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

Good morning, and good morning. Thank you all for being here. My name is Bhavan Suri. I'm the analyst at William Blair that covers Dynatrace. You can find all the appropriate disclosures on our website at www.williamblair.com. It's a real pleasure to have an old friend of mine Kevin Burns here, CFO at Dynatrace. And as most of you know, we're big fans of his business, kind of a leading player in the observability of monitoring space. And we're going to do this as a fireside chat. I have a bunch of questions for Kevin. They're all going to be very, very tough questions, Kevin. And we'll open it up to the audience. And Noelle Faris runs Investor Relations over Dynatrace. Thank you both for being here. Thank you for your support.

And I guess we'll kick it off, Kevin, just at a high level for folks who might be new to story. Just tell us a little bit about what Dynatrace does? The industries you participate in and the problems you solve for customers?

Yes. So at a very high level, we believe we're one of the leading observability and intelligence platforms. Built for today's modern dynamic cloud environments. And we really help enterprises, at scale, digitally transform. We help them simplify their cloud complexity, and we help them operate securely. So when you think about the Dynatrace, it's an all-in one platform. We purpose-built that over the last couple of years to focus on automation and intelligence. And we go-to-market with a platform. We have about 6 different modules, including full-stack, infrastructure, DEM, cloud security, cloud automation. We continue to evolve the platform and product over time. When you think about our technology, what makes us a little bit different is we have a little bit of secret sauce. And I won't go into too much detail here, but when you think about how we built our platform, we focus on automation. Capturing all the different information and whatnot across an enterprise, so that you have visibility into what's going on. But then when you translate that into by using PurePath and tracing where all these data components went, put it into a dependency map. And then at the end of the day, where the real value is, we put AI at the core. So we've got this platform that we built from the ground up over the last 4 to 5 years to help companies at scale to see their entire platform observability, identify root causes, identify issues that are going wrong. Compare and bring that into business value as well. So we focus on the Global 15, as I said, providing true end-to-end observability platform, and we think we're in a great spot to continue to proceed in the marketplace.

Yes. And I think, Kevin, maybe dig into that a little bit. Just maybe walk through a little bit. There's always confusion in the marketplace around the legacy guys, the 3.0 guys, the log guys, the APM guys. And maybe just sort of if you want to -- I'm happy to throw out names, or you can. But just sort of explain like what you might fit in vis-à-vis like a Splunk maybe or a Datadog which is viral low end, however you guys want to think about that? I'd love for you to just clarify where you fit in because there is a lot of confusion about, do these guys all just run into each other? Or are there places they play?

Yes. Yes. No, we quite often get that question, Bhavan, and it's in the form of, hey, it's a crowded marketplace, what's going on, right? And frankly, our -- we don't believe it's that crowded. So if you go back 5 to 7 years, the applications and the environment people were trying to monitor, there were big applications on-prem, rather static, not a lot going on. Companies that instrumented 10% -- 5% to 10% of those applications, it was time-consuming, labor-intensive and took a lot of money to do that. What we did, though, is we saw, the world was changing. Right? So the companies were moving from large apps on-prem, to smaller applications, containerized environments, multi-cloud environments and all of that was changing. So we actually took all of our code put it to the side, innovator's dilemma, and said, we need to rebuild and that's what we did. So we rebuilt about 5 years ago, thinking about where the market's going to be, right? And again, the way we think about that is, smaller applications, much more dynamic, much larger in scale and data everywhere. There's going to be some on-prem, there's going to be some in different hyper-scale environment and large global enterprises needed the visibility to cross that. So we purpose-built our platform and our technology to monitor in those environments today. So if we think about the competition today, we feel so those second-generation players that were very successful 4 or 5 years ago, they missed a tech cycle, right? They missed the microservices, the containers, and I think they're having a hard time adapting to that. So we feel like we're in a good spot when we think about the observability marketplace, working in large-scale environments, we've been at this. This is our third-generation of the Dynatrace platform. We've reinvented a couple of times along the way. We're always building to sort of where the market is going next. So the way we think about the market is it's not as crowded. We're seeing some of those folks sort of go by the wayside over the last couple of years. Our biggest competition today, frankly, Bhavan, are those CIOs who want to do it themselves, right? They want to get a database, they want to find a correlation engine, they want to find some AI, and they want to build this platform where we've spent the last 5 to 7 years perfecting. So our challenge, in our opinion, is getting into those accounts to show them the value that we deliver to them.

Yes. No, that's helpful. I mean I think you've talked about putting the technology aside and rebuilding it I remember you and I, I think John who was the CEO, sat in her office, and you showed me how the platform led off, I think it was 5 or 6 years ago, and I was blown away by sort of the automation. But you've also gone through a transition in terms of replatforming and the shift from a the old Dynatrace to the new Dynatrace. Maybe talk a little bit about that dynamic. And we'll get to the impacted numbers, but just talk about what's happened and a little bit of history of how it's played out and where we are today because the transition is effectively done.

Yes. No. And we're very pleased with the transition, right? And I think there's two fundamental transitions that took place. And the biggest one was moving our customers from the legacy, what we call classic application products that we sold to the new Dynatrace all-in-one platform. And there's two ways you can approach a customer-migration customer-conversion story. One is, you put the stick out there and say you're going to move. That wasn't our approach. Our approach was, hey, you are moving workloads from on-prem whether you're refactoring or building cloud native applications, we want to go and help you monitor those very complex dynamic environments. So our go-to-market over the last couple of years was, hey, let's find for our customer base those environments. Let's prove the value in terms of automation that we deliver, the intelligence that we deliver. And then once we prove that in our global enterprise accounts, they're going to take all that classic legacy spend and sort of move it over to the new platform. So it was a 2-year cycle. We took about 20% of our sales energy to focus on that conversion program. But I'll tell you, 2 years in, 99% of our ARR is on that new platform and our customers' ability to expand different modules and use cases on that platform is amazing. So customers love it, 2-year cycle to get them over there. And yes, we can talk about how the business model transformed as well. But from a customer standpoint, they loved it.

Yes. And I'm actually going to interrupt with a question that's coming from the audience because I think a little clarification will help. So the question comes out, this sounds a bit like Arista Networks' EOS or what they call Extensible Operating System software -- I'll just jump back to the question for a second. This sounds a little bit like Arista's EOS software. Are you complementary or competitive with Arista Networks' network switching routing systems. So again, I think there's so much imperative like complexity. Like peeling it out a little bit would be helpful, but anyway, someone is asking that question. So you just maybe talk about the complementary nature of your solution to networks, routing, switching, et cetera.

Yes. I think, look, at the end of the day, our primary focus when sort of brand the market observability, and our go-to-market motion over the last couple of years has always been to focus on the applications because we believe in the enterprise accounts, making sure your applications are running and all the infrastructure that supports those applications that's where the business value is. So our platform includes, as I mentioned, the full-stack application coverage includes the infrastructure piece with the logs, and then we also expanded to real user monitoring and cloud automation, and we can talk about security a little bit later. But our focus, as you want to think about those applications because for global enterprise accounts if the apps aren't working it's going to have a pretty big meaningful impact on perhaps the business outcomes for that company.

Yes. Yes. Let's touch a little bit on TAM. And more importantly than TAM is the drivers behind the business. Because you start to see a couple of things, right? You've started to see your net dollar retention rate, which is very high. We'll get into it, remain consistent, but you've seen new logos accelerate. You've seen demand accelerate. You've talked about, first we're going to increase sales head count by 20%, and a little more and a little more and so we've seen that, et cetera. Let's talk about the drivers of the business, like what are you seeing in the marketplace that is driving this accelerating growth in your business?

Yes. So I think if we look at it from a product standpoint, we -- I'll start there, and maybe then we can talk a little bit about productivity and the tail and drivers there. If you look back over the last couple of years, 2 -- 4 or 5 years ago, companies can only instrument 5% to 10% of the applications, and you ask yourself, well, why is that? If these are mission critical, why wouldn't they instrument more, the reason why it was so time-consuming and labor-intensive. They define these agents, instrument the environment. As the environment changes, they needed to go and reinstrument. Our technology automatically instruments the entire environment for our customers. It saves a huge amount of time and energy for our customers. And then what we do is we take that information, all the data we're capturing and build a real-time dependency map. And so instead of people looking at screens and trying to figure this all out, the systems, taking the data, building the dependency map and then the value comes in with the AI engine. Because it's actually identifying the root cause problem that you have in your environment. What's different is all of that used to be done manually. And so you would have war room set up, you would have a bunch of alerts coming on the screen and so we talk about the value of automation and intelligence, and that's what companies are looking for. They don't want to spend time developing monitoring tools. They want to go see the business impact. They want to go see how they drive more, better customer engagement and user experience. So we're trying to take that piece out of the puzzle to allow customers to observe more, to monitor more, to instrument more and get better visibility across our entire enterprise at scale.

Yes. Yes. I would also add to that. The number of applications that have been created is just so much more and so as we can instrument them, that's helping. I think that's a critical driver of sort of what's being played out there. Let's touch on sales. As you think about the go-to-market, you have an incredibly efficient model. You're very profitable from a cash flow perspective despite the growth. I'd like to understand, as you think about the enterprise focus, you're generating $260,000 in ARR per customer, just can you walk us through the go-to-market playbook and the sales motion that allows for that level of efficiency?

It's a pretty simple model that we've -- I think we've tuned very nicely over the last couple of years. And we do this, an enterprise sales organization, as you mentioned, and have spent a lot of time figuring out the right balance of sales reps and RDs and RVPs, and we've got that model down nicely. But our go-to-market is, go into a new logo account and find the most complex applications, microservices, containers, super complicated, where their existing tools are falling apart. Instrument that and do it in a small scale. It doesn't need to be a large multimillion-dollar sale on day 1. Go in there with $100,000 opportunity, prove the value of our platform, get it embedded into an enterprise account. And then we have dozens and hundreds of used cases where you can see how in 3 months, 6 months, 12 months, they're expanding not only the number of applications, but then they're expanding the modules they're using. Infrastructure and DEM and things like that. So we believe we've got a really nice, proven model that we've developed over the last couple of years in terms of the go-to-market motion, and we're pretty excited that we can continue that. When you think about then if we have a proven model, go-to-market model, is how do you do -- how do you go faster, right? And so we think about that as well. And there's a couple of things we're working on there. One is we're growing our sales organization. So last year, we grew our quota organization, about 25%. This year, we're going to grow at 30%. The other thing that's happened in the last 12 months is we've seen a change in the shift between the number of new reps and the number of mature reps. And as you know, with mature reps, higher quota, higher payment, higher productivity, and that's been great. So -- but 30% growth of sales reps, a maturing of the sales organization and a proven land and expand strategy gives us a great model from a go-to-market standpoint.

Yes. And I'm going to just lay in a follow-up right there. One of the things you commented about is how the initial lands used to be like $100,000 and then they vary quarter-on-quarter which are [ 111 and 105 ]. But if you look at that increasing size of initial land, how are you also seeing a shortening duration of when a sales rep starts to sell to close? Are you seeing that in the marketplace yet? Or is that still pretty consistent with what you've seen historically? Because those 2 factors alone can drive some really nice acceleration.

Yes if we didn't have this period of COVID, I think the trend lines would be a little bit cleaner, but certainly over the last year, we've gotten a little bit of COVID influencing some of the metrics and instrumentation that we capture internally in our organization. But what -- again, I think I'll summarize it by saying, once we're in the door and we do a POC, it doesn't take long. It's a week, it's a month, right? And our enterprise accounts are seeing that value. So I think the punchline for me is as quickly as we can go to a POC and show those accounts, the enterprise value the automation and the intelligence that's incorporated into our platform. That's what's going to accelerate a little bit more some of the new logos and the expansion. And I just think this year, given some of the COVID headwinds, I think that didn't necessarily pop up in some of the metrics that we capture.

Yes. Just touching on new lands a little bit, and I'll ask a follow-up on duration. But new lands, we talked about the size of new lands? I guess just some color -- what are your expectations for the -- let's just say the foreseeable 2, 3, 4 years of how the new lands play out.

So this past quarter, our average new land size for folks was about $105,000. And I think that was up about 10% to 15% on a year-over-year basis. So we're definitely seeing a little bit of an expansion that will probably continue as we introduce new modules. So maybe that goes up to $120,000, $125,000. But ultimately, we also don't want to get to that price point where it needs to go to the CIO for approval. We want to get in the door with whether it's 5 apps or 10 apps or 3 hose or 10 hose and prove the value there. Because once we're in the door, Bhavan, it's amazing where they see the value. And then they're taking resources off of instrumentation and managing the environments and putting it on, well, what's the user experience, and how do we optimize things like that.