Greetings, and welcome to Dynatrace First Quarter Fiscal 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Noelle Faris, Vice President, Investor Relations. Please go ahead, Ms. Faris.

Thanks, operator. Good morning, everyone, and thank you for joining Dynatrace's First Quarter Fiscal 2023 Earnings Conference Call. With me on the call today are Rick McConnell, Chief Executive Officer; and Kevin Burns, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, such as statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these uncertainties and risk factors is contained in Dynatrace's filing with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on August 3, 2022. Dynatrace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial measures during today's call. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website. Unless otherwise noted, the growth rate we discuss today are non-GAAP, reflecting constant currency growth. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and financial presentation under the Events section of our website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell. Rick?

Thanks, Noelle, and good morning, everyone. Thank you for joining us on today's call. Let me start by saying that I am proud of the Dynatrace team and our solid first quarter performance. In particular, we saw a continuation of our mid-30s growth in adjusted ARR again in the first quarter at 34% year-over-year. Subscription revenue came in at $250 million, an increase of 32% year-over-year in constant currency. And non-GAAP operating income was $60 million or 23% of revenue. This is a testament to the strength of our market, the significant value of our platform and the ongoing durability of our business model, which, combined, enable us to run a business that delivers high growth, with strong profitability and free cash flow. Kevin will share more details about our Q1 performance and guidance in a moment. In the meantime, I'd like to share my view of current market trends and our platform leadership and our operational approach to the remainder of this fiscal year. Let me start with the underlying market opportunity and trend that have been fueling our growth today. As we've said in the past, digital transformation has become ubiquitous. Observability as well as application security solutions are still at an early stage of evolution, and yet are rapidly becoming essential element of successful cloud deployments. In our estimation, the current economic challenges will drive an even higher priority for digital transformation initiatives given the demand for greater efficiency of IT resources. Like cloud deployments typically yield data that is exploding in volume and complexity, which companies are simply not equipped to handle with internally-built solutions. This is driving an enormous market opportunity in observability. Dynatrace's ability to drive greater efficiency at lower cost places us near the top of the strategic IT priority list now more than ever. And as our customers widely proclaim, organizations need Dynatrace. Based on these fundamentals, we are confident that the digital transformation trend will continue to fuel our growth for many years to come. Our durable enterprise customer base, coupled with our recurring subscription revenue model, provide us with relative resiliency even in an uncertain economic environment. This is a growth market. And as our Q1 results illustrate, we are a growth company. At the same time, we are obviously not immune to the rapidly evolving macro environment, which we saw primarily in the form of elongated sales cycles in the latter half of June. We saw this most notably in our new logo close rate during the quarter with 135 added, consistent with the first quarter of last year. For our installed base, we delivered our 17th straight quarter of a net expansion rate greater than 120%. Our existing customers view us as an essential partner to their ecosystem and are eager to expand their usage of Dynatrace given the proven value we provide. As a testament to this, our average ARR per customer has now grown to over $300,000. In updating our guidance, we believe it's prudent to assume that this economic uncertainty continues through the balance of our fiscal year. Our expectations assume greater conservatism in ARR and top line growth as a reflection of the macro environment. We continue to be a leader in enterprise observability and are addressing a huge market with tremendous growth opportunities. I will talk further about how we intend to operationalize this plan in a moment. But before doing so, I'd like to reemphasize our platform differentiation and why Dynatrace continues to grow at a rapid rate. Digital transformation is, of course, not just oriented to resource efficiency and offloading workload management. Organizations depend on software for essentially every facet of their operations to deliver products, facilitate commerce, drive supply chain efficiency, engage with employees and much more. To achieve these goals, organizations expect their software to work perfectly. To help customers enable this performance, our approach to observability is radically different. Dynatrace provides not a single product, but rather a comprehensive software intelligence platform, covering end-to-end observability with sophisticated AI ops capabilities unmatched in our industry. It combines the deepest and broadest multi-cloud observability solution with continuous run-time application security. We focus on global 15,000 enterprise accounts where data volume and complexity are highest and where our scale and automation enable them to run their businesses most effectively. This is the power of Dynatrace and why customers choose us. Whereas other approaches deliver dashboards, Dynatrace delivers precise answers and intelligent automation from data to help customers navigate the massive complexity that comes with digital transformation initiatives. It enables our customers to deliver flawless and secure digital interactions by providing broad-based situational awareness of their cloud ecosystem at all times and enabling them to take action immediately to ensure maximum uptime and performance. And over time, customers will use the intelligence we provide to integrate the Dynatrace platform directly into their application as code or auto remediation. Industry analysts corroborate our leadership position. Recently, Gartner released its annual Magic Quadrant for application performance monitoring and observability, naming Dynatrace a leader for the 12th consecutive time, and in the Gartner Critical Capabilities for APM and observability report, our platform differentiation compared to the competition is even more indelible, with Dynatrace leading in 4 of 6 use cases: for DevOps and application development; site reliable engineering and platform ops; IT operations; and digital experience monitoring. I'd like to share a couple of examples of customer wins this quarter that highlight our platform strength. First, a major California insurance company was leveraging a siloed approach to their cloud-first strategy. These tools provide a disparate information that was not integrated into their IT services management system. They realized they couldn't measure what they couldn't see and they were unable to improve what they couldn't measure. By consolidating these tools through deployment of an end-to-end observability solution from Dynatrace, this customer dramatically enhanced its visibility in their entire ecosystem. This resulted in vastly improved operational management and AI-driven insights, while reducing costs. Let's take another example. A large supermarket chain with an extremely complex ecosystem, dependent upon dozens of SaaS and third-party tools, was looking for comprehensive visibility across their environment. During the evaluation process, they suffered a production system outage impacting their loyalty program. Dynatrace was able to identify the root cause and resolve the issue within minutes rather than hours or days, avoiding lost revenue, wasted marketing dollars and damage to the customer loyalty they have invested to build. They selected Dynatrace because of the precision of our answers and our enablement of immediate action to ensure maximum uptime and performance. These are just 2 examples of the trends that are widespread throughout our customer base. Our customers' jobs have never been harder. Now more than ever, it is critical for them to make observability an integral part of every cloud deployment. At Dynatrace, we refer to this as cloud done right. We've never been in a stronger position to make consistent leverage the Dynatrace platform of reality across a wide array of cloud environments. We also have ample runway to continue to expand our footprint within our installed base. We have only just begun to gain meaningful momentum with our application security module. Application security was a brand-new market for us less than 2 years ago. And just this quarter, we closed a number of 6-figure deals, including Fannie Mae, UPS and Kroger. And our R&D team continues its fervent commitment to innovation. We believe that the log market is ripe for disruption. We remain on track to release a dramatically enhanced logging capability based on a massively scalable data store and platform evolution we called [ Rail ] in the back half of this year. Customers frequently tell us they are generally dissatisfied with the functionality, visibility and cost of their current logging tools. And they want a highly performance and cost-effective log monitoring solution that scales with the largest businesses. Customers also see enormous value in treating logs as part of an end-to-end observability solution and data set rather than a siloing tool. We recently closed a 7-figure deal with a major national bank to replace their existing log and security offer and a major retailer invested in error log capabilities. We look forward to sharing more details about this offering in the coming months. This brings me to my final topic, and that is our plan to navigate through the current economic backdrop. I recently attended an event in which the speaker reminded a number of CEOs of a common auto racing expression, that drivers win races in the curbs. Unlike straightaways, which are more predictable, curves upset the status quo. Turns can bring the unexpected. They are where races are often won or lost. Gartner talks about winning in the turns as a time when leaders must sharpen decision-making capabilities, manage resources strategically and be ready to take the lead. I believe there are some parallels that we can apply to the current macro backdrop, and we are being thoughtful and strategic about how we execute in this turn. There are several actions we are taking to support our long-term growth objectives to enable us to gain market share and accelerate platform leadership while maintaining healthy margins. First, we have adjusted increases in headcount and OpEx through the balance of the year to deliver operating margins in line with our prior guidance to reflect the revised top line model. We still plan to add nearly 800 people during FY '23, reflecting our commitment to ongoing investments in our growth. Innovation and go-to-market expansion remain top priorities for us, and we'll continue to invest most aggressively in these strategic areas. Through the end of July, we grew our direct sales force by 30% year-over-year, and we plan to continue to grow the team to support our growth objectives. We are also focused on building more high-quality pipeline, rapidly qualifying leads and infusing even more rigor into our deal validation process. On the indirect side, we will continue to expand relationships with the 3 major hyperscalers for increased leverage and sales cycle acceleration. We'll also continue to expand our relationships with global system integrators. Last quarter, we announced that Deloitte had selected Dynatrace to build observability into their digital transformation practice. And we expect to share similar announcements with other system integrators in the future. Overall, we have proven our discipline in delivering growth in challenging environments while managing top to bottom line in a balanced way. And we plan to continue to execute in this fashion looking ahead. In closing, Q1 was a solid start even amidst macro uncertainty. We remain highly confident in our market opportunity, the resiliency of our enterprise customer base and our platform leadership. I expect us to continue to innovate with passion, which is paramount to our future growth and core to our culture. We plan to use this period to increase differentiation from our competitors. We're going to manage prudently from a financial perspective. And we intend to invest thoughtfully in strategic opportunities to emerge even stronger competitively than before. With that, let me turn the call over to Kevin.

Thank you, Rick, and good morning, everyone. As Rick mentioned, we delivered a solid first quarter in a dynamic environment. Overall, the resiliency of our subscription model and the strengthening of our enterprise customer base are reflected in our Q1 performance. This provides a strong foundation from which we expect to continue to deliver a balanced business of growth, profitability and cash flow, consistent with the last 3 years operating in the public market. As with previous quarters, I will focus on adjusted ARR growth, as it normalizes for currency fluctuations and the wind down of perpetual ARR. Please note that all growth rates will be year-over-year and in constant currency unless otherwise stated. Dynatrace delivered 34% adjusted ARR growth in the first quarter, representing the ninth straight quarter of mid-30% growth, highlighting the resiliency and predictability of our subscription business model. ARR for the first quarter was $1.031 billion. Excluding the currency and perpetual license ARR headwinds, we grew net new ARR by $281 million year-over-year, which was 28% growth. Before I discuss the building blocks of growth for the business, let me provide a little color on the macro impact we saw in the first quarter. Throughout April and May, we were pleased with strength and linearity as well as new logo wins and net expansion rates. The tone of customer conversations was positive and our pipeline coverage was consistent with historical trends. However, as we entered the final 2 weeks of the quarter, we saw increased deal scrutiny and additional budget authorization requirements that led to a lengthening in sales cycles, primarily impacting new logos. Our win rates remained healthy and consistent with the last few quarters. And deals that we did not close in Q1 either remain in the pipeline or have been signed. These blocks of growth continue to be the combination of new logos added to the Dynatrace platform and net expansion with existing customers. As Rick mentioned, we added 135 new logos in the first quarter, consistent with Q1 of last year. And we were pleased to see that more than half of these new logos land into a 3 or more modules. And our net expansion rate for the first quarter was once again above 120%. From an existing customer standpoint, we continue to see strength in multi-module adoption, with more than half of our customers now using 3-plus modules at an average ARR of nearly $500,000 per customer. Given the significant cross-sell and expansion opportunity in our customer base, we continue to believe that the average ARR per enterprise customer could be $1 million or more, providing ample runway for expansion with our current platform. Overall, we are very pleased with the resiliency of our enterprise customers that drove a healthy first quarter performance. Our existing customers view us as an essential part of their ecosystem, given the proven value, operating efficiencies and insights that we deliver. Moving on to revenue. Total revenue for the first quarter was $267 million, exceeding the high end of our guidance range by $4 million and up 32% year-over-year. Subscription revenue for the first quarter was $250 million, up 32%, a $3 million beat versus the high end of our guidance. With respect to margins, gross margin for the first quarter was 84%, down 1 point from Q1 of last year, primarily due to the investment in our customer success initiative, which led to a further strengthening of our impressive growth retention and net expansion rates. As we have said before, we have a very healthy margin profile, reflecting the value and efficiency of the Dynatrace platform. As Rick mentioned, innovation and go-to-market expansion remain top priorities for us. For the first quarter, we invested $41 million in R&D, up 35% from last year. We continue to successfully attract and retain talent in our R&D organization, consistent with our expectations. On the go-to-market side, we invested $94 million in sales and marketing this quarter, up 31% over last year and within our current target investment zone of 34% to 36% of revenue. Our non-GAAP operating income for the first quarter was $60 million, resulting in an operating margin of 23%, in line with our expectations given the planned targeted investments we previously communicated. On the bottom line, non-GAAP net income was $52 million or $0.18 per share. Looking at the balance sheet. As of June 30, we had $571 million of cash, an increase of $184 million compared to the same period last year and inclusive of $120 million of debt repayments. Our free cash flow was $136 million compared to $81 million in the same period last year. As a reminder, cash flow in the first quarter was positively impacted by a tax refund of over $30 million. This was previously expected to be received last year. On a trailing 12-month basis, our free cash flow was $289 million or 29% of revenue. We remain very pleased with our continued healthy cash generation. The last financial measure that I would like to discuss is our remaining performance obligation. RPO was approximately $1.53 billion at the end of the quarter, an increase of 27% over Q1 of last year. The current portion of RPO, which we expect to recognize as revenue over the next 4 quarters, was $877 million, an increase of 28% year-over-year. We are very pleased with the growth in RPO. However, we continue to believe ARR is the best metric to understand the business performance as they remove variability associated with billing and contracting modification. Now let me turn to guidance. There are a few things to keep in mind with respect to our guidance. First, we remain confident in the long-term durability and predictability of our growth. At the same time, we want to be mindful given the extended sales cycles we saw in the last few weeks of Q1. Our revised guidance assumes these trends will continue for the balance of fiscal '23. Given that, we believe the majority of the macro headwind will be concentrated in new logo growth. As such, we now expect new logo additions in fiscal '23 to be consistent with the 700 new logos we added in fiscal '22. We are confident in the resiliency of our customer base and the ongoing value we deliver to our customers, and we believe the macro impact on this cohort will be less significant. In fact, we saw our best ever gross retention rate this past quarter, and it has been consistently trending up for the last 2 years. We continue to believe our net expansion rate will be above 120% for fiscal '23. Second, with almost half of our business denominated in foreign currency, continued strength of the USD creates a sizable headwind. We now expect full year ARR constant currency impact to be approximately $40 million and $47 million on revenue. And finally, consistent with prior guidance, the perpetual license wind down for fiscal '23 is expected to be approximately $8 million or 80 basis points, consistent with prior guidance. The headwind in Q2 will be approximately 2.5 percentage point and will then taper off throughout the year. With that in mind, let's start with our guidance for the full year, again, with growth rates in constant currency. Let's start with ARR. We expect ARR to be between $1.213 billion and $1.226 billion, representing an adjusted ARR growth of 27% to 28%. This is a 2-percentage point decline from previous guidance, mostly driven by the lower new logo expectations for fiscal '23. In terms of Q2 seasonality, we expect roughly 18% of the annual net new ARR to close in Q2. We now expect total revenue to be between $1.125 billion and $1.136 billion and subscription revenue to be between $1.053 billion to $1.062 billion. Both of which result in 26% to 27% year-over-year growth and a 1 percentage point decline from previous guidance. From a profit standpoint, we remain committed to the margin expectation we set for fiscal '23. We are reaffirming our non-GAAP operating margin guidance of 22.5% to 23%. As Rick mentioned, we are a growth business and we continue to hire. However, we are slowing the rate of hiring and adjusting certain operating expenses to align with our revised top line expectations. We expect non-GAAP EPS of $0.73 to $0.76 per share based on 292 million to 294 million diluted shares outstanding and a non-GAAP effective cash tax rate of 11%. And finally, we expect free cash flow to be between $310 million and $325 million or 27.5% to 28.5% of revenue. Looking at Q2, we expect total revenue to be between $272 million and $275 million or 26% to 28% growth. Subscription revenue is expected to be between $255 million and $257 million, up 26% to 27% year-over-year. From a profit standpoint, non-GAAP operating income is expected to be between $62 million and $64.5 million, 23% to 23.5% of revenue, and non-GAAP EPS of $0.18 to $0.19 per share. In summary, we are pleased with our first quarter fiscal '23 performance, where we saw solid ARR and top line growth, combined with healthy cash margins amidst a dynamic environment. We have a proven track record of consistent execution. We are being mindful of our investment levels. And we'll continue to prioritize investments strategically in commercial expansion and innovation to support sustained growth. Our strong financials, subscription model and enterprise customer base continue to position us for resilient and predictable growth and profitability as we move forward. And with that, we will open the line for your questions. Operator?

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James.

Okay. Rick, I just wanted to start on the upcoming logging solution and the infrastructure product more broadly. I know that you've talked about that solution potentially being as big as APM over time. So an interesting growth driver moving forward. Wondering if you can speak to maybe the pipeline and early-stage trajectory of that product. And any additional color around the key competitive differentiation and pricing on logging would be helpful.

Great. Thanks very much, Adam. First, infrastructure continues as a module to grow much faster than our standard ARR, our average ARR growth. So we feel very, very positive about ongoing infrastructure growth. It is a core element to integrating that into our end-to-end observability platform, inclusive of APM plus infrastructure log, you'll experience and others. So it is a core part of the solution. With respect to logging, we feel great about the development of where we are. We're very much on track in delivery of [ Rail ] in the second half of this year. We are already in the process of beginning early access, what we call our EAP or early access program to the solution. We do believe, as I said in my prepared remarks, that this is a market and opportunity very ripe for disruption. We're focused on delivering a highly performance solution, at great price points with tremendous scale. It doesn't have the issue of cold-to-warm repopulation or a pullback of the data. So we're in very good shape, and we look forward to releasing the solution later this year.

Great. And maybe just as a quick follow-up for Kevin. And this might be hard to do, but it -- could you maybe bifurcate core business versus new product expectations built into guidance for the rest of the year? Rick mentioned logging solutions on track for the back half. I'm just wondering -- I think that's mostly not built into guidance, but I'm wanting to confirm that.

Yes, Adam. So from a portfolio standpoint, as Rick mentioned, I think we're going to continue to strengthen the infrastructure product. The new logging capabilities will be a contributor primarily towards the end of Q3 going into Q4. But obviously, a much more meaningful contributor over the next 2 years, where we certainly think, within 2 years, that can be a $100 million piece of business for us. So the other component from a core module standpoint, apps and microservices continues to grow very well, generally in line with our ARR growth, maybe a little bit smaller because infrastructure is growing faster. And then app security, we've had some nice progress here over the last 4 or 5 quarters. We're gaining more and more momentum there as well. So I definitely think the new product introductions are paying dividends, following the back half a little bit more. But as we go into FY '24, it will become a meaningful -- much more meaningful contributor.

Our next question comes from Matt Hedberg with RBC Capital Markets.

Great. Rick, I guess, for you, on the elongated deal cycles, was there a geographic -- was anything geographic there on some of the new business side? Was it more European, was it North America? Just curious on that aspect of it?

Matt, I would say that we saw a modestly incremental impact in Europe. But it really was a global slowdown, or I would say, a global extension of deal cycle that we saw in late June. So modest in Europe, but the global in nature.

Global. Okay. Okay. That's helpful. And then Dynatrace has been around for a long time, and it's been through many economic cycles. And I liked your analogy of win -- races are won in the turn. Although you're tempering some of your new business expectations based off the macros, has there been periods of time where, historically, customers that are perhaps running multiple observability or [indiscernible] vendors who look at this as an opportunity to say, hey, like I'm running for, I don't need to -- I'm going to try to consolidate that maybe 1 or 2. Could that actually help new business sales at some point here as customers try to do maybe more with fewer vendors and maybe standardize even more so on Dynatrace?

Absolutely. It's a great observation. We do see it certainly in our pipeline in terms of opportunities for consolidation of other tools, and it occurs all the time. So that is a source of potential new logo, and certainly, market share increases that we see, in part come from precisely that phenomenon.

Our next question is from Kamil Mielczarek with William Blair.

Can you update us on how churn looks in the quarter? It looks like it may have picked up. And how much of that is attributable to the planned decline in nonstrategic customers? And what are your expectations for customer churn through the end of the year?

Kamil, I'm assuming you're talking about customer count churn, is that?

That's right.

Yes, yes. So as we communicated over the last 4 to 5 quarters, we do have a small set of customers who's becoming smaller and smaller, that probably close to over 150, 200 customers with very low sort of combined single-digit ARR, single products, perhaps running a synthetic product or not deployed across an organization. These are non-core customers to us. We are certainly working to expand them, but they're going to continue to decline. So what you've seen over the last 4 quarters is really a burn down of this low customer for ARR cohort. We think that will continue for another quarter or 2. I think we're coming to the end of that cycle. The new logos that we've been adding sort of -- when you think about the growth in the business, we're landing them at a healthy ARR. And then more importantly, I think, Kamil, is that they're landing [indiscernible] the platform. But they're landing with 3 modules: apps, micro services, [indiscernible] infrastructure. And when our customers have those components of those solutions deployed, it's so much more stickier and their net expansion rates are so much healthier. So the way we think about it is it's a little bit of a churn on the customer count side. As anticipated, it does not move the needle from an ARR standpoint. And we think we're going to come out of this with a super strong full customer base that has a great ability.

That's very helpful. And then if I could just follow up on free cash flow. Margin was very strong in the quarter, I think, over 50%, at a multiyear high. Can you provide some more detail on what drove the free cash flow strength in the quarter? And given the strong start to the year, why bring down your full year free cash flow margin guide?

Sure. So great free cash flow number in the Q1. There's a lot of seasonality, I think, Kamil, as you know, in our business. We had a very strong bookings quarter in Q4 that resulted in a very high ARR balance. In addition, we received a tax refund of about $30 million. So despite -- if you back out the $30 million tax refund, we still had a really healthy free cash flow number in the quarter based on the health of the business over Q3 and Q4 that led to increased collection. So that all bodes well for RPO, for deferred revenue, for revenue visibility. When we think about the guide for the year though, we want to be careful in this environment. So we are assuming that ARR will be coming down by about $20 million on a constant currency basis. And as a result of that, that will result in some lower bookings and billings. So a little bit more prudence and conservatism on that free cash flow number. We've been generating healthy cash margins in the business for many years, and we expect that to continue. So the way we do that is it's just a slight sweep based on current market conditions.

Our next question comes from Mike Cikos with Needham & Co.

You hear Mike Cikos. I wanted to ask about these elongated cycles that you're talking to. And really, my sense based on some of your commentary is it -- was just the last 2 weeks of June where this really picked up? So I'm curious with what you saw between deals either staying in the pipeline or closing since then, can you help us separate the 2? Like how -- what is that number that has closed versus remains in the pipeline? And then the second part of that question is, has the behavior from your customers been consistent through July? Or are we seeing a further elongation of those cycles as we move away from June?

Mike, it's Kevin. So if we go back and sort of revisit the last 2 weeks of the quarter, what we saw, we saw a continued strength in our existing customer expansion numbers, right? There was a little bit of pressure there just due to multiple approvals required on some budget items. So a little bit of that pushed into Q2. The bigger change really was in the new logos where we saw this during COVID, right? People, when they're looking at a new solution, may be a little bit more tempered in their buying patterns. So we saw some deals pushed from Q1 into Q2 from a new logo standpoint. And we certainly have closed some of those. Some of those remain in the pipeline. But I think when we think about the next couple of quarters, Q2, Q3, Q4, we just think there's going to be sort of this push of new logos throughout the course of the year just based on buying patterns and how we've seen new logos come, and those things are going to take a little bit longer. So overall, we're pleased with the customer -- existing customer expansion in the quarter. New logos, the way we think about it is the Q1 push, it's going to just keep pushing into Q2, Q3 and Q4. We're obviously very targeted at adding new logos to the franchise. It's super important for the long-term health of the business. But given the current marketing conditions, we wanted to call sort of flat new logo growth on a year-over-year basis, which means we'll add 700 new logos this year. So that's how we think about it. No changes in market conditions from the end of June into where we are today. So no further deterioration, it's set differently. So we'll see how the quarter plays out. But we could take all that into account when we guide.

I appreciate the color. And if I could just squeeze one more in. When I think about the budget pressures or maybe some of these deals pushing from, let's say, increased scrutiny, are you seeing new logos land smaller then? And then is there any way -- I know that you guys target the Global 15,000. But to the extent, has there been any delineation if I think about like the ultra, mega enterprise customers versus maybe more mid-market type customers as far as that customer behavior we're talking to?

So generally, I think as you appreciate, our trailing 12-month new logo land is $105,000, $110,000 in net ZIP code. It's been increasing over the last 4 to 5 quarters, primarily due to the fact that customers are landing with the 3 modules that I mentioned earlier. Q1, the number came down a little bit. I wouldn't call it a meaningful mover and I don't think it's a leading indicator of deal size at this point. We love the $100,000 landing zone. It's a great way to get into an organization, highlight certain applications in the full stack and expand from there. It's also $100,000 purchase. It's not a significant purchase from an enterprise level. So it smooths out those budget approvals and result in, we believe, faster time to market, faster time to close deals. So look, overall, yes, to answer your question, slight decline in average land on the new logo side. We don't think that's necessarily a trend that's going to continue. We make $100,000 sort of land for an enterprise customer that gets popped in.

Our next question comes from Erik Suppiger with JMP Securities.

One, you had mentioned a target of 800 employees -- or 800 new employees for the year. Can you give us a sense of where you are in terms of that hiring to date?

Erik, it's Kevin. So we got up to a great start in the first quarter. From a sales standpoint, our current quota capacity, as Rick mentioned, has grown 30%. That's great. Our R&D organization made significant progress as well from a hiring standpoint. So off to a good start. Close to about 300 new hires in the first quarter out of the 800 that we're projecting for the year. So pleased with the performance. And as we've talked about, we've brought down our original hiring targets, which were generally going to be in line with the revenue growth assumptions. And we just updated our headcount growth rates down -- back down to where we think revenue growth rates will be for the year. So growing headcount in that -- new headcount in that 25%, 26% year-over-year. We will continue the focus in go to market. And we're going to continue to focus on, obviously, R&D innovation. And then obviously, we want the appropriate metrics from a customer success standpoint that we want -- so we want to make sure we're high in there based on the revenue trajectory of the business.

And we can think of the growth within your sales organization in that type of growth range, like you were just saying, 25%, 27%?

We -- well, so sales has been growing. And sales capacity, so I think direct sales reps grew 30% through the end of July on a year-over-year basis. Our stated goal for our sales rep headcount growth this year is 30% as well. That may move around a little bit, Erik, depending on the trajectory of the business coming off of Q2, going into Q3 and Q4. But we are prioritizing the investments in the direct business as we believe, once we get through some of these macro pressures, it will put us in a much stronger position to continue to grow and perhaps even accelerate growth going into FY '24 depending on where the market is at that point.

Okay. And lastly, your security module, I know it's still early. But is that on a trajectory where it could reach an attach rate that's comparable to your other popular modules? Is that something you see in another couple of years? Or where do you think that attach rate could fall out longer term?

We absolutely believe so, Erik. It's a very popular module, especially since [indiscernible] occurred in the December time frame. Our vulnerability management solution seems to have hit a nerve in the market for sure and seems to be the best tool out there to do the job, to assess vulnerabilities and enable companies, especially our customers who deployed it, to successfully utilize it to uncover vulnerabilities and triage them most rapidly. So we're very pleased by it. In terms of long-term opportunity, we certainly see this as a $100 million opportunity type business over a few years span. And that's what we felt the last couple of quarters, and we feel the same as we see the current trajectory.

Any sense of timing on when it could start to approach some of the other attach rates?

Well, the attach rate will grow over time. I gave you sort of the few year projection as to where we think it's going to be. And that attach rate will reflect growth through that period and beyond.

Our next question comes from Koji Ikeda with Bank of America.

Rick and Kevin, I just wanted to kind of come back to the -- really the elongated sales cycles comments here. We really appreciate the prior commentary on June and how it's been trending since in July. But I really kind of wanted to hit on April and May. Was there any sort of early indications or maybe cracks in the sales cycles or comments that you're hearing from the sales teams that was kind of pointing to potentially elongating sales cycles there? Or was it really just pronounced in the last 2 weeks of June?

No, it was an interesting time period. Obviously, we're very well instrumented across the organizations in terms of pipeline, deal coverage, and have a pretty thorough process for covering all that. April and May, we're trending extremely well in terms of linearity of bookings, so they were ahead of historical trend. Pipeline coverage was excellent. So it was a little bit of a surprise when we went through the last 2 weeks of the quarter to see so that certainly those new logo numbers come off when over the prior 10 weeks of the quarter, things seemed very healthy. So definitely a slowdown in the last 2 weeks, which is something that we're expecting to continue for the balance of the year. And then we'll see how long these macro pressures remain.

And Koji, if I could just add to the answer from Kevin. It took the form, for example, of additional layers of approval in late June that we thought that the CIO would be sufficient to sign the deal. That's what had been communicated. And even in some of these cases, the CIOs would tell us [ GSA ] require more levels of approval, which force the deals into a later quarter. Just to be clear and also to address some prior questions, we do not view these as deals lost. In fact, we didn't identify any of these as lost to competitors. So in the vast majority of these cases, they were deals to continue in pipeline and that we're continuing to work through the course of the quarter.

Our next question comes from Raimo Lenschow with Barclays.

Perfect. I've got 2 quick ones. Actually, related to this one, if you think about these new deals and the extra levels of approval, Rick, does that become like a sales execution thing? Because like you basically -- obviously at the beginning of these kind of turmoils, you get surprised because you're not aware of these extra layers that are needed. But then once you kind of bake that into the sales process -- the sales execution process, you kind of think you kind of have it more covered. Is that something that could happen as we go through this? That obviously, everyone got caught out in the last week of June. But now you know that that's required. So did you -- are you reacting in terms of the sales process, et cetera? That's my first question. And the second question is on logging. Obviously, really excited to hear that. The one thing is, what makes it so special for you? Because if I look into the market, there's been only like 2 super successful log vendors out there because it's quite a technical problem actually. What makes you so confident that you kind of crack it here and will be like a first guy in that space?

Great. I'll take both of them. So first, on sales process, Raimo, a great observation. Absolutely, you can imagine that we are doing much more thorough inspection and evaluation of deals in terms of what it takes to get these closed, asking incremental questions of our champions within customers to evaluate what that close cycle looks like, specifically what it's going to take to get the paperwork done. So we have reacted and reacted quickly to an updated environment requiring that additional approval cycle. So very aggressive. Yes, to the answer to the first question to say, we are all over it from a sales execution standpoint of further a deal review as we go through the process. Second, with regard to logging. What I would say is special are several elements. The first is, we believe that based on hypergraph technology that we're putting into place here that we've seen in the lab so far, that, as I said earlier, we can deliver a highly performing, very scalable solution at lower cost that has no data rehydration requirement. So no distinction between cold and warm storage. So we believe that just on its own, our logging capabilities is very compelling in the market. But what we really believe is most compelling about the logging solution, is its fundamental integration into our end-to-end observability platform. That's what makes it most differentiated. And the reason is because we simply don't see logs as a uniquely independent data set. It really is part of logs, traces, metrics, behavioral analytics, metadata, digital experience or real user data. And it is the application of all of that data to our AIOps engine that really enables us to deliver the answers and intelligent automation from data that we see. So that's -- we differentiate on the logging solution alone. But really, when you integrate it into the end-to-end observability platform, that's where you get the biggest bang for the buck.

Our next question comes from [ Akash Rajan ] with Goldman Sachs.

Extremely clear analysis of the quarter, and also, your take on how you constructed the guidance. So really well done case. A question for you, Rick, you've been through a couple of downturns before. And I'm curious to get your take on, what are customers saying? The new logos that you still have on the table, what are they saying as to what they are looking for in order to proceed with these contracts? And what is your best prediction on what kind of a recovery we are expecting? Is it like a U-shaped recovery? Or is it a much elongated recovery? Because maybe your customers are more concerned about certain other things happening with respect to the economy, that they're not quite sure. But what's your best prediction as to how we come out of this and the shape of the recovery?

Thanks, Akash. Thanks for joining. So on the customer front, what they're telling us in terms of our champions in our various different companies that we're speaking to is that they want to proceed with the solution. They need some additional levels of approval. And they're going about trying to get those levels of approval as we speak. So the deals are very much alive, and we're still working through the system. It's just going to take a little bit longer than perhaps it used to in a different environment. So our customers, namely our champions are so very much of the mindset of continuing to drive these opportunities with us. With respect to a recovery, Akash, I don't know how to predict that. I don't have a strong stance on it. Obviously, you've got a macro environment which has 40-year inflation highs, interest rates growing at 0.75%, 2 times in a row now, in June and July. We've got geopolitical challenges, both in the Ukraine, and now assuming even over the past couple of days to accelerate in China, which are creating additional challenge in the market, as you know. So I don't know, is the short answer, what that recovery is. And I'm not going to take a position on it other than to say that our guidance reflects an ongoing environment that we saw at the end of June and into July through the balance of our fiscal year, and that's how we factored it in. if we see a more rapid recovery than that of the economic environment, then we should benefit from that.

As a follow-up, Rick, how are you evolving your sales cycles? And what is the new flavor to ensure that you do get your fair share of new customers to sign on? Because there's an opportunity here, right? Curious how the playbook changes?

Yes. In terms of the sales playbook, in pipeline generation, which is a core area of focus for us, we're focused in 3 areas in particular. One that I've spoken of in detail in the past is around partners, talked about Deloitte, for example, last quarter as a global system integrator. We continue to work with the hyperscalers on the global system integrator front with Deloitte specifically. I'm delighted to report that we have closed already our first contract deal with them, or I should say, through them, a couple of million dollar total contract value deal at Canada. So I'm pleased with that. We've got several dozen customers or opportunities in the pipeline with them. And they've trained almost now a dozen individuals on sales and partner enablement. So we feel good about that. We do expect, as I indicated in my comments, to have additional system integrator announcements to come. I'm pleased about that. So partners is one category. Another category is through our sales development reps and then through our account executives, with both of those additional channels being also core focal areas for our pipeline investment and development.

Our next question comes from Keith Bachman with PMO Capital Markets.

[indiscernible] time, I'll ask my questions concurrently. The first, if you could update us on your thinking on M&A. There was some controversy a couple of quarters on kind of what the message is now, can the prices for public assets have fallen materially? Privates perhaps not as -- haven't followed the same trend line, but even privates are feeling some pressure. How do you think about M&A? And particularly, how do you balance the issues surrounding integration of assets, particularly on the technical side versus the opportunity to accelerate growth? And my second question, a little bit off of cash but perhaps in a different direction is, if the macro continues to slow, because you mentioned that your guidance is based on a steady state from the last 2 weeks of June through August. But let's say, the macro, and therefore, the pressure on your top line continues to slow, will you further moderate hiring to try to preserve some margin? We had noticed that you had slowed hiring in the last 6 weeks. So just wondering, if things get worse, so to speak, is your plan to subsequently slow again? Or will you just keep hiring and negatively impact the margin? That's it for me.

Thanks, Keith. To address the M&A one, no change in stance over the last couple of quarters. As we've communicated, we continue to look at M&A in terms of tuck-in opportunities for acceleration of R&D road maps. If we can accelerate our R&D road map by 12 to 18 months, then that's definitely worth us looking at. Having said that, we are very disciplined buyers, and we're not going to overpay for assets. So we're going to be very careful about that. We are not looking at transformational M&A. So that is not something that is on the table or in scope. So it's very much tuck-in in orientation. We do continue to evaluate those types of opportunities. With respect to the overall macro environment hiring, it is our commitment, as we've stated repeatedly, to manage top line to bottom line. We run a balanced business, with focus on profitability and operating margin. As you see, we maintained constant in our guidance at prior guidance rates, in the 22.5% to 23%. We did that by reducing the hiring ramp, even though we are recruiting quite significantly, as we indicated, 800 people this year as a target. And we will continue to manage variable expenses in order to manage to that operating margin target that we have. So if necessary, based on further top line adjustment, it is our commitment to continue to manage to the operating margins that we've indicated.

Our last question comes from Joel Fishbein with Truist.

You guys have talked about doubling down on the government go-to-market. I'm just curious about your expectations with regard to the public sector throughout the remainder of the year. That would be helpful.

A good input and question, Joel. Thanks very much. I was actually down in Virginia and D.C. recently with our federal team. I think that, that is -- it remains to be a significant opportunity in agencies from classified to civilian. And I am very optimistic about our opportunity to grow that business faster than our average ARR growth rate over the course of time. So I feel very good about the federal situation in particular. Okay. I think that brings us to a close. I want to thank you all very much for joining. Just to summarize. We view Q1 as a very solid start to fiscal 2023 in spite of some interesting macro headwinds that appeared late in June, and that continue to persist, and we're managing through. We remain absolutely confident and convicted in our market opportunity. We are seeing resiliency in our enterprise customer base. And we certainly aspire to maintain the ongoing durability of our business model. We are committed to running this business in a balanced way, with strong profitability and free cash flow. Kevin and I also will be participating in several investor conferences this quarter. So we look forward to seeing many of you there. Thank you very much for your own good support, and have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.