“We expect free cash flow margin to be approximately 29% to 30% of revenue, which equates to $330 million to $345 million.”

In context

“Kevin Burns (CFO): Good morning, everyone, and thank you, Rick. I appreciate the kind words. Before I get into the financials, I want to thank the entire Dynatrace team for giving me this incredible opportunity to be CFO of this amazing company. Together, we have built a world-class team and organization that is still early in its growth trajectory. I look forward to working with Rick to onboard a new CFO, ensuring a successful transition and then taking a break to enjoy time with my family. As Rick mentioned, Q4 was a fantastic quarter, capping off a strong finish to fiscal '22. ARR is a key performance metric of the overall strength of the business, and we delivered 35% adjusted ARR growth for the second year in a row, exceeding the high end of our guidance range by one percentage point, highlighting the resiliency and predictability of our business model. Please keep in mind, adjusted ARR growth normalizes for currency and the wind down of perpetual license ARR, a reconciliation can be found on our IR website. Total ARR was up $221 million year-over-year, ending the fiscal year at $995 million. Reported ARR would have been $10 million higher and well above the high end of our guidance range when considering two items. First, we suspended business in Russia, resulting in a nearly $6 million reduction in ARR. Secondly, we had another $4 million of incremental currency headwinds as the U.S. dollar strengthened yet again in recent months. As we have communicated for the last few years, the building blocks for ARR growth continue to be the combination of our net expansion rate and the addition of new logos. Our net expansion rate for the fourth quarter was above 120%, which is now four years in a row. We continue to see momentum in new logo additions. We added 205 new logos in the fourth quarter. That's up 18% over last year. In total, we added 706 new logos this year, that's 21% growth and above our previously communicated expectations of 15% to 20%. Our average ARR per customer with three or more modules continues to increase. This cohort represented nearly half of our customers in the fourth quarter. These customers have an average ARR of nearly $500,000. Given the significant cross-sell and expansion opportunities in our customer base, we continue to believe that the average ARR per customer could be $1 million or more. Moving on to revenue, total revenue for the fourth quarter was $253 million, $6 million above the high end of our guidance. Total revenue and subscription revenue both grew 31% over last year. With respect to margins, total non-GAAP gross margin for the fourth quarter was 84%, down one percentage point, driven by a slight change in revenue mix and increased investments in customer success. We expect gross margins to remain roughly consistent in fiscal '23. Our non-GAAP operating income for the fourth quarter was $58 million, which is $4 million above the high end of our guidance range, driven by the revenue upside in the quarter. This resulted in a non-GAAP operating margin of 23%, exceeding our guidance range by roughly 100 basis points. Non-GAAP net income was $48 million, or $0.17 per share, $0.01 above the high end of our guidance. Turning to a quick summary of the financial results for the full year. Total revenue was $929 million and subscription revenue was $870 million, both of which grew 32% year-over-year. Non-GAAP operating income for the year was $234 million, resulting in a non-GAAP operating margin of 25%. Non-GAAP net income for the year was $198 million, or $0.68 per share. As we've mentioned in the past, 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. This approach proves to be even more important as we navigate the rapidly evolving macro environment, where the resiliency and predictability of our business model is paramount. Turning to the balance sheet, as of March 31, we had $463 million of cash, and our net cash position was $189 million. Our unlevered free cash flow for Q4 was very solid at $82 million. For the full year, our unlevered free cash flow was $234 million, or 25% of revenue. This came in below our guidance range due to a tax refund that was due in fiscal '22 but not received until the start of fiscal '23. Given the strength of our cash flow and the declining interest expense as we've reduced our long-term debt consistently, this quarter will be the last quarter we provide unlevered free cash flow and are moving to free cash flow as a metric. The last financial measure that I would like to discuss this morning is our remaining performance obligation, which at the end of the quarter was approximately $1.6 billion, an increase of 33% over Q4 of last year. The current portion of RPO, which we expect to recognize as revenue over the next four quarters, was approximately $900 million, an increase of 34% year-over-year. Now let me turn to guidance. We are very pleased with how the business has performed in recent years, and we anticipate delivering another strong performance in fiscal '23. We believe we have the right foundation in place to sustain 15% to 20% growth in new logos and a net expansion rate of 120% or higher for fiscal '23. There are a few things to keep in mind with respect to our guidance. First, we are mindful of the evolving macro environment. To be clear, we have not seen any material impact on our business, and we are confident in the durability and predictability of our growth. However, we believe it makes sense to be prudent with guidance. Second, with almost half of our business conducted in foreign currency, the continued strength of the U.S. dollar creates a sizable currency headwind. Based on FX rates as of April 30, we expect the FX headwind to ARR and revenue to be roughly $20 million for fiscal '23. With respect to Q1, we anticipate the FX headwind to be roughly $15 million to ARR. As you think about your models over the course of the year, keep in mind that every 1% movement in non-USD currency equates to roughly $6 million of movement in ARR. Third, we announced that we suspended business in Russia, which results in a headwind of approximately $6 million on ARR and revenue for fiscal '23. Finally, fiscal '23 will be the final year where the perpetual license wind down will have a significant impact on ARR growth rates. The overall annual impact in fiscal '23 is approximately $8 million, or 80 basis points. The impact will be most notable in Q1 with a three percentage point headwind that will taper off throughout the year. Starting with our guidance for the full year, again, with growth rates in constant currency, we expect ARR to be between $1.25 billion and $1.265 billion, representing an adjusted ARR growth of 29% to 30%. This assumes net new ARR growth of $290 million at the high end of guidance, offset by the $20 million headwind that I just mentioned. Given the FX impact in Q1, we wanted to provide you with a little bit more color on Q1 seasonality. Historically, roughly 18% of our annual net new ARR is closed in Q1, which would imply $52 million of net new ARR in constant currency in Q1. As I just said, there is also a $15 million currency headwind on our fiscal '22 year number that needs to be taken into account in Q1. Total revenue for the full year is expected to be $1.142 billion to $1.158 billion. Underlying that, subscription revenue is expected to be between $1.071 billion and $1.086 billion, both up 27% to 28% year-over-year. We expect non-GAAP operating income to be between $257 million and $266 million, resulting in a non-GAAP operating margin of 22.5% to 23% for the year. We expect non-GAAP EPS of $0.74 to $0.77 per share based on 292 million to 294 million diluted shares outstanding and a non-GAAP cash tax rate of 13%. We expect free cash flow margin to be approximately 29% to 30% of revenue, which equates to $330 million to $345 million. This is 45% growth year-over-year at the midpoint and incorporates the impact from the timing of the tax refund I mentioned earlier. Looking at Q1, we expect total revenue to be between $261 million and $263.5 million or 29% to 31% growth. Subscription revenue is expected to be between $244 million and $246.5 million, up 29% to 30% year-over-year. From a profit standpoint, non-GAAP operating income is expected to be between $60 million and $62 million, which is 23% to 23.5% of revenue, and non-GAAP EPS of $0.17 to $0.18 per share based on the share count of 291 million to 292 million diluted shares. In summary, we are very pleased with our fourth quarter and fiscal '22 performance where we saw strong ARR and top line growth combined with healthy cash margins. We have achieved the important milestone of $1 billion in annualized revenue and continue to operate at Rule of 60. Dynatrace's breadth of product offerings and our geographic reach provides us with multiple growth opportunities in the future. Overall, we believe we are well positioned for resilient and predictable growth profitability and cash flow in fiscal '23 and beyond. And with that, we'll open the line for questions.”