Dynatrace, Inc. (DT) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call shows strong financial performance with a 17% revenue increase and a 31% non-GAAP operating margin. Despite some concerns about net retention rate, the Q&A reflects optimism about future growth, supported by strategic go-to-market changes and robust ARR bookings. The company's focus on AI and cloud trends further strengthens its position. The raised non-GAAP EPS guidance and strong cash flow also contribute to a positive outlook. Given these factors, a positive stock price movement is anticipated over the next two weeks.
Key Financial Performance
Annual Recurring Revenue (ARR) $1.9 billion, representing 16% growth year-over-year. This growth was driven by strong expansion and new logo bookings, particularly in North America and Asia Pacific, with many deals influenced by GSI partners.
Net New ARR $70 million, up 16% year-over-year. This was driven by strong expansion and new logo bookings across geographies.
Subscription Revenue $473 million, up 17% year-over-year. This increase was driven by strong net new ARR bookings.
Total Revenue $494 million, up 17% year-over-year. This was driven by strong net new ARR bookings.
Non-GAAP Operating Margin 31%, exceeding the top end of guidance by 150 basis points. This was driven mostly by revenue upside flowing through to the bottom line.
Non-GAAP Net Income $133 million or $0.44 per diluted share, $0.03 above the high end of guidance. This was driven by strong revenue performance.
Free Cash Flow (Trailing 12-Month Basis) $473 million or 26% of revenue. Pretax free cash flow was 32% of revenue. This reflects strong cash generation despite a 700 basis point impact related to cash taxes.
Log Management Revenue Rapidly approaching $100 million in annualized consumption, growing more than 100% year-over-year. This growth was driven by a unified data model and increased customer migrations to Dynatrace.
Net Retention Rate (NRR) 111%, in line with the prior quarter. This reflects strong customer retention and expansion.
Average ARR Per Customer Over $450,000, highlighting the criticality and business value provided to customers.
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Operating Highlights
AI-powered observability: Dynatrace's platform has evolved to preventive operations, enabling software to self-heal and anticipate issues before they impact users. The platform includes technologies like Grail, Smartscape, Davis, and Davis Copilot for comprehensive situational awareness and automation.
Autonomous operations: Dynatrace is advancing towards autonomous operations, leveraging AI to maintain software reliability and performance with minimal human intervention. This includes orchestrating internal and external AI agents for auto-prevention, remediation, and optimization.
Log management: Log management is the fastest-growing product category, growing over 100% year-over-year and nearing $100 million in annualized consumption. Dynatrace's unified data model allows for faster root cause analysis and more accurate insights.
Strategic partnerships: Dynatrace announced a multiyear collaboration with ServiceNow to advance autonomous IT operations and intelligent automation. It also integrated with Atlassian for real-time production insights and joined GitHub's Model Context Protocol Registry to enhance debugging and software improvements.
Geographic performance: Strong execution in North America and Asia Pacific, with significant deals including a major Japanese bank and a U.S. airline expanding their relationship with Dynatrace.
ARR and subscription revenue growth: Annual Recurring Revenue (ARR) grew 16% to $1.9 billion, and subscription revenue grew 17%. The average ARR per customer exceeded $450,000.
DPS licensing model: 50% of customers and 70% of ARR now utilize the Dynatrace Platform Subscription (DPS) model, leading to broader adoption and increased consumption.
Consumption growth: Platform consumption grew over 20%, outpacing subscription revenue growth. DPS customers consumed at nearly double the growth rate of SKU-based customers.
Tool consolidation: Dynatrace is capturing demand for large-scale tool consolidations, enabling customers to reduce costs and improve efficiency.
AI workload observability: Dynatrace is focusing on observing AI-native workloads, addressing the complexity of interactions among AI agents and preventing issues like hallucinations.
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Risk or Challenges
Macroeconomic and Geopolitical Environment: The macroeconomic and geopolitical environment, particularly in EMEA, remains dynamic, which could impact demand and deal closures.
Pipeline Weighting Towards Larger Deals: The pipeline is increasingly weighted towards larger, more strategic tool consolidation opportunities, which creates increased timing variability and longer durations to close deals.
Customer Contract Behavior: Customer decisions to consume on demand or renew early can vary, leading to unpredictability in revenue recognition and ARR growth.
Log Management Market Disruption: The rising cost of legacy log management solutions and the need for seamless migrations could pose challenges in capturing market share.
Dependence on Strategic Partnerships: The company's growth is tied to strategic partnerships with GSIs, hyperscalers, and other partners, which could introduce risks if these partnerships do not perform as expected.
Adoption of AI Workloads: The complexity of AI-native workloads and the need to prevent issues like hallucinations require significant investment in observability solutions, which could strain resources.
Consumption Growth Variability: While consumption growth is strong, it is subject to variability based on customer adoption rates and the timing of expansions.
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Guidance & Outlook
Annual Recurring Revenue (ARR): Raised full-year ARR growth guidance to 14%-15% in constant currency, reflecting confidence in growth drivers and strong first-half performance.
Revenue Growth: Increased full-year total revenue and subscription revenue growth guidance to 15%-15.5% in constant currency.
Operating Margin: Raised full-year non-GAAP operating margin guidance to 29%, reflecting an $8 million increase in non-GAAP operating income guidance.
Free Cash Flow: Maintained full-year free cash flow margin guidance at 26%, with expectations for Q4 to be more weighted than historical levels.
Earnings Per Share (EPS): Increased full-year non-GAAP EPS guidance to $1.62-$1.64 per diluted share, up $0.04 at the midpoint.
Q3 Revenue: Projected Q3 total revenue between $503 million and $508 million, with subscription revenue between $481 million and $486 million.
Q3 Operating Margin: Expected Q3 non-GAAP operating margin between 28.5% and 29% of revenue.
Q3 EPS: Guided Q3 non-GAAP EPS to $0.40-$0.42 per diluted share.
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Shareholder Return Plan
Share Repurchase Program: Dynatrace has a $500 million opportunistic share repurchase program. In Q2, the company repurchased 994,000 shares for $50 million at an average share price of just over $50. Since the inception of the program in May 2024 through September 30, 2025, Dynatrace has repurchased 5.3 million shares for $268 million at an average share price of just over $50.
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Key Q&A
Q:Why is the net retention rate (NRR) lagging despite favorable business momentum?
A:NRR is a trailing 12-month metric, so it takes multiple quarters to show significant movement. While NRR stabilized from Q1 to Q2, the company is optimistic about its growth due to strong net new ARR, go-to-market changes, and increasing consumption.
Q:What is the productivity impact of go-to-market improvements and the 6-month quotas?
A:The go-to-market changes have improved productivity, with close rates and pipeline growth reflecting these efforts. The 6-month quotas have improved linearity in bookings and allowed for midyear adjustments, aligning incentives for the sales organization.
Q:How should we think about the convergence of net new ARR and subscription revenue growth towards 20%?
A:The company operates on a ratable revenue recognition model, so subscription revenue growth lags behind consumption growth. Over time, as consumption grows and contracts expand, there will be a convergence between these metrics.
Q:Should consumption be the key metric to focus on over ARR and subscription revenue?
A:Consumption is a critical metric as it underpins growth and drives expansions, but it is not the only important metric. ARR and other metrics also play significant roles in evaluating performance.
Q:What is the contribution of logs to $1 million ACV deals?
A:Logs are rapidly approaching $100 million in consumption and are the fastest-growing product category. The number of customers spending over $1 million has doubled, and those spending over $500,000 have quadrupled year-over-year.
Q:What are the seasonality dynamics for the second half of the year?
A:The company expects more balanced seasonality compared to prior years due to the 6-month quota system. However, prudence has been built into the guidance due to the timing variability of large deals.
Q:Are macro trends like cloud migration and AI benefiting the company?
A:Yes, the demand environment is healthy, and the company is well-positioned to benefit from trends like cloud migration and AI. The pipeline and large deal activity reflect this momentum.
Q:What are the learnings from large platform deals over the past two years?
A:The trend of large deals driven by vendor consolidation is real and growing. The company has high win rates due to a compelling value proposition, but timing variability remains a factor.
Q:What is the company's approach to AI-native opportunities?
A:The company is embedding with AI services like AWS Bedrock and Azure OpenAI. AI-native companies are attracted to Dynatrace for its ability to provide precise answers that enable autonomous operations.
Q:What is the outlook for DPS adoption and non-DPS customer expansion?
A:DPS adoption is expected to reach 80-85% of the business. The company is focusing on moving even like-for-like renewals to DPS, which has proven to drive higher consumption and NRR.
Q:Are early DPS renewals impacting financial guidance?
A:Yes, early DPS renewals have contributed to strong net new ARR. The sales force is incentivized to drive ARR-generating expansions, which has exceeded expectations.
Q:How has visibility and confidence changed compared to a year ago?
A:Visibility and confidence have improved due to mature go-to-market changes, better pipeline growth, and strong sales execution. However, timing variability of large deals is still a consideration.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific reasons why NRR is lagging despite favorable business momentum, providing only general explanations about the trailing nature of the metric and the time required for improvement.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ACV figure
AI Gartner
AI complexity
AI development
AI environment
AI foundation
AI intelligence
AI interaction
DPS
ServiceNow
ability observability
action software
auto
cause
domain
enterprise AI
evolution AI
experience
future
incident
infrastructure
integration
metric
migration
mission
observability analytics
observability type
order
organization AI
outcome
party
platform phase
production insight
resolution
root
self
software reliability
topology
update driver
visibility
workload AI
world
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The earnings call shows strong financial performance with a 17% revenue increase and a 31% non-GAAP operating margin. Despite some concerns about net retention rate, the Q&A reflects optimism about future growth, supported by strategic go-to-market changes and robust ARR bookings. The company's focus on AI and cloud trends further strengthens its position. The raised non-GAAP EPS guidance and strong cash flow also contribute to a positive outlook. Given these factors, a positive stock price movement is anticipated over the next two weeks.
DT Slides
DT Report
Frequently Asked Questions
Where does this earnings call transcript come from?
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