Q3 2022 Dynatrace Inc Earnings Call

Speaker 1: Greetings. Welcome to Diner Trace Fiscal Third Quarter 2022 Ertings' House.

Greetings and welcome to <unk> fiscal third quarter 2022 earnings call.

Speaker 1: this time all participants are in the civilian mode. A question and answer session will follow the formal presentation.

All participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Speaker 1: If anyone should acquire operative assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Speaker 1: At this time, I'll now turn the conference over to Noel Ferris, Vice President and Investor Relations. Noel, you may now begin.

At this time I'll now turn the conference over to New Welfarist, Vice President Investor Relations Noel you May now begin.

Speaker 2: Thanks operator, good morning everyone, and thank you for joining Diner Traces, third quarter, FY22, earnings conference call. With me on the call today, our Rick McConnell Chief Executive Officer and Kevin Burns, Chief Financial Officer.

Thanks, operator, good morning, everyone and thank you for joining <unk> third quarter FY 'twenty two earnings conference call.

Me on the call today are Rick Mcdonald, Chief Executive Officer, and Kevin Burns Chief Financial Officer.

Speaker 2: 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 some statements.

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.

Speaker 2: Additional information concerning these uncertainties and respectors is contained in Diner Traces filing with the SEC, including our annual report on Form 10K and quarterly reports on Form 10Q.

Additional information concerning these uncertainties and risk factors is contained in penetration filings with the SEC, including our annual report on Form 10-K , and quarterly report on Form 10-Q .

The forward looking statements included in this call represent the company's views on February 2nd 2022 demonstrates disclaims any obligation to update these statements to reflect future events or circumstances.

Speaker 2: But forward-looking statements included in this call represent the company's views on February 2, 2022. Signestration explains any obligation to update these statements to reflect future events or circumstances.

Speaker 2: 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, Rick McConnell. Rick?

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, Mike Mcconnell Red.

Thanks, Noel and good morning, everyone.

Speaker 3: Thanks, Noel, and good morning, everyone. Thank you for joining us on today's call. I am very excited to be kicking off when I anticipate will be the first of many positive earnings calls as Dynatrace's CEO .

Thank you for joining us on today's call I am very excited to be kicking off what I anticipate will be the first of many positive earnings calls as diner traces C E O.

Speaker 3: First, I'd like to thank John Van Siklin for his contributions in growing dynatrace as CEO to nearly $1 billion in ARR. He set the stage for a smooth and seamless transition in leadership for which I'm very grateful.

First I'd like to thank John Van Hickman for his contributions and growing Diana trades as CEO nearly $1 billion in a R. R.

He set the stage for a smooth and seamless transition in leadership for which I'm very grateful.

Speaker 3: I'm going to cover a lot of grants today. So at the highest level, there are three key messages I'm hoping you take away from today's discussion. First, Dhanitres has established a solid foundation and we are continuing to fire on all cylinders.

I'm going to cover a lot of ground. So at the highest level. There are three key messages I'm, hoping you take away from today's discussion first diagnosed Reis has established a solid foundation and we are continuing to fire on all cylinders second Q3 was a very strong quarter, beating.

Speaker 3: Second, Q3 was a very strong quarter, beating expectations across all T operating metrics, and we are raising guidance for FY22.

<unk> across all key operating metrics and we are raising guidance for FY 'twenty two.

Speaker 3: And third, we're leaning further into our sales and marketing as well as R&D investments with the intention to drive accelerated growth.

And third we're leaning further into our sales and marketing as well as R&D investments with the intention to drive accelerated growth.

Speaker 3: Before talking about our financial performance and how I think about the future of the business, I thought it would be helpful to share with you my primary reasons for joining Dynatrade.

Before talking about our financial performance and how I think about the future of the business I thought it would be helpful to share with you My primary reasons for joining diner Chris.

Speaker 3: First, the addressable market is enormous. Over $50 billion in accelerating across all industries, and we've only scratched the surface.

First the addressable market is enormous over $50 billion in accelerating across all industries and we've only scratched the surface.

Second Diana trace this technology is world class and highly differentiated.

Speaker 3: Second, Dynastasis technology is world class and highly different

Speaker 3: Customers and analysts provided me with powerful third party validation of the strength of Dynatrace and its products. And my recent customer conversations since taking the role have further reinforced this perspective.

Customers and analysts provided me with powerful third party validation of the strength of diner trace and its products and my recent customer conversations since taking the role have further reinforced this perspective.

Third Dayni traits. This financial performance is exceptional and positions us in a very elite group of companies with similar results with growth in excess of 30% and strong profitability. We are in excellent position to continue investing to deliver ever increasing value to our customers.

Speaker 3: Third, dining traces financial performance is exceptional. And positions us in a very elite group of companies with similar results. With growth in excess of 30% and strong profitability, we are in excellent position to continue investing, to deliver ever increasing value to our customers. I enjoy building market-leading, multi-billion dollar business.

I enjoyed building market, leading multibillion dollar businesses and this is precisely the opportunity we have in front of us at <unk>.

Speaker 3: And this is precisely the opportunity we have in front of us at Tiny.

Speaker 3: And finally, I joined Dynatrace because of the expertise and talent of our people. I admire the vibrancy of the Dynatrace culture, celebrating innovation, collaboration, and customer orientation.

And finally I joined Dine in Tracy you got to the expertise and talent of our people I admire the vibrancy of the diner crazed culture celebrating innovation collaboration and customer orientation.

Speaker 3: In short, this is a company I'm thrilled to be a part of. And my passion and enthusiasm have only grown since starting in mid-December. I'm fired up and looking forward to this next phase of growth.

In short this is a company I'm thrilled to be a part of.

And my passion and enthusiasm has only grown since starting in mid December and fired up and looking forward to this next phase of growth.

Moving onto our Q3 performance.

Speaker 3: Let me start by sharing how extremely pleased I am with the team's execution, once again beating guidance across all our key operating metrics.

Let me start by sharing how extremely pleased I am with the team's execution once again, beating guidance across all our key operating metrics.

Speaker 3: ARR finished at $930 million, up a very strong 32% year-over-year in constant currency.

Our our finish at $930 million up a very strong 32% year over year in constant currency subscription revenue was $226 million up 34% year over year in constant currency.

Speaker 3: Subscription revenue was $226 million, up 34% year over year in constant currency.

Speaker 3: People often speak of the rule of 40 as exemplifying strong performance in a highly successful SaaS business, with the combination of ARR growth and free cash flow being greater than 40%.

People often speak of the rule of 40 as exemplifying strong performance in a highly successful SaaS business with the combination of they are our growth and free cash flow being greater than 40%.

Speaker 3: On a trailing 12-month basis, we've been operating at a rule of nearly 60, with 32% ARR growth and 27% unlevered free cash flow margins. And this remains the case for our FY22 guidance.

On a trailing 12 month basis, we've been operating at a rule of nearly 60 with 32% a our gross and 27% Unlevered free cash flow margins and this remains the case for FY 'twenty two guidance.

Our foundation for sustainable long term, a or our growth continues to be the combination of adding new logos to the dining cross platform plus the ongoing expansion of existing customers. We continued to see strength in both areas.

Speaker 3: Our foundation for sustainable long-term ARR growth continues to be the combination of adding new logos to the Dynatrace platform, plus the ongoing expansion of existing customers. We continue to see strength in both ARRs.

Speaker 3: We have added more than 500 new logos to the Dynatrace platform over the past nine months, which at 22% growth is above our historical 15 to 20% goal.

We've added more than 500, new logos to the diner trade platform over the past nine months, which had 22% growth is above our historical 15% to 20% goal.

Speaker 3: During the quarter, we continue to add industry leaders from diverse industries, such as Barry and Medical Systems, Janus Capital, the state of Arkansas, and Wendy.

During the quarter, we continue to add industry leaders from diverse industries, such as Varian medical systems, Janus capital the state of Arkansas and Wendy's.

Speaker 3: Of equal importance, we are closing larger initial transactions driven by multi-module sales, a key indicator of the value our customers are deriving from our observability platform.

Of equal importance, we are closing larger initial transactions driven by multi module sales a key indicator of the value our customers are deriving from the Arabs and mobility platform.

Year to date, our new logo a R. R is up 37% over last year and 50% of these were three plus module sets.

Speaker 3: Year-to-date, our new logo ARR is up 37% over last year, and 50% of these were three-plus module six.

Speaker 3: As to existing customers, Secretaria General de Administración, Marathon Petroleum and General Motors are a few examples of companies that expanded their Dynatrace investment.

As to existing customers Secretary of Hana, Rob administer us young marathon petroleum and General Motors are a few examples of companies that expanded their diner trace investments.

Speaker 3: contributing to our net expansion rate being above 120% for the 15th consecutive quarter.

Contributing to our net expansion rate being above 120% for the 15th consecutive quarter.

Speaker 3: consistent execution against the two building blocks of new logo acquisition and net expansion rate has resulted in a sustained 30% plus ARR growth business over the past couple of years, which is a tremendous accomplishment.

Our consistent execution against the two building blocks of new logo acquisition and net expansion rate has resulted in a sustained 30% plus AOR growth business over the past couple of years, which is a tremendous accomplishment.

Speaker 3: At the same time, we continue to see healthy bottom line performance in Q3 with 25% non-gap operating margins and non-gap EPS of $0.18 per diluted share, reflecting our commitment to running a balanced business even as we invest for future growth.

At the same time, we continued to see healthy bottom line performance in Q3, with 25% non-GAAP operating margins and non-GAAP EPS of <unk> 18 cents per diluted share, reflecting our commitment to running a balanced business, even as we invest for future growth.

With the strength of our Q3 results and positive outlook ahead, we are increasing our guidance for FY 'twenty, two as I mentioned, which Kevin will provide more detail on shortly.

Speaker 3: With the strength of our Q3 results and positive outlook ahead, we are increasing our guidance for FY22, as I mentioned, which Kevin will provide more detail on shortly.

Speaker 3: Now I'd like to shift to how I think about our business moving forward.

Now I'd like to shift to how I think about our business moving forward.

Speaker 3: It would come as no surprise to any of you that digital transformation is at the heart of many global businesses today, with IDC forecasting global spending in this area to exceed $10 trillion over a five-year period. The result, if executed well, is an organization that is better suited to meet its customers' needs, can compete more effectively in an online world, and is equipped to do so more efficiently at lower cost.

It would come as no surprise any of you that digital transformation is at the heart of many global businesses today with IDC is forecasting global spending in this area to exceed 10 trillion dollars over a five year period.

The result, if executed well is an organization that is better suited to meet its customers' needs can compete more effectively in an online world and is equipped to do so more efficiently at lower cost.

Speaker 3: Digital transformation has become ubiquitous in driving corporate strategy from customer relationships to supply chain to internal processes and beyond.

Digital transformation has become ubiquitous in driving corporate strategy from customer relationships to supply chain to internal processes and beyond.

Speaker 3: To execute digital transformation initiatives, organizations are often leveraging modern, ever-changing multi-cloud environments that deliver efficiency and flexibility. But these environments also bring a scale and complexity that's well beyond that of the data center world. Teams need assistance in simplifying the overwhelming volume and complexity of data.

To execute digital transformation initiatives organizations are often leveraging modern ever changing multi cloud environments to deliver efficiency and flexibility.

But these environments also bring a scale and complexity, that's well beyond that of the data Center world.

Teams need assistance in simplifying the overwhelming volume and complexity of data.

Speaker 3: To innovate quickly, organizations need what we think of at Dynatrace as answer-driven automation, not just data, but rather answers from the data that drive automated action.

To innovate quickly organizations need what we think of a diner trace as answer driven automation not.

Not just data, but rather answers from the data that drive automated action.

Speaker 3: They want to optimize all aspects of their business at every moment in time, anywhere around the globe. And if there is an issue, they need to know it in real time before their customers or partners.

They want to optimize all aspects of their business at every moment in time anywhere around the globe.

And if there is any issue they need to know it in real time before their customers or partners do.

Speaker 3: They need to be able to pinpoint the origin of the problem to enable rapid or even automatic resolution. And they want to go further to gain insights and user experiences and use the wealth of information blowing through their systems to understand customer behavior and drive better business results, such as increased conversions, higher revenue and profit optimization. This is the path.

They need to be able to pinpoint the origin of the problem to enable rapid or even automatic resolution and they want to go further to gain insights into user experiences and use the wealth of information blowing through their systems to understand customer behavior and drive better business results.

Such as increased conversions higher revenue and profit optimization.

This is the power of Diana <unk>.

Instead of requiring multiple disparate and disconnected tools and providing petabytes upon petabytes of data dying of trace provides a software intelligence platform that makes sense of it all even in the most complex hybrid and multi cloud environments.

Speaker 3: Instead of requiring multiple disparate and disconnected tools and providing petabytes upon petabytes of data, Dynatrace provides a software intelligence platform that makes sense of it all, even in the most complex hybrid and multi-cloud environment.

Speaker 3: These modern environments demand more than serving up data on dashboards for manual analysis and action. Rather, we provide deep situational awareness to keep businesses operating and to radically improve innovation, efficiency, and response.

These monitored environments demand more and serving our beta on dashboards for manual analysis and action.

Rather we provide deep situational awareness to keep businesses operating and to radically improve innovation efficiency and responsiveness.

Speaker 3: Powered by our unique AIOps engine, unified with the deep and broad observability provided by the Dynatrace platform, we deliver the answers companies need to run their businesses most effectively. And the automation...

Powered by our unique AI ops engine unified with a deep and broad observe ability provided by the diner Tracy platform we.

We deliver the answers companies need to run their businesses most effectively.

And the automation to do it efficiently.

Speaker 3: In so doing, we have gone well beyond the capabilities of other in-house or competitive tools to become an indispensable part of our customers' cloud ecosystem.

In so doing we have gone well beyond the capabilities of other in house or competitive tools to become an indispensable part of our customers' cloud ecosystems.

Let me share a couple of examples of how the power of our platform translated into several strategic customer wins for dine in Tres during Q3, one of the largest insurance providers in the U S. As a goal to digitally transform the insurance industry and make it easier for customers to buy their distribution teams to.

Speaker 3: Let me share a couple of examples of how the power of our platform translated into several strategic customer wins for Dynatrace during Q3. One of the largest insurance providers in the U.S. has a goal to digitally transform the insurance industry and make it easier for customers to buy, their distribution teams to sell, and their employees to work.

Cell and their employees to work in the midst of their transformation. He found the previous Siloed multi tool approach required bar too much manual work and did not provide the answers to allow them to innovate, but the speed and quality the business demand.

Speaker 3: In the midst of their transformation, they found the previous siloed multi-tool approach required far too much manual work and did not provide the answers to allow them to innovate at the speed and quality the business demanded.

Speaker 3: With Dynatrace, they move to a single source of truth, an AI-driven answer.

With diner trace they moved to a single source of truth and AI driven answers.

Speaker 3: This freed time for innovation, accelerated their digital transformation, and enabled them to optimize every step of their biggest client-facing application to ensure that their software performed precisely as internal and external customers expected.

This freed time for innovation accelerating their digital transformation and enable them to optimize every step of their biggest client facing application to ensure that their software perform precisely as internal and external customers expect.

Speaker 3: Another customer, a Fortune 500 global oil and gas company based in Asia, is reshaping its operations to ensure a sustainable future. Their previous monitoring tools and approaches were not designed for modern environments.

Another customer a fortune 500 global oil and gas company based in Asia is reshaping its operations to ensure a sustainable future.

Their previous monitoring tools and approaches were not designed for modern environments. The scale speed of change and complexity of the multi cloud architecture that is powering their transformation had surpassed these tools ability to keep up.

Speaker 3: The scale, speed of change, and complexity of the multi-cloud architecture that is powering their transformation has surpassed these tools' ability to.

Speaker 3: The customer came to Dynatre's to tame cloud complexity and provide end-to-end visibility and roof-cause analysis to reduce manual work.

The customer came to dine at Tres to tame cloud complexity and provide end to end visibility and root cause analysis to reduce manual work.

By delivering intelligence and automation at enormous scale, we eliminated thousands of alerts any numerable war rooms, resulting in greater simplification faster innovation and more efficient collaboration.

Speaker 3: By delivering intelligence and automation at enormous scale, we eliminated thousands of alerts in innumerable war rooms, resulting in greater simplification, faster innovation, and more efficient collaboration. As a result, Dynatrace has now become the blueprint for observability across the organization.

As a result.

This has now become a blueprint or observe ability across the organization.

These are just a couple of customer examples.

Speaker 3: I learn of more each day and with each successful engagement, it reinforces my enthusiasm for Dynatrace and the value we bring to our customers.

I learn more each day and with each successful engagement and reinforces my enthusiasm for Dino trace and the value we bring to our customers.

Near term our focus will be on continued execution, leveraging what we're doing well and then finding ways to grow even faster.

Speaker 3: Near term, our focus will be on continued execution, leveraging what we're doing well, and then finding ways to grow even faster.

Consequently, we believe there is an opportunity to modestly increase investment in both sales and marketing as well as R&D to accelerate growth, while maintaining healthy profitability, which Kevin will say more about shortly.

Speaker 3: Consequently, we believe there is an opportunity to modestly increase investment in both sales and marketing, as well as R&D, to accelerate growth while maintaining healthy profitability, which Kevin will say more about shortly.

We've already made great strides in these areas with quota carrying reps growing over 30% year over year partners now influencing more than 50% of our transactions and brand awareness increases.

Speaker 3: The level of interest generated for our PErforM conference next week is a great indicator of these efforts, with more than 32,000 registered attendees expected, representing over 8,500 organizations, more than half new to Dynadome.

The level of interest generated for our perform conference next week is a great indicator of these efforts with more than 32000 registered attendees expected representing over 8500 organizations more than half new at a diner Trish.

You can also expect that will continue to fuel our innovation engine with existing module expansion, new module creation and platform innovation to enable even more comprehensive abuse of our customer ecosystems.

Speaker 3: You can also expect that we'll continue to fuel our innovation engine with existing module expansion, new module creation, and platform innovation to enable even more comprehensive views of our customer ecosystem.

Speaker 3: Our cloud application security module is a great example of our focus on continued innovation to produce substantial customer value as a fundamental element of our software intelligence platform.

Our cloud application security module is a great example of our focus on continued innovation to produce substantial customer value is a fundamental element of our software intelligence platform. We're.

Speaker 3: We're seeing positive early signs of traction and our differentiated approach is worth highlighting.

We're seeing positive early signs of traction and our differentiated approach is worth highlighting.

Speaker 3: back in December as the world raised to protect systems from the log 4J vulnerability, our application security module was able to detect it within minutes of being public.

Back in December as the World race to protect systems from the log for Jay vulnerability, our application security module was able to detect it within minutes of being published not only did we detect all instances of the vulnerability across highly distributed multi cloud environments, but through our AI engine.

Speaker 3: Not only did we detect all instances of the vulnerability across highly distributed multi-cloud environments, but through our AI engine, as well as our associated understanding of the topology and transaction pattern.

And as well as air associated understanding that apology and transaction patterns, we help their customers prioritized application updates and mitigation strategies customers using alternative tools had to go through the painful and largely manual process of upgrading their agents and restarting their applications to <unk>.

Speaker 3: We help our customers prioritize application updates and mitigation strategies.

[noise] mitigate borg for shell.

One customer said other tools tell us we have a vulnerability, but diner trace apps that tells us everything about what where and how to fix it.

Another customer told us it's mind blowing how diner trace application security found the log for Jay vulnerability before any of our other numerous security products.

And yet another said we've spent hundreds of hours trying to understand our exposure and once diner trace App SEC was enabled we immediately understood. It.

With this level of clear value added customers. It's no surprise that we saw in over 10 X jump in P. O sees during this time.

While we don't hope for more vulnerabilities they have become an unfortunate and common reality.

It is still early and diner traces app sector in it but I was delighted with the performance of the March as well as our customers' engagement and response.

It offers a strong proof point of our unique offering and leads to our plan to drive our growth in this area in FY 'twenty three and beyond.

It is worth also noting my personal enthusiasm for our opportunity in this area given my background in application security over the past decade.

Before I turn it over to Kevin I am very pleased to welcome Ambika Kapoor to the diner tray sport.

<unk> has extensive product marketing knowledge and experience from her work at Vmware bracket computing and Cisco and her expertise in this area represents a valuable addition to the already strong breadth of knowledge and experience across this group.

In summary, I am delighted with our continued strong performance in Q3 and for the first three quarters of this fiscal year, we are putting our growth profitability and cash generation to good use in our investments in innovation go to market in the world class talent needed to fuel future growth.

I couldn't be more delighted to be part of diner trace and I look forward to meeting many of you in the future.

Now I'll turn the call over to Kevin for more on our Q3 financials and our outlook for the fourth quarter Kevin.

Thank you Rick and good morning to everyone.

As Rick mentioned, we delivered another outstanding quarter on both the top and bottom line setting us up for a solid finish to fiscal 'twenty two with the building blocks in place for sustained a or growth of 30% plus.

Our investments in sales and commercial expansion continued to result in strong topline performance with air our revenue and subscription revenue exceeding our guidance and resulting in another increase in our annual guidance.

Air for the third quarter was $930 million, that's an increase of $66 million sequentially or $208 million year over year, representing 29% year over year growth sequentially.

Sequentially. This includes a 15 million dollar FX headwind.

The year over year basis. This is a $21 million FX headwind of roughly 300 basis points.

Given the fact that we focus on the needs of global enterprises, approximately half of our business is conducted in currencies other than the U S. Dollar.

This means that our a R and financial results are subject to foreign currency fluctuations.

Given the strengthening of the U S. Dollar this is creating an ongoing headwind to our reported growth as a result, we believe investors should focus on our constant currency growth rates as these reflect the true strength of the business.

On a constant currency basis total air was $951 million, an increase of $229 million, representing 32% growth over last year.

Backing out the $34 million of perpetual license headwind to a R, which negatively impacted year over year growth rates by about 450 basis points, our constant currency adjusted air growth rate was 36% year over year.

This represents the fourth quarter in a row with sustained growth rates above 35%.

And is reflective of the increased investments we have been making in our commercial organization.

As we wind down the perpetual license revenue included an a or we believe the constant currency adjusted air growth reflects the sustained and durability growth rate of the business.

And even on this further when looking at are excluding the impact of the perpetual license headwind, we added $263 million of new E. R. Over the last 12 months compared to $176 million for the prior 12 months, an increase of nearly 50%.

We included a quarterly historical chart of new Air expansion normalize for currency and perpetual run off in our investor deck and beta trends table that are available on our website.

As Rick mentioned the building blocks for sustained air growth remain the same. The addition of new logos combined with the ability to expand existing customer relationships as measured by our net expansion rate.

New logo growth continues to be healthy we added 206, new logos in the quarter, an increase of 9% over last year and year to date, we added 501, new logos up 22% compared to the same period last year.

Given the changes in seasonality of our business last year, where we had a much stronger back half due to the COVID-19 headwinds in the first half we believe the year to date view is the best way to look at new logo additions as it normalizes for these quarterly fluctuations.

As observed ability becomes a primary driver for new sales, we continue to see positive momentum with a higher percentage of customers landing with three or more modules on a year to date basis. The number of new logos landing with three or more modules was 44% compared to 33% for the same period last year and.

In addition over the last year, new logos have continued to land at a very healthy level with initial air lands of $116000 on a trailing 12 month basis.

Given the observed ability landing zone, we're starting to see a healthy increase in our average land sites.

At this point nearly half of our customers are now using three or more modules demonstrating that dining choices open and unified platform is an indispensable part of their ecosystem with over 3200 customers on the platform. That's an increase of more than 450 customers from a year ago when about one.

One third of our customers you use three or more modules.

J R for three plus module customers has increased to nearly $500000 almost twice the size of the average error podiatrists customer and $287000.

Underlying this healthy average IRR for three plus module customers is the air contribution from our infrastructure module, which increased over 75% from Q3 of last year.

Moving on to revenue total revenue for the third quarter was $241 million up 33% year over year in constant currency and exceeding the high end of our guidance range by $6 million.

Subscription revenue for the third quarter was $226 million up 34% in constant currency, a $5 million beat versus the high end of our guidance.

As I move forward in prepared remarks, I will be using non-GAAP measures unless otherwise noted.

With respect to margins gross margin for the third quarter was 85% inline with last quarter in Q3 of last year as we have said before a very healthy margin, reflecting the value and efficiency of the diamond trade platform.

Overall, we are extremely pleased with the strength of both our air growth and associated revenue performance. We believe that this further validates our strategy to continue to accelerate investments to grow the topline as Rick discussed.

You'll continue to see us lean in on both commercial expansion and technology innovation to capture the large and growing market opportunity ahead of us.

For the third quarter, we invested $34 million in R&D up 37% from last year, we continue to successfully attract and retain talent in our R&D organization consistent with our expectations on the go to market side, we invested $84 million in sales and marketing.

Up 45% over last year and within our current target investment zone of 34% to 36% of revenue.

Our operating income for the third quarter was $61 million $5 million above the high end of our guidance range, primarily due to the revenue upside that flowed through to the bottom line.

This resulted in an operating margin of 25% compared to 29% in the third quarter of last year.

Again keep in mind that we saw significant savings last year related to the Covid shutdown and we began to reaccelerate investments starting in Q3 of last year.

On the bottom line net income was $52 million or <unk> 18 per share.

Turning to the balance sheet as of December 31, we had $409 million of cash an increase of $109 million compared to the same period last year.

We are pleased with our continued healthy cash generation and believe this puts us in a strong position to consider strategic business investments, where there's opportunity to accelerate growth in selected areas.

Year to date, our Unlevered free cash flow was $152 million consistent with the same period last year.

As a reminder, due to changes in billing patterns. We believe it's best to view Unlevered free cash flow over time.

On a trailing 12 month basis, our unlevered free cash flow was $238 million or 27% of revenue.

The last financial measure that I would like to discuss is our remaining performance obligation.

Our appeal was approximately $1 $4 billion at the end of the quarter, an increase of 37% on a constant currency basis over Q3 of last year.

Current portion of our P O, which we expect to recognize as revenue over the next four quarters with $804 million, an increase of 35% year over year on a constant currency basis.

We're very pleased with the growth in our P. O. However, we continue to believe a R is the best metric to understand the businesses performance as it removes variability associated with billings and contracted.

Moving onto guidance as a reminder, when we talk about margins and profitability I will be referring to non-GAAP measures. Since the end of Q3 U S. Dollar has further strengthened resulting in a growing Q4 FX headwind to.

To provide investors better visibility into the fundamental strength of our business I'll share and recommend that investors focus on constant currency growth rates.

Once again, we believe our investments in commercial expansion and product innovation will enable us to maintain 120% net expansion rate and 15% to 20% and new logo growth over the midterm.

These are the core building blocks that deliver sustained a or growth of 30% plus over time.

With that in mind, we're once again, raising our FY 'twenty two a our guidance to 30% to 31% growth year over year on a constant currency basis up 100 basis points from our prior guidance.

We expect as reported are to be between 990 and $996 million up 28% to 29% year over year. In addition, our air guidance assumes roughly 300 basis points of headwind to air growth rates in fiscal 'twenty two to do the associated perpetual.

[noise] license find out.

Therefore, we expect that our constant currency adjusted air growth will be 33% to 34% again, an increase of 100 basis points from prior guidance.

We're also raising our constant currency revenue guidance by 100 basis points for the year. We now expect total revenue to be between $922 million to $924 million, representing 31% year over year growth or 30% to 31% year over year growth on a constant currency basis.

Underlying that we are also raising our subscription revenue guidance for the year by 150 basis points in constant currency. We now expect subscription revenue to be between 866, and $867 $5 million up 32% year over year, both as reported.

<unk> and in constant currency.

We continue to expect subscription revenue to be 94% of total revenue driven by the size and strength of the air and associated subscription revenue growth.

Moving down the P&L, we expect full year operating income to be between $228 million to $230 million.

As Rick mentioned earlier and consistent with our stated goals over the last year, we plan to lean in on investments to fuel additional air expansion and topline growth. However, it will take time to ramp additional investments before we further move the needle on a our expansion.

For the year, we expect sales and marketing to be in a range of 35% to 36% of revenue and R&D to be around 15% of revenue, resulting in an operating margin of nearly 25% of revenue.

As we plan beyond fiscal 'twenty, two and continue to lean in on our investments we expect to layer in another 200 to 300 basis points between R&D and sales and marketing throughout fiscal 'twenty three.

For the full here, we expect EPS up 66 67 per share up two cents on the high end of our previous guidance, our net income and EPS calculations assume an effective cash tax rate of 12% consistent with prior guidance.

At these investment levels, we're able to continue delivering strong unlevered free cash flow margins, we're raising unlevered free cash flow slightly to be.

$268 million to $275 million or approximately 29% to 30% of revenue for the year.

To summarize our full year guidance. It is a continuation of our durable balance of growth and profitability guiding to a rule of 60 business when combining air growth and Unlevered free cash flow margin.

Looking at Q4, we expect total revenue to be between 245, and $247 million up 25% to 26% year over year or 27% to 28% in constant currency and.

In addition subscription revenue is expected to be between 235 $232 million up 26% to 27% year over year or 29% to 30% in constant currency.

From a profit standpoint operating income is expected to be between 51, five and $53 $5 million, resulting in an operating margin of 21% to 22% of revenue as we continue to execute on our investment strategy combined with the incremental spend related to our performance.

<unk> Conference next week.

Finally, we expect EPS to be between 15, and 16 cents per share.

In summary, we are once again very pleased with the overall momentum of our third quarter performance with strong E. R and topline growth combined with healthy margins as we have outlined we have a solid foundation for sustained growth.

And with that we'll open the line for questions operator.

Thank you at this time, we'll now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

So that we may address questions from as many participants as possible. We ask you. Please limit yourself to one question.

One moment, please while we poll for questions.

Thank you and our first question is from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.

Hey, guys. Good morning, Rick welcome to dietary some and we certainly look forward to working with you on an ongoing basis. So congrats on that first and foremost.

I guess it seems like people are focused on the slight constant currency adjusted air artist celebration this quarter, but I think you're doing your new disclosures on the net new Air Girl from Super helpful. This quarter and I guess the way I look at it if you exclude currency and the perpetual run off it looks like you know it.

Two year stack basis, you continue to accelerate our growth is.

Is that the right way to think about this and I guess overall can you characterize the spending patterns for those that worry about maybe a slowdown in digital transformation spending post COVID-19 .

Sure Hey, Matt, It's Kevin Hope, you're doing well. So so I think absolutely right I think you know what we did provide it and in the top tracking also in our supplement that we filed in our 8-K. That's on our website is a disclosure about our new a our expansion bookings and what this is is you know with the growth in the business and this year on a trail.

12 month basis, we grew the R E R by $263 million, which was as we have highlighted was up 49% on a year over year basis. So that really is the underlying growth of our expansion bookings and we think that's a great indicator of the health of the business I will also say you know it is it's important to look at it.

At our growth rate on a constant currency basis over the last four quarters or a or excluding the purple license headwind has been north of 35% this quarter it dropped slightly to 36%, but super healthy underlying the business you know the demand environment remains very robust.

Company continues to perform and we're hiring sales reps above plan and you know we think we think the business has continued to do extremely well so between the combination of the 36% are adjusted growth and the 49% and air expansion bookings were Super excited and pleased with the results in Q3.

And thanks very much for the welcome Mat appreciate it look forward to meeting you very excited that both on the new logo front as well as net expansion rate are both look very strong and feel very good about the future.

Thanks, a lot guys.

Our next question is from the line of Sterling Auty with J P. Morgan. Please proceed with your question.

Yeah, Thanks, Hi, guys and let me Echo Matt's comments, Rick welcome to dietary just a further maths line of questions because yes, that's what we're getting the most inbound interest from investors on that are our side that slight or the 2% deceleration quarter over quarter.

You know can you give us a sense of any thoughts that you might have around what your market share might have done in the quarter or pricing you know trends or anything else that may have also contributed to that two point slowdown.

No no significant change in Sterling and in market share you know, we continue to have very healthy win rates across our across the board. So I think that continues you know I'd say there is a slight change in seasonality. If you look at our air expansion in the first half of last year and certainly on a year to date basis. It was impac.

And by Covid in the first half, which you made a little bit of an easier comp in Q2 of 'twenty two compared to Q3 of 'twenty. Two so fundamentally win rates remain very healthy across the board and as I mentioned earlier, the demand environment remains robust and the people are continuing to accelerate their digital transformation initiatives.

We think that bodes well for the future.

Got it thank you.

I mean, what I would what I would say Sterling is is just that we continue to see the biggest opportunity is being replacement of DIY.

It is a that is that is the biggest greenfield then as global 15000 customers and companies move over to a digital transformation initiatives. They they just have a hodgepodge of tools that they need to replace with an integrated software intelligence platform and that's what we're focused on delivering to that category of companies.

Our next question comes from the line of Mike because with Needham and company. Please proceed with your question.

Hey, guys. Thanks for taking the questions here I did want to circle back on some of the prepared remarks to make sure that I heard you properly, but I thought that the comment was that you guys are looking to layer in additional investments when we think about fiscal 'twenty three specifically in the sales and marketing and R&D could.

Could you remind us I guess, where.

How those investments are expected to layer into those two functions as well as how long. It takes a typical sales rep to ramp on on data trace. Thank you Chi.

Sure let me take the first part of that.

Our expectation and what we're seeing in the market is that there is upside opportunity for growth and that's what we're gonna be investing and so we're looking at a one to two point increase in R&D to drive innovation and additional product deployment in terms of new modules and module expansion and one to two point expansion during FY 'twenty three in sales and marketing to drive awareness.

Ernest New logo generation.

And overall, our penetration with partners.

Those are the areas that we're going to be focused on driving in order to generate that growth incremental opportunity.

And from a from a time to productivity, Mike you know, it's fairly consistent over the last couple of quarters. You know it's anywhere from four to five quarters in terms for sales reps to become productive.

And we continue as I mentioned earlier.

A very solid healthy clip of growing our sales rep is as you probably know last year. We grew our sales organization direct quota capacity, 25%. This year. Our goal is 30% we did better than that in Q3 here and as Rick mentioned, we're going to put some more money into sales and marketing and in one of their goals as well as to increase.

The number of direct sales reps as well across the board.

Great. Thank you.

Our next question comes from the line of Raimo lunch out with Barclays. Please proceed with your question.

Yeah, Hey, Rick all the best for me as well I'm, just if you think about the investments that you're doing there and like just through the Mama for four to five quarters like.

You know, what we kind of get an idea of how we think about growth as well, but the question here is a little bit it's like how do you think fundamentally about to grow.

You guys said you cut off Kevin.

Kevin sat there you see upsides in the golf opportunity upside didn't go up in the market like can you just frame it you know.

Slightly more bigger picture of you know you've been the company that has been solidly growing in the midst purchased now for several quarters like how do you think this will evolve in the future against like a Gordon market opportunity. Thank you.

Let me, let me take that thanks for the question.

The starting point here as we articulated in our prepared remarks is really around digital transformation.

That really is the fundamental and primary market driver that is a that is growing this and especially growing the opportunity in the market in the global 15000, because that is creating enormous complexity of everything from on Prem to hybrid cloud multi cloud environments that are untenable.

So that's where we start and air linkage opportunity into these digital transformation projects is just enormous which is why one of the areas. We're leaning into is through partnerships hyperscale or than others, because they're now generating a substantial percentage of new logo opportunity for us. So that's the beginning and then what we need to do is.

We need to provide an integrated software intelligence platform that provides situational awareness to allow for the monitoring and the observe ability of an entire infrastructure not reactively and proactively to provide essentially answers to two up to the questions that customers are asking.

Thing about managing those infrastructures going forward and automatic resolution. So these are the kinds of areas in which we're investing to drive our opportunity into the future.

Thank you.

The next question comes from the line of Jonathan <unk> with Baird. Please proceed with your question.

Yeah.

Good morning, everyone I'm, sorry, Rick I think this is more for you. When you look at the sales motion I'm kind of curious to hear your view on developer engagement purposes that you can focus on targeting a C level suite, particularly given our success in some of your competitors are showing where the more bottoms up approach.

Great. Great question, we are absolutely shifting laugh because the terminology goes into into earlier in the development cycle. So this is going to be a key aspect of our our development opportunities and our marketing and sales opportunities as we look to the future.

Not only are we dealing elements and combining capabilities like code validation, but integrating through a P. I.

Which are announcements that you'll see to come it directly into code basis to provide for an allowance absorbability metrics to be integrated directly at the code level. So this is a it is a great question and it is directly consistent with where we're headed in the future in terms of the shift.

<unk> motion motion back into the development process.

Okay helpful.

The next question is from the line of Adam Tindle with Raymond James. Please proceed with your question.

Okay. Thanks, and good morning, Rick I, just wanted to double click and take a step back on the increased investment notion first could you just maybe just take us through the process that you went through in determining the need for further investment understand run a very efficient R&D organization, but already fairly healthy levels for sales and marketing spend.

And so the process that you went through in determining that and secondly, the framework that you've thought about for earning a return on those investments I imagine a lot of it is related to growth. If you could maybe double click on the specific areas of growth that you're thinking about for pay off that would be helpful. Thank you.

Great question, so on the R&D front, our two to take that one we run a very efficient very efficient R&D organization, primarily out of Europe . It is a it is incredible and how much they deliver but we believe that a the market is ripe for further expansion in terms of both our existing module.

And deployment as well as new opportunities for example look at our what we've been talking about with the OPSEC module. We believe that we've hit a huge nerve and vulnerability analytics that provides us with immense capability to target a latent need that has only just begun and we're at the very very early stages of apps.

A R R and yet we think that that has dramatic opportunity for growth into next year.

So that's one example of where we're investing in development logging AR associated with infrastructure and the infrastructure growth that we see of that module is also another area of substantial investment in the R&D side those have corollary investments, obviously that need to happen in the sales and marketing side to grow our.

And infrastructure grow our opportunity in App Sac and grow awareness in the market about the brand overall and we're seeing this opportunity manifests itself through our customers and customer spend in terms of things like multi module deployment and in terms of growth in the E. R. R per customer for those multi module deployments. So.

This is a that's the analysis that we went through to evaluate that now is the time and the new modules provide the fuel for us to be able to go after that additional wallet share.

Very helpful. Thank you.

The next question comes from the line of cash Rangan with Goldman Sachs. Please proceed with your question.

Thank you very much and congratulations on your position curious to get a high level any changes in the strategic direction for the company secondly on a more tactical level.

Were you able to discern any changes in the.

Product contribution from the different silos.

And any update on the competitive environment would also be very useful. Thank you so much.

Sure. So in terms of overall strategic direction as we as we've said several times. This is a company that is as we believe firing on all cylinders and so nothing is incoming in Jon did an amazing job of building the company to the point that we're at today, and so I and of great fortune enjoy.

A company that is operating and performing exceptionally well that is a great Foundation. So no major changes in strategy or certainly in the first six or seven weeks here for me.

What I would say and as we as we've indicated in the call. We believe that there's an opportunity to lean in further, especially with some of the new modules and new capabilities that we have an infrastructure as well as <unk>. For example, so those are our areas both on the development side and on the sales and marketing side that we'll lean into a the other aspect that I would.

Would indicate is just on the partner front as well.

I've as I've alluded to partner opportunities are substantial and in my view to create acceleration over her over the course of FY 'twenty three it has to be to some extent the power of the Ann.

As a as I've heard in the past many times. It is it is not just the expansion at the 30% level of number of reps, we have and going after the market in the same way that we've done so in the past, but also then expanding that opportunity to include partners to be able to canvass the market more completely so I would say that those are some of the air.

He is well that we'll look at one other area that Oh, obviously, we can't comment on in any detail, but but I owned M&A and yeah for the last 10 years. It at Akamai and that was a tool that I used pretty extensively so we're gonna be active shoppers and very disciplined.

Very disciplined buyers only leaning in where we see it appropriate but that's another tool that we have in our Arsenal that will begin to look at as well things like the Spectre X acquisition that we did to focus on our continuous analytics at enormous scale. These are elements that we can integrate directly into our platform to drive further scaling.

Yeah.

That's great and just a quick follow up if all of these initiatives bear fruit are we making too much of that sequential deceleration because everybody's pointing out and at least initiatives bear fruit, but could we see.

The acceleration in the business because you are definitely investing for growth as you as we said on the research and development and the partnership and as soon as the markets.

Hi, Josh its Kevin Yeah is as Rick said, we're we are firing on all cylinders and these incremental investments you know are all focus on accelerating our growth over the midterm and longer term. It will take a few quarters for sure for that said, obviously kick into that are our top line, but you know the market opportunity is tremendous ahead of us our platform is amazing.

We have some great modules that we can that we're bringing to market here in the next 12 months as well and I think all of those combined gets us pretty excited about that top line growth number accelerating over the longer term.

Wonderful. Thank you so much and congratulations.

Thank you.

Our next question is from the line of Camille military with William Blair. Please proceed with your question.

<unk>.

Good morning, everyone. Thanks for taking my question so.

I just want to follow up on the comment I think Rick made on M&A can you just maybe talk a little bit more about the framework behind your decision to acquire versus build new products and given diner phrases now in a net cash position and we're seeing digitization drive the secular tailwind for likely multi years are would you consider something more.

More transformative.

Well well look we're not going to we're not going to come in on on specific acquisitions and opportunities, but I would say and it's a great question I figured I was kind of prompt a follow up.

Out of that other that set of remarks and I do appreciate the I do appreciate the question.

Gonna be opportunistic are looking and scanning the market for M&A really across the gamut and certainly I'm not going to commit to a transformational M&A or anything of that nature. What I will say is we'll be looking at M&A is the tolerance for us.

And that so that was really my earlier comment and we'll look at it at all shapes and sizes and evaluating it but we're going to be very very disciplined in our acquisition acquisition strategy as we look at.

Great. Thank you Dan and just a quick follow up for Kevin can you maybe update us on how our customer count growth kick came in relative to your expectations and how should we think about the single product customer churn of over the next few quarters.

Okay.

Yeah. So it is it's playing out as we had anticipated and as we communicated on our Q4 call I think as just as a reminder, we had for folks we had about 200 customers that were a single module non sort of non platform are legacy customers that we do believe we're going to turn it over the next four to six quarters.

[noise] churned about half of them, so far and I think over the next three to four quarters Camille we'll see the churn of the balance of those you know probably another hundred or so over the next three three to four quarters ish.

That's great. Thanks again.

Yep.

Our next question is from the line of Fatima <unk> with Citi. Please proceed with your question.

Good morning, Thank you for taking my questions and welcome to the team and look forward to working with you and maybe I'll start with you.

He's got a tremendous pedigree in the security Arena and you spent a lifetime talking about how big the application security franchise could be forgone, you trace I'm curious in the reinvestment envelope that you set out for fiscal 'twenty, three and can you talk to us a little bit about maybe the opportunities and challenges.

And just with selling to a much more different buyer are in the security realm and sort of how we should think about that manifesting in your sales and marketing expenses in posture and then I have a quick follow up for Kevin.

Okay sure in terms of the in terms of the buyer. The good news is I think there's a ton of leverage and the buyer that we have today in fact, where with the with a lock for J situation that occurred back in December any bald, obviously, those discussions happen very rapidly in order to get our App stack module deployed into POC and then of course wasn't.

A new buying process that was through our existing buyers who had a very strong need to resolve the law for Jay situations very rapidly and so the good news is there's a lot of there's a lot of overlap now as we move into Hopsack, even more deeply clearly the buyer will morph a little bit, but we think that there is as I say enormous leverage.

There in terms of the broader question on asset, yes, I I think that this is a this is an enormous growth opportunity for the company I think it is very natural and logical for customers to be looking at managing their overall ecosystems and environment and wanting simultaneously to make sure that you're protected and so the value proposition.

Is extraordinary and I think it is a very consistent story for our customers to expand in this in this factor.

I appreciate that Rick Kevin.

Historically or certainly in the last couple of quarters.

Certainly had some conversations about the buying and procurement behavior as you know.

Quote unquote economically sensitive industries I'm curious as you look at your pipeline just from a vertical perspective, where are we are in terms of business momentum and buying posture in some of these economically sensitive industries that he called out historically and you know frankly are we sort of back to pre pandemic levels.

And engagement and purchasing activity any updates there would be very helpful. Thank you sure Hi, Fatima. So I think look I think the punch line is we are seeing strength across all the different verticals. So certainly obviously during this over there we're getting some headwinds in COVID-19 related industries, but every company now is.

It is embarking or have embark on digital transformation initiatives. They it's critical to their success going forward. So we're seeing strength across the board and in all different verticals, Rick anything to add on it.

I, certainly think that some of those protected verticals, we're gonna be important areas and avenues of evolution digital transformation isn't isn't resigned to be just in just in one or two verticals. It's obviously enormous in areas like banking and commerce manufacturing health care.

Where we see it driven first and foremost but are the federal government. For example, a variety of others or are all areas and wishes transformation is occurring and in which we have an opportunity for growth.

Thank you.

The next question comes from the line of D. J Hynes with Canaccord. Please proceed with your question.

Hey, good morning, guys, Rick I want to ask a high level question abuse. So as you did your diligence on dyno trace and I've gotten to know the business better over the last month and a half or so what are the kpis that stood out to you where he said you know man. This is really best in class and we can get a lot of leverage out of this and then Conversely in probably more interestingly to this crowd what.

The Kpis, where you thought Oh. This is okay, but you know we could probably do better.

Jeez, that's that's a great question why I started with the financial performance actually because our financial performance at nearly a rule of 60 is phenomenal and so when a when I got a call. It a consider being CEO of a company that was operating at a rule of 60 had for a bit of time and it looked like it was going to continue that.

Into the future and had further opportunity fresh acceleration I was all in and very very excited to be at to be in the seat now so thrilled with the selection of our board to give me the opportunity to go drive. It. So that was a that was that in terms of kpis that have surprised me on the downside I would say I would say no.

Not really I would I would probably pivot the answer to the question to instead say, where can we lean in and I think the areas, where we can lead in or the areas that we've been been discussed like for example, our new modules and multi module sales I think can be even bigger where diner trace really shines for our customers and what is when you do full.

Of the entire software intelligence platform and so we've got an opportunity for further penetration into both our installed base as well as new customers with these multi multi module sales and deployment, we're going to continue to add new modules new capabilities in everywhere from infrastructure to abstract as we've been discussing so those are areas for for leaning in.

I also think that we have an opportunity to lean in on the sales and marketing side as we've been discussing so I won't belabor it other than to say that I think that there's substantial opportunity with with the hyperscale or expansion, our global system integrators and other partners around the world in order to further accelerate so I view it as as a it's all good no surprises on.

The downside and and a lots of opportunity for us to execute against on the upside.

Yeah, Okay, great that's great to hear thanks.

Our next.

It is from the line of Gray Powell with BTG. Please proceed with your question.

Great. Thanks, really appreciate that so so yeah I know you've received a lot of questions on the operating margin side, but I just had a couple of follow up.

Okay. So so yeah demonstrates there's always deliver just a really compelling balance of high growth and strong margins you just talked about how you know the rule of 60 was why one of the reasons you felt was really compelling to join tighter trace. So I'd just be curious Rick what like what do you think the right margin level is going forward such that you don't.

Miss out on any potential growth opportunities.

Well, great Great question, I think I'll tune it a well tuned it over time, but at least in our initial assessment you sort of heard the focus around profitable growth and we are very much committed to maintaining this this profitable growth growth approach, we believe that leaning in to the tune of as I said, one to two points on the R&D.

I had one to two points in sales and marketing.

Is the correct initial land to go after this opportunity given the growth in the business at a topline north of 30% that obviously fuels a lot of incremental opex ended up itself as you're growing head count and growing opportunity for spend in other areas. So it's really the combination of those factors that we're leaning into.

We'll continue to reassess as we go through time, but but that certainly gives us the powder, we believes make the investments needed to be successful in driving this incremental growth.

Got it thanks.

Our next question is from the line of Keith Bachman with Bank of Montreal. Please proceed with your question.

Hi, Thank you for you Kevin I wanted to ask a clarification and a question a clarification first when you talk about the incremental investments is that a F quiet enough over acquirers that have a Q4 run rate when we think about our F Y and if you could also clarify is there a similar.

The impact that we should be thinking about.

The free cash flow margins or is there some offsets on working capital.

The question I have Kevin also is for you.

Just wanted to review the growth algorithm as we think about 'twenty three FY 'twenty three for you.

And coming off your analyst day, when we think about you know kind of a 120 plus on the net retention rate.

15 to 20, new customer logo ads is that still.

Or what the right kind of algorithm in what I'd, particularly like to hear you climb up and because I think there is broad investor concern is there anything changed as you approach the new fiscal year on win rates.

And our net retention rate and if you could also just comment on anything specific on how you think about.

The security offerings that you have may be contributing.

And when the new fiscal year in terms of that growth algorithm.

Okay. Yeah, a couple of a couple of different questions. There Keith so from an Opex standpoint break break sort of outlined wanted two basis points in both R&D and sales and marketing and we're going to step into these investments over the next couple of quarters. It it's not something that we just turned the spigot on and we can increase hiring overnight. So you will see the margin in.

Packed over the next couple of quarters throughout fiscal 'twenty three.

Bringing that down to free cash flow again, not trying to provide guidance on this call at this point, but certainly that will reduce cash flow by a couple of couple of hundred basis points. However, our cash has also been negatively impacted by the by the perpetual license run off over the last couple of years, so that can be an offset as well.

So we're not thinking as big of an impact on the Unlevered free cash flow side.

As compared to the operating income side.

Hopefully hopefully that was helpful.

And then when I think about the building blocks for FY 'twenty, three you're absolutely right. The 120% net expansion and 15 to 20 per cent new logo growth and if you do the math on that just on the sort of those those those base numbers, 120% net expansion adds about $200 million of they are next year.

If you do new logo growth and you grow 20% in your average land is 100 and $125000 that's another $80 million ish.

So between those two sort of core building blocks.

We're growing the business by $280 million again, not trying to provide a guidance on the call and you know I sort of think of those as as the base numbers. Obviously, if you look at our net expansion rate right now it's impacted by the perpetual license headwind and you know that will start to Les has started to wind down as well. So we have a pretty healthy net expansion rate.

You know a nice nicely above that 120% rate. So hopefully that was helpful. Keith in terms of how we think about just the core basic building blocks of the business next year that they haven't changed and I think as Rick outlined and we're putting some other programs in place that we think and can boost boost and grow and accelerate the business as well.

A rapidly my caveat any any specific comments on the security I know them at the end of the lineup. So apologize for us for a long question, but any comments on security.

Security I would say is a is very early as I said, but an area in which we're leaning into well a we'll be driving in aggressively and you'll hear more of the good news is a lot for Jay is a great example of vulnerability analytics and how critical it is to the market and as we said in our prepared remarks, we will have increased by 10 Axa in one in one month really for them.

December to January the number of D. O sees that we're driving there. We're now evaluate our customers are evaluating going through that process. So early days, but excited about the opportunity for growth and very committed to abstract a leadership overtime.

Thank you.

Thank you My last question is coming from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Oh, great guys. Thanks for squeezing me in here. So so question for Rick you've been there for a couple of months now you saw some big deal expansion I mean, the business is operating in a big Tam businesses investing in our sales and technology.

M Absorbability Super important for organizations of all sizes out there and then thinking about the legacy run off to you know the question is how do you think about the potential where the commentary on NR or it goes up to 125, plus or maybe even better you know up from the 120% plus all the company has been delivering so consistently for such a long.

I'm now.

Well any or is a is a huge metric for us and the fact that we've delivered it now for 15 straight quarters at North of 120% I think is demonstrable just the power of the platform that our customers see and the fact that they're leaning in aggressively to things like multi module deployments increased host units those tax fan.

Infrastructure and new modules all of these elements are driving that any our north word in terms of the installed base of existing customers and then once we deploy new customers. The other good piece of news is that those new customers are increasingly likely to deploy multiple multiple modules as well. So we're seeing the power of the platform.

Across the board. It is certainly my expectation as we add more module capabilities in the existing modules plus new modules, such as App stack that we're gonna see even further expansion of multi module deployments and further increases in spend so I I believe that there's an opportunity to have some accretion in any or as we look forward but.

It's still early in that regard in the meantime, we look to continue to operate the business at north of 120% in any or as we look at.

Thank you.

So so well thanks very much for joining for my first call as a C. E O I really appreciate it a summary message I guess I would leave leave with you are coming out of the call is is as follows number one we are a company firing on all cylinders. So some of the questions.

Remarks, now that came through the Q&A session are that that's why I'm here and that's why I'm excited about it I do think that there is an opportunity for accelerating growth, which is why we're leaning in here, even even more aggressively in some of the areas like R&D and sales and marketing and so those are those are opportunities for us for further expansion as we.

We are as we look to the future and that's why we increased the guide for for the the fiscal year. So we're leaned in also Super excited about our perform conference to come next week, where we've got over 30000 expected registrants and so that's another area, where we I look forward to seeing you are seeing some of you on that.

As well so thank you. Thank you all very much for participating in our call and as I said at the outset I look forward to meeting many of you in the future. Thanks very much.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.