Logo of jester cap with thought bubble.

Image source: The Motley Fool.

DATE

Wednesday, May 13, 2026, at 8 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Rick McConnell
  • Chief Financial Officer — James Benson

TAKEAWAYS

  • Annual Recurring Revenue (ARR) -- $2.05 billion at quarter-end, representing 16% growth for a fourth consecutive quarter, with foreign exchange headwind of $4 million relative to guidance.
  • Net New ARR -- $81 million in Q4 (constant currency), totaling $277 million for the year, up 12%, with consistent double-digit half-over-half increases.
  • Log Management Consumption -- Annualized log consumption exceeded $100 million, growing over 100% in every quarter, meeting publicly stated targets.
  • Deal Size -- Record 22 deals with incremental annual contract value over $1 million and an average land size above $200,000; nine of these deals were new customer logos.
  • Customer Growth -- Added 126 new logos in Q4, with new logo ARR up 43% in the quarter and 30% for the second half.
  • DPS Licensing Model Penetration -- Over 75% of ARR and 60% of customers now on Dynatrace platform subscription (DPS) model; DPS customers deliver double the adoption and consumption rates versus non-DPS customers.
  • Gross and Net Retention -- Gross retention rate remained in the mid-90% range; trailing 12-month net retention rate (NRR) was 110%.
  • Operating Margins -- Q4 non-GAAP operating margin was 27%, with full-year non-GAAP operating margin at 29%, including targeted efficiency improvements.
  • GAAP Operating Income -- Q4 included $28 million in restructuring and impairment charges attributed to workforce reductions and office footprint rationalization.
  • Stock-Based Compensation -- Composed just under 15% of revenue in fiscal 2026, more than 100 basis points below prior year; planned decrease to under 14% in 2027.
  • Free Cash Flow -- $529 million for the year, or 26% of revenue, with pretax free cash flow at 32% of revenue after adjusting for cash taxes.
  • Share Repurchases -- Repurchased 11.4 million shares for $479 million (90% of free cash flow), with $849 million remaining under the $1 billion authorization as of March 31.
  • Guidance for Fiscal 2027 -- ARR expected between $2.38 billion and $2.4 billion (up 15.5%-16.5%), net new ARR of $320 million to $340 million (16%-23% growth), subscription revenue between $2.22 billion and $2.24 billion (up 14%-15%), and non-GAAP operating margin at 29.5%.
  • Q1 2027 Guidance -- Total revenue between $540 million and $551 million, subscription revenue from $523 million to $527 million, non-GAAP operating margin of 27.5%-28%, and non-GAAP EPS of $0.44-$0.45 per diluted share.
  • Platform Adoption Metrics -- Over 500 customers using agented capabilities for autonomous operations; more than 850 customers employing the platform to observe AI and LLM workloads in production.
  • Large Account Motion -- Focused expansion in Global 500 accounts will extend to an additional 150 strategic customers to improve coverage and drive pipeline development.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

  • Q4 GAAP operating income was negatively impacted by $28 million in restructuring and impairment charges, directly attributed to workforce reductions and office rationalization initiatives.
  • Guidance includes a 100 basis point headwind in gross margin due to increased cloud hosting costs from higher platform consumption, which management characterizes as "temporary" but notes will be offset only over time by cost efficiency initiatives.

SUMMARY

Dynatrace (DT 11.32%) ended the year with ARR surpassing $2 billion, highlighting stable 16% year-over-year growth and achieving record high-value contract activity. Management detailed significant operational momentum from expanded large-enterprise wins and a deepening transition to the DPS model, with cross-portfolio platform adoption and consumption continuing to accelerate. Log management posted over $100 million in annualized consumption for the first time, while integration and expansion in agentic AI and developer-focused functions broadened addressable opportunities. Fiscal 2027 guidance signals further acceleration in net new ARR, driven by both organic demand and AI-led market trends, while margin projections reflect near-term cloud cost pressures and an active capital return program.

  • The company completed acquisitions in feature management and telemetry pipeline technology, directly enhancing platform capabilities and developer integration.
  • Management confirmed that cloud hosting expense growth will temporarily suppress gross margins; projects are underway to restore historical profitability levels in the following year.
  • Dynatrace maintained leadership in all referenced third-party analyst reports for observability and AI Ops, as stated by management during the call.
  • Capital allocation remains balanced between innovation investment and share repurchases, as evidenced by the doubled buyback authorization and action in Q4.
  • Pipeline coverage entering the new fiscal year is "healthy," with management expecting stronger net new ARR weighting toward the first half based on current visibility.

INDUSTRY GLOSSARY

  • DPS (Dynatrace Platform Subscription): A usage-based licensing model that provides full access to the Dynatrace platform suite, enabling broader platform adoption and deeper feature consumption.
  • Agentic AI: Advanced AI architecture where software agents, either human- or AI-led, autonomously take action across IT and software environments using context-rich observability data.
  • Grail: Dynatrace's extensible AI-driven data lakehouse that connects telemetry and operational data across enterprise environments to power real-time analytics and autonomous operations.
  • Smartscape: A real-time topology graph within the Dynatrace platform that maps and monitors dynamic IT environments for contextual insights and analytics.

Full Conference Call Transcript

Rick McConnell: Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Dynatrace delivered a strong finish to fiscal 2026 marked by meaningful scale, durable execution and continued innovation. In particular, we surpassed $2 billion in ARR and delivered our fourth consecutive quarter of 16% ARR growth. We drove continued traction in logs, now well over $100 million in annualized consumption growing more than 100% per year. We launched major platform innovations, including Dynatrace intelligence and domain-specific AI agents. We advanced our cloud native integrations across AWS, Azure and GCP, moving operations from reactive monitoring to autonomous action.

We extended our Agentic AI ecosystem with native connectivity to Anthropics Claude Code, deepened our integration with ServiceNow and broadened developer workflow integrations with GitHub CoPilot. We acquired Dev cycle, a feature management company as well as buying plan, an open standards-based telemetry pipeline company as we entered the new fiscal year. We maintained a leadership position in all major third-party analyst reports for observability and AI Ops, and we delivered robust operating and pretax free cash flow margins. Our consistent performance in fiscal 2026 underscores the growing criticality of observability, the strength of our strategy and the value of our platform to customers.

Jim will share more details about our Q4 financial performance and fiscal 2027 guidance in a moment. In the meantime, I'd like to cover 4 topics: how AI is reshaping the observability market, why we believe Dynatrace is unique, Q4 customer highlights and the growth opportunity ahead. To begin, observability is entering a new era, one in which observability is more mission-critical than ever, but a new set of demands is reshaping what observability must deliver. Observability has already become foundational for enterprises looking to deliver business resilience amidst growing workload complexity and data volumes. And increasingly, organizations are looking to leverage their observability solution to evolve toward autonomous operations. enabling software to auto prevent, auto remediate and auto optimize.

Adopting this approach requires organizations to trust the accuracy of the data that fuels agents to take action. Deterministic and causal insights from Dynatrace allow our platform to become the system of record, so the development and SRE teams and increasingly AI agents can act with confidence to deliver what we refer to as answers, not guesses. Beyond business resilience, organizations now need observability for reliable AI. The former addresses the question of is it working? The latter addresses the question of, is it accurate, namely, he's the content coming from AI models trustworthy in driving action and/or credible in providing recommendations to end users.

AI also adds yet another layer to the software stack increasing the need for more observability. Enterprises are deploying new agents, models, orchestration layers and agentic architectures that behave differently than traditional systems. Their environments generate dramatically more telemetry, connect decisions across agents and introduce probabilistic behavior that must still operate safely, securely and at enterprise scale. Organizations now require continuous validation of system and agent behavior, governance and auditability of autonomous decisions, cost control across GPU-intensive infrastructure and strong security management. As a result, software development life cycles are evolving as well, requiring organizations to operate in 2 modes. The first is human-led with development teams building and operating resilient systems.

These teams are increasingly augmented by AI-powered observability that drives intelligent automation, agentic workflows and progressively more autonomous operations. We continue to invest to expand our reach in this area by extending left to provide development teams platform engineers and SREs with the observability functionality needed to put workloads into production faster. Second mode is agent-led, resulting in AI-first environments in which agents themselves are primarily acting as the builders and operators. In this environment, observability insights are consumed directly by the agents in the creation and oversight of delivered software. And those insights are crucial to the effective and trustworthy operation of the environment.

We believe the winner and observability will be the provider that can meet the needs of both human-led and agent-led environments with a shared system of truth that spans both modes across AI, cloud native and traditional workloads. This is the moment for which the Dynatrace platform has been built, serving customers in both modes with the trust and accuracy that autonomous operations demand and the reliability that AI-driven initiatives require is exactly what the Dynatrace platform was built to do. So why do we believe Dynatrace is unique? It is because our advantage is architectural, not feature-based.

Dynatrace has built as a real-time context engine that operates at massive scale across millions of monitored entities and exabytes of data all connected and all in real time. By combining deterministic AI with Agentic capabilities, we deliver faster, more accurate insights that approaches that rely on agenda I alone. This level of intelligence, speed and efficiency cannot be achieved with point solutions that offer visibility without causality. And this is why so many of the largest organizations in the world rely on Dynatrace. As enterprises increasingly operate in agent-led environments, this architectural advantage compounds.

Every new workload, AI service and agent added to the Dynatrace platform deepens causal context, strengthens autonomous reasoning, and extends the gap between fragmented visibility and the unified intelligence that only Dynatrace delivers. That intelligence is built on 3 integrated components of our third-generation platform. Grail has an extensible AI data lake house that connects every signal across an enterprise's digital environment. Smartscape as the real-time integrated topology graph and Dynatrace Intelligence delivering both answers as well as action. Together, these 3 elements provide durable competitive differentiation or other providers that add capabilities across stage data stores, it's difficult to reproduce a unified data foundation with real-time causality plus trustworthy automation in the most complex mission-critical environments.

And certainly extremely difficult to do so in the time frame AI demands. We now deliver agents across 3 domains, and customers are already using them in production to coordinate agents to take end-to-end action. Our SRE agent handles tasks such as Kubernetes troubleshoot and infrastructure optimization and automated incident resolution. Our developer agent supports use cases that surface production contacts during deployment, validate changes and prevent issues before they reach customers. And our security agent identifies vulnerabilities triaging threats and accelerating security of response, all in real time.

That intelligence extends beyond the Dynatrace platform itself, ecosystem integrations then enable agentic interactions to extend Dynatrace intelligence into third-party tools from ServiceNow and GitHub to the hyperscalers to drive autonomous actions across development, SRE, ITSM and IT ops workflows. With separate Dynatrace's agents from others is the deterministic foundation underneath real root cause analysis, anomaly detection and forecasting grounded in Grail. That's not AI that guesses, it's AI that reasons from facts. More than 500 customers are deploying Dynatrace's agented capabilities to run operations autonomously and extend that intelligence into AI development tools like quad code and GitHub CoPilot.

At the same time, more than 850 customers are using Dynatrace to observe and bus AI and LOM workloads in production today. Enterprises aren't just managing their environments with the Dynatrace platform. They're using it as the intelligent foundation for AI agents across their ecosystem, creating a critical role for Dynatrace as AI adoption accelerates. This momentum is increasingly evident in customer wins across multiple buying personas, highlighting 4 examples from Q4. One of the largest banks in Brazil signed a 7-figure expansion and is standardizing on Dynatrace with 100% open telemetry data flowing into Grail, choosing Dynatrace for an open, scalable architecture with a clear runway for broader platform expansion.

Another large U.S.-based airline selected Dynatrace as a 7-figure new logo through a partner originated opportunity. They chose Dynatrace to consolidate a complex multi-vendor environment to improve business absorbability outcomes and reduce operational disruption. A leading hospitality SaaS provider consolidated onto Dynatrace as a 7-figure new logo, displacing legacy tooling and invoking end-to-end visibility across their cloud native platform. And an AI native security platform selected Dynatrace as a 7-figure new logo to deliver end-to-end observability across AWS. Together, these wins reflect increasing demand for an end-to-end AI-powered observability platform in the most complex environments. Looking ahead, our strategy is to win with both human-led and agent-led operating modes on a single platform.

Our product and go-to-market approaches reflect this dual reality. Combining enterprise engagement focused on business outcomes with a strong developed promotion that enables genic workflows to expand at scale. This strategy leads us to an expanded set of growth drivers for FY '27. First, our go-to-market investments in both direct sales and partner enablement have improved productivity and deal quality. End-to-end platform deals are getting larger and more strategic with Q4 annual contract value of anchor deals up 60% with a record 22 deals with incremental annual contract value over $1 million. EPS, which now represents greater than 75% of ARR also continues to produce double the platform adoption and consumption of non-DPS customers.

Second, cloud growth is an accelerating tailwind with the major hyperscalers now growing at 40% annually. As customers scale hybrid and multi-cloud architectures across AWS, Azure and Google Cloud, Dynatrace's expanding cloud native integrations and automation drive sustained platform usage as complexity and scale increase. Third, logs and telemetry pipelines represent a meaningful consumption and displacement opportunity. With our bind plan acquisition now complete and resulting in expanded ingest from open telemetry, we are simplifying telemetry collection and routing at scale, reducing friction for customers to bring more data into Dynatrace and we are accelerating time to value plus consumption growth. Fourth, agentic AI itself is an expansion driver.

As in genetic development accelerates, customers need more context, precise answers, governance and closed-loop automation, areas in which Dynatrace is structurally advantaged. And finally, develop our long-term growth engine through the integration of Dynatrace's observability into AI development cycles, including support for Quadcode, [indiscernible] and GitHub Copilot. With our dev cycle acquisition, we extend this opportunity even further expanding Dynatrace's footprint earlier in the life cycle and driving durable usage over time. To close, observability is already mission-critical infrastructure for AI-driven enterprises. Context and domain knowledge make Dynatrace not only durable, but essential in an AI first world.

We believe we are uniquely positioned with a differentiated end-to-end platform, providing the intelligence engine in AI control plane that produce both insights as well as autonomous action. The tailwinds in cloud and AI plus Dynatrace specific growth drivers, we are focused on accelerating ARR growth in fiscal 2027 and enthusiastic about the year ahead. Jim, over to you.

James Benson: Thank you, Rick, and good morning, everyone. As we close out fiscal '26, I want to take a moment to reflect on the execution and underlying momentum for Dynatrace over the past year. At the start of the fiscal year, we laid out a road map designed to put the company on the path to ARR acceleration. We talked about the growing trend of large enterprise customers seeking end-to-end observability solutions. The maturation of our go-to-market transformation. The powerful consumption economics of our Dynatrace platform subscription or DPS licensing model, the expanding opportunity in logs and the secular tailwinds driving observability adoption in an AI first world.

All of these were strategic underpinnings to stabilize ARR growth in fiscal '26 and position us for future acceleration. Let me walk you through a few milestones that define fiscal '26. We achieved 4 consecutive quarters of consistent ARR growth at 16%. We delivered double-digit net new ARR growth for the first time in 3 years. We now have over 75% of ARR and 60% of customers on the DPS licensing model. We exceeded our $100 million log management annualized consumption goal growing 100% plus year-over-year in every quarter of the year. We delivered a robust 29% non-GAAP operating margin for the year while making targeted investments focused on accelerating growth and improving scale.

And finally, we stepped up our share repurchase program doubling our authorization to $1 billion in February and spending over $478 million in fiscal '26, representing 90% of our free cash flow. Collectively, these achievements demonstrate the building momentum in the business and our confidence and conviction that ARR acceleration in fiscal '27 is in our sights. Let's review the Q4 and full year results in more detail. Growth rates mentioned will be year-over-year and in constant currency, unless otherwise stated. Annual recurring revenue, or ARR, ended the year at $2.05 billion representing 16% growth for the fourth consecutive quarter. This ARR result reflects a foreign exchange headwind of $4 million compared to our guidance.

Adjusting for foreign exchange movements, Q4 net new ARR was $81 million, coming in near the high end of guidance. A net new ARR for fiscal '26 was $277 million, representing 12% growth with consistent double-digit growth in the first and second half of the year. This healthy performance was driven by strength in new logo bookings growing momentum in logs and ongoing success in capturing large end-to-end consolidation opportunities. We added 126 new logos in Q4 and including a record 9 7-figure lands as we continue to target new logos in large enterprise accounts with a higher propensity to expand.

The average land size in Q4 remained robust at over $200,000 and helped drive new logo ARR up 43% in the quarter and up 30% for the second half. Our value proposition continues to resonate with enterprise customers outgrowing their existing DIY and commercial tooling solutions. They are seeking business value from tool consolidation. And coming to Dynatrace for the depth, breadth and automation of our unified AI-powered observability platform. Once customers experience the benefits of the Dynatrace platform, they have been quick to expand their usage. Our average ARR per customer is now over $500,000.

With cross-sell and upsell opportunities still ahead of us in our enterprise base, we believe the average ARR per customer opportunity should be $1 million or more over the long term. Gross retention rate in Q4 remained in the mid-90s and underscoring the value of the Dynatrace platform as mission-critical infrastructure our customers depend on. Net retention rate or NRR on a trailing 12-month basis was 110% in the fourth quarter. Our DPS licensing model has now become our contracting standard. As I mentioned earlier, we exited the year with over 75% of our ARR and over 60% of our customer base on DPS.

With access to the full platform, customers are adopting Dynatrace more broadly across their IT environments, resulting in increased consumption. We continue to see a broader usage and deeper penetration of capabilities across the platform, notably in log management, which remains the fastest-growing product category, growing over 100% and exiting the year well over $100 million in annualized consumption. We expect fiscal '27 to be another year of robust consumption of the platform. Moving on to revenue. Total revenue for Q4 was $532 million, and subscription revenue for Q4 was $506 million, both up 16% and exceeding the high end of our guidance range by 200 basis points. Turning to profitability.

Q4 non-GAAP operating margin was 27% and above our guidance of 26%. Non-GAAP net income was $124 million or $0.41 per diluted share, $0.02 above the high end of guidance. In our GAAP results, please note that our Q4 GAAP operating income includes $28 million in restructuring and impairment charges, primarily reflecting actions to align our cost structure with our strategic growth and scale priorities. These actions included targeted workforce reductions and impairment charges from office footprint rationalization. Turning now to a quick summary of the full year results. Total revenue was $2.02 billion and subscription revenue was $1.93 billion, both growing 17%. Non-GAAP operating margin came in at 29%.

We continue to drive scalability in the business model while investing for growth and scale with some years driving more leverage than others, while we sequence investments and expected returns. Over the past 4 years, we have expanded operating margins over 400 basis points, and our margin profile is well above peers of similar scale. We also continue to drive efficiencies in our management of equity compensation. Fiscal '26 stock-based compensation as a percent of revenue was just under 15% and representing a decrease of more than 100 basis points from fiscal '25 levels. Non-GAAP net income for the full year was $518 million or $1.70 per diluted share.

Our non-GAAP earnings factored in an effective cash tax rate of 18.5%. Free cash flow was $529 million or 26% of revenue. above the high end of guidance and roughly 100 basis points above fiscal '25. As a reminder, this strong cash flow margin includes absorbing points of impact due to cash taxes. We are somewhat unique relative to most software companies given our strong GAAP profitability and therefore, pay more in cash taxes. Excluding cash taxes to provide an operational compare closer to our peer group, pretax free cash flow for fiscal '26 was 32% of revenue. Moving to our share repurchase program.

In addition to doubling the size of our share repurchase authorization to $1 billion in February, we significantly increased the level of buybacks in Q4, repurchasing 5. 9 million shares for $224 million compared to roughly $160 million in Q3. This uptick in spend reflects our conviction in the company's operational momentum, long-term growth and cash flow trajectory and view that our shares are undervalued. For the year, we repurchased 11.4 million shares for $479 million, representing 90% of our free cash flow. As of March 31, we had approximately $849 million remaining the $1 billion authorization, and we plan to continue to take a disciplined approach to capital allocation, investing in innovation and growth while delivering value to shareholders.

Turning to our fiscal '27 outlook. We entered the year with high conviction, fueled by a rapidly expanding market. The shift towards Agentic AI and autonomous operations has made observability a foundational requirement. Further, intensifying vendor consolidation, inclusive of log management plays directly to our strengths as enterprises trade tools sprawl in favor of an AI-enabled end-to-end platform that can deliver a compelling ROI. We believe our fiscal '26 results prove we are winning and exiting the year in a position of strength. We have stabilized ARR growth, delivered double-digit net new ARR growth and continue to improve our go-to-market execution. With these building blocks in place, we are well positioned to sustain and improve our current momentum.

Now let's turn to our full year guidance. We expect ARR to be between $2.38 billion and $2.4 billion, representing ARR growth of 15.5% to 16.5%. This ARR guide implies full year net new ARR adjusted for foreign exchange movements of $320 million to $340 million, growing 16% to 23% and accelerating from fiscal '26 levels. While we don't provide quarterly ARR guidance, we expect net new ARR to be modestly more weighted to the first half of the year compared to historical seasonality as we entered the year with healthy forecasted pipeline coverage. As usual, we'll revisit our full year ARR outlook once we get closer to the midpoint of the fiscal year. Turning to revenue.

We expect total revenue to be between $2.32 billion and $2.34 billion. Underlying that, subscription revenue is expected to be between $2.22 billion and $2.24 billion, both up 14% to 15%. Note, our total revenue and subscription revenue growth rates are impacted by a difficult fiscal '26 compare from the change in accounting for on-demand consumption revenue and other miscellaneous onetime revenue true-ups. We expect non-GAAP operating margin of approximately 29.5%. Unpacking operating margins, we continue to drive efficiency gains across all functions notably in sales and marketing and G&A. This operating margin guidance includes 150 basis points of additional OpEx leverage versus fiscal '26.

This scalability is expected to be partially offset by a headwind of 100 basis points in gross margins from an increase in cloud hosting costs driven by robust consumption growth within our customer base. We expect this margin pressure to be temporary as we execute on defined projects to improve our cloud cost efficiency with gross margins beginning to recover during fiscal 2018. Another important area of leverage is stock-based compensation. We expect stock-based compensation as a percentage of revenue to once again decreased by 100 basis points in fiscal '27 to just under 14%.

We expect non-GAAP net income to be $584 million to $594 million, resulting in non-GAAP EPS of $1.93 to $1.95 per diluted share. based on 302 million to 304 million shares outstanding. Our effective cash tax rate is expected to be 18.5%. We expect free cash flow margins of 26.5% and pretax free cash flow margins of 32%. As a helpful reminder for your model due to seasonality and variability in billings, we expect free cash flow to be significantly higher in the first and fourth quarters and significantly lower in the second and third quarters.

Looking to Q1, we expect total revenue to be between $54 million and $551 million and subscription revenue to be between $523 million and $527 million. As I noted earlier, our Q1 total revenue and subscription revenue growth rates are impacted by a difficult compare from the change in accounting for on-demand consumption in Q1 last year. Non-GAAP operating margin is expected to be 27.5% to 28%. Lastly, non-GAAP EPS is expected to be $0.44 to $0.45 per diluted share based on a share count of 298 million to 299 million shares. In closing, the strength of our Q4 and fiscal '26 performance sets a solid foundation for fiscal '27.

The secular growth drivers fueling the observability market continue to expand in our AI posts and improving efficiency. At the same time, we will continue to invest in future growth opportunities that we expect will drive long-term value. With that, we will open the line for questions. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Matthew Martino with Goldman Sachs.

Matthew Martino: Maybe to start, and I appreciate the setup on kind of the fiscal 2027 outlook. But when we look at kind of the Q4 net new ARR, it came in around 9% on a constant currency basis. and the fiscal '27 guide implies a fairly meaningful step-up in the net new from here. Can you walk us through the bridge between the Q4 exit and what's embedded in the FY '27 growth algorithm? And ultimately, the role the renewal cohorts around DPS are going to play in terms of getting used to that full year guide?

Unknown Executive: Sure, I'll take that, Matt. That's a good question. I think what I would tell you is that we had a very solid Q4. We had a great half 2. We had a great fiscal year. So there's underlying momentum building in the business. If you kind of step back and you say, what did we do in fiscal '26. And I outlined it in the prepared remarks, it's a year of milestones in a year first. We stabilized ARR growth at 16%. We showed double-digit net new ARR growth for the first time in 3 years. Logs, well over $100 million, growing 100%. The go-to-market traction is building. You've seen it in large deals.

Record new logo lands over $1 million. DPS now over 75% of our ARR. Consumption growing at a very rapid rate. . I outlined 2 years ago that we were going through a fixed stabilized accelerate kind of journey. And we're in the -- we finished the stabilization. If you look at this guide, you're right, this guide implies almost double the net new ARR growth from fiscal '26 levels. And it's all of the building momentum that we've seen. So it's not anything new like we need some new play. This is just a continued execution of the existing play. So Q4 was a solid finish.

You're going to have quarters that are like that, you're going to have quarters that are more robust than that. I can tell you that pipeline is healthy. forecasted coverage is good. There's just significant interest. So I think it's just a continued building of what we've been doing. We talked about this with our go-to-market changes 2 years ago. They're starting to take root, and we expect that, that will continue. And I would say, Matt, that AI tailwinds, agent tailwinds, cloud tailwinds are also contributing to our view of FY '27. So it's a combination of internal growth as well as market factors overall.

Operator: Our next question comes from the line of Eric Heath with KeyBanc Capital Markets.

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

James Benson: Yes. I'd say from a macro perspective, you know as well as I do that certainly, there's a lot going on in the Middle East right now. I would not say that had any material impact on the quarter, something that we're monitoring, for sure. for our EMEA business. But I would say nothing notable. Relative to EPS, again, DPS even beyond kind of -- it is the contracting standard. Now that we have 75% of our ARR on that. And as we outlined that when you get customers on this vehicle, you can now team them up with our customer success teams and our strike teams to drive consumption and consumption continues to grow at a very rapid rate.

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

Operator: Our next question comes from the line of Will Power with Robert W. Baird.

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

Rick McConnell: Yes. A lot of questions in there. Well, we'll attack them. So the architectural advantages, we typically will talk about rail as a completely integrated, massively parallel processing data lake counts. We talk about Smartscape as an integrated top logical graph that can provide analytics in context. We talk about Dynatrace Intelligence, which we launched back in January is covering really 2 elements of the spectrum -- first element of the spectrum being around determines [indiscernible]. And then the second regarding agentic AI, where we actually can take action. What all of that is driving to is a completely integrated, fully unified platform that enables our customers to move into an agentic world successfully.

And that agentic world enables autonomous operations to take hold, which is what they need to be able to manage increasingly complex overall IT environments and software workloads. So we believe that, that architectural advantage is durable, and we believe it's sustainable. And that when you get into manual tagging of data stores across multiple data stores, you end up with an environment that is much more fractured. So that was piece number one. With regard to AI natives, we have been focused mostly in the history of Dynatrace on IT operations, on CXOs.

That's how we've ended up with end-to-end observability and that's when we get into these larger deployments for large customers where we've been incredibly successful with the go-to-market plan over the last couple of years which we initially deployed. That is evolving to include developers. And we've made huge strides in the platform beginning 18 months ago, with new implementations around elements like we mentioned last quarter like Bedrock aging core integration or [indiscernible]. This quarter, we talked about cloud code integrations now assist headed into AI control tower. So we continue to evolve the platform to enable more developer adoption, that developer adoption opens and unlocks the opportunity with AI natives, which we're driving along with developers now.

And finally, you mentioned agentic. Agentic is certainly a very strong opportunity for us in multiple ways. Number one, as it's driving us toward autonomous operations in our existing core base of enterprise deployments. But secondly, also in, as I mentioned, a brand-new way of development, we see a sea change in a movement from software development life cycles to AI development life cycles and we believe that observability fundamentally is going to be a core foundation of that. We also believe that Dynatrace based on our architecture, going back to my first remarks, has an opportunity to be a primary participant in that shift from the software development life cycle to the AI DLC. Three different questions.

So I try to attack all 3 of them, but good question.

Operator: Our next question comes from the line of Mark Murphy with JPMorgan.

Unknown Analyst: This is [indiscernible] JPMorgan on for Mark Murphy. You mentioned closing a record 22 deals with more than $1 million ACV in 9 of those were new logos. We had a couple of chances over the quarter that mentioned momentum in the Dynatrace business and new logos, largely logo specifically. So I'd love to kind of hear what you think is driving some of the momentum with the large deals and new customer lands at scale? .

Unknown Executive: I'll take that. I think one of the things that we've been talking about, I think I began talking about it probably 2 years ago, I talked about it as an emerging trend of these very large enterprises that had fragmented DIY and commercial tooling solutions so that we're looking to vendors for consolidation, both for economic benefits and also just a better customer experience. And so that trend has continued. And I would say, especially in very large customers that there is huge interest. There is significant interest in integrating fragmented tools to save money. There is money to be had when you can go from multiple vendors to one vendor.

And you can get a better experience with Dynatrace for all the reasons that we've outlined. So that trend has continued. I'd say the changes we made in the go-to-market side we're developing much better and deeper relationships with C-level decision makers. These are the people that make these decisions. And so it actually is a market tailwind moving in that direction. And we're in a good position to benefit that from the platform depth and breadth that Dynatrace provides. And so I expect that, that will continue.

Operator: Our next question comes from the line of Koji Ikeda with Bank of America.

Koji Ikeda: Jim, maybe a question for you. When I look at past transcripts and the way you characterized the guidance was you always used the word prudent. And I noticed this time you did it. And I look at -- you definitely talked about much stronger net new ARR growth this year. And so I just wanted to ask, has the guidance philosophy changed with the removal of the word prudent. And if so, why now?

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

Operator: Our next question comes from the line of Matt Hedberg with RBC Capital Markets.

Matthew Hedberg: Rick, I wanted to come back to some of the first couple of questions that were asked. And referencing your script, there's a lot of positivity about industry trends and why the Dynatrace architecture is well positioned to capture that. But I think -- the question people keep asking me is, given those, why aren't you growing faster? I think NRR was maybe a little bit lower than what people are thinking. And I guess I'm just wondering, like, is there a lag between enterprise AI and inferencing spend and ultimately, your observability products? Like is it just a timing thing that's holding you back from better growth?

Unknown Executive: [indiscernible] question, Matt. I do think that there is a bit of timing difference between what we're seeing in the enterprise and what AI natives are seeing. I think that is with regard to, for example, a genetic deployment, agentic usage. As I said in my remarks, we're already seeing 500 customers plus deploying and using our agent capabilities. We've got now more than 850 customers that are using us to evaluate the reliability and trust of AI and LLM workloads. So in the enterprise, we certainly are beginning to see that kind of adoption.

And we believe that, that adoption will, of course, through the DPS mechanism get deployed into the numbers over the course of time, DPS, as you know, does have a bit of a lag with regard to expansions, vis-a-vis a straight consumption model, which is why we see some of the delta between our consumption numbers with those being in the low -- or in the 20%-plus range relative to ARR. So that's some of what you see with regard to AI natives.

This is where I believe the new evolution evolutionary elements and development capabilities in the platform will facilitate us expanding to the developer expanding the AI natives more aggressively as we look and we're beginning to see some of that momentum in the AI native as well.

Operator: Our next question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow: Perfect. And can you talk a little bit to -- on the large customer momentum that sounded like a very good outcome this quarter? And I was also surprised on the new customers that came up straight into launch. Is that something that you're seeing now as your offering that a lot broader, the platform pricing kind of makes adoption really nicely there. Is that something that you see in the pipeline as well?

Rick McConnell: Yes. I mean, Raimo, I'd simply say it's all of the above, and I kind of answered it previously that large enterprise customers are looking for vendors to consolidate on to be able to integrate fragmented tools and provide a better experience. And if you come even more so when you move into an AI first world. And so we're in a great position to be able to do that. And so I would say the go-to-market changes that we've made have allowed us to go access and penetrate those opportunities. One thing I will tell you is that while we're not making radical go-to-market changes at all for fiscal '27, it's a continuation of what we've been doing.

The traction that we've made in our large strategic accounts, which is think of them as the Global 500, we're going to extend that motion down probably to another 150 or so customers, where we're going to improve the density of coverage and get closer to customers to be able to drive either new logos or expansions with these existing customers by getting closer to them. And so I think it's just -- it's a phenomena of what's happening just in the industry that large customers are looking for vendors that they can consolidate on that, and we have a very unique position to be able to give them both better economics and a better kind of business outcome.

James Benson: Yes, I would just add, Raimo, that I believe that point product observability is dead or at least dying. And that's why we see some of the ongoing expansion that we saw this quarter and that we see in the pipeline related to end-to-end observability. And we have a great proven solution there for large enterprises to deploy. And it's at the data layer, it's a domain layer -- it's at the persona layer, all of those layers are looking for end-to-end observability because that is what is enabling the best outcomes of observability, number one.

And number two, it is a necessity as you look to an agentic future to be able to leverage that underlying fabric in order to deliver the genetic future that's expected leading toward autonomous operations.

Operator: Our next question comes from the line of Ittai Kidron with Oppenheimer & Company.

Ittai Kidron: Jim, I had a couple of things that I may do so hopefully you can clarify on the fiscal '27 guide you made a comment that net new ARR is going to be weighted towards the first half. I'd love to get some color on this again, where the deals...

Unknown Executive: You're breaking up. I can't hear you.

Ittai Kidron: [indiscernible] for OTC. If you could break that down, that would be great.

Unknown Executive: Yes, I couldn't hear the question. The only thing I heard in the question was the first half. I think you said, could I clarify the commentary about maybe net new ARR being a little bit more weighted to the first half. And I would say it's modest, but I'd say we wanted to make sure we provided some color on that. I think it's mostly a function of -- we have very strong forecasted pipeline coverage. It continues to build. And so I think what we're signaling is that we expect to have a good start to the year. Not just for Q1 but also for Q2.

Obviously, your visibility over the next 3 to 6 months is greater than over the kind of beyond that. And I'd say what you see is this is just growing visibility and confidence around what we can deliver. .

Operator: Our next question comes from the line of Sanjit Singh with Morgan Stanley.

Sanjit Singh: I wanted to get back to some of the drivers that you're seeing in the core business. Clearly, vendor consolidation tool consolidation, is a sales motion that you guys have been executing very well on and has probably been the driver of enterprise large deals for the last couple of years. To what extent is the business seeing the impact yet? Or do you expect to see the impact from just the big in [indiscernible] is just software development initiatives with these coding agents getting adopted, not even if we just even exclude the [indiscernible], but even in the enterprise, you're seeing quite strong adoption of coding agents and that should drive more software creation.

When do you think that ultimately drives -- emerges as another core driver for AR growth for business?

Unknown Executive: Yes, I'll take that, Sanjit. Absolutely, as we mentioned in the prepared remarks, I think the whole notion of AI evolution is a core driver. The ability to use AI coding agents is critical -- we talked about the integration into Claude Code, for example, as a mechanism for that for debugging root cause analysis, those sorts of elements. So we do see this going through a few stages, whereas today, they're using coding assistance, coding is done at least in part, by AI systems and AI capabilities. We see that transitioning to an AI DLC where the primary builders of code are, in fact, agents themselves where agents are building and operating code.

And so we are going to go through rapidly this process evolving through a software development life cycle in our perspective, all the way through an AI DLC. We absolutely are seeing momentum in this area in the enterprise with our customers. That's where I had talked about the 500 customers or so already using us to do genetic integrations. So we're seeing this and the expectation during FY '27 is that, that will be a growth driver, driving actually increased and accelerated ARR.

Operator: Our next question comes from the line of Keith Bachman with BMO Capital Markets.

Keith Bachman: I wanted to ask a clarification and a question. Jim, if you don't mind, could you just relate what you think the NRR will be for '27? I'm just trying to back into the net new guidance? And then my broader question, Rick, for you is when I think about Dynatrace, you've made progress in logs, maybe a little less so in security in terms of at least for investors the visibility we have with that potential. But when I think about you versus your nearest publicly traded competitor, I think there's been more meaningful product expansion. And so I just wanted to see philosophically with Grail out there.

How do you think about the product expansion opportunity over the next couple of years, particularly now with an activist involved who may be looking for more margin expansion. But if you could just speak to your product expansion philosophy over the next couple of years?

James Benson: Let me take the front end of that, Keith, and then I'll let Rick comment on the broader question. So we don't guide specifically between new logo and expansion or NRR. You should expect that it's going to be similar to what we've had historically, which is net new ARR is going to be roughly 1/3 new logos, 2/3 expansions. As you've seen this year, sometimes it may be weighed more towards one towards than the other. I think that's a function of reps are compensated on maximizing bookings, whether it be new logos or expansions.

And so that's one of the reasons we don't guide, but I can certainly look at it that if you look at the historical levels, that's roughly what we're going to operate. And so to your point, if you look at the high end of the guide, which is net new ARR growth of 23% or 24%, you're going to see it both on the expansion side and on the new logo side.

Rick McConnell: And Keith, on the broad product acceleration front, what I would say is there's been a huge amount of innovation in the Dynatrace platform over the last couple of years. Of course, we've delivered Grail, foundational data lake house. We've talked about that. We delivered Dynatrace Intelligence back in January. This is a major setup for an Agentic operations system that can allow for [indiscernible] truly autonomous operations, leading to the evolution of overall development through an AI DLC. Dynatrace Intelligence is really a foundational enabler of that. . As you mentioned, we have logs. The logs capability is quite substantial, as Jim mentioned in his remarks, now well above $100 million, growing at more than 100%.

So huge amount of opportunity there, bringing logs into an end-to-end observability platform. We believe to be quite foundational to getting end-to-end observability right as a foundation for the agentic future, talked about AppSec. We don't say -- we haven't said as much about AppSec. It is absolutely a relevant ongoing investment thread for us not growing as fast as the log front, but we do see ongoing convergence of observability and security use cases.

And so we're focused on those -- and I would say now that our third gen platform continues to emerge and be more mature, you're going to see any further acceleration in innovation around feature set and functionality for add-on capabilities in the platform as we look at.

Operator: Our next question comes from the line of Patrick Colville with Scotiabank.

Patrick Edwin Colville: I guess maybe this one to both Rick and Jim. If I look at the financial model, we had a lot of questions on the top line. I just want to kind of zoom in on the bottom line, in fact, the guidance you gave us helpful commentary that expecting GMs to come down slightly in fiscal '27 due to cloud hosting costs. Could you mind us unpacking why that is exactly?

And then also just maybe just zooming out, like what is the philosophy on profitability as of May 2026 because Dynatrace is wonderfully profitable, but we've been at levels that have been consistent now for about 2 years and you're guiding to kind of flat again in fiscal 2027. So how are you thinking about that aspect of the business?

Unknown Executive: I'll start with Patrick, that we continue to drive efficiency in the business, which is why I mentioned that if you look at operating expenses, this guide implies 150 basis points of incremental leverage in operating expenses. We are going through a bit of a, I'd say, a year with gross margins which is kind of -- I'd say it's a good news, bad. The good news is what's driving that is robust consumption of the platform. And so all the reasons we talked about that consumption is growing rapidly, growing significantly faster than ARR growth. There is a lag between when you see that in an expansion. And when you see that show up in revenue.

Whereas when you look at cost of goods sold, you see that immediately because it is recognized as incurred. And so it's truly a function just of growing consumption on the platform. And there's a bunch of initiatives, as you can imagine, that we're driving very defined initiatives to improve our cloud cost efficiency ratios. There's always a give and take between are indeed dollars that are spent on those things versus R&D dollars that are spent on efficiency. And so our expectation is that this is temporary and that as we enter fiscal '28, you're going to start to see margins go back -- gross margins go back to more historical levels.

I will remind you that even a bit of pressure on gross margins, we still have incredibly robust gross margins even with a 100 basis point headwind. So this is a kind of a philosophy of continuing to drive leverage in the model, as I mentioned in my prepared remarks. Some years, we're going to do more than others. Sometimes we sequence investments where the return on those investments comes in the following year. But you can expect we will continue to drive efficiency across the business.

Operator: Our next question comes from the line of [indiscernible] with Truist Securities.

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

Rick McConnell: I'll take that, Miller. We have not done an on-prem SIM. So we have not addressed that with the security use case. We have addressed the observability use cases. number one. Number two, as we've reported in the past, we are working on and we'll expect over the course of time to deliver a cloud-based SIM. So that will begin to take on some of the security use cases around logs, but the moment, most of the commentary has been around observability blocks. And that brings us to the end of the call, so let me just wrap up. . First of all, thank you all for your engagement and continued support.

We really do appreciate it FY '26 was a solid year of stabilized ARR with us at 16%. We delivered double-digit net new ARR growth through the course of the year. We saw it as a year of exceeding $2 billion in ARR. And of course, we delivered very, very strong logs momentum, as we indicated, now well more than $100 million still growing and 100%. We have a number of growth drivers in the business.

We're very excited about what's happening by way of innovation, and we believe we have a number of market tailwinds around AI, around cloud, around Agentic that will provide further fuel to the opportunity to accelerate FY '27 ARR growth, which is precisely what we're looking for with accelerating net new ARR growth at the midpoint of our guidance. We thank you again for joining. We look forward to connecting with you at upcoming IR events, and we wish you a great day.

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