Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Annual Recurring Revenue (ARR) grew 20% year-over-year in constant currency.
- Subscription revenue increased 21% year-over-year in constant currency.
- Free cash flow was 30% of revenue on a trailing 12-month basis.
- Dynatrace Inc (DT, Financial) added 162 new logos in Q1, up 5% from the year-ago quarter.
- The company's DPS licensing model continues to see strong traction, with over 900 DPS customers representing more than 20% of the customer base and over 40% of ARR.
Negative Points
- The dynamic macro environment and current market choppiness continue to pose challenges.
- The growing trend of larger observability architecture and vendor consolidation deals comes with increased timing variability.
- The evolution of the go-to-market strategy will take time to settle in and mature.
- Despite the positive results, the company is maintaining a prudent approach to guidance due to economic uncertainties.
- Net retention rate, while improved to 112%, still reflects a cautious outlook for future quarters.
Q & A Highlights
Q: Congrats on a really good set of results. I guess I want to ask about the CrowdStrike incident. Will this possibly drive incremental business?
A: It's premature to attribute any future ARR growth to the CrowdStrike incident. However, the feedback from customers was overwhelmingly positive. We materially accelerated getting customers back online rapidly by enabling them to prioritize their software workloads. These outages highlight the mission criticality of observability software.
Q: The 112% NRR seems to suggest that maybe the in-quarter retention rate likely improved quite a bit sequentially. Can you talk about the drivers of that?
A: It was a modest improvement from Q4, going from 111% and change to something that rounds up to 112%. We had a very strong expansion quarter, and our DPS licensing model continues to see strong traction. Customers on DPS are consuming more of the platform at a much more significant rate than non-DPS customers.
Q: Can you comment on anything you're seeing in terms of changes with respect to macro, large deal timing, or other trends impacting guidance?
A: Nothing has changed from three months ago. The market from a macro perspective hasn't worsened but hasn't improved either. Customers have multiple levels of approval, and we are seeing a growing theme of tool consolidation initiatives. The go-to-market changes are settling in, and we had a solid start to the year.
Q: Have you been able to hire and promote all the sales executives intended to better target the Global 500? How do you think about the risk to close rates as the year progresses?
A: The changes are complete, and we have assigned all the accounts. The hiring will happen more substantively in the back half of the year. We are not worried about disruption from account reassignments. The accounts moved were those with significant propensity to spend but not significant traction.
Q: Congrats on another quarter of positive net ARR growth. Can you provide an update on the DPS traction and the capabilities customers are turning on upon moving to DPS?
A: We are very pleased with DPS traction, with significant interest in logs and application security. Customers are leveraging more of the platform at a much more significant rate. We have become more precise in our sales playbook, targeting end-to-end observability and cloud modernization.
Q: Can you help us think about the partner ecosystem and any noticeable changes since the overhaul of the partner economic model?
A: We only put the new model in place at the beginning of our fiscal year, so it's early. However, qualitatively, partners are very happy with the changes. We did see an uptick in deal origination above the historical 30% level. We have removed friction for direct reps wanting to leverage partners.
Q: How did it go with AppSec and logs as contributors to growth in the fiscal first quarter?
A: We had very good consumption in both logs and application security. Logs are growing faster than application security. We are very pleased with the growth rates and continue to see significant interest in these areas.
Q: Can you provide more color on the new logo acquisition in the quarter?
A: We had roughly 162 new logos in the quarter, up 5%. We are focusing on the quality of new logo lands, aiming for an average ARR per new logo of over $100,000. This focus ensures that these customers expand at a much more rapid clip.
Q: Looking at net new ARR, it grew over 20% in Q1. Why would it be reasonable to assume a decline in the remaining quarters?
A: We had a solid start to the year with net new ARR up 23%. We are maintaining guidance to be prudent given the choppy market. The pipeline remains healthy, and we are optimistic about the opportunities ahead.
Q: When do you think Dynatrace could get back to the old formula of adding 15-20 points each from new customers and existing customers?
A: Our expectation is to stabilize ARR growth this year and increase it in the future. Elements like go-to-market changes, partner lean-in, and the movement toward end-to-end observability will contribute to this acceleration.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
