“As a result of these strategic investments coupled with a return to a more normal level of employee spend, we expect the operating margins will return to pre-pandemic levels over the next year.”

In context

“Kevin Burns (CFO): Thank you, John. Good morning, everyone and thank you for joining us on our Q3 earnings call. As John mentioned, we delivered a great quarter across the board driven by strong ARR performance, which was well above our internal expectations. We believe ARR is the key performance indicator of the overall strength and health of the business. ARR in the third quarter was $722 million, that’s up $188 million representing 35% year-over-year growth or 32% in constant currency. We are extremely pleased with the rate and pace of our ARR growth and it is even more impressive when you take into account the headwinds related to the perpetual license roll-off and COVID-related impacts. With respect to the perpetual license headwind and as a reminder, when we sold a Dynatrace perpetual license, we would recognize the license revenue ratably over 3 years. About 2 years ago, we removed perpetual license agreements from our price book and they were sold on an exception basis only. As a result, we had begun to see the wind down of these perpetual license agreements, which negatively impacted ARR by roughly $8 million in the third quarter, representing a little more than 1.5 percentage points of headwind to the ARR growth rate in the quarter. So, excluding the perpetual license headwind, our adjusted ARR grew 37% on an as-reported basis and 33% on a constant currency basis. Additionally, roughly 20% of our ARR is with enterprise customers we consider to be in an industry that are facing headwinds due to the COVID crisis, such as travel, hospitality and automotive. And while we haven’t seen these customers churn from the platform, their net expansion rates are below the average net expansion rate for the business as a whole. We are starting to see the net expansion rates for this cohort tick back up in the third quarter with expansion deals in retail, automotive and oil and gas verticals. This is a promising time resulting in an ARR headwind that was roughly half to 300 to 400 basis point headwind that we experienced last quarter. As we have discussed, the building blocks for ARR growth are new logos and net expansion rate. As John mentioned, we continue to see an acceleration in new customers, adding 189 new logos in Q3, which is 9 percentage points higher than the 174 new logos we added in Q3 of last year. We expect that growth rate to accelerate further in Q4, putting us on track to overachieve our previously shared plans of roughly 530 new logos by the end of the fiscal year. As a reminder, we had 145 new logos in Q4 of last year. We exited the third quarter with 2,794 Dynatrace customers. Our net expansion rate was above 120% for the 11th consecutive quarter and our ARR per Dynatrace customer increased approximately 20% year-over-year to $251,000. Our average ARR per customer with three or more modules continues to increase as well. As John mentioned, this cohort represented 33% of our customers in the third quarter, up from 24% last year, with an average ARR of more than $400,000. As more and more customers adopt the platform approach, we continue to believe the average ARR per enterprise customer could be north of $1 million. Moving on to revenue, total revenue for the third quarter was $183 million, $10 million above the high end of our guidance and representing an increase of 28% on a year-over-year basis or 25% in constant currency. The strength in total revenue growth is being driven by 33% growth in subscription revenue or 30% in constant currency. Overall, revenue came in well above our guidance due to some forex tailwinds, but more importantly, we saw strength in all areas, including new bookings, strong linearity and solid retention rates that drove revenue and ARR outperformance. With respect to margins, total non-GAAP gross margin for the third quarter was 85%, in line with last quarter and up over 1 percentage point from Q3 of last year. Our non-GAAP operating income for the third quarter was $53 million, $8 million above the high-end of our guidance due to the revenue and associated gross margin upside. This led to a non-GAAP operating margin of 29%, up 3 percentage points from the third quarter of last year. We are very pleased with this performance as it shows the operating leverage potential inherent in our business. However, we have shared that we believe in a balanced approach to operating the business, one that delivers strong and durable performance on both the top line and bottom line. Last quarter, I mentioned our strategy to accelerate investments in targeted areas to support the long-term growth of the business. Many of these initiatives were in place in Q3, resulting in a sequential increase of $12 million in non-GAAP operating expense, with R&D increasing 5% and sales and marketing increasing 16% sequentially. Looking forward, we expect another step up in investments in the fourth quarter and this is reflected in the guidance that I will cover in a moment. From a profit standpoint, non-GAAP net income was $48 million or $0.17 per share. Turning to the balance sheet as of December 31, we had $300 million of cash, an increase of $111 million compared to the same period last year. Our ability to generate cash while investing in the business remains strong. Our long-term debt was $451 million at the end of Q3, that’s down $89 million over the third quarter of last year and $30 million sequentially due to a principal repayment that we made early in the quarter. As we have shared in the past, we are committed to reducing our outstanding debt and improving our leverage ratio. At the end of the third quarter, our leverage ratio was well below 1x trailing 12-month adjusted EBITDA. We made an additional repayment of $16 million during the month of January, further reducing our debt balance to approximately $391 million. Through January of ‘21, our principal repayments have totaled $120 million in the current fiscal year. Our unlevered free cash flow for Q3 was very healthy at $74 million. On a trailing 12-month basis, our unlevered free cash flow was $215 million or 33% of the trailing 12-month revenue. This margin level is above our previous annual guidance of 29% to 30% due to a combination of the health of the top line, COVID related cost savings, and a tax refund that was more favorable than our original estimates. Turning to our guidance, ARR is expected to be between $756 million and $760 million, up 32% to 33% year-over-year or 29% in constant currency. Our ARR guidance assumes approximately $16 million in perpetual license roll-off while roughly 3 percentage points of headwind to growth. Excluding the perpetual license headwinds, our adjusted ARR growth rate is expected to be roughly 32% year-over-year on a constant currency basis. For the fourth quarter, we expect total revenue to be between $190 million to $192 million, up 26% to 28% year-over-year or 23% to 24% in constant currency. Subscription revenue is expected to be between $178 million and $180 million, up 32% to 33% year-over-year, or 28% to 29% in constant currency. From a profit standpoint, non-GAAP operating income is expected to be between $44 million and $46 million, 23% to 24% of revenue and non-GAAP EPS of $0.13 to $0.14 per share. This EPS guidance assumes cash taxes paid of $3 million in the fourth quarter, resulting in an annual effective cash tax rate of approximately 7% for the fiscal year in line with previous guidance. Total revenue for the full year is expected to be $697 million to $699 million, up 28% year-over-year, 27% in constant currency. Underlying that, subscription revenue is expected to be between $650 million and $652 million, up 33% to 34% year-over-year or 32% in constant currency. Moving down the P&L, we expect full year non-GAAP operating income to be between $202 million and $204 million and non-GAAP EPS of $0.61 to $0.62 per share. We are raising our unlevered free cash flow margin guidance to approximately 32% of fiscal ‘21 revenue. That’s 2 percentage points above the high-end of our previous guidance due to the top line strength of the business combined with COVID-related cost savings as well as a favorable tax refund of approximately $10 million versus our original guidance. This full year guidance assumes operating margin leverage of roughly 5 points compared to last year due to a strong business performance and COVID-related cost savings. As I mentioned at our Investor Day, and since then, we are committed to investing for the long-term. We expect to increase our sales and marketing and R&D spend as a percent of revenue. As a result of these strategic investments coupled with a return to a more normal level of employee spend, we expect the operating margins will return to pre-pandemic levels over the next year. In summary, we are very pleased with our third-quarter performance with strong ARR and top-line growth, healthy profitability and a proven ability to generate strong cash margins. We believe our unique platform approach will continue to drive new customers to the Dynatrace platform and our innovation engine will continue to power our net expansion rate. These building blocks provide us with the confidence for sustained growth as we move forward. And with that, John and I would be happy to take your questions. Operator?”