Earnings Call: Q1 2020

Sep 4, 2019

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynatrace, Inc. Fiscal 1st quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Michael Bowen, Investor Relations, you may begin your conference. Thank you, operator. Good afternoon and thank you for joining us today to review to trace first quarter fiscal 2020 financial results. With me on the call today are John Van Sicklin, Chief Executive Officer and Kevin Burns, Chief Financial Officer. After prepared remarks, we will open up the call for a question and answer session. Before we start, I'd like to draw your attention to the Safe Harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward looking within the meaning of Section 27A of the Securities Act of 1933. As amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts are forward looking statements, including statements regarding management's expectations of future, financial and operational performance, and operational expenditures, effective growth and business outlook, including our financial guidance for the 2nd fiscal quarter full year 2020. Forward looking statements reflect our views only as of today. And except as required by law, we undertake no obligation to update or revise these forward looking statements. Please refer to cautionary language in today's press release and to our final IPO prospectus, which is filed with the SEC on July 31, 2019, and our other SEC filings for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we'll refer to certain non GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non GAAP financial measure used or discussed in a reconciliation of the differences between each non GAAP financial measure and comparable GAAP financial measure can be found with our first fiscal quarter 2020 earnings press release in the Investor Relations section of our website at dynastrace.com. With that, I'd like to turn the call over to our Chief Executive Officer, John Van Sicklin. John? Thanks, Michael. I'd like to start by thanking all of you for joining us today on our first conference call as public company. We're I did do have completed our successful IPO on August 1st. This represented an important milestone for Dynatrace. And one that further enhances our brand awareness and ability to execute the company's long term growth strategy. We are also very pleased with the first quarter financial results, where we achieved 43 percent ARR growth to $438,000,000. And strong total revenue growth, driven by subscription and services revenue, which increased 36% year over year. We continue to focus on building a balanced business with strong growth and cash flow for greater durability over time. As this is our first quarter as a public company, I wanted to provide a brief overview of Dynatrace's transformation, our value proposition and our market opportunity in addition to providing details on key drivers behind our recent performance. Dentatrace is a market leading software intelligence company, purpose built for the enterprise cloud. Every company in every industry is transforming into a software business, how they interact with their customers, assure quality experiences, optimize existing revenue streams and create new ones. Success or failure comes down to the software supporting these efforts. Bendentry's software intelligence sits at the core of these digital transformations to assure that this run the business software always works perfectly for every interaction, every transaction, and every user journey. Let's step back a moment and talk about how we got here. Dynatrace is now fourteen years old. We spent the 1st 9 years building a category leader in APM, application performance monitoring. In 2014, after sending a dozen of our top product lines often determine how monitoring would work in the future, We made a bold decision to reinvent our platform from the ground up, and in so doing, refresh our entire business model. This team realized that the cloud would disrupt market. Although we were already widely recognized as the APM leader, we decided to disrupt ourselves. And in so doing disrupt the market. The result was a 2016 launch of Dynatrace. An all in one full stack cloud monitoring platform with a powerful AI engine at the core. With the complexity, scope and frequency of change these modern cloud ecosystems would experience. We chose to put answers first versus simply pumping more data on glass and hoping I teams could keep up. This answers first approach brings highly differentiated value to our platform use cases of APM, Cloud Infrastructure Monitoring, Digital Experience Management, and AI ops. This new platform has been driving the company's growth ever since, At the end of our June quarter, up from 70% at the end of our March The remaining 25 percent of ARR relates to our classic product set, which continues to actively transition to our Dynatrace platform. We are now 5 quarters into what we believe is a 10 to 12 quarter transition, and our classic customer to Dynatrace conversion program continues to run ahead of expectations. After launching our go to market motion has also evolved. We believe our customer acquisition process has become much more efficient with most customers us through a growing number of direct enterprise sales resources, value added resellers, and system integrators. With a platform that instruments and baselines the entire cloud stack automatically, implementation is dramatically streamlined we're seeing a growing number of customers expanding beyond the traditional 5% barrier that continues to hinder outdated gen 2 approaches. At the end of our fiscal Q1, we had 1578 Dynatrace platform customers an increase from 1364 at the end of the prior quarter. Consistent with prior quarters, majority of these new customers to Dynatrace were net new logos to the business, with the balance converting to Dynatrace from our classic base. And once again, our net expansion rate across all Dynatrace customers was over 120%, consistent now for the past five quarters, on increasingly larger customer cohorts. Given our innovative AI powered platform and streamline go to market strategy, We believe we can capture meaningful share of the $18,000,000,000 in growing TAM we estimate is in front of us. With about 10% of our target 15,000 global enterprise accounts having adopted the Dynatrace platform. And what Gartner estimates to be only 5% of applications instrumented from an industry perspective versus what we believe is a longer term target that ranges 30% 50%. There is plenty of growth potential to build a very large company over time. And when you add to this, both ongoing cloud and application expansion and our ability to add additional platform use cases. We believe there is significant opportunity to further expand our TAM as time goes on. Now let me provide some insights into several new and expansion customers to illustrate our value differentiation, along with the power of our land and expand approach. First, one of our new logos in Q1 was a large U. S. Government agency that is moving to a hybrid multi cloud environment as part of an overall IT modernization program to improve access to benefits and services for 100 of 1000 of policyholders. As with many Dynatrace customers, the move to the cloud brings with it an exponential rise in complexity or resource draft IT organizations. The advanced automation of Dynatrace and the answers first approach leveraging Davis, our AI engine, has allowed this agency to dramatically reduce performance issues, improve operational efficiency, and accelerate their cloud migration and modernization efforts. As a side note, the U. S. Federal market is a relatively new market for us for which we see tremendous opportunity over time. The next example I'd like to share is an expansion customer, a major European auto manufacturer that has been moving to a hybrid multi cloud environment standing across their own data centers, plus AWS, Azure, and Google Cloud Platform. They've been using the competitors gen 2 APM product and found it inadequate for their new stack environment. It was proving too cumbersome, too manual and with limited cloud native observability. Customer started with a small taste of Dynatrace or an initial set of workload several months ago, after experiencing the advanced automation of Dynatrace, their IT team was able to roll out an additional 2000 hosts and dozens of applications in just a few weeks after acquiring additional licenses. With the continuous intelligent monitoring of Davis, their development and operations teams now focus on building value for their company, versus wasting time, gazing at dashboards, or into logs or searching for answers to problems that may or may not be impacting users. Bottom line, this auto manufacturers gain greater efficiency, which translates into greater speed for innovation in their digital transformation. The final example I'd like to share is a customer who converted from our classic products to the new Dynatrix platform. This is a company in the business of managing and running a large car auction marketplace. With our Dynatrace offering, they an opportunity to modernize their own application and infrastructure environment and shift to Azure. As we did a proof of concept with Dynatrace, as part of our conversion process, a number of application teams that we had never been able to access previously became interested. Before the cloud, these teams were separate, but with their new enterprise cloud, these teams were sharing cloud resources and software services. As a result, with the conversion came an upsell to expand coverage to more than 2 times the workloads and there's potential for more. This conversion from classic to Dynatrace took only 6 weeks from start to finish, and that includes the planning and change management process time. This is very common. The time and effort to convert is short, while the value realized from doing so is very compelling. Switching to the product front for a minute, we continue to innovate organically In Q1, we announced expanded support for Kubernetes. A dynamic container orchestration environment, we have automatically instrumented and monitored for some time now. In the quarter, we extended our automatic analysis of Kubernetes performance, now delivering full stack analysis of Kubernetes clusters, their containers and the application workloads within, in a single solution, fully leveraging our AI engine davis. In addition, we introduced 1st day support for Red Hat OpenShift 4 environments adding to our Google AWS and Azure coverage for Kubernetes, making it easier than ever to continuously observe and manage an enterprise multi cloud environment. In addition, we extended our observability coverage for hybrid clouds with the announcement of one agent support for kicks and IMS workloads on IBM mainframes, along with their associated integration and middleware frameworks. Now, Dynatrace customers can maintain their end to end visibility from mobile or IoT device through mainframe regions and Mac. This unique deep application and infrastructure observability allows our mainframe customers to understand the impact cloud application workloads on expensive mainframe resources and optimize the behavior to better leverage these critical compute resources. With 25 major releases per year and 100 of minor releases to assure cloud ecosystem currency and compatibility, We continue to increase the capabilities and scope of our market leading software intelligence platform for our enterprise customers. As we look forward, fiscal 2020 is shaping up to be a very exciting year, and we couldn't be more excited about our future. We have reinvented our business on a fresh new technology stack, ideally suited for today's dynamic multi clouds. Our shift to subscription is essentially complete. The conversion of our classic customer base is approaching the halfway mark, and the efficiency of our There is a massive opportunity ahead of us, and we plan to capture it with continued commercial investments in sales and marketing and ongoing innovation in R&D. We're excited to now be operating as a public company as we focus on building long term success for our customers. Long term value for our shareholders and a great place to work for our employees. With that, me turn the call over to Kevin Burns, our CFO. Kevin? It's John. It is great to connect with both existing and prospective shareholders our first call as a public company. I'm pleased that we have strong financial results to share, which were even better than the ranges we shared in our S-one. Before discussing our results in detail, as well as our guidance for I want to first review the important aspects of our business and revenue model considering that some of you may be new to the Dynatrace story. As outlined in our S-one, as we discussed during our roadshow, our focus and the long term future of the company is the Dynatrace platform. All revenue associated with the Dynatrace platform is recognized on a ratable basis and reported as subscription revenue. With respect to our classic offering, maintenance and SaaS revenues are recognized ratably and run through the subscription revenue. Perpetual and term licenses for our classic offering are recognized on delivery, and reported as one time license revenue on the P and L. Classic license has declined significantly is now down to and this is becoming apparent in total revenue growth. Now let me turn to our first quarter fiscal 2020 results. Our key financial metric as an organization is annual recurring revenue. For the quarter, ARR was $437,600,000, an The Dynatry platform continues to increase as a percent of total ARR and was $326,300,000 at the end of June, which, as John said, was 75% of our total ARR. The remaining 25% of our ARR relates to our class offering and we expect the majority of classic customer base to convert to Dynatrace over the next 2 years, with most of the remaining conversion activity to the ARR growth opportunity is not the conversion. It is getting customers onto the Dynatrace platform because from there, we can expand our footprint in ways that simply were not possible before. In addition, for investors new to Dynatrace, we do not charge conversion or upgrade fee to move to the new Dynatrace platform. And as a result, all of our ARR expansion is either footprint expansion or new logos to the business. If we quickly break down these 2 ARR growth drivers, during the quarter, we added 214 net new Dynatrace customers, ending the quarter with 1578 Dynatrace customers. Consistent with recent quarters, net new customers for a healthy balance of adding new logos to the franchise as well as classic customers moving to the Diamond Trace platform. In addition to a steady flow of net new customers, our dollar based net expansion rate remained above the 120 percent threshold that we have experienced over the last five quarters since we've ranked our efforts on the Dynatrace offering with existing customers. We will continue to confirm this net expansion level on a quarterly basis. And at the end of the fiscal year, we plan to share the specific net expansion rate for the year. Importantly, please keep in mind that our net expansion rate excludes the upfront expansion that occurs when classic customers convert to the Dynatrace platform. So our reported net expansion rate only takes into account expansion with customers after they are on the Dynatrace platform. Turning to revenue, total revenue was $122,600,000. This was an increase of 25% on a year over year basis. The acceleration in total revenue growth is being driven by the strong growth in subscription revenue, which was $108,100,000, an increase of 39% year over year. For the quarter, Classic lights and dress revenue was down to $3,800,000, and represented only 3% of our quarterly revenue. Please keep in mind that this will be going to 0 over the next 4 to 6 quarters as we and services revenue, which was $118,800,000 in the quarter, representing 97% of total revenue, an increase of 36 percent on a year over year basis. Before moving to our profit metrics, I would like to point out that I will be discussing non GAAP results going forward unless otherwise stated and that our non GAAP measures exclude stock based compensation, amortization of acquired intangibles and other items as outlined in the press release. Our non GAAP gross margin was 82.3 percent for the first quarter, an improvement compared to 80.7% in the first quarter of fiscal 2019. Gross margins are benefiting from increasing subscription margins due to the efficiency of the Diamond Trace platform, which has 1 code base and over 90% of our customers are on a version released in the last 30 days. Our non GAAP operating income 22%, up from 13% in Q1 of twenty nineteen. The increase in operating margin is largely driven by the fact that we are in final stages of tool to a subscription model. In addition, we had some margin overachievement in the first quarter of 20 that was driven by a combination of revenue and the shifting of certain expenses from the first quarter to the balance of the year. Finally, please keep in mind that our first quarter expenses do not include the cost of being a public company which will show up in G And A going forward. Non GAAP net income was $9,300,000 and net income per share was 0.04 dollars based on 238,600,000 shares outstanding. Turning to our balance sheet. As of June 30, we had cash and cash equivalents of $57,500,000. When looking at our leverage, form a basis taking into account the $590,000,000 of net proceeds from the IPO, our net debt as of June 30th would have been $355,000,000. This represents a leverage ratio of 3.3 times our trailing 12 month adjusted EBITDA of $106,400,000. Since the end of the first quarter, We had paid down $436,000,000 of debt, and our current debt balance is $567,000,000. Going forward, the business value for equity holders. The last balance sheet metric that I want to share was our RPO, which was $614,000,000, up 83% over Q1 of last year. The current portion of our PO which we expect to recognize as revenue over the next 12 months was $354,000,000 at the end of Q1 an increase of 62% year over year. Looking at cash for Q1, our unlevered free cash flow was $45,800,000 and it was $172,000,000 on a trailing 12 month basis. To be clear, we as we convert our Before moving to guidance, I'd like to review a few items that will impact our GAAP results for the second quarter of fiscal 2020. First of all, we incurred cash fees of approximately $14,000,000 related to the IPO and structuring that will head to P and L or APAC in the second quarter. These are in addition to the IPO commissions that were netted against the IPO proceeds. Discussed previously. 2nd, as a result of the spin of the Compuor mainframe business, we will also be recording a cash, tax charge in the second quarter of $273,000,000. Please keep in mind that we received $273,000,000 from the main Frank Business, pre IPO, and that these funds will be used to pay the federal and state taxes, a majority of which will be paid in second quarter of fiscal 2020 and the balance in early calendar year 2020. Overall, this is a neutral cash item to Dynatrace. Finally, as disclosed in our S1 and based on our IPO value, we are recording a one time mark to market stock charge in the second quarter For the second quarter of fiscal 'twenty, we expect total revenue to be in a range of $123,000,000 to $124,000,000 representing year over year $5,000,000 and non GAAP net income of $0.04 per share. This assumes approximately 270,000,000 shares outstanding For the full fiscal $50,000,000 representing year over year growth of 35% to 36%. Total revenue is expected to be in the range of 5 $21,000,000 to $524,000,000, representing year over year growth of 21% to 22%. We expect our non GAAP to $0.22 per share. This assumes approximately 270,000,000 shares outstanding for the fiscal year. In summary, we are very pleased with our performance in the first quarter and look forward to building a track record of success as we operate as a public company. We believe Dynatrace's financial profile is unique, including its upscale, growth and cash flow. With a large TAM in front of us and a market leading position, we believe the company is very well positioned for the long term. With that, we will open the call for questions. The first question is from Sterling Auty of JP Morgan. Please go ahead. Your line is open. Yes, thanks. Hi guys. I wonder if you can peel back the onion a little bit and just update us on where you are or where you finished the quarter in terms of the legacy conversions, what's left in front of us? And what kind of experience you're seeing in terms of, the pace of those conversions? Good, Sterling. How are you? So as we said, the conversions are nearly halfway through. At this point, 75 percent of ARR is now on Dynatrace. But the conversion process is, about halfway through now after five quarters. We believe as we've, we've talked about that it's a 2.5 to 3 year conversion process majority of those converting, you know, over the 1st 2 years or so. And we're very pleased with where we are right now. We're a little ahead of our our internal plans and goals. Alright. Great. And then the one follow-up is, as you think about the 3 areas of monitoring APM infrastructure logging, can you give just, you mean, some kind qualitative color in terms of the momentum that you're seeing in each one of those buckets on the new platform. Well, as, as you know, and maybe some of those, who are listening in, so our platform since day 1 has all, always assumed complete full stack observability. So whether if you're in the APM, an full stack customer, you get cloud infrastructure with it and the AI ops pieces as well, log, comes with it, you know, etcetera. So from that standpoint, and most of our opportunities we enter through APM, since that's our, sort of, been our legacy, and that's what customers know us for and the market knows us for best. You know, that's, you know, that, that has plenty of momentum as you can see in the numbers. As far as cloud infrastructure only environments, That's an expansion for us. And we're seeing good traction in that expansion. I mean, one of the unique characteristics out of our plat form is that our AI engine is at the core. And therefore, when someone adds a component, a new module, like infrastructure only to extend the view, they also get the AI engine that stitches everything together along with their full stack hosts. So that's the, and that, that's the same with, with, digital experience management as well. You add that to the, to the portfolio or to the platform, and the AI engine also absorbs that view into the full stack, AI powered, you know, answers first view. So, from that standpoint, you know, we're seeing good traction on all those, all those additional modules, but, we do think about it and the way we present ourselves to the market is much more of a platform than a set of peace parts. That makes sense. Thank you. Your next question comes from Matt Hedberg of RBC Capital Markets. Please go ahead. Your line is open. Thanks. This is actually Matt Swanson on for Matt you guys have had a very well established Air National presence. Could you just talk a little about what you're seeing from a demand environment and just from some of the recent earnings, we've heard some uneasiness in certain regions. So just what you're seeing out there? Yes. So appreciate the question. And you're right. We do have a pretty mature, footprint 40% to 45% of our business comes from outside North America. We haven't seen, a real shift in demand, you know, sort of, you know, negatively, you know, in any, in any region. Part of that may be that we focus exclusively on the more modern cloud environments, the dynamic multi cloud environments, and those are sort of central to everyone's digital transformation around the world. So that then may be part of, the difference of what's keeping us at least at this point, more resilient. Thanks. That's really helpful. And that's really interesting here. You talk about the U. S. Federal opportunity. Could you just expand a little bit more? I know you said it's early days, but maybe how you look at that vertical and maybe what investments or in technology or go to market you think you might need to make to capitalize on that in the future? Sure. The U. S. Federal market is a very different market than the commercial market, those who've ever, you know, been, been close to it or watch those or talk to others about it. It requires a longer term investment horizon. And so we hesitated to put that longer term investment in place until we had a quality team and a quality sales leader who really understood that market space. And so the last couple of years, we started the investment. We're starting to see the payoff begin. But as as I said and you reiterated, it's it's early days, but promising. The, one of the things that, is important in this environment is make sure you get FedRAMP certification, which wouldn't process up. And, you know, that's also an important component to help build momentum, long term momentum in the federal space. Your next question is from Heather Bellini of Goldman Sachs. Please go ahead. Your line is open. Great. Thank you. I just had two questions. Was one wondering if you could share with us any trends that you're seeing in the AI ops marketplace and the AA ops integration that you're offering? And then secondly, wanted to ask a little bit about the competitive environment. There was a competitor of yours who I do think it was early August talked about kind of changing landscape from a competitive standpoint. But just wondering if you could kind of walk us through what you've been seeing? Yes. So from an AI ops standpoint, we're seeing, and I sort of reiterated some stories, you know, they're just a moment to go about customers, both new and existing, and even converting customers the, the having AI at the core of our platform and really shifting from data on glass to an answers first, approach where the answers come automatically in a very precise fashion so that it's extremely actionable and the answers come within seconds of digredations and anomalies, ranked by user impact. That's serving us extremely well from a differentiation standpoint. And, you know, more and more customers are CIOs and CTOs have it on their shortlist of, you know, additional automation, for, for their IT organizations because they know they're source strapped. So that's going extremely well. And as far as folks actually, utilizing some of our new, sort of open APIs to, to bring new data sources into the, into the Dynatrace AI environment, that's been going well as also. It's fairly early days it's been 6 months since we've had those APIs available. But, we're with, with some of the, use cases around ServiceNow integration, F5, low balance kind of integrations, a number of things that are more out of the box now. It's, it's accelerating. So we're very pleased there. As far as the competitive landscape in general, It definitely, the observability space is getting a lot of interest these days. You know, we view observability as obviously a really important component or modern cloud environments. But we also see it as just the first step that the real value comes in the advanced automation and advanced analytics that come on top of the observability. And that's where we see the AI ops investment that we made when we reinvented the platform, really paying off. Great. Thank you. Your next question is from Jennifer Lowe of UBS. Please go ahead. Your line is open. Hi, thanks. This is Rakesh Kumar sitting in for Jennifer. So, you just reported 40% ARR growth, plus ARR growth, which is certainly impressive. I was wondering if you could talk about how you think of levers of ARR growth as it relates to net new logos versus conversions and expansion on conversion? Yes, sure. This is Kevin. So yes, as I'm sure you can see over the last couple of quarters, our AR growth has been over 40%. And as we discussed during our roadshow and in our S1, it's really is a, is a great combination of new logos to the business. As John mentioned earlier, majority of the additions rate. So not disclosing, the, the total number at this point, but it was north of 120%. For the last three quarters, when we talked about on our road show was in the high 130 percent range. So it really is a combination of getting new logos to the franchise. And then once they're on the Ninetrius platform, expanding very nicely. All right. And then I have a follow-up. I was wondering if you could talk about sales productivity trends and how long is the taking for reps to ramp and hiring plans that you have for the year? We're, we're, we're not disclosing, you know, sort of our, all the, all the hiring pieces and sales and, etcetera, etcetera. But what I what I will say is that we're, you know, we're in a better position than we've been in for, you know, for 2 or 3 years now. From a hiring standpoint. Part of it is the momentum in the business, of course, attracts talent, but also some of the positive, online, job site reviews relative to the company is also helping. So from our standpoint, we're doing extremely well, you know, meeting our hiring goals attracting talent and retaining talent. Thank you. Your next question is from Bhavan Suri of William Blair. Please go ahead. Your line is open. Hey, gentlemen, thanks and congratulations there. Nice job out of the quarter out of the gate there. I guess maybe I just want to touch first on that DM attach rates. Obviously, you sell that as a separate SKU there. I'd love to understand a little bit more about what you've seen there in terms of adoption, and the attach rates and how that's trended in the recent quarters? So the Digital Experience Management area, which is, you know, so the user experience components has been we've had that module in our classic product set for a while, it was just attached sort of a separate, you know, product set. Right. In the Diamond Trace platform, it's an integrated module where the AI engine pulls everything together into a single stitch together view from every TapClicks swipe, all the way through all the infrastructure components to the back end. You know, in a full stack view. So, we are seeing continued, momentum in the attach rate. It's interesting that cloud. As we move to the cloud, a lot of interest went to just building the foundation. But what we're starting to see now is an acceleration in back to the numbers that we had 3, 4 years ago in our classic world from an attach rate standpoint. I don't have the exact stats of the attach rate. You know, we're we're, you know, talking about how we want to, you know, bring that forward and present to the market investment community, but it's been healthy And I'll be in any place where there's users attached, e commerce, home banking, go down the list you know, those are, those are perfect opportunities for, you know, solid attach rate for, for the Dem module. Yes, John, that's helpful. I guess maybe a more strategic question and maybe I should have asked this one first, but you think about sort of the automatic instrumentation, the automation features of the new Dynatrace platform, it feels like it should make it make it easier for you to achieve greater penetration within customers because it's much easier to point manage. I guess is that the right way to think about it? Because if you think about historically, maybe talk about it a little bit, the average percentage of applications monitored by classic customers and what's that like historically? And sort of does that become meaningfully higher with DynaStage platform because of the automatic instrumentation detection, the way the platform lights up? I love just to understand some of the trends you've seen ask customers for sort of what that you're seeing in the expansion rate obviously, but love to know sort of numbers of applications or sort of and is that the right way to think about sort of that shift? Yes. Sorry if I misunderstood the first question. I thought you meant the digital experience, you know, management piece. I did. I would, this is more strategic as we did. Thank you, Anthony. Fair enough. But you're spot on that the automatic nature, and I, and I mentioned it in the expansion, you know, customer that I talking, talking about just a few minutes ago that, you know, people start with, with, with a taste try a few modules. Does this really work as advertised? Can my people really wield the weapon, you know, in other words? And the minute they get the hang of how easy it is, the expansion is quite rapid. It's been more and much more rapid than the, than our classic product set. And continues to show up in the net expansion rate. So yes, the bulk of the net expansion today is additional applications. Going forward, we believe it'll be a nice consistent mix between additional applications and additional cross selling and modules. Got it. Got it. Helpful. Thank you guys. Appreciate you taking my questions. Thank you. Your next question is from Richard Davis of Canaccord. Please go ahead. Your line is open. Hey, thanks very much. One of the areas that we've seen some of our companies try to pivot into is kind of government and things like that. Have you to what extent do you feel that that's an opportunity? And, you know, some companies, I can't recall if you have FedRAMP or not, but that's one of the check marks and things like that. To what extent do you see that as an opportunity over the long run? Thanks. Yes. So we're saying it's a huge opportunity. I mean, I don't know where the U. S. Government falls as far as a consumer of technology these days. It used to be like one of the top number 6 or 5 or 6 countries where they spend. So it's a good it's definitely a good sized market space. But we're early days in it, mainly because it requires an ongoing investment, for a while before you see the uptake, which we're now just starting to see, you know, the beginning with. From a, from a standpoint of FedRAMP, you know, that's something that's in process, important piece of the project. But I think that, you know, just we're excited about that opportunity going forward. I thought the exam all customer example was pertinent, and, I look forward to a lot more stories, and success in that part of the market. Thank you. Thank you very much. Your next question comes from Don DiFucci of Jefferies. Please go ahead. Your line is open. And so, Kevin, as you point out, grew 43% this quarter. That's 3 consecutive quarters of ARR growth in the 40 which accelerated from the low thirties prior to that. And we all know that ARR is a prelude to future revenue. I guess my question is, how sustainable is that accelerated growth? And it doesn't have to stay in the 40s, but those are pretty impressive numbers. And I'm just trying to understand, like, because we get the question a lot from clients, like, okay, when the classic ARR goes away, because you pointed out, I think, Kevin, that, hey, listen, when we convert, there's we see much broader adoption with the new Dynatrace platform. But you're also seeing the net retention, that's really high too. So just trying to understand like this there's something changed out there in the market too? Like that maybe that's a second question, but it related. And how should we be thinking about that ARR growth going forward? Yes. Thanks. I'll jump in and maybe John can connect to this as well. But I think there's a couple of things that are behind us right now are working in our favor. First of all, we've been ramping our sales organization over the last 12 to 24 months, and we expect to continue to do that. So, you know, that will increase product or increase some, some bookings. So that's one growth driver. 2nd growth driver, John mentioned it. The ease of use and implementation and the ability to scale out the Dynatrace platform for existing customers is much more rapid and automatic compared to 2nd generation monitoring. So that's driving higher net expansion rate. So I think the combination of those 2, and then as we're adding new logos, been a core focus for the company over the last 12 months as well. That has tremendous opportunity. Our average ARR, the Dynatrace platform per today is north of $200,000, you know, we think each one of those customers can can be a $1,000,000 ARR opportunity for us over time. So lot of opportunities to continue to expand ARR in both new logos and in our base. Okay. Has there anything? And maybe John, is there something else in the market too because, you know, APM, as you guys know, especially from your experience back with the classic, it's always made a lot of sense, right, and and And it's there was a lot of promise even in the early 2000s and a lot of companies went after the opportunity, comp where Dynatrace Gomez, and then all the others. And and I but it never really became, there were never really fulfilled its promise, but we're seeing something today in Dynatrace and also in others. And there is a lot of questions. Competition is something that wasn't asked a lot about right now and on your call, but it will be right? Because there's other companies doing well too. I'm just trying to get a sense of, is there enough room for others to continue to do well? Is something changed in the market that's also helping you? I think there's, there's a big disruptive shift that's going on around cloud. You know, we've talked about it before. This isn't just applicate locations going to the cloud and everything else status quo, this is the shift to the data centers to hybrid multi clouds. And that's requiring an entirely new set of tooling. So think about the 2030 years worth of tooling that's been out there, all having to change over the next, you know, 5 to 10 years. That's accelerating a shift to the to a modern, you know, set of platforms. And and I say platforms because in the cloud, you can't go after it in the old way with a bag of tools. You have to think about it in a much more holistic way because the entire stack and software. So with that disruptive shift, and that collapse of what were traditional ITOM use cases, you really have a dramatic shifting moment. We saw that 5 years ago. We came to market 4 years ago with a with an initial sort of offering to get our feet wet. We took an enterprise 3 years ago starting in 2016. And, we haven't looked back. So we're really pleased with the competitive position. I mean, you know, we the, the foresight we had is paying off. And the, this disruptive moment is only beginning. It's in the early innings for sure. I think that's what we're seeing and that's why the TAM expansion, you know, is so great and so rapid. Great, thanks John. Thanks Kevin. Your next question comes from Raimo Lenschow of Barclays. Please go ahead. Your line is open. Hey guys, this is Mohit Gogi on for Raimo. Thanks for taking my question and congrats again on the the first quarter out of the gate. So my question is on the product roadmap. So if you can shed more light on across, if you look at, obviously, it's a unified on, but if you look at the different use cases, I guess, across APM logs and infrastructure monitoring, along with the IOPS, just wondering if you can give us a sense of the product priorities that you have like are those more focused in some of those areas or is it more consistent across the board? And I have a follow-up question to that. No, it's a good question and thank you for your, for, kind words. The, our investment, is consistent across all of them, really. They're all monetizable modules. And when you have something that's monetizable then you're going to put some effort into it. So we have teams on every one of those, what we think of as key use cases. The, we're extremely strong in APM as you would expect. That's, you know, that we believe is a high ground. It's it's very, it's very difficult to do well at scale. And at the same time, it's it's essential for the way CIOs and CTOs and even CEOs now, think about, you know, their digital transformations. But we are we do have significant investments in cloud infrastructure monitoring, you know, in the AI ops space and in the digital experience space. Which we also feel is a very strategic high ground for us as well. So in order to cover the cloud, we've had to do all of these pieces because we do think of it as a full stack, so what we're doing now is sort of breaking out different pieces of the puzzle in the standalone sort of components for extensibility and reach beyond just the full stack view that we started with, if that makes sense to you. That's helpful color guys. The follow-up to that is the other part of the equation is the pricing model. So I mean, I'm just wondering if you can give us more color on what you're seeing in the pricing environment because some of your competitors, are sort of like talking about some new pricing models or maybe from your customer conversations, you were hearing the same. So just wondering if you can give us more color on the pricing environment you're seeing? Thank you. From a pricing standpoint, we have been, I would say, we listen to customers. I mean, I really do believe that the, you need to make sure that your customers are happy that you're easy to do business with and the rest And I think we're being smart with how we manage our pricing and our licensing models. We have a fair amount of flexibility have a direct sales organization. 90% of our sellers are outbound in the, you know, in the market. We sell to enterprise customers who expect some flexibility. And we're pretty good at, at adapting, you know, licensed strategies that fit customers and help them expand our products at widely within their organizations. And I think you see that with the net expansion rate mean, if we're really difficult and challenging, you just wouldn't see that. So, so I'm happy with how we're pricing. I'm happy with our flexibility in our licensing models. And, I can only speak for ourselves, but that's, you know, that's where we sit today. No need to change. Thanks, guys. Your next question comes from Erik Suppiger of JMP Securities. Please go ahead. Your line is open. Hi, this is Joe Goodwin on for Eric. Thank you for taking our question. I was hoping you guys can give us some color on what portion of customers are using Dynatrace for applications running on containers? And then anything around how fast the containers business is actually growing? So I don't have the exact numbers on on it Dynatrace customers running on containers, but what I can tell you, is it nearly 100% of the Dynatrace customers or cloud based customers? And you know, container world has been around for a little while now, whether they started with Docker, what have you, but what we've seen in the last 18 months of the rapid shift toward Kubernetes has really been, really been interesting to watch. As people look for a portability platform across sort of a multi cloud strategy. And whether that's, you know, 15% to 20% of our customers or whether it's, you know, more than that today, I'm not sure, But what we do hear from customers and surveys and so all we've done is that, you know, cloud native workloads and container orchestrated environments are going to sweep through our enterprise customers to the tune of 80% to 90% over the next couple of years. Understood. I should probably add on that. It's it's actually a great situation for us because we purposely built for dynamic containerized environments, So it's great for from our standpoint to see the rapid, rapid rise of this kind of dynamic orchestrated environments. Understood. And then just a quick follow-up. Can you provide any insight into how much of a drag on gross margins was the cost of supporting the class product during the quarter? So this is Kevin here. So we as you know, we have a super efficient Dynatrace back, one code base. All of our customers are tethered in when their data is in the cloud or behind the firewall. So super efficient there. The classic product is winding down and we will see some margin expansion over time, a gross margin standpoint, but we're not really breaking down how much of how many dollars are going to be pulled out of that business. Now we will continue to see as we've seen gross margin expansion going forward? Yes. I think the point, the point is, is that the classic product set, you know, is, is not as efficient as Dynatrace. And, you can sort of expect that from a totally new stack, you know, four or five years old versus some of the, classic products that go back, you know, 12 to 15 years in their technology stack. Great. Thank you. There are no further questions at this time. I will turn the call over to John Van Sicklick for closing remarks. Yes, thank you. And I'd like to thank all of the investors and analysts, you know, for your time today. As well as I'd like to thank, you know, the many customers we have partners and employees who helped us build a very strong company. When we're excited about the path we're on, we're excited about the opportunity ahead and we look forward to updating all of you in It's about 60 days from now. Thank you very much. Good evening. This concludes today's conference call. You may now