Dynatrace, Inc. (DT) Earnings Call Transcript & Summary

[Presentation] Ladies and gentlemen, welcome to the 2020 Dynatrace Investor Day event. Please note that this program will be recorded and available to view online after the broadcast. Now, we welcome Dynatrace's Vice President of Investor Relations, Noelle Faris.

Hello, everyone, and thank you for joining us today. We look forward to spending the next few hours with you. My name is Noelle Faris, and I'm the Vice President of Investor Relations at Dynatrace. We've a great lineup of topics and speakers for you today. The purpose of today's event is to share our perspective about the markets we serve, our product differentiation and our long-term growth opportunity. We will not be commenting on our fiscal Q2 performance, which ends on September 30, or our fiscal 2021 guidance. From a logistics standpoint, we do have a 10-minute break planned midway through the event to give you a chance to stretch your legs. We will be hosting a moderated Q&A session, starting around 12:00 p.m. Eastern. John, Bernd, Steve Tack and Kevin will be available to answer your questions. [Operator Instructions] And now before I turn it over to John, let me share our safe harbor statement with you. I won't read through it in detail, but to summarize, we will be making forward-looking statements today that reflect our views as of September 16, 2020. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Please refer to our SEC filing for a summary of these risks. 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 virtual event. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website. And lastly, references to growth rates will be in constant currency, unless otherwise noted. And with that, let me hand it over to our Chief Executive Officer, John Van Siclen. John?

Good morning. Thanks, Noelle, and thank you all for joining us today for our first Investor Day. 13 months ago, when we went public, we were in the midst of 2 significant transitions: the first, converting our customer base to the new Dynatrace platform; and the second, completing our shift to a predictable subscription business model. I'm very pleased to say these transitions are both behind us. The new Dynatrace platform now makes up 94% of overall company ARR, and subscription revenue now makes up 93% of overall company revenue. We are a single cloud-native SaaS platform, delivering solid financial results, simplified, streamlined, to focus on the tremendous market opportunity we have ahead of us. With these transitions behind us, it's time to provide greater visibility and depth into the building blocks for sustained growth and profitability, a balance, we believe, matters for durability over the long term. I've asked several members of my management team to join us today, so they can describe in greater detail these building blocks. We will cover go-to-market with Steve Pace who runs sales for us globally; the power of our platform with Steve Tack who runs our product management team; and our continuous innovation approach for sustained differentiation and value with Bernd Greifeneder, our Founder and CTO. Kevin Burns will then pull this all together in financial terms to provide visibility into how we drive continual growth at scale. Also, as part of our agenda, we have invited several of our customers to join us to share their experience with Dynatrace; why they chose us and the ongoing value we provide to them. Mike Maciag, our Chief Marketing Officer, will be facilitating the panel discussion with Angela Sim of BMO; Christian Heckelmann of ERT; Jay Cotton from Kroger; and Mark Forrester for Mitchells & Butlers. But before the team goes deep into each of these topics, let me quickly level set the audience on these 4 themes you'll hear throughout the day. First, our market opportunity has never been stronger. We are being fueled by 2 macro trends. The first is that digital transformation is accelerating. And the second is that dynamic clouds are the platform of choice for these transformations. Digital transformation drives disruptive change in the number of applications and services being deployed and managed. Their interactivity and interconnectedness, the frequency of change to drive greater value and the importance of these applications to revenue, customer loyalty and brand image, to provide the agility, flexibility and efficiency required for successful digital transformation, dynamic clouds, often multiclouds are the platform of choice, certainly within our enterprise customer base. The cloud has disrupted the entire IT operations management market, as clouds have become too large, too dynamic and too complex for older generation approaches. As you know, we reinvented our platform from the ground up several years ago to take advantage of this cloud disruption, and we continue to invest in the platform to take advantage of the trends we see ahead. With a $30 billion plus TAM today and accelerating digital transformation in cloud market fueling TAM expansion and new modules coming to expand our TAM even further, we believe we have the market opportunity to sustain strong growth for years to come. The second theme you'll hear throughout the day is that we are enterprise account-focused. This does not mean $250 million and above companies nor does it mean companies with $100,000 ARR and above. We mean $1 billion and larger companies, of which there are 15,000 around the world. We believe these enterprises have more complex, larger-scale digital transformation challenges. And we believe these accounts each have the ability to drive $1 million in ARR over time with a growing number able to drive over $10 million in ARR over time. These are well-known brand names that we are all familiar with, like Ford, Delta, Experian, JPMorgan Chase, Lloyds and so on. These are companies who continue to invest significantly in their digital transformation efforts for agility, efficiency and business advantage. These companies typically have a number of custom applications, multiple clouds, including complex hybrid extensions and large digital teams who must collaborate effectively to accelerate innovation. Partnering with these enterprise accounts is different than servicing a single app, small- to medium-sized business, and we excel at it. The third theme is that our approach to monitoring and observability is radically different than that of our competitors. Our unique approach puts automation and AI at the core, not simply gathering data and serving it up in charts on dashboards. Yes, we do this, too, and we do it very well, but we see the volume, velocity, variety and interconnectedness of data, already overwhelming many enterprise cloud customers. And if you pause for a moment and think about the world 3 to 5 years down the road, with the amount of data being processed 100x to 1,000x greater than today, the urgency for automation and AI-powered assistance will only grow. We believe investing in these areas of differentiation will continue to drive value for our customers over time, increase our expansion and cross-sell success and help us gain new enterprise customers at an increasing rate. We believe in the power of our platform, and we'll continue to invest aggressively in both existing and new modules to take advantage of this powerful core differentiation. And fourth, you will hear us talk about our balanced approach to the business. We believe a healthy combination of growth and profitability is sustainable as we scale and makes us a more resilient and durable business for the long term. Over the last year, we have proven the balance is real, that it's not hindering our ability to invest aggressively in commercial expansion and continuous innovation and that we simply have an inherently efficient platform, operating model and culture that will continue to generate strong margins and cash flow. We see the path to a multibillion-dollar category leader and are excited to share more about this trajectory over the next few minutes. With that, let me turn it over to Steve Pace, our Senior Vice President of Global Sales. Steve?

Thank you, John. And for those of you who don't know me, I've been responsible for running Dynatrace sales for the past 4.5 years, leading our direct sales team and our partner network through the transition from the Classic products to the new Dynatrace platform. And as John had mentioned, the business had previously been a mostly perpetual license business to now where it is much more predictable SaaS subscription business. And I must say, I'm very proud of how our global sales team accepted and executed on these significant and very important transitions. And I could not be happier to have these transitions behind us. Being able to simply focus on selling the Dynatrace platform, balancing new logo growth with ongoing expansion and cross-selling is a much more straightforward proposition. I'd like to discuss 3 topics today to give you a little bit more insight to our go-to-market program. First, I'll give you an overview of what we refer to as our frictionless enterprise sales model. Next, I want to share with you why I believe the direct enterprise sales model is an extremely powerful approach to fuel growth, given the accounts we target and the customers that we serve. And then, I'll wrap up with a look into what we see as an increasingly exciting go-to-market extension for us, our cloud partner network. Before I expand on these topics, let me level set on a few important building blocks of our go-to-market strategy. As John said, we begin by specifically targeting the Global 15000, which are companies of $1 billion in revenue and higher. The vast majority of these companies are in the midst of some type of digital transformation, and we seek out their most advanced cloud application teams and use cases as our initial landing zone into these accounts. It is here that our differentiation and value are most pronounced in dynamic clouds, mostly multicloud, with multiple cloud-native workloads and DevOps teams. These teams are responsible for the applications, user experiences and technology stacks that deliver significant revenue streams, customer or partner interaction and strategic business impacting services. Any delay in these new innovations, degradation of service, frustrated users or business impacting outages, is a big deal. It's here where performance matters most, it's here where complexity is accelerating and it's here where traditional tool-based approaches simply do not work. Next, our sales, marketing, services and support teams are global. We sell directly in 5 continents and through partners on a sixth in North and South Africa. This global footprint allows us to scale all these organizations quite efficiently, as we've been in territory for years now with a proven management team in all major geographies. And finally, armed with a SaaS platform, we can sell remotely as well as we can sell on-site face-to-face. When COVID hit, we pivoted to a complete work-from-home sales program overnight without missing a beat. Zoom has replaced air travel and physical events. However, the need for Dynatrace and the platform we deliver has never been stronger. This has given us the confidence to continue to expand our sales force in all geographies and in fact, accelerate our sales force expansion over our original operating plan for the fiscal year. Now on to the 3 key go-to-market topics. The first is our frictionless enterprise sales model. When the new Dynatrace platform was designed, a fully functional free trial was part of the SaaS platform model. A steadily growing number of our customers find us through this free trial. We nurture these through chat with inside sales development reps and sales engineering specialists until they're ready to engage in the sales cycle. SAP came to us this way, Intel came to us this way, and Mitchells & Butlers, the popular English pub franchise, who you'll hear from later, also came to us this way, as have many, many more. We find that many digitally transforming companies start in a relatively simple static cloud world, usually with a single public cloud provider and release cycles that are measured in months. In this simple state, nearly any type of observability and performance tooling can work. But as the cloud becomes larger, as hybrid data sources are connected in, as more applications and services are deployed, as multiple DevOps teams deploy code more frequently and more customers, partners and revenue streams depend on the cloud to perform flawlessly, the need set changes. It's here in the second phase of their digital transformation efforts where Dynatrace enters and it's here where our unique platform advantages with advanced automation and AI power blow people away. They're looking for something better than what they currently have, and they find something radically different with the Dynatrace platform. Something that transforms the way they work, taking them from their current state of reacting to the flood of alerts, issues and outages to an elevated state of proactive optimization and accelerated innovation. We really don't care who the incumbent may be, whether APM or infrastructure, sooner or later, complexity gets the better of the situation, and we have a unique and powerful solution that delivers immediate value that scales with the customers as they evolve. It's also important to understand that we tried very hard to keep our initial deployment of Dynatrace modest. Our reasonable landing zone is somewhere between $80,000 and $120,000. This is large enough to cover a meaningful set of cloud applications and infrastructure enough to experience the Dynatrace value, but not so large that the sales cycle gets overly elongated and complex. We know that the product works so well, and our postsales teams do such a good job of onboarding new customers that we know will be successful in expanding our initial land with both additional applications as well as in cross-selling additional modules. It's a combination of both that really ramps our ARR per customer. Currently, the average ARR per customer for 3-plus module customers is over $400,000, well above our $229,000 average ARR for the entire 2,400 Dynatrace customer base. And 3-plus module customers now represent 30% of our customer base and climbing. This leads me to the second point I'd like to make, the power of a direct selling organization for predictably scaling and enterprise customer base. We offer the market a radically different approach to solving the age-old pain of reactive monitoring where companies have a disparate bag of tools and overwhelming amount of data that must be analyzed by a limited amount of people resulting in tools for all, finger-pointing and alert fatigue. In addition, the time they have to perform their jobs gets squeezed more and more each quarter with greater and greater business repercussions when the surprises happen. As I said earlier, our customers are usually in the second phase of their cloud journey as they move to more complex, dynamic, multicloud use with a growing number of DevOps teams and serious modern cloud workloads. I hear more and more from the CIOs and the CTOs that I meet on how they want one observability platform, one source of truth, so they can still gain situational awareness across their entire cloud ecosystem. They can break down the silos between development, operations and business and accelerate agility and innovation. They're looking for a new way, not more the same. And this is where a direct consultative sales approach, a relationship with expertise to ensure success comes in. We take our relationships with our customers very seriously. Their success is our success. We provide an essential platform to accelerate successful digital transformation, and we understand the responsibility that comes with this. Although our platform is incredibly easy to deploy, with time to value measured in hours, our customers expect education, best practices and expanded use case support to get the most out of our platform and its various capabilities and modules. To accomplish this, we utilize a global service, customer success and support organization, working closely with partners to assure postsale success. It is this attention to go beyond simply selling software that builds a trusted relationship and accelerates ongoing expansion. Few enterprise customers I've ever met with want more vendors. Rather, they're looking for a select few true partners that they can consolidate around. We believe our direct relationship approach will continue to set us apart as the cloud continues to collapse use cases and customers continue to consolidate vendors around those who are viewed as trusted advisers. Now let me hit my third and final go-to-market topic for today, and that is the potential of our cloud partner program. And I say potential because we believe the big opportunity is still ahead of us. Of course, we've had a global partner program for some time now. These are mainly smaller regional value-added partners who focus on reselling Dynatrace for APM use cases. This partner network is several hundred strong and especially robust and deep outside of North America. They augment our sales efforts and are an important part of our current sales productivity profile in EMEA, Latin America and Asia Pacific. But what is particularly exciting for us is the growing interest in our platform and AI approach by the global cloud systems integrators and the larger regional cloud systems integrators in North America and around the world. They see their customers pushing beyond initial set of cloud implementations to the dynamic multicloud world that we serve so well. We work well with them in the field and now we have several who have built us into their blueprints and offerings that they are actively introducing us to their customers. We are becoming part of their go-to-market. For example, Wipro's AIOps and Cloud Studio offerings are both powered by Dynatrace. HCL includes Dynatrace in their DRYiCE and ElasticOps offerings with active customers such as Manchester United. DXC's, Platform DXC and Bionix is fully integrated with the Dynatrace platform, supporting joint customers, such as Campbell Soup. And similar embedded offerings are in the works with Cognizant, Fujitsu, TCS and Accenture. It's the combination of advanced observability at scale, an extensible automation framework and open, explainable AI approach that they can build around that gets them excited. We are beginning to be viewed as a powerful augmentation to their current services engagements and value propositions that they are actively bringing to their many digitally transforming customers. My team is leaning into this opportunity, and I look forward to discussing our success here with more tangible results next time we meet. With that, let me summarize. Our approach to increasing new logo lands is well oiled. It's a proven, frictionless approach that fits our well-differentiated platform and target account segment, and the market continues to move forward our value proposition. Once we land, the Dynatrace platform and our postsales teams make it straightforward for us to expand rapidly through a combination of more applications and a cross-sell of additional modules. And as we scale as a company, and our platform becomes recognized in more and more of the Global 15000, cloud systems integrators are taking notice, educating their consultants and incorporating us into their offerings. Our land and expand model is stronger than ever. And with the ongoing expansion of our direct sales team, combined with the leverage of global systems integrators, we have the potential to kick it into another gear moving forward. But you don't have to take just my word for it. As John mentioned earlier, we have invited several of our customers to join us today to provide a view into their digital transformation initiatives, why they chose Dynatrace, and the ongoing value we provide to them. And with that, I'd like to turn it over to Mike Maciag, our Chief Marketing Officer. Mike?

Great. Thanks, Steve. Really excited today to have a panel of experts together to talk about their digital transformations and how Dynatrace has helped them along that path and how they're moving to the cloud. Joining me today, I've got Angela Sim from the Bank of Montreal; Jay Cotton from Kroger; Mark Forrester from Mitchells & Butlers, and Christian Heckelmann from ERT. So first, let me start with Angela Sim from the Bank of Montreal. Angela, can you tell us a little bit about what's important to you and the bank right now? And maybe a bit about your company as we do so?

Yes. I'd love to Mike. Thanks so much for having me here. Bank of Montreal is a 200-year-old bank with more than 12 million customers. For those of you who aren't familiar with it, it's 8th largest bank by assets in North America. We have a very large presence in both Canada and also the Midwest and the United States with BMO Harris Bank. I personally lead BMO's infrastructure team globally, and I'm responsible for all of the nonproduction and production systems. So that really includes server, mainframe, network storage, other devices. It's really the whole infrastructure end-to-end.

Mark, what about Mitchells & Butlers? I know you guys have a lot of properties. Tell us a little bit more about the company.

Yes. So Mitchells & Butlers is one of the U.K.'s largest restaurant companies. We have 1,800 outlets roughly, which covers, in total, roughly around 14,000 employees. We have a turnover in the U.K. of around GBP 2.5 billion, which will be about USD 3 billion. We have multiple brands across the business. We have traditional brands, such as Toby Carvery for that Great British Sunday dinner experience and Harvester, which is a chicken brand, all the way through to [ wet-led ] outlets, such as Castle and Nicholson's, which have the traditional cocktails and whiskeys, et cetera. So we have a full [ wraps ] of bars and restaurants to complement to total of that 1,800 outlets.

Christian, can you tell us a little bit more about ERT?

So ERT is a global endpoint-driven data and technology company. We are working with the top pharma and biotech companies and supported over 50% of all FDA drug approvals since 2013. So our solutions including cardiac safety, respiratory and imaging.

Jay, I know most of us have shopped at Kroger, but can you tell us more about the company?

So Kroger is 137-year-old company that has gone through several transformations and many different iterations of everything that we've done. We are the largest U.S. grocery store, largest U.S. retailer. We have -- in this time, in this age, we have been absolutely pivotal and probably the most important thing for a lot of people and a lot of people in their lives. And we have to keep up, and we have to innovate, and we have to keep doing things moving forward. We do not want to be known as the 137-year-old grocery store that's doing 137-year-old things. So we try to move as quickly as we can within being safe to make sure we do the right things for our customers and for our base going forward.

I know everybody on the panel is going through a digital transformation of one form or another. I think it would be great if we could just give everybody a sense of what your digital transformation looks like. Jay, do you want to start with Kroger?

So when you're essential, you're essential, and we are responsible for people's life lines, for people to get food, for people to move forward and be able to feed their family. And the tolerant rate went from 0.001 to absolute 0. I mean there is no time for downtime. We've converted some of our stores into digital-only stores because the digital e-commerce has just absolutely gone through the roof. We have probably 3 or 4 stores out here in Cincinnati that only take digital orders, and it allows us to kind of encapsulate our employees to make sure everybody is in a COVID-free environment and that you could go and pick groceries and do all sorts of things. And just in the digital space, we did over 1,500 deployments last year. And we're doing in real time, middle of the day, no customer impact. And we need to be able to have that complexity under control and be able to understand everything that's going on at a given time.

Yes, it sounds like a very complex environment. What role does Dynatrace play in that complex environment? And does it help you to simplify?

Well, it enables us to see everything. We have public cloud, we have private cloud, we have our own data centers. We have things inside of the GCP data center, we have things inside of the Azure data center. And it gives us kind of that single pane of glass to make sure that we could see everything and everything that's going on. We are in highly dynamic-scale environments. We utilize Kubernetes, we utilize Pivotal Cloud Foundry. We have a lot of different pieces that allow our business to flex and to move as we get more people into our system, as we get higher levels of engagement, as more people come on website. Think of it almost like a Black Friday, every day is pretty much Black Friday for us. I mean, in this current environment, everybody needs their groceries, everybody needs it up, everybody needs it available all the time. So we need to be up, available and have the ability to flex and move with that. Previously, we were on all the incident calls. Any time there was a problem, it was me and my team, and we were a small team. We were essentially known as the guys that knew how to read the tea leaves. I don't do that anymore. We don't get on the incident calls anymore. We have a platform that enables the teams through automation, through artificial intelligence, to be able to go out and find the issues by themselves. I mean data is all there, and it's very approachable. The Dynatrace tool is so easy and so approachable. It leverages infographics, it gives us the ability to win a developer or a team gets an incident. The incident comes to them, they have the link, they click on the link and AI and the Davis just tells them what the problem is. They don't have to go digging. They don't have to go looking. They don't have to engage us. They say, hey, I got this ticket, I don't know where it's coming from. The answers are in the ticket. The answers are right there. They just have to have one click and they know exactly where the problem is, and they can go and fix it and move on. And it cuts down time of the resolution time for a lot of our incidents. I mean it's just that quick and that easy.

That's great. Thanks, Jay. Now, Angela, what's important to you in your digital transformation at the Bank of Montreal?

Mike, when you ask about what's important to Bank of Montreal. BMO like most financial institutions are focused on digital transformation along with cloud migrations. And although the new modern technology is really important, stability and operational excellence is still continuing to be a top priority for us. When I look at what Dynatrace AI and alerting proactively shows us, it shows me even a modest change in either a transaction volume, a performance degradation, which addresses -- which allows me to quickly address an issue. What I love about Dynatrace is it enables me to learn in my environment. So it means that Dynatrace automatically baselines my transactions for performance and failure rates, it raises events when we deviate from automatically established norms. So there isn't a lot of custom configuration that I have to do within my environment. When I look at what Dynatrace has done, it's really been that gold thread that could enable our environment end-to-end to dynamically tie things together, no more manual documents that no one maintains, but actually Dynatrace dynamically creates the flow live in the environment.

Mark, I think it's fascinating how restaurant and pub chains can go through digital transformations. Maybe you can share a little bit about what you've been doing at Mitchells & Butlers?

So we're on a very accelerated plan. We started off probably 2 years ago now when we first bought a Dynatrace that was the first part of our digital transformation to understand our infrastructure, making sure it's ready for the next phase of the digital rollout. We began about 18 months ago now, doing things like order at table. So you walk into one of our bars, find an empty table, open your mobile phone, there's the menu, select the items you want, you click it, you pay for it and then the waiters will deliver it to your table. Obviously, in the current climate with COVID-19, we've seen, since lockdown, there's been a massive uplift in the people for order at table because that means that the social distancing can be adhered to, and that allows the business to do that order at table facility across multiple brands now. So that is rolling out at that pace across more and more brands within the business. So obviously, we need the infrastructure and the capacity and the monitoring and the support to obviously make sure that all of these digital touch points are there and accessible for our customers.

And I think I heard, as you begin to implement order at table, it had an impact on ticket sales and average ticket?

Yes, that's correct. So we initially trialed this is like a version 1 as a proof of concept, obviously. And what we saw in one of our brands is that basically, when the customers -- compared to an order at the bar, the customers actually were spending roughly 20% more in the basket total. And what we put this down to is the -- we take that friction away. I also kind of express the story of a customer comes into a busy bar, they would have to find the shortest queue to get to the bar, to get to the front, to get the attention of the waiter or waitress behind the bar. And then obviously, they go, what would you like? And they go, oh, and then they -- at that point, only then do they consider what they would like to purchase. But with the order at table application, what that does is, it gives them the full menu, it takes all of that friction away and allows our customers to browse the full menu and make a more informed choice at their own time. And what we're finding is that people are literally upselling themselves into higher quality drinks because they may not have seen it when they were the bar it might not have been in that location of where they were. So that allows them to upsell and basically purchase higher quality drinks, et cetera, and make a more informed choice, which normally leads to them spending more money on the transaction.

That's great. Thanks. So how did you come to find Dynatrace? When you were looking for a solution, how did you come to find Dynatrace? And maybe talk a little bit about how Dynatrace came onboard?

Yes. So I told the story many times. But the Dynatrace, we didn't really know Dynatrace as a product. So what we did was our current monitoring platform, we could see that it was -- it didn't really fit our needs anymore as we were moving into this digital era. There was a lot of manual configuration that we needed to do. So what we did, we just went to the Gartner Quadrant, and we could see that our current supplier was New Relic, and we would see that there was 2 more, obviously, products in the market that were higher placed in the top quarter. So we decided to reach out to both suppliers. Obviously, we had a demonstration from AppDynamics, it was #2. And we went to Dynatrace website, could see that we could take a trial. So we just went on the website, literally clicked a few buttons, got the test tenant as it was back then. And we took the agent and installed it into our -- like a UAT environment. And within minutes it was becoming very clear that we looked at the website and thought, can it really do that? And the answer is yes, it can because we obviously went on to them and purchase the product because we could see that what it was doing and the way the AI was alerting and the ease of use of the program. So we have a very small team in Mitchells & Butlers of like 5 people that look after all of our digital resources from a support perspective and then it's supplier backed-up through contracts, et cetera.

Christian, I know when you came across Dynatrace, there was a lot of doubt of this couldn't be true, and you went to prove Dynatrace wrong. And I think that around on the train or something like that, share a little bit about that.

Yes, sure. So we first met Dynatrace at the AWS summit in Berlin back in 2018 when my boss, a colleague and I went to Berlin to actually plan with a competitor of Dynatrace our next steps and adopting their solution. And on the last day, we had an appointment with Dynatrace on the booth. And we said, okay, let's take a look at their solution. And yes -- and when it's not mind-blowing then we will move ahead with a competitor, and then we go to the booth. And the guy on the booth told us, so yes, all you have to do is to deploy OneAgent and the OneAgent will do all stuff for you, and you don't need to configure anything from application server level perspective or something like this. And we were like, yes, sure, you're right. And this will definitely work and so on. And then we left the booth. And while we were in the train back from Berlin to Wolfsburg, my boss opened a Dynatrace trial account on the SaaS platform. And told us, hey guys, here's a SaaS platform account. You should have received an invitation, play around, if you want. And while we were sitting on the train, we were rolling out OneAgent to one of our preproduction environments. And it was really easy because it's only 3 lines of code you have to run on servers. And nowadays with answering all the different tools, it's really easy. And then we rolled up the Dynatrace OneAgent on servers and suddenly you're seeing popping up all the softwares and services in the Smartscape topology. And this was really cool to see how to -- yes, how the services speak with each other because the Dynatrace agent will automatically interact in its network back and so on and so on. So this was the start of how we are using Dynatrace, and even with the cracking Internet on the general train, it was possible to roll out OneAgent without any extra configuration effort like, as I said before, configuring any plug-ins or extra configuration from the application server level perspective.

That's great. Thanks, Christian. I'm not sure, but I'm willing to bet that ERT is the only company to undertake a Dynatrace trial on a speeding train. But switching back to the value of Dynatrace again. I'm finding -- we're finding that lots of customers are using Dynatrace to enable greater levels of automation, to leave more time for innovation in their organizations. Jay, I know you've done some of that at Kroger. Can you share?

Yes, absolutely. So one of the things that I mentioned is, you need to automate everything that you do every day to make yourself -- make sure you're at a point where you get to do the fun stuff. So we've set up a CICD pipeline that allows teams to tag their services with whatever kind of learning that they need. We have an automated process that runs through a couple of scripts. And when they deploy their service, it puts the group that's responsible for that service on them. So when it gets deployed Dynatrace, Dynatrace automatically knows who's responsible for it, and we could leverage Davis a little bit. And team A is responsible for service today. Tomorrow, team B is responsible for it. They just have to change a little file in their deployment cycles, and now they've completely shifted and they've broken down to pendencies. And teams are not sitting around doing just churning time waiting for someone else to do something to help them, they could enable and they could do things on their own, and they could automate it. So we've embedded things in the CICD pipeline. We've embedded the ability for them to do SLOs and SLA stuff, which is hugely important inside a large organization. You need to be able to have something to measure yourself against. And we're working on right now doing automatic remediation, the auto remediation through Ansible. We're leveraging that so that if teams do deployments overnight, if something goes wrong, it will roll back automatically, it doesn't affect customers and they get an e-mail and they could actually sleep. So you get happy developers, you get happy teams and you get happy customers because we're pushing forward with new technologies and new features set every day.

Great. Thanks. Christian, I know that automation is important to ERT, and you've got some ambitious goals. Tell us more.

So what is our goal we're trying to achieve is to working towards autonomous cloud. So the full automation or fully automated life cycle for our application, when you think about controlling applications, automated quality gates, SLA SLO evaluation of our builds, then automated growth out to higher environments, deploying to production, automatic remediation, and so less meantime to remediate some issues when found. So this will be -- or Dynatrace is enabling us to go towards this goal.

Great. Thanks. Angela, when we were chatting earlier, it sounds like Dynatrace has become a pretty strategic platform to the bank. Is that one of many? Are there other strategic platforms at the Bank of Montreal?

Dynatrace is a critical platform at the Bank of Montreal. What we've chosen to do is also integrate it with other critical platforms like ServiceNow, which has our ITSM capability and also event management with ServiceNow. And what we found was that the integration was fairly seamless that we really use ServiceNow Event Management, which integrates beautifully with Dynatrace and its capabilities. We've decided to make Dynatrace our corporate standard across the environment. We've enabled a large number of our critical systems, and we've just actually recently expanded our road map substantially with the road map for Dynatrace for the next year. That will substantially increase our footprint. Our plan is to continue to leverage Dynatrace in both our performance and production environment. And now we're actually expanding to a nonproduction environment because we think if we can enable also our testing environment, it will give us some quality and capabilities later on that we'll gain in production.

Thanks, Angela. I think we've got time for one more question. It strikes me as I listen to the panel talk that Dynatrace has fundamentally changed the way that your teams work, enabling them to be more proactive rather than just reacting to problems. Anybody want to comment on that?

So yes. I mean, it fundamentally changed the way the whole team works. So I say traditionally, as a team, we were only known because once something went wrong, people came knocking on our door. That is completely changed in today's environment. So we are being asked for advice, how can we hook Dynatrace in better because everyone's understanding that the level of insight, the further we hook Dynatrace into all of our digital platform, the Davis AI and the rest of the product can actually leverage things and give us insight into things that we never knew. So it allowed us to streamline our product, I call it, virtual gardening because had a very bloated application layer and Dynatrace allowed us to prune and pull out the weeds and make it a very efficient platform to work with. So from our perspective, it's changed that. And what it's allowed us to do is change the team and their ethos because they're enjoying now more their day-to-day job because people are integrating with them. People are coming and asking questions rather than that constant feed of, this is broke, that is broke, X is broke. With the Davis AI, we can see that things are broke, but it allows us to see that breakage in that small minute break at a very low level. So before, it was only broken when somebody couldn't book a table, and it's catastrophic to the business, obviously, because that's a revenue driver. But with Dynatrace, we can see when we're exhausting connection pools and we can fix that. So therefore, most people are now unaware that we have issues because I say failure is inevitable in this digital age. But we can see these failures at such a granular level, we can put out these very, very tiny fires so fast and react to these alerts that are coming through that actually never gets to that stage where you're having a full-scale table bookings outage or the basket isn't working. So from our perspective, it allows us to be way more efficient because we can deal with lots of little issues much quicker than we can, obviously, with the full-scale issue, trying to understand what's broke and back trace it because we understand what the root cause is straightaway because Davis AI will tell you that.

Thanks, Mark. That was great. And thanks to everybody who's been on the panel today. It's always great to hear directly from customers. Hopefully, it was useful to those watching on Investor Day as well. And with that, we wrap the customer panel, and I turn it over to my colleague, Steve Tack. Steve, take it away.

Thanks, Mike. Hi, I'm Steve Tack, SVP of Product Management at Dynatrace. I work closely with Steve Pace and his team in the field to collaborate with customers on their cloud and digital transformation needs; and with Bernd, our CTO and Founder, who you'll hear from next on the direction of the Dynatrace platform. You've heard the story of our reinvention back in 2015, taken enterprise in 2016, how we saw the cloud coming, containerization coming, scope and scale expanding to 1,000x, the DevOps movement accelerating and so on. These macro trends continue to shape the technology and business strategies of the enterprise as digital transformation accelerates. What is most important to note is that a reinvention of the Dynatrace platform was not a onetime replatforming event. We established the culture, the processes and resourced the team for the continual reinvention that is required to win in our dynamic market. The cloud infrastructure, application and development market segments are all continually changing and driving toward the future of a truly autonomous cloud, one that requires no human intervention. And we are leading the way in our dynamic market. With nearly 800 R&D professionals now, 25 major releases a year and over 90% of our customers always on our latest release, we are bringing innovation and value to our customers at an accelerating rate. There are 3 dimensions of our platform that create sustainable advantages for our business as the market rapidly evolves. Each one positions Dynatrace to adjust quickly to changing market dynamics and anticipate new requirements. Most importantly, these are not elements that competitors can quickly copy or bolt-on later. Each one required us to build it into the core of the platform. I'll address all 3 of these elements throughout my talk, which are automatic and intelligent observability of scale, radically different approach to AIOps, and addressing purpose-built use cases through modules that leverage a common platform. Before I begin, it's important to remember that we focus on the largest enterprise accounts in the world, the Global 15000. These companies are $1 billion or more in revenue. And as Steve Pace said earlier, these customers have fundamentally different requirements than SMB or single application customers. And our platform approach and key differentiators fit them exceptionally well. The foundation of our platform is how we collect and manage observability data at scale, which we've been doing ever since we've reinvented our platform. It starts with a platform approach, gathering a wide breadth of data in a purpose-built common data model that supports our many use cases, while making it easy, automatic and web scale. The market shift to observability is significant as cloud-native technology has broken traditional silo-based monitoring approaches. This realization has led to the rise of observability as a new approach to a modern cloud world. This market shift is perfect for Dynatrace, as we anticipated this need and have a broader, more automatic and more intelligent approach. And it provides a perfect opportunity to bring the power of the Dynatrace platform to significant and growing markets. The observability basics of metrics, logs and traces are important, but enabling IT to accelerate digital transformation projects requires a lot more than simply collecting data from disparate siloed tools and displaying it on dashboards. To start with, we believe that modern cloud observability requires a broader set of data to complete the use cases our enterprise cloud customers expect. Beyond metrics, logs and traces, Dynatrace provides distributed tracing, code level detail, entity relationships in topology and user experience behavior data. Distributed tracing and code level detail are required by development, DevOps and site reliability engineering teams to quickly identify anomalies and understand precise root cause, so problems can be fixed immediately, proactively, and performance can be continually optimized. User experience data capturing every user journey, whether from mobile device, laptop, kiosks or IoT device experiences and more provide an important outside-in view of how the full cloud stack is supporting user interactivity required to assure applications are continually delivering what users and the business expects. Metadata, such as version, deployment and business contacts are also captured, tying full stack observability data directly to business metrics and workflows. For example, product teams can measure the adoption of success of new features in bluegreen or canary releases and make decisions on where to invest resources on future enhancements. Application owners can analyze conversion rates by customer segment and now have a real-time view of their digital business initiatives to drive collaboration. Again, it's not about collecting another set of data. It's about tying the entire set together, so better data-informed decisions can be made. And in addition to collecting a broad set of data and organizing it into a common data model, we put all this data in the context of a precise real-time topology. Dynatrace understands the exact relationships and dependencies across the enterprise cloud, literally billions of dependencies between applications, services, processes, host, networks and infrastructure. As a dynamic multicloud evolves, this real-time topology is updated continuously, providing end-to-end, top to bottom situational awareness that digital teams in our AI engine depend on. Now trying to do all this data collection via scripts and tags and topology mapping manually might be possible in an SMB with one or few applications in a relatively static cloud environment. But this simply is not possible to do at scale with multiple cloud-native workloads running across a modern dynamic multicloud. And with 84% of enterprises embracing containers in production and 55% moving to a daily or weekly release cycle, cloud-native application techniques present a rapidly growing challenge that Dynatrace uniquely solves, highlighted by over 90% of our platform customers using Dynatrace in these environments. Through our patented OneAgent and PurePath technologies, we automatically discover an entire multicloud environment, dynamically instrument, modern and traditional applications and continually learn an update without human scripting or user configuration. Our competitors like to claim OneAgent capabilities as well. But offering a single binary, followed by several manual steps to configure each agent, is not what we are talking about. Dynatrace is truly automatic. No human intervention to set up, configure, providing the only way to keep up with dynamically orchestrated cloud-native workloads at scale. Before I move on from observability, let me touch on future data gathering trends, in particular, the promise of OpenTelemetry. I've been asked, will this disrupt Dynatrace's unique advantages? The answer is no. In fact, we are fully embracing OpenTelemetry. Though it's in its very early innings, we are excited about its potential. We've always said collecting data will become a commodity. It's how you do it and what you do with it to save customers' time, resource and money that matters. We believe OpenTelemetry will simplify our development efforts to collect data, extend the reach of our platform and make our AI engine even smarter. We've been an early and significant contributor to OpenTelemetry along with Microsoft and Google. And as we do with the rest of the broad set of data we collect, Dynatrace will enrich OpenTelemetry with code level analytics, extended distributed tracing support and provide automatic data capture with the unified content. The bottom line is that our observability differentiation will continue to be strong, high-value and sustainable. Now let me move on to the second core differentiator for Dynatrace. Our embedded AI approach, we call Davis. AIOps is another hot topic in the industry and getting hotter as multicloud complexity explodes. As John said, the volume, velocity and variety of data is quickly outstripping human ability to process and analyze in any reasonable time frame. AIOps promises to bridge the growing gap between cloud complexity and limited trained resources, a promise of proactive response versus reactive fire drills. To fulfill the promise is very difficult. Dynamic multiclouds are ever-changing and evolving, which makes learning approaches like correlation engines impractical. These approaches are therefore imprecise and very hard to maintain. On the other hand, no one wants a black box AI solution either. I've not met a cloud architect or IT exec yet, who is ready to trust critical cloud operation decisions to a machine. So how did we solve this AIOps challenge? We stepped back and took a radically different approach. We knew we had to eliminate the need to learn, and we had to provide an explainable approach that could be trusted. So we invented Smartscape. Smartscape builds and maintains a precise topology of any dynamic web scale multicloud by observing every transaction and entity at run time with no manual intervention. All relationships are captured with code level precision across cloud platforms, containers, micro services and traditional applications. Smartscape is always current and uses its understanding of relationships as one of the building blocks for Davis, our deterministic and explainable AI engine. Davis is built into the core of the platform, combining the context of Smartscape with patented algorithms and embedded expertise. This unique approach doesn't rely on training or correlation-based guessing. Davis delivers automatic and precise answers without noise, and with problems and anomalies prioritized to buy business impact. By eliminating reactive manual work, time-consuming war runs and unproductive finger pointing, digital teams shift from reactive to proactive, spending less time on firefighting and more time driving innovation and strategic business value. It's important to note that Dynatrace's AIOps value comes with every module, delivered as a unifying characteristic of the platform, always on and automated, delivering 1 plus 1 equals 3 value as modules are added versus alternative solutions, where separate tooling or lack of unified data model yield a 1 plus 1 equals 2 value proposition at best. And it's not just AI Ops for what Dynatrace delivers out of the box. Our platform is completely open through APIs and SDKs to extend to other data sources and use cases, making any dynamic multicloud ecosystem even smarter. For example, we have a growing number of customers integrating Dynatrace throughout their continual delivery pipeline in IT operations management workflows, combining Dynatrace with offerings like ServiceNow and Ansible for orchestration and self-healing. With over 450 technologies provided by Dynatrace, the openness and intelligence of our platform provides an exciting opportunity to accelerate the journey to a truly autonomous cloud. Bernd will talk more in a minute about how we're further opening this up to partner and customer-contributed extensions and applications. Bottom line, our AI approach is unique, and we believe it will continue to deliver sustainable differentiation for our business for years to come. For others to compete with our AI at scale, they'll need to fundamentally rearchitect, and that takes time. In the meantime, we will continue to invest to widen that gap. The third platform differentiator I'll take you through today is our approach to deliver purpose-built modules on top of our highly differentiated platform. Each module is designed and packaged to address the needs of development teams, DevOps and SRE teams, IT Ops and line of business stakeholders. Our competitors either go-to-market with a suite of tools and provide a unified data model, but without purpose-built use cases. Each of our modules is monetizable via consumption units, post units, DEM units or Davis data units. And as I just said, each comes unified through Smartscape and Davis. Our most popular module is our APM module. As you know, APM has done where we traditionally land. We are well-known and best-in-class with distributed tracing, code-level detail, an automatic precise root cause determination built in. It is important to note that with Dynatrace's APM module, customers get infrastructure and log monitoring included, unified. Because to understand cloud application workloads, customers need full stack observability all at once. We believe applications are still the high ground, where IT meets the business. We continue to see a healthy spending environment here as companies digitally transform through more and more applications. In fact, IDC projects that over the next 3 years, there will be as many new applications built and deployed as have been built and deployed over the past 40 years. And we believe the monitoring coverage of applications will double from 30% to 60% as the interdependency of services increases and CICD pipelines drive an increase in business-impacting workloads. With more applications being built and deployed, existing apps scaling further and higher percentage of cloud app workloads needing full stack monitoring, it's an evergreen market that Dynatrace is in great position to continue to capture. Our most popular add-on module today is our digital experience module. We have been in the digital experience monitoring market for over 5 years now and have over 70% of our APM customers extending APM with digital experience capabilities. With applications distributed between smart browsers at the edge and back-end cloud and hybrid services to understand end-to-end experience requires APM plus DEM, not as separate silos of data, like most of our competitors, but interconnected end-to-end. The core of our offering is our real user capabilities, where we automatically instrument and monitor every tap, click, swipe of any edge device, mobile, laptop, IoT devices and so on. We not only capture the click pass, we also produce 4K movie-like playback we call Session Replay. To complete the module, we offer synthetic monitoring as well for operational use cases and proactive baselining of key transactions, services and APIs. We believe our DEM capabilities are second to none. And when coupled with our APM module and AI, it's no wonder our attach rate is so high. With mobile use on the rise, up over 300% year-over-year in our customer base, and the continued innovation in IoT, connected car, kiosks and more, we believe there are significant ARR growth ahead for this module. Next, though still we train as a stand-alone module, digital business analytics is an exciting addition to the portfolio. It directly connects observability data with business KPIs such as conversion rates, revenue, feature adoption and so on. 4 out of 5 C-level executives I talk to want to link their IT efforts to business value more effectively. And our digital business analytics module does just that. It breaks down the silos between business and IT, getting everyone on the same page for biz DevOps. And we see more and more customers combining its use with DEM for digital business owner use cases. And then there's finally our infrastructure log monitoring module. This has been an exciting growth area for us. We now have 32% of our APM customers expanding their platform use with infrastructure and log monitoring. This is up from 22% a year ago. And perhaps most exciting is that in this past quarter, 30% of our APM land deals included these extended capabilities. So why are customers selecting Dynatrace for infrastructure and log monitoring? Well, first, we have been rapidly expanding OneAgent coverage for infrastructure metrics and logs. You may have seen our announcements around complete coverage for both AWS and Azure services, and there's more to follow here. And second, when you consider the unifying power of Smartscape and Davis to provide broad situational awareness with precise detail automatically 24x7, it's not hard to see why more customers are consolidating their cloud tooling and going with Dynatrace as their automatic and intelligent observability platform. We continue to believe in the power and value of an all-in-one platform. We like our landing zone with APM, and we are expanding more and more rapidly with 3 or more modules. In fact, 3-plus module usage is at 28%, up from 19% 1 year ago and 22% 6 months ago. And importantly, this customer segment has an average ARR of over $400,000, considerably higher than our average ARR per Dynatrace customer of $229,000. Our platform selling and cross-selling muscles are getting stronger. And as it does, our ARR per customer should continue to climb. Let me summarize, as I know I've covered a lot. In response to the massive disruption we saw coming in the cloud, we architected, built and continued to innovate on a highly differentiated platform with powerful and defensible moats. We approach the problem differently. Automatic and intelligent observability at scale. AIOps at the core and purpose-built modules on a common platform for rapid land and powerful expand over time. This approach brings us sustainable differentiation that will continue into the future. The current platform will support our journey to a multibillion-dollar company. And what's perhaps even more exciting is what we have in store next, which you'll hear more about from Bernd. But first, we'll take a short break, and we'll see everyone back here in 10 minutes. [Break]

Hello, everyone, and welcome back. We're going to go ahead and get started. Up next, we have Bernd Greifeneder to kick off the second half of today's agenda. Bernd?

Thank you, Noelle. Happy to be here today. Hello, I'm Bernd Greifeneder, founder of Dynatrace and now Chief Technology Officer. What really energizes me every day is the ability to create the best product in the market and to experience the wow moments that customers have as we solve their problems in new and easy ways. The fact that this requires continuous reinvention on the technology, business and cultural fronts and beating the competition makes it all more fun. When we anticipated the volume, velocity and variety of data generated by modern multicloud, we knew that AI and automation at the core of our platform would be required to simplify complexity that would quickly grow beyond human scale. We also realized that the old approach still taken by our competitors of packaging siloed products in suite-like offerings wouldn't work. A powerful and explainable requires an all-in-one approach to fully leverage the data context for actionable precision. We experienced ourselves that high grade of automation, coupled with a cloud-native software development culture, helps to keep innovation speed and productivity up, while customer count and size grows rapidly. This is why way we scaled to 780 R&D employees today, scaling to 3,000 R&D employees powered by an open Dynatrace in the modern value creation culture. We moved from DevOps to NoOps in 2014, allowing us to maintain uptime for well over 1,500 production nodes and 1,900 managed clusters in the 99.99%, while delivering a major release every other week with no 24x7 operations team. You heard that correctly, 0 people on a 24x7 operations team. These results are only possible with remediation and self-healing-based automation, driven by Dynatrace AI, coupled with modern software development and delivery processes. Sharing our cultural and process innovations with customers has turned Dynatrace into a role model that inspire them towards greater levels of AI and automation through weaving Dynatrace into their fabric. Today, we call this NoOps methodology autonomous cloud enablement, and we are confident that customers will adopt it over the next several years. The crucial need for automating the cloud presents a great opportunity for Dynatrace as a business-critical automation platform in the fast-growing delivery and IT automation market, estimated to reach 22 billion by 2025. Automation is an essential weapon to combat the growing gap between constrained IT resources and accelerating cloud scale and complexity. Through automation, IT frees up scarce talent, stays competitive and creates new digital services faster with better experiences. In addition to our AI and automation-driven platform and our disruptive NoOps autonomous cloud enablement methodology, we have created a simple and reliable way to codify our autonomous cloud know-how into an open source project called Keptn. Keptn has already reached over 4,000 downloads. It has recently been accepted by the Cloud Native Computing Foundation as a sandbox project with CNCF foundation, actually, all the hosts to Kubernetes. Keptn automates continued software delivery with quality checks and automated operations, including self-healing capabilities. This unique event-driven approach has a patent pending as well. While it is a true open source project, which can be used for free, we've already heard from our customers that they will only run a commercial supported version of Keptn in production. Of course, we will capture this opportunity for us. What is particularly cool is that the enterprise edition of Keptn will be seamlessly embedded in the Dynatrace platform as part of an autonomous cloud solution that leverages all of the platform benefits, including enterprise scale, security, intelligent observability, Davis AI and our SaaS and managed deployment models. As a result, customers gain immediate best practice approaches for modern cloud automation. And as such, they can faster transform to cloud-native DevOps models, can release fast at higher qualities and the scarce IT staff can focus on delivering new services at higher frequencies, while letting Dynatrace and Keptn take the legwork out of operations. As the tech stack shifts and enterprises adopt dynamic cloud technologies like Kubernetes, we see the number of instances quadrupling, deployment speeds drastically accelerating and online services becoming increasingly interconnected. This new level of scale and complexity alongside agile, continuous delivery process completely breaks existing security approaches, which provides Dynatrace with a second big market opportunity I'd like to discuss next. Existing problems in security today are: Enterprise firewalls get perforated by web service integrations and hybrid cloud deployment; intrusion detection systems get blind to network content; vulnerability scanners missed what's actually running in production; and the agile software rollouts are much faster than existing security and compliance processes can handle; security operations centers overwhelmed with hundred thousands of false positives from their log-based security information and event management systems that lack the context and causal information; and risk management turns into gambling because configuration management databases are constantly out of date as dependencies grow exponentially, too. So basically, this means that every company who moves to cloud technology must upgrade their security approach. Many of the core technologies of the Dynatrace platform allow us to solve exactly those previously mentioned problems at higher speed, higher scale, higher precision, and in a market-disrupting manner that is just too good of an opportunity to pass up. So Dynatrace will soon enter the cybersecurity software market, focusing on the field of application security, a fast-growing market segment sized at $18 billion by 2025. We plan to bring our first component of a complete application security offering to market within the next 9 months. It starts with solving applications security pain in cloud-native Kubernetes deployments. We have many unique advantages that make us confident in our ability to disrupt this market. Let me explain 3 of them: First, real-time dependency grows. Dynatrace is the only vendor with an automatically discovered and continuously updated graph called Smartscape. Dynatrace's deterministic AI engine, Davis, leverages this directed graph to provide true causation and enables automated risk and impact analysis to speed up analysis by 1,000x, while providing a new level of precision, reducing false positives by 90% or more. Second, the automatic intelligent observability for the most complete coverage. Dynatrace OneAgent technology automatically instruments applications built on the most common stacks without relying on developers manually placing observability routines into the code. So Dynatrace won't miss a code change or new deployment because OneAgent continuously and automatically discovers changes. Such high coverage limits the exposure to vulnerabilities and can make the difference between a critical application being dead or alive for enterprises and its customers. Dynatrace OneAgent is the market's only unified lowest overhead and most enterprise-proven enterprise technology. So monitoring customers get the additional benefit that the same agent that they use for automatic observability today is used for application security as well. This means enabling Dynatrace application security capabilities is a matter of a single click, drastically simplifying deployments and making our upsell frictionless. Third, the automatic context beyond observability. The unique advantage of having Smartscape dependency graph, web and mobile real user monitoring, deep code visibility, dramatic observability in the unified platform is that we can automatically leverage context like a user session for behavioral analytics and fraud analysis. This can save 20% or more of developers and security analysis work and solve problems that previously couldn't be solved. Today, there are over 3.5 million job openings for security talent. With a shift to dynamic multiclouds and growing cloud complexity, the labor shortage will only get verse, meaning automating security is not an option, it's a requirement. There's simply not enough talent to keep doing things the same way. That is why I believe in no [indiscernible] as much as I believe in NoOps when we brought that to life. Cloud automation and application security are huge growth areas for Dynatrace. Let me explain the third long-term growth area that opens the Dynatrace platform to a massive ecosystem. As enterprises digitalize to automate and build new services, they double their survey instances and data capture every 3 to 4 years. So obviously, there is too much data that is too hard to process. As enterprises understand the importance of the data, they need easy-to-use enterprise-grade digital business analytics that drive automation, smart orchestration, IT and business automation, fraud detection, remediation, customer experience optimization, business analytics, automatic compliance checking, real-time VIP user segmentation, feeder adoption, cloud cost optimization, vertical-specific application performance management, automating quality gates are just a few example of almost unlimited use cases. Digital business analytics and automation corresponds to the business intelligence and product analytics markets, sized at $29 billion by 2025. Customers have told us for years that the Dynatrace contextual data that we automatically capture is gold, and ask us how they can leverage it beyond the use cases that we provide out of the box. This convinced us to open the Dynatrace platform even further and bring Dynatrace to a new level of programmability, analytics and openness for integration in custom use cases. So we are extending the platform in 3 areas: First, massive scale hypergraph data engine. Dynatrace is already the most scalable software intelligence solution. We're scaling our storage and analytics capability by another 1,000x to meet the scalability and data growth needs for the next decade. The open data access with rapid distributed mesh-based processing will not only be enterprise scale and secure, but it will also be the only in the market that brings a graph-based database approach with metrics, logs, traces, behavioral and deep code level information together, making it the only digital business analytics with a graph-based causation engine to tackle today's multicloud problems with unmatched precision. Second, the Dynatrace apps. Customers, partners and even Dynatracers will write ops that run on top of a Dynatrace platform because it is most feasible to bring the custom logic to the data and not vice versa. For that, we are adding a low code development interface and function as a service capability into the Dynatrace platform. Third, the Dynatrace hub. We are building an ecosystem of partners who create Dynatrace ops that are valuable to enterprise customers. A new Dynatrace hub will make creation and publishing of Dynatrace apps easy. What makes the Dynatrace platform additionally attractive is the low development efforts because Dynatrace apps build on the platform's existing enterprise capabilities, like single sign-on, enterprise security, automatic size its managed deployments, and it provides access to the power of Dynatrace AI into hypergraph-based analytics. The final success criterion is to differentiate from generic business intelligence. Therefore, we are focused on digital business data, where we provide greatest value and differentiation, allowing us to take the lead. This is a multiyear journey that will get Dynatrace well and deeper into customers' cloud fabric and multiply the value we can provide. Customers will extend Dynatrace with custom use cases. Partners will drive business with custom applications and Dynatrace can build apps to provide offerings for vertical market. I do believe that focusing our innovation efforts in the 3 areas of cloud automation, application security and digital business analytics that includes automation, plus an ecosystem around the Dynatrace hub, will fuel the future growth for Dynatrace and to pave the way for a rapidly growing multibillion-dollar business. I believe the value of our unique platform approach is only getting started. Given how our technology leads and continued innovation culture, it will be hard for the others to follow us on the course I've just laid out. The market continues to move towards us, and I'm excited about what we'll accomplish over the next several years. Thank you. With that, I'm handing it over to Kevin.

Great. Thanks, Bernd. Today, from a financial perspective, I'm going to review 3 main areas: First, I will recap our now completed journey through the 2 major transitions that John mentioned earlier and our financial success during our first year as a public company; second, how we've built a well-diversified business; and third, how we are well positioned to deliver sustainable growth and profitability over the long term. A good portion of my discussion will focus on our path and the building blocks to achieve our goal of becoming a multibillion-dollar category leader. But before I get there, let me start by reflecting on our performance against our internal and external goals that we established before we went public last year. Beginning a few years ago, we set a goal to convert our classic customer base to the new Dynatrace platform and, at the same time, transition our financial model from perpetual revenue to a more predictable and durable subscription business. We believe we have successfully delivered, if not over-delivered, these goals. The result has been rapid growth in ARR, strong growth in total revenue being driven by an increasing mix of subscription business and solid profitability that is driving healthy cash flow that enables us to delever our balance sheet. As John mentioned earlier, we consider the perpetual to subscription transition and the classic to Dynatrace conversion as being complete. Subscription revenue as a percent of total revenue, grew from 65% in fiscal '18 to 93% this past quarter. And the Dynatrace platform ARR now makes up over 94% of total ARR, up from 30% at the end of fiscal '18. Over the past 5 quarters, we believe we have demonstrated our ability to execute and adapt as the business has transitioned and not just on the top line in terms of ARR and revenue, but also on the bottom line in terms of operating income and unlevered free cash flow. We've been very pleased with our top line performance. We ended Q1 of '21 with ARR of $601 million, that's up 39% year-over-year, and an annualized revenue run rate of almost $625 million, which is up 30% year-over-year. I'm equally pleased with our bottom line performance, with operating income in the first quarter of $154 million on a trailing 12-month basis, representing a 27% operating margin and unlevered free cash flow of $141 million over the same time period. This represents a 24% cash margin. Overall, it is a powerful balance of growth and profitability at scale during our first year as a public company. Looking at our capital structure. We have successfully delevered the balance sheet ahead of our expectations that we set at the time of the IPO. In addition to using IPO proceeds to reduce our debt, the primary use of our strong cash generation over the last 4 quarters has been focused on reducing our leverage ratio. With our debt repayment plan well underway and our leverage ratio at 1.6x EBITDA, we are now increasing our focus on strategic uses of cash. We will continue to reinvest back into the business with a particular focus on investments in customer success, innovation and commercial expansion, a track we have been on and we'll work to accelerate. We also plan to be opportunistic with respect to small tech tuck-ins where we can integrate the technology into our platform to complement and leverage the nearly 800 engineers we now have in our R&D organization, focused on enhancing and expanding the Dynatrace platform. As we move forward, we will always be looking at how we can best leverage our cash balance. We expect that we'll grow on the balance sheet over the short to midterm, appropriate to support the scale of the business we are building, while we continue to reduce our debt and delever the business. Taking our execution into consideration, our bottom line performance enables us to reduce our debt while continuing to make strategic investments to fuel top line growth. This demonstrates our approach to operating a balanced business. Many of you are familiar with the Rule of 40, a common measure that is used to analyze the health of software companies. It takes into consideration 2 of the most important metrics for a SaaS company: top line growth and profitability. When you combine our revenue, our ARR growth rates with our unlevered free cash flow or operating margin, you can see that we are running the business at an impressive Rule of 50-plus. When you look at it through the lens of subscription revenue growth, this puts us well over a Rule of 60. No matter how you slice it, we are very pleased with our performance over the last year, where we have delivered what we believe is a best-in-class combination of growth and profitability at scale. So now that we are through the 2 major transitions and established a solid trajectory, investors often ask, what are the right metrics to be view the business going forward? Let me start off with the metrics that are not accurate reflections on the health of our business: RPO, deferred revenue and calculated billings. This is consistent with our previous commentary on these metrics. It's important to understand that there are several factors in play, causing variability within each of these 3 metrics. And this variability will continue to play out over the near term. The first factor pertains to a program we recently rolled out called One Contract, One Price. Historically, as our customers expanded, each purchase would require an added contract with unique prices and anniversary dates. This could result in a customer with 5, 10 or more renewal contracts at different times over the course of several years, which is extremely inefficient from an administrative perspective for both us and our customers. As a result, we are looking to move all of our customers to a single, often multiyear contract with a fixed price for expansion and one renewal event. As renewal dates shift as part of this journey, it doesn't have an impact on revenue, but it can create significant variability in our billings, deferred revenue and RPO. As we execute against this One Contract, One Price program over the next few years, there will continue to be variability in these metrics that had nothing to do with the underlying health of our business. The second factor impacting RPO is being driven by a change in contract durations. As we transition to a subscription business, we saw a tailwind in our total RPO growth, driven by longer contract lengths. Our average subscription contract length has increased from a little over 1 year in fiscal '18 to almost 2 years this past quarter, resulting in a higher long-term RPO growth rate. Finally, our transition away from perpetual to subscription has caused variability in our deferred revenue. As a reminder, when we sold a perpetual license, we will recognize the license value ratably over 3 years. This resulted in an increase in short and long-term deferred revenue initially and a decline in deferred revenue as we recognize these licenses. As of June 30, we had about $50 million of ARR related to these perpetual licenses. And assuming minimal new perpetual licenses, which is what we are seeing today, we expect this to wind down to almost 0 by the end of fiscal '23. You are seeing this decline initially in our long-term deferred revenue, and it will then be a headwind to short-term deferred revenue as the recognition is completed. When this wind down is over, deferred revenue will start to normalize with the full subscription business. Over the next few years, as we work through these items, we believe RPO, deferred revenue and calculated billings will become meaningful metrics of growth. In the meantime, we continue to believe that ARR, subscription revenue and margin are the key high level metrics to understand the momentum and overall health of the business, with a few supporting metrics worth noting. The key growth drivers for ARR will continue to be: one, new logos to the Dynatrace platform; two, the average ARR of the initial land; and three, our net expansion rate. All these translate to ARR per customer, which is a measure we will talk about more often moving forward. As a reminder, expansion at the time of conversion from classic to Dynatrace was only about 4 to 5 points of our ARR growth rate in fiscal '20. And now that we are essentially complete with this conversion program, it is immaterial going forward. From a revenue perspective, our strategic focus is growing subscription revenue, which is derived from our ARR growth. Looking forward, we believe subs revenue will increase as a percent of total revenue due to the compounding effect of the subs model, combined with the fact that more services work will be done through our cloud partners. As a result, we continue to view subscription revenue growth as the most important revenue metric over and above total revenue growth. From a profitability standpoint, as I mentioned earlier, we believe in running a balanced business, which means top line growth combined with profitability. For those of you not familiar with Dynatrace, there are several items that help us run a balanced business. Perhaps the most important is a highly efficient SaaS offering. As Bernd mentioned, we do 25 major Dynatrace platform releases a year and hundreds of compatibility updates, resulting in a very efficient customer assistance and support and success organization that delivers very healthy gross margins. Second, as Bernd outlined, our major R&D labs are in Austria, Poland and Spain, where we are able to recruit and retain top talent. If we had this investment in major U.S. cities, our R&D spend as a percent of revenue would be double. Certainly, a little secret sauce here. And third, as Steve Pace mentioned earlier, our global sales, marketing, services and support organization are quite mature from a geographic standpoint, allowing us to more efficiently scale globally. Overall, these factors help deliver healthy margins. And as we continue to grow the top line, we believe we can continue to be efficient as we invest aggressively in innovation and commercial expansion. So now let's take a look at the depth and breadth of our portfolio and what gives us confidence in the ongoing durability of our business. There are 3 factors contributing to the durability of our business. First, as we mentioned several times today, 93% of our revenue is now recurring, which provides us with solid visibility and predictability. Second, digital transformation is accelerating, and you can argue, it's even more important now than ever. And third, as Steve Pace mentioned, we target large enterprise-class customers, defined as customers with revenue greater than $1 billion and have a healthy and growing modern cloud customer base. Let's double-click on our customers to give you a better sense of where we operate. The vast majority of our ARR comes from customers that spend more than $100,000 with us annually. Nearly half of that comes from customers spending more than $1 million per year. We have succeeded in expanding our platform penetration, most notably among our large customer cohorts. As a result, we now generate the majority of our ARR from customers that are using 3 or more of our product modules. We believe this sets the foundation for future growth as we expand our footprint and modules across our customer base. Our focus on large enterprise is by design. We have differentiated offering to meet their needs. They have the largest IT budgets, and we believe they are far more resilient and will continue to invest in digital transformation initiatives for agility, efficiency and business advantage. We believe the results speak for themselves. These customers have had consistent growth CAGRs across geographies, with the business well diversified on a global basis. We are also diverse across verticals, which also provides for greater durability. So moving on to my third main topic. Let's review what gives us confidence for sustained growth into the future. Let me share with you how I we think about it. As you know, there are 2 core building blocks to ARR growth. They are: New logos to the platform and expansion of existing customers. Assuming our growing direct sales organization and expanding cloud partner network can deliver new logo growth in a range of 15% to 20% per year, and we maintained the existing land ARR of about $100,000, while keeping our net expansion rate over 120%, this would translate to an ARR CAGR in the mid-20% range for the next several years and create a multibillion-dollar business. Breaking down these growth drivers. The first one I'd like to focus on is our new logo growth. While we saw headwind in the first quarter due to the pandemic, we remain confident in our ability to achieve sustainable growth and new customer additions over the longer term. With less than 20% penetration of the target Global 15,000 enterprise accounts, we have a lot of runway for future growth. We continue to see very healthy win rates, not only in competitive situations where we have an opportunity to displace a legacy vendor. Also, as more companies embark on digital transformation journeys and mature their approach to multicloud monitoring, we believe we will continue to see ample greenfield opportunity to acquire new customers. The second growth driver is our ability to expand in our existing set of enterprise accounts. Having now reported 9 consecutive quarters with a net expansion rate greater than 120%, we remain confident in our land and expand strategy. Underpinning this expansion are several key drivers: First, as Bernd and Steve mentioned, we are making aggressive investments in both building out our platform offering and in the go-to-market muscle that will allow us to cross-sell these modules to our existing customer base. As we become more critical to organizations in areas such as digital experience, expanded infrastructure and logged use cases and eventually security, we believe we have a massive opportunity to drive a larger platform footprint across the enterprise. In addition to the cross-sell opportunity, we also believe that there will be continued tailwinds in the cloud application monitoring market as the number of applications per enterprise increases, resulting in continued expansion opportunity in its core Dynatrace use case. Taking all of this into account, these building blocks provide us with the confidence for sustained growth into the future. So what does the financial profile look like for us moving forward? We believe we have the foundation in place to continue scaling the business and operate under the rule of 50 as we make the appropriate investments for future growth. That translates to an ARR CAGR in the mid-20% range, with the revenue CAGR slightly below that. While we believe there may be a longer-term opportunity to raise profit and cash flow margins, our near-term focus is not expanding what are already best-in-class margins for a high-growth software company. Operating margin in the mid-20% range is very healthy and gives us a lot of firepower to continue to invest in innovation and commercial expansion. Double-clicking on non-GAAP operating margin. We intend to maintain our current levels and investment in R&D while growing the top line. We continue to expand our sales force and marketing efforts. So you may see those levels of investments tick up while we expect to have leverage on the G&A line. The bottom line is this, with a large TAM fueled by digital transformation and cloud adoption, an enterprise cloud customer base that continues to grow steadily and a platform that continues to expand and become more robust, we believe that a mid-20% ARR growth rate is sustainable for many years to come. Couple this with a continued disciplined approach to running the business, we believe we can maintain a healthy rule of 50 for the next several years as we become a multibillion-dollar category leader. With that, I will turn it over to John for a quick recap before we jump into Q&A. John?

Thank you, Kevin. As Kevin said, we are focused on building a multibillion-dollar category leader, certainly in the enterprise segment of the market. This segment alone, we believe, provides us a massive TAM of over $30 billion and is growing quickly. These accounts are large, they are digitally transforming aggressively and we are in the early innings of their transformation journeys. You heard from Steve Pace how we continue to perfect and adapt our land-and-expand go-to-market from frictionless free trial to remote Zoom selling and onboarding to trusted relationships for platform expansion. With an expanding direct sales organization and increasing leverage from cloud partners, we believe we can drive solid new logo growth, plus ARR per customer expansion consistently well into the future. You heard from Steve Tack and our customers on the powerful differentiation of our platform and purpose build modules and the ongoing value they provide to accelerate and enhance digital transformation. Our automatic and intelligent approach to dynamic multi-cloud observability is highly differentiated and defensible over time even as data sources, cloud building blocks and cloud ecosystems evolve. And we're not stopping here to catch our breath. As Bernd discussed, we are aggressively extending our differentiation and value into new markets, disrupting the status quo and continually redefining what's possible. Autonomous Cloud enablement, cloud-native app security and Function as a Service programmability will extend our platform in new ways, expanding our market opportunity, increasing go-to-market potential with cloud partners and expanding ARR potential per customer. With a massive market, well-differentiated offering and proven go-to-market, our financial profile is strong and balanced. As Kevin said, we have the building blocks in place to continue to grow rapidly while generating very healthy margins and cash flows, a rule of 50 business with potential even beyond this. No question, it's an exciting time for Dynatrace. The course is set. Our objective to become a multibillion-dollar category leader is clear. We have the market, the platform, the vision and the talent to get there. Now it's time to execute. Thank you very much. Noelle, shall we open the floor for questions?

Thank you, John. We have a little over 30 minutes remaining to answer questions. [Operator Instructions] We'll start off first with a question for you, John. This question comes from Jen Lowe of UBS. She says, "Steve talked about the land-and-expand sales motion. Is there any general flow around when those expansions happen, time from the first land to the first expand? And has that time line changed at all?"

Sure. Yes, there's actually probably 2 thoughts there. The first one that we're seeing is that our land is actually a little bit larger. Steve Tack mentioned that we're starting to see more of our lands with 3-plus modules, and that is driving up the ASP of the lands. It also means that we're getting better at that cross-selling of the multi-modules of the platform sooner in the sales cycle. And that actually sets us up for what we're also seeing, which is expansion that's coming a little bit quicker. Now whether that's sort of our sales skills getting better, selling that platform, whether it's the observability movement kicking in, which actually anticipates the platform or whether it's digital transformation accelerating, I'm not really sure. But whatever it is, it is kicking in expansions a little bit faster. We see most of those initial expansions within the first 6 months.

Great. Okay. So our next question is also for you, John, and it's on the topic of cloud partner program. The question is from DJ Hynes of Canaccord. He says he would love to hear a bit more about the cloud partner program. What is the go-to-market strategy there? And how do they contribute to bookings today? And how do the economics work? So maybe Kevin can pick up on that one. And how do you see this evolving? And then if we fast forward 5 years, how significant could the channel be to Dynatrace?

Well, what's wrapped in there a few different questions, but let me try to sort that out. Our cloud partner program has been active now for a little over 18 months. And it's an extension or sort of an outcropping of a partner program we've had for a number of years, as Steve Pace mentioned. But this one is focused really on the cloud system integrators, who are the ones behind many of the enterprise digital transformation efforts. And they bring to their clients, their customer base, a series of solutions that include multiple different pieces that need to come together to put together a cloud ecosystem. It will include a platform player like AWS, Azure or Google. It will include often some kind of Kubernetes orchestration layer. It will include some kind of an ITSM management system like a ServiceNow. So there's a number of components that need to be brought together. Within that portfolio, there also needs to be automatic, intelligent observability. And that's where we fit in. And we see more and more of those SIs who thought monitoring was done with the collection of tools starting to now seek a platform that they can weave into the ecosystem and make that entire ecosystem smarter and more automatic. And with that, that serves us extremely well and why we've been leaning in. As Steve also mentioned, it's early days, okay? The economics of this are baked into sort of our financial models and the rest, but they're starting to embed us into the way they think about their solution set. That does not mean they're OEM-ing us, that just means they bake us into their solution set and take us to market with them. We do believe it's an accelerant to the business, a future accelerant or certainly potential accelerant. And that's why we're sort of excited about that opportunity that we see ahead of us.

Great. And I noticed that you also picked up on the economic question, so we don't even need to volley that to Kevin. So thanks for that.

I'm sure there'll be plenty for Kevin.

Yes, I'm sure. So our next question is from Parthiv Varadarajan of Jefferies. And Steve, we're going to have you start with this one and maybe some additional commentary from Bernd, if that makes sense. So regarding today's ServiceNow connector program announcement, as application architecture shift toward containers, can you speak to the challenges faced by downstream enterprise systems like the CMDB to keep up with rapid pace of change at the application and infrastructure layer? And how does today's announcement address some of those challenges?