Dynatrace(DT) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total Annual Recurring Revenue (ARR) for Q3 was $1.43 billion, an increase of $263 million year-over-year, representing 21% growth [7] - Total revenue for Q3 was $365 million, up 21% year-over-year, exceeding guidance by $6 million [13] - Subscription revenue for Q3 was $348 million, up 23% year-over-year, exceeding guidance by $8 million [13] - Non-GAAP operating income for Q3 was $105 million, resulting in a non-GAAP operating margin of 29%, exceeding guidance by 200 basis points [14] - Non-GAAP net income was $96 million, or $0.32 per diluted share, exceeding guidance by $0.04 [15] - Free cash flow for Q3 was $67 million, with a trailing 12-month free cash flow of $340 million, representing 25% of revenue [16] Business Line Data and Key Metrics Changes - Net new ARR on a constant currency basis was $70 million in Q3, with 209 new logos added to the Dynatrace platform [8] - Average ARR per new logo was approximately $140,000, consistent with Q2 and up 17% year-over-year [9] - The gross retention rate remained in the mid-90s, contributing to a net retention rate of 113% in Q3 [10] - Over 150 DPS deals were closed globally in Q3, bringing total DPS customers to roughly 400, representing more than 10% of the customer base [12] Market Data and Key Metrics Changes - The number of deals in the pipeline greater than $1 million of ACV increased by 39% compared to the same quarter last year [18] - The demand environment remains healthy, with a growing number of larger and more strategic deals related to observability architecture and vendor consolidation [17] Company Strategy and Development Direction - The company plans to continue investing strategically in go-to-market areas and R&D innovation to capture market opportunities and drive ongoing leadership [4] - The acquisition of Runecast is expected to enhance Dynatrace's contextual security protection in analytics, addressing risks in hybrid and multi-cloud ecosystems [2] - The company aims to balance growth, profitability, and free cash flow while maintaining a focus on tool consolidation and automation [4][23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing demand for automated observability and application security solutions, highlighting the durability of the business model [3][6] - The company is building incremental prudence into its near-term guidance due to the timing variability of larger strategic deals [19][20] - The demand environment remains healthy, with no fundamental changes noted, despite the need for increased prudence in guidance [51] Other Important Information - The company raised its revenue guidance for the full year to approximately $1.422 billion to $1.427 billion, representing 22% growth year-over-year [22] - Non-GAAP EPS guidance was raised to $1.16 to $1.18 per diluted share, based on a diluted share count of 299 million to 300 million shares [25] - The company expects total revenue for Q4 to be between $372 million and $377 million, with subscription revenue between $353 million and $358 million [27] Q&A Session Summary Question: Insights on top of funnel and pipeline activity - Management noted that pipeline growth continues to exceed ARR growth, with increasing deal sizes across the board [32] Question: Factors affecting net ARR growth - Management indicated that pipeline coverage is growing, and higher conversion rates are needed, which will depend on macroeconomic improvements and sales execution [36] Question: Impact of DPS on net retention rate - Management expects to see the impact of DPS on net retention rates in fiscal '25, as customers on DPS contracts consume faster [46] Question: Timing of large deals and pipeline health - Management confirmed that while some deals may push out of quarters, the overall health of the pipeline remains strong, with a significant increase in larger deals [69] Question: Competitive landscape and tool consolidation - Management highlighted that competitors like AppDynamics and New Relic are sources of new logos, with ongoing opportunities due to market disruptions [84] Question: Strategic view on Runecast and cloud security - Management emphasized that the acquisition of Runecast will enhance vulnerability analytics capabilities and is part of a broader push into cloud security [99][100]