Dynatrace Inc at Citi Global TMT Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Fatima Boolani - Citigroup Inc - Analyst : Excellent. Yes, I think a good place to start is, I think there's a lot of familiarity with the Dynatrace story and kind of the key markets that you're playing in, specifically observability. But I think a good place to start for all of us to just level set is just an overview of the Dynatrace story and where you are as a company in terms of your market and product presence and then we can kind of dig into the financial model and pricing model. But just start at 30,000 first?

Question: Fatima Boolani - Citigroup Inc - Analyst : Jim, you mentioned this. You've been doing this for the better part of 13 years, right? So clearly, the problem and the concept of application monitoring is not new, right? But it's certainly taken on new significance, new importance, new criticality and I think complexity has to do a little some something with that, right? So can you tell us why Dynatrace has kind of catapulted to the front of the line. Again, this has not really been a new technological concepts. Applications have existed, right. You have had some permutations of competitors in this space or the better part of the last decade. So what has empowered you, enabled you to speed gate past everybody else and be a dominant force in providing clarity in complex infrastructure and application environments?

Question: Fatima Boolani - Citigroup Inc - Analyst : Jim, one of the questions I get a lot is you've delivered very steady performance in your franchise over the last couple of years. There hasn't been as much of an elasticity in either direction in a dramatic way as it relates to the bigger picture around cloud adoption, right. And I think there are some of your peers, any competitors in the space, who maybe have more proximity or exposure to some of these cloud native, VC-backed, small but fast-growing customers. I was hoping you could take some time to kind of discuss just from an end market perspective, what your customer base looks like. And the reason I ask is your opening comments were just around, Hey, you were helping solve really thorny, hairy problems on very complicated applications, which naturally typically tend to reside for some of your larger and maybe enterprise companies. So I was hoping you could spend a little bit of time on kind of delineating some of those perceptions but potentially misperceptions as well?

Question: Fatima Boolani - Citigroup Inc - Analyst : That 15,000, G15K, so Global 15,000 addressable audience, right? You have 4,000 customers today. So that's a pretty significant mathematical runway to kind of go after, right? But your growth on the installed base side has been more measured, right? And I think you've alluded to that in the context of, Hey, we're solving for quality of logos versus quantity of logos. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 2:50PM, DT.N - Dynatrace Inc at Citi Global TMT Conference I wanted to spend a little bit of time on how you're kind of straddling this quality versus quantity, especially as you've also demonstrated that you're doing larger land transactions and if you can I would love for you to put some numbers around that. So what that strategy around installed base and logo growth potential is given 15K is a pretty big number versus your 4K today?

Question: Fatima Boolani - Citigroup Inc - Analyst : I think one of the other ways that you've expanded your aperture on driving more adoption, improving velocity of customer acquisition and even expansion is the introduction of the Dynatrace platform subscription. And I think it kind of came into our consciousness early last year. So it's been incubating. So I'd love for you to spend a little bit of time talking about DPS. And then relatedly, what are the milestones and mile markers you've hit? And as the adoption grows, what are some of the things that you're anticipating from a consumption standpoint and KPI, operational metric standpoint?

Question: Fatima Boolani - Citigroup Inc - Analyst : Whereas historically, it was you subscribed to one particular product portfolio.

Question: Fatima Boolani - Citigroup Inc - Analyst : One of the questions I get a lot is introducing DPS to customers just from a financial model standpoint. Doesn't that actually introduce maybe a lot more volatility in the numbers and that, Hey, you used to be a subscription model. Now, it's commit based. So you've got customers that are maybe burning through their contract in six months, right, and so you're having that's a great conversation to have versus one year, right? So, anything you can share in terms of behavioral patterns because I think the other juxtaposition is a lot of CFOs and you're in the seat, right? You're more inclined to under-commit. So there's also a likelihood that you're going to blow through the cap sooner, right? So that's the good side of that. So how are you managing some of those variables? And what are you actually observing in how customers are behaving? Are they habitually and dramatically under committing? Or are they closer to the pin? And then ultimately, as CFO, how are you incorporating some of these volatilities in the way you're thinking about ARR trajectory, ARR linearity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 2:50PM, DT.N - Dynatrace Inc at Citi Global TMT Conference

Question: Fatima Boolani - Citigroup Inc - Analyst : Is the overage piece becoming more prominent or is that just sort of a tail dynamic?

Question: Fatima Boolani - Citigroup Inc - Analyst : The other comment you mentioned was, Hey, consumption is tracking very nicely ahead, almost 2 times what you're monetizing?

Question: Fatima Boolani - Citigroup Inc - Analyst : Got it.

Question: Fatima Boolani - Citigroup Inc - Analyst : It should catch up.

Question: Fatima Boolani - Citigroup Inc - Analyst : And what is that. So it's a very natural outcome that ARR and net retention rate is going to have to mechanically catch up to the amount that is being consumed by the installed base. And so what are some of the evidence points you're seeing? And is there a kind of a time frame? Is this a six month lag? Is this a 12-month lag? And I can appreciate only 20% of the base is on DPS, right? So how should we internalize the downstream financial impact and when that should actually provide upward positive upward pressure on net retention rates in ARR?

Question: Fatima Boolani - Citigroup Inc - Analyst : Cruising altitude.

Question: Fatima Boolani - Citigroup Inc - Analyst : Current cruising altitude.

Question: Fatima Boolani - Citigroup Inc - Analyst : I think DPS, clearly, the shift towards this very attractive contracting vehicle, has been a pretty significant change in the way the sales organization has gone to market, but there's also been some other more express changes to how you are going to market, right? You've had a new CRO come into the role. Can you walk us through some of the intrinsic sales organizational changes that you've instituted over the course of this year and the end of last year? And how do you expect some of those outcomes to play out?

Question: Fatima Boolani - Citigroup Inc - Analyst : I think the other piece on the chessboard as it relates to go-to-market has been you implementing the biannual quota system. Talk to us a little bit about that, the impetus there. I think maybe some of it is obvious, but what was the motivating force to kind of do the biannual quota. And I think you've rightly been conservative in the way you're thinking about guidance. But why wouldn't we actually see almost immediate productivity improvements because you either make quota in six months or you don't?

Question: Fatima Boolani - Citigroup Inc - Analyst : And none of that is really factored into the way you're thinking about ARR?

Question: Fatima Boolani - Citigroup Inc - Analyst : So you read up macro. So I'm going to ask you the obligatory macro question. You do have a sizable international business. So, hate it or love it, you are exposed more to what's happening in EMEA and APAC. So, I was hoping you could spend a little bit of time on what some of the behavioral patterns, technology adoption patterns are that are maybe distinct from geography to geography. And I know maybe EMEA gets a little bit of a bad rap that, hey, they were kind of behind the curve on cloud adoption. So, they may be a little bit slower on the top curve. And I don't think you've experienced that. So, I'd love to get your perspective on it. But just the business performance from an international and regional theater perspective? And any observations on if customer maturity or customer procurement behavior is markedly different?

Question: Fatima Boolani - Citigroup Inc - Analyst : And by the way, has that manifested more on a slower net expansion. So if you were to decompose net retention rates from a geographic perspective and layering on some of the comments, are you seeing that EMEA behavior manifest slower and slower logo growth or slower expansion?

Question: Fatima Boolani - Citigroup Inc - Analyst : And this is all in the span of the last year?

Question: Fatima Boolani - Citigroup Inc - Analyst : Jim, I wouldn't be a card-carrying software analyst if I didn't ask you about Generative AI. I know you have a couple of ideas on how Generative AI is going to be operationalized for yourselves, but for customers, but just kind of in broad strokes, what's the strategy here? Are you immediately monetizing this? Is this just going to be a vehicle to make Davis that much more of a sticky user experience?

Question: Fatima Boolani - Citigroup Inc - Analyst : Got it. I'd be remiss if I didn't ask you about how you're thinking about the investment envelope. You've obviously demonstrated you can walk and chew them at the same time. So you can grow, but you can also show margin expansion and free cash flow conversion. So when you're thinking about these competing priorities, at the top line, what influence is that having on how you're thinking about sales capacity or driving more efficiency from distribution from partners? Anything you can share with us on the kind of the philosophy from an OpEx standpoint?

Question: Fatima Boolani - Citigroup Inc - Analyst : You did it before, it was cool.

Question: Fatima Boolani - Citigroup Inc - Analyst : How are you thinking about maybe the uptake of some of these COGS or margin hungry products like Grail, for instance? There's just more ingestion, like there is incremental COGS associated with that. So to the extent that scales because DPS just makes it that much easier. Is that something that the model can absorb? And would that maybe be a contributing factor to having more muted expansion because it's a high-quality problem to have?

Question: Fatima Boolani - Citigroup Inc - Analyst : My very last question for you, Jim, is distilling a lot of what we talked about, how you get the business from, what is 15% ARR growth right now back up to the 20 ZIP code, the two things that need to go right and two things that are keeping a little bit paranoid that could maybe have you take a little bit of a detour to get back to 20% plus on ARR growth?

Question: Fatima Boolani - Citigroup Inc - Analyst : That's a good thing.