Greetings. Welcome to Dynatrace Fiscal Second Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I will now turn the conference over to Noelle Faris, Vice President of Investor Relations. Ms. Faris, you may now begin.

Thanks, Operator. Good morning, everyone. And thank you for joining Dynatrace’s second quarter fiscal 2023 earnings conference call. Joining me on today’s call 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 November 2, 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. Dynatrace’s Q2 results solidly beat expectations on the top and bottomline. In particular, adjusted ARR in the second quarter was 33% year-over-year. Subscription revenue came in at $261 million, an increase of 29% year-over-year in constant currency. Non-GAAP operating income was $73 million or 26% of revenue. And on a trailing 12-month basis, free cash flow margin was 29%. These results once again highlight our ability to run a balanced business that delivers compelling topline growth coupled with strong bottomline performance, and they are a testament to the strength of our market, the significant value of our platform and the ongoing durability of our business model. In addition, I am excited to highlight the launch and release last month of what we believe will prove to be a market-changing product innovation with the launch and release of Grail. Kevin will share more details about our Q2 performance and guidance in a moment. In the meantime, I’d like to share my view of the current market environment and long-term demand trends, our platform leadership, including further comments on Grail and our intended operational approach for the remainder of the fiscal year. Beginning with market opportunity, digital transformation remains one of the most durable areas of investment for enterprises. This has driven a sustained need for more sophisticated observability and application security solutions to successfully navigate the resulting complexity and enormous scale of data. Our customers tell us that such solutions are mission-critical and view them as increasingly mandatory to drive greater operational efficiency, improve customer satisfaction and facilitate commerce. This market evolution has been a key catalyst to our growth in recent years, and we continue to see very healthy demand and result in pipeline generation across…

Thank you for the kind words, Rick, and good morning, everyone. Before I jump into the business, I want to share that it has been a true pleasure to be part of the team that has helped build Dynatrace over the last six years. I’d like to thank our Board, John and Rick for providing me the opportunity to be part of this talented team. It has been a truly rewarding experience and a highlight of my career. Equally important, I’d like to thank all the Dynatracers that have so much passion and commitment. It is so rewarding to see such a vibrant community. Together, we have all built Dynatrace into one of the most successful software businesses. The market opportunity is immense. You are in great hands with Rick and Jim, and I remain confident that Dynatrace will continue to be highly successful. And now on to our second quarter performance, as Rick mentioned, we delivered a strong second quarter in a fluid environment. We over achieved our internal forecast and guidance across all of our key operating metrics, even as we saw many of the macro trends from last quarter continued to weaken in Q2. Overall, the resiliency of our subscription model, the strength of our enterprise customer base and solid execution are reflected in our performance. We have a strong business and expect to continue to deliver a balanced performance of growth, profitability and cash flow. 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 33% adjusted ARR growth in the second quarter. ARR for the second quarter was $1.065 billion. Please note that…

Thank you. [Operator Instructions] Thank you. And our first one question is from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Good morning, guys. Thanks for taking my questions. I guess either for Rick or Kevin, Q2 was a really nice quarter and a really tough tape. And kind of looking at, Kevin, your new ARR assumptions, I think, for my math, it looks like it’s down about 27% in the second half, that’s versus up about 13%, the first half and I guess the question that we are getting from a lot of folks are, sort of your level of confidence that this will be the last cut. And so maybe I know you gave some of the underlying assumptions, but maybe ARR assumptions or anything else that can kind of get us helpful with what looks like a significant level of conservatism.

Sure. No. Thanks, Matt. Good to connect. We were certain -- as you mentioned, we were certainly pleased with the performance in the quarter and it came in ahead of expectations internally and obviously externally as well. So we are pleased with that performance. When we thought about the back half, though, as you -- I am sure you can imagine, we went back and looked at the pipeline and coverage and how the geographies were performing and also the economic conditions in the regions. And we just continue to see additional pressure and we are expecting additional pressure coming out of the European area. So generally the reduction is primarily focused in the European part of the world. That will be a little bit of new logos, as we talked, new logos will be down 5% year-over-year against generally most of that will be coming out of Europe and there will be some pressure, obviously, on the net expansion rate. We did reduce bookings by -- ARR by $30 million, and obviously, that will have some pressure on the net expansion rate. We do believe, though, Matt, that we -- as we said in the call, it’s -- we put this as a back-end loaded adjustment and I think that’s indicative of what we thought guide from a revenue standpoint where we actually slightly increased our revenue guidance. So back-end loaded, trying to be very -- trying to be cautious. We did -- we reset once. Unfortunately, we had to do it again. Unfortunately, we want to be very conservative just going into Q3 and Q4. We are very bullish on the business. We are optimistic, but we need to balance it with setting expectations that we will deliver on into Q3 and Q4.

Yeah. Let me just add quickly, Matt…

Sure.

… and thanks for the question. First of all, we are very confident overall in this business. Pipeline is growing. That is a great sign. The challenge is some purchasing decisions are getting deferred, as Kevin said, particularly in Europe and that’s elongating some sales cycles. So we wanted to de-risk the model as we look to the second half and that’s what we sought to do. Overall health of the business, very strong, great about the overall product leadership and evolution, which I talked about and that’s how we are going to manage the business in the second half.

That’s super helpful, guys. And then, Rick, maybe just one for you on Grail, obviously, a lot of exciting things to think about there for the future, 100 customers on a POC, eventually, when that starts to hit your ARR. I mean, how do you expect that to sort of benefit? Is it just even more -- maybe just the monetization of, I guess, is the question, eventually when it comes in, I know it’s still early here, but how should we think about that eventually maybe as a fiscal 2024 driver?

Well, as I said, Matt, we believe that the log management and analytics market is very right for disruption. We believe we have a very, very unique opportunity to take advantage of that given the technological framework that we have constructed and we are thrilled with the early demand and interest from customers. We saw this in our customer innovate sections, which we executed globally in Singapore, Sao Paulo and London over the prior month to six weeks, getting first-hand feedback from customers here. So we feel very good about it. We still believe what we said a quarter ago, which is that as with infrastructure, we think that log management and analytics can add $100 million or so of ARR over an eight-quarter span or thereabouts. So that’s what we are still expecting following launch.

Thanks, guys.

Thank you. Our next question comes from the line of Sterling Auty with MoffettNathanson. Please proceed with your question.

Yeah. Thanks. So, first, Kevin, congratulations. Thank you for all the hard work and good luck with all the future endeavors. And then in terms of question, I wanted to drill in on the existing customers. We saw a notable slowdown out of the hyperscalers. How did you factor that into your ARR and what gives you the confidence that, that’s the right level in terms of the full year guide?

So, thank you, Sterling. It’s been great working with you. So I always appreciate the great covering and great questions and insights you have in the business as well. So I appreciate that. Thank you. With respect to our ARR guidance how we thought about the hyperscalers, it was absolutely part of the equation. I will say that our hyperscaler component of our business continues to grow nicely. So we didn’t see a dramatic of a slowdown that they did some of them printed publicly. So we are pleased about that. And I’d say the other thing that we are super excited about again more over the next couple of quarters as opposed to the near term, but is the GSI partnerships that we are developing, right, the one that we have with Deloitte, the one that we just announced DXC, other ones in process that we will hopefully talk about in the near future as well. So we definitely took some adjustments from hyperscaler slowdown. We are pleased with the performance internally. We do also think there’s another tailwind on the GSI. So I am not trying to walk up our guidance and get too excited about it, but definitely some tailwinds there that we adjusted down, but we think there’s some tailwinds that we are seeing today.

The only thing I would add, Sterling, is that, we obviously have a huge market opportunity with the installed base of hyperscalers already. It is obviously well, well over $100 billion in revenue and we believe that as observability becomes more commonplace, becomes more standard in cloud deployments, especially for enterprise customers, that there is a lot of opportunity to penetrate that installed base, and obviously, the growth rate continues to be strong, even though down over the prior quarter for the hyperscalers.

Understood. Thank you, guys.

Thanks.

Thanks, Sterling.

Our next question is from the line of Kamil Mielczarek with William Blair. Please proceed with your question.

Hey. Thanks for taking my question. I just want to better understand the linearity of demand. As the quarter progressed, when did you see the largest deterioration in sales and how did that change in the first few weeks of the December quarter?

So in Q2, Kamil, our business performed as expected, if not slightly as we mentioned, it performed slightly better. So we definitely reached our expectations a little bit in terms of linearity and linearity came in line -- performance came in line with expectations for the quarter. So, pleased about that. When we look into Q3, when we look into Q4, our approach is just to be more cautious, right? It -- the economy seems to be getting tougher, deal cycles are -- we believe will continue to elongate. As Rick said, we have great pipeline coverage, our win rates are great, but the close rates, we just expect them to slow down in Q3 and Q4, and that’s really what’s driving. So those are the -- it’s really a close rate assumption is sort of how we are thinking about adjusting our guidance. Top funnel, all those metrics, win rates are doing great, but we just wanted to be a little bit more cautious as we fill into the back half of the fiscal year.

That’s helpful. And if I could just follow up, Kevin -- and Kevin called out a slight slowdown in the pace of sales rep hiring, can you update us on your hiring targets for fiscal 2023 for the business as a whole and what has hiring look like to-date?

So, ballpark we are at 25% for total company midpoint through the year, which is great. I’d say we are definitely a little -- slightly a little bit higher on the innovation sort of R&D and sales and marketing side, and our sales headcount growth, as I mentioned, we did about 25% growth there. So we did a great job in the first half of getting great talent on the Board. Our retention is very high as well, which is great. I think that can also help our sales capacity, as we go we will have better and more mature revenue. So that’s where we are at midpoint of the year. We will continue to grow R&D and sales 20% plus in that range. We will see how the good quarters play out here over the next six months and then we will slow some other things down generally. So I think the punch line is, I think, fiscal year ending headcount will probably be around 20% growth with it a little bit higher in the innovation and go-to-market.

Got it. Appreciate the color and thanks again.

Our next question is from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Hey. Thank you. So the -- Kevin let review, if you look at the -- how other companies or how we kind of think about the scenario, like, close rate is usually the one that the CFO is driving in terms of the, like, I -- everything is kind of seems to be working, but like close rate as kind of where kind of put the final stop one. If you look about your pipeline and you said the pipeline coverage is totally fine. If you think about like deal sizes in the pipeline and also how they track through the pipeline, have you seen a change there or is that all still like what you have seen before, but like the final step of the close rate is where you kind of want to be more conservative? And then I have one follow-up for Rick.

Yeah. It really -- Raimo, it really is -- it’s close rate. That’s what we have looked at, and of course, there’s some moving parts here and there. But the fundamental change in the business is elongating cycles, which means our close rate are just aren’t what they were historically. So that’s what we see, and again, as we mentioned, it’s more pronounced over in the European region.

Raimo, the only thing I would add to that is that, while that’s true on close rates, it is important to understand that we expect close rates to renormalize. There’s nothing that we have seen to suggest that as the macro environment improves, although we are not predicting exactly when that is, but as the macro environment improves, we expect those close rates to renormalize. And the good news is…

Yeah.

… with ongoing growth in pipeline and no change in win rates, we think that that’s a very productive long-range scenario.

Okay. Yeah. Makes sense. And then one question on Grail, like, if you think about -- you mentioned earlier that it’s not just a number tool. It’s like slightly more fundamental. Like how do we have to think about your positioning of Grail and your other products in the market, like, is Grail becoming like the platform that everything builds out, is it the underlying analytics platform, like, how do you think about, like, why think about Dynatrace and how they are positioning -- how you guys positioning your product like in a year or two, like, how does it all fit together, could you just speak to that a little bit? Thank you.

Sure. Grail, as I mentioned, Raimo, is a core technology, just like OneAgent, PurePath, Smartscape, et cetera, for us. It is, as I said, massively parallel processing data lake house that gives us incredible performance at exceptional scale and also an ability to do that in a very cost-effective way. So that’s how we sort of look at Grail. The first instantiation of it is log management and analytics, and that’s how we will initially deploy Grail. So that’s sort of our overall perspective on how we take advantage of this market opportunity and leverage Grail going forward. It is a solution that doesn’t do reindexing, doesn’t do rehydration and uses graphing technology to provide very complex analytics on logs in near real-time and that is a very, very unique position in the market.

Yeah. Okay. Thank you.

The next question is from the line of Mike Cikos with Needham & Company. Please proceed with your question.

Hey, guys. Thanks for taking the questions here. The first question I wanted to ask about was around the adjusted ARR guide. I know that we have this -- you are calling out from Europe and you have cited as pressures we are expecting in the second half of the year on both new logos and the expansions. So, first, happy to have the color regarding that 5% year-to-year decline we expect the new logos for fiscal 2023. Regarding the net expansions, we should be thinking about that playing out over the remainder of the year? Is there a potential for that to actually dip below that 120% plus you guys have been posting on a consistent basis?

Mike, it’s Kevin. So, yes, unfortunately, based on our guidance, there’s -- mathematically, the net expansion rate in the fourth quarter would fall below 120%. Again, that’s based on what we have currently guided. We also highlighted in our -- in the prepared remarks that our net expansion rate remains very healthy. Certainly in the second quarter, it was very healthy. Our third quarter is always a very big quarter from us going back to our customer base and expansion in our customer base. So we are optimistic about that and it’s still early on Q4. But so, again, we wanted to de-risk the number in Q4. Mathematically, net expansion rate could drop below Q4 for a period of time. As Rick said, though, we think these are just transitory items in the business and long-term net expansion rate will certainly rebound north of 120%, assuming we come in around where the guidance is. But I don’t want to walk numbers something again, but we are very bullish about the ability to continue to sell on our customer base. Average ARR is still around $300,000, significant opportunity. With Grail coming on board, that will be another boost in FY 2024 as well. So, again, we definitely believe there’s a lot of tailwinds to that number and if it does drop below 120%, we think that will be shortly.

Thank you. That’s very helpful with the color there. And if I could just tack on one more follow-up, it’s really around the sales cycle elongation that we are calling out today. And I just wanted to make sure I was clear, can you give a rough order of magnitude for the delta that we are seeing, like, are these push outs weeks, are we more in the neighborhood of months? And then the follow-up question, just given how you guys are describing Europe, I think, it’s probably fair to characterize the Europe pressure is being more pervasive in nature. So first is volume of pressure in Europe, a fair characterization? And then second, is any of that weakness spilling over to other geographic regions that you guys participate in?

Well, the -- Mike, the weakness in macro environment is clearly global, but more pronounced in Europe, which is what we are calling out. So that’s point number one. And with regard to the overall sales cycles, we look at it mostly in terms of quarters, but the vast, vast majority of any deals that pushed out due to lengthening close cycle last quarter we expect to close this quarter. And as I said, no change in win loss ratio, so we feel good about the prospects as we look into the quarter associated with those close rates.

Thank you very much, guys.

Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

Okay. Thank you. I want to start with a question on the close rates and the operating margin expansion. So I appreciate your focus on profitability and expanding that margin. But do you think maybe the slowdown in hiring, do you think that could possibly extend this period of lower close rates or are those close rates really independent of the sales capacity that you have?

No. I think that’s right. I think they are independent, Andrew, and I think they are independent for two reasons. One is, as I mentioned, we grew the sales organization 25%. The other thing that’s happening in that organization is the tenures increase, right? And I think you have talked about this clearly before, as you have more mature reps, their productivity is much higher as well. So we do believe 25% headcount growth in the sales organization with increasing maturity, low attrition rates sets us up to reaccelerate when macroeconomic conditions rebound. And then the other piece that can be additive over time, which I think Rick and the organization have done a great job is the partner channel, right? I think we are doing well with the hyperscalers. I think we are doing and the opportunity is perhaps even larger with the GSIs and we talked about that in the prepared remarks in terms of what we have done, including the recent DXC announcements, the Deloitte partnership and more to come there as well. So, overall, I think that gives us a lot of capacity to reaccelerate the business as we move forward when conditions rebound.

Okay. That’s great. Thank you. And then I wanted to ask a follow-up question on Grail. You noted that it’s more than just a new module. So I am wondering, is this -- is Grail targeted at new customers to replace their legacy data warehouse solutions in their data lakes or will this be more of an add-on sale initially targeted at existing customers? Just wondering where do you think you will see that initial traction with Grail.

Well, the lowest hanging fruit is in clearly our installed base where our customers trust Dynatrace already. They have strong and healthy net expansion. They are used to adding modules. We have more than 50% of our customers now on three-plus modules, and in fact, new logos are closing with more than three-plus modules at greater than 50% as well. So it is a cross-platform sell, a cross-platform play and Grail fits nicely into that. But having said that, we also have experienced and seen interesting and significant demand even out the chute from new customers that are interested and candidly moving away from their existing log management and analytics solution.

Got it. Thank you.

Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Hey, guys. Thanks for taking the question. I had a question on sales capacity. You had comments on investing for the future, potential ARR growth reacceleration, lots of commentary on the pipeline and how it continues to build, but really balanced against the current environment affects the close rate. So the question here is really what are you looking for around the end market, maybe signal a pickup again in sales hiring, so the capacity is ramping ahead of a demand curve versus potentially trying to catch up to demand?

I think, hi, Koji. I think the leading indicator is that we will continue to monitor. We will be top of funnel, right, and then we are going to be looking at close rates and win rates and conversion rates as well. So once we start to see those move in, that’s when I think we would probably step into a little bit more sales capacity investments. But again, please keep in mind based on what I just said, we think we have a lot of capacity in the organization. Obviously, there -- if the productivity flow in the environment, so we think this organization that we have and where they are going to be in six months, 12 months, will give a lot of capacity to reaccelerate the business. So we think -- we generally think, Koji, that we are in a good spot with the sales organization and the partner organization at this point and we will add a headcount as we see the demand...

Got it. Thanks. And then maybe just a quick follow-up for Kevin. In your prepared remarks, you did mention that you aren’t seeing any payment term changes right now. But thinking about the guide, are there any assumptions for more flexible payment terms incorporated within the guidance? Thanks, guys.

There are not. Like, we -- I added that in. We added that in just to give folks comfort that the enterprise customer base that we are working with. When they decide to move forward on projects, generally, they are not negotiating payment terms, obviously, that would see to tend to focus on the discount. So we are good there. We have pretty good visibility into the cash flow over the next six months as well. So we didn’t take anything in. We don’t see it meaningful. Even during COVID, the impact was de minimis. So I don’t expect that would move the needle on the fiscal year guidance.

Got it. Thanks so much, guys. Thank you.

The next question is from the line of Adam Tindle with Raymond James. Please proceed with your question.

Okay. Thanks. Good morning. Rick, I just wanted to start with kind of the story for the stock. You previously considered this fiscal year, fiscal 2023 to be more of an investment year where margins would be in the low 20% range and then they would re-accrete to the mid-20% range in fiscal 2024, alongside new product releases, so we thought growth would potentially accelerate and a lot to think about for fiscal 2024. Today, obviously, the environment has changed. You are increasing your profitability outlook and now in the mid-20% range here today. I am wondering how we can think about this story from here. I am wondering if this means fiscal 2024 becomes more of an investment, some of these investme6nts are now spread over multiple years as some of those initiatives are understandably pushed out and how you would kind of reset telling the growth and margin story from here, if that makes sense?

Yes. Hi, Adam. So a few things, few quarters ago, we did want to make some incremental investments in certain areas. We have made those investments in Grail, in partners, in SDRs, for example. Those have enabled us to expand the business through this period of time and set ourselves up for the long term. We have additionally operated in the mid-20s operating margin and that’s what we expect to do going forward. So that’s where we are resetting the boundary to an operating margin at this stage. So we have taken it up by 175 basis points at the midpoint and that’s where we expect to be able to operate as we look ahead.

Okay. Got it. And then maybe just as a follow-up on the question, why is this last cut as I think about potential risk factors from here and please add any that you are thinking about, but EMEA is the region that you are seeing a lot of the challenges. I am wondering how currency impacts demand in that region? I think you do have some U.S. dollar pricing. And I am wondering, as I think about potential pressure from here, the need to reduce pricing in that region to match the purchasing power of the customer, particularly relevant as I am sure you have a bunch of renewals coming up this coming quarter. Just wondering how you are thinking about pricing and currency as it relates to that and any potential deflation to happen in the model. Thank you.

To clarify, that was a question for your -- on Europe, I am sorry, I missed the region.

Right. FX impact and whether you will potentially need to reduce pricing, which would potentially be a headwind to growth, right?

So we operate in Europe. I would say 95% of our business is done in local currency or euro, if not closer to 99%. So our guidance is assuming that the euro remains where it is for the balance of the year. So we don’t expect to see any additional constant currency adjusted ARR guide, assuming currency stay flat. With respect to pricing and what’s happening there from an end user standpoint, are we -- when we do renewals with our customers, we are actually looking to drive higher price increases, right? I appreciate the economy is tough right now, but the cost of everything is going up and we are trying to pass some of that on to our end users as well. So, historically, we have done sort of low single-digit price increases. We are trying to realize a higher percent price increase as we move the business forward. We are certainly seeing that from our vendors that we work with and we think that’s the right thing to do through the business. So no specific additional price pressures over in Europe and we are certainly trying to make sure that we increase prices appropriately to maintain margin over there.

Thank you.

Our next question is from the line of Fatima Boolani with Citi. Please proceed with your question.

Good morning. Thank you for taking my question. Rick, one for you and one for Kevin. Rick, I will start with you. Just the commentary on budgetary caution, I can appreciate that’s contributing to sales cycle conversation being protracted. But I am wondering if you can share some nuances as to what these customers are doing in lieu of launching onto the Dynatrace platform? Is it more of sticking to DIY, lower cost open source environment or are they sticking with incumbents? What are some of the granularities in the discussion in terms of the reasons customers are pushing out the conversation?

Hi, Fatima. It is absolutely just sticking with what you currently have, typically, DIY. We always say that DIY is our biggest competitor and it is companies that just think I can get by for another quarter or another two quarters, doing what they have been doing with DIY deployments and trying to manage through that without taking advantage of sophisticated AIOps and performing capabilities such as those that Dynatrace delivers. So that’s what’s happening currently.

Got it. And Kevin, just for you, with the cost moderation measures that are now clearly in place and you can see it in your comments around the moderating hiring, when should we see some of that dovetail into free cash flow conversion, just curious because you didn’t change the ranges on your free cash flow margin. So how should we think about a delayed impact or seasonal factors that maybe aren’t obvious to us on the free cash flow margin side versus the operating margin upside? Thank you.

Sure, Fatima. So, generally, as we mentioned, we took ARR down by about $30 million, which you would think would generally flow through to free cash flow depending on when you build that. However, that was offset by our slower investments, right, so operating income, operating margins went up to offset, generally the decline in ARR, which is why we were able to maintain the free cash flow conversion rate of margin of 28%. So we don’t -- nothing is going to happen in FY 2024 that is going to change the trajectory. We are not pulling things in to drive higher cash flow here in 2023. That’s just a normalized run rate based on operating at a 24.5% operating margin.

Operator?

Thank you. Our final question is coming from the line of Will Power with Baird. Please proceed with your question.

Great. Thanks for taking the question. Maybe just to start with the follow-up. I know as it pertains to the full year outlook, you are now expecting weaker customer expansion as well on top of some of the new logo pressures. I wonder -- just to be clear, is that something you are already seeing, I guess, as you kind of look through the month of October and if it is something you are seeing and expect? Are there particular workload or use cases where you are expecting some of that customer expansion pressure relative to perhaps prior expectations?

It’s not something we are seeing now, but what we have seen, as we have mentioned during the call here is that, it’s a closed rate item at this point, right? And obviously, close rate means that whether it’s an expansion deal or new logo deals, all those things are getting pushed out, which implies that, obviously, your new logo number is going to come down and net expansion rate is going to come down. We have seen over the last two quarters a slight change, just given that adjusted ARR came down by a percentage point, a very slight change in net expansion rate in Q2. Again, we are optimistic. I don’t want to walk up numbers. We are optimistic that the business continues to perform and remain resilient, but trying to be cautious and conservative, we wanted to bring down that back-end number. So I -- there’s no trends we are seeing. The only trend we see right now is just close rates are extended in Europe in particular and be implied as new logos and net expansion will come down as a result of that. But as we have tried to communicate this is hopefully short-term temporary and we do believe every customer can need to accelerate both move forward.

Okay. And then maybe to sneak one in for Kevin, nice to see the higher margin assumptions for the year, I know you referenced moderating hiring, I know that’s probably a big piece of that, anything else on the higher operating margins to call out that we should be aware of?

No. As Rick mentioned, we did make some of the strategic targeted investments in the first half, right? So those will be reduced in Q3 and Q4. So that drives higher margins. And then, I think, generally, as you can see from our P&L, we have been operating at a 25% op income margin. So it really is generally at this point, headcount and those targeted investments we have made in Q1 and Q2 are coming to conclusion here as well. So those are sort of the two things that we needed to adjust generally.

Great. Thank you.

Okay.

Thank you. At this time, we have reached the end of our question-and-answer session and I will turn the call over to Rick McConnell for closing remarks.

Well, thank you all for joining this morning’s call. We really do appreciate it. Dynatrace has a very strong business, Q2 was very solid, delivering high growth, profitability, free cash flow. I am extremely bullish in Dynatrace’s market opportunity and our growing product differentiation with solutions such as Grail, as we discussed and absolutely believe in very strong view to the future. We are participating in several conferences this quarter and look forward to speaking with you in the coming weeks and we thank you again for your continued support.

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