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

Greetings, and welcome to the Dynatrace First Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Noelle Faris, VP of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Dynatrace's First Quarter Fiscal 2027 Earnings Conference Call. Joining me today are Rick McConnell, Chief Executive Officer; and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements such as statements regarding revenue, earnings guidance and economic conditions. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. The forward-looking statements contained in this call represent the company's views on August 5, 2026. We assume no obligation to update these statements as a result of new information, future events or circumstances. Unless otherwise noted, the growth rates we discuss today are year-over-year and non-GAAP reflecting constant currency growth and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures please refer to today's earnings press release and supplemental presentation, which are both posted in the Financial Results section of our IR website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Thanks, Noelle, and good morning, everyone. Thank you for joining us today. On our last earnings call in May, we expressed confidence that the growth drivers we put in place would drive a year of ARR acceleration in fiscal 2027. The strength we saw across the business in Q1 reinforces our conviction and ability to deliver this outcome. Here are a view of the noteworthy highlights from the quarter. Total ARR grew 17%. Net new ARR was $85 million, growing 66% and 41% organically. We achieved record new logo growth of more than 160%. Both total and subscription revenue exceeded the high end of our guidance. And we delivered a non-GAAP operating margin of 29%, reflecting the disciplined investment approach you've come to expect from us. Q1 strong reflected healthy enterprise demand for end-to-end observability, stronger execution and growing complexity across customer environments. We are seeing AI contribute in 3 ways, which I will expand upon shortly, increasing consumption across our platform, creating demand for new AI observability capabilities and directly monetizing agent usage. This Q1 performance reflects both the significant market opportunity and our strong execution to begin the fiscal year. This morning, I'd like to discuss the observability market, why we believe Dynatrace is built for an AI-first world, and how we expect to drive incremental AI in monetization. The observability market has entered a new era, software that once took months to build now ships in days. AI agents are taking autonomous action across infrastructure. And enterprise customers are now deploying AI rapidly, not because every risk has been resolved, but because standing still means falling behind. In this environment, unified observability matters more than ever. Systems are more interconnected, more autonomous and more difficult to manage manually than ever before. The enterprise is winning in this environment are the ones that can keep complex, fast-moving systems working reliably and quickly understand when they are not. Additionally, AI workloads do not simply add volume. They behave differently. They can operate perfectly and still produce incorrect results. That's a problem observability has never had to solve before and addressing it represents a significant emerging opportunity. We estimate the AI observability total addressable market will exceed by $10 billion by 2030, growing at more than 50% annually. We see AI observability as the next logical evolution of the broader observability market, and that evolution is already underway. What this means in practice is that observability in the age of AI has to answer far more questions than ever before. And while the majority of enterprises are still in early phases of their AI journey, the requirements are evolving quickly. Let me walk through 3 of the questions that matter most today in an AI first world. The first is it working. Our applications, infrastructure and systems working as intended. This question is about business resilience, and it's the same question we ask of traditional workloads. Second is new, is it accurate. More specifically, is the AI model delivering output that can be trusted and relied upon with confidence. Answering this means evaluating AI systems for accuracy and intended behavior, determining whether an AI system behaves is intended before it ships is emerging as one of the most important aspects of observability. The third, are agentic systems delivering the outcomes they were built for. Enterprises are deploying agents to build software at a pace that wasn't possible before. The advantage goes to those who can accelerate the full life cycle and trust the results. Code fit well, ship safely and runs reliably. The last question is where our newest offering, Bluebox comes in, built for AI first teams Bluebox helps development teams and their coding agents bring software into production in a way that customers can trust. It closes the loop between building and running. It gives coding agents live context from running systems before a change is released. And once that changes live, it's agentic SRE capability finds root cause and returns an evidence-backed fix, with the developer and control across the entire AI delivery life cycle. This is the moment for which Dynatrace was built. With AI agents increasingly acting alongside humans across development and operations, both need a common source of trusted context. Dynatrace provides that through Grail and Smartscape giving agents and teams a unified understanding of system relationships and behavior. Dynatrace intelligence turns that understanding into action combining deterministic and agentic AI to deliver the precise causal insight that led both people and agents act with confidence. These core differentiators give customers on operating foundation across both human and autonomous workflows. Our platform has a distinct advantage with this depth of insight. And as agents become a larger part of enterprise operations, that distinction becomes even more important. Officially, we are purposefully building for an open, interoperable ecosystem. Our newly acquired Bindplane supports the open standard for open telemetry data collection. DevCycle acquired earlier this year supports the open standard for feature flags. These acquisitions aren't coincidental. They reflect a deliberate commitment to open standards and interoperability. Customers are not locked into proprietary pipelines. Our platform is built to work alongside the tools enterprises already use, including partners such as ServiceNow and to operate natively in MCP environment as the AI ecosystem evolves. We believe openness is a competitive advantage. It is one of the reasons enterprises trust Dynatrace as the intelligent foundation for AI-powered businesses, both powered by AI and built for AI -- our unified architecture becomes more valuable as AI increases complexity. And that growing value reflected in higher consumption, broader platform adoption and the following 3 new monetization opportunities. First, AI workloads are similar for observability workloads and that they leverage the same types of data such as logs, traces and metrics. But AI workloads generate dramatically more telemetry than the systems that came before them. This is one of the reasons why log management remains our fastest-growing product category, with consumption nearly doubling since surpassing the $100 million milestone just 2 quarters ago. Fine plan facilitates easier data ingestion and it is already performing ahead of plan. Second, as I mentioned earlier, AI observability is an incremental monetization driver. It increases consumption of the platform as it validates whether the AI workloads are producing accurate results, behaving as intended and operating safely and efficiently. This is the newest capability of the platform and is expanding quickly. And third, beyond AI workloads and the data they generate, we monetize our own AI and agents. Every time a customer uses Dynatrace intelligence to get answers through AI function goals or MCP integrations or when one of our agents like the SRE or this agent takes autonomous action to resolve an issue. -- it drives DPS usage. As agents increasingly become consumers of observability, this represents a growing opportunity that didn't exist 2 years ago. Today, more than 1,000 customers use Dynatrace to observe AI and LLM workloads in production, up from roughly 850 last quarter. and more than 800 are running operations autonomously with Dynatrace's Agentic capabilities, up from roughly 500 last quarter. Additionally, consumption growth for customers in these AI cohorts is 1.5x higher than that of non-AI cohort customers. Our platform integrates natively with Quad code, ServiceNow, GitHub Copilot, Atlassian and the major hyperscalers, AWS, Azure and GCP. -- enabling autonomous action across development and operations at scale. Here are several examples of how customers are leveraging Dynatrace to advance their AI strategies and observability initiatives. In Q1, we signed a 7-figure ACV expansion deal, more than doubling ACV with a top global financial institution. This customer is using Dynatrace to validate model consumption control cost and maintain full data lineage from prompt to response, helping it deploy AI with greater confidence while reducing compliance and audit risk. We secured a 6-figure ACV expansion also nearly doubling ACV with a leading recreational vehicle retailer. This customer use Dynatrace is their operational system of record while building a custom CRM application through AI-assisted development, generating approximately 7 figures of savings and expanding usage of our platform. A leading digital insurance provider use Dynatrace AI observability to reduce onboarding time from days to minutes and identified an outdated model version that was driving unnecessary token consumption and costs. And finally, we secured an 8-figure ACV new logo win with one of Latin America's largest financial institutions. Now highly competitive sales process, the customer selected Dynatrace to consolidate a fragmented multi-vendor observability stack across a complex environment, supporting mission-critical citizen-facing services. Our differentiation continues to be recognized by independent analysts, Gartner named Dynatrace a leader in the Gartner Magic Quadrant for observability platforms for the 16th consecutive year. Gartner describes Smartscape and Dynatrace Intelligence as the gold standard for real-time, high-fidelity dependence mapping to automate root cause with Dynatrace and third-party agents. We believe this recognition validates both the strength of our architecture and our ability to help customers confidently scale AI and agentic workloads. Finally, as many of you have seen, Jim plans to retire from Dynatrace by the end of the fiscal year. We will conduct a thorough search for his successor over the coming months and I am confident we will have a smooth transition. Jim has been an exceptional partner playing a critical role in scaling the business, strengthening our financial profile and positioning Dynatrace for its next phase of growth. I am deeply grateful for his leadership and many contributions and we will miss his valuable insights and guidance when he retires. To wrap up, Q1 was a tremendous start to FY '27 and a powerful reflection of the momentum we are seeing across the business. Organizations are increasingly looking to consolidate on platforms that can help them manage growing complexity, unlock greater productivity and realize the full potential of AI. As enterprises accelerate their AI initiatives, we believe Dynatrace is uniquely positioned to help them innovate faster, operate more efficiently and maximize the return on their technology investments. In an AI-first world, observability autonomous operations become critical day by day. We are more enthusiastic than ever about the opportunity. Jim, over to you.

Thank you for the kind words, Rick, and good morning, everyone. Q1 was an exceptional start to the fiscal year. Once again, we exceeded the high end of all our top line growth and profitability guidance metrics fueled by record new logo ARR growth, expanding traction in logs and continue robust consumption of the platform. These results reflect broad-based momentum across the business and reinforce our conviction that we are on the path to ARR acceleration this fiscal year. Let me review our first quarter results in more detail. Unless otherwise noted, all growth rates are year-over-year and in constant currency. Starting with ARR. We ended the quarter at $2.14 billion, up 17% year-over-year. Q1 net new ARR was $85 million, adjusted for foreign exchange movements, growing 66% from a strong first quarter last year. Excluding the $13 million ARR contribution from our Bindplane acquisition, Q1 net new ARR was $73 million or 41% organic growth. This strong performance was driven primarily by record new logo ARR growth and our continued success in winning large end-to-end platform consolidation opportunities, including an 8-figure ACV. The maturation of our go-to-market transformation, which began in fiscal '25, is clearly reflected in improving net new ARR productivity. To help illustrate the momentum in the business, we believe trailing 12-month net new ARR is a useful metric because it smooths the quarter-to-quarter impact of large enterprise transactions. Due to that lens, we have now delivered 4 consecutive quarters of acceleration in trailing 12-month organic net new ARR growth. Growth reached 17% on an organic basis in Q1. up from 12% in Q4, demonstrating continued momentum. In Q1, we added 122 new logos to the Dynatrace platform. The average land size continues to build and was nearly $285,000, contributing to record new logo ARR growth of more than 160%. We remain focused on landing with high-quality customers with strong expansion potential. Our value proposition continues to resonate with enterprise customers that are outgrowing DIY or commercial point solutions and AI-driven complexity is only increasing the need for a unified platform. Customers are seeking business value through tool consolidation and are turning to Dynatrace for the depth, breadth and automation of our unified AI-powered observability platform. Simply put, we believe the Dynatrace platform was built for the AI era. Once customers experience the benefits of the Dynatrace platform, they often expand quickly. Average ARR per customer continues to increase and is now well over $500,000, reflecting broader adoption and the value we deliver. As we have shared in the past, given the significant cross-sell and upsell opportunities within our enterprise customer base, we believe the average ARR per customer can exceed $1 million or more over the medium to long term. Gross retention rate in Q1 remained in the mid-90s, underscoring the strategic importance of Dynatrace as a mission-critical component of our customers' operations. Net retention rate, or NRR, was 110% on a 12-month basis. We continue to see broader usage and deeper adoption across the platform, particularly in log management. Logs remains our fastest-growing product category, growing -- continuing to grow well above 100% and reaching nearly $200 million in annualized consumption. As a reminder, we crossed the $100 million milestone just 2 quarters ago. We expect logs to remain a powerful growth driver, accelerating consumption while providing a path to future ARR expansion as customers consume their commitments and move into larger contracts. Turning to revenue. Total revenue was $555 million and subscription revenue was $530 million, holds up 15% and 100 basis points above the high end of guidance driven by strong net new ARR performance. Moving to profitability. Non-GAAP operating margin was 29%, exceeding the high end of guidance by 100 basis points driven by revenue upside flowing through to the bottom line and some expense timing between quarters. Non-GAAP net income was $140 million or $0.48 per diluted share, $0.03 above the high end of our guidance. Now turning to free cash flow. We have updated our free cash flow definition to adjusted free cash flow, which excludes the impact of restructuring acquisition-related and other nonrecurring cash expenses. This better aligns the metric with our non-GAAP operating income definition and provides investors with a clear view of cash generation from ongoing operations of the business. We generated $309 million of adjusted free cash flow in the first quarter. Given seasonality and quarterly variability in billings, we believe this metric is best evaluated on a trailing 12-month basis. Adjusted free cash flow over the trailing 12 months was $579 million or 28% of revenue. This includes 500 basis points of impact from cash taxes. On a pretax basis, adjusted free cash flow was 32% of revenue. Turning to capital allocation. We increased the pace of our share repurchases in Q1, buying back 7.1 million shares for $275 million compared to $224 million in Q4. This increased level of repurchases reflects our confidence in the company's operational momentum, long-term growth and cash flow trajectory and our view that the shares remain undervalued. We will continue to take a disciplined approach to capital allocation, balancing investment in innovation and growth while also returning capital to shareholders. Moving now to guidance. Our confidence in accelerating ARR growth in fiscal '27 has strengthened following our first quarter performance. Demand for observability remains robust. The growth drivers we outlined in May continue to trend positively and our teams are executing well. That said, we are still early in the fiscal year and consistent with our historical approach, we will remain prudent in our guidance. Lastly, with nearly 40% of our business denominated in foreign currency, the strength of the U.S. dollar since our last call creates a sizable headwind. We now expect FX to be a headwind of $14 million to ARR and $4 million to revenue. This represents an incremental headwind of $23 million to ARR and $19 million to revenue. And with that as context, let me summarize our updated full year outlook that we detailed in this morning's press release. ARR, we are maintaining our constant currency ARR growth guidance of 15.5% to 16.5%. As usual, we plan to revisit our full year ARR growth guidance at the midpoint of the fiscal year. For revenue, we are retaining our constant currency total revenue and subscription revenue outlook by 25 basis points at the midpoint, reflecting the operational outperformance in Q1. We now expect total revenue and subscription revenue growth of 14.5% to 15% year-over-year. Turning to profitability. We are increasing the high end of our full year non-GAAP operating margin guidance by 25 basis points to 29.75%, while continuing to dose top line growth acceleration with margin expansion. We are also raising non-GAAP EPS guidance for a range of $1.97 to $1.99 per diluted share, an increase of $0.04 at the midpoint. This outlook assumes a diluted share count of 295 million to 297 million shares and an effective cash tax rate of 18.5%. Finally, we are maintaining our adjusted free cash flow margin guidance of 26.5%. Our prior guidance was based on our current free cash flow definition, which didn't reflect the new adjustments. As a reminder, for your cash flow models, seasonality and billing patterns historically result in higher cash flow in the first and fourth quarters and significantly lower cash flow in the second and third quarter. As such, we believe trailing 12-month performance remains the most meaningful way to evaluate this metric throughout the year. Looking at Q2, we expect total revenue and subscription revenue growth of 15% to 16%. Non-GAAP operating margin of 29.5% to 30% and non-GAAP EPS of $0.48 to $0.49 per diluted share. In summary, we are pleased with our strong start to fiscal '27 and remain confident that we are on the right track to accelerate ARR growth. We are focused on executing against the significant opportunity ahead in a rapidly growing observability market. We have a proven track record of consistent execution and remain committed to delivering a balanced combination of strong growth and profitability while continuing to invest in opportunities that will drive long-term value. With that, we will open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Brent Thill with Jefferies.

Just on the net new adds. You mentioned the overwhelming strength. Maybe if you can just drive into what you're seeing in terms of the success with those new logos where you're finding them? Any more color would be helpful.

Brent, this is Jim. That again, I think what you've seen, this is not the first quarter that we've seen strength in new logos. I think this is the fifth consecutive quarter that the average land size has continued to build. This quarter alone was almost $285,000 on average land size. So it is a function of some of the go-to-market changes that we made 2 years ago, where we waited investments in strategic and enterprise accounts. And what you're seeing is growing traction. And specifically, what I talked about roughly 2 years ago about this emerging trend of customers looking for platform consolidation, tool consolidation and going from fragmented tools to 1 vendor, we are benefiting significantly from that. That's been our #1 sales play, and we expect it to continue even in this environment where people are evaluating where budgets go. Consolidation actually is an economic benefit to customers because when they consolidate fragmented tools and they go to one vendor, they can get better economics and their outcome from Dynatrace. So those are really the reasons why we're benefiting and continue to benefit from new logo lands at a very large size.

Our next question comes from the line of Gray Powell with BTIG.

Great. And congratulations on the really strong results. So yes, if I -- I'm just looking at the numbers and I just want to make sure that I understand everything correctly. But if I back out buying plan, it looks like you need to grow net new ARR by about 17% to hit your fiscal '27 guidance. I know it's only 1 quarter that you're going to wait until Q2 to update, but you just posted 40% growth in net new ARR. It sounds like there are a lot of tailwinds out there, particularly log monitoring. So can you maybe just help us rank the upside drivers that you saw in Q1? And then just how should we think about the sustainability of those drivers?

So Gray, it's a great question. And actually, your math is right, but the math would suggest for Q2 through Q4 at the high end of our guide that you're at the high teens growth rates. We're coming off a quarter, obviously, organically where we grew 41%. You're not going to see that every quarter. We've talked about that in the past that the nature of an enterprise sales motion, in particular, where we are going after large strategic accounts is your land sizes are going to be very big, both for new logos and for expansions. And so it is a bit of the nature of the business. And so you're going to see timing. We had an exceptional start to the year, actually stronger than we expected. We knew the first half would be strong. But to your point about tailwinds, we expect the tailwinds to continue. I expect we will continue to be able to land large with new logos. I expect that in the back half of the year where we have a significant increase in our DPS contracts that are coming up for renewal that you're going to have an opportunity for expansions. Consumption is continuing to grow at a robust rate. logs, as we mentioned, is nearly $200 million. So there's just a lot of momentum building in the business. We have a lot of confidence that we can continue that. I'd say one of the questions that I got from last quarter's earnings call was, "Hey, this guide looks a bit ambitious, Jim. Hopefully, what this demonstrates is that there is building momentum in the business. This is the fourth quarter in a row that we've had trailing 12-month improvement in net new ARR growth." So that smooths out variability quarter-to-quarter, 17% in the first quarter on a trailing 12-month basis organically. So this business is showing significant momentum, and we expect that, that will continue.

I think Jim definitely covered the highlights, great. It's about consumption. It's about logs. It's about those elements. But one element that I'd love to add in is just the notion that AI is driving even greater consumption of the platform. So we talked about some of the metrics in the prepared remarks. But those workloads are driving increased consumption. It's also also shifting the market mindset to an AI observability, which we also referenced. So that's an incremental driver to some of the other ones that Jim already mentioned.

Our next question comes from the line of Will Power with Baird.

Okay. Great. I guess, first, to you, Jim, just congratulations on your retirement, and thanks for all the help here over the years. I guess, Rick, you made the comment that you're seeing organizations increasingly run autonomous operations. I think you said just sequentially, the number of organizations moving to autonomous operations that have gone from 500 to 800. Maybe just talk about kind of the key drivers of that. I mean, AI, obviously, feeds into that. But yes, any color you can share on kind of what's driving that? And then just anything you can drill down in terms of how you monetize that? I know DPS is the contracted vehicle, I guess. But the color on that part would be great.

Sure, great questions. Well. So to start, we absolutely see a Gentech evolution, both in our traditional workloads as well as AI workloads. So for example, perhaps a couple of quarters ago, I mentioned the evolution of traditional observability in moving from reactive to proactive to predictive on to autonomous. And it is in this autonomous environment where you get the benefit of using Dynatrace's deterministic AI to provide causal interpretation and insights as to what's going on in that environment. Bad deterministic AI enables agents to then take action in an autonomous way and those agents can actually provide then results to allow for elements such as auto remediation. So that's in traditional workloads, and that's where agents can actually take action. On the AI observability front, you're adding incremental questions like, for example, is the information coming out of LLM is accurate. Again, agents are then helping you build and run code. In both areas, you have agents that are increasingly operationalizing your observability systems and in both cases, we expect to monetize those agents directly to enable us to benefit from that agenetic usage. And so it is, as you mentioned, these 800 worker -- 800 customers using our agentic capabilities up from roughly 500 last quarter that we'd like to see because that's increased aging usage.

One thing that I'd add to that, Will, and I think to your point is while enterprises are still early in their adoption of AI, I think to Rick's point, it's building -- and I think what we outlined there is consumption is growing at a very robust rate for the company in total and customers that are leveraging AI grow at 1.5x that rate. So there's significant volume increase in consumption that, again, with the nature of the DPS contract, you don't have to purchase something, you had access to full capabilities of the platform, you will burn down your commitments earlier and our expectation is that this continues, that should lead to a source of future expansion.

And perhaps just to put a pin in it, I did cover this in the prepared remarks, but just to highlight it because I really do think it is important, we're thinking very acutely as to how we monetize and evolving AI space. Number 1 is just around increased consumption of AI workloads. They consume way more telemetry. Number 2 is that you've got incremental workloads that require AI observability, namely, are they delivering accurate responses coming out of LLMs, and then finally, we're monetizing, as I mentioned earlier, the agents themselves. So 3 different very discrete methods of monetization of AI workloads and a genetic work models as we look at.

Our next question comes from the line of Keith Bachman with BMO Capital Markets.

I wanted to ask about the renewal installed base. And if you could just provide a little bit of context on how that installed base looks over the next 3 quarters versus what it was in the June quarter? Is it frankly, is it a greater target rich audience when you think about that installed base, any nuances that you want us to consider as we look out over the next 3 quarters. And additionally, any update on how that installed base when the renewals unfold the behavior. In other words, what's the ratio that you're picking up as those customers, in fact, renew their DPS contracts any change in behavior, upsell rates associated with those DPS renewals, in particular, as we think about what that installed base may do. And I'm going to try to sneak in. Just Jim, any comments on what BuyingPlan will grow over -- you mentioned $13 million, which was ahead of our number, but any comments on how that will grow and contribute to the ARR? That's it for me.

Okay. A couple of questions in there. So -- the -- as we've shared before, Keith, that the weighting of our renewals, DPS and just other non-DPS renewals are very weighted to the back half of the year. And so Q1 and Q2 are light renewal quarters. And so I think the statistic is for DPS, I think 70% of our renewal activity or annual resets actually occur in the back half of the year. And so I've shared before that consumption continues to grow at the rates we're expecting, we believe that you should see NRR inflection in the back half of the year. I don't think you're going to see it in the first half of the year just because it's a light renewal period. And as I shared before, your DPS contracts this year, you're having all 3 cohort classes come up for the first time. And so if consumption continues to grow at that rate, we do expect to see an improvement in expansion activity. And I'd say what we saw in Q1, very consistent customers that some customers grow on demand and some customers do expansions. And so again, because it's a light renewal period, you're not notably seeing an uplift in our ARR yet, but our expectation is you will in the back half. And relative to Bindplane, you're right. So Bindplane, I think we used big numbers when we said $10 million. So what we inherited was $13 million. We are very pleased with buying plan. It's exceeded our expectations. And you should expect that, that will be a contributing source to aid our logs business to continue to accelerate at the rates that it's done because buying plane will be an accelerant to logs. And so we expect that to be an additive source. We haven't necessarily outlined a specific growth target for it, but you could expect that it's going to grow at a robust rate.

Our next question comes from the line of Andrew Sherman with TD Cowen.

Jim, congrats on your retirement. It's been great working with you. is it fair to think that the deals that slipped in EMEA last quarter closed, how did that region perform in the quarter? And then globally, how is the pipeline of big deals in Q2 and for the second half?

So first, thank you. I'll just remind you, I'm not going anywhere yet, so you guys are stuck with me for a while, but thank you for the kind words. Relative to EMEA, you're right. One of the -- we saw a little bit of softness in EMEA in the fourth quarter. EMEA actually had a very strong start to the year. So EMEA had a good Q1 and so -- I mean they weren't the primary source of the growth for the quarter, but they had a rebound from Q4 to Q1. And then your second question was on pipeline -- the pipeline. Pipeline, again, pipeline continues to be weighted to large deals. That is not new. It's the nature of our sales motion. -- which is why we've mentioned that having a trailing 12-month metric to look at net new ARR as a good lens because it smooths out the timing that you'll see with large deals like that, but the pipeline continues to be robust.

Our next question comes from the line of Fatima Boolani with Citi.

Jim, I wanted to follow up with you on something that you were potentially hiding on last quarter and now because you started the new fiscal year that brings me to ask you, there was some consideration around potentially having more, let's just say, elastic or more premium healing pricing on demand consumption behavior. Knowing what you know, seeing what you're seeing in the pipeline as it relates to the renewals cohort, their behaviors, their consumption patterns. I'm wondering if you maybe have an update or a finer point you could put on the decision around more premium pricing elasticity on ODC and how that factors or doesn't factor into your guidance for the remainder of the year?

So the short answer to that question, Fatima, is that we've not made any decisions to change our pricing mechanism for on-demand consumption. As you mentioned, we do not charge a premium. It is something that we've evaluated and continue to evaluate internally. So within my guidance does not assume any change in that. That is not to suggest that it wouldn't make a change. It's just not something that we've contemplated yet. And obviously, when you make a change like that, you'd have to roll that out over a period. You could do that for new customers, you'd have to figure out the timing of doing it for existing customers. So even doing it would not have a material impact on the fiscal year.

Our next question comes from the line of Sanjit Singh with Morgan Stanley.

Congrats on the strong net new performance in Q1. It seemed like this quarter, the strength of post business, but really the story is the new logo performance, I think kind of more than doubling the size of the average lands. When I think about that NRR and I think about just the momentum that you guys are seeing, explosive momentum you're seeing on the log side of the equation. I guess the question is why is the logs driving that improvement in NRR. I know we have like the renewal cohort in the back half, but why was a bigger driver for an NRR improvement?

I thinks it's all timing, Sanjit, as we've said, that it everything is dependent upon who are the customers that are driving significant logs consumption. And so it's a bit of the nature of when do those customers fall into their renewal cycle. And again, as I mentioned, Q1 and Q2 are light renewal quarters. And so we're already seeing some of it, but just happened to be quarters where you're not going to see the same level of expansion activity. But trust me, they are going to be -- and we expect to be a future source of expansion activity. As we mentioned, that just 2 quarters ago, we talked about the business being $100 million, and now it's nearly $200 million. So you should expect that in the back half of the year, this consumption growth continues that we should see an inflection in NRR.

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