Sumo Logic, Inc. (SUMO) Q3 2022 Earnings Call Transcript

Sumo Logic, Inc. (SUMO)
Q3 2022 Earnings Call
Dec 06, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Sumo Logic third quarter fiscal 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to the Sumo Logic team.

Unknown speaker

Thank you. Good afternoon, and welcome to Sumo Logic's third quarter fiscal 2022 earnings conference call. Joining me on the call today are Ramin Sayar, president and CEO; and Jennifer McCord, vice president of finance and chief accounting officer. Our format today will include prepared remarks by Ramin and Jennifer, followed by a question-and-answer session. Some of our discussions and responses to your questions will contain forward-looking statements, including statements related to the expected impact of the COVID-19 pandemic, the expected performance of our business, expectations regarding our platform and solutions, expectations regarding our go-to-market efforts and investments, future financial results and guidance, our strategy and market opportunity, and overall future prospects. These statements are subject to risks and uncertainties.

Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, including our risk factors filed with our most recently quarterly report on Form 10-Q and the risk factors that will be included in our Form 10-Q that will be filed subsequent to this call. Sumo Logic assumes no obligation and does not intend to update or comment on forward-looking statements made on this call, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for, or in isolation from, our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results, may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and on our investor relations website at investor.sumologic.com. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in our earnings release posted on our investor relations website. With that, let me turn the call over to Ramin.

Ramin Sayar -- President and Chief Executive Officer

Thanks, everyone, for joining us today on our third quarter earnings call. We are pleased with the strong results we saw this quarter, which exceeded the high end of all of our guided metrics. These results were underpinned by the improving performance that we laid out earlier this year that delivered revenue growth of 20% year over year. We saw strength and good contribution across our enterprise and the mid-market segments in North America, as well as in our international theaters. In addition, we continue to see strong performance and contribution across our global channel partners, namely resellers and MSSPs. Overall, our performance was driven by improving customer growth and the continued adoption of our observability and security portfolio, which leverage many of our new features and enhancements released earlier this year. In fact, this quarter, we saw strong new business and the best expansion we've seen in multiple quarters as our customers continue to increase usage of our platform for both existing and new use cases. Turning to financial highlights, we saw strong top-line performance this quarter, with total revenue of 62 million coming in above the high end of our guidance range.

We ended the quarter with 438 customers, with more than 100K in ARR. This represents a year-over-year increase of 26%. Additionally, our total customer count grew by more than 10% year over year. Looking at the mix of business, we continue to see strong adoption of our full-stack observability suite consisting of logs, metrics, and traces for both new and cross-sell opportunities. In addition, as in previous quarters, security momentum was strong from both new logo and cross-sell opportunities, which contributed to over 50% of new business in the quarter. This was driven by our package security analytics offerings, which target smaller customers who value simplicity by giving them speed and ease of use, whereas our cloud SIEM and SOAR offerings target the larger and more sophisticated enterprise customers who need to transform and modernize the security operations. The market we serve is rapidly growing, being driven by digital transformation across every geography and vertical.

This is leading to new application and cloud infrastructure architectures, and also creates exponential amounts of new machine data each year. Due to the increase in cloud migration and application modernization, as well as the rise in IoT with more connected devices, it's also creating an unprecedent rise in various types of security threats, which have become increasingly harder to identify, given the mountains of data and noise being created. As such, we believe that our cloud-native Continuous Intelligence Platform is the answer to many of these DevSecOps challenges. This is applicable to organizations of all sizes, who are trying to mature and evolve their application in cloud architectures, and/or improve the security posture and practices. Therefore, our platform does three things to help solve these challenges for our customers.

First, ensure application reliability. Second, manage and optimize multicloud infrastructure. And third, secure and protect against modern security threats. With that, now, I'd like to share some of our exciting wins from this quarter where customers were able to leverage our platform to address the opportunities of cloud migration and digital transformation. This quarter, we had our largest seven-figure full-stack observability deal with a leading DevOps enterprise customer in North America.

This customer initially started several years ago with a log analytics solution for the existing customer-facing application and, over time, expanded their usage and scale of Sumo. They are now using us for full-stack observability to gain better visibility and performance, thereby ensuring the reliability of their newly modernized customer-facing application. This new application is based on new microservices architecture and required a massive amount of new instrumentation, which required large-scale metric collection and real-time monitoring and troubleshooting. This strategic cross-sell replaced both the homegrown and a legacy tool, as well as leveraged various open-source collections. Our mid-market sales team landed a high six-figure deal with a fast-growing software company preparing for IPO.

Sumo's DevSecOps strategy and capabilities were selected in order to secure their mission-critical infrastructure and applications. Now, we are monitoring their security events for over 10,000 AWS accounts and providing actionable insights within our platform. Ultimately, they chose Sumo because of our ease of use, out-of-the-box functionality, as well as our platform's differentiated security and controls. However, they also selected Sumo because we were able to simplify and replace a complex homegrown open-source solution, as well as replace a complicated licensing model, thereby lowering their operational costs as they continued to grow and scale. Another new logo win this quarter was a six-figure land with a company who's taking steps to become more digitally focused. As they continued building out their customer-facing apps, they're also leveraging more microservices.

As such, their CISO saw the importance of engineering and security teams working together to ensure both application and infrastructure reliability, as well as security. Because of Sumo's DevSecOps capabilities, we became the clear choice. We're also seeing customers increasingly expand beyond a single use case, as they recognize the benefits of using our DevSecOps platform for engineering, operations, and security teams to address the challenges of observability and security. In APAC, we had a six-figure cross-sell with the international financial services firm with more than 80,000 employees. We initially landed this customer last quarter and they're now using Sumo for a new mobile banking application in a different geography.

They required a single solution for both security and observability, which is why they selected our security analytics and full-stack observability capabilities. Not only do our customers see the differentiation of Sumo but we continue to receive industry recognition for our modern cloud-native platform. In fact, this quarter our Cloud SOAR was named leader in the GigaOm Radar Report for SOAR. In addition, Sumo Logic was selected by Amazon Web Services as a 2021 ISV Global Partner of the Year at AWS re:Invent last week. This recent award recognized Sumo Logic's performance and commitment to helping customers drive innovation as they embark on their digital transformation, modern application, and cloud migration initiatives. Moving on, I like talking about our annual global user conference, Illuminate 2021, and some of the product announcements that were made at this event to extend the capabilities of our platform for both observability and security. For observability, we announced improvements to our monitoring and troubleshooting capabilities with new alert response features, new real-time data sources integrations, as well as additional enhancements to support open source. These enhancements include a new open source for AWS OpenTelemetry Distro, making it even easier for customers to run their workloads on AWS, as well as Red Hat OpenShift Operators through the Red Hat Marketplace.

In addition, we announced integration of Sensu Go to our platform and introduced Sensu Go Plus, which further enhances the monitoring-as-code capabilities of Sensu Go and allows real-time insights for all data types for improved troubleshooting, reliability, and security. Moving on to our security suite. This clear that complexity continues to be a challenge with today's modern enterprise. As such, they need a cloud-native solution that integrates that detection and alert response solutions that leverage their existing tools and technologies like EDR and XDR. Therefore, we announced that Sumo Logic is expanding our security vision for openness with enhancements to our cloud security analytics and monitoring solution.

These further help improve our customer's ability to address modern workload protection, open XDR, which goes out-of-the-box XDR threat detection and response, as well as expanded security insights with new and updated applications. I'm proud of everything that Sumo team has accomplished, especially on the product innovation front. In fact, I believe our product portfolio has never been stronger with our leading cloud log analytics, cloud SIEM and SOAR, as well as the growing adoption of a differentiated full-stack observability suite. This underscores my confidence that we have the right technology and strategy to capture meaningful share this fast-growing market.

However, it's clear to me that we need additional levels of operational rigor and focus to drive a real acceleration of growth in the business. As a result, besides a continued focus on product innovation investments, we're also enhancing our go-to-market efforts to make sure that we have the appropriate experience, coverage, and resources in place to scale our business. In fact, I'm delighted that we recently announced Lynne Doherty as president in worldwide field operations. Lynne brings with her extensive sales and go-to-market leadership experience, with a track record of scaling operations at multiple large tech companies. Under her leadership, we are continuing to invest in our go-to-market strategy to capture the large and growing market opportunity in front of us.

Given her experience, I'm confident that she will help us gain additional market share by focusing our go-to-market motion, strengthen our global expansion and partner ecosystem, and helping Sumo scale for its next leg of growth. In addition, I'm happy to announce that Stewart Grierson will be joining our executive leadership team as our new chief financial officer on Monday, December 13, 2021. I'm particularly excited because Stewart has been leading finance and operations with high-growth private and public companies for more than 25 years. He is joining Sumo Logic from Delphix, a leader in DevOps software, where he served as CFO. Previously, Stewart spent eight years as CFO of ArcSight, the first generation SIEM leader.

This experience in two of the primary markets that Sumo Logic competes in, security and observability, will allow Stewart to quickly come up to speed on the company's strategy and operational plans. In summary, it was an excellent quarter. The investments we have been making in our platform improve operational rigor, and our go-to-market evolution are yielding results. I'm delighted with the addition of Lynne and Stewart. I look forward to partnering with them as we continue to implement more operational improvements in order to scale and capture the large observability and security market opportunity. With that, it is my pleasure to now have Jennifer McCord, our VP of finance and chief accounting officer, provide more details on our financial results in Q3 and our outlook for Q4.

Jennifer McCord -- Vice President of Finance and Chief Accounting Officer

Thanks, Ramin, and thanks, everyone, for joining us on the call. Please excuse my voice today. I lost it over the weekend, and it hasn't quite come back. Turning into the results for the quarter, I'd like to start with a brief summary of the financial highlights of the quarter and then go into more detail on each topic. First, as Ramin mentioned, we saw a robust performance in the quarter with year-over-year revenue growth of over 20%.

We saw strong new business and the best expansion we've seen in multiple quarters, driven by continued adoption of new capabilities and multiple use cases for a differentiated platform. This adoption in strength was seen across enterprise, mid-market, international, and channel. Next, we saw strong customer activity across billings, RPO, and logo counts. And finally, we saw improving margin performance, including acquisitions and planned investments made in the quarter. We continue to have strong customer growth as our total customer count grew over 10% year over year, which was the fastest growth we've seen in the last seven quarters.

We continue to see opportunities across various industries and customer sizes. We ended this quarter with 438 customers with more than 100K in annualized recurring revenue or ARR. This was a year-over-year increase of 26% and outpaced revenue growth. It's the fastest growth we've seen in the last six quarters.As expected, our dollar-based net retention remained a few percentage points below 110% this quarter. As a reminder, our dollar-based net retention is a four-quarter average.

However, we saw an improvement in the in-quarter retention with noticeable strength across our total customer base. While we do expect modest variability in this metric, over the medium to long-term, we expected an increase in dollar-based net retention. Turning to billings, calculated billings for the trailing 12-month period totaled $263.1 million, up 30% year over year as our customer base continues to leverage the capabilities of our platform. Recall that we look at calculated billings over a trailing 12-month period, as this metric can fluctuate from quarter to quarter, due to the timing of our renewals and billings duration for larger customers.

Therefore, we believe a 12-month measurement period best reflects the fundamentals of our business. Moving to remaining performance obligation or RPO, we're continuing to see our new customers make larger and long-term commitments due to our differentiated multi-use case platform and flexible licensing model. This quarter's RPO increased 25% year over year, driven by the size and duration of new and expansion contracts due to the continued opportunities around cloud migration, application modernization, and security transformation. Our average land continues to be approximately two years in length. In addition, current RPO increases 39% year over year, as the investments in our portfolio expansion continue to drive early upgrades and renewal. Now, I'll review the income statement in more detail.

As a reminder and unless otherwise noted, all metrics are non-GAAP. A reconciliation of GAAP to non-GAAP measures is included in our earnings release and posted on our website. We delivered compelling performance in the third quarter, total revenue increased to $62 million, up 20% year over year. Third-quarter revenue, excluding our largest customer, was $57.4 million, up 19% year over year. Recall that we break out our largest customer because of variability in seasonality that is historically different from the rest of our business.

However, more recently, their activity has become more aligned with our overall business, making the segmentation less relevant. Moving on to gross margins, in the third quarter, we saw 73% gross margin, compared to 77% in the year-ago period. The year-over-year decline was driven by a faster ramp in new features that have not been fully optimized on our cloud-based platform. However, we can see the benefits of that optimization in the current quarter's margin, which improves compared to the prior quarter's gross margin of 72%. As we continue to evolve our platform and provide new capabilities and products, there can be some variation in gross margin based on the timing of these releases and adoption by our customers. Moving on to operating expenses.

Sales and marketing expense was $29.5 million, or 48% of revenue, compared to 43% of revenue in the year-ago period. Given our significant platform enhancements and large market opportunity for both greenfield and existing customers, we're continuing to invest in go-to-market coverage, capacity, and new market expansion going forward. Research and development expense was $18.6 million or 30% of revenue, compared to 25% of revenue in the year-ago period. The increase as a percent of revenue was driven by our continued focus on product innovation as investments, including our acquisition of DFLabs and Sensu as the majority of their employees are in R&D functions. General and administrative expense was $11.3 million, or 18% of revenue, compared to 14% of revenue in the year-ago period.

G&A expense includes increased costs associated with operating as a public company. In total, our operating margin was negative 22% or 2 percentage points above the high end of our guidance range, driven by revenue outperformance in the quarter. We continue to be pleased with the margin outperformance after our continued investments in platform enhancements, acquisitions, and go-to-market capabilities. Net loss in the quarter was $13.3 million or $0.12 per diluted share based on approximately 110.4 million weighted average diluted shares outstanding. Turning to our balance sheet and cash flow, we ended the period with $362.1 million in cash and marketable securities. Free cash flow in the quarter was negative $13.2 million, or negative 21% of revenue, compared to negative 36% in the year-ago period. Now, turning to guidance. For the full fiscal year 2022, we're increasing our full-year guidance to reflect Q3 reported results.

We remain optimistic about our future as we continue to evolve and improve our go-to-market capabilities under new leadership. We expect total revenue of 238.8 million to 239.8 million, representing a growth rate of 18% year over year. Revenue excluding our largest customer of 222.8 million to 223.8 million, representing a growth rate of 19% year over year. Non-GAAP operating loss of 53 million to 52.5 million, or an operating loss of 22%, and non-GAAP loss per share of $0.51 to $0.50 on approximately 108.5 million weighted average shares outstanding. For Q4, we expect total revenue of 63.7 million to 64.7 million, or a growth rate of 18% to 20% year over year; revenue, excluding our largest customer of 59.5 million to 60.5 million. This represents a growth rate of 17% to 19% year over year. Non-GAAP operating loss of 15.9 million to 15.4 million, or an operating loss of 25% to 24%, and non-GAAP loss per share of $0.17 on approximately 112 million weighted average shares outstanding. In summary, it was a strong quarter as we saw a 20% revenue growth year over year. Customer activity is continuing to improve with compelling growth in logo counts, billings, and RPO.

We delivered revenue and margin outperformance while continuing to make investments in our platform and go-to-market capabilities. These results give us confidence that the investments we've been making are delivering results, and we'll continue to expand our efforts to capture the growing market opportunity in front of us. We remain excited about the opportunity for continued durable growth, as evidenced by our differentiated Continuous Intelligence Platform, which has helped our customers ensure application reliability, manage and optimize multicloud infrastructure, and secure and protect against modern security threats. With that, Ramin and I are happy to take any of your questions. Operator?

Questions & Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Matt Swanson -- RBC Capital Markets -- Analyst

Great. Thank you. This is actually Matt Swanson on for Matt. First off, just congratulations to Sumo, as well as Stewart on the hire.

And then maybe for the questions, switching to another hire, if we could focus on Lynne Doherty. It was great to see the North American issues from last quarter with the elongated sales cycles, and some of the close rates since that they really got cleaned up. First, is that kind of what you saw from the quarter? And then any changes you feel that she might make early on, maybe from her past experience on any change to go-to-market or the strategic outlook?

Ramin Sayar -- President and Chief Executive Officer

Great. Thanks, Matt. This is Ramin. First of all, we're also delighted to have Stewart and Lynne join us.

In particular, with respect to the question around last quarter, we had a few quite -- few deals that we had technically won, and the commercials were a little bit delayed. We did not see that trend in the Q3 time period. We saw strong performance in Q3, driven by North America and rebound, so to speak, if you want to refer to it with some of those transactions that we talked about. But more importantly, we saw a strong contribution from our mid-market business, cross-sells, and upsells because of the portfolio investments we've been making, and overall contributed to the strong quarter. The second part of your question in terms of the changes, this has been an evolution for us as we've been, you know, continuing to enhance and refine and simplify our go-to-market focus, and the addition of Lynne, and now Stewart, will help bring in that operational rigor, discipline, and scale experience so that we can continue and invest for the future quarters of durable growth.

Matt Swanson -- RBC Capital Markets -- Analyst

Yeah. That's super helpful. And then maybe as my second question, Ramin, it was great to see another strong quarter for security, and I know digital transformation, that's been a driver for you. There's always these conversations about digital transformation, security transformation, you have chicken and the egg, which comes first.

But it seems like you're really sets the stage for faster growth from DevSecOps as kind of like an overall philosophy of people trying to, you know, make changes on both sides that, one, it needs to become more collaborative. Are you seeing your customer base? I mean, obviously, you're seeing traction in security, but it is also people starting to understand kind of the strength of the unified platform more as they're going through these transformations?

Ramin Sayar -- President and Chief Executive Officer

Yeah. Good question. Sometimes it's hard to delineate whether digital transformation or the threat and risk of security modernization is driving some of those, particularly in the large enterprise, right? But I will say that these are distinct markets. These are different selling motions.

They include different practitioners and buyers. This is something that Sumo has been doing for more than 10 years, selling to these distinct separate markets. I think what you're pointing out is the need and desire to have ability for security operations and DevOps teams to be able to better collaborate with each other, and Sumo Logic is a logical choice with a single cloud-native platform that provides that today.

Matt Swanson -- RBC Capital Markets -- Analyst

Perfect. Thank you.

Operator

Our next question is from Derrick Wood with Cowen and Co. Please proceed with your question.

Andrew Sherman -- Cowen and Company -- Analyst

Oh, great. Thanks. It's Andrew on for Derrick. Congrats on the strong quarter.

Jennifer, on the net rev retention, you mentioned it is few points below 110. How are you feeling about getting that back to over 115? What leverage do you have to get there, and over what timeframe should we think about this?

Jennifer McCord -- Vice President of Finance and Chief Accounting Officer

Yeah. Hi, Andrew. Again, I apologize for my voice. Dollar-based net retention did come in below 110 this quarter, which we expected.

As a reminder, it is a four-quarter average, which can obscure the improvement that we are seeing. As I mentioned in my prepared remarks, the incurred retention did increase, and we're encouraged with the momentum that we're seeing across our total customer base, as we noted in the metrics that we gave. Gross retention continues to improve due to the investments in our product portfolio, which we're seeing a lot of early upgrades and renewals with our customers. This is one of the best quarters of expansion that we've had. But because of the four-quarter average, it will take some time to normalize for you to see that.

Andrew Sherman -- Cowen and Company -- Analyst

Fair enough. And, Ramin, last quarter, you talked about 25% growth in fully ramped enterprise reps. Just wanted to check how that's trending currently and how the ramp to productivity is going for new reps?

Ramin Sayar -- President and Chief Executive Officer

Yeah. I mean, I think we all are facing the global labor market challenges. You know, we're continuing to invest domestically and internationally. You know, in North America, we've been adding in the mid-market, as well as in the enterprise, and also getting, you know, better coverage and capacity outside of North America theaters.

Andrew Sherman -- Cowen and Company -- Analyst

Great. Thanks, guys.

Operator

Our next question is from Sanjit Singh with Morgan Stanley. Please proceed with your question.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the question, and congrats on a solid quarter. I want to talk a little bit just about overall growth, and then trajectory of that growth. So, Jennifer, I think you mentioned that, you know, the trailing 12-month billings number came in at 30%. I look at your RPO, your current RPO, I think, was up 39% year over year by my calculations.

And so, you know, kind of square that with the revenue growth, which is sort of straddling 20%. Does that imply that, you know, as quarter sort of progress into 2022 that you should be seeing that acceleration in revenue to converge with the billings growth rates and the RPO growth rates that we are seeing? Or do you think this is kind of more execution, more coming out of a pandemic that still needs to be done to get back to those higher levels of growth?

Jennifer McCord -- Vice President of Finance and Chief Accounting Officer

So, I can start with Ramin. Hi, Sanjit. So, yeah -- I mean, as you mentioned, the current RPO was up 39%. You know, what we're seeing is customers are upgrading earlier and extending their contract duration with us rather than co-terming as they're continuing to commit to the cloud platform.

You know, we're happy to see that both current and total RPO is growing faster than revenue. There isn't a reason to believe that that shouldn't converge with revenue over time. But, you know, as we've mentioned, there's still some work that we have to do with the executives coming on board. So --

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. And I also hope you start to -- get your voice some rest, and I hope you start to feel better. So, I'll take my next question to Ramin, which I guess the other sort of possibility on the product side beyond security is like -- because like there's -- the path is moving forward with the observability strategy. I was wondering if you could frame out, Ramin, if you look at your sort of core log analytics customers, you know, for that IT ops team, what percentage of that core log analytics customers has adopted observability, like how much -- how penetrated are we on that, and what do you think you can get those penetrations to with the sort of observability cross-sell over time?

Ramin Sayar -- President and Chief Executive Officer

Yeah. So, Sanjit, good to hear your voice. Thanks for joining us. So, I think first and foremost, it's important that we realize that the investments that we are making in the product portfolio manifest itself to not only the install-base question and penetration but also net new business, right? This past quarter, we saw a strong contribution for best -- both new logos, as well as cross-sells. On the cross-sells, I highlighted one of the examples where a traditional large enterprise DevOps customer and scaling and using Sumo for logs, and as they modernize their new platform to Kubernetes and they rolled it out to production, they realized their existing tools, and do it yourself wasn't scaling.

So, that's when they logically expanded and moved into the full-stack observability. Why we highlight that one or I bring it up is, that's a pretty repeatable process that we see when customers deploy new -- the new microservices of Kubernetes architecture, and they want to scale up and scale out. It's a logical extension of replacing some homegrown or point tools. I just can't handle that. So, now to the other part of the question, I think we have -- we're in the early innings of that cross-sell, and we have a lot to do in the install base to be able to penetrate with respect to the cross-sell for observability, let alone security.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. Appreciate it. Thank you, Ramin.

Operator

Our next question is from Mark Murphy with JPMorgan. Please proceed with your question.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yeah. Thank you very much. I'll add my congrats. So, Ramin, I think, you commented that 50% of bookings related to security use cases in Q3, if I heard that correctly.

And so, I'm just wondering how you see that trending going forward, especially with Lynne, taking over field operations? I believe she has had more experience in security than in observability and monitoring in the past.

Ramin Sayar -- President and Chief Executive Officer

Yeah. I mean, I think this is not about necessarily Lynne's leadership in a domain. This is about the larger market opportunity that we see in front of us. And Stewart has experienced both in observability and security.

But I think what we saw in Q3, in terms of the contribution of security, was equally balanced by strong contribution in observability for both new business from new logos, as well as cross-sell. I think also what we highlighted in the past is proximately a third of our new business came from multi-use case right out of the gates, whether that was upgrade and renewal or a brand new business. So, I think that will continue to be kind of a mix that we will see going forward as we've shown and highlighted in Q3, as well as Q2.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

OK. So, remaining somewhere around 50% good forward. For the upcoming fiscal year, you commented as well that you are investing in go-to-market, of course, that's good to see. Can you approximate what the quota-carrying sales headcount increase could look like that Lynne would be targeting for that -- for the next fiscal year?

Ramin Sayar -- President and Chief Executive Officer

Mark, you got to remember, she's 30 days into the job, right? And so, been doing a very good job so far in the first 30 days understanding the business and coming up to speed. So, that coupled with Stewart starting next week, we got some work ahead of us to get prepared for that for next year. So, at this point, can't really approximate, I need to bring these new leaders in, get them on board, and together develop our plans and strategy going forward. I will say, this is a continuation of stuff that we put in place and our commitment to accelerate growth, and more importantly, to what we've already delivered on, we feel there's a huge market for us.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

OK. One final one, Ramin. If you look back on the move that you made to the Cloud Flex Credits pricing model, I think it was about 18 months ago.

Ramin Sayar -- President and Chief Executive Officer

Yup. 

Mark Murphy -- JPMorgan Chase and Company -- Analyst

So, you've got to based on DPM, and you know it's allowing completely unlimited users. Any comments on just how well you think that has resonated with the customer base? Is that any -- is there like -- is there a delayed reaction to that that could be helping you now? Or it has -- that driven an increase in the number of active users you've got per customer?

Ramin Sayar -- President and Chief Executive Officer

Yeah. Great question. Well, I mean, we've commented before on the volume of growth in terms of data that we're analyzing every day, which is exceeding an exabyte. And I think a lot of that has to do with the continued innovation on tiered analytics, new features, but also because that complements the desire for a more appropriate licensing model that mirrors the economic model of analytics and cloud. Now, to the second part of your question, from an ARR perspective, approximately -- actually greater than 80% of our ARR is on the new credits model.

And a lot of that -- the contract duration you'll see is 24 months or more when they upgrade. So, that gives us strong and occasion that they like the new features, they like the new Cloud Flex licensing model with credits, and allows them time to right-size, supersize, and expand on different features. So, we know we have the right product capabilities, the lights -- the right strategy for DevSecOps, and the right benefit customers expect in this area.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Thank you very much.

Operator

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

Kamil Mielczarek -- William Blair and Company -- Analyst

Thanks, and congrats on the good quarter. It's good to see the progress you're making, the partner ecosystem. Can you provide more detail on how partner contributions today compare to contributions made pre-COVID when you -- especially when you started making some of these MSP investments? And as you look at the longer term, how do you think about the investments you can make to further leverage this channel?

Ramin Sayar -- President and Chief Executive Officer

Sure. Kamil, good to hear your voice. Hope you're well. So, you know, I think from an ecosystem perspective is important to delineate when we talk about partners.

The ISV ecosystem, which we continue to make strong traction and integrations to provide customers the flexibility and choice they need to get access to the data sources. That's why we put a lot of effort in the security monitoring and observability efforts around open XDR, as an example, or efforts we've done with the DevOps space with Atlassian and others. Now, on the go-to-market side, as you look at how we sell through and with, MSPs continues to be a massive opportunity as they themselves need to transform a lot of cases. The tools that they've been cobbling together or tried to build it themselves where they can easily flip on Sumo to address not only security but even observability use cases to grow their stickiness and retention with their business, right? So, we continue -- we'll continue to invest in that and drive that globally. Third, as it pertains to the standard two-tier distribution model, with respect to distributors and VARs, that's an area where we think we can get better coverage, particularly international and new markets being fed, LatAm and international. So, those will continue to be a focus for us going forward, and Lynne's experience there will be helpful for us as we continue to scale out next year.

Now, for Q3 --

Kamil Mielczarek -- William Blair and Company -- Analyst

That's great.

Ramin Sayar -- President and Chief Executive Officer

For Q3, to your question, more than 50% of our business -- approximately 50% of our business came to the channel. Last thing I will leave you with --

Kamil Mielczarek -- William Blair and Company -- Analyst

OK. And -- yeah, go ahead, sorry.

Ramin Sayar -- President and Chief Executive Officer

Kamil, last thing I'll leave you with is, in recognition of that, we were also awarded by AWS the ISV Global Partner of the Year Award last week because of the help that we've been giving them and the ecosystem of ISVs and VARs to transform their business. So, we're pretty proud of that.

Kamil Mielczarek -- William Blair and Company -- Analyst

Yeah. It's great to see that award, and thanks for all the color, Ramin, it's really thorough. If I could just quickly follow up on competition. So, we've seen some of your competitors introduce features over the past year or two that help their customers actually limit the amount of data that's being loaded onto their platforms and help better control the costs that the enterprises are seeing.

Are you seeing any changes in competition generally? And had the conversations around pricing changed in the most -- in the last one or two quarters? And really quickly, can you maybe update us on how win rates have been trending?

Ramin Sayar -- President and Chief Executive Officer

Well, I'll say, "Welcome to the game." Sumo has been doing this for -- since our existence. We've always provided the flexibility around an average utilization or usage with respect to ingest, and that's when we move to the credit-based model, that's when we introduce tiered licensing, and more changes. So, I think that's been a core focus and strategy for us for a long time. In the new credit-base model, customers can see real-time their ability to -- real-time their usage and their ability to optimize it versus be billed in the rears and shocked. So, unfortunately, a lot of the vendors who are putting some things in to throttle the ingest is because too oftentimes customers are too -- are still surprised and they get that bill, that shock afterwards. So, what we have seen in the marketplace is customers want transparency.

They want choice. They want flexibility. And that's what Sumo has always provided. So, we underscore our benefit for customers, and I think that's been something that we'll continue to see going forward.

As it pertains to more broadly speaking in the marketplace, nothing in terms of competitive dynamics have changed last quarter versus previous quarters.

Kamil Mielczarek -- William Blair and Company -- Analyst

That's good to hear, and I get to see the attraction of the new pricing model, so congrats again. Thanks for taking my question.

Operator

Our next question is from Blair Abernethy with Rosenblatt Securities. Please proceed with your question.

Blair Abernethy -- Rosenblatt Securities -- Analyst

Thanks very much, and nice quarter, guys. Ramin, just two quick things. I wonder if you could just give us an update on Sensu Go, in particular, Go Plus. I know it's really early, but just wondering if you had any early customer feedback?

Ramin Sayar -- President and Chief Executive Officer

Sure, Blair. So, I think it's important to put some context around that. For quite some time Sumo has been committed to open-source -- the open-source community and the ability for customers to be able to leverage a lot of their open-source collection and data pipeline efforts. And that's what Sensu had been doing for quite some time. The addition of Sensu Go Plus as a result that we announced during our conference last quarter was really the ability to connect the backend, so to speak, that provides that ingestion, analysis, dashboarding, alerting, and troubleshooting with the collection of the data pipeline that they've been building.

So, that's the second point. Third point in terms of early feedback, in terms of their existing customers and net new opportunities, it's still in the very short time since we've closed the acquisition and released the integration. But it's been very positive to reinforce their strategy and commitment to the ecosystem being part of Sumo, and secondly the product vision of how those two come together with Sensu Go Plus.

Blair Abernethy -- Rosenblatt Securities -- Analyst

OK. Great. Thank you. And just a quick follow-up on the go-to-market side.

In terms of your new customer lands, what did you see in the quarter in terms of, you know, the customer and average deal sizes for some of these new customers? And, you know, I mean, most still -- mostly greenfield, or what sort of -- what can you characterize as what the new customers are coming in as?

Ramin Sayar -- President and Chief Executive Officer

Well, as I mentioned before, we saw a strong multi-use case from our customers in the quarter. Naturally, when you see about 50% of the new business come from security, you're going to have a higher ASP from security versus the transaction lands on observability, right? However, we saw some very strong performance in upsells and cross-sells, as I highlighted with one of our customers in an enterprise segment moving to full-stack observability. So, that also drove ASP of the observability business up last quarter. But I still think that, you know, this is still very much a best-of-breed market, greenfield opportunities prevail, and we have a great market opportunity to go capture with improvements that we've released and brought to market this year.

Blair Abernethy -- Rosenblatt Securities -- Analyst

Great. Thank you.

Operator

Our last question is from Gray Powell with BTIG. Please proceed with your question.

Gray Powell -- BTIG -- Analyst

All right. Great. Thanks for working in. Yeah, a lot of my questions have been asked and answered, but I did have one left.

So, I should be curious like one of the bigger themes that we often hear about in our work on the security space is on managed detection and response, and it's just mainly because, you know, your typical company, particularly in an end market, they just don't have the headcount they need on the security side. So, can you maybe just kind of talk about how you play into that theme, and what kind of exposure you have to MDR providers?

Ramin Sayar -- President and Chief Executive Officer

Great. So, I mean, I think, if anything, the MDR providers are a partner for us. A lot of the EDR/MDR providers are becoming MSPs and MSSPs, and they need to evolve their offering, that's been a strong go-to-market for us. The second response to that is, as customers want to move from an element manager of endpoint, right, and get a broader holistic view of their infrastructure to cloud to compliance. That's why we did that integration to security analytics, offering that as a stepping stone to the cloud SIEM and/or SOAR opportunities and offerings that we have in the portfolio. So, it's not only an expansion opportunity for the partners but also directly for customers.

So, I think it's a great time to standardize on how the endpoints, firewall, network, and more is collected, and that's what we've been trying to do, and help the ecosystem evolve.

Gray Powell -- BTIG -- Analyst

OK. Great. Thank you very much.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Unknown speaker

Ramin Sayar -- President and Chief Executive Officer

Jennifer McCord -- Vice President of Finance and Chief Accounting Officer

Matt Swanson -- RBC Capital Markets -- Analyst

Andrew Sherman -- Cowen and Company -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Kamil Mielczarek -- William Blair and Company -- Analyst

Blair Abernethy -- Rosenblatt Securities -- Analyst

Gray Powell -- BTIG -- Analyst

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