Q1 2023 Dynatrace Inc Earnings Call
Greetings and welcome to <unk> first quarter fiscal 'twenty 'twenty three earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
Now I'd like to turn the conference over to your host Kalle AHL Paris, Vice President Investor Relations. Please go ahead Sir.
Thanks, operator, good morning, everyone and thank you for joining Guyana traces first quarter fiscal 2023 earnings conference call with me on the call today are Rick Mcconnell, Chief Executive Officer, and Kevin Burns Chief Financial Officer.
Before we get started please note that today's comments include forward looking statements such as statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties, depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.
Yeah.
Additional information concerning these uncertainties and factors is contained in noninterest filing with the SEC, including our annual report on Form 10-K, and quarterly reports on Form 10-Q.
The forward looking statements included in this call represent the company's view on August 3rd 2022 demonstrates disclaims any obligation update these statements to reflect future events or circumstances.
As a reminder, we will be referring to some non-GAAP financial measure Dream Oh.
A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website.
Unless otherwise noted.
Great. We discussed today are non-GAAP , reflecting constant currency growth to see the reconciliation between non-GAAP and GAAP measures. Please refer to today's earnings press release and financial presentation under the events section of our website and with that let me turn the call over to our chief Exec.
The box there Rick Mcconnell right.
Thanks, Noel and good morning, everyone.
Joining us on today's call.
Let me start by saying that I am proud of the dietary team and our solid first quarter performance.
In particular, we saw a continuation of our mid thirties gross and adjusted <unk> began in the first quarter at 34% year over year.
Subscription revenue came in at $250 million, an increase of 32% year over year in constant currency.
And non-GAAP operating income was $60 million or 23% of revenue.
This is a testament to the strength of our markets.
And value of our platform and the ongoing durability of our business model when combined enable us to run a business that delivers high growth with strong profitability and free cash flow.
Kevin will share more details about our Q1 performance and guidance in a moment.
In the meantime, I'd like to share my views.
Current market trends, our platform leadership and our operational approach to the remainder of this fiscal year.
Let me start with the underlying market opportunity and trend.
Fueling our growth today.
As we said in the past digital transformation has become ubiquitous.
Observe ability as well as application security solutions are still at an early stage of evolution and yet are rapidly becoming an essential element of successful cloud deployments.
In our estimation the current economic challenges will drive an even higher priority or digital transformation initiatives given the demand for greater efficiency of I T research.
Like cloud deployments typically yield the data that is exploding in volume and complexity, which companies are simply not equipped to handle with internally built solutions.
This is driving an enormous market opportunity.
Yeah.
Diana traces ability to drive greater efficiency at lower cost places us near the top of the strategic priority list now more than ever and as our customers widely from Blaine organizations.
Dino trace.
Based on these fundamentals we are confident that the digital transformation trend will continue to fuel our growth for many years to come.
Our durable enterprise customer base, coupled with their recurring subscription revenue model provide us with relative resiliency, even in an uncertain economic environment. This is a growth market and as our Q1 results illustrate we are a growth company.
At the same time, we are obviously not immune to the rapidly evolving macro environment, which we saw primarily in the form of elongated sales cycles in the latter half of June .
We saw this most notably in our new logo close rate during the quarter with 135 added consistent with the first quarter of last year.
For our installed base, we delivered our 17th straight quarter of a net expansion rate greater than 120%.
Our existing customers view us as an essential partner to their ecosystem and are eager to expand their usage of dining crazy given the proven value we provide.
As a testament to this our average <unk> per customer has now grown to over $300000.
And updating our guidance, we believe it's prudent to assume that the economic uncertainty continues through the balance of our fiscal year.
Our expectations assume greater conservatism in a R. R and top line growth is a reflection of the macro environment.
We continue to be a leader in enterprise and shared mobility and are addressing a huge market with tremendous growth opportunities.
I will talk further about how we intend to operationalize. This plan in a moment, but the board doing so I'd like to reemphasize, our platform differentiation and why Diamond trade continues to grow rapidly.
Digital transformation is of course, not just oriented your resource efficiency and Offloading workload management.
Organizations depend on software for essentially every facet of their operations.
Deliver products facilitate commerce drive supply chain efficiency engage with employees and much more to achieve these goals organizations expect their software to work perfectly.
To help customers enable this performance our approach to observe ability is radically different.
<unk> provides not a single product, but rather a comprehensive software intelligence platform covering end to end observe ability with sophisticated AI ops capabilities unmatched in our industry.
It combines the deepest and broadest multi cloud observed annuity solution with continuous runtime application security.
We focus on global 15000, enterprise accounts, where data volume and complexity are highest and where our scale and automation enable them to run their businesses most effectively.
This is the power of dying trees, and why customers choose us.
Whereas other approaches deliver dashboards diner trace delivers precise answers and intelligent automation from data to help customers navigate the massive complexity that comes with digital transformation initiatives.
It enables our customers to deliver flawless and secure digital interaction by providing broad based situational awareness of their cloud ecosystem at all times and enabling them to take action immediately to ensure maximum uptime and performance and.
And over time customers will use the intelligence, we provide to integrate the dining traced platform directly into their application as co or auto remediation.
Industry analysts corroborate our leadership position recently Gartner released its annual Magic quadrant for application performance monitoring and observed ability mainly diner creates a leader for the 12th consecutive time and.
And then the gardener critical capabilities for APN and Absorbability Airport, our platform differentiation compared to the competition is even more in Dallas.
With diner trace leading in four of six use cases for Dev ops and application development site reliable engineering and platform ops I T.
<unk> and digital experience monitoring.
I'd like to share a couple of examples of customer wins this quarter that highlight our platforms right.
First a major California insurance company was leveraging I, let approach to their cloud first strategy.
These tools provide a disparate information that was not integrated into their IP services management system. They realized they couldn't measure what they couldn't see and they were unable to improve what they couldn't match.
By consolidating these tools redeployment of an end to end observe at the least solution from dining trace this customer dramatically enhances visibility in their entire ecosystem.
This resulted in vastly improved operational management, and AI driven insights while reducing costs.
Let's take another example.
A large supermarket chain with an extremely complex ecosystem dependent upon dozens of SaaS and third party tools was looking for a comprehensive visibility across their environment.
During the evaluation process, they suffer any production system outage impacting their loyalty program.
<unk> was able to identify the root cause and resolve the issue within minutes rather than hours or days of lost revenue wasted marketing dollars and damaged in customer loyalty and investment Bill.
They selected <unk> because of the precision of our answers and our enablement of immediate action to ensure maximum uptime and performance.
These are just two examples of the trends that are widespread throughout our customer base.
Our customers' jobs have never been on <unk>.
Now more than ever it is critical for them to make observe ability and integral part of every cloud deployment.
A diner trace we referred to this as cloud.
Right.
We've never been in a stronger position to make consistent leverage the diamond trade platform, a reality across a wide array of cloud environments.
We also have ample runway to continue to expand our footprint within our installed base.
We have only just begun to gain meaningful momentum our application security module.
Application security was a brand new market for us less than two years ago and just this quarter. We closed a number of six figure deals, including Fannie Mae U P. S <unk> program.
And our R&D team continues its forbid commitment to innovation.
We believe that the log market is ripe for disruption.
We remain on track to release, a dramatically enhanced logging capability based on a massively scalable data store and platform evolution, we called whale in the back half of this year.
Customers frequently tell us they are generally satisfied with the functionality visibility and cost of their current logging tools.
And they want a highly performance and cost effective log monitoring solution that scales with the largest businesses.
Customers also see enormous value in treating logs as part of an end to end absorbability solution and dataset rather than a siloed tool.
We recently closed a seven figure deal with a major national bank to replace their existing lobby and security off in a major retailer invested in our lab capabilities.
We look forward to sharing more details about this offering in the coming months.
This brings me to my final topic and that is there a plan to navigate through the current economic backdrop.
I recently attended an event in which the speaker reminded a number of Ceos of the common auto racing expression that drivers win races and it hurts.
Unlike straightaways, which are more predictable courage upset the status quo.
<unk> can bring the unexpected there were races are often won or lost.
Ordinary talks about winning in the terms of a time when leaders must sharpen decision making capability.
Manage resources strategically and be ready to take the lead.
I believe there are some parallels that we can apply the current macro backdrop.
And we are being thoughtful and strategic about how we execute in this term.
There are several actions, we're taking to support our long term growth objectives enable us to gain market share and accelerate platform leadership, while maintaining healthy margins first.
First we have adjusted increases in head count and Opex through the balance of the year to deliver operating margins in line with our prior guidance to reflect the revised topline model.
We still plan to add nearly 800 people during FY 'twenty, three reflecting our commitment to ongoing investments in our growth.
Innovation and go to market expansion remain top priorities for us and we will continue to invest most aggressively in these strategic areas.
Through the end of July we grew our direct sales force by 30% year over year, and we plan to continue to grow the team to support our growth objectives.
We are also focused on building more high quality pipeline rapidly qualifying leads and infusing even more rigor into our D O validation costs.
On the indirect side, we will continue to expand relationships with three major hyperscale.
Our increased leverage in sales cycle acceleration.
We'll also continue to expand our relationships with global system integrators last quarter, we announced the Deloitte has selected diner trace and build observe ability into their digital transformation.
And we expect to share similar announcements with other system integrators in the future.
Overall, we have proven our discipline and delivering growth in challenging environments, while managing top to bottom line in a balanced way and we plan to continue to execute in this fashion looking ahead.
In closing Q1 was a solid start even amid macro uncertainty.
We remain highly confident in our market opportunity.
Zillions of our enterprise customer base and our platform leadership.
Expect us to continue to innovate with passion, which is paramount to our future growth and core to our culture.
We plan to use this period to increase differentiation from our competitors.
Going to manage prudently from a financial perspective, and we intend to invest thoughtfully in strategic opportunities to emerge even stronger competitively and before.
With that let me turn the call over to Kevin.
Thank you Rick and good morning, everyone as Rick mentioned, we delivered a solid first quarter.
MC environment.
Or all the resiliency of our subscription model and the strengthening of our enterprise customer base are reflected in our Q1 performance.
This provides a strong foundation from which we expect to continue to deliver a balanced business of growth profitability and cash flow consistent with the last three years operating in the public market.
As with previous quarters, I will focus on adjusted air growth as it normalizes for currency fluctuations and the wind down of perpetual error.
Please note that all growth rates will be year over year and in constant currency unless otherwise stated.
Dining trace delivered 34% adjusted air growth in the first quarter, representing the ninth straight quarter of mid 30% growth highlighting the resiliency and predictability of our subscription business model.
<unk> for the first quarter was $1.031 billion.
Excluding the currency and perpetual license are headwinds, we grew net new air by $281 million year over year, which was 28% growth.
Before I discuss the building blocks of growth for the business, Let me provide a little color on the macro impact we saw in the first quarter.
Throughout April and May we were pleased with strengthened linearity as well as new logo wins and net expansion rates.
Tone of customer conversations with positive and our pipeline coverage was consistent with historical trends.
However, as we entered the final two weeks of the quarter we saw.
Increased steel scrutiny and additional budget authorization requirement.
To a lengthening in sales cycles, primarily impacting new logos.
Rates remained healthy and consistent with the last few quarters.
Deals that we did not close in Q1, either remain in the pipeline or had been signed.
There's lots of growth continued to be the combination of new logos added to the managers platform and net expansion with existing customers.
As Rick mentioned, we added 135, new logos in the first quarter consistent with Q1 of last year and we were pleased to see that more than half of these new logos landed with three or more modules.
And our net expansion rate for the first quarter was once again above 120%.
From an existing customer standpoint, we continue to see strength in multi module adoption with more than half of our customers now using three plus module and an average error or a mirror.
$500000 per customer.
Given the significant cross sell and expansion opportunity in our customer base. We continue to believe that the average error or enterprise customer it could be $1 million or more.
[noise] ample runway for expansion with our current platform.
Overall, we are very pleased with the resiliency of our enterprise customers and drove a healthy first quarter performance, our existing customers view us as an essential part of their ecosystem given the proven value operating inefficiencies and insight that we deliver.
Moving on to revenue total revenue for the first quarter with $267 million exceeding the high end of our guidance range by $4 million and up 32% year over year.
Subscription revenue for the first quarter with $250 million up 32%, a $3 million beat versus the high end of our guidance.
With respect to margins gross margin for the first quarter was 84% down a point from Q1 of last year, primarily due to the investment in our customer success initiative, which led to a further strengthening of our impressive grocery tension and net expansion rates.
As we have said before we have a very healthy margin profile, reflecting the value and efficiency of diamond trade platform.
As Rick mentioned innovation and go to market expansion remain top priorities for us for the first quarter, we invested $41 million in R&D up 35% from last year.
We continue to successfully attract and retain talent in our R&D organization.
With our expectations.
And the go to market side, we invested $94 million in sales and marketing this quarter up 31% over last year and within our current target investment zone of 34% to 36% of revenue.
Our non-GAAP operating income for the first quarter with $60 million.
Dosing in an operating margin of 23% in line with our expectations given the planned targeted investments we've previously communicated.
On the bottom line non-GAAP net income was $52 million or <unk> 18 per share.
Looking at the balance sheet as of June 30, we had $571 million of cash an increase of $184 million compared to the same period last year and inclusive of $120 million of debt repayments.
Our free cash flow was $136 million compared to $81 million in the same period last year.
Reminder, cash flow in the first quarter was positively impacted by tax refund of over $30 million. This was previously expected to be received last year.
On a trailing 12 month basis, our free cash flow was $289 million or 29% of revenue.
We remain very pleased with our continued healthy cash generation.
The last financial measure that I would like to discuss is our remaining performance obligation.
R. P O was approximately $153 billion at the end of the quarter, an increase of 27% over Q1 of last year.
The current portion of our P O, which we expect to recognize as revenue over the next four quarters was $877 million, an increase of 28% year over year.
We are very pleased with the growth in our PEO. However, we continue to believe that.
That metric to understand the businesses performance as it removes variability associated with billing and contracting modification.
Now, let me turn to guidance there are a few things to keep in mind with respect to our guidance first we remain confident in the long term durability and predictability of our growth at the same time, we want to be mindful given the extended sales cycles. We saw in the last few weeks of Q1 <unk>.
Our revised guidance assumes these trends will continue for the balance of 23.
Given that we believe the majority of the macro headwind will be concentrated in new logo growth.
As such we now expect new logo additions in fiscal 'twenty three to be consistent with the 700, new logos, we added in fiscal 'twenty two.
We are confident in the resiliency of our customer base and the ongoing value, we deliver to our customers and we believe the macro impact on this cohort will be less significant.
In fact, we saw best ever gross retention rates this past quarter and it has been consistently trending up the last two years. We continue to believe our net expansion rate will be above 120% for fiscal 'twenty three.
Second with almost half of our business denominated in foreign currency continued strength of the USB creates a sizable headwind. We now expect full year air constant currency impact to be approximately $40 million and $47 million on revenue.
And finally consistent with prior guidance.
Petrol license wind down for fiscal 'twenty, three is expected to be approximately $8 million or 80 basis points consistent with prior guidance.
The headwind in Q2 will be approximately two and a half percentage point and it will then taper off throughout the year.
With that in mind, let's start with our guidance for the full year again with growth rates in constant currency.
Let's start with the air we expect air to be between one point to one three and one point to two $6 billion, representing an adjusted air growth of 27% to 28%.
It is a two percentage point decline from previous guidance, mostly driven by the lower new logo expectation for fiscal 'twenty three.
Terms of Q2 seasonality, we expect roughly 18% of the annual net new air are to close in Q2.
We now expect total revenue to be between 1125, and $1 $136 billion and subscription revenue to be between 1.5.
Five three to one point over six $2 million.
Both of which result in 26% to 27% year over year growth and a one percentage point decline from previous guidance.
From a profit standpoint, we remain committed to the margin expectation we set for fiscal 'twenty. Three we are reaffirming our non-GAAP operating margin guidance of 22, 523%.
As Rick mentioned, we are a growth business and we continue to hire however, we are slowing the rate of hiring and adjusting certain operating expenses to align with our revised top line expectation.
We expect non-GAAP EPS of <unk> 73 to 76 cents per share based on 290 to 294 million diluted shares outstanding and a non-GAAP effective cash tax rate of 11%.
And finally, we expect free cash flow to be between 310 and $325 million.
Or 27.5% to 28.5% of revenue.
Looking at Q2, we expect total revenue to be between $270 million to $275 million or 26% to 28% growth.
Subscription revenue is expected to be between 255, and $257 million up 26% to 27% year over year.
From a profit standpoint, non-GAAP operating income is expected to be between 62 and $64 $5 million.
23% to 23.5% of revenue.
non-GAAP EPS of 18 to 19 cents per share.
In summary, we are pleased with our first quarter fiscal 'twenty three performance, where we saw solid air our topline growth combined with a healthy cash margins and let's say dynamic environment. We.
We have a proven track record of consistent execution, we're being mindful of our investment levels and will continue to prioritize investments strategically and commercial expansion and innovation to support sustained growth.
Our strong financials subscription model and enterprise customer base continue to position us for resilient and predictable growth and profitability as we move forward.
And with that we'll open the line for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that 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.
One moment, please while we poll for questions.
Our first question comes from Adam Tindle with Raymond James. Please proceed with your question.
Okay. Thank you and good morning, Rick I, just wanted to start on the upcoming logging solution and the infrastructure product more broadly I know that you've talked about that solution potentially being as big as a P. M overtime. So an interesting growth driver moving forward wondering if you can speak to maybe the pipeline in early stage trajectory of that product.
And any additional color around the key competitive differentiation pricing logging would be helpful. Thanks.
Great. Thanks, very much Adam first our infrastructure continues as the module to grow much faster than our standard.
Our average IRR growth. So we feel very very positive about ongoing infrastructure growth. It is a core element to integrating that into our end to end in terms of like platform inclusive of APM infrastructure logs, you'll experience than others. So it is a core part of the solution with.
The respect of logging feel great about the development of where we are very much on track in delivery of rail in the second half of this year.
We are already are in the process of beginning early access what we call our EAP or early access program to the solution. We do believe as I said in my prepared remarks that this is a market an opportunity very ripe for disruption are focused on delivering a highly performance solution at great a great pre.
<unk> points with tremendous scale. It doesn't have the the issue a cold too warm repopulation or or a pullback of the data. So we're we're in very good shape and and we look forward to releasing the solution later this year.
Great and maybe just as a quick follow up for Kevin and.
This might be hard to do but it's you know could you maybe bifurcate core business versus new product expectations built into guidance for the rest of the year, Rick mentioned logging solutions on track for the back half I'm. Just wondering I think that's mostly not built into guidance, but I wanted to confirm that thank you.
Yeah, Hi.
So from a portfolio standpoint, yet as Rick mentioned, I think we're gonna contingencies or strengthen the infrastructure product.
New logging capabilities will be a contributor it's primarily towards the end of Q3 going into Q4, but obviously a much more meaningful contributor over over the next two years, but we certainly think that within two years that could be 100 million dollar piece of business for us. So the other component from a core module standpoint absent micro services continues to grow.
You know very well generally generally in line with our air growth, maybe a little bit smaller because of infrastructure spend faster and then add security we've had some nice progress here.
Over the last four or five quarters, I was getting more and more momentum there as well so.
Definitely I think the new product introductions are paying dividends.
The back half a little bit more but as we go into FY 'twenty four it will become a meaningful much more meaningful contributor.
Yeah. It sounds like a lot of exciting stuff ahead. Thank you so much.
Okay.
Our next question comes from Matt Hedberg with RBC capital markets. Please proceed with your question.
Great. Thanks for taking my questions and thanks for all the detail.
Guys, Rick I guess for you on the elongated deal cycles was there a geographic that was anything geographic there are on some of the new business side was it was it more European was in North America, just curious on that aspect of it.
I would say that our we saw modestly incremental impact in Europe , but it really was a global global slowdown where I would say a global extension of deal cycles that we saw in late June .
Modest in Europe , I had thought that the global nature.
Okay. Okay. That's helpful. And then you know demonstrates its been around for a long time and it's been through many economic cycles and I like your analogy of win races are one of the turn although you're you're tempering some of your new business expectations based off the macros.
Has there been periods of time, where historically you know customers that perhaps running multiple observe ability. We're monitoring boundaries look at this as an opportunity to say hey, like I'm running for I don't need to I'm going to try to consolidate out maybe one or two it could that actually help new business sales at some point here as customers try to do maybe more with fewer vendor.
And maybe standardize even more so on the dinosaurs.
Absolutely. It's a great observation, we do see it certainly in our pipeline in terms of opportunities for consolidation or other tools and it occurs all the time. So that is a source of potential new logo and certainly market share increases that we see in part come from product precisely that Oh.
That phenomena.
Great. Thanks, guys.
Yeah.
Our next question is from Camille Zurich with William Blair. Please proceed with your question.
Good morning, Thanks for taking my questions.
Uh huh.
Can you update us on how churn looked in the quarter. It looks like it may have picked up and how much of that is attributable to the planned decline in non strategic customers and what are your expectations for customer churn through the end of the year.
So to me I'm, assuming you're talking about customer count churn is that.
That's right.
Yeah, Yeah, so as as we communicated over the last four to five quarters, we do have a.
Small set of customers is becoming smaller and smaller that probably closer to 152, and our customers with very low sort of combined single digit error or single product. You know, perhaps you know running a synthetic product or not deployed across the organization. These are noncore noncore.
Customers to US you know, we are certainly working to expand them, but they're going to continue to decline. So what you've seen over the last four quarters is really a burn down of this low customer low customer cohort. We think that will continue for another quarter or two I think we're coming to the end of that cycle.
Loved ones that we've been adding to that you know when you think about the growth in the business.
Where we're landing them at a healthy a are and more importantly, I think Neal is that the way.
And even with their platform or their language three modules apps micro services and infrastructure and whether our customers have those components.
Why it's so much more stickier and that expansion rates aren't so much healthier. So what do we think about it is it's a little bit of a churn on the customer count side as anticipated. It does not move the needle from an air standpoint, and we think we're going to come out of it.
Super strong the whole customer base that has been granted breakthrough.
No that's very helpful.
I could just follow up on free cash flow margin was very strong in the quarter I think over 50% that are at a multiyear high.
Can you provide some more detail on what drove the free cash flow strengthen in the quarter and given the strong start to the year why bring down your full year free cash flow margin guide.
Sure so great great free cash flow number in the Q1 Q1, there's a lot of seasonality I think cumulus email and our business. We had a very strong bookings quarter in Q4 that resulted in the very high are balanced. In addition, we received a tax refund of about $30 million. So the dispatch.
If you back out the $30 million tax refund, we still had a really healthy free cash flow number in the quarter based on the health of the business over Q3, and Q4 that led to increased collection. So that all bodes well for our appeal for deferred revenue for revenue visibility on when.
When you think about the guide for the year, though we want to be careful in this environment. So we are assuming that are or will be coming down by about $20 million on a constant currency basis.
And as a result of that that will result in some lower bookings and billings, so a little bit more prudent prudence and conservatism conservatism on that free cash flow number we've been generating healthy cash margins in the business for many years and we expect that to continue so the way we view that as just a suite slight tweak based on.
On current market conditions.
Yeah, that's very helpful. Thanks again.
Our next question comes from Mike cycles with Needham <unk> Co. Please proceed with your question.
Hey, guys. Thanks for getting me on here you have Mike. She goes I wanted to ask about these elongated cycles that you're talking to and really my sense based on some of your commentary is it was just the last two weeks of June where this really picked up so I'm curious with what you saw between deals either staying in the pipe.
Flying or closing since then can you help us separate the two like how.
What is that that number that has closed versus remains in the pipeline and then the second part of that question is has the behavior from your customers been consistent through July are we seeing a further elongation of those cycles as we move away from June .
And Mike It's Kevin So if we go back and sort of revisit the last two weeks of the quarter. What we thought we saw continued strength in our customer or existing customer expansion numbers right. There was a little bit of pressure there just due to multiple approvals required on some budget item, so a little bit of a little.
Of that pushed into Q2, the bigger change really wasn't in new logos, where we saw this during COVID-19 right people when they're looking at a new solution may be a little bit more tempered.
Tempered in their buying patterns that we saw some deals push from Q1 into Q2 from a new logo standpoint, and certainly have closed some of those some of those remaining in the pipeline, but I think when we think about the next couple of quarters Q2, Q3, Q4, we just think there's going to be sort of this push up new logos throughout.
The course of the year, just based on base based on buying buying patterns and how we'd see new logos.
And those things are going to take a little bit longer. So overall, we're pleased with customer existing customer expansion in the quarter New logos you know the way we think about it is the Q1 push is going to get just keep pushing into Q2 Q3 and Q4.
We're obviously very targeted.
Adding new logos to the franchise, it's super important for the long term health of the business, but given the current marketing conditions, we wanted to call it sort of flat new logo growth on a year over year basis, which means will add 700, who loves it. This year. So that's how we think about it no changes in market conditions.
From the end of June into where we are today. So no further deterioration as said differently. So we'll see how the quarter plays out, but we can take all that into account.
Thank you for that I appreciate the color and if I could just squeeze one more in.
I mean, I think about the budget pressures, where maybe some of these deals pushing from let's say increased scrutiny or you're seeing new logos land smaller than and then is there any way I know that you guys target the global 15000, but.
To the extent has there been any delineation, if I think about like the ultra Mega enterprise customers versus maybe more mid market type customers as far as that that customer behavior, we're talking to.
So generally I think as you appreciate our trailing 12 month new logo land is.
Hundred and $510000 in that ZIP code, it's been increasing over the last four to five quarters, primarily due to the fact that customers are landing with the three modules that I mentioned earlier Q1, the number came down a little bit you know I wouldn't call it meaningful mover and I don't think it's a leading indicator of deal size at this point.
We'd loved $100000 land themselves, it's a great way to get into the organization.
Highlights highlight certain applications in the full stack and expand from there and also $100000 purchase but not a significant purchase from an enterprise level. So.
Smoothed out those budget approvals in.
<unk> results and we believe faster time to market faster time to close the deal so.
Overall, yes to answer your questions slight decline in ASP elaborate average laying on the new logo side. We don't think that's necessarily a trend that's going to continue we think under a thousand dollars sort of land for the enterprise customers at a good spot.
Terrific. Thank you for the color I'll pass it on.
Our next question comes from Eric <unk> with J P Securities JMP Securities. Please proceed with your question.
Yeah. Good morning, Thanks for taking the question. One you had mentioned a target of 800 employees or 800, a new new employees for the year can you give us a sense of where you are in terms of that hiring to date.
Hi, Eric it's Kevin.
So we got off to a great start in the first quarter from a sales standpoint, our current quota capacity as Rick mentioned is has grown 30% that's grade our R&D organization made significant progress as well from up from a hiring standpoint, so off to a good start close close to about 300, new hire.
In the first quarter out of the 800 that we're projecting for the year I'm. So pleased with the performance and you know as we've talked about we've brought down or.
Our original hiring targets, which were generally going to be in line with the revenue growth assumptions and we just updated our head count growth rates down back down to where we think revenue growth rates will be for the year, So growing head count in that.
New head count in that 'twenty five 'twenty six.
Year over year, we were intending to guests and go to market and we're going to continue to focus and obviously R&D innovation and then obviously, we want the appropriate metrics from our customer success standpoint that we want and so we wanted to make sure where we're hiring there based on the revenue trajectory of the business.
And we can think of the growth within your sales organization and that and that type of type of growth range. Like you were just saying a 2025, 27%.
We well so sales has been growing in sales capacity I think you know direct sales reps grew 30% through the end of July on a year over year basis, our stated goals for sales Rep head Count club. This year is 30% as well that may move around a little bit Eric depending on the trove.
Sector of the business.
Coming off of Q2 going into Q3 and Q4, but we are prioritizing the investments in the direct business.
We believe once we get through some of these macro pressures it will put us in a much stronger position to continue to grow and perhaps even accelerate growth going into FY 'twenty, four and depending on where the market is at that point.
Okay Lastly, your security module.
No. It's still early but is that on a trajectory where it could reach an attach rate that's comparable to you know to your other popular modules.
Is that something you see in another couple of years or where do you think that attach rate.
Could could fall out longer term.
We absolutely believe so Eric that's a it's a very popular module, especially since a lot of our J occurred in the December timeframe.
On mobility management solution seems to have hit a nerve in the market for sure and it seems to be the best tool out there to do the job to assess vulnerabilities and enable companies and especially our customers who deployed it to successfully utilize it to uncover vulnerabilities and and triage the most rapidly.
We're very pleased by it in terms of long term opportunity. We certainly see this as 100 million dollar opportunity type business over a few year span and that's what we felt the last couple of quarters and we feel the same as a as we see the current trajectory.
Any sense of timing on when it could start to approach some of the other attach rates.
Well the attach rate are the attach rate will grow over time I gave you sort of the the few year projection as to where we think it's going to be and that attach rate will grow through that period and India.
Very good thank you.
Yeah.
Our next question comes from Koji I came out with Bank of America. Please proceed with your question.
Oh, Thank you, Hey, Rick and Kevin I, just wanted to kind of come back to the you know really the elongated sales cycles comments here, we really appreciate the prior commentary on June and how it's been trending since in July , but I really kind of wanted to hit on April and May was there any sort of early indications or maybe crack.
So the sales cycles are comments that youre hearing from the sales teams that that was kind of pointing to potential elongated sales cycles, there or was it really just pronounced in the last two weeks of June .
I can tell you get no. It was an interesting time period, obviously, we're very well instruments and across the organization in terms of pipeline coverage and then I have a pretty thorough process for covering all of that April and may were trending extremely well in terms of linearity of bookings. So they were ahead of historical trends.
<unk> pipeline coverage was excellent so it was a.
It was a little bit of a surprise when we went through the last two weeks of the quarter, let's see that's certainly those new logo numbers come off when over the.
Prior 10 weeks of the quarter.
Things seem very healthy so definitely a slowdown in the last two weeks, which is which is something that we're expecting to continue for the balance of the year and then what.
And how long do these macro pressures.
And could you if I could just add to the answer and Kevin. It took the form for example, additional layers of approval and in late June that we thought that the CIO would be sufficient to sign the deal. That's what had been communicated and even in some of these cases the C. I always would tell us that require more levels of approval, which forced the D.
Sales into a later quarter just to be clear and also to address some prior questions. We do not view. These as deals lost in fact, we didn't identify any of these there's lots of competitors. So in the vast majority of these cases.
They were deals that continued in pipeline and that we're continuing to work through the course of the quarter.
Got it thanks, guys I'll hop into the queue. Thank you so much.
That's great.
Our next question comes from Raymond Lin Chi with Barclays. Please proceed with your question.
Perfect. Thank you I've got two quick ones I'm actually released it to this one is to think about these new deals and the extra levels of approval Rick I'm just have to come like a seal.
Two execution things like like you basically obviously at the beginning of these kind of throw them. All you get surprised because you're not aware of these extra layers are needed. But then once you kind of baked that into the sales process to see what the execution process.
You kind of think you kind of have it more covered is that something that could happen as we go through this that you know obviously, everyone got caught out the last week of June but now you know that that's required. So did you. You know are you reacting in terms of the sales process et cetera. That's my first question and the second question is on logging obviously video.
Sorry to hear that the one thing that's what makes it so especially for you because if I look into the market. There's been only like two super successful log vendors out there because it's a quite a technical problem actually what makes you. So confident that you kind of crack at year end and will it be like a FERC in that space. Thank you.
Great I'll take both of them so first on sales process.
I'm a great a great observation absolutely you can imagine that we are doing much more thorough inspection and evaluation of deals in terms of what it takes to get these closed asking incremental questions air champions within customers to evaluate what that close cycle looks like specifically what.
It's going to take to get the paperwork done. So we have reacted and reacting quickly to an updated environment requiring that additional approval cycle. So they ever get Brussels, yes.
The answer to the first question to say, we are all over it from a sales execution standpoint, but further do a deal with you as we go through the process.
With regard to logging what I would say is its special are several elements. The first is we believe that based on hyperdrive technology that we're putting into place here that we've seen in the lab. So far that as I said earlier, we can deliver a highly performing.
Very scalable solution at lower cost, but now that has no data rehydration requirement. So no distinction between cold and warm storage. So we believe they just on its own are logging capabilities is very compelling in the market.
But what we really believe is most compelling about the logging solution isn't fundamental integration into our end to end Absorbability platform. That's what makes it most differentiated.
And the reason is because we simply don't see laws as a uniquely independent dataset. It really is part of logs traces metrics behavioral analytics metadata digital experience. So really use your data and it is the application of all of that data to our AI ops engine that really enables.
As to deliver the answers and intelligent automation from data that we see so that's the way we differentiate on a lot of new solution alone, but usually when you integrate it into the end of an end to end Absorbability platform, that's where you get the biggest bang for Buck.
That's perfect. Thank you.
Our next question comes from a cash crunch on with Goldman Sachs. Please proceed with your question.
Okay.
Hello, Thank you very much extremely clear analysis of the quarter and also your take on how you constructed the guidance it really really well done case a question for you you've been through a couple of downturns before.
And I'm curious to get your take on.
What what are customers, saying that the new logos that.
You still have on the table what are they saying as to what Theyre looking for Sundar to proceed with these.
With these contracts and what is your best prediction on what kind of a recovery. We are expecting is it like a U shaped recovery or is it a much.
Much elongated recovery because maybe your customers are more concerned about certain other things happening with respect to the economy, but they're not quite sure, but what's your best prediction as to how we come out of that center shape with Republic. Thank you so much once again.
Thanks Kash early morning for you. Thanks, Thanks for joining.
On the on the customer on the customer front, what they're telling us in terms of our champions in our in our various different companies that we're speaking to is that they want to proceed with the solution. They need some additional levels of approval and they're going about trying to get those levels of approval as we speak so the deals are very much alive.
And we're still working through the system and it's just going to take a little bit longer than perhaps it used to be in a different environment. So our customers, namely our champions are so very much of the mindset of continuing to drive these opportunities with us with respect to a recovery.
Gosh, I don't know how to how to predict that I I don't have a strong stance on it obviously you got a macro environment, which has 40 year inflation high interest rates borrowing at three quarters of a percent a two times in a row now in June and July you've got geopolitical.
Challenges.
Both in the Ukraine, and now assuming even over the past couple of days to accelerate in China, which are creating additional challenge in the market. As you know so I don't know is the short answer what that recovery is and I'm not going to take a take a position on it other than to say that our guidance reflects an ongoing an ongoing.
<unk> environment that we saw at the end of June and into July through the balance of our fiscal year and that's how we factored it in if we see a more rapid recovery than that of the economic environment than then we should we should benefit from that.
And as a follow up thank you. So much how are you evolving your sales cycles and what does the new playbook to ensure that you do get your fair share of new customers to sign on.
Because there's no certainty here, but I'm curious about the playbook changes.
Yeah in terms of the sales playbook and pipeline generation, which is a core area of focus for US we're focused in three areas in particular, one that I've spoken of in detail in the past is around partners.
Deloitte for example, last last quarter as a global system integrator, we continue to work with the Hyperscale or on the global system integrator front with Lloyd's specifically I'm delighted to report that we have closed already our first contract a deal with them or I should say through them a couple of million dollar total contract value deal at.
Ananda So I'm pleased with that is that several dozen customers or opportunities in the pipeline with them and they've trained almost now it doesn't individuals' on sales and partner enablement. So we feel good about that we do expect as I indicated in my comments to us to have additional system integrator announcement.
To come I'm pleased about that so partners as one category and other categories through our sales development reps and then through our account executives with both of those additional channels being also core focal areas for for our pipeline investment and development.
Wonderful. Thank you so much.
Our next question comes from Keith Bachman with PMO capital markets. Please proceed with that.
Time, I'll ask my questions concurrently.
The first if you could update us on your thinking on M&A.
There was some controversy a couple of quarters on kind of what the messages now candidly prices for public assets have fallen materially privates, perhaps not as haven't followed the same trend line, but but even privates are feeling some pressure how do you think about M&A in particular, how do you balance the issues surrounding.
Integration of assets, particularly on the technical side versus the opportunity to accelerate growth.
And my second question, a little bit off of cash, but perhaps in a different direction as if it's a macro continues to slow because you mentioned that your guidance is based on a steady state from the last two weeks of June through August , but let's say the macro and therefore the pressure on your top line continues to slow will ya.
Further moderate hiring.
To try to preserve some margin we had noticed.
That you had slowed hiring in the last six weeks. So just wondering if things get worse. So to speak with you. What is your plan to subsequently slow again or will you just keep hiring and negatively impact the margin. That's it for me. Thank you.
Thanks, Keith to to address the M&A one no change in stance over the last couple of quarters as we've communicated and we continue to look at M&A in terms of tuck in opportunities for acceleration of R&D roadmap. If we can accelerate in R&D a roadmap by 12 to 18 months then that's definitely worth us looking at having said that we are very disciplined buyers.
And we're not going to overpay for assets. So we're going to be very careful about that we are not looking at transformational M&A. So that is not something that is on the table and scope. So that's very much a tuck in in orientation and we do continue to evaluate those types of opportunities.
With respect to the overall macro environment hiring it is our commitment and we say as we've stated repeatedly to manage top line to bottom line, we run a balanced business with focus on profitability and operating margin as you see we maintained constant in our guidance at at prior guidance rates into 'twenty two.
<unk> 23 per cent, we did that by reducing the hiring ramp even though we are recruiting quite significantly as we indicated 800 people. This year as a target and we will continue to manage variable expenses in order to manage to that operating margin target that we have so if necessary based on based on further top line adjustment.
It is our commitment to continue to manage to the operating margins that we've indicated.
Perfect. Thanks.
Our last question comes from Joseph Spine mature. Please proceed with your question.
Thanks for squeezing me in.
Guys have talked about doubling down on the government go to market I'm just curious about your expectations are with regard to the public sector.
Throughout the remainder of the year that'd be helpful. Thank you.
Good good good insulating question Jo and thanks, very much I was actually down in Virginia in D. C. Recently with our federal team I can't say that is a it remains to be a significant opportunity in agencies from classified the civilian and I am very optimistic.
Our opportunity to grow that business faster than our average they are our growth rate over the course of time, So I feel very good about our about the federal the federal situation in particular.
Thank you.
Okay, I think that brings us to a close I want to thank you all very much for joining just to summarize we've used you want it's a very solid start to fiscal 2023 in spite of some interesting macro headwinds that that appeared late in June .
And that continue to persist and are managing through we remain absolutely confident and convicted in our market opportunity. We are seeing resiliency in our enterprise customer base and we are we certainly aspire to maintain the ongoing durability of our business model. We are committed to running this business in the balance.
Way with strong profitability and free cash flow, Kevin and I also will be participating in several investor conferences. This quarter. So we look forward to seeing many of you. There. Thank you very much for your ongoing support and have a good day.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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