Dynatrace, Inc.

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynatrace, Inc. Fiscal First Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Michael Bowen, Investor Relations, you may begin your conference.

Thank you, Operator. Good afternoon, and thank you for joining us today to review Dynatrace's first quarter fiscal 2020 financial results. With me on the call today are John Van Sicklen, Chief Executive Officer, and Kevin Burns, Chief Financial Officer. After prepared remarks, we will open up the call for a question and answer session. Before we start... I'd like to draw your attention to the safe harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Act of 1933 as amended and a Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical fact are forward-looking statements, including statements regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the second fiscal quarter and full year 2020. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to cautionary language in today's press release and to our final IPO prospectus. which was filed with the SEC on July 31st, 2019, and our other SEC filings for discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed in a reconciliation of the differences between each non-GAAP financial measure and comparable GAAP financial measure can be found with our first fiscal quarter 2020 earnings press release in the investor relations section of our website at dynatrace.com. With that, I'd like to turn the call over to our Chief Executive Officer, John Van Sicklen. John?

Thanks, Michael. And I'd like to start by thanking all of you for joining us today on our first conference call as a public company. We're excited to have completed our successful IPO on August 1st, This represented an important milestone for Dynatrace and one that further enhances our brand awareness and ability to execute the company's long-term growth strategy. We are also very pleased with the first quarter financial results, where we achieved 43% ARR growth to $438 million and strong total revenue growth driven by subscription and services revenue, which increased 36% year over year. We continue to focus on building a balanced business with strong growth and cash flow for greater durability over time. As this is our first quarter as a public company, I wanted to provide a brief overview of Dynatrace's transformation, our value proposition, and our market opportunity, in addition to providing details on key drivers behind our recent performance. Benetrace is a market-leading software intelligence company, purpose-built for the enterprise cloud. Every company and every industry is transforming into a software business. How they interact with their customers, assure quality experiences, optimize existing revenue streams, and create new ones, success or failure comes down to the software supporting these efforts. Benetrace software intelligence sits at the core of these digital transformations, to assure that this run the business software always works perfectly for every interaction, every transaction, and every user journey. Let's step back a moment and talk about how we got here. Dynatrace is now 14 years old. We spent the first nine years building a category leader in APM, Application Performance Monitoring. In 2014, After sending a dozen of our top product minds off to determine how monitoring would work in the future, we made a bold decision to reinvent our platform from the ground up, and in so doing, refresh our entire business model. This team realized that the cloud would disrupt the entire ITOM world. Everything would change. And if we seized the opportunity, we could redefine the market. Although we were already widely recognized as the APM leader, we decided to disrupt ourselves, and in so doing, disrupt the market. The result was a 2016 launch of Dynatrace, an all-in-one full-stack cloud monitoring platform with a powerful AI engine at the core. With the complexity, scope, and frequency of change these modern cloud ecosystems would experience, we chose to put answers first. versus simply pumping more data on glass and hoping IT teams could keep up. This answers-first approach brings highly differentiated value to our platform use cases of APM, cloud infrastructure monitoring, digital experience management, and AIOps. This new platform has been driving the company's growth ever since. At the end of our June quarter, the new Dynatrace platform comprised 75% of our total ARR, up from 70% at the end of our March quarter, and up from 39% a year ago. The remaining 25% of ARR relates to our classic product set, which continues to actively transition to our Dynatrace platform. We are now five quarters into what we believe is a 10 to 12 quarter transition, and our classic customer to Dynatrace conversion program continues to run ahead of expectations. After launching the new platform, our go-to-market motion has also evolved. We believe our customer acquisition process has become much more efficient, with most customers now discovering and exploring Dynatrace through a frictionless free trial. We then further nurture our land and expand sales process through a growing number of direct enterprise sales resources, value-added resellers, and system integrators. With a platform that instruments and baselines the entire cloud stack automatically, implementation is dramatically streamlined, and we're seeing a growing number of customers expanding beyond the traditional 5% barrier that continues to hinder outdated Gen 2 approaches. At the end of our fiscal Q1, we had 1,578 Dynatrace platform customers, an increase from 1,364 at the end of the prior quarter. Consistent with prior quarters, the majority of these new customers to Dynatrace were net new logos to the business, with the balance converting to Dynatrace from our classic base. And once again, our net expansion rate across all Dynatrace customers was over 120%, consistent now for the past five quarters on increasingly larger customer cohorts. Given our innovative AI-powered platform and streamlined go-to-market strategy, We believe we can capture a meaningful share of the $18 billion in growing TAM we estimate is in front of us. With about 10% of our target 15,000 global enterprise accounts having adopted the Dynatrace platform, Edward Gardner estimates to be only 5% of applications instrumented from an industry perspective versus what we believe is a longer-term target that ranges between 30% and 50%. There's plenty of growth potential to build a very large company over time. And when you add to this both ongoing cloud and application expansion and our ability to add additional platform use cases, we believe there's significant opportunity to further expand our TAM as time goes on. Now let me provide some insights into several new and expansion customers to illustrate our value differentiation along with the power of our land and expand approach. First, one of our new logos in Q1 was a large U.S. government agency that is moving to a hybrid multi-cloud environment as part of an overall IT modernization program to improve access to benefits and services for hundreds of thousands of policyholders. As with many Dynatrace customers, the move to the cloud brings with it an exponential rise in complexity resource-strapped IT organizations. The advanced automation of Dynatrace and the answers-first approach leveraging Davis, our AI engine, has allowed this agency to dramatically reduce performance issues, improve operational efficiency, and accelerate their cloud migration and modernization efforts. As a side note, the U.S. federal market is a relatively new market for us, for which we see tremendous opportunity over time. The next example I'd like to share is an expansion customer, a major European auto manufacturer that has been moving to a hybrid multi-cloud environment spanning across their own data centers, plus AWS, Azure, and Google Cloud Platform. They had been using a competitor's Gen2 APM product and found it inadequate for their new stack environment. It was proving too cumbersome, too manual, and with limited cloud-native observability. Although this customer started with a small taste of Dynatrace for an initial set of workloads several months ago, after experiencing the advanced automation of Dynatrace, their IT team was able to roll out an additional 2,000 hosts and dozens of applications in just a few weeks after acquiring additional licenses. With the continuous intelligent monitoring of Davis, their development and operations teams now focus on building value for their company versus wasting time gazing at dashboards, pouring through logs, or searching for answers to problems that may or may not be impacting users. Bottom line, this auto manufacturers gain greater efficiency, which translates into greater speed for innovation in their digital transformation. The final example I'd like to share is a customer who converted from our classic products to the new Dynatrace platform. This is a company in the business of managing and running a large car auction marketplace. With our Dynatrace offering, they saw an opportunity to modernize their own application and infrastructure environment and shift to Azure. As we did a proof of concept with Dynatrace as part of our conversion process, a number of application teams that we had never been able to access previously became interested. Before the cloud, these teams were separate. But with their new enterprise cloud, these teams were sharing cloud resources and software services. As a result, with the conversion came an upsell to expand coverage to more than two times the workloads, and there's potential for more. This conversion from classic to Dynatrace took only six weeks from start to finish, and that includes the planning and change management process time. This is very common. The time and effort to convert is short, while the value realized from doing so is very compelling. Switching to the product front for a minute, we continue to innovate organically. In Q1, we announced expanded support for Kubernetes, a dynamic container orchestration environment we've automatically instrumented and monitored for some time now. In the quarter, we extended our automatic analysis of Kubernetes performance, now delivering full-stack analysis Kubernetes clusters, their containers, and the application workloads within in a single solution, fully leveraging our AI engine data. In addition, we introduced first-day support for Red Hat OpenShift 4 environments, adding to our Google, AWS, and Azure coverage for Kubernetes, making it easier than ever to continuously observe and manage an enterprise multi-cloud environment. In addition, We extended our observability coverage for hybrid clouds with the announcement of one-agent support for KICS and IMS workloads on IBM mainframes, along with their associated integration and middleware frameworks. Now, Dynatrace customers can maintain their end-to-end visibility from mobile or IoT device through mainframe regions and back. This unique deep application and infrastructure observability allows our mainframe customers to understand the impact of cloud application workloads on expensive mainframe resources and optimize their behavior to better leverage these critical compute resources. With 25 major releases per year and hundreds of minor releases to assure cloud ecosystem currency and compatibility, we continue to increase the capabilities and scope of our market-leading software intelligence platform for our enterprise customers. As we look forward, fiscal 2020 is shaping up to be a very exciting year, and we couldn't be more excited about our future. We have reinvented our business on a fresh new technology stack, ideally suited for today's dynamic multi-clouds. Our shift to subscription is essentially complete. The conversion of our classic customer base is approaching the halfway mark, and the efficiency of our new platform affords us is evident in our strong profitability profile. There is a massive opportunity ahead of us. We plan to capture it with continued commercial investments in sales and marketing and ongoing innovation in R&D. We're excited to now be operating as a public company as we focus on building long-term success for our customers, long-term value for our shareholders, and a great place to work for our employees. With that, let me turn the call over to Kevin Burns, our CFO. Kevin.