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 rates 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 elements 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, provides 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 reliability 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 of the Dynatrace platform a 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 performant 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 offering, 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 curves. 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 operating expenses 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 a higher 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 landed into 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+ 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 modifications. 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 points 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.

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. As a quick follow-up for Kevin, could you separate the expectations for our core business from those for new products as outlined in the guidance for the remainder of the year? Rick mentioned that logging solutions are expected to perform well in the second half. I'm curious if this is included in the guidance.

Yes, Adam. From a portfolio perspective, as Rick noted, we will continue to enhance the infrastructure product. The new logging capabilities are expected to contribute mainly towards the end of Q3 and into Q4, but we believe they will become a significantly larger contributor over the next two years, potentially reaching $100 million in revenue for us by then. Additionally, our core modules, including apps and microservices, continue to perform well, generally aligning with our ARR growth, albeit at a slightly slower pace due to the faster growth of infrastructure. We've also seen positive advancements in app security over the past four or five quarters, gaining more momentum. I am confident that our new product introductions are yielding beneficial results, especially as we approach the second half of the fiscal year 2024, at which point they will become a much more substantial contributor.

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

Great. Rick, regarding the elongated deal cycles, was there a geographic trend on the new business side? Was it more prominent in Europe or North America? I'm just curious about that aspect.

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 global in nature.

Dynatrace has been in the market for a considerable time and has weathered various economic conditions. I appreciate your comparison to races being won in the turn. While you're adjusting some of your new business expectations due to the macroeconomic environment, have there been historical moments where customers, particularly those using several observability vendors, saw this as an opportunity to consolidate? For instance, could they move from using four vendors to just one or two? Might this trend actually boost new business sales as customers strive to do more with fewer vendors and increasingly standardize 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, as we've mentioned over the past several quarters, we have a small number of customers, around 150 to 200, whose contribution is minimal, often generating only single-digit annual recurring revenue. These customers are not core to our business. While we are working to grow them, their numbers will continue to decrease. The reduction in this low-revenue customer group has been evident over the last four quarters and we expect it to persist for another quarter or two, but we believe we're nearing the end of that phase. The new customers we are acquiring are coming on board with healthy annual recurring revenue and, more importantly, they are adopting the platform with three modules: apps, microservices, and infrastructure. When our customers utilize those components, their commitment deepens and their net expansion rates improve significantly. We see this as a form of churn in terms of customer count, but as we expected, it doesn't significantly impact our annual recurring revenue. We believe we will emerge from this phase with a very strong customer base that has substantial potential.

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. We had a great free cash flow number in Q1. Our business experiences a lot of seasonality, and as you know, Kamil, we had a very strong bookings quarter in Q4, which led to a high ARR balance. Additionally, we received a $30 million tax refund. Even without accounting for that tax refund, we still had a very healthy free cash flow in the quarter due to the strength of the business in Q3 and Q4, which resulted in increased collections. This positive situation supports our RPO, deferred revenue, and revenue visibility. However, when considering our guidance for the year, we must be cautious in the current environment. We expect ARR to decrease by about $20 million on a constant currency basis, which will lead to lower bookings and billings. Therefore, we are approaching our free cash flow estimate with some prudence. We have consistently generated healthy cash margins over the years, and we anticipate that trend will continue, adapting slightly based on current market conditions.

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

I wanted to ask about the elongated cycles you've mentioned. It seems that the last two weeks of June was when things really accelerated. Can you clarify how many deals have closed compared to those that are still in the pipeline since then? Also, has customer behavior remained consistent throughout July, or are we seeing an increase in the elongation of those cycles as we move further from June?

Kevin, during the last two weeks of the quarter, we noticed continued strength in our existing customer expansion numbers. However, there was slight pressure due to the need for multiple approvals on some budget items, which caused some of that to shift into Q2. The more significant change was with new logos, which we observed during COVID; potential customers appeared to be more cautious in their buying decisions. This resulted in some deals being pushed from Q1 into Q2 regarding new logos. We have certainly closed some of these, while others remain in the pipeline. Looking ahead to the next few quarters, we anticipate a continued push for new logos throughout the year, influenced by buying patterns and the time it takes to acquire these new customers. Overall, we are satisfied with existing customer expansion in the quarter. We foresee that the push for new logos from Q1 will extend into Q2, Q3, and Q4. Our aim of adding new logos remains critical for the long-term health of the business. Given the current market conditions, we are expecting flat new logo growth year-over-year, which translates to adding 700 new logos this year. That encapsulates our outlook. There have been no changes in market conditions from the end of June to now, so we haven't seen any further deterioration. We'll observe how the quarter unfolds, and this will be factored into our guidance.

I appreciate the insights. If I could ask one more question, considering the budget pressures and increased scrutiny on some deals, are you seeing new customers coming in at a smaller scale? Also, while I know you target the Global 15,000, has there been any distinction in customer behavior between ultra-large enterprise customers and more mid-market ones?

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.

You mentioned a target of 800 new employees for the year. Can you update us on your current hiring progress?

Erik, it's Kevin. We kicked off the first quarter on a strong note. In terms of sales, our current quota capacity has increased by 30%. That's excellent. Our R&D team also made notable progress with hiring, bringing in nearly 300 new employees in the first quarter out of the 800 we expect for the year. I'm happy with this performance. As we've discussed, we've adjusted our initial hiring targets to align more closely with our revenue growth expectations, which we've now revised downward to match our projected revenue growth rates for the year. This means we're looking at new headcount growth of about 25% to 26% year-over-year. We will maintain our focus on go-to-market strategies and R&D innovation, ensuring we also track the right metrics for customer success to align with 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%?

Sales has been growing, and our sales capacity has increased. I believe the number of direct sales representatives grew by 30% year-over-year by the end of July. Our goal for sales rep headcount growth this year is also 30%. That figure might fluctuate slightly, depending on the business trajectory as we transition from Q2 to Q3 and Q4. However, we are prioritizing investments in the direct business, as we believe that once we navigate some of these macroeconomic pressures, we will be in a much stronger position to continue growing and potentially accelerate that growth as we enter FY '24, depending on the market conditions at that time.

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 the acquisition 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 wanted to revisit the comments about the extended sales cycles. We appreciate the insights from June and the trends observed in July. However, I wanted to focus on April and May. Were there any early signs or feedback from the sales teams that indicated potential elongation in the sales cycles during that time, or was this issue mainly evident in the last two 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 the pipeline and that we're continuing to work through the course of the quarter.

Our next question comes from Raimo Lenschow with Barclays.

I have two quick questions. First, regarding the new deals and the additional levels of approval, Rick, do you think this becomes a matter of sales execution? At the onset of these situations, it can be surprising because these extra layers weren't previously known. However, once you incorporate that into the sales execution process, it seems you would be better prepared. Is this something that might happen as we move forward? Everyone seemed to face challenges in the last week of June, but now that you are aware of the requirements, are you adapting your sales process accordingly? My second question is about logging. I'm really eager to hear more about it. What makes your approach unique? From what I've observed, there have only been a couple of highly successful log vendors in the market due to the complexity of the problem. What gives you the confidence that you have the solution and can be a leader in this area?

Certainly. I'll address both questions. First, regarding the sales process, we are conducting much more in-depth inspections and evaluations of deals to understand what it takes to close them. We are asking more detailed questions to our contacts within customer organizations to gauge the close cycle and the necessary steps to finalize the paperwork. We've quickly adapted to the current environment, which requires an additional approval cycle. So yes, we are actively engaged in enhancing our sales execution and reviewing deals throughout this process. Second, in terms of logging, we believe that our implementation of hypergraph technology allows us to provide a high-performing, scalable solution at a lower cost, without the need for data rehydration, meaning there is no difference between cold and warm storage. This makes our logging capabilities particularly attractive in the marketplace. However, what truly sets our logging solution apart is its seamless integration into our comprehensive observability platform. We view logs not as an isolated data set but as part of a broader ecosystem that includes traces, metrics, behavioral analytics, metadata, and user experience data. This integration with our AIOps engine enables us to deliver intelligent automation and insights from data, which is where our differentiation lies. While our logging solution is strong on its own, the greatest advantages are realized when it is part of our end-to-end observability platform.

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 last question comes from Keith Bachman with PMO Capital Markets.

I will ask my questions together. First, could you provide an update on your thoughts regarding mergers and acquisitions? There has been some controversy over the past couple of quarters about the current message. It seems that the prices for publicly traded assets have dropped significantly. While private assets haven't followed that same trend, they are also feeling some pressure. What are your thoughts on M&A, and how do you balance the challenges of integrating assets, especially on the technical side, against the chance to boost growth? My second question, which diverges a bit from cash but is relevant, is about the macroeconomic situation. You mentioned that your guidance is based on conditions remaining stable from the last two weeks of June through August. If the macro environment continues to worsen, thus impacting your revenue, will you further reduce hiring to protect your margin? I've noticed that you reduced hiring in the past six weeks, so I’m curious if your plan would be to slow hiring even more if conditions deteriorate, or if you would continue hiring at the risk of affecting your margins. That's all from 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 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.