Dynatrace, Inc.

Greetings and welcome to the Dynatrace fourth quarter and full year fiscal 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Noelle Farris, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Dynatrace's fourth quarter and full year fiscal 2026 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 expectations due to a number of risk 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 13, 2026. 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 year-over-year and 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.

Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Danny Trace delivered a strong finish to fiscal 2026 marked by meaningful scale, durable execution, and continued innovation. In particular, we surpassed $2 billion in ARR and delivered our fourth consecutive quarter of 16% ARR growth. We drove continued traction in logs, now well over $100 million in annualized consumption, growing more than 100% per year. We launched major platform innovations, including Dynatrace Intelligence and domain-specific AI agents. We advanced our cloud-native integrations across AWS, Azure, and GCP, moving operations from reactive monitoring to autonomous action. We extended our agentic AI ecosystem with native connectivity to Anthropix Cloud Code, deepened our integration with ServiceNow, and broadened developer workflow integrations with GitHub Copilot. We acquired DevCycle, a feature management company, as well as BindPlane, an open standards-based telemetry pipeline company, as we entered the new fiscal year. We maintained a leadership position in all major third-party analyst reports for observability and AIOps. and we delivered robust operating and pre-tax free cash flow margins. Our consistent performance in fiscal 2026 underscores the growing criticality of observability, the strength of our strategy, and the value of our platform to customers. Jim will share more details about our Q4 financial performance and fiscal 2027 guidance in a moment. In the meantime, I'd like to cover four topics. how AI is reshaping the observability market, why we believe Dynatrace is unique, Q4 customer highlights, and the growth opportunity ahead. To begin, observability is entering a new era, one in which observability is more mission critical than ever. But a new set of demands is reshaping what observability must deliver. Observability has already become foundational for enterprises, looking to deliver business resilience amidst growing workload complexity and data volumes. And increasingly, organizations are looking to leverage their observability solution to evolve toward autonomous operations, enabling software to auto-prevent, auto-remediate and auto-optimize. Adopting this approach requires organizations to trust the accuracy of the data that fuels agents to take action. Deterministic and causal insights from Dynatrace allow our platform to become the system of record so that development and SRE teams and increasingly AI agents can act with confidence to deliver what we refer to as answers, not guesses. Beyond business resilience, organizations now need observability for reliable AI. The former addresses the question of, is it working? The latter addresses the question of, is it accurate? Namely, is the content coming from AI models trustworthy in driving action and or credible in providing recommendations to end users? AI also adds yet another layer to the software stack, increasing the need for more observability. Enterprises are deploying new agents, models, orchestration layers, and agentic architectures that behave differently than traditional systems. Their environments generate dramatically more telemetry, connect decisions across agents, and introduce probabilistic behavior that must still operate safely, securely, and at enterprise scale. Organizations now require continuous validation of system and agent behavior, governance and auditability of autonomous decisions, cost control across GPU-intensive infrastructure and strong security management. As a result, software development life cycles are evolving as well, requiring organizations to operate in two modes. The first is human-led, with development teams building and operating resilient systems. These teams are increasingly augmented by AI-powered observability that drives intelligent automation, agentic workflows, and progressively more autonomous operations. We continue to invest to expand our reach in this area by extending left to provide development teams, platform engineers, and SREs with the observability functionality needed to put workloads into production faster. Second mode is agent-led, resulting in AI-first environments in which agents themselves are primarily acting as the builders and operators. In this environment, observability insights are consumed directly by the agents in the creation and oversight of delivered software. And those insights are crucial to the effective and trustworthy operation of the environment. We believe the winner in observability will be the provider that can meet the needs of both human led and agent led environments with a shared system of truth that spans both modes across AI, cloud native and traditional workloads. This is the moment for which the Dynatrace platform has been built. Serving customers in both modes with the trust and accuracy that autonomous operations demand and the reliability that AI-driven initiatives require is exactly what the Dynatrace platform was built to do. So why do we believe Dynatrace is unique? It is because our advantage is architectural, not feature-based. Dynatrace is built as a real-time context engine that operates at massive scale. across millions of monitored entities and exabytes of data, all connected and all in real time. By combining deterministic AI with agentic capabilities, we deliver faster, more accurate insights than approaches that rely on agentic AI alone. This level of intelligence, speed, and efficiency cannot be achieved with point solutions that offer visibility without causality. And this is why so many of the largest organizations in the world rely on Dynatrace. As enterprises increasingly operate in agent-led environments, this architectural advantage compounds. Every new workload, AI service, and agent added to the Dynatrace platform deepens causal context, strengthens autonomous reasoning, and extends the gap between fragmented visibility and the unified intelligence that only Dynatrace delivers. That intelligence is built on three integrated components of our third-generation platform. GRAIL has an extensible AI data lakehouse that connects every signal across an enterprise's digital environment. SmartScape has a real-time integrated topology graph. And Dynatrace Intelligence delivering both answers as well as action. Together, these three elements provide durable competitive differentiation. For other providers that add capabilities across stitched data stores, it's difficult to reproduce a unified data foundation with real-time causality plus trustworthy automation in the most complex mission-critical environments, and certainly extremely difficult to do so in the timeframe AI demands. We've now delivered agents across three domains, and customers are already using them in production to coordinate agents to take end-to-end actions. Our SRE agent handles tasks such as Kubernetes troubleshooting, infrastructure optimization, and automated incident resolution. Our developer agent supports use cases that surface production contacts during deployment, validate changes, and prevent issues before they reach customers. And our security agent identifies vulnerabilities, triaging threats, and accelerating security response, all in real time. That intelligence extends beyond the Dynatrace platform itself. Ecosystem integrations then enable agentic interactions to extend Dynatrace intelligence into third-party tools from ServiceNow and GitHub to the hyperscalers to drive autonomous actions across development, SRE, ITSM, and ITOps workflows. What separates Dynatrace's agents from others is the deterministic foundation underneath. Real root cause analysis, anomaly detection, and forecasting grounded in GRAIL. That's not AI that guesses. It's AI that reasons from facts. More than 500 customers are deploying a Dynatrace's agentic capabilities to run operations autonomously and extend that intelligence into AI development tools like QuadCode and GitHub Copilot. At the same time, more than 850 customers are using Dynatrace to observe and trust AI and LLM workloads in production today. Enterprises aren't just managing their environments with the Dynatrace platform. They're using it as the intelligent foundation for AI agents across their ecosystem, creating a critical role for Dynatrace as AI adoption accelerates. This momentum is increasingly evident in customer wins across multiple buying personas. Highlighting four examples from Q4. One of the largest banks in Brazil signed a seven-figure expansion and is standardizing on Dynatrace with 100% open telemetry data flowing into Grail. Choosing Dynatrace for an open, scalable architecture with a clear runway for broader platform expansion. Another large US-based airline selected Dynatrace as a seven-figure new logo through a partner-originated opportunity. They chose Dynatrace to consolidate a complex multi-vendor environment to improve business observability outcomes and reduce operational disruption. A leading hospitality SaaS provider consolidated onto Dynatrace as a seven-figure new logo. displacing legacy tooling and invoking end-to-end visibility across their cloud-native platform. And an AI-native security platform selected Dynatrace as a seven-figure new logo to deliver end-to-end observability across AWS. Together, these wins reflect increasing demand for an end-to-end AI-powered observability platform in the most complex environments. Looking ahead, our strategy is to win with both human-led and agent-led operating modes on a single platform. Our product and go-to-market approaches reflect this dual reality, combining enterprise engagement focused on business outcomes with a strong developer motion that enables agentic workflows to expand at scale. This strategy leads us to an expanded set of growth drivers for FY27. First, our go-to-market investments in both direct sales and partner enablement have improved productivity and deal quality. End-to-end platform deals are getting larger and more strategic with Q4 annual contract value of anchor deals up 60%, with a record 22 deals with incremental annual contract value over $1 million. PPS, which now represents greater than 75% of ARR, also continues to produce double the platform adoption and consumption of non-DPS customers. Second, cloud growth is an accelerating tailwind, with the major hyperscalers now growing at 40% annually. As customers scale hybrid and multi-cloud architectures across AWS, Azure, and Google Cloud, Dynatrace's expanding cloud-native integrations and automation drive sustained platform usage as complexity and scale increase. Third, logs and telemetry pipelines represent a meaningful consumption and displacement opportunity. With our bind plane acquisition now complete and resulting in expanded ingest from open telemetry, we're simplifying telemetry collection and routing at scale, reducing friction for customers to bring more data into Dynatrace, and we are accelerating time to value plus consumption growth. Fourth, agentic AI itself is an expansion driver. As agentic development accelerates, customers need more context, precise answers, governance, and closed-loop automation, areas in which Dynatrace is structurally advantaged. And finally, developers are a long-term growth engine through the integration of Dynatrace observability into AI development life cycles, including support for Cloud Code, Purser, and GitHub Copilot. With our Dev Cycle acquisition, we extend this opportunity even further, expanding Dynatrace's footprint earlier in the lifecycle and driving durable usage over time. To close, observability is already mission-critical infrastructure for AI-driven enterprises. Context and domain knowledge make Dynatrace not only durable but essential in an AI-first world. We believe we are uniquely positioned with a differentiated end-to-end platform. providing the intelligence engine and AI control plane that produced both insights as well as autonomous action. With tailwinds in cloud and AI, plus Dynastrate-specific growth drivers, we are focused on accelerating ARR growth in fiscal 2027 and enthusiastic about the year ahead. Jim, over to you.

Thank you, Rick, and good morning, everyone. As we close out fiscal 26, I want to take a moment to reflect on the execution and underlying momentum for Dynatrace over the past year. At the start of the fiscal year, we laid out a roadmap designed to put the company on the path to ARR acceleration. We talked about the growing trend of large enterprise customers seeking end-to-end observability solutions, the maturation of our go-to-market transformation, the powerful consumption economics of our Dynatrace platform subscription or DPS licensing model.

The expanding opportunity in logs and the secular tail ... 26 and position us for future acceleration.

Let me walk you through a few milestones that defined fiscal 26. We achieved four consecutive quarters of consistent ARR growth at 16%. We delivered double-digit net new ARR growth for the first time in three years. We now have over 75% of ARR and 60% of customers on the DPS licensing model. We exceeded our $100 million log management annualized consumption goal, growing 100% plus year over year in every quarter of the year. We delivered a robust 29% non-GAAP operating margin for the year, while making targeted investments focused on accelerating growth and improving scale. And finally, we stepped up our share repurchase program, doubling our authorization to $1 billion in February, and spending over $478 million in fiscal 26, representing 90% of our free cash flow. Collectively, these achievements demonstrate the building momentum in the business and our confidence and conviction that ARR acceleration in fiscal 27 is in our sights. Let's review the Q4 and full-year 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 $2.05 billion, representing 16% growth for the fourth consecutive quarter. This ARR result reflects a foreign exchange headwind of $4 million compared to our guidance. Adjusting for foreign exchange movements, Q4 net new ARR was $81 million, coming in near the high end of guidance. And net new ARR for fiscal 26 was $277 million, representing 12% growth, with consistent double-digit growth in the first and second half. Large end-to-end consolidation opportunities. We added 126 new logos in Q4. including a record nine seven-figure lands, as we continue to target new logos in large enterprise accounts with a higher propensity to expand. And up 30% for the second half. Our value proposition continues to resonate with enterprise customers outgrowing their existing DIY and commercial tooling solutions. They are seeking business value from tool consolidation and coming to Dynatrace for the depth, breadth, and automation of our unified AI-powered observability platform. Once customers experience the benefits of the Dynatrace platform, they have been quick to expand their usage. Our average ARR per customer is now over $500,000. With cross-sell and up-sell opportunities still ahead of us in our enterprise base, we believe the average ARR per customer opportunity could be $1 million or more over the long term. Gross retention rate in Q4 remained in the mid-90s, underscoring the value of the Dynatrace platform as mission-critical infrastructure our customers depend on. Net retention rate, or NRR, on a trailing 12-month basis was 110% in the fourth quarter. Our DPS licensing model has now become our contracting standard. As I mentioned earlier, we exited the year with over 75% of our ARR and over 60% of our customer base on DPS. With access to the full platform, customers are adopting Dynatrace more broadly across their IT environments, resulting in increased consumption. We continue to see a broader usage and deeper penetration of capabilities across the platform, notably in log management, which remains the fastest-growing product category, growing over 100% and exiting the year well over $100 million in annualized consumption. We expect fiscal 27 to be another year of robust consumption of the platform. Moving on to revenue, total revenue for Q4 was $532 million and subscription revenue for Q4 was $506 million, both up 16% and exceeding the high end of our guidance range by 200 basis points. Turning to profitability, Q4 non-GAAP operating margin was 27% and above our guidance of 26%. Non-GAAP net income was $124 million or 41 cents per diluted share. two cents above the high end of guidance. In our GAAP results, please note that our Q4 GAAP operating income includes $28 million in restructuring and impairment charges, primarily reflecting actions to align our cost structure with our strategic growth and scale priorities. These actions included targeted workforce reductions and impairment charges from office footprint rationalization. Turning now to a quick summary of the full year results, total revenue was $2.02 billion, and subscription revenue was $1.93 billion, both growing 17%. Non-GAAP operating margin came in at 29%. We continue to drive scalability in the business model while investing for growth and scale, with some years driving more leverage than others. while we sequence investments and expected returns. Over the past four years, we have expanded operating margins over 400 basis points, and our margin profile is well above peers of similar scale. We also continue to drive efficiencies in our management of equity compensation. Fiscal 26 stock-based compensation at the percent of revenue was just under 15%. representing a decrease of more than 100 basis points from fiscal 25 levels. Non-GAAP net income for the full year was $518 million, or $1.70 per diluted share. Our non-GAAP earnings factored in an effective cash tax rate of 18.5%. Free cash flow was $529 million, or 26% of revenue, $4 million above the high end of guidance, and roughly 100 basis points above fiscal 25. As a reminder, this strong cash flow margin includes absorbing 600 basis points of impact due to cash taxes. We are somewhat unique relative to most software companies given our strong gap profitability and therefore pay more in cash taxes. Excluding cash taxes to provide an operational compare closer to our peer group, Pre-tax free cash flow for fiscal 26 was 32% of revenue. Moving to our share repurchase program, in addition to doubling the size of our share repurchase authorization to $1 billion in February, we significantly increased the level of buybacks in Q4, repurchasing 5.9 million shares for $224 million, compared to roughly $160 million in Q3. This uptick in spend reflects our conviction in the company's operational momentum, long-term growth and cash flow trajectory, and view that our shares are undervalued. For the year, we repurchased 11.4 million shares for $479 million, representing 90% of our free cash flow. As of March 31st, we had approximately $849 million remaining of the $1 billion authorization, and we plan to continue to take a disciplined approach to capital allocation, investing in innovation and growth while delivering value to shareholders. Turning to our fiscal 27 outlook, we enter the year with high conviction, fueled by a rapidly expanding market. The shift towards agentic AI and autonomous operations has made observability a foundational requirement. Further, intensifying vendor consolidation, inclusive of log management,

plays directly to our strengths.

We believe our fiscal 26 results prove we are winning and exiting the year in a position of strength. We have stabilized ARR growth, delivered double digit net new ARR growth, and continue to improve our go-to-market execution. With these building blocks in place, we are well positioned to sustain and improve our current momentum. Now let's turn to our full year guidance. We expect ARR to be between $2.38 and $2.4 billion, representing ARR growth of 15.5 to 16.5%. This ARR guide implies full year net new ARR adjusted for foreign exchange movements of $320 to $340 million, growing 16 to 20%. are to be modestly more weighted to the first half of the year compared to historical seasonality as we entered the year with healthy forecasted pipeline coverage. As usual, we'll revisit our full year ARR outlook once we get closer to the midpoint of the fiscal year. Turning to revenue, we expect total revenue to be between $2.32 and $2.34 billion. Underlying that, subscription revenue is expected to be between $2.22 and $2.24 billion, both up 14% to 15%. Note, our total revenue and subscription revenue growth rates are impacted by a difficult fiscal 26 compare from the change in accounting for on-demand consumption revenue and other miscellaneous one-time revenue true-ups. We expect non-GAAP operating margin of approximately 29.5%. Unpacking operating margins, we continue to drive efficiency gains across all functions, notably in sales and marketing and G&A. This operating margin guidance includes 150 basis points of additional OPEX leverage versus fiscal 26. This scalability is expected to be partially offset by a headwind of 100 basis points in gross margins from an increase in cloud hosting costs driven by robust consumption growth within our customer base. We expect this margin pressure to be temporary as we execute on defined projects to improve our cloud cost efficiency with growth margins beginning to recover during fiscal 28. Another important area of leverage is stock-based compensation. We expect stock-based compensation as a percentage of revenue to once again decrease by 100 basis points in fiscal 27 to just under 14%. We expect non-GAAP net income to be $584 to $594 million, resulting in non-GAAP EPS of $1.93 to $1.95 per diluted share, based on 302 to 304 million shares outstanding. Our effective cash tax rate is expected to be 18.5%. We expect free cash flow margins of 26.5% and pre-tax free cash flow margins of 32%. 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 $547 and $551 million, and subscription revenue to be between $523 and $527 million. As I noted earlier, our Q1 total revenue and subscription revenue growth rates are impacted by a difficult compare from the change in accounting for on-demand consumption in Q1 last year. Non-GAAP operating margin is expected to be 27.5% to 28%. Lastly, Non-GAAP EPS is expected to be 44 to 45 cents per diluted share, based on a share count of 298 to 299 million shares. In closing, the strength of our Q4 and fiscal 26 performance sets a solid foundation for fiscal 27. The secular growth drivers fueling the observability market continue to expand, and our AI-powered end-to-end platform differentiates us and puts us and a strong competitive position. 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. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question. Thank you. Our first question comes from the line of Matthew Martino with Goldman Sachs. Please proceed with your question.

Hey, good morning. Thanks for taking the question. Maybe to start, and I appreciate the setup on kind of the fiscal 2027 outlook, but when we look at kind of the Q4 net new ARR, it came in around 9% on a constant currency basis. And the fiscal 27 guide implies a fairly meaningful step up in the net new from here. Can you walk us through the bridge between the Q4 exit and what's embedded in the FY27 growth algorithm, and ultimately the role the renewal cohorts around DPS are going to play in terms of getting you to that full year guide. Thank you.

I'll take that, Matt. That's a good question. I think what I would tell you is that we had a very solid Q4. We had a great half two. We had a great fiscal year. So this underlying momentum building in the business, if you kind of step back And you say, what did we do in fiscal 26? And I outlined it in the prepared remarks. It's a year of milestones. In a year of firsts, we stabilized ARR growth at 16%. We showed double-digit net new ARR growth for the first time in three years. Logs, well over $100 million, growing 100%. The go-to-market traction is building. You've seen it in large deals. A record new logo lands over $1 million. DPS now over 75% of our ARR. Consumption growing at a very rapid rate. I outlined, you know, two years ago that we were going through a fixed, stabilize, accelerate kind of journey. And we just finished the stabilization. If you look at this guide, you're right, this guide implies almost double the net new ARR growth from fiscal 26 levels. And it's all of the building momentum that we've seen. So it's not anything new, like we need some new play. This is just a continued execution of the existing play. So Q4 was a solid finish. You're going to have quarters that are like that. You're going to have quarters that, you know, are more robust than that. I can tell you that pipeline is healthy. Forecasted coverage is good. There's just significant interest. So I think it's just a continued building of what we've been doing. We talked about this with our go-to-market changes two years ago. They're starting to take root, and we expect that that will continue.

And I would say, Matt, that AI tailwinds, agent tailwinds, cloud tailwinds are also contributing to our view of FY27. So it's a combination of internal growth as well as market factors overall.

Thank you. Our next question comes from the line of Eric Heath with KeyBain Capital Markets. Please proceed with your question.

Hey, great. Thanks for taking the question. Jim, just to continue on the point there, I mean, was there any macro impact in the quarter, just given some of the geopolitical volatility, and did it cause some deals to push? And just any additional commentary you can speak to about the DPS renewal activity in the quarter among some of the fiscal 24 cohort of customers?

Yeah, I'd say from a macro perspective, you know it as well as I do, that certainly there's a lot going on in the Middle East right now. I would not say that had any material impact on the quarter. something that we're monitoring for sure for our EMEA business. But I would say nothing notable relative to DPS. Again, DPS, even beyond kind of, it is the contracting standard now that we have 75% of our ARR on that.

And, you know,

and consumption continues to grow at a very rapid rate. As you would expect, consumption for our DPS customers is growing much faster than our non-DPS customers. We continue to see healthy expansions. One thing to note, I think I've mentioned this in the past, that fiscal 27 is a year where you're going to see the largest cohort of DPS customers coming up for their annual resets, or in some cases, their actual renewal. And so there's an opportunity, again, depending upon how consumption grows, to continue to see healthy expansion. So we're quite pleased with the traction there and the momentum that we're building in that area in particular.

Thank you. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

Okay, great. Thanks. Rick, in your prepared remarks, you called out what you all view as some of your architectural advantages. Can you just kind of speak to how that's resonating with customers, what you're doing, what you maybe still need to do to help demonstrate that? And maybe as part of that, anything you could share with respect to AI native adoption of the platform? And then just maybe more broadly, you know, what you're seeing in terms of agentic usage trends that might speak to that. I think you talked about 500 customers using some of your agentic capabilities, but anything you could share on just the broader usage within those architectural advantages?

Yeah, a lot of questions in there. Well, we'll attack them. So the architectural advantages, we typically will talk about rail as a completely integrated, massively parallel processing data lakehouse. We talk about SmartScape as an integrated topological graph that can provide analytics and context. We talk about Dynatrace Intelligence, which we launched back in January, is covering really two elements of the spectrum. First element of the spectrum being around deterministic AI, and then the second regarding agentic AI, where we actually can take action. What all of that is driving to is a completely integrated, fully unified platform that enables our customers to move into an agentic world successfully. And that agentic world enables autonomous operations to take hold, which is what they need to be able to manage increasingly complex overall IT environments and software workloads. So we believe that that architectural advantage is durable, and we believe it's sustainable, and that when you get into manual tagging of data stores across multiple data stores, you end up with an environment that is much more fractured. So that was piece number one. With regard to AI natives, We have been focused mostly in the history of Dynatrace on IT operations, on CXOs. That's how we've ended up with end-to-end observability, and that's when we get into these larger deployments for large customers where we've been incredibly successful with the go-to-market plan over the last couple of years, which we initially deployed. That is evolving to include developers, and we've made huge strides in the platform beginning 18 months ago, with new implementations around elements like we mentioned last quarter, like Bedrock Agent Core integration or Azure SRE agent. This quarter, we talked about Cloud Code integrations, now Assist headed into AI Control Tower. So we continue to evolve the platform to enable more developer adoption. That developer adoption opens and unlocks the opportunity with AI natives, which we're driving along with developers now. And finally, you mentioned Agentic. Agentic is But secondly, also in, as I mentioned, a brand new way of development. We see a sea change in a movement from software development life cycles to AI development life cycles. And we believe that observability fundamentally is going to be a core foundation of that. We also believe that Dynatrace, based on our architecture, going back to my first remarks, has an opportunity to be a primary participant in that shift from the software development lifecycle to the AIDLC. Three different questions, so I tried to attack all three of them, but the question will be.

Thank you. Our next question comes from the line of Mark Murphy with J.P. Morgan. Please proceed with your question.

Hey, this is already from JP Morgan on for Mark Murphy. Thanks for taking the question. You mentioned closing a record 22 deals with more than a 1 million ACV. I think nine of those were new logos. We had a couple of channel checks over the quarter that mentioned momentum in the Dynatrace business and new logos, large new logos specifically. So I'd love to kind of hear what you think is driving some of the momentum with the large deals and new customer lands at scale.

Thanks.

that had fragmented DIY and commercial tooling solutions that were looking to vendors for consolidation both for economic benefits and also just a better customer experience and so that trend has continued and I would say especially in very large customers that there is huge interest there is significant interest in integrating fragmented tools to save money you know, there is money to be had when you can go from multiple vendors to one vendor and you can get a better experience with Dynatrace for all the reasons that we've outlined. So that trend has continued. I'd say the changes we made in the go-to-market side, we're developing much better and deeper relationships with C-level decision makers. These are the people that make these decisions. And so it actually is a market tailwind moving in that direction. And we're in a good position to benefit that from the platform depth and breadth that Dynatrace provides. And so I expect that that will continue.

Thank you. Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Yeah. Hey, guys. Thanks so much for taking the question. Jim, maybe a question for you. You know, when I look at past transcripts and the way you've characterized the guidance list, you always used the word prudent. And I noticed this time you didn't. And I look at, you know, you definitely talked about much stronger net new ARR growth this year. And so I just wanted to ask, has the guidance philosophy changed, you know, with the removal of the word prudent? And so why now? Thank you.

No, our guidance philosophy has not changed. Koji, I would say that the way we've guided in the past and the way you should think about this guide, I think I've, built enough experience with you guys that you know how I do guide. I don't think it's necessary to continue to kind of provide that language that you should expect that what I guided here is consistent with how I've guided historically.

Thank you. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my question, guys. Rick, I wanted to come back to some of the first couple questions Um, you know, that, that were asked and, you know, you know, re referencing your script, there's, there's a lot of positivity about industry trends and, you know, why the dinosaur architecture is well positioned to capture that. But I think, you know, the question people keep asking me is, you know, you know, given those, you know, why aren't you, uh, growing faster? You know, I, I think NRR was, was maybe a little bit, uh, lower than what people are thinking. Uh, and I guess I'm just wondering, like, is there a lag between. enterprise AI and inferencing spend and ultimately your observability product? Like, is it just a timing thing that's holding you back from better growth?

Question, Matt. I do think that there is a bit of timing difference between what we're seeing in the enterprise and what AI natives are seeing. I think that is with regard to, for example, agentic deployment, agentic usage. As I said in my remarks, we're already seeing 500 customers plus Deploying and using our agentic capabilities, we've got now more than 850 customers that are using us to evaluate the reliability and trust of AI and LLM workloads. So in the enterprise, we certainly are beginning to see that kind of adoption. And we believe that that adoption will, of course, through the DPS mechanism, get deployed into numbers over the course of time. DPS, as you know, does have a bit of a lag with regard to expansions. vis-à-vis a straight consumption model, which is why we see some of the delta between our consumption numbers with those being in the 20% plus range relative to ARR. facilitate us expanding to the developer, expanding to AI natives more aggressively as we look to FY27. And we're beginning to see some of that momentum in the AI natives as well.

Thank you. Our next question comes from the line of Remo Lencho with Barclays. Please proceed with your question.

Perfect. Thank you. Can you talk a little bit on the large customer momentum? That sounded like a very good outcome this quarter, and I was also surprised on the new customers that came up straight into large. Is that something that you're seeing now as your offering got a lot broader, the platform pricing kind of makes adoption really nicely there? Is that something that you're seeing in the pipeline as well? Thank you.

Yeah, I mean, Ramo, I'd simply say it's all of the above. And I kind of answered it previously that large enterprise customers are looking for vendors to consolidate on, to be able to. And so I would say the go-to-market changes that we've made have allowed us to go access and penetrate those opportunities. One thing I will tell you is that while we're not making radical go-to-market changes at all for fiscal 27, it's a continuation of what we've been doing, the traction that we've made in our large strategic accounts, which is think of them as the global 500, we're going to extend that motion down probably to another 150 or so customers where we're going to improve the density of coverage and get closer to customers to be able to drive either new logos or expansions with these existing customers by getting closer to them. And so I think it's just a, it's a phenomenon of what's happening just in the industry that large customers are looking for vendors that they can consolidate on that. And we have a very unique position to be able to give them both better economics and a better kind of business outcome.

Now, I would just add, Remo, that, I believe that point product observability is dead or at least dying. And that's why we see some of the ongoing expansion that we saw this quarter and that we see in the pipeline related to end-to-end observability. And we have a great proven solution there for large enterprises to deploy. And it's at the data layer, it's the domain layer, it's at the persona layer. All of those layers are looking for end-to-end observability. because that is what is enabling the best outcomes of observability, number one. And number two, it is a necessity as you look to an agentic future to be able to leverage that underlying fabric in order to deliver the agentic future that's expected leading toward autonomous operations.

Thank you. Our next question comes from the line of Itai Kidron with Oppenheimer & Company. Please proceed with your question.

Thanks. Jim, I had a couple of things I needed to hopefully can clarify. I'm the fiscal 27 guy. You made a comment that new ARR is going to be weighted towards the first half. I'd love to get some color on this, again, where there are deals that's forward. You're breaking up. I can't hear you. Fiscal 27 for ODC. If you could break that down, that would be great.

Yeah, I couldn't hear the question. The only thing I heard in the question was the first half. I think you said, could I clarify the commentary about maybe net new ARR being a little bit more weighted to the first half? And I would say it's modest, but I'd say we wanted to make sure we provided some color on that. I think it's mostly a function of we have very strong forecasted pipeline coverage. It continues to build. And so I think what we're signaling is that we expect to have a good start to the year, not just for Q1, but also for Q2. You know, obviously your visibility over the next three to six months is greater than over the kind of beyond that. And I'd say what you see is this is just growing visibility and confidence around what we can deliver.

Thank you. Our next question comes from the line of Sandit Singh with Morgan Stanley. Please proceed with your question.

Yeah, thanks for taking the question. I wanted to get back to some of the drivers that you're seeing in the core business. Clearly, vendor consolidation, tool consolidation is a sales motion that you guys have been executing very well on and has probably been the driver of enterprise large deals for the past couple of years. To what extent is the business seeing the impact yet, or do you expect to see the impact from just you know, the big thing seems to be just software development initiatives with these coding agents getting adopted, not even if we just even exclude the AI natives, but even in the enterprise, you're seeing quite a strong adoption of coding agents and that should drive more software creation. When do you think that ultimately drives, emerges as another core driver for AR growth for instance?

Yeah, I'll take that, Sanjay. Absolutely, as we mentioned in the prepared remarks, I think that Whole notion of AI evolution is a core driver. Those sorts of elements. So, you know, we do see this going through a few stages, whereas today they're using coding assistance. Coding is done at least in part by AI systems and AI capabilities. We see that transitioning to an AI DLC system. where the primary builders of code are, in fact, agents themselves, where agents are building and operating code. And so we are going to go through rapidly this process, evolving through a software development lifecycle in our perspective, all the way through an AI DLC. So we're seeing this and the expectation during FY27 is that that will be a growth driver driving actually increased and accelerated ARR.

Thank you. Our next question comes from the line of Keith Backman with BMO Capital Markets. Please proceed with your question.

Hi. Thank you very much. I wanted to ask a clarification and a question. Jim, if you don't mind, could you just relate what you think the NRR will be for 27? I'm just trying to back into the net new guidance. And then my broader question, Rick, for you is, when I think about Dynatrace, you've made progress in logs, maybe a little less so in security in terms of, at least for investors, the visibility we have with that potential. But when I think about you versus your nearest publicly traded competitor, I think there's been more meaningful product expansion. And so I just wanted to see philosophically with Grail out there, how do you think about the product expansion opportunity over the next couple years, particularly now with an activist involved who may be looking for more margin expansion. But if you could just speak to your product expansion philosophy over the next couple years.

Let me take the front end of that, Keith, and then I'll let Rick comment on the broader question. So we don't guide specifically between new logo and expansion or NRR. You should expect that it's going to be similar to what we've had historically, which is net new AI. I think that's a function of reps are compensated on maximizing bookings, whether it be new logos or expansions. That's one of the reasons we don't guide, but you can certainly look at it that if you look at the historical levels, that's roughly what we're going to operate. And so to your point, if you look at the high end of the guide, which is, you know, net new ARR growth of 23 or 24%, you're going to see it both on the expansion side and on the new logo side.

And Keith, on the broad product acceleration front, what I would say is there's been a huge amount of innovation in the Dynastrace platform over the last couple of years. Of course, we've delivered GRAIL, foundational data lakehouse. We've talked about that. We delivered Dynatrace Intelligence back in January. This is a major setup for an agentic operations system that can allow for truly autonomous operations, leading to the evolution of overall development through an AI DLC. Dynatrace Intelligence is really a foundational enabler of that. As you mentioned, we have logs. The logs capability is Quite substantial, as Jim mentioned in his remarks. Now well above 100 million, growing at more than 100%. So huge amount of opportunity there. Bringing logs into an end-to-end observability platform, we believe to be quite foundational to getting end-to-end observability right as a foundation for the agentic future. Talked about AppSec. We don't say, we haven't said as much about AppSec. It is absolutely a relevant ongoing and investment thread for us. not growing as fast as the logs front, but we do see ongoing convergence of observability and security use cases, and so we're focused on those. And I would say now that our third-gen platform continues to emerge and be more mature, you're going to see further acceleration in innovation around feature set and functionality for add-on capabilities in the platform as we look at

Thank you. Our next question comes from the line of Patrick Colville with Scotiabank. Please proceed with your question.

Thank you for taking my question. I guess maybe this one's to both Rick and Jim. If I look at the financial model, we had a lot of questions on the top line. I just want to kind of zoom in on the bottom line, in fact. The guidance, you gave this helpful commentary that expecting... GMs to come down slightly in fiscal 27 due to cloud hosting costs. Do you mind just unpacking why that is? Exactly, and then also just maybe just zooming out like what is the philosophy on? profitability as of you know, May 20 26 because don't race is Wonderfully profitable, but we've been at levels that have been consistent now for about two years and you're guiding to kind of flat and again in fiscal 2027. So how are you thinking about that aspect of the business? Thank you.

I'll start with Patrick that we continue to drive efficiency in the business, which is why I mentioned that if you look at operating expenses, this guide implies 150 basis points of incremental leverage in operating expenses. We are going through a bit of, I'd say, a year with gross margins, which is kind of a, I'd say it's a good news, bad. The good news is what's driving that is robust consumption of the platform. And so all the reasons we talked about that consumption is growing rapidly, growing significantly faster than ARR growth, there is a lag between when you see that in an expansion and when you see that show up in revenue. Whereas when you look at cost of goods sold, you see that immediately because it is recognized as incurred. And so It's truly a function just of growing consumption on the platform. And there's a bunch of initiatives, as you can imagine, that we're driving, very defined initiatives to improve our cloud cost efficiency ratios. There's always a give and take between R&D dollars that are spent on those things versus R&D dollars that are spent on efficiency. And so our expectation is that this is temporary and that as we enter fiscal 28, you're going to start to see margins go back Gross margins go back to more historical levels. I will remind you that even a bit of pressure on gross margins, we still have incredibly robust gross margins, even with 100 basis point headwinds. So this is a kind of a philosophy of continuing to drive leverage in the model, as I mentioned in my prepared remarks. Some years we're going to do more than others. Sometimes we sequence investments where the return on those investments comes in the following year. But you can expect we will continue to drive efficiency across the business.

Thank you. Our next question comes from the line of Miller Jump with True Securities. Please proceed with your question.

Great. Thank you for taking my question. So the logs momentum continues to stand out. Can you just talk about where you are in your ability to displace competitors for security use cases in logs? and the comparative size of the market opportunity that you see for observability versus security there?

I'll take that, Miller. We have not done an on-prem SIM, so we have not addressed that with the security use case. We have addressed the observability use cases, number one. Number two, as we've reported in the past, we are working on and will expect over the course of time to deliver a cloud-based SIM So that will begin to take on some of the security use cases around logs. But for the moment, most of the commentary has been around observability logs. And that brings us to the end of the call. So let me just wrap up. First of all, thank you all for your engagement and continued support. We really do appreciate it. FY26 was a solid year of stabilized ARR. With us at 16%, we delivered double-digit net new ARR growth through the course of the year. We saw it as a year of exceeding $2 billion in ARR. And, of course, we delivered very, very strong logs momentum, as we indicated, now well more than $100 million, still growing at 100%. We have a number of growth drivers in the business. We're very excited about what's happening by way of innovation. And we believe we have a number of market tailwinds. around AI, around cloud, around agentic that will provide further fuel to the opportunity to accelerate FY27 ARR growth, which is precisely what we're looking for with accelerating net new ARR growth at the midpoint of our guide. We thank you again for joining. We look forward to connecting with you at upcoming IR events, and we wish you a great day.

Goodbye. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.