What Dynatrace (DT) Said on Its Q2 Earnings Call

Key Points

• Revenue and margins grew, but net new ARR disappointed: Q2 revenue rose 17% to $580 million and the non-GAAP operating margin reached 32%. Net new ARR was $70 million, flat year over year, as several large enterprise expansions shifted to the second half.
• AI and consumption are key growth drivers: Platform consumption grew more than 20%, while customers observing AI workloads used the platform at over twice the rate of other customers. Log-management consumption grew more than 100% year over year, and Dynatrace began monetizing its AI agents in Q3.
• Outlook and capital returns: Dynatrace maintained its standalone fiscal 2027 ARR growth outlook of 15.5%–16.5% and raised its revenue outlook; including Arize, it expects ARR growth of 17.5%–18.5%. The board authorized an additional $1 billion in share repurchases.

Dynatrace NYSE: DT reported second-quarter fiscal 2027 revenue growth and operating-margin expansion, while net new annual recurring revenue fell short of expectations as several large enterprise expansion deals shifted into the second half of the fiscal year.

Chief Executive Officer Rick McConnell said total ARR increased 16% year over year to $2.21 billion, while total and subscription revenue each rose 17%. The company generated a 32% non-GAAP operating margin, which McConnell said produced a “Rule of 48” when combined with ARR growth.

However, net new ARR was $70 million, adjusted for foreign-exchange movements, and was flat from a year earlier. Chief Financial Officer Jim Benson attributed the result to the timing of an elevated number of large enterprise opportunities, particularly complex deals involving tool consolidation and end-to-end observability.

“These deals aren't lost,” Benson said during the call. “These deals are still in the pipeline. Several big deals have already closed.”

Enterprise deal timing weighs on quarterly ARR

Management said the deals that moved out of the second quarter were primarily expansions rather than renewals that had reached their contract end dates. McConnell characterized the impact as high single-digit millions of dollars in net new ARR relative to expectations, involving only a handful of large transactions.

The company said first-half organic net new ARR still grew 17% year over year, following 41% growth in the first quarter. Dynatrace expects activity in the second half to be weighted toward the fourth quarter, reflecting the timing of its renewal base. Approximately 70% of annual renewals are scheduled for the second half, with 65% of those renewals expected in the fourth quarter.

Benson said net retention was 109% on a trailing 12-month basis, down one percentage point sequentially because late-stage expansions shifted into the second half. Gross retention remained in the mid-90% range.

Dynatrace added 120 new customers during the quarter. Its trailing 12-month average land size exceeded $200,000, compared with $140,000 in the prior-year quarter, while average ARR per customer rose to more than $500,000. Management said it believes average ARR per customer could eventually exceed $1 million.

AI workloads, infrastructure and logs drive consumption

McConnell said overall platform consumption grew more than 20%, with customers using Dynatrace for AI workloads consuming at more than twice the rate of other customers. The company said more than 1,100 customers are using its platform to observe AI and large-language-model workloads.

Dynatrace’s research found AI workloads drove a 93% increase in log volume over the past 12 months, according to McConnell. Log-management consumption continued to grow at more than 100% year over year and is approaching $250 million in annualized consumption, Benson said. Infrastructure monitoring surpassed $500 million in annualized consumption and grew about 30%.

The company has also moved from previewing to monetizing its Dynatrace agents beginning in the third quarter. More than 1,100 customers had used the agents during the public-preview phase, up from 800 in the prior quarter. McConnell said Dynatrace will monetize agent activity through AI-unit usage, while increased AI telemetry, logs and traces should also drive consumption under its Dynatrace Platform Subscription, or DPS, model.

Management cited customer demand for consolidating fragmented monitoring tools as an important growth driver. During the quarter, Dynatrace signed several seven-figure expansions and new-logo wins, including agreements with public-sector organizations, a global bank, a nonprofit organization and a U.K. semiconductor and software-design firm.

Arize acquisition broadens AI observability strategy

Dynatrace closed its acquisition of AI observability company Arize on Oct. 1. McConnell said Arize adds model evaluation and observability capabilities, along with access to AI developers through its open-source Phoenix platform, which has millions of monthly downloads.

The company said Arize contributed approximately $25 million in ARR at closing and is expected to reach $40 million by the end of fiscal 2027. Dynatrace expects the acquisition to add 200 basis points to total fiscal-year ARR growth and $16 million of revenue during the year.

Dynatrace will continue offering Arize AX and Dynatrace as standalone products while integrating the platforms for joint customers. McConnell said the company already has several dozen cross-sell opportunities underway. He added that Arize had no role in delaying customer decisions or contributing to second-quarter deal timing.

The company also announced a partnership with CrowdStrike involving Bindplane, which Dynatrace described as an intelligent telemetry layer. The partnership is intended to allow customers to route log data to Dynatrace for observability or CrowdStrike for security information and event management, while avoiding vendor lock-in.

Guidance maintained for ARR, raised for revenue

Dynatrace maintained its fiscal 2027 standalone constant-currency ARR growth outlook of 15.5% to 16.5%. Including Arize, the company expects total ARR growth of 17.5% to 18.5%.

The company raised its standalone constant-currency outlook for total and subscription revenue by about 50 basis points at the midpoint following second-quarter outperformance. Including Arize, it now expects total and subscription revenue growth of 16% for the full year.

• Second-quarter total revenue: $580 million, up 17% year over year.
• Second-quarter subscription revenue: $553 million, up 17%.
• Second-quarter non-GAAP net income: $162 million, or $0.54 per diluted share.
• Trailing 12-month adjusted free cash flow: $593 million, representing a 27% margin.
• Full-year non-GAAP operating-margin outlook: 28% to 28.25%, including roughly 175 basis points of dilution from Arize.
• Full-year non-GAAP EPS outlook: $1.88 to $1.90 per diluted share.

Dynatrace’s board authorized an additional $1 billion for share repurchases. The company repurchased 5.2 million shares for $246 million during the second quarter and reported approximately $1.3 billion of remaining buyback capacity.

The company also said Benson plans to retire by the end of the fiscal year. McConnell said Dynatrace has several candidates under consideration for the CFO role and expects to provide an update once a successor has been selected.

About Dynatrace (NYSE:DT)

Dynatrace, Inc provides an observability and application security platform designed to help organizations monitor, analyze and optimize complex digital environments. Its software uses artificial intelligence and automation to provide visibility across applications, infrastructure, cloud services, logs, user experiences and business operations.

The company's products support application performance monitoring, infrastructure monitoring, digital experience monitoring, log and analytics management, cloud automation and application security.

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