Dynatrace Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2025

Key Takeaways

  • Dynatrace reported Q4 subscription revenue growth of 20% to $424 million and full-year ARR reached $1.73 billion, both exceeding the high end of guidance.
  • Non-GAAP operating margin expanded by over 100 bps to 26% in Q4, while pretax free cash flow margin improved roughly 250 bps to 32%, demonstrating strong profitability and cash generation.
  • Adoption of the Dynatrace Platform Subscription (DPS) model reached 40% of customers and accounted for over 60% of ARR, with DPS customers consuming services at twice the rate of SKU-based customers and averaging over $600 K in ARR.
  • Log management uptake climbed to one-third of customers with consumption growth exceeding 100%, positioning Dynatrace to surpass its $100 million consumption ARR target in FY26.
  • For fiscal 2026, Dynatrace guides 13–14% ARR growth, 14–15% revenue growth and a 29% non-GAAP operating margin, reflecting a cautious stance amid uncertain macroeconomic conditions.
AI Generated. May Contain Errors.
Earnings Conference Call
Dynatrace Q4 2025
00:00 / 00:00

Transcript Sections

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Operator

Greetings and welcome to the Dynatrace Fourth Quarter and Full Year Fiscal twenty twenty five Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Noelle Ferris, Vice President, Investor Relations. Noelle, please go ahead.

Noelle Faris
Noelle Faris
Vice President, Investor Relations at Dynatrace

Good morning and thank you for joining Dynatrace's fourth quarter and full year fiscal twenty twenty five earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer and Jim Betson, 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 10 Q and our upcoming annual report on Form 10 ks that we plan to file later this month. The forward looking statements contained in this call represent the company's views on 05/14/2025.

Noelle Faris
Noelle Faris
Vice President, Investor Relations at Dynatrace

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 non GAAP, reflecting constant currency growth and per share amounts are on the diluted basis. We will also discuss 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 webpage. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Dynatrace delivered a strong finish to fiscal twenty twenty five, having achieved several noteworthy milestones and accomplishments. Subscription revenue grew 20%. We surpassed $1,700,000,000 in ARR and $1,000,000,000 in DPS ARR.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

We expanded our non GAAP operating margin by more than 100 basis points and our pretax free cash flow margin by roughly two fifty basis points, emphasizing the strength of our balanced business model. We surpassed 4,000 customers and 5,000 employees. We announced major platform innovations, including Braille for GCP, observability for developers, preventive operations, cloud security posture management, AI powered log management and analytics and AI observability to name just a few. And we were consistently named a leader in all major analyst reports for observability and AI ops over the past year. Today, I'm going to cover my perspective on the observability market, growth tailwinds and opportunities, our AgenTik AI vision and the growing criticality of business observability.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Let's begin with the market. While we are clearly in an uncertain economic environment, we continue to see strength in the observability market as virtually all organizations aspire to have their software work perfectly, just as our vision imagines. And now more than ever, customers need to deliver improved productivity and a better user experience at lower cost, which is precisely our value proposition. As such, we see observability spend continuing to be a priority. Additionally, cloud growth remains healthy.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Hyperscalers are now generating nearly $250,000,000,000 in annualized revenue growing in the mid-20s. And as organizations accelerate cloud and AI native initiatives, the need for AI powered observability at scale has never been greater. We expect to see materially greater penetration in the coming year into hyperscaler workloads, where we expect the majority of observability market growth to occur. And we are innovating to capture this opportunity. Our next major platform release planned for June will further empower cloud and AI native teams to expand their AI ops and preventive operations.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

These new capabilities will provide development teams with easy access to hyperscaler and Kubernetes telemetry, leverage Davis to analyze all data with AI assistance and leverage Davis Copilot for remediation workflows or instant response. We believe these secular tailwinds will fuel an addressable market opportunity that we now size at $65,000,000,000 in observability and application security. Beyond these market dynamics, I'd like to talk next about four key Dynatrace growth drivers. Each of these represents an intentional area of focus to drive consumption growth across the Dynatrace platform. First are the ongoing investments in our go to market efforts, including customer segmentation, partner enablement and expanding our sales motion beyond application performance to include end to end observability and cloud modernization.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

We kicked off these initiatives at the beginning of fiscal twenty twenty five, and they continue to gain traction. We expect them to drive sales productivity gains in fiscal twenty twenty six. We've seen a consistent trend in total pipeline growth, driven primarily by strength in strategic accounts where pipeline was up 45% compared to last year, highlighting the traction in our customer segmentation efforts. More than 80% of our ACV closed in the quarter were partner influenced with over 40% of those coming from GSIs and hyperscalers. And the expansion of our sales motion beyond our proven land and expand approach resulted in more than 50% of our anchor deals in the quarter driving end to end observability.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

These investments are gaining traction and contributed to large deal closures in the quarter, including 15 deals with incremental ACV of over $1,000,000 Second, our Dynatrace platform subscription or DPS licensing model continues to build momentum with over 40% of our customer base and more than 60% of ARR leveraging this approach as of the end of the fourth quarter. With access to the full platform, customers are adopting Dine and Trace more broadly across their IT environments, resulting in increased consumption. We expect this DPS adoption to materialize over time in early expansions or on demand consumption beyond customer commit levels. Third is the massive opportunity in log management. We believe the logs market remains ripe for disruption given expensive legacy solutions that largely operate independently from existing observability tools and result in lower value.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Our unique approach to log management and analytics integrates logs, traces, metrics and other core observability and security data types into a single platform, providing a holistic view of the health of IT ecosystems. Combined with our AI approach, teams can derive greater value from logs faster and at lower cost. Leveraging Grail as our massively parallel processing data lakehouse, logs can then contribute near real time insights at enormous scale. We are seeing strong adoption of our log management offering with a third of our customers now using this solution. The number of customers leveraging logs is up 18% compared to last quarter, plus nearly half of our new logos added in the fourth quarter are deploying logs in their initial implementation compared to roughly 20% in the same quarter last year.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

And finally, in what could arguably be our largest growth opportunity, the AI revolution is upon us. So I'd like to turn to that next. As you know, AI is evolving into a whole new era where systems can plan, make decisions and take action autonomously. According to IDC, by 2029, Geni AI based software testing tools capable of writing 85% of tests will be augmented by AI agents and agentic workflows. And we expect that as much as 80% or more of developers' time is spent ensuring that code is running properly in production by securing, debugging and optimizing it.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

In many ways, this is exactly what Dynatrace was purpose built to enable, and it represents a massive opportunity. We were pleased to see that Forrester recently recognized Dynatrace as a leader in AIOps with the highest score in the current offering category. Our mission for many years has been to deliver answers and intelligent automation from data, well beyond dashboards and root cause analysis. Automation is enabled by an autonomous system that can recommend and then carry out action based upon trustworthy deterministic conclusions from context rich data. And AgenTik AI is the architectural approach for that system.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Indeed, our AI native platform is what sets Dynatrace apart from our peers and we believe that as a result of this market evolution, it will become an even bigger differentiator in the future. In fact, Dynatrace has been investing in advancing our capabilities to evolve into a fully agentic AI platform that can automatically remediate, protect and optimize without the need for human intervention. A true agentic platform must be able to make intelligent decisions to act in real time. We postulate this requires various core capabilities. You need a common data lakehouse to store all data types in context for accuracy, performance and scale without manual tagging.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

You must be able to act in real time without limitations of predefined schemas or indexing. You need causation of data, not correlation to deliver answers that are trustworthy and actionable. You need a combination of AI techniques, including causal, predictive and generative AI to facilitate the discovery and prediction of issues to provide answers. And in autonomously preventing and remediating issues as well as optimizing cloud native workloads, an agentic AI system needs to delegate and handle tasks not only on its own, but also to an ecosystem of AI agents. We believe Dynatrace is uniquely positioned to lead in this space with Crayola.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Our index list schema free lakehouse designed for real time intelligent AI automation at scale. Today, we already provide the knowledge, memory, reasoning, planning and actioning to meet the heightened requirements of an agentic AI system. Our knowledge is fueled by one agent collecting all data types in context, normalized with our semantic dictionary cleansed, protected and then ingested through Open Pipeline. Rail provides instant access to petabytes of short and long term data in context, the real time memory to enable AI queries. Davis leverages the combination of causal, predictive and generative AI to handle the reasoning.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Davis AI Copilot can then intelligently plan actions based on context and reasoning. And finally, our automation engine is able to take action, autonomously executing tasks and collaborating with third party AI agents. We plan to continue to innovate aggressively to meet the needs of this rapidly evolving AI landscape. I'd like to next turn to business observability. As the AI landscape continues to evolve, so too have our customers' needs for a more sophisticated observability approach.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

They want more than technical analytics. Organizations want to use observability solutions to help them understand core business metrics. Business observability provides precise answers to help customers address not only operational issues such as cost reduction and risk mitigation, but also customer centric issues such as optimizing user experience and driving profitability. For example, a large cruise ship operator is using Dynatrace to enable an exceptional on ship experience for passengers. They begin with the core user experiences they want to track and then drill down into micro services and technical analytics rather than the other way around.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

In many such customer deployments, our platform is playing an increasing role in our differentiation. Only Dynatrace captures business events in context with other data types, enabling quick and easy querying, rich visualization dashboards and business driven automation. I'd like to highlight just a few of our larger Q4 wins. A major airline already committed to spend nearly $50,000,000 with Dynatrace over its contract term signed an additional 7 figure expansion in an ongoing effort to reduce the number of disparate monitoring tools, including logs to have all their relevant data types in one place with Grip. A Canadian financial services company, another 8 figure customer, added a 7 figure expansion to consolidate various observability and log monitoring tools, standardize on Dynatrace and substantially reduce costs.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

And we closed a 7 figure expansion deal with a large software company including Logs on Grail to ensure stability and performance during a major software release. Finally, I'd like to welcome Steve McMahon to Dynatrace as our new Chief Customer Officer, replacing Matthias Dolanciar, who is retiring from the company. I wish Matias well after an incredible career here over the past decade. And I am delighted with Steve's employment as his background in observability and security at Splunk, CrowdStrike and Zscaler provides him a terrific foundation for a rapid ramp. To wrap up, our market opportunity is stronger than ever.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

We have several Dynatrace specific drivers supporting our growth. We have a significantly differentiated AI powered observability platform that is leading the way toward us delivering a highly differentiable agentic observability platform. We are increasingly bringing customers deep business insights. And we have a compelling business model, which has enabled us to deliver a sustained balance of growth and profitability. Jim, over to you.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Thank you, Rick and good morning everyone. Q4 was a strong finish to fiscal twenty twenty five. Once again, we exceeded the high end of guidance across all top line growth and profitability metrics. Our ability to execute successfully in this dynamic environment is a testament to the growing criticality of observability and security in the market, our highly differentiated AI powered platform, our ability to demonstrate exceptional business value and ROI for our customers and the predictability and durability of our business model. Fiscal twenty twenty five was a pivotal year in evolving our go to market model and driving broader usage of the platform across our customer base.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Leveraging our flexible, scalable and frictionless DPS licensing model, we have made it easy for a growing number of customers to gain full access to the platform and adopt Dynatrace more extensively within their IT environments, including capturing more usage of our emerging and adjacent solutions. This journey continues in fiscal twenty twenty six. Let's review the 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 1,730,000,000 representing 17% growth, slightly above the high end of guidance driven by steady expansion bookings including a number of 7 figure ACV vendor consolidation deals.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

We added 171 new logos in Q4, up slightly from a year ago as we remain focused on landing enterprise accounts with a higher propensity to expand. The average new logo land size remains healthy at $130,000 on a trailing twelve month basis, highlighting the market trend away from ineffective point solutions and towards software providers like Dynatrace with platform breadth and depth. Once customers experience the benefits of the Dynatrace platform, they had been quick to expand their usage. Our average ARR per customer continues to grow and is now well over $400,000 highlighting the incremental adoption of the platform and inherent business value we provide to customers. Given the significant cross sell and upsell opportunities in our enterprise customer base, we believe the average ARR per customer opportunity could be $1,000,000 or more over the long term.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Our gross retention rate in Q4 remained in the mid-90s demonstrating the strategic relevance for the Dynatrace platform as a mission critical component of our customers' operations. Net retention rate or NRR was 110% in the fourth quarter. Customer penetration of our DPS licensing model is gaining traction. As Rick noted, we exited Q4 with over 40% of our customer base on DPS more than doubling the number of DPS customers during fiscal twenty twenty five. Further, DPS customers now contribute over 60% of our ARR representing more than $1,000,000,000 Our expectation when we launched DPS was that customers with full access to the platform would leverage more capabilities and extend Dynatrace more broadly into their IT environment and we have seen this thesis play out.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

For example, DPS customers consume on average 12 capabilities compared to five capabilities for SKU based customers. In terms of usage volumes on the platform, DPS customer consumption growth rates are 2x the rate of SKU based customers and leading to much higher expansion rates. As a result, the average ARR per DPS customer is over $600,000 well above the company average. While consumption growth takes time to translate into subscription revenue or ARR growth, these robust DPS penetration and platform consumption trends are positive indicators for future top line growth. As we shared last quarter, as DPS has matured and scaled its customer friendly approach to pricing, which was not which does not penalize customers for exceeding commitments is leading some customers to consume on demand instead of renewing or expanding early.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

In Q4, on demand consumption revenue or ODC was $9,000,000 up from $7,000,000 in Q3 and bringing trailing twelve month ODC revenue to $21,000,000 ODC is another lever for subscription revenue growth in addition to new logo and expansion bookings. However, this revenue is not captured in our NRR or ARR metrics, which only include contractually committed revenue. Moving on to revenue. Total revenue for Q4 was $445,000,000 growing 19% and exceeding the high end of our guidance range by 200 basis points. Subscription revenue for Q4 was $424,000,000 up 20% and similarly exceeding our guidance aided by strength in ODC revenue.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Turning to profitability, Q4 non GAAP operating margin was 26% exceeding the top end of guidance by over 100 basis points driven by revenue upside flowing to the bottom line. Non GAAP net income was $99,000,000 or $0.33 per diluted share, 0.2 above the high end of guidance. Turning to a quick summary of the full year results. Total revenue was $1,700,000,000 and subscription revenue was $1,620,000,000 both growing 20%. Full year non GAAP operating margin was 29%, twenty five basis points above the high end of guidance and 120 basis points above fiscal twenty twenty four, demonstrating our ability to drive leverage in the business model while still investing for growth.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Non GAAP net income for the year was $422,000,000 or $1.39 per diluted share. Our non GAAP earnings factor in an effective cash tax rate of 22%. Full year free cash flow was $431,000,000 or 25% of revenue, 50 basis points above the high end of guidance and 100 basis points above fiscal twenty twenty four. As a reminder, this strong cash flow margin result includes absorbing nearly 700 basis points of impact due to cash taxes. Adjusting for cash taxes, pre tax free cash flow for fiscal twenty twenty five was 32% of revenue, an improvement of nearly two fifty basis points compared to fiscal twenty twenty four.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Turning to the balance sheet. As of March 31, we had nearly $1,200,000,000 of cash and investments in zero debt. In Q4, we repurchased 787,000 shares for $43,000,000 as part of our opportunistic share repurchase program. Since the inception of the program in May 2024 through 03/31/2025, we have repurchased 3,400,000.0 shares for $173,000,000 with approximately $327,000,000 remaining of the $500,000,000 authorization. Let's turn to guidance.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

As always, we continue to manage the business in a measured manner and our prudent approach to guidance remains unchanged. We are mindful of the fluid nature of the geopolitical and macro landscape. While we have not seen any notable impacts in demand or close rates to date, we expect enterprises to remain careful in their spending and our approach to guidance assumes an incremental level of caution in terms of budget scrutiny and sales cycle length throughout fiscal twenty twenty six. With that as context, let's start with our guidance for the full year. We expect ARR to be between 1,975,000,000.000 and $1,990,000,000 representing ARR growth of 13% to 14%.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

While we don't guide to ARR on a quarterly basis, we expect quarterly seasonality of net new ARR to be similar to the last several years. Turning to revenue, we expect total revenue to be between $1,950,000,000 to $1,965,000,000 up 14% to 15%. Underlying that subscription revenue is expected to be between $1,865,000,000 and $1,880,000,000 also up 14% to 15%. Within subscription revenue, we are assuming an ODC revenue contribution of $30,000,000 Since ODC is uncommitted, dependent on many factors and our history is somewhat limited, we are being appropriately conservative with our initial ODC assumption for the year. Our fiscal twenty twenty six guidance is based on foreign exchange spot rates as of 05/12/2025, representing an FX tailwind to ARR and revenue of $20,000,000 and $17,000,000 respectively.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

We expect non GAAP operating income to be between $560,000,000 and $570,000,000 resulting in a non GAAP operating margin of 29% for the year. We will continue prioritizing investments in R and D, sales capacity, customer success and our partnership programs, while driving further scale and efficiency in other areas. We expect non GAAP net income to be $481,000,000 to $494,000,000 resulting in a non GAAP EPS of $1.56 to $1.59 per diluted share based on $3.00 9,000,000 to $310,000,000 shares outstanding. We estimate our fiscal twenty twenty six effective cash tax rate to be 19%, down from 22% in fiscal twenty twenty five due primarily to the benefit of the IP transfer I mentioned last quarter. We expect free cash flow to be between $5.00 $5,000,000 and $515,000,000 or 26% of revenue, a 100 basis point improvement from fiscal twenty twenty five levels.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

As a full cash taxpayer, we believe the best way to benchmark our cash flow generation is on a pre tax basis as most software peers pay minimal cash taxes. Adjusting for cash taxes, pretax free cash flow margin is expected to be 32% in fiscal twenty twenty six. As a helpful reminder for your modeling, 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 $465,000,000 and $470,000,000 and subscription revenue is expected to be between $445,000,000 and $450,000,000 both growing 16% to 17%. Non GAAP operating income is expected to be between $130,000,000 and $135,000,000 or 28% to 28.5% of revenue.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Lastly, non GAAP EPS is expected to be $0.37 to $0.38 per diluted share based on a share count of $3.00 4,000,000 to $3.00 5,000,000 shares. In closing, the strength of our Q4 and fiscal twenty twenty five performance sets a solid foundation for fiscal twenty twenty six. The secular growth drivers fueling the observability market are unchanged and our AI powered end to end platform differentiates us and puts us in a strong competitive position. The fundamentals of the business are increasingly being driven by consumption and we are investing to fuel that growth. We have a strong track record of consistent execution.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

We are committed to maintaining a disciplined approach to optimizing costs 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

Thank you. We'll now be conducting a question and answer session. Session. Our first question is coming from Patrick Hallville from Scotiabank. Your line is now live.

Patrick Colville
Lead Equity Research Analyst at Scotiabank

Thank you so much for taking my question. I'm going to ask this one to both Rick and Jim. In our field work, logs is performing very well. It was interesting to hear in your prepared remarks similar commentary. If I rewind back to this time last year, the logs target for $100,000,000 of ARR was pushed out slightly.

Patrick Colville
Lead Equity Research Analyst at Scotiabank

So I guess could you kind of wrap around some quantitative context to that qualitative logs commentary? And any updates if possible on where we are versus that target and what we should expect in fiscal twenty twenty six in logs? Thank you.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Good question, Patrick. We're very pleased with logs. We have over a third of our customers now leveraging our log solution. So it continues to grow. As you can imagine, varies for customers that are using it pretty significantly and customers that are just starting with it.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

It's the fastest growing product category in the company it has been. And for the hundred million dollar goal, just to remind you that that's kind of a because it's consumption oriented goal, not an ARR goal because we we with DPS contracts, we don't exactly know what the customer is consuming until they consume it. So the hundred million dollar ambition, we have high confidence we will exceed that in fiscal twenty six. And it is a business just to give you just some rough numbers. That business will grow well over a % in fiscal twenty six.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

I would just add, Patrick, that we had a pretty substantial upgrade wave in the logs capability back in the October time frame, and that's when we really saw logs begin to accelerate. So we're excited about what we've seen. We like the metrics of more than $100,000,000 in consumption this year, as Jim said, and at that growth rate of north of 100%, we were quite optimistic about the business to come this year.

Operator

Thank you. Next question today is coming from Matt Hedberg from RBC. Your line is now live.

Matt Hedberg
Matt Hedberg
Managing Director & Software Research Analyst at RBC Capital Markets

Great. Thanks for taking my question. Rick, I wanted to drill into the go to market. It looks like you had a lot of success this past year with GSIs and hyperscalers in particular. That's great to see.

Matt Hedberg
Matt Hedberg
Managing Director & Software Research Analyst at RBC Capital Markets

I guess, first of all, how would you talk about sales productivity? You guys obviously made a lot of changes last year, including new six months quotas and you also realigned some territories. I guess, how did that fair versus your expectations? And are there any other significant changes you're planning on making this year to kind of the go to market?

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Yes. Let me take the first part and I'll let Jim comment on sales productivity. On the first part, GSIs and hyperscalers are a fundamental part of our strategy. We have now grown our overall partners, as we said in the prepared remarks, to well more than 70% of our overall deployment in ACV. And it gives us substantially greater reach to get to customers for deployments, implementations, management.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

So it gives us a bigger footprint to then attack those customer opportunities. We look forward. GSIs are obviously very much aligned to our target customer base, so that's helpful. And as we shift our attention to cloud native workloads, as well as AI native workloads, those those are all gonna be present in the cloud in which, in which case hyperscalers become incrementally more critical for us to do those contracts. So, we're fully leaned into partners.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

It remains a core element of the overall sales motion. Jim, you wanna comment?

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yeah. What I would say about the go to market update is I think I would say we we remain pleased with the progress. As a reminder, you mentioned a few of the changes, but the three big ones were we, refocused to kind of reps more to higher propensity to spend customers. That's progressing well. Those accounts have doubled the pipeline than the pipeline in total, so very good traction there.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Obviously, pipeline is a precursor to, to a booking. Rick mentioned channels, and we now have over three quarters of our business that is leveraging a channel. We still wanna continue to get some progress on partner originated, but good progress on channels. And then the sales plays, the sales plays being the your traditional APM sales play, kind of a a cloud native workload sales play and end to end, tool consolidation. Again, doing very well doing very well, particularly with tool consolidation.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

So we feel very good about it. I'd say the maybe the one enhancement, Matt, that we're making for fiscal twenty six. Everything else that I said remains unchanged. We are adding what we're calling strike teams. So these are teams of people that, one, are working they're not specialist teams, but they're strike teams that have a particular focus area.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And the focus areas for our strike teams are one logs, two application security, and three DEM, digital experience monitoring. So those three areas, we're gonna have strike teams, and they're focused on driving adoption, driving consumption. You heard a lot in the opening remarks about the company underpinnings becoming more consumption and adoption oriented. Having these strike teams are going to help us fuel that growth on the go to market side. So we feel very good about that.

Operator

Thank you. Next question today is coming from Brent Thill from Jefferies. Your line is now live.

Brent Thill
Brent Thill
Tech Sector Leader, Software/Internet Research at Jefferies Financial Group

Thanks. Just on the strategic account growth, think you mentioned over 45% pipeline growth. Just remind us when have you seen that level of strength? And maybe to Matt's question on the close, the pipeline seems like it's growing at a much higher rate. When did the close rates start to come up to kind of match that pipeline growth you're seeing?

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes, it's a good question. I mean, I'd say what you have, you have the tailwinds and I'll say headwinds. On the tailwind side, I think that the demand environment continues to be pretty resilient. And so therefore, you're seeing that kind of in broader pipeline. And the good news is these larger accounts, we're seeing a growing percentage of that pipeline.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Having said that, I'd say what's changed in the last maybe three months, and I'd say the the macro environment is a bit more uncertain. I still think deals are gonna get done. I think what we try to imply in this is that deals might take a little bit longer, especially when you're talking large strategic accounts, especially for those that are considering some level of tool consolidation. Those deals and those accounts take a little bit longer. And so, you know, I think that for us, the fuel is pipeline.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And, you know, to remind you that, again, about this notion of driving more consumption that with our business becoming more heavily weighted towards Dynatrace platform subscriptions, 60% of our ARR now and growing, The notion of driving adoption and consumption becomes much, much more important because that, by its definition, is a consumption oriented model. It has the benefit of a ratable revenue recognition subscription model, but its underpinnings are consumption. And so there's a bit of a reorientation within the company. As I mentioned, strike teams, it's also our customer success teams around making investments to drive more consumption. Now there's a lag between consumption and when you see it either show up in ARR or in subscription revenue through ODCs, but it is kind of a core underpinning of future growth for the company.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And the good news is consumption is growing at a very rapid clip.

Operator

Thank you. Our next question today is coming from Rob Owens from Piper Sandler. Your line is now live.

Rob Owens
Rob Owens
Managing Director & Senior Research Analyst at Piper Sandler Companies

Great. Thank you for taking my question. I'd love to pivot a little bit to the security opportunity and what you think needs to happen to unlock it more broadly. Is this a function of product depth or, more so go to market at this point? Thanks.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

I think it's a combination, Rob. We we see good traction with our RBA solution for vulnerability analytics. We need to continue to extend our offerings in this area. Expectations toward movement to CADR and cloud SIM type opportunities, I think, represents the next foundation of growth for us. So that's where we're looking.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

And, of course, we've got Kubernetes and cloud security posture management, which is now available, which, we expect to grow as well. So, short form is combination of expanded product offerings with which, we are working and delivering to the market as well as expanded go to market. Jim mentioned strike teams earlier. We have an AppSec strike team that is exclusively focused on the go to market part of this area as well.

Operator

Thank you. Next question today is coming from Raimo Lenschow from Barclays. Your line is now live.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Hey, thank you. Congrats from me as well. Jim, you have the not so easy task to think about on demand revenue for next year. Can you talk a little bit about how you went about it? Because you obviously, as you said, you don't have a lot of historic data.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Like how should we think about how you kind of frame that? Thank you.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

That's a good question, Raimo. Obviously, we kind of inserted in Q3 this notion of on demand consumption becoming a kind of a growing part of the of the growth story of the company, which is, again, underpinning this consumption point that I made earlier. So, we're a year into it, as you can imagine, with customers that have gone through at least the first cohort of customers that have gone through their annual reset periods. And so we've looked at how they behaved. We've looked at what are the think of it as the attach rates.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

How much of your business is going through an annual reset, period by quarter? How much is that growing? What is the kind of, for lack of better term, ODC attach rate to what you've seen historically? So what we've done is we've tried to apply some analytics on that. And as I mentioned in my prepared remarks, because it's uncommitted and it, you have to account for a bunch of factors, including do cohort classes for your first year cohorts behave the same way in year two?

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Do the new cohort classes behave the same way as the first year cohort classes? And so we did apply a level of kind of conservatism to that. We'll update you along the way. But that's kind of the general way that we framed it. We looked at it from a think of it as an attach rate perspective, but we built some caution knowing that cohort classes are gonna behave a little bit differently.

Operator

Thank you. Next question is coming from Akash Ranjan from Goldman Sachs. Your line is now live.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Hello. Thank you very much. Congrats on finishing up the fiscal year very solidly. As you look at the on demand revenue, how do you trade off the upside where you want to do better and maybe talk about the sales incentives that are going into the consumption aspect of the business versus also at the same level raising the bar for what is predictable and increasingly trying to get the upside into the customer contracts. So you lock them up and you get even more visibility.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

So trading off the upside versus the predictability at a higher level is where I wanted to get your thoughts on. Thank you so much.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes, Kash, that's a good question. As you can imagine, there's a bunch of variables, within there. One of the things that we haven't done that we are doing this year, Kash, is that our customer success teams and the strike teams that we mentioned, they are exclusively measured on consumption and adoption. And so it's a bit of a change where we now have dedicated teams of people that before we're working with customers on helping them in the adoption of our products and solutions. We now have a new team with these strike teams in addition to our core customer success teams.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And so these these, from an incentive perspective, both of these teams, their measurement is on consumption. So, you know, again, my point about driving more adoption, driving more consumption, and, you know, as I said in my prepared remarks, we're already making tremendous traction, get customers on DPS as a contracting vehicle. And we have found they consume more. They consume more of the platform, so they consume more of our solutions. They consume more deeply.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And so what we needed to do in the changes we made this year is to is to better fortify teams that are focused on driving consumption and consumption and adoption. And so that's the big focus. As you mentioned, that that'll show up in two ways. Ultimately, it'll show up with in a maybe a continued high growth in consumption and customers burn through their commitments early and either go to an on demand consumption, or in some cases, customers will renew early. It you know, there's a bit of timing delay for these, but again, of a core underpinning that we were trying to convey on this call is that consumption is is becoming a growing kind of part of the narrative that we've historically been a kind of bookings ARR oriented company.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

That's still important, but this consumption notion is is becoming more important for the company. And that's I'd say we're going through a bit of a transition and '26 will be that kind of a you know, the next phase of the transition that started in fiscal twenty six.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Yeah. I would I would add to that. Just to highlight, we are still a subscription business. But that said, we believe that especially in a DPS world, it really is about driving consumption. So to Jim's point, whether it is it is compensating on consumption for strike teams or d one services teams, our customer success teams, we see dramatically higher consumption in a DPS deployment.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

We believe that that is a precursor to future revenue and subscription growth opportunity. And so that's where we're focused as a company.

Operator

Thank you. Our next question today is coming from Andrew Nowinski from Wells Fargo. Your line is now live.

Andrew Nowinski
Andrew Nowinski
Analyst at Wells Fargo

Thank you. Good morning and nice quarter results. I wanted to ask maybe on the net retention rate. So I know the ODC component seems to distort that real net retention rate given that it's not included in ARR. But I'm wondering given that it is a growing piece of your business, what would NRR look like if or would it have increased if you would use subscription revenue instead of ARR as part of the NRR calculation?

Andrew Nowinski
Andrew Nowinski
Analyst at Wells Fargo

And then how are you thinking about the trajectory of the net retention rate in fiscal twenty twenty six? Thank you.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes, it's a good question. As you can imagine, the dynamics of NRR, as you said, there's a correlation between what is committed, which is in NRR and what is uncommitted, which is not in NRR. So NRR ticked modestly down. We're talking decimals from 111 to 110 from Q3 to Q4, but again decimals that if you added in ODCs, which I kind of think about them as deferred ARR or deferred NRR, actually you would have seen a modest uptick in NRR in Q4 from Q3.

Operator

Thank you. Our next question today is coming from Sanjit Singh from Morgan Stanley. Your line is now live.

Sanjit Singh
Sanjit Singh
Executive Director at Morgan Stanley

Yes. Thank you for taking the questions. A bit higher level question kind of on your AI theme, Rick, in your script. We're hearing more about autonomous or maybe nearly autonomous SRE agents. Two questions there.

Sanjit Singh
Sanjit Singh
Executive Director at Morgan Stanley

One, any sort of trend line that you're seeing about customers wanting to move to this sort of operational cadence, having agents execute a lot of the observability workflows? And if that is the case, what do you think the impact is on overall observability demand and sort of how products are built if agents are going to be executing the workflows and then observability platform versus human SRE engineers? Thanks for the thoughts.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

That was a great question, Sanjit. And after about an hour, I will have answered it. The short form is is we see we see the trend line absolutely moving and moving aggressively toward AgenTik AI broadly and specifically in observability. And the result of it is that what customers really want is they want the the conclusion or effectuation of our mission, which is to deliver answers and intelligent automation from data. What they've been getting in observability is the data part or the answers part, but not the automation part.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

So the way that we see this evolving is that through agentic observability or an agentic observability platform with Dynatrace, they actually can now take action based on those answers. Well, that begins to get your second question of how does this how does this occur? What we believe is that you need multiple different layers of capabilities to deliver a true agentic observability platform. You first need a completely integrated data lake house in which we have in Rail, which has all data types, logs, traces, metrics, etcetera, in context in one unified data lake house. Secondly, you need a completely integrated Davis AI engine, which we have that does causal predictive AI as well as generative AI to be able to deliver those answers that are trustworthy.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Once you can trust the answers, then you need an automation engine, which we have to then be able to execute those instructions within the observability environment. And finally, an area that we're beginning to work more fervently on is to then extend that agentic set of protocols to third party agents to be able to then effectuate change in code, for example. So it is a multilayered stack. We believe we have a foundation for success here that is unique in the observability industry, and we're all in on driving an agentic future in observability utilizing Dynatrace. And so this is a major, major thrust for us as we look to the future.

Operator

Thank you. Next question is coming from Pindrano Bora from JPMorgan. Your line is now live.

Pinjalim Bora
Pinjalim Bora
Executive Director - Equity Research at JP Morgan

Great. Thank you for taking the questions and congrats on the quarter. Jim, I just want to go back to it a few years. How are you thinking of kind of the or how should we, I guess, should think about the customer behavior around on demand consumption going forward in this macro? And as you look towards kind of building the guide, how did you thread the needle between the assumptions around incremental ODC component versus last year's ODC leading to larger committed contracts?

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes, it's a good question that I tried to answer a little bit of that with Raimo's question, which is the way we thought about ODCs that we thought about ODCs in the realm of looking at cohort classes, cohort classes that come up with their contract resets and looking even though our sample size is limited, it's four quarters. How did prior customers behave? We know that contract types vary a little bit. Some customers were in ramps. Some customers are not.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

So we factored a bunch of things in. But we did apply a, some conservatism to it because, by nature, it is uncommitted. Having said that, everything we've been talking about for the past thirty minutes has been about our focus on driving more consumption and adoption. To the extent we can do that, you'll either see it hopefully show up in the form of ODC or an ARR. And relative to the macro, it's hard to judge.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

I'd say right now the fact that customers are using more of the platform would tell you that they're getting value out of it. And so I think the criticality observability is even greater now than it was kind of a year ago, especially with the evolution of things. But, you know, I'd say from a macro perspective, what you might find is you might find customers that maybe commit to, you know, a more finite number when they actually have a crack contractually committed deal. And they're willing to go into ODCs because, again, we don't penalize you from for going over your your consumption or your commitment, I should say. And so I think that it's actually good in a in a tighter macro environment because we're not doing something that pushes a customer to maybe throttle something, can increase their adoption and we're not penalizing them for it.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

So it's actually a very kind of favorable vehicle in an environment that maybe customers are be a bit budget conscious.

Operator

Thank you. Our next question today is coming from Will Power from Baird. Your line is now live.

William Power
Senior Research Analyst at Baird

Okay, great. Rick, you've called out the strength you're seeing in partner relationships from a go to market strategy perspective. And I think in your prepared remarks, you called out the expectation for material hyperscaler growth in particular. I wonder if you could just kind of drill down for us kind of what really is underpinning the confidence around the hyperscaler trends, what you're seeing today versus what you've maybe seen in the past?

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

Well, a couple of things, Will. First, that is where we see the vast majority of the observability growth happening is in hyperscaler workloads. And given that that's where the majority of the growth is happening in observability, the majority of customers wanna take their contractual relationships through the hyperscalers because it it utilizes their contractual total spend. So those relationships become seminal, I would say, in making sure that we have the the most frictionless contract vehicle to be able to take orders for hyperscaler workloads, which is which is vastly increasing. Second thing is we either have entered or in the process of entering various different go to market relationships with hyperscalers, such as the one we recently announced with AWS with their SCA program to effectively, engage in in greater co sell.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

And when we add the combination of co sell plus teaming agreements with our other partners, we see very, very strong win rates. So this is one of the reasons we're pushing on it and one of the areas of, acceleration potential as we see in that flight 26.

Operator

Thank you. Our next question is coming from Jake Roberge from William Blair. Your line is now live.

Jake Roberge
Equity Research Analyst at William Blair & Company, L.L.C

Hey, thanks for taking the question. Just on DPS, great to hear those customers are still expanding at pretty healthy rates. Can you talk about how behavior has trended across the different cohorts that you've onboarded on to DPS? I know early on there may have been some selection bias there, but now that you've started to get a larger base of customers on the DPS, are you seeing those same types of expansion rates play out across the longer tail of the base?

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes. I mean, it's a good question. I mean, I'd say broadly speaking, answer is yes. You're right. The early cohort classes were customers that were SKU based customers that were already pretty significant Dynatrace users, and they just wanted a better vehicle to better consume Dynatrace.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

But as we've added new cohort classes, we've seen kind of a a a broader behavior where customers are leveraging more of the of the capabilities. And so I'd say that what used to be kind of a sampling bias has become something that's played out across kinda pretty broadly, and which is again why our focus is get more customers onto DPS as a contracting vehicle, get our adoption teams oriented to try to drive more consumption. We have proven that when we do that, customers will burn through their commitments earlier and they're either go through an ODC or they'll do an expansion. And so that's kind of the play that we're trying to run and we feel very good about the traction we made in fiscal twenty twenty five.

Operator

Thank you. Next question is coming from Keith Bachman from BMO Capital Markets. Your line is now live.

Keith Bachman
Keith Bachman
Senior Research Analyst at BMO Capital Markets

Good morning. Thank you very much. I also want to ask about DPS in two different regards. A, on the more near term, how are you thinking about the uptake rate for DPS in the next fiscal year? In other words, where do you think you'll end up either as a percent of customers or percent of ARR?

Keith Bachman
Keith Bachman
Senior Research Analyst at BMO Capital Markets

And then part B of the question is one of the key benefits of DPS is the ability of customers to adopt your portfolio more rapidly. It reduces friction to buying. And I was wondering if you could just talk a little bit about how you're thinking about thereby portfolio expansion. And you have a couple of key building blocks obviously with Grail getting widespread adoption and AI, candidly probably requiring and enabling more adoption. And part of the context of the question is Datadog candidly just has a broader portfolio of solutions.

Keith Bachman
Keith Bachman
Senior Research Analyst at BMO Capital Markets

And I just wanted to hear you speak a little bit about how you're thinking about your portfolio expansion given the building of the box and given DPS over not just the next year, but over the next number of years? Thanks very much.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

Yes. So Keith, I'd hesitate to give you a percentage for fiscal twenty twenty six around percentage of EPS customers in ARR, other than to say we expect it to continue to grow. I'd say longer term, we do expect, call it, 75% to 85% of our customers ultimately to go on to that.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

You probably won't get all of them. There'll still be customers that wanna stay on SKU based vehicles, maybe government entities, things of that nature. But I'd say the the the objective longer term is we get set 75 to 85%. So think of that as, you know, the the vast majority of your business is going to be on this contracting vehicle. And your point about adoption is, you know, that is the fundamental fundamental premise of DPS.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

You get them on on the to the DPS contract and be able to get full access to the platform. And if you if you do look at the capabilities, they're you know, I would say that we have quite a few capabilities on the platform. And even though we're getting some level of penetration, even for this kind of new emerging areas, logs being the most notable. So the fact is a third of our customers are now on logs, but that third is not spending anywhere near what the opportunity is for logs. Logs, you know, for the reasons that Rick outlined, I think is, you know, we're primed to be disruptive in that area just with the underpinnings of the platform with Grail.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And so so part of it is getting them to adopt more of the platform. You know, there are a a bunch of offerings that we do have even within the kind of the there's other capabilities beyond the core offerings of, call it, full stack infrastructure, DEM, logs, AppSec. There's other kind of subcomponents that we monetize as well. And so it's broader than maybe maybe you're characterizing. So I think we feel pretty good about that.

Jim Benson
Jim Benson
Chief Financial Officer at Dynatrace

And the whole thing with our adoption teams is drive more adoption, try to give the customer something that they're getting more value from and leverage the advantages that we have within the platform. And we feel very good about where we are and, you know, kind of the strategy to go after that.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

The the short form, Keith, is that we absolutely agree with you that we need to drive the business both in terms of depth of existing capabilities and expanded breadth in areas such as log management, application security, digital experience management with insights. We just bought Metis for database observability. So, we'll continue to expand the platform in both dimensions. That, that brings us to the end of our call. Thank you all for your engaged questions and ongoing support.

Rick McConnell
Rick McConnell
Chief Executive Officer at Dynatrace

To close, and I think as you can as you can tell, we are very enthusiastic about the growth opportunities ahead for us. We look forward to connecting with you at IR events over the coming months, and we wish you all a very good day.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Executives
    • Noelle Faris
      Noelle Faris
      Vice President, Investor Relations
    • Rick McConnell
      Rick McConnell
      Chief Executive Officer
    • Jim Benson
      Jim Benson
      Chief Financial Officer
Analysts
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