Dynatrace, Inc.

Trace's Fiscal Third Quarter 2024 Earnings Call. At this time, all participants will be in 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 from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Noelle Farris, Vice President of Investor Relations. Noelle, you may now begin.

Good morning, and thank you for joining Dynatrace's third quarter 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, 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 was filed earlier today. The forward-looking statements contained in this call represent the company's views on February 8, 2024. 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 rates, and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measure on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the financial results section of our IR website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Our Q3 results of balanced growth, profitability, and free cash flow reflect our continued ability to execute successfully in a dynamic market. ARR grew 21% year over year. Subscription revenue? increased 23% year over year. Non-GAAP operating income increased to $105 million, or 29% of revenue. And we delivered a 25% free cash flow margin on a trailing 12-month basis, or 30% on a pre-tax basis. These results are a testament to our market leadership, the strategic importance of our differentiated platform, and the durability of our business model. Jim will share more details about our Q3 performance and fiscal 2024 guidance in a moment. In the meantime, I would like to discuss the trends we're seeing in the market, highlights from our Perform customer conference last week, and our continued rapid pace of innovation. I'd like to begin with three transformative megatrends that are driving the market. Last week at Perform, we called them waves. First, cloud modernization continues to drive workloads to the cloud. Second, the AI revolution is sweeping across industries with the opportunity for enormous advancements in innovation and productivity. And third, the escalating threat landscape is increasing the need for more sophisticated cybersecurity protection. These megatrends are occurring amidst an increasing focus by organizations to leverage digital transformation to drive business transformation. But they also bring sizable challenges, such as an explosion of data, a massive increase in its complexity, disconnected tools, and a need for better analytics. And it is these challenges, especially with the exponential increase in AI workloads, that have moved observability and application security from optional to mandatory. But not all observability and application security tools are created equal. In this world of containers, microservices, hybrid and multi-cloud environments, as well as limited resources, it is no longer feasible to use dashboards, alerts, and manual triage to manage these workloads. Given this landscape, our approach is radically different in three critical respects. First, the Dynatrace platform enables contextual analytics. We will store all data types, logs, traces, metrics, real user data, business events, and others in Grail, an integrated, highly performant, and massively scalable data store. By keeping all of these data types together in context, we are able to analyze billions of interdependencies across applications, networks, and infrastructure throughout the enterprise. These dependencies are continuously captured, providing virtually instant end-to-end awareness that is not possible to replicate without a unified data store. Our second key differentiator is our hypermodal AI. For over a decade, Dynatrace customers have relied on the predictive and causal AI techniques of our AI engine, Davis. we expect to make our generative AI capabilities available on the platform through Davis Copilot beginning this quarter, thereby bringing the Dynatrace platform to a much wider array of end users. These three AI techniques together deliver a game-changing solution with each making the other iteratively more intelligent. Our third key differentiator is automation. Organizations want broad-based situational awareness and analytics that can lead to an auto remediation of issues. Dynatrace one agent automatically discovers an entire cloud environment, dynamically instruments applications, and consistently learns and updates without human scripting or user configuration. The result is a trusted foundation that supports workflows to automate resource optimization and progressive delivery, eliminating the need for manual troubleshooting. This is especially critical during business impacting incidents. And textual analytics, hypermodal AI, and automation are three key reasons why Dynatrace is considered a visionary leader in the market. And our customers view these elements as essential in enabling them to navigate the challenges brought on by digital transformation, an explosion of generative AI, and the growing threat landscape. These differentiators enable us to deliver actionable answers, rapid resolution, and incident prevention. They also drive purchasing behavior for customers across a variety of use cases, including enterprise-wide tool consolidation, cloud-native application performance, faster software delivery, cost-effective log management at scale, and secure cloud applications. These trends, differentiators, and advantages were certainly top of mind last week at our Perform conference in Las Vegas. It was a tremendously exhilarating event where we hosted over 2,000 people in person. including customers, prospects, and partners, plus thousands more virtually. If you weren't able to participate, I encourage you to watch the replay of our main stage presentations and breakout sessions. We, along with several customers and partners, share insights on how these trends and challenges can present business transformation opportunities for customers especially in the areas of driving innovation, optimizing cost, and mitigating risk. One example of how Dynatrace is helping innovation was from TDPEC. They strive to deliver legendary experiences for their customers, requiring consistently high application availability and performance. They found that by reducing a myriad of tool sets down to one, the team can now focus on driving innovation rather than maintaining complex relationships among tools. Lloyd's Banking Group shared their story of optimizing cost. They have teamed up with Dynatrace to measure and reduce proactively the carbon footprint of their IT ecosystem. Lloyd's Bank is a thought leader in their approach to sustainability, looking to reduce the direct carbon emissions in their operational sectors by at least 75%. Dynatrace has helped Lloyd's assess its IT carbon emissions, see where their sustainable efforts are most impactful, and identify meaningful opportunities to optimize their digital infrastructure. A standout example showcasing our ability to mitigate risk comes from the largest application security win in our history, which we closed in Q3. A leading global payment technology company chose Dynatrace because of our ability to immediately identify impactful common vulnerabilities, provide contextual understanding of criticality, and pinpoint the exact location of their vulnerabilities, something their existing security tooling was not able to do. It is a fantastic mode of confidence in our security product from a very large organization. As customers look for ways to drive innovation, optimize cost, and mitigate risk, they know that consolidating their existing observability tools and standardizing on a unified platform is the optimal way to do it. As such, another great story from Perform last week came from the VP of Engineering at PicPay, Brazil's financial ecosystem app. He shared his experience using Dynatrace to help them achieve platform observability at massive scale. This encompasses 35 million users and hundreds of Kubernetes clusters with thousands of nodes. PicPay is a newer customer for Dynatrace. They realized that using multiple tools is costly and inefficient. With Dynatrace, they gain the benefits of visibility and automation through a single unified platform. PicPay is not alone. We are seeing increased demand in large strategic deals where customers are looking to make broader observability architecture decisions. We believe Dynatrace is in a great position to benefit from this trend given our proven track record of helping customers eliminate siloed tools, significantly improve software availability and performance, reduce cost, and drive organizational innovation and productivity. While these deals are a positive sign of future growth potential, near term these larger deals add a degree of variability as customers require more time to make these strategic decisions. We view this increasing trend to consolidate existing observability tools and standardize them on a unified platform as a significant opportunity for us. As such, we are continuing to invest in strategic go-to-market areas such as GSI partnerships, demand generation, and targeted sales capacity, while also continuing to prioritize investments in R&D. In addition to the frictionless sales motion, that we are driving with hyperscaler partners, we are seeing early positive signs of traction with the investments we've made with GSI partners, such as Accenture, Deloitte, DXC, and Kindred. It was through one such GSI that we closed a seven-figure Q3 win with a major social media platform. The customer was looking to gain end-to-end visibility into their incredibly complex environment. our ability to demonstrate the power of AI and automation to greatly reduce outages while saving cost drove the opportunity. We plan to continue to invest in these partnerships to generate pipeline and gain efficiency as we maintain our focus on scaling the business. We also plan to continue our investment in targeted sales capacity in the fourth quarter, weighting our resources toward the higher end of our target global 15,000 market where the propensity to spend is far greater. We are confident that with the evolution of our go-to-market leadership team, we have the right skills and proven track record to scale the team and build the brand to seize this market opportunity. I'd also like to call out the exciting addition in January of Laura Heisman, the former CMO at VMware as our new chief marketing officer. In addition to our targeted go-to-market investments, we plan to continue investing in our R&D engine to extend our technology leadership position. The team's relentless focus on market-leading innovation was evident last week With a plethora of announcements and new solutions, we unveiled to enhance our platform. First, we announced the availability of Dynatrace AI observability, which enables customers to embrace AI confidently by providing insights into all layers of AI-powered applications, including large language models and generative AI to manage cost, experience, reliability, and security. Second, we announced Dynatrace Open Pipeline to empower customers with full control of data at the point of ingest, helping customers boost security, ease management, and maximize the value of data. And third, we announced Dynatrace Data Observability to help ensure that data collected through external sources outside of our one agent, such as open telemetry, business systems, and through Dynatrace APIs is reliable and accurate for business analytics, smart cloud orchestration, and reliable automation. We believe these platform enhancements provide further monetization opportunities as customers drive more usage, more ingest, more storage, and most notably, more queries and business analytics. Before I turn the call over to Jim, I wanted to comment on our plans to acquire Runecast. Adding Runecast to the platform will extend Dynatrace contextual security protection in analytics with Runecast security posture management. This will enable customers to address the risk of misconfigurations and compliance violations in hybrid and multi-cloud ecosystems based on AI-driven and automated real-time vulnerability assessments. Additionally, it will allow customers to perform threat detection and incident response with full context, detailing their security vulnerabilities, affected applications, and attack factors. We are thrilled to welcome this talented team to our R&D organization. In closing, our Q3 results reflect the ongoing demand for automated observability and application security solutions, the durability of our business model, and our ability to execute successfully in an evolving marketplace. Our unified platform with contextual analytics, hyper-modal AI, and automation differentiates us in the market and positions us well relative to competitive alternatives. We believe the market is moving toward us with a desire for fewer solutions, better insights, and actionable answers leading to rapid incident resolution and prevention. And we plan to continue to invest strategically in go-to-market areas as well as R&D innovation to capture market opportunity and drive ongoing leadership while maintaining our commitment to balance growth, profitability, and free cash flow. Jim, over to you.