Dynatrace, Inc.

Greetings, and welcome to Dynatrace's first quarter fiscal 2023 earnings call. At this time, all participants are in a listen-only 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Noelle Tarras, Vice President, Industrial Relations.

Please go ahead, Ms. Tarras. Thanks, Operator. Good morning, everyone, and thank you for joining Dynatrace's first quarter fiscal 2023 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 these 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 August 3, 2022. Dynatrace 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. Unless otherwise noted, the growth rate we discussed today are non-GAAP, reflecting constant currency growth. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and financial presentation under the events section of our website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Rick? Thanks, Noelle, and good morning, everyone. Thank you for joining us on today's call. Let me start by saying that I am proud of the Dynatrace team and our solid first quarter performance. In particular, we saw a continuation of our mid-30s growth in adjusted ARR again in the first quarter at 34% year-over-year. Subscription revenue came in at $250 million, an increase of 32% year-over-year in constant currency. And non-GAAP operating income was $60 million, or 23% of revenue. This is a testament to the strength of our market the significant value of our platform, and the ongoing durability of our business model, which combined enable us to run a business that delivers high growth with strong profitability and free cash flow. Kevin will share more details about our Q1 performance and guidance in a moment. In the meantime, I'd like to share my view of current market trends, our platform leadership, and our operational approach to the remainder of this fiscal year. Let me start with the underlying market opportunity and trends that have been fueling our growth today. As we've said in the past, digital transformation has become ubiquitous. Observability as well as application security solutions are still at an early stage of evolution and yet are rapidly becoming essential elements of successful cloud deployments. In our estimation, the current economic challenges will drive an even higher priority for digital transformation initiatives given the demand for greater efficiency of IT resources. But cloud deployments typically yield data that is exploding in volume and complexity, which companies are simply not equipped to handle with internally built solutions. This is driving an enormous market opportunity in its availability. Dynatrace's ability to drive greater efficiency at lower cost places us near the top of the strategic IT priority list. Now more than ever, and as our customers widely proclaim, organizations need Dynatrace. Based on these fundamentals, we are confident that the digital transformation trend will continue to fuel our growth for many years to come. Our durable enterprise customer base, coupled with our recurring subscription revenue model, provide us with relative resiliency even in an uncertain economic environment. This is a growth market, and as our Q1 results illustrate, we are a growth company. At the same time, we are obviously not immune to the rapidly evolving macro environment, which we saw primarily in the form of elongated sales cycles in the latter half of June. We saw this most notably in our new logo close rate during the quarter, with 135 added, consistent with the first quarter of last year. For our installed base, we delivered our 17th straight quarter of a net expansion rate greater than 120%. Our existing customers view us as an essential partner to their ecosystem and are eager to expand their usage of Dynatrace given the proven value we provide. As a testament to this, our average ARR per customer has now grown to over $300,000. In updating our guidance, we believe it's prudent to assume that this economic uncertainty continues through the balance of our fiscal year. Our expectations assume greater conservatism in ARR and top-line growth as a reflection of the macro environment. We continue to be a leader in enterprise observability and are addressing a huge market with tremendous growth opportunities. I will talk further about how we intend to operationalize this plan in a moment. But before doing so, I'd like to re-emphasize our platform differentiation and why Dynatrace continues to grow at a rapid rate. Digital transformation is, of course, not just oriented to resource efficiency and offloading workload management. Organizations depend on software for essentially every facet of their operations to deliver products, facilitate commerce, drive supply chain efficiency, engage with employees, and much more. To achieve these goals, organizations expect their software to work perfectly. To help customers enable this performance, our approach to observability is radically different. Dynatrace provides not a single product, but rather a comprehensive software intelligence platform covering end-to-end observability with sophisticated AIOps capabilities unmatched in our industry. It combines the deepest and broadest multi-cloud observability solution with continuous runtime application security. We focus on global 15,000 enterprise accounts where data volume and complexity are highest and where our scale and automation enable them to run their businesses most effectively. This is the power of Dynatrace and why customers choose us. Whereas other approaches deliver dashboards, Dynatrace delivers precise answers and intelligent automation from data to help customers navigate the massive complexity that comes with digital transformation initiatives. It enables our customers to deliver flawless and secure digital interactions by providing broad-based situational awareness of their cloud ecosystems at all times and enabling them to take action immediately to ensure maximum uptime and performance. And over time, customers will use the intelligence we provide to integrate the Dynatrace platform directly into their application as code for auto remediation. Industry analysts corroborate our leadership position. Recently, Gartner released its annual magic quadrant for application performance monitoring and observability, naming Dynatrace a leader for the 12th consecutive time. And in the Gartner Critical Capabilities for APM and Observability Report, our platform differentiation compared to the competition is even more indelible, with Dynatrace leading in four of six use cases for DevOps and application development, site-reliable engineering and platform ops, IT operations, and digital experience monitoring. I'd like to share a couple of examples of customer wins this quarter that highlight our platform strength. First, a major California insurance company was leveraging a siloed approach to their cloud-first strategy. These tools provided disparate information that was not integrated into their IT services management system. They realized they couldn't measure what they couldn't see, and they were unable to improve what they couldn't measure. By consolidating these tools through deployment of an end-to-end observability solution from Dynatrace, this customer dramatically enhanced its visibility in their entire ecosystem. This resulted in vastly improved operational management and AI-driven insights while reducing costs. Let's take another example. A large supermarket chain with an extremely complex ecosystem, dependent upon dozens of SaaS and third-party tools, was looking for comprehensive visibility across their environment. During the evaluation process, they suffered a production system outage impacting their loyalty program. Dynatrace was able to identify the root cause and resolve the issue within minutes rather than hours or days, avoiding lost revenue, wasted marketing dollars, and damage to the customer loyalty they had invested to build. They selected Dynatrace because of the precision of our answers. and our enablement of immediate action to ensure maximum uptime and performance. These are just two examples of the trends that are widespread throughout our customer base. Our customers' jobs have never been harder. Now more than ever, it is critical for them to make observability an integral part of every cloud deployment. At Dynatrace, we refer to this as cloud done right. We've never been in a stronger position to make consistent leverage the Dynatrace platform a reality across a wide array of cloud environments. We also have ample runway to continue to expand our footprint within our installed base. We have only just begun to gain meaningful momentum with our application security module. Application security was a brand new market for us less than two years ago, and just this quarter, We closed a number of six-figure deals, including Banime, UPS, and Kroger. And our R&D team continues its fervid commitment to innovation. We believe that the log market is ripe for disruption. We remain on track to release a dramatically enhanced logging capability based on a massively scalable data store and platform evolution we called Grail in the back half of this year. Customers frequently tell us they are generally dissatisfied with the functionality, visibility, and cost of their current logging tools, and they want a highly-performance and cost-effective log monitoring solution that scales with the largest businesses. Customers also see enormous value in treating logs as part of an end-to-end observability solution and data set, rather than a siloed tool. We recently closed a seven-figure deal with a major national bank to replace their existing log and security offer, and a major retailer invested in air log capabilities. We look forward to sharing more details about this offering in the coming months. This brings me to my final topic, and that is our plan to navigate through the current economic backdrop. I recently attended an event in which the speaker reminded a number of CEOs of the common auto racing expression that drivers win races in the turns. Unlike straightaways, which are more predictable, curves upset the status quo. Turns can bring the unexpected. They are where races are often won or lost. Gardner talks about winning in the turns as a time when leaders must sharpen decision-making capabilities, manage resources strategically, and be ready to take the lead. I believe there are some parallels that we can apply the current macro backdrop, and we are being thoughtful and strategic about how we execute in this term. There are several actions we are taking to support our long-term growth objectives, enable us to gain market share, and accelerate platform leadership while maintaining healthy margins. First, we have adjusted increases in headcount and OPEX through the balance of the year to deliver operating margins in line with our prior guidance to reflect the revised top-line model. We still plan to add nearly 800 people during FY23, reflecting our commitment to ongoing investments in our growth. Innovation and go-to-market expansion remain top priorities for us and will continue to invest most aggressively in these strategic areas. Through the end of July, we grew our direct sales force by 30% year-over-year, and we plan to continue to grow the team to support our growth objectives, We are also focused on building more high-quality pipeline, rapidly qualifying leads, and infusing even more rigor into our deal validation process. On the indirect side, we will continue to expand relationships with the three major hyperscalers for increased leverage and sales cycle acceleration. We'll also continue to expand our relationships with global system integrators. Last quarter, we announced that Deloitte had selected Dynatrace to build observability into their digital transformation practice, and we expect to share similar announcements with other system integrators in the future. Overall, we have proven our discipline in delivering growth in challenging environments while managing top to bottom line in a balanced way, and we plan to continue to execute in this fashion looking ahead. In closing, Q1 was a solid start even amidst macro uncertainty. We remain highly confident in our market opportunity, the resiliency of our enterprise customer base, and our platform leadership. Expect us to continue to innovate with passion, which is paramount to our future growth and core to our culture. We plan to use this period to increase differentiation from our competitors. We're going to manage prudently from a financial perspective, and we intend to invest thoughtfully and strategic opportunities to emerge even stronger competitively than before. With that, let me turn the call over to Kevin.