• Annual Recurring Revenue (ARR): $1.65 billion, up 18% year-over-year.
• Net New ARR: $68 million on a constant currency basis.
• New Logos Added: 193 in Q3.
• Average ARR per New Logo: Over $140,000 on a trailing 12-month basis.
• Average ARR per Customer: Surpassed $400,000.
• Gross Retention Rate: Mid-90s.
• Net Retention Rate (NRR): 111% in Q3.
• Total Revenue: $436 million, up 20% year-over-year.
• Subscription Revenue: $417 million, up 21% year-over-year.
• Non-GAAP Gross Margin: 84%.
• Non-GAAP Operating Margin: 30%.
• Non-GAAP Net Income: $112 million or $0.37 per diluted share.
• Free Cash Flow: $38 million in Q3; $406 million on a trailing 12-month basis.
• Share Repurchase: 732,000 shares for $40 million at an average price of $54.64.
• Full Year ARR Growth Guidance: $1.705 billion to $1.715 billion, representing 16% to 16.5% growth year-over-year.
• Full Year Total Revenue Growth Guidance: $1.686 billion to $1.691 billion, representing 19% growth year-over-year.
• Full Year Subscription Revenue Growth Guidance: $1.609 billion to $1.614 billion, representing 20% growth year-over-year.
• Full Year Non-GAAP Operating Margin Guidance: 28.5% to 28.75%.
• Full Year Non-GAAP EPS Guidance: $1.36 to $1.37 per diluted share.
• Full Year Free Cash Flow Guidance: $415 million to $420 million, representing a 25% margin.

• Warning! GuruFocus has detected 7 Warning Sign with DOV.

Release Date: January 30, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Dynatrace Inc (NYSE:DT) outperformed its guidance across all top line and profitability metrics, showcasing strong execution and demand for its AI-powered observability platform.
• Annual Recurring Revenue (ARR) grew 18% year-over-year, and subscription revenue increased by 21% year-over-year.
• The company is seeing significant traction with its Dynatrace Platform Subscription (DPS) licensing model, which now represents over 35% of its customer base and 55% of ARR.
• Dynatrace Inc (NYSE:DT) is benefiting from increased customer interest in end-to-end observability and tool consolidation, with deals greater than $1 million growing 55% year-over-year.
• The company is experiencing strong growth in its log management solutions, with over 1,000 customers leveraging these solutions, up 17% compared to the previous quarter.

Negative Points

• Net new ARR on a constant currency basis was down modestly from the same period last year.
• The company is facing challenges in the commercial segment, with lower expansion levels compared to strategic accounts.
• There is increased variability in close timing and deal certainty due to the trend of larger and more strategic deals.
• The strength of the US dollar is creating a sizable headwind, with an expected FX impact of $38 million to ARR and $17 million to revenue.
• Dynatrace Inc (NYSE:DT) has a high percentage of sales reps with less than one year of tenure, which may impact sales productivity in the short term.

Q & A Highlights

Q: Can you provide more details on the on-demand consumption model and its impact on Q4 guidance and fiscal 2026? A: Jim Benson, CFO, explained that the on-demand consumption model is evolving as expected, with customers consuming at twice the rate of those on the SKU-based platform. For Q4, they modeled mid-single digits for on-demand consumption, acknowledging its variability. For fiscal 2026, they anticipate on-demand consumption to grow as DPS grows, impacting subscription revenue positively.

Q: How does the on-demand consumption model affect the net retention rate (NRR) trajectory? A: Jim Benson noted that on-demand consumption is not included in ARR or NRR metrics, which only account for contractually committed revenue. However, DPS customers are expanding at a greater rate than SKU-based customers, suggesting potential NRR accretion over time as DPS matures.

Q: Can you elaborate on the traction Dynatrace is seeing with AI-related tools and their impact on revenue? A: Rick McConnell, CEO, highlighted that AI is a significant tailwind, driving data complexity and the need for sophisticated observability platforms. Dynatrace's AI observability capabilities are gaining traction across various sectors, with hundreds of customers already using them, indicating a positive impact on revenue.

Q: What are the expectations for ARR growth in Q4, and how does it relate to the DPS model? A: Jim Benson stated that the ARR guidance for Q4 reflects a prudent approach due to the funnel's heavy weighting towards large strategic deals, which introduces variability in close timing and deal certainty. The DPS model's on-demand consumption dynamic also influences ARR growth expectations.

Q: How are the go-to-market changes impacting sales productivity, and what are the expectations moving forward? A: Jim Benson mentioned that while productivity improvements are not yet evident, they are seeing positive indicators like improved rolling four-quarter pipeline and deal closures in strategic accounts. They continue to focus on tuning the commercial segment to enhance expansion levels.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.