“We expect DPS will drive net expansion and become an accelerant to ARR in future periods.”

In context

“Rick McConnell (CEO): Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Dynatrace delivered an exceptional finish to FY 2023 with fourth quarter results that exceeded expectations across the board. For the full-year, adjusted ARR growth, constant currency subscription revenue growth, and free cash flow margin were all 29%. I'd like to thank the nearly 4,200 Dynatracers globally for their incredible commitment to excellence and tremendous execution this past year. These results continue to demonstrate our ability to run a balanced business that has been delivering high growth coupled with strong bottom line performance. They are a testament to the strength of our market, the significant customer value of our unified observability and security platform, our people and partners, and the ongoing durability of our business model. Jim will share more details about our Q4 performance and fiscal 2024 guidance in a moment. In the meantime, I'd like to share my view of the broader market dynamics, primary use cases that are driving customer buying behavior, and significant investment areas for FY ‘24 and beyond. Let's start with our market opportunity. We believe the estimated $50 billion market for observability and application security is at an inflection point. The complexity of modern technology ecosystems is forcing companies to move from in-house or open source dashboards to much more sophisticated observability solutions that deliver vastly improved insights and automation. Additionally, we expect that AI technologies such as generative AI and predictive analytics will contribute to this inflection point. In particular, we believe AI technology advancements will increase the volume and complexity of software delivery, further strengthening the need for observability and security with automation and AI at its core. We are fully equipped already today in our platform to help customers navigate AI initiatives and are in early stages of actively collaborating with the hyperscalers to create secure enterprise-ready offerings that bring the power of generative AI and predictive analytics to market. This past quarter, AWS, Azure, and GCP reported over $175 billion in combined annualized revenue. Yet Andy Jassy, Amazon's CEO, estimated that 90% of global IT spend is still on premises and poised to move to the cloud. For these and other reasons, we believe the market opportunity for observability and security of cloud-based workloads is enormous. Without question, the cloud yields undeniable benefits, including accelerated product development, increased supply chain efficiencies, improved customer satisfaction, and more. At the same time though, the cloud has also brought some notable challenges. In particular, the scale and dynamic nature of modern cloud ecosystems have made them too complex to manage through legacy monitoring approaches and manual troubleshooting. Effective operations require more than dashboards and alerts. As such, we believe automated observability is rapidly moving from optional to mandatory. Dynatrace makes order out of this chaos; we leverage sophisticated causal AI capabilities and a comprehensive understanding of an organization's hybrid and multi-cloud ecosystem to deliver rapid insights in real-time along with actionable remediation. We enabled delivery of more reliable infrastructure and applications, improved application security, and more successful digital transformation initiatives. And we believe we are uniquely positioned to lead this market evolution by providing the only fully unified end-to-end platform for observability and application security with analytics and automation at its core. I’d now like to offer several specific use cases that have become key drivers of our customers' purchasing behavior. First, companies are looking to deliver highly performing cloud-native infrastructure and applications. We as end users expect applications to work perfectly. Many organizations underestimate the complexity of the microservice processes required to manage their cloud workloads effectively. In Q4, one of the top 10 global financial services companies broadly expanded their deployment with a mid-seven figure Dynatrace Platform Subscription or DPS deal to ensure their growing footprint of infrastructure and applications continues to run smoothly. At the beginning of DPS, we made it available to our entire customer base last month. With DPS, we are now making our solution set broadly and easily accessible through a simplified cross-platform licensing model. This model allows customers to trial and deploy any aspect of our solution, such as logs or AppSec, while leveraging a single commitment. We expect DPS will drive net expansion and become an accelerant to ARR in future periods. Second, companies want to increase productivity and accelerate software delivery through cloud-native technologies and processes. We believe the adoption of agile development, continuous deployment, and DevOps will drive accelerated demand for automated observability solutions to ensure development teams deliver secure high-quality releases faster. In Q4, a Fortune 50 technology company embraced a shift-left approach and delivered self-service observability and security to their development teams, resulting in increased innovation through automation. Third, organizations are seeking cost-effective and more insightful log management at scale. They tell us that they are spending too much time and money on slow and limited analytics and forensics that add few insights to their businesses without substantial manual engagement. Companies are capturing logs, but a log without context of other data types fails to enable rapid reaction to changing business conditions. We now have a major retailer spending seven figures with us to take advantage of the insights their log management solution provides with Grail. Fourth, companies are spending substantial sums to ensure the delivery of secure cloud applications. Global data compliance requirements, an increase in software vulnerabilities, end-user data breach concerns, and brand impact are among the many contributors to this trend. We closed our largest application security deal to date, a seven-figure expansion with the same Fortune 50 company I mentioned earlier they help secure their cloud applications from vulnerabilities. We now have nearly 400 AppSec customers and remain on track toward our goal of reaching $100 million in security ARR by the end of fiscal 2025. Fifth, companies are increasingly coming to Dynatrace for us to provide a fully unified observability solution at scale. This especially applies to the vast array of organizations often using dozens of disparate tools in an effort to manage their software ecosystem. They struggle with a fragmented set of capabilities that lack a single source of truth, making it difficult to develop meaningful insights. This need for unified observability at scale, including a consolidation of other third-party solutions is what Brazil's Financial Ecosystem App PicPay in addition to a leading French SaaS marketing company to displace and consolidate their existing monitoring tools and sign seven-figure deals with Dynatrace in Q4. And finally, we discussed cloud optimization last quarter as a tailwind for Dynatrace being a headwind for the cloud providers. One part of cloud optimization is about cost optimization, reducing or eliminating ancillary workloads. Critical workloads, however, generally cannot be eliminated. Organizations need these workloads to be optimized, to run more efficiently and with less manual oversight to ensure maximum return from their cloud environments. These are the areas in which cloud optimization plays directly into our mantra of cloud done right. And this is precisely the value that Dynatrace provides through process automation, faster deployment of software, and dramatically improved analytics. Given that we are at the beginning of a new fiscal year and following directly on the pain points that are driving purchasing decisions, I'd like to wrap up with some of our primary investment areas as we look to the future. Keep in mind, our approach to investments remains unchanged. We take a targeted and prudent approach, and we plan to balance our investments to grow the top line while also delivering modest margin expansion in fiscal ‘24. First, we plan to leverage both in our R&D, as well as go-to-market efforts, the demand shift from point products and observability to a unified analytics and automation platform. As I noted, customers are looking for a single solution that cohesively solves a variety of use cases. Our platform processes all data types, logs, metrics, traces, open telemetry, real user data, behavioral analytics, and more in a single contextual data store with near real-time analytics. We believe our core technologies of Davis, Grail, OneAgent, PurePath, and Smartscape combined to deliver a radically different approach to solve the observability challenge and provide enormous platform differentiation relative to the more siloed approach of our competitors. Second, we continue to invest in security expansion. We see an ongoing convergence of observability and application security in large part because the insights derived from observability enable a much more comprehensive and time-critical security response. We recently conducted an independent global survey of 1,300 CIOs in large organizations. The research revealed that 68% of CIOs found it increasingly difficult to keep their software secure given the growing complexity of their hybrid and multi-cloud environments. We are expanding our efforts from vulnerability management, where we participate today, to adjacent areas in both agent-driven and data-driven security. Third, we are accelerating investment in developer observability. Development teams are increasingly expected to incorporate observability capabilities into their solutions or shift-left, as well as assume greater ownership for availability and operational management or shift-right. BizDevSecOps will become more crucial in this environment. At minimum, we expect development teams to have growing influence over the observability, application security, and automation environments. Thus, we intend to expand both our R&D, as well as our go-to-market initiatives to deliver best-in-class observability to this audience. Fourth, we are executing against a broad-based set of initiatives around optimizing and expanding our go-to-market. We remain focused on the global 15,000, where complexity and the value of automation and analytics at scale are greatest. In addition to our planned Salesforce expansion during FY ‘24, we increasingly expect to leverage partners to drive a flywheel of opportunity. Partners today already influence nearly two-thirds of our new ARR, but they account for a much smaller percentage of deal origination. Hyperscalers play an important role in the frictionless onboarding of customers. In fact, new ARR transacted through our largest hyperscaler partner grew by more than 80% in FY ‘23 versus the prior year. We also saw strong traction from the investments we made in growing our relationships with global system integrators, driven both by direct overlap in our customer base, as well as the highly synergistic value they can deliver to clients in digital transformation projects. We ended the fiscal year with 10 strategic GSI partners and a few including Deloitte and DXC have built Dynatrace into their reference architectures. A final area of investment is in customer success. Fiscal ‘23 was a year of incredible innovation with the delivery of critical new functionality enabling improved log management, enhanced infrastructure monitoring and application security, improved user experience and access to insights, faster application development and broader automation tools. We are driving fiscal ‘24 as a year of customer adoption and value realization. We want our customers to derive maximum value from our solution set and enable them to solve not one, but several of the use cases I described earlier. We expect this will also drive net expansion and contribute to future ARR growth. In closing, we are proud to have delivered a tremendous finish to FY ‘23. Despite ongoing macro headwinds that continue to create market uncertainty, we drove record levels of ARR and revenue with excellent operating margins and cash flow generation. Additionally, we are innovating at a very rapid pace with groundbreaking new customer solutions and platform enhancements. Our products uniquely address the challenges that our customers face with a high degree of differentiation around data-driven automation and analytics. We are building upon and evolving our go-to-market initiatives, including increased leverage with formidable partners who are expanding their digital transformation practices to include observability. And we remain passionate about delivering ever more value to our customers. With that, let me turn the call over to Jim.”