Dynatrace, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Dynatrace Fiscal Fourth 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 keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. And I'd like to hand the conference over to your speaker for today. Michael, with Investor Relations, please go ahead.

Thank you, Operator. Good morning, and thank you for joining us today to review Dynatrace's fourth quarter and fiscal year 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 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 first fiscal quarter and fiscal year 2021. 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 January 31, 2020, 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 and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter and fiscal year 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 VanSicklen. John?

Good morning, everyone, and thank you for joining us on our Q4 and year-end fiscal 20 earnings call. Since late January, when we last broadcasted a Dynatrace earnings call, the COVID-19 pandemic has dramatically impacted families, communities, and businesses around the world in a way that we never thought possible. It is our hope that everyone is staying healthy and safe and that those who have become ill have a speedy recovery. And of course, our hearts go out to those who have suffered the tragic loss of a loved one. The sudden shift to remote work has caused applications and the clouds they run on to become an even more essential way to provide services, drive revenue, engage customers, and collaborate among teams. We continue to work closely with our customers to help them respond to their rapidly changing workloads and requirements, enabling faster innovation, easier collaboration, and greater efficiency without wasted motion. Despite these challenging times, I believe our strong platform differentiation, balanced business model, and world-class team continue to provide us with a durable growth business. I'd like to reinforce three points this morning. First, the success with which Dynatrace has responded to COVID-19 and what we are seeing across our customer base and market at large. Second, as this marks our fourth earnings call and the end of our fiscal 2020, I'd like to update you on the tremendous progress we've made in both our customer conversion and subscription business model transitions. And third, as our platform becomes increasingly robust across all modules, and automation and AI become critical success factors for dynamic multi-cloud observability. I'd like to update you on some of the platform advances we've recently made and the success of our cross-selling motion of emerging products. This will be an important growth area for us as we look ahead. First, I could not be more proud of how the Dynatrace team responded to the challenges of COVID-19. With a modern SaaS platform and agile workforce, we transitioned to work from home almost overnight and did not miss a beat. We made sure we kept running so our customers could keep running. Not only were we essential to assuring the rapid shift to work from home was successful for our customers around the world, we also provided essential situational awareness to ensure business continuity of run-the-business applications, services, and workloads. for banks, healthcare companies, logistics companies, government portals, and more. So, despite what was essentially a two-week pause during mid-March as the shock of the global pandemic took hold and many of our customers were focused on the health and safety of their employees and establishing their work-from-home programs, we closed a solid Q4 with ARR up 42% year-on-year and subscription and services revenue up 37% year-on-year. Linearity and close rates were generally in line with prior Q4s. New logos were up year-on-year, and our net expansion rate was above 120% for the eighth consecutive quarter. We believe the strength of our results is largely a reflection of this mission-critical nature of our software intelligence platform. Software eating the world has been a powerful multiyear trend that is still in the early innings, and the rapid move to online commerce and work-from-home initiatives have made the uptime and performance of the underlying software applications and infrastructure more important than ever. The Dynatrace platform addresses these pain points, and it is fast to deploy and scale with rapid time to value. We believe, and our customers share this sentiment, that this places Dynatrace near the top of the strategic IT priority list. The strong majority of our ARR, roughly 80% to 85%, is outside of industries more challenged by COVID-19. And we also have strength in surging markets, such as healthcare, e-learning, communications, and government. Our customer base is highly diversified, and we focus on the top 15,000 largest enterprises around the world. This said, we do estimate that approximately 15% to 20% of our ARR is with enterprise customers that we consider to be in industries that are facing headwinds due to the health pandemic, such as travel, hospitality, retail, and automotive. It is prudent to expect that new demand from these industries will be impacted somewhat in the near term. However, at the same time, within these industries, we are typically working with some of the largest and financially healthy companies, and our solution is near the top of their priority list, What we have seen over the past eight weeks has shown us that essential applications and transformation projects continue to move forward, even within industries experiencing headwinds. For example, we did a sizable expansion deal in Italy in late March. This energy company wanted to assure continuous, high-quality service throughout the country, and if issues arose, to proactively address them before service was impacted. In the past, reacting after a failure occurred and service was already disrupted was not unusual. You can imagine, with COVID and mandatory shelter at home, high-quality energy service was an imperative. Dynatrace's rapid automatic rollout and unified AIOps approach to identifying service-impacting issues at time of degradation with precise, actionable answers for rapid remediation made the Dynatrace expansion decision straightforward. Another customer example was an oil company, a new logo to Dynatrace. In the midst of maybe the greatest disruption to the oil business in history, this company determined it was essential to revamp and modernize its commodity trading applications and the technology stack it was running on, a shift to cloud for agility and efficiency for a set of revenue-driving applications and services. They chose Dynatrace because of simplicity, advanced automation, and rapid time to value. It's too early to tell what the specific net impact of COVID-19 will be across our overall customer base and target market. But with a solid Q4 close and fast start to our June quarter, with April bookings a bit stronger than a year ago, we are encouraged that we can generate solid growth even with an assumption that we will continue to operate within a challenging macroeconomic backdrop. Shifting now to our progress converting our customer base and transitioning our business model, FY20 was a fantastic year. We are where we hoped, ahead of schedule. We now have 92% of our ARR on the Dynatrace platform, with only 8% left on our classic product set. We added over 1,000 new customers to the Dynatrace platform this past year, now over 2,300 customers, with the majority continuing to be new logos. As we said before, nearly all these customers use Dynatrace for observing and optimizing cloud workloads. These clouds may be public, they may be hybrid, or what we see more and more often now, they are multi-cloud, multi-public with hybrid backends where critical systems of record and many run-the-business applications still reside. More often than not, Kubernetes is used for container orchestration. And more and more look to multiple DevOps teams utilizing the latest cloud-native techniques to rapidly build, deploy, and manage applications and workloads at scale. With this combination of complexity, dynamism, and frequency of change, only an automatic AI-assisted observability platform that can handle the most complex public and hybrid environments will work. I am very pleased our customers have chosen to modernize with us, and it's exciting to know that we are now part of their current and future digital transformation initiatives. Regarding our business transition to a more predictable subscription model, in Q4, 98% of revenue was subscription or services. Our transition from a classic license business to a subscription business is virtually complete. And we've done this while increasing gross margin to 83% overall and 88% for subscription. With over 90% of our customers on a release no more than 30 days old, our operations and support teams are extremely efficient, giving us more time to drive adoption and success across the Dynatrace base. With the customer conversion and subscription business transitions now behind us, we look forward to driving a more streamlined, one platform SaaS business in the years ahead. We will be even more focused, we will drive more value, and we will remain resilient and durable. Now to our platform. Simply put, we have never been in a stronger position. As a response to COVID-19 is highlighted, applications need to work perfectly at all times to drive employee productivity, ensure optimal customer interaction, guarantee business and transactional continuity, and so on. Work locations may change, workloads may shift, but applications must run flawlessly. Applications are the high ground. It's where the business meets IT. Over the past month, the industry's leading analyst firm, Gartner, simultaneously released their annual APM Magic Quadrant and APM Critical Capabilities Guide. For the 10th consecutive year, Dynatrace is considered a leader, and once again, we were given the highest marks among all competition for vision. In the critical capabilities guide, our platform differentiation compared to competition is even more clear, with Dynatrace leading in five of six categories. To achieve this separation requires a radically different approach to the challenges of modern cloud observability. We've made the bold decisions, but reinventing APM was just a piece of the puzzle. In Q4, we announced expanded capabilities for both our infrastructure-only module and our digital experience module. Over the past year, we have gone from approximately 15% of our customers buying three or more modules from us to over 25%, and that's on a rapidly growing customer base. Our cross-selling muscles are getting stronger. Digital experience has been a popular module extension for us for a few years now. But recently, we have seen a surge in demand for mobile monitoring. Part of this is that we have made it easier than ever to instrument native mobile applications. And we believe part of this is a renewed appreciation for needing to assure that the full stack of cloud services, a complex layering of virtual services and processes, actually deliver the value to the end user that is expected. One of our banking customers recently saw a surge in mobile traffic as their customer base went to shelter in place. They quickly added licenses to cover the surge. Another bank told me they did not expect to see their surge in mobile traffic reduce much, if any, post-COVID. They said COVID has done more to train their customer base on the power and ease of home banking than any campaign they ever ran. With higher degrees of online mobile use likely to be a major outcome of the new normal, our early investments and outstanding functionality in digital experience, especially for mobile, should continue to pay off for us. Our infrastructure-only module is newer for us. It's now maturing as we expand coverage for AWS, Azure, and Google Cloud Platform Services. Unlike alternatives that only place metrics on dashboards, our unique platform capabilities, like AI assistance and automation at scale, strengthen this module significantly. Though early in the adoption ramp, we are very encouraged by the uptake of infrastructure-only, now used by 29% of our customer base. And they love the flexibility to toggle up or down on their own between our deep full-stack APM mode and the lighter, though broader coverage of infrastructure-only mode at a lower cost. I should point out, for those who are new to our story, our full-stack APM module includes both infrastructure monitoring and AIOps, fully unified. And our infrastructure-only module includes log monitoring, network monitoring, and AIOps, also fully unified. We package differently than our competition. Rather than fragment our offering into a list of tools, we take a more holistic approach and solve by use case, going after a larger problem set to drive greater simplicity, efficiency, and value for our customers. Let me summarize. I know I've covered a lot. First, our business has performed very well in the face of unprecedented macro challenges. Though a few of our in-markets may face greater near-term headwinds, we've been very encouraged by overall business trends during April. We believe Dynatrace is well-positioned to continue generating strong growth in an uncertain economic environment due to the fact that we have a differentiated leadership position in a category that is considered near the top of the strategic IT priority list. In addition, we are now a one-platform subscription business. We made tremendous progress this past year converting our base to the new Dynatrace platform and completing our transition away from our classic licensed business. This renewed focus streamlines our go-to-market and builds a more predictable and durable growth business for the long term. With that, let me turn it over to Kevin for a deeper look into our financials and a guide into Q1, in our full year fiscal 2021. Kevin.