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Yahoo
15-05-2025
- Business
- Yahoo
Dynatrace Inc (DT) Q4 2025 Earnings Call Highlights: Strong Revenue Growth and Strategic ...
Subscription Revenue Growth: 20% increase. Annual Recurring Revenue (ARR): $1.73 billion, representing 17% growth. Non-GAAP Operating Margin: Expanded by more than 100 basis points. Pretax Free Cash Flow Margin: Improved by roughly 250 basis points. Customer Base: Surpassed 4,000 customers. Employee Count: Surpassed 5,000 employees. New Logos Added in Q4: 171 new logos. Average New Logo Land Size: $130,000 on a trailing 12-month basis. Gross Retention Rate: Mid-90s percentage. Net Retention Rate (NRR): 110% in the fourth quarter. DPS Licensing Model: Over 40% of customer base and more than 60% of ARR. On-Demand Consumption Revenue (ODC): $9 million in Q4, $21 million trailing 12 months. Total Revenue for Q4: $445 million, growing 19%. Non-GAAP Net Income for Q4: $99 million or $0.33 per diluted share. Full Year Total Revenue: $1.7 billion, growing 20%. Full Year Non-GAAP Operating Margin: 29%. Full Year Free Cash Flow: $431 million or 25% of revenue. Cash and Investments: Nearly $1.2 billion as of March 31. Share Repurchase Program: 787,000 shares repurchased for $43 million in Q4. Fiscal '26 ARR Guidance: $1.975 billion to $1.99 billion, 13% to 14% growth. Fiscal '26 Total Revenue Guidance: $1.95 billion to $1.965 billion, 14% to 15% growth. Fiscal '26 Non-GAAP Operating Income Guidance: $560 million to $570 million. Fiscal '26 Free Cash Flow Guidance: $505 million to $515 million, 26% of revenue. Warning! GuruFocus has detected 8 Warning Signs with GAIN. Release Date: May 14, 2025 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Dynatrace Inc (NYSE:DT) achieved a 20% growth in subscription revenue and surpassed $1.7 billion in ARR. The company expanded its non-GAAP operating margin by over 100 basis points and pretax free cash flow margin by roughly 250 basis points. Dynatrace Inc (NYSE:DT) surpassed 4,000 customers and 5,000 employees, indicating strong market presence and growth. The company announced major platform innovations, including AI-powered log management and analytics, enhancing its competitive edge. Dynatrace Inc (NYSE:DT) was consistently named a leader in major analyst reports for observability and AI Ops, reinforcing its industry leadership. The economic environment remains uncertain, which could impact future growth and customer spending. On-demand consumption revenue (ODC) is not captured in ARR or NRR metrics, potentially distorting growth visibility. The transition to a consumption-oriented model may lead to variability in revenue recognition and forecasting challenges. Despite strong pipeline growth, there is a concern about longer sales cycles, especially for large strategic accounts. The company faces competition from peers with broader portfolios, such as Datadog, which may impact market share. Q: Can you provide an update on the logs target for $100 million of ARR and expectations for fiscal '26? A: James Benson, CFO, stated that logs are the fastest-growing product category, with over 1/3 of customers leveraging the solution. The $100 million target is a consumption-oriented goal, not an ARR goal, due to the DPS contracts. They have high confidence in exceeding this target in fiscal '26, with the business expected to grow well over 100%. Q: How did the go-to-market changes, including new quotas and territory realignment, fare versus expectations? Are there any significant changes planned for this year? A: Rick McConnell, CEO, highlighted the importance of GSIs and hyperscalers in their strategy, noting substantial growth in partner-influenced business. James Benson added that the go-to-market changes have been positive, with a focus on higher propensity accounts and channel leverage. They are introducing "strike teams" focused on logs, application security, and digital experience monitoring to drive adoption and consumption. Q: What needs to happen to unlock the security opportunity more broadly? Is it a function of product depth or go-to-market strategy? A: Rick McConnell explained that it's a combination of both. They see good traction with their RVA solution for vulnerability analytics and are expanding offerings towards CADR and cloud SIM opportunities. They also have a strike team focused on the go-to-market aspect of application security. Q: How are you thinking about on-demand consumption revenue (ODC) for next year, given limited historical data? A: James Benson stated that they are applying analytics to cohort behavior and attach rates, with a level of conservatism due to the uncommitted nature of ODC. They are focused on driving more consumption and adoption, which will show up in ODC or ARR. Q: How do you trade off the upside of on-demand revenue versus predictability in customer contracts? A: James Benson explained that customer success and strike teams are now measured on consumption and adoption. This focus is expected to lead to high growth in consumption, with customers either going to on-demand consumption or renewing early. The company is transitioning to a more consumption-oriented model. For the complete transcript of the earnings call, please refer to the full earnings call transcript. This article first appeared on GuruFocus. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
15-05-2025
- Business
- Yahoo
Q4 2025 Dynatrace Inc Earnings Call
Noelle Faris; Vice President of Investor Relations; Dynatrace Inc Rick McConnell; Chief Executive Officer, Director; Dynatrace Inc James Benson; Chief Financial Officer, Senior Vice President, Treasurer; Dynatrace Inc Patrick Colville; Analyst; Scotiabank GBM Matt Hedberg; Analyst; RBC Capital Markets Wealth Management Brent Thill; Analyst; Jefferies Rob Owens; Analyst; Piper Sandler Raimo Lenschow; Analyst; Barclays Capital Inc. Kast Rangan; Analyst; Goldman Sachs Andrew Nowinski; Analyst; Wells Fargo Securities, LLC Sanjit Singh; Analyst; Morgan Stanley Pinjalim Bora; Analyst; J.P. Morgan Securities LLC Will Power; Analyst; Robert W. Baird & Co., Inc. Jacob Roberge; Analyst; William Blair & Company, L.L.C. Keith Bachman; Analyst; BMO Capital Markets Operator Greetings, and welcome to the Dynatrace fourth-quarter and full-year fiscal 2025 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Noelle Faris, Vice President, Investor Relations. Noelle, please go ahead. Noelle Faris Good morning, and thank you for joining Dynatrace's fourth-quarter and full-year fiscal 2025 earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer; and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements such as statements regarding revenue, earnings guidance and economic results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10-Q and our upcoming annual report on Form 10-K that we plan to file later this month. The forward-looking statements contained in this call represent the company's views on May 14, assume no obligation to update these statements as a result of new information, future events or circumstances. Unless otherwise noted, the growth rates we discuss today are non-GAAP, reflecting constant currency growth and per share amounts are on a diluted will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the Financial Results section of our IR web with that, let me turn the call over to our Chief Executive Officer, Rick McConnell. Rick McConnell Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Dynatrace delivered a strong finish to fiscal 2025, having achieved several noteworthy milestones and accomplishments. Subscription revenue grew 20%. We surpassed $1.7 billion in ARR and $1 billion in DPS expanded our non-GAAP operating margin by more than 100 basis points and our pretax free cash flow margin by roughly 250 basis points, emphasizing the strength of our balanced business model. We surpassed 4,000 customers and 5,000 announced major platform innovations, including Grail for GCP, observability for developers, preventive operations, cloud security posture management, AI-powered log management and analytics and AI observability to name just a few. And we were consistently named a leader in all major analyst reports for observability and AI Ops over the past year. Today, I'm going to cover my perspective on the observability market, growth, tailwinds and opportunities our agenetic AI vision and the growing criticality of business begin with the market. While we are clearly in an uncertain economic environment, we continue to see strength in the observability market as virtually all organizations aspire to have their software work perfectly, just as our vision imagines. And now more than ever, customers need to deliver improved productivity and a better user experience at lower cost, which is precisely our value proposition. As such, we see observability spend continuing to be a priority. Additionally, cloud growth remains are now generating nearly $250 billion in annualized revenue growing in the mid-20s. And as organizations accelerate cloud and AI native initiatives, the need for AI-powered observability at scale has never been greater. We expect to see materially greater penetration in the coming year into hyperscaler workloads, where we expect the majority of observability market growth to occur, and we are innovating to capture this next major platform release planned for June will further empower cloud and AI native teams to expand their AI Ops and preventive operations. These new capabilities will provide development teams with easy access to hyperscaler and Kubernetes telemetry, leverage Davis to analyze all data with AI assistance and leverage Davis Copilot for remediation workflows or instant believe these secular tailwinds will fuel an addressable market opportunity that we now size at $65 billion in observability and application security. Beyond these market dynamics, I'd like to talk next about four key Dynatrace growth drivers. Each of these represents an intentional area of focus to drive consumption growth across the Dynatrace are the ongoing investments in our go-to-market efforts, including customer segmentation, partner enablement, and expanding our sales motion beyond application performance to include end-to-end observability and cloud modernization. We kicked off these initiatives at the beginning of fiscal 2025 and they continue to gain expect them to drive sales productivity gains in fiscal 2026. We've seen a consistent trend in total pipeline growth, driven primarily by strength in strategic accounts, where pipeline was up 45% compared to last year, highlighting the traction in our customer segmentation efforts. More than 80% of our ACV closed in the quarter were partner influenced with over 40% of those coming from GSIs and the expansion of our sales motion beyond our proven land-and-expand approach resulted in more than 50% of our anchor deals in the quarter, driving end-to-end observability. These investments are gaining traction and contributed to large deal closures in the quarter, including 15 deals with incremental ACV of over $1 our Dynatrace Platform Subscription or DPS licensing model continues to build momentum with over 40% of our customer base and more than 60% of ARR leveraging this approach as of the end of the fourth quarter. With access to the full platform, customers are adopting Dynatrace more broadly across their IT environments, resulting in increased expect this DPS adoption to materialize over time in early expansions or on-demand consumption beyond customer commit levels. Third is the massive opportunity in log management. We believe the logs market remains ripe for disruption, given expensive legacy solutions that largely operate independently from existing observability tools and result in lower unique approach to log management and analytics integrates logs, traces, metrics and other core observability and security data types into a single platform, providing a holistic view of the help of IT ecosystems. Combined with our AI approach, teams can derive greater value from logs faster and at lower Grail as our massively parallel processing data lake house, logs can then contribute near real-time insights at enormous scale. We are seeing strong adoption of our log management offering with 1/3 of our customers now using this solution. The number of customers leveraging logs is up 18% compared to last quarter, plus nearly half of our new logos added in the fourth quarter are deploying logs in their initial implementation compared to roughly 20% in the same quarter last finally, in what could arguably be our largest growth opportunity, the AI revolution is upon us. So I'd like to turn to that next. As you know, AI is evolving into a whole new era where systems can plan, make decisions and take action autonomously. According to IDC, by 2029, [GenAI-based] software testing tools capable of writing 85% of tests will be augmented by AI agents and agentic workflows. And we expect that as much as 80% or more of developers' time is spent ensuring that code is running properly in production by securing debugging and optimizing many ways, this is exactly what Dynatrace was purpose-built to enable and it represents a massive opportunity. We were pleased to see that Forrester recently recognized Dynatrace as a leader in AIOps with the highest score in the Current Offering mission for many years has been to deliver answers and intelligent automation from data, well beyond dashboards and root cause analysis. Automation is enabled by an autonomous system that can recommend and then carry out action based upon trustworthy, deterministic conclusions from context-rich data. And agentic AI is the architectural approach for that our AI native platform is what sets Dynatrace apart from our peers. And we believe that as a result of this market evolution, it will become an even bigger differentiator in the future. In fact, Dynatrace has been investing in advancing our capabilities to evolve into a fully agentic AI platform that can automatically remediate, protect and optimize without the need for human intervention. A true agentic platform must be able to make intelligent decisions to act in real time. We postulate this requires various core need a common data lake house to store all data types in context for accuracy, performance and scale without manual tagging. You must be able to act in real time without limitations of predefined schemas or indexing. You need causation of data, not correlation, to deliver answers that are trustworthy and need a combination of AI techniques, including causal, predictive and generative AI to facilitate the discovery and prediction of issues to provide these answers. And in autonomously preventing and remediating issues as well as optimizing cloud-native workloads, an agentic AI system needs to delegate and handle tasks not only on its own, but also to an ecosystem of AI believe Dynatrace is uniquely positioned to lead in this space with Grail. Our indexless schema-free lake house designed for real-time intelligent AI automation at scale. Today, we already provide the knowledge, memory, reasoning, planning and actioning to meet the heightened requirements of an agentic AI knowledge is fueled by one agent collecting all data types in context, normalized with our semantic dictionary cleansed, protected and then ingested through open pipeline. Grail provides instant access petabytes of short- and long-term data in context, the real-time memory to enable AI queries. Davis leverages the combination of causal predictive and generative AI to handle the AI copilot can then intelligently plan actions based on context and reasoning. And finally, our automation engine is able to take action, autonomously executing tasks and collaborating with third-party AI agents. We plan to continue to innovate aggressively to meet the needs of the rapidly evolving AI landscape. I'd like to next turn to business observability. As the AI landscape continues to evolve, so too have our customers' needs for a more sophisticated observability want more than technical analytics. Organizations want to use observability solutions to help them understand core business metrics. Business observability provides precise answers to help customers address not only operational issues, such as cost reduction and risk mitigation, but also customer-centric issues such as optimizing user experience and driving example, a large cruise ship operator is using Dynatrace to enable an exceptional on-ship experience for passengers. They begin with the core user experience as they want to track and then drill down into micro services and technical analytics rather than the other way many such customer deployments, our platform is playing an increasing role in our differentiation. Only Dynatrace captures business events in context with other data types, enabling quick and easy querying rich visualization dashboards and business-driven automation. (inaudible)I'd like to welcome Steve McMahon to Dynatrace as our new Chief Customer Officer, replacing Matthias Dollentz-Scharer, who is retiring from the company. I wish Matthias well after an incredible career here over the past decade, and I am delighted with Steve's employment as his background and observability and security at Splunk, CrowdStrike and Zscaler provides him a terrific foundation or a rapid ramp. To wrap up, our market opportunity is stronger than have several Dynatrace specific drivers supporting our growth. We have a significantly differentiated AI-powered observability platform that is leading the way toward us delivering a highly differentiable genic observability platform. We are increasingly bringing customers deep business insights. And we have a compelling business model which has enabled us to deliver a sustained balance of growth and profitability. Jim, over to you. James Benson Thank you, Rick, and good morning, everyone. Q4 was a strong finish to fiscal '25. Once again, we exceeded the high end of guidance across all top line growth and profitability metrics. Our ability to execute successfully in this dynamic environment is a testament to the growing criticality of observability and security in the market, our highly differentiated AI-powered platform, our ability to demonstrate exceptional business value and ROI for our customers, and the predictability and durability of our business model. Fiscal '25 was a pivotal year in evolving our go-to-market model and driving broader usage of the platform across our customer our flexible, scalable and frictionless DPS licensing model, we have made it easy for a growing number of customers to gain full access to the platform and adopt Dynatrace more extensively within their IT environments, including capturing more usage of our emerging and adjacent solutions. This journey continues in fiscal ' review the results in more detail. Growth rates mentioned will be year over year and in constant currency, unless otherwise stated. Annual recurring revenue, or ARR, ended the year at $1.73 billion, representing 17% growth, slightly above the high end of guidance driven by steady expansion bookings, including a number of seven-figure ACV vendor consolidation added 171 new logos in Q4, up slightly from a year ago, as we remain focused on landing enterprise accounts with a higher propensity to expand. The average new logo land size remains healthy at $130,000 on a trailing 12-month basis, highlighting the market trend away from ineffective point solutions and towards software providers like Dynatrace with platform breadth and customers experience the benefits of the Dynatrace platform, they have been quick to expand their usage. Our average ARR per customer continues to grow and is now well over $400,000, highlighting the incremental adoption of the platform and inherent business value we provide to customers. Given the significant cross-sell and upsell opportunities in our enterprise customer base, we believe the average ARR per customer opportunity could be $1 million or more over the long gross retention rate in Q4 remained in the mid-90s, demonstrating the strategic relevance for the Dynatrace platform as a mission-critical component of our customers' operations. Net retention rate or NRR was 110% in the fourth quarter. Customer penetration of our DPS licensing model is gaining traction. As Rick noted, we exited Q4 with over 40% of our customer base on DPS, more than doubling the number of DPS customers during fiscal '25. Further, DPS customers now contribute over 60% of our ARR, representing more than $1 expectation when we launched DPS was that customers with full access to the platform would leverage more capabilities and extend Dynatrace more broadly into their IT environment, and we have seen this thesis play out. For example, DPS customers consume, on average, 12 capabilities compared to five capabilities for SKU-based terms of usage volumes on the platform, customer consumption growth rates are 2x the rate of SKU-based customers and leading to much higher expansion rates. As a result, the average ARR per DPS customer is over $600,000, well above the company average. While consumption growth takes time to translate into subscription revenue or ARR growth, these robust DPS penetration and platform consumption trends are positive indicators for future top line we shared last quarter, as DPS has matured and scaled it's customer-friendly approach to pricing, which was -- which does not penalize customers for exceeding commitments, is leading some customers to consume on-demand instead of renewing or expanding Q4, on-demand consumption revenue or ODC, was $9 million, up from $7 million in Q3 and bringing trailing 12-month ODC revenue to $21 million. ODC is another lever for subscription revenue growth in addition to new logo and expansion bookings. However, this revenue is not captured in our NRR or ARR metrics, which only include contractually committed revenue. Moving on to revenue for Q4 was $445 million, growing 19% and exceeding the high end of our guidance range by 200 basis points. Subscription revenue for Q4 was $424 million, up 20% and similarly exceeding our guidance aided by strength in ODC revenue. Turning to profitability. Q4 non-GAAP operating margin was 26%, exceeding the top end of guidance by over 100 basis points, driven by revenue upside flowing to the bottom line. Non-GAAP net income was $99 million or $0.33 per diluted share, $0.02 above the high end of to a quick summary of the full year results. Total revenue was $1.7 million, and subscription revenue was $1.62 billion, both growing 20%. Full year non-GAAP operating margin was 29%, 25 basis points above the high end of guidance and 120 basis points above fiscal '24, demonstrating our ability to drive leverage in the business model while still investing for growth. Non-GAAP net income for the year was $422 million or $1.39 per diluted share. Our non-GAAP earnings factor in an effective cash tax rate of 22%.Full year free cash flow was $431 million or 25% of revenue, 50 basis points above the high end of guidance and 100 basis points above fiscal '24. As a reminder, this strong cash flow margin result includes absorbing nearly 700 basis points of impact due to cash taxes. Adjusting for cash taxes, pretax free cash flow for fiscal '25 was 32% of revenue, an improvement of nearly 250 basis points compared to fiscal '24. Turning to the balance sheet. As of March 31, we had nearly $1.2 billion of cash and investments and 0 Q4, we repurchased 787,000 shares for $43 million as part of our opportunistic share repurchase program. Since the inception of the program, in May 2024 through March 31, 2025, we have repurchased 3.4 million shares for $173 million with approximately $327 million remaining of the $500 million authorization. Let's turn to guidance. As always, we continue to manage the business in a measured manner, and our prudent approach to guidance remains unchanged. We are mindful of the fluid nature of the geopolitical and macro we have not seen any notable impacts in demand or close rates to date, we expect enterprises to remain careful in their spending, and our approach to guidance assumes an incremental level of caution in terms of budget scrutiny and sales cycle lag throughout fiscal ' that as context, let's start with our guidance for the full year. We expect ARR to be between $1.975 billion and $1.99 billion representing ARR growth of 13% to 14%. While we don't guide to ARR on a quarterly basis, we expect quarterly seasonality of net new ARR to be similar to the last three years. Turning to expect total revenue to be between $1.95 billion to $1.965 billion, up 14% to 15%. Underlying that, subscription revenue is expected to be between $1.65 billion and $1.88 billion, also up 14% to 15%. Within subscription revenue, we are assuming an ODC revenue contribution of $30 million. Since ODC is uncommitted, dependent on many factors and our history is somewhat limited, we are being appropriately conservative with our initial ODC assumption for the year. Our fiscal '26 guidance is based on foreign exchange spot rates as of May 12, 2025, representing an FX tailwind to ARR and revenue of $20 million and $17 million, expect non-GAAP operating income to be between $560 million and $570 million, resulting in a non-GAAP operating margin of 29% for the year. We will continue prioritizing investments in R&D, sales capacity, customer success and our partnership programs while driving further scale and efficiency in other areas. We expect non-GAAP net income to be $481 million to $494 million, resulting in a non-GAAP EPS of $1.56 to $1.59 per diluted share based on 309 million to 310 million shares estimate our fiscal '26 effective cash tax rate to be 19%, down from 22% in fiscal '25 due primarily to the benefit of the IP transfer I mentioned last quarter. We expect free cash flow to be between $505 million and $515 million or 26% of revenue, a 100 basis point improvement from fiscal '25 a full cash taxpayer, we believe the best way to benchmark our cash flow generation is on a pretax basis. as most software peers pay minimal cash taxes. Adjusting for cash taxes, pretax free cash flow margin is expected to be 32% in fiscal ' a helpful reminder for your modeling, due to seasonality and variability in billings, we expect free cash flow to be significantly higher in the first and fourth quarters and significantly lower in the second and third quarters. Looking to Q1, we expect total revenue to be between $465 million and $470 million, and subscription revenue is expected to be between $445 million and $450 million, both growing 16% to 17%.Non-GAAP operating income is expected to be between $130 million and $135 million or 28% to 28.5% of revenue. Lastly, non-GAAP EPS is expected to be $0.37 to $0.38 per diluted share based on a share count of 304 million to 305 million closing, the strength of our Q4 and fiscal '25 performance sets a solid foundation for fiscal '26. The secular growth driver is fueling the observability market are unchanged and our AI-powered end-to-end platform differentiates us and puts us in a strong competitive position. The fundamentals of the business are increasingly being driven by consumption, and we are investing to fuel that have a strong track record of consistent execution. We are committed to maintaining a disciplined approach to optimizing costs and improving efficiency. At the same time, we will continue to invest in future growth opportunities that we expect will drive long-term value. With that, we will open the line for questions. Operator? Operator (Operator Instructions) Patrick Colville, Scotiabank. Patrick Colville I'm going to ask this one to both Rick and Jim. In our field work, logs is performing very well, was interesting to hear in your prepared remarks, similar commentary. If I rewind back to this time last year, the logs target for $100 million of ARR was pushed out slightly. So I guess, could you kind of wrap around some quantitative context to that qualitative logs commentary? And any update if possible on where we are versus that target and what we should expect in fiscal '26 in logs? James Benson Good question, Patrick. We're very pleased with logs. We have over 1/3 of our customers now leveraging our log solutions. So it continues to grow. As you can imagine, it varies for customers that are using it pretty significantly and customers that are just starting with the fastest-growing product category in the company, it has been. And for the $100 million goal, just to remind you that, that's kind of a -- because it's a consumption-oriented goal, not an ARR goal because with DPS contracts, we don't exactly know what the customers consuming until they consume the $100 million ambition, we have high confidence we will exceed that in fiscal '26. And it is a business just to give you just some rough numbers, that business will grow well over 100% in fiscal '26. Rick McConnell I would just add, Patrick, that we had a pretty substantial upgrade wave in the logs capability back in the October time frame. And that's when we really saw logs begin to accelerate. So we're excited about what we've seen. We like the metrics of more than $100 million in consumption this year, as Jim said. And at that growth rate of north of 100%, we were quite optimistic about the business to come this year. Operator Matt Hedberg, RBC. Matt Hedberg Rick, I wanted to drill into the go-to-market. It looks like you had a lot of success this past year with GSIs and hyperscalers in particular. So that's great to see. I guess, first of all, how would you talk about sales productivity? You guys obviously made a lot of changes last year, including new six-month quotas and you also realigned some territories.I guess, how did that fare versus your expectations? And are there any other significant changes you're planning on making this year to kind of the go-to-market? Rick McConnell Yes. Let me take the first part, and I'll let Jim comment on sales productivity. On the first part, GSIs and hyperscalers are a fundamental part of our strategy. We have now grown our overall partners, as we said in the prepared remarks, to well more than 70% of our overall deployment in it gives us substantially greater reach to get to customers for deployments, implementations, management, so it gives us a bigger footprint to then attack those customer opportunities we look forward. GSI's are obviously very much aligned to our target customer base. So that's helpful. And as we shift our attention to cloud-native workloads as well as AI native workloads, those are all going to be present in the cloud, in which case, hyperscalers become incrementally more critical for us (inaudible) those we're fully leaned into partners. It remains a core element of the overall sales motion. Jim, do you want to comment on productivity? James Benson Yes. What I would say about the go-to-market update, is, I think, I would say we remain pleased with the progress. As a reminder, you mentioned a few of the changes, but the three big ones were we refocused to kind of wrapped more to higher propensity to spend customers. That's progressing well. Those accounts have doubled the pipeline and the pipeline in very good traction there. Obviously, pipeline is a precursor to a booking. Rick mentioned channels. We now have over 3/4 of our business that is leveraging a channel. We still want to continue to get some progress on (inaudible) originated, but good progress on then the sales play, the sales plays being the -- your traditional APM sales play, kind of a cloud-native workload sales play and end-to-end tool consolidation, again, doing very well -- doing very well particularly with tool we feel very good about it. I'd say maybe the one enhancement, Matt, that we're making for fiscal '26, everything else that I said remains unchanged, we are adding what we're calling strike teams. So these are teams of people that, one, are working, they're not specialist teams but they are strike teams that have a particular focus area. And the focus areas for our strike teams are, one, logs; two, application security and; three DEM, digital experience those three areas, we're going to have strike teams, and they're focused on driving adoption, driving consumption. You heard a lot in the opening remarks about the company underpinning is becoming more consumption and adoption oriented. Having these strike teams are going to help us fuel that growth on the go-to-market side. So we feel very good about that. Operator Brent Thill, Jefferies. Brent Thill Just on the strategic account growth, I think you mentioned over 45% pipeline growth just remind us, when have you seen that level of strength? And maybe to Matt's question on the close, the pipeline seems like it's growing at a much higher rate. When do the close rate start to come up to kind of match that pipeline growth you're seeing? James Benson Yes, it's a good question. I mean, I'd say you have the tailwinds and I'll say headwinds. On the tailwind side, I think that the demand environment continues to be pretty resilient. And so therefore, you're seeing that kind of in a broader pipeline. And the good news is these larger accounts, we're seeing a growing percentage of that said that, I'd say what's changed in the last maybe three months, and I'd say the macro environment is a bit more uncertain, I still think deals are going to get done. I think what we've tried to imply in this is that deals might take a little bit longer, especially when you're talking to large strategic accounts, especially for those that are considering some level of tool consolidation, those deals and those accounts take a little bit so I think that for us, the fuel is pipeline. And to remind you that again, about this notion of driving more consumption that with our business becoming more heavily weighted towards Dynatrace platform subscriptions, 60% of our ARR now and growing. The notion of driving adoption and consumption becomes much, much more important because that, by its definition, is a consumption-oriented model. It has the benefit of a ratable revenue recognition subscription model, but it's underpinnings are consumption. And so there's a bit of a reorientation within the I mentioned, strike teams, it's also our customer success teams around making investments to drive more consumption. Now there's a lag between consumption. And when you see it either show up in ARR or in subscription revenue through ODCs, but it is kind of a core underpinning of future growth for the company. And the good news is consumption is growing at a very rapid clip. Operator Rob Owens, Piper Sandler. Rob Owens Great. I'd love to pivot a little bit to the security opportunity. And what you think needs to happen to unlock it more broadly? Is this a function of product depth or more so go-to-market at this point? Rick McConnell I think it's a combination, Rob. We see good traction with our RVA solution for vulnerability analytics. We need to continue to extend our offerings in this area, expectations toward movement to CADR and cloud SIM type opportunities, I think, represents the next foundation of growth for us. So that's where we're looking. And of course, we've got Kubernetes and cloud security posture management, which is now available which we expect to grow as short form is a combination of expanded product offerings with which we are working in delivering the market as well as expanded go-to-market. Jim mentioned strike teams earlier. We have an AppSec strike team that is exclusively focused on the go-to-market part of this area as well. Operator Raimo Lenschow, Barclays. Raimo Lenschow Jim, you have the not so easy task to think about on the (inaudible) revenue for next year. Can you talk a little bit about how you went about it? Because obviously, as you said, you don't have a lot of historic data. Like how should we think about how you kind of frame that? James Benson It's a good question, Raimo. Obviously, if we kind of inserted in Q3 this notion of on-demand consumption becoming kind of a growing part of the growth story of the company, which is, again, underpinning this consumption point that I made we're a year into it, as you can imagine, with customers that have gone through at least the first cohort of customers that have gone through their annual reset periods. And so we've looked at how they behaved. We've looked at what are the -- think of it as the attach rate, how much of your business is going through an annual reset period by much is that growing? What is the kind of -- for lack of better word, ODC attach rate to what you've seen historically. So what we've done is we've tried to apply some analytics on that. And as I mentioned in my prepared remarks, because it's uncommitted and it -- you have to account for a bunch of factors, including do cohort classes for your first year cohorts behave the same way in year the new cohort classes behave the same way as the first year cohort classes. And so we did apply a level of kind of conservatism to that. We'll update you along the way. But that's kind of the general way that we framed it. We looked at it from a -- think of it as an attach rate perspective, but we built some caution knowing that cohort classes are going to behave a little bit differently. Operator Kash Rangan, Goldman Sachs. Kast Rangan Congrats on finishing up the fiscal year very solidly. As you look at the on-demand revenue, how do you trade off the upside where you want to do better? And maybe talk about the sales incentives that are going into the consumption aspect of the business versus, also at the same level, raising the bar for what is predictable and increasingly trying to get the upside into the customer contracts, so you lock them up and you get even more visibly. So trading off the upside versus the predictability at a higher level is what I wanted to get your thoughts on. James Benson Yes. Kash, that's a good question. As you can imagine, there's a bunch of variables within there. One of the things that we haven't done that we are doing this year, Kash, is that our customer success teams and the strike teams that we mentioned, they are exclusively measured on consumption and so it's a bit of a change where we now have dedicated teams of people that before we're working with customers on helping them in the adoption of our products and solutions, we now have a new team with these strike teams in addition to our core customer success so these from an incentive perspective, both of these teams, their measurement is on consumption. So again, my point about driving more adoption, driving more consumption. And as I said in my prepared remarks, we're already making tremendous traction, get customers on DPS as a contracting vehicle. And we have found they consume more -- they consume more of the platform, so they consume more of our solutions. They consume more so what we needed to do and the changes we made this year is to better fortify teams that are focused on driving consumption and adoption. And so that's the big focus, as you mentioned, that, that will show up in two ways. Ultimately, it will show up with maybe continued high growth in consumption and customers burn through their commitments earlier and either go to an on-demand consumption or in some cases, customers will renew a bit of timing delay for these, but again, kind of a core underpinning that we were trying to convey on this call is that consumption is becoming a growing kind of part of the narrative that we've historically been a kind of bookings, ARR oriented company. That's still this consumption notion is becoming more important for the company. And I'd say we're going through a bit of a transition and '26 will be that kind of the next phase of the transition that started in fiscal '26. Rick McConnell Yes, I would add to that, just to highlight, we are still a subscription business. But that said, we believe that especially in a DPS world, it really is about driving consumption. So to Jim's point, whether it is compensating on consumption for strike teams, our D1 services teams, our customer success teams, we see dramatically higher consumption in the DPS deployment. We believe that, that is a precursor to future revenue and subscription growth opportunity. And so that's where we're focused as a company. Operator Andrew Nowinski, Wells Fargo. Andrew Nowinski And a nice quarter results. I wanted to ask maybe on the net retention rates. So I know the ODC component seems to distort that real net retention rate given that it's not included in ARR. But I'm wondering given that it is a growing piece of your business, what would NRR look like if -- or would it have increased if you would use subscription revenue instead of ARR as part of the NRR calculation? And then how are you thinking about the trajectory of the net retention rate in fiscal '26? James Benson Yes, it's a good question. As you can imagine, the dynamics of NRR, as you said, there's a correlation between what is committed, which is an NRR and what is uncommitted, which is not an NNR. So NRR ticked modestly down. We're talking decimals from 111 to 110 from Q3 to Q4. But again, decimals that if you added in ODCs, which I kind of think about them as deferred ARR or deferred NRR actually, you would have seen a modest uptick in NRR in Q4 from Q3. Operator Sanjit Singh, Morgan Stanley. Sanjit Singh A bit higher level question. Kind of on your AI theme, Rick, in your script, we're hearing more about autonomous or maybe nearly autonomous SRE agents. Two questions there. One, any sort of trend line that you're seeing about customers wanting to move to this sort of operational cadence, having agents execute a lot of the observability workflows?And if that is the case, what do you think the impact is on overall observability demand and sort of how products are built if agents are going to be executing the workflows and an observability platform versus human SRE engineers? Rick McConnell That was a great question, Sanjit. And after about an hour, I will have answered it. The short form is we see the trend line absolutely moving and moving aggressively toward agentic AI broadly and specifically in observability. And the result of it is that what customers really want is they want the conclusion or fluctuation of our mission, which is to deliver answers and intelligent automation from data. What they've been getting in observability is the data part or the answers part but not the automation the way that we see this evolving is that through agentic observability or an agentic observability platform with Dynatrace they actually can now take action based on those answers. Well, that begins to get your second question on how does this occur?What we believe is that you need multiple different layers of capabilities to deliver a true agentic observability platform. You first need a completely integrated data link house in -- which we have in Grail which has all data types, log traces metrics, et cetera, in context in one unified data lake house. Secondly, you need a completely integrated Davis AI engine which we have that does causal predictive AI as well as generative AI to be able to deliver those answers that are you can trust the answer is then you need an automation engine which we have to then be able to execute those instructions within the observability environment. And finally, an area that we're beginning to work more (inaudible) on is to then extend that agentic set of protocols to third-party agents to be able to effectuate change in code, for it is a multilayered stack. We believe we have a foundation for success here that is unique in the observability industry, and we're all in on driving an genic future in observability utilizing Dynatrace. So this is a major, major thrust for us as we look to the future. Operator Pinjalim Bora, JPMorgan. Pinjalim Bora Congrats on the quarter. Jim, I just want to go back to a see a bit. How are you thinking of kind of the -- how should we, I guess, should think about the customer behavior and on-demand consumption going forward in this macro? And as you look towards kind of building the guide, how do you thread the needle between the assumptions around incremental ODC component versus last year's ODC leading to larger committed contracts? Rick McConnell Yes. It's a good question that I tried to answer a little bit of that with Raimo's question, which is the way we thought about ODCs that we thought about ODCs in the realm of looking at cohort classes, for classes that come up with their contract resets and looking even though our sample size is limited, it's four quarters, how did prior customers behave. We know that contract types vary a little bit. Some customers were in (inaudible). Some customers are we factored a bunch of things in. But we did apply some conservatism to it because by nature, it is uncommitted. Having said that, everything we've been talking about for the past 30 minutes has been about our focus on driving more consumption and adoption. So to the extent we can do that, you'll either see it hopefully show up in the form of ODC or in ARR. And relative to the macro, it's hard to judge, I'd say, right now, the fact that customers are using more of the platform would tell you that they're getting value out of so I think the criticality of observability is even greater now than it was kind of a year ago, especially with the evolution of things. But I'd say from a macro perspective, what you might find is you might find customers that maybe commit to a more finite number when they actually have a contractually committed they're willing to go into ODCs because, again, we don't penalize you for going over your consumption or your commitment, I should say. And so I think that it's actually good in a tighter macro environment because we're not doing something that pushes a customer to maybe throttle something, they can increase their adoption and we're not utilizing them for it. So it's actually a very kind of favorable vehicle in an environment that maybe customers will be a bit budget conscious. Operator Will Power, Baird. Will Power Okay. Great. Rick, you've called out the strength you're seeing in partner relationships from a go-to-market strategy perspective. And I think in your prepared remarks, you called out the expectation for material hyperscaler growth in particular. I wonder if you could just kind of drill down for us kind of what really is underpinning the confidence around the hyperscaler trends what you're seeing today versus what you've maybe seen in the past? Rick McConnell Well, a couple of things, Will. First, that is where we see the vast majority of the observability growth happening is in hyperscaler workloads. And given that, that's where the majority of the growth is happening in observability, the majority of customers want to take their contractual relationships through the hyperscalers because it utilizes their contractual total those relationships become seminal, I would say, in making sure that we have the most frictionless contract vehicle to be able to take orders for hyperscaler workloads, which is vastly increasing. Second thing is we either have entered or in the process of entering various different go-to-market relationships with the hyperscalers such as the one we recently announced with AWS with their SCA program to effectively engage in greater when we add the combination of co-sell plus teaming agreements with our other partners, we see very, very strong win rates. So this is one of the reasons we're pushing on it and one of the areas of acceleration potential as we see in FY26. Operator Jake Roberge, William Blair. Jacob Roberge Just on DPS -- great to hear those customers are still expanding at pretty healthy rates, can you talk about how behavior has trended across the different cohorts that you've onboarded on to DPS? I know early on, there may have been some selection bias there, but now that you've started to get a larger base of customers on the DPS, are you seeing those same types of expansion rates play out across the longer tail of the base? Rick McConnell Yes. I mean, it's a good question. I mean, I'd say broadly speaking, the answer is yes, you're right. The early cohort classes were customers that were SKU-based customers that were already pretty significant Dynatrace users, and they just wanted a better vehicle to better consume Dynatrace. But as we've added new cohort classes, we've seen kind of a broader behavior where customers are leveraging more of the so I'd say that what used to be kind of a sampling bias has become something that's played out across pretty broadly, which is, again, why our focus is get more customers on to DPS as a contracting vehicle, get our adoption teams oriented to try to drive more consumption. We have proven that when we do that, customers will burn through their commitments earlier and they either go through an ODC or they'll do an expansion. And so that's kind of the play that we're trying to run and we feel very good about the traction we made in fiscal '25. Operator Keith Bachman, BMO Capital Markets. Keith Bachman I also want to ask about DPS in two different guards. A, on the more near term, how are you thinking about the uptake rate for DPS in the next fiscal year? In other words, where do you think you'll end up either as a percent of customers or a percent of ARR?And then part B of the question is, one of the key benefits of DPS is the ability of customers to adopt your portfolio more rapidly just it reduces friction to buying. And I was wondering if you could just talk a little bit about how you're thinking about thereby portfolio expansion? And you have a couple of key building blocks, obviously, with Grail getting widespread adoption and AI, candidly probably requiring and enabling more part of the context of the question is Datadog candidly, just has a broader portfolio of solutions. And I just wanted to hear you speak a little bit about how you're thinking about your portfolio expansion given the building of the box and given DPS over -- not just the next year, but over the next number of years? James Benson Yes. So Keith, I'd hesitate to give you a percentage for fiscal '26 around percentage of DPS customers in ARR other than to say we expect it to continue to grow. I'd say longer term, we do expect, call it, 75% to 85% of our customers ultimately to go on to that. You probably won't get all of them. There will still be customers that want to stay on SKU-based vehicles, maybe government entities, things of that I'd say the objective longer term is we get 75% to 85%. So think of that as the vast majority of your business is going to be on this contracting vehicle. And your point about adoption is that is the fundamental premise of DPS. You get them on the -- to the DPS contract and be able to get full access to the platform. If you do look at the capabilities there, I would say that we have quite a few capabilities on the even though we're getting some level of penetration, even for us kind of new emerging areas, logs being kind of the most notable, so the fact is 1/3 of our customers are now on logs. But that 1/3 is not spending anywhere near what the opportunity is for for the reasons that Rick outlined, I think, is we're prime to be disruptive in that area just with the underpinnings of the platform with Grail. And so part of it is getting them to adopt more of the platform. There are a bunch of offerings that we do have even within the kind of the -- there's other capabilities beyond the core offerings of call it full stack infrastructure, DEM, logs, AppSec. There's other kind of subcomponents that we monetize as well. And so it's broader than maybe you're I think we feel pretty good about that. And the whole thing with our adoption teams is drive more adoption, try to give the customer something that they're getting more value from and leverage the advantages that we have within the platform. And we feel very good about where we are and kind of the strategy to go after that. Rick McConnell The short form, Keith, is that we absolutely agree with you that we need to drive the business both in terms of depth of existing capabilities and expanded breadth in areas such as log management, application security, digital experience management with just bought Medis for database observability. So we'll continue to expand the platform in both dimensions. That brings us to the end of our call. Thank you all for your engaged questions and ongoing support to I think, as you can tell, we are very enthusiastic about the growth opportunities ahead for us. We look forward to connecting with you at our events over the coming months, and we wish you all a very good day. Operator Thank you. That does conclude today's teleconference and webcast. You may disconnect.
Washington Post
14-05-2025
- Business
- Washington Post
Dynatrace: Fiscal Q4 Earnings Snapshot
WALTHAM, Mass. — WALTHAM, Mass. — Dynatrace Inc. (DT) on Wednesday reported fiscal fourth-quarter earnings of $39.3 million. The Waltham, Massachusetts-based company said it had net income of 13 cents per share. Earnings, adjusted for one-time gains and costs, were 33 cents per share. The results topped Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for earnings of 30 cents per share.
Yahoo
31-01-2025
- Business
- Yahoo
Q3 2025 Dynatrace Inc Earnings Call
Noelle Faris; Vice President, Investor Relations; Dynatrace Inc Rick McConnell; Chief Executive Officer, Director; Dynatrace Inc Jim Benson; Chief Financial Officer; Dynatrace Inc Matt Hedberg; Analyst; RBC Fatima Boolani Will Power; Analyst; Baird Keith Bachman; Analyst; BMO Capital Markets Pinjalim Bora; Analyst; JP Morgan Mike Cikos; Analyst; Needham & Company Sanjit Singh; Analyst; Morgan Stanley Andrew Nowinski; Analyst; Wells Fargo Koji Ikeda; Analyst; Bank of America Operator Greetings. Welcome to Dynatrace Fiscal third quarter 2025 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Noelle Faris, Vice President, Investor Relations. Thank you. You may begin. Noelle Faris Good morning, and thank you for joining Dynatrace's third quarter fiscal 2025 earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer; and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements such as statements regarding revenue, earnings guidance and economic conditions. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10-Q that we filed earlier today. The forward-looking statements contained in this call represent the company's views on January 30, 2025. We assume no obligation to update these statements as a result of new information, future events or circumstances. Unless otherwise noted, the growth rates we discuss today are non-GAAP, reflecting constant currency growth and per share amounts are on a diluted basis. We will also discuss other non-GAAP financial measures on today's call. To see reconciliations between non-GAAP and GAAP measures, please refer to today's earnings press release and supplemental presentation, which are both posted in the Financial Results section of our IR website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell. Rick McConnell Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. We're proud that Dynatrace once again outperformed our guidance across all top line and profitability metrics. It is a testament to the team's disciplined execution, the strength of our AI-powered observability platform and the significant business value we provide to our customers. In Q3, ARR grew 18% year-over-year. Subscription revenue increased 21% year-over-year. And trailing 12-month free cash flow margin was 25%. Jim will share more details about our Q3 performance and fiscal 2025 guidance in a moment. In the meantime, I'd like to discuss observability market tailwinds, our platform differentiation, core growth drivers and customer wins. To begin, our conviction in the observability market opportunity continues to strengthen based on several factors. Cloud modernization drives observability demand and is evidenced by the now more than $220 billion in annualized hyperscaler revenue. Aggressive cloud expansion has, however, contributed to tool sprawl within organizations, resulting both in operational inefficiency and high cost. It's not uncommon for companies to have more than a dozen internal and external observability tools and aim to consolidate them into a more effective unified and lower cost approach. The AI revolution adds another layer of complexity as organizations look to accelerate innovation, deliver better customer service, drive efficiency and obtain a competitive advantage. Each of these market drivers is resulting in an explosion of data, and a massive increase in its scale and complexity that are simply untenable for organizations to manage as they have previously. As a result, the need for comprehensive end-to-end observability has become mandatory, especially for larger organizations. We believe that an AI-powered observability platform with sophisticated analytics and automation capabilities is vital in providing the visibility needed for software to work perfectly, and customer feedback reflects just that. This leads me to our primary technology differentiators. The core of the Dynatrace platform is a massive parallel processing, highly performing data store called Grail, that maintains all observability, security and business data types, logs, metrics, traces, real user data and importantly, business events, all in context. Grail then enables us to uniquely apply AI to analyze billions of interconnected data points in real time to deliver answers, not just data and not just dashboards. We then leverage our contextual analytics and AI insights to automate responses and to help avoid incidents. It is our contextual analytics, AI and automation that differentiate us from our peers. Our unified architecture has enabled us to deliver new observability and security capabilities that help customers adopt cloud and AI native technologies with confidence. These include not only the inherent benefits of a full stack observability to help customers anticipate and resolve issues in complex environments, but also enrich business data with IT context to provide insights and recommendations for improved business outcomes. We have been introducing these and other new capabilities for SREs, platform engineers and development teams to extend this differentiation to a broader array of end users. Next, I'd like to highlight four key growth drivers for Dynatrace. Let's start with AI. As I mentioned, AI is a huge market driver of data. And with our long history in AI, Dynatrace has a unique ability to leverage this opportunity. We parse it into two distinct buckets. First is AIOps, which includes the core AI capabilities we use to deliver observability, security and automation to all customers. AIOps is and has been foundational to the Dynatrace solution for many years, and we keep innovating to enable customers to move from visibility to automation. Our AI-powered observability platform enables customers to automatically detect problems, analyze them and drive automatic remediation actions using an AI system that we believe is the most advanced in our space. We achieve this by leveraging multiple techniques, including causal, predictive and generative AI to rapidly assess billions of the interconnected data points to identify, resolve and prevent issues without tedious and error-prone manual overhead. Second AI driver for Dynatrace is the observability of AI workloads themselves. Secular innovation cycle around AI is being viewed as the biggest sea change ever in the technology landscape. What started with GenAI has quickly evolved to retrieval augmented generation, or RAG, inference AI and more recently, Agentic AI. As with Dynatrace itself, this evolution illustrates a migration from information and insights to automated response. And with the rapid pace of cloud and AI native innovation, enterprises need an observability solution that can adapt to those changes in real time. With the enormous processing power of Grail, we are uniquely positioned to enable enterprises to adopt GenAI and other AI technologies successfully. Dynatrace can analyze LLM model performance and behavior, safeguard the quality of application input and output to prevent LLM misuse, deliver multimodel tracing for end-to-end observability, predict changes in cost and calculate the business benefit and ROI. We are already engaged with hundreds of customers in observing their GenAI initiatives. One such customer, a large insurance provider, found that they could accelerate the deployment of AI use cases into production by 60% with the help of Dynatrace AI observability. The second growth driver for Dynatrace is the substantial existing market for log management, which we continue to see as being ripe for disruption. We are well positioned to grow our market share given our unique approach. Customers have broadly told us that legacy log management solutions are too expensive, provide too little value and operate independently from existing monitoring tools. This creates operational inefficiencies that lead to delayed incident resolution, increased costs, security vulnerabilities and dissatisfied customers. Our next-generation log management and analytics offering integrates logs, traces, metrics and other core observability and security data types into a single platform, providing a holistic view of the health of IT ecosystems. Combined with our AI approach, teams can derive greater value from logs faster and extend them to security use cases. Leveraging Grail as our data store, they can do so at enormous scale. And we enable log observability deployment and access without manual setup or the need to understand query languages. We now have well over 1,000 customers leveraging our log solutions. That's up 17% compared to last quarter. Plus, more than 50% of our new logos added over the past year are leveraging logs in their initial deployments. The third growth driver for Dynatrace is the ongoing investment in our go-to-market strategy. As a reminder, at the beginning of this fiscal year, we introduced go-to-market changes focused on customer segmentation, partner enablement and expanding our sales motion beyond application performance to include end-to-end observability and cloud modernization. At the beginning of the year, we made adjustments in our sales force to target IT 500 and strategic accounts. We have since accelerated the addition of sales reps during the second half of the year to increase capacity. Our investments in partner enablement continue to gain traction. In Q3, more than half of the new logos in the quarter were partner originated. We are benefiting from increased customer interest in end-to-end observability and tool consolidation. In Q3, the dollar contribution of deals greater than $1 million grew 55% year-over-year. Finally, our cloud modernization sales motion contributed to several key wins in the quarter, including one 7-figure TCV deal with a top private bank in India. They were moving their major banking platform to a micro services environment in the cloud, and were struggling with frequent issues impacting end users, which their existing monitoring tools were unable to resolve. During the PoC, Dynatrace provided deeper insights and proactively identified potential issues before they impacted end users. The final growth driver I wanted to cover is the Dynatrace platform subscription or DPS licensing model, which continues to gain traction rapidly. This customer-friendly licensing model allows trialing of new capabilities without surprise overages or premiums. Our DPS customers have full access to our platform, enabling them to adopt Dynatrace more broadly across their IT environment. And now that we have passed the annual anniversaries of several cohorts of DPS customers, we're seeing our thesis play out. In particular, customers that benefit from the value of Dynatrace consume more than customers on our legacy licensing model, and they expand earlier. We now have roughly 1,500 DPS customers globally, representing over 35% of our customer base and roughly 55% of our ARR leveraging this approach. On average, the rate of consumption growth for DPS customers is nearly double the rate of our non-DPS customers. Next, I'd like to discuss several notable wins in the quarter that highlight why customers choose Dynatrace. A top Canadian bank signed an 8-figure TCV deal with Dynatrace, displacing an existing tool as part of their ongoing journey to simplify, digitize and personalize their products. Dynatrace's ability to automate processes and lower costs led to this key win. A large Midwest retailer signed an 8-figure TCV deal, displacing their log provider and standardizing on Dynatrace. They were already benefiting from the flexibility of DPS, which allowed them to adapt to changing business needs during their peak season. A major American automobile manufacturer concerned with the risk and cost associated with the deployment of harmful code into production environments, signed a 7-figure TCV expansion with Dynatrace to automate change impact analysis and quickly validate service availability. We won an 8-figure TCV new logo deal with a British semiconductor and software design company. They were looking to reduce the number of issues occurring on the engineering side of the production process and increase their productivity. With Dynatrace, their IT teams can detect and resolve issues in production significantly faster, allowing them to meet their deployment goals. And more recently, we announced that we have become the official observability and performance analytics technology partner of the Visa Cash App Racing Bulls, also known on the track as VCARB, a Formula One racing team. Every millisecond counts in F1, and the Dynatrace platform will be delivering real-time insights into vehicle dynamics, driver performance and race optimization to give VCARB a competitive edge to maximize performance. Finally, we're excited to host customers, partners and prospects next week at Perform, our annual Customer Conference in Las Vegas. This is going to be our largest customer conference yet, with over 50 customers from around the world taking the stage to share their stories of how they are harnessing the power of Dynatrace to accelerate business-critical initiatives, drive innovation and deliver more reliable software. To wrap up, we are highly enthusiastic about our opportunity ahead. There's a common theme we've covered here today. Customers understand that a unified observability platform is mission-critical. We have a significantly differentiated AI-powered observability platform, and there are several Dynatrace-specific drivers that we see supporting our growth. Jim, over to you. Jim Benson Thank you, Rick, and good morning, everyone. Q3 marked another quarter of consistent execution as we once again surpassed the high end of our top line growth and profitability guidance metrics, showcasing the durability of our balanced business model and ongoing demand for our leading AI-powered observability platform. Now let's review the third quarter results in more detail. Please note, the growth rates referenced will be year-over-year and in constant currency, unless otherwise stated. Annual recurring revenue, or ARR, ended the third quarter at $1.65 billion, up 18% year-over-year. Q3 net new ARR on a constant currency basis was $68 million, down modestly from the same period last year and up 5% year-to-date for fiscal 2025. In Q3, we added 193 new logos to the Dynatrace platform. As we have stated in the past, we continue to target landing high-quality new logos that have a greater propensity to expand. Our average ARR per new logo was over $140,000 on a trailing 12-month basis, and up versus both the prior quarter and prior year. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or commercial tooling solutions. They are seeking business value from tool consolidation and coming to Dynatrace for the depth, breadth and automation of our unified observability platform. Once customers experience the benefits of the Dynatrace platform, they are often quick to expand their usage. Average ARR per customer continues to grow, and surpassed $400,000 for the first time, highlighting the continued adoption of the platform and value we provide to customers. Gross retention rate remained in the mid-90s, demonstrating the strategic relevance of the Dynatrace platform as it remains a mission-critical part of our customers' operations. Net retention rate, or NRR, was 111% in the third quarter. Our DPS licensing model continues to gain traction and adoption. We now have almost 1,500 DPS customers globally, representing more than 35% of our customer base and over 55% of our ARR. As Rick mentioned, our expectation when we launched DPS was that customers with full access to the platform would trial more capabilities and adopt Dynatrace more broadly within their IT environment. I'm pleased to say that thesis is proving itself out. What has become clear, as DPS has started to mature and scale, is that the customer-friendly approach to DPS pricing, which does not penalize customers for exceeding commitments, is leading to some customers to consume DPS on demand, instead of renewing early. This on-demand consumption is benefiting subscription revenue growth, which outperformed expectations nicely in Q3. However, it's important to note this revenue is not captured in our ARR or NRR metrics, which only include contractually committed revenue. Let me put some numbers around this to make the impact on our financials clearer. In Q3, we had $7 million of on-demand consumption in our subscription revenue. This contributed to 150 basis points of year-over-year subscription revenue growth. On a year-to-date basis, we had $12 million of on-demand consumption revenue. The fact that DPS makes it easier to consume the platform is positive for Dynatrace. The outcome of customers expanding and broadening their usage of the platform, whether that be contractually committed or on demand, drives continued subscription revenue growth. Going forward, we believe investors should assess the underlying health of the business by taking into consideration both ARR, which will still be the largest growth indicator, and on-demand consumption revenue. Our expectation is that as DPS grows and scales so too will on-demand consumption, with likely variability and seasonality quarter-to-quarter. Moving on to revenue. Total revenue for the third quarter was $436 million, up 20% year-over-year and exceeding the high end of guidance by $8 million. This beat includes absorbing a $3 million FX headwind from the strengthening US dollar. Subscription revenue for the third quarter was $417 million, up 21% year-over-year and exceeding the high end of guidance by $7 million as reported and $10 million in constant currency, with the upside primarily driven by the on-demand consumption dynamic I just mentioned. Shifting to margins, non-GAAP gross margin for the third quarter was 84%, down slightly from the prior quarter and prior year due to increasing cloud hosting costs as we migrate more of our customers to our SaaS solution. Non-GAAP income from operations for the third quarter was $131 million, $11 million above the high end of guidance, driven by increased revenues flowing through to the bottom line. This resulted in a non-GAAP operating margin of 30%, exceeding the top end of guidance by 200 basis points. Non-GAAP net income was $112 million or $0.37 per diluted share. This was $0.04 above the high end of our guidance. We generated $38 million of free cash flow in the third quarter. Due to seasonality and variability in billings quarter-to-quarter, we believe it is best to view free cash flow over a trailing 12-month period. On a trailing 12-month basis, free cash flow was $406 million or 25% of revenue. As a reminder, this includes a 650 basis point impact related to cash taxes. Pretax free cash flow on a trailing 12-month basis was 31% of revenue and up 25% year-over-year. On a related tax note, as part of our ongoing strategic tax planning efforts, we completed an IP-related transfer to a Swiss subsidiary, resulting in a noncash $321 million tax benefit to our GAAP net income and EPS. There was no impact to non-GAAP net income or EPS. And while the impact of this IP transfer to fiscal 2025 cash taxes is insignificant, we do expect it will have a more meaningful impact in fiscal 2026 and beyond. More to follow on this in our May earnings call. Finally, a brief update on our $500 million share repurchase program. In Q3, we repurchased 732,000 shares for $40 million at an average price of $54.64. Since the inception of the program in May 2024 through December 31, we repurchased 2.7 million shares for $130 million at an average price of $48.89. Moving now to guidance. Let me walk through some of the assumptions and insights underpinning our updated guidance. First, based on our learnings from early DPS cohorts, we believe it is likely that on-demand consumption will be an ongoing and growing part of our subscription revenue stream as the DPS contracting model matures. To put a finer point on this, going forward subscription revenue growth will be driven by a combination of upfront ARR growth and on-demand consumption on the tail end of contracts for those customers that choose not to renew early once they've exceeded their upfront commitment. Second, the trend of larger and more strategic deals related to observability platform architecture and tool consolidation initiatives continues to grow. The sales funnel is weighted heavily to these types of deals. While we believe this trend is a net positive for Dynatrace given our highly differentiated AI-powered platform and positions us well to capitalize on these opportunities, it also introduces increased variability in terms of both close timing and deal certainty. Third, we continue to mature the go-to-market adjustments we made in the beginning of this fiscal year. As we expected, it takes time for new reps to build relationships and positively impact sales productivity. Fourth, while the demand environment for observability remains healthy, we do not assume a material change in the macro environment as enterprises continue to be cautious in their spending. Finally, with 40% of our business denominated in foreign currency, the strength of the US dollar since our last call creates a sizable headwind. We now expect FX to be a headwind of $38 million to ARR and $17 million to revenue. This represents an incremental headwind of $28 million to ARR and $10 million to revenue. And with that as context, let me outline our updated outlook. We are raising our constant currency full year guidance across all top line growth and profitability metrics. We are increasing our full year ARR growth guidance, 75 basis points at the midpoint, to $1.705 billion to $1.715 billion. This represents 16% to 16.5% growth year-over-year. We are raising our total revenue growth guidance, 150 basis points at the midpoint, to $1.686 billion to $1.691 billion, representing 19% growth year-over-year. And with the uptick in on-demand consumption revenue, we are raising our subscription revenue growth guidance, 250 basis points at the midpoint, to $1.609 billion to $1.614 billion, representing 20% growth year-over-year. This growth rate represents a 350 basis point increase from the midpoint of guidance that we provided at the beginning of this fiscal year. Turning to our bottom line, we are raising our full year non-GAAP operating income guidance by $13 million. This translates to non-GAAP operating margin guidance of 28.5% to 28.75%, up 50 basis points at the high end of the range and up roughly 75 basis points from where we landed in fiscal 2024. We are raising non-GAAP EPS guidance to a range of $1.36 to $1.37 per diluted share, representing an increase of $0.05 at the midpoint of the range. This non-GAAP EPS is based on a diluted share count of 303 million to 304 million shares. This EPS and share count guidance excludes the impact of any potential share repurchases in Q4. We are raising our free cash flow guidance to $415 million to $420 million, an increase of $19 million at the midpoint, representing a free cash flow margin of 25% of revenue. Excluding an expected 650 basis point impact from cash taxes, this represents a pretax free cash flow margin of 31.5%, which is up 150 basis points from fiscal 2024. Looking at Q4, we expect total revenue to be between $432 million and $437 million. Subscription revenue is expected to be between $410 million and $415 million. From a profit standpoint, non-GAAP income from operations is expected to be between $104 million to $110 million or 24% to 25% of revenue. Keep in mind, we have some seasonal expenses in the fourth quarter, including incremental spending for our Perform customer conference and a structural reset of payroll taxes. We believe it is best to look at margins on a full year basis. Lastly, non-GAAP EPS is expected to be $0.29 to $0.31 per diluted share. In summary, we are pleased with our third quarter fiscal 2025 performance. The observability market is healthy and growing. We have a proven track record of disciplined execution, balancing top line growth with expanding profitability and free cash flow. While we continue to maintain a prudent approach to the near-term outlook, we are optimistic about the long-term growth opportunities in front of us and the maturation of our go-to-market evolution to go after it. And with that, we will open the line for questions. Operator? Operator (Operator Instructions) Matt Hedberg, RBC. Matt Hedberg Great. Congrats on the results. Jim, we're getting questions on the on-demand piece. So I wanted to kind of ask a little bit of a question there. It seems to be ramping rapidly, which I think is a good thing for long-term adoption of DPS. I guess when you think about your Q4 guidance assumptions, do you have any sense for what's your -- what's implied there for on-demand in 4Q? And I know it's early, but when we think about next year, how should we sort of -- what's the conceptual framework we're thinking about on-demand for fiscal '26 as we think about ARR next year? Jim Benson Yes. Thanks for the question, Matt. I'd say we're learning as the DPS model evolves. And you're absolutely right that what we're seeing is exactly what we wanted to see play out, which is with DPS customers have a vehicle that is a very frictionless model for them to consume more of the platform. And we're seeing that play out that customers that are on DPS consumed at 2 times the rate of customers that are on the SKU-based platform. So DPS is really all about driving consumption. I would say, this phenomenon with on-demand consumption is even something that we didn't expect initially when we came up with DPS that what we're finding is that this means that customers are exceeding their commitments early. And we're finding that some customers are just willing to go in a period of on-demand. Now for us, it's all about subscription revenue. I mentioned in the prepared remarks that we improved our subscription revenue guide from the beginning of the year to now 350 basis points. Obviously, a component of that is on-demand consumption. And so you really do need to look at Dynatrace, both ARR growth, which is obviously a primary kind of leading indicator. And then what we're seeing here with on-demand consumption, we do believe this will grow as DPS grows. Because it's uncommitted, it's something that, obviously, we're going to continue to build a level of caution in. But if you just look at where we're at year-to-date, $12 million, and you're absolutely right, it has rapidly grown. Now it will vary by cohort class by quarter. But if you just equate that, even though it's uncommitted kind of in ARR terms, that's 80 bps of ARR. And so it's a good model. For the fourth quarter specifically, we've modeled like mid-single digits in that because, again, because it's uncommitted, you don't know exactly what it's going to be. But we're very, very pleased with what we're seeing here with DPS because it is driving the consumption that we were hoping it would. Operator [Fatima Boolani]. Fatima Boolani Just to riff off of Matt's question, Jim, how should we think about the net retention rate trajectory as you continue to see sort of this decoupling or breakage, if you will, between customer consumption behavior and contracted ARR on the grounds of greater DPS consumption and usage? Jim Benson Okay. So that's a very good question, Fatima. So as I said in the prepared remarks, that neither ARR or NRR has on-demand consumption embedded in it. That is just contractually committed business. But because we're seeing this phenomenon with ODC, that it will not show up in the NRR metric. That does not mean that you will not see with DPS, NRR accretion. As a matter of fact, even though we're very early days with the cohort classes with DPS, we are seeing DPS customers expand at a greater rate and pace than SKU-based customers. I admit there's probably a bit of sampling bias with that. But now that we have 55% of our ARR on that, I'd say the sampling bias component will start to diminish. And so you will see NRR, but you will see NRR at the time of an expansion. And because we have on-demand consumption. And just maybe a clarification for investors is most of our ARR that's on DPS is multiyear contracts. So I think it's, call it, 80%-plus of our ARR are multiyear contracts. So the way to think about this is customers contract in, call it, three one-year commitments individually. And so when you have a customer that may be in year one of their contract, that's going through this on-demand consumption component, they don't necessarily have to expand early. They can just go on demand, then they go into year two and think of it as the clock resets. Now they're obviously consuming at a greater rate and pace. So you will get an expansion. Sometimes you'll get an expansion early in year one, and sometimes you won't get an expansion until later in the contract life. So NRR will benefit. It's just the timing of when do you see ODC and when will you see NRR. And I think as DPS grows and matures, you will see it more reflected in NRR. Operator Will Power, Baird. Will Power Okay. Great. Rick, I want to come back to some of the introductory comments around AI. You laid out a nice suite of tools that are designed to help on AI fronts, whether it's observing LLMs or helping with agentic work. I guess, I wonder if you could just help highlight, where are you seeing the most traction today? And is agentic AI something that's starting to benefit you and what's the outlook there? And is there any way just to kind of help conceptualize revenue or ARR contribution around all that? Rick McConnell Thanks, Will. And sorry, [hurt] you off for a bit of a raspy voice this morning, but we'll get through it together. The AI piece, for us, is an absolute tailwind, I would say, across the board. Started with generative AI, it went to RAG, it's continuing with inference. It's moving on to agentic AI. All of this is moving, if you will, from analytics and data, to inference, knowledge, analytics and onward to agents that are driving behavior and automation. And in many ways, we think about our AI strategy at Dynatrace as mirroring that because we're also moving from overall observability to deep answers, and intuitive results all the way through automation. And so we believe that AI is a huge tailwind because at the end of the day, it's driving enormous amounts of data, increases in its complexity and our ability to manage that complexity through a sophisticated observability platform is of paramount importance to our customers. One last point, the hundreds of customers that we have already using AI observability with Dynatrace are really across the board in sectors and industries. So we see AI being adopted very broadly. They're interested in observing AI workloads, and we believe it is a tailwind for our AI observability capabilities as a result of that. Operator Keith Bachman, BMO Capital Markets. Keith Bachman I have a question maybe just sneak in a clarification. If I look at your ARR guidance implied for Q4, if I'm doing the math right quickly, it suggests sort of a mid-60s numbers again in terms of net new, which is down year-over-year. And I know you said -- I think you said that the DPS contracts or the consumption-based element maybe is mid-single digits, but it's still declining year-over-year pursuant to your guidance. I just want to see if there's anything you can help us understand because it sort of starts the jumping off point as we begin to fine-tune our models for FY26. And then just a clarification, Jim, I know you said you'd give us more help on taxes. But just philosophically, as we think about '26, we're trying to set our free cash flow. Is the change -- is the cash tax impact just broadly -- is it a help, hurt or neutral, just to help us think about our free cash flow estimates for '26. Jim Benson Thanks for the questions, Keith. Relative to the ARR guide, I think the primary driver of the ARR guide, we obviously had 15% to 16% growth last time. We're now three quarters of the way through the year. You have one quarter left. So we certainly lopped off the low end of the range, and we did inch it up on the high end. And I'd say we inched it up probably more prudently, largely because I said in my prepared remarks, we actually have the funnel. The funnel is pretty heavily weighted to -- maybe even more so than last year, heavily weighted to a very large strategic binary deals. And when you have a funnel that's weighted that way, you have 90 days left in the year, we're not necessarily expecting the same level of execution that we did last year. We ran the table last year. And so the good news is we think this is a good net positive for Dynatrace because as customers thinking about consolidation, we're actually in a good position to compete with those opportunities. So we think it's a net positive relative to a trend. Obviously, near term, it does introduce a level of close timing variability and deal certainty. So that's kind of the -- maybe the way to think about it on the ARR front. And I think that trend will continue. Even though we're not providing fiscal '26 guide, our expectation is this continued trend will continue into fiscal '26. And relative to taxes, the very simple way to put it, Keith, is, as you can imagine, we know we are a significant cash taxpayer, 650 basis points of cash taxes as a percent of revenue. And so we've been doing what we can around strategic tax planning, and this IP-related transfer to Switzerland will lower the tax rate for the company. So this will be a benefit to lower cash taxes in fiscal '26. So it's not a headwind. It's a tailwind. I'll share more about the extent of how much of a tailwind that will be. It will build over the years, but you will see benefit in fiscal '26 from lower cash taxes. Operator Pinjalim Bora, JPMorgan. Pinjalim Bora Congrats on the quarter. Jim, I just wanted to understand the NRR dynamics one more time, if you might. It seems like the DPS tool overages has increased, you said $7 million last quarter. I think you said low single digits or something like that. So that is a headwind to ARR, I understand. But that $7 million is a quarterly number. So the headwind to ARR, would that be an annualized number? And then obviously, from the last quarter, you would have caught up with some of those contracts, which should be a tailwind to ARR, if you have. But it seems like you might not have caught up in three months, it can take maybe more than that. So I'm trying to understand what is the net of this? Because NRR did downtick sequentially. And I'm trying to understand if you net it out, is that 100%, the downtick from last quarter, is that 100% because of this dynamic would you say? Jim Benson Yes. I don't know if I would necessarily the NRR downtick is a result per se of kind of this phenomena of what's going on with ODC. I would say we -- for the quarter and -- actually the -- I would say, year-to-date, we talked about our go-to-market changes with our go-to-market changes really being oriented around customer segmentation and applying more resource at the top of the pyramid, global IT 500 companies. And the good news is, while it takes a while to build relationships, we are starting to see some green shoots from that effort. And so we're starting to see pipeline grow in that space. We are starting to see deal closures in that space. And so I'd say we feel good about the traction even though it's still early days. I'd say the -- below the IT 500, which we call the commercial segment, admittedly, the commercial segment, we're not seeing the same level of performance in the commercial segment around expansions. And so like everything else that -- there's areas that you need to tune in the model. So for us, we're getting traction in the areas we've been focusing on. We need to tune the model a little bit more for the commercial segment where expansions were a little bit less. And that was -- that's probably the area that has pressured NRR. And just relative to making sure people understand how DPS works, I try to use the example of a multiyear contract, for which most of our DPS contracts are. They have 3 1-year individual commitments. So this on-demand consumption phenomenon does not necessarily mean the customer needs to do a renewal. By definition, they're not up for renewal for 3 years. You're in year 1. But they burn through their year 1 commitment early, which means they're consuming more of the platform, which is exactly what we wanted. The customer does not necessarily want to do an early renewal in year 1 because maybe the amount of overage was not substantial. The unit pricing reduction they would get maybe wouldn't be as impactful to go through a broad effort. So they're willing to then go into the following reset year. So think of it as year 1, you get on-demand consumption. You're done with your year 1 maybe. Now you're in year 2. But when you're in year 2, this clock starts at 0 again. So think of it as a contract that's maybe a $6 million TCV. $2 million a year. They spend $2.2 million in the first year with 200 of on-demand consumption. Following year, the clock starts at 0 again. Now granted their run rate is higher, so the likelihood may be that they'll do an early expansion in year 2 increases because maybe the benefit of doing it then. But that's just kind of how it works. It's not necessarily that because you're on on-demand consumption, that you'll see the following quarter in expansion. It doesn't necessarily work that way. It does work that way in some cases, but because we're very early in the renewal cohort class, sometimes it happens, sometimes customers just go through a reset. Rick McConnell And Pinjalim, I would just add that this is a reason that we are suggesting that we increase view not just on ARR, but also on subscription revenue as we look ahead because both of these metrics are going to increasingly matter in a DPS world. Jim Benson And the only other thing I would say, Pinjalim, that I didn't answer in your commentary about the way that -- you were saying, hey, can you annualize maybe this impact that we saw $7 million? I would say that it's uncommitted. So yes, you could annualize it because as DPS grows, you would expect that, yes, that's kind of the way to generally think about it. I'd say because it has variability because it's uncommitted, I'd say we're always going to apply a bit of caution. But your -- kind of your mental model is the right one. If you did annualize that value, that is the amount of kind of the equivalent, uncommitted ARR that it would equate to. And then it's a matter of what's the timing by which the customer does an expansion to then see that show up in ARR. Operator Mike Cikos, Needham & Company. Mike Cikos I just wanted to cycle back on the go-to-market changes that you guys announced earlier this year and just get an update. I wanted to get a sense of where we are in recognizing the sales productivity gains from those changes? And really, what gives management here the confidence? Because I know in Rick's prepared remarks, he had cited the fact that you guys are looking to accelerate this transition. Can you give us an order of magnitude on that front? Jim Benson Yes. That's a very good question. I won't belabor what we've done around the go-to-market change because you do know that. So we're 3 quarters in, and we certainly didn't expect productivity improvements three quarters in. Your transitioning accounts, especially when you're in strategic accounts, it does take a while to establish relationships. I'd say the green shoots and leading indicators, Mike, that we look at is are we starting to see, call it, rolling four-quarter pipeline improve? And the answer is yes. So the first thing you want to know, people are settling in, they're establishing new relationships. What's the first thing we're going to see? Well, we'd like to see that the rolling 4-quarter pipeline is improving. We are seeing that. And so we are seeing, in some cases, some deal closures in that segment already. So this -- you're already seeing maybe an improvement in deal closures in that segment, penetration in that segment and then within customers that we already had deeper expansion. So I'd say we're still -- we are not at the point of showing an improvement in productivity. But we do feel like where we're at is about where we would expect. As I mentioned, that was the focus, which is strategic accounts. There is some work for us to do to tune the commercial segment to get the commercial segment to improve the expansion level that we're seeing. We're not necessarily seeing the same level of activity there. But again, you're always tuning the model. I think that's something that we'll continue to work on as we head into fiscal '26. Rick McConnell Mike, I would just add also that last quarter, we reported on having north of 30% of our reps with less than one year of tenure. We continue to add reps. And so we continue to be in a situation where in which we have 30% or greater than 30% of reps with less than one year of tenure. So productivity will expect to increase as that 10-year increases over the course of time. Also on the partner side, we continue to see traction there. More than three quarter of the deals are transacted through our partner ecosystem, and we're now seeing greater than 50% of new logos transacted through a partner, which is net new business, which we'd like to see as well. Operator Sanjit Singh, Morgan Stanley. Sanjit Singh Rick, I hope you feel better. Coming back to some of the color, Jim, that you provided on the structure of the DPS contract. That was super helpful, noting that they're multiyear contracts. I guess the question is, what's going to be the triggering event for an expansion, if let's say a customer is in sort of year one of DPS, their renewal is not for another two-plus years. How do you sort of see that? How do you sort of see that playing out? And I guess the context here is within these sort of year 1, year two, year three dynamics, are there step-ups in commitments? Or are they sort of like $1 million in year one, $1 million in year two, $1 million in year three? Just a little bit more clarity on what the average DPS contract is sort of constructed. Jim Benson Yes. It's a very good question, Sanjit. I guess I'll take your last question first, that there are customers that they will -- we have a variety of models with DPS. Some are what we call ramp deals. So think of it, to your point, it's a 1 in year one and 2 in year two, 3 in year three. So it ramps, that's for some customers. Some customers have a TCV deal, where it's over the contract life. So their DPS is over the contract life. Some customers have maybe to your point, a 2 2 2, you're using my example, that it's -- they have the same volumes, but they have them in equivalent resets. And it varies. So it's hard to equate all of them. But the way it will work even -- regardless of kind of the vehicle that you're on, it becomes a customer decision, right? And again, for us, what we're looking for the customer to do is get more value from the platform and consume faster. That ultimately is what we're looking to have happened. Now whether it shows up as an on-demand consumption for the dynamics I mentioned or whether it shows up maybe in an earlier expansion, to some extent, we're indifferent. They're getting more value of the platform, which means they're consuming faster. I'd say we are seeing that there are triggering events to your point, depends upon how fast you're consuming. And if you think a recontract or we kind of doing an early repackage would result in a significantly improved unit price, you might be willing to go through that. And then there are customers that just in some cases, what they'll do is they budget for what they would consider a minimum commitment, and they're more than happy to have overages because they budget for overages. And they say, "All right, for this contract life, I have 100% conviction I'll spend to the minimum commitment." I'll budget for more for on-demand consumption. And so those will be customers that will stay. And then there are customers that, again, depending on how fast they're consuming, it might not be worth a repackage because they don't see the benefit on unit pricing. And so it varies. And so what it's going to mean is, call it, the NRR improvement that you're going to see is going to be staged depending upon the profile of those different customers. Again, the timing of that is difficult to call. But we kind of bring you back to -- there are benefits to this model to subscription revenue growth. It's just a dynamic that probably there's been a very clear focus on ARR. And I do think going forward, you're going to need to look at ARR, plus you're going to need to look at this dynamic of what's going on with on-demand consumption combined. And you'll probably see it play out better in subscription revenue than ARR in the near term. Operator Andrew Nowinski, Wells Fargo. Andrew Nowinski It sounds like you're seeing a lot of positive tailwinds as it relates to most of the leading indicators in your business with the pipeline improving. I think you said more traction through partners and more business transacted through partners. But if you look at the new logo adds, I guess they were down year-over-year. Is that related to the commercial segment weakness you talked about? Or is there something else going on there? Jim Benson I'd say, yeah, we are a bit light on new logo from a unit perspective. But I continue to remind you that we're very focused on the quality of the land, which is landing them at the right size. And we actually saw a very, very healthy lands in the third quarter. We talked that -- I think last quarter, we were just a little bit over 130,000 average land size on a trailing 12-month basis. We were well over 140. So if you look at the individual quarter, the individual quarter for Q3, by itself, had very, very large land sizes on average. And so yes, we want units, but we want units that have the highest propensity to expand. Those units tend to be units that land north of $100,000. So we're pretty pleased, I'd say, with the land size. You are right, we'd like to increase the volume. And in the commercial segment would be obviously an area that we'd like to see more new -- obviously, legacy units in the Global 500 as well. But I'd say where you're going to see a larger volume is going to be in the commercial segment. Operator Koji Ikeda, Bank of America. Koji Ikeda So just from a real high level, just trying to understand, is ARR and NRR, as it's defined today, no longer the right metrics to gauge the health of the business? Maybe why or why not from a long-term perspective? And then with on-demand becoming a much bigger part of the story, is there a way to maybe talk about qualitatively, how subscription NRR compares to reported NRR? Maybe how DPS NRR compares to subscription NRR, if you could. Jim Benson I would not go so far as to say that ARR and NRR are not important metrics. Those will remain important metrics for Dynatrace. I'd say, what you can't do is you can't look at them in isolation. Because of the DPS contracting vehicle and the fact that we are getting, what I would say is delayed ARR growth from on-demand consumption, you need to look at both ARR and NRR and ODC together because I think that is -- those are the best measures of kind of the health of the business. And I'd say just qualitatively, again, when you talked about NRR and ARR and how they'll behave, I think the way they're going to behave is they're going to behave the way they have historically. Maybe with the exception of you may see with the advent of DPS, you may see more on-demand consumption earlier. You may see expansions later. And so could be early expansions, in some cases, as I mentioned. But I actually think if you look at it combined, there may be a delay in when you see ARR show up given the dynamic of where DPS is. But again, let's go back to what is it about? It is about driving consumption. It is about driving future subscription revenue. That's what DPS is doing. It's just showing up in two different metrics. Rick McConnell That brings us to the end. Thank you all for your engaged questions and of course, your ongoing support. To close, we remain very enthusiastic about the growth opportunities ahead of us, especially given the market as well as Dynatrace-specific tailwinds that we covered on this call. To those of you joining us in Perform next week, we very much look forward to seeing you in person, and we look forward to connecting with many of you at IR events over the coming months. We wish you all a very good day. Thank you. Operator Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Yahoo
31-01-2025
- Business
- Yahoo
Dynatrace Inc (DT) Q3 2025 Earnings Call Highlights: Strong Revenue Growth and AI-Driven Demand
Annual Recurring Revenue (ARR): $1.65 billion, up 18% year-over-year. Net New ARR: $68 million on a constant currency basis. New Logos Added: 193 in Q3. Average ARR per New Logo: Over $140,000 on a trailing 12-month basis. Average ARR per Customer: Surpassed $400,000. Gross Retention Rate: Mid-90s. Net Retention Rate (NRR): 111% in Q3. Total Revenue: $436 million, up 20% year-over-year. Subscription Revenue: $417 million, up 21% year-over-year. Non-GAAP Gross Margin: 84%. Non-GAAP Operating Margin: 30%. Non-GAAP Net Income: $112 million or $0.37 per diluted share. Free Cash Flow: $38 million in Q3; $406 million on a trailing 12-month basis. Share Repurchase: 732,000 shares for $40 million at an average price of $54.64. Full Year ARR Growth Guidance: $1.705 billion to $1.715 billion, representing 16% to 16.5% growth year-over-year. Full Year Total Revenue Growth Guidance: $1.686 billion to $1.691 billion, representing 19% growth year-over-year. Full Year Subscription Revenue Growth Guidance: $1.609 billion to $1.614 billion, representing 20% growth year-over-year. Full Year Non-GAAP Operating Margin Guidance: 28.5% to 28.75%. Full Year Non-GAAP EPS Guidance: $1.36 to $1.37 per diluted share. Full Year Free Cash Flow Guidance: $415 million to $420 million, representing a 25% margin. Warning! GuruFocus has detected 7 Warning Sign with DOV. Release Date: January 30, 2025 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Dynatrace Inc (NYSE:DT) outperformed its guidance across all top line and profitability metrics, showcasing strong execution and demand for its AI-powered observability platform. Annual Recurring Revenue (ARR) grew 18% year-over-year, and subscription revenue increased by 21% year-over-year. The company is seeing significant traction with its Dynatrace Platform Subscription (DPS) licensing model, which now represents over 35% of its customer base and 55% of ARR. Dynatrace Inc (NYSE:DT) is benefiting from increased customer interest in end-to-end observability and tool consolidation, with deals greater than $1 million growing 55% year-over-year. The company is experiencing strong growth in its log management solutions, with over 1,000 customers leveraging these solutions, up 17% compared to the previous quarter. Net new ARR on a constant currency basis was down modestly from the same period last year. The company is facing challenges in the commercial segment, with lower expansion levels compared to strategic accounts. There is increased variability in close timing and deal certainty due to the trend of larger and more strategic deals. The strength of the US dollar is creating a sizable headwind, with an expected FX impact of $38 million to ARR and $17 million to revenue. Dynatrace Inc (NYSE:DT) has a high percentage of sales reps with less than one year of tenure, which may impact sales productivity in the short term. Q: Can you provide more details on the on-demand consumption model and its impact on Q4 guidance and fiscal 2026? A: Jim Benson, CFO, explained that the on-demand consumption model is evolving as expected, with customers consuming at twice the rate of those on the SKU-based platform. For Q4, they modeled mid-single digits for on-demand consumption, acknowledging its variability. For fiscal 2026, they anticipate on-demand consumption to grow as DPS grows, impacting subscription revenue positively. Q: How does the on-demand consumption model affect the net retention rate (NRR) trajectory? A: Jim Benson noted that on-demand consumption is not included in ARR or NRR metrics, which only account for contractually committed revenue. However, DPS customers are expanding at a greater rate than SKU-based customers, suggesting potential NRR accretion over time as DPS matures. Q: Can you elaborate on the traction Dynatrace is seeing with AI-related tools and their impact on revenue? A: Rick McConnell, CEO, highlighted that AI is a significant tailwind, driving data complexity and the need for sophisticated observability platforms. Dynatrace's AI observability capabilities are gaining traction across various sectors, with hundreds of customers already using them, indicating a positive impact on revenue. Q: What are the expectations for ARR growth in Q4, and how does it relate to the DPS model? A: Jim Benson stated that the ARR guidance for Q4 reflects a prudent approach due to the funnel's heavy weighting towards large strategic deals, which introduces variability in close timing and deal certainty. The DPS model's on-demand consumption dynamic also influences ARR growth expectations. Q: How are the go-to-market changes impacting sales productivity, and what are the expectations moving forward? A: Jim Benson mentioned that while productivity improvements are not yet evident, they are seeing positive indicators like improved rolling four-quarter pipeline and deal closures in strategic accounts. They continue to focus on tuning the commercial segment to enhance expansion levels. For the complete transcript of the earnings call, please refer to the full earnings call transcript. This article first appeared on GuruFocus. Sign in to access your portfolio
