Dynatrace (DT -0.24%), a software company specializing in AI-powered observability and automation tools for large enterprises, released its results for Q1 FY2026 on August 6, 2025. The main news was that revenue and Non-GAAP earnings per share both fell short of Wall Street expectations, with GAAP revenue of $477 million versus analyst estimates near $534 million, and Non-GAAP earnings per share of $0.42 compared to a $0.43 estimate. Despite missing consensus, the company posted 20% GAAP revenue growth year over year and improved non-GAAP profitability for FY2025. Overall, Dynatrace continued to grow its core recurring business, saw substantial adoption of its platform subscription model, and delivered solid margins, but the gap between company guidance and Street expectations stood out this quarter.
| Metric | Q1 FY26(Ended June 30, 2025) | Q1 Estimate | Q1 FY25(Ended June 30, 2024) | Y/Y Change |
|---|---|---|---|---|
| EPS (Non-GAAP) | $0.42 | $0.43 | $0.33 | 27.3% |
| Revenue | $477 million | $533.78 million | $399.2 million | 19.5% |
| Subscription Revenue | $457.5 million | $381.6 million | 19.9% | |
| Non-GAAP Operating Margin | 30% | 29% | 1.0 pp | |
| Free Cash Flow | $262 million | $227.4 million | 15.2% |
Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q4 2025 earnings report.
Dynatrace’s Business and Recent Areas of Focus
Dynatrace delivers software that helps organizations monitor, analyze, and automate their complex IT systems. Its core platform uses artificial intelligence (AI) and automation to give customers real-time insights into cloud and hybrid IT environments. The company’s products are designed to help businesses detect problems, optimize performance, and respond rapidly to incidents in their applications and infrastructure.
Recently, Dynatrace has concentrated on expanding its advanced AI capabilities within its platform, broadening cloud integration, and encouraging customers to adopt its flexible subscription model. The company’s main success drivers include scalable AI features, tight partnerships with leading system integrators and cloud providers, and a seamless shift to consumption-driven pricing through its Dynatrace Platform Subscription (DPS) program. Key focus areas also include automation and broad ecosystem partnerships.
Key Developments and Performance in the Quarter
Dynatrace posted total revenue of $477 million (GAAP), a 20% increase from the prior-year Q1. Subscription revenue saw similar growth at nearly 20%. Annual recurring revenue (ARR), a metric measuring the rate of predictable, contracted income, reached $1.82 billion, growing at 18% year-over-year and further cementing the company’s subscription-focused model. Despite beating its own management guidance, both headline revenue (GAAP) and Non-GAAP EPS were below consensus analyst estimates. Specifically, GAAP revenue fell short by about 10.6%, and Non-GAAP EPS missed analyst estimates by 2.3%.
Operating efficiency remained a notable strength, with Non-GAAP operating margin improving to 30%. Free cash flow reached $262 million. However, free cash flow margin (non-GAAP) declined slightly from 57% in Q1 FY2025 to 55%, which management attributed to ongoing investments and some seasonality in customer billing and payments. The company reported $269.7 million in GAAP net cash provided by operating activities, about 56% of revenue (GAAP).
Adoption of the DPS model continued to expand, with over 45% of customers and more than 65% of ARR now running on this flexible subscription format. Management highlighted that DPS users typically consume more platform features and often spend more over time, helping to drive further revenue growth. As of Q4 FY2025, DPS customers consumed, on average, 12 capabilities compared to 5 for SKU-based customers, and the average ARR per DPS customer was over $600,000. Notably, Dynatrace closed 12 large expansion deals worth over $1 million annually, with 10 of those involving partners. About half of these large deals included significant deployments of the company’s Log Management product family, which centralizes data from system logs and integrates it with other operational insights.
The company continued to advance its AI-powered observability tools, led by its “Davis AI” engine designed for analytics and automated incident response. Dynatrace launched new agentic AI capabilities aimed at giving IT teams more autonomous control and resource efficiency, including features to prevent and adapt to infrastructure issues before they impact operations. The Dynatrace platform also saw expanded integrations with cloud providers, including NVIDIA’s Enterprise AI Factory, Amazon Bedrock, OpenAI, and Red Hat, bolstering its hybrid and AI-native positioning in the observability market.
In terms of recognition, Dynatrace earned “Leader” status in the 2025 Gartner Magic Quadrant™ for Observability Platforms for the 15th consecutive year and was named a “Customers’ Choice” by Gartner Peer Insights. Management noted that Log Management, which gathers and analyzes huge volumes of machine-generated event data, is the fastest-growing part of Dynatrace’s platform. Management expects log management to post over 100% growth, with log-related consumption projected to exceed $100 million. This area is now used by over one-third of the company’s customer base.
The company also reported buying back 905,000 shares at a cost of $45 million, as part of its ongoing $500 million repurchase program. Since program inception in May 2024, Dynatrace has repurchased 4.4 million shares for $218 million.
Looking Ahead: Guidance and Expectations
For fiscal 2026, management raised guidance, now expecting total revenue between $1.97 billion and $1.985 billion, and Non-GAAP EPS in the $1.58–$1.61 range. These increases were driven mainly by a favorable foreign exchange effect, which management estimates will add about $29 million to revenue and $34 million to ARR. Free cash flow guidance remains at $505–$515 million, translating to a free cash flow margin of 26% (non-GAAP).
Total revenue for Q2 FY2026 is projected to reach $484–$489 million, a 16–17% increase over the prior year’s second quarter. Management reported no change in the Non-GAAP operating margin outlook, which is still pegged at 29% for the full year. Given the move to the DPS consumption-oriented model, the company expects some variability in revenue and growth rates from quarter to quarter.
Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.
