Earnings Call: Q1 2021

Jul 29, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Dynatrace First Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Noel Ferris. Great. Thank you, operator, and good morning, everyone. With me on the call today are John Van Sicklin, chief executive officer, and Kevin Burns, chief financial officer. Before we get started, Please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Banner Trace's filings with the SEC, including our annual report on form 10 k and quarterly reports on form 10 q. The forward looking statements included in this call represent the company's view on July 29th, 2020. Diana Trace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non GAAP financial measures during today's call. A detailed reconciliation of GAAP and non GAAP measures can be found on the Investor Relations section of our website. And lastly, references to growth rates will be in constant currency unless otherwise noted. And with that, let me turn the call over to our chief executive officer, John Van Sicklin. John? Good morning, everyone, and thank you for joining us on our Q1 fiscal 'twenty one earnings call. Since early May, when we last reported earnings, the COVID-nineteen pandemic has continued to impact families, communities, and businesses around the world. You don't have to go far to find friends or family impacted by this unprecedented situation. And I truly hope that you and your loved ones have remained safe and healthy. Despite the challenging economic backdrop resulting from the COVID pandemic, Digital transformation projects continue to be prioritized as essential as companies strive for greater agility, efficiency, and speed to market. And Dynatrace continues to be considered an essential component for sustained digital transformation success. I'm pleased to report that the solid business performance we saw in April continued throughout our fiscal Q1. For the quarter, ARR was up 39% year on year and subscription revenue was up 37% year on year. And once again, we coupled our strong top line growth with strong bottom line results as well. With the resilient value proposition, well suited for the digital transformation macro trends we see ahead and a predictable subscription business, delivering growth and profitability at scale. We continue to be optimistic about our future opportunity and the durability of our business for long term value creation. Based on the strength of our Q1 results and ability to grow through the difficult economic backdrop. We have increased our annual guidance for revenue and profitability, as Kevin will discuss in a few minutes. There are three areas that I'd like to highlight this morning that give us confidence in our ability to achieve our increased guidance for fiscal 2021. First, the essential role that Dynatrace plays in the success of our customer's digital transformations. 2nd, with digital transformation taking place in modern dynamic multi clouds, a Dynatrace is well positioned to continue growing ARR. By adding new continue investing in both commercial expansion and ongoing innovation to expand market share and take advantage of the large and rapidly growing TAM. We have in front of us. 1000 of companies have embraced digital transformation as a primary way to drive revenue, provide services, engage customers, and collaborate among teams. For these reasons, we are beginning to see an acceleration of digital transformation projects around the globe. According to a recent May survey by Fortune Magazine, 75% of CEOs anticipate accelerating the digital transformation project. Customers tell us that they consider Dynatrace an essential element of executing a successful digital transformation. As they drive towards greater agility, efficiency and business effectiveness. Despite the global pandemic, continuing to delay some new sales cycles, customer's confidence in Dynatrace, and the intelligent observability we provide into the dynamic multi cloud ecosystems underpinning these transformations. Is reflected in our strong first quarter results across all key operating measures. As we discussed in early Our approach to the pandemic was to immediately focus on our 2400 Dynatrace customers worldwide. To help them through their work from home transitions, and shifting cloud workloads. Assuring customer success in times of challenge helps strengthen long term relationship an important part of our growth strategy. This approach also helped us maintain a net expansion rate above 120% for the 9th consecutive quarter. A great example of how digital transformation continues fuel our expansion efforts within our base is a large brick and mortar retailer with an expanding digital footprint. This customer first brought Dynatrace in to bring application observability to their cloud modernization project. During the initial deployment, the retailer experienced firsthand how Dynatrace's rapid automatic rollout and unified AI ops approach to identify service impacting issues, save them time, money, and resources across more than just application use cases. DinderTracer's unified data model allow them to tear down silos among teams, create more effective collaboration, accelerate innovation, simplify operations, and drive greater online and in store success. This drove the recent decision to standardize on Dynatrace across infrastructure monitoring, log analytics, and digital experience monitoring in addition to APM. Consolidating multiple disparate tools while gaining the power of unified observability, advanced automation, and AI powered intelligence. Is a powerful combination of value as more of our customers strive to do more with less. And it's this unified platform value that we believe will allow us to continually expand our ARR per customer over time from the $229,000 on average we see today to what we believe can be over a $1,000,000 per customer, as we did with this retailer. While we increased focus on back to base selling during Q1, We are also excited to have added some fantastic new enterprise relationships around the globe with organizations like National Grid, MGM, Texas Health And Human Services, Yale University And Banco Sabadell. Digital transformation continues to happen across all industries, even those currently challenged by coping. Pick a US Airline, a new logo for Dynatrace this past quarter. Despite the fact that travel is down dramatically on a year over year basis, this customer came to Dynatrace to optimize conversions from initial customer contact to booked tickets. The airline had taken a classic multi tool approach to monitoring with different digital teams favoring their own tool This left Masilo to data and blind spots and how users were truly experiencing the revenue driving booking With mobile usage increasing rapidly and the need for greater efficiency rising quickly, they knew their approach had to change. After demonstrating the power of connecting applications, infrastructure, and user experience of durability with conversion funnel KPI. The airline quickly rolled out Dynatrace into production. Within days, actionable answers about conversion bottlenecks and optimization opportunities allowed the airline to make high impact efficiency and simplicity of the Dynatrace platform compared to their previous tools. Customer commented, quote, You guys are Hussein Bolt and the other guys are simply weekend joggers. We believe this powerful unification cloud observability data with business value metrics. We'll continue to drive our new logo growth as we penetrate deeper into our target Global 15,000 account base. As we enter Q2 with work from home disruptions largely behind us, and digital transformation projects continuing to accelerate. We see the opportunity to increase the balance of our sales efforts by increasing our focus again on new logos. Our pipeline is strong and our differentiation is compelling. The resulting due much more with much less effort and cost value proposition is powerful, especially now when IT And Development organizations feel more and more pressure to move faster and accelerate their digital transformations. Speaking of market position and opportunity, this brings me to my second point. Not only is the general macro trend of digital transformation fueling our business. So are the disruptive trends shaping modern cloud environments? As we've said before, cloud workloads. These clouds may be public, they may be hybrid, or what we see more and more often now, they are multi cloud. Multipublic with hybrid back ends where critical systems of record and many run the business applications still reside. More often than not, Kubernetes is used for container orchestration, and more and more look to multiple DevOps teams utilizing the latest cloud native techniques to rapidly build, deploy, and manage applications and workloads at webscale. With this combination of complexity, dynamism, good observability platform at work. The ongoing innovation across our platform continues to put us in a strong position to take advantage of these disruptive shifts in the cloud platform and cloud native application landscape. Let me give you a quick example of what I'm talking about here. Asset solution provider for K through 12 school administration, serving over 12,000 educational organizations, and 80,000 schools. As this organization approached the renewal date for 1 of their existing monitoring tools, They brought in Dynatrace and another company for a 3 way bake off. While skeptical at first, the Dynatrace was different, 3 things became clear during the evaluation and they Dynatrace the clear choice. First, the automation and AI at the core of our platform showed how they could quickly continuously and intelligently observe and understand their dynamic Kubernetes environment, something that was highly manual, and left them searching for answers with their current tooling. 2nd, they realized that with instant and precise answer they could speed product delivery by automating large parts of their DevOps delivery pipeline that previously had required manual steps, earning precious time, valuable resource. And third, the power of the Dynatrace 1 solution became clear as the customer expanded the scope of pilot beyond APM as a further investigated Dynatrace or an infrastructure monitoring initiative by leveraging our common data model and unified AI ops approach across both infrastructure and application use cases, they realized they could eliminate silos between their cloud operations and applications teams, smoothing collaboration, and accelerating innovation. Predicting the continued expansion of dynamic multi cloud environments as a platform of choice for Global Enterprises, and the rise in AI ops a requirement for allowing resource strapped IT and development organizations to do much more with much less effort and cost. We believe the Dynatrace value proposition and platform differentiation will continue to serve us well, both in gaining new enterprise cloud customers and in expanding ARR per customer over time. Now let me touch on Third Point, Investing In Growth. Given the fact that we are fortunate to be in an industry category that is well positioned to continue thriving during a difficult economic environment, we have a highly differentiated platform, well positioned for the disruptive cloud trends ahead. What is that? I wanna reiterate have not been. Continuing to invest aggressively in growth. Okay. We expanded our global team by over 90 employees in Q1, with over a 100 more already signed on to start throughout Q2. Sales, customer success, and R and D continue to be the primary areas of investment for us as we expand our customer base on our platform footprint. We also recently completed our FedRAMP certification at moderate impact level, which gives us broader access to the massive digital transformation effort of the US government. We've doubled our sales investment in U. S. Federal Government over the past year and expect to see this business segment continue to grow at an accelerated rate. On the product front, we are committed to investing in ongoing innovation. Our largely European based R and D organization continues expand, including a new lab recently opened in Vienna, Austria. And we continue to expand the capabilities of all five monetizable modules as well as bring greater scale, fall tolerance and extensibility to the platform itself. This past quarter, we extended scalability and fall tolerance for our largest customers, allowing them to should go down. For our many Kubernetes customers, we announced extended AI powered support for advanced observability Kubernetes infrastructure, container, and application workloads. Now our customers can get a unified view of across all tiers to better understand, manage, troubleshoot, and optimize their growingly complex Kubernetes clusters. Cloud native applications that run on them, and the back end data sources of middleware these modern cloud applications depend on to operate effectively. And we continue to mature our infrastructure monitoring and log analytics module with greater coverage of cloud services including all 80 of the core Azure services. I think it's important to note that when we add coverage, we don't just add a data feed for a service. We had 1 agent automation, unified dependency understanding across all cloud dimensions with smartscape, and AI understanding with Davis, to provide ease of ongoing operation and intelligent answers and insights for greater efficiency and lower ongoing costs. It's gratifying when all this work, all our innovation and value is recognized by third parties, but it's especially gratifying when the feedback comes from your customers. During the quarter, G2, a leading peer review site, had reviewers rank observability platform leaders across several use cases. Dinatrace came out number 1, including number 1 rankings across cloud infrastructure monitoring, AI ops platforms, application performance monitoring, container monitoring, digital experience monitoring, and session replay categories. Our platform expansion continues to gain traction with our customer base, with a number of Dynatrace customers now using 3 or more modules, 44% over the past 6 months. We're grateful for the support and recognition of our many customers and pleased our reputation as the modern cloud observability leader continues to grow. So let me summarize as I've covered a fair amount this morning. Our opportunity is large and growing rapidly. It's fueled by position in times of challenge and the power of our differentiation to both acquire new logos as well as expand rapidly within our base. This combination, along with the investments we continue to make in commercial expansion and ongoing innovation, put us in a strong position in a market segment that will continue to sit near the top of the strategic IT priority list for some time to come. With that, let me turn it over to Kevin for a deeper look into our financial results and guidance. Kevin? Thank you, John, and good morning, everyone. As John mentioned, we had a strong start to our fiscal 2021 with solid growth in ARR, revenue and earnings. There is still a fair amount of uncertainty in the global economy, but our solid first quarter results demonstrate that digital transformation sustainable growth potential. So let me start with a quick review of the first quarter financial highlights and then move on to our outlook. Annual recurring revenue continues to be one of the key financial measures to understand the momentum of our business. ARR grew to $101,000,000, that's up 39% year over year, an increase of $164,000,000 on an as reported basis compared to the year ago period. The 2 drivers of ARR growth are new local customers and our Dynatrace net expansion rate. As we mentioned on our last call, over the last few months, we increased our sales focus to help our existing customer established their work from home and digital transformation efforts. This contributed to our strong net expansion rate, which remained over 120 percent for the 9th consecutive quarter. ARR per Dynatrace customer also increased to $229,000 up over 10% year over year. We added 85 Netnew customers in Q1, bringing our total Dynatrace customer count to 2458 customers. As it's the combination of our increased focus on our installed base, coupled with a more challenging business environment led to a moderation and new additions to the Diamond Trace platform in the first quarter. With a solid pipeline of new logos for the second quarter, and we believe new logo adds will be roughly 450 for the remainder of this year. This would be consistent with the new logo additions for the same period last year and ahead of our initial guidance assumption coming into the year based on the resilience of digital transformation projects and the essential role Dynatrace plays in ensuring digital transformation success. Moving to revenue, total revenue for the first quarter was $155,500,000, $5,500,000 above the high end of is being driven by 37% growth in subscription revenue, partially offset by the expected decline in classic license revenue. Which now represents less than as the subscription revenue mix increases. Total non GAAP gross margin for the first quarter was 85%, up two percentage points from last quarter and up three percentage points from Q1 of last year. We are very pleased with our margin performance primarily due to the efficient way we manage our platform coupled with modest cost savings related to the Our non GAAP operating income for the first quarter was $50,800,000, above the high end of our guidance of $40,000,000, due to revenue and gross margin upside expansion and lower than expected operating expenses due to prudent expense management as we evaluated the business environment over the course of the quarter. This led to a non GAAP operating margin of 33%, up 11 percentage points from the first quarter last year. While this performance shows the operating leverage potential inherent in our business, Given the strength of our platform and Innovation. Results Consistent with what we communicated last quarter, we do expect margins will come down from Q1 levels as we move throughout the fiscal year. Non GAAP net income was $36,900,000 or $0.13 per share, $0.03 above the high end of our guidance. Turning to the balance sheet. As of June 30th, we had $250,000,000 of cash, and our long term debt was $510,000,000. Given the strength program to further reduce our outstanding debt. As a result, we made a principal repayment of $30,000,000 in early July, reducing our debt balance to $480,000,000. Since our IPO we have consistently improved our leverage ratio which ended the first quarter at 1.6 times our trailing 12 month adjusted EBITDA. Our leverage ratio is down over 50% from our post IPO leverage ratio of 3.3 times EBITDA. As a reminder, our unlevered free cash flow can be a bit lumpy on a quarterly basis with our strongest cash generation occurring in the last quarter of the fiscal year following the seasonality of growth bookings and renewals. Therefore, we believe the best way to look at our unlevered free cash is on a full year or trailing 12 month basis to smooth out the effect of quarterly seasonality. For the first quarter, unlevered free cash flow was $37,000,000. We were very pleased with our Q1 performance which was nicely above our internal expectations. On a TTM basis, unlevered free cash flow was $141,000,000 which was 24 percent of revenue. We continue to expect to deliver full year unlevered free cash flow margins of 29% to 30%. The last financial measure that I would like to discuss is our remaining performance obligation, which at the end of the quarter was $857,000,000, an increase of 40% over Q1 of last year. The current portion of RPO which we expect to recognize as revenue over the next 12 months was $503,000,000, an increase of 42% year over year. Our healthy RPO expansion has benefited from the move to a subscription business, combined with a general increase in the duration of our new subscription agreements. Now let's move to guidance. As a reminder, all references to growth rates will be in constant currency unless noted. As I mentioned earlier, after initial pausing on some expenses as we evaluated the business environment, we do plan to increase investments in the second quarter and the remainder of the fiscal year. These will include additional hires to accelerate commercial expansion, further expansion in our labs to support innovation and ongoing investments in our customer success initiatives. As a result, we should expect to see 1st Q1, which ran well ahead of our expectations, primarily due to the strength of our revenue. With that as backdrop for the 2nd quarter, we expect total revenue to be in a range of $159,000,000 to $161,000,000, representing year over year growth of 25 percent to 26 percent. We expect Q2 subscription revenue to be in a range of 149 to $150,500,000, representing year over year growth Q2, we expect non GAAP operating income to be in the range of $43,000,000 to $45,000,000 27 to 28 percent of revenue, and non GAAP EPS of $0.09 to 0.10 dollars per share, assuming 288 to 289,000,000 shares outstanding. We estimated Q2 cash tax rate of approximately 30% due to higher state cash taxes in the quarter. For the full year ARR guidance is $698,000,000 to $708,000,000 23% to 25% growth. We expect total revenue to be in a range of 646 to $656,000,000, representing year over year growth of 20% to 22%. We expect our subscription revenue to be in a range of $603,000,000 to $612,000,000 representing year over year growth of 26% to 27%. I would also like to highlight our fiscal 'twenty one expectation with respect to our Dynatrice net expansion rate. As John mentioned earlier, and we noted in our earnings release today, We have achieved 9 quarters with a net expansion rate above 120%. It continues to be a strong part of our business. Our current guidance assumes we'll continue helping net expansion rates above 120% for the remainder of the fiscal year. This compares to our initial guidance assumption of 115%. And we are comfortable increasing this base on our Q1 performance ongoing conversations with our customer base and the strength For the full year, we expect non GAAP operating income to be in a range of $166,000,000 and non GAAP EPS of $0.46 to $0.49 per share. This assumes a tax benefit between 6 to $8,000,000 in the back half of the year. We still expect our annual effective cash tax rate of approximately 11% but will have quarterly variability. And I mentioned this earlier, but just to echo what again, we continue to expect unlevered free cash flow margins to be approximately 29% to 30%, resulting in 187 to $195,000,000 of unlevered free cash flow. Finally, we expect 288,000,000 to 290,000,000 diluted shares for fiscal 2021. We feel great about the resilience of the business and are confident that our growth will continue to We are firming up the details of a virtual investor day for early September, and you can expect a release with more specifics shortly. We look forward to sharing more details about our business strategy, market opportunities, product vision and continued investments in the development Your first question comes from the line of Matt Hedberg with RBC Capital Markets. Oh, hey, guys. Thanks for the, thanks for the time. And, John and Pete, congrats on the strong results. Very impressive. You know, John, you talked about accelerated visual transformations post COVID, which is great to hear and really caught my attention. Can you talk about the level of monitoring some of these customers? And I think you called out a large retailer in particular. Where were they at? Pre, you know, from a monitoring perspective, and and where are they at now when they start when they go all in a Dyna trace? No, thanks, Matt. Appreciate it. The, yeah, so what we're seeing just in general is, some adhesive that we had going into the quarter, but, you know, we we, of course, guided, you know, cautiously, you know, in case there was you know, things we didn't didn't see happening, but the the, you know, I think throughout the quarter, we saw a much more resilience and the thesis of Dynatrace being essential for digital transformation really playing out. And, what's as companies move to, you know, greater degrees of digital transformation, they're accelerating their cloud journeys. Because that's what underpins, you know, digital transformation and they move their applications more rapidly from Jazz to lift and shift model to true cloud native, you know, application designs. And as they do this, it seems, great with agility and speed, but the complexity under the hood goes through the roof. And it's that complexity that we simplify without instrumentation and sort of that kind of observability at scale, which requires advanced degrees of automation and and AI to be able to to handle that level of when you're talking about billions of dependencies with these microservices, you know, floating across multiple multi clouds. Now Dynatrace just starts to shine, you know, even brighter. And so what before COVID seemed like, we can take our time and maybe we can still do it with our current investments of of disparate tooling, quickly become there is no way we can accelerate digital and in our and so on. And so that's what we're seeing is that it's that as as digital transformation accelerates the need for a Dynatrace class solution even goes off. And, that's what we're we're we we saw the beginnings of it in in our in our fiscal Q1, and we continue to see it as we look out into Q2 and beyond with the sales cycles we're now in. That's great. And then, you know, Kevin, on on ARR, 39% constant currency growth is is super impressive, especially when you consider, I think last year, you were at 43% growth. But I believe that saw a benefit from classic Dynatrace customers that this quarter didn't see. I guess to that point, can you remind us roughly what the benefit was last year on on that classic conversion, because I think, you know, if you were to normalize for that, you you might have even had similar ARR growth. That's right. So if you look back in maybe take the last six quarters, our average ARR growth on a constant currency basis was in the low 40 sec. When you break it out and you just look at new logos and expansion for our Dyna trace customers on our platform, that growth rate was about 3940 percent. And again, this quarter, on a constant currency basis, apples, apples, 33 9%. So, most of the reduction in the AR really came as a result of the the fact that we've moved our customer base towards the Dyna platform and aren't stated on on that now. Super helpful. Hold on, guys. Thank you. And your next question comes from the line of Jennifer Lowe with UBS. Maybe just quickly on the ARR and continuing that train of thought, Kevin, you mentioned the assumption now is 120% of net new relative to 115 prior, but there's also a discussion on the focus on new logo acquisition and that being a big emphasis as we move through the remainder of the year. So can you just parse through, with the increase of ARR guidance, is that purely a function of the change and the assumption around net pension or are you also factoring in better new logo acquisition? What are sort of the puts and takes there? Because it seems like there's a few different drivers then Sure. If you so if you sort of take is that bad? We set that 115% bar in a in a period of uncertainty, 3, 4 months ago. Dig into strength of the business in the first quarter, the the a combination of of new logos, which are stronger than we had expected when we started the quarter and also a healthy net expansion rate. Really, our guidance or our guidance, I should say going forward, is a combination of new logos growth, right, better than we were expecting about, 90 days ago and a step up in the net expansion rate. So we're seeing strength from where we were 90 days ago and called segment Smart Business. If you look at the back three quarters, we're expecting about 450 new logos, which fairly consistent with where we were last year. We had healthy pipeline there. And the nitration and expansion rate, you know, we're doing a great job of cross selling and it's seeing, the platform and and our existing customers. So a combination of cost. Okay. And maybe just one more for me on that net new logo focus and sort of the specificity on the target there. Did you introduce any changes in the sales compensation to preferentially encourage them a bit more on that new logo or is it more just sort of strategic, hey, this is where you want you guys to be focused? Any color there would be helpful as well. And that's it for me. Yeah, this is John. Thanks, Jennifer. There's no real changes, you know, year to year on, sort of new logo incentive we we do have an incentive, you know, for sales to continue to drive new logos. We have such a fantastic platform for for built in expansion. And so we've, for the last couple of years, we've had that new logo, you know, incentive as well. And and the balance seems to be working. And, you know, as as Kevin said, you know, based on sort of pipelines and and, you know, what we see in our, in our sales cycles, we're quite confident, in that new logo growth again this year. Great. Thank you. And your next call comes from Heather Bellini with Goldman Sachs. Great. Thank you so much guys for taking the question. I just had a couple, 1, and I know you mentioned this in your initial converse, your initial comment about back to basic just wondering, you know, versus the start of the quarter, which was obviously a period of great uncertainty, not that we're fully out of the woods yet, but but what are conversations like today? And and then also from a lead gen perspective, I guess a little bit following up on kind of what Jen was asking with new logos. What have you done differently, in this new environment of no travel to generate new logo demand and kind of how have the conversations evolved, meaning are customers becoming, were they way more hesitant the beginning of the quarter and now things are starting to progress back to where you feel like pipeline build is, is kind of on pace with what it was prior don't know if you could share any thoughts on those, that'd be great. Thank you. Sure, Heather. So what happened at the beginning of the quarter, I'm just not on expected. I mean, I think many of the, folks wrote about this, maybe yourself as well, that in in the disruption of everybody scrambling to work from home and the scrutiny around which projects we're going to wise as essential and which ones were gonna fall as non essential. That process took several weeks out of our out of the quarter. And, so we anticipated that we, you know, pivoted to, makes a ton of sense, of course, which is go take care of your base. So it's, you know, back to the base was was a was a key part of our, early part of Q1. It served us extremely well, and we generated a number of new logos as well as a very strong new logo pipeline for the balance year. The conversations, you know, have have really only changed in the discussion around Why is this project essential, Mr. Customer, or around a Dynatrace, nearly as essential part of your digital transformation let's discuss how where and how we can expand the value of the platform for you. So it's just centered, maybe a little bit, differently from the standpoint of it's not just a project it's an essential project for digital transformation. So more pointed, if that makes sense. On on the on the new on the new logo, on the new logo front, you know, what we're what we're seeing there again is, you know, a pretty clear conversation that cuts to the quick, you you, immediately, which is around that sort of essential nature of of project. If it's not essential, nobody wants to spend time on it. If it's essential, it actually moves more effectively or sort of more predictably through the sales cycle because it had to be blessed early. By, you know, the higher up management that this program would be essential. So we're seeing that dynamic in in the new logos which is actually very, you you know, very, very helpful. And as I've said before, you know, we we have the the blast we're we're blessed with being in a category that, you know, when times get tough, people turn to their applications they turn to their digital transformation. So they turn to sort of that, a digital side of their business where they can get closer to first, there could be more agile, they can save cost, and they can drive new revenue streams. And, you know, we're we're essential for that. For that movement and nice place to be. Thanks so much. Your next question comes from Sterling with JP Morgan. Yeah, thanks. Hi, guys. I actually want to circle all the way back to Matt Hedberg's question. One of the things, that is a frequent topic of conversation with investors is the idea of that Gartner report talking about 5% of applications are currently monitored. And I think investors are trying to get a handle on with the digital transformations where does that percentage go to? And obviously, based on your qualitative comments, the answer is higher, but is there any sense as you're seeing that shift to the cloud does that 5% of apps become 50 or 25 or just, you know, any qualitative commentary around that would be helpful? Sure, Sterling. The shift to the cloud, it actually has an interesting dynamic with it. In the in the sort of siloed world of the data center where you have different applications on different stacks of hardware, you know, connected by physical networks, and and and now it's all moved to sort of a virtual pool of resources. There are many more applications and services that are involved in, in, you know, a visual business than ever before. So we're seeing customers you know, wanna take their sort of application, you monitoring and observability up into that, you know, 60 plus percent of applications. All tier 1, most of tier 2, and even into some tier 3 zones. So it is increasing with the cloud, and it's just a dynamic of how how the cloud sort of operates and how the services, you know, become interconnected, you know, in in the cloud. So as as companies do digitally, you know, transform, there continues to be application expansion for sure. But I also don't want to think that the only expansion that we're doing is because of the application layers where we're actually starting to get you know, much stronger in the cross selling, across the non application hosts and and services. As well as, you know, more and more, sort of, extensions into digital experience and digital business analytics. And those are those are super valuable. I mean, I gave the, the example of an airline it it was really the user experience and the and the connection with digital KPIs that go that opportunity from just, you know, why should I, why should I replace my current, you know, monitoring systems, it's because it wasn't helping with with digital outcomes that were a that were critical, you know, of course, over the last few months. And and so it's that sort of comprehensive platform capability across all these modules and how they work together in a unified platform like Dynatrace that really, you know, is is a key to, you know, why we believe you know, we can raise that net expansion rate back up to 120% plus and and continue that for the foreseeable future. Very helpful. Thank you. And your next question comes from the line of Kash Rangan with BAML. Hi. Good morning. Congratulations. I was wondering if you could give us some some metrics that would represent the monitoring side of the business versus the APM site? And, if the time is really that large, and obviously, you have the mesh to prove that, that you have net new logos that you've, got it to be very positive. Your net expansion rates running quite high, your real rates in the monitoring space seem to be quite high. Why would the company not reconsider raising its longer term growth forecast? Because you are after all been very successful in a brand new market. That is 1. And secondly, if you can give us a little bit more commentary on the replacement of, of, legacy monitoring letters. What exactly is happening there and why are you really there? That looks great. Thank you so much. Sure. Let me try to parse those those questions a little bit. So so the first one, just regarding sort of metrics between between, you know, APM and sort of cross selling. I think, you know, last quarter, I I I talked about, 25% of our customer base, our growing customer base, you know, using, you know, 3 plus modules which is really sort of those are the platform customers, the ones that had really moved themselves from sort of tool thinking, the platform thinking. And, you know, just gave, you know, another staff that over the last 6 months, it's, that's actually increased 44%. So just to share with with the group here in our investment community that the cross selling, that we've been talking about for the last year is taking off. And so, you know, think about us maybe as a you know, where a year ago, we might have been at 80% APM and, you know, 20%, you know, emerging products, think of us as a 70% and 30% emerging products, but also remember that the base of customers is expanding rapidly as well. Alright? Maybe that gives you a little bit of color. And I'm gonna protect that trend, of course, continue, you know, as we as we drive to sort of more and more, you know, platform customer usage, you know, over time. So I think that that's that's that's key. The second one as far as, you know, growth rate, but we're pretty pleased with with the growth rate, that we have right now. If, if and when that moves up, we'll continue to guide. But you're gonna find us to be, you know, relatively conservative you know, company from a guidance standpoint, we think that's a proper way to automate, and, I'm sorry, proper way to to guide. And, you know, we just think that's that's that's prudent. Okay? And who are you winning, the the monitoring business against? The legacy or the modern vendors, if you have any color there, that should be, that should be great. Right. Yes. Sorry about that, that third piece there. The, it's it's a combination of both. Okay? So it's it's actually an interesting dynamic. We're seeing more and more movement to sort of what we've called in the past greenfield. It's where you sort of have to do it yourself approach, taking over no real incumbent because as people move to the cloud, they realize their their prior investments in gen 1 and gen 2 tooling, no longer work. In dynamic multi clouds. And, so so that's gonna do it yourself world is starting to actually show up as an observability project world. Okay? So we're we're starting to see that that the beginnings of that that trend that's about 40% of what we see, you know, in the market, and that's up from about 30% a year ago. We still see an incumbent in our base, we have been clear that we still land on the application layer. It's where we're best known with that APM segment on what we call our APM module. And, and there, you know, it's sort of the classic gen 2 and gen 1 competitors, that are that are in that space. And as time goes on, our differentiation becomes much more valuable. And our win rates continue to climb against all those competitors. And as I said, that's 16%. 60% of of of the, engagements, you know, we enter into these days. And your next question comes from the line of Breville Lynchhell with Barclays. Hey. That's a new version. Thanks. Hey. Can I stay on that subject? So if you think about it, there there are kind of, initiatives out from a lot of different players around this and everyone coming from a different angle with new product announcements, etcetera. Like if you think from your perspective, what's the main thing that people that you think where you kind of have the lead and, and, should kind of kind of continue to strive because like, you know, you see, like, the logs guys, the infrastructure monitoring guys, all of them coming into the middle ground, which is observability. Like, can you talk a little bit about the the complexity of what you did over the last couple of years in terms of kind of redoing the product and and bringing it all together on the one umbrella. And then I had one follow-up. Sure. So so, yeah, let me step step back just quickly because, you know, our our reinvention of our platform was simply to bring together, give these these observability data sources, you know, plus some other ones, like topology code and some other you know, 8 elements. That was part of it because we knew that the cloud required a a different kind of observability been just layer by layer by layer. You had to see it as a sort of a homogeneous hole. A unified whole. But we also built in automation and AI, which, in that differentiation, becomes more and more essential as, as IT And Development Organizations, you know, try to move faster with fewer resources. Then then, of course, they would like to have, in order to accomplish all the the application and digital transformation needs that they're being tasked with. So it really is a combination of that observability plus automation and plus AI. That really sets apart from a differentiation standpoint as we attack, you know, the the the the modern cloud market. So so so keep that keep keep that in mind. When when we look out and and, you know, we see, you know, sort of a world that's collapsing new cases where, you know, that other players see as well where they might be coming off of infrastructure or log. We still believe that that application layer or the that application thinking that we bring is really pretty vital because it's applications where IT and the business connect. The underlying common of a of a, you know, cloud stack is interesting to make sure that cloud platform is working properly. For the applications to run on it, but the connective tissue with the business is there in that application layer. And so when we think about, you know, going forward, we think about not just connecting the plumbing with the application. We also think about user experience business KPIs and the rest also connecting. And so it's that complete, you know, end to end, you know, stack of of of platform value components that really make a difference for us. And I think, you know, that when you take the airline example or whether you take the retailer example, or you take the K-twelve example, that I gave every one of those required, a much more complete set of modules in order to solve their their tran digital transformation efforts than just observability alone. Okay. Yeah. Makes sense. Thanks for that. And then the, congratulations on bringing the leverage down. So now you're at the level that is kind of, like, way while into kind of the normal range? Like, how do you think about that trajectory going forward? Because it's, you know, it's a classic case. You know, obviously software doesn't do a lot of that But then if you do financial, financial science, you just kinda realize, okay. Well, it's, like, actually decent levels of carry, and it's gonna is also kind of a decent thing. How do you think about that going forward? Sure. So first of all, we're super pleased with the progress significant its IPO and and well ahead of plan of actually de levering the company. In July, as I mentioned in a in a prepared remarks, we did pay down another $30,000,000 of debt. Our debt balance is now about $280,000,000 and a fairly low interest rate. And given our cash generation rating capabilities, our net leverage will be below 0, in in the very near future. If we take out sort of cash usage outside of that, I'd probably push that conversation out to our annual thing, but if talk about some other, you know, areas where we can explore that cash, cash usage and where we can put it to work. But for now, for the next couple of quarters, It's certainly just focused on getting that leverage ratio down a little bit more. Okay. Perfect. Congrats. Thank you. And your next question comes from the line of Lavonne Suri. Hey guys. Thanks for, squeezing me in here at the end and congrats, a really nice set of numbers. I guess I wanted to touch on 2 quick things. 1, on Salesforce productivity, you'd had a part of Salesforce task, which was that shift to Dentistry's platform. And, John, you've talked about productivity, improving. And then sort of saying, okay, now we have capacity to go drive customer expansion, which again, you did really well to get to 120 or north of 120. How much do you think of that capacity is available for these new logo ads? How much do you think you have to ramp higher and sort of meet the customer targets this year and then obviously kind of going into next year? Hey, Bob. The, let me, let me take that in a couple pieces here. So the first one is the, the, the sales capacity expansion or really general commercial expansion for us continues. And and that hasn't stopped. It's one of the things that we kept our foot on the gas throughout the the early COVID period, you know, even in those those times of uncertainty there. So that's that's continued to scale. Some of that capacity that's you know, freeing up from conversions as well as being added to the business, you know, it's helping us drive, you know, pipeline growth and sort of momentum in the business that Kevin, you know, talked about and is is, you know, shared in our in our guidance here. So with, with some, you know, headwinds, of course, because of economic uncertainty and certain, you know, sectors of our business, which are, you know, more heavily impacted, as well as certain geographies that, have also been a little more impacted. I think that capacity growth, you know, is is, right now going to, you know, sort of driving our current, you know, growth trajectory and not sort of propelling it one step beyond it. But I'm still really pleased with with where we are from a from a growth standpoint. And and as I said, you know, it's reflected in our guidance. I think that, you know, going going forward, just from investment standpoint in the business. We talked about not only commercial expansion, but also continued, you know, innovation, you know, expansion And, you know, I've shared some of that, you know, success we're having with cross selling, which of course comes with maturing on some of those additional modules. But I'm really excited to, be able to share some of the plans ahead, you know, when we did our Investor Day in, in early September. And I think, you'll also see, you know, some of the, some of what's coming, when you get that, that point. So stay tuned and excited to share in a couple of months. Got it. One one quick one for you or Kevin. Just something that's starting to come up a little bit more, but what did you guys see in 'sixteen around the election? Because you've obviously put out the new logo count out there which is new for all of us, as a guide. But, you know, there's always been this concern, just spending so down with people postpone decisions, you know, kind of going into the election or post election a little bit depending on results. And I again, you guys went public and succeed, but so what do you see? What do you expect? What do you hear from customers? Around concerns around that or no concerns or hasn't come up, but love to just get some color on how you're thinking about what plays out. Again, not for the next few months, but but as we get closer to November, which is which is actually a few months. So, yeah, we'd love to get that done. Thank you. Sure. Well, whether it's surveys that, that we read like the loan that we shared, you know, from Fortune or whether it's actually direct conversations with customers, digital transformation is a long term trend. It definitely transcends, you know, elections. And it's not something that's going to, you know, be get pushed one way, you know, or the other, it it's on a long term macro trend trajectory. And and that's what we're hearing, and so that's what gives us confidence. From a from a government standpoint, digital transformation is a critical part. Again, it's it's a long term trend. It's beyond election year. You know, kind of sending. And, you know, and so I'm excited about our Fed opportunity as well, which I which I highlighted in in in this, this earnings call in particular. So we don't see a real issue with, with elections because this is really is an exciting long term macro trend, you know, environment as businesses you know, remake themselves into digital businesses. Yeah. Yeah. No. Fair enough. Congrats on the the federal opportunity I'll hop off. I know we're running late. Thanks for taking my questions guys and congrats again. Great. Thank you. I appreciate it. Maybe I should, with that sort of, yeah, one more time. We can speak in one more. One more question. Alright. One more question. Your final question comes from the line of David Hynes with Canaccord. Kevin, maybe this one's for you. As I think about the drivers of net expansion, what's having a more significant impact? Are follow on deals getting larger or are they coming more frequently? In terms of net expansion, it it really is a combination of, right, given the different verticals that we operate in. We're, we're, we are seeing expansion footprint expansion, having more more rapidly than we had seen over the last couple of years. It has been impacted a little bit in the quarter in terms of, in terms of just going to point something down a little bit again, but nicely, we had a helping that expansion rate in the quarter. And then the second piece is in terms of the new logos Is it okay? I'm sorry. Mister Mister Frank, these are the question data? No. No. I was just asking about are the follow on deals getting larger? Are they coming more frequently nothing about new logos. I I think you hit on it as a as a comment. Oh, yeah. No. So it's really just a lot of the time for the deals that are seeing fairly consistent. I think it's just becoming a little bit more rapid in terms of installing expansion in our customer base. Yes. Sure. Exactly. And then, John, maybe a quick follow-up for you since you mentioned said in the response to Bhavan there. Is there a common incumbent across the federal environment? And just how do you think about the scope of the opportunity there? It'd be yeah. It's a it it's it's a good question. It's it's it's not dissimilar to the commercial market where there's a number of incumbents, but then those who are more advanced in their, in their cloud transformations are already seeing them fall away. So again, there's a do it yourself. You know, there as well that we we interact in on and and provide a platform to simplify that world and and, eliminate the necessary tooling you know, challenges that, that you run into when you take that kind of richer self approach. So it's really not that that different. It's just that they're big project based as opposed to commercial, which moves a little bit faster. That's why we hesitated our investment in in US Federal, intel about 2 years ago. And now we're investing aggressively because we see that the the US government being much more active and much more purposeful, you know, in their digital transformation efforts. Perfect. That makes sense. Okay. Thanks guys. Congrats on the continued momentum. And and thank you everybody for for, joining us this morning. We're we're we're excited about that this has we had a great start to to our year, and we look forward to sharing more with you both at our Investor Day and then again at our next earnings call in October. Thank you very much. Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.