To welcome Dynatrace, a leader in observability, from the company of Jim Benson, who is the Chief Financial Officer. So Jim, thanks so much for being here. I guess this is gonna be a fireside chat format, and if you have questions in the audience, you have some instructions in front of you. That's a great way to submit any questions you might have, and I'll try to get those included as well. Maybe just to kinda kick it off, you know, for those that might be less familiar with the story, maybe just a little bit of background, you know, on the company and kinda your kinda core target markets and maybe differentiators.
Sure. Sure. Well, first I wanna thank actually having even some audience out here for 5:00 P.M. on the first day of the conference, so you guys are troopers. So, just a brief overview of Dynatrace. So, we talk as a company about, like, what is the vision of what we do, and the vision of what we do is we really want a world where software works perfectly. And I think, you know, you say: Well, what exactly does that mean? I think we all know in our day-to-day interactions with different applications, that software doesn't always work perfectly. And in the world today, with IT environments that are either on-prem, they're in public clouds, they're in hybrid clouds, they're in very multi-cloud environments, that the need to identify with precision when there is problems with software is becoming critical.
So the need to identify where software issues exist, and then a need to figure out how do you go remediate them. So at its simplest level, what Dynatrace does is we are a leader in the observability space, which provides infrastructure software to identify and remediate issues. And what makes Dynatrace unique is we are, we've been purpose-built as a platform for enterprise-oriented customers, and so there is a built-in level of contextual analytics, there is a built-in level of AI, and there's a built-in level of automation in the platform. And in large enterprises, you can't have people chasing alerts, and the historical way of observability software companies to work is they have dashboards.
Think of dashboards as green, yellow, red, flashing lights, people looking at them, and then people are going and identifying and figuring out where exactly is the issue and how do we remediate. What Dynatrace does is we have a built-in level within the platform to specifically identify the root cause of the issue, and then a built-in level of automation to go address the issue. The company has been around for some time. We've been public now, I think, for five years. You know, the world is just getting more and more complicated. Well, as you know, more and more workloads are moving into public cloud environments, and with that becomes an explosion of data, and the more data, the more workloads, the more complexity, the more need for observability software.
So it's a very rapidly growing market, and we think we are poised to benefit with the evolution of the market.
Yeah. Okay. Well, that's great. Let me have you start kinda higher level from a macro standpoint. I know you've had some comments, and maybe you can update us to, as to what you're seeing in terms of larger customer activity and sales cycles and whatnot, but I know there have been, you know, more data points over the last couple of weeks, even from some of the other software providers around macro maybe being a little bit worse. Just maybe give any kind of real-time updates as to kinda what you're seeing from a macro, whether it's, you know, sales cycles, willingness to spend on new projects-
Yeah, I mean-
Et cetera.
Just at the, I would say, not to say that we were kind of a bellwether, but we have been talking about kind of a choppy macro environment for some time, Will, that. And so I would say in the last couple weeks, I don't think the environment has notably changed. It's still kind of a choppy environment. That doesn't mean that it's worsening. So I personally don't think that it's necessarily worsening. We haven't seen that. We haven't seen that with deals. Having said that, a choppy macro environment means customers are very budget sensitive. They are certainly prioritizing spend for observability, so, but it's not unlimited spend. But I'd say the macro environment hasn't changed fundamentally. You know, I've certainly listened as you have with others.
I think what we identified maybe earlier, probably six months ago, is a need to ensure you're building that into your ongoing expectations for your business, that an ongoing choppy macro means deal cycles will tend to be elongated. In our case, they were a little bit more elongated in our fourth quarter because we had some very, very large deals. So size of the deal, complexity of the deal go hand in hand, and timing. The good news is we had a really strong fourth quarter and closed most of them, but I'd say the macro environment is pretty consistent.
So maybe talk a little bit about what you're seeing up market. I know, you know, you've got more of an enterprise focus.
Yes.
You've got, you know, good partner relationships with systems integrators that probably help, you know, on that front as well. You know, what's kind of built into your expectations on that, you know, front for the year? And I think—and I guess, you know, the second part of that is just trying to understand, you know, the level of conservatism, I guess, kind of in guidance from here, you know, given some of that choppiness.
Yeah. So we, what we outlined, you know. Our fiscal year ends in March, so we guided for our fiscal 25 just three weeks ago. And we talked about three things that we factored into our guide. One is we factored in to the discussion we just had, an expectation for continued ongoing macro uncertainty. Two, what we included in the guide was a what we think is going to be a growing trend of our observability architecture platform decisions, so customers that are interested in consolidating vendors. And with that, we know from experience that that tends to be larger deal sizes, and that tends to be deals that require C-level approvals. They take longer.
And so we introduced into our guide some timing conservatism, into that, knowing that, you're not gonna have a quarter just like we had in our last quarter, where you run the table on all the deals. You're gonna have choppiness potentially with that. So that's the second thing. The third thing that maybe we'll talk about a little bit further here is we introduced some go-to-market changes for the company. Not revolutionary changes, kind of evolutionary changes, where we've looked at the segmentation of our customers, and we've reweighted some of our sales force to, I'll call them, higher propensity to spend customers. And whenever you make changes in your go-to-market segmentation, even if they're evolutionary, the sales organization does take a time to kind of stabilize and mature.
And so those three things were built into the guidance, and so I feel reasonably confident that the guide we provided for our fiscal 2025 factors those three things, and that we try to set an expectation that those things aren't gonna change, Will, fundamentally in the next three months. So we'll probably be updating, call it the top-line guide, more likely, at midyear.
Yeah. I mean, the go-to-market changes are still pretty new. How long do you think it will take?
Two months
T o determine whether, you know, that has any kind of more meaningful impact, I guess?
Yeah. I mean, certainly the benefit of these go-to-market changes are intended to drive more customer intimacy and to get better penetration within customers, which, at the end of the day, should lead to more NRR for existing customers and hopefully a better new logo penetration for some of these very large customers. And again, we haven't changed the profile of customers we're going after. We've always targeted what we call the Global 15,000, which are the largest 15,000 enterprises out there. But when we looked at where the resources were being deployed, the sales resources, that the top of that pyramid, Will, is, of the Global 500, I'll call them, has greater than 50% of the spend, you know, like the TAM.
Right.
And so when we looked at how we were resourced in that segment of customers. And, oh, by the way, I talked about we're purpose-built for the enterprise. Well, we're even more purpose-built for very large, large enterprises. And so we looked at the weighting of resources in that segment, and we on average, had 8-10 accounts per rep, and we thought we needed more weighting. And so we've actually changed from 8-10 accounts per rep for those Global 500 to 4-5. So you can do the math. That'd be basically double the capacity of resources. And we're doing that because we think we can drive better penetration with existing customers and go after customers that maybe we're not as deep with, with
Because the sales motion is a little bit different with those customer segments, that it is very much an account management-oriented model, where you're developing account plans. You're much more embedded with the customer, understanding what their strategy is, and trying to understand how your solutions map to that, and so just drives more intimacy. And so the intention for these changes is to drive an improvement in rep productivity. But you're right, it will take some time, Will, for that to manifest itself. Probably we'll start to see it through pipeline generation, and hopefully, in the back half of the year, we will start to see it in incremental productivity for the sales force.
So let me ask you, kinda if you take a, you know, medium-term view, I know you haven't given official guidance, but, you know, if you look 2-3 years out, how do you think about the growth rate of the business from here, right? You're effectively gonna be mid-teens this year. What are the things that could help you, you know, get back to, you know, close to or, you know, to 20%, and is that still kind of the goal?
So I would say the answer is yes. I think that is it is our ambition for. You know, we ended fiscal 2024 at 20% growth. I do believe that the capabilities of Dynatrace and of the platform and of the evolution of where the market is going, I think you're seeing a growing interest in platform consolidation decisions. There is a growing need for observability as more and more workloads move into these complex environments. And so I think the market supports us being able to get back to 20% ARR growth. Obviously, our guide this year is prudent, and I told you the three reasons why. You can expect our internal plan is more ambitious than that, Will. But I think the market and our capabilities allow for an ambition to get back to 20.
Obviously, we have to execute against that. Step one is stabilize ARR growth before you start talking about acceleration. But all these go-to-market changes that we identified are designed to get deeper penetration, which means better execution out of the sales force. We're gonna add incremental capacity as well. So I think there is certainly a path to get back, but, you know, I'd say, you know, you, you mentioned 2-3 years. That's our ambition, and I think, you know, we'll have to see. I think it's more of a. I do not believe we are opportunity-constrained. I think it's execution oriented.
Yeah. Okay, well, it feels like one of the, one of the tailwinds is this, is your DPS initiative, right? Dynatrace Platform Subscription, pushing that. I think you talked about 700 customers now? O n some sort of DPS, you know, plan?
Yeah, we have almost 20% of our customer base is on a DPS contract.
So how impactful has that been thus far? I mean, early with some of those customers, but how much of a tailwind or opportunity could that be as that gets into deeper penetration of the base? And 'cause I mean, that would impact your NRR numbers-
It, yes.
which would be obviously-
So I'd say we're very pleased with the 20% of our customers are now leveraging this. And just to be clear, it's not a forced march. This is not a requirement. So this isn't, there's no special sales incentives. There's no customer being forced to move to this vehicle. But we believe it is a better vehicle for customers 'cause it provides much better frictionless experience and a much better access to the platform, with very transparent, flexible pricing. And so it's 20, roughly 20% of our customers, call it a little over 30% of our ARR. As you said, we've only been at it for a year, so the way to think about it is, let's look at the cohorts that are actually on these vehicles.
What we are seeing is that customers that are on this DPS vehicle are consuming much more of the platform than non-DPS customers. And to your point, what that should lead to is earlier expansions. Earlier expansions should lead to more NRR. Now, because we're really only on our first cohort class, which was Q1, and that cohort class is relatively small, I think where you're gonna see the manifestation for that, if we continue to see the traction we are, is in the back half of the year.
Yeah. Are there, are there key new products that customers are gravitating to trying that maybe they hadn't tried in the past? I mean, and I guess maybe it kind of gets to, you know, security and logs and some of your newer areas of focus.
Yeah, I-
Is that starting to open up doors, do you know?
Yeah, I would say yes. It certainly opens up doors for them to try products that they haven't bought already. And it's just a much easier vehicle for them because historically, what they've done is they've bought SKUs, and they bought a finite number of host units for application performance monitoring or infrastructure monitoring or digital experience monitoring. And you didn't really have the flexibility to swap, so if in fact, you were buying a finite number for each one of those things. What DPS allows you to do is get access to everything with a rate card. So to your point, they can try things, and we have a customer success team that can introduce some of these things to them. So we do believe it will.
And we've actually seen it, well, that we've the customers that are on a DPS contract leverage more of Dynatrace's capabilities than customers that are not on a DPS contract. Having said that, if I'm intellectually honest, that cohort tends to be your larger customers, and so by definition, they probably would have leveraged those solutions as well. But even when we break it down a little bit further, even customers that are new to Dynatrace, you know, 70% of our new logos are on a Dynatrace Platform Subscription in Q4, we are seeing that those customers are leveraging more of Dynatrace's capabilities than their non-DPS counterparts.
Why not incent sales to push that more? You know, wouldn't that be a-
Because we don't want it to be forced. We don't want. We want it to be customer choice. It has to be something that the customer is interested in. And so sometimes when you incent the sales force, they're, you know, they will go to great lengths to sell something to a customer that maybe they're not interested in. I think over time, what you're better off doing is having a model that is incenting the why would the customer want to buy DPS? Well, they'd want to buy DPS 'cause it gives them all the things that I mentioned.
But there are some customers that, you know, maybe that is not the, that they are content with a SKU-based model, where they want a finite list of what they're gonna purchase, and they maybe don't want to have a risk that they're gonna exceed the, the budgeted allotment that they have. And that the benefit of DPS for us is that the more they like it, the more they consume. The more they consume potentially means an earlier expansion. Well, from a customer's perspective, that might mean, you know, that they have a budget overage. So we kinda have the benefits for us with a, we have a subscription model wrapped in a consumption drawdown. So, you know, I, I would say that I would rather have success with the model, drive what sales wants to do than force them.
Yeah. Okay. Yeah, I've got a, I've got a bunch of other questions, but I've actually got one here from the audience, so I'll go ahead and just,
Sure
A nd throw at you. Just, question is: What is the key differences in product or go-to-market compared to Datadog?
What is the key difference in what?
The key differences in product and go-to-market compared to Datadog.
So I would say the product, you know, I'd say at the highest level, they're similar products, where you are performing a similar value proposition, whether it be application performance monitoring, infrastructure monitoring. So the products, as they're outlined, are similar. I'd say what's different is that our embedded products have a level of contextual analytics. And so think of that as we have a group, a very strong understanding of a customer's environment and their ecosystem and can identify very precisely where issues are. And we can automate and instrument remediation for them. I'd say relative to competitors, competitors have more sophisticated dashboard-oriented model, where you are leaving it to humans to go identify. There's gonna be an alert that comes up, but humans are gonna go chase the alert.
I'd say what makes us—the products and name are similar. I'd say the functionality that, that we provide is a bit more analytics, AI, and automation than our competitors. And the go-to-market is different in, in that our go-to-market model is kind of an enterprise sales model, that I'd say competitors, like a Datadog, they do have an enterprise sales motion, but they also have a very strong motion with the hyperscalers-
Yeah.
W here they're, you know, they kind of will go through a department sale, through a hyperscaler. You know, that maybe they've added a workload into a hyperscaler, and they want to add observability. So our model is very much an enterprise sales motion, where we're selling primarily to the centralized IT decision maker. In some cases, they might be selling to the developer community.
Yeah. Well, you bring up a, I mean, a good point, 'cause one of the key, you know, areas of differentiation for you all for some time has been Davis AI and-
Yep
I nnovations you've had there, just the level of automation that, you know, you help inject in organizations. Maybe just talk about, you know, the usage of automation, how important that is, you know, to what degree that you think that does help set you apart, I guess.
I think it's critical. And again, it varies based on persona, right? So we've targeted the largest enterprises in the world because our product is designed with them in mind, that large organizations have explosions of data, massive complexity, and they're dealing with these very multi-cloud environments that traversing from kinda mobile to mainframe, with just an enormous amount of data and complexity. And what Davis AI and some of the other capabilities of automation build in is, it's just too much for a human to go chase, and so you have to have a level of built-in analytics and automation to actually allow them to do their job more effectively and more seamlessly. And so it works. I'd say it's resonating with customers.
I think a proof point, Will, is, as we've seen, over the last quarter, an emerging trend of customers that are now considering consolidation decisions. You know, one example is we had a land in our fourth quarter, our largest land ever, a nearly eight-figure land, new logo land, with a global airline, that displaced 4 existing tools. And, you know, that it took a year, this deal took a year in the making, and it certainly started out with the customer saying: "Well, I don't want another tool." And then it, it, it morphed into: "Well, wait a minute, you mean you're actually, your platform can actually solve some of the problems I have? Which is, I have a disparate set of tools.
I have a poor experience from my customer, which is when there's an outage, I don't exactly know where the problem is, and it takes a long time to detect, and it takes a long time to remediate. Prove to me that you can do something different for me, Dynatrace." And after a sequence of months, convert, you know, POCs, this is a, you know. Again, this is- we were not even in the customer's environment. So I think it is a proof point that we are different, and, you know, I'd say that our sweet spot is very large, complex environments, and that's where we shine, and that's what we go after.
Yeah. Maybe just touch on, then, you know, what kind of impacts you might be seeing on the, you know, kind of the Generative AI front. Where's the opportunity for you all, A, to kind of enhance some of these automation, you know, capabilities? And, B, from your lens, are you starting to see more organizations actively try to get their data into the cloud, which would present an opportunity, you know, to help observe that data, or is that still-
You know, I would say that-
the same cadence?
C ertainly just to, as a level set, so we've been at AI for over a decade, right? You know, we've had causal and predictive AI, causal being we can tell you the root cause of where the problem is, not through correlations, but literally through topology of knowing exactly where the problem is. And we've had predictive AI for a decade, which is understanding different attributes that exist in an ecosystem to know when you potentially are gonna have an outage. And so the benefit of those two things is you can identify issues quickly, and you can prevent issues from happening in the first place.
What gen AI has allowed is you can now leverage large language models to be able to have not super users be the ones that can figure out, you know, how to use all these analytics. You literally can have large language models that you can increase the number of practitioners that are leveraging the data source. And we call it hypermodal because you're gonna be able to use gen AI, leverage with our causal and predictive AI, going back and forth, to be able to get better answers. So I'd say we're still early days on the AI activity.
I do think it's gonna become more and more important as the observability ecosystem expands, that the need for AI in identifying where issues are and automating them, to your point, and getting to the point where there's more automation and remediation going on, as opposed to time to detect and then effectively having people chase alerts to go figure it out. So you're talking going from, you know, maybe hours and days to kind of minutes. And, you know, that's what customers are expecting, and that's what, at the end of the day, the end user expects.
Yeah. L ook, two of your new big opportunities are in application security, you know, looking for, I don't know, abnormalities or the different, you know, just given the lens you have across an organization, and in logs, right? You've, you know, I think you've called out, you expect both those to be $100 million businesses. You pushed that back a little bit this last quarter in terms of when you expect to get there. But, you know, what are you kinda seeing on those fronts? And can those be, you know, $500 million businesses, you know, 5 years or 10 years or whatever from now? I mean, not-
You know, 'cause it seems like, I mean, some of your competitors, at least one in particular, has, you know, you know, that's become a big part of the platform, the broader platform.
Yeah, I mean, I would say that the short answer is yes, that we still are very optimistic about. We're very optimistic about the core business. So, you know, I'll start out with, those are emerging product areas that we've added with Application Security and logs. I'd say there's still a lot of runway, Will, with just the core business.
Yeah.
I think sometimes people forget that, that the core business still has a lot of runway. Having said that, I do think that logs and application security, both should. You know, the first objective is to get them to be $100 million annualized businesses. I think those businesses can be significantly bigger than that. I do think our appetite in the application security space is gonna have to broaden for that business to be materially larger, that. And we have an aspiration to go into areas like cloud SIEM and things of that nature. So there will be more, more to say about what we want to do in the application security space, here in the future. But I think both, both spaces are ripe for, you know, them being very, very large businesses for the company.
So where might M&A then play in all that, right? You generate good cash flow, got a good balance sheet. How do you, how do you think about, you know, organic development versus M&A? What does that environment look like?
So one of the things that's made Dynatrace, I'd say, unique, is that others talk about having a unified platform in name only, but it's really at a user interface level. Our platform is truly unified at the data layer, and so by definition, that platform means that acquisitions can't be bolt-ons, you know, that you literally have to have acquisitions that you can embed into the platform, 'cause that's the secret sauce of the company. And so historically, what we've done, Will, is acquisitions have been much more technology tuck-in oriented, and so I think you're gonna continue to see us do that. Could there be an adjacency in an area?
I'm not suggesting that there couldn't, but I'd say it would have to make sense and leverage the power of the platform, and so I think that that's what we will continue to do on the M&A front. You're right, we generate a lot of free cash flow. We have a lot of cash on the balance sheet. We did announce a buyback, an opportunistic buyback program, which was another use of capital. You know, we generate $400 million of free cash flow. We have $900 million worth of cash. The M&A aspirations that I just outlined are likely gonna be probably more modest. And oh, by the way, if we did need to access the debt markets, that we could, given our profile, and so we think we're in a good place.
I think the first and foremost, we want to invest in the business. That is the priority. But we thought a buyback actually made sense opportunistically to return cash to shareholders, just given our financial wherewithal to do so.
Yeah. Okay. Yeah, we do have another question here, just around vendor consolidation. You know, if you were to look at the top 200 accounts, is there an estimate of how many observability tools they might have on average, and would you typically replace all the tools at once? How's that process-
Yeah, it's a good question.
-typically work?
I'd say every environment differs, but probably on average they're not always all vendor-specific tools. They could be DIY tools that they've developed on their own. But I'd say, of the deals that we've seen, customers may have between 5-7 solutions that they're using.
Hmm, okay. Well, let me ask you, just kind of in that vein, we're down to, like, kind of the last minute here, but a lot of questions on Cisco Splunk. Is that creating opportunities? I mean, obviously, you're still pretty early in logs, so I don't know if you have all the full capabilities you need to, you know, you know, play there, but curious if that's, you know, how you're thinking about-
Yeah, I mean,
that as an opportunity.
Yeah, I mean, I would say anytime there's an acquisition, there is a level of uncertainty. You know, obviously Cisco is going to endeavor to try to integrate the offerings that they have, to have kind of the vision of what they're talking about become a reality. I, it hasn't materially changed customer conversations. Customers that were interested in. They, they've been interested, in some cases, for maybe alternative vendors for logs anyways, so whether Splunk's part of Cisco, whether Splunk alone, that I think we just felt that our opportunity, our approach to log management analytics was a little bit different, and that we thought we had a unique, a unique way of, of being able to address that. I'd say we're still early days at it, and we have roughly 600 customers leveraging our solutions.
But I'd say, aside from Cisco, I still think we have, you know, a lot of runway to make in the log space.
Okay. Awesome. Okay, well, with that, we're-