“On the seasonality of ARR, we continue to expect roughly 40% of net new ARR to land in the first half of fiscal 2025, and roughly 60% to land in the back half.”

In context

“Jim Benson (CFO): Thank you, Rick, and good morning, everyone. Q1 was indeed a strong start to fiscal 2025. Once again, we surpassed the high end of our top-line growth and profitability guidance metrics. Our continued ability to successfully execute in this dynamic macro environment is a testament to the growing criticality of observability and application security in the market, our product and platform differentiation, the value proposition we provide to customers, and the ongoing durability of our business model that continues to deliver a balance of strong growth and profitability. Now, let's review the first quarter results in more detail. Please note the growth rates mentioned will be year-over-year and in constant currency, unless otherwise stated. Annual recurring revenue, or ARR, was $1.54 billion, up 20% year-over-year. This is an increase of $247 million compared to the same period last year. Q1 net new ARR on a constant currency basis was $46 million, up 23% year-over-year. In Q1, we added 162 new logos to the Dynatrace platform, up 5% from the year ago quarter. We continue to target quality new logos that have a greater propensity to expand. In Q1, the average ARR per new logo came in at roughly $140,000 on a trailing 12-month basis and consistent with Q4. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or commercial tooling solutions. They are seeking business value and tool consolidation and coming to Dynatrace for the depth, breadth, and automation of our end-to-end observability platform. Once customers experience the benefits of the Dynatrace platform, they are quick to expand their usage. Our average ARR per customer continues to increase and is approaching $400,000, highlighting the mission-critical value we provide to customers. Churn continues to be low, with gross retention rates stable in the mid-90s, best-in-class in our industry, while the net retention rate came in at 112% in the first quarter, a slight improvement from Q4. Our DPS licensing model continues to see strong traction. We closed roughly 200 DPS deals globally in Q1, bringing total DPS customers to over 900, representing more than 20% of our customer base and over 40% of our ARR. As we have shared in the past, we believe our simplified cross-platform DPS licensing model will further contribute to NRR over time as customers can immediately access newer solutions, encounter less friction in the buying process, and enjoy more flexible, predictable, and transparent pricing, all of which should lead to more consumption of capabilities on the platform and deliver more business value to customers. One example of DPS leading to broader platform adoption is with a Fortune 500 international hotel brand. The flexibility of DPS licensing provided them with the opportunity to trial logs on Grail and compare it to their existing legacy log management solutions. The value provided by our log analytics resulted in a seven-figure DPS expansion deal in Q1, displacing the incumbent log monitoring provider. Moving on to revenue, total revenue for the first quarter was $399 million and subscription revenue for the quarter was $382 million, both up 21% year-over-year and exceeding the high end of our guidance by $6 million. Shifting to margins, non-GAAP gross margin for the first quarter was 85%, up slightly from the prior quarter and prior year. Non-GAAP income from operations for the first quarter was $114 million, $6 million above the high end of our guidance range, driven by the top-line upside. This resulted in a non-GAAP operating margin of 29%, exceeding the top end of the guidance range by roughly 100 basis points. Non-GAAP net income was $99 million or $0.33 per diluted share. This was $0.03 above the high end of our guidance range, primarily driven by the revenue upside and higher interest income. We generated $227 million of free cash flow in the first quarter, representing more than 50% of our full-year guidance. Q1 cash flow was particularly robust from strong collections associated with elevated Q4 renewal and growth bookings. Due to seasonality and variability in billings quarter to quarter, we believe it is best to view free cash flow over a trailing 12-month period. On a trailing 12-month basis, free cash flow was $450 million or 30% of revenue. As a reminder, this includes 600 basis points of impact related to cash taxes. Pre-tax free cash flow on a trailing 12-month basis was 36% of revenue and up 55% year-over-year. Finally, a brief update on our $500 million share repurchase program. In Q1, we repurchased roughly 1.1 million shares for approximately $50 million. We plan to continue to buy back shares opportunistically based on market conditions, underscoring our confidence in the business, our conviction in the significant long-term opportunities ahead, and commitment to delivering shareholder value. Moving now to guidance. The demand environment and pipeline remain healthy. Our end-to-end platform and broad set of capabilities differentiate us and put us in a strong competitive position. Our teams continue to execute well. However, as we shared on our last earnings call, we are taking a prudent approach to guidance due to three factors. First, the dynamic macro environment and current market choppiness. Second, the growing trend of a larger observability architecture and vendor consolidation deals comes with an increased level of timing variability. And third, the evolution of our go-to-market strategy will take time to settle in and mature. On our last earnings call in May, we indicated that we would update our full-year ARR guidance on our second quarter earnings call in November. That remains our current plan. We believe this prudent approach makes sense due to the historical seasonality of our business, where typically less than 20% of net new ARR is booked in the first quarter, and 60% is booked in the second half of the fiscal year. Waiting until the Q2 earnings call gives us time to have a better sense of the traction we are getting with the go-to-market changes we discussed last quarter and assess any potential impact on IT spending from recent economic uncertainty. As such, we are maintaining our full-year fiscal 2025 guidance for ARR, revenue, non-GAAP operating margin, EPS, and free cash flow. There are a few underlying elements of color I'd like to share for modeling purposes. On the seasonality of ARR, we continue to expect roughly 40% of net new ARR to land in the first half of fiscal 2025, and roughly 60% to land in the back half. Based on foreign exchange rates as of July 31, we expect the full-year foreign exchange headwind to be roughly $12 million on ARR, and approximately $10 million on revenue, representing an incremental headwind of approximately $2 million to ARR and no change to revenue compared to our prior guidance. And for free cash flow, as we shared on our May earnings call, we expect significantly lower free cash flow in the second and third quarters, and lower than prior year levels due to expected seasonality in billings and the timing of cash tax payments. We are, however, maintaining our full-year guidance for free cash flow. Looking at Q2, we expect total revenue to be between $404 million and $407 million. Subscription revenue is expected to be between $388 million and $390 million. From a profit standpoint, non-GAAP income from operations is expected to be $113 million to $116 million, or 28% to 28.5% of revenue. Non-GAAP EPS is expected to be $0.32 to $0.33 per diluted share. In summary, we are pleased with our first quarter fiscal 2025 performance. We have a proven track record of consistent execution. While we are taking a prudent approach to the near-term outlook, we remain optimistic about the fiscal 2025 growth opportunity in front of us and our ongoing ability to manage the business with discipline. And with that, we will open the line for questions.”