Q2 2026 Dynatrace Inc Earnings Call

Speaker #3: Greetings . Welcome to Dynatrace, Inc. fiscal second Quarter 2026 Earnings Call . This time , all participants are in listen only mode . The question and answer session will follow the formal presentation .

Speaker #3: If anyone should require operator assistance during the conference , please press Star Zero on your telephone keypad . Please note this conference is being recorded .

Speaker #3: At this time , I'll now turn the conference over to Noelle Faris Vice President , Investor Relations . Noel , you may now begin .

Speaker #4: Good morning , and thank you for joining Dynatrace, Inc. second quarter fiscal 2026 earnings conference call . Joining me today are Rick McConnell Chief Executive Officer and Jim Benson , chief Financial officer .

Speaker #4: Before we get started , please note that today's comments include forward looking statements such as statements regarding revenue , earnings guidance and economic conditions .

Speaker #4: Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace, Inc. SEC filings , including our most recent quarterly report on Form 10-q and Annual Report on Form 10-K .

Speaker #4: The forward looking statements contained in this call represent the company's views on November 5th , 2025 . We assume no obligation to update these statements as a result of new information , future events or circumstances .

Speaker #4: 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 .

Speaker #4: We will also be discussing 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 .

Speaker #4: And with that , let me turn the call over to our Chief Executive Officer , Rick McConnell .

Speaker #5: Thanks , Noel . And good morning , everyone . Thank you for joining today's call . Dynatrace delivered very strong second quarter fiscal 2026 results , exceeding our guidance across every metric .

Speaker #5: RR grew 16% . Subscription revenue grew 17% and pre-tax free cash flow was 32% of revenue on a trailing 12 month basis . This overachievement in performance was due to successful execution of our strategy to capture the growing demand for end to end observability and large scale multi-cloud tool consolidations , including ongoing growth in our logs .

Speaker #5: Business Dynatrace is consistent . Execution gives us the confidence to raise our revenue and operating income outlook for the full year . Jim will share more details about our Q2 financial performance and guidance in a moment .

Speaker #5: In the meantime , I'd like to devote my remarks to why we believe AI powered observability is mission critical to software reliability and performance , especially in an evolving agentic world .

Speaker #5: And I will also provide an update on our key growth drivers . To start the Dynatrace platform has evolved through multiple phases from reactive operations to automated root cause to now preventive operations .

Speaker #5: And I will also provide an update on our key growth drivers . To start the Dynatrace platform has evolved through multiple phases from reactive operations to automated root cause to now IRR consistent over the past years to enable a world in which software works perfectly by definition , that means that software must always be available .

Speaker #5: And when issues do occur , the software must self-heal . Preventive operations is about anticipating and taking action on issues before they become end user impacting .

Speaker #5: Customers are increasingly seeking not just answers , followed by manual resolution , but rather answer driven automation to deliver and operate software that works optimally .

Speaker #5: The Dynatrace, Inc. generation platform was built from the ground up to handle precisely the level of complexity and scale of modern cloud and AI .

Speaker #5: Native environments , including the following core elements . Rail our massively parallel processing data . Lakehouse is capable of analyzing billions of interconnected data points in near real time to deliver comprehensive situational awareness .

Speaker #5: Provides deep contextual insights of topology and metadata through a directed knowledge graph . Davis delivers reliable , causal and predictive AI insights to produce deterministic answers .

Speaker #5: David's co-pilot automatically generates remediation proposals and Automation Engine helps orchestrate and manage intelligent , automated responses across the digital ecosystem . These technologies , by being part of a fully unified platform rather than a series of point products with fragmented data stores , enable true end to end observability , which is crucial to delivering accurate analytics and recommendations .

Speaker #5: In this way, our AI-powered platform is enabling the next phase of observability for Dynatrace, which is autonomous operations in this business.

Speaker #5: Transformational phase , we take preventive operations to the next level by leveraging ecosystem of agents , both from dynatrace and third parties , to take action to maintain software reliability , security and performance .

Speaker #5: It's about deploying intelligence that enables self-healing systems to keep software operational and performant with less human intervention . Moreover , worldwide spending on AI is forecast to be nearly $1.5 trillion in 2025 , according to Gartner , as organizations broadly adopt Agentic AI themselves , complexity will grow further , driving even greater need for a more scalable , autonomous approach .

Speaker #5: We see Dynatrace and the evolution of observability becoming a bridge to the agentic world for enterprises . Defeated ? Perhaps most succinctly , we see Dynatrace as the AI powered observability platform for autonomous operations .

Speaker #5: With this evolution , will be able to orchestrate and supervise both internal and external AI agents to auto prevent auto remediate and auto optimize .

Speaker #5: We believe the Dynatrace is unique in our ability to deliver such an observability environment . One of our superpowers lies in our ability to pinpoint the so-called needle in the haystack in understanding software availability and performance .

Speaker #5: This has always been Dynatrace biggest differentiator . An organization will only allow autonomous action if it's based on precise , reliable answers , not loosely correlated data points .

Speaker #5: We like to think of this as answers , not guesses . Based on this deterministic knowledge , we can then confidently conduct agentic platform based orchestration through both Dynatrace and third party agents to take action .

Speaker #5: In order for an autonomous approach to be effective , it has to be built on a foundation of genuine end to end observability that provides deep analytics and insights .

Speaker #5: Ultimately enabling an automated response . Our ability to analyze all observability data types , logs , traces , metrics , real user data .

Speaker #5: Pathology , and even business events in context is essential for generating the most accurate and trustworthy answers . Additionally , the ability to oversee all domains , including infrastructure , apps , log management , user experience , application security , and business observability provides the most comprehensive perspective of an organization's IT ecosystem .

Speaker #5: Whereas metrics and logs are often the data types of choice for infrastructure management faces a long strength of dynatrace become increasingly important for end to end inspection of agentic systems .

Speaker #5: Combination of full stack visibility and domain breadth allows customers to operate more efficiently , reduce overall costs , and increase productivity , as well as the pace of innovation .

Speaker #5: Perhaps most importantly , though , we believe these elements together yield superior outcomes and customers are rapidly extending these outcomes beyond technical analytics of software performance into true business observability .

Speaker #5: There's also a vastly growing demand for organizations needing to observe AI native workloads , customers adopting Agentic AI will need to understand the complex interactions among agents and know exactly what to do when something unpredictable happens , including the avoidance of hallucinations .

Speaker #5: In order to have that level of visibility all telemetry , especially traces and logs , must be captured and enriched with context and analyzed in real time .

Speaker #5: At massive scale . To prevent or instantly remediate issues . We are enabling AI to observe AI workloads through deep end to end observability .

Speaker #5: In some , dynatrace is rapidly progressing toward a future where our AI powered platform doesn't just observe , but empowers organizations through knowledge , reason , and action .

Speaker #5: This is why organizations that are leading the evolution of AI are partnering with Dynatrace as a foundation for smarter , faster , and more reliable .

Speaker #5: It operations . So let me now highlight some recent developments with third parties . To help bring autonomous operations to reality . Last Monday , Dynatrace and ServiceNow Co announced a multi-year strategic collaboration to advance autonomous it operations and scale intelligent automation for joint enterprise customers .

Speaker #5: We are bringing together Dynatrace AI powered observability platform with ServiceNow AI platform for business transformation to provide proactive , self-healing . IT environments .

Speaker #5: This partnership enables IT management and operations with real time , trustworthy , autonomous actions across the software developer delivery life cycle . We also announced our integration with Atlassian to help customers fully understand issues and act quickly by embedding real time production insights directly into incident management processes , automatically tying incidents to root cause empowers organizations to operate more efficiently and proactively in managing complex digital ecosystems .

Speaker #5: And finally , we joined GitHub's model context protocol registry . This integration helps speed up debugging efforts during development and leverages Dynatrace observed production insights to increase Agentic software improvements .

Speaker #5: This also further enables us to extend left to reach cloud and AI native development , and platform engineering teams . I'd like to turn next to an update on four key growth drivers for our business , all of which continue to trend positively .

Speaker #5: First is the massive opportunity that we continue to see in log management . We believe the logs market remains ripe for disruption given the rising cost of legacy solutions that offer little to no expansion in business value .

Speaker #5: As we have stated in the past , we have taken a very different approach to logs . Traditionally , logs were separated from other observability data types .

Speaker #5: Instead , Dynatrace, Inc. , a unified data model , inclusive of logs allowing for cross data analytics without manual stitching , resulting in faster root cause analysis and more accurate observability insights .

Speaker #5: Log management is our fastest growing product category and is rapidly approaching $100 million in annualized consumption , continuing to grow more than 100% year over year .

Speaker #5: In addition , as more customers look to migrate their existing log to Dynatrace, Inc. , we're investing to increase the speed of those migrations .

Speaker #5: Last month , we announced a partnership with Crest Data Systems to deliver a seamless , automated migration experience for customers moving to the Dynatrace platform .

Speaker #5: This enabled us , for example , to meet an aggressive timeline for a global financial services company by automating 70% of their dashboard migrations .

Speaker #5: Second , the investments we made last year to align our sales coverage around strategic account's pipeline and partners continue to pay off our fourth quarter pipeline for strategic accounts is up 45% versus last year .

Speaker #5: Bookings through strategic GSI partners doubled year over year , and we saw a 53% increase in Q2 ACV from seven figure deals compared to last year .

Speaker #5: Here are just a few examples of large wins in the quarter . An AI native revenue intelligence company and new logo selected Dynatrace to be their end to end business solution for mission critical workloads , displacing multiple tools .

Speaker #5: Our biggest new logo deal in APAC is one of Japan's largest banks fragmented tools in the complexity of their architecture were making it difficult for them to reduce mean time to resolution .

Speaker #5: With Dynatrace , they will now have an end to end view of their ecosystem to resolve issues more quickly . A major US airline expanded its existing relationship with us 18 months after adopting Dynatrace to further consolidate tools , including logs .

Speaker #5: After seeing significant improvement in incident resolution and the benefits of end-to-end observability, a third growth driver is the Dynatrace platform.

Speaker #5: Subscription licensing model , or DPS . We reached a major milestone in the second quarter with 50% of our customers and 70% of our RR now utilizing DPS .

Speaker #5: When we launched DPS over two years ago , our expectation was that customers with full access to the platform would leverage more capabilities and extend Dynatrace more broadly into their IT environment .

Speaker #5: This thesis has played out with DPS customers adopting two times the number of capabilities , and it nearly double the consumption growth rates of those on a SKU based model .

Speaker #5: And finally , overall platform consumption is a strong indicator of future expansions and is the primary compensation metric for our Customer Success team .

Speaker #5: Total Q2 consumption growth was more than 20% , and continues to outpace subscription revenue growth . To wrap up , we are pleased to have delivered a strong first half of the fiscal year .

Speaker #5: The Absorbability market opportunity is more critical than ever given the rapid evolution of cloud and AI . Native workloads . We have a differentiated , AI powered platform that is enabling autonomous operations in an evolving agentic AI world .

Speaker #5: We delivered significant customer value driving accelerating platform consumption . We continue to see momentum in our core growth drivers , and we have a compelling business model which has enabled us to deliver a sustained balance of growth and profitability .

Speaker #5: Jim , over to you . Thank you , Rick , and good morning , everyone . Q2 was an excellent quarter across the board .

Speaker #5: We surpassed the high end of our top line growth and profitability guidance metrics .

Speaker #6: Once again , as Rick mentioned , this strong performance was driven primarily by our ability to capture the growing demand from enterprise customers for end to end observability and large scale tool consolidations among many highlights , we continue to demonstrate traction in key growth areas .

Speaker #6: This includes momentum in large deal activity and pipeline accelerating consumption and adoption across the platform . Notable strength in logs . Continued adoption of DPS , and a growing number of early expansions , including several seven figure deals in the second quarter .

Speaker #6: Additionally , our partner ecosystem is maturing with growing traction across GSIs , hyperscalers , and strategic partnerships . Let's review the second quarter results in more detail .

Speaker #6: Annual recurring revenue , or IRR , ended the quarter at $1.9 billion , representing 16% growth consistent with Q1 , Q2 net new IRR on a constant currency basis was $70 million , up 16% from a year ago , driven by both strong expansion and new logo bookings across the geographies .

Speaker #6: Execution was particularly strong in North America and Asia Pacific , with many deals influencing driven by our GSI partners . For the first half of the year .

Speaker #6: Net new IRR was up 14% from a strong first half last year . In Q2 , we added 139 new logos to the Dynatrace platform with an average IRR per new logo of over $140,000 on a trailing 12 month basis .

Speaker #6: We continue to target landing with high quality new logos that have a higher propensity to expand the average land size in Q2 was particularly robust , with new logo IRR growing well over 30% year over year .

Speaker #6: We continued to see accelerating consumption and adoption of the platform with our average IRR per customer . Over $450,000 . Highlighting the criticality and business value we provide to customers .

Speaker #6: The strategic relevance of the Dynatrace platform is further reflected in our gross retention rate , which remained in the mid 90s . Net retention rate , or IRR , was 111% in the second quarter .

Speaker #6: In line with the prior quarter . As Rick mentioned , our DPS licensing model continues to gain traction , achieving a major milestone with 50% of our customer base and 70% of our IRR .

Speaker #6: Now , on this vehicle . At the end of Q2 , DPS has become our defacto contracting model with access to the full platform .

Speaker #6: Customers are adopting Dynatrace more broadly across their IT environments , resulting in increased consumption . Turning quickly to usage volumes on the platform .

Speaker #6: Q2 was another quarter of robust consumption of the platform , with the annualized consumption dollar growth rate accelerating and continues to track north of 20% .

Speaker #6: Further , DPS customers continue to consume at nearly two x , the growth rate and leverage two x the number of capabilities compared to SKU based customers contributing to that consumption rate logs remains the fastest growing product category .

Speaker #6: Growing well over 100% year over year , and rapidly approaching our $100 million milestone . We believe there is plenty of momentum in runway into half , two and beyond .

Speaker #6: Increased consumption on the Dynatrace platform can sometimes accelerate usage above a customer's original DPS annual commitment , resulting in either ODC revenue or an early expansion opportunity .

Speaker #6: The decision to consume on demand or renew early is customer dependent and will vary based on that quarter's customer cohort behavior and influenced by the remaining duration of their contract .

Speaker #6: In Q2 , we saw more DPS customers expand early versus going on demand and contributing to our strong net new IRR result . ODC revenue came in at $7 million for the quarter , just shy of our expectation .

Speaker #6: The key takeaway , however , is that the company's emphasis on driving platform adoption and consumption serves as the foundational growth engine . Whether it's fueling ODC revenue or supporting early expansion of net new IRR .

Speaker #6: Both contribute to subscription revenue , with ODC reflected immediately in AR over time . Moving on to revenue . Total revenue for Q2 was $494 million , and subscription revenue was $473 million .

Speaker #6: Both up 17% and exceeding the high end of guidance by nearly 100 basis points , driven by strong net new RR bookings . Turning to profitability , non-GAAP operating margin was 31% , exceeding the top end of guidance by 150 basis points , driven mostly by revenue upside flowing through to the bottom line .

Speaker #6: non-GAAP net income was $133 million , or $0.44 per diluted share , $0.03 above the high end of our guidance . We generated $28 million of free cash flow in the second due to seasonality and variability in billings quarter to quarter .

Speaker #6: We believe it is best to view free cash flow over a trailing 12 month period on a trailing 12 month basis . Free cash flow was $473 million , or 26% of revenue .

Speaker #6: As a reminder , this includes a nearly 700 basis point impact related to cash taxes , free tax , free cash flow on a trailing 12 month basis was 32% of revenue .

Speaker #6: Finally , a brief update on our $500 million opportunistic share repurchase program in Q2 . We repurchased 994,000 shares for $50 million at an average share price of just over $50 .

Speaker #6: Since the inception of the program in May 2024 through September 30, 2025, we have repurchased 5.3 million shares for $268 million at an average share price of just over $50.

Speaker #6: Moving now to guidance , our conviction in growth drivers continues to strengthen , fueled by secular tailwinds of vendor consolidation , cloud modernization , and AI workload proliferation .

Speaker #6: Our go to market momentum and funnel of large anchor deals continues to grow with the pipeline of strategic enterprise ACV up 45% year over year .

Speaker #6: Consumption growth continues to significantly outpace IRR growth , driven by customer adoption of DPS , leading to broader upsell and cross-sell penetration . Log management continues to be a significant source of growth both in our installed base and with new logos .

Speaker #6: We are balancing these leading growth indicators and our strength in the first half of the year with a prudent approach for the second half .

Speaker #6: With two primary factors in mind: first, the weighting of the pipeline towards larger, more strategic tool consolidation opportunities often creates increased timing variability and a longer duration to close.

Speaker #6: Second , I'll observability demand remains resilient . The macro and geopolitical environment , particularly in EMEA , remains dynamic . And with that , as context .

Speaker #6: Let me summarize our updated full year outlook . The underlying strength in consumption growth , coupled with the strong first half performance , gives us the confidence to raise our full year IRR growth guidance by 100 basis points at the midpoint to 14 to 15% growth in constant currency .

Speaker #6: Seasonally , we expect net new IRR to be weighted more towards Q4 than last fiscal year , due to the mix and timing variability of large deals in the funnel .

Speaker #6: Moving now to revenue , we are raising our total revenue and subscription revenue growth guidance by 75 basis points at the midpoint to a range of 15 to 15.5% growth in constant currency .

Speaker #6: Given the half one mix shift towards early expansions and IRR , we now expect ODC revenue to be in the low 30s . Turning to our bottom line , we are raising our full year non-GAAP operating income guidance by $8 million , translating to a non-GAAP operating margin of 29% .

Speaker #6: We expect free cash flow margin of 26% . While we do not guide to free cash flow on a quarterly basis , we anticipate free cash flow to be more weighted to Q4 than historical levels .

Speaker #6: Finally , we are raising non-GAAP EPs guidance to a range of $1 . 62 to $1.64 per diluted share , representing an increase of $0.04 at the midpoint of the range .

Speaker #6: This non-GAAP EPs is based on an expected diluted share count of 307 to 308 million shares . Looking to Q3 . We expect total revenue to be between 503 and $508 million .

Speaker #6: Subscription revenue is expected to be between 481 and $486 million . As a reminder , we saw a notable increase in revenue in Q3 and Q4 last year , and with the revision to estimated Ratable rhetoric treatment this year , this will result in a headwind to revenue growth rates in our third and fourth quarters .

Speaker #6: This year from a profit standpoint , non-GAAP income from operations is expected to be between 143 and $148 million , or 28.5 to 29% of revenue .

Speaker #6: Lastly , non-GAAP EPs is expected to be 40 to $0.42 per diluted share . In summary , we are very pleased with our Q2 performance and strong momentum in the first half of the year .

Speaker #6: The strategic adjustments and investments we made last year in our go to market strategy are taking hold and evidenced in the latest results .

Speaker #6: We're starting to see momentum in large deal activity in pipeline accelerating consumption growth across the platform , ongoing traction in logs , broader adoption and a maturing of our strategic partner ecosystem .

Speaker #6: We have a proven track record of consistent execution and delivering a balance of strong top line growth and profitability . While we're maintaining a prudent approach to our near-term outlook for confident in the foundational elements driving growth in fiscal 2026 and remain committed to investing in initiatives that we believe will generate long term value .

Speaker #6: And with that, we will open the line for questions. Operator.

Speaker #3: Thank you . At this time , we'll be conducting a question and answer session . We ask that you please limit yourself to one question to allow as many as possible to ask questions today .

Speaker #3: If you'd like to ask a question at this time , you may press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue .

Speaker #3: You may press star two . If you'd like to withdraw your question from the queue . For participants using speaker equipment , it may be necessary to pick up your handset before pressing the star key's .

Speaker #3: Thank you . And our first question comes from the line of Fatima Bulani with Citi . Please proceed with your question .

Speaker #7: Good morning . Thank you for taking my questions . I appreciate it , Jim . I was hoping we could spend a little bit of time on the net retention rate metric , and if you could help us peel back the onion .

Speaker #7: So to speak , on some of the puts and takes there . And really , the spirit of the question is why is the metric lagging in contrast to otherwise very favorable momentum that you have shared in your prepared remarks on renewals on expansions , on accelerating customer growth , as well as signs that you're seeing that customers are now expanding earlier .

Speaker #7: So just wanted to get a maybe more granular understanding on why net retention rate looks like it's stuck in the mud when all other factors in the business are pointing to more favorable momentum .

Speaker #7: Thank you .

Speaker #6: It's a happy to take that Fatima that I start with . We had a really strong net new RR quarter . You know it grew 16% for the quarter and it grew 14% for the half .

Speaker #6: So the business momentum is quite healthy in growing net new RR . I think you know , Gnrh-r is a kind of a trailing 12 months metric .

Speaker #6: And so it's going to take multiple quarters to significantly move as a metric . So Gnrh-r stabilized Q1 to Q2 . So we feel really good .

Speaker #6: I mean , one of the things we talked about in the prepared remarks is we're getting really good traction with the go to market changes that we made a year ago .

Speaker #6: It's showing up in the results . It's showing up in growing pipeline . We are poised to benefit from continued end to end observability tool consolidation opportunities , consumption continues to grow at a rapid clip .

Speaker #6: So we're very optimistic about the underpinnings of the business . So you know , these metrics , you know , Gnrh-r , if we continue to see the performance that we are seeing in consumption and these other areas , you will start to see movement in Gnrh-r , but it will happen over time .

Speaker #3: Our next question comes from the line of Matt Hedberg with RBC Capital Markets . Please proceed with your question .

Speaker #8: Great . Thanks for taking my question . Congrats on the strong quarter and increased guide . I had a question . You know , you guys have spent a lot of time focused on go to market improvements really over the last several years , and it really feels like it's paying dividends right now in terms of large deals .

Speaker #8: I'm curious , you know , when you think about sort of some of the the capacity adds that you've added historically , could you talk to the level of productivity you're seeing there and secondarily , you know , with a strong Q2 , I'm curious to see if the six month quotas are doing what was intended sort of .

Speaker #8: Improving linearity for the year . Thanks , guys .

Speaker #6: Happy to take that , Matt . It's actually two very good questions . So you're absolutely right . We've been building on these go to market changes since basically Q1 of fiscal 25 .

Speaker #6: And as you know , we talked about that we were making investments in the top of the pyramid where we had on average , roughly 8 to 10 accounts per rep with very large customers .

Speaker #6: We made investments there to lower that to 4 to 5 . We're seeing it in close rates . We're seeing it in pipeline .

Speaker #6: So yes , we are seeing a productivity lift from the investments that we made there . So we're very , very pleased with that .

Speaker #6: I'd say relative to the two six month quotas , just to remind you , we did that for two reasons . One gives you an opportunity if you want to make a mid-year adjustments , either a little bit on go to market or even on maybe compensation plan design .

Speaker #6: Two it also gives you an opportunity to see improve on the seasonality of bookings . And so we saw a little bit of that last year where this is our second year of going through it .

Speaker #6: So I think it's actually bearing out what we thought , which is it's showing an improvement in linearity of the business . And so this is not a matter of , hey , there was a lot of pull in from Q3 per se , but I just think there's an incentive for the sales organization twice a year to be an accelerator .

Speaker #6: And I think that's what you saw . So I'd say both things are playing out as we were hoping .

Speaker #3: Thank you . The next question is from the line of Brad Rebbeck with Stifel . Please proceed with your question .

Speaker #9: Great . Thanks very much , Rick . You alluded to the over 20% consumption growth in the base . So either for you or Jim , how should we think about the convergence of net new RR and subscription revenue growth towards that 20% order the puts and takes as we look out over the next year or two .

Speaker #9: Thanks .

Speaker #6: So , Brad , you know , I'd say the puts and takes are , you know , we are as you know , we are a radical revenue recognition business .

Speaker #6: So we you know , when we book something it just subscription revenue gets amortized rapidly . And so we are not a business that has revenue recognition on a consumption basis .

Speaker #6: If we were these growth rates that we're talking about for consumption for the company would be in the 20s . So it does take time .

Speaker #6: You have to put more 20 plus percent growth rates . Obviously there's an element of your contract terms and your contract terms and burning through commitments and going through expansions .

Speaker #6: And so it won't happen overnight . It'll happen over time . So there will be a convergence . I think the important thing for investors to watch for is us continuing to give you an update on how is consumption tracking consumption ultimately , other than bringing in a new logo , consumption is the underpinning for sales to grow in and upsell a customer .

Speaker #6: And we're seeing it play out . We're seeing it play out with early expansions and his clearly that with DPS , they're able to trial different things on the platform logs , notably and trial logs .

Speaker #6: You're under DPS contract . We had a very large global airline that we had a very big contract with that we just booked maybe a year and a half ago for a five year deal .

Speaker #6: This customer did a huge expansion because they trialed a product category that was not really part of their initial configuration . And now you have a huge upsell , literally two years into a five year deal .

Speaker #6: And so the more you look at consumption and the more we focus on kind of getting our teams aligned on consumption , whether they be the CSM teams or strike teams for logs or dem or security , that ultimately is going to be the underpinning .

Speaker #6: And you will see over time a convergence of those growth rates with subs , growth and IRR growth .

Speaker #5: I just add , Brad , that while we don't recognize revenue based on consumption , it absolutely is a key leading indicator . The thought process is quite simply that we want consumption to be growing faster than IRR because it is an opportunity then to utilize fully DPS contracts as we use those contracts , then renewals and expansions occur thereafter .

Speaker #5: So it is the metric of choice for our customer success organization and is where we are pressing the organization to essentially affirm our performance for customers .

Speaker #3: Next question is from the line of Eric Heath with KeyBanc Capital Markets . Please assist you with your questions .

Speaker #10: Hey , thanks for taking the question . And maybe just a clarification , Rick and Jim , just given the the focus on consumption , and that's accelerating .

Speaker #10: I mean , should consumption be the key metric that we focus on over IRR and and subscription revenue as an indicator for future acceleration ?

Speaker #10: Looking into fiscal 27 and then just curious on on logs and how that contributed to the million dollar ACV deals you did in the quarter .

Speaker #10: Thanks .

Speaker #6: So I'll take that . So we have a handful of metrics . I , you know , what's my favorite metric . We have a handful of them .

Speaker #6: So I would not say it's one metric . Certainly IRR is very important . But ultimately you know you know you have you need to get your go to market motion going .

Speaker #6: Bring customers on the platform . Once they get on the platform , have your customer success and strike teams drive more adoption . So ultimately the underpinning I would say , of growth will be consumption .

Speaker #6: So I do think it's something we're going to continue to want to talk to you about , because that is something it doesn't show up .

Speaker #6: You know , like it is not a metric that we you see in the financial results . It's not a revenue , it's not RR , it's not anything like that .

Speaker #6: But it ultimately fuels and expansion . And so it is an important metric to focus on . It's not the only one . There's other metrics .

Speaker #6: Obviously , that we share . And I think your other question was on logs . And we are rapidly and I say rapidly , very rapidly approaching $100 million .

Speaker #6: It is by far the fastest growing product category . You know , that we've seen a doubling of customers from a year ago that now spend over $1 million with us .

Speaker #6: We've almost seen A4X increase in customers that spend over $500,000 a year with us , and we have a lot of customers now that are still under $100,000 , that we have a huge opportunity to continue to expand with .

Speaker #6: So we're very , very happy with the progress we're making in logs . Yeah .

Speaker #5: Just to add on to the logs piece growing more than , well , more than 100% year over year on now , what is getting to be a much larger number ?

Speaker #5: As Jim said , approaching $100 million in consumption . And it is really key to emphasize what we said in the earlier remarks that not only are we saving customers a fair bit of money from legacy Solutions , what they're doing today , but by incorporating logs into the overall observability mix and framework , we are delivering , delivering markedly better outcomes because you have logs , traces , metrics , real user data all in the same data .

Speaker #5: Lake house , it results in better outcomes . And that's what we're seeing across the board for the customers that have deployed at scale .

Speaker #3: Our next question is from the line of Mark Murphy with J.P. Morgan . Please proceed with your question .

Speaker #11: Hey , this is Noah Herman on for Mark Murphy from JP Morgan . Thanks for taking the question . Hope you're doing well .

Speaker #11: The constant currency net new RR results really stood out positively this quarter based on the guidance framework . It seems like seasonality between the first half and second half of the year is more equally weighted .

Speaker #11: Whereas in prior years it seems more of like a 4060 split . So can you just maybe unpack that a little bit ? The seasonality dynamics we should expect going forward ?

Speaker #11: Thank you .

Speaker #6: Yeah , that's a good question . I mean , you're right . We've historically seen more like a 40 , 60 or 4258 .

Speaker #6: You know , I think it was Matt that asked earlier around our two six month plan designs , I do believe with these plan designs you will I don't think you're going to necessarily always have balance between the first half and the second half .

Speaker #6: But I think you're going to get closer to that because there's an incentive for the sales organization to improve linearity . We're actually seeing that .

Speaker #6: I would also say , to be fair , as I said in my opening remarks , we are not demand constrained . So the pipeline is extremely healthy .

Speaker #6: This is the I think , the fifth consecutive quarter of an acceleration in our kind of four quarter rolling pipeline . So pipeline trends and the demand environment is quite healthy .

Speaker #6: I think what we've done for the back half of the year is we've built some prudence into the back half of the year because as we have focused more on large , high propensity to spend customers , the good news is we're seeing a significant improvement in the pipeline , but that is also coming with very large deals and very large deal sizes .

Speaker #6: So the timing variability for those deals is difficult to judge . And so we appropriately build some prudence into the back half of the year that maybe deals fall out of kind of the back half , maybe into the first half of fiscal 27 .

Speaker #6: This is similar to what we talked about maybe a year ago . But I would say the pipeline is even more weighted to large deals .

Speaker #6: So we're very pleased with the pipeline . I think we've just built some prudence , so we'll have to see how we execute , you know , but I'd say I'm very optimistic with the kind of the the overall go to market improvements we've made and the pipeline that we're seeing across the business .

Speaker #3: So next question is from the line of Patrick Horvat with Scotiabank . Please see with your question .

Speaker #12: Rick . And Jim , thank you for taking my question . I guess , you know , when I think about the big macro trends in it right now , you know , it's accelerated public cloud migrations .

Speaker #12: It's an increased trend to multi-cloud AI . All these trends in my opinion , should play well into the dynatrace story . If I look at results this year , you know , net new AR constant currency this year versus the back half of last year , you know , we're in a much better spot .

Speaker #12: So I guess as it relates to these kind of macro trends , are we seeing or have we passed and inflection point for dynatrace to really kind of ride , you know , this tidal wave of those macro trends or is this a case of these , you know , net new IRR has been has whipped around in the past and , you know , you don't overindex on these last two quarters .

Speaker #6: Yeah , I guess what I would say is kind of a similar to the remarks . I just made , which is the demand environment is very healthy .

Speaker #6: So to your point about macro trends , I think we're seeing that play out in what is a significant increase in the overall pipeline .

Speaker #6: And pipeline health of the business . So I kind of anchor you on that , and I'd anchor you on , you know , we had a very strong Q2 , a very strong first half , you know , is this a hey , we don't think it's going to be as good in the back half .

Speaker #6: That's I don't want that to be the takeaway relative to this guide . I think we built some prudence into the fact that as more deals become larger , that we just built some timing variability into this .

Speaker #6: And , you know , we'll see how we progress in the back half of the year . But it is I don't think it's a demand environment element .

Speaker #6: I think the demand environment is quite healthy . And I think we are poised to benefit from that . We just built some prudence into , you know , the execution of these large deals .

Speaker #5: Yeah . Patrick , I would I would say very strong first half . Solid increase in the guide . We've provided some of the metrics that are leading indicators for us .

Speaker #5: Elements like strategic account pipeline up 45% year over year . Large deals from the from the first half , up 53% year over year .

Speaker #5: I think these are all good indicators that are corroborating the evidence that we're seeing in what's happening in in the hyperscaler results . And the ongoing demand for cloud and AI native workloads .

Speaker #3: Thank you . Our next question is from the line of Jake Rivera with William Blair . Please see with your question .

Speaker #13: Yeah . Thanks for taking the question . And congrats on the solid results . You talked about building some prudence in the back half just related to those large deals that you have in the pipeline .

Speaker #13: Can you talk about what some of the learnings have been from the past two years on these larger platform deals ? And whether you're starting to see an improvement in win rates and close rates as as you've been able to kind of tweak and adjust the model .

Speaker #6: It's a very good question . I mean , obviously every every year is going to be a little bit different . I think when we started , Jake , I want to say this might have been in a due for fiscal 24 , where we began to see this emergence and we didn't call it a trend .

Speaker #6: We said , is this emergence of of very large deals with customers that were considering vendor consolidation . And if you recall , we kind of rolled the table in that quarter .

Speaker #6: We actually , you know , we had an unbelievable close . I'd say we had a really strong close last Q4 . And I'd say what was an emerging trend became kind of a continued trend .

Speaker #6: And I'd say this is the momentum , the sales plays that we have has been the number one sales play for the company , and it's the number one sales play , because ultimately that's what customers are looking for .

Speaker #6: Customers are looking for someone that they can consolidate . What are a disparate set of tools ? So I think we're learning that this trend is real .

um when you look at the capability, uptake and expansion uh of non DPS customers,

Is there a deterioration in depth? Not because customers are doing less, but because the remaining cohort,

Uh are by definition less and less attracted, to the value proposition, for whatever reason that you're selling.

Yeah, I will take that. Um, so I think what we said before, um, relative to like where do we think? Ultimately um,

it will go as far as DPS penetration, and there are certain industries that DPS is problematic and that's in like government industries that

uh, they have to actually buy finite, um, fuses. Um, so we're working to see if there's a way to work around that, but I would say what we've said is that we think that we, you know, we should be able to get 80 to 85 of our business, um, onto a DPS contract. Now, if we can remove some of those, um, barriers that I mentioned, you could go even higher. I think of it as we've kind of said 80 to 85% of our business. Um, and I, I don't think there's any barriers relative to, you know, customers that are on skew to DPS. 1 of the things that we've done and remember, is we have been focusing on customers that have been going through.

New customers, won 80, plus percent of them, go to DPS. And for renewals, we were only focused on moving customers on a renewal to DPS if they were doing an expansion. So, if you were doing a like for like renewal, um, we were not moving them to DPS because we did not want to introduce friction into the process. We have adjusted that, um, um, effective. Um, this half that we are now going to be for customers that are even going to a like for like renew. We were having teams of people that are going to help in what I would say.

Portability of customers, moving more to DPS and so I think you're going to continue to see progress, I think we're going to have the, there's going to be a longer tail here between the 70% that we're at now and the 80 to 85. But again, all the proof points that we've talked about, you get them on DPS, they can try anything. On the platform we've proven that they have 2X the consumption growth rates, they have 2X the number of capabilities that they add and they have much, much higher nrr. So there's a good value proposition to continue to move them. Um, and I think we're, I think we're focused on all the right things.

Our next question comes from the line of Ryan. Rick Williams with Wells, Fargo. Please just to see if your question.

Hey guys, thanks for the question. I believe you mentioned more early DPS, customer renewals, and your remarks. I’d love to hear more color. If early renewals of BPS customers are impacting the Q3 subscription revenue guide and the ODC guide as well, I’d like to hear about those dynamics. Thanks.

Influence that, you know, at the end of the day, what I will say is we did make some, um, compensation changes for our sales force. In fiscal 26 where they get paid more for an are generating expansion and they do for an ODC. And so I think uh, inherently, they're more incentive to drive an an expansion. So our expectation is I think that motion will continue. Um I think we're getting in front of it with customers earlier when they're running hot on their consumption and trying to see if we can put something that's compelling for them, you can give them better unit price. If they increase their volumes and you're starting to see that play out and I expect that will continue

The next question is from the line of sanjit Singh with Morgan Stanley. Please proceed with your question.

Yeah, thank you for taking the questions on the 16% cost and currency that new our growth. I had a 2-part I apologize for it, but it's sort of around the same topic because wondering, if you could sort of, um, you know, sort of unpack, the Strategic collaboration with service now, and what your hopes for that relationship over the next year from a commercial perspective and then, secondly, more broadly when we think about, um, making that Evolution, uh, to that more, uh, proactive self-healing type system when you think about, um, capabilities around itsm, which are partnering with the leaders there. But also, when you think of like, okay, if we need to, um, Drive some code fixes, how do you

You think about sort of the DevOps platform; is that another area for partnership or a potential further organic expansion of the dietary platform?

Yeah, thanks, man. I'll take those. Uh, so first on the service now partnership, we are delighted with, um, with that, um, with that strategic collaboration that we announced a couple of weeks ago, you can think about it as service. Now connecting and automating workflows, we then, as data Trace provide, the precise answers to inform those workflows. So it really is an incredible opportunity even over the past couple of weeks I've met with, I don't know. Half a dozen customers, every single 1 of them mentioned, the the service. Now a relationship with Dino trace and wanting to leverage it to better connect our Solutions, we do Loosely coupled connections today but this collaboration with service now enables us to really engage much more deeply on the product side to provide a much better experience for joint customers and there's a huge overlap in our customer base with service now customers. So that's, uh, that's Point number 1. We are also, uh, also

Please that as part of that announcement, uh, we're deploying service now, service, now is deploying dining, trace for a digital or some of their digital operations. Uh, so that makes us essentially customer zero for on both sides for these Integrations. So we think that that will be a wonderful proof point to customers as to how to best use these Technologies together in a very symbiotic way. So that's on, uh, the service downside. As we look at sort of more proactive Integrations, uh, around code and others. We talked about, uh, we talked about GitHub, we talked about it last year. Our view of the world is quite simply that we have the answers that are trustworthy and precise. We will enable those answers to become exposed through a series of apis. Whether through an mCP server or otherwise we're either Dino Trace agents or third-party agents in the ecosystem. Be they through at I see in GitHub hyper.

Scaler service now to then take action as appropriate.

To then deliver deliver autonomous operations, and that is precisely what the evolution is. That we're seeing in observability 1 from reactive to proactive to predictive to, now, autonomous, and that is, this is our vision. This is the directional heading of observability. And this is where we can really deliver for customers software that, uh, as per our Vision works perfectly

The next question is from the line of Howard M with Google. I'm Securities pleased to see if your question.

Great. Uh, thanks for taking the question and I want to extend my congratulations on a strong quarter as well. My question is, do you think the sales comp change, uh, to incent are over on demand consumption is, is that the primary reason for customers opting to early renew? And is it the primary reason for the lower to ODC expectations and in the back half and On a related note are the expansions uh, tied to the early renewals of your expectations? Thank you.

Only driver, I certainly compensation does Drive Behavior, but at the end of the day, the customer has to be willing. And so, I think what we're, um, you know, now that we're a year into this. I think we're much more proactive with customers and understanding what's going on.

Within their environments from a consumption perspective. So, uh, I I think it's a good thing that the sales organization is very, um, tightly coupled with the customer around how their consumption is driving and working with them, is there a win-win where we can, uh, extend, um, our business with them and give them more favorable unit pricing as a result of that. And so I think it's, it's, you know, you as compensation probably does Drive some Behavior. But I also think that ultimately

It's much more proactive with customers in their journey and their life cycle around what they're doing around observability. I mentioned logs being an area new areas. New use cases sales is looking for those things and doing an early expansion. Um, you know, helps with that and whether or not it exceeded our expectations. The answer to that is yes, we it absolutely exceeded our expectations that we are, we've seen more of that than we even expected.

Thank you. Our final question comes from the line of Andrew Sherman with TD account. Please just use your question.

Okay, thank you. Uh, 1 for Jim. Uh, how would you compare and contrast your visibility now versus a year ago given where you've come with the go to market changes. Do you have better? Visibility sounds like certainly better sales, execution and close rates, anything else we we should consider as we look into the second half. Thanks.

That the great question, I would say, uh, visibility and confidence uh, is greater now than it was a year ago. Um, you know, that a year ago, we were kind of adding a lot of sales reps. We were

Kind of changing a bunch of things we were maturing that process. Uh, and we were beginning to see the the evidence of that at this time last year, you know, we're a year and a half into it now. Um, I think we are well established. I think the, um, our geographies are performing at a, at a very high level. Um, I think our visibility and focus on growing Pipeline and seeing that pipeline close is better than ever. Um, having said that, I, you know, going back to my point around, you know, when you have large deals like this, you factor in, you know, what is the, your timing certainty? So I feel really good. I I think we have good visibility, we have good conviction that we're going to have a a good back half to the year. Um well let's just see how it plays out.

All right. Well thank you all for your engagements and ongoing support. As always it blows we delivered a strong first half of fiscal year and we are confident in the foundational elements underpinning our growth. We look forward to connecting with you all at IR events over the coming months and we wish you all a very good day. Thanks for joining.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference, you may now disconnect your lines and have a wonderful day.