Dynatrace, Inc. (DT) Earnings Call Transcript & Summary

Awesome. Thank you for joining us. This is the last fireside chat of the day. So we have Dynatrace with us for day 2 of Needham's Tech Week. I am Mike Cikos, and my coverage spans across the infrastructure, analytics and security sectors here at Needham. I'm pleased to say that we have with us Dynatrace's CEO, Rick McConnell, and Investor Relations, Noelle Faris. Just for some quick logistics. I have a list of questions I prepared on my side. But if the clients, at any point, have questions that they want to get in front of Rick while we have him here, please be sure to send those through. I will make sure we get that in front of the management team while we have them. And anything subsequent to this, if you want us to facilitate, more than happy to engage. With that out of the way, Rick and Noelle, thank you very much for joining us at the conference today. We really do appreciate it.

Thanks for having us. Saving the best for the last, Mike, is what I'm going to go with.

There you go. There you go. And so I know -- one of the things that I wanted to touch on before we started digging into the model for a second, but you guys have had some important announcements this year with respect to the technology, right? And I'm thinking specifically about Grail. I know we teased a bit for a couple of months because it was in incubation before you guys had the former launch, but that is now out there in the market today. And so I would really like if you could just frame for the audience here, myself included, what is unique to Grail that maybe Dynatrace didn't have previously or that your -- quite frankly, your competitors might not have.

Sure. Well, it's a great place to start, Mike. So if I back up a second, the origin of Grail really occurred 4 or so years ago. Grail is a massively parallel processing, highly scalable data lakehouse. So think of it as massive storage, but that can be immediately accessed for analytics against that data in real time. No reindexing, no rehydration. No rehydration translates to lower cost. No reindexing means much more rapid performance in near real time. So why do we need that? Well, if I back all the way up to the beginning, digital transformation, cloud migration, cloud deployment is driving an enormous avalanche of data requirements. Huge amounts of data, huge amount of data complexity. It needs this sort of data store to be able to manage all that and do so effectively. And at the same time, companies want to be able to analyze that data very rapidly and that was the origin of Grail and why we thought it was missing in the marketplace and why we thought that it needed to be for us core and not context.

Great. And I know you guys have definitively accentuated the point around the -- you no longer need to rehydrate that data. You can very readily index and query it, right? And I think that the data lakehouse -- we've been through several iterations as far as the architecture, but the data lakehouse does seem to be a very obvious marriage of trying to take the benefits of the positives from the data warehouse while removing some of those constraints and the data lake while removing those constraints as well. So I understand that. I did want to start with the first area of the Grail, and I know the Grail is that underlying technology, but the first area that it launched into was, let's say, log analytics, right? And so there's this thought in the market that I've been dealing questions from clients on, but the idea that logs have been around forever. And almost the idea that the technology has been done, right? So I'd be curious, how is it you guys are trying to bring a different flavor to solving the problem of logs in the current market? And maybe you could draw on your own personal experience in that as well, I'd appreciate any color.

You bet. So our view of Grail vis-a-vis logs, which you're right, is the first instantiation of it, very well put, is that there are 2 aspects to it. The first is we believe that the log market is highly ripe for disruption. And it is simply because of scale, performance, analytics, those elements that -- and cost. All of these elements lend themselves to our view that we can do logs better than what's in the market today over the course of time with Grail. The second piece, though, I would say, is equally important, which is that today, logs are really isolated in their own silo. And you think of end-to-end observability is traces, routes, spans, metrics, all of the other components of end-to-end observability and oftentimes logs are thought of as something somebody else does. And that doesn't make sense. Logs in context of traces, routes and all these other data types are much more valuable than logs in an isolated way because they deliver causation, not just correlation based on analytics. I can do a much better job of assessing where an issue is in your IT ecosystem if I know that a log and a trace and span and route. All of these pieces happen at the same time. And so therefore, there you can cross-correlate them. So one thing is focus on logs and do that better based upon non-reindexing, non-rehydration, massive scale, lower cost, but the other piece is integrating to the end-to-end observability framework, that is Dynatrace.

That's a great overview. And it resonates because I know that we actually held a private company call recently. And their big push or the way that they were talking about it is, to your point, logs can give you that causation, not necessarily just that correlation, right? And so the amount of detail that you can get from those logs is more. You need to have that in some way integrated for that context that you're talking about. So I think we're well aligned as far as the view to have a tied together platform on that front. Maybe stepping away from Grail for a second and thinking through the most recent earnings print. I know that there were a couple of different changes to guidance. We look at the customer growth, which is now expected to decline 5% year-to-year. Can you help us think through maybe the parameters that you have around that guidance and how you guys went through that construction process? And really, what I'm getting at is with the customer declines that we're now talking about on a year-to-year basis, is a decent amount or a solid chunk of that really tied to customers either deferring or pushing out some of these deals in the current macro just because -- I think we're all very aware of what's going on out there in the world, but just wanted to see if you could help us better frame that.

Our view is really quite simple, which is that it is, in fact, macro driven. And for us, as we indicated in our guide as part of our Q2 earnings announcement last month, we see that being most pervasive in Europe. And that's the impact that we saw in the month of September, headed into October. And we decided that it was appropriate to derisk the guide as we look forward based upon the economic environment that we're seeing. That led us to a presumed reduction in the number of new logo ads. Just to be clear, it's not the number of customers that's declining by 5%, it's the number of new logos we're adding year-over-year that's going to go down by 5%. But that's where we see the biggest impact from the macro environment is the new customer close rate. Why is that? The primary reason is quite simply that everybody is doing monitoring today, one way or another, on apps. It just is happening virtually entirely with DIY solutions or open source or other areas. It's -- I was in Europe actually last week meeting with customers. And it's amazing to me the number of customers tell me of a dozens of monitoring tools. What they're looking to do is consolidate those tools. The -- every app has developed its own monitoring tool and they've used open source or leveraged off-the-shelf tools. What they want to do is they want to centralize that and they want to deliver answers, not just data, not just dashboards. That's what Dynatrace does. But they also, in a budgetary weakening cycle, can say, "You know what, I just have to get by 1 more quarter, maybe 2 more quarters." And so we've inspected all of the orders that slipped out of last quarter to this quarter. And what we really observe is that they just pushed. We haven't lost them. The win-loss ratio hasn't changed. Pipeline continues to grow and grow nicely. So that is not the issue. It's just pipeline coverage ratio has had to increase as well. We expect that as we move out of the macro weakness that we're currently seeing over, hopefully, in the next 2 to 3 quarters, the pipeline coverage ratios will renormalize. And as that happens, that should result, as we expect, in bookings acceleration.

Thank you for that, and I appreciate you calling me out too. I apologize if I misspoke on the reduction. It was in the customer additions for this year, not the total...

Yes, I don't think you misspoke. I just want to clarify for people listening that, no, we're not seeing reduction in customers, just a modest reduction in the growth number.

And so I know that we spoke about Europe as a specific geography that's seeing some of this weakness, right? Is there a way to think about maybe certain verticals or industries -- like how do I think about those different factors underlying that European umbrella? Or alternatively, is it more just Europe-based in scope when you think about the overall geography?

I think that based on my trip even last week, along with the prior month, when I was in Europe in both those times, I think that there is a lot of concern coming out of Europe. So there's no doubt about it based on the customers that I'm seeing. It isn't so much that they've seen it in the numbers in a rapid way, but there's a lot of apprehension. Now where they are seeing it is in areas like fuel prices. I mean people were telling me that their fuel bills had gone up by 2x or more year-over-year. One person said that their fuel bill in the U.K. had gone up 4x year-over-year for the month of September. So you really are seeing it hit people in the pocketbook. And that's going to cause different buying patterns that existed before. Especially, when you see ongoing inflation at 40-year highs, these kinds of numbers are really quite substantial. Even though we've seen a reduction in some of the inflation numbers lately, they're still much higher than recent historical averages.

Great. And I know -- I did want to circle back to it, but I know that you had said, when we were talking about the pipeline conversation, no change in win-loss rates, right? They're still on the pipe. But I did just want to make sure, I'm thinking about, I guess, those push deals and those win-loss rates. Is it fair to think -- I want to make sure I'm structuring the question properly. Like when I think about this current environment, if I have -- I'm a European customer and I'm telling you, I have a dozen different monitoring tools, right? And the C-suite is probably pushing down on me saying, can you get by for a quarter or 2? Is Dynatrace able to help those customers may be overcome those initial barriers? And where I'm going with that is like, can you engage with those prospects and maybe help them understand the benefits, the ROI or the longer-term cost savings by embracing the Dynatrace platform and consolidating those separate vendors? In my view, it would be a much more -- or it is a relatively simple sales process. But again, I'm not the one selling the platform, and I'm just sitting here at my desk, right? So I want to make sure I'm thinking about that appropriately.

Maybe I had to bring you over [indiscernible] Mike. I think that sounds like a good deal because I think you've got the story just about right. The expectation is that absolutely, there is real cost savings to be had here. But think of it this way. The way that we see it today is that what you're monitoring is you're monitoring through an army of people that are manually processing and looking at dashboards. Something goes red, yellow, green, you see it go red and you attack the problem. You try to figure out where it is, what team do you call, how do you get them up to speed and then how do you get them to address and then remediate the issue. This is a very time consuming issue or approach in the best of cases. In the cases where data is exploding, applications are exploding, now you moved from whack-a-mole to multiple incidents simultaneously, you can't manage it. And so our thesis -- our hypothesis, if you will, is that with cloud migration, with cloud deployment, with digital transformation, the amount of data makes that existing process totally unwieldy. Because you can't even add the number of people you need to resolve it and you bury application development teams in trying to triage issues. So that's what we're trying to move away from through the automation that Dynatrace provides. Where does this lead? Well, maybe I'll do that through an example. BT -- so British Telecom in the U.K., over the last 6 to 9 months, deployed Dynatrace, and they put out a press release actually that was driven by them. It said that through the deployment of Dynatrace, we expect to save GBP 28 million over a 3- to 4-year span. These are real dollar cost savings from the approach of using automation to resolve issues. Moreover, they reduced their MTTR by 90% in major incidents, 90% reduction in incidents -- in incident resolution time and a 50% reduction in overall number of incidents. These are amazing stats that we can take to new customers because we see this very consistently across the board. And as we bring those to customers, they get very passionate about the deployment of Dynatrace. Getting over the hump, which is where you were going with it initially, of getting those first budget dollars, that's the challenge. Once we sell that, once we get it done, we prove it time and time and time again that the extreme significant value that Dynatrace delivers to those customers.

And from a competitive standpoint, I want to make sure that I'm being thoughtful here as well. But like, again, let's take that European organization that might have a dozen different monitoring tools. Are there certain tools that you've seen more frequently when thinking about customers may be using open source? Because I have to imagine that the DIY is probably altered together, probably over time, just starts to look a little bit more like a Frankenstein. But is there anyone that you see more frequently when going through those engagements and actually working with your customers towards that end goal of actually signing them on?

Yes, I wouldn't say that there's any consistency that I've seen really across the board. Many of them have application teams that have developed their own or they'll use snippets of open source code and they'll pull them in. The problem is then when the network operations center, IT ops center needs to get monitoring tool updated, they go back to the application team. It could have been 2, 3 years ago, 5 years ago that the tool was built that they're still using today. Meanwhile, I was at an oil and gas company down in Houston in the last couple of months. They walked me into their network operations center and basically said, Rick, this is what Dynatrace needs to help us eliminate. Not completely eliminate the network operations center, but certainly make it more efficient. And by the way, move from 60-some-odd tools, in their case, to a much, much lower number.

That's helpful. And if I could just take that 1 step further, but I'm thinking about it -- I don't know if this oil and gas company is the example here, but let's just use them since we're on it, right? My thought would be is -- if you have this internal team, it stitched together a DIY tool. There is a concern, if talent leaves the door, does that DIY tool still hold up? Or is there -- has there been a lot of talent that knows how to properly use that DIY tool in the first place, right? Whereas having a standardized third-party platform like yourself, again, probably lends itself to a consistent investment in the technology, which we were talking about earlier with Grail, but also a more seamless reduction of coming down the learning curve and using that tool in the first place. So...

Imagine the network operations center, people sitting there having to say, "Okay, this app broke, so I've got to use that tool. Well, this app broke, I got to use that tool. This infrastructure went down, I got to use that tool. Oh my gosh, I'm having a real user access issue in the middle part of the United States. Why is that?" Whatever it might be, using multiple tools for the existing team is completely inefficient. And then God forbid, you do need to get any of those tools updated because you can't find the people who wrote them in many cases. So that's an issue. The combination of all this just doesn't make sense. And even when those tools are working at full strength to perfection, they are still only delivering typically dashboards. They are not delivering answers based upon your ecosystem of where the issues are so that they can be rapidly addressed. A good example. We did a POC with a supermarket recently and they put us on their loyalty program. Well, loyalty program, we all want our $1.35 at checkout. When we put in our phone number, that $1.35 is really critical. And it's -- and loyalty program goes down, that's a problem. It just so happened that -- by a strange twist of irony that while we were doing the POC, their loyalty program, which we were observing, went down. And by using Dynatrace in the POC, they were able to resolve the issue in 15 minutes. They came back to us and said, that would have taken us hours, if not days, to fix in the past. And it is that kind of motion that makes Dynatrace so valuable to customers. And they immediately converted that POC to an order as a result of it because they saw real time the value of Dynatrace in their environment.

Great. Great color. And Again, I'm sorry to come back to it, but I just want to make sure I'm being thorough here. We've spoken about pipeline coverage, hopefully, renormalizing in the next couple of quarters. We spoke about the win-loss rates staying consistent. And so I'll give you the scenario that I have from my side. And I'm just curious how you would respond. But once the company took down its guidance following the most recent quarter, I had people in 1 ear saying, "Hey, they double-dipped and took down the guidance for the second time this year. How do we build conviction in the outlook now?" And then on the other side of the line, I had people saying, "Hey, they've derisked the numbers, they don't want to do it a third time this year, and they have a new CFO coming, so they gave him a low bar to execute against." So I think 2 very different viewpoints I'm getting, and just wanted to see, can you again just better frame out the guidance that we have for the rest of the year? How is it you guys are building confidence there? And maybe from the outside looking in, but like should I be thinking about the RPO metrics that you guys report the current RPO? Like is there anything that we can look at from the outside to help build our views? I would be curious if you could just provide some color there as well.

Yes. I mean, certainly, RPO -- current RPO give some guidance. But the broader answer to your question is that we didn't take down guidance because we have a new CFO. That's not what we would do. We did, however, take down guidance to derisk the model. And it's very clear that we don't want to do it third time. And so we tried to factor in Europe. A good example to give you a more direct representation is, at the end of our fiscal Q2, we saw the weakness in Europe resulted in bookings deferrals. Not loss, as I talked about earlier, but deferrals. We assume that, that was going to continue into Q3 and Q4 with respect to our guidance. Moreover, we assume that a bit of that malaise would begin to infuse itself in the other 3 geos, which we did not see in Q2. And so we wanted to be conservative not just for Europe, as we looked ahead, but we assumed that if Europe started to show increasing weakness, that might expand into other geos. And we reflected that in the guide. So about half of the 300 basis point reduction in ARR -- adjusted ARR growth guide was coming from Europe and about half of that reduction was from the other 3 geos in combination, even though we did not see that in those geos at the end of Q2.

Very helpful. And I really appreciate you getting granular on that, the global scope versus maybe that European dynamic we're seeing. I also wanted to talk through the go-to-market, like we were just talking about how to nurture these customers and maybe help them get over the hump in the current macroeconomic environment. But in this environment, do you find that maybe certain go-to-market selling motions or maybe more specific products within that Dynatrace platform are resonating more today than they were, let's say, 12 months ago? Has there, in any way, been sort of reprocessing or a tinkering or a tactical change in the message that DT is communicating? Or is it fair to assume that it's more business as usual, you just might need to get closer to these prospects and do a little more handholding through that sales cycle?

I don't think that there's any massive change needed in our selling process. We are getting deals to the finish line in and about the same way that we were before. It's sort of at that final step or final couple of steps in the close cycle where we see the deferral. I went through with Kevin, our CFO, any deal that slipped out of Q2 into Q3 deal by deal with the senior sales leadership team. And in virtually all cases, what happened was that budget was deferred or another level of approval was required that wasn't expected before. And it was amazing the number of times that CIO came back and said, "Geez, I had authority before and it was held at the CFO level. Pending, pending spend or budget free up." so those were the kinds of scenarios we're seeing where we did see deferrals or delays in the order, very late in the sales cycle. Again, I think that renormalizes as we look over time. I don't think that persists. So that's clearly a piece of it. To come back and address your other comment or point, Mike, on what products you're selling. What is great is that our sales cycle, our go-to-market motion is really focused on end-to-end platform sale. It is not oriented to go sell APM, application performance monitoring; go sell infra; or go sell digital experience or even application security. It really is oriented around an end-to-end platform sale. And we see that in the numbers. More than half of even the new logo lands, let alone the existing installed base, are 3 or more modules, multi-module as we refer to that, which represent that the selling motion of a cross-platform sale is resonating and landing effectively with customers. So that's what we're focused on selling with -- we talked at the outset of this about Grail and the addition of logs. And we would expect that, that starts to get integrated into the overall cross-platform sale as well.

Great. And maybe another piece to talk to here would be like the gross retention figures for Dynatrace. I believe that figures have actually been tracking up over the last couple of years on the gross retention side. And I just wanted to get a better understanding. So what is driving that improvement for Dynatrace? I have a follow-up on the gross retention, but like why would that be tracking up? Just given that -- I know that we've been talking about you guys as a broader platform play for some time with these multiple modules that you sell this end-to-end solution, as you were just saying, but is it the market is increasingly recognizing the value that you guys deliver? Or are people really looking at you as more of a strategic partner? Like how do you put all that together?

Well, to start on the retention front, churn is extremely low, especially once you get in the north of 20,000, 30,000 ARR kinds of numbers, which if we do see churn, it's at a very low end. But in our sweet spot, Global 15,000 markets, we just don't see churn. Once Dynatrace gets integrated, it's integrated. And it typically stays there because it generates tremendous value for our customers. So that's sort of 1 point. The broader point on retention, and you're right, it is very strong and increasing modestly, I would say. And the reason is simply because of the end-to-end platform play that you deployed APM, you want to add infrastructure. You want -- you got infrastructure, you want to add application security. You're also adding your workloads. So the way that I think about net expansion is there are at least a few categories. And to cover them quickly, category 1 is, I'm already using -- I'm a customer. I'm already using Dynatrace on a particular workload. I needed 5,000 more servers because of my customers using it more and more, using that app more." So though that's an expansion, it's a mandatory expansion. We need more Dynatrace to manage that up. Another one is expansion to new apps and the third one is expansion to new modules. The second one and third one, I would say, are more optional in that they can be deferred, but yet the value that customers are seeing in Dynatrace is this end-to-end observability. So it is the ability to deploy us in full stack plus digital experience for real user monitoring plus AppSec, et cetera, that brings it all together and really delivers a whole that is much greater than some of the parts. So the desire, the motion, the pipeline build-out is all consistent with that cross-platform play.

Great. And I know, again, we've been focused on probably some of those top line pieces, whether it's macro or the deferrals here. But I don't want to lose sight either. Dynatrace has demonstrated the ability to drive sustainable profitability and strong cash flow, right? So I would put it back to you now with the margin guidance that you guys have been able to keep for this year. And I guess the question is more around how or where is Dynatrace looking to prioritize some of that investment spend, especially since we are in this weaker environment today versus where we were a year ago?

Yes. Good question. A couple of answers to it. First, we are a balanced growth story. We're growing very fast, and we're doing so with strong profitability in the mid-20s for operating margins, high 20s cash flow. This is a very, very solidly running company. And yet, we believe that in a $50 billion market opportunity for the combination of observability and application security, that there's even more to be had. Now in the middle of the macroeconomic weakness that we see, it's probably not exactly the right time for growth acceleration. But coming out of this environment, we see that the demand for observability is just going to get stronger and stronger and stronger. And for all the reasons that I articulated earlier, it's just not going to be possible to manage the explosion of data and its complexity manually. It's going to force you to automated tools in a digitally transformed environment. And so that is going to provide a huge tailwind, I think, to the observability space going ahead. And the vendors, the participants in that space that can automate the resultant answers there are going to have the best opportunity to really take advantage of that. Now double-clicking through to profitability specifically, the thinking on profitability is that, we absolutely can and should and expect to be operating in the mid-20s operating margin range. And we believe that, that's a landing zone that we can continue to maintain as a primary target landing zone as we look at. Not establishing guidance for FY '24 at this juncture, but generally speaking, we've been operating in the mid-20s in the past. And we expect that, that's a good landing zone for us in the future.

So again, just to make sure I'm being clear here, but like with the guidance adjustments that we saw on adjusted ARR, right, and the fact that the company was still able to maintain the operating margin metrics that they have for the full year, it sounds like, again, you -- some of that pullback in spending that we're seeing or the deferral in spending coming from Dynatrace is really more around that growth-oriented investment where -- all right, it probably doesn't make as much sense to press on the gas here given some of these macro headwinds. Let's focus on that mid-20s operating margin you're talking to. And then when the time improves, we can turn that funnel back on and get that going again. Is that a fair way to describe it?

Exactly. Let me double-click on it further for you. We're not changing our investment profile with respect to R&D, for example. We think that innovation and the criticality of -- as I talked about a couple of times, winning in the turns, so to speak, with the macro environment being kind of a turn that we're all managing through right now. We want to continue to innovate, but we want to continue to deliver against an R&D pipeline. We've done it with application security, with Grail, with our core platform. Infrastructure, for example, monitoring got to $100 million over an 8-quarter span. Those are the kinds of investments we want to continue to be making irrespective really of the economic environment. We also grew our sales team in the 25% plus range over the first half. And that really has given us sufficient capacity, we believe, going into the second half to be able to moderate that a little bit and continue to add salespeople in the second half at the same rate. Now that may again accelerate next year when we get into FY '24. But at least for the time being, we believe that we're in a good capacity environment. We're also going to continue to invest in certain other areas, like, for example, global system integrators. That is an area where we believe there's great synergy for Dynatrace. So one-to-one correlation in their client base to our customer base. And we believe that those relationships could be highly productive over the course of time. Those aren't immediate-term ARR generators, but certainly medium term, could be very sizable ARR generators. So we announced these kinds of relationships, for example, with Deloitte, with DXC and we've got others in the works there as well. So those are areas where we are investing. We've obviously cut back in areas like travel, variable marketing and brand spend and some other areas that can be more easily modulated as the economic environment changes.

And probably 2 more topics. I'm hoping -- I think we have enough time to get to both. But on the partners, right, let's talk about Deloitte and DXC since you brought them up. I understand that it's more of a medium-term focus, right, with those GSIs and totally understand that one-to-one correlation you're talking about with the customer base, it makes sense, especially if you guys have already been focused on the Global 15,000. I think about where those GSIs are to begin with. My question is maybe just more historical in nature, but it feels like with the amount of attention that you guys are giving this now, it feels like it's a newer push. And so again, maybe more historical perspective, but like why was Dynatrace not pushing on this quarter earlier? Or is it more a function of, "Hey, we're viewing this as something that can really be stood up as a good sales or go-to-market flywheel alongside our sales rep that we're scaling?"

I think you hit that, the word that I was going to respond to, on the head, which is flywheel. Look, we've got a great sales motion today. It's working. It's building pipeline. It's converting that pipeline. Yes, there are macro conditions that are requiring more pipeline coverage. But I think that's to be expected, especially in the new logo area with regard to the current macro environment. So that's what we're seeing. But the opportunity for growth to get you from $1 billion to $3 billion, in my experience, is not the same as what you got you from $0 to $1 billion or $100 million to $1 billion. And you need more leverage in the model, in my view. And my background was at Cisco, a highly partner-led organization, where I observed the power of partners. And I believe that partners could be one of those flywheels in the go-to-market area that we really can leverage. And it is one that makes a lot of sense to me because of the fact that GSIs, for example, are the ones driving digital transformation employments. So if you think about it, heretofore, the digital transformation and cloud deployments have preceded observability decisions, maybe by months, sometimes even years. We should be able to close that gap in a material way. And one of the ways to close that is to have observability be deployed and be it at the same time that you did the overall digital transformation initiative. And so that opportunity is quite substantial in my view.

That's great. And really on that last point, it's funny you're bringing this up. We brought it up in a similar vein earlier today. But let's talk about that narrowing of the gap, right, if you can be there right alongside the GSIs as they're embracing their customers and going through that digital transformation initiative. It's actually one of the things that we were talking about earlier today. The idea that historically, when customers are migrating workloads to the cloud, they migrate that workload and then the second or derivative purchase is then to embrace observability for that workload. It's an afterthought. And so one of the things we've been pointing to clients as well is maybe this looser coupling between those public cloud providers and where the observability players are, you guys should be a little bit more insulated because you have this greenfield TAM that you can execute against. And again, historically, you have lagged that first order purchase, right? So I think what you're saying makes a ton of sense as far as embracing the partners, getting there at the start, if you will.

Yes. Look, hyperscalers solve a lot of problems in digital transformation. They accelerate deployment and product development because they've got a whole bunch of code that you can access to accelerate that. That's fantastic. They improve some light chain, improve customer satisfaction and experience, all of that is great. They also create a problem in that this explosion and complexity of data is creating an unmanageable environment. And that's where observability is going to become more and more and more critical over the course of time. And that's where automation is going to be essential.

Great. And probably the last thing we'll be able to touch on before time runs out on us, but I didn't want to miss it. And I know we were talking about technology for a good chunk of this fireside. We spoke about Grail. I know that you had brought up the $100 million in ARR in the first 8 quarters from infra, AppSec, right? It came up a number of times as well. Can you just help us think through maybe how that -- I guess, what customer feedback is like on application security? And then how that, over time, continues to become a more integral piece of the overall solution that you guys are bringing to the market today?

What we've said on application security, we're now at about 250 customers on AppSec. So that's great, continue to grow very rapidly. We said at the beginning of this calendar year that we expected in an AppSec, it would take us probably 12 quarters to get to $100 million because it's a slightly different buyer. We think in Grail's case, by the way, for log management, that's probably closer to infra that 8 quarters to $100 million in log management. But back to the AppSec environment, we see great traction there. Customers love the vulnerability management capabilities that we've got. We're continuing to add and expand to that portfolio. And that's clearly an area of strong investment for us as we look to the future.

That's great. And I do think that, that is all the time we have for questions. But what I'll say before I let everyone go, listen, I know Rick and Noelle are happy to make themselves readily available, again, if there's any way we can facilitate a call or if you have a follow-up question. And with that, Rick and Noelle, thank you very much for the time. I really do appreciate it.

Thanks, Mike. Appreciate your support, as always, and thanks to you all for joining today. Really appreciate it.

Great. Thank you. Bye guys.