Dynatrace, Inc. Q4 FY2025 earnings call

• Rick mentioned the observability market remains strong despite uncertain economy, cloud growth healthy, and Dynatrace expecting greater penetration in hyperscaler workloads. Key growth drivers include ongoing go-to-market investments, DPS licensing model momentum, log management opportunity, and AI revolution. Announced major platform innovations and was recognized as a leader in observability and AI Ops. - Jim highlighted Q4 and fiscal '25 were strong, exceeding guidance on top line and profitability. ARR ended at $1.73 billion, grew 17%. Added 171 new logos in Q4. Gross retention rate mid-90s, NRR 110% in Q4. DPS penetration gaining traction. ODC revenue up. Total revenue Q4 $445 million, up 19%. Non-GAAP operating margin 26% in Q4. Full year total revenue $1.7 billion, subscription revenue $1.62 billion, both up 20%. Non-GAAP operating margin 29% for full year. - Welcome Steve McMahon as new Chief Customer Officer.

Subscription revenue grew 20%. ARR ended the year at $1.73 billion, representing 17% growth. Non-GAAP operating margin expanded by more than 100 basis points and pretax free cash flow margin by roughly 250 basis points. Surpassed 4,000 customers and 5,000 employees. Log management offering has 1/3 of customers using it, with the number of customers leveraging logs up 18% compared to last quarter, and nearly half of new logos added in Q4 deploying logs in initial implementation compared to roughly 20% in the same quarter last year. DPS licensing model has over 40% of customer base and more than 60% of ARR leveraging it, with DPS customers consuming on average 12 capabilities compared to 5 for SKU-based customers, and customer consumption growth rates 2x that of SKU-based customers.

• Full year 2026 ARR expected between $1.975 billion and $1.99 billion, growth 13%-14%. Total revenue expected between $1.95 billion and $1.965 billion, up 14%-15%. Subscription revenue expected between $1.65 billion and $1.88 billion, up 14%-15%, with ODC revenue contribution of $30 million. - Non-GAAP operating income expected between $560 million and $570 million, margin 29%. Non-GAAP net income $481 million to $494 million, EPS $1.56 to $1.59. Effective cash tax rate expected 19% in 2026. Free cash flow expected between $505 million and $515 million, 26% of revenue. - Q1 2026 total revenue expected between $465 million and $470 million, subscription revenue $445 million to $450 million, both up 16%-17%. Non-GAAP operating income expected between $130 million and $135 million, 28%-28.5% of revenue. Non-GAAP EPS expected $0.37 to $0.38 per diluted share.

• Geopolitical and macro landscape fluidity, which may lead to enterprises being careful in spending, causing budget scrutiny and sales cycle lag throughout fiscal '26.

Q: Patrick Colville asked about quantitative context on logs commentary and update on logs target and fiscal '26 outlook.

A: James Benson said logs is fastest-growing product category, over 1/3 of customers using it, and expects to exceed $100 million ambition in fiscal '26 with growth well over 100%. Rick McConnell added there was a substantial upgrade wave in logs capability in October driving acceleration.

Q: Matt Hedberg asked about sales productivity and changes for fiscal '26.

A: James Benson said pipeline for higher propensity to spend customers has doubled, over 3/4 of business leverages channel, and adding strike teams focused on logs, application security, and DEM to drive adoption and consumption in fiscal '26.

Q: Brent Thill asked about strategic account growth pipeline and close rate.

A: James Benson said demand environment resilient, larger accounts have growing percentage of pipeline, and while macro environment uncertain, deals will get done with pipeline growth being fuel for future bookings.

Q: Robbie Owens asked about security opportunity unlock.

A: Rick McConnell said it's a combination of expanded product offerings and expanded go-to-market, with an AppSec strike team focused on go-to-market in this area.

Q: Raimo Lenschow asked about on-demand revenue guidance for next year.

A: James Benson said looked at customer behavior, cohort classes, and applied conservatism due to uncommitted nature, using analytics and considering cohort class behavior differences.

Q: Kasthuri Rangan asked about trading off upside and predictability in on-demand revenue.

A: James Benson said customer success and strike teams are measured on consumption, with focus on driving adoption and consumption, and Rick McConnell added Dynatrace is a subscription business focused on driving consumption in DPS world.

Q: Andrew Nowinski asked about net retention rate and trajectory in fiscal '26.

A: James Benson said NRR ticked modestly down from Q3 to Q4, but adding ODCs would have seen modest uptick.

Q: Sanjit Singh asked about AI theme and impact on observability demand and product building.

A: Rick McConnell said trend line moving aggressively toward agentic AI in observability, requiring integrated data lake house, Davis AI engine, automation engine, and extending to third-party agents, with Dynatrace having a unique foundation in observability industry.

Q: Pinjalim Bora asked about customer behavior and on-demand consumption in macro.

A: Rick McConnell said factored conservatism in ODCs due to uncommitted nature, but focus on driving consumption and adoption, and customers using more platform indicates value, with ODCs favorable in tighter macro as not penalizing over consumption.

Q: William Power asked about hyperscaler growth trends.

A: Rick McConnell said vast majority of observability growth in hyperscaler workloads, and relationships with hyperscalers seminal for contract vehicles, with strong win rates in go-to-market relationships.

Q: Jake Roberge asked about DPS cohort classes behavior.

A: Rick McConnell said early cohort classes were existing significant users, but new cohort classes show broader behavior with customers leveraging more capabilities, and focus on getting more customers on DPS to drive consumption.

Q: Keith Bachman asked about DPS uptake rate and portfolio expansion.

A: James Benson said expects DPS to continue growing, longer term 75%-85% of customers to go on DPS, and Rick McConnell said will continue to expand platform in depth and breadth with acquisitions like Medis for database observability.