Dynatrace, Inc. (DT) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Dynatrace Fiscal Fourth Quarter 2020 Earnings Conference Call. [Operator instructions]. Thank you. I would now like to hand the conference over to your moderator today, Michael with Investor Relations. Please go ahead.

Thank you, operator. Good morning and thank you for joining us today to review Dynatrace's fourth quarter and fiscal year 2020 financial results. With me on the call today are John Van Siclen, Chief Executive Officer; and Kevin Burns, Chief Financial Officer. After prepared remarks, we will open up the call for a question-and-answer session. Before we start, I'd like to draw your attention to the Safe Harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements, including statements regarding management's expectations of future, financial and operational performance and operational expenditures; expected growth and business outlook, including our financial guidance for the first fiscal quarter and fiscal year 2021. Forward-looking statements reflect our views only as of today and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and to our latest Form 10-Q, which was filed with the SEC on January 31, 2020, and our other SEC filings for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter and fiscal year 2020 earnings press release in the Investor Relations section of our website at dynatrace.com. With that, I'd like to turn the call over to our Chief Executive Officer, John Van Siclen. John?

Good morning, everyone. And thank you for joining us on our Q4 and year-end fiscal '20 earnings call. Since late January, when we last broadcasted a Dynatrace earnings call, the COVID-19 pandemic has dramatically impacted families, communities, and businesses around the world in a way that we never thought possible. It is our hope that everyone is staying healthy and safe and that those who have become ill have a speedy recovery. And of course, our hearts go out to those who have suffered the tragic loss of loved one. Sudden shift to remote work has caused applications and the clouds they run on to become an even more essential way to provide services, drive revenue, engage customers, and collaborate among teams. We continue to work closely with our customers to help them respond to their rapidly changing workloads and requirements enabling faster innovation, easier collaboration, and greater efficiency without wasted motion. Despite these challenging times, I believe our strong platform differentiation, balanced business model, and world class team continue to provide us with a durable growth business. I'd like to reinforce three points this morning. First, the success with which Dynatrace has responded to COVID-19 and what we are seeing across our customer base and market at large. Second, as this marks our fourth earnings call and the end of our fiscal 2020, I'd like to update you on the tremendous progress we've made in both our customer conversion and subscription business model transitions. And third, as our platform becomes increasingly robust across all modules an automation and AI become critical success factors for dynamic multi-clouds observability, I'd like to update you on some of the platform advances we've recently made and the success of our cross selling motion of emerging products. This will be an important growth area for us as we look ahead. First, I could not be more proud of how the Dynatrace team responded to the challenges of COVID-19. With a modern SaaS platform and agile workforce, we transitioned to work from home almost overnight and did not miss a beat. We made sure we kept running so our customers could keep running. Not only were we essential to assuring the rapid shift to work from home was successful for our customers around the world, we also provided essential situational awareness to ensure business continuity of running the business applications, services, and workloads for banks, healthcare companies, logistics companies, government portals and more. So despite what was essentially a two-week pause during mid-March as the shock of the global pandemic took hold and many of our customers were focused on the health and safety of their employees and establishing their work-from-home programs, we closed a solid Q4 with ARR up 42% year-on-year and subscription and services revenue up 37% year-on-year. Linearity and close rates were generally in line with prior Q4s. New logos were up year-on-year and our net expansion rate was above 120% for the eighth consecutive quarter. We believe the strength of our results is largely a reflection of this mission critical nature of our software intelligence platform. Software eating the world has been a powerful multi-year trend that is still in the early innings and the rapid move to online commerce and work from home initiatives that made the uptime and performance of the underlying software applications and infrastructure more important than ever. Dynatrace platform addresses these same points, just fast to deploy and scale with rapid time to value. We believe, and our customers share the sentiment, that this places Dynatrace near the top of the strategic IT priority list. The strong majority of our ARR roughly 80% to 85% is outside of industries, more challenged by COVID-19. And we also have strength in surging markets such as healthcare, e-learning, communications, and government. Our customer base is highly diversified and we focus on the top 15,000 largest enterprises around the world. This said, we do estimate that approximately 15% to 20% of our ARR is with enterprise customers that we consider to be in industries that are facing headwinds due to the health pandemic such as travel, hospitality, retail and automotive. It is prudent to expect that new demand from these industries will be impacted somewhat in the near-term. However, at the same time, within these industries we are typically working with some of the largest and financially healthy companies and our solution is near the top of their priority list. What we have seen over the past eight weeks has shown us that essential applications and transformation projects continue to move forward even within industries experiencing headwinds. For example, we did a sizable expansion deal in Italy in late March. This energy company wanted to assure continuous high quality service throughout the country and if issues arose proactively addressed them before service was impacted. In the past reacting after a failure occurred and service was already disrupted was not unusual. You can imagine with COVID and mandatory shelter at home, high quality energy service was an imperative. Dynatrace's rapid automatic rollout and unified AIOps approach to identifying service-impacting issues at time of degradation with precise actionable answers for rapid remediation made the Dynatrace expansion decision straightforward. Another customer example was an oil company, a new logo to Dynatrace. In the midst of maybe the greatest disruption to the oil business in history this company determined it was essential to revamp and modernize its commodity to trading applications and the technology stack it was running on a shift to cloud for agility and efficiency for a set of revenue driving applications and services. They chose Dynatrace because of simplicity, advanced automation and rapid time to value. It's too early to tell what the specific net impact of COVID-19 will be across our overall customer base and target market. But with a solid Q4 close and fast start to our June quarter with April bookings a bit stronger than a year ago, we are encouraged that we can generate solid growth even with an assumption that we will continue to operate within a challenging macro economic backdrop. Shifting now to our progress converting our customer base and transitioning our business model FY20 was a fantastic year. We are where we hoped ahead of schedule. We now have 92% of our ARR on the Dynatrace platform with only 8% left on our classic product set. We added over 1,000 new customers to the Dynatrace platform this past year, now over 2,300 customers with the majority continuing to be new logos. As we said before, nearly all these customers use Dynatrace for observing and optimizing cloud workloads. These clouds may be public, they may be hybrid or what we see more and more often now, they are multi-cloud, multi public with hybrid back ends where critical systems of record and many run the business applications still reside. More often than not Kubernetes is used for container orchestration. And more and more look to multiple DevOps teams utilizing the latest cloud native techniques to rapidly build, deploy and manage applications and workloads at scale. With this combination of complexity, dynamism and frequency of change, only an automatic AI-assisted observability platform that can handle the most complex public and hybrid environments will work. I'm very pleased our customers have chosen to modernize with us and it's exciting to know that we are now part of their current and future digital transformation initiatives. Regarding our business transition to a more predictable subscription model in Q4, 98% of revenue was subscription or services. Our transition from a classic license business to a subscription business is virtually complete. And we've done this while increasing gross margin to 83% overall and 88% for subscription. With over 90% of our customers on a release no more than 30 days old our operations and support teams are extremely efficient giving us more time to drive adoption and success across the Dynatrace base. With the customer conversion and subscription business transitions now behind us, we look forward to driving a more streamlined one platform SaaS business in the years ahead. We'll be even more focused, we'll drive more value and we will remain resilient and durable. Now to our platform. Simply put, we have never been in a stronger position. As response to COVID-19 is highlighted, applications need to work perfectly at all times to drive employee productivity, ensure optimal customer interaction, guarantee business and transactional continuity and so on. Work locations may change, workloads may shift, but applications must run flawlessly. Applications are the high ground. It's where the business meets IT. Over the past month, the industry's leading analyst firm, Gartner, simultaneously released their annual APM Magic Quadrant and APM critical capabilities guide. For the tenth consecutive year, Dynatrace is considered a leader and once again we were given the highest marks among all competition provision. In the critical capabilities guide our platform differentiation compared to competition is even more clear with Dynatrace leading in five of six categories. To achieve the separation requires a radically different approach to the challenges of modern cloud observability. We've made the bold decisions. Reinventing APM was just a piece of the puzzle. In Q4, we announced expanded capabilities for both our infrastructure-only module and our digital experience module. Over the past year, we have gone from approximately 15% of our customers buying three or more modules from us to over 25%, and that's on a rapidly growing customer base. Our cross-selling muscles are getting stronger. Digital experience has been a popular module extension for us for a few years now. Recently, we have seen a surge in demand for mobile monitoring. Part of this is that we have made it easier than ever to instrument native mobile applications. And we believe part of this is a renewed appreciation for needing to assure that the full stack of cloud services, a complex layering of virtual services and processes actually deliver the value to the end user that is expected. One of our banking customers recently saw a surge in mobile traffic as their customer base went to shelter in place. They quickly added licenses to cover the surge. Another bank told me they did not expect to see their surge in mobile traffic reduce much, if any, post-COVID. They said COVID has done more to train their customer base on the power and ease of home banking than any campaign they ever ran. With higher degrees of online mobile use likely to be a major outcome of the new normal our early investments and outstanding functionality in digital experience, especially for mobile, should continue to pay off for us. Our infrastructure-only module is newer for us. It's now maturing as we expand coverage for AWS, Azure, and Google Cloud Platform services. Unlike alternatives and only place metrics on dashboards, our unique platform capabilities like AI-assistance and Automation of scale strengthen this module significantly. Though early in the adoption ramp, we are very encouraged by the uptake of infrastructure only now used by 29% of our customer base. And they love the flexibility to toggle up or down on their own between our deep full stack APM mode and the lighter though broader coverage of infrastructure-only mode at a lower cost. I should point out for those who are new to our story, our full stack APM module includes both infrastructure monitoring and AIOPs fully unified. And our infrastructure-only module includes log monitoring, network monitoring, and AIOPs, also fully unified. We package differently than our competition. Rather than fragment our offering into a list of tools, we take a more holistic approach and solve by use case going after a larger problem set to drive greater simplicity, efficiency, and value for our customers. Let me summarize. I know I've covered a lot. First, our business has performed very well in the face of unprecedented macro challenges. Though a few of our in-markets may face greater near-term headwinds, we've been very encouraged by overall business trends during April. We believe Dynatrace is well-positioned to continue generating strong growth in an uncertain economic environment due to the fact that we have a differentiated leadership position in a category that is considered near the top of the strategic IT priority list. In addition, we are now a one platform subscription business. We made tremendous progress this past year converting our base to the new Dynatrace platform and completing our transition away from our classic license business. This renewed focus streamlines our go-to-market and builds a more predictable and durable growth business for the long term. With that, let me turn it over to Kevin for a deeper look into our financials and the guide into Q1 and our full year fiscal 2021. Kevin.

Thank you, John. And good morning everyone. Before I start, I would like to express my sympathy to all those who have been impacted by this health crisis and a huge thank you to all the amazing people who have been working tirelessly to help the world deal with the crisis especially everyone on the front lines. The pandemic requires change and adaptation and we are no exception. Our main objective during this time has been to support our employees as well as our customers and their mission critical applications. As John indicated, we seamlessly moved to working remotely and our employees have adapted nicely. From a customer standpoint, we are pleased that our net retention rate remains robust in this environment. In the fourth quarter, we were modestly impacted on the new bookings side during the second half of March, but overall the fundamentals of our business remain very solid. We had a strong performance in Q4 and have been very pleased with the progress we had made over the last four quarters as a public company including exceeding the high end of our quarterly and annual guidance. We continue to operate the business with a healthy combination of growth and profitability, a trend we believe we can continue to deliver on for quite some time given the increasing importance of cloud software and the strength of the Dynatrace platform and the expanding addressable market we operate in. As a result, despite some headwinds associated with the current environment, we are comfortable establishing full year guidance that calls for a combination of strong growth and subscription revenue coupled with meaningful profitability and cash flow. So let me start with a quick review of the fourth quarter and fiscal year highlights and then move to fiscal 21. Our key financial metric focus on business momentum is annual recurring revenue. As John said, ARR grew 42% year over year to $572.8 million, an increase of $169 million compared to the year ago period. This was 44% growth on a constant currency basis and throughout the year our ARR faced currency headwinds in the range of 200 basis points to 300 basis points per quarter. The Dynatrace platform continues to increase as a percent of total ARR and was approximately $528 million at the end of March or 92% of our total ARR. The remaining 8% of our ARR relates to our classic offering. We are extremely pleased with the success of our conversion program and now that the classic base is down to a single digit percentage of total ARR and shrinking each quarter, we feel there is no longer a need to break out these components. Moving forward, we will no longer be doing so. The two drivers of ARR growth are new logo customers in our Dynatrace net expansion rate. If we quickly break down these two growth drivers, during the quarter, we added 165 net new Dynatrace customers ending the quarter with 2,373 Dynatrace customers. Consistent with recent quarters, new customers were a healthy balance of adding new logos to the franchise as well as classic customers moving to the Dynatrace platform. Over the last 12 months about 60% of our Dynatrace customer count growth has been the result of new logos to the company. As our conversion program winds down, the volume of new customer adds to the Dynatrace platform is likely to decline on a quarterly basis while obviously the ratio of new logos will increase. In addition to a steady flow of new logos our Dynatrace net expansion rate remained at or above the 120% threshold for the eighth consecutive quarter. As of year-end, the Dynatrace net expansion rate was 123%. In fiscal '21, we'll continue to focus on the Dynatrace net expansion rate, but we will no longer exclude the impact from expansion at the time of conversion as we do not expect it to have a significant impact now that the Dynatrace platform is over 90% of our total business and growing. Our Dynatrace ARR per customer continues to trend up and is over $220,000. We continue to believe that there is a large opportunity for further expansion in our existing customer base. The majority of applications at our customers still lack instrumentation, we continue to expand our value proposition in these cases and our enterprise customers continue to expand their portfolio of cloud-based applications as they digitally transform their businesses. Moving to revenue, total revenue for the fourth quarter was $150.6 million, $2.6 million above the high end of our guidance, an increase of 30% on a year-over-year basis and 31% in constant currency. The acceleration in total revenue growth is being driven by the strong growth in subscription and services revenue, which was $148.3 million in the fourth quarter, an increase of 37% year-over-year and 38% in constant currency. For the quarter, classic license revenue declined to $2.3 million and represented less than 2% of our quarterly revenue. As John said, our non-GAAP gross margin was 83% for the fourth quarter, an increase from 80% in the fourth quarter of fiscal '19. We continue to see a healthy increase in our subscription gross margin percentage now at 88% as we realize the benefits of winding down the classic product stack. These world-class margins are a result of a highly reliable platform and autonomous SaaS operation, using Dynatrace on Dynatrace is a unique advantage for us. Our non-GAAP operating income for the fourth quarter was $36 million above the high end of our guidance of $34.5 million, primarily due to the combination of revenue and associate gross margin upside. This led to a non-GAAP operating margin of 24%, up from 22% in the fourth quarter of '19. Non-GAAP net income was $29.8 million or $0.11 per share and so is above our guidance of $0.08 per share. Turning to a quick summary, the financial results for the full year, total revenue was $545.8 million, up 27% year-over-year and up 29% in constant currency. Total revenue growth is being driven by the growth in subscription revenue, which was $487.8 million, an increase of 39% year-over-year and 42% in constant currency. Classic license revenue declined by $27.7 million to $12.7 million in fiscal '20. Overall, we believe our two-year model transition to a subscription business is now virtually complete. Non-GAAP operating income for the year was $130 million with non-GAAP operating margin of 24%, up from 18% in fiscal '19, a very healthy year-over-year improvement in line with our internal expectations. Turning to the balance sheet, as of March 31, we had $213 million of cash and our long-term debt was $510 million after taking into account $30 million principal payment in January. In the fourth quarter, we repriced our long-term debt to LIBOR plus 225 basis points, down 50 basis points. We are not anticipating any additional debt principal payments in the near term and so we want to grow our cash balance to maintain financial flexibility. We think this is prudent given current market conditions. During fiscal '20, we consistently decreased our leverage ratio, which ended the fiscal year at 2.1x our trailing 12-month adjusted EBITDA of about $140 million. This is down over one turn in eight months from our post IPO leverage ratio of 3.3x EBITDA. Unlevered free cash flow for Q4 was $63.3 million and it was $149.5 million or 27.4% of revenue for fiscal '20. We experienced two headwinds to this number. There was about one percentage point due to lower classic perpetual bookings and about two percentage points due to higher DSO in Q4 resulting from a macro-environment uncertainty. We continue to evaluate our AR position and have not made any additional provisions for collectability outside of normal parameters. The last financial measure that I would like to discuss is our remaining performance obligation, which at the end of the quarter was approximately $860 million, an increase of 56% over Q4 of last year. The current portion of RPO, which we expect to recognize as revenue over the next twelve months, was $495 million, an increase of 52% year-over-year. Our healthy RPO expansion has benefited from the move to a subscription business combined with an increase in the duration of our new subscription agreements over the course of fiscal '20. Now let me move to guidance. Embedded in our guidance are few underlying assumptions that I think are noteworthy so you can understand our view of the environment and our opportunity as we move forward in fiscal '21. First, our assumption is that we are going to be operating in a difficult economic environment for the full fiscal year. We expect the greatest COVID headwinds on bookings and renewals in Q1 due to a global economic shutdown, with the headwinds gradually declining over the course of the fiscal year. Second, we expect a little over two points of currency headwinds to continue throughout the year. From a customer standpoint, as John mentioned, our exposure to highly affected verticals such as travel, automotive, and hospitality represent 15% to 20% of our ARR. However, based on the enterprise size of our base and conversations with many of these customers, they view the Dynatrace platform as a mission critical platform and, as a result, we expect only a modest negative impact on our renewal rates within this portion of our customer base. As an aside, we have closed new business with customers in some of these verticals so far in the first quarter, which is further support for our expectation of a modest negative impact. From a profitability and cash flow perspective, there are also a few key points to highlight. First, we expect to modestly grow headcount in Q1 as we initially moderated the timing of investments as we evaluated the impact of the health crisis on our business. We have increased the pace of hiring and plan to reaccelerate our commercial and innovation investments later in the fiscal year if the demand environment is playing out as we expect or better. As a result, from a P&L standpoint you should expect to see higher operating income in the first part of the year and then normalizing out as we go into the back half. Finally, with respect to cash and working capital, we believe it is prudent to expect that some customers may request modified billing terms, which does not impact revenue but would serve as a headwind to our unlevered free cash flow throughout the year. With that as the backdrop for the first quarter, we expect total revenue to be in the range of $148 million to $150 million representing year-over-year adjusted currency growth of 24% to 25%. We expect first quarter non-GAAP operating income to be in the range of $38 million to $40 million, 25% to 27% of revenue and non-GAAP of $0.09 or $0.10 per share. For the full year, ARR guidance is $680 million to $692 million, 19% to 21% growth. We expect total revenue to be in the range of $630 million to $643 million representing year-over-year growth of 15% to 18% and 17% to 20% growth adjusted for currency. Looking at the components of revenue, we assume that classic license revenue declines from about $13 million in fiscal '20 to under $1 million in fiscal '21. Based on the current guidance, we expect services revenue to be down on a year-over-year basis in the 10% range given that we have moved almost all of our customers to the Dynatrace platform where the product is automated and needs less services combined with our SI partners doing more services work. As a one-time guidance disclosure, we believe subscription revenue will be in the range of $591 million to $601 million, which is 21% to 23% growth and 23% to 25% growth on a currency-adjusted basis. I would like to also quickly highlight our fiscal 21 expectations with respect to our Dynatrace net expansion rate. As John highlighted earlier and we noted in our earnings release today, we have achieved eight quarters at or above 120%. It continues to be a strong part of our business. However, based on the current revenue guidance, we anticipate we would experience a modest decline in our net expansion rates throughout fiscal '21 resulting in a net expansion rate above 115% for the year. We feel great about the fundamentals of the business and feel confident we have a good balance between both customer net expansion and new logo growth. Moving to the rest of the P&L non-GAAP operating income for fiscal '21 is expected to be in the range of $146 million to $156 million which is 23% to 24% of revenue, non-GAAP EPS of $0.39 to $0.42 per share. From a cash flow perspective, in addition to the AR and working capital headwind I discussed, our effective cash tax rate is expected to go from 8% of non-GAAP pre-tax income to approximately 10% resulting in incremental cash tax expenses of about $5 million. Despite the AR cash tax headwinds, we believe we can increase unlevered free cash flow as a percent of revenue from 27% last year to a range of 29% to 30% which is $180 million to $190 million. Based on the midpoint of this range, unlevered free cash flow would increase 24% on a year-over-year basis. In summary, we are very pleased with our fourth quarter and full year performance and with a market leading position, we remain confident Dynatrace is well-positioned for the long term. Most important for our shareholders is that we continue to show our financial profile that we believe is durable and unique including meaningful scale, strong growth, healthy profitability and cash flow. With that, we will open the call for questions.

Certainly. [Operator Instructions]. Matt Hedberg with RBC Capital Markets, your line is open.

Well, hi, guys. Thanks for taking my questions. And glad you're well and thoughts go out to everybody as it relates to COVID. John, a lot of good commentary on how you're helping customers navigate this difficult situation really in a world post-COVID where CILs look to embrace cloud even faster than before. Do you think this ultimately accelerates the importance of cloud-based monitoring and perhaps could it help you even address your TAM faster than before?

Matt, appreciate the question. We do. We also believe that not only will this new normal sort of really highlight and focus the lens on cloud, it will also focus the lens on applications themselves as the high ground for where business meets IT. So I think we're in a really strong position from that standpoint. I also feel that the automation and the AI that we've built into our platform from the ground up will also be sort of essential care-abouts for IT as they move forward because it's really going to be about how do I take my existing team, my limited resources and do more with that? How do I move faster? How do I get to more applications? How do I innovate more effectively? And these characteristics of our platform that our customers are currently enjoying, we hope many customers -- additional customers ahead will be enjoying in the future.

That's great. And then the other thing that really stood out to me I think you noted 25 customers are now buying three or more products which is great. I'm wondering though, can you talk about that trend within new customers? In other words, are new customers now landing with a higher cadence of new products than say, let's say, a year ago?

They are, but I don't have all the quant for that but anecdotally, yes. It's some look to add the infrastructure piece and extend the infrastructure environment along with their full stack of APM because they're thinking about laying down a broader cloud platform. Others look to the APM and extend it first with the digital experience piece because they want a complete view of the application stack from the outside in. So they need either from the edge on in through all the virtual cloud layers to make sure that the performance and capability that they're expecting to deliver is actually delivered to that mobile device, or IoT device, et cetera. So those are the two primary that will go together depending on the point of view of the customer was pretty quick to add there and go keep going from there.

Sterling Auty with JPMorgan, your line is open.

Hi, guys. This is Matt on for Sterling. Thanks for taking the questions. The first question was just curious to see did you guys see customers' needs shifting? I'm guessing more of the activity in terms of the uptake was more focused on the cloud versus on-prem. But I just wanted to get some more color on that front.

So first, all of our customers or nearly every one of them is focused on cloud and cloud workloads. Whether they deploy our platform, have us host it or whether they host it behind their firewall, still the same SaaS platform exactly the same code. So from that standpoint, we really haven't seen that much of a shift at this point although we do expect to see a little bit more leaning to a Dynatrace hosted environment. That said, what we have seen are that the customers are shifting -- shifted their focus to work from home for probably four weeks. Actually they're still doing little bit more here and there, but those are things where they focused on making sure that employee productivity was optimized sort of leaned in to some of our hybrid extensions like Citrix monitoring, some of our third-party cloud monitoring capability so they could assure Salesforce, Microsoft 365, Zoom, some of these other third-party clouds that they depended on actually performed as advertised to keep their workforce productive. What we're seeing now is a leaning back toward faster to the future investments back into digital transformation and we think that will characterize sort of that -- sort of the post-COVID we're all here as we enter Q2 and beyond for the year.

Great. That's very helpful. And then just one follow-up maybe for Kevin. So long-term deferred declined sequentially. Was just trying to understand if that was from customers that have -- that are doing shorter contracts or if there was something else there that we should be aware of?

So generally over half of our customers are signing three-year agreements with us, but please keep in mind that our payment terms are annual in advance, so that does not necessarily -- that does not impact our long-term deferred. What you're actually seeing is the burn down of the perpetual licenses that we've sold primarily sort of two years ago and a little bit last fiscal year. As you may recall, we recognized those licenses over three years and as we're bringing that down, that's going to have an impact on our long-term deferred and as you can imagine that also puts some pressure on unlevered free cash flow for this year fiscal '20 and it will put a little bit of pressure continuing pressure in 20 -- fiscal '21, and then it will alleviate thereafter primarily. So we sold perpetual licenses two to three years ago. It was pretty healthy, but that has essentially gone at zero at this point and it's just so working down at that perpetual license and long-term deferred.

Heather Bellini with Goldman Sachs, your line is open.

Great. Thank you so much guys for taking the question and, John, really helpful opening remarks. So thank you so much for them and how detailed they were. A couple of questions. Just you mentioned that new logos are up. I was wondering if you could mention maybe how the size of the new lands may be being impacted, have you noticed anything in terms of the size of those given what's going on? And even particular what might be more helpful just in Q1, if there's any difference? And then thank you for the commentary on NER, the 123% you gave and even the color about next year. But just wondering was the 123% -- and I know this is the first time you've actually given the exact number, was that a tick down at all from what you saw in the prior quarter? And then I just have a follow-up. Sorry. Thank you.

Yes. Let me start with the new logos. So we actually have seen the new logo land in -- at -- in $92,000 or $100,000 range now for quarters on end, so it's very consistent in that range. So nothing really to note plus or minus there. If anything, it's ticking up slightly, but I think that's a result of the sales organization being more effective at selling at least a second module if not three modules at once when they actually land a new customer but it's not material, but it has not dropped if that was sort of like the part of the question. And I think it's a healthy place to land. We were not really -- I know some folks out there may think we're a big deal company and everything's a multi-million dollar deal. We're actually a much higher volume transaction company where we really focus on land and expand. Where we land in 100k and then we expand gradually with our customers as they expand their footprint as they add more applications and now more than ever as they add additional modules. So where -- we like where we are, we think it's the right place to be at an enterprise -- as an enterprise-focused company focused on the global 15,000. And so I like where we are and I think we're going to maintain that going throughout the next several years. Kevin?

Yes. Heather, on the Dynatrace, the net expansion rate, it was a modest decline from the prior quarter, less than 1% from prior quarter, so relatively flat Q3 to Q4. To put a little bit more color in terms of where they think where it's going in the future, based on what we view as prudent guidance on the top-line and a combination of what we think will be helping new logos, mathematically obviously that net expansion rate is dropped down from that 120% bar down to 115%. With that said, we're optimistic. John about a lot of expansion opportunities and our customer base at the low point and hopefully throughout the course of the year we will maintain a much healthier net expansion rate. I think one final thing is that Dynatrace net expansion rate had a couple of carve-outs in it. And if you looked at our total company expansion rate over the last four quarters, it's been higher than the Dynatrace net expansion rate because we are again backing out some expansion at the time of conversion. So overall, we're very pleased with the retention, we're very pleased with our customers expanding their footprint, an use case event as John was talking about earlier, more modules over time as well.

And then one just quick follow-up to the last question that was related to long-term deferred. So based on your comments, should we expect -- I think it went from $80 million to $60 million off the top of my head, but should we expect that phase to continue, so when you look out over 12 to 18 months that should be a much smaller number than where we just ended?

That's right. You want to think maybe six to eight quarters and that -- and that'll be wrapped, but most of it, Heather, in the next six quarters in terms of that long-term deferred wind down and then just wrapping up in eight quarters. So we will always have some level of long-term deferred, but that's the timeframe.

Bhavan Suri with William Blair & Company, your line is open.

Hi, guys. Thanks for taking my question. I'm glad everyone's doing well. Congrats on the quarter. Couple of quick questions from me. One, just on the top of the funnel. I know you've talked about the exposure to some of the affected industries and some of your expectations around sales, hiring ramp, but love to understand what you've seen on the top of the funnel. In this environment feels like the digital experience thing should be really picking up. It feels like infrastructure, multi-cloud is interesting, but that piece to me seems really interesting as well some of the AI related pieces. You said April's off to a good start, but just love to understand you're seeing at the top of funnel in terms of what's driving some of those deals coming in today? And sort of how do you think that plays out going forward, say, for the next two, three quarters, which is COVID time driven and post-COVID? Do you think logically there might be an acceleration of business? Just love trying to understand how you think about that coming out of COVID too.

Yes, Bhavan. Thank you. Thanks for the question. So we're not seeing a huge shift in sort of the characteristics, we didn't see that four weeks before for we kind of shift to work from home and people leaning into different aspects of our product line for employee productivity. But the bulk of our business is really focused on run the business applications that run on -- in modern cloud environments, more and more that multi-cloud environment that I articulated, combination of multiple public cloud with hybrid back ends, and that environment continues to be more prevalent and accelerating. People are really getting sort of the hang of how to unmanage these large complex Kubernetes orchestrated environments, they understand how difficult and challenging they are. We have a very unique highly automatic solution with built-in AI to help them manage these environments and extend them more quickly than ever without the blind spots associated with sort of the do-it-yourself or bag of tools kind of approach, that's sort of the alternative that we see most often out there. So coming out of this COVID-19 sort of situation and into a new normal, I really do believe that our automation and AI will become sort of primary drivers for differentiation rather than sort of interesting nice to have kinds of characteristics the way they might be in certain sales cycles that we've had in the past. So I like our differentiation, I like where we sit, and I think we're very well-positioned for a new normal and a faster to cloud with limited resources.

Got you. Got you. Okay. And then one quick one sort of on the competitive environment and really around pricing. So you obviously talk about the land at 100 grand. But you are a premium offering when you think about it compared to say New Relic or Datadog and others. And I guess the premium offering was sort of the price point, it's not a viral sale, it's not using credit card, et cetera, well above that they have New Relic. Did that present any challenge at all in that first four weeks or have you seen any pressure from -- or changes in the price environment, competitive environment? Love to understand what, if there was any impact at all?

Yes. Well, first of all, you need to understand that our sales organization for the most part works remotely anyway. They don't sit in offices, they work from home. They're all very familiar with Zoom and our platform is a SaaS platform so that anything you can do sort of on-site, you can do remotely. So whether its demonstrations, proof of concepts, helping customers sort of manage environments, making sure that they adopt the latest techniques, all done remotely. So there's no miss on the beat in a shift from office to work from home. So that's I think the first key thing. The second thing is, as I mentioned, we package our product differently, Bhavan. It's much more around use cases or a series of use cases rather than little slices of tools. And we believe that that's a more effective, more efficient, higher value way to support customers at the enterprise level. So we include multiple things. When we talk about APM platform, we're including infrastructure monitoring, we're including AIOps. Other companies have to sell three or four products to do what we do in one. Same thing with infrastructure-only, it includes log monitoring, includes network monitoring because that's what you need to solve the full infrastructure challenge, you don't self-buy three products. So I think that as our customers become familiar with how that works and really appreciate the fact that it's a unified offering, we're all gluing up all the pieces together already done for you rather than you have to throw bodies at that and then maintain it over time. So our customers, who get to know us and why we expand as well as we do on our base, understand that we're sort of the value leader even if they pay a little bit more for the combination of unified software we provide.

[Operator Instructions]. Kash Rangan with Bank of America, your line is open.

Hi. Thank you very much. Congrats on the quarter. I'm looking at your forward looking trends. Your month of April is actually stronger than the month -- year earlier. Net expansion rate continues to be very solid. Looks like the front end of the pipeline is also pretty solid from a demand generation standpoint and the sales execution also has been enabled through Zoom on virtual settings. Yet what I struggled to reconcile all that, with all the field work that we've done -- and also by the way, your RPO very strong. And when I reconcile that with your guidance, there is extreme, extreme, extreme conservatism, although it is prudent to have conservatism it is just very extreme. Just wondering if you have probably assumed even Draconian because if I just take the net expansion rate and the fact that 80%, 85% of your business is within healthy verticals, it doesn't quite add up to what you're guiding to, so I'm just trying to understand how critically conservative you've been with your guidance? Thank you so much.

Yes. There are certainly a lot of positives that we've seen throughout the course of fiscal '20 and leading indicators into the first quarter of '21. And as highlighted as well, some of the things that when we think about '21 that are important, I -- we had 80% coverage on our guide number from a subscription standpoint and backlog plus RPO. So, look, with that in mind, John and I spent some time thinking about the business, and overall our approach is we want to be very prudent, we want to set the bar that we feel extremely comfortable with. And hopefully, we have a good beat and raise strategy throughout the course of the year as our program evolves. We're very optimistic about the opportunity. Sales organization is in action, they're doing well. Our renewal rates are very healthy. But little bit of the uncertainty, we just thought it'd be very prudent to set really solid foundation, Kash.

Raimo Lenschow with Barclays, your line is open.

Yes. Hey, thank you. Question on the infrastructure monitoring. Like, you mentioned that you're -- more comprehensive there and you can do a lot more stuff. But if you look at the adoption, at the moment a lot of people just kind of asked to go to the cloud, just needs like an early quick solution there. So how do you see that playing out, like people understanding that you can deliver a lot more so you will be kind of the secondary guy adopted as kind of people realize they actually need more? What do you see that, already like in the first phase kind of playing out, just to understand how that momentum is playing out there? Thank you.

Sure. Good question. Well, we see both dynamics. We see the dynamic when we come in when workloads start hitting the cloud in volume and the customer understands that all they have is an infrastructure view, they don't have the application view and the application teams need more visibility across sort of what's happening with these workloads in a dynamically orchestrated environment and realize that nothing really provides that. Even if you're able to pull some traces off, you don't have them a distributed tracing capability that really gives you value in that application layer, which is why we talk about entering many of our opportunities through sort of an APM lens and landing and then expanding from there. We do see customers at the time they make the decision to expand their cloud investments to actually understand that they need more than just infrastructure only monitoring and they go out and they look for the full stack observability platform. And then that -- then we enter earlier even before the volume of workloads have been placed on their cloud environment. So we do have a combination of both, but I'd say it leans right now more heavily to the -- I'm expanding the workloads on the cloud, I have lots of blind spots, I need to fix this, I can't do this with a bunch of tools, I need something more comprehensive, that's our primary, but the other one is starting to grow more and more often coming up off of sort of the good hygiene approach as customers get more familiar with the right models to expand cloud effectively.

Okay. Makes sense.

Hopefully that makes sense to you?

Yeah. That makes sense.

Hynes with Canaccord, your line is open.

Hi. Thanks guys. Congrats on the results. Hey, John, just in terms of the expansion opportunity, can you just remind us where the average customer is in terms of percent of apps or staff that's being monitored and then maybe where some of your best customers are?

Sure. Well, so many companies are still in that 5% to 10% of their application range. The cloud is driving the need to adopt much higher than some of the old Gartner stats that said, hey, 25% to 30% receiving customers in the 50%, 60% range where they run the business applications and associated workloads around it. We have customers in that 30% to 40% percent range who want to continue to go up, but that's the minority. The vast majority are really in that 5% to 10% range. There's a lot of room just in the up sell, let alone the cross-sell which as I said we're getting much stronger in. When you take a look at our landing zone which is in that $90,000 to $100,000 range and then you look at our average ARR per customer which is now a little over $220,000, there's a lot of room to continue growing that average ARR per customer, toward a million-dollar ARR per customer which we believe any global 15,000 company or any billion-dollar company would be willing to invest to assure that their applications that run the business applications run flawlessly all the time. Okay. One more question, I think.

Our final question comes from a line of Walter Pritchard with Citi. Your line is open.

Hi. Thanks. Just a clarification on the hiring. Sounds like you did slow it, you resumed it. Can you talk about sales hiring and how we should think about sales capacity build in fiscal '21 and how's that, any slowing in hiring is impacting the growth rate you're looking for in '21, and then sort of what you're looking for specifically in sales in order to re-accelerate the hiring? Thanks.

Yes. So we haven't stopped the hiring and sales folks. We did slow it down a little bit but the focus is still on the gas. And we've been re-accelerating it as we're building more and more confidence in this year and they -- that's sort of the current uncertainty becomes a little bit less uncertain. So you should expect us to bring our investments back to where they were year ago which were healthy investments in sales expansion, also R&D, the innovation expansion and customer success expansion. Those are the three key vectors for us and we're leaning into all those currently.

All right. Thank you very much everyone. Appreciate the time this morning. And I hope you can tell we're bullish on the business. Good Q4. Good start to Q1. We're going to continue to run a balanced business which I know which Kevin and I stay focused on to grow profit and scale, and we're excited about the future. We look forward to this year and catching up again in 90 days and talking about how we did in our fiscal Q1. Cheers, everyone. Stay healthy.

This concludes the Dynatrace fiscal fourth quarter 2020 earnings conference call. We thank you for your participation. You may now disconnect.