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

Yes. I think that's our queue. All right. Let's get started. Good morning, everyone. I'm Pinjalim Bora, software analyst at JPMorgan. I cover midcap software. Delighted to have here with us CEO of Dynatrace, Rick McConnell; CFO, Dynatrace, Jim Benson; and we have CRO as well, Dan Zugelder. Thank you, guys, for coming, and welcome to the conference.

Thanks, our pleasure.

Great. Maybe to start off with a brief introduction, each one of you and maybe a little bit Rick, if you can talk about Dynatrace for the people in the audience who might not know about the story at all.

Sure. Well, at Dynatrace, our vision is to help deliver a world in which software works perfectly. The way we do that is to participate in a market that is commonly referred to as observability and application security. It tends to be thought of as on the order of a $50 billion market space, and it is getting more and more critical based upon what's happening in cloud and cloud spend. The cloud has numerous advantages, but among other things, it also causes an explosion of data and a massive increase in its complexity. And what that means is keeping software functional, performance and of high quality becomes harder and harder. And as a result of it, a year ago, maybe even year pendulum at this conference, I would have said that, that observability is moving from optional to mandatory. This year, we would say observability that is to say, sophisticated observability is mandatory. We see this over and over and over again at large enterprise customers that require observability solutions to make their software work as expected. We differentiate by delivering, as we say, a Dynatrace answers, not just data, not just dashboards. Dashboards give you an indication that something is wrong, answers using intelligent AI as we deliver at Dynatrace, enable you to assess precisely where something is wrong and get it corrected as rapidly as possible. And all times or not eliminate the incident from happening in the first place by being able to predict where issues may occur using AI. So this is Dynatrace's value proposition and our competitive differentiators.

Yes. That was actually my first question on observability spend, right? As a category, it seems like it is elevating. And this is all -- a few of your major GSIs that we have spoken to have highlighted that. We had spoken to some of your customers who have highlighted that. One of your large customers actually said observability solution is an insurance vehicle against risk. That's how they view it, right? So you talked about complexity of environment. What else is driving that elevation in kind of observability spend in budgets?

I would say that there are 3 principal drivers from my point of view. One of those drivers is user experience. We all expect software to work perfectly, get out our phones, get out our laptops, something doesn't work, we're frustrated. And we want it rectified immediately. And ultimately, if it breaks enough, we start thinking about alternative providers. So user experience is key. Second is cost. The solutions today are often, especially by large enterprises deployed through multiple different vendors. And none of them work particularly well together. So this consolidation and elimination of cost is the second driver. And a third driver is productivity. I was on the phone with one of our larger customers, and they said that an incident process can have 100 people in it immediately and it lasts for hours. They want to eliminate this or move it to -- from hours to minutes to seconds, to resolve incidents and radically reduce the number of people involved in incident response. The results of that is you have much more development resource focused on productivity and innovation rather than maintenance and troubleshooting. So those 3 drivers, I would say.

Can I double thing on the consolidation point, right? You talked about cost being a factor. But it's the complexity of the environment and the other kind of stuff that you mentioned also results in the single pane of glass of pain kind of view where people don't want to have separate solutions for infra logs or app sec, wants to have one. So how -- is it possible to understand consolidation driven by macro versus consolidation driven by secular trends. Is consolidation more of a continued kind of theme, maybe even when macro gets better.

I would say consolidation is driven by both. I would say consolidation is in fact driven by user experience, desire for better user experience, better incident management, elimination of incidents. If you have logs, metrics, traces, behavioral analytics, meta data, all of these elements together in one system of record, if you will, then you can resolve incidents much more rapidly than if you have multiple different systems of record from multiple different vendors. And so pulling those together adds enormous, enormous advantage. And so this drives an improved user experience. But make no mistake about it, one of the customers we closed last quarter was spending on observability tools on the order of $12 million a year, pretty substantive amount of payment to multiple different vendors. By moving to Dynatrace, they were able to reduce that by over 20% and get a single system of record with much better user experience and incident reduction outcome.

I'm assuming you're talking about the 8-figure land...

Yes, I was -- 8-figure alliance...

Right. Okay. So let's talk about that, right? You're seeing larger deals, larger strategic deals. You started talking about in the fiscal Q3. I believe, now we are starting to see some of those deals close, 9-figure expansion seems like humongous. I remember the first time we heard Salesforce talk about 9-figure expansions. 8-figure lands is also really big for you. So talk about -- what is driving that -- these huge deal sizes? Kind of help us understand the flavor of those discussions within your customer -- within your clients.

Maybe I'll start and then Dan, you can comment. But what I would say is driving it are the other drivers that I talked about earlier. It is the realization that organizations increasingly are spending a huge amount of money getting underwhelming results. Underwhelming from the standpoint of cost and underwhelming from the standpoint of delivering performance software. And while it's happening over the course of time, and it's happening at different rates for different customers, there is no doubt that it's happening. And these organizations want to deliver better user experience, more productivity at lower cost. And at some stage, one of the biggest catalyst is that it's escalating from, let's say, the Director of Operations decision level to the CIO, CTO level to centralize that decision. And as increasingly that decision gets centralized, you have a much broader end-to-end observability view over the entire IT ecosystem. And that's really a core driver that we're seeing.

Yes. Just to piggyback on that a little bit. I think ultimately, the bar keeps getting raised in observability. People are getting visibility and are getting a, what I'll call it, improved and mean time to resolution and predictive but they want to get even better. And right now, because the software and their applications are so customer facing, any outage at all is at the CEO level. So it's beyond the CIO, it's a CEO level. And there is a lot of frustration if that's not resolved in minutes or quite frankly, they get on saying, how do we prevent this from ever happening again. And so when they look at Dynatrace, they said, your ability to look across our enterprise gives us a far better chance of having a better outcome. And then, by the way, if you guys know the spend culture right now is everybody scrutinizing all spend. So it gets elevated up. So they're saying, okay, I see the money we're spending. We're not 100% happy with the overall outcome, how do we do both? I think that's where it comes together well.

To specifically talking about the large deals, the 9-figure and the 8-figure land, did those start as somewhat smaller and kind of expanded through it? Did you kind of start folding in business stakeholders, which is something we have been hearing around Dynatrace. Help us understand how specifically those deals kind of went through.

Most of them start small, right? We get in, we demonstrate our capabilities. We start to show the impact that we're making at some type of smaller scale and then most customers along with our team say, okay, we did this in a relatively small way, how could -- and we like the result? How do we do this in a much bigger way. So they do start in a land and expand, that's still a very core motion for us and will continue to be. But we're now that enables us to have a conversation and say, how do we take this further. That's usually how they start.

I would say just to add, I mean, specifically, because you commented on the 8-figure or nearly 8-figure land, that actually was the case where we didn't start small. So they actually were not an existing Dynatrace customer. They literally had multiple tools. And Rick can give you the kind of the broader story on it later, but this is a customer that had tools [indiscernible] and they had -- they weren't getting the business outcome that they were looking for, and they were spending a lot of money. Ultimately, I think Dan is absolutely right. We went in, we did some POCs with them. And then ultimately, landed the deal but really because of the value proposition that we do bring. We do bring a business value ROI proposition given the unification of the platform.

Yes. Understood. Since Dan is here, I want to go into the go-to-market changes, which is a big topic of discussion. Maybe talk about the rationale behind those changes? And why right -- I mean, I guess it's the first fiscal year going into this year. But trying to understand what led to those changes?

Yes. So I didn't start -- I started in July of last year. And speaking to Rick and Jim and the Board, everybody felt like there probably was a potential to do some things differently. So there was already an appetite to evaluate it. So I had a chance to come in and evaluate what we are doing. And like any organization, we are having a tremendous amount of success. We were growing and we had a methodology for our go-to-market, and it was working. But like anything, it has to continue to evolve. So we had a chance to take a look at that. I was like what I'll call it, clean sheet of paper, to go in and say, okay, how would I evolve this. So I was not married to anything that was being done. And so I just took an objective view with the team and said, "Hey, what's working, what's not?" What can we do better and different. And we came really in 3 different major categories to that. One is that we -- and this is fairly generic, but we kind of treated all customers the same. And we started to take a look at it, what have we treated the largest customers differently. And we invested and we didn't get away from our other customers. We continued with them. But where we had an incremental investment, and when you put those to the largest customers. So we look at segmentation and being a little bit more clean with that, where we had previously maybe somebody had Walmart and maybe somebody had a mid-tier enterprise accounts. So just to be a little bit cleaner with that. So people on our strategic truly have strategic account. They have the right skills for that. They have the right approach and methodology for that. So I think that's category #1. Category #2 was we were treating all partners relatively the same, be it a hyperscaler, be it a GSI, be it a regional partner. We kind of paid them, did enablement the same? We kind of had a one-size-fits-all from partners. And so we brought in a new partner leader in December that did the same thing, I kind of did at the partner level and reevaluated how we look at all partners. And we started getting very specific on how we're going to pay hyperscalers, how we're going to do marketing to hyperscalers, how we're going to do products. So we have -- and pay how we're doing that with GSIs, how we're doing that with regional partners, still a much more refined approach to our partner strategy because they all operate a little differently. They all have different things that mean something to them. And then I think lastly was ensuring that we've done a very effective job of land and expand. It's a great way. We do proof of concepts. Our software demonstrates itself very well. And we've grown a business mostly from that. But I also had a chance to say, why are some reps doing better than others? And they keep doing better than others year-in, year out. I had a chance, I went and interviewed and I could start with saying I don't know much, why are you doing so well? And I found out that our top reps were running a play or approach to call it end-to-end observability. And I really kept asking questions about that they were highly differentiated. The market is evolving and demanding this and we said, okay, we know we've been successful with some reps, how do we do that more at scale. So we started implementing, continuing the land and expand, it's effective, but want to broaden that to an end-to-end observability. We know it works. We just weren't doing it necessarily at scale. And then the last thing is looking at these cloud migrations as we partner with GSIs to say, hey, they want to get -- our cloud partners and GSIs all want to get people to the cloud faster and observability can be a key mechanism for that and make sure we're really giving our salespeople the confidence to go in and help both the GSI and the customer get to the cloud faster.

Yes, that's very helpful, pretty thorough. One step that you talked about last quarter, I think, concerns a lot of people with 30% rep movement number that you talked about. Maybe talk about how much of it is incremental? How many -- how much -- what is that 30% typically, right? I'm sure every year, there is some movement of reps. What is that typical number -- are these reps being given existing accounts, new accounts that when you're moving things around? And then lastly, I mean, the capability of the reps, right, if a rep has given a strategic account, is that rep handling before a mid-tier account and now being given a strategic account, are they capable of handling a strategic account? Can you talk about all of that?

Yes. I think overall, we you had 30%. I'd say that's split probably 60-40, 60% prospects, 40% customers. And to make it -- help everybody understand if you -- you typically as an enterprise, you have a lot of accounts, you typically go to a subset of those and focus your energy. You only have so much time and energy. So what we first did is said, okay, where are people not spending time. So if we're going to move, we didn't move the accounts that people are spending all their energy and all their time on. We looked at the accounts where they weren't. And those were the opportunity to go and put a rep that had more time and energy for that. I think you're right. I think the evolution and some of the prudence that we talked on this year is we're evolving some of the skills of our strategic account reps to do account planning to really align to business strategy, to IT strategy, to how Dynatrace fit into that. We think we fit very well, but that's some evolution that we're having on our sales skills. So we think it's a -- we don't think the move was overly intrusive, but yes, we know that it's going to cause some transition. And ultimately, we think that our approach to the largest accounts will have huge dividends for us.

And Pinjalim, I would say that in a normal year, it's probably 10% to 20%. So this isn't 0 to 30.

Yes. Got it. Okay. And as you are focusing more on these large accounts, help us understand the mid-tier accounts and the smaller tiers, right? Is the -- you're taking the eye off the ball from those ones? Or how are you kind of tackling that part of the customer segment?

Yes. We're not deinvesting from any of ours. We have 3 strategic enterprise and commercial. We're not deinvesting from that. So that's continuing on as we've done. It's just our incremental investment that we're putting in strategic. So it's just where we get -- where Jim continues to give us ability to invest in the business we're adding to that. So we're not getting away from that. Actually, we do quite well. So we want to continue that motion. No change. We would think we would evolve and get better, but no material change to the approach.

Yes. I mean it's, for sure, kind of a reweighting and rebalancing that we didn't have as much density in the Global 500 that we should have. I mean if you look at the propensity for those customers, how much they spend, the significant amount of the spend is within your top 500 accounts. And we just didn't have the density there. So waiting more investment there, while not taking it from somewhere else. And again, we're still going after 15,000, we're going after it at the bottom of the pyramid kind of with an inside sales motion, kind of the mid-enterprise is certainly a direct motion, but with more accounts per rep than the top of the pyramid as Dan is talking about, we're basically going from, call it, 8 to 10 accounts per rep to 4 to 5. And to his point about you're not moving accounts that had significant activity, you're moving accounts that didn't have as much activity.