Dynatrace, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Dynatrace second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you would require further assistance, please press star 0 on your telephone. I would now like to hand the conference over to your speaker today. Mr. Michael Bowen, Investor Relations, please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining us today to review Dynatrace's second quarter fiscal 2020 financial results. With me on the call today are John Van Sickland, Chief Executive Officer, and Kevin Barnes, 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 Exchange Act of 1933 as amended and 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 third 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 the cautionary language in today's press release and to our Form 10-Q, which was filed with the SEC on September 5, 2019. and our other SEC filings for a 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 and a reconciliation of the differences between each non-GAAP financial measure and a comparable GAAP financial measure can be found within our second fiscal quarter 2020 earnings press release in the investor relations section of our website at dynastrace.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. We are very pleased with the company's performance in the second quarter, which resulted in financial results that were better than our top line and bottom line guidance. I'm especially pleased that ARR increased by a robust 44% year-on-year to $471 million, with our new Dynatrace platform now making up 80% of total ARR, up from 75% a quarter ago. Fueled by continued strong growth in ARR, our subscription plus services revenue, what we see as the best measure of growth on our P&L increased by 37% year over year, up from 36% last quarter. As we look ahead, we remain optimistic about the business outlook as our new Dynatrace platform continues to be adopted by a growing number of new enterprise customers. And each quarter, we are proving our ability to expand rapidly within our growing customer base. This optimism is reflected in the increased top line guidance that Kevin will detail in a few minutes. We're also proud that our rapid growth is complemented by strong operating margins. Not only did our top line results exceed our Q2 guidance, our bottom line delivered stronger than expected results as well. We run a very efficient business with gross margin at 83% and EBITDA at 25%. We continue to be cash flow positive on an operating basis while investing across the board in growth. As we've said before, we believe in running a balanced business. a unique combination of growth and profitability at scale. We believe this balance, combined with our focus on investing aggressively in commercial expansion and continuous innovation, provides Dynatrace with attractive durability over the long term. Let me now turn to four major advancements made in our fiscal Q2. New logo expansion, customer net expansion once they are on our new Dynatrace platform, continued progress moving classic customers to Dynatrace, and finally, innovation highlights around platform and TAM expansion. I'll take each of these in order, starting with business from new customers. Once again, during the quarter, over 200 new customers have joined the Dynatrace platform family. We are now up to 1,828 customers on the new platform, an increase of 250 from a quarter ago, and more than double from a year ago. Consistent with prior quarters, the majority of these customers continue to be net new logos to our business. Nearly every new customer win is precipitated by the realization that their cloud program is disrupting their ability to keep up with the accelerating complexity of the ecosystem supporting their digital transformation. More and more run-the-business applications are being deployed into the enterprise cloud while visibility and situational awareness are declining. To regain control and bridge the complexity gap, more and more enterprises are finding us through word of mouth or via our frictionless free trial. For example, a major insurer in the UK has been in the process of digital transformation. They are leveraging a multi-cloud environment that includes new go-to-market customer applications. After looking at a number of cloud monitoring solutions, the insurer selected Dynatrace as they determined it was the only platform that could show them the cost of outages in the context of application performance and how degradations in performance impacted their call center operations. During their proof of concept, something we do with all new customers to demonstrate the Dynatrace difference, they discovered the power of Dynatrace's explainable AI engine, Davis, which continually learns what normal performance is, processing billions of dependencies in real time to serve up precise answers that were beyond their team's ability to quickly identify. Davis's ability to provide precise root cause problem identification for faster decision making, greater optimization of IT resources, and better business outcomes led to the selection of the Dynatrace software intelligence platform. Once customers are on the new Dynatrace platform, we continue to see rapid expansion which is evidenced by the rapid growth in our ARR that I referenced earlier. Once again in Q2, our net expansion rate comfortably exceeded 120%. This is the sixth straight quarter we've exceeded this mark. As we are still in the early innings of Dynatrace adoption, most of our expansion is driven by customers deploying our platform into new application stacks. The automatic continuous discovery and instrumentation the automatic self-adjusting baselines, the automatic problem determination prioritized by business impact all contribute to rapid rollout and high value for low effort economics our customers enjoy. This is something that we expect to continue benefiting from in the foreseeable future as we barely scratched the surface of cloud application expansion. In addition, we are also beginning to see increased adoption of additional platform modules as customers recognize the power of our broader platform capabilities. Let me share an example of one of the many meaningful customer expansions during the quarter. A large US-based consumer products company that completed a seven-figure expansion just five months after their initial land purchase of the Dynatrace platform. After a bad experience with their previous supplier, a Gen 2 player who missed the market transition to the enterprise cloud The company acquired its initial licenses for Dynatrace in the second quarter of this calendar year for an initial set of applications running in Azure. This first purchase was to prove the value they saw in Dynatrace in the proof of concept and to test our digital experience module for mobile and web use in production. Five months later, after a very successful initial rollout, the customer completed a seven-figure deal for a broader set of tier one applications that included expanded use of our DIMM module. Based on cloud optimization savings alone, the company calculated a payback for their Dynatrace investment of less than six months. On the conversion front, the movement of our classic APM customer base to the broader Dynatrace software intelligence platform, conversions continue to accelerate. Plastic ARR has now declined to $94 million, down $17 million from a quarter ago, and now only represents 20% of total company ARR. As we've discussed, we started this conversion program in earnest six quarters ago, with approximately $200 million in ARR to convert. We've been successful in moving our classic customer base to the new Dynatrace platform because virtually every company has new enterprise cloud initiatives. We are not simply upgrading from one product set to a new version. Our conversions typically involve a shift from legacy stacks to new stack cloud environments and a move from perpetual licensing to more predictable subscriptions. While it takes more time to find new stack buyers and transition licensing models, it yields a much more valuable customer in the strategic go-forward growth segment of their business, their enterprise cloud. We believe the added sales time and effort we've been spending on a near-term perspective is well worth it over the long term, as we have transitioned our own business to drive sustainable growth and predictability. As an example of a converting customer, this past quarter, a Fortune 100 brick-and-mortar retailer and customer of our classic product set signed a mid-six-figure contract to convert to the Dynatrace software intelligence platform, with plenty of opportunity to grow into multiple seven figures over time as they expand their cloud initiative. Previously, the customer had a low urgency to change, as our classic offering was serving their needs well for current enterprise applications. But when new management came on board and prioritized digital transformation, their needs and urgency quickly changed. The company rapidly transitioned from third-party developed applications run in a traditional data center to in-house developed applications run in a new enterprise cloud. Dynatrace not only fit the new stack requirements perfectly, it proved invaluable to the company in getting up and running quickly and successfully across a very large hybrid e-commerce cloud environment at all layers of the stack. Network, infrastructure, applications, and user experience. The Dynatrace platform's automatic install, self-learning baselining, and in-product chat enable the company to meet a tight time frame for implementation for its new applications and underlying enterprise cloud. This story and many more like it illustrate that as every company becomes a software company and transitions from old stack to new stack, the demand for Dynatrace to enable this transformation continues to grow. We are very pleased that we are over halfway through the conversion process and believe we will substantially complete this process over the next four quarters. This is particularly exciting for us for two reasons. First, we've proven our ability to expand rapidly with customers once they are on the broader Dynatrace platform. And second, we believe the completion of this process will further improve the productivity of our sales organization as the conversion distractions end and they can refocus on landing new customers and expanding them across more applications and more use cases. Let me finish by highlighting the expansion of our Dynatrace platform itself, which we believe will further improve our ability to win new customers, expand with existing customers, and incent classic customers to convert to Dynatrace. Earlier this month, we announced an important new purpose-built module to the Dynatrace all-in-one platform. Digital Business Analytics. Monitoring cloud infrastructure and applications is not simply about metrics, logs, and traces. It's about assuring better business outcomes, whether that be measured by user experience, conversion rates, increased revenue, or enhanced brand loyalty. With digital business analytics, Dynatrace now connects best-in-class cloud infrastructure and application observability with key business analytic data, such as conversion rates, revenue by product and geography, segmentation by channel, abandonment rates, by page or path, and more. And with our powerful AI engine Davis at the core of our platform, Dynatrace Digital Business Analytics instantly surfaces answers to degradations and anomalies with precise problem determination across the entire delivery chain so that human action can be taken rapidly to resolve issues before users and revenue are impacted. A number of our early adopter customers are using this functionality today, including fashion retailer Talbots. They have publicly shared how they've been able to get real-time insights and how business outcomes, such as product and cart, checkout review, and shipping and billing, are impacted by application performance. Dynatrace provides answers to the underlying issues affecting user journeys, enabling them to optimize user experience and improve conversion rates. Don Hall, Talbot's manager of e-commerce support, summarized the outcome as, quote, this has changed how we work, with our operations team now working closer with the merchandising team and other parts of the business to drive improved business outcomes, end quote. While others are still working to pull together full-stack observability, we delivered full-stack observability at enterprise scale four years ago, and are moving ahead to higher levels of business value as we extend the capabilities of our software intelligence platform. We're excited about the initial reception to and adoption of this new business analytic module, and we plan to further build out a complete set of analytics and integrations with adjacent business analytics players over the next several quarters. Over time, we believe digital business analytics we'll expand our total addressable market by several billion dollars as we enter the $24 billion analytics and business intelligence market as defined by Gartner. In addition to adding new modules to the Dynatrace platform, we continue to expand existing platform capabilities as well. One of the most powerful brought to market in Q2 was a doubling of capacity of a Dynatrace cluster, which now scales to 50,000 hosts per cluster. And we also added support for the clustering of clusters, including cross-cluster distributed tracing for scalability without limits. Web-scale environments, which were a novelty just a couple years ago, are becoming commonplace as enterprises shift from static on-premise data centers to dynamic multi-cloud architectures with highly distributed microservices workloads. A number of our largest customers from financial services, healthcare, E-commerce and technology are enjoying rapidly scaling Dynatrace environments without compromising high-fidelity observability, smart automation, and real-time intelligence. It really is a tribute to our world-class engineering, led by Vern Greifenator, our CTO and founder, and the next-generation architecture he and his key architects reimagined five years ago, that we continue to raise the bar for software intelligence at scale. So in summary, our execution across our key performance indicators remains strong. We are consistently winning new cloud business against all competitors. We continue to build on our track record of rapidly expanding with customers once they are on the Dynatrace platform. We continue to run ahead of plan on moving classic customers onto the Dynatrace platform. And as I just described, our innovation engine continues to deliver highly differentiated product value for our growing enterprise customer base. Before I conclude, let me say that it's more than just great product and a rapidly growing market that makes a sustainable, world-class company. It's also the team you assemble around you. We've been blessed with the exceptional stewardship from Tomo Bravo. Their counsel, guidance, and support have been invaluable to our success. As we go forward, the role of outside counsel, guidance, and governance will shift to independent board members At time of IPO, we added two outside board members, Steve Lipschatz, CFO of Lytics and prior to that Fleetmatics, and Mike Capone, CEO of Qlik, both accomplished businessmen and directors. We also recently added Jill Ward to our board. She serves on the board of HubSpot and served as a director of Carbon Black and Adaptive Insights, among others. I look forward to their ongoing contributions as we drive value and success for our customers, our shareholders, and our employees. With that, let me turn the call over to Kevin Burns for a review of our financials. Kevin.