Q3 2024 Dynatrace Inc Earnings Call
Greetings welcome to dine at Tres fiscal third quarter of 2024 earnings call.
Operator: Greetings. Welcome to Dynatrace's fiscal third quarter 2024 earnings call. At this time, all participants will be in listen-only mode.
Speaker Change: At this time, all participants will be in listen only mode.
Operator: The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Noelle Faris, Vice President of Investor Relations. Noelle, you may now begin.
Speaker Change: Question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Speaker Change: Please note this conference is being recorded.
Noah Welfarist: At this time I'll turn the conference over to know Welfarist, Vice President of Investor Relations.
Welfarist: You may now begin.
Welfarist: Good morning, and thank you for joining <unk> third quarter fiscal 2024 earnings Conference call. Joining me today are Rick Mcdonald, Chief Executive Officer, and Jim Benson Chief Financial Officer.
Noelle Faris: Good morning, and thank you for joining Dynatrace's third quarter fiscal 2024 earnings conference. Joining me today are Rick McConnell, Chief Executive Officer, and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, such as statements regarding revenue, earnings guidance, and economic conditions. However, actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10-Q that was filed earlier today. The forward-looking statements contained in this call represent the company's views as of February 8, 2024. 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 discussed today are non-GAAP, reflecting constant currency growth, and per share amounts are on a diluted basis.
Welfarist: Before we get started please note that today's comments include forward looking statements such as statements regarding revenue 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.
Welfarist: Our most recent quarterly report on Form 10-Q that was filed earlier today.
Welfarist: The forward looking statements contained in this call represent the company's views on February eight 2024, we assume no obligation to update these statements as a result of new information future events or circumstances.
Welfarist: Unless otherwise noted the growth rates, we discuss today are non-GAAP, reflecting constant currency growth rates and per share amounts are on a diluted basis.
Welfarist: We will also discuss other non-GAAP financial measure on today's call to see reconciliations between non-GAAP and GAAP measures. Please refer to today's earnings press release, and supplemental presentation, which are both posted in the financial results section of our IR website.
Noelle Faris: We will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the financial results section of our IR website. And with that, let me turn the call over to our chief executive officer, Rick McConnell. Thanks, Noelle, and good morning, everyone.
Rick M. McConnell: And with that let me turn the call over to our Chief Executive Officer, Rick Mcconnell.
Rick M. McConnell: Thanks, Noel and good morning, everyone. Thank.
Rick M. McConnell: Thank you for joining us on today's call. Our Q3 results of balanced growth, profitability, and free cash flow reflect our continued ability to execute successfully in a dynamic market. ARR grew 21% year-over-year, and subscription revenue increased 23% year-over-year. Non-GAAP operating income increased to $105 million, or 29% of revenue. And we delivered a 25% free cash flow margin on a trailing 12-month basis or 30% on a pre-tax basis. These results are a test of our market leadership, the strategic importance of our differentiated platform, and the durability of our business. Jim will share more details about our Q3 performance and fiscal 2024 guidance in a moment. In the meantime, I would like to discuss the trends we're seeing in the market, highlights from our Perform Customer Conference last week, and our continued rapid pace of innovation. I'd like to begin with three transformative mega-trends that are driving the market. Last week at Perform, we called them the way.
Rick M. McConnell: Thank you for joining us for today's call.
Rick M. McConnell: Our Q3 result of balanced growth profitability and free cash flow reflect our continued ability to execute successfully in a dynamic market.
Rick M. McConnell: A R. R grew 21% year over year.
Speaker Change: Subscription revenue increased 23% year over year non.
Speaker Change: non-GAAP operating income increased to $105 million or 29% of revenue.
Speaker Change: And we delivered a 25% free cash flow margin on a trailing 12 month basis or 30% on a pretax basis.
Speaker Change: These results are a testament to our market leadership, the strategic importance of our differentiated platform and the durability of our business model.
Speaker Change: Jim will share more details about our Q3 performance and fiscal 2024 guidance in a moment.
Speaker Change: In the meantime, I would like to discuss the trends we're seeing in the market.
Speaker Change: Highlights from our perform customer conference last week, and our continued rapid pace of innovation.
Speaker Change: I'd like to begin with three transformative megatrends that are driving the market.
Last week it perform we call them wage.
Rick M. McConnell: First, cloud modernization continues to drive workloads. Second, the AI revolution is sweeping across industries, with the opportunity for enormous advancements in innovation. And third, the escalating threat landscape is increasing the need for more sophisticated cyber security. These megatrends are occurring amidst an increasing focus by organizations to leverage digital transformation to drive business, but they also bring sizable challenges, such as an explosion of data, a massive increase in its complexity, disconnected tools, and a need for better. And it is these challenges, especially with the exponential increase in AI work, that have moved observability and application security from optional to mandatory. But not all observability and application security tools are created equal.
Speaker Change: First cloud modernization continues to drive workloads to the cloud.
Speaker Change: Second the AI Revolution is sweeping across industries with the opportunity for enormous advancements in innovation and productivity.
Speaker Change: And third the escalating threat landscape is increasing the need for more sophisticated cyber security protection.
Speaker Change: These megatrends are occurring amidst an increasing focus by organizations to leverage digital transformation to drive business transformation.
Speaker Change: But they also bring sizable challenges such as an explosion of data a massive increase in its complexity disconnected tools and a need for better analytics.
Speaker Change: And it is these challenges, especially with the extra natural increase in AI workloads that have moved observe ability and application security from optional to mandatory.
Speaker Change: But not all observe ability and application security tools are created equal in this world of containers micro services <unk>.
Rick M. McConnell: In this world of containers, microservices, hybrid, and multi-cloud environments, as well as limited resources, it is no longer feasible to use dashboards, alerts, and manual triage to manage this work. Given this landscape, our approach is radically different in three critical ways. First, the Dynatrace platform enables contextual analytics. We will store all data, logs, traces, and metrics.
Speaker Change: <unk> and multi cloud environments as well as limited resources. It is no longer feasible to use dashboards alerts and manual triage to manage these workloads.
Speaker Change: Given this landscape Ara approach is radically different in three critical respects.
Speaker Change: First the diner trade platform enables contextual analytics.
Speaker Change: We will store all data types logs traces metrics real user data business attached others in rail and integrated highly perform it and massively scalable data store.
Rick M. McConnell: Real User Data, Business Events, and others, in Grail, an integrated, highly performant, and massively scalable data center. By keeping all of these data types together in context, we are able to analyze billions of interdependencies across applications, networks, and infrastructure throughout the These dependencies are continuously updated, providing virtually instantaneous end-to-end awareness that is not possible to replicate without a. Our second key differentiator is our hypermodal AI. For over a decade, Dynatrace customers have relied on the predict..., and causal AI techniques of our AI engine, David. We expect to make our generative AI capabilities available on the platform, with Davis Co-Pilot beginning this, thereby bringing the Dynatrace platform to a much wider array of. 3 AI techniques together deliver a game-changing solution, each making the other iterally better.
Speaker Change: By keeping all of these data types together in context, we are able to analyze billions of injured dependencies across applications networks and infrastructure throughout the enterprise.
Speaker Change: These dependencies are continuously capture providing virtually instant and awareness that is not possible to replicate without a unified data store.
Speaker Change: Our second key differentiator is our hyper modal a odd.
Speaker Change: For over a decade dining creates customers have relied on the predictive and causal AI techniques of our AI engine Davis.
Speaker Change: We expect to make our generative AI capabilities available on the platform through Davis co pilot beginning this quarter.
Speaker Change: Thereby bringing the diner trade platform to a much wider array of end users.
Speaker Change: These three AI techniques together deliver a game changing solution with each making the other eater, Italy more intelligent.
Speaker Change: Our third key differentiator is automation.
Rick M. McConnell: Our third key differentiator is automation. Organizations want broad-based situational awareness and analytics that can lead to auto-remediation. Dynatrace OneAgent automatically discovers an entire cloud environment, dynamically instruments applications, consistently learns, and updates without human scripting or user configuration.
Speaker Change: Organizations want broad based situational awareness and analytics that can lead to an auto remediation of issues.
Speaker Change: <unk> one agent automatically discovers an entire cloud environment dynamically instruments applications and consistently learns and updates without human scripting or user configuration.
Rick M. McConnell: The result is a trusted foundation that supports workflows to automate resource optimization and progressive delivery, eliminating the need for manual troubleshooting, especially critical during business-impacting incidents. Contextual Analytics, Hypermodal AI, and Automation, are three key reasons why Dynatrace Holdings is considered a visionary leader in the market. And our customers view these elements as essential, in enabling them to navigate the challenge, brought on by digital transformation, an explosion of generative AI, and the growing, These differentiators enable us to deliver actionable answers, rapid resolution, and incident. They also drive purchase, for customers across a variety, including enterprise-wide tool consolidation, cloud-native application, faster software delivery, cost effective log management at scale, securecloud.io, Trends, Differentiators, and Advantage, were certainly top of mind last week at our Perform.com. LLC.
The result is a trusted foundation that supports workflows to automate resource optimization and progressive delivery, eliminating the need for manual troubleshoot.
Speaker Change: This is especially critical during business impacting incidents.
Speaker Change: And textual analytics Hypermobile AI and automation are three key reasons why diner trace is considered a visionary leader in the market.
Speaker Change: And our customers view these allergies elements as essential.
Speaker Change: In enabling them to navigate the challenges brought on by digital transformation and explosion of generative AI and the growing threat landscape.
Speaker Change: These differentiators enable us to deliver actionable answers rapid resolution and incident prevention.
Speaker Change: Also drive purchasing behavior for customers across a variety of use cases.
Speaker Change: Including enterprise wide tool consolidation.
Speaker Change: Cloud native application performance.
Speaker Change: Faster software delivery cost effective log management at scale and secure cloud applications.
Speaker Change: These trends Differentiators and advantages, we're certainly top of mind last week at our perform conference in Las Vegas.
Rick M. McConnell: It was a tremendously exhilarating event where we hosted over 2,000 people, including customers, prospects, and partners, plus thousands more. If you weren't able to participate, I encourage you to watch the replay of our main stage presentations and... We, along with several customers and partners, shared insights on how these trends and challenges can present business transformation opportunities for customers, especially in the areas of driving innovation, optimizing cost, and mitigating risk. One example of how Dynatrace is helping innovation was from. They strive to deliver legendary experiences for their customers, requiring consistently high application availability. They found that by reducing a myriad of tool sets down to one, the team can now focus on driving innovation rather than maintaining complex relationships.
Speaker Change: It was a tremendously exhilarating of that where we hosted over 2000 people in person, including customers prospects and partners plus thousands more virtually.
Speaker Change: If you weren't able to participate I encourage you to watch the replay of our main stage presentations and breakout sessions.
We along with several customers and partners share insights on how these trends challenges can present business transformation opportunities for customers, especially in the areas of driving innovation optimizing cost and mitigating risk.
Speaker Change: One example of how diner tracers, helping innovation west from TD Bank.
Speaker Change: They strive to deliver legendary experiences for their customers require and consistently high application availability and performance.
Speaker Change: He found that by reducing a myriad of tool sets down to one the team can now focus on driving innovation, rather than maintaining complex relationships amongst us.
Speaker Change: Lloyds banking group share their story of optimizing cost they have teamed up with diner trace to measure and reduce proactively the carbon footprint of their ecosystem.
Rick M. McConnell: Lloyd's Banking Group shared their story of optimizing; they have teamed up with Dynatrace to measure and reduce the proactive carbon footprint of their IT Ecosystem. Woods Bank is a thought leader in their approach to sustainability, looking to reduce the direct carbon emissions in their operational sectors by at least 75%.
Speaker Change: Lloyds Bank as a thought leader in their approach to sustainability looking to reduce the direct carbon emissions in their operational sectors by at least 75%.
Rick M. McConnell: Dynatrace has helped Lloyd's assess its IT carbon emissions, see where their sustainable efforts are most impactful, and identify meaningful opportunities. Optimize Their Dish. A standout example showcasing our ability to mitigate risk comes from the largest application security win in Arizona, which we closed in Q3. A leading global payment technology chose Dynatrace because of our ability to immediately identify impactful common vulnerabilities, provide contextual understanding of criticality, and pinpoint the exact location of their vulnerability, something their existing security tooling was not able to do. It is a fantastic expression of confidence in our security product from a very large organization, as customers look for ways to drive innovation, optimize cost, and mitigate risk. They know that consolidating their existing observability tools and standardizing on a unified platform is the optimal way to do it. As such, another great story from PErforM last week came from the VP of Engineering at PICC. Brazil's Financial Ecosystem
Speaker Change: Chinese prices help Lloyd's assess its carbon emissions see where their sustainable efforts are most impactful and identified meaningful opportunities to optimize their digital infrastructure.
Speaker Change: A standout example, showcasing our ability to mitigate risk comes from the largest application security win in our history, which we closed in Q3.
Speaker Change: A leading global payment technology company chose <unk> because of our ability to immediately identify impactful Commonwealth their abilities.
Speaker Change: I'd contextual understanding of criticality and pinpoint the exact location of their vulnerabilities.
Speaker Change: Something their existing security tooling was not able to do.
Speaker Change: It is a fantastic vote of confidence in our security product remained very large organization.
Speaker Change: As customers look for ways to drive innovation optimize cost and mitigate risk.
Speaker Change: They know the consolidating their existing observe ability tools in standardizing on a unified platform is the optimal way to do it.
Speaker Change: As such another great story from performed last week came from the VP of engineering at pick PE, Brazil's financial ecosystem App.
Speaker Change: He shared his experience using dine at Tres to help them achieve platform observe ability at massive scale.
Rick M. McConnell: He shared his experience using Dynatrace to help them achieve platform observability at scale. This encompasses 35 million users and hundreds of Kubernetes clusters, with thousands. NCHPAY is a newer customer for Dynatrace Holdings. They realized that using multiple tools is costly and inefficient. With Dynatrace, they gain the benefits of visibility and automation through a single unified platform. Pay is not a loan.
Speaker Change: This encompasses 35 million users and hundreds of kubernetes clusters with thousands of notes.
Speaker Change: It pays a newer customer for diner trace they realized that using multiple tools.
Speaker Change: Lastly, and inefficient with diner trace they gain the benefits of visibility and automation through a single unified platform.
Speaker Change: <unk> pay is not alone.
Rick M. McConnell: We are seeing increased demand in large strategic deals where customers are looking to make broader observability architecture decisions. We believe Dynatrace is in a great position to benefit from this trend, given our proven track record of helping customers eliminate siloed tools, significantly improve software availability and performance, reduce cost, and drive organizational innovation. While these deals are a positive sign of future growth, near term, these larger deals add a degree of variability as customers require more time to make these strategic decisions. We view this increasing trend as a significant opportunity to solidify existing observability tools and standardize them on a unified platform.
We are seeing increased demand in large strategic deals where customers are looking to make broader absorbability architecture decisions.
We believe diamond traces in a great position to be.
Speaker Change: Benefit from this trend given our proven track record of helping customers eliminate siloed tools significantly improve software availability and performance reduce cost and drive organizational innovation and productivity.
Speaker Change: While these deals are a positive sign of future growth potential near term. These larger deals at a degree of variability as customers require more time to make these strategic decisions.
Speaker Change: We view this increasing trend to consolidate existing absorbability tools in standardize them on a unified platform is a significant opportunity for us.
Rick M. McConnell: As such, we are continuing to invest in strategic go-to-market areas such as GSI partnerships, demand generation, and targeted sales, while also continuing to prioritize. In addition to the frictionless sales motion that we are driving with hyperscaler partners, we are seeing early positive signs of traction with the investments we've made with GSI, such as Accenture, Deloitte, DXC, and It was through one such GSI that we closed a seven-figure Q3 win with a major social media platform.
Speaker Change: As such we are continuing to invest in strategic go to market areas, such as GSI partnerships demand generation and targeted sales capacity, while also continuing to prioritize investments in R&D.
Speaker Change: In addition to the frictionless sales motion that we're driving with Hyperscale or partners. We are seeing early positive signs of traction with the investments we've made with GSI partners, such as Accenture, Deloitte EXE and kindred.
Speaker Change: He went through one such GSI that we closed a seven figure Q3 win with a major social media platforms.
Speaker Change: The customer was looking to gain end to end visibility into their incredibly complex environment.
Rick M. McConnell: The customer was looking to gain end-to-end visibility into their incredibly complex... our ability to demonstrate the power of AI and automation and greatly reduce outages while saving costs drove the. We plan to continue to invest in these partnerships to generate pipeline and gain efficiency as we maintain our focus. We also plan to continue our investment in targeted sales capacity in the fourth quarter, weighting our resources toward the higher end of our target global $15,000 market, where the propensity to spend is far greater. We are confident that with the evolution of our go-to-market leadership. We have the right skills and proven track record to scale the team and build the brand to seize this market opportunity. I'd also like to call out the exciting addition in January of Laura Heisler, former CMO at VMware, as our new, in addition to our targeted go-to-market efforts.
Speaker Change: Our ability to demonstrate the power of day I and automation.
Speaker Change: Greatly reduce outages, while saving costs drove the opportunity.
Speaker Change: We plan to continue to invest in these partnerships do generate pipeline and gain efficiency as we maintain our focus on scaling the business.
Speaker Change: We also plan to continue our investment in targeted sales capacity in the fourth quarter weighting air resources toward the higher end of our target global 15000 market, where the propensity to spend is far greater.
Speaker Change: We are confident that with the evolution of our go to market leadership team, we have the right skills and proven track record just scale the team and build the brand to seize this market opportunity.
Speaker Change: I'd also like to call out. The exciting addition in January of Lora Highsmith, former CMO at Vmware as our new Chief marketing Officer.
Speaker Change: In addition to our targeted go to market investments, we plan to continue investing in our R&D engine to extend our technology leadership position.
Rick M. McConnell: We plan to continue investing in our R&D and to extend our technology leadership position. The team's relentless focus on market-leading innovation was evident. With a plethora of announcements and new solutions, we unveiled to enhance our platform. First, we announced the availability of Dynatrace AI observability, which enables customers to embrace AI content by providing insights into all layers of AI-powered applications, including large language models and generative AI to manage cost
Speaker Change: The team's relentless focus on market, leading innovation was evident last week with a plethora of announcements and new solutions, we unveiled to enhance our platform.
Speaker Change: First.
Speaker Change: We announced the availability of diner trace AI, absorbability, which enables customers to embrace AI confidently by providing insights into all layers of AI powered applications, including large language models and generative AI to manage cost experience rely.
Rick M. McConnell: Experience, Reliability, and Security. Second, we announced Dynatrace Open Pipeline. Power Customers with Full Control of Data at the Point of Injury, helping customers boost security, ease management, and maximize value. And third, we announced Dynatrace Data Observer, to help ensure that data collected through external sources outside of our one, such as OpenTelemetry, Business Systems, and through Dynatrace APIs, is reliable and used for Business Analytics, Smart Cloud Orchestration, and Reliable Automation.
Speaker Change: The ability and security.
Speaker Change: Second we announced diamond trace open pipeline to empower customers with full control of data at the point of ingest, helping customers Bruce security.
Speaker Change: <unk> management and maximize the value of data.
And third we announced dyno trace data observed ability to help ensure the data collected through external sources outside of our one agent such as open telemetry business systems and through diner trace a P eyes is reliable and accurate for business analytics smart.
Speaker Change: Orchestration and reliable automation.
Speaker Change: We believe these platform enhancements.
Rick M. McConnell: We believe these platform enhancements provide further monetization as customers drive more usage, more ingest, more storage, and, most notably, more queries. Before I turn the call over to Jim, I wanted to comment on our plans to acquire Rooney. Adding RuneCast to the platform will extend Dynatrace Contextual Security Protection in analytics with Runecast Security Posture Manager. This will enable customers to address the risk of misconfigurations and compliance violations in hybrid and multi-cloud ecosystems, based on AI-driven and automated real-time vulnerability assessment.
Speaker Change: I'd further monetization opportunities as customers drive more usage more ingest more storage and most notably more queries and business analytics.
Speaker Change: Before I turn the call over to Jim I wanted to comment on our plans to acquire rune cast.
Speaker Change: Adding rune cast the platform will extend diner trace contextual security protection in analytics with Rune cast security posture management.
Speaker Change: This will enable customers to address the risk of mis configurations, and compliance violations in hybrid and multi cloud ecosystems.
Jim Benson: On a I driven and automated real time vulnerability assessments.
Jim Benson: Additionally, it will allow customers to perform threat, and incident response with full details of their security vulnerabilities, affected applications, and a TACVAC. We are thrilled to welcome this talented and the RR&D organization. In closing, our Q3 results reflect the ongoing demand for automated observability and application security solutions, as well as the durability of our business model. Our ability to execute successfully in an evolving market differentiates us in the market. We believe the market is moving toward, with a desire for fewer solutions. Better Insights and Actionable Answers Leading to Rapid Incident Resolution and Prevention. And we plan to continue to invest strategically in go-to-market areas as well as R&D innovation to capture market opportunity and drive ongoing leadership while maintaining our commitment to balanced growth, profitability, and pre-cash flow. Jim, over to you. Thank you, Rick. And good morning, everyone.
Jim Benson: Additionally, it will allow customers to perform threat detection and incident response with full context detailing their security vulnerabilities.
Jim Benson: The applications and attack vectors we.
Jim Benson: We are thrilled to welcome this talented team to our R&D organization.
Jim Benson: In closing our Q3 results reflect the ongoing demand for automated observed ability and application security solutions, the durability of our business model and our ability to execute successfully in an evolving marketplace.
Jim Benson: Our unified platform with contextual analytics, Hypermobile, AI and automation differentiates us in the market and positions us well relative to competitive alternatives.
Jim Benson: We believe the market is moving toward us where they desire for fewer solutions better insights and actionable answers leading to rapid incident resolution and prevention.
Jim Benson: And we plan to continue to invest strategically in go to market areas as well as R&D innovation to capture market opportunity and drive ongoing leadership, while maintaining our commitment to balanced growth profitability and free cash flow.
Jim Benson: As Rick mentioned, Q3 marks another quarter of solid execution by the Dynatrace team, as we once again surpassed the high end of our top line growth and profitability guidance. Our continued ability to execute successfully in this dynamic environment is a testament to the growing criticality of observability and application security in the market, our platform differentiation, the value proposition we provide to customers, and the ongoing durability of our business. Now, let me review the third quarter results in more detail. Please note that the growth rates mentioned will be year-over-year and in constant currency unless otherwise stated. Starting with Annual Recurring Revenue, or ARR, total ARR for the third quarter was $1.43 billion, an increase of $263 million compared to the same period last year, representing 21% growth year-over-year. Net new ARR on a constant currency basis was $70 million in the quarter.
Jim Benson: Jim over to you.
Jim Benson: Thank you Rick and good morning, everyone as Rick mentioned Q3 marks another quarter of solid execution by the dying trees team as we once again surpassed the high end of our topline growth and profitability guidance metrics.
Jim Benson: Our continued ability to execute successfully in this dynamic environment is a testament to the growing criticality of Absorbability in application security in the market.
Jim Benson: Our platform differentiation the value proposition, we provide to customers and the ongoing durability of our business model.
Speaker Change: Now, let me review the third quarter results in more detail.
Speaker Change: Please note the growth rates mentioned will be year over year and in constant currency unless otherwise stated.
Speaker Change: Starting with annual recurring revenue or <unk>.
Speaker Change: Sure.
Speaker Change: Total <unk> for the third quarter was $143 billion, an increase of $263 million compared to the same period last year, representing 21% growth year over year.
Jim Benson: In Q3, we added 209 new logos to the Dynatrace platform, roughly consistent with the year-ago quarter. As I have shared in the past, we are focused on the quality of new logo lands that have a greater propensity to expand. In Q3, average ARR per new logo came in at roughly $140,000 on a trailing 12-month basis, consistent with Q2 and up 17% year-over-year, to continue to attract enterprise customers that are outgrowing their existing DIY or commercial tooling seeking business value in tool consolidation and coming to Dynatrace for the depth, breadth, and automation of our unified observability platform. Our growth retention rate remained best-in-class in our industry in When we think about our net retention rate, there are three areas that drive customer expansion. One is the growth of existing observability workloads. Two, adding new observability workloads.
Speaker Change: Net new a or on a constant currency basis with $70 million in the quarter.
Speaker Change: In Q3, we added 209, new logos to the dietary its platform roughly consistent with the year ago quarter.
Speaker Change: As I have shared in the past we are focused on the quality of new logo lands that have a greater propensity to expand in Q3 average a R. R per new logo came in at roughly $140000 on a trailing 12 month basis, consistent with Q2 and up 17% year over year.
Speaker Change: We continue to attract enterprise customers that are outgrowing their existing DIY or commercial tooling solutions seeking business value in tool consolidation and coming to diner trees for the depth breadth and automation of our unified observer ability platform.
Speaker Change: Our gross retention rate remain best in class in our industry in the mid nineties and contributed to a net retention rate of 113% in the third quarter coming in at the high end of our expectations.
Speaker Change: Yeah.
Speaker Change: When we think about our net retention rate there are three areas that drive customer expansion.
Jim Benson: And three, cross-selling new solutions like log management, analytics, or application security. We estimate that our customers are observing only 20 to 30% of their workloads today. We believe these three growth factors provide us with a significant opportunity to expand further within our installed customer base. And, as we highlighted last week at Perform, our innovation engine continues to deliver enhanced platform solutions, increasing our upsell and cross-sell opportunities. In addition, we believe our DPS licensing model will further contribute to growth in the net retention rate over time as customers gain greater access to newer solutions and encounter less friction in the buying process. We continue to see strong momentum and interest in this type of contracting model. In Q3, we closed over 150 DPS deals globally, bringing total DPS customers to roughly 400, representing more than 10% of our customers.
One growth of existing Absorbability workloads to adding new observer ability workloads and three cross selling new solutions like log management analytics or application security.
Speaker Change: We estimate that our customers are absorbing only 20% to 30% of our work of their workloads today.
Speaker Change: We believe these three growth factors provide us with significant opportunity to expand further within our installed customer base.
And as we have highlighted last week at perform our innovation engine continues to deliver enhanced platform solutions to increase our upsell and cross sell opportunities.
Speaker Change: In addition, we believe our D. P. S licensing model will further contribute to growth in the net retention rate over time as customers gain greater access to newer solutions and encounter less friction in the buying process.
Speaker Change: We continue to see strong momentum and interest in this type of contracting model in Q3, we closed over 150 D. P S deals globally.
Jim Benson: Moving on to revenue, total revenue for the third quarter was $365 million, up 21% year-over-year, and $6 million above the high end of guidance. Subscription revenue for the third quarter was $348 million, up 23% year-over-year, and $8 million above the high end of guidance. With respect to margins, non-GAAP gross margin for the third quarter was 85%, consistent with the prior quarter and up 100 basis points from Q3 of Our non-GAAP operating income for the third quarter was $105 million, $8 million above the high end of our guidance.
Speaker Change: Bringing total dps customers to roughly 400 <unk>.
Speaker Change: Representing more than 10% of our customer base.
Speaker Change: Moving onto revenue total revenue for the third quarter was $365 million up 21% year over year and $6 million above the high end of guidance.
Speaker Change: And subscription revenue for the third quarter was $348 million up 23% year over year and $8 million above the high end of guidance.
Speaker Change: With respect to margins non-GAAP gross margin for the third quarter was 85% consistent with the prior quarter and up 100 basis points from Q3 of last year, driven by ongoing cloud hosting efficiency efforts.
Speaker Change: Our non-GAAP operating income for the third quarter was $105 million $8 million above the high end of our guidance driven by the combination of revenue upside and disciplined expense management.
Jim Benson: Driven by the combination of revenue upside and disciplined expense management, this resulted in a non-GAAP operating margin of 29%, exceeding the top end of guidance by 200 basis points. Non-GAAP net income was $96 million, or $0.32 per diluted share. This was $0.04 above the high end of our guidance range, driven by the items I just highlighted and a slightly lower tax rate, driven by several discrete items related to additional foreign tax credits and incentives. Our free cash flow was $67 million in the third quarter.
Speaker Change: This resulted in a non-GAAP operating margin of 29% exceeding the top end of guidance by 200 basis points.
Speaker Change: non-GAAP net income was $96 million or 32 cents per diluted share.
Speaker Change: This was four cents above the high end of our guidance range driven by the items I, just highlighted and a slightly lower tax rate driven by several discrete items related to additional foreign tax credits and incentives.
Speaker Change: Our free cash flow was $67 million in the third quarter.
Speaker Change: As we've discussed in the past we 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.
Jim Benson: As we've discussed in the past, we 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 $340 million, or 25% of revenue. As a reminder, this includes 500 basis points of impact related to cash tax. Pre-tax free cash flow on a trailing 12-month basis was 30% of revenue and a 43% year-over-year increase. Finally, we ended the third quarter with a robust balance sheet, including $783 million of cash and zero debt. Before I move to the guidance details,
Speaker Change: On a trailing 12 month basis free cash flow was $340 million or 25% of revenue.
Speaker Change: As a reminder, this includes 500 basis points of impact related to cash taxes pre tax free cash flow on a trailing 12 month basis was 30% of revenue and up 43% year over year.
Speaker Change: Finally, we ended the third quarter with a robust balance sheet, including $783 million of cash and zero debt.
Speaker Change: Before I move to the guidance details.
Jim Benson: I want to give you a brief update on the demand environment and trends we are seeing. The observability market opportunity is growing. The demand environment remains healthy, and our pipeline continues to grow at a faster pace than our reported ARR growth rate. More specifically, within the sales funnel, we are seeing a growing number of larger and more strategic deals related to observability architecture and vendor consolidation initiatives, and we expect this directional trend to continue. To give you a sense of the magnitude of this trend, the number of deals in the pipeline greater than $1 million in ACV, both new logo and installed base, has increased 39% compared to the same quarter last year. We view the growing number of these deals as a sign that the increasing complexity of managing fragmented tools is becoming unmanageable, and customers are looking for a partner to help them drive business value through tool consolidation. And we believe our highly differentiated unified platform with contextual analytics, AI leadership, and data-driven automation positions us well to capture these opportunities. At the same time, given the larger values of these strategic deals and the sea-level approvals that they require, they introduce increased variability in terms of timing required to close.
Speaker Change: I wanted to give you a brief update on the demand environment and trends we are seeing.
Speaker Change: The observer ability market opportunities growing the.
Speaker Change: The demand environment remains healthy and our pipeline continues to grow at a faster pace than our reported a growth rate.
Speaker Change: More specifically within the sales funnel, we are seeing a growing number of larger and more strategic deals related to absorbing really architecture and vendor consolidation initiatives and we expect this directional heading to continue.
It gives you a sense of the magnitude of this trend the number of deals in the pipeline greater than $1 million of D. C. D. Both new logo and installed base has increased 39% compared to the same quarter last year.
Speaker Change: We view the growing number of these deals as a sign that the increasing complexity of managing fragmented tools is becoming unmanageable.
And customers are looking for a partner to help them drive business value and tool consolidation.
Speaker Change: And we believe our highly differentiated unified platform with contextual analytics AI leadership in data driven automation position us well to capture these opportunities.
Speaker Change: At the same time, given the larger values of these strategic deals and the C level approvals that they require they introduced increased variability in terms of timing required to close as such we believe it is best to be incrementally more prudent in our near term guidance.
Jim Benson: As such, we believe it is best to be incrementally more prudent in our near-term guidance. And with that in mind, let's start with our updated guidance for the full year with growth rates and constant current. We are lowering our ARR guidance by 100 basis points from our prior guidance to account for the incremental level of prudence related to the timing of the large strategic deals I just mentioned. We now expect ARR to be
Speaker Change: And with that in mind.
Speaker Change: Let's start with our updated guidance for the full year with growth rates in constant currency.
Speaker Change: We are lowering our AOR guidance by 100 basis points from our prior guidance to account for the incremental level of prudence related to the timing of the large strategic deals I just mentioned, we now expect <unk> to be.
Speaker Change: 1.485 to $1 $495 billion or 18% to 19% growth year over year.
Jim Benson: $1.485 to $1.495 billion, or 18 to 19% growth year over year. As a reminder, we have $13 million of ARR expansions associated with early renewals in the fourth quarter. It was the first time in our history as a public company where we saw a sequential increase over our seasonally strongest third quarter, making for a difficult year-over-year comparison. Given our strong Q3 finish for revenue, we are raising our revenue guidance by approximately $11 million at the midpoint to $1.422 and $1.427 billion, up 50 basis points from our prior guidance and representing 22% growth year-over-year. We are raising our subscription revenue guidance This represents an increase of 150 basis points from our prior guidance.
Speaker Change: As a reminder, we had $13 million of AOR expansions associated with early renewals in the fourth quarter last year.
Speaker Change: It was the first time in our history as a public company, where we saw a sequential increase over our seasonally strongest third quarter, making for a difficult year over year compare this Q4.
Speaker Change: Given our strong Q3 finish for revenue we are raising our revenue guidance by approximately $11 million at the midpoint to 1422, and one $4 billion to $7 billion up 50 basis points from our prior guidance and representing 22% growth year over year.
Speaker Change: We are raising our subscription revenue guidance by approximately $16 million at the midpoint to 1.352 to 135 $7 billion or 24% growth year over year. This represents an increase of 150 basis points from our prior guidance.
Jim Benson: Turning to our bottom line, the strength and resilience of our financial model is evident in our ongoing margin performance. We are committed to investing in future growth opportunities that we expect will drive long-term value while also optimizing costs and driving profitability. We continue to rebalance our cost profile to prioritize our investments in R&D innovation, CSM coverage, and strategic go-to-market areas, such as GSI partnership, demand generation activities, and targeted sales capacity.
Speaker Change: Turning to our bottom line the strength and resilience of our financial model is evident in our ongoing margin performance.
Speaker Change: We're committed to investing in future growth opportunities that we expect will drive long term value, while also optimizing costs to drive profitability.
Speaker Change: We continue to rebalance our cost profile to prioritize our investments in R&D innovation.
Speaker Change: S M coverage and strategic go to market areas, such as GSI partnership demand generation activities and targeted sales capacity.
Jim Benson: With this in mind, we are raising our full-year non-GAAP operating income guidance by $9 million. This translates to non-GAAP operating margin guidance of 27.25% to 27.5%, representing an increase of 25 basis points at the low end of the range and 50 basis points at the high end. We are raising our non-GAAP EPS guidance to $1.16 to $1.18 per diluted share, representing an increase of six cents at the midpoint of the range. This non-GAAP EPS is based on a diluted share count of 299 to 300 million shares.
Speaker Change: With this in mind, we are raising our full year non-GAAP operating income guidance $9 million.
Speaker Change: This translates to non-GAAP operating margin guidance of $27, two 5% to 27, 5% representing an increase of 25 basis points at the low end of the range and 50 basis points at the high end of that range.
Speaker Change: We are raising non-GAAP EPS guidance to $1 16 to $1.18 per diluted share representing an increase of six cents at the midpoint of the range.
Speaker Change: This non-GAAP EPS is based on a diluted share count of 299 to 300 million shares.
Speaker Change: We are raising our free cash flow guidance to $330 million to $335 million, an increase of $16 million at the midpoint, representing a free cash flow margin of 23% of revenue up 50 basis points at the midpoint.
Jim Benson: We are raising our free cash flow guidance to $330 to $335 million, an increase of $16 million at the midpoint, representing a free cash flow margin of 23% of revenue, up 50 basis points at the midpoint. And finally, this guidance assumes the acquisition of Runecast, which we expect will close by March 31st. This technology tuck-in transaction will not have a material impact on our financial results... Looking at Q4, we expect total revenue to be between $372 and $377 million, or 18 to 19% growth. Subscription revenue is expected to be between $353 and $358 million, up 20% to 21% year-over-year. From a profit standpoint, non-GAAP operating income is expected to be between $85 and $90 million, or 23 to 24% of revenue. Keep in mind, we have some seasonal expenses taking place in the fourth quarter, including incremental spend for our Perform Customer Conference, as well as a structural reset of payroll taxes. Non-GAAP EPS is expected to be $0.26 to $0.28 per diluted share.
Speaker Change: And finally this guidance assumes the acquisition of Rune cast, which we expect will close by March 31st.
Speaker Change: As technology Tuck in transaction will not have a material impact on our financial results.
Looking at Q4, we expect total revenue to be between 372, and $377 million or 18% to 19% growth.
Speaker Change: Scripture revenue is expected to be between 353, and $358 million up 20% to 21% year over year.
Speaker Change: From a profit standpoint, non-GAAP operating income is expected to be between 85 and $90 million or 23% to 24% of revenue.
Speaker Change: Keep in mind, we have some seasonal expenses, taking place in the fourth quarter, including incremental spend for our perform customer conference as well as a structural reset of payroll taxes.
Speaker Change: non-GAAP EPS is expected to be 26 to 28 cents per diluted share.
Speaker Change: In summary, we are pleased with our third quarter fiscal 'twenty four performance, we have a proven track record of disciplined execution balancing topline growth with profitability and free cash flow. We are building incremental prudence in our near term outlook, while we remain optimistic about our intermediate term growth.
Operator: In summary, we are pleased with our third quarter Fiscal 24 performance. We have a proven track record of disciplined execution, balancing top-line growth with profitability and free cash. We are building incremental prudence in our near-term outlook, while we remain optimistic about our intermediate-term growth opportunities and growing differentiation in the market. And with that, we'll open the line for the operator. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: <unk> and our growing differentiation in the market.
Speaker Change: And with that we will open the line.
Speaker Change: Operator.
Speaker Change: Thank you.
Speaker Change: At this time well be conducting a question and answer session.
Speaker Change: If you'd like to ask a question. Please press star one from your telephone keypad.
Speaker Change: Information that will indicate your line is in the question queue.
Speaker Change: You May press Star two if you like to move to your question from the queue.
Speaker Change: Her participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: So that we may address questions for as many participants as possible, we ask that you please limit yourself to one question. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Jake Robert with William Blair. Please proceed with your question. Hey, thanks for taking the questions. Rick, you've talked the past two quarters about the incremental go-to-market investments you're making. Can you talk about what you're seeing on top of funnel and pipeline activity that continues to give you confidence to make those investments? Sure, Jake, thanks for the question. The short form is we continue to see pipeline growth in advance of or, or higher than our ARR growth. So that's one element.
Speaker Change: So that we may address questions from as many participants as possible. We ask that you. Please limit yourself to one question.
Speaker Change: One moment, please when we poll for questions. Thank you.
Speaker Change: Our first question comes from the line of J crew bar with William Blair. Please proceed with your question.
Speaker Change: Hey, Thanks for taking my questions, Rick you've talked the past two quarters about the incremental go to market investments, you're making can you talk about what you're seeing on the top of funnel and pipeline activity that that continues to give you confidence to make those investments.
Rick: Sure Jami. Thanks for the question the short form as we continue to see pipeline growth in advance of war or higher than our AOR growth. So that's one element as Jim indicated in his remarks, we see increasing deal size for increased deal sizes really across the board.
Rick M. McConnell: As Jim indicated in his remarks, we see increasing deal sizes for increased deal sizes really across the board. These are strategic deals, they take a little bit longer to close, but we feel very positive about the pipeline growth that we're seeing. Great. Thanks for taking the question. Our next question is from the line of Brad Rebeck with Stiefel.
Rick: These are strategic deals they take a little bit longer to close, but we feel very positive about the pipeline growth that we're seeing at the moment.
Speaker Change: Great. Thanks for taking the question.
Speaker Change: Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.
Rick M. McConnell: Please proceed with your question. Great. Thanks very much.
Brad Reback: Great. Thanks very much.
Rick M. McConnell: Rick, that new ARR growth has been at best for the last kind of five or six quarters. What needs to improve? Execution, economy, or both to get back to a more steady growth cadence there? Thanks. Well, I would say that the pipeline coverage continues to grow, so that's, that's a positive. We see, as I mentioned in the answer to the prior question, pipeline growth exceeding ARR growth. So that's good; we need to be able to convert that pipeline at a higher rate. And that's, that's going to come with macro improvement that occurs over time, but also, obviously, with sales execution against the larger deals and larger transactions that we mentioned. Okay, thanks very much.
Speaker Change: Alright.
Brad Reback: Our growth has been.
Brad Reback: Around like that.
Brad Reback: Last kind of five or six quarters.
Brad Reback: What needs to improve execution economy, or both to get back to a more steady growth.
Speaker Change: Cadence there thanks.
Speaker Change: Well I would say that the.
Speaker Change: Pipeline coverage continues to grow so that's a that's a positive we see as I mentioned in the answer to the prior question pipeline growth exceeding AOR growth. So that's good we need to be able to convert that pipeline at a higher rate and that's that's going to come with with macro improvement that occurs over time, but also obviously.
Speaker Change: <unk> with sales execution against the larger deals and larger transactions that we mentioned.
Speaker Change: Okay. Thanks very much.
Jim Benson: Our next question is from the line of Patrick Colville with Scotiabank. Please proceed with your question. All right, guys. Thank you so much for having me on the call.
Speaker Change: Our next question is from the line of Patrick Colville with Scotiabank. Please proceed with your question.
Patrick Colville: Alright, guys. Thank you so much for having me on the call.
Patrick Colville: Well I mean, one of the Juicy metrics you gave this quarter was the 150 D. P. S deals, whether you called out but 10% of costs towards the mountain Dps.
Jim Benson: One of the juicy metrics you gave this quarter was the 150 DPS deals. I think you called out that 10% of customers are now on DPS. I mean, I guess what impact is DPS having on NRR, if at all, already? And if it's not having any impact right now, can you just give us a framework when we think DPS might impact NRR? Thank you. Thank you, Patty. This is Jim.
Patrick Colville: I mean, I guess, what impact is the B S. Having on adderall if it already.
Patrick Colville: It is not having any impact right now can you just give us a framework as to like when we think dps might.
Patrick Colville: The impact on or off.
Speaker Change: Thank you.
Speaker Change: Thank you Patrick this is Jim.
Jim Benson: So for.
Jim Benson: So, for DPS, we've talked about this before, what the DPS contracting vehicle gives you is it gives you an ability to get full access to the platform with a unified rate card, to a rate card for all of our capabilities, as opposed to buying it on a skew basis. So you commit to a dollar amount for a term, and you draw down based on consumption against this rate card. So you can leverage all the capabilities on the platform. And because of that, it's a much more frictionless buying experience. Patrick, the timing of when you get expansion is you get them on the platform and the expectation, and we've proven this with DPS on limited availability for probably a year and a half now. And what we have found is that customers that are on such a contracting vehicle consume faster. So when they consume faster, it means it leads to incremental expansion rates. We're at the very early phase of this. This has been generally available since April.
Jim Benson: For Dps, we've talked about this before what the Dps contracting vehicle gives you is it gives you an ability to get full access to the platform with a unified race car to a rate card for all of our capabilities.
Jim Benson: As opposed to buying it on a SKU basis. So you commit to a dollar amount for a term and you draw down based on consumption against this rate card. So you can leverage all of capabilities on the platform.
Jim Benson: So because of that it's a much more frictionless buying experience so.
Jim Benson: I think the timing of when you get.
Jim Benson: <unk> expansion is you get them on the platform and the expectation and we've proven this with we've had dps unlimited availability for probably.
Jim Benson: Probably a year and a half now and what we have found is that customers that are on such a contracting vehicle consumed faster. So when they consume faster. It means it leads to incremental expansion rates were at the very early phase of this this has been generally available since April so.
Jim Benson: So we're kind of, I would say when you're going to begin to see this is when you start to see lapsing, call it in the kind of roughly 12 month horizon. So, you know, we track it, and what we do see is that customers that are on a DPS contract consume faster than those that are not on a DPS contract. So our expectation is that we'll see that, but it'll probably be in fiscal 25. Thank you so much.
Jim Benson: So we're kind of I would say where you're going to begin to see this is when you start to see lapsing call. It in the kind of roughly 12 month horizon. So you know we track it and what we do see is that our customers that are at a D. P. S.
Jim Benson: Contract consumed faster than those that are not on a deep gas contract. So our expectation is that we'll see that but it'll probably be in the fiscal 25 period.
Speaker Change: Terrific. Thank you so much.
Speaker Change: Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your question.
Rick M. McConnell: Our next question comes from the line of Kash Rangan with Goldman Sachs. Pleased to see you for your question. Hi, thank you very much for the chance to ask a question and congratulations on a spectacular performance. Good to see you wake up on stage making waves.
Speaker Change: Yeah.
Speaker Change: Yeah.
Kasthuri Gopalan Rangan: Hi, Thank you very much for the chance to ask the question and congrats on a spectacular for fall good to see you break up on stage, making waves. My question has to do with the timing of the large deals and the close process. What's the pipeline for new era was up 39% than the G. P. S.
Jim Benson: My question has to do with the timing of the large deals and the closing process. If the pipeline for new ARR is up 39 percent, then you've got DPS potentially kicking in next year. I'm curious if you think the next fiscal year, which starts a few months from now, could show better growth rates than this fiscal year, which obviously is a lagging indicator of the investments you've made in your new products, which were very well received. It's going to go to market capacity and the bend towards large deals and then DPS, obviously. Thank you so much. Cash, this is Jim.
Speaker Change: Really kicking in next year.
Speaker Change: Curious if you think the next fiscal year, which starts in a few months from now.
Good show better growth rate than this fiscal year, which obviously is a lagging indicator.
Speaker Change: Once you've made in your new products, which were birthday perform.
Speaker Change: Could you kind of go to market capacity and the trend towards large deals and then Dps obviously, thank you so much.
Speaker Change: Yes. This is Jim I'll take that.
Jim Benson: I'll take that. Obviously, we're not going to provide fiscal 25 guidance on this call. You know, I would say the thesis of the various areas that you talked about certainly are growth drivers. But I'm not going to comment on whether that leads to an acceleration in Fiscal 25. But what I will say, just to make sure that I was clear in the prepared remarks, that when you step back and you say, what has fundamentally changed in the last 90 days relative to the pipeline? It remains strong.
Well, obviously, we're not going to provide fiscal 'twenty five guidance on this call you know I would say the thesis of the various areas that you talked about certainly our growth drivers.
Jim Benson: I'm not going to comment on whether that leads to an acceleration in fiscal 'twenty five, but what I will say just just to make sure that I was clear in the prepared remarks that.
Jim Benson: When you step back and you say what has fundamentally changed in the last 90 days relative to the pipeline.
Jim Benson: Our pipeline remains strong we have a growing number of very large vendor consolidation opportunities that I've mentioned so.
Jim Benson: We have a growing number of very large vendor consolidation opportunities, as I mentioned. So, I'd say it's a net positive for Dynatrace because what we're seeing in the market is a trend towards customers doing or considering more tool consolidation and vendor consolidation because of the complexity of the environment of having a bunch of disparate tools. So this is a net positive, we believe, for Dynatrace. The only thing that has changed is that we are building an incremental level of prudence, knowing that these deal sizes are very large, they're strategic, and the timing for closing them can be a bit variable to pick within a three-month window. So all we've done is we've tried to build a level of incremental prudence into the guide, so there's no change in the demand environment.
Jim Benson: I'd say, it's a net positive for <unk> because of what we're seeing in the market is a trend towards customers doing or considering more tool consolidation vendor consolidation because of the complexity of the environment with having a bunch of disparate tools. So this is a net positive.
Jim Benson: We believe for dining trees.
Jim Benson: The only thing that as Jay has changed is that we are building an incremental level of prudence knowing that these deal sizes are very large they're strategic.
Jim Benson: And the timing for closing them can be a bit variable to pick within a three month window. So all we've done is we've tried to build a level of incremental prudence into the guide there was no change in the demand environment the demand environment remains healthy.
Jim Benson: The demand environment remains healthy. Cash, let me just add to that. First of all, thanks very much for attending Perform. That's, that's exceptional.
Jay: Kash, let me just add to that first of all thanks very much for attending for form that's a that's exceptional what what I would say simply is that the market fundamentals here remain in our view very strong.
Rick M. McConnell: What I would say simply is that the market here will remain, in our view, very strong, and we like our position based on contextual analytics, hyper-modal AI, and automation to take advantage of a market that really requires this degree of automation to evolve. Because the number of IT resources that are available to do manual processing of IT workloads is constrained.
Kasthuri Gopalan Rangan: And we like our position based on contextual analytics, Hypermobile AI and automation to take advantage of a market that really requires this degree of automation to evolve.
Kasthuri Gopalan Rangan: The number of resources that are available to do manual processing of Ikea workloads is constrained and observe ability in particular sophisticated observe ability and application security solutions like Gaiam cases are going to become more and more critical in fact mission critical in this market as we look at.
Rick M. McConnell: And observability, in particular, sophisticated observability and application security solutions like Dynatrace, are going to become more and more critical, in fact, mission critical, in this market as we look at it. Thank you. Our next question is from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question. Hi, many thanks. And it was nice to be at Perform last week.
Kasthuri Gopalan Rangan: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Keith Bachman with BMO capital markets. Please proceed with your question.
Keith Frances Bachman: Hi, many thanks and it was nice to be a perform last week I had a question related to the past couple if we look at the a or our growth and we layer in various scenarios for our logs and analytics and security.
Jim Benson: I had a question related to the past couple. If we look at the ARR growth, and we layer in various scenarios for logs and analytics and security, it suggests a pretty significant degradation of what we'll call the residual business. And I just wondered, is that a fair way to look at it?
Keith Frances Bachman: The pretty significant degradation of what we'll call the residual business and I just wondered a.
Keith Frances Bachman: Is that a fair way to look at it and B why why do you think that's happening with the growth of your new offerings again. It suggests a pretty significant degradation of the residual for lack of a better word.
Jim Benson: And B, why do you think that's happening with the growth of your new offerings? Again, it suggests a pretty significant degradation of, you know, the residual, for lack of a better word. And Jim, just a clarification, if you could help set our models for next year, will cash taxes also have an impact on incremental cash taxes in FY25? Or is it sort of a one-time thing, just so we can at least establish a framework for our cash flow for next year? Many thanks.
Keith Frances Bachman: Just a clarification if you could help set our models for next year, well cash taxes also have an impact and incremental cash taxes.
Keith Frances Bachman: FY 'twenty five or is it sort of a one more of a one time thing just so we can at least start with a framework for cash flow for next year. Many thanks.
Jim Benson: Yeah, I'll start with Yeah, that. So the answer is cash tax that we've seen, which has been called roughly 500 basis points, is going to continue. Fiscal 25 is not a one-time event. We are a full cash taxpayer because we are GAAP profitable, and we don't have... NOLs or Tax Loss Carry Forward.
Speaker Change: Yeah, I'll start with that so the answer is cash tax that we've seen which has been call it roughly 500 basis points.
Keith Frances Bachman:
Keith Frances Bachman: Is.
Keith Frances Bachman: It's going to continue this is that fiscal 'twenty five is not a one time, we are a full cash taxpayer.
Keith Frances Bachman: Because we are GAAP profitable and we don't have.
Keith Frances Bachman: Nols or tax loss carryforwards, So you should expect that the cash.
Jim Benson: So you should expect that the cash tax that we have in Fiscal 25 will continue going forward. Obviously, there are always strategic tax planning efforts that we're going through, but as a general answer, you should expect that that will continue. Relative to AR. But at the same, yeah, sorry, just at the same rate, though, right? It doesn't get incrementally worse.
Keith Frances Bachman: Cash tax that we have in fiscal 'twenty five we'll continue going forward, obviously, there's always strategic tax planning efforts that we're going through but as a general answer you should expect that that will continue realm.
Keith Frances Bachman: Relative but at the same but to say, yes, sorry, just at the same rate, though right. It doesn't get incrementally worse, so let's see.
Jim Benson: So I mean, I'm not going to give you a guide for fiscal 25, but I will tell you that as you become more profitable, you're going to pay more taxes. So whether whether that rate grows a little bit or not, I'm not going to say, but it's going to be at a minimum what it currently is. Okay, good.
Speaker Change: I would say I'm not going to guide for fiscal 'twenty. Okay.
Speaker Change: Five, but I will tell you that as you as you become more profitable you're going to pay more taxes, so whether it whether that rate grows a little bit or not.
Speaker Change: I'm not going to say, but it's going to be at a minimum what it currently is at.
Speaker Change: Okay.
Speaker Change: And relative to our you know.
Jim Benson: And relative to ARR, you know, we don't unpack for you at a level of detail all the product categories. So I think I would kind of remind you a bit that we are still in the early phase of the journey for application security and for logs. So, you know, we've talked about those businesses exiting fiscal 25, being at $100 million ARR. We've been at AppSec a little bit longer than Logs. But the point is that what you're gonna see is, we talked about Logs in particular, that Logs starts with a POC. It then goes to kind of smaller workloads in a production environment.
Speaker Change: No we don't unpack for you at a level of detail all the product categories. So I think I would kind of remind you a bit that we are still on the early phase of the journey for application security and for our logs. So we've talked about those business.
Speaker Change: <unk> exiting fiscal 'twenty five.
Speaker Change: Being at $100 million.
Speaker Change: We've been in App stack, a little bit longer than the logs the.
Speaker Change: But the point is that what youre going to see is we talked about logs in particular that log starts with the POC. It then goes to a kind of smaller workloads in a production environment. The next phase in that journey as you have newer workloads in a production environment and then the last phase being you your.
Jim Benson: The next phase in that journey is you have newer workloads in a production environment, and then the last phase is you're kind of leveraging existing workloads. So we're still in the very early phases of that journey.
Speaker Change: Kind of leveraging existing workloads. So we're still in the very early phases of that journey. So when you think about about our kind of product cuts that today logs in abject don't make up a material portion of our a R. Certainly the.
Jim Benson: So when you think about our kind of product cuts that today, logs and AppSec don't make up a material portion of our ARR. Certainly, the areas that we've been strong in all along around full stack infrastructure, then those continue to be the horses that drive most of our ARR. And I'd say what you should expect is that we're gonna continue to see an acceleration in application security and in logs, but the hockey stick, so to speak, will happen in fiscal 25. That's our expectation.
Speaker Change: The areas that we've been strong in all along around full stack infrastructure damn those continue to be the horses that drive most of AOR and I'd say, what you should expect is that we're going to continue to see an acceleration in application security and in logs, but.
Speaker Change: The hockey stick so to speak will happen in fiscal 'twenty five that's our expectation.
Speaker Change: Okay, and then he and I might add that.
Rick M. McConnell: I might add that quarter over quarter, we saw a 50% increase in paying logs customers, and log management customers, and an additional 30% increase in POCs on log management. So we do continue to see traction in this new one.
Speaker Change: Over quarter, we saw a 50% increase in paying logs customers log management customers and an additional 30% increase.
Speaker Change: In POC shuttle log management so.
Speaker Change: So we do continue to see traction in this in this new offering.
Speaker Change: Okay excellent. Thank you.
Jim Benson: Excellent. Our next question is from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question. Thank you.
Speaker Change: Our next question is from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.
Matt Hedberg: Great guys. Thanks for taking my question I guess for either of you regarding the IRR commentary and I think the uncertainty of large deal timing did any abnormal large deals push out of the quarter and I guess are there things that either your sales force or partners are focused on to accelerate the closing of what sounds like a growing.
Jim Benson: Thanks for taking my question. I guess for either of you, regarding the ARR commentary and I think the uncertainty of large deal timing, did any abnormal large deals push out of the quarter? And I guess, are there things that either your sales force or partners are focused on to accelerate the closing of what sounds like a growing pipeline of these large deals that could ultimately start to have a positive impact on growth? Yeah, I guess I will take that.
Matt Hedberg: Pipeline is these large deals that could ultimately start to have a positive impact on on growth.
Speaker Change: Yeah, I guess I'll I'll take that realm.
Jim Benson: Relative to these deals that we're seeing, and whether they had kind of some of them that pushed out of Q3, I'd say you always have deals that push out of a quarter that you pull into a quarter, but I would say nothing, Matt, that's like notable. These are these are deals that you can imagine they've been in the funnel. They don't happen overnight, and as they progress... You get a better assessment of the deal size and the deal timing. And the good news is that these deals, many of them have been growing as we've been working through the sales process. So we're actually in a good position relative to the health of the funnel. The only thing that has fundamentally changed is, as I mentioned, the timing.
Speaker Change: Relative to.
Speaker Change: These deals that we're seeing and whether they had kind.
Speaker Change: Kind of some of them that pushed out of Q3, I'd say you always have deals that push out of a quarter that you pull into a quarter, but I would say nothing Matt. That's like notable these are these are deals that you can imagine they they've been in the funnel.
Speaker Change: They don't happen overnight.
Speaker Change: And as they progress.
Speaker Change: You get a better assessment of kind of the deal size and the deal timing and the good news is these deals many of them have been growing as we've been working through the sales process. So we're actually in a good position relative to the health of the funnel. The only thing that has fundamentally changed is as I mentioned the timing.
Jim Benson: And the challenge with deals like these is there's not always a kind of compelling event for a specific date for them to close. Because if you're doing a vendor consolidation decision, there may be a kind of timing of a, maybe a competitor solution that may have a contract upgrade rule. So that may be one element of a compelling event.
Speaker Change: And the challenge with deals like these is is not always a kind of a compelling event for a specific date.
Speaker Change: For them to close because if you're doing a vendor consolidation decision.
Speaker Change: There may be a kind of the timing of a maybe.
Speaker Change: A competitor solution that may have a contract up for renewal so that maybe one element of a compelling event, but in general that these are very strategic decisions for customers and so there's.
Jim Benson: But in general, these are very strategic decisions for customers, and so there's a serious and significant evaluation when they go through that. And we're just building an incremental level of prudence. As I said before, nothing has fundamentally changed in the Demand Environment. The demand is still healthy. The pipeline is still very robust.
Speaker Change: There is a serious and significant evaluation when they go through that and we're just.
Speaker Change: Building, an incremental level of prudence that nothing like as I said before nothing has fundamentally changed in the demand environment is still healthy the pipeline is still very robust as I mentioned in my prepared remarks that these deals that are over $1 million of are in the pipeline are up over 39% and I remind you that.
Jim Benson: As I mentioned in my prepared remarks, these deals that are over a million dollars in the pipeline are up over 39%. And I remind you that we had a huge Q4 last year. So this is a significant movement in the pipeline. It's just a matter of when you have very large deals like this, to call it within a 90-day window is a little bit more volatile. We tried to build a level of prudence.
Speaker Change: We had a huge Q4 last year. So this is a significant movement in the pipeline. It's just a matter of when you have very large deals like this to call. It within a 90 day window is a little bit more variable when we tried to build a level of prudence into it.
Speaker Change: I would just add Matt that with GSI is in particular since you mentioned the partner front, we continue to be very enthusiastic about the evolution of the GSI partner opportunities, especially with some of the core GSI as I mentioned like Accenture, Deloitte <unk> and Kindle and those deals are inherently going to be bigger in.
Rick M. McConnell: I would just add, Matt, that with GSIs in particular, since you mentioned the partner front, we continue to be very enthusiastic about the evolution of the GSI partner opportunities, especially with some of the core GSIs I mentioned, like Accenture, Deloitte, TXC, and Kindrel. Those deals are inherently going to be bigger and take a bit longer to close as well, but we feel very good about our Thanks, guys. Thank you. Our next question is from the line of Mike Chikos with Needham & Company. I am pleased to see you with your question. Hey guys, thanks for taking the question here. And I know a lot has been made on the AOR guide, and I just really want to fine-tune it.
Speaker Change: Take a bit longer to close as well, but we feel very good about our posture and position associated with the GSI evolution.
Speaker Change: Thanks, guys.
Speaker Change: Thank you. Our next question is from the line of Mike <unk> with Needham and company. Please proceed with your question.
Mike: Hey, guys. Thanks for taking the question here and I know a lot has been made on the AOR guide and I, just I really wanted to fine tune. It I know, Jim you've spoken about incorporating incremental prudent tied to these larger more strategic deals.
Jim Benson: I know, Jim, you've spoken about incorporating incremental prudence tied to these larger, more strategic deals. So the first question is, can you elaborate on what the magnitude of that incremental prudence is? I think that would help level set expectations as we're thinking about this change to the guidance philosophy or construction now. And then the second point, which would go a long way in helping investors think about the guidance today, really, were it not for these larger, more strategic deals, which are taking longer to close, excluding that, would management actually be raising the fiscal 24 constant currency AOR guide today? Well, you can imagine the pipeline is just a basket of opportunities.
Mike: The first question is can you can you elaborate on what the magnitude of that incremental prudency I think that would help level set expectations. As we were thinking about this the change to the guidance philosophy or construction now and then the second point, which would go a long way in helping investors think about the guidance today.
Mike: Really were it not for these larger more strategic deals, which are taking longer to close.
Mike: Excluding that weed management actually be raising the fiscal 'twenty for constant currency AOR guidance to that.
Mike: Well you can imagine the pipeline is just a basket of opportunities there's large opportunities smaller opportunities. So I think what we are seeing though is the funnel is becoming a bit more weighted to these large opportunities.
Jim Benson: There are large opportunities and small opportunities. So I think what we are seeing, though, is the funnel is becoming a bit more weighted to these large opportunities. And I will tell you that the guide that I provided last time, which was 19 to 20 percent growth, you know, and the guide now 18 to 19, the way you should think about that is the difference in that of 100 basis points is literally just incremental improvements. Nothing else has fundamentally changed.
Mike: And I will tell you that the guide that I provided last time, which was 19% to 20% growth.
Mike: And the guide now 18 to 19 in the way you should think about that is the vet.
Mike: The difference in net of 100 basis points is literally just incremental fruits nothing else has fundamentally changed.
Jim Benson: Terrific. Thank you for that. I appreciate it.
Speaker Change: Terrific. Thank you for that I appreciate it.
Jim Benson: Thank you. Our next question comes from the line of Fatima Bolani with Citi. Please proceed with your question. Good morning.
Speaker Change: Thank you. Our next question comes from the line of Adam <unk> with Citi. Please proceed with your question.
Adam: Oh good morning, Thank you for taking my question.
Jim Benson: Thank you for taking my questions. Jim, just along these lines, historically, it's been very helpful for us to internalize your growth algorithm between new logo acquisition and install-based expansion. So, bearing in mind some of your commentary on some of the expansionary behavior, the DPS uptake, and what you're seeing in the pipeline, I was hoping you could help flesh out for us what your expectations are as it relates to new logo business versus a potential recovery on the install-based expansion side. Thank you.
Adam: Jim just along these lines historically, it's been very helpful for us.
Adam: Internalize your growth algorithm between new logo acquisition in the installed base expansion. So just bearing in mind. Some of your commentary on some of the expansion here in behavior, the Dps update a cake.
Adam: You are seeing in the pipeline I was hoping you can help us flesh out for us what your expectations are as it relates to our new logo business versus a potential recovery on the installed base expansion side. Thank you.
Speaker Change: Yeah, the way to.
Jim Benson: Yeah, the way to I think I shared this before in the last call that we thought that expansion rates would be in the 112 to 113% range in the near term, and I expect that to be the case for the remainder of this year. And we had said before that we're probably going to be in the low single-digit growth in new logos, but at higher land sizes. So our land sizes have been, call it, roughly 140,000 on a trailing 12-month basis.
Adam: I've shared this before that and I shared in our last call that we thought that expansion rates would be in the $1 12 to $1 13 per cent range in the near term and I and I expect that to be the case cause.
Speaker Change: For the remainder of this year.
Adam: And we had said before that we probably going to be in the low single digit growth in new logos, but at higher land sizes. So our land sizes have been call it roughly a 140000.
Adam: On a trailing 12 month basis so.
Jim Benson: So those two underpinnings continue to be kind of the building blocks underneath that. And on the new logo front, it's because we're focusing on a larger set of customer segments that we have seen have a higher propensity to expand. When we land at a larger size, they tend to expand.
Adam: Those two underpinnings continue to be kind of the building blocks underneath that and on the new logo front, it's because we're focusing on a larger set of customer lands that we have seen have a higher propensity to expand when we land at a larger size they tend to expand so those whose fundamentals.
Jim Benson: So those fundamentals won't change. Obviously, when I provide fiscal 25 guidance, I'll give you guys a little bit more color on that. But those continue to be kind of the major building blocks. And obviously, the other one being we continue to have Best-in-Class Retention Rates. So the product is very sticky.
Adam: Won't change obviously, when I provide fiscal 'twenty five guidance I'll give you guys a little bit more color on that but those continue to be the kind of the major building blocks and obviously the other one being we continue to have.
Adam: Best in class retention rates. So the product is very sticky we don't have a lot of churn or down shell. So you know obviously, we don't expect any changes in that regard either.
Rick M. McConnell: We don't have a lot of churn or downsell, so you know obviously we don't expect any changes in that regard either. Thank you. Our next question is from the line of Ray McDonough with Guggenheim. Please proceed with your question. Great, thanks. Rick, when we talked to some of your partners, it does seem like tool consolidation is accelerating, and you've hit on that throughout the call. But is that acceleration due to a change in control at a couple of your competitors?
Adam: Yeah.
Speaker Change: Thank you.
Ray Mcdonough: Our next question is from the line of Ray Mcdonough with Guggenheim. Please proceed with your question.
Ray Mcdonough: Great. Thanks.
Ray Mcdonough: When we talk to some of your partners. It does seem like tool consolidation is accelerating and you've hit on this throughout the call, but is that acceleration due to a change in control at a couple of your competitors and if so can you help us understand where those opportunities are coming from specifically is it some of your traditional APM competitors or are you seeing any displacement.
Rick M. McConnell: And if so, can you help us understand where those opportunities are coming from specifically? Are they some of your traditional APM competitors? Or are you seeing displacement opportunities in log management and other areas at this point? Obviously, you mentioned it's still early on for logs, but any color would be helpful.
Ray Mcdonough: <unk> needs and log management and other areas at this point, obviously you mentioned, it's still early on for logs, but any color would be helpful.
Rick M. McConnell: Thanks, Ray. I would say a bit of all of the above by way of tool consolidation. AppDynamics continues to be a source of new logos for us in a material way. New Relic going private certainly has created some disruption, as has the acquisition of Slunk by Cisco, which creates certainly some degree of market confusion and apprehension that leads to opportunity for us. Having said that, it's still relatively early stage in terms of some of these transaction announcements, and we'll have to see how they evolve over the course of time. Great, thanks.
Speaker Change: Thanks, Ryan I would say a bit of all of the above by way of tool consolidation.
Speaker Change: At dynamic continues.
Speaker Change: Continues to be a source of new love us for us in a material way.
Speaker Change: New relic going private certainly has created some disruption as has the acquisition.
Speaker Change: <unk> by Cisco, which creates certainly some degree of market confusion and apprehension.
Speaker Change: That leads to opportunity for us.
Speaker Change: You said that it's it's all relatively early stage in terms of some of the <unk> transaction announcements and we'll have to see how they evolve over the course of time.
Speaker Change: Great. Thanks.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Gray Powell with B T. I T. Please proceed with your question.
Jim Benson: Our next question comes from the line of Gray Powell with BTIG. Please proceed with your question. Okay, great.
Gray Wilson Powell: Okay, great. Thanks for thanks for let me ask a question here.
Jim Benson: Thanks for letting me ask a question here. Um, so yeah, I know you've got a lot on net new ARR trends, the statistics on $1 million ACV deals that were really helpful. Is there a way to just help us think through like how much or like what the normal sales cycle is for larger deals and then just how much it's been extending in recent quarters as customers take on more multi-product deals?
Gray Wilson Powell: So yeah, I don't I know you've gotten a lot on net new AOR trends the statistic on $1 million ACB deals that that was really helpful is there a way to just help us think through like how much are like like like what the normal sales cycle is for larger deals and then just how much its been extending in recent quarters as customer.
Gray Wilson Powell: Take on more like multi product deals. Thanks.
Jim Benson: Thanks. Yeah, our normal sales cycle is six to nine months, as you can imagine, and it depends upon whether it's a new logo or an expansion. If it's a new logo, you're going to be on the longer end of that because customers are doing a much more significant evaluation with a POC and things of that nature. So it varies between expansions and new logos. And as I mentioned, Gray, these growing number of larger deals are not just new logos. We're actually seeing it also on the installed base site, so it's actually both.
Speaker Change: Yeah, I mean, our normal sales cycle is six to nine months as you can imagine you know that and it depends upon.
Speaker Change: Whether it's a new logo or an expansion if it's a new logo you gotta be on the longer end of that because our customers are doing is much more significant evaluation with the POC and things of that nature. So it varies between expansions and new logos and as I mentioned.
Speaker Change: Gray that.
Speaker Change: These these growing number of larger deals are not just new logos, we're actually seeing it.
Speaker Change: I'm also on the installed base side, so it's actually both.
Jim Benson: Because even where we have installed base customers, they are also leveraging DIY tools and, in other cases, other commercial tooling solutions. They are now beginning to make more tool consolidation decisions. And as I mentioned, the funnel is showing a 39% increase in that, and that's over a period of time that was very, very healthy. So I think it's a positive trend, you know, but I would tell you that it does introduce a level of variability, as I mentioned, which is why we built more prudence into, you know, and it's hard to say: is it a month? Is it two months? It varies, right? It varies by, You know, in some cases, it could be a quarter.
Speaker Change: Because even where we have installed base customers. They also are leveraging DIY tools and in other cases come other commercial tooling solutions. So.
Speaker Change: They are now beginning to make more tool consolidation decisions and as I mentioned, the funnel is showing a 39% increase in that and that's what we're kind of like a year ago period that was very very healthy so.
Speaker Change: I think it's a it's a positive trend.
Speaker Change: No. It I would tell you that it does introduce a level of variability as I mentioned, which is why we built more prudent into you know.
Speaker Change: It's hard to say is it a month is it two months it varies right it varies by.
Speaker Change: You know in some cases, it could be a quarter.
Jim Benson: In some cases, it could be a month. I really couldn't tell you an average for it, other than to say that when you are doing deals of this size, because there are both people and process implications for customers, because if they're using existing tools, and they want to go to a new vendor, it has an impact on their organization, and it has an impact on the processes within their organization. So it's a serious evaluation that they go through, and you have to anticipate that as you're trying to determine a closed deal. So it's like an extra month to three months, not like an extra six months. Did that work?
Speaker Change: Some cases it could be a month I really couldnt tell you an average for it other than to say that when you are doing deals of this size, where where because theres both people and process implications for customers because if they are using existing tools and they want to go to a new vendor it has an impact on their.
Speaker Change: And it has an impact on the processes within their organization. So there's a serious evaluation that they go through and you have to anticipate that as you're trying to determine a close date.
Speaker Change: Got it so it's like an extra month to three months not like an extra six months.
Speaker Change: No no no.
Jim Benson: No, no. Okay, thank you. Our next question comes from the line of Joel Fishbein with Truist Securities. Please answer your question. Thanks for taking the question. I have a follow-up to one of the earlier questions around observability consolidation, which we're seeing in the market as well. Can you talk about the vendors that you think are positioned to compete with you on those observability deals? You know, we hear ServiceNow is making some noise, and there are some others out there. I just want to know the competitive dynamics of those, or you went to some great lengths to talk about your competitive differentiations, which we saw last week as well. So I'd love to hear from you about, you know, who you're seeing in the market.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Joel Fishbein with Truest Securities. Please proceed with your question.
Joel P. Fishbein: Thanks for taking the question I have a follow up to one of the earlier questions around the.
Joel P. Fishbein: He absorbability consolidation, which we're seeing in the market as well can you talk about the vendors that you think are positioned to compete with you on news observer ability deals you know we hear you.
Joel P. Fishbein: Service now, making some noise in there some others out there I just wanted to know the competitive dynamics of those or.
Joel P. Fishbein: You wouldn't you went to great lengths to talk about your competitive differentiation, which we saw last week as well so love to hear from you about who youre seeing in the market.
Joel P. Fishbein: Well I talked to that are talked about some of the competitors are already to some extent I think that are providing some opportunity based on the disruption in those areas.
Jim Benson: Well, I talked about some of the competitors already, and to some extent, I think they are providing some opportunity based on the disruption in those areas. And to extend that, to extend that further, I would say, again, that I very much like our position vis-a-vis these trends toward larger strategic deals based upon our core differentiation, especially at the higher end of the market. And you asked about ServiceNow. We actually still see them mostly as a partner, as opposed to a competitor in the market. They just don't have the capabilities yet in observability and application security that we do.
Joel P. Fishbein: You extend that.
Joel P. Fishbein: To extend that further I would say.
Joel P. Fishbein: Again that I very much like our position decently nice trends toward larger strategic deals based upon our core differentiation, especially at the higher end of the market.
Joel P. Fishbein: And you had asked about our service now.
Joel P. Fishbein: We actually still see them, mostly as a partner as opposed to a competitor in the market. They just don't have the capabilities, yet an observer ability and application security that we do so it's a more times than not our customers are asking us to integrate with surface now versus compete with them.
Rick M. McConnell: So it's, more times than not, customers are asking us to integrate with ServiceNow. Are there any other vendors that you think can match you guys from a consolidation perspective, from a product perspective? Well, at the high end of the market, the higher end of the market, at the global 15,000, I would say that most of the deal flow and pipeline are moving in our direction. So in our target market segment, I think we have a very strong play, and the biggest competitor, as we've said in the past, continues to be DIY. Thank you so much for the clarification.
Joel P. Fishbein: Are there any other vendors that you think can can match you guys from a.
Joel P. Fishbein: Consolidation perspective from a product perspective.
Joel P. Fishbein: Well at the at the high end of the market at the higher end of the market at a global 15000 are I would say that most of the deal flow and pipeline lose our direction. So in our target market segment.
Joel P. Fishbein: I think we have a very strong play.
Joel P. Fishbein: The biggest the biggest competitor was what we said in the past continues to be DIY.
Speaker Change: Thank you so much for the clarification.
Rick M. McConnell: Our next question is from the line of Adam Tindall with Raymond James. Please proceed with your question. Okay, thank you, Rick. Good morning.
Joel P. Fishbein: Our next question is from the line of Adam Tindle with Raymond James. Please proceed with your question.
Adam Tindle: Okay. Thank you Rick good morning, I wanted to ask the strategic question related to rune cast to start with the motivation for that was posture management something that customers were asking before adopting app sick or would you characterize this.
Rick M. McConnell: I want to ask a strategic question related to RuneCast. To start with, you know, the motivation for that. Was posture management something that customers were asking before adopting AppSec, or would you characterize this as maybe the start of a broader push into CNAP? And then secondly, into that, just zooming out, your kind of strategic view on cloud security, broadly speaking. There's been a lot of investment and a lot of growth in that space, a combination of agent and agentless technologies going on. I wonder where you think Dynatrace fits in that market. Do you see a holistic platform, like a whiz-type player over time, or attractive areas that you're going to pick and choose your spots?
Adam Tindle: Maybe the startup of a broader push into seen app.
Rick: And then secondly into that just zooming out your your kind of strategic view on cloud security broadly speaking, there's been a lot of investment a lot of growth in that space combination of agent and agent must technologies going on and I Wonder where you think diamond trees plays in that market you see a holistic platform like a win type of player over.
Rick: Time or attractive areas that youre going to pick and choose your spots.
Rick M. McConnell: Thanks, Adam. So, first, on the CNAP front, I would say yes. The intent here is to head toward CNAP and use cloud security posture management as a way to enhance our vulnerability analytics capabilities that we have.
Speaker Change: Thanks, Adam So first on the scene upfront I would say yes.
Speaker Change: The intent here is to head toward head towards seen App and use cloud security posture management as a way to escalate our vulnerability analytics capabilities.
Rick M. McConnell: We really, really like the Runecast team and technology. I should say we like that technology and team quite a lot. It adds AI and contextual security protection analytics to what we're doing, which fits nicely into our portfolio, and in particular, allows us to address the risks of misconfigurations and compliance violations added to our existing vulnerability analytics capability. So it is a very, very good fit to expand it.
Rick: We have we really really like.
Rick: Rune cast that team and technology I should say, we like that technology and team quite a lot. It adds a I and contextual security protection analytics into what we're doing which fits nicely into our portfolio and in particular allows us to address the rest of Ms configurations and compliance.
Rick: <unk> added to our existing vulnerability analytics capabilities. So it is a very very good fit and expanding it.
Rick M. McConnell: The broader question you ask, I would simply say that we continue, as we have mentioned time and time again in the past, to see that observability and application security are converging. And the capabilities that we deliver in our platform generally, with regard to things like contextual analytics and high-promoted AI, provide very, very strong capabilities for application security as well. So in the AppSec market, we've been focused on leveraging the core elements of our observability platform to do application security better than others in the market in these types of spaces.
Jim Benson: The broader question you asked I would simply say that we continue.
Rick: We have mentioned time and time again in the past.
Rick: To see that observe ability and application and security are converging.
Rick: And the capabilities that we deliver in our platform generally with regard to things like a textual analytics and Hypermobile AI provide very very strong capabilities in application security as well so in the ASIC market, we've been focused on leveraging the core elements of our facility.
Rick M. McConnell: Platform to do application security better than others in the market in these types of spaces. So we're very enthusiastic about room cat also continue to be very excited about our investments in apps that generally.
Rick M. McConnell: So we're very enthusiastic about RuneCast, and we also continue to be very excited about our investments in AppSec. Thank you. Thank you. Our final question comes from the line of Will Power with Robert W. Baird. Please proceed with your question. Okay, great. Thanks for fitting me in.
William Verity Power: Thank you.
Speaker Change: Thank you.
Jim Benson: Our final question comes from the line of Willpower with Robert W. Baird. Please proceed with your question.
William Verity Power: Okay, great. Thanks for thanks for fitting me in.
Rick M. McConnell: You know, I guess, Rick, it'd be great to get your perspective on the kind of tone of customer conversations that perform, you know, being fresh here, and just how customers that you're talking to are thinking about, you know, I guess both, you know, budgets and priorities as we kind of, you know, head into, you know, 2024 here. And then any perspective with respect to how any of that might have changed versus those conversations, you know, a year ago? Well, I would simply say that obviously, Perform customers are a bit self-selected. They are generally existing Dynatrace customers or Dynatrace prospects. They've chosen to be there. So you get that flavor of the market.
William Verity Power: I guess, Rick it'd be great to get your perspective.
Willpower: Kind of tone of customer conversations at perform being fresh here is this how customers that youre talking to or thinking about I guess, both you know budgets and priorities as we kind of head into 2024 here and then any perspective with respect to how any of that might have changed versus those.
Willpower: Conversations you know a year ago.
Speaker Change: Well I I would.
Rick M. McConnell: I would simply say that obviously in pro form customers or if it's all selected are they they are existing generally existing demonstrated customers or or penetration prospects. They have chosen to be there.
Speaker Change: So you get a you get that flavor of the bargain having said that.
Rick M. McConnell: Having said that, I would say that the conversations with customer after customer after customer at Perform were absolutely exceptional, and the engagement was phenomenal. They are absolutely leaned in with regard to Dynatrace and the investments they're making in the Dynatrace platform. And they buy into this notion that, number one, observability is becoming more and more critical amidst a world in which digital transformation is driving business transformation. Number two, that they can't do it in a manual way through dashboards and alerting, which leads to number three, that they need a platform that is driving analytics, AI, and automation to enable them to do it better than they could do otherwise.
Willpower: I would say that the conversations with the customer after customer after customer it perform we're absolutely exceptional.
Rick M. McConnell: And engagement was phenomenal.
Rick M. McConnell: They are absolutely leaned in with regard to interface and the investments, they're making the <unk> platform and they buy off on this notion that number one observe ability is becoming more and more critical or it's a world in which digital transformation is driving business transformation.
Willpower: And number two.
Rick M. McConnell: That they can't do it in a manual way through dashboards, it alerting which leads to number three that they need a platform that is driving analytics AI and automation to enable them to do it better than they could do otherwise and so that was the that was the type of feedback that we heard extremely positive it was.
Rick M. McConnell: And so that was the type of feedback that we heard was extremely positive. It was simply fantastic. Okay, thank you. All right, that brings us to the close. I wanted to thank you all for your engaged questions as usual and your ongoing support. We, as we've echoed throughout the course of this call, remain quite bullish about the opportunity that lies ahead. We look forward to connecting with you at upcoming IR events over the coming weeks, and we wish you all a very good day. This will conclude today's conference. You may now disconnect your lines at this time, log off your webcast, and thank you for your participation. Have a wonderful day.
Rick M. McConnell: Simply.
Rick M. McConnell: That's simply a fantastic event.
Speaker Change: Okay. Thank you.
Rick M. McConnell: All right that brings us to a close I wanted to thank you all for your engage questions as usual and your ongoing support.
Rick M. McConnell: We are as we've echoed throughout the course of this call remain quite bullish about the opportunity that lies ahead, we look forward to connecting with you at upcoming events over the coming weeks and we wish you all a very good day. Thank you.
Rick M. McConnell: This will conclude today's conference you may now disconnect. Your lines at this time log off your webcast and thank you for your participation and have a wonderful day.
Rick M. McConnell: Yeah.