Dynatrace, Inc.

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Dynacare third quarter 2020 earnings conference call. At this time, all participants are in a lesson-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 require any further assistance, please press star 0. I would now like to turn the conference over to your moderator today, Michael from Investor Relations. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining us today to review Dynatrace's third 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, including 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 fourth 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 latest Form 10-Q, which was filed with the SEC on November 4, 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 the comparable GAAP financial measure can be found within our third 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. Once again, we are very pleased with the company's quarterly performance, which resulted in third quarter financial results that were better than both our top line and bottom line guidance. I'm especially pleased that ARR once again increased by 44% year on year to $534 million, with our new Dynatrace platform now making up 87% of total ARR, up from 61% from a year ago. Fueled by the continued growth in ARR, our subscription plus services revenue, what we see as the best measure of revenue growth on our P&L, increased by 36% year over year. As we look ahead, we remain optimistic about the business as our new Dynatrace platform continues to be adopted by a growing number of new enterprise cloud customers. And each quarter, we are proving our ability to expand rapidly within this growing customer base. Our optimism is reflected in the increased top line guidance that Kevin will detail in a few minutes. We are also proud that our solid growth is complemented by strong operating margins. We run an efficient business with gross margins at 84% and a non-GAAP operating margin of 26% for the third quarter. 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 powerful 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. Now let me turn to four major advancements made in our fiscal Q3. New logo expansion, customer net expansion once they're on our new Dynatrace platform, continued progress moving classic customers to Dynatrace, and finally, innovation highlights around platform expansion and differentiation. I'll take each of these in order, starting with business from new customers. This past quarter, we saw a sizable uptick in new customers on the Dynatrace platform. 380 new customers joined the Dynatrace platform family in Q3, bringing our total Dynatrace platform customer count to 2,208, nearly double from a year ago. Q3 was a strong conversion quarter for us, with twice as many customers converting as we converted a year ago. And even with this strong conversion uptick, half of the customer growth added to our Dynatrace platform came from customers that are new logos to the franchise. Nearly every new customer win, whether net new or converted, is participated 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 their enterprise cloud while visibility and situational awareness are declining. To regain control and bridge the complexity gap, more and more enterprises are turning to Dynatrace. For example, a large US bank recently became a Dynatrace customer after concluding that its current APM solution could not keep up with the dynamic nature and scale of its microservices-based environment. Prior to Dynatrace, the bank experienced excessive service disruptions in applications running in their AWS cloud, which negatively impacted the bank's business and put their brand loyalty at risk. Like most of our customers, The bank ran a trial of Dynatrace to prove ease of use, scalability, and the value of our advanced automation. The bank was immediately impressed by the Davis AI engine at the core of our platform and its ability to automatically map the entire full stack topology of their hybrid cloud and precisely identify problems and their root cause in real time, right out of the box. At the conclusion of their trial, the bank became a seven-figure ARR customer with plenty of room for expansion over time. I should also mention that shortly after starting with Dynatrace, the bank began to use our digital business analytics module announced in October to understand and reverse its drop in conversion rates for bringing new customers to the bank. This is a great example of the power of our all-in-one approach with end-to-end observability from user experience through infrastructure put in business context to drive better digital business outcomes. As we've said, once customers are on the new Dynatrace platform, we see rapid expansion, which is evidenced by the solid growth in our ARR that I referenced earlier. Once again in Q3, our net expansion rate exceeded 120%. This is the seventh straight quarter we've exceeded this mark. As we're 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 self-adjusting baselines, the automatic problem determination prioritized by business impact all contribute to rapid rollout and the high value for low-effort economics our customers enjoy. 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 US-based SaaS company that standardized on the Dynatrace platform and within two quarters completely replaced their previous Gen 2 supplier who missed the market transition to the enterprise cloud. Earlier this year, the SaaS company was struggling to effectively manage their four different data centers with their previous solution. and foresaw even greater issues with their evolution to a Kubernetes orchestrated cloud. After a successful trial last summer, the company decided to start by switching to Dynatrace in one of their data centers. Based on the rapid deployment of Dynatrace and success they achieved as a result of gaining real-time answers and insights into performance degradations and anomalies, thanks to Davis, they decided to expand their Dynatrace footprint and make Dynatrace the company standard for both the remaining data center migrations, as well as their upcoming move to a dynamic web scale cloud. This expansion came after only two quarters from the initial land deal with Dynatrace. Turning it to our continued progress on the conversion front, which is the movement of our classic APM customer base to the broader Dynatrace software intelligence platform, classic ARR has now declined to $69 million. That's down $25 million from a quarter ago and now represents only 13% of total company ARR. As we've discussed, we started this conversion program in earnest seven 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're 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. While it takes more time to find new stack buyers, it yields a much more valuable customer in the strategic go-forward growth segment of their business, their enterprise cloud. As an example of a converting customer this past quarter, a large U.S.-based airline converted from our classic tooling to the Dynatrace software intelligence platform. As the airline transformed from legacy systems to a modern multi-cloud architecture, they realized that the disparate monitoring tools, both commercial and open source, that they had acquired over the years were costing them precious time, money, and resource. This led to excessive manual configuration, the need to stitch together data from multiple sources, and operating war rooms to get the answers they needed. It's part of an initiative to gain observability into their entire environment. including all airport terminal kiosks, the airline began a trial of the all-in-one Dynatrace software intelligence platform. Again, it was advanced automation and full-stack observability at scale across a wide array of IAAS, CAS, and container technologies that were the key factors in the successful displacement of competing tools. Our all-in-one platform included provides the airline both the modern observability it requires and the real-time precise answers required to address degradations in performance and business impacting anomalies. After a successful trial, the airline converted from our classic tooling to the new Dynatrace platform, and the larger footprint led to an expanded seven-figure ARR contract. We are excited to be well along the way with the conversion process and look forward to wrapping this up over the next few quarters. As I've said before, 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 distraction ends and they focus 100% of their efforts on landing new customers and expanding them across more applications and modules. Let me finish by highlighting several of the innovations we announced recently, which we believe will further improve our ability to win new customers, expand with existing customers, and incent remaining classic customers to convert to Dynatrace. In early December, we announced the extension of our software intelligence platform to support AWS hybrid clouds and provide seamless support across all AWS public regions and outposts. Due to regulatory or data security requirements, many enterprise customers want flexibility with regard to where their observability data resides. With a flexible deployment model, Dynatrace offers a single platform built on cloud-native architecture that seamlessly supports any configuration of AWS hybrid cloud environment, including both VMware Cloud on AWS Outposts and the AWS native variant of Outposts. Dynatrace AWS customers will benefit from the regular automatic updates and automated administration of the Dynatrace platform while still meeting the strict governance, security, and latency requirements of on-premise workloads. This reduces the complexity, costs, and risk associated with alternative cloud observability approaches that do not support the flexible deployment modes of AWS and the other major IaaS and PaaS providers. During Q3, we also announced Keptn, an open source pluggable control plane to advance the industry's movement toward autonomous clouds. Keptn is an outcome of the knowledge and expertise gained as Dynatrace adopted a no-ops environment itself internally. In talking with CIOs and CTOs of many of our enterprise customers, it's become clear that advanced levels of automation and intelligence are required to bridge the growing gap between limited IT resources and the exponential increase in scale and complexity of dynamic enterprise clouds and the growing cloud native workloads now being deployed. We purpose-built our new Dynatrace platform with a powerful, explainable AI engine at the core to identify anomalies and degradations with precise root cause to trigger automatic self-healing actions. But what's been missing has been a simple, repeatable way to harness this potential and leverage it for a true no ops approach. Kepton provides the automation and orchestration of the processes and tools needed for continuous delivery and automated operations for cloud native environments. And we have a growing number of customers now engaged in leveraging Kepton and Dynatrace expertise to advance no ops within their enterprise cloud environments. Finally, Just two to three weeks ago, we announced that we've been collaborating with Google, Microsoft, and other industry leaders on the OpenTelemetry project to shape the future of open standard-based observability. Having been a leader in distributed transaction tracing at scale for years, Dynatrace is contributing know-how and manpower in this area to the project. As OpenTelemetry gains momentum, OpenTel data will serve as an additional data source for that further extends the breadth of our cloud observability, which in turn feeds Davis our AI engine, providing our customers with richer insights and automatic actions across a wider landscape as dynamic multi-clouds continue to evolve and scale. We see this open source standard as a benefit to the market and another potential accelerant to the adoption and expansion of Dynatrace. In summary, our innovation engine continues to differentiate our solutions and expand our market opportunity. Our Dynatrace customer base continues to increase as dynamic multi-clouds and workloads expand and scale. New logos are being added, and existing customers are converting and expanding on the new platform, both at a healthy pace. And our execution across our key performance indicators remains strong. With that, let me turn the call over to Kevin Burns for a deeper review of our financials. Kevin?