Q4 2024 Dynatrace Inc Earnings Call
Greetings and welcome to the <unk> fourth quarter and full year fiscal 2024 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.
Operator: Greetings and welcome to the Dynatrace fourth quarter and full year fiscal 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Noelle Faris, Vice President of Investor Relations for Dynatrace. Thank you. You may begin.
Welfarist: Please press Star zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Welfarist, Vice President of Investor Relations for diner tree.
Welfarist: You may begin.
Good morning, and thank you for joining diner traces fourth quarter and full year fiscal 'twenty 'twenty four earnings conference call. Joining me today are Rick Mcconnell, Chief Executive Officer, and Jim Benson Chief Financial Officer.
Noelle Faris: Good morning, and thank you for joining Dynatrace's fourth quarter and full year fiscal 2024 earnings conference. Joining me today are Rick McConnell, Chief Executive Officer, and Jim Benson, Chief Financial Officer.
Noelle Faris: 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 and our upcoming annual report on Form 10-K that we plan to file later this month. The forward-looking statements contained in this call represent the company's views as of May 15, 2024.
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 our most.
Welfarist: A recent quarterly report on Form 10-Q, and our upcoming annual report on Form 10-K that we plan to file later this month.
Welfarist: Forward looking statements contained in this call represent the company's views on May 15, 2024, we assume no obligation to update these statements as a result of new information future events or circumstances.
Noelle Faris: 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 rates, and per share amounts are on a diluted basis. 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, I will turn the call over to our Chief Executive Officer, Rick McConnell.
Welfarist: Unless otherwise noted the growth rates, we discussed today are non-GAAP, reflecting constant currency growth rate.
Welfarist: And per share amounts are on a diluted basis. 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.
Speaker Change: 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 you for joining us for today's call.
Rick M. McConnell: Thanks, Noelle, and good morning, everyone. Thank you for joining us on today's call. Dynatrace Delivery had a very strong finish in fiscal 2024, having achieved several noteworthy milestones and accomplishments. We surpassed $1.5 billion in ARR, representing 50% growth compared to the $1 billion level two years ago. Additionally, we landed our first nine-figure TCB deal. We closed our largest new logo ever, a nearly eight-figure ACV deal. Top analyst firms named Dynatrace a leader nine times in reports on observability and AI operations over the past year. And during fiscal 2024, we added approximately 300 basis points of non-GAAP operating margin from fiscal 2023 plus through pre-tax free cash flow margins by 200 basis points.
Rick M. McConnell: Diner trace delivered a very strong finish to fiscal 2024.
Rick M. McConnell: <unk> achieved several noteworthy milestones and accomplishments.
Rick M. McConnell: We surpassed $1 $5 billion and they are all representing 50% growth compared to the $1 billion level two years ago.
Rick M. McConnell: We landed our first nine figure T C b deal.
Rick M. McConnell: We closed our largest new logo ever in nearly eight figure ACB deal.
Rick M. McConnell: Top analyst firms named diner trace a leader nine times and reports, an observer ability and AI ops over the past year.
Rick M. McConnell: And during fiscal 'twenty 'twenty four we added approximately 300 basis points.
Rick M. McConnell: non-GAAP operating margin for fiscal 2023, plus grew pre tax free cash flow margins by 200 basis points.
Rick M. McConnell: There are three key themes I'd like to highlight as we begin today's call.
Rick M. McConnell: There are three key themes I'd like to highlight as we begin today's call. First, we are confident that our end-to-end platform is a meaningful differentiator in the expanding observability market. Second, we are benefiting from the evolution toward larger, more strategic observability architecture and vendor consolidation initiatives. And we expect this trend to... And third, we continue to execute with a business model that is well balanced between growth and profitability. Jim will share more details about our Q4 and FY24 performance, fiscal 2025 guidance, and the Share Repurchase Program we announced earlier today in a moment. In the meantime, I would like to discuss some of the key wins in the quarter, the market opportunity, investments in ongoing platform innovation, and our go-to-market evolution. Starting with some notable wins.
Rick M. McConnell: First we are confident that our end to end platform as a meaningful differentiator in the expanding observed ability market.
Rick M. McConnell: Okay.
Rick M. McConnell: We are benefiting from the evolution towards larger more strategic Absorbedly architecture, and vendor consolidation initiatives and we expect this trend to persist.
And third we continue to execute with a business model that is well balanced in growth and profitability.
Speaker Change: Jim will share more details about our Q4 and FY 'twenty for performance.
Speaker Change: 'twenty 'twenty guidance and the share repurchase program, we announced earlier today in a moment.
Speaker Change: In the meantime, I would like to discuss some of the key wins in the quarter the market opportunity investments in ongoing platform innovation and our go to market evolution.
Speaker Change: Starting with some notable wins last quarter, we shared that we were seeing increased demand for large strategic deals in which customers. We're looking to make broader absorbability architecture decisions.
Rick M. McConnell: Last quarter, we shared that we were seeing increased demand for large strategic deals in which customers were looking to make broader observability architecture decisions. Our thesis was that Dynatrace is uniquely positioned to benefit from this trend given our proven track record of helping customers eliminate siloed tools, significantly improve software performance and user experience, reduce cost, and drive organizational innovation and productivity. Our Q4 results show that this thesis played out as we had expected. We successfully closed numerous platform consolidation deals, contributing to a record 18 seven-figure ACB wins in the quarter. Among these were the following:
Speaker Change: Our thesis was the diner trace is uniquely positioned to benefit from this trend given our proven track record.
Speaker Change: Helping customers eliminated silo tools significantly improve software performance and user experience reduce cost and drive organizational innovation and productivity.
Speaker Change: Our Q4 results showed that this thesis played out as we had expected we.
Speaker Change: We successfully closed numerous platform consolidation deals.
Speaker Change: Contributing to a record 18, seven figure ACB wins in the quarter.
Speaker Change: Among these were the following.
Speaker Change: We won a nine figure multi year T. C V expansion with a top 20 global financial institution.
Rick M. McConnell: We want a nine-figure multi-year TCB expansion deal with a top 20 global financial institution. In a POC, the customer found Dynatrace to have the most advanced offering for cloud and container environments, resulting in dramatically reduced time and cost to prevent and resolve incidents. I'm also very pleased that this deal was closed in conjunction with Accenture. We won a mid-eight figure TCB expansion deal with a Fortune 50 corporation
Speaker Change: P O C. The customer found diamond trace to have the most advanced offering for cloud and container environments.
<unk> dramatically reduce time and cost to prevent and resolve incidents.
Speaker Change: I'm also very pleased that this deal was closed in conjunction with Accenture.
Speaker Change: We won a mid eight figure expansion deal with a fortune 50 Corporation.
Speaker Change: This company is in the process of moving to the cloud.
Rick M. McConnell: This company is in the process of moving to the cloud and selected Dynatrace to demonstrate their existing monitoring solution. As part of their digital transformation efforts, they are aiming to have 70% of their applications and 75% of their data in public or private clouds by the end of the year. Dynatrace's end-to-end observability platform was selected to provide a view across their entire hybrid and multi-cloud environment. We landed a nearly eight-figure ACV deal with one of the world's largest airlines.
Speaker Change: And selected Diamond trace displaced their existing monitoring solutions.
Speaker Change: As part of their digital transformation efforts, they are aiming to have 70% of their applications.
And 75% of their data in public or private clouds by the end of the year.
Speaker Change: Diner traces and and observe the leap platform.
Speaker Change: Selected to provide a view across their entire hybrid and multi cloud environment.
Speaker Change: We landed at nearly eight figure ACB, new logo with one of the world's largest airlines.
Rick M. McConnell: It is yet another consolidation win. But what ultimately led to this selection was our focus on their business transformation initiative and how Dynatrace could help them seamlessly transport more than half a million passengers every day. And we won a seven-figure expansion deal with a large healthcare company that is seeking to enable its developers to focus on innovation, rather than performance issues or vulnerabilities. Dynatrace, which provides real-time vulnerability analytics and contextual awareness, proved the perfect fit and made up nearly half of this expansion.
Speaker Change: It is yet another tool consolidation win.
Speaker Change: But what ultimately led to the selection was our focus on their business transformation initiatives.
And how diamond trace could help them seamlessly transport.
Speaker Change: More than half a million passengers everyday.
Speaker Change: And we won a seven figure expansion deal with a large health care company that is seeking to enable developers to focus on innovation rather than performance issues or vulnerabilities.
Dino Tracers real time vulnerability analytics and contextual awareness through the perfect debt and made up nearly half of this expansion deal.
Speaker Change: We believe that these types of larger strategic deals will be a material contributor to our long term growth.
Rick M. McConnell: We believe that these types of larger strategic deals will be a material contributor to our long-term growth. And while we are extremely pleased with the number of these large strategic deals that closed in the quarter, they do come with an increased level of variability that will continue to necessitate a prudent approach to guide. Interest in our newer offerings, including log monitoring and application security, also continues to grow, especially for those customers leveraging our Dynatrace platform subscription or DPS contract vehicle. The airline deal I just mentioned is our largest BPS transaction to date, and they are already leveraging log monitoring. In Q4, approximately 70% of our new logo deals were closed with TPS licenses.
Speaker Change: And while we are extremely pleased with the number of these large strategic deals that closed in the quarter.
Speaker Change: Do come with an increased level of variability that will continue to didn't necessitate a prudent approach to guidance.
Speaker Change: Interest for our newer offerings, including log monitoring and application security also continues to grow.
Speaker Change: Especially for those customers leveraging our diner trace platform subscription or D. P S contract vehicles.
Speaker Change: The airline deal I, just mentioned is our largest V. P. S transaction today and they are already leveraging log monitoring.
Speaker Change: In Q4, approximately 70% of our new logo deals were closed with T. P. S licensee.
Rick M. McConnell: And we've increased the number of DPS customers from 100 to over 700 since DPS became generally available just over a year ago. EPS is now our default offering for new logos, and we are driving increased penetration in our installed base. While it is still early, consumption for DPS customers is growing at a significantly faster rate than our ARR growth. Also of note, Partner Momentum is building. 15 of these 18 seven-figure deals were closed in collaboration with partners, especially GSIs and IPERFs. Turning next to the market.
Speaker Change: And we've increased the number of D. P. S customers from 100 over 700 since D. P. S became generally available just over a year ago.
Speaker Change: EPS is now our default offering for new logos.
And we are driving increased penetration in our installed base.
Speaker Change: While it is still early consumption for Dps customers is growing at a significantly faster rate than they are.
Speaker Change: Our a R our growth.
Speaker Change: Also of note partner momentum is building.
Speaker Change: 15.
Speaker Change: All of these 18 seven figure deals were closed in collaboration with partners, especially G S eyes and Hyperscale.
Speaker Change: Turning next to the market.
Rick M. McConnell: We believe that our success in closing anchor deals provides evidence of the tailwind in what is already a large and growing space; cloud modernization and Gen AI are additional. Two weeks ago, AWS, Azure, and GCP reported combined annualized revenue of nearly $220 billion, growing 24% year over year. Each of the hyperscalers mention the underlying growth drivers of workloads moving to the cloud as well as Gen-AI. Andy Jassy from Amazon stated that 85% or more of the global IT spend remains on-premises, and this is before we contemplate Gen AI.
Speaker Change: We believe that our success in closing anchor deals.
Speaker Change: Evidence of a tailwind than what is already a large and growing space.
Speaker Change: Cloud modernization and Jan AI are additional catalysts.
Speaker Change: Two weeks ago, AWS Azure N G. C. P reported a combined annualized revenue of nearly $220 billion growing 24% year over year.
Speaker Change: Each of the Hyperscale or as mentioned the underlying growth drivers of workloads moving to the cloud as well as G&A Guy.
Speaker Change: Andy Jessie from Amazon stated that 85% or more of the global I T spend remains on premises and this is before we contemplate Gen AI impact.
Speaker Change: We believe the journey I will overtime materially increase developer productivity.
Rick M. McConnell: We believe that Gen AI will, over time, materially increase developer productivity. This, in turn, is expected to result in radically more data as well as complexity, both of which play to the strengths and differentiation of Dynatrace, given our more than a decade of leadership in AI. On the innovation front, we see our R&D engine as driving an ongoing stream of technological advances. Last year, we released a game-changing Platform Evolution with Grail, an integrated, highly performant, and massively scalable data store that keeps all data types, Metrics, Logs, Traces, Real User Data, and Business Events, together in content. Providing near real-time, end-to-end awareness, Braille serves as the foundation for all of our solutions, including full stack, infrastructure, log monitoring, and application security.
Speaker Change: This in turn is expected to result in radically more data as well as complexity.
Speaker Change: Both of which play to the strengths and differentiation of diner Tres given far more than a decade of leadership in AI.
Speaker Change: On the innovation front, we see our R&D engine is driving an ongoing stream of technology advancements.
Speaker Change: Last year, we released a game changing platform evolution with gradual.
Speaker Change: An integrated highly performance and massively scalable data store that keeps all data types metrics logs traces really user data business events together in context.
Speaker Change: Providing near real time end to end awareness.
Speaker Change: Rail serves as the foundation for all of our solutions, including full stack infrastructure log monitoring and application security.
Speaker Change: Throughout fiscal 2024, the team's relentless focus on market, leading innovation was evident with the plethora of platform enhancements that provide further monetization opportunities in core as well as adjacent areas.
Rick M. McConnell: Throughout fiscal 2024, the team's relentless focus on market-leading innovation was evident with the plethora of platform enhancements that provide further monetization opportunities in core as well as adjacent areas. We believe the Dynatrace platform is highly differentiated and delivers unmatched business value in driving the business transformation initiatives that executives care most about. Our platform is integrated from the front end to the back. We have a single underlying data store where each of the solutions accesses that data store through the same set of core technologies.
Speaker Change: We believe the diner trade platform is highly differentiated and.
Speaker Change: And delivers unmatched business value in.
Speaker Change: Driving the business transformation initiatives that executives care most about.
Speaker Change: Our platform is integrated from the front end to the back end.
Speaker Change: Really think underlying data store, where each of the solutions access that data store through the same set of core technologies.
Rick M. McConnell: We have the industry's leading causal and predictive AI technology, along with automation that provides precise answers in real time. In contrast, our peers generally have a series of separate data that are aggregated only at the user interface level through manual error-prone tagging. This may be effective for SMB companies. But large, complex enterprises recognize the value of Dynatrace's end-to-end platform with automation and AI, enabling them to deliver much more performance software in a highly enriched end-user experience.
Speaker Change: We have the industry, leading causal and predictive AI technologies.
Speaker Change: Along with automation that provides precise answers in context.
In contrast, our peers generally out of a series of separate data stores that are aggregated only at the user interface level through manual error prone tagging.
Speaker Change: This may be effective for S. M b companies, but large complex enterprises recognize the value of diner traces.
Speaker Change: And N platform with automation and AI, enabling them to deliver much more performance software.
Speaker Change: A highly enrich and user experience.
Speaker Change: We continue to receive exceptional third party recognition of our platform and resultant market leadership.
Rick M. McConnell: We continue to receive exceptional third-party recognition of our platform and resultant market leadership. Most recently, we were named a leader in the 2024 gigaohm radar report for cloud observability solutions, positioned as the vendor closest to the center of the radar. Dynatrace was also recognized as a customer's choice in the 2024 Gartner Peer Insights Voice of the Customer for Digital Experience Monitoring report, the only provider to receive this. We are humbled by this ongoing third-party validation of our strategic differentiation, and we remain committed to our ongoing investment to maintain this leadership position. Turning Last, or Go-To-Market Strategy We recently hosted our annual kickoff in Orlando with our global sales team. The energy and excitement were at an all-time high.
Speaker Change: Most recently, we were named a leader in the 'twenty 'twenty four Giga AUM radar report for cloud observed ability solutions.
Speaker Change: Position as the vendor closest to the center of the radar.
Speaker Change: Dino trace it was also recognized as a customer's choice in the 'twenty 'twenty four Gartner peer insights voice of the customer or digital experience monitoring report the only provider to receive this distinction.
Speaker Change: We are humbled by this ongoing third party validation of our strategic differentiation and we remain committed to our ongoing investment to maintain this leadership position.
Speaker Change: Turning last to our go to market strategy.
Speaker Change: We recently hosted our annual kickoff in Orlando with our global sales team.
Speaker Change: The energy and excitement were at an all time high.
Speaker Change: Over the past 10 months.
Rick M. McConnell: Over the past 10 months, we have added several seasoned leaders with extensive experience scaling large go-to-market functions, with the addition of our Chief Revenue Officer, Chief Marketing Officer, and SVP and Partner in Alliance. Sales Kickoff provided this new leadership team the opportunity to share their vision and specific plans to execute on our fiscal 2025 go-to-market strategy. We are enhancing and evolving our go-to-market approach in three focal areas to drive deeper penetration within our installed base and better capture and extend our leadership to maximize the opportunity in front of us.
Speaker Change: We have added several seasoned leaders with extensive experience scaling large go to market functions with the addition of our Chief revenue Officer, Chief Marketing officer, and SVP of partner and alliances.
Speaker Change: Sales kick off provided this new leadership team the opportunity to share their vision and specific plans to execute on our fiscal 'twenty 'twenty four I'd go to market strategy.
Speaker Change: We are enhancing and evolving our go to market approach in threep local areas to drive deeper penetration within our installed base and better capture and extend our leadership to maximize the opportunity in front of us.
Speaker Change: First is customer segmentation.
Rick M. McConnell: We will be increasing the focus of our sales force on the Global 500 and strategic enterprise accounts to drive the highest productivity with the accounts that have the largest potential ARR. Territory and account coverage changes have already been communicated, and we are executing accordingly. We are also expanding our international reach and sector specialization consistent with this segmentation approach. And we will be investing in customer success to align these resources to our segmentation mapping to ensure successful deployment, adoption, and expansion. The second go-to-market area, which I mentioned earlier, is our focus in part. Partners today influence more than two-thirds of our ARR, but they account for only 30% of deal origination.
Speaker Change: We will be increasing the focus of our sales force on the global 500, and strategic enterprise accounts to drive the highest productivity with the accounts that have the largest potential a R. R.
Speaker Change: Territory and account coverage changes have already been communicated and we are executing accordingly.
Speaker Change: We are also expanding our international reach and sector specialization consistent with this segmentation approach.
Speaker Change: And we will be investing in customer success to align these resources doors segmentation mapping to ensure successful deployment adoption and expansion.
Speaker Change: The second go to market area, which I mentioned earlier is our focus on partners.
Speaker Change: Partners today influence more than two thirds of our a R. R.
Speaker Change: But they account for only 30% of deal origination.
Rick M. McConnell: Highlighting the enormous white space of opportunity in this area, we are focusing our energy on our highest priority and most impactful. We are building a dedicated partner enablement engine to scale our priority, and we are simplifying our economic model with partner-neutral compensation and a co-sale approach with hyperscalers to remove friction and drive closer collaboration. The third and final go-to-market focal area relates to harnessing or competitive differentiation to drive broader market adoption and deeper installed base penetration.
Speaker Change: Highlighting the enormous white space of opportunity in this area.
Speaker Change: We are focusing our energy on our highest priority and most impactful partners.
Speaker Change: We are building a dedicated partner enablement engine to scale our priority partners.
Speaker Change: And we are simplifying our economic model with partner neutral compensation and a co sale approach with hyperscale or to remove friction and drive closer collaboration.
Speaker Change: The third and final go to market focal area relates to harnessing our competitive differentiation.
Speaker Change: To drive broader market adoption in deeper installed base penetration.
Speaker Change: We will increasingly focus on end to end absorbability opportunities as we have discussed.
Rick M. McConnell: We will increasingly focus on end-to-end observability opportunities, as we have discussed. We will continue to drive application performance engagement, our traditional sales motion that enables us to land and expand across our customers' workloads. And finally, we will target cloud modernization, in which platform engineers and DevOps teams are responsible for how their organizations develop and release software and require complete visibility of data at scale. In closing, we delivered a fantastic finish to fiscal 2024.
Speaker Change: We will continue to drive application performance engagements, our traditional sales motion that enables us to land and expand across our customers' workloads.
Speaker Change: And finally, we will target cloud modernization efforts in which platform engineers and Dev ops teams are responsible for how their organizations develop and release software and require a complete visibility of data at scale.
Speaker Change: In closing, we delivered a fantastic finish in fiscal 'twenty 'twenty four.
Rick M. McConnell: And I'd like to thank the approximately 4,700 Dynatracers globally for their incredible commitment to innovation and excellence this past year. As we look to fiscal 2025, I'm highly enthusiastic about our process. Finishing where I began, the market for observability and application security is growing rapidly. Our end-to-end platform differentiates us and puts us in a strong competitive position. And finally, we have a solid business model that continues to deliver a strong balance of growth and profitability. Kim, over to you.
Speaker Change: And I'd like to thank the approximately 47 hungry diners tracers globally for their incredible commitment to innovation and excellence this past year.
Speaker Change: As we look to fiscal 2025.
I'm highly enthusiastic about our prospects.
Speaker Change: Finishing where I began the market or observe ability and application security is growing rapidly.
Speaker Change: Our end to end platform differentiates us and puts us in a strong competitive position.
Speaker Change: And finally, we have a solid business model that continues to deliver a strong balance of growth and profitability.
Jim: Jim over to you.
James Martin Benson: Thank you, Rick, and good morning, everyone. Q4 was indeed a very strong finish to fiscal 2020. Once again, we surpassed the high end of our top line growth and profitability guidance metric. Our value proposition continues to resonate as enterprises look to consolidate their siloed monitoring into a unified observability platform, specifically architected to address the growing complexity inherent in dynamic multi-cloud enterprise environments.
Thank you Rick and good morning, everyone.
Jim: Q4 was indeed, a very strong finish to fiscal 2024. Once again, we surpassed the high end of our topline growth and profitability guidance metrics.
Jim: Our value proposition continues to resonate as enterprises look to consolidate their siloed monitoring tools into a unified observer ability platform.
Jim: Specifically architected to address the growing complexity inherent in dynamic multi cloud enterprise environments.
James Martin Benson: Our results reflect relentless execution by the Dynatrace team, the criticality of observability and application security in the market, and our platform differentiation. Now, let's dive into the fourth quarter and full year fiscal 2024 results and more. Please note, the growth rates mentioned will be on a year-over-year basis and in constant currency unless otherwise stated. For example, beginning with Annual Recurring Revenue or ARR. In Q4, as Rick mentioned, we surpassed the $1.5 billion threshold for ARR, representing 20% growth.
Jim: Our results reflect a relentless execution by the diner truths team the criticality of observer ability and application security in the market.
Jim: And our platform differentiation.
Jim: Now, let's dive into the fourth quarter and full year fiscal 2024 results in more detail.
Jim: Please note the growth rates mentioned will be on a year over year basis and in constant currency unless otherwise stated.
Jim: Beginning with annual recurring revenue or a R. R.
Speaker Change: Q4, as Rick mentioned, we surpassed the one and a half billion dollar threshold for a R R representing 20% growth.
James Martin Benson: This result was 100 basis points above the high end of guidance, driven primarily by our strong execution, including many of the large strategic observability architecture vendor consolidation deals we outlined in our last earnings call. Our EMEA GEO, in particular, had a tremendous finish to the year.
Speaker Change: This result was a 100 basis points above the high end of guidance driven primarily by our strong execution, including many of the large strategic observer body architecture of vendor consolidation deals we outlined in our last earnings call.
Speaker Change: Our EMEA Geo in particular had a tremendous finish to the year.
Speaker Change: We added $84 million of constant currency net new <unk> in the quarter driven by a record number of seven figure competitive wins are our largest nearly eight figure E. C V. New logo land in our first ever nine figure T. C D expansion.
James Martin Benson: We added $84 million of constant currency net new ARR in the quarter, driven by a record number of seven-figure competitive wins, our largest, nearly eight-figure ACV new logoland, and our first ever nine-figure TCV expansion. These results clearly demonstrate enterprise customers are choosing Dynatrace for our highly differentiated unified platform, with contextual analytics, AI leadership, and data-driven automation. We closed 168 new logos in the fourth quarter for a total of 692 new logos for the fiscal year, roughly consistent with a year ago.
Speaker Change: These results clearly demonstrate enterprise customers are choosing diner trees for our highly differentiated unified platform with contextual analytics AI leadership in data driven automation.
Speaker Change: We closed 168, new logos in the fourth quarter for a total of 692, new logos for the fiscal year, roughly consistent with a year ago.
Speaker Change: A number of the seven figure deals added in the quarter were new logos and contributed to the average new logo land size of roughly a $140000 on a trailing 12 month basis.
James Martin Benson: A number of the seven-figure deals added in the quarter were new logos and contributed to the average new logo land size of roughly $140,000 on a trailing 12-month phase. As we have shared in the past, we are focused on the quality of new logo lands that have a greater propensity to expand. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or Commercial Tooling Solutions, seeking business value and tool consolidation and coming to Dynatrace for the depth, breadth, and automation of our unified observability platform.
Speaker Change: As we have shared in the past we are focused on the quality of new logo lands that have a greater propensity to expand our.
Speaker Change: Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY.
Speaker Change: Or commercial tooling solutions seeking business value in tool consolidation and coming to dine at Tres for the depth breadth and automation of our unified Absorbability platforms.
James Martin Benson: Once customers experience the benefits of the Dynatrace platform, they are quick to expand their use. Our average ARR per customer continues to increase and is approaching $400,000, highlighting the business value we provide to customers. Our growth retention rate is in the mid 90s and continues to be best in class in our industry, and our net retention rate, or NRR, was over 111% in. We ended the year with nearly 4,000 Dynatrace customers, representing an increase of 10% over last. Our DPS licensing model continues to see strong growth.
Speaker Change: Once customers experienced the benefits of the dietary platform. They are quick to expand their usage. Our average <unk> per customer continues to increase and is approaching $400000 highlighting the business value we provide to customers.
Speaker Change: Our gross retention rate is in the mid nineties and continues to be best in class in our industry and net retention rate or N. R. R was over 111% in the fourth quarter.
Speaker Change: We ended the year with nearly 4000 diner trade customers, representing an increase of 10% over last year.
Rick M. McConnell: Our Dps licensee model continues to see strong traction as Rick noted, we now have over 700 D. P S customers, representing more than 18% of our customer base and over a third of our era.
James Martin Benson: As Rick noted, we now have over 700 DPS customers representing more than 18% of our customer base and over a third of our ARR. We believe our simplified cross-platform DPS licensing model will further contribute to growth in NRR over time.
Rick M. McConnell: We believe our simplified cross platform Dts licensee model will further contribute to growth in N out over time.
James Martin Benson: As customers can more easily gain greater access to newer solutions and experience less friction in the buying process and enjoy more flexible, predictable, and transparent pricing, all of which should lead to more consumption of the capabilities in the platform and deliver more business value for our customers. And while it's still early days for our DPS customers, we're seeing very healthy usage across the platform. In fact, consumption of the platform for DPS customers is growing nearly two times faster than non-DPS customers, an indication of increasing expansion opportunities in the future.
Rick M. McConnell: As customers can more easily gain greater access to newer solutions and counter less friction in the buying process and enjoy more flexible predictable and transparent pricing all of which should lead to more consumption of the capabilities and the platform and deliver more business value for our customers.
And while it's still early days for our Dps customers, we're seeing very healthy usage across the platform.
Rick M. McConnell: In fact consumption of the platform for Dps customers growing nearly two times faster than non dps customers and an indication of increasing expansion opportunity in the future.
Rick M. McConnell: Turning to our emerging solution areas of logs and application security traction. We now have roughly 600 customers leveraging each of these solutions and consumption for these offerings is growing very rapidly north of 100% exiting fiscal 2024.
James Martin Benson: Turning to our emerging solution areas of logs and application security traction, we now have roughly 600 customers leveraging each of these solutions, and consumption for these offerings is growing very rapidly, north of 100% by fiscal 2024. As such, we remain confident in our ability to exceed the $100 million annualized revenue thresholds we set for ourselves some time ago. However, based on current consumption trends, it is more likely we will surpass these thresholds during fiscal 2026 rather than the end of fiscal 2022.
Rick M. McConnell: As such we remain confident in our ability to exceed the 100 million dollar annualized revenue thresholds, we set for ourselves some time ago.
Rick M. McConnell: However, based on current consumption trends. It is more likely we will surpass these thresholds during fiscal 2026, rather than at the end of fiscal 2025.
James Martin Benson: Nothing has changed relative to the market opportunity or our competitive differentiation, but the increasing market shift away from point solutions to broader end-to-end observability platform decisions is impacting the sequencing and ramping of deploying these new solutions.
Rick M. McConnell: Nothing has changed relative to the market opportunity or our competitive differentiation.
Rick M. McConnell: But the increasing market shift away from point solutions to broader end to end Absorbability platform decisions is impacting the sequencing and ramping of deploying these new solutions.
James Martin Benson: Moving on to revenue, total revenue for the fourth quarter was $381 million, 21% growth and $4 million above the high end of our guidance. Subscription revenue for the fourth quarter was $360 million, 22% growth and $2 million above the high end of our guidance. Shifting to margins, total non-GAAP gross margin for the fourth quarter was 84%, consistent with last year.
Rick M. McConnell: Moving onto revenue total revenue for the fourth quarter was $381 million, 21% growth and $4 million above the high end of our guidance.
Rick M. McConnell: Subscription revenue for the fourth quarter was $360 million, 22% growth in $2 million above the high end of our guidance.
Rick M. McConnell: Shifting to margins total non-GAAP gross margin for the fourth quarter was 84% consistent with last year.
Rick M. McConnell: Our non-GAAP operating income for the fourth quarter was $95 million $5 million above the high end of guidance due to the combination of revenue upside and disciplined expense management.
James Martin Benson: Our non-GAAP operating income for the fourth quarter was $95 million, $5 million above the high end of guidance due to the combination of revenue upside and disciplined expense management. This resulted in a non-GAAP operating margin of 25%, exceeding the top end of guidance by nearly 100 basis points. Non-GAAP net income was $89 million, or 30 cents per diluted share. This is 2 cents above the high end of guidance, primarily driven by the items I just highlighted.
Rick M. McConnell: This resulted in a non-GAAP operating margin of 25% exceeding the top end of guidance by nearly 100 basis points.
Rick M. McConnell: non-GAAP net income was $89 million with 30 cents per diluted share. This is two cents above the high end up got the high end of guidance, primarily driven by the items I just highlighted.
James Martin Benson: Turning to a quick summary of the financial results for the full year, total revenue was $1.43 billion, representing 22% growth. Subscription revenue was $1.36 billion, representing 24%. Non-GAAP operating income for the year was $398 million, resulting in a non-GAAP operating margin of 28%. This result is 50 basis points above the high end of guidance and nearly 300 basis points above fiscal 2023, as we have consistently demonstrated our ability to drive further leverage in our business model. Non-GAAP net income for the year was $358 million, or $1.20 per diluted share. Our non-GAAP EPS includes an effective cash tax rate of 17.4%. Turning to the balance sheet, as of March 31st, we had $883 million in cash and investments and zero debt.
Rick M. McConnell: Turning to a quick summary of the financial results for the full year total revenue was $1.43 billion, representing 22% growth.
Rick M. McConnell: Subscription revenue was 1.36 billion, representing 24% growth.
Rick M. McConnell: non-GAAP operating income for the year was $398 million, resulting in a non-GAAP operating margin of 28%. This result is 50 basis points above the high end of guidance and nearly 300 basis points above fiscal 2023, as we have consistently demonstrated our ability.
Rick M. McConnell: <unk> to drive further leverage in our business model.
Rick M. McConnell: non-GAAP net income for the year was $358 million or dollar 20 per diluted share. Our non-GAAP EPS includes an effective cash tax rate of 17, 4%.
Rick M. McConnell: Turning to the balance sheet as of March 31st we had $883 million of cash and investments and zero debt.
Rick M. McConnell: Our free cash flow was $121 million in the fourth quarter and $346 million for the full year were 24% of revenue exceeding the high end of guidance by 100 basis points.
James Martin Benson: Our free cash flow was $121 million in the fourth quarter and $346 million for the full year, or 24% of revenue, exceeding the high end of guidance by 100 basis points. As a reminder, this strong cash flow result includes absorbing nearly 600 basis points of the impact of cash tax. Adjusted for cash taxes, fiscal 2024 pre-tax cash flow was up 34%, representing 30% of revenue and up more than 200 basis points year over year.
Rick M. McConnell: As a reminder, this strong cash flow result includes absorbing nearly 600 basis points impact of cash taxes adjusted for cash taxes fiscal 2024 pre tax cash flow was up 34%, representing 30% of revenue and up more than 200 basis points year over year.
Rick M. McConnell: A year.
Rick M. McConnell: As our free cash flow profile evolves, our capital allocation strategy also evolve our top priority continues to be investing in the business, both organically and through solution adjacency acquisitions to help drive sustainable long term growth.
James Martin Benson: As our free cash flow profile evolves, our capital allocation strategy also evolves. Our top priority continues to be investing in the business, both organically and through solution adjacency acquisition, to help drive sustainable long-term growth. Even as we strategically invest, we are equally committed to driving increased free cash. Given our strong profitability, cash flow, and balance sheet, we also believe the time is right to add a share repurchase program as another strategic use of capital.
Rick M. McConnell: Even as we strategically invest we are equally committed to driving increased free cash flow given our strong profitability cash flow and balance sheet.
Rick M. McConnell: Also believe the time is right to add a share repurchase program is another strategic use of capital.
James Martin Benson: As we announced today, our board has authorized a $500 million share repurchase program, which we plan to utilize opportunistically based on market conditions. This program underscores our confidence in the business, our conviction in the significant long-term opportunities ahead, and our commitment to driving exceptional shareholder value. With that, let me turn to guidance.
Rick M. McConnell: As we announced today our board has authorized a 500 million dollar share repurchase program, which.
Rick M. McConnell: Which we plan to utilize opportunistically based on market conditions. This program underscores our confidence in the business our conviction and the significant long term opportunities ahead, and our commitment to driving exceptional shareholder value.
Rick M. McConnell: With that let me turn to guidance.
James Martin Benson: We are confident in the long-term growth opportunity for Dynatrace. The addressable market is large and growing. The observability and security ecosystem is expanding.
Rick M. McConnell: We are confident in the long term growth opportunity for dining trees, the addressable market is large and growing.
James Martin Benson: The demand environment remains healthy. Our pipeline continues to grow faster than our ARR growth. Our platform and growing capabilities are highly differentiated, and our financial model is both balanced and durable. Near term, we are mindful of the ongoing dynamic macro environment, and while we've seen resiliency in the observability market, we believe it's appropriate to continue to assume a challenging macroclimate in our guidance philosophy. Enterprises continue to be cautious in their spending, and our approach to guidance assumes that ongoing budget scrutiny and elongation of sales cycles will persist through fiscal 2021.
Rick M. McConnell: Durability and security ecosystem is expanding the demand environment remains healthy.
Rick M. McConnell: Our pipeline continues to grow faster than our AOR growth our platform and growing capabilities are highly differentiated and our financial model is both balanced and durable.
Rick M. McConnell: Near term, we are mindful of the ongoing dynamic macro landscape and while we've seen resiliency in the Absorbability market. We believe it's appropriate to continue to assume a challenging macro climate and our guidance philosophy.
Rick M. McConnell: Enterprises continue to be cautious in their spending and our approach to guidance assumes that ongoing budget scrutiny and elongation of sales cycles will persist through fiscal 2025.
Rick M. McConnell: We also expect a growing trend of larger more strategic deals related to absorbing all the architecture and vendor consolidation initiatives will continue.
James Martin Benson: We also expect a growing trend of larger, more strategic deals related to observability architecture and vendor consolidation initiatives will continue. We are well positioned to capitalize on this trend. At the same time, these deals come with increased timing variability and longer duration to close.
Rick M. McConnell: We are well positioned to capitalize on this trend.
Rick M. McConnell: At the same time these deals come with increased timing variability and longer duration to close.
James Martin Benson: Lastly, as Rick outlined, we are enhancing and evolving our go-to-market strategy for fiscal 2020. These changes are all designed to drive deeper penetration and customer intimacy within our installed base and better capture and extend our leadership, especially with strategic, enterprise, and global account segments. With more than 30% of our accounts now transitioned to new sales reps, our guidance incorporates the potential for some near-term impact from these changes as they will take time to mature and begin positively impacting our sales performance.
Speaker Change: Lastly, as Rick outlined we are enhancing and evolving our go to market strategy in fiscal 2025. These changes are all designed to drive deeper penetration and customer intimacy within our installed base.
Speaker Change: And better capture and extend our leadership.
Speaker Change: Especially with strategic enterprise and global accounts segments with more than 30% of our accounts now transition to new sales reps our guidance incorporates the potential for some near term impact from these changes if they will take time to mature and begin positively impacting our sales performance.
Speaker Change: And with that as an opener, let's start with our guidance for the full year with growth rates in constant currency.
James Martin Benson: And with that as an opener, let's start with our guidance for the full year with growth rates and constant currency. We expect ARR to be between $1.72 and $1.735 billion, representing ARR growth of 15% to 16%. And while we don't guide to ARR on a quarterly basis, we expect the quarterly seasonality of net new ARR to be similar to fiscal 2024.
Speaker Change: We expect a IRR to be between 172, and $1 73, $5 billion, representing a growth of 15% to 16%.
Speaker Change: And while we don't guide to ALR on a quarterly basis, we expect the quarterly seasonality of net new IRR to be similar to fiscal 2024.
James Martin Benson: We expect to provide an update on our full-year ARR guidance on our fiscal Q2 earnings call when we have a better sense of our go-to-market track. Turning now to revenue, we expect total revenue for the full year to be $1.644 to $1.658 billion, up 16 to 17 percent year over year. Underlying that, subscription revenue is expected to be $1.571 and $1.585 billion, up 16% to 17%. Based on foreign exchange rates as of April 30th, 2024, we expect a $10 million headwind to both ARR and revenue for fiscal year 2021.
Speaker Change: We expect to provide an update on our full year guidance on our fiscal Q2 earnings call. When we have a better sense of our go to market traction.
Speaker Change: Turning now to revenue, we expect total revenue for the full year to be 1.644 to 165 $8 billion up 16% to 17% year over year.
Speaker Change: Underlying that subscription revenue is expected to be 1.571, and 1.585 billion up 16% to 17%.
Speaker Change: Based on foreign exchange rates as of April 32024, we expect a 10 million dollar headwind to both <unk> and revenue for fiscal year 2025.
James Martin Benson: We expect non-GAAP operating income to be between $459 and $467 million, resulting in a non-GAAP operating margin of approximately 28% for the year. This represents an anticipated 25 basis point improvement over fiscal 2024. We plan to continue prioritizing investments in R&D, sales capacity, customer success, and our partnership program while realizing additional leverage in other areas.
Speaker Change: We expect non-GAAP operating income to be between 459 and $467 million, resulting in a non-GAAP operating margin of approximately 28% for the year.
This represents an anticipated 25 basis point improvement over fiscal 2024.
Speaker Change: We plan to continue prioritizing investments in R&D sales capacity customer success, and our partnership program, while realizing additional leverage in other areas.
Speaker Change: We expect non-GAAP net income to be $383 million to $392 million, resulting in a non-GAAP EPS.
James Martin Benson: We expect non-GAAP net income to be $383 to $392 million, resulting in a non-GAAP EPS of $1.26 to $1.29 per diluted share, based on roughly 303 to 305 million shares outstanding. Given the strength of our profitability on a gap basis, we will fully utilize the remaining tax credit carry forwards in fiscal 2024. Furthermore, given our R&D is primarily outside the U.S., we are significantly impacted by Internal Revenue Code Section 174, which requires a 15-year capitalization and amortization period for international R&D.
Speaker Change: All 26 to $1 29 per diluted share based on roughly 303 to 305 million shares outstanding.
Speaker Change: Given the strength of our profitability on a GAAP basis, we fully utilize our remaining tax credit carryforwards in fiscal 2024 further given our R&D is primarily outside the U S. You are significantly impacted by internal revenue code section 174.
Speaker Change: It requires a 15 year capitalization and amortization periods for international R&D as such we expect an increase in our effective cash tax rate and related cash taxes in fiscal 2025.
James Martin Benson: As such, we expect an increase in our effective cash tax rate and related cash taxes in fiscal 2021. These are non-GAAP net income and non-GAAP EPS calculations. Assume a non-GAAP effective cash tax rate. 22%, up from 17% in fiscal 2024. We expect the cash tax rate to stabilize in the low 20s going forward. With incremental cash taxes factored in, we expect free cash flow to be between $386 and $398 million, or 23.5 to 24% of revenue.
Speaker Change: Our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 22% up from 17% in fiscal 2024, we.
Speaker Change: We expect the cash tax rate to stabilize in the low twenties going forward.
Speaker Change: With incremental cash taxes factored in we expect free cash flow to be between $386 million to $398 million or 23.5% to 24% of revenue.
James Martin Benson: The Anticipated Pre-Cash Flow Impact from Cash Tax, approximately $110 million or 7% of revenue, up from $81 million or 6% of revenue in fiscal 2024. Excluding cash taxes, pre-tax free cash flow is expected to be between 30% and 30.5%, up 50 basis points from fiscal 2024 at the high end of the ring. As a helpful reminder for your modeling, due to seasonality and variability in billings, we expect significantly higher free cash flow in the first and fourth quarters and significantly lower free cash flow in the second and third quarters.
Speaker Change: The anticipated free cash flow impact from cash taxes.
Speaker Change: It was approximately $110 million or 7% of revenue up from $81 million or 6% of revenue in fiscal 2024.
Speaker Change: Excluding cash taxes pre tax free cash flow is expected to be between 30% and 35% up 50 basis points from fiscal 2024 at the high end of the range.
Speaker Change: As a helpful reminder, for your modeling due to seasonality and variability in billings, we expect significantly higher free cash flow in the first and fourth quarters and significantly lower free cash flow in the second and third quarters.
James Martin Benson: Looking now at Q1, we expect total revenue to be between $391 and $393 million, or 18 to 19% growth. Subscription revenue is expected to be between $374 and $376 million, up 19% year-over-year. From a profit standpoint, non-GAAP operating income is expected to be between $105 and $108 million, or 27 to 27.5% of revenue. Lastly, non-GAAP ETS is expected to be approximately 29 to 30 cents per diluted share, based on a share count of approximately 301 to 302 million shares.
Speaker Change: Looking now at Q1, we expect total revenue to be between 391, and $393 million or 18% to 19% growth subscription revenue is expected to be between 374 and $376 million up 19% year over year from a.
Speaker Change: But standpoint, non-GAAP operating income is expected to be between 105 and $108 million or 27% to 27, 5% of revenue.
Speaker Change: Lastly, non-GAAP EPS is expected to be approximately 29% to 30 cents per diluted share.
Speaker Change: Based on a share count of approximately 301 to 302 million shares.
James Martin Benson: In summary, we are very pleased with our fourth quarter and fiscal 2024 performance. We are balancing conviction and our long-term opportunity with near-term prudence as we evolve our go-to-market strategy to drive customer adoption and support our growing pipeline of large competitive displacement opportunities. We have a strong track record of consistent, profitable growth. We are committed to maintaining a disciplined and balanced approach to optimizing costs, improving efficiency, and profitability. At the same time, we will continue to invest in future growth opportunities that we expect will drive long-term value. And with that, we will open the line for questions.
Speaker Change: In summary, we are very pleased with our fourth quarter and fiscal 2020 for performance, we're balancing conviction in our long term opportunity with near term prudence as we evolve our go to market to drive customer adoption and support our growing pipeline of large competitive displacement opportunities we have.
Speaker Change: Strong track record of consistent execution, we are committed to maintaining a disciplined and balanced approach to optimizing costs improving efficiency and profitability.
Speaker Change: At the same time, we will continue to invest in future growth opportunities that we expect will drive long term value and with that we will open the line for questions.
Speaker Change: Operator.
Speaker Change: Thank you at this time of conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.
Speaker Change: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys and.
In the interest of time, we ask that you each keep to one question and one follow up thank you.
Speaker Change: Our first question comes from the line of Sanjay Singh with Morgan Stanley. Please proceed with your question.
Sanjit Kumar Singh: Thank you for taking the questions and congratulations on the Q4. I wanted to talk a little bit about some of these large deals that you landed in Q4, you know, a nine-figure TCV deal, an eight-figure land deal. It sort of reaffirms what you guys have been telling us the last couple of quarters that there are a lot of these large and cheap deals in the pipeline, and it looks like you guys proposed a healthy amount of them in Q4.
Sanjay Singh: Thank you for taking my questions and congrats on the Q4.
Sanjay Singh: I wanted to talk a little bit about some of these large deals that you landed in Q4.
Speaker Change: Nine figure T. C V deal bigger land deal sort of reaffirms that you guys have been telling us the last couple of quarters that was a lot of these products.
Speaker Change: On the pipeline.
Speaker Change: It looks like you guys got a healthy amount of that in Q4, Rick I was wondering if you watch what's the go to market changes that you have to plan for the early part of the year.
Sanjit Kumar Singh: Rick, I was wondering if you want to put the go-to-market changes that you have planned for the early part of the year in the context of the suspects you're seeing with these large enterprise deals. Should I take the go-to-market changes, meaning that you're trying to focus more on the down market and other customer segments, or do you just need more sort of sales capacity to close more volume of deals? Given the success that you've seen in landings before, I'd love to just better understand the rationale for some of these go-to-market changes that you have planned for the first half. Thank you.
Speaker Change: Context that you're seeing with these large enterprise deals should I take the go to market changes maybe that you are trying to focus more downmarket in other customer segments or just being more sort of sales capacity to close more volume of deals given the success that ensued in landing in Q4, I'm sure love to just better understand the.
Speaker Change: The rationale for some of these go to market changes that you've got planned.
Thank you.
Rick M. McConnell: Good morning Sanjit. The short form answer is that we're seeing increased momentum, increased traction, and increased centralization of the end-to-end observability and broad-based observability architecture decisions. And the result of that is that's where you focus your sales energy. So in the go-to-market evolution, our focus on things like customer segmentation and partner, really to address that end-to-end observability architecture approach is very consistent with what we're seeing in the market, and that's the bet that we're making headed into FY25.
Speaker Change: Good morning signed yet are the the short form answer is that we're seeing increased momentum increased traction increased centralization of the end to end observer ability and broad based absorbability architecture decisions and the result of that is that's where you focus yourselves energy.
Speaker Change: So in our go to market evolution.
Our focus on things like customer segmentation and partners.
Speaker Change: Really to address that and then observed ability architecture approach is very consistent with what we're seeing in the market and that's the bet, we're making edited in FY 'twenty five.
Unknown Executive: The only other thing I'd add to that is it's actually providing more resources at the top of the pyramid, so if you think about the global 500, the propensity for Spend there is significantly higher than those customers that are below that. So we are awaiting more resources at the higher end of the pyramid. So that's that's primarily what we're doing, and it's in line with what Rick outlined, which is more end-to-end of durability decisions tend to occur with very large enterprise customers where our value proposition really thrives.
Speaker Change: Yeah. The only other thing I'd add to that is it sounds as if he's actually providing a more resource at the top of the pyramid. So if you think about the global 500, the propensity for spend there is significantly higher than those customers that are below that so we are waiting more resource at the higher end of the pyramid. So that's that's primarily.
What we're doing and it's in line with what Rick outlined which is more antenna durability decisions tend to occur with very large enterprise customers, where our value proposition really thrives.
Rick M. McConnell: It was great to see the validation of the thesis, and 18 anchor deals closed in Q4 for greater than a million dollars. So seven-figure ACV deals, very, very strong.
Speaker Change: Yeah. It was great to see the validation of the thesis and age 18 anchor deals closed in Q4, a greater than a million dollars. So seven figure <unk> deals.
Very very strong performance.
Speaker Change: Yes that was very impressive.
James Martin Benson: Yeah, that was very impressive. As a follow-up, just in terms of what sort of underpins the guidance, it's certainly not you're assuming any sort of improvement in outlook. If you look at some of the things that could drive upside to your guidance, you know, what would be some of the swing factors, if you will, that could get the AR north of the 15 to 15% guidance?
Speaker Change: As a follow up just in terms of what sort of.
Speaker Change: Underpins the guidance that certainly not you're assuming any sort of improvement in the outlook.
Speaker Change: If you look at some of the things that could drive upside to your guidance.
Speaker Change: What was the what would be the swing factors, if you will back to that.
Speaker Change: There are lots of <unk>.
Speaker Change: 15% guidance.
James Martin Benson: Yes, Sanjit, I'll take that. That's a good question, and as we outlined kind of as a context for the guidance, we did suggest that, hey, we think the macro environment is not going to improve, it's not going to worsen, and customers are still leveraging observability as a priority. We did outline that we do expect this trend of architecture for observability decisions to continue. And as we outlined around some of these go-to-market enhancements, what we're doing is we're building in some prudence.
Speaker Change: Sounds good I'll take that that's a good question that as we outlined kind of as a context for the guidance. We did suggest that hey, we think the macro environment is not going to improve it's not going to worse than.
Speaker Change: Customers are still leveraging observe ability as a priority.
Speaker Change: We did outline that we do expect this trend of architecture for Absorbability decisions to continue and as we outlined around some of these go to market enhancements. What we're doing is we're building in some prudence I mentioned in my prepared remarks that roughly 30% of our accounts are.
James Martin Benson: I mentioned in my prepared remarks that roughly 30% of our accounts are going to have a new rep. That's already taken place. So this is not like it's going to change throughout the year, but we've changed accounts per rep. We know at times that can result in some near-term disruption. We've tried to factor that in. So to answer your question directly, to the extent we can minimize that, to the extent some of these larger deals, the timing of them occurs faster. I think those would be two factors that would drive improvement in this guy. Very clear, Jim. Thank you.
Speaker Change: Gonna have a new rep. That's already taken place. So this is not like it's going to change throughout the year, but we've changed accounts per rep.
Speaker Change: We know at times that can result in some near.
Speaker Change: Near term disruption, we've tried to factor that in so to answer your question directly to the extent we can.
Speaker Change: Minimize that to the extent some of these larger deals the timing of them occur is faster.
Speaker Change: I think those would be two factors that would drive improvement to this guy.
Speaker Change: Very clear thank you so much.
James Martin Benson: Very clear, Jim. Thank you so much.
Speaker Change: Thank you. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your question.
Kasthuri Gopalan Rangan: Thank you. Our next question comes from Kasthuri Rangan with Goldman Sachs. Please proceed with your question.
Kasthuri Gopalan Rangan: Hi, Thank you very much one question for Rick one for Jim.
Kasthuri Gopalan Rangan: Hi, thank you very much. One question for Rick, and one for Jim. So Rick, clearly the move-up market is working. You're landing big deals, very strategic engagements, and that's great. But it does look like the net expansion rate on a trading 12-month basis came down. So I'm wondering if you could talk about the other side of this, the mid-market business, and what's happening there, and what could happen there. And one for you, Jim, looks like net new ARR. First of all, I got to tell you that you guys are one of the very few that disclose net new ARR. So thanks for the transparency.
Speaker Change: Clearly the move upmarket as work in your mind doing big deals very strategic engagements and that's great.
Speaker Change: But it does look like the latest fashion regular trailing 12 month basis came down. So wondering if you could talk about the other side of the fence.
Speaker Change: The mid market business and what's happening there what could happen there and one for you Jim It looks like this new era are frustrated as opposed to basketball I got it.
Speaker Change: So one of the very few that disclosed Mickey radar. So thanks for the transparency.
Kasthuri Gopalan Rangan: The year was down, but the quarter was up. The trend is getting better, right? If this trend holds, notwithstanding the changes to the field organization, what does that do to the guy?
Speaker Change: It was down for the quarter was up trend is getting better right. This trend hose notwithstanding the changes to the field organization, what does that do to the guidance. Thank you so much.
Rick M. McConnell: Let me take the first one, Cash. So relative to the net new ARR, in particular, a question around mid-market, the strategy around mid-market is really partners. We talk about that a lot. We are definitely leaning in relative to GSIs and hyperscalers, and that is really how we would expect to attack the mid-market space, which is through that avenue. Jim, on the second.
Speaker Change: Let me, let me take the first one cash so relative to the net new IRR in a particular question around mid market.
Speaker Change: As you around mid market is really partners and we talk about that a lot. We are definitely leaned in relative to GSI is in hyperscale.
Speaker Change: And that is really how we would expect to attack the mid market space, which is through through that Avenue.
Jim: Jim on the second our second piece well relative to the net new way or one of the things you are right that if.
James Martin Benson: Well, relative to the net new ARR, one of the things you are right about is that if you look at the guide, this guide would suggest a slight moderation and net new ARR for the year of fiscal 25. As I mentioned to Sanjit, I think there are factors that could drive improvement to that. We actually felt that it was important to start with a guide that we thought reflected some prudence given some of the changes that we outlined.
Jim: If you look at the guide this guy would suggest a slight.
Jim: Slight moderation in net new a IRR for the euro for fiscal.
Jim: 25.
Jim: As I mentioned assigned to it I think there are factors that.
Jim: Could drive improvement to that we actually felt that it was important to start with a guide that we thought reflected some prudent given some of the changes that we outlined.
James Martin Benson: I would tell you, as you know, just from a seasonality perspective, the other thing we included in the prepared remarks is that you should expect the net new ARR linear called seasonality to be similar to what it was in fiscal 24, which is lighter in the first half and heavier in the second half. In Q1, in particular, because it's the first quarter of the year, Q1 is seasonally our lightest quarter. So- No, Jim, you went through that.
Jim: Tell you as you know just from a seasonality perspective, the only thing. We've included in the prepared remarks as you should expect a net new way, our linear called seasonality to be similar to what it was in fiscal 'twenty, four which is lighter than the first half.
Jim: And heavier in the second half in Q1 in particular, because it's the first quarter of the year Q1 is seasonally our lightest quarter. So you.
Speaker Change: You you went through that was crystal clear absolutely I appreciate that but on the mid market what's happening in the mid market. So why couldnt net expansion rates be back to the 118 119 that they were versus the 111. It looks like the swing factor is really the mid market because the large enterprise is doing really really well. Thank you. So much I appreciate your patience.
James Martin Benson: That was crystal clear. Absolutely, I appreciate that. But Rick, on the mid-market, what's happening in the mid-market? So why couldn't net expansion rates be back to the 118, 119 that they were versus the 111? It looks like the swing factor is really the mid-market because the large enterprise is doing really, really well. Thank you so much. I appreciate your patience.
Speaker Change: Yeah, I would say again that our partners really are going to drive that end market for us, especially hyperscale ups. If you get more granular cash we would expect GSI used to be headed up market. If anything you look at the nine digit PCB accenture deal with a large global financial institution. That's the kind of thing that we are.
Rick M. McConnell: Yeah, I would say, again, that partners really are going to drive the mid-market for us, especially hyperscalers. If you get more granular cash, we would expect GSIs to be headed upmarket, if anything. You look at the nine-digit TCB Accenture deal with a large global financial institution, that's the kind of thing that we're going to see out of GSIs. Hyperscaler engagements: we announced the partnership, a go-to-market partnership with GCP in the past quarter as well. Those are the elements that will likely drive NRR in the mid-market.
Speaker Change: Yes.
Hyper scaler engagements, we announced a partnership go to market partnership with G. C. P.
Speaker Change: In the past quarter as well those are the elements that will likely drive and are are in the mid market.
Speaker Change: Thank you. Our next question comes from the line of Cody <unk> with Bank of America. Please proceed with your question.
Koji Ikeda: Thank you. Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.
Koji Ikeda: Hey guys, thanks for taking the questions here. A couple from me. I wanted to go back to the record 18 seven-figure deals and wanted to ask, how often was Grail a part of those big deals? And speaking about consolidation, was a part of that log on Grail replacing incumbents?
Speaker Change: Yeah, Hey, guys. Thanks for taking the questions here a couple from me I wanted to ask him to go back to the record 18, seven figure deals and wanted to ask how often was grail a part of those big deals and we're thinking about consolidation was a part of that log on grail, replacing incumbent vendors.
Rick M. McConnell: Yes, and yes, GRAIL is part of essentially every SAS deal that we do at this point. But GRAIL, remember, is not equal to LOGS. Grail is the underlying massively parallel processing data store for enormous amounts of data that can be accessed to store all sorts of different data types, logs, traces, metrics, et cetera. Log access Grail and logs are a key element of this end-to-end observability architecture approach. What customers are finding is that the log element really should not be viewed as an independent data type or an independent avenue for things like root cause
Speaker Change: Yes, and yes, our Grail is as part of essentially every SaaS deal that we do at this point so our Grail remember is not equal to logs.
Speaker Change: Grail is underlying massively parallel processing data store or enormous amounts of data that can be accessed to store all sorts of different datasets logs traces metrics et cetera.
Speaker Change: Large access Grail and logs are a key element.
Speaker Change: This end to end observe Italy architecture approach.
Speaker Change: What what customers are finding is that the log element really should not be viewed as an independent data type or an independent avenue for things like root cause analysis.
Rick M. McConnell: They instead want to incorporate all data types into one universal observability orientation. It drives a better user experience. It drives lower cost and drives better outcomes. And so logs on Grail are very typically part of the Grail deployments.
Speaker Change: They instead want to incorporate all data types into one universal observe ability orientation.
Speaker Change: It drives better user experience.
Speaker Change: Raj lower cost drives better outcomes and so logged on rail are very typically part of they were able to plants.
Speaker Change: Got it no. Thank you for that and maybe a follow up for Jim here in the past you said that internally the company thinks.
Koji Ikeda: Got it. No, thank you for that.
Koji Ikeda: Maybe a follow-up for Jim here. In the past, he said that internally, the company thinks of the business as a rule of 50 type, 20% plus ARR growth with the remainder coming from pre-tax free cash flow. And so looking at the guide today, a bit shy of the target, you know, appreciate all the commentary on why the guidance.
Speaker Change: Of the business as a rule of 50 type business.
3%, plus AOR growth with the remainder coming from pre tax free cash flow and so looking at the guide today a bit shy of the target I. Appreciate all the commentary on why the guidance and it's starting to way that it is but it does sound like you know when.
Speaker Change: When you're looking at the rule of 50 type business profile, its mostly falling short from the AOR growth side of the equation and so how do you view the shape of our growth over the next call. It 12 to 24 months to achieve that target or are you thinking about that target a bit differently. Now. Thank you know your it's a great question Koji, we still do view us very much.
James Martin Benson: No, it's a great question, Koji. We still view internally this rule of 50. You're absolutely right. We've done a fantastic job driving leverage in the model with 30% pre-tax free cash flow margin. So the guide would suggest we're gonna be a bit below that for fiscal 25. But you can certainly imagine that we're driving the business to a better outcome on the top line. So that is certainly our ambition.
unknown: [inaudible] No, you're a loser
Speaker Change: Internally this rule of 50, you're absolutely right, we've done a fantastic job driving leverage in the model.
Speaker Change: With 30% pre tax free cash flow margins. So the guide would suggest we're going to be a bit below that for fiscal 'twenty five Oh, you can certainly.
Speaker Change: Imagine that we're driving the business to a better outcome on the top line. So that's that is certainly our ambition.
Speaker Change: And the changes that we're making on the go to market side that Rick outlined we know those changes may take a little while to kind of mature, but those are the changes that we believe will lead to acceleration and AOR growth.
James Martin Benson: And the changes that we're making on the go-to-market side that Rick outlined, we know those changes may take a little while to kind of mature, but those are the changes that we believe will lead to acceleration and ARR growth. And so that will be the driver of getting us back.
Speaker Change: And so that will be the driver of getting us back to rule of 50.
Speaker Change: Thank you. Thank you for taking the question.
Koji Ikeda: Thank you. Thank you for taking the questions.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from the line of Keith Bachman with BMO capital markets. Please proceed with your question.
Keith Frances Bachman: Thank you. Our next question comes from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.
Keith Frances Bachman: Do you think.
unknown: Keith, are you there? Keith?
Speaker Change: Oh I'm sorry.
Keith Frances Bachman: Yeah.
Keith Frances Bachman: Oh.
Speaker Change: For taking the question.
Keith Frances Bachman: for taking the question. I wanted to direct my first question on why. And what I mean by that is, if we take the feedback that we get from channel, it's pretty universal that Dynatrace has leading technology, particularly with the advent of grail. And yet, if I look at the trend from 22, 23, 24, and what you're guiding to for 25, there's a steady erosion of growth, particularly if I focus on that new.
Speaker Change: I wanted to direct my first question on the why and what I mean by that is.
Speaker Change: If we take the feedback that we get from channel, it's pretty universally that penetrates has leading technology, particularly with the advent of Grail.
Keith Frances Bachman: And while I appreciate it, you've made some comments on there being some changes to go to market and whatnot. This has been an ongoing trend. I'm just trying to maybe tease out the why a little bit more about the deceleration, particularly in light of if I superimpose our views of what security and logs are doing, it suggests the legacy or core, if you will, is having a more meaningful deceleration. And I'm just trying to understand why because of the, you know, the elongation of deal cycles, you would think that that anniversary is at some point in time.
Speaker Change: And yet if I look at the trends from 'twenty, two 'twenty three 'twenty, four and what you're guiding to for 25.
Speaker Change: Theres, a steady erosion of growth, particularly if I focus on net new.
Speaker Change: And while I appreciate.
Speaker Change: You've made some comments on there are some changes to go to market and whatnot.
Speaker Change: This has been an ongoing trend and I'm just trying to maybe tease out the why a little bit more about the deceleration, particularly in light of if I superimpose our views of what security.
Speaker Change: And logs are doing.
It suggests the legacy or core if you will is having a more meaningful deceleration and I'm just trying to understand why because the you know the elongation of deal cycles, you would think that that anniversary. So at some point in time, so it's hard to reconcile that with the amount of deceleration.
Speaker Change: That's that youre demonstrating.
Keith Frances Bachman: So it's hard to reconcile that with the amount of deceleration that you're demonstrating. And, you know, is that because the underlying market for APM is slowing down? Or is it the fact that you guys are focused on the largest customers? So perhaps, Ben, this tighter, they're just, you know, really trying to understand not just what this quarter was, which was an excellent quarter? But really, what's the trend over the last couple of years? And why is there such a significant slowdown and deceleration? Because it doesn't seem that go-to-market fully explains it.
Speaker Change: And is it because the underlying market of Atms slowing down or is it. The fact that you guys are focused on the largest customers so perhaps than the tighter there just.
Speaker Change: You know really trying to understand not just what this quarter is which was an excellent quarter.
Speaker Change: But really what's the trend over the last couple of years and why is there such significant slowdown or deceleration because it doesn't seem that go to market.
Speaker Change: Fully explains that.
Speaker Change: Well I can start with that and Rick you can offer so one I remind you [noise] excuse me that the timeframe that you're talking about is the timeframe, where the macro environment worsened materially so a moderation in growth rates look at anyone in the software sector that generally has affected all software.
unknown: Well, I can start with that. And Rick, you can offer.
James Martin Benson: So one, I remind you, excuse me, that the time frame that you're talking about is a time frame where the macro environment worsened materially. So a moderation in growth rates, look at anyone in the software sector, that generally affected all software companies. So that is not unique to Dynatrace. So I would say growth moderation is not an anomaly. I would concur that, you know, this guide specifically for fiscal 25 is prudent.
Speaker Change: Where companies so that is not unique to dine at trees.
Speaker Change: So I would say the growth moderation is not an anomaly I would concur that you know the this guide specifically for fiscal 'twenty five.
James Martin Benson: I think we are building changes for the company for the long term. We've not abandoned the land and expand model at all. So that's still the predominant motion.
Speaker Change: Is prudent I think we are building changes for the company for the long term, we've not abandon a land and expand model at all so that's still a predominant motion, but we do believe in order to get the penetration and growth that we need an adjustment to the go to market model was needed we needed to get more weighting of resources too high.
James Martin Benson: But we do believe in order to get the penetration and growth that we need, an adjustment to the go-to-market model was needed. We needed to get more weighting of resources to higher propensity customers. And these customers are the customers that our offering is a sweet spot for them. Our value proposition really is oriented to very enterprise-oriented, complex environment companies. Ensuring we had the right focus there is what we needed to adjust.
Speaker Change: Their propensity to spend customers.
Speaker Change: And these these customers who are the customers that our offering is a sweet spot for them our value proposition.
It's really oriented to vary enterprise oriented complex environment companies, ensuring we had the right focus there is what we needed to adjust that is largely the driver. So these changes that we're making we think are focusing on the right profile of customers for the value proposition that we provide.
James Martin Benson: That is largely the driver. So these changes that we're making, we think, are focusing on the right profile of customers for the value proposition that we provide. And once we get through this, it will lead to a reacceleration.
Speaker Change: And that once we navigate through this will lead to a reacceleration.
Speaker Change: Yeah, Keith I would simply add that we've gone through a platform transition really to Grail number one number two we have gone through go to market transition. So there have been a couple of transactions in this image. This macro environment that Jim described as well and as we think about these trends toward end to end Absorbability architecture.
Rick M. McConnell: Yeah, Keith, I would simply add that we've gone through a platform transition really to GRAIL, number one. Number two, we've gone through a go-to-market transition. So there have been a couple of transitions amidst this macro environment that Jim described as well. And as we think about these trends toward end-to-end observability architecture decisions that play to our favor, combined with the strength of GRAIL, the strength of the platform underlying it, along with these go-to-market changes to take advantage of this market trend, we're very optimistic as we look to the future.
Speaker Change: Patients that play to our favor combined with the strength of rail the strength of the platform underlying it.
Speaker Change: Along with these go to market changes to to take advantage of this market trend.
We're very optimistic as we look to the future.
Keith Frances Bachman: Okay. Okay. Terrific.
Speaker Change: Okay, Okay terrific and Jim maybe I'll just direct my follow on question, which relate to that.
James Martin Benson: And Jim, maybe I'll just direct my follow-on question which relates to that. You indicated that the $100 million targets that you had previously anticipated for 2025 are pushing into 26. Was that for both security and for logs? And what you know, which in past conversations, I think you had some more optimism, if you will, around logs. But maybe you could just tease out a little bit why those are being pushed out. And did I hear you correctly, that sort of both are pushing in the 20 steps? Yeah, you did it.
Speaker Change: You indicated that the $100 million targets that you had previously anticipated for 25.
Speaker Change: We're pushing into 'twenty six.
Speaker Change: For both security and per logs and what.
Speaker Change: Which in past conversations I think you had some more.
Jim: Optimism, if you will around logs, but but maybe you could just tease out a little bit why those are being pushed out and did I hear you correctly that that's sort of both are pushing into 'twenty. Yet you did so I'll start with we're making very good traction with both of those so both areas we have.
James Martin Benson: So I'll start with, we're making very good traction with both of those. So in both areas, we have 600 plus customers leveraging either our application security solution, or 600 on the log side. So we're getting good traction. I would say on the adoption side, I've always said on logs in particular, that adoption would take a while and that there would be a requirement for an uptick in the back half of fiscal 25. Again, we still have confidence, and so the market is still good for those offerings. I think our competitive differentiation is still compelling.
Jim: 600, plus customers leveraging either our application security solution and 600 on the log side. So we're getting good traction I would say on the adoption side I've always said on logs in particular that the adoption.
Jim:
Jim: Would take a while and that there would be a requirement for an uptick.
Jim: In the back half of fiscal 'twenty five.
Jim: Again, we still have confidence that so the market is still good for those offerings I think our competitive differentiation is still compelling. So I think they will be $100 million plus businesses. We just wanted to be open that we think that that might extend.
Jim: And the reason is as we see a growing trend of these end to end absorbability decisions from customers, what we have found.
James Martin Benson: So I think they will be $100 million plus businesses. We just wanted to be open about how we think that might extend. And the reason is, as we see a growing trend of these end-to-end observability decisions from customers, what we have found, and it's still early days, is that they sequence what they deploy. And when they sequence what they deploy, sometimes they're deploying application observability, infrastructure monitoring, things of that nature first, and log and application security are like on their roadmap, but those are call it those are following.
James Martin Benson: And so the adoption of those areas is probably going to push them a little bit. So we think these businesses will still be $100 million plus businesses. We do think this trend of what we're seeing with platform consolidation will change the sequencing and adoption of some of these new emerging technologies. Okay, terrific. Yeah, I would also just add that it just adds an increase in the number of log customers to 600, which is up 30% quarter over quarter increase and a similar increase in the number of access customers. So we continue to see traction and continue to see deployment in these core areas with substantial growth in consumption.
Jim: And it's still early days is they sequence what they deploy and when they sequence what they deploy sometimes they're deploying application absorbability infrastructure monitoring things of that nature first and logged in application security are like on their roadmap, but those are call. It those are following and so the.
Jim: The option of those areas, we believe are probably going to push a little bit.
Jim: So we think these businesses will still be $100 million plus businesses. We do think this trend of what we're seeing with platform consolidation will change the sequencing and adoption of some of these new emerging areas.
Speaker Change: Okay terrific.
Speaker Change: I would also just add that it just just add are the increase in number of law customers to 600, which is up 30% quarter over quarter.
Speaker Change: Increased similarly, increasing the number of apps that customers. So we continue to see traction and continue to see an appointment and in these core areas with substantial growth in consumption.
Keith Frances Bachman: Okay. Okay. Terrific. Thank you.
Speaker Change: Okay. Okay terrific. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Raimo Mindshare with Barclays. Please proceed with your question.
Raimo Lenschow: Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.
Raimo Lenschow: Thank you. As we, as you guys kind of pursue these larger deals, obviously, there's only like a few vendors, can you talk a little bit about the changes in the vendor landscape that you're kind of dealing with then? Is that like a consolidation of tools? Are you replacing things? And then on the replacement side, there's obviously just one big one that comes to mind, but they kind of, kind of seem to have locked in a lot of their customers on kind of renewals. Can you talk a little bit about the timing then that we could see here in terms of like getting some and then kind of the building momentum on the larger deal side? Thank you.
Speaker Change: Thank you.
Speaker Change: As we as you guys kind of pursue these larger deals obviously, there's only like a few vendors like can you talk a little bit about like due to changes in the vendor landscape that you're kind of dealing with them is that probably the consolidation of towards are you, replacing things and then on the replacement side. There's obviously been spending just one big one at <unk>.
Speaker Change: Comes to mind, but that's kind of a kind of seem to have locked in.
Speaker Change: I loved that customers on kind of renewals.
Tito: Can you talk a little bit about the timing then that we could see here in terms of like getting some and then kind of the building momentum on the mantra Tito. Thank you.
Speaker Change: Grandmother.
Rick M. McConnell: Raimo, the landscape is evolving, as I mentioned earlier, really toward an increased view toward centralization of the overall landscape and decisions associated with observability. What we saw, for example, in the large airline example that we provided in our prepared remarks, was they felt they were spending too much money to get too little user experience and too many incentives. By bringing together multiple different vendors together, it would improve user experience, reduce cost, and dramatically reduce the number of incidents, and this is the trend that we're seeing, and there are, frankly, just very few vendors in the space that can provide this solution to that landscape orientation, and Dynatrace is core among them.
Speaker Change: The landscape is evolving as I mentioned earlier really toward an increase maybe towards centralization of the overall landscape in decisions associate with that sort of annuity.
Speaker Change: We saw for example in a large airline example that we provided in our prepared remarks.
Speaker Change: As they thought they were spending too much money to get too little user experience and too many incidents.
Speaker Change: By consolidating multiple different vendors together.
Speaker Change: They wouldn't improve user experience reduce cost.
Speaker Change: And dramatically reduce the number of incidents and this is a trend that we're seeing and they're frankly, just very few vendors in the space.
Speaker Change: That can provide this this solution to that landscape orientation, and and diner traces is a core among them.
Raimo Lenschow: Okay, perfect. And then for Jim, in the previous quarters, you talked a little bit about the need for investments, etc. And you were one of the first to point out that I need to pre-invest in sales capacity, etc. If I look at the guidance and the numbers now, it actually looks like you're managing to still show us good profitability levels and still seem to invest well. Can you talk a little bit about some of the initiatives you're doing there to achieve that? Thank you, and congratulations from me as well.
Speaker Change: Yep, Okay, perfect and then for Jim like in the previous quarters, you talked a little bit about the needs for investments et cetera.
Speaker Change: You wouldn't want us to first to point out that our need to pre invest into sales capacity et cetera, If I look at the guidance and the numbers no. It actually looks like youre kind of managing the two.
Speaker Change: Two kind of kind of still true was good profitability levels and still seem to invest well, but can you talk a little bit about some of the initiatives you're doing there to achieve that thank you and congrats from me as well.
James Martin Benson: You're right, Raimo, that one of the things you've always gotten with Dynatrace is an commitment to continue to try to drive leverage and drive balance, as evidenced by what is almost 300 basis points of operating margin expansion this year and 200 basis points of free cash flow. We are continuing to drive scale across the business. So if you saw leverage in G&A, you should expect to see more leverage in G&A, this thing we're doing around cloud hosting costs, where potentially we can drive some modest leverage in gross margins. So I would say it's multiple.
unknown: Uh, you're right, uh, Raimo, that, you know, one of the things...
You're right Raimo that you know one of the things you've always gotten with diner trace is a commitment to continue to try to drive leverage and drive balance you know as evidenced by what is almost 300 basis points of operating margin expansion. This year 200 basis points of our free cash flow.
Speaker Change: We're going to we are continuing to drive scale across the business. So you saw leverage in G&A, you should expect to see more leverage in G&A.
Speaker Change: There's things we're doing around our cloud hosting costs, where potentially we can drive some modest leverage in and gross margin. So I would say, it's multiple and it's call it modest in areas, but it adds up the areas that we are making very specific investments are we are making.
Speaker Change: Very specific investments in R&D, we expect R&D to actually as a percent of revenue to grow in fiscal 'twenty five.
Speaker Change: We do think on the sales and marketing side, we will see a little bit of leverage some of that leverage will come from to Rick's opening point of our partners in driving more through partners, but I do want to make it clear we are also going to make.
James Martin Benson: And we call it modest in areas, but it adds up the areas that we are making very specific investments. We are making very specific investments in R&D; we expect R&D to actually grow as a percent of revenue in fiscal 25. We do think on the sales and marketing side, we will see a little bit of leverage. Some of that leverage will come from Rick's opening point about partners and driving more through partners.
James Martin Benson: But I do want to make it clear that we are also going to make incremental sales rep investments in fiscal 25. So there will be investments in sales capacity in addition to kind of getting better partner leverage and productivity. So it's a bunch of different areas. And what we're committed to is to stabilize and or expand margins for the business.
Speaker Change: Incremental sales rep investments in fiscal 'twenty five so there will be investments in sales capacity. In addition to kind of getting better partner leverage and productivity. So it's a bunch of different areas and what we're committed to is to stabilize <unk> expand.
Speaker Change: <unk> for the business.
Speaker Change: Okay perfect. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.
Matthew George Hedberg: Thank you. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.
Dan Bergstrom: Hey, it's Dan Bergstrom from Matt Hedberg. Thanks for taking our question. So on the partner side, sounds again like great contribution for partners on those large seven-figure deals. You talked about some white space around new logos for partners in the prepared remarks. Just wondering what maybe you can do to help the origination side of the equation for partners.
Speaker Change: Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking our question. So on the partner side. It sounds again like great contribution for partners on those large seven figure deals you talked to some white space around new logos for partners in the prepared remarks, just wondering what maybe.
Speaker Change: Can you do to help the origination side of equation for partners.
Speaker Change: Well the the whole purpose of driving partners is really for that origination we already have a very substantial percentage of partner influence deals I mentioned in my prepared remarks over two thirds of deals are already partner influenced though we are deeply engaged with the partner community already.
Rick M. McConnell: Well, the whole purpose of driving partners is really for that origination. We already have a very substantial percentage of partner-influenced deals. As I mentioned in my prepared remarks, over two-thirds of deals are already partner-influenced, so we are already deeply engaged with the partner community. The real thrust of our partner initiatives is to drive that 30% origination higher, which is precisely what we're doing with the GSIs and the hyperscalers. So that is the major thrust of our partner strategy.
Speaker Change: The real thrust around our partner initiatives is to drive that 30% origination higher which are which is precisely what we're doing with the GSI and the hyperscale or so that that is the major thrust of our partner strategy.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Brad Robert Reback: Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Brad Robert Reback: Good morning. I know you mentioned that the changes in Salesforce changed up 30% of your logos.
Brad Robert Reback: Good morning, I know you mentioned that the changes in the sales force a change you know 30% of your your your logos.
Brad Robert Reback: Have you done this in the past and what have you seen.
Brad Robert Reback: Effectively what are what are you trying to achieve it seems like a pretty big change in the in the go to market. So I'm just curious if you could double click and what do you expect to achieve through this.
Yeah, So I'll take that so every year there is some modest level of account movements. So that's call. It not unique I'd say it is what is unique is having 30% of your accounts now kind of moved to.
Brad Robert Reback: I guess, have you done this in the past? And what have you seen? And effectively, what are you trying to achieve? It seems like a pretty big change in the way we go to market. So just curious if you could double click and what you expect to achieve through this.
Brad Robert Reback: Two a new rep, but just to be clear again, one of the things that we're doing is the sweet spot for Donna trays.
James Martin Benson: Yeah, so I'll take that. So every year, there is some modest level of account movement. So that's called it not unique; I'd say it is unique, is having 30% of your accounts now kind of move to a new rep. But just to be clear, again, one of the things that we're doing is The sweet spot for Dynatrace, very large enterprise environments. And when we looked at the resource coverage that we had in the Global 500, we felt we needed more investment there; we needed more sales capacity there than the number of accounts per rep. And that part of the kind of coverage pyramid was not the density that we wanted.
Brad Robert Reback: Very large enterprise environments and when we looked at the resource coverage that we had in the global 500, we felt we needed to wait more investment there we needed more sales capacity there that the number of accounts per rep.
Brad Robert Reback: And that part of the of the kind of coverage pyramid was not the density that we wanted so we're making more investments some of that investment is just reallocating investments from call. It the mid commercial to the strategic global accounts.
James Martin Benson: So we are making more investments; some of that investment is just reallocating investments from what is called the mid commercial to the strategic global account. Obviously, the whole point of this is that those customers have a greater propensity to spend. The more we can do to get better coverage with them, I would say the more intimacy and the more penetration we can get for their spend. And so the whole point of it is to drive more dedication of observability spend to Dynatrace with those customers and also garner some new logos in that space that we don't have today.
Brad Robert Reback: Obviously, the whole point of this is those customers have a greater propensity to spend.
Brad Robert Reback: The more we can do to get better coverage with them.
Brad Robert Reback: The more.
Brad Robert Reback: The more intimacy in the more penetration, we can get for their spend and so the whole point of it is to drive more dedication of spent of observer ability spend to dying trees with those customers and also garner some new logos in that space that we don't have today. So that's really the focus and then.
James Martin Benson: So that's really the focus. And then, to Rick's point, it's also leveraging partners kind of in the broader ecosystem. And certainly at the bottom end of the pyramid, it's an inside sales motion, which we've had in the past, but adding more capacity there with an inside sales motion. But all of these changes are designed to drive better productivity and to drive an acceleration in bookings and ultimately ARR growth.
Speaker Change: To Rick's point, it's also leveraging partners kind of in the broader ecosystem and certainly at the bottom end of the pyramid, It's a inside sales motion, which we've had in the past, but adding more capacity there with an inside sales motion, but all of these changes are designed to drive better productivity.
Speaker Change: And to drive an acceleration in bookings and ultimately AOR growth.
Speaker Change: Okay, and then I think maybe just tying back to the guidance that these actions are accounted for that.
Brad Robert Reback: Okay, and I think maybe just tying back to the guide, these actions are accounting for the deceleration you're seeing despite all the hyperscalers seeing accelerating growth and growth that's anywhere between the high teens to 40% plus. Yeah, I would say what we're doing is we're trying to build some prudence so that when you make
Speaker Change: The deceleration you're seeing despite all the hyperscale are seeing accelerating growth and growth that's yeah anywhere between high teens to the <unk>.
Speaker Change: 40% plus.
James Martin Benson: Yeah, I would say what we're doing is we're trying to build some prudence that when you make go-to-market changes like this, we're mindful that sometimes these changes can cause reps to pause; you have reps that are learning new accounts, reps that are building relationships, things of that nature. And that we are trying to build in some prudence that there may be some near-term impact from this account movement. As I said, I think it was to Sanjit, what could allow us to do better is if, as we transition through this, if this disruption that we're modeling doesn't occur, then we could deliver a better outcome. And that's certainly what we're striving to do.
Speaker Change: Yeah, I would say what we're doing is we're trying to build some prudence that when you make go to market changes like this.
Speaker Change: We're mindful that sometimes these changes can cause.
Speaker Change: Reps to pause you have reps that are learning new accounts were upset or building relationships things of that nature and that we are trying to build in some prudence that there may be some near term impact from this account movement.
Speaker Change: As I said I think it was decided yet.
Speaker Change: What could allow us to do better is if we as.
Speaker Change: As we transition through this if this.
Speaker Change: Disruption that we're modeling doesn't occur then we could deliver a better outcome and that's certainly what we're striving to do.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah.
Brad Robert Reback: Thank you. Our final question this morning comes from the line of Fatima Boolani with Citi. Please proceed with your question.
Speaker Change: Thank you. Our final question. This morning comes from the line of Fatima <unk> with Citi. Please proceed with your question.
Speaker Change: Hi, Good morning, Thank you for taking my question.
Fatima Aslam Boolani: Hi, good morning. Thank you for taking the time to answer my questions. Just, Jim, for you, I wanted to unpack the dollar-based net retention rate performance in the quarter. I know macro hasn't necessarily gotten worse, but I was hoping you could speak to some of the puts and takes on that hitting 111% or a two-point sequential deceleration in the quarter. And if you can paint a pathway for us as to the time and slope of a re-expansion in this metric, especially when I, you know, superimpose some of your commentary around how successful the consumption trends under the DPS selling vehicle are going.
Speaker Change: Jim for you I wanted to unpack that dollar based net retention rate performance in the quarter.
Speaker Change: I know macro hasn't necessarily gotten worse, but I was hoping you could speak to kind of the puts and takes on that heading 111% or a two point sequential deceleration in the quarter and if you can paint a pathway for us too.
Speaker Change: The time and Hello.
Speaker Change #100: Spansion and this metric, especially when I.
Speaker Change #100: Super imposed some of your commentary around how successful the consumption trends under the Dps selling vehicle going I was hoping you can bridge the gap for us in terms of kind of a license and the compression this quarter and how we can get back to a path towards.
Fatima Aslam Boolani: So I was hoping you could bridge the gap for us in terms of some of the lightness and the compression this quarter and how we can get back on a path towards, you know, your historical 120% levels. And a quick follow-up, please.
Speaker Change #101: Is there a historical 20% level I have a quick follow up please.
James Martin Benson: Right, so I'd say you're right that the NRR was at what was just, you know, I'd say it rounded down from 112 to 111. So a little bit lighter, but I think that's largely driven by the fact that, you know, we had a very, very strong new logo quarter. And so sometimes you have quarters where new logos are stronger than expansions; we had a very good new logo quarter.
Speaker Change #102: Right, so that I'd say, you're right that the MLR was.
Speaker Change #103: It was just it was you know I'd say it it rounded down from $1 12 to 111, so a little bit lighter, but I think that's largely driven by the fact that you know we we had a very very strong new logo quarter. So sometimes you have quarters, where new logos are stronger than expansions, we had a very good new logo quarter.
Speaker Change #104: You did highlight some important things to make sure we comment on is deep.
James Martin Benson: You did highlight some important things to make sure we comment on DPS as a vehicle, still early days, making good traction 18% of our customers now call it 30 plus percent of our ARR. The fact that these customers are consuming faster is a, think of it as a leading indicator. It is a leading indicator that if they consume faster, it means they're getting more value out of the platform. It means they're consuming at a faster rate, which means that it is a leading indicator of future expansion.
Speaker Change #104: D. P. S. S vehicles still early days, making good traction 18% of our customers.
Now I'll call. It 30 plus percent of our a R. R.
Speaker Change #104: The fact that these customers are consuming faster.
Speaker Change #104: Is a think of it as a leading indicator. It is a leading indicator that if they consume faster means are getting more and more value out of the platform. It means they're consuming.
Speaker Change #104: At a faster rate, which means that as a leading indicator of our future expansion. We're relatively early days with Dps. So you think of the cohorts that we have that we've only been at it for a year and so it will take a little bit of time for this to manifest itself in expansion and an IRR, but that is the expectation and the.
James Martin Benson: We're in relatively early days with DPS, so you think of the cohorts that we have, and we've only been at it for a year. It will take a little bit of time for this to manifest itself in expansion and in NRR, but that is the expectation. The leading indicator we're seeing is DPS as a contracting vehicle is doing exactly what we thought, which is... allows customers to access the platform without committing SKU-based items that they are dollar-based commitments.
Speaker Change #104: A leading indicator we're seeing is dps as a contracting vehicles doing exactly what we thought which is.
Speaker Change #104: It allows customers to access the platform without comedian.
Speaker Change #104: SKU base items that they are dollar based commitment there leveraging as much of the platform. They have an ability to leverage all of the product capabilities. The fact that they're consuming at a rapid rate means that we believe that you will see an earlier expansion that otherwise would've occurred under our SKU base model.
James Martin Benson: They're leveraging as much of the platform; they have an ability to leverage all the product capabilities. The fact that they're consuming at a rapid rate means that we believe that you will see an earlier expansion that otherwise would have occurred under a SKU-based model. Will we, I think we will see some of that in fiscal 25, but I think, you know, leaving fiscal 25 is where you'll see even more of that.
Speaker Change #105: Well, we I think we will see some of that in fiscal 'twenty five, but I think you know exiting fiscal 'twenty five is really youll see even more of that.
I appreciate that and just on the point of new logo and new logo growth I know historically you've talked about.
Fatima Aslam Boolani: I appreciate that. And just on the point of new logos and new logo growth, I know historically we've talked about an algorithm between acquiring new logos and going down the expansion path with your very loyal and very large customers who have that propensity to spend. But I'm curious if you can please comment on how you're thinking about the new logo trajectory in Fiscal 25 in the context of, you know, rebalancing some of your sales capacity resources and, you know, straddling the quality versus the quantity dynamic of a new logo acquisition. Thank you.
Speaker Change #106: Algorithm between.
Speaker Change #106: Acquiring new logos and going down the expansion path.
Speaker Change #107: With your very loyal and very large customers you have that propensity to spend and I'm curious if you can please comment on how you're thinking about the new logo trajectory fiscal 'twenty five in the context of rebalancing some of your.
Speaker Change #108: Well, it's capacity resources and.
Speaker Change #108: Styling.
Speaker Change #108: The quality versus quantity.
Speaker Change #109: Our new local acquisition. Thank you.
James Martin Benson: It's a great question. I would say the model hasn't fundamentally changed, as far as you know, that I'd say today of our ARR, 40% of our ARR roughly comes from new logos, and 60% from expansion. That's not going to change fundamentally. Your comment about quantity versus quality is right; we are very focused on quality. I'm not as focused on the quantity. What we have found is that if we land customers with greater than 100K of ARR, they expand much faster.
Speaker Change #110: Yeah. It's a great question I would say the model hasn't fundamentally changed as far as you know that I'd say today of our ALR, 40% of our air are roughly comes from new logos, 60% from expansion, that's not going to change fundamentally your comment about quantity versus quality of we are very focused on the quality.
Speaker Change #110: I'm not as focused on the quantity of what we have found is that when we land customers greater than a 100 K. They are are they expand much faster obviously, what you've seen is this growing trend of architecture decisions.
James Martin Benson: Obviously, what you've seen is this growing trend of architecture decisions; you're gonna have some quarters like we had in the fourth quarter where you're overweighted in that area, and they're very, very, very, very, very large. So I'd say we're focused more on the quality of the land. Some of these go-to-market changes that we've outlined, I think are, again, geared towards more quantity, a little bit in the mid-market, but I'd say it's primarily quality. And so the call of the equation we think about is call it roughly 40% of the ARR coming from new, 60% from expansion, and I think that's probably gonna continue.
Speaker Change #110: You're going to have some quarters like we had in the fourth quarter, where you're over weighted in that area and they're very very very very large so I'd say, we're focused more on the quality of the land. Some of these go to market changes that we've outlined I think are again geared towards more.
Speaker Change #110: More quantity a little bit in the mid market, but I'd say, it's primarily quality and so the called the equation. We think about is call. It roughly 40% of the ALR coming from new 60 per cent from from expansion and I think that's probably going to continue.
Rick M. McConnell: Alright, well, thank you all for your questions and ongoing support. We saw Q4 as a very strong finish to fiscal 2024 and established momentum as we head into the new fiscal year. We are quite bullish about the opportunity for end-to-end observability decisions to come. We look forward to connecting with you at upcoming IR events over the coming weeks, and we wish you all a very good day.
Speaker Change #111: Thank you alright, well. Thank you all for your questions and ongoing support we saw Q4 is a very strong finish to fiscal 'twenty 'twenty, four and establishing momentum as we head into the new fiscal year, we are quite bullish about the opportunity or end to end absorbability decisions to come.
Speaker Change #111: We look forward to connecting with you at upcoming IR events over the coming weeks and we wish you all a very good day.
Speaker Change #112: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.
Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.