Dynatrace, Inc.

Greetings. Welcome to Dynatrace's fiscal third quarter 2023 earnings call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Noel Farris, Vice President of Investor Relations. Noel, you may now begin.

Good morning, and thank you for joining Dynatrace's third quarter fiscal 2023 earnings conference call. Joining me on today's call are Rick McConnell, Chief Executive Officer, and Jim Benson, 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 and economic conditions. 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 view on February 1, 2023. 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 rates 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. I'm very pleased with the team's execution this past quarter amidst a difficult macro backdrop. Dynatrace's strong third quarter results solidly beat expectations on the top and bottom line. Adjusted ARR growth and constant currency subscription revenue growth were both 29% year over year. Non-GAAP operating margin in the third quarter was 27%. And free cash flow margin on a trailing 12-month basis was also 27% of revenue. These results continue to demonstrate our ability to run a balanced business that delivers high growth coupled with strong bottom line performance. They are a testament to the strength of our market, the significant customer value of our platform, and the ongoing durability of our business model. Jim will share more details about our Q3 performance and guidance in a moment. In the meantime, I'd like to share my view of the current market environment, our platform leadership and differentiation, and our investment priorities to support future growth. To start, our market opportunity has never been stronger. We recently conducted an independent global survey of 1,300 CIOs and senior DevOps managers, 90% of whom indicated that digital transformation within their organization has accelerated in the past 12 months. They also said that their DevOps teams spend on average over 30% of their time on manual tasks involving code quality issues and security vulnerabilities, which reduces the time spent on innovation. These research findings support our perspective that observability is increasingly moving from optional to mandatory. Digital transformation, and in particular cloud modernization initiatives, continue to grow rapidly. Consequently, the volume of data is exploding, as is its complexity, making manual troubleshooting and analytics based on dashboards nearly impossible. Organizations need answers and intelligent automation from data to streamline their processes and maximize employee productivity. They expect Dynatrace to provide deep situational awareness to keep their businesses operating while radically improving their innovation, efficiency, and responsiveness. As a result, our solutions are becoming an indispensable part of our customers' cloud ecosystems. It is worth noting that the hyperscalers, AWS, Google Cloud, and Microsoft, have started to speak more broadly about an increased focus from customers on cloud optimization as an element of their digital transformation initiatives. This is a trend that directly benefits Dynatrace. Cloud optimization is about ensuring that cloud deployments deliver a compelling ROI. It's about effectively managing the exploding number of cloud workloads to ensure high availability and resource efficiency. Dynatrace facilitates such optimizations by providing trusted insights based on causal AI-powered analytics and automation to enable substantially higher software reliability. This is reflected in our mantra of cloud done right, and it is consistent with companies' efforts to work smarter in the cloud. Our ability to provide insight and visibility, drive efficiencies, and optimize spending across our customers' IT ecosystems is unique. Industry analysts consistently agree. As we previously shared, we were selected as a leader in the Gartner Magic Quadrant for APN and observability, as well as the ISG provider lens for cloud-native observability and security. Then in December, Dynatrace received the highest score overall in the Forrester 2022 Wave for AIOps report, topping all other solution providers reviewed. The author later published a blog saying, quote, the vendor best able to demonstrate a strong and differentiating offering across all 35 capabilities was Dynatrace, end quote. And we continue to invest in our innovation engine to further differentiate ourselves and enhance our leadership position. So turning to our roadmap for R&D innovation, I'd like to talk next about three focal areas. The first is increased automation, including AIOps, DevOps, DevSecOps, and the concept of shift left. Our customers aspire to deliver a software environment that works perfectly and one with an exceptional user experience. We already enable customers to move away from manual monitoring and dashboarding to automated answers. The next step is to increasingly integrate the Dynatrace platform directly into code to allow proactive, automated remediation of issues before they become visible to end users. The second is real-time data management and analytics with GRAIL. AIOps and automation are the foundation to manage, process, store, and analyze data in real time, keeping all data, including traces, metrics, logs, real user data, open telemetry, et cetera, in context is mission critical. This requires us to store and manage petabytes of customer data, and it mandates highly efficient analytics against that data in near real time. With our October launch of Grail, that are massively parallel processing data lake house, purpose-built for observability and AppSec use cases, we now have the core technology in place to deliver against this sizable challenge. It's still early, yet we are now engaged in over 160 active POCs and a growing community of paying customers for our first use case of log management and analytics. This remains a market that we believe is ripe for disruption through improved performance and scale, as well as the deep inclusion of logs with other observability data types in AIOps analyses. We closed several six-figure deals in the quarter, and we've only just started. That leads me to our third R&D focal area, application security. Observability and AppSec are inextricably convergent. driven by the growing need for organizations to better understand threat and vulnerability activity inside their environments. Customers are looking to operationalize the observability data being generated to understand and assess these threats in real time in their infrastructure and apps. We added 85 new AppSec customers in the quarter, again, including several six-figure deals. Our application security offering in Grail are excellent examples of our product team's ability to anticipate where the market is going and develop solutions that meet customer needs. Later this month in Las Vegas, we are looking forward to hosting Perform, our first in-person global customer conference since 2020. We plan to share our most comprehensive set of technology and platform announcements today, which will set the tone for the year ahead. Investors are invited to attend in person or tune in virtually to our main stage presentations. And members of our leadership team will be on hand for a moderated investor Q&A breakout session. In addition to our relentless commitment to innovation, we also continue to advance our go-to-market efforts. In particular, we have grown our direct sales force by nearly 20% year over year, while at the same time gaining leverage and scale by dramatically increasing our focus and investment in partners, most notably with hyperscalers and global system integrators, or GSIs. In addition to the formal alliance agreement between Deloitte and Dynatrace we announced last May, we have expanded our relationship with DXC as well as eight other strategic GSIs that are striving to help customers digitally transform their businesses and reduce cloud complexity. Our objective is to participate in digital transformation projects earlier in the purchasing cycle and in so doing enable customers to establish more resilient cloud deployments from the start. Strong partnerships are consequently a critical element for us to construct a flywheel of momentum in new logo growth, as well as expansion in our installed base. As I mentioned previously, we also continue to enhance our pricing and packaging structure, which we believe will help unlock the full potential of the Dynatrace platform and accelerate expansion. Our installed base has significant growth potential amidst a rapidly growing solution portfolio, and we believe a more extensible and simplified licensing model will help us capture that opportunity. Our Dynatrace platform subscription or DPS model is already used by roughly 100 of our largest customers and enables an ARR-accretive, frictionless licensing experience through a committed spend with flexible usage across the Dynatrace solution set. To emphasize the power of these investment priorities in delivering customer value, I'd like to share some recent wins to highlight why organizations choose Dynatrace. We partnered with AWS to land a seven-figure, three-year deal with a major airline. They are leveraging six of our modules, including logs on Grail, having discovered that their existing dashboard tool provided little value on Cyber Monday due to blind spots and unpredictable cloud resource spikes. Now the customer has insights with root cause analysis across their workloads and can more effectively and proactively solve problems with AI and automation. We also landed an eight-figure multi-year deal with a large US insurance company that is transitioning to SAS and leveraging AWS. This company had been dealing with a recurring SEV1 issue impacting tens of thousands of insurance agents. In the past, the company's application would cease to work multiple times a year for hours at a time, affecting agents, policyholders, IT resources, and future customers. The company estimated that the cost for downtime was millions of dollars per year. With Dynatrace, they quickly found the root cause of the highly complex problem, eliminating application downtime, saving teams from additional wasted time and helping increase customer satisfaction. Another customer, a major bank, expanded its existing seven-figure commitment with us, bringing its total annual recurring revenue up to an eight-figure relationship. Due to Dynatrace's ability to scale, and drive efficiency across its entire technology ecosystem. And finally, one of the largest European producers of premium and luxury automobiles in charge of multiple car and truck brands signed a seven-figure land deal using DPS licensing, placing Dynatrace as the number one solution for observability within their internal marketplace. With this agreement in place, all their brands can simply sign on for observability with a pre-negotiated rate card without the time-consuming negotiations and approval chain. This is a great example of the frictionless expansion opportunity that the DPS model can create for us. In closing, I am grateful to our customers for their feedback on the significant value that we provide in achieving their business objectives, not to mention the positive relationships they have with our team. We have proven our ability to deliver growth in a challenging environment while consistently managing the business top to bottom line in a balanced way. We remain highly motivated by our market opportunity as well as our platform leadership, and we continue to innovate to meet our customers' evolving needs to further differentiate ourselves in the market. And finally, we remain focused on solid execution, even through turbulent economic conditions, to be in an even stronger position when the macro environment improves. With that, let me turn the call over to Jim. Jim, it is great to have you on board for your first Dynatrace earnings call.