Q1 2024 Dynatrace Inc Earnings Call
Greetings and welcome to the diner trace fiscal first quarter 'twenty 'twenty four earnings call. At this time, all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it is now my.
Closer to introduce your host now wildfires Vice President of Investor Relations. Thank you you may begin.
Good morning, and thank you for joining <unk> first quarter and fiscal 2024 earnings Conference call. Joining me today are Rick Mcconnell, Chief Executive Officer, and Jim Benson <unk> 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 and economic conditions.
Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in diner traces SEC filings, including our most recent quarterly report on Form 10-Q that we filed earlier today.
The forward looking statements included in this call represent the company's views on August 2nd 2023, we assume no obligation to update these statements as a result of new information future events or circumstances.
Unless otherwise noted the growth rates, we discuss today are non-GAAP , reflecting constant currency growth and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. We provide reconciliations between non-GAAP and GAAP measures in todays earning.
Press release and in the financial presentation slides posted in the Investor Relations section of our website and with that let me turn the call over to our Chief Executive Officer, Rick Mcconnell Rick.
Thanks, Noel and good morning, everyone.
Thank you for joining us for today's call.
We had a solid start to our fiscal year exceeding the high end of our guidance across all metrics.
Our our grew 25% year over year.
Subscription revenue.
Increased 27% year over year in constant currency and non-GAAP operating income was $92 million or 28% of revenue.
These results continue to demonstrate our ability to deliver a powerful combination of top line growth and profitability.
They are a testament to the criticality of observe ability and application security in the market and the significant value our platform provides to our customers even as the economic environment continues to impact behind behavior.
Jim will share more details about our Q1 performance in a moment in the meantime, I'd like to share an update on the broader market outlook customer wins and recent announcements.
Let's start with our market opportunity, which we continue to view as massive and growler.
As organizations increasingly rely on multi cloud and cloud native computing for successful execution of their digital transformation strategies simplification through observe ability has become essential.
The scale and dynamic nature of modern cloud ecosystems have made them too complex to manage with dashboards alerts and manual troubleshooting.
Organizations are frustrated with fragmented tools negative customer experiences and limited analytics.
Dino trace makes water out of this chaos by enabling customers to have better control of their I T ecosystems and to help combat these pain points.
Last quarter I mentioned, several use cases that have become key drivers of customers purchasing behavior among them.
Organizations purchase Dayni trace because they are looking to deliver a highly performing cloud native infrastructure and applications.
Our seeking cost effective and more insightful log management at scale.
They are investing substantial sums to secure their cloud applications.
They want to dramatically reduce incidents and downtime.
And they are seeking a fully unified absorbability platform helped drive material cost savings and improved oversight by consolidating the myriad of disconnected tools, they're using today.
These use cases helped drive new logo growth at 15% in the first quarter on a year over year basis, and led to a dollar based net retention of 116%.
Some notable customer wins from this quarter include the following.
Our leading financial software company signed a seven figure deal through the Azure portal.
This customer is in the process of modernizing their environment from legacy virtual machines to kubernetes.
The time and cost associated with Triaging incidents Emmanuel troubleshooting any modern complex environment was a major pain point for them.
Now with full stack observer ability and logs on Grail with diner trace this customer estimates that it will save $1.5 million in the first three months of deployment due to greater efficiency productivity and higher collaboration across teams.
Another seven figure win in the quarter was with one of the largest satellite TV providers.
This customer was overwhelmed with the number of alerts and manual troubleshooting your existing monitoring tool provided they were looking to simplify and reduce inefficiencies as well as get visibility into every aspect of their cloud environment with no blind spots. They have now chosen to standardize on tiny trips.
And a major U S oil and gas company signed a significant expansion to add applications security to their deployment.
After the log for shelf software vulnerability was identified they realize they didn't have visibility into what our abilities were either unresolved or reintroduced into their environment.
With dining trace app that they now have better visibility into their applications and we're able to integrate Dev ops with Dev checkups.
These are just a few examples of the strength of our product offering and the business value. The diner trace platform provides.
We have often said in the past, we strive to enable our customers to deliver flawless and secure digital interactions.
The analytics and automation embedded in our unified observe ability and security platform.
What differentiate us in the market and frequently drive customers to choose diner traced over alternative approaches.
Last month after evaluating 19 vendors Gartner named dying to trace a leader in the 2023 magic quadrant for application performance monitoring and observe ability.
Positioning diamond trace furthest for completeness of vision and highest for ability to execute.
This was the 13th straight time that Diamond trace has been in the leader quadrant.
We were also ranked number one across all six use cases in the Gartner 2023 critical capabilities for a P. M. Absorbability report we.
We believe diamond Grace's position longevity and criticality in both reports reflect our ability to execute and anticipate change in this constantly evolving market.
I'd like to turn matched to two key announcements we made over the past couple of weeks in the areas of hyper modal AI and developer Absorbability, both of which are great. Examples of our core focus on innovation.
First let's start with Hypermobile AI evolving from a radically different approach artificial intelligence dying.
Diner trade stateless is our AI engine that has long been a primary differentiator for us.
<unk> customers have used Davis AI for years to tie servers items or ability with user impact deterministic Lee reduced hundreds of alerts to single problems and automate the root cause analysis process in large scale and complex cloud native environments.
We've extended our causal a I to security use cases, such as automating risk analysis of vulnerabilities and accelerating investigations and remediation.
And we've made our predictive AI and more powerful by leveraging machine learning to identify anomalies and forecast future patterns with great precision based on historical behavior.
Last year, we extended our predictive AI and causal AI capabilities with even richer context, leveraging our Grail data Lake House extracting precise answers in driving automation from data in real time at massive scale.
Last week, we announced the planned addition of the third critical element to our AI architecture and solution set generative AI to deliver the industry's first hyper modal artificial intelligence serve ability offering.
I promoted AI is the combination of three different AI techniques delivered by diner trace each having a unique value, but with a whole much greater than the sum of the parts.
Predictive AI I uses models to recommend future actions based on data from the past.
How does AI analytics.
Elijah dependencies.
Cross massive datasets, while retaining an accurate context to deliver backed based precise answers in automation.
In general today I provides recommendations on how to solve specific tasks through prompts enriched with automated context of a customer's environment uniquely provided by Dino trace.
Our generative AI capability is named Davis co pilot.
Davis co pilot will work with dining trace causal and predictive AI.
To automatically provide recommendations for issue remediation and optimization.
Great actions in.
And allow people to use natural language to explore salt or complete tasks.
Many organizations have announced strategies around generative AI.
Our approach however, it goes far beyond simply adding a natural language interface.
Lives on human intelligence to steer generative AI solutions.
Our predictive and causal AI will be designed to feed comprehensive and specific prompts to Davis co pilot to help avoid outages or degradations.
Before they happen and help remediate and resolve active incidents when they arise.
We view hyper modal AI as a significant catalyst for customer expansion.
Increasing both the breadth of end users, who can leverage the platform and the creation of workloads. We believe this will lead to higher dollar based net retention, resulting from more customer cross sell and upsell as well as an increase in the stickiness of the diner Tracy Platt.
We are also very excited about the ongoing evolution of our platform in the area of developer observe ability.
As we have indicated in the past we believe that the role of development teams will continue to expand in the observe ability and application security decision process.
In particular, we believe these capabilities will continue to shift left into software development life cycles to enable more productive handling of absorbability insights and answers directly in software.
And that in turn will lead development teams to shift right to take on greater responsibility for successful software operations, including availability and end user experience.
This week, we signed a definitive agreement to acquire broke out a Tel Aviv based developer first observe ability platform to further expand our capabilities and investment in this area.
In particular code debugging in production environments has been a major pain point for developers traditionally debugging tools have only addressed issues in preproduction environments, leaving developers without an efficient or secure way to troubleshoot production applications.
Lookouts highly differentiated technology allows developers to address issues in life coach with privacy controls in place without restarting redeploying or adding even more coke.
We believe the combination of workouts debugging technology seamlessly integrated into the diner trace platform will be very powerful for our customers.
We expect it to create a new standard for how engineers improve quality and deliver better business outcomes by enabling developers to troubleshoot and debug without disruption.
In addition to these exciting announcements on product innovation and platform evolution. We've also had some noteworthy announcements on the go to market side of the business.
Two weeks ago, we announced the expansion of our relationship with Microsoft.
We are stepping up our committed spend over a multiyear horizon in anticipation of even more growth through the azure platform.
Together, it will be increasing our joint sales enablement and marketing to accelerate cloud migration and optimization initiatives.
Earlier in the quarter, we announced the expansion of our collaboration with Red hat with new integration capabilities between dining trace and Red hat event driven ansible.
This is a great example of how diner trace turns data into answers that can then be turned into actions.
This integration enables customers to automate Dev ops use cases, such as closed loop remediation and application healing to drive greater operational efficiencies and boost the performance reliability and security of their workloads.
And we continue to build momentum with a leading strategic global system integrators or gsi's.
We have more than 10 strategic GSI is partnering with us today and a few including Deloitte in D. C are built diamond trace into their reference architectures.
By way of example sales pipeline contribution from one of our largest GSI partners has more than doubled when compared to last year and continues to show strong momentum.
Before I turn the call over to Jim I'd like to take a moment to discuss our CFO transition.
In June we announced the appointment of Danzig elder as our new CFO .
Dan is four weeks into his role at dine at Tres and we are extremely pleased to have him onboard.
Dan brings deep industry knowledge, having spent his career working at ADP, Dell EMC and most recently Vmware.
He has a strong background in building multibillion dollar sales organizations, which will be instrumental as diamond trade plans to scale in our next phase of growth.
On behalf of the entire diner trace team I'd like to thank steep pace for his dedication and execution as our CRO over the past seven years.
His contributions to building a world class sales organization have position diner trace for sustainable long term growth.
Steve will be retiring from Daina trace in early October and he is actively involved in ensuring a smooth transition.
In closing, we had a solid start to our fiscal year, even as ongoing macro headwinds persist.
We remain highly confident in our market opportunity our platform leadership and the powerful combination of topline growth and profitability.
We are humbled by the third party validation from Gartner of our product leadership, and we are committed to continuing our delivery of significant innovations and customer value consistent with that leadership.
Financially, we will continue to manage our business prudently and invest thoughtfully in those strategic opportunities that we believe put us in a position of strength for the future.
We are purposeful and driven by our vision of enabling our customers to deliver a world in which their software works perfectly.
We have made great progress, but in the context of an increasingly cloud based software world in which we can materially improve software performance and end user engagement, we have a really only just begun.
With that let me turn the call over to Jim.
Thank you Rick and good morning, everyone. As Rick mentioned, we are off to a solid start to our fiscal year, beating the high end of our guidance across all of our key operating metrics. Our continued ability to successfully execute in this dynamic macro environment.
As a testament to the growing criticality of observer ability and application security in the market.
Our product differentiation.
Proposition, we provide to our customers and the ongoing durability of our business model.
Now, let's dive into the first quarter results in more detail.
Please note that the growth reach mentioned will be year over year and in constant currency unless otherwise stated.
Starting with annual recurring revenue.
As a reminder, the headwind associated with the wind down of perpetual license is now less than 100 basis points.
As I mentioned last quarter, we will no longer be referring to adjusted AOR growth in our prepared remarks.
For comparison purposes, we will continue to share the impact of perpetual license and our quarterly presentation.
And in the financial data trends file available on our website.
Total E R or for the first quarter was $1.29 billion, an increase of $263 million year over year and $47 million sequentially.
Foreign exchange was a $3 million tailwind year over year, and a 10 million dollar tailwind sequentially.
<unk> and 25% year over year AOR growth on a constant currency basis.
Net new a or on a constant currency basis was $37 million in our seasonally lightest bookings quarter of the year.
And as we shared in our last call. We had a tremendous closed Q4 of fiscal 'twenty three.
Which included $13 million of incremental expansions from early renewals that were originally expected to close in the first quarter.
New logos grew 15% in the first quarter, adding a total of 155, new logos to the <unk> platform.
The average a R. R per new logo land was consistent with the prior quarter at roughly $130000 on a trailing 12 month basis.
Our gross retention rates continued to be best in class in the mid nineties and contributed to a solid dollar based net retention rate of 116% in the first quarter in line with our mid teens expectation for fiscal 2024.
With nearly two thirds of our customers using three or more modules. It's clear that customers are standardizing diner trees as their full stack observer ability and security platform.
Our innovation engine continues to home, creating additional cross sell and upsell opportunities in our in our customer base.
As Rick mentioned, Hypermobile, AI and developer Observer ability are great examples of building incremental capabilities to extend our reach to a wider range of users and accelerate the pace and volume of new workloads, which we believe will ultimately contribute to an incremental expansion in the future.
In addition, we're seeing strong customer interest for the diner trees platform subscription or D. T S. Having made it generally available to customers in April .
With D. P. S. We were making our solutions had broadly and easily accessible through a simplified cross platform licensee model.
This model allows customers to trial and deploy any aspect of our solution such as logs or app SEC, while leveraging a single commitment.
We expect Dps will drive enhanced net expansion and accelerate a R. R in future periods.
Moving onto revenue total revenue for the first quarter was $333 million up 25% and exceeding the high end of guidance by $5 million.
And subscription revenue for the first quarter was $316 million up 27% and exceeding the high end of our guidance range by $7 million.
With respect to margins, we continue to have a very healthy margin profile, reflecting the value and efficiency. So the dietary is platform.
non-GAAP gross margin for the first quarter was 84% consistent with both last year and Q4 levels.
Our non-GAAP operating income for the first quarter was $92 million $14 million above the high end of our guidance range due to the revenue upside in the quarter and a staggered pace of hiring in anticipation of the rook out acquisition.
This resulted in a non-GAAP operating margin of 28%.
Exceeding the top end of the guidance range by roughly 400 basis points.
non-GAAP net income was $79 million or 27 cents per share.
This was five cents above the high end of our guidance range driven by the items I just mentioned.
Turning now to the balance sheet.
As of June 30th we had $701 million of cash and zero debt. This represents a sequential increase in our cash balance of $145 million compared to March 31.
Our free cash flow with a very healthy $124 million in the first quarter.
We continue to believe it is best to view free cash flow over a trailing 12 month period due to seasonality and variability in billings quarter to quarter.
On a trailing 12 month basis free cash flow was $321 million or 26% of revenue.
The last financial measure that I would like to discuss is that remaining performance obligation.
A P O was approximately $1 $9 billion at the end of the quarter.
An increase of 20% over Q1 of last year.
Current portion of our P O, which we expect to recognize revenue over the next four quarters.
It was $1.097 billion, an increase of 24%.
It is important to remember that seasonality associated with bookings and contract upselling because variability in the RVO growth rates.
As such.
We continue to believe a R. R is the best metric to understand the health and durability of the business as it removes noise associated with the timing of billings.
Now, let me turn to guidance it's.
As Rick mentioned, we are confident in the long term growth opportunity for Daina trace the.
The addressable market is large and growing.
Observer ability and application security are becoming even more critical successful cloud and multi cloud deployments. Our offerings are highly differentiated we are well positioned as the industry leader and we have a financial model that is both balanced and durable near.
Near term, we are mindful of the current macro uncertainty.
And while we have seen signs of resiliency in the observer ability and application security market.
We believe it is prudent to continue to factor the dynamic macro landscape into our guidance.
Enterprises remain cautious in their spending and our approach to guidance assumes that tighter budget scrutiny and elongation of sales cycles will persist.
We had a solid start to the year, but it is still early in our fiscal year and we do not want to get ahead of ourselves.
There are a few things to keep in mind with respect to our guidance.
This guidance continues to assume new logo growth in the low single digits.
In a dollar based net retention rate in the mid teens for fiscal 2024.
We expect the full year foreign exchange tailwind to as reported <unk> to be approximately $11 million and approximately $15 million on revenue.
Awfully consistent with our prior guidance.
The workout acquisition is expected to close within the second quarter and is embedded in our guidance.
This is this technology tuck in acquisition there was insignificant revenue as part of this transaction. However, we believe the combination of workouts code debugging technology seamlessly integrated into the unified <unk> platform will be very powerful and address a major developer paint.
And with that as an opener, let's start with our guidance for the full year with growth rates in constant currency.
We are maintaining our a R. Our guidance of 1.4 $75 billion to $1.49 billion or 18% to 19% constant currency growth.
Consistent with what I shared last quarter.
Seasonality of net new E. R. R.
Expect it to be more backend loaded this year compared to prior years with roughly 35% expected to land in the first half of fiscal 2024, and approximately 65% in the back half.
Turning now to revenue, we are raising our revenue guidance at the midpoint by $11 million for the year.
Driven by our over achievement in subscription revenue in the first quarter we.
We are raging non-GAAP E. P. S guidance to one dollar three to one dollar six cents per share representing an increase of five cents at the mid point the range.
This non-GAAP E. P. S is based on a diluted share count of 300 to 301 million chairs and a non-GAAP effective cash tax rate of 19 per cent consistent with prior guidance.
And finally, we are maintaining our free cash flow guidance of $303 million to $312 million, representing a free cash flow margin of approximately 22% of revenue.
And while we do not guide free cash flow quarterly.
Due to the seasonality and variability in billings as well as the timing of cash tax payments, we expect free cash flow to be higher than our first and fourth quarters and significantly lower in our second and third quarters.
And given are expected back end loaded bookings linearity. This year free cash will will be even more skewed to queue for that in prior years.
Looking at Q2, we expect total revenue to be between 343, and $346 million or 21% to 22% growth.
Subscription revenue is expected to be between 325, and $328 million up 22% to 23% year over year.
From a profit standpoint, non-GAAP operating income is expected to be between 90, and $93 million or 26% to 27% of revenue and non <unk> E. P. S of 26 27 cents per share.
In summary.
We are pleased with our first quarter of fiscal 2024 performance, we have a proven track record of consistent execution.
As we have consistently demonstrated we're committed to maintaining a balanced approach to optimize cost to drive profitability, while continuing to invest in future growth opportunities that we expect will drive longterm value.
With that we will open up the line for questions operator.
Thank you and I'll be conducting a question and answer session.
Would like to ask a question.
On your telephone keypad the confirmation tonal indicate your line is in the question can you give me your first star too if you'd like to remove your question from the <unk>.
Participant isn't figure equipment, and there'd be necessary to pick up your handset before pressing the star Q.
One moment, please while we call a quick question.
Hi, Thank you. Our first question is from 10, Joanne Hora with J P. Morgan. Please proceed with your question.
Oh, great. Thank you for taking the question congrats on the corner I wanted to ask you in D. P. S. Since you're leaning on D. P. S. This year, what have you seen so far from customer feedback on Dps [laughter] are people kind of able to map their existing spend on D. P. S. As their period of learning in any way to understand the expansion character.
Six month over month Alright. Thank you you talked about the the point about accelerating your router because of D. P. S. I think you said the last quarter as well as just trying to understand any indications that that might corroborate that point.
Hi, Angela and it's wreck very early still and Dts rollout. We just went G. A in late April but ER very good momentum already many dozens of closures of new customers on it pipeline continues to grow and already for new logos. The vast majority of our dollar based pipeline.
<unk> is coming in and Dps, So I would say early but very good solid positive performance on EPS evolution, so far and.
Just add something pendulum that you mentioned.
On the expansion side, we've certainly seen for Dts customers that Cps customers have actually shown better expansion rates and non dts customers now admittedly some of that is some of our largest customers. So the the sample size is a bit skewed, but we're optimistic that D. P. S is going to be a great contract.
Go to actually drive more expansion.
Got it thank you and one follow up for your gym on are are I'm trying to understand the implied Q2 nephew <unk> you kind of kept the 35% and I. Appreciate that you know it's early in the year and all that but it does imply a kind of a downtick in <unk> in Q2 verses.
One in the group.
I'm trying to understand if you're seeing any kind of have you seen anything in the business that makes you feel like the nephew growth my take down next quarter.
Was there any kind of <unk> of deals into Q1 from Q2 or orange, they're just a little bit more conservative give conservatism given kind of the Sierra transition.
Yeah, well, it's a it's a great question and I would say that in fairness that there is we maintain the guy for the year because one as we'd shared that we fought that the seasonality would be a little bit more back end loaded this year than normal so 35% in the first half roughly 60.
65 in the second half.
We had a very solid start to the year, but you're still a very early in the year. So we wanted to make sure that we didn't get ahead of ourselves.
So we have maintained a level of prudence one thing I would tell you is that so the demand environment is still pretty solid, but what we have certainly seen.
And you saw it in our queue for which was really really strong.
Was that the timing of when you close some deals is really hard to guess you know and so, especially some large deals that we wanted to make sure we maintain a bit of caution with that because sometimes deals my clothes. A month later would be a quarter later.
So we wanted to make sure we acknowledge that given what's going on in the broader environment. So demand trends look good. We certainly have maintained a level of prudence and as we had shared that you know more of the the business will be back in loaded which is kind of makes sense because the majority of our renewal activity happens in the back half of the year, which is very 10.
To get a lot of expansions and so that's really what's driving kind of the the broader guide.
Got it thank you very much.
Thank you. Our next question is from Mike Pickles with Native been company. Please proceed with your question.
Hey, guys. Thanks, Thanks for getting me on here and I appreciate all the disclosures for the guidance I think my questions are going to be more along the lines of that guidance construction, though and I just wanted to get a sense.
For the dollar based on that retention in the 116 that we're looking at in Q1 is there a thought that we see further erosion of that matrix through this year and then the the follow up if I could just pack it on now, but I guess when your view would hope that retention.
Climbed back from from current levels Uhm, if we're looking for improvement.
In your view needs to happen to to drive that improvement. Thank you.
Yeah. So it's a very good question. So we had shared in our guide last quarter that we thought dollar based on retention would be in the mid teens and so I still expect that so Q1 came in roughly in line with what we had thought very very strong new logo quarter for Q1, I think you saw that we had a fifth.
<unk> per cent growth in new logos with actually a pretty pretty good land size of roughly $130000. So really strong on the new logo front and debates never transferred in line with our expectations up you.
We do expect that to be you know.
However, at the you know the mid teens level call at 114 to 116 through the year and what's gonna, causing acceleration I think one we're being a bit cautious given we have seen longer buying cycles, and we'd seen expansions as they've gone through the funnel shrink in size as customers may.
Be split expansions over multiple periods, where as they used to give us large expansions at once so some of the budgetary environment is cause maybe less expanses in the near term I'll tell Ya on your on the positive side, there's a lot more to sell with logs on Grail and other <unk>.
<unk> that we have in you.
In the business from a product perspective, so yep I think near term, we're dealing with some budgetary headwinds I do think that the portfolio continues to grow I think the market opportunity continues to grow so we're quite optimistic that you're gonna see a reacceleration database that retention I think we're just being cautious here over the next year.
Great. Thank you will turn it over to my colleagues. Thank you Jim.
Alright. Our next question is from Sterling Audi with Martha Nathan Sir. Please proceed with your question.
Yeah. Thanks, Hi, guys I just wanted to continue on with one question around the macro just specific if you can give us a little bit of color in terms of what you're experiencing at the end of the quarter and now in the beginning of of this quarter and has that changed in any degree versus what you have been experiencing because I think a lot of the commentary.
You're using matches, what's been said you know through the calendar year. So just wondering if anything different and then specifically you know the one question. We all ask is cloud optimizations and what your sense is about nearing the bottom and you know I'm kind of getting past that thank you.
I guess I'll start and then maybe Rick can comment more on the the cloud optimization comment that we really haven't seen sterling a real change in the macro environment. The macro environment is I would say <unk>, it's been very consistent but to be Frank the last three quarters.
And so it's not better if not worse I'd say, it's consistent.
But consistent means it is definitely deals are taking longer to go through approval cycles <unk>.
D. L sizes is kind of are shrinking as as they kind of go especially for expansions. So while the demand environments healthy I would say that as they go through the sales cycle. We're certainly seeing some lengthening it's not worsening, but it's not improving either and so we've tried to ensure that and our guy we don't want to get ahead of ourselves.
Where our expectation is that that environment will continue until we see a change in that I think it's prudent to have a guy that reflects kind of an uncertain macro environment and <unk> I don't know if you want to comment on the cloud optimization trips right Unclad optimizations, a couple of quick clients first as we sat in the past Sterling.
R V as a cloud optimizations really do in any way speak to dining choices value add in the market. So we continue to believe and see that that we are a solution in many ways to cloud optimizations.
We're also less impact just based on our business model in our approach to pricing. So that's that's sort of the Dynatrace perspective. Overall my view is a cloud optimizations are beginning to to reduce in overall impact in the market notch or at the bottom, but we seem to be to be making progress toward that at.
Makes sense. Thank you guys.
Okay.
Thank you. Our next question is from Adam Tyndall with Raymond James. Please proceed with your question.
Okay. Thanks, Good morning, Rick I, just wanted to start with a kind of a general question on AI broadly and just be would be curious your observations from bleeding edge customers or maybe your relationships with Hyperscalers. My question would be how did the needs of the absorbability stacked change with those types of the deployments wondering if the attach right a monitor.
<unk> software is similar or different than a traditional deployment and then secondly, how does the competitive landscape different bake-offs with those use cases.
Thanks, Adam first on on the market in General I would just say before even getting to generative a I N N hyper modal AI and our solution to that the market continues to show very very strong evolution observe.
Observe ability overall continues to be of higher demand higher need or customers due to increased complexity and volume of data and workloads. So that's that's that's my overall comment on the market.
How does that relate to the AI commentary the way. It relates is it is it a in a particular generative AI is gonna contribute notably to enabling customers to be more efficient more productive and their management Observability systems. So the the combination generative AI, along with causal and predict.
They I wage collectively we call hyper modal AI.
We believed to be a mission critical solution that will catalyze demand over the course of the future by opening up our ability to more end users to more people within companies, bringing natural language capabilities and into the Observability framework, but also using the combination of productivity from January .
With the with the deterministic capabilities of cause on Friday today, I and collectively these elements provide substantial value to to Catalyzing, we think future demand.
Got it that's helpful. Maybe as a follow up I wanted to ask about the Microsoft partnership and Rick Uhm, We hear a lot of competitors talk about working with Microsoft, but this sounds a little bit different and much more strategic so maybe you could start with just what went into forging that partnership and Jim If you could talk about what.
This means for margin it sounds like there's some committed cost associated with this just curious what it means from a margin perspective, the cost how variable. They are anything that you can give us around the financial aspect of this partnership. Thank you.
Sure very important relationship with Microsoft and as you point out Adam material extension or commit to them and they're coming back to US and then go to market size. So obviously, we just signed it about very optimistic about the evolution of it.
Yeah, and what I would say on the financial side as you as you can imagine is Rick said, we're expanding our relationship with them, which means we're expanding our as as your commitment with them a dollar perspective, so what it's telling you as a as a signal of strong customer interest of having dynatrace business on the <unk>.
<unk> and so with that it with an increased commitment we get much much more favorable pricing and so the pricing that we get is very consistent with pricing that we get we would say and AWS and so customers and I Wanna put in a situation and we're in a situation where your pricing is very similar on it on and as your platform.
As well as in AWS platform. So this is something that's going to be I'd say.
Enable us to continue to scale on gross margins as we move more and more of the business assassin. So the way you should expect it is it will allow us to continue to maintain this very very healthy gross margin profile kind of in the in the mid eighties.
Very helpful. Thank you.
Thank you. Our next question is from at Andrew <unk> Wednesday with Wells Fargo. Please proceed with your questions.
Great. Thank you good morning, everyone. So I wanted to ask about your <unk> partners. I think you said you know Ive 10, 10 partners signed up and one has a pipeline that's more than doubled year over year is there anything unique or specific about that partner in their piper.
Pipeline and and how does that compare to maybe the other nine partner at the pipeline you have with the other nine partners.
Alright, Thanks, Andrew I appreciate I appreciate it a question Gsi's continue to grow quite notably for us in terms of pipeline even in terms of conversion. So I don't feel very good about the evolution.
The the the primary taken <unk>, we do believe at G. S is becoming increasingly material segment of our channel distribution over the course of time, but.
But the deal tend to be quite large and medications that are coming through digital transformation initiatives.
Hyper cloud migrations and and.
Other other types of solutions of that nature, so they're gonna take a little bit longer to close so pipeline is a great leading indicator, which is why we we provided that.
The the statistic way provided on doubling of one of our largest strategic G. S eyes with just an indicator of that that leading indication of that pipeline.
Okay. Thank you and then I wanted to ask about.
New the new cheaper Avenue office around Dan's only been in the seat for less than a month, but.
Any early observations about maybe changes to go to market that he plans to implement.
Yeah, I mean, it for weeks in we're not planning on any notable are material changes in our in our go to market strategy. What I would say is it obviously, we are increasing our focus and intensity around partners for example, the the.
The the hyper clouds also the also the G. S eyes. So we're gonna continue to lean in in those particular areas to grow our partner focus and that's gonna be evidence in our cannot go to market strategy as as we evolve.
Okay. Thanks for it.
Yep.
Thank you. Our next question is from that Hedberg with RBC capital markets. Please proceed with your question.
Great got it thanks for taking my questions Rick Uhm I wanted to go to <unk>, it's starting to show up a lot more and partner conversations.
Tend to be somewhat larger deals to on a logging sorry can you give us a bit a bit more color on you know how you were thinking about cross selling that what what are the pipeline look like for that and you know in terms of like areas too you know maybe reaccelerate and are are.
Is that is that is that how do you how do you feel about grail in the context of that.
Well, let me, let me sort of a separate out grail from logs on rail to start which I I tried to do and last last quarter skull as well. The first thing is braille as an underlying core technology in the platform that is used as a massively parallel processing data data Lake House, if you will.
That data store spans traces log drafts metrics [laughter] all of the all of the components of data store.
We would have.
It is initially focused at AWS first asked appointments and virtually every one of our AWS ash customers is already on rail as a core technology.
They are already using and operating on rail as a core technology now.
Seamless migration happened in the background customers didn't have to do anything so if they are already benefiting from rail in the ground deployment.
Now the the question that has the next question is what about logs on <unk>. Good news is a very strong evolution already seen customers using it material scale.
Customers like global retailer doing 30 terabytes of logs per day for example, so good evolution error logs on rail requires the selling process through poc's.
Now on the P. O C front, we saw an increase in P. As he's acted psc's.
About 20% quarter over quarter. So while we continue to see the evolution of our policies again as a leading indicator for logs on ground. So hopefully that clarifies the distinction between Grail as an underlying core technology and logs on Grail as an incremental sale.
Spelling <unk>, Yeah got it. Thank you. Thank you for that and then going back to a I you know there's been a lot of talking to industry about vector databases Rebecca search.
I you know I don't know that we've talked about that in terms of the Dynatrace platform can you give them sort of your perspective on on on <unk>.
Plays a role in the tech stack.
Yeah, I I I don't want to I don't want to spend too much time on that other than to other than to say that our view is that our hyper modal AI approach, we do believe to be radically different from other solutions and announcements in the market in the sense that it brings together more.
All different AI techniques.
And those techniques include what we've been doing for more than a decade with causal and predictive a I linked into what we expect to G. A by the end of the year or the end of the calendar here, which is the generative aip's, putting those together we believe gives us a a very very strong platform for.
Being an enormous ongoing differentiator for dynatrace as it has been really throughout our history.
Got it thanks for it.
Thank you. Our next question is from Koji Kita with Bank of America. Please proceed with your questions.
Yeah, Hey, guys. Thanks for taking the question to phone for me I wanted to ask a question on a new logo growth and actually how to think about new logo growth for the rest of the year.
<unk> very nice new local grow up to 15% definitely above that low single digits target for the rest of the year uhm, but when we look at the new logo AD compares for the rest of the year, they get harder and harder.
How can we be thinking about the new Grove, new logo growth kaden from here and what are you seeing in the pipeline in it that is giving you confidence for the remainder of the year on the new logo for us.
I'll take that that's a good question now Koji that you're absolutely right. We had a very good new logo order. This quarter, we actually had a good new local quarter in our fourth quarter as well.
And if you do if you look at the guide, obviously, where where maintain a guy to kind of low to mid single digits. I will tell you that the pipeline looks very strong obviously, our pipeline as we have more visibility to the pipeline here over the next quarter then.
Maybe the back half of the year. So the new logo pipeline is quite strong.
And I think as I shared on other calls that were really focus with a new logos on driving the right new logos the right new logos that we think you're going to drive incremental expansion. Once we land them. So we're not just signing up new logos for the sake of signing up new customers were really particular, which is why.
You'll see that.
We continue to average around $130000 average land size on a trailing 12 month base, which is pretty solid so we're focusing on the quality of the land or.
Visibility is pretty good too new logos.
I don't think we're gonna have every quarter, where you're going to grow 15%, but I think we have enough visibility that our ability to grow in the low to mid single digits I feel pretty confident.
Got it thanks, Sam Thanks for taking the question.
Thank you. Our next question is from cash Brandon with Goldman Sachs. Please proceed with your question.
Hello. Thank you so much good morning and.
I have a question for you one for Joe <unk> your forward looking indicators.
Quite good considering the macro environment, you've got this G. S. I that is two extra pipeline that's is expanding partnership with asthma.
Yes customers are taking longer but.
Why would you or would you not consider wrapping up yourselves capacity. It does look like it.
Make sure you do not have a recession Richardson.
But.
As companies come out of downturns, the ones that activate the go to market and to ensure or.
It was successful so in that regard.
Let's see or the company, how do you look too.
Anti and getting services competition, because it does look like the product value proposition with automotive, Hey, I <unk> I kept British coming in by the end of this year I'll look to reposition the company well, but one way you could kind of a small grocery store three sales capacity this conversion.
Fly by as you know you're better off the industry, it's still achieve better growth by deploying extra capacity and forward looking indicators. So looking good. So I'm wondering what your thoughts are there that front and also Joe one for you.
U X out the earlier knows in queue for what would be.
<unk>, New era <unk> look like.
Thank you so much once again.
So I'll I'll I'll I'll take both of them if Rick wants to comment he can't when the sales capacity. So we actually feel pretty good about sales capacity I think I shared on the last call and it's the same now that are tenure of reps that are two plus your reps is higher that's been over the last couple of years. So you can imagine two plus you reps drive more pro.
What activities the new reps.
So R. I don't believe at all that we're constraining sales capacity, we're gonna make sure we Ah line, adding sales capacity as needed. So I don't think we're we're in a constrained world. We're gonna have a line that with the demand environment. If we see an incremental demand then we will modulate adding more.
More more sales capacity, so I don't think we're constrained at all.
I think there's an opportunity for us to to get better leverage out of the existing model that we have and will augment that as as we we see kind of the demand signals change.
So I feel pretty good about that and on the early renewal sorry, you're right, we had about $30 million or renewals and of expansions in the fourth quarter. There were scheduled in the first quarter I would say the first quarter was <unk>, you're always gonna have a million here a millionaire, but nothing notable on kind of.
Really renewals in the first quarter, you know I'd say the first quarter as I've said in my opening remarks is seasonally the company's kind of lightest quarter and so the our start to the year, we feel pretty good about as I said, we're going to be a little bit more back end loaded for the reasons that I outlined.
But feel pretty confident kind of where we sit right now.
Jim did change it.
Did not have any effect on pulling in business in the queue for worse at the expense of cure.
No.
Okay. Good to clarify that thank you so much.
Thank you. Our next question is from Keith often with BMO capital markets. Please proceed with your question.
Hi, Good morning, [noise] excuse me. Thank you I wanted to ask about targets for both logged in analytics insecurity I understand grill as the platform that enables logged in <unk>, you've sort of talked about.
Ideas or direction or maybe you know kind of 100 million.
25 for both.
Is is that still the case and where do you think your relative to those.
You know those goals and then the Bernice last quarter, you gave us some numbers for where you are a D. P. S. In terms of the number of customers my understanding is to adopt grill.
Bye have logged in but if you need to be on the D. P. S contract.
Could you give us some update on you know specifics as it relates to the number of customers on the new contract platform. Thank you.
So I'll I'll I'll take maybe both of those enough Rick wants to comment traditionally can.
So we feel pretty good about both areas you mentioned bolts application security and logs on grill that we're on track to deliver the numbers that we talked about $100 million for each obviously grill is being a little bit sooner. We said over a couple of years versus <unk>, which is gonna be over three years. So we feel pretty good about that I'd say, hey, you can imagine.
And we're further along on <unk>, because <unk> been out in the market longer.
Ah, but you know two weeks earlier points, we feel very good about the interest in grill, and so I would expect to see an uptick in logs on grill in particular.
Over the course of the next year, we're still kind of early days with that so.
Again feel pretty confident in bold hundred million targets and relative to G. P. S.
I just want to make sure. We're clear that you can buy logs on grill, you don't have to have a dts contracted by <unk> you know.
You can buy you can buy logs on grill through a skew base model. Obviously, you have to be on the staff platform to benefit from from logged on grill, but you can buy logs on grill outside of a dts vehicle.
Mmm.
Okay, Okay, but any comments on where you are in the conversion of Europe .
Yeah, I mean, I think it's <unk> yeah, the the way to characterize it as we were I think whereas where are we expected you know that like Rick said, we've only had dps available general availability since the end of April and as you can imagine buying cycles are six to nine months. So most of the deals you've been closing I've been deals that have been in the pipeline for awhile.
And those deals where we're deals that didn't necessarily have D. P. S. As a vehicle and so you wouldn't expect to see a huge uptick in D. C. S. I would say I would expect to see an uptick in D. P. S. One with new logos going forward and more of the back half of the year.
And so I'd say it makes it I think we had several dozen incremental dps cuss contracts in the first quarter.
And I think you're going to see more of that with new customers and I think as customers renew you'll start to see more of them expand with D. P. S. But I I would expect more of an uptick Ah later in the year and going into physical 25.
Mmk Mmk great. Thanks.
Thank you. Our next question is from Eric Super There with J M. P. Securities. Please proceed with your questions.
Yeah. Thanks for fitting me and say I'm curious about the competitive landscape if you've ever seen any change and also can you speak to what you see from the likes of a new relic in light of some of the changes going on with a new really curious if if if you have any.
Comments about February private if that changes or anything of the competitive <unk>.
So on the competitive landscape no real change in the competitive landscape.
No real change in kind of the pricing environment.
D. I Y continues to be kind of the biggest competitor.
And you know outside of that there are a handful to vendors that you'll see and we've see we didn't really commented on the script, we probably could have that we we continue to do a fair job of where customers have environments that get large and complex.
And they have additional tools in place whether it be DIY, our competitor tools Racine.
Continued competitive takeouts.
<unk> in particular.
So.
The environment hasn't changed I think we continue to farewell Mcnair really well when customers start to reach a point, where DIY uncompetitive tools, just kinda maxed out.
And relative to new relic you know.
The only thing I would say is that they've tended to focus on a different market segment, and we have and where are we do see them in the market.
We compete very well and actually we mentioned in our last call that several of our competitive take out we're actually new relic competitive take out. So you know obviously when you're going through take private there was a bit of disruption, but you know I would say that where we see them we farewell.
Any comment when you say other than a different segment are you referring to smaller customers or are you referring to a cloud first customers or what what are you <unk>, where do you see them.
More and more sides of customer that you know that if you feel that the general the number of customers that they have they are targeting nauseous enterprise customers, but they are also talking to B S. M D space, where only target in the global 50000, so where will see them.
Maybe where they're playing in that space and as I said that we have found.
Many cases, where you know the customer's environments have gotten really complicated and multiple tools and even competitor tools, just having scaled well and they've they've looked at all the alternatives and that alternative we've benefited from that with several key wins.
We've provided examples of that in prior calls of takeout competitors. It is simply not scaled with besides volume or complexity their existing absorbability environments.
Very good thank you very much.
Yep.
Alright, well. Thank you all very much for your engage questions that brings us to the end of our formal call. We really do appreciate your ongoing support we remain extremely bullish about the opportunity that lies ahead the fundamental latest up our environment needs more and more observe ability and they observe ability that they need needs to.
Become more sophisticated in automating their solutions.
We are.
<unk> bye and proud of the third party validation such as that from Gartner with us being highest in ability to execute furthest out in terms of completeness vision and we believe that that provides even further a further catalyst for dynatrace as we look at.
We we very much look forward to connecting with your upcoming IR events over the coming weeks and we wish you all the very good day.
This concludes today's conference. He may disconnect. Your lines at this time. Thank you for your participation.