Q4 2022 Dynatrace Inc Earnings Call
Greetings welcome to Diamond <unk> fourth quarter and fiscal year 2022 earnings conference call at.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should they should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note that today's conference is being recorded.
At this time I'll turn the conference over to New Welfarist, Vice President of Investor Relations.
You may begin.
Thanks, operator.
Good morning, everyone and thank you for joining <unk> fourth quarter and fiscal year 'twenty and each Mi earnings conference call with me on the call today are Mike Macdonald, Chief Executive Officer, and Kevin Burns Chief Financial Officer.
Before we get started please note.
Today's comments include forward looking statements.
Statements regarding revenue and earnings guidance.
These forward looking statements are subject to risks and uncertainties, depending on a number of factors that cause.
Actual results could differ materially from those expressed or implied by such statements.
Additional information concerning these uncertainties is contained in penetration filings 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 easy on me.
<unk> 2022.
China trace disclaim 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.
Unless otherwise noted was right can you discuss today are non-GAAP , reflecting constant currency growth.
You can see the reconciliation between these non-GAAP and GAAP measures. Please refer to today's earnings press release, and Q4 financial presentation under the events section of our website.
That let me turn the call over to our Chief Executive Officer, Mike Mcconnell right.
Thanks, Noel and good morning, everyone. Thank you for joining us on today's call.
I'd like to begin by thanking the 3600 plus.
People are dying to trace for their many contributions in helping us to achieve several notable milestones in fiscal 2022.
In particular, we continued to deliver very strong growth and adjusted <unk> of 35% for the fourth quarter and the full fiscal year.
Marking the second straight year of mid thirties growths for dine to Trish.
Additionally, in the fourth quarter, we surpassed the $1 billion threshold in annualized revenue. This is a.
Significant achievement, while operating in a rule of 60, when combining adjusted <unk> growth and free cash flow margin.
It is a testament to the strength of our market.
Platform and the durability of our business model, which in combination enable us to run a business that delivers high growth with strong profitability and free cash flow.
Let me share a few financial highlights from the fourth quarter.
<unk> ended the fiscal year at $995 million.
Subscription revenue was $235 million, an increase of 31% year over year.
non-GAAP operating income was $58 million or 23% revenue.
These strong results were driven by the combination of solid new logo additions to the tiny trading platform. In addition to the expansion of existing customers. We grew our new logo additions by 18% year over year for Q4, and 21% for the full year above the high end of our 15%.
20% annual ball and.
And our net expansion rate was at or above 120% for the 16th straight quarter.
I'd like to devote the rest of my remarks to how we drive our continued success in fiscal 2023 and beyond.
Pacifically covering market opportunity product leadership and go to market leverage.
Let me start with the market.
We have sized our market opportunity at $50 billion in gorilla.
Digital transformation has become ubiquitous and our markets are observe ability and application security solutions has become an essential element of successful transformation.
According to Idc's 2022 worldwide CEO survey driving digital transformation is the number one business priority for Ceos in 2022.
To execute these digital transformation initiatives organizations are accelerating their movement.
But when many companies are realizing is that as they scale the dynamic nature of modern clouds introduces incredible complexity.
The larger the business, they're more complex, they're cloud ecosystem mobile 15000 companies are running multi cloud and hybrid cloud environments with thousands of applications.
Many of which leverage micro services and containers.
Frequently yields a complicated ecosystem, often generating petabytes of data and tens of millions of interdependencies.
Companies are often overwhelmed and ill equipped to handle this level of complexity.
The majority of observed ability solutions deployed have been assembled in turn pulled.
In multiple disparate tools to gain visibility into their ecosystem.
But the end result is even more non cohesive data for teams to process and when there is an issue. These tools don't provide sufficient clarity to enable rapid resolution.
Companies are looking to simplify this complexity with comprehensive absorbability, incorporating all forms of data across multiple aspects of their technology stack.
Want more than just dashboards.
I want answers and intelligent automation from their data along with remediation capabilities to enable them to operate more efficiently.
This brings me to my second topic, the strength and differentiation of the dining trace back and why enterprise customers choose tiny trace.
Overall, we are investing significantly in R&D to ensure that we expand customer value and deliver significant differentiation.
Nearly a third of our workforce is driving our innovation engine to extend the depth and breadth of our platform.
The dining traced platform delivers uniquely is end to end observe ability.
Leveraging our AI engine to invoke situational awareness and true causation versus just correlation across complex ecosystems.
We deliver our platform across multiple modules.
First is our industry, leading solution for apps and micro services, which delivers best in class absorbability across the full stack, including infrastructure and applications.
Closely aligned to our full stack module is our digital experience management or dam mud.
Which optimizes user experience across channels and extends our platform value digital business owners.
Next is infrastructure monitoring, which provide server logs network and container observed ability.
It is our fastest growing module now in excess of $100 million and a R. R and deployed by more than 50% of our customers.
Our application security module has sparked significant interest in the market by helping companies manage vulnerabilities such as log for shop.
In fourth quarter, the number of customers using our abstract module more than doubled.
Our cloud automation module enables customers to perform automated quality and security validation for safer.
Also during Q4, we announced the ability of customers to ship left by accessing a huge array of the answers delivered by our platform its code and easily incorporate software intelligence capabilities into their applications.
And there is so much more to come with our platform.
One in particular that we expect to release in the second half of this year is dramatically enhanced logging capability.
And our vision is to provide a fully automated highly performing and cost effective log monitoring solution that scales with the largest business we.
We believe this market is ripe for disruption.
Unlike current logging tools, we do not he loves his siloed, but rather a key data source to analyzing the full context observe ability insecurity leveraging the intelligent automation capabilities of the fold down to trace that.
Our customers expand their usage in two dimensions, both with the number of modules deployed as well as the number and scale of the workloads run.
Both dimensions provide visibility to immense volumes of data and more data leads to more complexity, making manual alerting and response yearly untenable.
But the diner trades more data facilitates more sophisticated and improved AI analytics by processing all data sources, while reducing the time it takes to get precise answers that ensure well functioning software.
The average <unk> for customers using three or more modules is nearly $500000 and that level continues to increase.
Today, nearly half of our customers are multi module.
A British multinational telecommunications company at over 60, desperate systems deployed for observed ability, including those from our competitors.
Q4, they agreed to expand their existing relationship with an eight figure transaction covering the entire breadth of the diner trace back an enormous deal and testament to the power of dietary.
Another example of the value of Diamond trace is a multinational consumer electronics retailer that consolidated a wide array of technologies.
Bridging our software intelligence platform.
They had over 30 disparate tools collecting data across their ecosystem.
Beneath the one solution that could span the entire ecosystem unify the data and provide intelligence was evident when an issue arose causing end user disruptions that were undetectable by any of their existing tools.
<unk> was selected to provide visibility and precise cancers.
In application security a large UK gaming company had started to POC just days before log for shell came to light and quickly converted just three weeks later due to the value of the platform of detecting all instances of the vulnerability understanding their transaction patterns and prioritizing application of it.
This brings me to our go to market strategy.
Given the powerful trends and market opportunity I touched on earlier commercial expansion continues to be a top priority for us.
We've made great progress across three strictly you'd go to market areas, including the expansion of our direct sales force amplifying our partnerships and bolstering our brands.
With our direct sales force, we successfully increased our quota carrying sales reps by nearly 30% over the last 12 months, providing us with increased coverage for the global 15000 market that we target.
And our goal is to drive the same level of growth in reps in fiscal 'twenty three.
In late April we had our annual sales kickoff with the entire global sales team.
This was our first in person kick off since 2019, so you can imagine how energizing and engaging any of that was for all of us.
He's an answer to foster relationships.
Paint ourselves force and build upon our already successful and efficient go to market momentum.
Adding to this momentum we are heavily focused on the expansion of our partner ecosystem.
To start the three hyperscale or AWS Azure and G. C P.
Offer greater leverage through deeper integrations sales force engagement and offerings in their respective marketplaces.
<unk> transacted through Hyperscale is again more than tripled during the quarter versus last year.
The general availability of our platform last quarter running natively SaaS with Azure N. G. C. P with AWS already available represents another significant catalyst for us this year.
I'm, especially excited about our developing relationships with global system integrators.
Today, the Lloyd announced that they have chosen diner trace as their solution for their cloud absorbability practice their deep industry specific knowledge and modern delivery expertise coupled with our multi cloud observer ability and advanced AI ops capabilities is a powerful combination for global 15000 companies.
The combined offering will focus on optimizing cloud ecosystems.
I'll wrap up our go to market strategy with brands.
Market and brand awareness continue to be important components of our go to market efforts.
You may have seen we have begun to build out our branding and marketing efforts with an awareness campaign combined with increased targeting in search engine optimization.
We want companies beginning we're in the midst of digital transformation efforts to think a diner trace as cloud ecosystem done right.
When they are ready to increase cloud workloads, we want to be part of the initial deployment decisions, thereby shrinking the gap between cloud ecosystem migration and deployment of a world class observed ability.
Finally, as most of you have seen Kevin has decided to depart trying to trace as of the end of this calendar year.
During this period, we will be searching for an equally strong successor as CFO for the company.
Kevin's contribution to dine at Tres over the past six years has been in that.
From overseeing one of the fastest moves to a high growth recurring revenue business to our successful IPO in 2019.
I'd like to thank Kevin for his strong dedication to down to trace and I appreciate his commitment to a seamless transition.
To close we believe that our observed ability platform is highly differentiated and well positioned in a large and rapidly growing market.
We are innovating at a rapid rate and.
And we are building our go to market leverage through increased sales capacity as well as partners.
Fiscal 2022 was an extraordinary year for the company as we drove record levels, where they are or in revenue with excellent operating margins and cash flow.
We remain committed to ongoing strong financial performance and are deeply passionate about the opportunity ahead.
With that I will turn it over to Kevin to cover the financials and detailed guidance Kevin.
Good morning, everyone and thank you Rick I appreciate the kind words.
Before I get into the financials I want to thank the entire <unk> team for giving me this incredible opportunity to be CFO of this amazing company.
Together, we have built a world class team and organization that is still early in its growth trajectory I look forward to working with Rick to onboard a new CFO , ensuring a successful transition and then taking a break to enjoy time with my family.
As Rick mentioned Q4 was a fantastic quarter capping off a strong finish to fiscal 'twenty two.
Our or is a key performance metric of the overall strength of the business and we delivered 35% adjusted air growth for the second year in a row exceeding the high end of our guidance range by one percentage point, highlighting the resiliency and predictability of our business model.
Please keep in mind adjusted Air growth normalizes for currency and the wind down of perpetual license are are a reconciliation can be found on our IR website.
Totally or was up $221 million year over year, ending the fiscal year at $995 million reported they are would have been $10 million higher and well above the high end of our guidance range. When you take into account two items first we suspended business in Russia, resulting in EMEA early.
$6 million reduction in air and.
And secondly, we had another $4 million of incremental currency headwinds as the U S. Dollar strengthened yet again in recent months.
As we have communicated for the last few years the building blocks for a our growth continued to be the combination of our net expansion rate and the addition of new logos.
Our net expansion rate for the fourth quarter was about 120%, which is now four years in a row.
We continue to see momentum in new logo additions, we added 205, new logos in the fourth quarter, that's up 18% over last year in total we added 706, new logos. This year, that's 21% growth and above our previously communicated expectation of 15% to 20%.
Our average error per customer with three or more modules continues to increase this cohort represented nearly half of our customers in the fourth quarter. These customers have an average error of nearly $500000.
Given the significant cross sell and expansion opportunities in our customer base. We continue to believe that the average error or per customer to be $1 million or more.
Moving on to revenue total revenue for the fourth quarter was $253 million $6 million above the high end of our guidance.
Total revenue and subscription revenue both grew 31% over last year.
With respect to margins total non-GAAP gross margin for the fourth quarter was 84% down one percentage point driven by a slight change in revenue mix and increased investments in customer success.
We expect gross margins to remain roughly consistent in fiscal 'twenty three.
Our non-GAAP operating income for the fourth quarter was $58 million $4 million above the high end of our guidance range driven by the revenue upside in the quarter.
This resulted in a non-GAAP operating margin of 23% exceeding our guidance range by roughly 100 basis points.
non-GAAP net income was $48 million or <unk> 17 per share a penny above the high end of our guidance.
Turning to a quick summary of the financial results for the full year total revenue was $929 million and subscription revenue was $870 million, both of which grew 32% year over year non.
non-GAAP operating income for the year was $234 million, resulting in a non-GAAP operating margin of 25%.
non-GAAP net income for the year was $198 million or <unk> 68 per share.
As we've mentioned in the past we believe in a balanced approach to operating the business one that delivers strong and durable performance on both the topline and Bottomline. This.
This approach proves to be even more important as we navigate the rapidly evolving macro environment, where the resiliency and predictability of our business model is apparent.
Turning to the balance sheet as of March 31, we had $463 million of cash and our net cash position was $189 million.
Our unlevered free cash flow for Q4 was very solid at $82 million.
For the full year, our Unlevered free cash flow was $234 million or 25% of revenue.
This came in below our guidance range due to a tax refund that was doing in fiscal 'twenty, two but not received until the start of fiscal 'twenty three.
Given the strength of our cash flow and the declining interest expense as we have reduced our long term debt consistently this quarter will be the last quarter, we provide unlevered free cash flow and are moving to free cash flow as a metric.
The last financial measure that I would like to discuss this morning is our remaining performance obligation, which at the end of the quarter was approximately $1 $6 billion, an increase of 33% over Q4 of last year.
Current portion of our P O, which we expect to recognize as revenue over the next four quarters was approximately $900 million, an increase of 34% year over year.
Now let me turn to guidance, we are very pleased with how the business has performed in recent years and we anticipate delivering another strong performance in fiscal 'twenty three.
We believe we have the right foundation in place to sustain 15% to 20% growth in new logos and the net expansion rate of 120% or higher for fiscal 'twenty three.
There are a few things to keep in mind with respect to our guidance.
First we are mindful of the evolving macro environment to be clear, we have not seen any material impact to our business and we are confident in the durability and predictability I ever of our growth. However, we believe it makes sense to be prudent with guidance.
Second with almost half of our business conducted in foreign currency. The continued strength of the U S dollar creates a sizable currency headwind.
Based on FX rates as of April 30th we expect the FX headwind to a R and revenue to be roughly $20 million for fiscal 'twenty three.
And with respect to Q1, we anticipate the FX headwind to be roughly $15 million to our.
As you think about your models over the course of the year keep in mind that every 1% movement in non USD currency equates to roughly $6 million of movement and a R.
Third we announced that we suspended business in Russia, which results in a headwind of approximately $6 million on a R and revenue for fiscal 'twenty three.
And finally fiscal 'twenty three will be the final year, where the perpetual license wind down we will have a significant impact on air growth rates.
The overall annual impact in fiscal 'twenty, three is approximately $8 million or 80 basis points.
The impact will be most notable in Q1 with a three percentage point headwind and then tapering off throughout the year.
Starting with our guidance for the full year again with growth rates in constant currency, we expect <unk> to be between one point and two five and one point to $65 billion, representing an adjusted <unk> growth of 29% to 30%.
This assumes net new air growth of $290 million at the high end of guidance offset by the $20 million headwind that I just mentioned.
Given the FX impact in Q1, we wanted to provide you with a little bit more color on Q1 seasonality.
Historically, roughly 18% of our annual net new a R is closed in Q1.
Which would imply $52 million of met new a are in constant currency in Q1 and.
As I just said there was also a $15 million currency headwind on our fiscal 'twenty two year number that needs to be taken into account in Q1.
Total revenue for the full year is expected to be $1 billion 142 million to $1 billion $158 million underlying that subscription revenue is expected to be between $1.071 billion and $1.086 billion both up 27.
28% year over year.
We expect non-GAAP operating income to be between 257, and $266 million, resulting in a non-GAAP operating margin of $22, 5% to 23% for the year.
We expect non-GAAP EPS of <unk> 74 to 77 cents per share based on 292 to 294 million diluted shares outstanding and a non-GAAP cash tax rate of 13%.
We expect free cash flow margin to be approximately 29% to 30% of revenue, which equates to $330 million to $345 million.
This is 45% growth year over year at the midpoint and incorporates the impact from the timing of the tax refund I mentioned earlier.
Looking at Q1, we expect total revenue to be between 261, and $263 $5 million or 29% to 31% growth subscription revenue is expected to be between 244, and $246 $5 million up 29% to 30% year over year.
From a profit standpoint, non-GAAP operating income is expected to be between 60 and $62 million 23 to 23, 5% of revenue and non-GAAP EPS of 17 to 18 cents per share based on a share count of 291 to 292 million diluted shares.
In summary, we are very pleased with our fourth quarter and fiscal 'twenty two performance, where we saw strong a R and topline growth.
Bind with healthy cash margins we.
We have achieved the important milestone of $1 billion in annualized revenue and continued to operate at a rule of 60.
<unk> breadth of product offerings, and our geographic reach provides us with multiple growth opportunities in the future.
Overall, we believe we are well positioned for resilient and predictable growth profitability and cash flow in fiscal 'twenty, three and beyond 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 today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
You May press Star two if you like to move your question from the queue.
For participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Please while we poll for questions. Thank you.
Thank you and our first question comes from the line of her team up with Citi. Please proceed with your question.
Good morning. Thank you for taking my questions Brook I wanted to start with you just with respect to some of your comments in the prepared remarks around the broader secular opportunity and still a what is a vastly underpenetrated our estate for observer ability solutions, giving those broader trends, but I know there's been a lot of handwringing.
The investor community around.
Business and pricing models, rather than our consumption and he used to chase. So I'm curious if you can just sort of give us a quick overview on how's your model with one agent is differentiated and Ah yeah cloud usage.
Function are trends that are perhaps impacting summit.
Might not necessarily sure to come your way and I have a quick follow up for Kevin.
That's awesome. Thanks, so much for the question. So first of all completely agree with you in terms of the secular trends and the opportunity in and start with Delhi, We believe that as I mentioned in my upfront remarks. It is.
It's quite substantial in terms of an assumption I do think that well see more consumption based pricing over time and I just think that there is accretion opportunity and pricing as we look ahead, just and that's that the overall market environment. We do have built in price increases in our typical support contracts at time of renewal.
We see accretion opportunity as we look at.
Thank you Scott and Kevin just for you with respect to the new Oh, our performance in the quarter I know, Rick talked about sort of elevating our extending expanding our sales capacity by 30% in the trailing 12 month period, but I'm wondering where when and where we're going to see.
Martin meaningful or physical acceleration on the new logo front and that's it for me. Thank you.
Hi, it's hard enough. So when we think about the building blocks for next year.
Based model that we have right now.
20% of new logo growth.
What we've been doing consistently for the last couple of years I do agree with you our given some of the investments that we're making.
And accelerating in terms of the direct sales force or the investment that we're making the hyperscale or some partners that side there could be some further tailwind will not materialize in fiscal 'twenty three are starting in fiscal 'twenty four.
In that time zone, or not and that timeline, where yeah, we could probably start to see a little bit of a further acceleration.
Beside but today, we're super happy with the 2015% to 20% of new logo growth and a 120 plus percent net expansion rate that gives us sustainable 30, plus.
Yeah.
I appreciate that thank you.
Our next question is from the line of Mike Seacoast with Needham and company. Please proceed with your questions.
Hey, guys. Thanks for thanks for taking the questions. Here first question was more about the guidance and I want to come back to maybe some of the comments on our guidance during the call.
<unk>.
We're in this macro environment currently and I know that you guys are.
The comment was that you're being prudent with guidance can you help us think about puts and takes to how you guys thought about guidance coming into this year is there.
How did you weigh some of those external factors as.
So headwinds or tailwind to your business over the course of the next 12 months.
Sure Hi, Mike its Kevin so.
There's some headwind tailwind that we have.
We're certainly aware of the macro environment.
And you know the uncertainty that is out there today. So that's one thing that we can set our.
Saying that we were considering all the investments that we're making and when do you think those are going to get.
The payout as I, just mentioned Adam out there growing the direct sales organization hyperscale or the Deloitte partnership that we announced this morning, which is very exciting.
All of those can be some tailwind, but you know there is some uncertainty.
Real World I think that uncertainty that wouldnt recognize thinks about the guidance I think that's offset by the trend in digital transformation companies need to transform and the value that our software delivers up companies operate more efficiently and drive higher rois. So those are sort of the things that we can better.
Certainly do appreciate we're operating in a different environment than we were 90 days ago six months ago, and there was I think.
Yeah.
Maybe just building on that for the for the follow up and I did I'm trying to put it in comparison to where we were last year. When we first got our guidance for the year that we just finished right. There were still some puts and takes last year. When we were thinking about a normalizing environment post co.
And we've all seen how that has kind of played out to a certain extent, but is it is it fair to think that maybe with the current macro environment, there's maybe a bit more conservatism when thinking through.
Again, the kind of demand environment that we're in today and how these organizations respond accordingly.
I think that's fair Mike I think you know there's there there's a lot of uncertainty out in the world today, and I think that you know.
Certainly as we said in the prepared remarks.
Help us establish sort of a prudent guide where we are but we also don't want to get over our skis in terms of the contract here and set expectations too high and we're very bullish on the year.
The company is moving in the right direction.
Things are things are in motion and we're excited about it but given that macro uncertainty.
Okay.
Totally understand thank you very much guys I appreciate it.
Our next question is coming from the line of Adam Tindle with Raymond James. Please proceed with your question.
Okay. Thanks, Good morning, Kevin I, just wanted to start on the net new air are expert in constant currency and that's a mouthful it bounces around a little bit, but a 7% growth in Q4, I think Russia accounts for a little bit of that but if you wanted to maybe unpack a little bit of color on that.
7% number in Q4, what the real number would be and you made some comments on Q1 net new I just wanted to clarify if you could maybe expand a little bit more on how you're thinking about Q1 net new air are thanks.
Sure and for those of you who are interested in our in our on our Investor relations deck.
Let's say, we do have been met and the way our book now.
And so but to answer your question Mike in Q4, Yeah, you're absolutely right we are.
In any way or was 71 and a half million dollars back to the 7% that was impacted by $6 million because of Russia. So normalizing that for Russia that growth rate was six 2%.
For the year as I'm sure you appreciate the total menu we are doing well.
Two to $267 million to $8 million that was up 33% on a year over year basis.
So that's we're pleased with that there was a change in seasonality.
Talking about.
Fiscal 'twenty, one due to Covid, which is which made the year over year comps a little bit different and that's about 22, we do believe year over year comps.
'twenty three will normalize a little bit more meaning historically, we've always been about 40% of our net new business in the first half and 60% in the back half.
That's fairly consistent with what we did in 'twenty, two and we think that will continue into 'twenty three.
So hope back up at him.
Yeah, Yeah. It's very helpful. Thank you and maybe just as a follow up for Rick obviously big shoes to fill but if you could maybe talk about some key characteristics that you and the board will be seeking and Kevin successor, I know you mentioned previously that you might be a little bit more open to M&A. For example, I'm not sure if that was maybe like a core competency that you'd be.
Looking for the center of your kind of general characteristics that it'll be important to you. Thank you.
Thanks, Adam.
They choose to go for sure.
Kevin So that's true.
We ended the year to make sure that we get are exactly the right person on board and traces.
Great Company.
Very exciting market space.
Asleep Packable impeccable financial results are as we saw this quarter and have seen over the course of the last couple of years and beyond so we believe that we will attract a very very strong right into the role.
Characteristics, obviously, you want global experience you want multibillion dollar scale ideally in terms of the capabilities and the person's background and above and beyond all else, perhaps I want a an exceptional business leader and partner to join our leadership team as we look at it so.
Those are some of the elements you mentioned M&A, Adam obviously are obviously M&A tuck in as we talked about last quarter.
Certainly on the docket, we're not looking at transformational M&A, but.
Again, M&A is something that we'll look at so a person has that and experience as well.
Obviously, that's a plus.
Very helpful. Thank you.
Our next question comes from the line of Matt Hedberg with RBC capital markets. Please proceed with your questions.
Hey, this is stuff on Matt Hedberg. Thanks for taking my question, so you're going to going to hire at a strong piece and you know again expecting a similar growth in the quota carrying reps and a fiscal 'twenty or fiscal 'twenty two.
Can you expand on how you think about hiring and attracting the right people in this competitive environment with labor shortages and wage inflation.
Yes, thanks <unk>. Thanks.
Thanks very much for the question we are we are adding.
Very strong.
It's been amazing to watch over the last 123 quarters I do introductory meetings with new hires, especially in our sales team, but really more broadly than that on a very frequent basis.
The engagement passion enthusiasm that we're getting the quality of the candidates, we're seeing by way of resumes.
Is very very high so it gives us very strong confidence as to what the FY 'twenty three.
Both the numbers of our ability to recruit to the levels that we described in our prepared remarks, but also to the very high quality of thresholds.
So for ourselves as we look to the future. So so far in the year very very strong and I think by any traces of brand is becoming more and more visible and that brand awareness and recognition is assisting us in making sure we recruit the best talent.
Very optimistic on that front as we looked at right.
Very helpful. Thanks.
Our next question comes from the line of Koji Ikeda with Bank of America pushes you with your questions.
Hey, Rick Hey, Kevin and Kevin Congrats on the well deserved upcoming break thanks for taking the questions too I guess, maybe the first one for Kevin or for Rec thinking about the the 'twenty fiscal 'twenty three operating margin guide it looks like it's about 22, 5%, they're kind of at the midpoint.
Wanted to ask how youre thinking about the margin guidance framework here, you know thinking about typical conservatism, how you thought about it in the past you know any sort of return to work or in person expenses. This year and then I guess kind of following up on the last question too any sort of wage inflation or talent retention that's embedded in the guide this year.
Yeah, so from a wage inflation standpoint, you know.
The market is moving at all.
I appreciate and yeah, we have looked at that as an organization and made some nice adjustments in terms of cash compensation and long term incentive and equity. So we use the tools in our tool bag to make sure that where we're meeting the requirements and demands of.
Where the market is today.
From a margin standpoint.
We think about investments there. These are targeted investments that we're making in the business in fiscal 'twenty three.
Yeah.
Will happen during the course of the year, it's not going to happen all in one quarter.
But then what we will see as we go into fiscal 'twenty. Four is the margin accretion right. So getting back to a 25% operating margin in fiscal 'twenty, four and frankly going forward after that there should be additional leverage.
So targeted investments G are bringing margins down from 25% down to about 23%.
And then we will keep it that way accretion happening shortly thereafter.
Got it got it and then just one one quick follow up if I may pretty pretty simple question, just kind of thinking about the guidance here for the full year both from a revenue.
And margin standpoint, you know thinking about the macro related headwinds out there I mean, I guess does it assume you know the guidance with the macro out there does it assume things get better same or maybe even worse over for the rest of the year. Thanks guys.
Hey, Thanks, guys, Yeah, I would say that it's a it's a balanced view.
In evaluating the macro environment, we believe it's a prudent eye and that's macro constraints and considerations are but we're not making any predictions about the macro environment improving in it in any material way either geopolitically or in terms of the macroeconomic environment with respect to inflation or.
Other factors.
I would just add to that as well.
Just add to that as well. So you know we're highly instrument that we run a very efficient because it scared for the last six years, where super all while instrument that in terms of visibility and what sports, where we're making those investments and if we do see a change in circumstance and the environment. I think you will see us react pretty pretty properly as well.
Got it thanks, guys. Thanks for taking the questions.
Got it.
Our next questions come from the line of Joel Fishbein with Triumph Truest. Please proceed with your question.
Hi, Kevin Congrats to you as well and good luck Rick.
Last call you talked about doubling down on the fed love to get your input on where we are and instead and observe ability in and any color you could share there would be really helpful. Thanks.
Yeah, certainly the federal government opportunity I think is is really significant for us I've been engaged personally in that over the course of the last few months and it is it is growing faster than the baseline.
Growth of the company in terms of overall they are growing.
At a very nice, but I believe it's a significant opportunity for us to place additional baskin investments. So that's that's precisely what we're doing is the left hand side.
Corroborate all the comments from last quarter in terms of ongoing trends around the federal government and for that matter also about flat environment.
Wow.
Thank you.
Yeah.
Our next question will come from the line of D. J Hynes with Canaccord. Please proceed with your question.
Hey, good morning, guys I'm, Rick a two parter for you on the Deloitte partnership and then a quick follow up for Kevin I'm, just just from Deloitte I'm curious what kind of RFP process went into that I mean, I know there are customer. So maybe that was enough for them, but talk a little bit about why they landed on Montana trace and then.
Two of the question is this.
In your experience does this make it more or less likely that other sizable kind of consolidate and build practices around China trace right like I don't I don't know if they are fast followers in that industry are or you know if they actually prefer to have some sort of differentiate offering any thoughts along those lines would be helpful.
Sure.
To start I would say we are very enthusiastic about the Deloitte partnership.
I've spent a personal time on most of the senior leadership team of the Deloitte and we believe that there is substantial opportunity in working families do you look at it.
And it really does come back to argue the overall environment for Absorbability.
Because as a company do digital transformative work and go through a cloud migration, we believe that <unk> can deliver a cloud.
And it is that notion of reducing the gap between a digital transformation, a workload effort and move them to the durability solution without any trace that really is our principal objective. So if we can pull those things together and that's a substantial opportunity a door you can do this for US was very excited desktop pardon.
You asked about how we got to this point they are a customer but I assure you. They did a thorough review.
So on their input to us of solutions in the market and they believe the tiny trace is the best solution for their targeted customer base, which which aligns very nicely to ours.
So that's that's I think why they picked us and I think that this is.
This is just an on ramp to additional opportunities and further global system integrators. As we look ahead, because there's ongoing overlap with others as well I think that there are additional opportunities to come in between.
Perfect. Thanks, and then Kevin a follow up for you can.
Can you quantify the tax refund and then confirm is that has that already been received in fiscal 'twenty three.
Yes, yes. It has it was a little over $30 million okay.
Okay.
Yeah.
Perfect. Thank you guys congrats.
Okay.
Our next question is from the line of Raimo Mindshare with Barclays. Please proceed with your question.
Hi, it's been known on for Brian . Thanks for taking my question.
First just wanted to touch on adoption patterns for some of your newer module. Scott can you just talk about how infrastructure growth trended this quarter and then.
Adoption patterns for other solutions like App security trended I've been in the infrastructure or are there any differences worth pointing out. Thank you.
Hi, it's Kevin Yeah, we didn't know the infrastructure modules continues to be at a last quarter. I think we've communicated is about a 7% growth rate structure.
All those.
The growth rate this quarter is fairly consistent with that so we're seeing continued adoption of over half of our customers have you construct a module. It's also still very early in terms of penetration there as well.
We indicated in the past we believe for every dollar of our customer spends in after market services, they should be and there's another dollar and on the infrastructure side right now.
We're spending about 15 to 20 cents on the dollar so big opportunity to continue to expand our customer customer base, there, but also the opportunity additional opportunity to expand in our in our customer base.
Further penetration so that's on the infrastructure side at security.
Given some of the things that happened in the world.
R J.
Demand there is very good very with a lot of customers as well I'm not a meaningful mover to the air in the mine at this point, but we do think that's going to be a mover I see as we continue to hopefully.
Okay. Thanks, and then just one more for me you know you mentioned you hired.
30% of sales reps this year and you plan on doing that again. This year can you just remind us how long does it take to get a rep fully productive and kind of what did you learned over the.
The last year or so I'm, just as an organization in terms of kind of exploring expediting that process. Thanks.
So its in that its in the four to five quarter time timeframe. We it's it is it is a very big priority for our organization. So we've made big investments in terms of our sales organization.
Organization.
Our training ongoing education, we just had our sales kick off that Rick mentioned on the call as well, where we've got the whole team together further education. So we're making we are making investments and yeah. We do believe over the next couple of years and you can make.
Meaningful improvement in our debt.
Yeah.
Yeah.
Great. Thank you.
Yeah.
The next question is from the line of Camille Macerich with William Blair. Please proceed with your question.
Good morning, Thank you for taking my question.
One more follow up on the macro so we've heard from several other software companies. This earning season that while demand was generally strong some companies did see one or two deals slip in Europe .
Can you talk about what youre seeing in that market and more generally have you seen any changes in customer conversations and their willingness to adopt and sort of really be tools.
And to me out.
At.
It is in our view that we'd seen any slippage in deals at least at the moment.
So we are we are not seeing that as an act of our business at the current time, it's certainly possible that that changes in future, but at least so far our pipeline and deal flow either.
In roughly the same rate as expected.
That's good to hear and Rick you you spoke about the lag between cloud transitions and adoption are observed ability and we've talked about in the past for off the company precise an open source product or attempts to adult something internally, which as you mentioned, it's very difficult to do today.
Two questions on that.
First can you provide more detail on what you're doing to cut down that lag in purchasing decisions and second we've seen strong rates of cloud transitions over the past two years and likely acceleration in 'twenty, one or do you think dietary is seeing the benefits of these accelerated cloud transition today or given the lag is there potential for this to be a draw.
Her of higher levels of net new customer wins. It later this year or maybe in a fiscal 'twenty four.
I'd say, yes in terms of seeing the benefit of cloud transitions the movement of the movement of customers and well over 15000 companies in particular to the cloud is absolutely fueling demand for Diamond trade since you know what I mean.
So I'd say, our I'd say absolutely is the answer to that question in terms of the labs that are that really is the opportunity that we're driving against how do we shorten that gap between the time of the cloud migration and Absorbability decision and still too many customers or companies are.
Deploying homebuilder solutions simple dashboards based on open source tools.
And it is those companies that deploy diner trades also true at the time the migration that we believe get the best performance in terms of their overall platform and get the best results in terms of precise answers rather than dashboards and David glass. So that's that's really what were pushing how are we doing that partners.
As well as as well as our direct efforts in terms of new logo generation that we've been talking about partnerships like didn't really partnership should help in that regard. So that's where we're focused.
Yeah.
Yeah. That's helpful. Thanks again.
Our next question comes from the line of Kash Hunk out with Goldman Sachs. Please proceed with your questions.
Thank you so much for that.
The question and congrats on a fantastic commercial the fiscal year.
Curious to get your perspective on customer conversations.
Have your customers cause won't be have labor shortage supply chain shortage.
Inflationary pressures how are they prioritizing dialer case, and what what do those ROI conversations look like.
Especially since you've had a month and a half or so after the quarter ended but are there is there any change in the tone of that I guess.
This is being prioritized and I have a follow up question for Kevin. Thank you so much.
I guess I would say that if anything you have heard of.
Why for penetration is as strong as ever, especially in the I T shortages of personnel as well as wage inflation in that market. It's very difficult as you all know treat people at the at the current time and that's resulting in a need for greater automation automation tools automation of processes.
Et cetera, 90 trace can bring that to the company's instead with anything we should be able to deliver improved results of the companies that are experiencing those kinds of shortages.
You see it as well in terms of ongoing strength of our services bookings and that more companies are asking us to do more work for them in terms of deployment to ensure that we get ceded as quickly and effectively as possible.
Yes.
Wonderful. Thank you so much great Kevin congratulations on your retirement.
I was wondering if I could get your perspective on.
The quality of our customer base.
Exposure to unprofitable Tech companies, if you will that is.
Somewhat material at your company for certain other companies.
The the risks factors associated with the collectibility ongoing business conditions for certain aspects of your customer base that may be impacted by the recession, maybe we're starting to see.
Some negative effect, but maybe you are more insulated, but any statistics you can throw with respect to the diversification of your customer base.
Three verticals and the quality of their own financials.
Couldn't give you more conviction.
But those pressures or.
Not an issue for you guys. Thank you so much.
Yeah no. Thanks, guys appreciate it.
We're very excited about the customer base that we have for ABB target as you know the global 15000 largest enterprises in the World are we had best in class retention rates and so we're enterprise first we have very high quality revenue and we think that's going to be very durable long term. So it's low churn sticky product ROI.
And when you know CIO CTO, they're looking to make investments. We believe observer ability is going to be one of those areas.
It was just talking about the value that we deliver.
Especially in an environment, where there's actually shortages.
To help big companies become more efficient so we've thought about that as well given the environment that we operate and we think that's a big asset.
Great.
Cash and keep it up.
Yeah.
I'd like to just that adequate that quick one on the notion that you raised around profitable software companies.
It is really important to I think it takes them understanding any trace its operating at a very high level of growth mid thirteen's adjusted a ours, we discussed but also a very strong level of profitability and free cash. This is a you saw in the diet in 2019% to 30% guide for US I'm, sorry, what was the free cash flow.
Very strong and good operating margins that we expect will actually be agreed in the early portion of FY 'twenty four.
In the mid 20% range and on top of that are at very strong and solid growth for a company that's been delivering against a rule 60 over the course of the past couple of years. So we intend to continue to operate the company in a very balanced way and that profitability and strong cash flow to the ecosystem.
Got it that's actually really well appreciate I was more curious about your customers and their profitability, they're ready to go to.
The new contracts, but I think Kevin covered but thank you so much good to see the conviction very good. Thanks. Thanks Kash.
Our next question is from the line of Keith Bachman with BMO. Please proceed with your question.
Hi, Good morning. Thank you for the question I have two as well.
First on the broader side I want to think about how.
Rick and Kevin just thinking about portfolio expansion over the next two years I think there's a perception in the marketplace that perhaps one of your primary competitors is innovating faster and perhaps populating their portfolio more rapidly than you are.
Wanted to kind of get your take over the next two years, how should investors be thinking about the expansion of portfolio of your X. Now you know what does it look like in two years X plus something if you could just speak to the investment dollars are making surrounding R&D and how that might extend your portfolio and then I have a follow up please.
I am very very pleased with the way the breadth of our innovation engine and how were investing that we have as I mentioned about a third of the people of diner tracing R&D, our R&D R&D related activities. So this is a this is a very sizable investment for the company that we're driving for.
We are making investments as we've discussed in the infrastructure area in the logging area, which we of course are very excited and then on into applications or any cloud automation and other other modules as I described at the outset. So we are at we are innovating innovating presently.
I do think that there is a.
The difference in perception. This based upon overall, our overall R&D spend just relative to where we conduct our R&D primarily across the rest of the globe, but that doesn't change the commitment of us too to driving the R&D engine is what would happen.
Okay. Then my follow up Kevin probably is more directed to you and again.
Sort of preliminary congratulations on your pending transition.
Is what's the behavior been of the perpetual customers and what I mean by that have the perpetual customers been leaving that.
That license or that contract in place and just paying the maintenance or have there been some conversion.
Of the perpetual either in terms of add ons or even transitioning away from perpetual I'm just trying to understand how the underlying economics have flowed in as we think about FY 'twenty three how that may flow.
Yeah, if you'd go back Keith.
Over the years and then you think about where those customers are today I would say probably half of those customers that converted to subscription model to appear for care model and the reason they've done that is when we started to add additional offerings, you know, whether that's factored them or infrastructure.
Sure those are only available on a subscription basis. So over last couple of years, we said moving our customers in that direction and as you also know in the last six seven quarters, we havent sold any new perpetual licenses. So that that you know underneath the covers that slowly.
Okay. So they're converting perpetual then moving away from maintenance and converting that to subscription.
And at times of that.
At times of expansion, that's when we don't do it that they want to cover more apps more micro services. They Wanna add cameras structure, you're on that most of the points over we're having those conversations.
Perfect. Thanks.
Thank you.
Thank you at this time, we're nearing the end of our question and answer session. There's time for one final question, which is coming from the line of Gray Powell with B T I T.
Okay, great. Thanks for thanks for taking the question and congratulations on the good results.
Yeah.
Maybe on the new product side, how are you thinking about pricing on the logging monitoring products in the second half of the year.
How disruptive could you be there to that space and then how additive could log monitoring b to your typical customers Bill.
The first element online monitoring is that it is that we believe a significant opportunity for disruption of the market. We do not look at odd monitoring in isolation that is to say that we don't look to sell log monitoring in a unique way, we really do believe that.
It is part and parcel to the value of the entire dinosaurs portfolio to have logging capability essentially built in to evaluate that along with apps and micro services infrastructure appetite and the other modules that we offer.
So that's sort of point number one is we really do believe that it is the value of the portfolio as a whole. It's a log monitoring will get attitude, that's an odd monitoring in and of itself in terms of the solution that we offer we believe will be a leapfrog solution and will add an opportunity for significant any of our growth into the future as we get into.
And and beyond.
Got it that's really helpful. And then I guess, just a follow up would be I mean, how do you think the traction I know, it's really early but but how can the traction there compare with what you've seen in the last couple of years with your infrastructure monitoring side it shouldn't be like as good better or just any thoughts there.
Logging is really it's really quite consistent with the way that we look at infrastructure in terms of its opportunity for growth. It will be a consumption based model. That's the way the logging typically would occur from a pricing standpoint. So it will be it will be essentially a pricing model that is oriented to consumption around logging.
But yeah I think it's I think it's safe to think of it as a infrastructure like in terms of this opportunity for substantial growth.
All right very helpful. Thank you very much.
Thanks, So that that brings us to a close thank you all for joining today, we really do appreciate your supporting her engagement with penetration FY 'twenty two was really an extraordinary year for us we drove record levels.
<unk> and revenue growth very strong operating margins excellent cash flow, we remain committed to that ongoing strong financial performance.
In the future and I can assure you that we've got 3600, plus or so people who are extremely passionate about the opportunity that dine in trace as okay. Thanks very much for joining our call today look forward to speaking with all of you and your ongoing.
This will conclude today's conference you may disconnect your lines at this time and we thank you for your participation.