Dynatrace, Inc.

Greetings and welcome to the Dynatrace fourth quarter and full year fiscal 2025 earnings conference call and webcast. At this time all participants are in listen only mode. If anyone should require operator assistance please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queued anytime by pressing star one on your telephone keypad and in the interest of time we ask you please limit yourselves to one question then return to the queue. As a reminder this conference is being recorded. It's now my pleasure to turn the call over to Noelle Farris, vice president investor relations. Noelle please go ahead.

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 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 10Q and our upcoming annual report on form 10K that we plan to file later this month. The forward-looking statements contained in this call represent the company's views on May 14, 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 discussed today are non-GAAP reflecting constant currency growth and per share amounts are on the 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 webpage. And with that let me turn the call over to our Chief Executive Officer Rick McConnell.

Thanks Noel 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 ARR. We expanded our non-GAAP operating margin by more than 100 basis points and our pre-tax 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 employees. We 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 agentic AI vision and the growing criticality of business observability. Let's 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 healthy. Hyperscalers 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 opportunity. Our next major platform release plan 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 co-pilot for remediation workflows or instant response. We 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 platform. First are the ongoing investments in our -to-market efforts, including customer segmentation, partner enablement, and expanding our sales motion beyond application performance to include -to-end observability and cloud modernization. We kicked off these initiatives at the beginning of fiscal 2025, and they continue to gain traction. We 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 hyperscalers. 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 -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 million. Second, 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 consumption. We 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 value. Our 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 health of IT ecosystems. Combined with our AI approach, teams can derive greater value from logs faster and at lower cost. Leveraging Grail as our massively parallel processing data lakehouse, logs can then contribute near real-time insights at enormous scale. We are seeing strong adoption of our log management offering, with a third 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 year. And 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, .AI-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 it. In 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 category. Our 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 system. Indeed, 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 capabilities. You need a common data lakehouse to store all data types in context for accuracy, performance and scale without manual tagging.

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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 actionable. You 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 agents. We believe Dynatrace is uniquely positioned to lead in this space with Crayon. Our indexless schema-free lakehouse 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 system. Our knowledge is fueled by one agent collecting all data types in context, normalized with our semantic dictionary, cleansed, protected and then ingested through open pipelines. RAIL provides instant access to 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 reasoning. Davis AI Co-Pilot 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 this 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 approach. They 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 profitability. For example, a large cruise ship operator is using Dynatrace to enable an exceptional on-ship experience for passengers. They begin with the core user experiences they want to track and then drill down into microservices and technical analytics rather than the other way around. In many such customer deployments, our platform is playing an increasing role in error differentiation. Only Dynatrace captures business events in context with other data types, enabling quick and easy querying, rich visualization dashboards, and business-driven automation. I'd like to highlight just a few of our larger Q4 wins. A major airline already committed to spend nearly $50 million with Dynatrace over its contract term signed an additional seven-figure expansion in an ongoing effort to reduce the of disparate monitoring tools, including logs, to have all their relevant data types in one place with grit. A Canadian financial services company, another eight-figure customer, added a seven-figure expansion to consolidate various observability and log monitoring tools, standardize on Dynatrace, and substantially reduce costs. And we closed a seven-figure expansion deal with a large software company, including logs on Grail, to ensure stability and performance during a major software release. Finally, I'd like to welcome Steve McMahon to Dynatrace as our new Chief Customer Officer, replacing Matthias Dolent-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 in observability and security at Splunk, CrowdStrike, and Zscaler provides him a terrific foundation for a rapid ramp. To wrap up, our market opportunity is stronger than ever. We 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, agentic 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.

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 -to-market model and driving broader usage of the platform across our customer base. Leveraging 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 26. Let's 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 deals. We added 171 new logos in Q4, up slightly from a year ago as we remained 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 depth. Once customers experienced the benefits of the Dynatrace platform, they had 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 up-sell opportunities in our enterprise customer base, we believe the average ARR per customer opportunity could be $1 million or more over the long term. Our 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 billion. Our 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 5 capabilities for SKU-based customers. In terms of usage volumes on the platform, DPS 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 growth. As we shared last quarter, as DPS has matured and scaled, its customer-friendly approach to pricing, which does not penalize customers for exceeding commitments, is leading some to consume on-demand instead of renewing or expanding early. In 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, total 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 33 cents per diluted share, 2 cents above the high end of guidance. Turning to a quick summary of the full-year results, total revenue was $1.7 billion, 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, pre-tax 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 31st, we had nearly $1.2 billion of cash and investments and zero debt. In 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 31st, 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 landscape. While 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 length throughout fiscal 26. With that as context, let's start with our guidance for the full year. We expect ARR to be between $1.975 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 the current new ARR to be similar to the last several years. Turning to revenue, we expect total revenue to be between $1.95 to $1.965 billion, up 14 to 15%. Underlying that, subscription revenue is expected to be between $1.865 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 respectively. We expect non-GAAP operating income to be between $560 and $570 million, resulting in a non-GAAP operating margin of 29% of 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 to $494 million, resulting in a non-GAAP EPS of $1.56 to $1.59 per diluted share, based on 309 to 310 million shares outstanding. We 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 and $515 million, or 26% of revenue, a 100 basis point improvement from fiscal 25 levels. As a full cash taxpayer, we believe the best way to benchmark our cash flow generation is on a pre-tax basis, as most software peers pay minimal cash taxes. Adjusting for cash taxes, pre-tax free cash flow margin is expected to be 32% in fiscal 26. As 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 and $470 million, and subscription revenue is expected to be between $445 and $450 million, both growing 16 to 17%. Non-GAAP operating income is expected to be between $130 and $135 million, or 28 to .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 to 305 million shares. In closing, the strength of our Q4 and fiscal 25 performance sets a solid foundation for fiscal 26. The secular growth drivers fueling the observability market are unchanged, and our AI-powered -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 growth. We 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? Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad. And as a reminder, we ask you please ask one question, then return to the queue. If you'd like to remove yourself from the queue, please press star 2. Once again, that's star 1 to be placed into question Q, and please ask one question, then return to the queue. Our first question is coming from Patrick Calvo from Scotiabank. Your line is now live.

Thank you so much for taking the question. I'm going to ask this one to both Rick and Jim. In our field work, logs is performing very well. It 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 Disco 26 in logs? Thank you.

Good question, Patrick. We're very pleased with logs. We have over a third of our customers now leveraging our log solution. So, it continues to grow. As you can imagine, it varies for customers that are using it pretty significantly and for customers that are just starting with it. It's 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 customer is consuming until they consume it. So, the $100 million ambition, we have high confidence. We will exceed that in Fiscal 26. And, you know, it is a business just to give you just some rough numbers. That business will grow well over 100% in Fiscal 26.

I would just add, Patrick, that we had a pretty substantial upgrade wave in the logs capability back in the October timeframe. 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.

Thank you. Next question today is coming from Matt Hedberg from RBC. Your line is now live.

Great. Thanks for taking my question. 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?

Yeah, 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 previous remarks, to well more than 70% of our overall deployment in ACV. And 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. GSIs 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 to make those contracts. So, we're fully leaned into partners. It remains a core element of the overall sales motion. Jim, you want to comment? Yeah, what I would

say about the -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 rep more to higher propensity to spend customers. That's progressing well. Those accounts have doubled the pipeline than the pipeline in total, so very good traction there. Obviously, pipeline is a precursor to a booking. Rick mentioned channels. We now have over three quarters of our business that is leveraging a channel. We still want to continue to get some progress on partner-originated, but good progress on channels. And then the sales plays, the sales plays being your traditional APM sales play. Kind of a cloud-native workload sales play and -to-end tool consolidation. Again, doing very well, particularly with tool consolidation. So, we feel very good about it. I 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're 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 monitoring. So, 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 underpinnings becoming more consumption and adoption oriented. Having these strike teams are going to help us fuel that growth on the -to-market side. So, we feel very good about that.

Thank you. Next question today is coming from Brent Till from Jeffery's. Your line is now live.

Thanks. Just on the strategic account growth, I think you mentioned over 45% pipeline growth. Just remind us, you know, when have you seen that level of strength? And maybe to Matt's question on the close, you know, the pipeline seems like it's growing at a much higher rate. When do the close rates start to come up to kind of match that pipeline growth you're seeing?

Yeah, it's a good question. I mean, I'd say what you have, 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 broader pipeline. And the good news is these larger accounts, we're seeing a growing percentage of that pipeline. Having said that, I'd say what's changed in the last maybe three months, and I'd say that 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 large strategic accounts, especially for those that are considering some level of tool consolidation. Those deals and those accounts take a little bit longer. And so, you know, I think that for us, the fuel is pipeline. And, you know, 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 percent of our air are now in 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 rattleable revenue recognition subscription model, but its underpinnings are consumption. And so there's a bit of a reorientation within the company. As 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.

Our next question today is coming from Rob Owens from Pepper Sandler. Your line is now live.

Great. Thank you for taking my question. 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? Thanks.

I think it's a combination, Rob. We see good traction with our RBA solution for vulnerability analytics. We need to continue to extend our offerings in this area. Expectations toward movement to see ADR 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 well. So short form is combination of expanded product offerings with which we are working in delivering to 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.

Thank you. Next question today is coming from Ray Mulvenso from Berkeley. Your line is now live.

Thank you. Congrats from me as well. Jim, you had the not so easy task to think about on demand 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 framed that? Thank you.

That's a good question, Ray Mulvenso. Obviously we kind of inserted in Q3 this notion of on demand consumption becoming a kind of a growing part of the growth story of the company, which is again, underpinning this consumption point that I made earlier. So 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, you know, how they behaved. We've looked at what are the, think of it as the attach rates, how much of your business is going through an annual reset period by quarter? How much is that growing? What is the kind of, for lack of a better term, 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 two? Do 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, I think of it as an attach rate perspective, but we built some caution knowing that cohort classes are going to behave a little bit different.

Thank you. Next question is coming from Akash Randran from Goldman Sachs. Your line is now live.

Hello. Thank you very much. Congrats on finishing up the fiscal year very solidly. As you look at the on-demand revenue, how do you trade off the, the upside where you want to do better and maybe talk about the, the sales incentives that are going into the consumption aspect of the business versus also, also at the same level of raising the bar for what is predictable, what is predictable, what is increasingly trying to get the upside into the customer contracts. So you lock them up and you get even more visibility. So trading off the upside versus the predictability at a higher level is where I wanted to get your thoughts on. Thank you so much.

Yeah, 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, cash is that our customer success teams and the strike teams that we mentioned, they are exclusively measured on consumption and adoption. 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 teams. And so these, these are from an incentive perspective, both of these teams, their measurement is on consumption. So, you know, again, my point about driving more adoption, driving more consumption, and, you know, as I said, in my prepared remarks, we're already making tremendous traction, yet 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 deeply. And so what we needed to do in the changes we made this year is to, 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'll show up in two ways. Ultimately, it'll show up with maybe a continued high growth in consumption and customers burn through their commitments early and either go to an on demand consumption, or in some cases, customers will renew early. You know, there's 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 important, but this consumption notion is, is becoming more important with the company. And I'd say we're going through a bit of a transition and 26 would be that kind of a, you know, the next phase of the transition that started in fiscal 26. Yeah,

I would, 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, it is compensating on consumption for strike teams or D1 services teams, our customer success teams, we see dramatically higher consumption in a 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.

Thank you. Our next question today is coming from Andrew Nowinski from Wells Fargo. Your line is now live.

Thank you. Good morning and a nice quarter results. I wanted to ask maybe on the net retention rate. I know the ODC component seems to distort that real net retention rate, given that it's, you know, not included in ARR, but I'm wondering, you know, 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? Thank you.

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 in NRR, and what is uncommitted, which is not in NRR. So NRR ticked modestly down. We're talking decimals, you know, from 111 to 110, from Q3 to Q4. But again, decimals that if you added in ODCs, which, you know, 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.

Thank you. Our next question today is coming from Sanjit Singh from Morgan Stanley. Your line is now live.

Yeah, thank you for taking the questions. 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? 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 in an observability platform versus human SRE engineers? Thanks for the thoughts.

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 effectuation 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 part. So the way that we see this evolving is that through agentic observability or an agentic observability platform with VenteTrace, they actually can now take action based on those answers. Well, that begins to get your second question of 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 lake house, which we have in Rail, which has all data types, logs, 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 trustworthy. Once you've entrusted the answers, then you need an automation engine, which we have to then be able to execute those instructions within the observability environment. Finally, an area that we're beginning to work more firmly on is to then extend that agentic set of protocols to third party agents to be able to then effectuate change in code, for example. So it is a multi-layered 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 agentic future in observability utilizing dinotrates. So this is a major, major thrust for us as we look to the future.

Thank you. Next question is coming from Pindalambora from JP Morgan. Your line is now live.

Oh, great. Thank you for taking the questions, and congrats on the quarter. Jim, I just want to go back to ODC a bit. How are you thinking of kind of the, or how should we, I guess, should think about the customer behavior around on-demand consumption going forward in this macro? And as you look towards kind of building the guide, how did you thread the needle between the assumptions around incremental ODC component versus last year's ODC leading to larger committed contracts?

Yeah, it's a good question that I tried to answer a little bit of that with Ramo's question, which is the way we thought about ODCs, that we thought about ODCs in the realm of looking at cohort classes, cohort 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 ramps. Some customers are not. So 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 an 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 it. 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 deal. And they're willing to go into ODC 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 penalizing them for it. So it's actually a very kind of favorable vehicle in an environment that maybe customers are a bit budget-conscious.

Thank you. Our next question today is coming from Will Power from Baird. Your line is now live.

Okay, great. Rick, you've called out the strength you're seeing in partner relationships from a -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. What really is underpinning the confidence around the hyperscaler trends, what you're seeing today versus what you've maybe seen in the past?

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 spend. So 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 -to-market relationships with the hyperscalers, such as the one we recently announced with AWS with their SCA program, to effectively engage in greater co-sell. And 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 DEF Y26.

Thank you. Next question is coming from Jake Roberge from William Blair. Your line is now live.

Hey, thanks for taking the question. Just on DPS, a great deal of 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 onto 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 onto DPS, are you seeing those same types of expansion rates play out across the longer tail of the base?

Yeah, I mean, that's a good question. I'd say broadly speaking, the answer is yes, you're right. The early cohort classes were skew-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 a broader behavior where customers are leveraging more of the capabilities. And so I'd say that what used to be a sampling bias has become something that's played out across pretty broadly, which is again why our focus is get more customers onto 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.

Thank you. Next question is coming from Keith Bachman from BMO Capital Marketing. Your line is now live.

Good morning. Thank you very much. I also want to ask about DPS in two different regards. 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 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. It reduces friction to buying. And I was wondering if you could just talk a little bit about how you're thinking about their buy portfolio expansion. And you have a couple key building blocks, obviously with GRAIL getting widespread adoption and AI, CANDLEE probably requiring and enabling more adoption. And part of the context of the question is, DataDog, CANDLEE just has a broader portfolio solutions. And I just wanted to hear you speak a little bit about how you're thinking about your portfolio expansion, given the building the box given DPS over not just the next year, but over the next number of years. Thanks very much.

Yeah. 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'll still be customers that want to stay on skew base vehicles, maybe government entities, things of that nature. But I'd say the objective longer term is we get set at 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 to the DPS contracting vehicle to get full access to the platform. If you do look at the capabilities, I would say that we have quite a few capabilities on the platform. And even though we're getting some level of penetration, even for its kind of new emerging areas, logs being the most notable. So the fact is a third of our customers are now on logs, but that third is not spending anywhere near what the opportunity is for logs. Logs, for the reasons that Rick outlined, I think is we're primed 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, there's other capabilities beyond the core offerings of call it full stack infrastructure, DEM, logs, AppSec. There's other kind of sub components that we monetize as well. And so it's broader than maybe you're characterizing. So 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.

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 Insights, we just bought Metis 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 close. And 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.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.