Q2 2025 Dynatrace Inc Earnings Call
Greetings and welcome to the diner trace fiscal second quarter 2025 earnings call.
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Speaker Change: It's now my pleasure to introduce no Welfarist Vice President of Investor Relations. Thank you you may now begin.
Speaker Change: Good morning, and thank you for joining Guyana, Chase's second quarter fiscal 2025 earnings conference call joining me today.
Speaker Change: Ah, Rick Mcdonald, Chief Executive Officer, and Jim Benson, Chief Financial Officer.
Speaker Change: Before we get started please note that today's comments include forward looking statements such as statements regarding revenue and earnings guidance and economic conditions.
Speaker Change: Results may differ materially from our expectations due to a number of risk factors and uncertainties discussed in Guyana, Chase's SEC filings, including our most recent quarterly report on Form 10-Q that we filed earlier today.
Speaker Change: The forward looking statements contained in this call represent the company's views on November seven 2024, we assume no obligation to update these statements as a result of new information future events or circumstances, unless otherwise noted the growth rates, we discuss today are non-GAAP, reflecting.
Speaker Change: Constant currency growth and per share amounts are on a diluted basis.
Speaker Change: 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: With that let me turn the call over to our Chief Executive Officer Rich Mcconnell.
Rich Mcconnell: Thanks, Noel and good morning, everyone.
Rich Mcconnell: Thank you for joining us for today's call.
Rich Mcconnell: Our second quarter performance is the result of the strength of our platform and our ability to execute effectively in a dynamic market.
Speaker Change: Our our grew 19% year over year subscription revenue increased 20% year over year and trailing 12 month free cash flow margin was 28%.
Speaker Change: We delivered strong first half to the fiscal year I believe the market is increasingly playing to our strengths in AI, driven absorbability, which we have been delivering for well over a decade.
Speaker Change: And our Q2 results offer a great proof point.
Speaker Change: Jim will share more details about our financial performance and guidance.
Speaker Change: Months.
Speaker Change: First I'd like to discuss the trends, we're seeing in the observer ability market, our ongoing commitment to innovation.
Speaker Change: Customer wins and the evolution of our go to market strategy.
Speaker Change: And again, the world's reliance on software is greater than <unk>.
Speaker Change: Innovation modernization and business resilience.
Speaker Change: Our top of mind for business leaders.
Speaker Change: Downtime and instability can't cripple businesses.
Speaker Change: Organizations are struggling to recruit the required resources to manage their software.
Speaker Change: Driving a need for increased productivity.
Speaker Change: And finally, we all expect exceptional customer experiences and we hold companies accountable for delivering it.
Speaker Change: Given this environment the success and failure of any business today can hinge on its ability to observe and analyze an enormous amount of data and massive increases in its complexity.
Speaker Change: The staggering amount of data being generated each day.
Speaker Change: We estimated by IDC at over 2.5, quintillion bytes globally cannot be processed manually.
Speaker Change: Both the tools and processes that organizations used to keep software running with high performance have to evolve in parallel to keep up with the data explosion.
Speaker Change: In these incredibly complex environments, we believe AI driven absorbability is no longer optional.
Speaker Change: Organizations are expected to find issues and resolve incidents before they impact customers.
Speaker Change: This can't be done efficiently in complex environments through reactive dashboard monitor.
Speaker Change: Rather organizations need to be able to trust the answers from the N and observe at the lead platform to action issues automatic.
Speaker Change: This is why organizations turn to dine at church.
Speaker Change: We are maniacally focused on ongoing innovation to deliver a highly differentiated AI driven absorbability platform.
Speaker Change: One that we believe delivers unmatched visibility and substantive business value.
Speaker Change: We began with a massively parallel processing highly performing data store called Grail to maintain all absorbability data types logs metrics and traces really user data and importantly business events in context.
Speaker Change: Rail then enables us to uniquely apply a Pat worth three AI to analyze billions of interconnected data place to deliver answers not just data and not just dashboards.
Speaker Change: Finally, we leveraged our contextual analytics and AI insights to automate responses and help avoid incidents.
Speaker Change: I'd like to expand on AI.
Speaker Change: And its particular criticality to observe ability.
Speaker Change: And at World trying to understand how to harness the wide ranging benefits of generative AI. It is important to clarify how our power of three AI works.
Speaker Change: We begin with causal ale.
Speaker Change: Which analyzes billions of data points to help find the needle in the haystack.
Speaker Change: This isolates precise issues in software any infrastructure.
Speaker Change: Cause away doesn't guess based on correlated data.
Speaker Change: Rather it evaluates data points in context to deliver causation based answers and enables an automated response.
Speaker Change: Second.
Speaker Change: Predictive AI applies machine learning to take causal AI one step further.
Speaker Change: It enables the dining trade platform to observe changes in a software environment and performed trending forecasting and anomaly detection.
Speaker Change: Optimize performance and ideally for bat for resolve issues before they create business impact.
Speaker Change: And finally generative AI brings the diner trade platform to a broader group of end users.
Speaker Change: In particular, it enables casual user rather than just a diner trade subject matter expert.
Speaker Change: To derive insights from the platform using natural language that then access as deterministic answer is derived from causal and predicted a hot.
Speaker Change: It is this combination of AI techniques working in unison and leveraging our underlying architecture that truly delivers the power of diner trace.
Speaker Change: Basel and predictive AI had been at the core of the diner trade platform.
Speaker Change: For a decade and every diner trace customer benefits from our continued advancements in these techniques.
Speaker Change: A final point on innovation as we strive to provide customers with the clarity and power to understanding act and accelerate their business where mission.
Speaker Change: Increasingly organizations aren't just seeking technical insights or root cause analysis.
Speaker Change: They want to uncover answers.
Speaker Change: And insights locked in their data to transform them into a mission critical asset.
Speaker Change: I had a CTO recently, telling me that their CEO wanted dying to trade on a desktop.
Speaker Change: Ill understand business performance.
Speaker Change: This is how diner trace can truly maximize customer value.
Speaker Change: We continue to be humbled by third party analysts reports that regionally I've recognized diner trace as a leader.
Speaker Change: Diamond trade was positioned furthest formation and highest in execution in the 'twenty 'twenty, four Gartner magic quadrant or absorbability platforms.
Speaker Change: This is the 14th consecutive time that Gartner has named diner trace a leader.
Speaker Change: We ranked number one across three of the five use cases in the 'twenty 'twenty four Gartner critical capabilities for observed with the lead platforms report.
Speaker Change: We were named a leader in the inaugural 'twenty 'twenty four Gartner magic quadrant for digital experience monitoring.
Speaker Change: And we were named to the 'twenty 'twenty four constellation shortlist for observe ability.
Speaker Change: I ops and digital performance management, recognizing diner trace is a leader in driving digital transformation.
Speaker Change: I'd also like to share a few customer wins from this past quarter that help illustrate the transformational value, we're providing to customers.
Speaker Change: We closed an eight figure T C D expansion deal with one of the top U K banks to provide end to end observe adult it.
Speaker Change: They are aspiring to be the uk's, leading digital bank and they're standardizing on dying to trace as the underlying platform to power their center of excellence with AI driven insights to provide visibility across important business services.
Speaker Change: A major U S airline signed a seven figure D. P S expansion.
Speaker Change: They were looking to reduce the meantime to resolution from over an hour to less than five minutes.
Speaker Change: With multiple tools across their ecosystem. They lack a single source of truth and struggled with blind spots.
Speaker Change: In collaboration with our partner Dx seat this customer chose diner trace to reduce the noise caused by dashboards.
Speaker Change: Place their legacy tools and provide absorbability run the application layer to the infrastructure layer, including traces and logs.
Speaker Change: We closed a seven figure expansion with a leading finance management platform.
Speaker Change: This customer had limited visibility into the thousands of incidents occurring in their production environment.
Speaker Change: They estimated that these incidents were costing them hundreds of thousands of dollars.
Speaker Change: Extending diner traces AI driven platform into their production environment, they gain substantive visibility and result in its business value.
Speaker Change: And finally, our new logo that highlights the evolution of our sales team in emerging markets represented a seven figure deal with a government agency in the Middle East.
Speaker Change: These are all examples of larger strategic transactions with customers looking for transformational benefits from our end and observed ability plot.
Speaker Change: Next I'd like to turn to the go to market changes, we rolled out at the beginning of this fiscal year. They focus on three primary areas.
Speaker Change: First.
Speaker Change: We adjusted our customer segmentation to increase focus on I T 500, and strategic accounts.
Speaker Change: This heightened attention to larger accounts enables us to drive more transformative platform deployments.
Speaker Change: Second.
Speaker Change: We have leaned in with partners.
Speaker Change: Through more effective enablement to make it easier to work with diner Tres over 75% of anchor deals closed in the quarter involved a partner.
Speaker Change: Third.
Speaker Change: We have expanded our go to market motion be onto application performance doing end to end observer ability and cloud modernization.
Speaker Change: Several recent customer wins are a direct benefit of arming our sales force and a broader set of use cases, including some of the deals I just noted.
Speaker Change: Overall, we are pleased with our progress in these go to market areas.
Speaker Change: At the same time, we're only two quarters into these adjustments and we view ourselves as still being early in the pipeline development stages.
Speaker Change: We continue to support our go to market initiatives with increased awareness and customer engagement opportunities across multiple venues.
Speaker Change: As we have said in the past, these deals equally come with an increased level of timing variability.
Speaker Change: Third, and most importantly, from a go-to-market perspective, we continue to work through the maturation of the go-to-market adjustments we made at the beginning of the fiscal year.
Speaker Change: Through the first half, we are pleased with how our team has executed while minimizing disruption as we implemented these changes.
Speaker Change: In addition, the acceleration of hiring new sales capacity has resulted in a higher mix of less tenured and therefore less productive reps compared to historic levels.
Speaker Change: Further, as part of our go-to-market changes, we introduced six-month sales compensation cycles.
Speaker Change: This resulted in an improvement in booking seasonality in the first half, but it's unclear the magnitude of the impact these semi-annual sales plans will have in the back half of the fiscal year.
Speaker Change: Factoring this all in, we believe it is best to maintain a prudent posture on ARR guidance and not get ahead of ourselves until the benefits of these changes manifest in an improvement in sales productivity.
Speaker Change: And with that, let's start with our updated guidance for the full year with growth rates and constant currency.
Speaker Change: We are maintaining our ARR guidance of $1.72 to $1.735 billion, representing 15 to 16 percent growth year over year.
Speaker Change: For Net New ARR, we expect Q4 to be higher than Q3, consistent with the second half of fiscal 2024.
Speaker Change: We are raising our revenue guidance by a hundred basis points.
Speaker Change: and Jeff Zients to account for the strength in our second quarter performance.
Speaker Change: We are raising total revenue by approximately $19 million at the midpoint to $1.67 to $1.68 billion.
Speaker Change: and we are raising our subscription revenue guidance by 17 million dollars at the midpoint to 1.59 to 1.6 billion dollars both now representing 17 to 18 percent growth year over year
Speaker Change: This ARR and Revenue Guidance factors in foreign exchange rates as of October 31st, resulting in no material changes compared to a prior full year guidance.
Speaker Change: Turning to our bottom line, the strength and resilience of our financial model are evident in our ongoing margin performance.
Speaker Change: We continue to invest in future growth opportunities while finding efficiencies in other areas.
Speaker Change: We continue to prioritize our investments in R&D innovation, customer success, and strategic go-to-market areas such as GSI partnerships, demand generation activities, and targeted sales capacity.
Speaker Change: With this in mind, we are raising our full-year non-GAAP operating income guidance by $7 million. This translates to non-GAAP operating margin guidance of 28% to 28.25% up roughly 25 basis points at the high end of the range.
We are raising non-GAAP EPS guidance to $1.31 to $1.33.
Speaker Change: cents per diluted share, representing an increase of four cents to the midpoint of the range.
Speaker Change: This non-GAAP EPS is based on a diluted share count of 303 to 305 million shares. This EPS and share count guidance excludes the impact of any share repurchases in Q3 and Q4 due to the opportunistic nature of our program.
Speaker Change: We are raising free cash flow guidance to $393 to $404 million, an increase of $6.5 million at the midpoint, representing a free cash flow margin of 23.5% to 24% of revenue.
Speaker Change: Excluding the expected 650 basis point impact from cash taxes, this represents a pre-tax free cash flow margin of 30 to 30.5 percent.
Speaker Change: As a reminder, our first and fourth quarters tend to be our seasonally strongest cash-generating quarters, with our second and third quarters being our lowest. We expect third-quarter free cash flow to be lower than historic levels due to timing of billings and cash tax payments.
Speaker Change: Looking at Q3, we expect total revenue to be between $425 and $428 million.
Speaker Change: Subscription revenue is expected to be between 407 and 410 million dollars.
Speaker Change: From a profit standpoint, non-GAAP income from operations is expected to be between $117 to $120 million, or 27.5 to 28% of revenue.
Speaker Change: Non-GAP EPS is expected to be $0.32 to $0.33 per diluted share.
Speaker Change: In summary, we are pleased with our second quarter fiscal 2025 performance.
Speaker Change: We have a proven track record of consistent execution, while we remain prudent in our approach to the near-term outlook, we continue to be optimistic about the growth opportunity in front of us and the maturation of our go-to-market evolution to go after it.
And with that, we will open the line for questions.
operator
Speaker Change: Thank you. Now we're conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
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One moment please while we poll for questions.
Speaker Change: Thank you and our first question is from the line of Pendulum Bora with J.P. Morgan. Please receive your questions.
Pendulum Bora: So great, thanks for taking the question and congrats on a solid quarter.
Pendulum Bora: I understand the prudence stance, but it sounds like you're a little bit more cautious about the second half, despite having completed kind of the first.
Pendulum Bora: all the changes on the sales side and things are looking good. So I want to just understand if there is something in the sales cycle, pipeline conversion rates that you're seeing that gives you caution for the second half, or maybe was there a pull forward of deals into Q2?
Thank you.
Speaker Change: Thanks for the question, Pendulum. I tried to provide a bit of an outline of that kind of in the opening remarks that I'll just start with we had a very strong Q2, we had a very strong half one, our sales team has executed very well.
Pendulum Bora: We've seen no disruption from the go-to-market changes. So Certainly, you've seen companies that have gone through go-to-market changes where there's been disruption. I think we've executed very well Through the first six months of the changes that we've made
Pendulum Bora: So very pleased with that relative to Maintaining the guide I I really would position it much more as I outlined as just being prudent that
Pendulum Bora: These changes that we made while there's been no disruption We do have a lot of reps with new accounts and they've only had these accounts for six months We have a lot more new reps in the company
Pendulum Bora: with the changes that we made. We made changes that introduced new reps that are now in some of these strategic accounts so we have no more kind of call it zero to one year tenured reps than we historically have.
Pendulum Bora: And you did mention an area that was also a benefit that we moved to two six-month compensation plans
Thank you.
and we do believe...
Pendulum Bora: that we did receive some benefit from a linearity and seasonality perspective, whereas normally 40% of our net new ARR happens in the first half and 60% in the second half. I do think we got some benefit from moving to two six-month plans.
Pendulum Bora: It's difficult to completely size, but I would just say we don't want to get ahead of ourselves. We are very optimistic about, one, the changes that we've made, two, the opportunities that are in front of us. We're just being a bit cautious. We're not worried. We're just being cautious.
Thank you.
Speaker Change: Understood. If I can have a follow-up, could you talk maybe about the adoption curve of the DPS customers across the portfolio, just trying to understand how does the consumption curve look like for logs in AppSec related to kind of your core products. Thank you very much.
Thanks for watching!
So we, I think we shared with this before that
Speaker Change: One, consumption on the platform in total is growing significantly faster than our ARR growth. So consumption in aggregate is very healthy.
Pendulum Bora: As you can expect, consumption for the emerging products is growing significantly faster than that. Now, admittedly, it's on a smaller number.
Pendulum Bora: So, good traction in aggregate and then within our emerging products, very good growth.
Pendulum Bora: We are growing significantly faster in logs, which doesn't surprise us, than in application security.
Pendulum Bora: that we now have nearly 25% of our customer base on our large products.
Pendulum Bora: We've talked about the adoption curve of customers that start small and then grow. We're seeing a building number of customers that are spending more with logs once they see the benefit of our log solutions. We did announce...
on some advanced analytics for our logs products.
Pendulum Bora: We have announced a new pricing model for customers that want to think of it as more of an all-you-can-eat model. So we're very, very optimistic with the emerging products. And in particular, we think the logs market in particular is ripe for us to gain share.
Thank you very much. Congrats on the quarter.
Thank you.
Speaker Change: The next question is from the line of Brent Thill with Jeffries. Please proceed with your questions.
Pendulum Bora: Hey guys, this is Bo Yen on for Grantsville. Thanks for taking the question. I guess the first one would be...
Pendulum Bora: You know, for the go-to-market changes, you talked about a lot on the Global 500 segment. But, you know, for the reps who are covering the accounts slightly below that segment,
Pendulum Bora: Any color on sort of what changes you've made there, maybe like the reps to account ratio for that segment right below and any productivity gaps that still need to be addressed there.
Speaker Change: Yeah, I think we talked about that a couple quarters ago, but just to remind you that so with the changes that we made that
Pendulum Bora: We made the changes that the number of accounts per rep in the top of the pyramid used to be about 8 to 10
Pendulum Bora: with adding more resources into that area or that segment we now have about four to five accounts per rep which we think is the right ratio to get more depth
Pendulum Bora: of penetration with our install based customers and in some cases customers that we don't have in the IT 500 that we can go penetrate.
Pendulum Bora: Relative to the accounts below that it hasn't changed fundamentally the number of accounts per rep
Pendulum Bora: It's still a model you can, you know, that you have fewer accounts per rep top of the pyramid, much more of an account based.
Pendulum Bora: account-focused, account-plan-oriented model and then below that is more of a territory-oriented model. So no fundamental changes in that other than what I would say is we continue to
Pendulum Bora: Look to that segment of the market, and even below that, to get broader penetration through leveraging partners.
Pendulum Bora: Partners certainly help us in the IT500 when you're working with the GSI, but some of the regional partners and our other partners can help us and get more traction below the IT500 as well. So those are just some of the changes that we made.
Pendulum Bora: I mean, this is this is worth highlighting that we focused on three areas as I mentioned in a prepared remarks segmentation Partners as well as go-to-market motion go-to-market motions were oriented around elements like and then observability
Pendulum Bora: and of course Application Performance Monitoring and Cloud Native. This is really a package of go-to-market motions that we're putting in place across the portfolio, inclusive of the Enterprise accounts as well as the IT500 accounts.
Speaker Change: Thanks. And then on DPS, you know, I guess the question is...
Speaker Change: You know, you've seen consumption pick up for the customers who are on DPS, but any customer feedback or early feedback from customers on how DPS has been received among larger spending customers and You know separately, you know on the net new logo side, does DPS have any impact to your average landing error?
Speaker Change: Yeah DPS, DPS continues to outpace expectations to be honest with 30% of our customers, 50% of ARR now on DPS. We launched it just in April of last year so
Pendulum Bora: We are on the order of 18 months in and half of our ARR is on DPS And it is driving around 2x consumption growth relative to non-DPS deployment of our legacy pricing model which was Q-based
Pendulum Bora: So, we're very excited to see the DPS adoption and pickup. It gives customers much more flexibility to deploy more capabilities more rapidly and consume faster with less friction. So, we're delighted with the DPS evolution.
Speaker Change: Yeah, the only thing I'd add to your last point about new logos that, you know, we still average about 70% of our new logos land with DPS.
Speaker Change: So we still have a very high percentage of new logos that land and I'd say that the land size Isn't higher or lower because they're they're landing with DPS or non DPS
Speaker Change: that is again, that is a it's much more a function of What customers are interested in and what I would tell you is that it's important for investors to know that
Speaker Change: This is a journey to Rick's point we started in April of last year
Speaker Change: kind of a year and a half in, we had to go through an evolution of getting the sales organization comfortable, going from a SKU-based model selling to a model where they're selling kind of a completely different way of contracting.
And the good news is...
Speaker Change: It is now muscle memory for the sales organization to sell DPS. So there's no more learning curve or obstacles that they're quite proficient at doing that.
Speaker Change: This is likely to be the common contracting vehicle, and again, we look at the demonstration of what we've shown is that if they can land with DPS, we find that they expand faster.
Thank you.
Speaker Change: Our next question is from the line of Sanjit Singh with Morgan Stanley. Please receive your question.
Sanjit Singh: Thank you for taking the questions. I wanted to stick on DPS again.
Sanjit Singh: You mentioned that it's sort of 18 months into the launch. In terms of customers sort of renewing on DPS, what are some of the trend lines there? I have to get that.
Sanjit Singh: first full year of experience under DPS pricing. And each sort of trend lines that you've seen when customers start to renew is that resulting in an uplift of expansion given the stronger underlying consumption trend.
Speaker Change: It's a great question and the answer is that we have higher
Sanjit Singh: expansion rates for DPS customers than non-DPS customers. We'll start with that. So
Sanjit Singh: your comment about the cohort classes that were maybe from Q1 and Q2 of last year.
Sanjit Singh: Those we have found that in aggregate our DPS customers just
Sanjit Singh: that you move over to DPS initially, or probably customers that were already, customers that love Dynatrace and would have expanded significantly anyways. But having said that, we've certainly seen
Sanjit Singh: that we're expanding faster and more importantly it's we're finding that more customers are leveraging more Capabilities of the platform which means they're trying things. They're trialing things. We talked about a couple
Sanjit Singh: things in the prepared remarks where the ability for them to trial
Sanjit Singh: without having to go through a sales cycle ultimately has led in a few cases to larger expansions. We mentioned one on the in the prepared remarks for logs. I think we mentioned a logs one in our last quarter call. So we're very pleased with the traction with DPS and do believe that it's the right contracting vehicle for most customers.
Thank you for watching.
I appreciate the thoughts, Jim. Thank you very much.
Speaker Change: Our next question is from the line of Jake Robert with William Blair. Please proceed with your question.
Jake Robert: Yeah, thanks for taking the questions. I just wanted to double click on the the sales front with that change to the six-month comp plans Do you feel like anything was pulled into Q2 that that may be causing a lower than normal pipeline heading into the back half?
Speaker Change: No, it's a great question. I would say that the demand environment is still quite healthy.
Speaker Change: So when we look at pipeline and our pipeline coverage ratios, they're very consistent, half one versus half two. So don't view it as there's really been a change in pipeline as a result.
Speaker Change: of moving to two six-month cycles. I do think, as I said,
Speaker Change: In my commentary, I do think we did see a benefit in the first half from deals that otherwise historically would have been booked in the second half were accelerated into the first half because it was an incentive for the sales organization to do that.
Sanjit Singh: It's difficult to size specifically because you don't know every deal and what would have moved But I certainly believe we've seen a benefit in seasonality as a result of that Which is kind of one of the reasons why we're being a bit cautious for the back half of the year
Sanjit Singh: You know, but I would say we're certainly very confident with the changes we made. We think two six-month sales cycles were the right, was the right move. We think all the other sales segmentation changes we made were the right moves.
Sanjit Singh: It's just a matter of allowing this model to mature before we get ahead of ourselves.
Speaker Change: Okay, I might add just a, sorry, I might add just a comment on overall pipeline drivers. One of the biggest pipeline drivers is going to be the maturity of our reps.
Sanjit Singh: And the account execs that we have in place now, which we've added, and Jim alluded to this earlier, essentially an above plan number of reps as we lean into this new segmentation model.
Sanjit Singh: So this is precisely the game plan that we're putting in place associated with the go-to-market movement that we made earlier in this year.
Speaker Change: Okay that's helpful and then been great to hear partners now influence close to 75% of deals. I think that's uptick from about two-thirds last year. Could you talk about how what you're seeing on the the partner source deals front and if they're actually starting to lead more of those deals through the funnel?
I think historically we've seen about
Sanjit Singh: A third of the partner deals were sourced by the partner.
in the first half of this year.
That number was closer to half.
not quite half of the first half.
Speaker Change: You know, again, talking about the maturation of the changes that Rick outlined with segmentation changes, partners, and the go-to-market motions or sales plays, that I think we're getting traction across the board. Obviously, our goal is to make sure that
Sanjit Singh: partner source continues to increase and their partners become more of a fly wheel and an accelerant for growth in the company.
Thank you.
Speaker Change: Our next question is from the line of Raymond Lenshow with Barclays. Please receive your question.
Perfect, thank you
Speaker Change: Can you speak to what you said on the last slide?
Thank you for watching.
Ramo
Speaker Change: Thank you. We'll move on, ladies and gentlemen, to the next question from Brad Reback with Stiefel.
Brad Reback: Great, thanks very much. Jim, can you give us a sense as we think about the BAC Have guidance, is there much contribution from consumption in there at all or is that all upside?
When you say on for the revenue guidance
Brad Reback: Yes Yeah, well I was going to say in both as well as NRR just tells all that captured in the
PNL.
So, obviously, we've seen the benefit of
Brad Reback: DPS already in our results. So you saw for NRR, the NRR was actually, call it when you, other than a few bits, was relatively stable Q4 through Q2.
Call it 111 and change in q4
Brad Reback: Now we're kind of 112. So NRR is already seeing some of the benefits of not just DPS, but just customers that are consuming more and consuming faster.
Brad Reback: So, again, going to your point about the second half, I think, Brad, we're just being cautious, to be honest, that we don't want to get ahead of ourselves. I don't want to imply to anyone on the call that
Brad Reback: We're worried about the back half the maintaining guidance is just more a function of we want to allow the sales changes We've made to continue to season a bit Less we get ahead of ourselves, so it is not a matter of we think that it's going to be a
Brad Reback: half, it's just we want to make sure that we allow the changes that we've made, one, to mature and two, to Rick's point, we have more reps that are new in their roles and it does take a while to ramp.
Brad Reback: and we just want to make sure that we're building some level of prudence in what we're outlining so that we don't disappoint. Obviously, our objective is to do better than 15-16.
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Speaker Change: Got it. And then Rick, real quickly, we're hearing more about customers using Grail and the platform.
Rick Mcdonald: within line of business for actual operational analytics. Is that happening just organically or has that been a bit of a pivot by the sales force to pursue some of those opportunities next?
Speaker Change: Well, to start, Grail is used by essentially all of our cloud-based customers. If you're on AWS, you're on Azure, you're using Grail. So I'd like to piece apart any selection or election
Speaker Change: to use Grail for any customers who are SaaS based customers because they're using it by definition.
They
then have more capabilities associated with Grail.
Rick Mcdonald: and especially if they're on DPS, they just have more capabilities to expand more broadly.
Speaker Change: portfolio and they're able to deploy it broadly from central IT all the way to developers and inclusive of departments. So the setup here enables precisely the kind of expansion that you're talking about.
Perfect. Thank you very much.
Thank you.
Speaker Change: Our next question coming from the line of Ramo Linshaw with Barclays. Please receive your question.
Perfect. Let me try that again.
Speaker Change: I want to stay on that subject. And if you think as part of really, obviously, we'll likely get more logs, like what are you seeing on, on logs, on the log momentum for you guys? And what are you seeing there in terms of
Speaker Change: One of the things from your customer conference in February was that, you know, there was a lot of unhappiness with kind of the main log vendor out there that is now with a different entity. Do you see there more conversations already, kind of that, you know, because you are innovating?
more that you're seeing more traction towards that. Thank you.
Speaker Change: I love the question, Raymo, I'll take this one. The log area, we believe absolutely, to Jim's earlier point is
Very much ripe for disruption.
Speaker Change: I literally had a large bank out of Australia the other day, the CTO, tell me that they were concerned about a meteoric rise in log price, not pricing, but log cost overall from their existing vendor.
Speaker Change: This is this is an example, but a common piece of input that I get there is a strong desire to evolve logs in multiple dimensions
Speaker Change: One of them is a dimension toward integrating logs into AI driven observability Which is to integrate it as part of your end-to-end observability platform, which gives you a better outcome
Speaker Change: based on AI analytics applied to all data types. And this is precisely the value add that Dynatrace brings. The second piece then is from a cost perspective.
Speaker Change: which is, in many customer cases, out of control. So, what we can do there...
Speaker Change: is essentially through some of our new pricing models provide essentially included queries for a period of time, which basically makes the cost much more predictable and gets it in line. And this is another point of excitement from customers.
Speaker Change: So overall We are we like what we see in the log space as Jim mentioned We're now at about 25% of our customer base. This is up
Speaker Change: about 20% sequentially, quarter over quarter for us in logs, and we see a huge opportunity ahead in this area to bring logs into the fray more significantly for dynatraces we look at.
Speaker Change: Okay, perfect. And then maybe, one for Jim maybe, what did you see on new logos this quarter? Like was there anything to call out for in terms of new logo momentum? Thank you.
Speaker Change: I would say that New Logos, I would characterize New Logos as a little bit light if I'm kind of balanced about it, but not surprising that when we made these
sales segmentation changes.
Speaker Change: It's not surprising that the first traction that you're going to get with the segmentation changes is going to be in the install base, not so much for new logos, because your people are still accounts transition and you're still going through the prospecting phase. So I'd say
Speaker Change: Decent lands. I'd say the good news is we continue to land at a size that we believe has the highest propensity to expand Which as we know
from experience, that if we land over 100,000...
Dollars
Speaker Change: that those customers tend to expand faster. And so good land sizes. I'd say the new logos on the unit side were just a little bit light, but again, I think that's a bit of a function of the maturation of the sales model changes and the building of pipeline.
Okay. Perfect. Makes sense. Thank you. Congrats.
Thanks very much.
Speaker Change: The next question is from the line of Andrew Sherman with TD Cowen. Please receive your questions.
Speaker Change: Oh great, thanks. Congrats on the quarter. Rick, you talked about having a lot more newer reps with less than one year tenure. Has the churn of more tenured reps been fairly stable or is this just because of your hiring over the past few quarters?
Speaker Change: and Jim, sales and marketing expenses down quarter over quarter, anything to call out there. Thanks.
Speaker Change: Yeah, I'll take that. It's a good question. So I would say the this is not a kind of a churn in the sense of that
Speaker Change: We've seen this uptick in attrition. We've had to do a lot of new hiring. That's not what it's been at all it's been more of
Speaker Change: When we made these account segmentation changes, there's a very different skill profile for someone that's selling into the strategic IT 500 accounts.
Speaker Change: and someone that fell below that. So the added capacity was more to fill roles. We certainly had some existing reps that could move up to do that, but we added capacity in that area largely from kind of new capacity.
Speaker Change: So that's kind of the change there. So we're in a good position. You know, the fact that we have a bit of a less tenured sales force that, again, we've shown that as they progress.
Speaker Change: that obviously productivity improves and you couple that with the fact that they have very rich accounts that they're selling into, I'd say there's room for optimism that we'll see some productivity improvement.
Speaker Change: Relative to sales and marketing spend, it happens seasonally. Seasonally, Q1 to Q2 sales and marketing spend goes down. We have our sales kickoff event in our first quarter being kind of the notable one and so
Speaker Change: It's not a matter of anything else other than seasonally, that's what occurs. We still expect to probably have sales and marketing expense in the lower 30s for the year.
Speaker Change: Okay, great. And then what are you assuming for a budget flush in December? How does it feel out there from the enterprise budget flush perspective versus last year?
Speaker Change: Yeah, we are not expecting any material budget flush this year, so we are this guidance assumes kind of muted budget flush Probably consistent with what happened last year
Thank you.
Great, thank you.
Thank you.
Speaker Change: Thank you. Our next question is from the line of John DeFucci with Guggenheim Securities. Please proceed with your questions.
Thanks for watching!
Speaker Change: Thanks for taking the question. This is Howard Ma on for John.
Speaker Change: Rick and Jim, if you look at the deals closed in the first half so far, which you've been clear about was driven in part by the change to the six months of the comp cycle, which is I understand that's the intended effect.
Speaker Change: but how would you describe the quality of those deals relative to your expectations and is their step up in observability deals and could that lead to more avenues for expansion in the back half relative to last year and also in the back half as you're thinking about
Speaker Change: In the back half as you're thinking about the timing of a renewal expansion is there anything that would make you more cautious about timing of those closures yes.
Speaker Change: Timing of renewal expansions. Is there anything I would make you more cautious about timing of those steel closures?
Speaker Change: Yeah. It's a good question I guess I hadn't thought about kind of have the deals in the first half kind of how are they I wouldn't say they're materially different.
Speaker Change: Yeah, it's a good question. I guess I hadn't thought about kind of have the deals in the first half kind of how they I wouldn't say they're materially different the deals that I've seen in the first half from what they've been historically so
Speaker Change: The deals that ive seen in the first half.
Speaker Change: From what they've been historically, so other than maybe we're a little bit more weighted on expansions maybe than we've been before for the reasons that I outlined.
Speaker Change: Other than maybe we're a little bit more weighted on expansions, maybe, than we've been before, for the reasons that I outlined.
Speaker Change: And then relative to kind of the back half of the year I think I've talked about that at length around what we're expecting which is we're just we're just building a level of kind of consciousness. We're certainly optimistic with the changes that we've made we're just being cautious relative to I'm not getting ahead of ourselves with the changes but.
Speaker Change: We're just building a level of kind of cautiousness. We're certainly optimistic
Speaker Change: with the changes that we've made. We're just being cautious relative to.
Speaker Change: not getting ahead of ourselves with the changes. But, you know, I certainly don't want to convey that there's worry because there's not worry. It's a matter of just.
Speaker Change: You know I, certainly don't want to convey that there's where you because it's not where you. It's a matter of just let's let the sales changes mature more.
Speaker Change: Let's let the sales changes mature more. Let's wait to see when we see the benefit of these productivity improvements before we start kind of reflecting that in improving guides.
Speaker Change: Let's wait to see when we see the benefit of these productivity improvements before we start I'm kind of reflecting that in improving guidance.
Speaker Change: And I would simply add that we have seen an increase the number of end to end absorbability deals, which are the larger strategic transactions. They do tend to take a little bit longer to get done and we've seen that increase because that is a an accelerated go to market motion that we talked about that earlier.
Speaker Change: I might I simply add that we have seen an increase the number of end-to-end observability deals which are the larger strategic transactions they do tend to take a little bit longer to to get done and we've seen that increase because that is a an accelerated go-to-market motion that we talked about a bit earlier
Speaker Change: Thanks, that's really encouraging and if I could slip in a follow on to it at this point in the D. C. S journey, how much of <unk> growth is coming from organic expansions and new logos as compared to migrations and are you starting to see more of a deal size uplift at the point of migration, So I understand the consumption.
Speaker Change: Thanks, that's really encouraging it if I could flip in a follow-on to at this point in the DPS journey how much of DPS growth is coming from organic expansions and new logos as compared to migrations and
Speaker Change: Are you starting to see more of a deal size uplift at the point of migration? So I understand the consumption, the 2x, but at the point of migration, are you seeing any uptake there?
Speaker Change: <unk>.
Speaker Change: To X, but at the point of migration are you seeing any uptick there.
Speaker Change: Yeah. It's a good question I would say not surprisingly that.
Speaker Change: If you think about it that we're seeing good expansion on both existing customers and new logos.
Speaker Change: You know relative to are we seeing more on one versus the other I'd say, where we're seeing it equally we're still earlier in the journey on the new logo front, because the cohort sizes that we had.
Speaker Change: You know relative to are we seeing more on one versus the other I'd say we're seeing it equally We're still earlier in the journey on the new logo front
Speaker Change: because the cohort sizes that we had from back in Q1 and Q2 were a little bit less. It's been building, but healthy expansions for both.
Speaker Change: From back in Q1, and Q2 were a little bit less because it's been building, but but healthy expansions for both.
Speaker Change: Great. Thanks again.
Great. Thanks again.
Speaker Change: Yeah.
Speaker Change: I think we'll try to squeeze in one more question and then we'll close it out I'm sure that will be coming from the line of Andrew the gas fruit with BNP Paribas.
Speaker Change: I think we'll try to squeeze in one more question and then we'll close it out. Sure, that will be coming from the line of Andrew DeGastry with BNP Paribas.
Speaker Change: Hey, this is the RFP had been sitting in for Andrew Thanks for taking my question.
Speaker Change: Hey, this is Ari Friedman sitting in for Andrew. Thanks for taking my question. I was just wondering on the tweaks to the sales and go-to-market, have you guys fully staffed the sales org or is there more hiring to be done for the rest of the year? Thanks.
Speaker Change: I was just wondering on the tweaks to the sales and go to market.
Speaker Change: Have you guys like fully staffed with sales org or is there more hiring to be done for the rest of the year. Thanks.
Speaker Change: So I mean, we're certainly staff to where we expect it to be ending the first half of the year, but as I mentioned in the prepared remarks you.
Speaker Change: So, I mean, we're certainly staffed to where we expected to be ending the first half of the year, but as I mentioned in the prepared remarks, you can expect that we built optionality into our investment envelope for the back half of the year, and adding incremental capacity will be part of that.
Speaker Change: You can expect that we built optionality into our investment envelope for the back half of the year and adding incremental capacity will be part of that.
Speaker Change: Great. Thank you.
Great, thank you.
Speaker Change: Okay, well that brings us to the end. Thank you all for your engage questions and ongoing support as usual to close it was a strong first half of fiscal 2025, and we're enthusiastic about the opportunity ahead, we look forward to connecting with you and I are events over the coming weeks and we wish you all.
Speaker Change: Okay, well that brings us to the end. Thank you all for your engaged questions and ongoing support as usual. To close, it was a strong first half of fiscal 2025 and we're enthusiastic about the opportunity ahead. We look forward to connecting with you at our events over the coming weeks and we wish you all a very good day. Thank you.
Speaker Change: All a very good day. Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation you may now disconnect at this time.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect at this time.