Dynatrace Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual) Transcript

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

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : So John, maybe the obvious, we'll start with you. I've known you for a long time, and you never want to see these days come, but you had some news yesterday. After 13 years of really leading Dynatrace through really a series of transitions to put yourself in, I think, such an enviable position, you are -- you announced your retirement. Rick McConnell is going to be taking over from Akamai. Can you fill us in on -- the timing on these things is never probably -- for us, it never maybe makes complete sense. But why is this timing right for Dynatrace, but also yourself?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : So yes, it's clear listening to your voice yesterday. I think it makes a lot of sense to me. I think for those -- no, no. For those less familiar with Rick, you guys could have had really your pick of the litter in terms of the next CEO of Dynatrace. What was it about Rick that the Board gravitated to? Because I've heard a lot of positive feedback, not knowing Rick all that well. The inbound from investors has been positive. What did the Board and kind of management see in Rick?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Yes, I think we're all looking forward to that. And maybe one last question on this topic, and then we'll move on to the business trends. It's -- ultimately, it's Rick and I'm sure the Board's decision. But from your perspective, John, at this point, are there any changes that we should expect in the near term with Rick coming in and sort of this transition?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : And Kevin, we chatted as well. You're not going anywhere. And that brings us a lot of comfort as well that, that continuity from yourself and John continues on. Obviously, the culture. No disrespect, John, but you built a great culture. And I think that culture lives on. And you've really, I think built that. And Kevin, you're a big part of that, too. So we're excited about sort of the next chapter in Dynatrace that we assume is going to be a lot of what we've seen previously. So that's great, John. Thank you for all that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 2:20PM, DT.N - Dynatrace Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual) Maybe one sort of high-level question for you, John, and then we'll go to Kevin. This -- the pandemic has really been a profound change for all of us for lots of reasons. But I think for me anyway, it's really illustrated how important this whole movement of digital transformation is and also a bit of a security transformation as well, which is a growth driver for yourself. And Rick brings an interesting perspective to that piece as well, I think, from the security side. Can you talk about some of the trends you're seeing from larger companies that you're targeting in a world where there's a lot of choice, right, for monitoring, for durability, for security? What are some of these trends? And why is Dynatrace resonating so well with some of these, the most biggest, most powerful companies on the globe these days?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : That's super helpful. We're going to come back to you in a second, John. You're not done yet. We still got some more time with you. Kevin, pivoting to you for a little bit. The quarter that you guys just reported I thought was strong on many levels, but there was some discussion about new logo adds. And while gross logo adds remain strong, you are seeing some churn on the legacy side of the business. That effectively is planned churn from your perspective. Can you go over that dynamic? And really then remind us again who your ideal customer is? And the potential to take their ARR higher from -- I believe, the average is today about 277,000 higher in the future. Maybe why some of those smaller customers that are churning just aren't sort of right for the future of Dynatrace.

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Yes, and I think that's what is so compelling, why Dynatrace has been such a compelling idea for me is you not only have the land, but this what seems like a significant expansion opportunity because, today, you guys you have, what is it, roughly 3,000 customers. Which out of your target 15k, you're only about 20% penetrated just in that alone. And then the expansion in there is significant, right, as you just alluded to. And I think John, when we were doing some virtual marketing a little bit ago, I think what really stood out to me is what's driving this is this digital fuel. Kevin, you just mentioned the ServiceNow comment. We're seeing the hyperscaler growth. To me, these things would be like we're going to be talking about these trends for the next decade, right? And I think in a world that seems like there's a lot of competition, I think the reality of it is this is a rising tide. And especially in the large enterprise, customers are -- they certainly have choice. But I think the realization is for full stack absorbability, which it seems like you guys are increasingly an important piece. There's a long runway for both the new logo adds and the expansion side, and I think that's what's -- which is so encouraging to me. And I guess, am I thinking about that the right -- sort of the right framework about kind of like what's driving these? What -- I presume it's almost even more greenfield deals today than maybe when you went public a couple of years ago.

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : And I think what stood out to me guys was how you guys are building this sort of this layered cake of ARR build in a very -- what feels like to me a very responsible manner. I think the temptation would be let's overgear this on the sales side or let's pour more gas on this fire over here. But I think understanding the cadence of the business in the market, I think you guys have a really good handle on that from my perspective. And so when we think about like the main governors of growth, what -- maybe, Kevin, what are those? I mean how do you think about the right level of new logo adds, the right level of expansion? And ultimately, I want to get to NRR here in a second, but -- and partners clearly seem like another level of -- layer of growth there as well.

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : The other thing -- that's helpful. NRR, you guys have said it's been over 120. But you did have some challenged verticals during COVID, but you still remained at that plus 120 level. I guess I'm wondering, with the growth drivers that you guys are suggesting and maybe some improvement in some of these challenged verticals, now that we're kind of coming up on -- getting close to that, can you believe, say, 2-year anniversary of COVID here. Does NRR have the ability to work even higher? I mean could that theoretically get to a 130 level here?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : So it seems to me that -- you guys have been very transparent about some of the puts and takes of ARR, including the perpetual runoff, which still persists next year. But I think you said it's going to exit next year below 1 point of headwind. So to me -- and again, I don't want to get ahead of ourselves from thinking next year, but it feels like the conviction around the durability here feels very robust to me given the levers of what you sort of described in terms of new logo adds, rep productivity, maybe some COVID headwinds diminishing the perpetual runoff going away. To me, it feels like -- again, I don't want to talk about guidance next year. But it does feel like the stability, if not, maybe even a bit of acceleration could be going on here just given the trends in place. So to that point, I guess, inevitably, the question comes up on competition. And I know, John, you've alluded to me that you're seeing a higher percentage of greenfield days -- deals today than you were even 2 years ago, which I think is counterintuitive to a lot of people. The obvious question is Datadog has talked about a lot of success in APM. I think they disclosed 500 million of ARR in APM and walking, growing maybe 100% last quarter. How often do you see competition? And why are you winning in some of these G 15 -- I shouldn't say, why are you winning. Maybe the more point of the question is what is the level of competition? Do you see Datadog in some of these G 15,000 wins when it comes to sort of full stack observability?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Got it. Got it. Well, we're getting some questions from people. We only have a couple of minutes left. So Kevin, we're going to hit a couple of rapid fire from folks here. One question from a member of the audience is, "Do you expect to get a nice step-up in NRR in your December quarter renewal as you true up consumption growth over the course of 2021?" REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 2:20PM, DT.N - Dynatrace Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual)

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : That's great. That's great. And actually a quick one for John, and the question was, "Did Rick have some particular experience in building out partner

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Okay. And we -- again, we need to make this longer, but we never really talked about security. But I guess another question was, did Rick have any particular -- or the question said, "Was Rick's experience in security, was that also an attractive in building out your app security portfolio?"

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Got it. The last one, and this is from me, but I -- Kevin, for you. When we think about those incremental drivers next year, given your large enterprise focus, could sales reps being a bit more active from a travel and a face-to-face perspective have a positive impact on pipeline build from your perspective?

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Excellent. Excellent. Well, we're out of time, unfortunately. Thanks for the questions from everybody. If you have follow-up questions, reach out to me. But really from all of us RBC, John, it's been a fun ride. The ride is going to continue. John, you're going to be an observer like all of us. So I do appreciate everything we've done for us over the years. And wish you all the best in trying to shave a couple of strokes off your handicap and spend some time with your grandkid. And really, thank you for everything you've done for us and really the -- for all the shareholders out there as well.

Question: Matthew George Hedberg - RBC Capital Markets, Research Division - Analyst : Cool. Well, Kevin, looking forward to continuing the dialogue. From all of us in RBC, thank you, gentlemen.