Q4 2025 Dynatrace Inc Earnings Call
Greetings and welcome to the diner trace our fourth quarter and full year fiscal 'twenty 25 earnings conference call and webcast.
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Noel Welfarist: It's now my pleasure to turn the call over to know Welfarist, Vice President of Investor Relations. Noel. Please go ahead.
Noel Welfarist: Good morning, and thank you for joining diner Chase's fourth quarter and full year fiscal 2025 earnings Conference call. Joining me today are Rick Mcconnell, Chief Executive Officer, and Jim Benson, Chief Financial Officer before.
Noel 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 Danny traces SEC filings, including our most recent quarterly.
Noel Welfarist: Court on Form 10-Q, and our upcoming annual report on Form 10-K that we plan to file later this month.
Noel Welfarist: The forward looking statements contained in this call represent the company's views on May 14th 2025, we assume no obligation to update these statements as a result of new information future events or circumstances.
Noel Welfarist: Unless otherwise noted the growth rates, we discuss today are non-GAAP, reflecting constant currency growth in 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.
Rick Mcconnell: <unk>, which are both posted in the financial results section of our IR webpage and with that let me turn the call over to our Chief Executive Officer, Rick Mcconnell.
Rick Mcconnell: Thanks, Noel and good morning, everyone.
Rick Mcconnell: Thank you for joining us for today's call.
Rick Mcconnell: Johnny trace delivered a strong finish to fiscal 2025, having achieved several noteworthy milestones and accomplishments.
Rick Mcconnell: Subscription revenue grew 20%.
Rick Mcconnell: We surpassed $1 $7 billion in a R. R.
And $1 billion in D. P. S. A R R.
Rick Mcconnell: We expanded our non-GAAP operating margin by more than 100 basis points.
Rick Mcconnell: And our pre tax free cash flow margin by roughly 250 basis points.
Rick Mcconnell: Emphasizing the strength of our balanced business model.
Rick Mcconnell: We surpassed 1000 customers and 5000 employees.
Rick Mcconnell: We announced major platform innovations, including rail for G. C P.
Speaker Change: Observe ability for developers preventive operations cloud security posture management, AI powered log management and analytics and AI observe ability to name just a few.
Speaker Change: And we were consistently named a leader in all major analysts reports for observe ability and AI ops over the past year.
Speaker Change: Yeah.
Speaker Change: Today I'm going to cover my perspective on the Absorbability market grows tail wins and opportunities.
Speaker Change: Our agenda, AI vision, and the growing criticality of business Absorbability.
Speaker Change: Let's begin with the market.
Speaker Change: While we are clearly in an uncertain economic environment, we continue to see strength in the observed ability market as virtually all organizations.
Speaker Change: Aspire to have their software work perfectly.
Speaker Change: Just as our vision imagines.
Speaker Change: And now more than ever customers need to deliver improved productivity and.
Speaker Change: In our battery user experience at lower cost.
Speaker Change: Which is precisely our value proposition.
Speaker Change: As such.
Speaker Change: We see absorbability spend continuing to be a priority.
Speaker Change: Additionally, cloud growth remains healthy.
Speaker Change: I for scalar is are now generating nearly $250 billion in annualized revenue.
Speaker Change: Rowing in the mid twenties.
Speaker Change: And as organizations accelerate cloud and AI native initiatives.
Speaker Change: The need for AI powered observe ability at scale has never been greater.
Speaker Change: We expect to see materially greater penetration in the coming year.
Speaker Change: Into Hyperscale workloads.
Speaker Change: Where we expect the majority of Absorbability market growth to occur.
Speaker Change: And we are innovating to capture this opportunity.
Speaker Change: Our next major platform release planned for June will further empower cloud and AI native teams.
Speaker Change: To expand their AI ops and preventive operations.
Speaker Change: These new capabilities will provide development teams with easy access.
Speaker Change: Two hyper scaler in kubernetes telemetry.
Speaker Change: Leverage Davis to analyze all data with AI assistance and.
Speaker Change: And leverage Davis co pilot for remediation workflows or instant response.
Speaker Change: We believe the secular tailwind will fuel an addressable market opportunity that.
Speaker Change: We now size at $65 billion in observer ability and application security.
Speaker Change: Beyond these market dynamics I'd like to talk next about four key <unk> growth drivers.
Speaker Change: Each of these represents an intentional area of focus.
Speaker Change: To drive consumption growth across the dining trade platform.
Speaker Change: First are the ongoing investments in our go to market efforts, including customer segmentation.
Speaker Change: Partner enablement, and expanding our sales motion beyond application performance.
Speaker Change: To include end to end observer ability and cloud modernization.
Speaker Change: We kicked off these initiatives at the beginning of fiscal 2025.
Speaker Change: And they continue to gain traction.
Speaker Change: We expect them to drive sales productivity gains in fiscal 2026.
Speaker Change: We've seen a consistent trend in total pipeline growth.
Speaker Change: Driven primarily by strength in strategic accounts, where pipeline was up 45% compared to last year highly.
Speaker Change: Highlighting the traction in our customer segmentation efforts.
Speaker Change: More than 80% of our ACD closed in the quarter were partner influenced with over 40% of those coming from GSI and Hyperscale.
Speaker Change: And the expansion of our sales motion beyond our proven land and expand approach.
Resulted in more than 50% of our anchor deals in the quarter driving end to end absorbability.
These investments are gaining traction and contributed to large deal closures in the quarter.
Speaker Change: Including 15 deals with incremental ACB of over $1 million.
Speaker Change: Second.
Our dining trade platform subscription or D. P S licensing model.
Speaker Change: Continues to build momentum with over 40% of our customer base and more than 60% of a R. R. Leveraging this approach as of the end of the fourth quarter.
Speaker Change: With access to the full platform customer.
Speaker Change: Customers are adopting dining trace more broadly across their it environments, resulting any increased consumption.
Speaker Change: We expect this D. P S adoption to materialize overtime and early expansions or on demand consumption beyond customer commit levels.
Speaker Change: Third is the massive opportunity in log management.
Speaker Change: We believe the large market remains ripe for disruption given expensive legacy solutions that largely operate independently from.
Speaker Change: From existing Absorbability tools and result in lower value.
Speaker Change: Our unique approach to log management and analytics integrates logs traces metrics and other core observer ability and security data types.
Speaker Change: Into a single platform.
Speaker Change: Providing a holistic view of the help of ITE ecosystems.
Speaker Change: Combined with our AI approach team.
Speaker Change: Teams can derive greater value from logs faster and at lower cost.
Speaker Change: Leveraging grail as are massively parallel processing data Lake House.
Speaker Change: <unk> can then contribute near real time insights at enormous scale.
Speaker Change: We are seeing strong adoption of our log management offering with a third of our customers now using this solution.
Speaker Change: The number of customers leveraging logs is up 18% compared to last quarter.
Speaker Change: Plus nearly half of our new logos added in the fourth quarter are deploying logs in their initial implementation comps.
Speaker Change: Compared to roughly 20% in the same quarter last year.
Speaker Change: And finally in what could arguably be our largest growth opportunity. The AI Revolution is upon us so I'd like to turn to that next.
Speaker Change: As you know AI is evolving into a whole new era, where systems can plan make decisions and take action autonomously.
Speaker Change: According to IDC by 'twenty twenty-nine Gen I AI based software testing tools capable of writing 85% of tests will be augmented by AI agents and Egencia workflows.
Speaker Change: And we expect that as much as 80% or more undeveloped burst time is spent ensuring.
Speaker Change: That code is running properly and production by securing debugging and optimizing it.
Speaker Change: Yeah.
Speaker Change: In many ways. This is exactly what Dino trace was purpose built to enable.
Speaker Change: And it represents a massive opportunity.
Speaker Change: We were pleased to see that Forrester recently recognized dining trace is a leader in AI ops.
Speaker Change: With the highest score in the current offering category.
Speaker Change: Our mission for many years has been to deliver answers and intelligent automation from data.
Speaker Change: Well beyond dashboards and root cause analysis.
Speaker Change: Automation is enabled by an autonomous system.
Speaker Change: That can recommend and then carry out action.
Speaker Change: Based upon trustworthy deterministic conclusions from context rich data.
Speaker Change: An agenda AI is the architectural approach for that system.
Speaker Change: Indeed, our AI native platform is what sets dining trace apart from our peers.
Speaker Change: And we believe that as a result of this market evolution.
Speaker Change: It will become an even bigger differentiator in the future.
Speaker Change: In fact diner.
<unk> has been investing in advancing our capabilities.
Speaker Change: To evolve into a fully agenda AI platform that can automatically remediate protect and optimize without the need for human intervention.
Speaker Change: A true a gentle platform must be able to make intelligent decisions to act in real time.
Speaker Change: We postulate this requires various core capabilities.
Speaker Change: You need a common data Lake house to store all data types in context.
Speaker Change: For accuracy performance and scale without manual tagged.
Yeah.
Speaker Change: You must be able to act in real time without.
Speaker Change: Without limitations and predefined schemas or indexing.
Speaker Change: Yes.
Speaker Change: You need causation of data not correlation.
Speaker Change: To deliver answers that are trustworthy and actionable.
Speaker Change: You need a combination of AI techniques, including causal predicted and generative AI.
Speaker Change: To facilitate the discovery and prediction of issues to provide these answers.
Speaker Change: And in autonomous Lee, preventing and remediated issues as well as optimizing cloud native workloads.
Speaker Change: An agenda AI system needs to delegate and handled tasks.
Speaker Change: Not only on its own but also to an ecosystem of AI agents.
Speaker Change: We believe <unk> is uniquely positioned to lead in this space with Grail.
Speaker Change: Our index list scheme of free Lake House designed for real time, intelligent AI automation at scale.
Speaker Change: Today, we already provide the knowledge memory reasoning planning and Actioning to meet the heightened requirements when adjourn take AI system.
Speaker Change: Yeah.
Speaker Change: Our knowledge is fueled by one agent collecting all data types in context.
Glenn: Normalized with our semantic dictionary Glenn.
Glenn: Cleansed protected and then ingested through open pipeline.
Glenn: Rail provides instant access to petabytes of short and long term data in context.
Glenn: The real time memory.
Glenn: To enable AI queries.
Glenn: Davis Leverages, the combination of causal predictive and generative AI to handle the reason.
Davis AI Copilot can then intelligently plan actions based on context and reasoning.
Glenn: And finally <unk>.
Glenn: Our automation engine is able to take action.
Lee: Economists Lee executing tasks and collaborating with third party AI agents.
Lee: We plan to continue to innovate aggressively to meet the needs of this rapidly evolving AI landscape.
Speaker Change: I'd like to next turn to business observe ability.
Speaker Change: Because the AI landscape continues to evolve so too have our customers' needs for a more sophisticated absorbability approach.
Speaker Change: They want more than technical analytics.
Speaker Change: Organizations, one he's observe ability solutions to.
Speaker Change: To help them understand core business metrics.
Speaker Change: Is this absorbability provides precise answers.
Speaker Change: To help customers address not only operational issues, such as cost reduction and risk mitigation.
Speaker Change: But also customer centric issues.
Speaker Change: Such as optimizing user experience and driving profitability.
Speaker Change: For example.
Speaker Change: A large cruise ship operator, using diamond trades to enable an exceptional on ship experience for passengers.
Speaker Change: They began with the core user experiences they want to track.
Speaker Change: And then drill down into micro services and technical analytics, rather than the other way around.
Speaker Change: In many such customer deployments Arab platform is playing an increasing role in our differentiation.
Speaker Change: Only dining traced captures business events in context with other data types.
Speaker Change: Enabling quick and easy querying reach visualization dashboards and business driven automation.
Speaker Change: I'd like to highlight just a few of our larger Q4 wins.
Speaker Change: A major airline already committed to spend nearly $50 million with diamond trace over its contract term.
Speaker Change: Signed an additional seven figure expansion in an ongoing effort to reduce the number of disparate monitoring tools, including logs to.
To have all their relevant data types in one place with Greg.
Speaker Change: Our Canadian financial services company, another eight big your customer.
Speaker Change: Added a seven figure expansion to consolidate various observer ability and log monitoring tools stay.
Speaker Change: Standardize on diner trace and substantially reduce costs.
Speaker Change: And we closed a seven figure expansion deal with a large software company, including logs on Grail to ensure stability and performance during a major software release.
Speaker Change: Finally, I'd like to welcome Steve Mcmahon to dining trace as our new Chief customer officer.
Replacing Mathias Dolent Shar, who is retiring from the company.
Speaker Change: I wish him and he is well after an incredible career here over the past decade.
Speaker Change: And I am delighted with Steve's appointment.
Speaker Change: His background and observe ability and security at Splunk crowd strike in Zee scalar provides him a terrific foundation for a rapid ramp.
Speaker Change: Yeah.
Speaker Change: To wrap up our market opportunity is stronger than ever.
Speaker Change: We have several dining trade specific drivers supporting our growth.
Speaker Change: We have a significantly differentiated AI powered absorbability platform that is leading the way toward us delivering a highly differentiable agenda absorbability platform.
Speaker Change: We are increasingly bringing customers deep business insights.
Speaker Change: And we have a compelling business model, which has enabled us to deliver a sustained balance of growth and profitability.
Jim Benson: Jim over to you.
Jim Benson: Thank you Rick and good morning, everyone.
Jim Benson: Q4 was a strong finish to fiscal 'twenty five.
Jim Benson: Once again, we exceeded the high end of guidance across all topline growth and profitability metrics.
Jim Benson: Our ability to execute successfully in this dynamic environment is a testament to.
Jim Benson: To the growing criticality of durability and security in the market are highly differentiated AI powered platform.
Jim Benson: Our ability to demonstrate exceptional business value and ROI for our customers and the predictability and durability of our business model.
Jim Benson: Fiscal 'twenty five was a pivotal year in evolving our go to market model and driving broader usage of the platform across our customer base.
Jim Benson: Leveraging our flexible scalable and frictionless Dps licensing model, we have made it easy for a growing number of customers to gain full access to the platform and adopt diamond trade more extensively within their it environments, including capturing more usage of our emerging and adjacent solutions.
Jim Benson: This journey continues in fiscal 'twenty six.
Jim Benson: Let's review, let's review the results in more detail growth rates mentioned will be year over year and in constant currency unless otherwise stated.
Jim Benson: Annual recurring revenue or a R. R ended the year at $1 $73 billion, representing 17% growth slightly above the high end of guidance driven by steady expansion bookings, including a number of seven figure ACB vendor consolidation deals.
Jim Benson: We added 171, new logos in Q4 up slightly from a year ago as we remain focused on landing enterprise accounts with a higher propensity to expand.
Jim Benson: The average new logo land size remains healthy at $130000 on a trailing 12 month basis.
Jim Benson: Highlighting the market trend away from ineffective point solutions and towards software providers like dining trace with platform breadth and depth.
Jim Benson: Once customers experienced the benefits of the <unk> platform. They had been quick to expand their usage. Our average <unk> per customer continues to grow and is now well over $400000 highlighting the incremental adoption of the platform and inherent business value we provide to customers.
Jim Benson: Given the significant cross sell and upsell opportunities and our enterprise customer base. We believe the average <unk> per customer opportunity could be $1 million or more over the long term.
Jim Benson: Our gross retention rate in Q4 remained in the mid nineties, demonstrating the strategic relevance for the <unk> platform as a mission critical component of our customers' operations.
Jim Benson: Net retention rate or <unk> was 110% in the fourth quarter.
Jim Benson: Customer penetration of our Dps licensing model is gaining traction.
Rick Mcconnell: As Rick noted, we exited Q4 with over 40% of our customer base on Dps more than doubling the number of dps customers during fiscal 'twenty five.
Rick Mcconnell: Further dps customers now contribute over 60% of our a R R representing more than $1 billion.
Rick Mcconnell: Our expectation when we launched EPS was that customers with full access to the platform with leverage more capabilities and extend diner trace more broadly into their it environment and we have seen this thesis play out.
Rick Mcconnell: For example, dps customers consume on average 12 capabilities compared to five capabilities for SKU based customers.
Rick Mcconnell: In terms of usage volumes on the platform Dps customer consumption growth rates are two X the rate of SKU based customers and leading to much higher expansion rates as a result, the average error for dps customer is over $600000 well above the company average.
Rick Mcconnell: While consumption growth takes time to translate into subscription revenue or a or our growth. These robust dps penetration and platform consumption trends are positive indicators for future top line growth.
Rick Mcconnell: As we shared last quarter as Dps has matured and scaled it's customer friendly approach to pricing, which was not which does not penalize customers for exceeding commitments is leading some customers to consume on demand instead of renewing or expanding early.
Rick Mcconnell: In Q4 on demand consumption revenue R. O D. C was $9 million up from $7 million in Q3, and bringing trailing 12 month OTC revenue to $21 million.
Rick Mcconnell: OTC is another lever for subscription revenue growth. In addition to new logo and expansion bookings. However, this revenue is not captured in our N R R or Ara metrics, which only include contractually committed revenue.
Rick Mcconnell: Moving onto revenue total revenue for Q4 was $445 million growing 19% and exceeding the high end of our guidance range by 200 basis points subscription revenue for Q4 was $424 million up 20% and similarly exceeds.
Rick Mcconnell: In our guidance aided by strength in OTC revenue.
Rick Mcconnell: Turning to profitability Q4, non-GAAP operating margin was 26% exceeding the top end of guidance by over 100 basis points driven by revenue upside flowing to the bottom line.
Rick Mcconnell: non-GAAP net income was $99 million or 33 cents per diluted share <unk> <unk> above the high end of guidance.
Rick Mcconnell: Turning to a quick summary of the full year results total revenue was $1 $7 billion and subscription revenue was $1.62 billion, both growing 20%.
Rick Mcconnell: Full year non-GAAP operating margin was 29% 25 basis points above the high end of guidance and 120 basis points above fiscal 'twenty four.
Rick Mcconnell: Demonstrating our ability to drive leverage in the business model, while still investing for growth.
Rick Mcconnell: non-GAAP net income for the year was $422 million or $1 39 per diluted share or.
Rick Mcconnell: Our non-GAAP earnings factor in an effective cash tax rate of 22%.
Rick Mcconnell: Full year free cash flow was $431 million or 25% of revenue.
Rick Mcconnell: 50 basis points above the high end of guidance and 100 basis points above fiscal 'twenty four.
Rick Mcconnell: As a reminder, this strong cash flow margin result includes absorbing nearly 700 basis points of impact due to cash taxes.
Adjusting for cash taxes pre tax free cash flow for fiscal 'twenty five was 32% of revenue an improvement of nearly 250 basis points compared to fiscal 'twenty four.
Rick Mcconnell: Turning to the balance sheet as of March 31st we had nearly $1 $2 billion of cash and investments and zero debt.
Rick Mcconnell: In Q4, we repurchased 787000 shares for $43 million as part of our opportunistic share repurchase program.
Rick Mcconnell: Since the inception of the program in May 2024 through March 31, 2025, we have repurchased three 4 million shares for $173 million.
Rick Mcconnell: With approximately $327 million remaining of the $500 million authorization.
Rick Mcconnell: Yeah.
Rick Mcconnell: Let's turn to guidance.
Rick Mcconnell: As always we continue to manage the business in a measured manner and our prudent approach to guidance remains unchanged.
We are mindful of the fluid nature of the geopolitical and macro landscape.
Rick Mcconnell: While we have not seen any notable impacts in demand or close rates to date, we expect enterprises to remain careful in their spending and our approach to guidance assumes an incremental level of caution in terms of budget scrutiny and sales cycle length throughout fiscal 'twenty six.
Rick Mcconnell: With that as context, let's start with our guidance for the full year.
Rick Mcconnell: We expect a IRR to be between 1.9, 75, and $1 $99 billion Rep.
Rick Mcconnell: Representing a growth of 13% to 14%.
Rick Mcconnell: While we don't guide to air or on a quarterly basis, we expect quarterly seasonality of net new <unk> to be similar to the last several years.
Rick Mcconnell: Turning to revenue, we expect total revenue to be between 1.95.
Rick Mcconnell: The $1 96, $5 billion up 14% to 15%.
Underlying that subscription revenue is expected to be between 1.865 and $1 $88 billion also up 14% to 15%.
Rick Mcconnell: Within subscription revenue, we are assuming an O D C revenue contribution of $30 million.
Rick Mcconnell: Since OTC is uncommitted dependent on many factors and our history is somewhat limited we are being appropriately conservative with our initial O D C assumption for the year.
Rick Mcconnell: Our fiscal 'twenty six guidance is based on foreign exchange spot rates as of May 12, 2025, representing an FX tailwind are are an revenue of $20 million and $17 million respectively.
Rick Mcconnell: We expect non-GAAP operating income to be between 560 and $570 million, resulting in a non-GAAP operating margin of 29% for the year.
Rick Mcconnell: We will continue prior toward prioritizing investments in R&D and sales capacity.
Rick Mcconnell: Customer success, and our partnership programs, while driving further scale and efficiency in other areas.
Rick Mcconnell: We expect non-GAAP net income to be $481 million to $494 million, resulting in a non-GAAP EPS of $1 56 to $1 59 per diluted share.
Rick Mcconnell: Based on 309 to 310 million shares outstanding.
Rick Mcconnell: We estimate our fiscal 'twenty six effective cash tax rate to be 19% down from 22% in fiscal 'twenty five due primarily to the benefit of the IP transfer I mentioned last quarter.
Rick Mcconnell: We expect free cash flow to be between 505, and $515 million or 26% of revenue a 100 basis point improvement from fiscal 'twenty five levels.
Rick Mcconnell: As a full cash taxpayer, we believe the best way to benchmark our cash flow generation is on a pre tax basis as most software peers pay minimal cash taxes adjusting for cash taxes pre tax free cash flow margin is expected to be 32% in fiscal 'twenty six.
As a helpful reminder, for your modeling due to seasonality and variability in billings, we expect free cash flow to be significantly higher in the first and fourth quarters and significantly lower than the second and third quarters.
Rick Mcconnell: Looking to Q1, we expect total revenue to be between 465 and $470 million and subscription revenue is expected to be between 445 and $450 million, both growing 16% to 17%.
Rick Mcconnell: non-GAAP operating income is expected to be between 130 and $135 million or 28 to 28, 5% of revenue.
Rick Mcconnell: Lastly, non-GAAP EPS is expected to be 37 to 38 cents per diluted share based on a share count of 304 to 305 million shares.
Rick Mcconnell: In closing the strength of our Q4 and fiscal 'twenty five performance sets a solid foundation for fiscal 'twenty six.
Rick Mcconnell: The secular growth drivers fueling the absorbability market are unchanged and our AI powered end to end platform differentiates us and puts us in a strong competitive position the.
Rick Mcconnell: The fundamentals of the business are increasingly being driven by consumption and we are investing to fuel that growth.
Rick Mcconnell: We have a strong track record of consistent execution, we are committed to maintaining a disciplined approach to optimizing costs and improving efficiency at the same time, we will continue to invest in future growth opportunities that we expect will drive long term value.
Rick Mcconnell: With that we will open the line for questions operator.
Rick Mcconnell: Thank you, we'll now be conducting a question and answer session, if you'd like to be placed in the question queue. Please.
Rick Mcconnell: Press Star one on your telephone keypad as a reminder, we ask you. Please ask one question then return to the queue, if you'd like to remove yourself from the queue. Please press star two once again Thats star one to be placed into question queue them. Please ask one question and then return to the queue. Our first question is coming from Patrick <unk> from Scotiabank.
Rick Mcconnell: Your line is now live.
Patrick: Thank you so much for taking my question.
Speaker Change: This one two both Rick and Jim.
Speaker Change: And I'll field work logs is.
Speaker Change: Performing very well it was interesting to hear in your prepared remarks similar commentary.
Speaker Change: If I rewind back to this time last year.
Speaker Change: Logs target for $100 million layer, all was pushed out slightly so I guess could you kind of wrap around.
Speaker Change: Some quantitative context to that qualitative looks commentary.
Speaker Change: And any update if possible on where we all of us at that target and what we should expect in fiscal 'twenty six and logs. Thank you.
Speaker Change: Good question, Patrick we're very pleased with logs, we have over a third of our customers now leveraging log solutions will continues to grow.
Speaker Change: As you can imagine it varies for customers that are using it pretty significantly and customers that are just starting with it.
Speaker Change: <unk> is the fastest growing product category.
Speaker Change: In the company it has been.
Speaker Change: And for the $100 million, we'll just remind you that that's kind of because it's called consumption oriented goal.
Speaker Change: Not an arguable because we with Dps contracts, we don't exactly know what the.
Speaker Change: Customers consuming until they consume it so the $100 million ambition, we have high confidence we will exceed that in fiscal 'twenty six.
Speaker Change: And you know it is a business just to give you just some.
Speaker Change: Rough numbers that business will grow well over 100%.
Speaker Change: In fiscal 'twenty six.
Speaker Change: I would just add Patrick that we had a pretty substantial upgrade wave in the logs capability back in the October timeframe.
Speaker Change: And that's one we really saw logs began to accelerate.
Speaker Change: We're excited about what we've seen we like the we like the metrics of more than $100 million in consumption. This year as Jim said and at that growth rate of north of 100% we were quite optimistic about the business. This year.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question today is coming from Matt Hedberg from RBC. Your line is now live.
Matt Hedberg: Great. Thanks for taking my question Brook, I wanted to drill into the go to market. It looks like you had a lot of success. This past year with with GSI is in Hyperscale and in particular, that's great to see.
Speaker Change: Yes.
Speaker Change: First of all how would you how would you talk about sales productivity you guys. Obviously made a lot of changes last year, including new six months quotas and you're also realigned some.
You know some territories I guess, how did that fare versus your expectations and are there any other significant changes you're planning on making this year to kind of the go to market.
Speaker Change: Now, let me take the first part and I'll, let Jim comment on sales productivity on the first part GSI in Hyperscale alerts are a fundamental part of our strategy.
Speaker Change: We have now grown our overall partners as we said in our prepared remarks to well more than 70%.
Speaker Change: Our overall deployment in ACD.
Speaker Change: And it gives us substantially greater reach to get to customers for deployments implementations management and so it gives us a bigger footprint.
Speaker Change: Then attack those those customer opportunities, we look forward, which are obviously very much aligned to our target customer base. So that's how pulp and as we shift our attention to cloud native workloads as well as AI native workloads. Those those are all going to be present in the cloud in wage.
Speaker Change: In which case hyper scalar has become incrementally more critical for us as those contracts. So we're fully leaned into partners. It remains a core element of the overall sales motion Jan you want to comment yeah, what I would say about the go to market update is I think I would say we remain pleased with the progress.
Speaker Change: As a reminder, a you mentioned a few of the changes, but the three big ones where we.
Speaker Change:
Speaker Change: Two kind of reps more to higher propensity to spend customers.
Speaker Change: That's progressing well those accounts have double the pipeline and the pipeline in total so very good traction there obviously pipeline as a precursor to.
Speaker Change: To a booking Rick.
Speaker Change: Rick mentioned channels, we now have over three quarters of our business that is leveraging a channel we still want.
Speaker Change: I want to continue to get some progress on hardware originated but good progress on channels and then the sales plays the sales plays being.
The your traditional ATM sales play kind.
Speaker Change: Kind of a cloud native workloads sales play and end to end tool consolidation again doing very well doing very well, particularly with tool consolidation. So we feel very good about it I'd say the maybe the one enhancement Matt that we're making for fiscal 'twenty six everything else that I said remains unchanged, we are adding what we're calling.
Strike teams. So these are teams of people that.
Speaker Change: One are working they're not specialist teams with their strike teams that have a particular focus area in the focus areas for our shrike teams are one logs to application security and three.
Speaker Change: Them digital experience monitoring so those three areas are going to a strike teams and are focused on driving adoption driving consumption you heard a lot in the opening remarks about the company underpinnings, becoming more consumption and adoption oriented having these strike teams are going to help us fuel that growth.
Speaker Change: On the go to market side, so we feel very good about that.
Speaker Change: Thank you. Our next question today is coming from Brent Thill from Jefferies. Your line is now live.
Brent Thill: Oh, Thanks, just on the strategic account growth I think you mentioned over 45% pipeline growth just remind us you know.
Speaker Change: When have you seen that level Frank.
Speaker Change: And maybe to Matt's question on the on the close in the pipeline it seems like it's growing.
Speaker Change: At a much higher rate when do the close rates start to come up to kind of match that pipeline growth you're seeing.
Speaker Change: Yeah. It's a good question I mean, I'd say, what you have you have the tailwind in I'll say headwinds on the tailwind side I think that the demand environment continued to be.
Speaker Change: Pretty resilient.
Speaker Change: And so therefore, you're seeing that kind of been broader pipeline and the good news is these larger accounts, we're seeing a growing percentage of that pipeline.
Speaker Change: Having said that I'd say, what's changed in the last maybe three months and I'd say that the macro environment is a bit more uncertain I still think deals are going to get done I think what we've tried to imply in this is that deals might take a little bit longer, especially when you're talking to large strategic accounts, especially for those that are considering.
Speaker Change: Some level of tool consolidation.
Speaker Change: Those deals and those accounts take a little bit longer and so you know I think that for us. The fuel is pipeline and you know to remind you that.
Speaker Change: Again about this notion of driving more consumption that with our business, becoming more heavily weighted towards <unk> platform subscriptions, 60% of our ALR now in growing up the notion of driving adoption and consumption becomes much much more important because that by its definition is a consumption oriented model. It has the benefit of a ratable revenue.
Speaker Change: Recognition subscription model, but it's underpinnings are consumption and so.
Speaker Change: There's a bit of a reorientation within the company as I mentioned strike teams. It's also our customer success teams around making investments to drive more consumption now there's a lag between consumption and when you see it either show up in a or or or in subscription revenue through <unk>, but it is kind of a core underpinning of future growth for the.
Speaker Change: And the good news is consumption is growing at a very rapid clip.
Speaker Change: Thank you. Our next question today is coming from Rob Owens from Piper Sandler Your line is now live.
Rob Owens: Great. Thank you for taking my question would love to pivot a little bit to the security opportunity.
Rob Owens: Do you think needs to happen to unlock it more broadly is just a function of product depth or more so go to market at this point. Thanks.
Rob Owens: Well I think it's a combination rod yeah, we see good traction with our RBA solution, our vulnerability analytics, we need to.
Rob Owens: Continue to extend our offerings in this area.
Rob Owens: Vacations toward movement to CAGR in cloud Tim type opportunities I think represents the next foundation of growth for us. So that's where we're looking and of course, we've got kubernetes and cloud security posture management, which is now available.
Rob Owens: We expect to grow as well so a.
Rob Owens: Short form is combination of expanded product offerings with which.
Rob Owens: We are working and delivering to the market as well as expanded go to market. Jim mentioned strike teams earlier, we have an apple ex strike team that is exclusively focused on the go to market part of this area.
Speaker Change: Thank you. Your next question today is coming from Raimo <unk> from Barclays. Your line is now live.
Speaker Change: Hey, Thank you congrats from me as well.
Speaker Change: Jim do you you have to you hopefully easy toss to think about on demand revenue for next year can you talk a little bit about how you went about it Chris you. Obviously as you said you don't have a lot of historic data like how should we think about how are you kind of frame that thank you.
Speaker Change: That's a good question Raimo, obviously, we kind of inserted in Q3 this notion of on demand consumption, becoming a kind of a growing.
Speaker Change: Part of the growth story of the company, which is again underpinning this consumption point that I made earlier, so we're a year into it as you can imagine with customers that have gone through at.
Speaker Change: At least the first cohort of customers that have gone through their annual reset periods and so we've looked at how they behaved well.
Speaker Change: We've looked at what are the think of it as the attach rates how much of your business is going through an annual reset period by quarter. How much is that growing what is the kind of for lack of a better from OTC attach rate to what you've seen historically so what we've done is we've tried to apply some analytics.
Speaker Change: On that and as I mentioned in my prepared remarks, because it's uncommitted.
Speaker Change: And it.
Speaker Change: You have to account for a bunch of factors, including do cohort classes for your FERC cohorts behave the same way in year two do the new cohort classes behave the same way as the first year cohort classes and so we did apply a level of kind of conservatism to that we'll update you along.
Speaker Change: Along the way, but that's kind of the general way that we framed it we looked at it from a think of it as an attach rate perspective, but we built some caution knowing that cohort classes are going to behave a little bit differently.
Speaker Change: Thank you. Your next question is coming from a car shrunk from Goldman Sachs. Your line is now live.
Car Shrunk: Hello, Thank you very much and congrats on finishing up the fiscal year very solidly as you look at the on demand revenue how do you trade off the.
Car Shrunk: Upside, where you want to do better and maybe talk about the the sales incentives that are going into the consumption aspects of the business versus also also at the same level of raising the bar for what is predictable and increasingly trying to get the upside into.
Car Shrunk: Into the customer contracts, so we locked them up and you get even more visibility so trading off the upside versus the predictability at a higher level as Florida wanted to get your thoughts on thank you so much.
Speaker Change: Yes, that's a good question as you can imagine there's a bunch of variables within there. It's one of the things that we haven't done that we are doing this year cash is that our customer success teams and the strike team that we mentioned they are exclusively measured on consumption and adoption and so it's a bit of a change where we.
Speaker Change: Now have dedicated teams of people that before we're working with customers on helping them in the adoption of our products and solutions. We now have a new team with these strike teams. In addition to our core customer success teams and so these these are from an incentive perspective both of these teams.
Speaker Change: Their measurement is on consumption. So you know again my point about driving more adoption driving more consumption.
Speaker Change: I said in my prepared remarks, we're already making tremendous traction yet customers on Dts as a contracting vehicle and we have found they consume more they consume more of the platform. So they consume more of our solutions they consume more deeply and so what we needed to do and the changes. We've made this year is to better.
Speaker Change: Four to five.
Speaker Change: Teams that are focused on driving consumption and consumption and adoption and so that's the big focus as you mentioned that that will show up in two ways Ulf.
Speaker Change: Ultimately it will show up with maybe a continued high growth in consumption and customers burnt through their commitments early you need to go to an on demand consumption or in some cases customers will renew early.
Speaker Change: There's a bit of timing delay for these but again kind of a core underpinning that we were trying to convey on this call as a consumption is becoming a growing.
Speaker Change: Part of the narrative.
Speaker Change: That we've historically been a kind of bookings.
Speaker Change: Oh are oriented company, that's still important but this consumption notion is is becoming more important for the company and that's I'd say, we're going through a bit of a transition in 'twenty six would be that kind of a.
Speaker Change: The next phase of the transition that started in fiscal 'twenty six.
Speaker Change: Yeah, I would I would add to that just to highlight we are still a subscription business, but that said, we believe that especially in a dps world. It really is about driving consumption.
Speaker Change: So to Jim's point, whether it is it is compensating on consumption for strike teams or D. One services teams our customer success teams.
Speaker Change: We see dramatically higher consumption than an EPS deployment, we believe that that is a precursor to future revenue and subscription growth opportunity and so that's where we're focused as a company.
Speaker Change: Thank you. Our next question today is coming from Andrew Nowinski from Wells Fargo. Your line is now live.
Speaker Change: Thank you good morning, and a nice quarter.
Speaker Change: Results I wanted to ask maybe on the.
Speaker Change: Net retention rate, so I know the OTC component seems distort that real net retention.
Speaker Change: Given that it's.
Speaker Change: Not included in there are but I'm wondering.
Speaker Change: Given that it is a growing piece of your business.
Speaker Change: What would look like if or what does it have increased if you would use subscription revenue instead of air or as part of the <unk> calculation and then how are you thinking about.
Speaker Change: The trajectory of the net retention rate in fiscal 2006. Thank you.
Speaker Change: Yeah. It's a good question as you can imagine that the dynamics of NRI as you said, there's a correlation between what is committed which is N O arm, what is uncommitted, which is not an NOI.
So and our Arctic modestly down we're talking decimals.
Speaker Change: From 111 to 110 from Q3 to Q4, but again decimals that if you add it in.
Speaker Change: Oh D CS, which I kind of think about them as deferred a or are deferred and R. R.
Speaker Change: Actually you would have seen a modest uptick in Iraq in Q4 from Q3.
Speaker Change: Thank you. Our next question today is coming from Sanjay Singh from Morgan Stanley. Your line is now live.
Sanjay Singh: Yes, thank you for taking the questions a bit of higher.
Sanjay Singh: Higher level question kind of on your AIC Rick in your script, we're hearing more about autonomous or maybe nearly economists SRV agents too.
Sanjay Singh: Two questions there one any sort of timeline that youre seeing about customers wanting to move to this sort of operational cadence having agents execute a lot of you observed ability workload workflows and if that is that if that is the case. What do you think the impact is on overall durability demand and sort of how products are built.
Sanjay Singh: If agents are going to be executing the workflows and then iteratively platform versus here.
Sanjay Singh: Few minutes, sorry engineers, thanks for the thoughts.
Sanjay Singh: How does a great question Sanjay and after about an hour I will have answered it [laughter].
Sanjay Singh: Yeah.
Sanjay Singh: The.
Sanjay Singh: Short form as is we see we see the trend line, absolutely moving and moving aggressively toward agenda AI.
Sanjay Singh: But broadly and specifically in <unk>.
Sanjay Singh: And the result of it is there to what customers really want is they want the the conclusion or saturation of our mission, which is to deliver answers and intelligent automation from data.
Sanjay Singh: What they've been getting and observe ability is the data part or the answer is hard but not the automation part.
So the way that we see this evolving is that drew again, thank observe ability or an objective observer ability platform with penetration. They actually can now take action based on those answers.
Sanjay Singh: Well that begin to get your second question on how does this how does this occur.
Sanjay Singh: What we believe is that you need multiple different layers of capabilities to deliver a true agenda conserve ability platform.
Sanjay Singh: In first need a completely integrated data Lake house in which we have in rail, which has all data types logs traces metrics et cetera in context in one unified data Lake House, Secondly, you need a completely integrated Davis AI engine, which we have that does causal predicted.
Sanjay Singh: Well, the generative AI to be able to deliver those answers that are trustworthy.
Sanjay Singh: Once you can trust the answers that you need an automation engine.
Sanjay Singh: Which we have to then be able to execute those instructions within the absorbability environment.
Sanjay Singh: And finally, an area that we're beginning to work more firmly on his do they then extend that against a set of protocols to third party agents to be able to then effectuate change in code for example.
Sanjay Singh: So it is a multi layered stack. We believe we have the foundation for success here that is unique and the desirability industry and we're all in on driving and <unk> future in observe ability utilizing <unk>. So this is a major major thrust for us as we look to the future.
Speaker Change: Thank you. Your next question is coming from Pajama borrow from JP Morgan Your line is that life.
Pajama borrow: Oh, great. Thank you, putting the questions and congrats on the quarter.
Speaker Change: Jim I just wanted to go back to it if you have it.
Speaker Change: How are you thinking of kind of the car how should we I guess, we should think about the customer behavior around on demand consumption going forward.
Speaker Change: This macro and as we look towards kind of building. The guide how do you thread the needle between the assumptions around incremental OTC component versus last years O D C leading to larger committed contracts.
Speaker Change: Yeah. It's a good question that I tried to answer a little bit of that with Ramos question, which is the way we thought about what he sees that we thought about Ot sees in the in the realm of looking at cohort classes cohort classes that come up with their contract resets and looking even though our sample size is limited it's for.
Speaker Change: Waters, how did prior customers behave we know the contract types vary a little bit some customers run ramps some customers are not.
Speaker Change: So we factored a bunch of things in.
Speaker Change: But we did apply a.
Speaker Change: Some conservatism to it because by nature. It is an uncommitted, having said that everything we've been talking about for the past 30 minutes has been about our focus on driving more consumption and adoption. So to the extent we can do that.
You'll need to see it hopefully show up in the form of OTC or in <unk> relative to the macro.
Speaker Change: It's hard to judge I'd say.
Speaker Change: Now the fact that customers are using more of the platform we.
Speaker Change: I would tell you that they are getting value out of it. So I think you know the criticality of durability is even greater now than it was kind of a year ago, especially with the evolution of things, but you know I'd say from a macro perspective.
Speaker Change: What you might find is you might find customers that maybe commit to.
Speaker Change: You know a more finite number when they actually have a crack contractually committed deal and they are willing to go into OTC because again, we don't penalize you.
Speaker Change: From for going over your your consumption.
Speaker Change: For your commitment I should say and so I think that it's actually good in a in a tighter macro environment, because we're not doing something that.
Speaker Change:
Speaker Change: You know pushes a customer to maybe throttle something they can increase their adoption and we're not penalizing them for it. So it's actually a very kind of favorable vehicle in an environment that maybe customers are being a bit budget conscious.
Speaker Change: Thank you. Our next question today is coming from will power from Baird. Your line is now live.
Will Power: Okay great.
Will Power: Rick you know you've called out the strength youre seeing in partner relationships.
Will Power: Our go to market strategy perspective, I think in your prepared remarks, you called out the expectation for material Hyperscale growth.
Will Power: In particular I Wonder if you could just kind of drill down for us kind of what what boy is underpinning our confidence around the hyperscale or trends, what you're seeing today versus what you've ever seen in the past.
Will Power: Well a couple of things well first that is where we see the vast majority of the observer ability growth happening is in <unk>.
Will Power: Hyperscale workloads.
Will Power: And given that that's where the majority of the growth is happening and observe ability.
Will Power: The majority of customers want to take their contractual relationships through the hyperscale.
Will Power: Because it utilizes their contractual total stat.
Will Power: So those relationships become seminal I would say in making sure that we have the.
Will Power: The most frictionless contract vehicle to be able to take orders for Hyperscale workloads, which is which is vastly increasing.
Will Power: Second thing is we either have entered or in the process of entering various different go to market relationships with hyperscale or such as the one we recently announced with AWS with their SBA program.
Will Power: To effectively engage in in greater close out.
Will Power: And when we add the combination of <unk> plus teaming agreements with our other partners, we see very very strong win rates.
Will Power: So this is one of the reasons, we're pushing on it and one of the areas of acceleration potential as we see in depth.
Speaker Change: Thank you. Our next question is coming from Jake Roberta from William Blair. Your line is now live.
Speaker Change: Hey, Thanks for taking the question just on Dps and great to hear those customers are still expanding at pretty healthy rates can you talk about how behavior has trended across the different cohorts that you've on boarded onto Dps I know early on there may have been some selection bias there, but now that you've started to get a larger base of.
Speaker Change: <unk> on the Dps are you seeing those same types of expansion rates play out across the longer tail of the base.
Speaker Change: Yeah, I mean, it's a good question I mean, I would say broadly speaking the answer is yes, you're right. The early cohort classes, where customers that were SKU based customers that.
Speaker Change: We're already pretty significant dying trees users and they just wanted a better vehicle to better consumed entrees, but as we've added new cohort classes, we've seen kind of a.
Speaker Change: A broader behavior, where customers are leveraging more of the of the capabilities.
Speaker Change: And so I'd say that what used to be kind of a sampling bias has become something that's played out across pretty broadly and which is again why our focus is.
Speaker Change: Getting more customers onto Dps as a contracting vehicle get our adoption team's oriented to try to drive more consumption.
Speaker Change: We have proven.
Speaker Change: That when we do that.
Speaker Change: Customers will burn through their commitments earlier in their either go through an OTC or they'll they'll do an expansion and so that's kind of the play that we're trying to run and we feel very good about the traction we made in fiscal 'twenty five.
Speaker Change: Thank you next question is coming from Keith Bachman from BMO capital markets. Your line is now live.
Speaker Change: Yeah.
Keith Bachman: Good morning. Thank you very much I also want to ask about D. P. S into two different guards a on the more near term how are you thinking about the uptake rate.
For GPS in the next fiscal year in other words, where do you think you'll end up either as a percent of customers or percent of IRR and then part b of the question is.
Keith Bachman: One of the key benefits of Dps is the ability of customers to adopt your portfolio more rapidly just it reduces friction to buying.
Keith Bachman: And I was wondering if you could just talk a little bit about how you're thinking about thereby portfolio expansion.
Keith Bachman: And you have a couple of key building blocks, obviously with Grail getting widespread adoption and AI are candidly, probably requiring and enabling more adoption and part of the context of the question is data data dog candidly just has a broader portfolio of solutions.
Keith Bachman: <unk> and I just wanted to hear you speak a little bit about how you're thinking about your portfolio expansion.
Keith Bachman: Given the building the box given D. P. S over not just the next year, but over the next number of years, thanks very much.
Keith Bachman: So Keith.
Keith Bachman: I would hesitate to give you a percentage for fiscal 'twenty six.
Keith Bachman: Around percentage of Dps customers in <unk>.
Keith Bachman: Other than to say, we expect it to continue to grow I'd say longer term, we do expect call it 75% to 85% of our customers ultimately to go onto that you probably won't get all of them. It will still be customers that want to stay on SKU based vehicles.
Keith Bachman: Maybe government entities things of that nature, but I would say the the the objective longer term as we get set at 75% to 85%. So think of that as you know.
Keith Bachman: The the vast majority of your business is going to be on this contract vehicle and your point about adoption is that is the funnel minimal fundamental premise sub dps should get them.
Keith Bachman: On the to the Dps contracting to be able to get full access to the platform.
Keith Bachman: Indeed, if you do look at the capabilities are there you know I would say that we have quite a few capabilities on the platform and even though we're getting some level of penetration even for as kind of new emerging areas logs being the most notable is the fact that a third of our customers are now on logs, but that third is not.
Keith Bachman: Spending anywhere near what the opportunity is for logs logs you know for the reasons that Rick outlined I think it's we're.
Keith Bachman: We're primed to be disruptive in that area, just with the underpinnings of the platform with Grail and so part.
Keith Bachman: Part of it is getting them to adopt more of the platform.
Keith Bachman: There are a bunch of offerings that we do have even within the kind of there's other capabilities beyond the core offerings of call. It full stack infrastructure damn logs app, there's other kind of.
Keith Bachman: Yeah.
Keith Bachman: Sub components that we monetize as well so it's broader than maybe maybe you're characterizing. So I think we feel pretty good about that and the whole thing with our adoption teams is drive more adoption.
Keith Bachman: I'll try to give the customer something that they are getting more value from and leverage the advantages that we have within the platform.
Keith Bachman: And we feel very good about where we are in kind of the strategy to go after that.
Speaker Change: Yeah. The short term Keith is that we absolutely agree with you that we need to drive the business both in terms of depth of existing capabilities and.
Speaker Change: Expanded breadth in areas such as log management application security digital experience management with insights. We just bought and that is for database observe ability. So we will continue to expand the platform in both matches.
Speaker Change: That that brings us to the end of our call. Thank you all for your engage questions and ongoing support.
Speaker Change: A close and I think as you can as you can tell we are very enthusiastic about the growth opportunities ahead for us.
Speaker Change: We look forward to connecting with you and I are events over the coming months and we wish you all a very good day.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.