a follow up.
Is there any way to get a bit more granular on the trends youre seeing in dollar base net retention is it.
Proving is it staying the same and I know kind of north of 120th of kind of the default comment and maybe it's part of that like there are multiple levers to expansion. So maybe just unpack maybe what's having the most impact there.
Sure. So I think some of the visibility we put this out actually in our investor deck, but we break out the expansion between two components C. J. So.
We break out of air growth between what's coming from new logos and what's coming from expansion in the base and if I just sort of mentioned in the last couple of quarters.
Well, we've been growing 30 plus percent, 24% growth has been coming from expanding in the base that was in the fourth quarter and over the last couple of quarters that stepped up so in Q2 I'm sorry in Q1 that was at 25% and then in Q2 that went to 27%. So that's sort of an indicator of that net expansion rate.
As you know we don't specifically give you the net expansion rate, but expansion from the base has been growing which is contributing to the overall air growth yes.
Perfect. Thank you guys.
Thank you. Our next question today is coming from Sterling Auty from Jpmorgan. Your line is now live.
Yeah. Thanks, Hi, guys, that's perfect timing, so maybe as a segue.
That question is when you look at that net expansion how much of that is more modules versus more applications.
It's actually the module.
Spansion beyond applications is growing a little bit faster than the applications.
But I won't say that it's it's materially faster because.
Implication expansion is as I've said before it's sort of a.
Evergreen environment, everybody is adding more applications every application scaling further then than it was a quarter or two ago, and so is because where consumption based.
It's a continue.
60% of their applications monitored by a sort of a deep wide technology like a diner trace.
So lots of room to grow there and no question that we have even more room to grow on the module side. So I think we're just in a we're doing a good job of executing but there's so much more room to go.
It's a wonderful market.
That makes sense and maybe one quick follow up when you look at the new business in the quarter, how would you characterize the mix of that business that.
Our observed ability on azure versus AWS versus GCB versus private cloud versus something else.
Well, you know the 80% or so of our of our customer base and this includes new logos at least 80% probably closer to 90.
<unk> are coming to us because of our expertise and modern cloud environments.
Whether they're public cloud kubernetes orchestrated cloud native application environments.
It's it's it's a combination of all those that really drives our business and the fact that we are extremely strong in the hybrid extension side is just another reason for why the global 15000, you know the digital transformers out their favorite diner trace so they can.
Get a real end to end view as they're migrating from the old to the new but what drives.
Our business is where companies are headed and that is modern cloud modern workload everywhere.
Thank you. Our next question is coming from Jonathan <unk> from Baird. Your line is now live.
Yeah, Good morning, guys and congrats on the on the performance so John what we're starting to see some of these Dev ops platform vendors, notably get lab talk about their ability to provide value across the entire Dev ops lifecycle, including observer ability and I'm just kind of curious you know what what.
How do you view that positioning from a Dev ops perspective, and the focus on that buying center. You did did you view it as a potential.
Potential competitive impact over time.
Well the short answer is we don't view it as a competitive impact over time.
Because what we do sort of sits up above the ICD tool chain kind of approach out there.
You know, having intelligent automated observe ability.
Along the path.
And the same sort of tooling between deploy.
Deployment to production the sunsetting of our.
Legacy or outdated code.
At at scale requires a little bit different kind of a platform.
And different kind of approach than sort of that multi tool approach that pretty much everybody hasnt, including get lab.
So it's.
It's a complement for sure.
Okay. That's helpful.
The second question I.
It might be more for Kevin, but you you've talked about potentially turning off a few hundred lower value account. So I'm wondering if you could just talk about how that has progressed, including you know are you seeing success, maybe Tony those those those accounts into more meaningful platform customers and that on the other hand. It if you are seeing some churn.
And on those customers anyway to quantify what what kind of impact that might be to a R. R.
Yes. So we so we've mentioned that there are a few hundred customers that were single module customers and a lot of these customers have been running one of our synthetic product synthetic monitoring products and we have sort of seen some turnover that the last couple of quarters on that.
We also do land some new logos you know not a lot at this point, but some new logos.
With a single module, but we've also we've been very successful in terms of growing those margins growing those customers that have multi module more observer ability players over time and so yes, we're seeing the churn as we've communicated I think in our fourth quarter call.
Nothing nothing sort of out of line there keep in mind that customer segment. When you look at it from an <unk> standpoint in sort of mid single million dollar a number so not meaningful from an air standpoint, and not meaningful from a customer count.
Thank you. Our next question is coming from Jack Andrews from Needham <unk> Company. Your line is now live.
Hi, Good morning, Thanks for taking my question I wanted to ask maybe a two part question and the first part is could you speak to what types of metrics. Your enterprise customers are focused on driving from there observer ability solutions. These days, meaning that is it still just about number of critical incidents and you know things like meantime to resolution or.
Are they increasingly looking to tie observe ability into tangible business outcomes like measuring net promoter score for example.
More and more of these are these customers are trying to tie together sort of the business impact.
Of that.
You know platform in tool chain.
Other words.
You know measuring results around.
User experience against different kind of FX in just in indexes and so on or relative to conversion rates or abandoned carts.
And that kind of direct connect.
The business outcomes.
And it's one of the unique and powerful aspects of dyno traces that we actually connect the dots between all the rest of the plumbing all the applications and services with the actual outcomes themselves.
To give to give operators a very good well focused approach to how they should optimize where they shouldn't troubleshoot and how they should manage their innovation investments to improve their there.
Their business their business results.
So it is a growing it is a growing trend.
And one that we're excited about and well positioned for.
Well, thanks for the color on that and just as a quick follow up could you maybe expand on your comments in terms of how youre thinking about M&A and other particular aspects.
Aspects of your platform that you think might make sense to perhaps acquire capabilities rather than the than building organically.
Yes, no great question.
The our approach has always been a.
Platform first because we believe that's easier for customers to manage to operate.
And and we can apply.
Greater degrees of automation and AI against use cases, if we sort of manage all the components of that of that platform.
And so technology tuck ins, therefore, you know fit extremely well on that strategy and.
We've started to do we we announced our <unk> acquisition.
And as we find additional similar kinds of talented teams that can accelerate roadmaps.
Materially.
We will be acquisitive.
And it just it makes sense you know, where we have a large enough portfolio, Kevin talked about sort of the cash generation of the business and we want to put that to work.
In whatever way, we can to continue to extend our differentiation and drive topline growth.
Thank you. Your next question today is coming from Koji Ikeda from Bank of America. Your line is now live.
Oh, Hey, Hey, John and Kevin very nice quarter, and thank you for taking my questions.
I guess just as a follow up just to dig in on that M&A strategy, you know thinking about the spec that acquisition. It's been about six weeks now since the acquisition closed. So a couple of questions here first around the technology that was acquired I guess, how much did it accelerate the roadmap for high speed parsing and analytics for Diamond trades and inspect.
That's a good way to think about the inorganic roadmap acceleration strategy and then I guess second it's still early but how has the initial reaction been with our partners and customers out there.
Yeah no. Good good good question. So so first of all I'd say that from a roadmap standpoint, I'd say 18 to 24 month kind of bumped forward, which is you know which is significant.
Second of all.
We believe the first parts of their technology will will be infused into our platform and somewhere between six to nine months from closing the acquisition.
It is about the right kind of timeframe that we think about when we think tuck ins.
And the feedback that we've gotten.
From from customers and partners have been two thumbs up you know, what's next and what else do you have up your sleeve kind of thing.
So.
We've done this before we did want a couple of years ago, we found it to be highly successful.
And you.
Kevin and I see more in our future, where they make sense no there'll be smart there'll be tuck ins and but will be it will be you know.
<unk> and <unk>.
Said, extending our differentiation and driving top line growth.
Got it thanks, John and maybe a follow up for Kevin If I may I was hoping we could dig into the FX impact a bit more.
Can you help us understand a bit more granularly around what regions are driving the FX impacts we're seeing right now.
Yes, so so for the year as I mentioned in the call. Our as reported guidance was reduced by about $15 million or sort of two percentage points of growth related to FX.
A majority of that came as a result of the dollar strengthening primarily against the euro and the pound and also the Australian dollar. So those are sort of three major currencies that we're operating in where we saw the currency movement towards the back towards the end of the second quarter. So that's sort of that resulted in that that as reported are impact.
But as we said in the call.
What we'd like investors to focus on is certainly the constant currency <unk> growth, which we increased by about 250 basis points at the midpoint for the year. So.
Kind of normalize out that any of that FX headwind there.
Thank you. Your next question today is coming from Gray Powell from <unk>. Your line is now live.
Great. Thanks for taking the questions just a couple on my side.
So last quarter, you highlighted that I think 45% of customers use infrastructure monitoring outside of full stack any update there and then for customers that are taking infrastructure monitoring outside of full stack APM. How much are they spending on the product like if they are spending $100 per year in APM, what does infrastructure add today.
And where could it go.
Yes so.
We we just dropped some of the some of the side you know data, but think of it as about a 5% increase in the customer base on a quarter over quarter basis, I mean, we're doing extremely well.
Selling cross selling that module.
With a full stack customers.
And when you think about how many how many cents on the dollar versus the full stack.
Application micro services module.
Think about it as public today, maybe we're in the 15 to 20.
On the dollar kind of range.
It can clearly be a dollar for dollar there's a lot of of.
Structure kind of workloads in that by the way is log analytics for us because we package that together and in our infrastructure module. So theres a lot of dimensions of expansion for that module with every customer we have.
So like I said, we're excited about its maturity I can go toe to toe with anyone and cross sell it's going very well with that with that module in particular and it's a key driver of the three plus module.
Growth.
As well.
Got it okay. That's really helpful. Thank you.
Thank you. Your next question today is coming from Camille, Missouri from William Blair. Your line is now live.
Thank you hi, congrats on the solid quarter.
John You said in the past that a third of customers land with the three or more module platform approach and you you've attributed this I think last quarter. So the move toward a observer ability as a landing zone away from applications as a landing zone. So in that context, I would like to better understand how you expect the size of new lands.
Long term, how do you expect that landing zone to evolve and is there a point, where you choose to limit the growth in new land in favor of maybe a faster pace of new logo wins, and then faster expansion rates.
Or should we expect the size of new logo asps to trend up for the foreseeable future.
Yeah, No. That's that's definitely what you know are a.
A key question.
Question that we continue to ask ourselves because the speed of new logo acquisitions.
It is a really important long term growth driver for us. So that's why you've seen that landing zone stay pretty constant, but I will say when we when we IPO Ed a couple of years ago. It was more in the 90 to 95 K and now it's in the 105 to 100 10-K.
So it has been creeping up and that's that creep has been.
More modules on day one.
So the shift to observe ability definitely has some impact to it no no no question about that and I do believe that it will continue to creep up.
Okay, I won't jump up but it will creep up.
As a as you know more and more landing zones or are observed ability of broader platform approach.
<unk>, which is today as you pointed out about a third.
<unk> approach is 50% you know obviously that that will impact.
That landing zone number.
Think we'll always try to keep it pretty close to.
The 100, K, maybe it gets to 120 125, but.
Even there it's still up.
Still not.
It's not too high for $1 billion business, whose digitally transforming to try something new.
It just might work.
Better than advertised fulfill the promises that many have had that had fallen short. So I still think it's in the right zone, but I do expect it to creep up over time.
That's helpful. Thank you and and a quick follow up for Kevin current or a P. O is up in the high thirties billings on a trailing 12 month basis is up close to 40% I think there are after adjustments also high <unk>. So why aren't we seeing that kind of growth rate in revenue yet whats called named convergence and is it fair to expect.
And revenue growth to converge sometime in the next few years.
Yeah.
So I think what we're seeing so so first of all from an RPI standpoint, I think we're very pleased in the growth of that yeah. We've got implemented one contract one price. We're also doing a lot of more rip and replace and accelerating growth with our customer base and extending the three year deals. So that's sort of driving that that <unk> growth but.
The more important metric I think as you all as you appreciate it.
And that's been that's been growing nicely.
Subscription revenue I think that's the metric that you need to think about and I think those will start to converge, there's a little bit of a dynamic in the subscription revenue due to the perpetual license wind down, but as we get through that transition here over the next couple of quarters, you will start to see the air growth rate in the subscription growth rate essentially mirror.
<unk> marry each other but I think that's probably four to six quarters away. So there'll be a slight discrepancy between those two metrics at this point.
But again, they're both growing pretty nicely and will converge over time.
Thank you. Our next question today is coming from Keith Bachman from Bank of Montreal. Your line is now live.
Hi, Thank you I wanted to focus on security for my first question could you give us an update on where you are in terms of a potential traction over the next 12 months and going back to the.
The dollar for dollar.
<unk> said, how would you characterize it now that you've had a couple more quarters at least observe it.
And what the potential is but if you could just give us an update on security, including other.
All the recent M&A may impact your thoughts there and then I have a follow up if I could.
Sure sure Keith.
So things are still going extremely well with that with that module. We've introduced it now to about 20% of our customer base trialed it in about 10%.
Feedback is still the same that we've heard before this is a there's nothing like this is a greenfield opportunity for us and it just needed a few sort of pieces to be mature enough.
For our global 15000 C. So to approve.
And we're at that at that point now in a combination of coverage as well as sort of operational automation capabilities of how it fits in a Dev ops.
Environment. So so those have been the two.
Two key technology elements that we.
We see this quarter or really the second half of this year as a scale up of customers and end growth opportunities, but it's still off of a super small numbers. So you won't see it really in any impact until fiscal 'twenty three but that's consistent with what we said about a year ago. When we talked about it I think.
It was either December or January that we introduced the <unk> module and.
And we're on track, maybe a little bit ahead of track, but actually as far as acquisitions go and sort of impact over time.
Today with the functionality, we have we think it's probably able to capture maybe 20 cents on a full stack dollar, but with the roadmap. We have you know a year from now we'll be capturing 50 50 cents.
On the full stack dollar and where we are two years from now we think it's clearly should be a dollar for dollar with the observer ability.
Pete.
Perfect Okay.
Around the scale up la rubia, yeah, well that.
Smoke.
No.
What are customers.
Re plus modules and I think your total module offering is six.
How would you how would you think investors should consider what that looks like three years from now but in other words does your model module offering double over the next three to five years or how should we be thinking about the potential.
For portfolio expansion over the next three plus years.
So so first of all let me let me just start with the way we package modules is different than others. We packaged by use cases, which includes multiple sort of features and components things other people might call products will package them all around use cases so.
It's a different kind of packaging strategy, which which fits our global 15000 customer you know a little bit a little bit better.
So we'll never have.
A massive amount of modules, but we will continue to gradually increase the modules over time.
The way, we'll end up talking about and that's a little speculative, but you know I think you still start talking a little bit about four plus module five plus module customers.
But the key I think is the trend is the movement of <unk> for customer like how do you go from a landing zone of 100000.
In <unk> to a $1 million, which we believe all of our customers can reach and exceed and I think that that's really right. Now we're talking about three plus modules that you can see is close to 500000 halfway there yet a fourth and a fifth and you keep growing.
And it's.
Really underpins our thesis of that expansion above 120% for for a pretty long time to come and that's a key part of our entire growth strategy to stay above 30% over the long term.
Thank you we 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, No I appreciate your attendance today support for the business.
Just leave you with a few thoughts first of all you know we believe our business has never been stronger.
Or this was a very strong financial quarter for us business results.
And.
And one of our stronger guides actually when you take it in constant currency. So we're thrilled about that you know teams extremely strong proven and our execution ability has never been better as well. So we're thrilled for the future and look forward to catching up you know what.
At our next call in January or early February when we talk about our Q3 results. Thank you very much.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day.
Thank you for your participation today.