Earnings call transcript: Dynatrace Q2 2026 beats expectations with EPS and revenue

Dynatrace Inc reported its fiscal Q2 2026 earnings, surpassing Wall Street expectations with an EPS of $0.44 against a forecast of $0.41, marking a 7.32% surprise. Revenue also exceeded predictions, reaching $494 million compared to the anticipated $487.3 million, a 1.37% surprise. The company's stock responded positively in pre-market trading, rising by 2.92% to $51.08, despite closing the previous day at $49.63.

Key Takeaways

• Dynatrace's Q2 2026 EPS and revenue both exceeded forecasts.
• Pre-market stock price increased by 2.92% following the earnings release.
• Subscription revenue and Annual Recurring Revenue (ARR) both grew by 17% year-over-year.
• The company raised its full-year ARR growth guidance to 14-15%.
• Strategic partnerships and AI-driven innovations are key growth drivers.

Company Performance

Dynatrace demonstrated strong performance in Q2 2026, with total revenue growing 17% year-over-year. The company's focus on AI-powered observability and strategic partnerships has bolstered its competitive position in a rapidly evolving market. Subscription revenue, a significant component of its business model, also saw a 17% increase, underlining the company's robust growth trajectory.

Financial Highlights

• Revenue: $494 million, up 17% YoY
• Subscription revenue: $473 million, up 17% YoY
• Annual Recurring Revenue (ARR): $1.9 billion, up 16% YoY
• Non-GAAP operating margin: 31%
• Non-GAAP net income: $133 million
• Free cash flow (trailing 12 months): $473 million

Earnings vs. Forecast

Dynatrace's actual EPS of $0.44 surpassed the forecasted $0.41, resulting in a 7.32% positive surprise. Revenue also exceeded expectations, reaching $494 million compared to the forecast of $487.3 million, marking a 1.37% surprise. This performance highlights Dynatrace's ability to outperform market predictions consistently.

Market Reaction

Following the earnings announcement, Dynatrace's stock rose by 2.92% in pre-market trading, reaching $51.08. This increase contrasts with the previous day's close of $49.63, reflecting investor confidence in the company's financial health and growth prospects. The stock's movement aligns with its 52-week range, which spans from $39.3 to $63.

Outlook & Guidance

Dynatrace has raised its full-year ARR growth guidance to 14-15% and expects total revenue growth of 15-15.5%. The company anticipates continued momentum in large enterprise deals and has increased its non-GAAP operating income guidance to 29%. These revisions reflect Dynatrace's confidence in its strategic initiatives and market positioning.

Executive Commentary

Rick McConnell, CEO, emphasized Dynatrace's position as the "AI-powered observability platform for autonomous operations." CFO Jim Benson highlighted consumption growth as a key future indicator, stating, "Consumption is the underpinning for sales to go in and upsell a customer." These insights underscore the company's strategic focus on expanding its AI capabilities and customer base.

Risks and Challenges

• Market saturation in the observability sector could limit growth.
• Economic uncertainties may impact enterprise spending.
• Rapid technological advancements require continuous innovation.
• Competition from established cloud service providers poses a threat.
• Dependence on strategic partnerships for growth could introduce vulnerabilities.

Q&A

Analysts focused on consumption growth and early customer renewals during the Q&A session. The strategic account pipeline's 45% increase was a point of interest, indicating strong future growth potential. Analysts also inquired about tool consolidation opportunities, reflecting industry trends towards integrated solutions.

Full transcript - Dynatrace Holdings LLC (DT) Q2 2026:

Noelle, Earnings Call Moderator/Operator, Dynatrace: Good morning, and thank you for joining Dynatrace's second quarter 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 our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent quarterly report on Form 10Q and annual report on Form 10K. 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. Unless otherwise noted, the growth rates we discuss today are year-over-year and non-GAAP, reflecting constant currency growth, and per-share amounts are on a diluted basis.

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. With that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Rick McConnell, Chief Executive Officer, Dynatrace: Thanks, Noelle, 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. ARR 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 business. Dynatrace's consistent execution gives us the confidence to raise our ARR, revenue, and operating income outlook for the full year. Jim will share more details about our Q2 financial performance and guidance in a moment. 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.

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. Our vision has been consistent over the past years. To enable a world in which software works perfectly. By definition, that means that software must always be available. 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. Customers are increasingly seeking not just answers followed by manual resolution, but rather answer-driven automation to deliver and operate software that works optimally. The Dynatrace third-generation platform was built from the ground up to handle precisely the level of complexity and scale of modern cloud and AI-native environments, including the following core elements.

Grail, our massively parallel processing data lakehouse, is capable of analyzing billions of interconnected data points in near real time to deliver comprehensive situational awareness. Smartscape 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. Davis Copilot automatically generates remediation proposals. An 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. In this way, our AI-powered platform is enabling the next phase of observability for Dynatrace, which is autonomous operations.

In this business transformational phase, we take preventive operations to the next level by leveraging an ecosystem of agents, both from Dynatrace and third parties, to take action to maintain software reliability, security, and performance. 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. We see Dynatrace and the evolution of observability becoming a bridge to the agentic world for enterprises. As stated perhaps most succinctly, we see Dynatrace as the AI-powered observability platform for autonomous operations. With this evolution, Dynatrace will be able to orchestrate and supervise both internal and external AI agents to auto-prevent, auto-remediate, and auto-optimize.

We believe that 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. This has always been Dynatrace's biggest differentiator. Organizations will only allow autonomous action if it's based on precise, reliable answers, not loosely correlated data points. 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. 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, ultimately enabling an automated response. Our ability to analyze all observability data types, logs, traces, metrics, real user data, topology, 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. Whereas metrics and logs are often the data types of choice for infrastructure management, traces, a long-time strength of Dynatrace, become increasingly important for end-to-end inspection of agentic systems. The 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. Perhaps most importantly, though, we believe these elements together yield superior outcomes. Customers are rapidly extending these outcomes beyond technical analytics of software performance into true business observability. There is 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. In order to have that level of visibility, all telemetry, especially traces and logs, must be captured, enriched with context, and analyzed in real time at massive scale to prevent or instantly remediate issues. We are enabling AI to observe AI workloads through deep end-to-end observability. In sum, Dynatrace is rapidly progressing toward a future where our AI-powered platform does not just observe, but empowers organizations through knowledge, reason, and action. This is why organizations that are leading the evolution of AI are partnering with Dynatrace as a foundation for smarter, faster, and more reliable IT operations. 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. We are bringing together Dynatrace's AI-powered observability platform with ServiceNow's AI platform for business transformation to provide proactive, self-healing IT environments. This partnership enables IT management and operations with real-time, trustworthy, autonomous actions across the software delivery lifecycle. 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. 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.

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. 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. 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. Instead, Dynatrace provides 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. 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. In addition, as more customers look to migrate their existing logs to Dynatrace, we're investing to increase the speed of those migrations. Last month, we announced a partnership with Crest Data Systems to deliver a seamless, automated migration experience for customers moving to the Dynatrace platform. This enabled us, for example, to meet an aggressive timeline for a global financial services company by automating 70% of their dashboard migrations. Second, the investments we made last year to align our sales coverage around strategic accounts, pipeline, and partners continue to pay off. Our four-quarter pipeline for strategic accounts is up 45% versus last year. Bookings through strategic GSI partners doubled year over year. We saw a 53% increase in Q2 ACV from seven-figure deals compared to last year. 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. Our biggest new logo deal in APAC is one of Japan's largest banks. Fragmented tools and the complexity of their architecture were making it difficult for them to reduce mean time to resolution. With Dynatrace, they will now have an end-to-end view of their ecosystem to resolve issues more quickly. A major U.S. airline expanded its existing relationship with us 18 months after adopting Dynatrace to further consolidate tools, including logs, after seeing significant improvement in incident resolution and the benefits of end-to-end observability. A third growth driver is the Dynatrace platform subscription licensing model, or DPS. We reached a major milestone in the second quarter with 50% of our customers and 70% of our ARR now utilizing DPS.

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. This thesis has played out. With DPS customers adopting two times the number of capabilities, and at nearly double the consumption growth rates of those on a SKU-based model. Finally, overall platform consumption is a strong indicator of future expansions and is the primary compensation metric for our customer success team. 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. The observability 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. We deliver significant customer value, driving accelerating platform consumption. We continue to see momentum in our core growth drivers. We have a compelling business model which has enabled us to deliver a sustained balance of growth and profitability. Jim, over to you. Thank you, Rick, and good morning, everyone. Q2 was an excellent quarter across the board. We surpassed the high end of our top-line growth and profitability guidance metrics 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. 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. 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. Annual recurring revenue, or ARR, ended the quarter at $1.9 billion, representing 16% growth consistent with Q1. Q2 net new ARR 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. Execution was particularly strong in North America and Asia-Pacific, with many deals influenced and driven by our GSI partners. For the first half of the year, net new ARR was up 14% from a strong first half last year.

In Q2, we added 139 new logos to the Dynatrace platform, with an average ARR per new logo of over $140,000 on a trailing 12-month basis. 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 ARR growing well over 30% year over year. We continue to see accelerating consumption and adoption of the platform, with our average ARR per customer over $450,000, highlighting the criticality and business value we provide to customers. The strategic relevance of the Dynatrace platform is further reflected in our gross retention rate, which remained in the mid-90%. Net retention rate, or NRR, was 111% in the second quarter, 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 ARR now on this vehicle at the end of Q2. DPS has become our de facto contracting model. With access to the full platform, customers are adopting Dynatrace more broadly across their IT environments, resulting in increased consumption. Turning quickly to usage volumes on the platform, 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%. Further, DPS customers continue to consume at nearly 2X the growth rate and leverage 2X the number of capabilities compared to SKU-based customers. Contributing to that consumption rate, logs remains the fastest-growing product category, growing well over 100% year over year and rapidly approaching our $100 million milestone.

We believe there is plenty of momentum and runway into half two and beyond. 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. 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. In Q2, we saw more DPS customers expand early versus going on demand and contributing to our strong net new ARR result. ODC revenue came in at $7 million for the quarter, just shy of our expectation. 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 ARR.

Both contribute to subscription revenue, with ODC reflected immediately in ARR over time. Moving on to revenue, total revenue for Q2 was $494 million, and subscription revenue was $473 million, both up 17% and exceeding the high end of guidance by nearly 100 basis points, driven by strong net new ARR 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. Non-GAAP net income was $133 million, or $0.44 per diluted share, 3 cents above the high end of our guidance. We generated $28 million of free cash flow in the second quarter. Due to seasonality and variability in billings quarter to quarter, 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. As a reminder, this includes a nearly 700 basis point impact related to cash taxes. Pre-tax free cash flow on a trailing 12-month basis was 32% of revenue. 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. 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. 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.

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. Consumption growth continues to significantly outpace ARR 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. 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, 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 longer duration to close. Second, while observability demand remains resilient, the macro and geopolitical environment, particularly in AMEA, remains dynamic. With that as context, 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 ARR growth guidance by 100 basis points at the midpoint to 14%-15% growth in constant currency. Seasonally, we expect net new ARR to be weighted more towards Q4 than last fiscal year due to the mix in timing variability of large deals in the funnel. 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%-15.5% growth in constant currency. Given the half-to-one mix shift towards early expansions and ARR, 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%.

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. Finally, we are raising non-GAAP EPS guidance to a range of $1.62-$1.64 per diluted share, representing an increase of 4 cents at the midpoint of the range. This non-GAAP EPS is based on an expected diluted share count of 307-308 million shares. Looking to Q3, we expect total revenue to be between $503-$508 million. Subscription revenue is expected to be between $481-$486 million. As a reminder, we saw a notable increase in ODC revenue in Q3 and Q4 last year.

With the revision to estimated ratable redirect treatment this year, this will result in a headwind to revenue growth rates in our third and fourth quarters this year. From a profit standpoint, non-GAAP income from operations is expected to be between $143-$148 million, or 28.5%-29% of revenue. Lastly, non-GAAP EPS is expected to be $0.40-$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. The strategic adjustments and investments we made last year in our go-to-market strategy are taking hold and evidenced in the latest results. We are starting to see momentum in large deal activity and pipeline, accelerating consumption growth across the platform, ongoing traction in logs, broader DPS adoption, and a maturing of our strategic partner ecosystem.

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, we're 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. With that, we will open the line for questions. Operator. 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. If you'd like to ask a question at this time, you may press Star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star 2 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 keys. Thank you. Our first question comes from the line of Fatima Bhulani. What city? Please proceed with your question. 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 peel back the onion, so to speak, on some of the puts and takes there. 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? 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. Thank you. No, I'm happy to take that, Fatima. I'd start with we had a really strong net new ARR quarter. It grew 16% for the quarter, and it grew 14% for the half. So the business momentum is quite healthy in growing net new ARR. I think you know NRR is a kind of a trailing 12-month metric, and so it's going to take multiple quarters to significantly move NRR as a metric. NRR stabilized Q1 to Q2. We feel really good. 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. 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 pace. We are very optimistic about the underpinnings of the business. These metrics, NRR, if we continue to see the performance that we are seeing in consumption and these other areas, you will start to see movement in NRR, but it will happen over time. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question. Great, guys. Thanks for taking my question. Congrats on the strong quarter and increased guide. I had a question. 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 is paying dividends right now in terms of large deals.

I'm curious, when you think about sort of some of the capacity ads that you've added historically, could you talk to the level of productivity you're seeing there? And secondarily, with a strong Q2, I'm curious to see if the six-month quotas are doing what was intended, sort of improving linearity for the year. Thanks, guys. Happy to take that, Matt. It's actually two very good questions. You're absolutely right. We've been building on these go-to-market changes since basically Q1 of fiscal 2025. As you know, we talked about that we were making investments in the top of the pyramid where we had, on average, roughly 8-10 accounts per rep with very large customers. We made investments there to lower that to 4-5. We're seeing it in close rates. We're seeing it in pipeline. Yes, we are seeing a productivity lift from.

The investments that we made there. We are very, very pleased with that. 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 adjustment, either a little bit on go-to-market or even on maybe compensation plan design. Two, it also gives you an opportunity to improve on the seasonality of bookings. We saw a little bit of that last year. This is our second year of going through it. I think it's actually bearing out what we thought, which is it's showing an improvement in linearity of the business. This is not a matter of, hey, there was a lot of pull-ins from Q3 per se, but I just think there's an incentive for the sales organization twice a year to be in accelerators.

I think that's what you saw. I'd say both things are playing out as we were hoping. Thank you. The next question is from the line of Brad Rebeck with Stifel. Please proceed with your question. Great. Thanks very much. Rick, you alluded to the over 20% consumption growth in the base. Either for you or Jim, how should we think about the convergence of net new ARR and subscription revenue growth towards that 20%? What are the puts and takes as we look out over the next year or two? Thanks. Brad, I'd say the puts and takes are, as you know, we are a ratable revenue recognition business. When we book something, the subscription revenue gets amortized ratably. We are not a business that has revenue recognition on a consumption basis.

If we were, these growth rates that we're talking about for consumption for the company would be in the 20s. It does take time. You have to put more 20-plus % growth rates. Obviously, there's an element of your contract terms, and your contract terms and burning through commitments and going through expansions. It won't happen overnight. It'll happen over time. 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 go in and upsell a customer. We're seeing it play out. We're seeing it play out with early expansions. There's examples clearly that with DPS, they're able to trial different things on the platform. Logs notably.

You trial logs, 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. This customer did a huge expansion because they trialed a product category that was not really part of their initial configuration. You have a huge upsell, literally two years into a five-year deal. 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, our strike teams for logs, or DIM or security, that ultimately is going to be the underpinning. You will see over time a convergence of those growth rates with subs growth and ARR growth.

That might just add, Brad, that while we do not 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 ARR because it is an opportunity then to utilize fully DPS contracts. As we use those contracts, then renewals and expansions occur thereafter. 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. Next question is from the line of Eric Heath with KeyBank Capital Markets. Please proceed with your question. Hey, thanks for taking the question. And maybe just a clarification, Rick and Jim, just given the focus on consumption and that is accelerating, I mean, should consumption be the key metric that we focus on over ARR and subscription revenue as an indicator for.

Future acceleration looking into fiscal 2027? And then just curious on logs and how that contributed to the million-dollar ACV deals you did in the quarter. Thanks. I'll take that. We have a handful of metrics. What's my favorite metric? We have a handful of them. I would not say it's one metric. Certainly, ARR is very important. Ultimately, you need to get your go-to-market motion going, bring customers on the platform. Once they get on the platform, have your customer success and strike teams drive more adoption. Ultimately, the underpinning, I would say, of growth will be consumption. 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. It is not a metric that you see in the financial results. It's not a subs revenue.

It's not ARR or anything like that. It ultimately fuels an expansion, and it is an important metric to focus on. It's not the only one. There are other metrics, obviously, that we share. I think your other question was on logs. We are rapidly, and I say rapidly, very rapidly approaching $100 million. It is by far the fastest-growing product category. We have seen a doubling of customers from a year ago that now spend over $1 million with us. We have almost seen a 4x increase in customers that spend over $500,000 a year with us. We have a lot of customers now that are still under $100,000 that we have a huge opportunity to continue to expand with. We are very, very happy with the progress we are making in logs.

Yeah, just to add on to the logs piece, growing well more than 100% year over year on now, what is getting to be a much larger number, as Jim said, approaching $100 million in consumption. 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 and what they're doing today, but by incorporating logs into the overall observability mix and framework, we are delivering markedly better outcomes because you have logs, traces, metrics, really user data, all in the same data lakehouse. It results in better outcomes. That is what we're seeing across the board for the customers that have deployed at scale. Our next question is from the line of Mark Murphy with JP Morgan. Please proceed with your question.

Hey, this is Noah Hermanon from Mark Murphy from JP Morgan. Thanks for taking the question. Hope you're doing well. The constant currency net new ARR 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, whereas in prior years, it seems more of like a 40-60 split. Can you just maybe unpack that a little bit, the seasonality dynamics we should expect going forward? Thank you. Yeah, that's a good question. I mean, you're right. We've historically seen more like a 40-60 or 42-58. 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.

I think you're going to get closer to that because there's an incentive at the sales organization to improve linearity. We're actually seeing that. I would also say, to be fair, as I said in my opening remarks, we are not demand constrained. The pipeline is extremely healthy. This is, I think, the fifth consecutive quarter of an acceleration in our kind of four-quarter rolling pipeline. Pipeline trends in the demand environment are quite healthy. 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. That is also coming with very large deals and very large deal sizes. The timing variability for those deals is difficult to judge.

We appropriately built 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 2027. This is similar to what we talked about maybe a year ago. I would say the pipeline is even more weighted to large deals. We are very pleased with the pipeline. I think we just built some prudence. We will have to see how we execute. I am very optimistic with kind of the overall go-to-market improvements we have made and the pipeline that we are seeing across the business. Our next question is from the line of Patrick Holville with Scotiabank. Please proceed with your question. Rick and Jim, thank you for taking my question. I guess when I think about the big macro trends in IT right now, it is accelerated public cloud migrations.

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, net new ARR, constant currency this year versus the back half of last year, we're in a much better spot. I guess as it relates to these kind of macro trends, are we seeing, have we passed an inflection point for Dynatrace to really kind of ride this tidal wave of those macro trends? Or is this a case of net new ARR has been whipped around in the past and don't over-index on these last two quarters? Yeah, I guess what I would say is kind of similar to the remarks I just made, which is the demand environment is very healthy.

To your point about macro trends, I think we're seeing that play out in what is a significant increase in the overall pipeline and pipeline health of the business. I kind of anchor you on that. I'd anchor you on we had a very strong Q2, a very strong first half. Is this a, "Hey, we don't think it's going to be as good in the back half"? I don't want that to be the takeaway relative to this guide. I think we've built some prudence into the fact that as more deals become larger, we just built some timing variability into this. We'll see how we progress in the back half of the year. I don't think it's a demand environment element. I think the demand environment is quite healthy. I think we are poised to benefit from that.

We just built some prudence into the execution of these large deals. Yeah, Patrick, 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, elements like strategic account pipeline up 45% year over year, large deals from the first half up 53% year over year. I think these are all good indicators that are corroborating the evidence that we're seeing and what's happening in the hyperscaler results and the ongoing demand for cloud and AI-native workloads. Thank you. Our next question is from the line of Jake Rivera with William Blair. Please proceed with your question. 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.

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 you've been able to kind of tweak and adjust the model? It's a very good question. I mean, obviously, 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 Q4 of fiscal 2024, where we began to see this emergence. And we didn't call it a trend. We said it was an emergence of very large deals with customers that were considering vendor consolidation. If you recall, we kind of rolled the table in that quarter. We actually had an unbelievable close. I'd say we had a really strong close last Q4.

I'd say what was an emerging trend became kind of a continued trend. I'd say this is the momentum, the sales plays that we have. This has been the number one sales play for the company. It's the number one sales play because ultimately, that's what customers are looking for. Customers are looking for someone that they can consolidate what is a disparate set of tools. I think we're learning that this trend is real. I think our sales force is well equipped. I think the company is well equipped to benefit from this. I'd say our win rates are quite high because I think we have a very compelling proposition. I think we're in a good place. I think it's just a matter of you got to the timing variability of these things varies because of the size of these deals.

You have to go through a kind of extra level of approval. I'm optimistic of our chances and our win rates, but we're just building some caution just into timing. Jake, I would say at a very tactical level, the interest that we see from CXOs of major organizations around the globe is increasing at a very rapid rate. I have literally done dozens and dozens of CXO meetings around the globe over the prior three months. The interest and mission criticality of observability has never been higher in my observation. That continues to drive things. What I would say is they're all interested in one or more of three things. They're interested in end-to-end observability, which is driving tool consolidation, opportunity for more efficiency, better outcomes, lower cost. Secondly, they're interested in AI observability and deploying observability for AI workloads.

Thirdly, they're interested in business observability, extending observability overall to include business events that give them a better handle on the business well beyond what's just happening technically in their software stacks. These are core themes that really have evolved, I think, over the prior year. Thank you. Our next question is from the line of Matthew Martino with Goldman Sachs. Please proceed with your question. Hey, good morning. Thanks for taking my question. Great to see the momentum in the business. Rick, you highlighted an AI-native win in your prepared remarks. Can you share a bit more on what attracted this customer to the Dynatrace platform? Are you starting to see more potential opportunities within the AI space? If you could contextualize that for us. Thanks a lot. Yeah, that's a great question. Let me sort of parse it into a couple of components.

First, you have the companies that are our typical customers that are deploying AI workloads. Those customers, we have in the hundreds already. They're deploying AI workloads using Dynatrace to provide observability. What you're getting at a little bit are the AI-native companies that have developed against AI workloads. That is where that is evolving rapidly. We are now deeply embedding with AWS services like Bedrock, Azure services like OpenAI and Foundry, Google services like Vertex, NVIDIA's AI infrastructure, etc. We are targeting more with our third-gen platform developer capabilities. This is expanding interest in Dynatrace. Overall, what they're most interested in is getting deterministic answers that enable agentic action. This is what I talked about earlier in the prepared remarks. You cannot take action in an agentic world if you don't trust the underlying answers.

This is where we say answers, not guesses. You have to know what the answers are in order to be able to take action. I think this is what is increasingly attracting AI-native companies to Dynatrace because that is foundational in how they need to operate the businesses autonomously as they look forward. Our next question is from the line of Itay Kidjon with Oppenheimer. Please proceed with your question. Thanks, and best results, guys. A couple of small ones for me. First of all, Rick, do you have a point of view? Clearly, you're making very good progress with DPS adoption, 50% customers, 100% of ARR. Do you have perhaps an updated point of view on where those metrics could peak for you guys, number one? And number two, when you look at the capability uptake and expansion of non-DPS customers, is there a deterioration?

In that, not because customers are doing less, but because the remaining cohort are by definition less and less attracted to the value proposition for whatever reason that you're selling. Yeah, I'll take that. So I think what we said before, relative to where do we think ultimately it will go as far as DPS penetration? There are certain industries that DPS is problematic, and that's in government industries that they have to actually buy finite fuels. We are working to see if there's a way to work around that. I would say what we've said is that we think that we should be able to get 80-85% of our business onto a DPS contract. If we can remove some of those barriers that I mentioned, you could go even higher.

Think of it as we've kind of said 80-85% of our business. I don't think there's any barriers relative to customers that are on SKU to DPS. One of the things that we've done, remember, is we have been focusing on customers that have been going through new customers. One, 80-plus % of them go to DPS. For renewals, we were only focused on moving customers on a renewal to DPS if they were doing an expansion. If you were doing a like-for-like renewal, we were not moving them to DPS because we did not want to introduce friction into the process. We have adjusted that. Effective this half, we are now going to be, for customers that are even going through a like-for-like renewal, we were having teams of people that are going to help in what I would say.

Portability of customers moving more to DPS. I think you're going to continue to see progress. I think we're going to have there's going to be a longer tail here between the 70% that we're at now and the 80-85%. Again, all the proof points that we've talked about, you get them on DPS, they can trial 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. They have much, much higher NRR. There's a good value proposition to continue to move them. I think we're focused on all the right things. Our next question comes from the line of Ryan McWilliams with Wells Fargo. Please proceed with your question. Hey, guys. Thanks for the question. I believe you mentioned more early DPS customer renewals in your remarks.

Love to hear more color if early renewals of DPS customers are impacting the Q3 subscription revenue guide and the ODC guide as well. Love to hear about those dynamics. Thanks. Yeah, you're right. You picked up on Q2 was a quarter where, again, very strong net new ARR quarter. I'd say a big piece of that is we did see customers that were on a DPS contract that renewed early. I mentioned a large global airline. They were one. We had many of them. You go back to consumption. You get them on the platform. You get teams working with them on driving adoption and consumption. Ultimately, good things will happen. That's what we're seeing. You're right. There is a dynamic between whether a customer does an early expansion or whether they maybe go on demand.

We can't really influence that at the end of the day. What I will say is we did make some compensation changes for our sales force in fiscal 2026 where they get paid more for an ARR-generating expansion than they do for an ODC. I think inherently, they're more incented to drive an expansion. Our expectation is I think that motion will continue. 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 and give them better unit price if they increase their volumes. You're starting to see that play out. I expect that will continue. The next question is from the line of Sanjeet Singh with Morgan Stanley. Please proceed with your question. Yeah, thank you for taking the question.

Thank you for asking on the 16% constant currency net new ARR growth. I had a two-parter. I apologize for it. It's sort of around the same topic. Rick, I was wondering if you could sort of unpack the strategic collaboration with ServiceNow and what your hopes are for that relationship over the next year from a commercial perspective. Secondly, more broadly, when we think about making that evolution to that more proactive, self-healing type system, when you think about capabilities around ITSM, which you're partnering with the leaders there, but also when you think of, okay, if we need to drive some code fixes, how do you think about sort of the DevOps platform? Is that another area for partnership or a potential further organic expansion of the Dynatrace platform? Yeah, thanks, Sanjeet. I'll take those.

First, on the ServiceNow partnership, we are delighted with that strategic collaboration that we announced a couple of weeks ago. You can think about it as ServiceNow connecting and automating workflows. We then, as Dynatrace, provide the precise answers to inform those workflows. It really is an incredible opportunity. Even over the past couple of weeks, I have met with, I do not know, half a dozen customers. Every single one of them mentioned the ServiceNow relationship with Dynatrace and wanting to leverage it to better connect our solutions. We do loosely coupled connections today, but this collaboration with ServiceNow enables us to really engage much more deeply on the product side to provide a much better experience for joint customers. There is a huge overlap in our customer base with ServiceNow customers. That is point number one. We are also.

Pleased that as part of that announcement, we're deploying ServiceNow. ServiceNow is deploying Dynatrace for digital or some of their digital operations. That makes us essentially customer zero on both sides for these integrations. 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. That is on the ServiceNow side. As we look at sort of more proactive integrations around code and others, we talked about GitHub. We talked about Atlassian. 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, for either Dynatrace agents or third-party agents in the ecosystem, be they through.

Atlassian, GitHub, Hyperscaler, ServiceNow, to then take action as appropriate to then deliver autonomous operations. That is precisely what the evolution is that we're seeing in observability, one from reactive to proactive to predictive to now autonomous. That is our vision. This is the directional heading of observability. This is where we can really deliver for customer software that, as per our vision, works perfectly. The next question is from the line of Howard Mott with Google and I'm Securities. Please proceed with your question. Great. Thanks for taking the question. I want to extend my congratulations on a strong quarter as well. My question is, do you think the sales comp change to incent ARR over on-demand consumption, is that the primary reason for customers opting to early renew? Is it the primary reason for the lower to ODC expectations in the back half?

On a related note, are the expansions tied to the early renewals above your expectations? Thank you. It is tough to gauge whether compensation is the only driver. Certainly, compensation does drive behavior. At the end of the day, the customer has to be willing. I think now that we are a year into this, we are much more proactive with customers and understanding what is going on within their environments from a consumption perspective. I think it is a good thing that the sales organization is very tightly coupled with the customer around how their consumption is driving. Working with them, is there a win-win where we can extend our business with them and give them more favorable unit pricing as a result of that? I think, yes, compensation probably does drive some of the behavior.

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. Doing an early expansion helps with that. Whether or not it exceeded our expectations, the answer to that is yes. It absolutely exceeded our expectations that we've seen more of that than we even expected. Thank you. Our final question comes from the line of Andrew Sherman with TD Cowen. Please proceed with your question. Oh, great. Thank you. One for Jim. 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 should consider as we look into the second half? Thanks. That's a great question. I would say visibility and confidence is greater now than it was a year ago. 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. And we were beginning to see the evidence of that at this time last year. We're a year and a half into it now. I think we are well established. I think our geographies are performing at a very high level. I think our visibility and focus on growing pipeline and seeing that pipeline close is better than ever. Having said that, going back to my point around when you have large deals like this, you factor in what is your timing certainty. So I feel really good.

I think we have good visibility. We have good conviction that we're going to have a good back half to the year. We'll just see how it plays out. All right. Thank you all for your engaged questions and ongoing support, as always. To close, 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.

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