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

Good morning, everybody. I'm DJ Hynes, I'm Canaccord's lead software analyst. Thanks very much for tuning into the Canaccord conference. This is the 41st year that we're doing this. So very much appreciate your support. Delighted to have Dynatrace here with us this morning. We have CEO, John Van Siclen. For those who were on our last session, we just -- we were speaking with LogicMonitor. So it's a bit of a natural transition to kind of stick in that observability world. So super excited to have John here. And John, thank you, and we appreciate the support.

No. Great to be here, DJ.

So I'm going to assume that most folks tuning in are familiar with the business, the problem that you're solving. So instead of the kind of what do you do intro, maybe we can just talk about Q2, some of the key trends that you saw there and any highlights that you'd want to call out for investors.

Sure. So it's been a couple of years since we IPO-ed. And we've doubled the customer base, doubled the ARR pretty close anyway, doubled the ARR, which is our sort of leading growth metric and sort of been able to create some value for shareholders along the way. And Q2 was just another strong quarter. We're growing well mid-30s kind of growth rate. And we're doing it because digital transformation is really a journey, not an event. It did get a little tailwind because of the pandemic, which sent everyone scrambling to realizing that agility, new revenue streams, risk mitigation to business, et cetera, was paramount. And the way to do that was to lean on applications, and applications happen to run on dynamic multiclouds today. Certainly for the -- for those forward-thinking digital transformers. And so with that kind of a tailwind, we have a fantastic platform for those digital transformation projects. To get the visibility, as you know, that's a key part of the observability program. But for us, it's more than that. It's also the unique automation and AI capabilities that we bring to bear and that continues to resonate with customers. They're trying to do more with less. They're trying to move faster, and they're trying to do it at lower risk. And no question that automation and AI can play a big role in it, and we happen to lead in sort of that combination of observability and AIOps.

Yes. Yes. It's a perfect intro. It's funny. Like I was prepping questions before we got into this, and one of them that was on the list was around competitive dynamics. And it's funny. Like I feel like the narrative with investors has shifted a little bit. Like it used to be, like, oh my God, the space is so competitive, but I feel like folks are starting to figure out where Dynatrace fits in the market, right? And obviously, it's at the high end with the enterprise customers. I'm curious, as you look at who else is out there, like who's able to compete in enterprise? What's required in that -- at that end of the market? And why is Dynatrace winning?

Yes. A couple of years ago, it felt like it was a little more competitive than it is today, actually. And one of the big reasons for that is that dynamic multiclouds are the platform of choice, and you can't just throw old tooling at it any longer. So we see less of the Cisco AppDynamics, New Relics. We rarely run into a Datadog or a Splunk out there. So it is a massive market. But I think a lot of it is that the problems that we solve for digital transformers, I mean, they have multigenerational technologies. They are quite advanced with cloud, but they connect it back into sort of a hybrid back end, and we're just uniquely positioned for it. The other thing with the digital transformers, the billion-dollar-plus companies that we target is that they have multiple apps, multiple lines of business. It's a complex environment. And we shine the greater the complexity. Because that's what we built the automation and AI for, was for those environments that just overwhelming amounts of data, variety, velocity, the amount of change, et cetera. So in those more complex environments, our combination of capabilities really shine.

Yes. Yes. I want to talk about new customer lands and just -- it seems like they're getting more strategic upfront. And I've picked up a couple of comments from you guys that I found interesting over the years, which is in the past, customers used to buy Dynatrace for automated instrumentation. But now it's all about the AI, right, and giving answers, not signals, right? And then the second, there's been this shift towards observability versus kind of the landing zone of APM, right? Can you just talk about both of those and what it means for your business?

Yes. So I think that the bigger one is actually the latter, which is a shift and a realization that clouds are different. You need multiple kinds of data to understand them. And because they're very complex, it has to be real time, all the time, et cetera. And so observability, which is a combination of things that used to be separate tools or tooling, logs, the metrics, the traces, user experience, other kinds of telemetry, they were brought together in little pieces because the old data center world thought that way and the classic ITSM strategies define them that way. But as more people have figured out the cloud really is different and you need to have that combination of the pieces in order to really understand what's going on, it's left many sort of competitors behind, your would-be competitors behind. So this observability movement is sort of a core piece. And we see now 3 out of 5 engagements being observability centric as opposed to maybe APM or some kind of metrics or log or whatever. And that puts us in a really good place because we reinvented our platform 6, 7 years ago with that realization sort of in mind. And so that's a key characteristic out there. And what that's allowing us to do now is land with multiple modules more often. The size of our landing zone isn't any larger. It's a nice zone. It's a $100,000 kind of land zone, which makes sense for billion-dollar companies. But we're also expanding faster. And that's because you have the app piece, the infrastructure piece, the log piece and often, the user experience piece all brought together on that initial land purchase. So they're buying a platform, a concept, not buying a piece and then I'll buy another piece and another piece, if that makes sense.

Yes. It makes perfect sense. So the opportunity is clearly there. You're seeing it manifest in the market. Let's talk about what you're doing to kind of capitalize on that opportunity. We'll talk about the product in a second, but I want to talk about kind of go-to-market first. So you've committed to kind of a 30 -- I think 25% to 30% increase in sales capacity this year. So 2 questions there. Like a, just confidence in your ability to get there, right? It's a tight labor market. And then b -- and you and I have talked about this, like if you're so well positioned, why not hire more? I'd love to get your thoughts on both of those.

Sure, sure. Well, we do see a great opportunity ahead. And it really is as fast as we can go without breaking is how we're going. 2 years ago, we were talking about growing 20%. Last year, we grew 25 -- the sales organization 25%. And this year, we're up to 30%, and we're doing great with hiring, onboarding and maturing that sales organization at that rate. And so we're thrilled with that, but it takes a lot of planning. You have to have a lot of sales infrastructure and continue to stay 6 to 12 months ahead on that in order to be able to bring reps in and not just in and out, but actually in and create additional capacity for the business. So anyway, that's been going extremely well. We still have plenty of room to increase our coverage geographically, deeper into markets, deeper with customers and prospective accounts and so on. So we'll continue at this pace or maybe even a little faster pace over time. But we'll do it in a methodical way where we know we're adding real capacity, where we're actually seeing the results, the return on investment and not just creating a spinning door of people in and out.

Yes. Yes. Let's maybe transition to some of the partners that amplify your direct sales reach, right? So you guys work with the SIs, a newer and kind of growing effort with the hyperscalers. Just maybe talk about what those partners do for the business and, I guess, if there's anything that Dynatrace can do to help maybe better enable those partners.

Sure. Well, Partner Program is a key part of our strategy. We've actually had the program for years and years now, but it was focused more on sort of a reseller group as opposed to really cloud SIs that are driving sort of the ecosystem integration, the general contractors of, "I need a little AWS. I need a little Azure. I need a little observability. I need some IT management systems like a ServiceNow or whatever," and they're snapping all these pieces together. So those are the kind of players that we talk about when we talk about cloud system integrators. And we're doing extremely well with it. 45%, now a little bit more is influenced through these folks. So they may be working on an AWS project. We get in there, and we team together to provide a better solution for that customer or what have you, any combination thereof. So that's going extremely well, and no reason not to think we can continue to scale that up. We've been investing in this team at the same rate or faster than the direct sales team, okay, because we see it as a great long-term sort of productivity enhancer to our sales program. The hyperscalers are a little bit newer for us. We've always had great tech relationships with them, but the go-to-market relationship has been a little like how do we really get some leverage. And with the marketplaces and especially the private offers and the hyperscalers' interest in aggregating corporate spend so that they can retire or have a Dynatrace product to actually flow through, it relieves sort of the point total so that the customers might have that they'd be committed to and they also pay their sellers and retire quota. That kind of motion now is accelerating sales cycles to enough. It could be several weeks, it could be a couple of months. But in our kind of a world, if you can give the sales organization another 20% of their time back because we're not spending it in procurement and paperwork cycles, it's a significant tailwind. So we're excited about it. It's sort of early days, but the year-over-year impact is clear. So again, more [indiscernible] that as well.

Yes. Last one on the go-to-market motion. It was just around kind of expand dynamics. And I guess there's 2 questions there, which is like the catalyst to expand, is it customer led or Dynatrace kind of sales driven, which I guess is kind of like a pull versus push question, right? And then the second part would just be, is the bigger driver increasing coverage? Or is it new modules, right? And how has that maybe evolved over time?