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Dynatrace Holdings LLC (NYSE:DT)
Q3 2020 Earnings Call
Jan 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Dynatrace third-quarter 2020 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to turn the conference over to your moderator today, Michael from investor relation.

Please go ahead.

Michael Bowen -- Investor Relations

Thank you, operator. Good morning. And thank you for joining us today to review Dynatrace's third-quarter fiscal 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 would like to draw your attention to the safe harbor statement included in today's press release. During this call, we will 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 21E 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 fourth fiscal-quarter and full-year 2020.

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 November 4, 2019 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 will 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 third fiscal-quarter 2020 earnings press release in the Investor Relations section of our website at dynatrace.com. With that, I would like to turn the call over to our Chief Executive Officer John Van Siclen. John?

John Van Siclen -- Chief Executive Officer

Thanks, Michael. And I would like to start by thanking all of you for joining us today. Once again, we are very pleased with the company's quarterly performance, which resulted in third-quarter financial results that were better than both our top-line and bottom-line guidance. I'm especially pleased that ARR once again increased by 44% year on year to $534 million with our new Dynatrace platform now making up 87% of total ARR, up from 61% from a year ago.

Fueled by the continued growth in ARR, our subscription plus services revenue, what we see as the best measure of revenue growth on our P&L, increased by 36% year over year. As we look ahead, we remain optimistic about the business as our new Dynatrace platform continues to be adopted by a growing number of new enterprise cloud customers. And each quarter, we are proving our ability to expand rapidly within this growing customer base. Our optimism is reflected in the increased top-line guidance that Kevin will detail in a few minutes.

We are also proud that our solid growth is complemented by strong operating margins. We run an efficient business with gross margins at 84% and a non-GAAP operating margin of 26% for the third quarter. We continue to be cash flow positive on an operating basis while investing across the board in growth. As we've said before, we believe in running a balanced business, a powerful combination of growth and profitability at scale.

We believe this balance, combined with our focus on investing aggressively in commercial expansion and continuous innovation, provides Dynatrace with attractive durability over the long term. Now let me turn to four major advancements made in our fiscal Q3: new logo expansion, customer net expansion once they are on our new Dynatrace platform, continued progress moving classic customers to Dynatrace, and finally, innovation highlights around platform expansion and differentiation. I will take each of these in order, starting with business from new customers. This past quarter, we saw a sizable uptick in new customers on the Dynatrace platform.

380 new customers joined the Dynatrace platform family in Q3, bringing our total Dynatrace platform customer count to 2,208, nearly double from a year ago. Q3 was a strong conversion quarter for us with twice as many customers converting as we converted a year ago. And even with this strong conversion uptick, half of the customer growth added to our Dynatrace platform came from customers that are new logos to the franchise. Nearly every new customer win, whether net new or converted, is participated by the realization that their cloud program is disrupting their ability to keep up with the accelerating complexity of the ecosystem supporting their digital transformation.

More and more run-the-business applications are being deployed into their enterprise cloud, while visibility and situational awareness are declining. To regain control and bridge the complexity gap, more and more enterprises are turning to Dynatrace. For example, a large U.S. bank recently became a Dynatrace customer after concluding that its current APM solution could not keep up with the dynamic nature and scale of its microservices-based environment.

Prior to Dynatrace, the bank experienced successive service disruptions in applications running in their AWS cloud, which negatively impacted the bank's business and put their brand loyalty at risk. Like most of our customers, the bank ran a trial with Dynatrace to prove ease of use, scalability and the value of our advanced automation. The bank was immediately impressed by the Davis AI engine at the core of our platform and its ability to automatically map the entire full stack topology of their hybrid cloud and precisely identified problems and their root cause in real time right out of the box. At the conclusion of their trial, the bank became a seven-figure ARR customer with plenty of room for expansion over time.

I should also mention that shortly after starting with Dynatrace, the bank began to use our Digital Business Analytics module announced in October to understand and reverse its drop in conversion rates for bringing new customers to the bank. This is a great example of the power of our all-in-one approach with end-to-end observability from user experience through infrastructure, putting business context to drive better digital business outcomes. As we've said, once customers are on the new Dynatrace platform, we see rapid expansion, which is evidenced by the solid growth in our ARR that I referenced earlier. Once again, in Q3, our net expansion rate exceeded 120%.

This is the seventh straight quarter we've exceeded this mark. As we are still in the early innings of Dynatrace adoption, most of our expansion is driven by customers deploying our platform into new application stacks. The automatic continuous discovery and instrumentation, the self-adjusting baselines, the automatic problem determination prioritized by business impact all contribute to rapid rollout and the high value for low effort economics our customers enjoy. In addition, we are also beginning to see increased adoption of additional platform modules as customers recognize the power of our broader platform capabilities.

Let me share an example of one of the many meaningful customer expansions during the quarter. A U.S.-based SaaS company that standardized on the Dynatrace platform. And within two quarters, completely replaced their previous Gen 2 supplier who missed the market transition to the enterprise cloud. Earlier this year, the SaaS company was struggling to effectively manage their four different data centers with their previous solution and foresaw even greater issues with their evolution to a Kubernetes orchestrated cloud.

After a successful trial last summer, the company decided to start by switching to Dynatrace in one of their data centers. Based on the rapid deployment of Dynatrace and success they achieved as a result of gaining real-time answers and insights into performance segregations and anomalies, thanks to Davis, they decided to expand their Dynatrace footprint and make Dynatrace the company standard for both the remaining data center migrations, as well as their upcoming move to a dynamic web scale cloud. This expansion came after only two quarters from the initial land deal with Dynatrace. Turning into our continued progress on the conversion front, which is the movement of our classic APM customer base to the broader Dynatrace Software Intelligence Platform.

Classic ARR has now declined to $69 million. That's down $25 million from a quarter ago and now represents only 13% of total company ARR. As we've discussed, we started this conversion program in earnest seven quarters ago with approximately $200 million in ARR to convert. We've been successful in moving our classic customer base to the new Dynatrace platform because virtually every company has new enterprise cloud initiatives.

We are not simply upgrading from one product set to a new version. Our conversions typically involve a shift from legacy stacks to new stack cloud environments. While it takes more time to find new stack buyers, it yields a much more valuable customer in the strategic go-forward growth segment of their business, their enterprise cloud. As an example of a converting customer this past quarter, a large U.S.-based airline converted from our classic tooling to the Dynatrace Software Intelligence Platform.

As the airline transformed from legacy systems to a modern multi-cloud architecture, they realized that the disparate monitoring tools, both commercial and open source, that they had acquired over the years, were costing them precious time, money and resource. This led to excessive manual configuration, the need to stitch together data from multiple sources and operating more rooms to get the answers they needed. As part of an initiative to gain observability into their entire environment, including all airport terminal kiosks, the airline began a trial of the all-in-one Dynatrace Software Intelligence Platform. Again, it was advanced automation and full stack observability at scale across a wide array of IaaS, PaaS and container technologies that were the key factors in the successful displacement of competing tools.

Our all-in-one platform provides the airline both the modem to observability it requires and the real-time precise answers required to address degradations in performance and business impacting anomalies. After a successful trial, the airline converted from our classic tooling to the new Dynatrace platform and the larger footprint led to an expanded seven-figure ARR contract. We are excited to be well along the way with the conversion process and look forward to wrapping this up over the next few quarters. As I've said before, this is particularly exciting for us for two reasons.

First, we've proven our ability to expand rapidly with customers once they are on the broader Dynatrace platform. And second, we believe the completion of this process will further improve the productivity of our sales organization as the conversion distraction ends and they focus 100% of their efforts on landing new customers and expanding them across more applications and modules. Let me finish by highlighting several of the innovations we announced recently, which we believe will further improve our ability to win new customers, expand with existing customers and incent remaining classic customers to convert to Dynatrace. In early December, we announced the extension of our software Intelligence platform to support AWS hybrid clouds and provide seamless support across all AWS public regions and outposts.

Due to regulatory or data security requirements, many enterprise customers want flexibility with regard to where their observability data resides. With a flexible deployment model, Dynatrace offers a single platform built on cloud native architecture that seamlessly supports any configuration of AWS hybrid cloud environment, including both VMware Cloud on AWS Outposts and the AWS native variant of Outposts. Dynatrace AWS customers will benefit from the regular automatic updates and automated administration of the Dynatrace platform, while still meeting the strict governance, security and latency requirements of on-premise workloads. This reduces the complexity, costs and risks associated with alternative cloud observability approaches that do not support the flexible deployment modes of AWS and the other major IAAS and PaaS providers.

During Q3, we also announced Keptn, an open source pluggable control plane, to advance the industry's movement toward autonomous clouds. Keptn is an outcome of the knowledge and expertise gained as Dynatrace adopted a no-ops environment itself internally. In talking with CIOs and CTOs of many of our enterprise customers, it's become clear that advanced levels of automation and intelligence are required to bridge growing gap between limited IT resources and the exponential increase in scale and complexity of dynamic enterprise clouds and the growing cloud native workloads now being deployed. We purpose built our new Dynatrace platform with a powerful explainable AI engine at the core to identify anomalies and degradations with precise root cause to trigger automatic self-healing actions, for what's been missing has been a simple, repeatable way to harness this potential and leverage it for a true no-ops approach.

Keptn provides the automation and orchestration of the processes and tools needed for continuous delivery and automated operations for cloud native environments. And we have a growing number of customers now engaged in leveraging Keptn and Dynatrace expertise to advance no-ops within their enterprise cloud environments. Finally, just two to three weeks ago, we announced that we've been collaborating with Google, Microsoft and other industry leaders on the OpenTelemetry project to shape the future of open standard-based observability. Having been a leader in distributed transaction tracing at scale for years, Dynatrace is contributing know-how and manpower in this area to the project.

As OpenTelemetry gains momentum, open tel data will serve as an additional data source that further extends the breadth of our cloud observability, which, in turn, feeds Davis, our AI engine, providing our customers with richer insights and automatic actions across a wider landscape as dynamic multi-clouds continued to evolve and scale. We see this open source standard as a benefit to the market and another potential accelerant to the adoption and expansion of Dynatrace. In summary, our innovation engine continues to differentiate our solutions and expand our market opportunity. Our Dynatrace customer base continues to increase as dynamic multi-clouds and workloads expand and scale.

New logos are being added and existing customers are converting and expanding on the new platform, both at a healthy pace. And our execution across our key performance indicators remain strong. With that, let me turn the call over to Kevin Burns for a deeper review of our financials. Kevin?

Kevin Burns -- Chief Financial Officer

Thank you, John. And good morning, everyone. I will start by providing a more detailed review of our third-quarter performance. And I will finish with our outlook for the fourth quarter and our increased full-year guidance.

Following my remarks, we will open the call for questions. Our key financial metric focused on business momentum as annual recurring revenue. As John said, ARR was $534.5 million at the end of the third quarter, an increase of 44% or $162 million compared to the year-ago period. Of the 44% growth year over year, 5 percentage points of the annual growth was due to customer expansion at the time our customers converted from our classic products to Dynatrace, and the balance of 39 percentage points of growth came from new logos and expansion in our customer base on the Dynatrace platform.

As a reference point, this compares to 44% growth last quarter on a year-over-year basis, of which, 6 percentage points of growth was due to expansion at the time of conversion and 38 percentage points from new logo and Dynatrace platform expansion. The Dynatrace platform continues to increase as a percent of total ARR and was approximately $466 million at the end of December or 87% of our total ARR. The remaining 13% of our ARR relates to our classic offering. This compares to a mix of 80% Dynatrace and 20% classic at the end of the last quarter.

We continue to track to plan on conversions and expect to be substantially complete with moving our customers to our new platform over the next three quarters. As you may recall, we started the conversion program with our sales organization seven quarters ago. And to date, we have converted nearly two thirds of the classic base. We are actively working with the remaining customers on conversion time lines and continue to have a very good line of sight to completion.

We are very pleased with the success of the program and the benefits that have been realized by our customers once they are on our new platform. By the end of our fiscal Q4, we expect classic AR will be below 10% of total ARR, marking a major milestone for the company. Circling back to total AR, there are two area of growth drivers in our business. The first is new logo customers and the second is our Dynatrace net expansion rate.

If we quickly break down these two growth drivers, during the quarter, we added 380 net new Dynatrace customers, ending the quarter with a little over 2,200 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, 54% of our Dynatrace customer count growth has been the result of new logos to the company. In addition to a steady flow of net new customers, our Dynatrace net expansion rate remained at or above the 120% threshold for the seventh consecutive quarter.

As a quick reminder, our ARR growth is not a result of our customer base converting from classic products to the Dynatrace platform as we do not charge a conversion fee. Our ARR expansion is driven primarily by footprint and product expansion in our customer base. We have been very focused on moving our customers to the Dynatrace platform because from there, our customers can expand their use cases and footprint in ways that were not possible with our classic products. As noted earlier, only 5 percentage points of our 44% ARR growth occurred at the time of conversion.

And in our view, even those 5 percentage points are true customer expansion. Our current Dynatrace ARR per customer remains north of $200,000 for the fourth consecutive quarter, and we continue to believe that there is a large opportunity for further expansion in our existing customer base. The majority of our applications at our customers still lack instrumentation. We continue to expand our value proposition and use cases.

And our enterprise customers continue to expand their portfolio of cloud-based applications as they digitally transform their business. Let's now turn to revenue. Total revenue was $143.3 million, $5.3 million above the high end of our guidance and an increase of 25% on a year-over-year basis. Total revenue growth was driven by strong growth in subscription revenue, which was $128.5 million in the third quarter, an increase of 40% year over year.

For the quarter, classic license revenue was $3.9 million, down from $12.1 million in the year-ago period. As John indicated, from a P&L perspective, we believe the best measure and reflection of our ongoing revenue growth profile is the combination of subscription and services revenue, which was $139.4 million in the quarter, representing 97% of total revenue and an increase of 36% on a year-over-year basis. Before moving to our profitability metrics, I would like to point out that I will be discussing non-GAAP results going forward as outlined in the tables in the earnings press release. Our non-GAAP gross margin was 84% for the third quarter, an increase from 82% in the third-quarter fiscal '19.

We continued to see a healthy increase in our subscription gross margin percentage as we realized the benefits of winding down the classic product stack, and more importantly, the benefits of the Dynatrace platform, which has one code base, and over 90% of our customers on a version release within the last 30 days, an extremely efficient product. Our non-GAAP op income for the third quarter was $37.5 million, well above the high end of our guidance of $31 million due to a combination of revenue and associated gross margin upside and to a much smaller extent, some investments that moved to the fourth quarter. This led to a non-GAAP operating margin of 26%, up from 21% in the third quarter of 2019. We are very pleased with the strong profitability performance for the quarter.

However, as discussed before, we remain focused on investing for long-term growth and plan to reinvest some of the upside we realized during the quarter back into the business, which is reflected in our Q4 and full-year guidance. Non-GAAP net income was $26.7 million or $0.10 per share. This was above our guidance of $0.06 to $0.07 per share. For the quarter, we had 280.2 million diluted weighted average shares outstanding.

Turning to the balance sheet. As of December 31, we had cash and cash equivalents of $189 million, and our long-term debt was $540 million after taking into account a $30 million principal payment in Q3. Our leverage ratio was 2.7 times our trailing 12-month adjusted EBITDA of $130 million. This is down from a leverage ratio of 8.9 times at quarter end prior to our IPO.

Keeping in line with our program to consistently reduce debt, we made another debt payment of $30 million in January. And our gross debt is now approximately $510 million. While on the debt topic, I would like to let you know that later today, we plan to launch a repricing of our debt facility. We anticipate that there will be some modest costs in the fourth quarter, and our guidance excludes any potential impact.

During fiscal '21, we expect to realize a modest benefit related to reducing our interest expense, but it is not material to our overall results. And we will provide more color on next quarter's call. Moving back to our key metrics. Unlevered free cash flow for Q3 was $13.3 million, and it was $161.9 million or 32% of revenue on a trailing 12-month basis.

As we've discussed, quarterly cash flows can vary due to seasonality, combined with the fact that as we convert our customers from classic to Dynatrace, it can impact the timing of when we invoice our customers. The last financial measure that I would like to discuss is our remaining performance obligation, which at the end of the quarter was $800 million, an increase of 74% over Q3 of last year. The current portion of RPO, which we expect to recognize as revenue over the next 12 months was $456 million, an increase of 66% year over year. Our healthy RPO expansion has benefited from our move to a subscription business, combined with an increase in the duration of our new subscription agreements.

We have consistently stated that we do not view calculated billings as a meaningful business metric in the near term mainly due to variability created by the timing of our customer conversions and our ongoing shift from perpetual license to a subscription offering. We are very pleased with the success that we've had in moving our business to a subscription model. This shift has no impact on ARR, and it actually has a positive impact over the long term, given it's a renewable source. Keep in mind, however, that the shift to subscription has and will continue to put pressure on our long-term deferred revenue balance as annual invoicing for subscriptions is lower than the upfront invoicing for perpetual licenses that are recognized over three years.

Moreover, the shift to subscription has happened even faster than expected this year, which we believe is a great thing for our business. It's for these reasons that we have focused on our ARR from the time of our IPO as we believe it is the most relevant leading indicator of our business momentum and will continue to be the case until we complete our revenue model transition. Now let me cover our guidance, which has increased due to the strength of our third-quarter results, combined with our continued positive outlook and the momentum of our business. For the fiscal year, we are increasing our ARR guidance to a range of $563 million to $566 million, representing year-over-year growth of 40% and an increase from our prior guidance of $550 million to $555 million.

Total revenue is now expected to be in a range of $542.2 million to $543.2 million, an increase from our prior guidance of $533 million to $535 million. We expect our non-GAAP op income to be in the range of $127.5 million to $128.5 million, up from a prior guidance of $119 million to $121 million and representing a non-GAAP operating margin of 24% at the midpoint of the range. Non-GAAP net income per share is now expected to be $0.28 per share, assuming approximately 272 million weighted average diluted shares for the year. For the fourth quarter, we expect total revenue to be in the range of $147 million to $148 million, representing year-over-year growth of 27%.

It is worth pointing out that we expect the combination of subscription and services to once again grow over 30% in the fourth quarter. We expect fourth-quarter non-GAAP op income to be in the range of $33.5 million to $34.5 million and non-GAAP EPS of $0.08 per share, assuming 284 million diluted weighted average shares outstanding for the fourth quarter. In summary, we are very pleased with our third-quarter performance, and our optimism about the future is reflected in our increased guidance for the year. With a large and growing TAM in front of us and a market-leading position, we believe that Dynatrace is well-positioned for the long term.

Most important for our shareholders is that we continue to show a financial profile that we believe is highly unique, including meaningful scale, strong growth healthy profitability and cash flow. With that, we will open up the call for questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Sterling Auty with JP Morgan. Please go ahead.

Matt Parron -- J.P. Morgan -- Analyst

Hey, guys. This is Matt on for Sterling. So looking at the significant upside in ARR versus what you did in subscription revenue, wondering if you could comment on the linearity in bookings during the quarter. Thanks.

Kevin Burns -- Chief Financial Officer

Yeah. Hi, Matt. Thanks for the question. So we actually attract linearity on a monthly basis.

What I will say is for our December calendar year-end quarter, we typically see a larger percentage of our bookings coming in that month rate. So yes, it is a little bit higher in this quarter, but it's consistent sort of with last few years in terms of linearity. So no real outliers in terms of the flow of the business. It did come in as expected.

Matt Parron -- J.P. Morgan -- Analyst

Great. Thanks, guys.

Operator

Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Hedberg -- RBC Capital Markets -- Analyst

Oh, hey, guys. Thanks for the question. Great quarter. In addition to the 44% ARR growth, new customer adds, it was really impressive to us.

And I think you added 130 more than you did in the year-ago quarter, as well as last quarter. Can you talk in a bit more detail of why new customer adds were so strong? Has something changed competitively? Perhaps could there be some acceleration in competitive replacements?

John Van Siclen -- Chief Executive Officer

Yes, Matt. So a couple of things. First of all, it was a big conversion quarter. And we've said that we've been stimulating the base now for a while.

And we're seven quarters into the program. And the end of the year is always a forcing function for many things, and this just happened to be a big quarter for moving the base over to Dynatrace. So that's a big part of it. But even with that, about half of that growth is still net new logos to the franchise.

And that's really coming because the market is now moving much more aggressively to multi-cloud environment, sort of web scale environments, including the modern workloads, microservice based workloads and Kubernetes orchestrated environments and really lead the Gen 1 and Gen 2 tooling behind. And so reinvention five, six years ago is now really playing well in the market, and so there is a competitive tailwind for us as well.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. And then maybe when you look at your customer base, John, can you estimate what percentage of, say, an average customer is monitoring cloud-based app or infrastructure versus, say, an on-premise app or infrastructure? And how do you think that differs versus sort of the broader competitive landscape?

John Van Siclen -- Chief Executive Officer

So from our standpoint, I mean, we've got a little bit of work looking back into it, and it's in that 70% to 75% range, our modern cloud workloads and modern cloud environments that the new platform is monitoring. And the way we go to market is we look for those modern cloud teams and stacks. And then as they get the hang of how Dynatrace works and the automation and intelligence built in, creating much greater efficiency for their sort of limited IT resources, they start bringing it back, further back, into their sort of legacy or classic environments. But that's a pretty high ratio.

And I'd say, well, obviously, relative to a Gen 1 or Gen 2 kind of tooling out there, it's much more into the modern cloud environments. So we think it's a good spot to be. I think over time, we will see that percentage continue to climb because we are uniquely positioned in those environments.

Matt Hedberg -- RBC Capital Markets -- Analyst

Great color. Well done, guys.

John Van Siclen -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Heather Bellini with Goldman Sachs. Please go ahead.

Heather Bellini -- Goldman Sachs -- Analyst

Great. Thank you very much. I mean, obviously, you guys are doing a great job converting the installed base. And I know you mentioned that you look to be done with the conversion over the next couple of quarters.

And you've had some very good success on new customer lands. But can you give us a sense? You made a comment on the call that, I mean, getting the salespeople not focused on conversions and focusing on new land will help improve productivity. Are there any changes to the incentives that you're paying the sales force as you move toward the next fiscal year and the conversions become even smaller? And I guess, the second part would be, when you're going after new customers, how do the size of those initial lands compare to the size of the initial conversion deals? Right, I know you don't charge for the conversion, but kind of what you're getting from those when they convert in terms of the uplift. So sorry for a complicated question, but any thoughts would be very helpful.

John Van Siclen -- Chief Executive Officer

Yes. So first of all, we haven't set our sales plans for the following year. That's in discussion now. But our approach has been to try to move as much of the base across the line and convert it by the end of this fiscal year so that we can free up sales and rework the sales incentive plan so that they can focus 100% of their time on new logo opportunities and expansion of the base, especially cross-selling some of the new modules.

It's the base. So that's still our program. We still have to work through some of the details, but those are our thoughts at this time. Relative to a land versus expand the deal, the land deals have been very consistent in the 95K kind of range.

I think if you look, we've been talking about 92,000 to 100,000 sort of in that or 92,000 to 97,000 sort of in that range for the last three quarters. So that's very consistent. And the expansion deals, they vary a little bit by time of year. Q3 happens to be a very strong expansion quarter and so does Q4.

So that those times of the year, the expansion deals can be tracked a little bit larger on an ASP basis, and then they come down to a little more of a run rate range in Q1 and Q2 for us in a fiscal year. But overall, there is not a huge difference between the two. We're a transaction-oriented business, we're not a big deal-oriented business. And I think that that helps us manage a more effective business over the long term.

Heather Bellini -- Goldman Sachs -- Analyst

Great. thank you.

Operator

Your next question comes from the line of Walter Pritchard with Citi. Please go ahead.

Walter Pritchard -- Citi -- Analyst

Hi. Thanks. A question for John and Kevin. For John, just looking at the expansion that you've seen, I'm curious product-wise, getting into things like digital experience monitoring, infrastructure monitoring versus just app expansion into new apps, has there been a trend there in terms of product versus sort of footprint expansion as you've continued to put up that NRR number?

John Van Siclen -- Chief Executive Officer

So I feel like we're still in the early innings of cross-selling. Most of that expansion still comes from more applications being instrumented, mainly because we have such a highly automated way of instrumentation, sort of a self discovery, very automatic, so we can break that old barrier that used to hinder prior application, performance monitoring products in about a 5% of that app range. We're well over that with the majority of our customers. But we are seeing an uptick in the cross-sell as we start to focus on a little bit more.

Digital experience is one that we're pretty used to push inning. So that one right now runs a little bit ahead. But we're seeing a nice uptick in the infrastructure side as well. I think that that's really driven by the fact that folks have realized that all that old tooling really falls away when you get to dynamic enterprise clouds.

So with those, we have a lot of optimism in our ability to scale that out as we go into next year. And that's one of the things we're going to focus on as we sort of wind down conversions and wind up cross-selling as we go into our fiscal '21.

Walter Pritchard -- Citi -- Analyst

And Kevin, can you just talk about on the investment side? Especially as we look into '21, sort of where in Q4 in particular you're investing in the business, and then how that pertains to how you're thinking about investing in 2021?

Kevin Burns -- Chief Financial Officer

Yes. I think it's status quo. But when I say status quo, it's continued focus on innovation, right? Building out our R&D organization so we can maintain our leads from a competitive product standpoint. We've been doing that very well over the last couple of years.

So that's one area of investment that we will continue. And the second big area of investment will be continued investments in commercial expansion, a lot as well of some marketing programs. So these are two things that we've been doing very well over the last couple of quarters, really, the last year. And you'll see a little bit more of that here in Q4, and that trend should continue as we try to continue to grow this business at a really nice clip.

Walter Pritchard -- Citi -- Analyst

Great. Thanks for the color.

Kevin Burns -- Chief Financial Officer

Yup.

Operator

Your next question comes from the line of Bhavan Suri with William Blair & Company. Please go ahead.

David Griffin -- William Blair and Company -- Analyst

Hey, good morning. This is David Griffin on for Bhavan. Thanks for taking the questions. Two if I could.

First, just so last quarter, you called out a pretty encouraging early interest in the new digital business analytics module. I was wondering if you could just give us an update on the level of interest that you're seeing from customers there. And maybe just talk a little bit about how the early partnership conversations with the traditional BI vendors are progressing.

John Van Siclen -- Chief Executive Officer

Sure. Well, it's still early. It takes a sales organization, a direct sales organization, a little while to pick up sort of new capabilities and introduce them to their accounts, the accounts to trial it and then start to adopt. But I did talk about one of the customers in my prepared remarks about one that sort of picked it up right away.

They were having conversion challenges with some of the new applications and bringing new customers online at the bank and it fell right in place for them. It was timely announcement. It was something they needed and dropped right in. So those kinds of examples sort of find their way through the sales organization.

I'd expect over time that the business analytics are going to become a really key piece of our go-forward dialogue with customers and opportunity in the market. So I'm pleased with where we are right now, but it is early innings, of course. As far as how this works with some of the other analytics players in the market, mainly those that focus on digital business teams as opposed to the operations teams, we're seeing is that the relationships really are driving the opportunity. But the fact that we complement those other analytic tools out there, like, let's say, in Adobe Analytics and be able to light up the entire tech stack underneath some of these environments.

So it's not just about, "Hey, what's happening with conversion rates? What's happening with with revenue? Why is there a drop-off? Or why can't we or what do we need to do to optimize?" We provide the visibility back into the stack as to exactly what to do to attack some of these things. So it's a great addition for the folks that use those kind of analytics tools, to be able to team with the development teams and their operation teams much more effectively to optimize their digital go to markets.

David Griffin -- William Blair and Company -- Analyst

Got it. That's helpful. And then I wanted to talk about one other recent announcement. So in December, you announced a new autonomous cloud enablement practice that, I guess, the goal is to provide things like best practices, hands-on expertise and automation services to help customers kind of make the transition to autonomous cloud operations, which certainly sounds interesting and an area of need.

Can you talk in a little bit more detail just about the practice, kind of how that's different from what you've been doing on the services side previously? And then maybe whether there are any margin implications associated with that.

John Van Siclen -- Chief Executive Officer

Sure. The focus of our service organization has always been making sure that customers get the most out of our software platform. Customers will tell you, and I believe as well, nobody really wants to buy software. They're trying to solve a problem or they're trying to get some kind of a lead in the market.

And our services organization has been fantastic in helping customers drive adoptions by exploring new use cases, etc. With this new announcement and this new practice, what we want to do is be sort of a little bit more proactive and help customers do what we've done ourselves, which is move their sort of reactive IT organizations, reactive to issues, now into a proactive, highly automatic or automated state. And so this practice is led by a team that's been very close to some of the work we've done with our open source control plane, Keptn, and the thinking behind that. And they're now taking that to a number of customers who've been asking us for more and more best practices and expertise in this area.

And so rather than just try to coach them along the way, we're actually building out a program to help enable them and help do some of the work for them to make sure that they can accelerate their directions and their drive toward Autonomous Cloud, which is really an inevitable place for every customer building web scale clouds. Nobody really wants to have lots of humans running around, trying to manage them, and deal with them and optimize them and deal with the issues of them. So we're just at the front edge of the spear on that one for the marketplace. It's a great place for us to be.

And we have a great platform to enable it from.

David Griffin -- William Blair and Company -- Analyst

Great. That's helpful. Thank you for taking the questions. And congrats on a solid quarter.

Operator

Your next question comes from the line of Richard Davis with Canaccord. Please go ahead.

Luke Morison -- Canaccord Genuity -- Analyst

Hey, guys. This is Luke on for Richard. So we've been talking with the number of interesting vendors in the DevOps space, and it seems like they finally gained some mainstream momentum. Our question for you guys would be, how do you guys think about this space? And do you envision extending into that ecosystem presumably on the op side of things? Thanks.

John Van Siclen -- Chief Executive Officer

Sure. Well, we already are in the DevOps world. We've always thought of performance and cloud application, optimization as something that needs to go upstream in a continuous deployment, all the way back into continuous integration. So we already do this, but the value we provide in those environments are fairly straightforward.

People have lots of capabilities to drive new function, but very few capabilities to make sure that they have their architectures maintained and the ability to scale is built into the continuous integration and continued deployment models. And as we see more and more from a dev standpoint, wanting to understand what their new code is doing in production, so visibility actually into sort of the early production releases. Whether they're Canary releases or A/B testing and that kind of thing, we see even a broader opportunity to be able to help those DevOps teams optimize code, drive better quality in those early stages prior to when things get out into production. The last thing I will say about it is our autonomous cloud program.

It actually starts with something we call unbreakable pipelines. And we start there because it's more straightforward with the devs to put all this together with the open source pluggable back plan that we built in Keptn. And so we'll be bringing even more sort of focus to the DevOps side of things as we go forward.

Luke Morison -- Canaccord Genuity -- Analyst

That's very helpful. Thanks.

Operator

Your next question comes from the line of Jennifer Lowe with UBS. Please go ahead.

Jennifer Lowe -- UBS -- Analyst

Great. Good morning. First question for me. So the commentary around the improvement in conversion was, I thought, particularly interesting.

And I wanted to parse through that a little bit more. Can you talk about how much of that was a function of market, i.e., as companies move to seize more complex environments, it's just a more pressing issue to modernize our APM and observability practices versus things that maybe you were doing differently from a sales process perspective versus anything you're seeing differently from a competitive perspective where maybe your win rates were a bit better in the quarter than they've been? If you could just sort of give a little more granularity, that'd be awesome.

John Van Siclen -- Chief Executive Officer

Yes. So I don't think it's anything that we're doing differently. It's just a culmination of a lot of work we've done over the last six, seven quarters. It takes customers a little while to digest something that's new.

We're not doing a like-for-like, this product for that product kind of a thing. We're actually taking multiple tools, and we're now providing a platform. And the multiple tools are all targeted into ATM for old stack environments or sort of classic stack environments. And the new platform is targeted at new stack cloud environments, which means sort of a new buyer.

So it takes a while, it's a sales process. As I've said, we believe that it's been worth all the effort. It's going to pay off because we're now in the mainstream go forward part of all these customers' businesses, their enterprise clouds. And this just happened to be a quarter that sort of culminated into a lot of things happening at once which is great.

I think it's a peak quarter for us. The next three quarters will be strong, but not as large as this past one. But I think it's just a culmination of a number of things that we've been doing well. And customers, as you said, sort of realizing that the enterprise cloud is a growing part of their portfolios and will become the lion's share of their IT portfolios here over the next 12 to 24 months.

Jennifer Lowe -- UBS -- Analyst

OK. And maybe just to follow up on that. So if we look at pipelines versus conversions, is it reasonable to think that the pipeline trajectory has been more steady and now the delta is really just converting on that pipeline more effectively? Or are you seeing pipelines expand as well?

John Van Siclen -- Chief Executive Officer

We're seeing both pipelines expand, as well as conversions remaining strong across the board. So both have bode well. Plus, as Kevin has pointed out a couple of times, we've been expanding our sales organization as well. So we're on track for the 25% increase in our sales rep capacity this year and look forward to as they ramp in, they're having some impact, and they'll have a greater impact as they mature.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Keith Bachman with BMO. Please go ahead.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Thank you very much. I had two questions as well. The first relates to an earlier question.

But as you look out and you see your conversion of legacy being zero or close to zero, does that help hurt or neutral to your ARR growth?

John Van Siclen -- Chief Executive Officer

It's a great question. And as a sort of you need a perfect crystal ball kind of to answer it. So three quarters from now, we'll be able to have a little bit of hindsight. But the way we look at it is this, it's great that we're shifting a customer base across, but it's taking a fair amount of sales bandwidth to do it because, as I said, it's really like a new sale because we don't just talk to the team that had our old tooling.

We have to find a whole new team on the other side to make sure they find the value of Dynatrace for their cloud programs. So we estimate that's anywhere from a 20% of sales effort, maybe a little bit higher given various quarters like this past quarter. But going forward, when the conversions run off and we have 100% sales focus and the full capacity of the sales organization focused on new logos and expansion, that should give us sort of a tailwind from a productivity standpoint in that regard. So how neutral do those two sides of the equation work? Time will tell, but we think it will be relatively neutral.

Kevin Burns -- Chief Financial Officer

And one other comment, just to add on that. If you look at our ARR growth over the last 12 months, as we mentioned, it grew 44%, 5 percentage points of that growth came at the time of a customers is converting. So at the time of conversion, they're expanding their footprint. Now, if you look at that on a net expansion rate, that is below 120% net expansion rate for that customer base when they're moving.

So we always talk about Dynatrace as being north of 120%. So you can argue or think that once they are on that new platform, we do believe that they will expand in a much more rapid pace on Dynatrace.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Thank you for that. My follow-up question relates to your expansion capabilities, or I shouldn't say your expansion, your portfolio within the context of APM continues to improve, so the pipeline, as you mentioned, is getting rich. Your conversion rates are good.

Are you seeing any different changes in attach rates to the infrastructure side?

John Van Siclen -- Chief Executive Officer

From a standpoint of cross-selling and what we consider expansion, as we've said before, we land from a position of strength, as you would expect, in our swim lane, which is the application performance monitoring focused on the cloud workloads. The expansion is increasing the attach rate of infrastructure, as well as digital experience are increasing. It's not something that we disclose at the moment and what does that look like as far as portfolio of emerging products relative to the APM module itself. But going forward, we're looking at when and how we do that maybe at the end of our fiscal year, beginning of the coming fiscal year.

Keith Bachman -- BMO Capital Markets -- Analyst

All right. Many thanks. That's it for me.

Operator

Your next question comes from the line of Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks for taking my question. More on a bigger picture one. Can you talk about like OpenTelemetry? Is that kind of coursed out, more vendors are doing it, but then some of the Gen 2 guys are not kind of very openly around it? How does that help you in terms of being out in the market with a more modern solution.

John Van Siclen -- Chief Executive Officer

It's a great question. OpenTelemetry is a great standard. It's why we've gotten involved in it with Google, Microsoft and some of the other industry leaders because we've always thought that gathering data is not really where the differentiation or value is going to come in. This is why when we rebuilt our platform, we thought about it with advanced automation and an AI engine at the core because that's where we really see the advancements and the opportunity to drive value.

That's where it's more about what you do with the data than it is about gathering it. OpenTel allows us to gather data over a much wider set of environments, server-less environments, mesh environments, a number of different areas that are just very hard to figure out how you might instrument or self-discover that. And so it enables a big footprint. It means that you're going to need a highly scalable engine that can process and analyze lots of data to make sense of it to allow sort of the IT teams, the limited IT teams, to do more and more as these environments get much larger and more complex.

So we see that as a great opportunity to sort of shine the light on our automation intelligence differentiation, and we think it's going to be a great sort of a tailwind for us as we go forward in the business.

Raimo Lenschow -- Barclays -- Analyst

OK, perfect. Thank you. And then one quick one for Kevin. Could you just remind us on you mentioned the debt situation on the prepared remarks.

What's your long-term target around debt leverage, etc.?

Kevin Burns -- Chief Financial Officer

Yes. So as I mentioned on the call, net leverage, the trailing 12 is 2.7 times EBITDA. The way we're trying to manage this is we're trying to maintain cash around $150 million to $200 million mark, which means we're going to be paying down on a quarterly basis any excess cash or using excess cash to make that payment. So in January, we paid down $30 million.

Obviously, given our cash-generating capabilities, we can reduce this $500 million of debt over the next couple of years very nicely. So we're going to continue to pay down consistently on a quarterly basis going forward as we have done over the last three quarters as a public company.

Raimo Lenschow -- Barclays -- Analyst

Good. Thank you.

Operator

Your next question comes from the line of Brent Thill with Jefferies. Please go ahead.

Parthiv Varadarajan -- Jefferies -- Analyst

Hey, guys. Thanks. This is Parthiv on for Brent. Just a follow-up on the net new adds this quarter.

On the half of the net adds that were new to the franchise, anything you'd call out from a vertical or a geo perspective relative to past quarters?

John Van Siclen -- Chief Executive Officer

Yes. So nothing unusual on any of those fronts really. The digital transformation is really across all industries. So there's really nothing I can point to that says, "Oh, this industry is all of a sudden accelerating and this one's decelerating or there's some shift." And the same thing from a geographic basis.

I mean, even the world sort of flat in these days, it used to be in Asia Pacific, you might think of as two years behind the U.S. or something. It's so much more level now. So there's no real shifts in geographic mix.

I wouldn't say there's any shift in industries. It's just more a mass movement of digital transformation and the realization that it's going to be cloud first. And that the clouds are no longer sort of static or exploratory. They really are enterprise class, multi-cloud, dynamic workloads.

I mean, we're hitting that, a sophistication level and a scale level that we anticipated five or six years ago, but really starting to hit the mainstream of the enterprise market now which I think, again, gives us a little bit of a tailwind as we go forward.

Parthiv Varadarajan -- Jefferies -- Analyst

Yeah, it makes sense. OK. And as a follow-up, just when you look at the AWS integration that you guys have just done, how would you guys measure the opportunity for host expansion with that integration over time relative to what you're seeing up in the hybrid cloud versus what you've seen in traditional on-prem environments?

John Van Siclen -- Chief Executive Officer

Sure. So the AWS move to Outposts is an interesting move because it was a religion two, three years ago that everything was going to come to public clouds. And it's a bit of a realization that hybrid environment is going to be around for a pretty long time. We have built a unique SaaS platform that allows us to run the same software cluster technology, whether it's in the cloud or whether it's behind people's firewalls.

That's same-code basis, as Kevin has pointed out a number of times, but we're able to use that exact same software to handle sort of both workload environments or both at the same time for hybrid cloud customers because the fact that AWS has now distributed their cloud so that you can actually run Outposts behind the firewall aligns with the model we've had for the last four years in enterprise sort of volume production. So it's perfect for us, and it's very hard for somebody with a SaaS-only platform to be able to cover all the workloads because of regulatory issues, because of data sovereignty or data security issues. And so when we look at it, we think of our TAM as the full TAM of enterprise customers and their workloads as opposed to only the ones that will allow for telemetry data to go into a cloud. So we think the move with AWS is actually going to accelerate sort of our penetration into the AWS enterprise portfolio.

It's early days, but we think it's a great move, and we're well-positioned to take advantage of that, like, whether it's the AWS variant or whether it's the VMware variant.

Parthiv Varadarajan -- Jefferies -- Analyst

Got it. That's helpful. Thanks, guys, and congrats.

John Van Siclen -- Chief Executive Officer

Thank you.

Kevin Burns -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Sarah Hindlian with Macquarie. Please go ahead.

Sarah Hindlian -- Macquarie Group -- Analyst

Yes. Hi. Congratulations of the great quarter. Just a quick question for you, following up actually on a few of my peers.

The international opportunity, as you discussed, it sounds like there's still plenty of room for you guys to go there. So my first question is really, how are you thinking about expanding in international, especially with the growth in headcount you just mentioned?

John Van Siclen -- Chief Executive Officer

So we've always had a very strong international presence. I mean, our business is 55% to 60% North America and the balance, international. And we've had that footprint for quite a while. So one of the advantages for us, we don't have to build out that sales, support, marketing infrastructure on a global basis.

We already have it. So when we talk about sales rep expansion, we think about it as pretty much, although there's a little bit more in North America since that's the front end of the enterprise cloud, but in general, you can think about it as when we say 25%, we mean 25% pretty much in each of the four major geographies. We think about North America. We think about EMEA, OK, which is Europe, Middle East and Africa.

We think of Latin America and then we think of Asia Pac. So from that standpoint, think about it as we expand them all sort of relatively similarly. And they all have a fantastic opportunity for us, and we're doing well in all those geographic sectors.

Sarah Hindlian -- Macquarie Group -- Analyst

OK, thank you very much. That was really helpful. And as a follow-up, I was wondering if maybe you're seeing a shift. I mean, you're seeing a lot more protection of cloud native as you're moving along.

But is there any way you can help us to kind of think about the magnitude of shifts you're seeing from on-premise to protecting cloud applications of any kind?

John Van Siclen -- Chief Executive Officer

So we don't really think about it as there's a shift from on-premise to cloud. We think about it as a shift from monolithic to cloud or cloud native environments. Containerized environments, think of it that way, because these hybrid clouds will run that with cloud technologies where everything is virtualized, network's virtualized, infrastructure is virtualized, apps are virtualized. And Kubernetes, which is now at about 85% of our customer base, is being used to orchestrate across all these various environments.

So workloads can literally run on-premise or in the cloud or multiple clouds and span across all of those environments. So this is the world that we're in, which is you know this blurring between old on-prem and public cloud environments. So that's why we talk about them as enterprise clouds because it's sort of everything, all sort of melded together with an underpinning of cloud technologies and approaches. And from that standpoint, there is a gradual migration to public clouds, for sure.

But there's so many data sources and environments on premise that are required in order for the applications to actually work properly. I mean, just think of an insurance company, you have your risk management system and your customer system on site. You're not going to put those data sets in the cloud. But yet all the applications, all the mobile apps and some of the other touch points are all sort of maybe running in a public cloud.

So that creates this hybrid environment, which we're extremely well suited for.

Sarah Hindlian -- Macquarie Group -- Analyst

Sure. That makes a ton of sense. Thank you. Congratulations on a great quarter.

John Van Siclen -- Chief Executive Officer

Thank you very much. I think just in the interest of time, we're probably going to have to cut off the questions. And I know, I'm sorry about that. Thank you all for your interest.

We're thrilled with our third quarter out as a public company. And I look forward to talking with all of you again in May when we're back with the end of our fiscal year, our fiscal '20. So thank you very much. Have a good morning, and take care.

We'll talk soon.

Operator

[Operator signoff]

Duration: 69 minutes

Call participants:

Michael Bowen -- Investor Relations

John Van Siclen -- Chief Executive Officer

Kevin Burns -- Chief Financial Officer

Matt Parron -- J.P. Morgan -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Walter Pritchard -- Citi -- Analyst

David Griffin -- William Blair and Company -- Analyst

Luke Morison -- Canaccord Genuity -- Analyst

Jennifer Lowe -- UBS -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Parthiv Varadarajan -- Jefferies -- Analyst

Sarah Hindlian -- Macquarie Group -- Analyst

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