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

All right. We've got a good group here. I'd like to thank everybody for coming out and joining us for today's investor breakout session. I know for many of you, this is a really busy time in terms of earnings cycle. So truly appreciate you guys all taking the time to be here today. Just a quick reminder, we do -- we are webcasting this particular session. We do have a good group of people joining virtually. So for those who are here, virtually, thank you so much for being here. All right. I want to take a quick moment just to kind of level set and talk about expectations on what we're going to do. We've got 1 full hour dedicated to just this session. Rick is going to kick us off for -- with about 10 minutes of prepared remarks, and then we're going to go into kind of a Q&A session. And so for that, I have already reached out to some folks on the investment side of the house, both buy side and sell side and solicited questions ahead of time that I will be going through. It's going to be very much like a fireside chat. So a very similar format to what you guys are all used to. But most important, we're going to open it up at the end, so you guys can ask just open questions here in the room for the audience. All right. So we've got a big list of members of our executive team. Unfortunately, the stage isn't super huge. But -- so we're limiting the folks on stage. They're going to be the top half of your screen. But I do want to point out that we have all the other folks on the bottom half of the screen are here right in front. And they can answer questions around ESG, branding, customer engagement, governance, people and culture. So lots of topics that we can cover both during the session and afterwards. So real quick, just some housekeeping items that I have to kind of flip through, unfortunately, safe harbor language or I'm sure Nicole's glad that we're going through it. So a quick reminder, today's discussion will contain some forward-looking statements. These statements reflect our views as of today, which is Thursday, February 16. These statements are subject to risks and uncertainties, and we disclaim any obligation to update such statements. Just a quick reminder that we may be referring to some non-GAAP financial measures. And so we do provide a detailed reconciliation of both the GAAP and the non-GAAP reconciliations on our website. And so with that, I will turn it over to Rick.

Okay. This is good. That's all the matters we can end the session now. Thanks a lot. All right. It is great to have all of you in Vegas. Thank you so much for coming, joining our Perform customer conference. We really are grateful to you. Very appreciative for those of you in the room. For those of you on the webcast, thanks very much for joining remotely. What I wanted to do at the outside here was to just set the stage for maybe some of the discussion to come. Now those of you who were here for the main stage sessions yesterday would have seen some of this content, but we still figured it would be useful to make sure that we all are level set at the same sort of foundational arena or area to get started. First and foremost, we absolutely see digital transformation as being ubiquitous. It is everywhere. People are moving to the cloud. They're continuing to drive to the cloud. You see the hyperscaler growth numbers, well more than $170 billion at this point, doubled or almost doubled in the last couple of years in terms of revenue. This is just AWS, GCP and Azure. And you see this growth rate still in roughly the 30% year-over-year type range. It's growing very strongly. Now having said that, we did hear a lot from [ Sacha ] and others about this notion of cloud optimization. And as I said in the earnings call, we believe that this is exactly in many ways why Dynatrace exists. We do cloud optimization. That is what we are here to do. There's a part of cloud optimization that is cost optimization, clearly, moving those workloads that are maybe ancillary workloads off to the side, reducing those workloads, maybe even stopping them all together. But much of cloud optimization is about getting an ROI from your cloud to [ plant ]. And as you look at that, that is where Dynatrace should be engaged because that's precisely what we can do, whether it is an ROI associated with process automation, better deployment of better software, better analytics and automation. These are the areas in which cloud optimization plays directly into the story of cloud done right, which is, in fact, the Dynatrace story. Now if you put all this together, the fact that digital transformation is getting driven at an incredible level, that it is an increase in focus relative to cloud optimization. We believe that this notion of observability is driving from optional to mandatory at an increasing accelerating rate. And it is because of the weight of these workloads just too much data, enormity of data, increasing this complexity, you can't find enough people in IT ops to manage this ever-expanding array of applications. You just can't do it, can't keep up. So you need to find a better solution. And what we're proposing is that Dynatrace can be that solution. We can deliver better answers, better analytics, more automation and in doing so, enabling process automation and improvement in your approach to delivering software. And this is why we see an increasing array of customers come to us and say, "I can't do it the old way. I can't do it the old fashioned way, I got to find a better way to enable the reacceleration of move to the cloud, of digital transformation, et cetera, but to do so in a thoughtful way that enables me to manage this ecosystem increasingly." And we do this in a radically different way. We do this by providing an integrated end-to-end platform that covers all of these modules and the various different data types, whether it is traces, routes, metrics, logs, behavioral analytics, meta data, real user data, you name it. By keeping all that data in context in the richness of that context, we actually can then do analytics and automation on that data that others simply can't do. And that's why we believe we have, in many ways, such a differentiation around the delivery of the Dynatrace platform that gets us excited. Maybe here it perform more than ever because we get to surround ourselves with a couple of thousand customers who are, of course, very enthusiastic about Dynatrace and give us a lot of feedback on what we're doing right and what we can even do better. This sort of leads to, well, what do we -- how do we differentiate ourselves? And at that point -- at this point in the story, it should be rather obvious in many ways. The first, that we drive around a mission of delivering precise answers and intelligent automation from data, not just data to glass, not just dashboards as I often say. And it is those answers that enable us to deliver the richness of value that customers expect. This enables them to do that sort of process automation and evaluation of how to deliver software better. That delivers a purpose or enables a purpose of flawless and secure digital interactions. We think of this as a fundamental prerequisite to software working perfectly. You have to find a way to deliver perfect software from end to end. And by the way, this is really where you get into this notion of increased automation from the development team all the way through the IT ops team. And then finally, this notion of a vision of a world in which software works perfectly that in order to deliver that world, you couldn't ever actually have an issue in the first place that you had to imagine, you had to be able to analyze and predict where issues were going to occur. And then based on those heuristics, be able to then assess how you can provide auto remediation directly in code. And as this happens, we will see a natural progression we expect, which has been a lot of what we've been talking about these last couple of days here Perform of both shift left and shift right. Shift left of the responsibility for effective operations of code all the way back in the development teams and their integration of observability tools and capabilities into their code, all the way to those development teams, having a responsibility for availability and reliability of that code in production. That they can't just be called when they need to fix something, but rather they have that responsibility from the outset. And this is so key. We believe to getting it right around software that works perfectly. Last slide. This notion of where are we investing? Where did all the announcements come from this week, of which there are so many. I said at the outset yesterday morning. Is it going to be an innovation announcement toward a force. And I think you probably have not seen that play out over the last couple of days. Now to begin with these various different pillars: first, this notion of harnessing big data in context. We delivered in October, Grail. Grail at that point was log management analytics built on top of Grail. Since then, we added business events. This week, we added traces, metrics and we added the Dynatrace query language, CQL with access to Smartscape. This is an incredible evolution. What we're saying is the Grail becomes an incredibly rich repository for data in context. And by doing so and accessing that data through DQL, you have such a rich environment to be able to do analytics in context on that data at all times. This is an environment that does not exist in the world as far as we can see. This element of having a data collection, a data lake house that is a massively parallel processing one that can provide the richness of this access is incredible. No rehydration, no reindexing. By doing so, you get more cost effective storage. You also get much more performance storage capabilities because you're going to get 5x to 100x improvement in complex queries in terms of that performance by never indexing it or never having to index. You layer on top of that analytics in automations at scale. This is part of that shift left, shift right. The elements of providing auto remediation, integrating it directly. You don't want to see a red alert on a dashboard and then have to figure out where did it wrong. We're going to tell you precisely what happened, where it went wrong. And by the way, we'd love to not ever have to tell you where it went wrong in the first place because we would have loved Dynatrace built into the code but it self-assessed, auto remediated, auto-corrected This is all around automation. This is going to make the process of software delivery, so much more effective, so much more efficient. And finally, that leads to the AppSec piece at the end, which is we're not trying to be all things to all people in AppSec. But we are trying to participate in delivering secure digital interactions, as I said earlier, around purpose. And the way we do that is to provide the degree of AppSec and the capabilities of AppSec from which they drive incredible immense value out of the observability data that we've got. And so where you can put together observability at AppSec and have a great correlation of those two. That's where we can provide immense additional advantage to customers who are looking for AppSec capabilities in providing those secure interaction. So that is the story that I wanted to deliver upfront. I hope that's gotten you all to a level of understanding of the 8-minute, 10 minutes, whatever it was version of the Dynatrace story and how we see it having evolved over the prior year or so. As you can tell, we've been working very, very hard on the innovations that we talked about here at Perform. We are very enthusiastic about the opportunity of this market. And I would say maybe the biggest takeaway of all is just that it's notion of observability becoming more and more and more critical every day to our customers, I think, is going to continue to drive market growth that is substantial. It is our job to figure out at Dynatrace how we deliver the solutions capabilities to take advantage of that and not just take advantage of standpoint of investors' growth, of course, in the business, but also in delivering real value to customers, which is really what we pride ourselves on doing. The feedback that we get from customers, these kinds of sessions and customer forms like Perform is just so valuable to say that we really did make a fundamental difference in your business, and that's what we're after. All right. I'm sure we want to get to your questions. So well, if we're ready to go, why don't we bring the panel up, and we'll get started.

All right. So let's go ahead and get started. Pretty much where you -- one of the topics that you brought up in your prepared remarks was around just the innovations. And so we'll start off with Bernd. Quite frankly, there's a lot out in the last 1.5 days. Is there anything in particular that is more important than others, more important than some of the other announcements, which one is your favorite?

Yes. All of them are my favorite after announcement. So no, but that's actually the reality because the key point is that all of those announcements are not individual sort of product pieces. It's all so well integrated into the platform, and they all interplay with each other. For instance, the new app engine can invoke automation, can invoke the automation engine, or the vice versa, the automation engine get additional powers and, for instance, ecosystem integrations through building an app that runs an app engine. And both of them also excess Grail, all of them leverage the same design system and so forth. So the whole power is everything together makes it super easy to access the data, analyze the data, use sort of all what's automatic their available at Dynatrace, but also build custom solutions easily. And foremost, it is secure because all is together because what happens otherwise, you need to send data from that system to that system to that system sort of their automation, there is 1 database and there is whatever Power BI. And then the teams all come up, oh, we need to buy data observability, oh, we need to buy a data flow and analysis tool and then the privacy teams in the company go like wild and sort of all this is gone and remediated because the data is all there together and the functionality you need to automate on top of observability and security data to analyze.

Great. So one of the things we announced was the inclusion of additional data types into Grails. So we had logs and now metrics and traces, is this -- do you feel like you now have all of the observability data types that we need in Grail, or is there more to come and/or additional road map?

So the answer is yes and yes. So yes, based on these announcements and Rick perfectly listed them all is that what the market sort of tries to define as observability is metrics, logs and traces, but I think this is by no means enough. There is the business in this. There is the end-user experience in this. We started out with Dynatrace always saying kind of just that you know that 1 CPU on a server is at 90%. What is it telling you relative to the business? This is why we have also the best real user monitoring solution in Dynatrace and all these tie user experience to the service side data and to do automatic impact analysis on this. So mapping it back to the business. So -- and I added implicitly here already on additional data type, and this is user experience and [ user decision ]. So and then we have so many more in Dynatrace, not all of them are yet on Grail. But eventually, it is a clear strategy that all will sit in Grail of what we have. And this is way, way more than just metrics, logs and traces because we have the entire Smartscaping Grail. We have deep code level information, the whole user behavior information, meta data, we treat vulnerability different than problems because we strongly believe that the quality and semantics of data matters. We don't want to be an after-the-fact symptom treatment. Oh I've gotten too many alerts. Now let's figure out to do werid pattern analysis. That's too late. We want to start at the root where the information the quality space and because we believe this is the best way to get precise answers that everyone can trust. So yes, we, of course, have those 3, but there is way more from Dynatrace that will be great, which is already.

It sounds like tip of the iceberg. Continuous evolution. So today, we announced DevSecOps, life cycle app with our partner alliance -- with Snyk and so maybe can you talk a little bit more about how that could make Dynatrace's AppSec product more competitive in the market end?

Yes. So Dynatrace leverages the strength that we have from the perspective of observability for security. Interestingly, 6 years ago, customers ask me, "Hey, you have the best data in there and such a great agent. Why don't you do security" and I said, no, we never ever do this. This is not our business, but then they realized all the security vendors can't build agents. And we have the best. And actually, by now, it's the only agent that has this low overhead and is all -- just all in 1 agent. And the Dynatrace 1 agent actually combines observability and security in it. And that is important because only such an agent is able to protect customers' applications from the inside out because the whole idea of firewalls and your fence, your entire IT, this is history. You know that the enemy is already in your network. So you need to protect each and every app and each and every service, doing this from the inside is the best approach and importantly, this works at run time always on continuously in production versus preproduction approaches to were often scanning. This is only point in time, you never know what's really then in production. So you might have lots of vulnerabilities there. So I mean, we do all the blocking production. So this is 1 element. The other element of Dynatrace is that we do data-driven analytics for security, sort of like threat intelligence and the like. And this is where Grail comes in and those announcements and those give security teams superpowers that they couldn't do on just log only solutions. So now to come back to your question, actually, I know this is a bit longwinded. Sort of refocus on how primarily on the production side because this is where the security offerings all are totally limited and very siloed. This doesn't -- this does not mean that Dynatrace doesn't work in preproduction. We, of course, are also used for security and staging environments and continuous delivery in all the stages. But what we intentionally do not want to do is give the developers aesthetic code and container analysis. I think this is what Snyk has done excellently, and we don't want to invest in this they do this well. So partnering up with them gives them customers, especially then the joint customers, a super complete picture sort of for the developers. They get preproduction container and code analysis and from there, all the other steps are then handled with Dynatrace. And even joined together, we can provide feedback from production about the footprint to feed it back to the development team for further automation along the delivery life cycle so that security is baked in to the automation.

I think we should add Bernd to earnings calls. Jim's and my job would be so much easier.

All right. Then I have 1 last question for you, Bernd. At least for me, this will be your last question, and you can relax your voice a little bit. But when you think about AppSec and where do you think it can be in the next 5 years from now.

Yes. So I listed already sort of the spread of abilities, but AppSec is all about automating the security challenges. I'm such a -- I'm actually shocked about how little securities automated these days and how siloed the security experts all work. So we are clearly seeing ourselves baked in, in all the automation approaches from the site reliability and DevSecOps teams into their entire delivery footprint that embed security into everything. So this is one clear approach then the other part that I see is that we will have completely revolutionized and sort of taken over that aspect of what today you would call the, for instance, a SEM type of offering, but we take a very different approach to this, although based on Grail and visibilities. So I think there is really a big, big change that we can drive here in the market.

All right. So lots of new product offerings for Steve Pace and his team to sell. So maybe now is a good time to shift to go-to-market and maybe, Steve if you could kind of give us your insights and what you're seeing in terms of pipeline health.

Sure. So our -- one of the metrics we use Dynatrace for selling and predicting in our future is it's pipeline growth and where we are. And it's as healthy as it has ever been. And actually, I was thinking about this. I think about this all the time, actually, the opportunity today that we have. And I joined the company about 7 years ago, and I was really excited when I joined because I saw all that it had to offer and the promise of it. And I gotta say, 7 years later, it looks like the opportunity is bigger than it was when I first got here. So -- and our pipeline growth has been growing through all the different modules that we offer. We had the base Dynatrace product. And then from there, we had a module weather it's DEM or infrastructure or security or whatever and it just keeps growing and growing. So -- and the sales organization is getting very adept at that cross module selling. So it looks good, things are good. We've had a strong team of people that have come up to speed and learn how we sell and what our value proposition is. And it's a good outlook. The quarter was a good quarter, and we don't like to have not good quarters. And it's been a good run, and I think it can continue. So it's a lot of work to do, but the pieces are in place.

Nice. Okay. So we talk about the Global 15,000 being our target market. We're were roughly about 20% penetrated. Do you feel like we still have tons of room to grow and that we're continuing to open doors there? Maybe you can.

So if you look at the Global 15,000, we probably are now, I don't know, 20% penetrated in the market probably. So there's 80% to go. And in that 20% that we're in, there's probably 3 to 4x more business that's available to us in any one of these sectors of technology that we're looking at. So the market is huge. The product is in the upper right, and has been for years. And the third piece of it is, which it was great to hear one of the feedbacks I got on the Perform this week was the third leg of the stool, I call it, and that's the people that make the product run and make the company run. And I've heard that from more than half a dozen people that I've talked to. And so as long as we keep innovation going like we do out of the software factory that we have and keep that going and the market continues to be strong, then it's execution, as you all know, it always is with companies, and I think we have the right people to do that. So that's why, yes, I think it's -- that's pretty much it. But yes, keep hiring the right people, keep driving them and with the hot market and great product, it's a great feature.

Great. Okay. So then shifting to competitive landscape. So you've been here for a while and throughout your tenure, it's obviously been an extremely competitive environment, has there been any marked shift in the competitive environment? And then when you are having conversations with customers and they do choose Dynatrace over a competitor, what has been kind of the sounding reason and why?

So the competition has been here since I've been here and Bernd and Steve have been here a lot longer than I have, but it probably has been the same. There's always been competition. When I first got here was CA with Wiley and some BMC and then that was the end of that and then there was the next wave that came and there was a lot of [ AppD ] in New Relic. And for one reason or another, we've kind of they are around a little bit, but in our market, not so much. And now there's the newer players as you probably all know, there's Datadog out there, there is [ DYI ]. There's a lot of different competitors. And in our space, I mean I think there's always going to be competition, but I think, again, back to the innovation, what the product does, how it's expanded from a tool to a platform. And that was a big deal for us. We went up from a single APM product, and we expanded out to a platform with all the capabilities that a platform offers that really kind of differentiates us. So competition is always there. But in our space, when we let the -- when we get a chance to get in front of the customer and talk about the product and do a proof of concept, whatever we usually start out way in advance of the competition. So it's always going to be there, but yes, we're doing okay.

Okay. Good. Good stuff. All right. So moving on from Steve, new customer acquisition. Why don't we move into kind of expanding within our installed base, and that's really kind of Matthias sort of area of expertise being the responsible for renewals and expansions. We recently talked about our retention rates being kind of in that mid-90% range, which is really kind of best-in-class almost for kind of the industry. What is your team doing? Has your team done something specific help drive those such high retention rates?

So I mean renewals and expansions is a follow function of running a healthy customer-focused business. So -- and then Bernd and Steve make my life pretty easy in driving innovation and creating really sophisticated product value for our customers. So I think that's a foundation where I can then build with my customer-facing teams in making sure people understand very quickly what the values of our platform, how they can drive very fast adoption and actually get Dynatrace out everywhere. So we have been investing in customer success teams and customer success approaches over the last couple of years. Actually, in every cohort where we have good coverage, we see a direct impact on return on investment. We have built a very sophisticated customer intelligence back end where we see what do customers do, how do they adopt our platform, how do we make progress and we can proactively help them and go after those use cases to make sure that there is a super healthy and fast time to value. And I think those recipes are a foundation of then having a decent retention rate in the end. I also hear frequently and specifically this week how highly skilled, how sophisticated our professional services team working with customers is how they love to work with those teams in team augmentation or project based. So I think that's another aspect of Dynatrace that we can provide not only a high-quality and high sophisticated product, but also the expertise on top in the field globally to make those super large projects actually happen in a pretty short of time.

Okay. Great. So then I think this kind of flows right into kind of net expansion rate. In the third quarter, we talked about net expansion rate dipping to slightly below the 120% where we've been, which wasn't unexpected, just sort of given kind of the macro and some of the commentary coming into the cloud. So maybe could you provide a little bit of color around what you're seeing in terms of expansion trends today within our customers? And then what do you think it could be potentially in the future?

So I believe we are in a pretty healthy corridor anyway. And yes, it was not 120%, it was, I think, 0.5 or 1 point, I don't know, it's a pretty sharp there. I mean net expansion rate is always a function of low churn plus expansion. So those 2 things come together. And I think we play pretty healthy on the retention side. So on the expansion side, it's maybe a little bit more on scrutiny and how fast people want to expand. So sometimes we see 2 bites instead of 1 big one right now. And maybe expansion budgets being a little bit more tougher questions within the customer base. So I think that's maybe the pattern of this past quarter, but I see a very healthy environment, a lot of traction and question from customers. And I strongly believe that there is a really healthy future going on with that.

Okay. So now, Rick, this is for you. All right. So we talked about new logos. We talked about net expansion rate, something I know that's near and dear to your heart is partnerships and relationships with both hyperscalers and GSIs. Investor that I get questions from often are kind of like how big is potential for partners to influence the business in the future. So where are we today and where do you think we can be in the future?

Well, let's see. So over the last year partner influenced deals have moved from around about 59%, 60%, up to 64%, 65%. So we're sort of in that range. We've added about 5 points of mix to partner influenced deals. I think it's going to continue to grow. And I believe that global system integrators, for example, are a great area of focus for the company. It seems to me that one of the things we want to do in observability is compress the time between the cloud migration cloud deployment and observability decision. Right now, those things are still delayed or observability is delayed from the former decision. We want to slam those together and have those be simultaneous. We saw this already and 1 great example, a 7-digit deal for us last quarter coming out of LatAm through GSI. It was a deal that we wouldn't have known about that we were in because of the GSI. And it was a deal that closed simultaneously on Dynatrace as it did on the broader portfolio of cloud migration. This is exactly the kind of motion we want to be seeing and driving. And we really do believe that the expansion of the relationships with GSIs is key to that. We have gone from months 9 months ago, 12 months ago, essentially 1, 2, 3 GSIs to now around 10. These are 10 that are in the garden rage quadrant for GSIs. So these are big ones. And we're evolving those partnerships in a core way. On the hyperscaler side, today, it is primarily a contract takedown mechanism that we have customers that want to utilize hyperscaler paper to take the agreement because it happens faster that way. And they want to use it to draw down their contracts with hyperscaler. Over the course of time, we certainly expect there's an opportunity of our expansion there as well, far more deal origination coming from the hyperscalers. So these are core areas of the strategy to continue to expand our opportunities to market.

Question. When you talked about new logos, which I think I may have glossed over and then Rick may think about something. Again, for new logos for us, I mean, that's the lifeblood obviously, the growth of the company. So a year or so ago, we decided to really focus or our new logos with a different organizational structure, and we added something called the strategic acquisition group, and they're more in the classic hunter versus farmer because Dynatrace for years was more of a farmer kind of led organization. So that's proven to be a big kick for us terms of our expansion around the world and the new logos. And then to Rick's point on the GSIs, that has been another accelerant to the fire. We can't get around the world, although we are around the world, but not to the levels that we want to without the GSIs and they've been very, very key to our new logo expansion as well. So I think those 2 elements is just -- I want to make sure you all understood that it's -- we're addressing that head on and it's showing early great results at this point. So we're going to continue down that path.

Great. Thanks for adding that. That's a good point. Carrying on with the hyperscaler piece. You talked about optimization on the earnings call, you talked about it here in your prepared remarks. We continue to get just investor inquiries around why wouldn't Dynatrace have the same sort of slowdown effect as the hyperscaler. So maybe boil it down in a little bit more detail, super direct around why wouldn't we have the same sort of impact as some of our peers are seeing in terms of cloud slowdown.

Great. I'm happy to start. Steve Tack, I'm going to give this to you in a second to add since I think your answer to this or at least as good as mine. My view is that, as I said earlier, we are a solution to cloud optimization. I know that I keep saying that, but customers think of us in that light. And so the result of it is that a hyperscaler slowdown does not have a direct correlation to our business in the same way, if that slowdown is occurring because of cloud optimization because we are part of the antidote to that problem. So that's the way I'll see it. We are also less tied than some other competitors in our market to hyperscaler drag through of wallet share on a quarter-to-quarter basis. And our pricing model is not directly tied to usage-based monthly overages, monthly payments. And so with a commit based model, it is much less spiky relative to that -- relative to the hyperscaler revenue. Steve, I don't know if you have anything to add to that?

Maybe just to piggyback on not just taking care of the infrastructure growth or the services alone. Most customers are always engaging us because they're going through some sort of change. Change creates unknowns instability, whatever that might be, and that's really what creates opportunity to bring observability and security to those new areas. And so we saw it even with some belt tightening that just made it that much more important for the software side of innovation to be up at front and center. It's what drives concepts that we talk about automation. We often talk about it almost as a twofer that you are looking to both optimize the cost, but at the same time, drive change and drive innovation forward. So it does create an opportunity. It does create the need for more answers and those hyperscaler projects are typically also building upon things that are happening in other parts of the organization. All just great sort of ingredients for Dynatrace to come in and take that platform-based approach that we've talked so much of the show to help drive those answers for them and help them be successful in those different initiatives.

The other thing I would say, Noelle, is that we don't need hyperscaler, obviously, it helps, but we don't need hyperscaler growth to have a market opportunity into which we would sell. It's $170 billion of spend on those 3 on an annualized basis, we're doing $1.2 billion. I believe that steady-state wallet share as a percentage of the overall cloud spend is much higher than that ratio. And if you believe that, then you believe that there's a lot of selling into that existing installed base of cloud yet to go.

Great. So you just answered my next question on the wallet chair for Steve, so you're off the up on that one. But I do have another one for you, Steve. So if we're -- it's been estimated that in terms of workload and them being observed out in the wild that it's anywhere between 10% to 30% of them being monitored. Do you feel like that number is accurate? And where do you think that number could be in the future? Could it be higher?

It's probably a pretty good representation of today. We are actually talking about this a little bit earlier, and we're kind of doing 20% maybe in terms of what that penetration looks like. That number could absolutely be higher. I think enterprises are looking to drive that up, and there's a couple of reasons. I mean 1 is just if we think about how -- a couple of the themes we talked about, both silos collapsing, that's happening not just because of the efficiencies alone, but as people go more cloud native hyperscaler services, just everything is connected. We talked about like retailers, it's not just that e-commerce front end, it's the logistics, it's the inventory, all these different systems need to work together. So it's not just a desire to go further and further, they need to continue to run the business. But there have been maybe some challenges with either other solutions, the fact that they didn't have the data together, there wasn't the right sort of analytical power to drive answers on top of that. So that's where a lot of the things that Bernd has talked about and that you and maybe for the people in the room saw from the different solution leaders, Dynatrace is taking a very different approach where we're looking to unlock those answer. I think if you look at competition, they're very siloed into specific data types, very siloed into a specific persona, and that inherently limits our growth, where Dynatrace has an opportunity to go much broader. I think 50% penetration is not something that would be that much of a stretch goal in the near-term future. The analytics, the answer is the automation are what are going to power that. Meanwhile, there's the demand and the pull from the customers as they integrate their applications and as they collapse the different organizations into those DevSecOps.

Steve, I remember early on, it was the Tier 1 applications. They got all the press. And then when they saw the value they realize the value of what that could do, they wanted to expand through. And I think retail, I also think of an airline that we work with early on that it was all about their frequent flyer application and they had a problem with. But before you know that we were in cockpit operations, maintenance, operations, baggage handling applications and everything. So to that point, it went from one particular group to blanketing the whole organization. And we still, all these years later, have room to grow through other modules. So yes, it's changed dramatically in that atmosphere.

Great example, manifest, baggage all those things, these services have to work together. They depend upon each other, and that's why they turn to offerings like Dynatrace to make it happen.

Okay. I want to be mindful of time, and I want to give you guys all some -- an opportunity to ask some questions. So if the folks could -- I'm going to ask Steve 1 more question. And then if the folks could kind of get the mics ready and we'll open it up in just a second. But I'm going to leave this conversation at probably one of most misunderstood and the most widely asked questions that I get in Investor Relations on just how much of Dynatrace is on-prem versus hybrid, versus modern cloud. And Steve has an amazing sort of take on it, and I wanted to give him an opportunity to kind of educate folks both here and on the webcast just on our take around that whole dynamic.

Got it. I'm not sure it's amazing, but it's a point of deal. So first, I just want to clarify 1 point because I think that there's this common belief that Dynatrace has 2 different delivery models, and we're unique in that respect that we have managed in SaaS. And there's been this concept that it's a one-to-one tie that if you're managed, that means you're on-prem and if you're SaaS, it means you're monitoring the cloud. And I just wanted to clarify that, that's false. It's actually independent, and we have Dynatrace SaaS customers that are monitoring systems, an automotive that goes from Azure to on-prem, Kubernetes and all the way back to System Z and the IBM mainframe. So we have that complete visibility across, and there should be no assumptions drawn based on delivery model alone. I think part of the delivery model concept is just we've been established. We continue to anticipate trends. We continue to drive forward. So there are customers who made a decision for managed years ago and their security postures changed. They're moving towards SaaS. And we do see that as being the driver in the future. And obviously, a lot of things we've talked about, it will help us with speed. Now if we establish that, it's then, well, what are people using Dynatrace for? And just like Matthias referenced kind of what we see to make sure customers are adopting properly, growing properly. We have really good insights how customers are using Dynatrace, what types of workloads. And the number, it's right about 85%. We see customers using Dynatrace for what we consider modern cloud. And I define that as using one of the major hyperscalers, leveraging serverless technologies in there, heavy Kubernetes, usage regardless of location and we put that stat as something that is really establishing Dynatrace and the fact that we are helping people at those cloud-native projects. I mentioned earlier that it's changed that creates the opportunity. Things that are established like that's still very important for like System Z transactions, but that stuff runs pretty well. It's more when people build upon that when they extend, when they start to move into the cloud when they start to use new technologies like containerized platforms, Kubernetes and more, that's where they really see the need to leverage someone like Dynatrace to give them that unique view that cut across all those different areas. So that's 85%. That's like the number that we quantified through our own internal systems. And hopefully, that, combined with the answer on the Dynatrace asset managed delivery models give some good clarification in terms what the Dynatrace footprint looks like.

Great. Okay. Lots of questions. Please introduce yourself when you ask a question because for us to see everybody with the light.

Adam Tindle, Raymond James. Bernd, I wanted to ask you a little bit on AppSec. I know it's a big pillar. Rick has talked about a $100 million revenue stream in a couple of years. And on market dynamics, 3 kind of buckets of competitors. We talked about Snyk, the announcement today, first might be the next-gen security vendors like that. I know they don't have an agent, but it's code level security, very high level of importance. They own the database that you're measuring vulnerabilities against. So why wouldn't they be the one to take disproportionate share? The second would be the XDR vendors, vulnerabilities ultimately needs remediation. Those guys know how to build agents or do it in agentless fashion. And the third would be the VM vendors themselves, Rapid7 [indiscernible] . So as you think about kind of those 3 buckets, who takes disproportionate share of AppSec over time? And why would it be you?

Yes. So to the topic of agents, for instance, Snyk tried to build an agent then we stopped it because they couldn't get it done, and agent is not agent because to build an agent that runs aside and does some active stuff, yes, this is easy. But an agent like Dynatrace OneAgent that runs inside of their application and has overhead that is not measurable or less than 3%, instant observability, instant security at the same time, there is no one out there. We have done a performance test, comparisons. The closest competitor is at 30% overhead in production. This is why no one uses them in production and only pre-prod versus us. So this is also one of the reasons why we invest in this because we have felt this is too unique. We have a too good technology to not use it for security there. And this was actually years ago at the starting point, and then we figured that the customers who told us all the time, "Hey, we have all the data, why don't you use it?" And then we said, okay, we don't have yet analytics, but now with CRI-O, and this is why we built Grail also in that fashion, we have those power. So to your point about XDR, yes, this is exactly -- we don't know yet how we call that. Right now, internally, we call it data-driven security. But this is tapping a bit into XDR, maybe more into SIEM. But who does it on so many different data sources and who does it with a true causation in there? So I'm not aware anyone is doing it this way as we are approaching it. I see all competitors trying to, yes, collect more data. So also the XDR type of vendors aren't going more end-to-end. Sort of yes, there is also the convergence from the security side into observability. They have realized the need observability data. But first, they have the challenge that they need, how do they get all the observability data, which is even more than the security events. And then secondly, they don't have it in that context. And third, I have so far seen them only to apply some form of pattern analysis or AI on top of the data when the data already is pretty much context-less. And this is our big opportunity, and this is also why sort of I keep repeating that a strong belief we will revolutionize this. And maybe you can help assign a proper name for this.

It's Keith Bachman from Bank of Montreal. Jim, I want to direct a question for you. You haven't gotten any today.

I have some for him. I've been saving the best for last.

Okay, I'll ask Noelle for some.

So Bernd gave us his top-down visibility or views on what's most exciting for him. I wanted to ask the same question for you. Representing the investor side as we look out over the next year or 2, there's a lot of announcements today, extension of the Grail, AppEngine, et cetera. How should we think about the potential impact to ARR of all the new product announcements?

Yes. I mean obviously, I'm not going to give you a specific guidance, but I think what you heard today was just a massive extension of the addressable market that we have. So the addressable market was already big to begin with, it's just extended to be even bigger. Obviously, we're dealing today with some macro headwinds. You hear -- you see it from all competitors and vendors that are out there. So to me, putting a number for ARR kind of over the next year is really kind of missing the point a bit that it's a massively growing market today. The market is expanding. Our ability to go after more use cases is expanding. So there is certainly a case that we could see a continued reacceleration in the business, but it's a matter, one, of macro conditions changing. And then two, execution. This is an execution game guys. If this is not -- we are not gated by capability. We are not gated by technology. What you've seen is innovation is alive and well. It's about kind of packaging, pricing and execution. And I think you -- if we can do those things, then I think the ARR acceleration is there in the future.

Okay. Kash?

Kash Rangan, Goldman Sachs. Noelle, good job with the questions. Pointed, direct and fearless PDF, but doesn't stop us from coming up with our questions. So one for Rick. This has been the first opportunity, I believe, for you to get in front of customers in a user conference context. What are you hearing from customers? We're not in a recession, maybe we're not yet in a recession. What is the holdback from the customer perspective as to why things are stalling a little bit? And secondly, since it's been a year plus on the job, I'm sure you've had a fantastic opportunity to study the landscape and have a view on how this industry evolves. But it does look like in the last couple of years, if you are to take a slightly critical view, everybody is doing everything, right, the cast of characters. Everybody is in each other's business, APM. And when you watch the demos, your technology is absolutely impressive. I think I studied every single demo out there. It's rock solid, very impressive. But I'm not able to tell the difference between multiple demos, after sometime they all seem to blur with each other. So from a customer perspective, industry perspective, how do you stand out? And when the game is done and the musical chairs stop, how do you ensure Dynatrace is the one that is the winner at the table?

So Kash, thanks for the question, always effective. Let's see, first, this is my second Perform, not my first, although the first one I was in a recording studio down the hallway. So we didn't actually have any people here, so it's a little bit different than it was this year. Headed to your second point, this -- the energy coming out of Perform, for those of you on the webcast who haven't been here, the energy is just incredible, amazing. I've been doing customer meeting after customer meeting, and getting captured in hallways. What strikes me as maybe most vibrant is the energy coming from customers on what they want to do with us. They're already enthusiastic as to what they're accomplishing with the platform. And many of them feel that there's so much more to be had, so much more to be realized. And so a lot of the questions are how do we unlock that for them. And we get Matthias's team and Steve's team involved with them to make sure that we really can engage them to have this be an evolved solution of everything from process automation, people automation and, of course, technology to deliver against that. So I think that's key. From the standpoint of macro and the macro environment, to Jim's point, there's right of sense. People don't know what's going to happen. It's -- you've got a very tight labor market, you've got ongoing persistent inflation, didn't come down from 6.5%, 6.2%. It was at 6.4% CPI the other day. So it continues to be nagging. There's still a wonder as to what the Fed is going to have to do on interest rates. You still have geopolitical impact globally, particularly in Europe, but also now in Asia. So there are challenges. This is why we continue to be, we believe, prudent in our outlook in terms of OpEx so that we can continue to deliver what we've indicated to the market in terms of top line and bottom line management, which we believe we do at least as well as anybody else in our industry to provide that degree of balance and balance growth with profitability. So these are all key elements, I think, to the question.

And then Fatima. I think that's Fatima. We will end with you, but I want to -- I also want to give Jim a chance to answer one more question.

Sure.

I'll get to Jim, don't worry. Fatima Boolani from Citi. Stephen Pace, I have a question for you. You talked about having a very healthy pipeline and the pipeline has just compounded in the time you spend at the company. Can you characterize for us if the bulk of the pipeline growth has come from customer environments expanding or the complexity of these environments increasing? And what I'm trying to get at is some of the commentary around the estate coverage you have with a lot of your customers, it could ratchet up to 50%, right? And maybe it's sitting at 20%. So what's really driving that behavior? And then as you think about some of what you all have telegraphed with respect to the platform, DPS Dynatrace platform subscription product, how does that dovetail into how you think about pipeline risks or opportunities as you change that model with more and more of these products coming down the pipe from what Bernd has talked about?

Let me start with the second question, the second first on the DPS. I believe the DPS for us is going to be something that makes it a little bit more easier to -- for a customer to deploy. So we take a lot of the complexity of that part out of their thought process and their plans as they go forward. So that's a real positive for us. That really opens up a lot of gates for us across the whole enterprise with all the different capabilities. So I don't know if I've reflected in our pipeline that particular pricing model, but it is absolutely part of a friction that I think when we look at our customers and how we interact with them, we want to be as frictionless as possible and that really helps out there. So I know there was an intangible there where we're getting a little bit of a kick and a little bit brighter look at that. The first part of the question on the expansion in the new, it's a very long, probably winded answer that I could give, I'll kind of shorten it up. It's a lot easier for salespeople to take existing customers and expand, right? Because they're current customers, they're happy. They're already in the family. But with that said, with the macro headwinds we've had, I mean, customers are pausing. We're still growing at these customers. But I think that the key to that is -- that and new customers is we've kind of disciplined the sales organization to cut through all the noise of all the different technologies that are out there from an IT perspective and focus on why Dynatrace. And we've always come out to a word, called it, essential spend. We have really, I think, captured a narrative with our customers that if you have a -- if we're an essential spend for you, that's going to continue to have you grow within your organization. And the new customers that we bring on board, that's really helped out a lot there. So the balance between the 2, I think maybe -- I don't know what our numbers were last quarter in terms of how much was expansion versus new. But you did see the new kick up a little bit last quarter. And I think because of the focus on that, that's probably helped out a lot. And I think just because of maybe the pause on -- because the macro headwinds, people will continue to buy, but maybe just a little bit less until they found out what was going on. So they're still both healthy. They're still both trended in the right direction. But we always kind of look at the markets and what's going on with it. I remember when COVID hit, we took probably a 30-day pause like what's this kind of mean. And our state and local government business went up and our retail business went up. It was amazing. People said, "If I'm going to survive, I've got to complete my digital transformation initiatives or whatever, and really it was huge in some customers around the world. So we had that and then the macro headwinds here as well with the economy, and we didn't really know what was going to hit. I don't know if anybody did. But when it came right down to it, customers and companies knew that the only way to survive was to continue down that digital path. So this essential spend thing that I keep talking about, really, I think it can plow through the macro environment. Now geopolitical is different. And when it gets really crazy, and we'll see how that one works too, but the first couple of balls that were thrown at us, we've been able to take care of with our existing customer and getting the new customers on board, so.

The only thing I'd add to that, Steve, is that I think, in particular, on the new customer side, that you have an expanded go-to-market motion now, even more so than we had, call it, a year ago. We're actually doing business not in a, I would say, a significant way, but we are doing business now with some of the GSIs. We weren't doing business like that with the GSIs kind of a year ago. And so I think the new logos now you have multiple ways of them coming in. It's not just Steve's direct sales force. We have leads coming in. Rick mentioned that we're starting to see an increase in channel leads. And so I think this is it takes a village, so to speak.

There's a measurable pipeline increase because of the GSIs. I mean we measure by GSI, by vertical, by stage in the pipeline, by reality of it. So yes, it's very much an upshot from a year ago. So that's an important piece of the growth as well, yes.

All right. So last question, and this is for Jim. And I stole this question from one of our analysts, who was doing diligence on Dynatrace. And I just thought this was just a great question, so stealing it. In a world of uncertainty, what aspects of the business are you the most certain about as we look beyond fiscal '23.

What am I most certain about? I would say one of the things that -- and I've said this to a few investors and I'll say it out loud to the group here, that one of the things that really excited to be about coming to Dynatrace was the market. So I believe in the market, I believe in the growth in the market. I did some channel checks on the company and believe in the company. And I'd say the third area is I really like the way the company managed itself, very balanced model of growing the top line and managing spending and profitability and doing it in balance. And so going to your point about what am I most certain of, I'm most certain that we can manage this company in a very balanced way. You're seeing announcements from competitors, peers in the tech industry that are going through layoffs and they're doing things that I would say are difficult for them. They're distracting. And they're distracting because they had lopsided business models. We have not had a lot side business model. We've had a very stable business model. So our ability to tune the model, I'm most certain about, and tune in a good way. If things -- in working with Steve, if we start to see demand pick up, we can tune the model to give -- make more investment in sales and marketing. If we think -- so we'll continue to make investments in a significant way in R&D, and we can scale up, go to market based on when we see demand. So I'm most certain about our ability to manage the business in a very balanced way.

Great. Okay. So that -- did you want to close up on anything or you want to just...

Let me just close before you close, Noelle, and just say, look, I've been in the role for about 14 months. I've spent a reasonable amount of time with all of you which -- or at least I'd like to think that I had, out in the field, at conferences, and I've done road shows with investors and others. And I have to say I really appreciate the engagements and the personal relationships. I learned so much from each of you from your perspectives on our business. And I hope you feel the reverse is true, too. I hope that you feel always we are as transparent with you as we can be, given the circumstances of the environment and that we really are, in some sense, in it together. One thing is certainly true. We believe, or I should say, I believe, more firmly than ever relative to when I started 14 months ago, that I made the right choice to go on to Dynatrace. It is a great company. It is a great company with great people. I can't believe the amount of innovation that we deliver out of this company, out of Bernd's organization, in particular. I can't believe the opportunity that we have ahead. And I can't tell you firmly enough just how much I believe that the market is moving to a point where observability is going to be critical, even more than it is today. Where it becomes mandatory, we need to be ready to catch that. And by God, I am all-in on making sure that Dynatrace is ready to grab that ball and run with it as we are doing so today and on in the future. So thank you again for being here. Thank you for your partnership and very much look forward to continuing to work with you over the coming year and look forward to seeing you back here next year.

Awesome. Well, thank you. I don't know how I can top that. So again, thank you all for being here. I know it's a busy time for you. I thank all of you guys for taking time out of the Perform schedule to be here, to meet with investors. And we're almost done with Perform. I think there's an AppSec customer panel that's coming up in main stage this afternoon and then Bernd is going to wrap us all up and then don't forget about Tony Hawk. So those are the 3 plugs for the rest of the event.

I guess to wrap up with Bernd.

Yes. So Rick gets direct...

There you go.

All right, folks.

Thank you very much.

Thank you.