“As I just mentioned, we expect unlevered free cash flow to be $262 million to $274 million, or 29% to 30% of revenue.”

In context

“Kevin Burns (CFO): Thank you, John. And good morning everyone. As John mentioned, we delivered another great quarter setting this up for a strong fiscal 22. The investments we have made and commercial expansions that drive sales productivity are evident across all of our top line metrics with ARR revenue and subscription revenue exceeding our guidance. We believe annual return revenue is a key performance metric of the overall strength of the business. ARR for the first quarter was $823 million. That's up $222 million year-over-year, 37% growth as reported and 32% in constant currency. Excluding the perpetual license wind down which was roughly $25 million, or 4 percentage points, our adjusted ARR growth was 41% as reported and 36% on a constant currency basis, all up sequentially from Q4. The building blocks for sustained ARR growth rate remained the same. The new enterprise logo additions to the Dynatrace platform, combined with how well we expand existing customer relations as measured by our Dynatrace net expansion rate. As John said, new global growth in the first quarter was very strong, with 135 new logos added in the quarter, and we have been landing our new logos over the past year at a very consistent land ARR of a little over $100,000 per new logo. This new logo growth represents a 52% increase over the 89 new logos we added in Q1 of last year, which is a soft comparison to the COVID environment. We ended Q1 with over 3,000 Dynatrace customers. Consistent with historical trends, once customers see the value of the Dynatrace platform, they're eager to adopt new modules and expand coverage. This is evident in our net expansion rate, which for the 13th consecutive quarter was at or above 120%. As a result of this, our ARR per Dynatrace customer continues to increase and in Q1 it was $271,000 per customer, an increase of 19% over last year. Adding on to that, we continue to see notable strength in both the number of customers with three or more modules and the expansion of the average ARR per customer in this cohort. At the end of Q1, more than 40% of our customers are using three or more modules with an average ARR of nearly $500,000 per customer. We now have over 1200 customers using three modules, and this cohort increased by well over 400 customers over the last year. Moving on to revenue, total revenue for the first quarter was $210 million, $6 million above the high-end of our guidance and representing an increase of 35% year-over-year, or 29% in constant currency. Subscription revenue for the first quarter was $197 million, an increase of 36% year-over-year, or 30% in constant currency. We are very pleased with the strength of our ARR and associated revenue performance as it further validates our strategy to accelerate investments in sales and marketing. With respect to margins, total non-GAAP gross margin for the first quarter was 85%, in line with last quarter and Q1 of last year, a very healthy margin reflecting the power of the Dynatrace platform. From an investment standpoint, we continue to make solid progress investing for growth. Our R&D organization is now 1000 employees, and we invested $30 million in R&D this quarter. That's up 44% from last year, and approaching our targeted investment level of 15% of revenue. On the commercial side, we continue to scale our sales organization, which as noted earlier is tracking 30% sales rep growth. Likewise, our partner organization has grown by over 30% in the last year, and we continue to invest marketing dollars focused on brand and pipeline development. Our sales and marketing investments are up 66% over last year and within our targeted investment zone of 34% to 36% of revenue. With these levels of increased investments, we continue to run a balanced business. Our non-GAAP operating income for the first quarter was $54 million, $3 million above the high end of our guidance range due to the revenue upside. This led to a non-GAAP operating margin of 26% compared to 33% in the first quarter of last year. Again, keep in mind we saw significant savings in the first half of last year related to COVID shutdown and our Q1 margin profile was more in line with how we exited fiscal 20. On the bottom line, non-GAAP net income was $45 million or $0.16 per share. This is a penny above the high end of our guidance range primarily due to the favorable revenue upside. Turning to the balance sheet, as of June 30, we had $387 million of cash, an increase of $137 million compared to the same period last year. We're pleased with our continued healthy cash generation and believe it puts us in a strong position to consider strategic business investments where there is an opportunity to accelerate our growth in selected areas. Our unlevered free cash flow for Q1 was $81 million or 39% of revenue. Remember due to seasonality variability, we believe it's best to view unlevered free cash flow on a full-year basis. We're extremely pleased with a strong start to the year and this achievement puts us in a good position to deliver on our previous guidance of 29% to 30% of revenue for fiscal 22. The last financial measure that I would like to discuss is our remaining performance obligations, which at the end of the quarter was about $1.3 billion, an increase of 46% over Q1 of last year. The current portion of RPO, which we expect to recognize as revenue over the next four quarters was $710 million, an increase of 41%, year-over-year. Though RPO may become a more meaningful metric for us in the future, we continue to believe ARR is the best metric to understand the performance of the business because it removes variability associated with billings and contracting changes. Now, let me turn to guidance. As I outlined last quarter, we believe the investments we are making in commercial expansion and product innovation will enable us to maintain 120% net expansion and at least 15% to 20% new logo growth over the midterm. These are the core building blocks that lead to a sustainable ARR growth rate over 30%. With respect to fiscal 22, we expect ARR to be between $984 million and $996 million, up 27% to 29% year-over-year, or 26% to 28% in constant currency. This is an increase of 1 percentage point across these growth rates when compared to our previous guidance. Keep in mind our ARR guidance assumes 3 to 4 percentage points of headwind to ARR growth rates in fiscal 22 due to the perpetual license wind down. We expect headwind in the second and third quarters to be a little over 4 points, and then it will decline to about 3 points in Q4 and drop thereafter. Excluding the perpetual license headwind, our full-year adjusted ARR growth rate is expected to be between 29% to 31% year-over-year on a constant currency basis. Wrapping up our ARR discussion and seasonality. As we have outlined in the past, our business continues to add strength in the back half of the year, with Q3 being our strongest quarter, followed by Q4. Moving on to revenue, total revenue for the full year is expected to be $902 million to $914 million, up 28% to 30% year-over-year, and 26% to 28% in constant currency. Underlying that, subscription revenue is expected to be between $848 million and $856 million, up 29% to 31% year-over-year, or 27% to 29% in constant currency. That's an increase of 2 percentage points for total revenue and subscription revenue growth rates when compared to our previous guidance. And we continue to expect subscription revenue to be 94% of total revenue driven by the size and strength of ARR and associated subscription revenue growth. Moving down the P&L, we expect full-year non-GAAP operating income to be between $208 million and $218 million. As we continue to message, we are investing for the long-term sustainable growth of the business. We believe the proper levels of investments for sales and marketing to be in a range of 34% to 36% of revenue and R&D to be around 15% of revenue. The result of this is a non-GAAP operating margin of 23% to 24% of revenue for the year consistent with prior guidance and not from a dollar standpoint to the higher revenue guidance. For the full year, we expect non-GAAP EPS of $0.60 to $0.63 per share, which is up a penny from our previous guidance. Our non-GAAP net income and non-GAAP EPS calculations assume a non-GAAP effective cash tax rate of 12%, consistent with prior guidance. At these investment levels, we're able to continue delivering strong unlevered free cash flow margins for the year. As I just mentioned, we expect unlevered free cash flow to be $262 million to $274 million, or 29% to 30% of revenue. To summarize our full-year guidance, it is a continuation of our durable balance of growth and profitability guiding to a rule of 50-plus business when combined ARR growth and unlevered free cash flow margins. Looking at Q2, we expect total revenue to be between $219 million and $221 million, up 30% to 31% year-over-year or 28% to 29% in constant currency. Subscription revenue is expected to be between $206.5 million and $208 million, up 31% to 32% year-over-year or 29% to 30% in constant currency. From the profit standpoint, non-GAAP operating income is expected to be between $53 million and $55 million representing 24% to 25% of revenue and non-GAAP EPS of $0.15 to $0.16 per share. In summary, we are very pleased with the overall momentum of our first quarter performance with a strong ARR and top line growth combined with healthy margins. We remain very excited about the high growth opportunities ahead of us. As John mentioned, the ongoing market dynamics continue to drive the market towards us. We are investing in commercial expansion to accelerate go-to-market success and we continue to expand the platform and module strength to address the full $50 billion TAM we see ahead of us. Overall, we believe we are well-positioned for sustained and durable growth rate in fiscal ‘22 and beyond. And with that we will open the line for questions.”