Dynatrace, Inc. Q3 FY2025 earnings call

• Observability market tailwinds: Cloud modernization drives observability demand, tool sprawl in organizations, and AI revolution increasing data complexity create a need for comprehensive observability. - Platform differentiation: Dynatrace's Grail data store, AI-powered analytics, and automation differentiate it. The unified architecture enables new observability and security capabilities. - Growth drivers: AI (AIOps and observability of AI workloads), log management disruption, ongoing go-to-market strategy investment, and DPS licensing model. - Notable wins: Top Canadian bank, large Midwest retailer, major American automobile manufacturer, British semiconductor company, and partnership with Visa Cash App Racing Bulls.

In Q3, annual recurring revenue (ARR) ended at $1.65 billion, up 18% year-over-year. Subscription revenue increased 21% year-over-year to $417 million. Trailing 12-month free cash flow margin was 25%. The DPS licensing model continues to gain traction, with nearly 1500 DPS customers globally, representing over 35% of the customer base and roughly 55% of ARR. The rate of consumption growth for DPS customers is nearly double that of non-DPS customers.

• Raised constant currency full year guidance for ARR, total revenue, and subscription revenue. ARR guidance increased to $1.705 billion to $1.715 billion (16%-16.5% growth y/y). Total revenue guidance is $1.686 billion to $1.691 billion (19% growth y/y). Subscription revenue guidance is $1.609 billion to $1.614 billion (20% growth y/y). - FX headwind of $38 million to ARR and $17 million to revenue. - Q4 guidance: Total revenue expected $432 million to $437 million, subscription revenue $410 million to $415 million, non-GAAP income from operations $104 million to $110 million, non-GAAP EPS $0.29 to $0.31 per diluted share.

• Variability in deal close timing and certainty due to large strategic deals. - Macro environment cautious spending. - FX headwinds. - Need to tune go-to-market model for commercial segment expansions.

Q: Matthew Hedberg asked about on-demand consumption and Q4/26 guidance.

A: Jim Benson said on-demand consumption is growing as DPS matures, and Q4 on-demand is mid-single digits, with on-demand likely to grow in fiscal '26.

Q: Fatima Boolani inquired about NRR and DPS.

A: Jim Benson explained NRR doesn't include on-demand consumption, but DPS customers expand faster, and NRR will benefit as DPS matures.

Q: Will Power asked about AI traction.

A: Rick McConnell said AI is a tailwind across generative, RAG, inference, and agentic AI, with broad customer adoption in various sectors.

Q: Keith Bachman questioned ARR guide and taxes.

A: Jim Benson said ARR guide is influenced by large strategic deals with variability, and tax planning will benefit cash taxes in fiscal '26.

Q: Pinjalim Bora asked about NRR and ODC.

A: Jim Benson explained NRR pressure from commercial segment expansions, and on-demand consumption doesn't require early renewal but increases consumption.

Q: Mike Cikos asked about go-to-market changes.

A: Jim Benson said rolling four quarter pipeline is improving, but commercial segment expansion needs tuning, and Rick McConnell added reps with less than a year of tenure are increasing.

Q: Sanjit Singh asked about DPS contract structure.

A: Jim Benson said DPS contracts vary, with customers consuming more as expected, and expansion timing depends on customer decisions.

Q: Andrew Nowinski asked about new logos.

A: Jim Benson said new logos are down but focus is on high-quality, expandable logos, with commercial segment volume expected to increase.

Q: Koji Ikeda asked about metrics and DPS.

A: Jim Benson said ARR and NRR are important but need to be viewed with on-demand consumption, as DPS drives consumption differently.