Dynatrace, Inc.

Greetings and welcome to the Dynatrace Fiscal First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Noelle Farris, Vice President of Investor Relations. Thank you, Noelle. You may begin.

Good morning, and thank you for joining Dynatrace's first quarter and fiscal 2024 earnings conference call. Joining me today 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. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10-Q that we filed earlier today. The forward-looking statements included in this call represent the company's views on August 2nd, 2023. We assume no obligation to update these statements as a result of new information, future events, or circumstances. Unless otherwise noted, the growth rates we discussed today are non-GAAP, reflecting constant currency growth and, Per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. We provide reconciliations between non-GAAP and GAAP measures in today's earnings press release and in the financial presentation slides posted in 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, Noelle, and good morning, everyone. Thank you for joining us for today's call. We had a solid start to our fiscal year, exceeding the high end of our guidance across all metrics. ARR grew 25% year over year. Subscription revenue increased 27% year over year in constant currency, and non-GAAP operating income was $92 million, or 28% of revenue. These results continue to demonstrate our ability to deliver a powerful combination of top-line growth and profitability. They are a testament to the criticality of observability and application security in the market and the significant value our platform provides to our customers, even as the economic environment continues to impact buying behavior. Jim will share more details about our Q1 performance in a moment. In the meantime, I'd like to share an update on the broader market outlook, customer wins, and recent announcements. Let's start with our market opportunity, which we continue to view as massive and growing. As organizations increasingly rely on multi-cloud and cloud native computing for successful execution of their digital transformation strategies, simplification through observability has become essential. The scale and dynamic nature of modern cloud ecosystems have made them too complex to manage with dashboards, alerts, and manual troubleshooting. Organizations are frustrated with fragmented tools, negative customer experiences, and limited analytics. Dynatrace makes order out of this chaos by enabling customers to have better control of their IT ecosystems and to help combat these pain points. Last quarter, I mentioned several use cases that have become key drivers of customers' purchasing behavior. Among them, organizations purchased Dynatrace because they are looking to deliver highly performant cloud-native infrastructure and applications. They are seeking cost-effective and more insightful log management at scale. They are investing substantial sums to secure their cloud applications. They want to dramatically reduce incidents and downtime. And they are seeking a fully unified observability platform to help drive material cost savings and improved oversight by consolidating the myriad of disconnected tools they are using today. These use cases helped drive new logo growth of 15% in the first quarter on a year-over-year basis and led to a dollar-based net retention of 116%. Some notable customer wins from this quarter include the following. A leading financial software company signed a seven-figure deal through the Azure portal. This customer is in the process of modernizing their environment from legacy virtual machines to Kubernetes. The time and cost associated with triaging incidents and manual troubleshooting in a modern complex environment was a major pain point for them. Now, with full stack observability and logs on GRAIL with Dynatrace, this customer estimates they will save $1.5 million in the first three months of deployment due to greater efficiency, productivity, and higher collaboration across teams. Another seven-figure win in the quarter was with one of the largest satellite television providers. This customer was overwhelmed with the number of alerts and manual troubleshooting their existing monitoring tool provided. They were looking to simplify and reduce inefficiencies as well as get visibility into every aspect of their cloud environment with no blind spots. They have now chosen to standardize on Dynatrace. and a major US oil and gas company signed a significant expansion to add application security to their deployment. After the Log4Shell software vulnerability was identified, they realized they didn't have visibility into what vulnerabilities were either unresolved or reintroduced into their environment. With Dynatrace AppSec, they now have better visibility into their applications and were able to integrate DevOps with DevSecOps. These are just a few examples of the strength of our product offering and the business value that Dynatrace platform provides. As we have often said in the past, we strive to enable our customers to deliver flawless and secure digital interactions. The analytics and automation embedded in our unified observability and security platform are what differentiate us in the market and frequently drive customers to choose Dynatrace over alternative approaches. Last month, After evaluating 19 vendors, Gartner named Dynatrace a leader in the 2023 Magic Quadrant for application performance monitoring and observability, positioning Dynatrace furthest for completeness of vision and highest for ability to execute. This was the 13th straight time that Dynatrace has been in the leader quadrant. We were also ranked number one across all six use cases in the Gartner 2023 Magic critical capabilities for APM and observability report. We believe Dynatrace's position, longevity, and criticality in both reports reflect our ability to execute and anticipate change in this constantly evolving market. I'd like to turn next to two key announcements we made over the past couple of weeks in the areas of hypermodal AI and developer observability, both of which are great examples of our core focus on innovation. First, let's start with hypermodal AI, evolving from a radically different approach to artificial intelligence. Dynatrace Davis is our AI engine that has long been a primary differentiator for us. Dynatrace customers have used Davis AI for years to tie server-side observability with user impact, deterministically reduce hundreds of alerts to single problems, and automate the root cause analysis process in large scale and complex cloud native environments. We've extended our causal AI to security use cases, such as automating risk analysis of vulnerabilities and accelerating investigations and remediation. And we've made our predictive AI more powerful by leveraging machine learning to identify anomalies and forecast future patterns with great precision based on historical behavior. Last year, we extended our predictive AI and causal AI capabilities with even richer context, leveraging our Grail data lake house, extracting precise answers and driving automation from data in real time at massive scale. Last week, we announced the planned addition of a third critical element to our AI architecture and solution set, generative AI, to deliver the industry's first hypermodal artificial intelligence observability offering. Hypermodal AI is the combination of three different AI techniques delivered by Dynatrace, each having a unique value, but with a whole much greater than the sum of the parts. Predictive AI uses models to recommend future actions based on data from the past. Pausal AI analyzes dependencies across massive data sets while retaining an accurate context to deliver fact-based, precise answers and automation. And generative AI provides recommendations on how to solve specific tasks through prompts enriched with automated context of a customer's environment uniquely provided by Dynatrace. Our generative AI capability is named Davis Copilot. Davis Copilot will work with Dynatrace causal and predictive AI to automatically provide recommendations for issue remediation and optimization, create actions, and allow people to use natural language to explore, solve, or complete tasks. Many organizations have announced strategies around generative AI. Our approach, however, goes far beyond simply adding a natural language interface that relies on human intelligence to steer generative AI solutions. Our predictive and causal AI will be designed to feed comprehensive and specific prompts to Davis Copilot to help avoid outages or degradations before they happen and help remediate and resolve active incidents when they arise. We view hypermodal AI as a significant catalyst for customer expansion, increasing both the breadth of end users who can leverage the platform and the creation of workloads. We believe this will lead to higher dollar-based net retention, resulting from more customer cross-sell and up-sell, as well as an increase in the stickiness of the Dynatrace platform. We are also very excited about the ongoing evolution of our platform in the area of developer observability. As we have indicated in the past, we believe that the role of development teams will continue to expand in the observability and application security decision process. In particular, we believe these capabilities will continue to shift left into software development life cycles to enable more productive handling of observability insights. and answers directly in software. And that, in turn, will lead development teams to shift right to take on greater responsibility for successful software operations, including availability and end-user experience. This week, we signed a definitive agreement to acquire Rookout, a Tel Aviv-based developer-first observability platform to further expand our capabilities and investment in this area. In particular, code debugging in production environments has been a major pain point for developers. Traditionally, debugging tools have only addressed issues in pre-production environments, leaving developers without an efficient or secure way to troubleshoot production applications. Rookout's highly differentiated technology allows developers to address issues in live code with privacy controls in place without restarting, redeploying, or adding even more code. We believe the combination of Rookout's debugging technology seamlessly integrated into the Dynatrace platform will be very powerful for our customers. We expected to create a new standard for how engineers improve code quality and deliver better business outcomes by enabling developers to troubleshoot and debug without disruption. In addition to these exciting announcements on product innovation and platform evolution, we've also had some noteworthy announcements on the go-to-market side of the business. Two weeks ago, we announced the expansion of our relationship with Microsoft. We are stepping up our committed spend over a multi-year horizon in anticipation of even more growth through the Azure platform. Together, it will be increasing our joint sales enablement and marketing to accelerate cloud migration and optimization initiatives. Earlier in the quarter, we announced the expansion of our collaboration with Red Hat with new integration capabilities between Dynatrace and Red Hat event-driven Ansible. This is a great example of how Dynatrace turns data into answers that can then be turned into actions. This integration enables customers to automate DevSecOps use cases such as closed-loop remediation and application healing to drive greater operational efficiencies and boost the performance, reliability, and security of their workloads. And we continue to build momentum with the leading strategic global system integrators, or GSIs. We have more than 10 strategic GSIs partnering with us today, and a few, including Deloitte and DXC, have built Dynatrace into their reference architectures. By way of example, sales pipeline contribution from one of our largest ESI partners has more than doubled when compared to last year and continues to show strong momentum. Before I turn the call over to Jim, I'd like to take a moment to discuss our CRO transition. In June, we announced the appointment of Dan Zugelder as our new CRO. Dan is four weeks into his role at Dynatrace, and we are extremely pleased to have him on board. Dan brings deep industry knowledge, having spent his career working at ADP, Dell EMC, and most recently, VMware. He has a strong background in building multi-billion dollar sales organizations, which will be instrumental as Dynatrace plans to scale in our next phase of growth. On behalf of the entire Dynatrace team, I'd like to thank Steve Pace or his dedication and execution as our CRO over the past seven years. His contributions to building a world-class sales organization have positioned Dynatrace for sustainable long-term growth. Steve will be retiring from Dynatrace in early October, and he is actively involved in ensuring a smooth transition. In closing, we had a solid start to a fiscal year, even as ongoing macro headwinds persist. We remain highly confident in our market opportunity, our platform leadership, and the powerful combination of top-line growth and profitability. We are humbled by the third-party validation from Gartner of our product leadership, and we are committed to continuing our delivery of significant innovations and customer value consistent with that leadership. Financially, we will continue to manage our business prudently and invest thoughtfully in those strategic opportunities that we believe put us in a position of strength for the future. We are purposeful and driven by our vision of enabling our customers to deliver a world in which their software works perfectly. We have made great progress, but in the context of an increasingly cloud-based software world in which we can materially improve software performance, and end-user engagement, we have really only just begun. With that, let me turn the call over to Jim.