Dynatrace, Inc.

Greetings. Welcome to the Dynatrace Fiscal Second Quarter 2025 Earnings Call. At this time, all participants will be in listen-only mode. The 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Noelle Farris, Vice President of Investor Relations. Thank you. You may now begin.

Good morning. And thank you for joining Dynatrace's second quarter fiscal 2025 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 risk factors 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 contained in this call represent the company's views on November 7th, 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, and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures 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. Good morning, everyone. Thank you for joining us for today's call. Our second quarter performance is the result of the strength of our platform and our ability to execute effectively in a dynamic market. ARR grew 19% year-over-year. Subscription revenue increased 20% year-over-year. And trailing 12-month free cash flow margin was 28%. We delivered a strong first half to the fiscal year. I believe the market is increasingly playing to our strengths in AI-driven observability, which we have been delivering for well over a decade. And our Q2 results offer a great proof point. Jim will share more details about our financial performance and guidance in a few moments. But first, I'd like to discuss the trends we're seeing in the observability market, our ongoing commitment to innovation, key customer wins, and the evolution of our go-to-market strategy. To begin, the world's reliance on software is greater than ever. Innovation, modernization, and business resilience are top of mind for business leaders. Downtime and instability can cripple businesses. Organizations are struggling to recruit the required resources to manage their software environments, driving a need for increased productivity. And finally, we all expect exceptional customer experiences, and we hold companies accountable for delivering them. Given this environment, the success and failure of any business today can hinge on its ability to observe and analyze an enormous amount of data and massive increases in its complexity. The staggering amount of data being generated each day, estimated by IDC at over 2.5 quintillion bytes globally, cannot be processed manually. Both the tools and processes that organizations use to keep software running with high performance have to evolve in parallel to keep up with this data explosion. In these incredibly complex environments, we believe that AI-driven observability is no longer optional. Organizations are expected to find issues and resolve incidents before they impact customers. This can't be done efficiently in complex environments through reactive dashboard monitoring. Rather, organizations need to be able to trust answers from an end-to-end observability platform to action issues automatically. This is why organizations turn to Dynatrace. We are maniacally focused on ongoing innovation to deliver a highly differentiated AI driven observability platform. One that we believe delivers unmatched visibility and substantive business value. We began with a massively parallel processing, highly performant data store called Grail to maintain all observability data types. Logs, metrics, traces, real user data, and importantly, business events in context. Braille then enables us to uniquely apply a power of three AI to analyze billions of interconnected data points to deliver answers, not just data and not just dashboards. Finally, we leverage our contextual analytics and AI insights to automate responses and help avoid incidents. I'd like to expand on AI and its particular criticality to observability. In a world trying to understand how to harness the wide-ranging benefits of generative AI, it is important to clarify how our power of three AI works. We begin with causal AI, which analyzes billions of data points to help find the needle in the haystack. This isolates precise issues in software and infrastructure. Causal AI doesn't guess based on correlated data. Rather, it evaluates data points in context to deliver causation-based answers and enables an automated response. Second, predictive AI applies machine learning to take causal AI one step further. It enables the Dynatrace platform to observe changes in a software environment and perform trending forecasting and anomaly detection to optimize performance and ideally prevent or resolve issues before they create business impact. And finally, generative AI brings the Dynatrace platform to a broader group of end users. In particular, it enables the casual user, rather than just a Dynatrace subject matter expert, to derive insights from the platform using natural language that then accesses deterministic answers derived from causal and predictive AI. It is this combination of AI techniques working in unison and leveraging our underlying architecture that truly delivers the power of Dynatrace. Causal and predictive AI have been at the core of the Dynatrace platform for over a decade, and every Dynatrace customer benefits from our continued advancements in these techniques. A final point on innovation is we strive to provide customers with the clarity and power to understand, act, and accelerate their business or mission. Increasingly, organizations aren't just seeking technical insights or root cause analysis. They want to uncover answers and insights locked in their data to transform them into a mission-critical asset. I had a CTO recently tell me that their CEO wanted Dynatrace on his desktop to help understand business performance. This is how Dynatrace can truly maximize customer value. We continue to be humbled by third-party analyst reports that recently have recognized Dynatrace as a leader. Dynatrace was positioned furthest for vision and highest in execution in the 2024 Gartner Magic Quadrant for observability platforms. This is the 14th consecutive time that Gartner has named Dynatrace a leader. We ranked number one across three of the five use cases in the 2024 Gartner Critical Capabilities for Observability Platforms report. We were named a leader in the inaugural 2024 Gartner Magic Quadrant for digital experience monitoring. And we were named to the 2024 Constellation Shortlist for Observability, AIOps, and Digital Performance Management, recognizing Dynatrace as a leader in driving digital transformation. I'd also like to share a few customer wins from this past quarter that help illustrate the transformational value we're providing to customers. We closed an eight-figure TCV expansion deal with one of the top UK banks to provide end-to-end observability. They are aspiring to be the UK's leading digital bank, and they're standardizing on Dynatrace as the underlying platform to power their center of excellence with AI-driven insights to provide visibility across important business services. A major US airline signed a seven-figure DPS expansion. They were looking to reduce the mean time resolution from over an hour to less than five minutes. with multiple tools across their IT ecosystem, they lacked a single source of truth and struggled with blind spots. In collaboration with our partner, DXC, this customer chose Dynatrace to reduce the noise caused by dashboards, displace their legacy tools, and provide observability from the application layer to the infrastructure layer, including traces and logs. we closed a seven-figure expansion with a leading finance management platform. This customer had limited visibility into the thousands of incidents occurring in their production environment. They estimated that these incidents were costing them hundreds of thousands of dollars. By extending Dynatrace's AI-driven platform into their production environment, they gained substantive visibility and resultant business value. And finally, a new logo that highlights the evolution of our sales team in emerging markets represented a seven-figure deal with a government agency in the Middle East. These are all examples of larger strategic transactions with customers looking for transformational benefits from an end-to-end observability platform. Next, I'd like to turn to the go-to-market changes we rolled out at the beginning of this fiscal year that focused on three primary areas. First, we adjusted our customer segmentation to increase focus on IT500 and strategic accounts. This heightened attention to larger accounts enables us to drive more transformative platform deployments. Second, we have leaned in with partners. Through more effective enablement to make it easier to work with Dynatrace, over 75% of anchor deals closed in the quarter involved a partner. Third, we have expanded our go-to-market motion beyond application performance to include end-to-end observability and cloud modernization. Several recent customer wins are a direct benefit of arming the sales force with a broader set of use cases, including some of the deals I just noted. Overall, we are pleased with our progress in these go-to-market areas. At the same time, we're only two quarters into these adjustments, and we view ourselves as still being early in the pipeline development stages. We continue to support our go-to-market initiatives with increased awareness and customer engagement opportunities across multiple venues. Last month, thousands tuned in to watch our Power of Possible streaming event, which featured several locations around the world and included customers and partners like BT and DXC. We focused on customer success stories, highlighting our latest innovations in several areas. First is a dramatically evolved user experience with simplified dashboards, streamlined navigation, and an updated interface that brings the power of Dynatrace to a wider audience. These advancements make it easier for users to access the insights they need to dive into their data, analyze it in context, and drive intelligent automation. Second is next generation log management and analytics. With these advanced solutions, teams can derive greater value from logs faster and at enormous scale. Customers are now able to automatically ingest, manage, and analyze logs without manual setup and without the need to understand query languages. Integrating logs in context with other data types such as traces and metrics dramatically enriches AI-driven observability insights. And third are expanded capabilities for cloud native teams that make it simpler for operations, SREs, and platform engineering teams to access deeper observability insights within cloud workloads. These enhancements enable organizations to extend left from operations to development teams to leverage the Dynatrace platform through purpose-built apps for Kubernetes and cross hyperscaler observability. In addition, these capabilities allow developers to drive automated actions through integrations with AWS, GitHub, GitLab, and others to build and maintain more resilient and reliable software. And finally, over the past two months, we had over 2,000 customers and partners attend our regional Innovate conferences across six locations globally. These events always make us better by hearing directly from those who use our platform to ensure we best prioritize future investments. To wrap up, we had a strong first half and we remain highly enthusiastic about the opportunity ahead. We believe the market is playing to our strengths by moving toward fewer solutions with growing need for actionable insights and visibility. And we believe the power of our AI-driven end-to-end observability platform makes an enormous difference. Jim, over to you.