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Dynatrace Holdings LLC (NYSE:DT)
Q4 2021 Earnings Call
May 12, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, and welcome to the Dynatrace fourth-quarter and fiscal-year 2021 earnings call and webcast. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Noelle Faris, vice president, investor relations. Please go ahead.

Noelle Faris -- Vice President, Investor Relations

Great, operator. Good morning, everyone, and thank you for joining Dynatrace's fourth-quarter and fiscal-year 2021 earnings conference call. With me on the call today are John Van Siclen, chief executive officer; and Kevin Burns, chief financial officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Dynatrace's filings 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 views on May 12, 2021. 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. And with that, let me turn the call over to our chief executive officer, John Van Siclen. John?

John Van Siclen -- Chief Executive Officer

Good morning, everyone, and thank you for joining us today. I am pleased to report that we had another quarter of strong execution, beating guidance across all our key operating metrics. ARR was $774 million, up 35% year over year. Subscription revenue was $183 million, an increase of 35% year over year.

And unlevered free cash flow was $86 million for the quarter, bringing full-year unlevered free cash flow to $237 million or 34% of revenue. These continued strong results were driven by the ongoing combination of solid new logo additions to the Dynatrace platform, the ongoing expansion of existing customers, and an inherently efficient business model, allowing us to deliver a sustained balance of growth and profitability. Encouragingly, we're starting to see signs of stabilization in the vertical markets most heavily impacted by the pandemic. These previously challenged verticals are once again investing in their digital transformation journeys.

Our ability to successfully navigate through this past year is a testament to the resilience of our value proposition, our commitment to customer success, and our incredible team. I want to take a moment to thank them, our 2,800 employees worldwide, for their focus, diligence, and teamwork throughout this past fiscal year. Their talent, attitude, and customer-first mindset are key to what makes Dynatrace such a unique and strong company. With the strength of our Q4 and year-end results as a baseline and solid outlook and fundamentals to build on as we go forward, we will be setting guidance for fiscal 2022, which Kevin will provide more detail on shortly.

This morning, I'd like to discuss four topics that I believe provide a proper backdrop for continued success in fiscal '22 and beyond. First, a brief reflection on our past two years as a public company and the track record we've built. Second, the powerful combination of new logos and consistent expansion across our customer base, are building blocks for sustained growth at scale. Third, our progress in go-to-market and commercial expansion initiatives, underpinning these building blocks for growth.

And fourth, the acceleration of our continuous innovation for sustained competitive differentiation and value in this evolving market. Let me start with a brief look back over these past two years as a public company. Two years ago, we said we transitioned our customer base smoothly and efficiently from what we called classic product to the new Dynatrace platform. Today, 99% of ARR is on the new platform.

We said we transitioned to a predictable high-growth subscription business. Today, 93% of our revenue is subscription, with strong growth in the mid-30% range year over year. We said our platform was highly differentiated, a powerful combination of best-in-class observability infused with AIOps automation capabilities, ideally suited to dynamic modern cloud use cases. The addition of nearly 1,200 new logos to the franchise over the past two years is proof that these capabilities and our unique value proposition are resonating with customers.

And we said we would sustain a durable balance of growth and profitability. And in fact, we've done that. A rule of 60 for the last three years, including the last two as a public company, when combining ARR growth and unlevered free cash flow margin. It's been a solid start.

We believe we delivered on our promises and built a predictable track record of success, a $774 million ARR business today, with line of sight to $1 billion business in the not-too-distant future. With a solid foundation in place, this leads me to the second topic. Our building blocks for sustainable success, the powerful compounding effect of new logos and net expansion across our customer base. During fiscal 2021, we increased our Dynatrace customer base by over 20% and ARR per customer by over 15%.

The compounding effect of these two resulted in total ARR growth of 35% year over year. It's this consistent addition of new logos, while at the same time increasing ARR per customer, that we believe provides Dynatrace the opportunity to maintain 30-plus percent growth over the long term. Specifically, in Q4, we added 173 new logos to the franchise, up 19% year over year. New logo lands included Amica Insurance, Pan Airlines, Frontier Communications, and Harrods Limited.

We continue to see cloud-first digital transformations accelerate globally and across all industries and governments as software and applications become critical to how services are provided and revenue is driven. As we've said, underpinning digital transformation are dynamic multi-clouds. These environments can seem simple at first, but when cloud-native workloads hit the cloud platform, as dynamic container orchestration kicks in at scale and as DevOps teams accelerate the frequency of change, complexity ensues. And at some point, this complexity becomes overwhelming and intelligent automation becomes essential.

It's this complexity wall, as some of our customers refer to it, that enables Dynatrace to enter any modern cloud environment and add significant value, ease of scaling, faster innovation, lower risk, and consistent success as cloud reach and impact increases at scale. On the expansion front, in Q4, we once again achieved a net expansion rate of over 120%, the 12th consecutive quarter we've achieved this result. Customers such as JPMorgan Chase, Fiserv, the European Commission, Cigna, and DHL expanded their Dynatrace footprints to simplify and accelerate their digital transformations. We continue to believe most of our customers are still in the 15% to 20% range of instrumented applications, with three to four times more applications targeted for full-stack observability.

This alone provides us plenty of opportunity to continue expanding in Tier 1 and 2 applications, our bread and butter. And add to this the significant cross-sell opportunity across what are now five additional modules beyond full-stack APM with the recent addition of cloud automation and cloud app security. And you can see why we believe we can achieve an average ARR per customer of greater than $1 million over time. In fact, customers who are using three-plus modules today have an average ARR of nearly $500,000, almost two times our customer average of $260,000.

This brings me to the third topic for this morning, commercial expansion. Given the powerful market trends, our high-value differentiation, and an expanding platform with multiple monetizable modules, commercial expansion continues to be a huge focus for us. I'm very pleased to see our progress back to healthy sales and marketing spend levels, again in the mid-30s as a percent of revenue. As we've discussed, we are investing in a combination of direct sales team expansion, cloud partner ecosystem expansion, and marketing-driven opportunity generation.

I'm pleased to report that over the last 12 months, we were able to increase our quota-carrying sales reps by 25% year over year and are targeting to step up quota-carrier expansion to the 30% range here in fiscal Q1 and for the balance of the year. In addition, we continue to fuel our cloud partnerships, both cloud SIs and strategic tech partner alliances. Cloud SI influence is now up to over 40% of our transactions worldwide. These are regional and global cloud SIs responsible for ecosystem integration of cloud platforms such as AWS, Azure, and GCP, with container orchestration from IBM OpenShift or VMware Tanzu.

Dynatrace's intelligent automation, wide and deep observability coverage, and pre-built extensions for easier implementation make it an ideal platform for these cloud SIs to leverage for any combination of modern cloud transformation. Also, in Q4, we continued our go-to-market progress with the three big hyper-scalers: AWS, Microsoft, and Google. During the quarter, dozens of joint customers transacted with us through marketplace offers across these three hyper-scalers as they look to leverage cloud spend and simplify their procurement processes. And as we continue building strong go-to-market relationships, we are also expanding our technical fit into new areas.

For example, with AWS, we recently added AIOps competency credentials to our containers, DevOps, and cloud migration competencies. We believe being the first and only observability platform to have added AIOps credentials will help us to continue to differentiate our offerings in the minds of the ever-expanding AWS community. In addition, our marketing progress should not be overlooked. It's a fuel for brand awareness and opportunity generation, and we've intensified our investment here over the past several quarters.

Having 28,000 registered attendees for our February user conference, Perform, 40% more than I projected at the end of January, was a massive hit. Expect to see ongoing investments in marketing to fuel sales and partner expansion as we go forward. This brings me to the fourth and final topic I wanted to cover today, the sustainability of our innovation engine. As many of you have witnessed, this is a dynamic market, ever-changing, always evolving, littered with companies who could not see around the corner and keep up.

I am proud to say Dynatrace has stood the test of time and not only succeeded when others have faltered but has actually thrived on disruptive change. We believe Gartner's recent 2021 APM Magic Quadrant is a perfect example. APM is the high ground for any observability conversation. It's where the business meets IT.

In this critical area, Dynatrace has been a leader 11 consecutive times. And once again, this year, we lead in both completeness of vision and ability to execute. Through multiple market shifts and changing competitive dynamics, Dynatrace has adapted, anticipated, and thrived. Here are several recent examples of this innovation engine in action.

In February, we announced a new Cloud Automation Module to our platform. The Cloud Automation Module enables DevOps teams to continuously deliver high-quality code and innovation faster with more consistency and greater efficiency. This module brings intelligent, automatic closed-loop remediations to critical DevOps processes, an important step toward autonomous cloud operation. Also, in February, we announced enhanced log analytics support with discovery and analysis of cloud platform logs from AWS, Azure, Google, and Kubernetes, as well as open-source logs such as Fluentd and Logstash.

Now customers can extend visibility in cloud-native environments and begin consolidating their log use cases and spend into Dynatrace, gaining both efficiency and lower costs. In this past quarter, we announced advanced GDPR functionality and session replay for mobile to our digital experience module. These capabilities provide important global and technical expansion to drive DEM adoption further and faster across more customer applications than ever before. Leveraging a combination of our proven approach, a highly talented R&D team, and the rapid growth in engineering talent that mirrors the pace of growth of the company itself, we are confident our innovation engine will continue to drive high value, highly differentiated capabilities across both platform and modules well into the future.

With that, let me summarize. These past two years have been fantastic, capped off with a great Q4 and year-end to our fiscal 2021. We've invested in the building blocks for sustained high growth to drive the compounding combination of new logos and continuous ARR expansion across our growing base. We've proven our ability to execute through challenging times and in a rapidly evolving market.

And we have delivered on our promise of a balanced approach to growth and profitability, sustaining a rule of 60 business for the past three years. With that, let me turn it over to Kevin to take us into our financial results and guidance. Kevin?

Kevin Burns -- Chief Financial Officer

Thank you, John, and good morning, everyone. As John mentioned, we delivered another great quarter across the board, driven by strong ARR performance well above our guidance range. The Dynatrace team has done a tremendous job executing in a challenging year. As you know, we believe ARR is a key performance metric of the overall strength and health of the business.

ARR was up $201 million over last year, ending the fiscal year at $774 million. This represents 35% year-over-year growth or 32% in constant currency. Excluding the perpetual license headwind, which negatively impacted ARR by $19 million or 3 percentage points, our adjusted ARR growth rate was 38% on an as-reported basis and 35% on a constant-currency basis. As we have communicated, the building blocks for ARR growth continue to be the combination of new logos and our net expansion rate.

We continued to see momentum in new logo additions, exceeding our expectations from a few quarters ago and well above the 9% growth rate last quarter. We added 173 new logos in the fourth quarter, representing 19% growth over the 145 new logos we added in Q4 of last year. We ended the year with more than 2,900 Dynatrace customers. Our net expansion rate was above 120% for the 12th consecutive quarter, and our ARR for Dynatrace customer increased to $260,000, up 17% year over year.

Our average ARR per customer with three or more modules continues to increase. This cohort represented 35% of our customers in the fourth quarter, up from 27% last year. As a result, we now have over 1,000 customers with three or more modules, an increase of almost 400 customers over last year. And it is noteworthy that these customers have an average ARR of nearly $500,000 per customer.

As John said, we believe that as more and more customers adopt new modules and expand coverage, the average ARR per enterprise customer could be north of $1 million. Moving on to revenue. Total revenue for the fourth quarter was $197 million, $5 million above the high end of our guidance and representing an increase of 31% on a year-over-year basis or 27% in constant currency. The strength in total revenue growth is being driven by 35% growth in subscription revenue or 32% in constant currency.

Overall, revenue came in nicely above guidance due to the strength in new logos and a solid net expansion rate, both driven by better sales productivity. With respect to margins, total non-GAAP gross margin for the fourth quarter was 85%, in line with last quarter and up 2 percentage points from Q4 of last year. We saw an expansion in our gross margin driven by cost savings related to the pandemic, combined with the benefits of our efficient Dynatrace platform. Our non-GAAP operating income for the fourth quarter was $49 million, $3 million above the high end of our guidance due to the revenue upside and associated gross margin expansion.

This led to a non-GAAP operating margin of 25%, up 1 percentage point from the fourth quarter of last year. Non-GAAP net income was $43 million or $0.15 per share. This is $0.01 above the high end of our guidance due to the favorable revenue upside. Turning to a quick summary of the financial results for the full year.

Total revenue was $704 million, $5 million above our guidance range, and up 29% year over year or 28% in constant currency. Total revenue growth is being driven by the underlying growth in subscription revenue, which was $655 million, $3 million above the high end of our guidance, representing an increase of 34% year over year and 33% in constant currency. Non-GAAP operating income for the year was $207 million, above the high end of our guidance, resulting in a non-GAAP operating margin of 29%, up from 24% in fiscal '20. As we've mentioned in the past, we believe in a balanced approach to operating the business, one that delivers strong and durable performance on both the top line and bottom line.

And as John mentioned earlier, our strategy to invest in strategic areas to support the long-term growth of the business is the right one. While we ended fiscal '21 with 500 basis points of non-GAAP operating margin leverage compared to fiscal '20, a large portion of this leverage was driven by COVID-related savings that we worked prudently throughout the course of fiscal '21 to reinvest back into the business to further support growth. Turning to the balance sheet. As of March 31, we had $325 million of cash, an increase of $112 million over last year.

Our long-term debt was $392 million at the end of Q4. Our gross debt was down $120 million over last year and down $60 million sequentially due to a principal repayment that we made earlier in the fourth quarter. In addition, we made another repayment of $30 million during the month of April, further reducing our debt balance to about $362 million. We are extremely pleased with our ability to generate cash while at the same time significantly increasing our investment levels in the business.

As we have shared in the past, we committed to reducing our outstanding debt and improving our leverage ratio, and I am pleased to report that we have delivered. Our unlevered free cash flow for Q4 was solid at $86 million. For the full year, our unlevered free cash flow was $237 million or 34% of revenue. This margin level is above our previous unlevered free cash flow margin guidance of 32% of revenue due to the combination of strength of ARR, stronger collections, and some other working capital improvements.

The last financial measure that I would like to mention is our remaining performance obligation, which at the end of the quarter, was approximately $1.2 billion, an increase of 38% over Q4 of last year. The current portion of RPO which we expect to recognize as revenue over the next four quarters was $684 million, also an increase of 38% year over year. As I've mentioned in the past, we believe ARR is the best metric to remove billings and contracting noise, but we do provide RPO as we believe, over time, it will become a more meaningful metric. Now, let me turn to guidance.

Again, our key financial metric to understanding the business momentum is ARR and the building blocks to ARR growth are new logos and our net expansion rate. We believe the investments we are making in commercial expansion and product innovation will enable us to sustain 15% to 20% new logo growth and maintain 120% net expansion rate for fiscal '22. From a guidance standpoint, ARR is expected to be between $975 million and $990 million, up 26% to 28% year over year or 25% to 27% in constant currency. Our ARR guidance assumes 3 to 4 percentage points of headwind to ARR growth in fiscal '22 due to the headwind associated with the perpetual license wind down.

We expect it will be at the higher end of that range for the first three quarters and then drop to 3% in Q4. At the end of the year, we believe perpetual license will be down to 1% to 1.5% of total ARR, which will essentially end the perpetual license transition and associated ARR headwind. Excluding the perpetual license headwind, our full-year adjusted ARR growth rate is expected to be between 28% to 30% year over year on a constant-currency basis. Wrapping up our ARR discussion.

As we have outlined in the past, our business is not linear from quarter to quarter, with a fair amount of seasonal strength in the back half of the year, with Q3 being our strongest quarter, followed by Q4. We do expect quarterly ARR expansion seasonality to be consistent with what we saw last year. Total revenue for the full year is expected to be $885 million to $900 million, up 26% to 28% year over year or 24% to 26% in constant currency. Underlying that, subscription revenue is expected to be between $834 million and $848 million, up 27% to 29% year over year or 25% to 27% in constant currency.

As discussed, we expect subscription revenue to be 94% of total revenue driven by the size and strength of ARR and associated subscription revenue growth. Moving down to P&L. We expect full-year non-GAAP operating income to be between $203 million and $216 million. From an investment standpoint, we are focused on the long-term growth of the business.

We believe the proper levels of spend for sales and marketing to be in a range of 34% to 36% of revenue and R&D to be around 15% of revenue. This results as a non-GAAP operating margin of 23% to 24% for the year. For the full year, we expect non-GAAP EPS of $0.59 to $0.62 per share based on 292 million to 293 million diluted shares outstanding. Our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 12%.

We believe utilizing an annual non-GAAP effective cash tax rate reduces quarterly variability. A recast of the first three quarters of our fiscal '21 quarterly results is available in the financial tables in today's press release, and also reflects a non-GAAP effective cash tax rate of approximately 8%, which was used throughout fiscal '20. At these investment levels, we are able to deliver very solid unlevered free cash flow margins. For the year, we expect unlevered free cash flow margin to be approximately 29% to 30% of revenue, which is $256 million to $268 million.

Looking at Q1, we expect total revenue to be between $202 million and $204 million, up 30% to 31% year over year or 25% to 26% in constant currency. Subscription revenue is expected to be between $190.5 million to $192 million, up 32% to 33% year over year or 27% to 28% on a constant-currency basis. From a profit standpoint, non-GAAP operating income is expected to be between $49 million and $51 million, 24% to 25% of revenue, and non-GAAP EPS of $0.14 to $0.15 per share. In summary, we are very pleased with our fourth quarter and fiscal '21 performance where we saw strong ARR and top-line growth combined with healthy margins.

We remain excited about the growth opportunity with a line of sight to $1 billion in ARR. This is another important milestone and further enhanced by being one of the few software companies operating at a rule of 50-plus. To wrap up, we have a solid position in a growing market, strong product differentiation, and a compelling value proposition that we believe will help us maintain top-line growth well into the future. At the same time, we also have a consistent track record of making the right strategic investments to maintain healthy margins and cash flow.

Overall, we believe we are well-positioned for sustained and durable growth in fiscal '22 and beyond. And with that, we will open the line for questions. Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question today is coming from Bhavan Suri from William Blair. Your line is now live.

Bhavan Suri -- William Blair -- Analyst

Thanks, everybody, and congratulations. That was just a strong, strong finish there. I guess I want to touch a little on the sales investments and the partner investment, and maybe this is for John here. But as you think about you're accelerating sales investments to 30% growth in headcount, you're increasing the partner investment.

I'd love to understand how you're balancing the two because, obviously, one feels more profitable than the other one and the partners do the pushing of the sales process and you're brought in kind of at the end? And then the second piece is, how does that drive? Because that to me, 30% growth in sales plus partners mean that potentially ARR could grow well more than 30%. So I'd like to understand how you think about that.

John Van Siclen -- Chief Executive Officer

Sure, Bhavan. And thank you for the comments there. So the combination of investments, they really do go hand in hand. We don't look at what partners as necessarily a separate channel.

We see it as an augmentation to our go-to-market approach, whether they're the ones that source an opportunity or we do, we work hand in hand to make sure that we do sort of the right thing for our customer base. Remember, our customer base are the largest companies on the planet, billion-dollar-plus companies. So they pretty much always have someone in there helping them with their digital transformation. So we see it sort of hand in glove and the combination actually driving greater momentum and productivity for our sales organization.

And you're right in that if we do our job right and we execute well, that we have an accelerant ahead of us. It's yet to pay off in that manner, but we're working hard at it and see some great opportunity ahead.

Bhavan Suri -- William Blair -- Analyst

Understood. I appreciate that color. Yes.

Kevin Burns -- Chief Financial Officer

Sorry, Bhavan. Just to jump in, right, in terms of the tailwinds to productivity as we think about it the next couple of years. As you mentioned, there's the 30% quota capacity, there's the partner program, which we're investing in, which is great. We've also came off a conversion program.

And I think this is the first quarter where we saw some tangible results there. And also, something we've talked about historically as well is the maturing of the sales organization. And we've seen a nice improvement over the last 12, 18, 24 months of, you know, reps that have been here for a longer period of time, which we believe can deliver higher productivity over time. So all those, we believe, are good tailwinds to the business and can support long-term sustainable ARR growth.

Bhavan Suri -- William Blair -- Analyst

That's really helpful. I want to follow up on that question for you guys about the ServiceNow relationship. If you want to share the productivity improvements, that would be great. But I do want to focus on ServiceNow.

ServiceNow, I mean, you've had a great partnership. And obviously, you do a ton of work for bill management of the company when it was previously -- where you're instrumental in supporting that. They enter the observability space. So I'd just like to get your thoughts and sort of does that change the relationship? How are you thinking about that? What does that mean? Because that was a great sort of somewhat unique partnership you have with ServiceNow.

John Van Siclen -- Chief Executive Officer

No. It's a good question, and I'm sure a timely question on people's minds. Our relationship with ServiceNow has really been in the field with joint customers. And those joint customers need our platforms to work extremely well together.

And that's where our focus has been. And that's what sort of pulled us together. The fact that they've added a little bit of sort of observability of sort of a future piece part tool makes sense for them. They need to be relevant inside clouds.

They're outside looking in at the moment. So it makes sense that they would try to get into a conversation they're not in yet. But as far as our relationship, our platform is much larger and much more strategic to customers than sort of a piece part add-on. So I don't really see any change to the relationship with ServiceNow in the field as we go forward.

Bhavan Suri -- William Blair -- Analyst

Great. Thank you, gentlemen. Congrats again on solid results.

John Van Siclen -- Chief Executive Officer

Thank you.

Kevin Burns -- Chief Financial Officer

Thank you.

Operator

Our next question today is coming from Raimo Lenschow from Barclays. Your line is now live.

Raimo Lenschow -- Barclays -- Analyst

Thank you, and congrats from me as well. On a slightly similar topic, John, you mentioned the Magic Quadrant, and it's really nice to see how you guys kind of moved more into the top right and kind of distinct yourself from the other guys. But you also saw like some of the newer entrants kind of coming up there. Can you just, for our benefit, help us understand a little bit where they might be playing versus you're playing in that broader space to get us a little bit of differentiation? To me, from our checks, it seems more you're kind of winning the enterprise and someone comes more on the low end.

But like just help me understand that a little bit better. Thank you.

John Van Siclen -- Chief Executive Officer

You know, that's the right observation. We've been clear since sort of IPO and actually years before that, that we were going to focus ourselves on what are more challenging customers, bigger and more scalable problem set which we excel at. So we focus on that Global 15,000 and we consistently win in that world. There are other entrants that enter sort of in the departmental or SMB markets.

Some excelling in those markets. But that's really quite a different market space. In our world, the combination of observability with automation and AI assistance, it's a critical intersection. There is no way to deal with the volume velocity and variety of data explosion, as this -- the dynamic orchestration of these multi-cloud environments, the frequency of change of multiple DevOps teams without some level, in fact, sophisticated levels of automation.

And so that's really setting us apart, giving us fuel. You can see it in our numbers. You can see it in the new logo growth, the expansion growth, that that combination resonates with these large enterprise-class customers. So we're happy with where we are.

We appreciate Gartner's support for the unique value proposition that we bring to the market. And we see a lot of great opportunity ahead with this combination and then continuing to fuel it, as I said in my prepared remarks, with the continuous innovation engine that we have that's just rolling along like crazy right now.

Raimo Lenschow -- Barclays -- Analyst

OK. Perfect. Thank you. And then one follow-up, and more for Kevin maybe.

As we start the new year and your investments are increasing on the sales and marketing side, etc., anything we should be aware of in terms of sales, sales structure as the new year starts to kind of get more -- the logo driven or change the sales force a little bit? Anything on that side? Thank you.

Kevin Burns -- Chief Financial Officer

No. We've been doing some minor adjustments along the way. But at the end of the day, we're an enterprise sales organization with a named account strategy and that will be complemented by our partner program as well. So our goal is just making sure we're hiring at all levels of the organizations from the VPs to the RDs down to the account executives and scaling these things out globally.

So no fundamental changes. It's more of the same, albeit at a better -- at a faster clip hopefully going into fiscal '22 here.

Raimo Lenschow -- Barclays -- Analyst

Thank you.

Operator

Our next question today is coming from Gray Powell from BTIG. Your line is now live.

Gray Powell -- BTIG -- Analyst

Great. Thanks for taking the question, and congratulations on the strong results. So maybe starting off on just sort of the obvious side. I mean, you all had a very good fiscal '21.

I think you beat your initial ARR guidance by over 10%. At the same time, you talked about how 15% to 20% of your business was from highly exposed industries. So is it possible to quantify what you think was the headwind from COVID, even if it's just a ballpark number last year? And then how should we think about the slope of recovery within those that impacted customer cohort? Thanks.

John Van Siclen -- Chief Executive Officer

Sure. Kevin, why don't I start, and if you want to put any – you know, a little bit of quant on it? because we have quantified it a little bit during the year. So from a -- the challenged verticals were -- they were more challenged in the first half than the second half. And as I said in my remarks, we're starting to see a recovery of those verticals as they prepare for sort of reemergence into growth verticals going forward.

And with that, software is one of the first things everyone invests in to make sure that they're most efficient, most agile, and most scalable they can be. Last thing they want is a fumble on their sort of reemergence from the pandemic. So that's what we're starting to see. It's encouraging.

And we look forward to having a full set of global verticals and governments, you know, investing in digital transformation in '22 and beyond. Kevin, any quant you want to add?

Kevin Burns -- Chief Financial Officer

Yeah. Just in terms of our results this year, obviously, as John mentioned, Q2 was the strongest -- was the quarter where we were most heavily impacted from a COVID headwind, and that was about 3 to 4 points is the way we sort of frame that at the time. And then going into Q3, that number got cut in half. And going into Q4, it reduced as well.

So there still is a little bit of a headwind. But as John says, companies are starting to ramp back up and making those investments. And we sort of think at this point, it's somewhat immaterial in terms of the headwind to the businesses, which is why we're not breaking it out as one of those tailwinds or headwinds to growth going forward.

Gray Powell -- BTIG -- Analyst

Understood. That makes a lot of sense. OK. Thank you very much.

Operator

Our next question is coming from David Hynes from Canaccord. Your line is now live.

David Hynes -- Canaccord Genuity -- Analyst

Hey, thanks, guys. Congrats on the strong results. John, I wanted to ask, look, obviously, the plans are in place for accelerated sales investment, that's awesome. I'm going to be greedy.

I'm going to ask, why not more, right? I mean, do you think the market could support faster sales investments? And I'd be curious to get your thoughts on kind of the gating factors there. Is it just about operationalizing a larger team? Or is there more to it?

John Van Siclen -- Chief Executive Officer

No, it's a great question. We ask ourselves that all the time as well. But I've talked about this before. In order to operationalize sales expansion, it takes a superstructure.

It takes onboarding. It takes operations for sort of measurement, productivity improvement, assurance that the bodies you're adding are actually turning into quota capacity. And so we've stepped up from the 20% range to 25%. We're now 25% to 30%.

We see line of sight to be able to do that with the investments we've made in the sales structure and as well as the partnerships because that's pretty key as well. Same thing with marketing opportunity development. So we have the building blocks in place that we didn't have maybe a year ago to be able to step up to 30%. And once we hit 30% and we're doing well and scale on that, we'll be talking about 35%.

So it's a prudent approach, I think, to scaling the sales operation.

David Hynes -- Canaccord Genuity -- Analyst

Yeah. Makes sense. And maybe I can follow up with a different competitive question. Bhavan asked about ServiceNow.

I want to ask you about Splunk. I know you've talked about having lots of joint customers in the past. I'm curious what you're hearing there as they expand into observability. I mean, look, obviously, lots of work for them to do in terms of moving the product together.

But I'm curious how you see that playing out. I mean, do you think they'll try and be price disruptive? I know they're not a core competitor today but would love any thoughts.

John Van Siclen -- Chief Executive Officer

Yeah. So we really haven't seen a change in the market environment or any of the conversations with our customers over the last, really, two years since they've been acquiring companies. And I think their recent announcements of their observability cloud is just sort of a repackaging of what they've already been talking about. So not sure what's going on over there and sort of how they're putting things together.

But I will say that the customers that we talk to, and as you point out, many are sort of have Splunk platforms in as well, they really value the automation and AI assistance that we bring because they know they have a real-time, massively scalable cloud challenge in front of them and a suite of tools is not going to cut it. So I like our differentiation. Whenever Splunk gets sort of their focus together, who knows? But like I said, I think the market is moving more toward us and away from just a simple observability play, certainly, at the enterprise level.

David Hynes -- Canaccord Genuity -- Analyst

Yeah. Very helpful. Thanks, guys, and congrats again.

John Van Siclen -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question today is coming from Matt Hedberg from RBC. Your line is now live.

Matt Hedberg -- RBC Capital Markets -- Analyst

Great. Hey, guys, thanks for taking my questions. Hey, John, hearing you talk about maintaining 30% growth over the long time is certainly impressive. And I guess part of that thesis, I think, is continuing to kind of diversify away from APM.

And last quarter, I think you noted 40% of your customers, or maybe nearly 40% were using infrastructure on non-full-stack workloads. I'm wondering can you comment on how that might trend this year? And then I guess, sort of importantly, why have you been so successful cross-selling outside of APM?

John Van Siclen -- Chief Executive Officer

Well, so there's several things going on at the same time that are actually helping us, giving us a bit of a tailwind. One of them is that the conversations that we're having with customers are less about APM, less about a layer, and more about the whole full-stack observability approach, which is perfect for us because that's what we rebuilt and reinvented our platform around, a full-stack approach, logs, metrics, user experience, topology, you know, etc. So it's perfect for us, perfect conversation. And I think that that's accelerating the multimodule approach.

And we'll continue to do that this year. I mean, the fact that we have 35% of our customers now with three-plus modules is something that I see us continuing to penetrate that customer base. Whether we take it to 45% or 50%, not sure this year, but it's certainly a key part of our focus. I think the other part of this is that once we relieve the sales organization of conversions, we were able to really step them up and focus them on cross-selling.

And I think you see that in the numbers this year. I mean, obviously, we're maintaining a great and healthy net expansion rate. And I see that continuing as well. And with the innovation engine adding a few more modules to that portfolio, that's all goodness as well for that multimodule cross-selling.

So I think you're going to see more of the same. The sales organization is doing a great job absorbing the additional functionality, and customers are looking forward to it. I mean, the centering of our platform around AIOps capabilities really unifies all these modules into a very powerful combination. So yes, we look forward to '22 and beyond.

We really do feel like we're in a good place, and we're riding a lot of great market momentum at this moment. So we'll keep it up.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. Certainly seems evident to us as well. And I guess, Kevin, you always do a good job of outlining sort of some of your building blocks assumptions for ARR, and there's been a lot of focus on NRR and obviously on your quota capacity adds this year. But I think you added about 20% -- you grew your customer base by about 20% last year.

I guess I'm wondering sort of within your ARR guide, what is sort of your assumption on customer adds this year? Do you think you might grow that base even more than you did last year?

Kevin Burns -- Chief Financial Officer

So I'd break it into two components. One is when we just look at the new logo additions, last year, we added about 584 new logos to the business. And what we talked about in the call is adding another 15% to 20%. And frankly, we're hopeful internally that we can overachieve that.

So that would be on the positive side to adding to the 2,900 customer base. From a churn standpoint, we still have a couple hundred customers who are single module, very small customers that came over the last couple of years from some of the -- primarily from some of the conversion programs that we did. And if you add up those customers, I think it's -- the total number is around 300 customers of the 2,900 customers. It represents less than $10 million of ARR.

I think it's in that $7 million to $8 million range of ARR. So I think you will see some of that churn, we will certainly try to make sure that some of those customers become platform customers. But if they don't, Matt, we're going to churn those out and, frankly, just sort of refocus our energies on what we believe would be more strategic opportunities. So long way of saying, take the 2,900, you add the new logos that were going to come in over the next 12 months.

And then there will be some churn component related to that single module, nonstrategic customer base that has a very low ARR component to it. So hopefully, that helps.

Matt Hedberg -- RBC Capital Markets -- Analyst

Yeah. No, that's super helpful. Congrats from me as well on the results, guys. Very strong.

Kevin Burns -- Chief Financial Officer

Thank you, Matt.

Operator

Our next question today is coming from Andrew Nowinski from D.A. Davidson. Your line is now live.

Andrew Nowinski -- D.A. Davidson -- Analyst

Thank you. Just a couple of questions. I think you mentioned that the ARR per customer increased $260,000 in Q4. Can you just talk about maybe more specifically which modules might be driving that increase? And then I have a follow-up.

Thanks.

John Van Siclen -- Chief Executive Officer

Sure. Well, we don't break it out every quarter, all the different pieces, but obviously, we land in a full-stack APM mode in the modern clouds, because you need that application, infrastructure, network, logs, metric trace, topology kind of combination in order to really understand how the apps are working in dynamic multi-clouds. So that's still the landing zone. But from an expansion standpoint, it's still a combination of the infrastructure only, like extending the Dynatrace platform beyond the full-stack host unit environments, try to get that additional visibility and AI assistance across a wider footprint.

So that's continuing to expand within our customer base. And the digital experience elements as well, where customers -- the pandemic really forced a lot of our customers to understand their remote customer pace better because they couldn't interact with them in any other way. So our digital experience business, especially the mobile application monitoring, took a big tick-up over last year and we don't see that slowing down at all. So those are probably the two primary.

And then we are seeing more and more metric ingestion areas, whether they're business metrics with our business analytics or whether they're additional data elements into our AI engine which are starting to fuel some of the ingestion metrics as well. So it's actually a combination. I mean, everything is working pretty well. But I think the infrastructure extension and the digital experience are the two primary drivers of additional modules.

Andrew Nowinski -- D.A. Davidson -- Analyst

Super. Thanks, John. And then I know the Cloud Application Security Module is very new, but I was wondering if you could just comment on how customer adoption was of that solution last quarter. And do you think that has enough features in it to see a fairly significant increase in adoption this year or this coming fiscal year here? Or is there more work to be done before it starts to contribute?

John Van Siclen -- Chief Executive Officer

Sure. So first of all, we're super excited. The feedback we're getting right now is it supports our thesis. We're entering the right place.

It's a greenfield space, and there's a little more work to do in order to fill out the product for it to be enterprise-ready. You got to remember that our customer base are billion-dollar-plus companies. They're very, very picky. And they expect a pretty wide footprint of coverage before they're willing to add something else to their security portfolio.

But that said, we've touched about 10% of our customer base. Everyone pretty much to the company is thrilled that we're getting into the space, that this is a great entry point. The DevOps teams are particularly excited as they sort of pick up the DevSecOps approach. So it's early, as we said.

We knew we had an early product that was going to need to fill out in the first half of this year, but I think it's going to start to make an impact in the second half and definitely be an ARR driver for us in fiscal '23, just as we had hoped.

Andrew Nowinski -- D.A. Davidson -- Analyst

Great. Keep up the good work. Thank you.

John Van Siclen -- Chief Executive Officer

Thank you.

Operator

Our next question today is coming from Sterling Auty from JPMorgan. Your line is now live.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Yeah. Thanks. Hi, guys. So you talked about a little bit of stability in the hardest-hit industries, but I want to go the other way.

Which industries are contributing the most at this point? And how do you see that evolving through the rest of this fiscal year?

John Van Siclen -- Chief Executive Officer

Well, I'd have to go down sort of a list here and there and sort of compare, Sterling, which ones have actually ticked up as a percent. And I don't think we'd notice a big tick-up or tick-down from some of the stronger verticals. But there is one that sort of sticks out for us, which I will mention, and that is the government. And these are governments around the world, as well as the state governments in the U.S.

The pandemic really changed the dynamic for government interaction with citizens. And it's put a lot of pressure on sort of older system approaches that need to modernize quickly to modern cloud. And we've seen an uptick across state and national governments around the world in upgrading and digitally transforming faster their environments. And so we've been investing.

Some of our sales resources and expansion has been going into that space around the world. And we see that that is a new augmentation if you will. I mean, it's hard to call it a vertical, but it is something relatively new for us that gives us great promise in continued expansion in the government business.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

That's great. And then one follow-up, Kevin, for you. Can you at least qualitatively give us a bridge of how we go from the operating margin in fiscal '21 to that in '22? So in other words, how much of this is coming from return to business travel, some of the pickup in T&E? How much is coming from sales and marketing expansion, as you talked about, versus other? Just so we can kind of understand the puts and takes.

Kevin Burns -- Chief Financial Officer

Yes. So as I'm sure you can see, over the course of fiscal '21, earlier in the year, we had quite a big cost savings on the P&L that sort of flowed through to op income. And we are prudent about how we put additional money to work over the course of Q3 and Q4. And I think you see the results of that coming through to the P&L.

And those investments were in more R&D resources, right, getting that spend back up to 15%-ish and then getting that sales and marketing to 34%, 36%. And those investments in sales and marketing at this point are primarily the people and around the partner programs and some of the marketing programs that John talked about as well going forward. So when we think about fiscal '22, there's going to be more of the same of that, right? Making sure we keep R&D at 15% primarily through making sure we're tracking and hiring the right people, which we've been doing a great job of. Sales and marketing, it's going to be quota, it's going to be direct sales organization, direct salespeople, more investments in the partner program.

And we do expect travel to come back online more so in the Q3, Q4 time frame. But given the strength of the P&L and the ARR and the top-line growth, we can absorb that without sacrificing, frankly, the investments that we're making in quota capacity, right, and driving higher quota capacity over time. So we do expect a rebound a little bit in terms of COVID, some of the stuff we saved from COVID, but it's -- we just don't -- also don't think it's going to get back to normal. So we're pleased that those investments we're making this year are really about the people, right? Engineers and people in the sales organization and marketing organization to drive durable growth.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Understood. Thank you.

Operator

Thank you. Our next question is coming from Jack Andrews from Needham and Company. Your line is now live.

Jack Andrews -- Needham & Company -- Analyst

Good morning. Thanks for taking the question. I was wondering if you could just describe how your view of the -- what the opportunity is for your Cloud Automation Module and whether you think this is largely a greenfield or a displacement opportunity? And how should we be thinking about the potential uplift or contribution of this module relative to some of the others in your portfolio?

John Van Siclen -- Chief Executive Officer

Yes. Great question. Now we actually see it as a greenfield opportunity and a continuation of an effort that we've had in place for a couple of years. It's actually maybe more of a formalization into a product module of an effort we've had.

It's been mainly a services approach to date. But we've been productizing the modules of productization of some of that early services work. It's targeted first at the DevOps, continuous deployment or environments, and bringing auto-remediation and automated quality steps along the way to ensure greater code quality, consistency, and efficiency, as I said. So we've always been involved in the DevOps processes because of our code-level detail that we provide, but this actually adds significant intelligent automation to the process.

That said, this is the beginning of the autonomous cloud approach. And so what we then do is we take the same approach that we're taking right now in the DevOps and extend it into cloud operations, the production operation environment, again, driving automatic remediations for the elimination of run books. And so anyway, it's a journey for us. It's the first step.

We see the opportunity, say, if you want to quant it, think of it as a $0.20 on the APM dollar kind of addition. And as we go, this module become more and more valuable. Similar to what we're doing with the security module, as we add capabilities and additional use cases, it will become more valuable, as I said, within the portfolio and for our customers. So it's fairly early in its evolution, but we're getting some great resonance with customers who have been along the services journey with us and have been looking for this level of productization so they can really scale it out within their organizations.

Jack Andrews -- Needham & Company -- Analyst

That's really helpful commentary. Thanks, and congratulations on the results.

John Van Siclen -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is coming from Erik Suppiger from JMP Securities. Your line is now live.

Erik Suppiger -- JMP Securities -- Analyst

Yeah. Thanks for taking the question, and congrats on a very solid quarter. Most of the questions have been asked, but I'm just curious, on the infrastructure module, can you speak to the competitive dynamics with Datadog? Can you talk a little bit about whether you've seen any change in terms of efforts that they're making to compete? And I presume that they are incumbent in many of the accounts that you're talking to. Talk a little bit about how the displacements have gone with some of those accounts.

John Van Siclen -- Chief Executive Officer

Well, I don't have lots -- we haven't seen a lot of change in our sort of competitive dynamic with Datadog. It's a massive market, and so our overlap is still quite light. But what we are seeing is that with our infrastructure module, we're competing more with a do-it-yourself approach. And what I mean by that is companies with many different products, different tools, trying to measure telemetry from all different angles and just running into a massive challenge.

It's sort of a tool fatigue, if you will, where it's every man and woman for themselves and no consistent sort of source of truth across a wide footprint, which everyone is looking for in these modern clouds. And so when we extend, we'd consolidate tooling and provide a single source of automated truth for multiple different teams throughout the digital transformation and process. So that's why we don't really think about competing against the Datadog. I mean, they may be there.

New Relic may be there. Other open-source tools may be there. But we solve a different problem, a bigger problem that is much more urgent for the larger customers where they really, really need fewer platforms. Maybe they're not going to go to one, but fewer platforms to deal with this runaway complexity that they're experiencing in their dynamic multi-clouds today.

So that's really the dynamic, and that's what drives and fuels our expansion. And that's really the dynamic we see in the market, and we're well-positioned for it.

Erik Suppiger -- JMP Securities -- Analyst

Thank you.

Operator

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

John Van Siclen -- Chief Executive Officer

Yes. Let me just say thank you again for everybody who joined us this morning. We're coming off of a fantastic fiscal '21, great momentum into '22. Market is continuing to -- market trends are continuing to be in our favor.

Our investments are paying off, as I think you've seen in the results and hopefully going forward in the results. And I look forward to reporting in July and updating everybody on our first step in fiscal '22. Thank you very much.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Noelle Faris -- Vice President, Investor Relations

John Van Siclen -- Chief Executive Officer

Kevin Burns -- Chief Financial Officer

Bhavan Suri -- William Blair -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Gray Powell -- BTIG -- Analyst

David Hynes -- Canaccord Genuity -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Andrew Nowinski -- D.A. Davidson -- Analyst

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Jack Andrews -- Needham & Company -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

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