Dynatrace, Inc.

Greetings. Welcome to Dynatrace Fiscal Third Quarter 2022 Earnings Call. At this time, all participants are in listening mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Noelle Farris, Vice President, Investor Relations. Noelle, you may now begin.

Thanks, operator. Good morning, everyone, and thank you for joining Dynatrace's third quarter FY22 earnings conference call. With me on the call today are Rick McConnell, Chief Executive Officer, and Kevin Burns, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, such as statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties, depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these uncertainties and risk factors is contained in Dynatrace's filing with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's views on February 2, 2022. SinusTrace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial measures during today's call. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell. Rick?

Thanks, Noel, and good morning, everyone. Thank you for joining us on today's call. I am very excited to be kicking off what I anticipate will be the first of many positive earnings calls as Dynatrace's CEO. First, I'd like to thank John Van Sicklen for his contributions in growing Dynatrace as CEO to nearly $1 billion in ARR. He set the stage for a smooth and seamless transition in leadership for which I'm very grateful. I'm going to cover a lot of ground today, so at the highest level, there are three key messages I'm hoping you take away from today's discussion. First, Dynatrace has established a solid foundation, and we are continuing to fire on all cylinders. Second, Q3 was a very strong quarter, beating expectations across all key operating metrics, and we are raising guidance for FY22. And third, we're leaning further into our sales and marketing as well as R&D investments with the intention to drive accelerated growth. Before talking about our financial performance and how I think about the future of the business, I thought it would be helpful to share with you my primary reasons for joining Dynatrace. First, the addressable market is enormous, over $50 billion and accelerating across all industries, and we've only scratched the surface. Second, Dynatrace's technology is world-class and highly differentiated. Customers and analysts provided me with powerful third-party validation of the strength of Dynatrace and its products, and my recent customer conversations since taking the role have further reinforced this perspective. Third, Dynatrace's financial performance is exceptional and positions us in a very elite group of companies with similar results. With growth in excess of 30% and strong profitability, we are in excellent position to continue investing to deliver ever-increasing value to our customers. I enjoy building market-leading, multi-billion dollar businesses, and this is precisely the opportunity we have in front of us at Dynatrace. And finally, I joined Dynatrace because of the expertise and talent of our people. I admire the vibrancy of the Dynatrace culture, celebrating innovation, collaboration, and customer orientation. In short, this is a company I'm thrilled to be a part of, and my passion and enthusiasm have only grown since starting in mid-December. I'm fired up and looking forward to this next phase of growth. Moving on to our Q3 performance. Let me start by sharing how extremely pleased I am with the team's execution. once again beating guidance across all our key operating metrics. ARR finished at $930 million, up a very strong 32% year-over-year in constant currency. Subscription revenue was $226 million, up 34% year-over-year in constant currency. People often speak of the rule of 40 as exemplifying strong performance in a highly successful SaaS business, with a combination of ARR growth and free cash flow being greater than 40%. On a trailing 12-month basis, we've been operating at a rule of nearly 60, with 32% ARR growth and 27% unlevered free cash flow margins, and this remains the case for our FY22 guidance. Our foundation for sustainable long-term ARR growth continues to be the combination of adding new logos to the Dynatrace platform, plus the ongoing expansion of existing customers. We continue to see strength in both areas. We have added more than 500 new logos to the Dynatrace platform over the past nine months, which at 22% growth is above our historical 15 to 20% goal. During the quarter, We continue to add industry leaders from diverse industries, such as Varian Medical Systems, Janus Capital, the State of Arkansas, and Wendy's. Of equal importance, we are closing larger initial transactions driven by multi-module sales, a key indicator of the value our customers are deriving from our observability platform. Year-to-date, our new logo ARR is up 37% over last year. and 50% of these were three-plus module sales. As to existing customers, Secretaria General de Administración, Marathon Petroleum, and General Motors are a few examples of companies that expanded their Dynatrace investments, contributing to our net expansion rate being above 120% for the 15th consecutive quarter. The consistent execution against the two building blocks of new logo acquisition and net expansion rate has resulted in a sustained 30% plus ARR growth business over the past couple of years, which is a tremendous accomplishment. At the same time, we continue to see healthy bottom line performance in Q3 with 25% non-GAAP operating margins and non-GAAP EPS of 18 cents per diluted share. reflecting our commitment to running a balanced business, even as we invest for future growth. With the strength of our Q3 results and positive outlook ahead, we are increasing our guidance for FY22, as I mentioned, which Kevin will provide more detail on shortly. Now I'd like to shift to how I think about our business moving forward. It would come as no surprise to any of you that digital transformation is at the heart of many global businesses today, with IDC forecasting global spending in this area to exceed $10 trillion over a five-year period. The result, if executed well, is an organization that is better suited to meet its customers' needs, can compete more effectively in an online world, and is equipped to do so more efficiently at lower cost. Digital transformation has become ubiquitous in driving corporate strategy, from customer relationships to supply chain to internal processes and beyond. To execute digital transformation initiatives, organizations are often leveraging modern, ever-changing multi-cloud environments that deliver efficiency and flexibility. But these environments also bring a scale and complexity that's well beyond that of the data center world. Teams need assistance in simplifying the overwhelming volume and complexity of data. To innovate quickly, organizations need what we think of at Dynatrace as answer-driven automation. Not just data, but rather answers from the data that drive automated action. They want to optimize all aspects of their business at every moment in time, anywhere around the globe. And if there is an issue, they need to know it in real time before their customers or partners do. They need to be able to pinpoint the origin of the problem to enable rapid or even automatic resolution. And they want to go further to gain insights and teaser experiences and use the wealth of information flowing through their systems to understand customer behavior and drive better business results, such as increased conversions, higher revenue, and profit optimization. This is the power of Dynatrace. Instead of requiring multiple disparate and disconnected tools and providing petabytes upon petabytes of data, Dynatrace provides a software intelligence platform that makes sense of it all, even in the most complex hybrid and multi-cloud environments. These modern environments demand more than serving up data on dashboards for manual analysis and action. Rather, we provide deep situational awareness to keep businesses operating and to radically improve innovation, efficiency, and responsiveness. Powered by our unique AIOps engine, unified with the deep and broad observability provided by the Dynatrace platform, we deliver the answers companies need to run their businesses most effectively and the automation to do it efficiently. In so doing, we have gone well beyond the capabilities of other in-house or competitive tools to become an indispensable part of our customers' cloud ecosystems. Let me share a couple of examples of how the power of our platform translated into several strategic customer wins for Dynatrace during Q3. One of the largest insurance providers in the US has a goal to digitally transform the insurance industry and make it easier for customers to buy, their distribution teams to sell, and their employees to work. In the midst of their transformation, they found the previous siloed multi-tool approach required far too much manual work and did not provide the answers to allow them to innovate at the speed and quality the business demanded. With Dynatrace, they moved to a single source of truth and AI-driven answers. This freed time for innovation, accelerated their digital transformation, and enabled them to optimize every step of their biggest client-facing application to ensure that their software performed precisely as internal and external customers expected. Another customer, a Fortune 500 global oil and gas company based in Asia, is reshaping its operations to ensure a sustainable future. Their previous monitoring tools and approaches were not designed for modern environments. The scale, speed of change, and complexity of the multi-cloud architecture that is powering their transformation had surpassed these tools' ability to keep up. The customer came to Dynatrace to tame cloud complexity and provide end-to-end visibility and root cause analysis to reduce manual work. By delivering intelligence and automation at enormous scale, We eliminated thousands of alerts in innumerable war rooms, resulting in greater simplification, faster innovation, and more efficient collaboration. As a result, Dynatrace has now become the blueprint for observability across the organization. These are just a couple customer examples. I learn more each day, and with each successful engagement, it reinforces my enthusiasm for Dynatrace and the value we bring to our customers. Near term, our focus will be on continued execution, leveraging what we're doing well, and then finding ways to grow even faster. Consequently, we believe there's an opportunity to modestly increase investment in both sales and marketing as well as R&D to accelerate growth while maintaining healthy profitability, which Kevin will say more about shortly. We've already made great strides in these areas, with quota-carrying reps growing over 30% year over year, partners now influencing more than 50% of our transactions, and brand awareness increasing. The level of interest generated for our PERFORM conference next week is a great indicator of these efforts, with more than 32,000 registered attendees expected, representing over 8,500 organizations, more than half new to Dynatrace. You can also expect that we'll continue to fuel our innovation engine with existing module expansion, new module creation, and platform innovation to enable even more comprehensive views of our customer ecosystems. Our cloud application security module is a great example of our focus on continued innovation to produce substantial customer value as a fundamental element of our software intelligence platform. We're seeing positive early signs of traction and our differentiated approach is worth highlighting. Back in December, as the world raced to protect systems from the Log4j vulnerability, our application security module was able to detect it within minutes of being published. Not only did we detect all instances of the vulnerability across highly distributed multi-cloud environments, but through our AI engine, as well as our associated understanding of the topology and transaction patterns, we helped our customers prioritize application updates and mitigation strategies. Customers using alternative tools had to go through the painful and largely manual process of upgrading their agents and restarting their applications to mitigate log4shell. One customer said, other tools tell us we have a vulnerability. But Dynatrace AppSec tells us everything about what, where, and how to fix it. Another customer told us, it's mind-blowing how Dynatrace application security found the log4j vulnerability before any of our other numerous security products. And yet another said, we've spent hundreds of hours trying to understand our exposure, and once Dynatrace AppSec was enabled, we immediately understood it. With this level of clear value add to customers, it's no surprise that we saw an over 10X jump in POCs during this time. While we don't hope for more vulnerabilities, they have become an unfortunate and common reality. It is still early in Dynatrace's AppSec journey, but I was delighted with the performance of the module, as well as our customer's engagement and response. It offers a strong proof point of our unique offering and leads to our plan to drive ARR growth in this area in FY23 and beyond. It is worth also noting my personal enthusiasm for our opportunity in this area, given my background in application security over the past decade. Before I turn it over to Kevin, I am very pleased to welcome Ambika Kapoor to the Dynatrace board. Ambika has extensive product marketing knowledge and experience from her work at VMware rapid computing in Cisco, and her expertise in this area represents a valuable addition to the already strong breadth of knowledge and experience across this group. In summary, I am delighted with our continued strong performance in Q3 and for the first three quarters of this fiscal year. We are putting our growth, profitability, and cash generation to good use in our investments in innovation, go-to-market, and the world-class talent needed to fuel future growth. I couldn't be more delighted to be part of Dynatrace, and I look forward to meeting many of you in the future. Now, I'll turn the call over to Kevin for more on our Q3 financials and our outlook for the fourth quarter.