“Moving down to P&L, we expect full-year non-GAAP operating income to be between $219 million and $226 million.”

In context

“Kevin Burns (CFO): Thank you, John. And good morning everyone. As John mentioned, we delivered another great quarter on both the top and bottom line, setting this up for a stronger fiscal '22. The investments we have made in sales productivity and commercial expansion are evident across all of our top line metrics with ARR above our internal expectations and revenue and subscription revenue exceeding our guidance. ARR for the second quarter was $864 million. That's up $226 million year-over-year, representing 35% growth or 34% in constant currency. Excluding the perpetual license headwind, which was roughly $25 million, our adjusted ARR growth rate was 39% on an as-reported basis and 38% on a constant currency basis. That's up 200 basis points sequentially from Q1. Please keep in mind our ARR as reported was impacted by currency movements and I will cover that component when I review the full-year ARR guide. The building blocks for sustained ARR growth remain the same. The addition of new logos to the Dynatrace platform combined with the ability to expand existing customer relationships, as measured by our net expansion rate. As John discussed, new logo growth continues to be strong, and it was up 33% for the first half to 295 new logos. We continue to see positive traction across all of our regions, with notable strength in EMEA and North America. We ended the quarter with more than 3,100 Dynatrace customers. At the same time, existing customers continue to see the value of the Dynatrace platform, adopting new modules and expanding coverage. This is evident in our net expansion rate, which for the 14th consecutive quarter was at or above 120%. As a result, our ARR per Dynatrace customer continues to increase. And in Q2, it was $277,000, an increase of 19% year-over-year. In addition, we continue to see strong momentum in the number of customers that are leveraging the Dynatrace platform for full-scale observability, defined as customers using three or more modules. At the end of Q2, more than 40% of our customers were using three or more modules, with an average ARR of nearly $500,000. We now have over 1,300 customers using three modules, and this cohort has increased by well over 400 customers over the past year. Moving on to revenue. Total revenue for the second quarter was $226 million, $5 million above the high end of our guidance, and representing an increase of 34% on a year-over-year basis, or 33% in constant currency. Subscription revenue for the second quarter was $213 million, $5 million above the high end of our guidance, representing an increase of 35% on a year-over-year basis or 33% in constant currency. With respect to margins, total non-GAAP gross margin for the second quarter was 85%, in line with last quarter and Q2 of last year. As we have said before, a very healthy margin reflecting the value and efficiency of the Dynatrace platform. Overall, we are extremely pleased with the strength of both our ARR growth and revenue performance. We believe this further validates that our strategy to continue to increase investments to grow our top line is the right path and you will continue to see us lean into both commercial expansion and technology innovation to capture the large and growing market opportunity ahead of us. As a result, we invested $32 million in R&D this quarter, that's up over 33% from last year and approaching our targeted R&D investment level of 15% of revenue. On the commercial side, we invested $76 million in sales and marketing this quarter, up 52% over the last year and within our target investment zone for sales and marketing of 34% to 36% of revenue. Even with these levels of increased investments, we continue to run a balanced business. Our non-GAAP operating income for the second quarter was $61 million, $6 million above the high end of our guidance range due primarily to the revenue upside that flowed through to the bottom line. This resulted in a non-GAAP operating margin of 27%, compared to 32% in the second quarter of last year. Again, keep in mind, we saw significant savings in the first half of last year related to the COVID shutdown. And we continue to invest for growth and innovation. On the bottom line, non-GAAP net income was $52 million or $0.18 per share. Turning to the balance sheet, as of September 30, we had $370 million of cash, an increase of $122 million compared to the same period last year. We are pleased with our continued healthy cash generation and believe it puts us in a strong position to consider strategic business investments where there's an opportunity to accelerate our growth in select areas as we did with SpectX this past quarter. Year-to-date, our unlevered free cash flow was $93 million, up 20% compared to the same period last year. As a reminder, due to seasonal variability, we believe it's best to view unlevered free cash flow on a full-year basis. On a trailing 12-month basis, our unlevered free cash flow was $252 million, or 31% of revenue. The last financial measure that I would like to mention is our remaining performance obligation, which at the end of the quarter was approximately $1.3 billion, an increase of 42% over Q2 of last year. The current portion of RPO, which we expect to recognize as revenue over the next four quarters, was $719 million, an increase of 38% year-over-year. Though our RPO may become a more meaningful metric force in the future, we continue to believe ARR is the best metric to understand the performance of the business as it removes variability associated with billings and contracts. Moving on to guidance, as I outlined last quarter, we believe the investments we're 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 mid-term. These are the core building blocks that support ARR growth of 30% plus. With respect to fiscal '22, ARR as reported is expected to be between $986 million and $996 million, up 27% to 29% year-over-year. As I mentioned at the beginning of the call, our as-reported ARR guidance was impacted by currency movement. To be specific, there was about $15 million or roughly 200 basis points of headwind to our as-reported ARR guidance when comparing it to previous guidance. To eliminate the FX impacts, I think investors should focus on our constant currency guide, which we're increasing 29% to 30% year-over-year. This is an increase of 250 basis points at the midpoint of the range. Also, keep in mind, our ARR guidance assumes roughly 300 basis points of headwind to ARR growth rates in fiscal '22 due to the perpetual license wind down. We expect the third quarter to be roughly 450 basis points of headwind and then it will decline to about 300 basis points in Q4 and continue to decline thereafter. Excluding the perpetual license headwind, our full-year adjusted ARR growth rate is expected to be between 32% to 33% year-over-year on a constant currency basis. This is also an increase of 250 basis points compared to what we communicated last quarter. Moving on to revenue, similar to ARR but not quite as pronounced, currency had a $7 million negative impact to our previous as-reported revenue and subscription revenue guidance. Despite that headwind, based on the strength of ARR, we're raising our revenue guidance for the full-year. We expect total revenue to be between $913 million to $919 million, up 30% to 31% year-over-year, or 29% to 30% in constant currency. We're raising our subscription revenue guidance, now expected to be between $857.5 million and $862.5 million, up 31% to 32% year-over-year or 30% to 31% in constant currency. It's also an increase of 250 basis points at the midpoint of the guidance range for both metrics when compared to our previous guidance. 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 to P&L, we expect full-year non-GAAP operating income to be between $219 million and $226 million. As we have been communicating, we are investing for durable growth of the business. We believe proper levels of investment 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 which is a non-GAAP operating margin of 24% to 24.5% of revenue for the year, up roughly one point when compared to our prior guidance, not from a dollar standpoint due to the higher revenue guidance. For the full-year, we expect non-GAAP EPS of $0.63 to $0.65 per share, up $0.02 on the high end of our previous guidance due to our revenue overperformance. 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, we're raising our unlevered free cash flow slightly to be between $263 million to $275 million or approximately 29% to 30% of revenue. To summarize our full-year guidance, there is a continuation of our durable balance of growth and profitability, guiding to a rule of 50 plus business when combining ARR growth and unlevered free cash flow margin. Quickly looking at Q3, we expect total revenue to be between $233 million and $235 million, up 27% to 28% year-over-year or 28% to 29% in constant currency. Subscription revenue is expected to be between $219.5 million and $221 million, up 29% to 30% year-over-year or 30% to 31% in constant currency. From a profit standpoint, non-GAAP operating income is expected to be between $54 million and $56 million, resulting in an operating margin of 23% to 24% of revenue as we continue to execute on our investment strategy. Finally, we expect non-GAAP EPS to be $0.16 per share. In summary, we're very pleased with the overall momentum of our second quarter performance with strong ARR and top-line growth combined with healthy margins. As John mentioned, we have an incredible long-term market opportunity ahead of us, and we're investing aggressively in commercial expansion to accelerate go-to-market success and in our platform to further strengthen our robust module offerings. Overall, we're well positioned for sustained and durable growth in fiscal '22 and beyond. And with that, we'll open the line for questions.”