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Greetings, and welcome to Dynatrace's Fiscal First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Noelle Faris, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Dynatrace's First Quarter Fiscal 2026 Earnings Conference Call. Joining me today are Rick McConnell, Chief Executive Officer; and Jim Benson, 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 annual report on Form 10-K. The forward-looking statements contained in this call represent the company's views on August 6, 2025. 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 year-over-year and non-GAAP reflecting constant currency growth and per share amounts are on a 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 website. And with that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Thanks, Noelle, and good morning, everyone. I'm thrilled to be joining you from our new corporate headquarters in Boston. It's a vibrant modern space that is a direct reflection of our collaborative and innovative culture, and I am excited to host customer and investor meetings here in the future. Moving on to our Q1 earnings. Dynatrace had a strong start to fiscal 2026. Subscription revenue grew 19%. ARR grew 16%. And pretax free cash flow was 33% of revenue on a trailing 12-month basis. These results continue to demonstrate our ability to deliver a powerful combination of top line growth, profitability and free cash flow. The strength of our AI-powered observability platform continues to resonate with customers as they look to standardize observability on a single end-to-end platform to deliver precise answers, deterministic insights and intelligent automation. Jim will share more details about our Q1 financial performance and guidance in a moment. In the meantime, I'd like to share my thoughts on what we see as the durable drivers of growth in the observability market and why I believe Dynatrace is well positioned to benefit from them. In the last several weeks, I've met with dozens of customers around the globe and there is increasing alignment around 3 key approaches to unlocking value with observability, end-to-end observability, AI observability and business observability. Let me start with end-to-end observability. The rapid rise of cloud modernization and AI workloads has caused a massive explosion of data and complexity. Hyperscalers are now generating more than $265 billion in annualized revenue, growing in the mid-20s. And this immense shift to the cloud is creating a level of scale too large for humans to manage. Meanwhile, traditional observability solutions used by organizations to manage digital workflows are often siloed and do not deliver the holistic picture needed to optimize results. And dashboards and other visualization tools require substantial manual oversight and response. Organizations are consequently looking for an end-to-end observability platform that provides deep analytics and insights ultimately enabling automated response. This is precisely the differentiating power of Dynatrace, allowing customers to take a proactive approach to address these challenges and deliver radically better outcomes. End-to-end observability first requires unification across observability domains with organizations increasingly seeking a single solution for applications, infrastructure, log analytics, real user monitoring, application security and other areas. By providing a unified platform, Dynatrace provides a complete picture of digital services rather than customers having to stitch them together manually. End-to-end observability also necessitates a common data layer. Dynatrace customers benefit from the power of Grail. Our massively parallel processing data lakehouse that houses all data types, logs, traces, metrics, real user data and more in context to provide accelerated insights at enormous scale. And finally, end-to-end observability mandates accessibility by all personas. With Dynatrace developers, platform engineers, SRE teams, IT Ops and even executives can now all leverage the same data in a unified platform to enable the groups to work better together to remediate, protect and optimize cloud-native workloads. Organizations are also able to extend left to take advantage of observability insights much earlier in the development process. This brings me to the second application of observability, AI observability. Dynatrace, we have been using AI to deliver insights for over a decade, and we continue to innovate aggressively in expanding our capabilities. We utilize multiple AI techniques in our platform. Causal AI for root cause analysis, predictive AI to apply anomaly detection and machine learning to anticipate issues. and generative AI to make the platform accessible to a wider array of end users. And customers are increasing their use of the platform to observe their AI workloads. For example, one financial software customer deployed agents to automate many different finance tasks. Prior to the launch, they leverage Dynatrace's AI observability to validate performance of their new agent capabilities. A large insurance company has been building an internal AI platform to increase the efficiency of their engineering teams. They utilize Dynatrace to help ensure their AI platform is functioning correctly and cost effectively. Furthermore, we have built our third-generation platform with Grail at its core to seamlessly unify observability, security and business data. This foundation empowers intelligent decision-making and action, enabling enterprises to transition from human oversight to intelligent autonomous systems. We recently announced significant advancements in our platform, evolving its ability to serve as the knowledge, reasoning, planning and actioning framework of agentic AI and provide trustworthy precision and adaptability. We believe that agentic AI advances the fulfillment of our vision by providing a clear directional heading that drives the core of our operations. And we are driving toward an agentic AI ecosystem in which our AI agents will interoperate with third-party AI agents to take appropriate action. Importantly, deterministic answers are critical for agentic AI to work properly. You have to trust answers to take action on them, which is precisely the confidence that we believe the Dynatrace platform provides. The third way customers are driving outcomes with observability is business observability. We think of business observability as the ability to deliver meaningful business value beyond technical analytics, root cause analysis and mean time to resolution. Because we include business events as a data type in Grail, we can provide a broad set of insights like business process optimization, revenue impact and real-time analytics for any observability source. For example, a large airline uses Dynatrace to assess gate operations and baggage handling. A cruise ship operator focuses its Dynatrace insights on the passenger onboard experience. And financial services firms are interested in time to open an account or mortgage or to make a payment. Business observability is about identifying the key performance indicators, a customer wants to address and leveraging an end-to-end observability framework to optimize their attainment. And this is where Dynatrace can increasingly become a force multiplier for businesses looking ahead. These 3 enterprise use cases for observability represent a strong growth opportunity for Dynatrace. And we are investing in sales and marketing initiatives across those areas. So next, I'd like to share several proof points of our go-to-market momentum from the first quarter. First, the investments we made during fiscal 2025 to align our sales coverage around strategic accounts with a higher propensity to spend is evident in the 12 7- figure ACV deals closed in the quarter. Additionally, our strategic enterprise pipeline has grown nearly 50% year-over-year. With the pipeline contribution of deals greater than $1 million, more than doubled over that time frame. Second -- we continue to see strong traction with our partner ecosystem, most notably in the growth and contribution of GSIs. Partners were involved in 10 of the 7-figure deals we closed in the quarter. And GSIs played a role in more than half of those. Our largest GSI partners ARR contribution in the first quarter has more than tripled year-over-year. And finally, the recent traction we're seeing in logs is a direct result of our broad-based sales execution in this area, combined with the investments we've made in building out strike teams to drive adoption. In Q1, our logs consumption increased 36% sequentially and well over 100% year-over-year. Given this traction, we remain confident in our ability to achieve $100 million in annualized logs consumption by the end of this fiscal year. Given the noteworthy traction of logs in the first quarter, I'd like to take a moment to discuss logs in more detail and why we believe we are positioned to win material share in this space. In particular, logs have rapidly become a core element of end-to-end observability as I mentioned before. And our third-generation platform provides the core capabilities to deliver meaningful value as customers expand in this direction. Dynatrace's log management solution has multiple advantages. By combining logs with other data types, logs actually add increased value in delivering deeper, more contextualized absorbability insights. Moreover, unlike traditional solutions, Grail does not require rehydration of logs. So they are always available and don't require manual categorization and separate complex pricing. And finally, we are able to offer our log solution at a lower cost, including unlimited querying over a fixed time window, maximizing insight while controlling spend. Once customers experience the value of our log management solution as part of their Dynatrace platform deployment, they often rapidly expand their usage. A major airline that became a customer within the last 18 months as a multi-vendor competitive takeout with end-to-end observability has now already exceeded an annualized logs consumption of several million dollars. In fact, many of our 7-figure ACV wins in the quarter were with customers looking to modernize their log management solutions, consolidating logs from multiple vendors as part of a broader end-to-end observability strategy. A Fortune 100 retailer expanded their deployment with Dynatrace to provide a precise view of the customer journey from online ordering through pickup. A global leader in logistics and transportation engage us to unify their data to reduce operating costs and increase efficiencies. And one of the largest insurance providers in North America is going all in with Dynatrace to help them improve their customer experience with our unparalleled visibility into their enterprise-wide environment. All 3 of these customers have a planned annualized logs consumption of at least $1 million. Finally, analysts continue to recognize Dynatrace as an industry leader. Last month, Gartner named Dynatrace a leader in the 2025 Gartner Magic Quadrant for observability platforms positioned highest in execution. This is the 15th consecutive year that Gartner has named Dynatrace a leader. Moreover, we ranked #1 across 4 of the 6 use cases in the 2025 Gartner critical capabilities for observability platforms report; and second, in the other 2 use cases, a very strong achievement. Plus, we were named a leader and outperformer in the 2025 GigaOm Radar for Kubernetes observability. We are proud of these achievements and committed to the ongoing innovation and customer engagement needed to earn these accolades year after year. To wrap up, the observability market opportunity is stronger than ever. We have a significantly differentiated AI-powered platform that provides the foundation for end-to-end observability, AI observability and business observability. We deliver significant customer value, and we have a compelling business model, which has enabled us to deliver a sustained balance of growth and profitability. Jim, over to you.

Thank you, Rick. And good morning, everyone. Q1 was indeed a strong start to the fiscal year. Once again, we surpassed the high end of our top line growth and profitability guidance metrics. Notably, and as Rick mentioned, we had a strong expansion quarter with a dozen 7-figure expansion deals, many of which have planned log management deployments. The building block fundamentals that serve as leading indicators of future growth potential, continue to gain traction in the company. Specifically, we are seeing growing momentum in large deal activities, expanding tool and vendor consolidation opportunities, building execution with our partner ecosystem, most notably with GSIs, further penetration of our Dynatrace Platform Subscription licensing model and accelerating consumption and adoption of the platform logs notably. Let's review the first quarter results in more detail. Please note the growth rates referenced will be year-over-year and in constant currency unless otherwise stated. Annual recurring revenue or ARR ended the quarter at $1.82 billion, representing 16% growth. Q1 net new ARR on a constant currency basis was $51 million, up 13% from a strong first quarter last year. Expansion activity was robust and particularly strong in our North America geography and our GSI channel. In Q1, we added 103 new logos to the Dynatrace platform. Our average ARR per new logo was over $130,000 on a trailing 12-month basis and in line with our target land size. Once customers experience the value of the Dynatrace platform, they have been quick to expand their usage. Our average ARR per customer continues to increase, reaching nearly $450,000, highlighting the ongoing adoption of the platform and business value we provide to customers. As we have shared previously, given the significant cross-sell and upsell opportunities in our enterprise customer base, we believe the average ARR per customer opportunity could be $1 million or more over the long term. The strategic relevance of the Dynatrace platform is further reflected in our gross retention rate, which remained in the mid-90s. Net retention rate, or NRR, was 111% in the first quarter, an improvement from the prior quarter. Our Dynatrace Platform Subscription licensing model or DPS continues to gain traction and adoption. We now have over 45% of our customer base and over 65% of our ARR on DPS. DPS customers with full access to all our platform capabilities, adopt roughly 2x the number of capabilities than those on a SKU-based model. They also consume at a much faster pace with consumption growth rates nearly 2x those on a SKU-based model. We have seen particularly robust consumption growth with customers leveraging logs management, our fastest-growing offering. This strong consumption sometimes accelerates use of a customer's original commitment, resulting in either early expansion or on-demand consumption, which we refer to as ODC revenue. In Q1, ODC revenue was $11 million. Historically, ODC revenue was recognized in the quarter it was incurred with quarterly revenue variability driven by DPS expiring commitment dollars that are much lower in the first half than the second half. Now that we have a full year of history with ODC, revenue accounting principles require us to estimate the amount of ODC revenue that we expect to receive over the next 4 quarters and recognize that amount ratably over that same period. The result of doing so, yields a onetime cumulative true-up benefit of $7 million in Q1. The simple way to think about it is we delivered $4 million of in- quarter as incurred ODC revenue and $7 million of revenue accrual. Going forward, ODC revenue will have much less quarter-to- quarter variability. And for fiscal 2026 should be in the range of $8 million to $9 million per quarter, give or take, depending upon weather and how much our incurred ODC in the quarter varies from our accounting estimates. Moving on to revenue. Total revenue for Q1 was $477 million, growing 19% and exceeding the high end of guidance by approximately 200 basis points. Subscription revenue was $458 million, up 19% also exceeding the high end of guidance by nearly 200 basis points, driven primarily by the incremental ODC revenue I just mentioned. Turning to profitability. Non-GAAP operating margin was 30%, exceeding the top end of guidance by 150 basis points, driven mostly by revenue upside flowing through to the bottom line. Non-GAAP net income was $126 million or $0.42 per diluted share, $0.04 above the high end of our guidance. We generated $262 million of free cash flow in the first quarter. Due to seasonality and variability in billings quarter-to-quarter, we believe it is best to view free cash flow over a trailing 12-month period. On a trailing 12-month basis, free cash flow was $465 million or 26% of revenue. As a reminder, this includes a 700 basis point impact related to cash taxes. Pretax free cash flow on a trailing 12-month basis was 33% of revenue. Finally, a brief update on our $500 million share repurchase program. In Q1, we repurchased 905,000 shares for $45 million at an average share price of just under $50. Since the inception of the program in May 2024 through June 2025, we have repurchased 4.4 million shares for $218 million at an average share price of just under $50. Moving now to guidance. While demand remains strong, we continue to take a prudent approach to our outlook with 3 factors in mind. First, we are still early in our fiscal year. And while Q1 was a strong start, we do not want to get ahead of ourselves. Second, we have a growing pipeline with an increasing number of larger, more strategic tool consolidation opportunities. These types of deals come with increased timing variability and longer duration to close. Lastly, the fluidity of the macro and geopolitical environment remains a constant. With that as context, let me summarize our updated full year outlook that we detailed in this morning's press release. We are maintaining our full year ARR growth guidance of 13% to 14% in constant currency, while passing through the incremental dollars from the weakening of the U.S. dollar since our last call. Full year ARR is now expected to be roughly $2 billion. While we do not guide to ARR quarterly, we continue to expect first half and second half constant currency net new ARR seasonality to be roughly consistent with last year. Moving now to revenue. We are raising our total revenue and subscription revenue guidance by $7 million in constant currency to account for the revised ODC revenue estimate accounting treatment. This required revenue recognition approach effectively records some revenue from fiscal '27 into fiscal '26 and was not factored into our prior guidance. Total revenue is now expected to be between $1.97 billion and $1.98 billion, and subscription revenue is expected to be between $1.88 million and $1.9 million, both up 14% to 15%. This revenue guidance includes $35 million to $40 million in ODC revenue. Turning to our bottom line. We are maintaining non-GAAP operating margin of 29% and free cash flow margin of 26%. While the weakening dollar is a tailwind to the top line, it is a modest headwind to margins, given our expense mix is heavily euro weighted. Finally, we are raising non-GAAP EPS guidance to a range of $1.58 to $1.61 per diluted share, representing an increase of $0.02 at the midpoint of the range. This non-GAAP EPS is based on a diluted share count of 309 million to 310 million shares. Looking to Q2, we expect total revenue to be between $484 million and $489 million. Subscription revenue is expected to be between $464 million and $469 million, both growing 15% to 16%. From a profit standpoint, non-GAAP income from operations is expected to be between $140 million and $145 million or 29% to 29.5% of revenue. Lastly, non-GAAP EPS is expected to be $0.40 to $0.41 per diluted share. In summary, we are pleased with our strong start to the fiscal year. We have a proven track record of consistent execution and delivering a balance of strong top line growth and profitability. While we continue to take a prudent approach to the near-term outlook, we remain optimistic about the fiscal 2026 growth building blocks, and we remain focused on investing in growth initiatives that we expect will drive long-term value. And with that, we will open the line for questions. Operator?

[Operator Instructions] Our first question is from Koji Ikeda with Bank of America.

Really nice performance here. I did want to ask you a question on the guide. Jim, you gave a lot of color, and I appreciate that [Technical Difficulty] in the prepared remarks. But why not raise the constant currency guide? DPS is sounding strong, logs is sounding strong, ODC is ramping nicely. And so just wanted to hopefully get additional color there on the guidance. And then one additional question on the guidance methodology. Could we, as investors just always anticipate in fiscal 1Q going forward that we will not be getting updates to the constant currency ARR guidance?

Yes, that's a good question, Koji. As you know, last year, -- we also went through a process where we said we were going to maintain the guide early in the year. The reality is we have 20% of the year under our belt. While we are very pleased with Q1, Q1 was an exceptional start. It's still early. And I tried to highlight some things that really factor into why we think it makes sense to maintain a prudent guide. It doesn't mean that we don't have confidence in the business. We actually do. There's a lot of momentum going on in the business that we have a growing pipeline, but that pipeline is very weighted towards large deals. Large deals have more uncertainty around the close timing. And so we just felt it made sense early in the year, maintained the guide. We've put some good points on the board here in Q1. We'll see how Q2 progresses, and then we'll provide an update then. But we are very optimistic about the building blocks that I tried to outline kind of in our prepared remarks.

Our next question is from Raimo Lenschow with Barclays.

Congrats from me as well. I wanted to talk a little bit about -- you talked about the bigger deals, Rick and the consolidation -- can you speak a little bit of like who you're consolidating there? I would assume on the logs is going to be Splunk, but it does feel like it's broader than that. And as part of that, like what's the appetite in the market for these sort of deals.

Jim, I'll take that one. The short form is all the log vendors, the traditional log vendors that you might imagine. The strong waves of change, I think, in the market are towards integrated solutions and then observability. And what this is rendering is that isolated log solutions just aren't delivering a customer needs. And by integrating that into an end-to-end observability framework, we find that customers are getting better outcomes at lower overall cost. And that's why they're coming to Dynatrace. They want an integrated platform. We provide that with better outcomes than they would otherwise get from stand-alone log offerings.

Our next question is from Eric Heath with KeyBanc Capital Markets.

Congrats on a strong start to the year and the acceleration that net new ARR. Rick, Jim, so it seemed like clearly a strong quarter on large expansion deals. I'm curious to understand a little bit better given some of the go-to-market changes earlier this year if kind of the activity you saw in expansion is above the typical trend line. And if kind of the expansion activity is being driven by customers consuming excess of their commitments and given kind of the compensation structure more towards commitments versus consumption, if that's driving the behavior you expected to see?

Good question, Eric, that as you mentioned, we did change kind of our sales incentive model relative to ARR versus on-demand consumption. So that may have had some modest impact. I think it's more driven by the changes that we made in our go-to-market area last year where we talked about changing our segmentation and waiting more resource and higher propensity to spend customers. And we're starting to see that. Those large customers we're seeing a large expansion opportunities. So the pipeline, I think, is more driven by and the performance is more driven by -- we now have a year of that activity, and you're starting to see it manifest itself in closed deals. And given where we waited the resource, it's not surprising that we're seeing it with large expansions. We talked about 12 that's like more than -- I think more than triple the number of million-dollar deals. And I think we nearly doubled the number of deals over $500,000. So a very, very strong expansion quarter. And we're optimistic the pipeline is very heavily weighted in particular, in those areas that we made investments in. I know Rick commented on that in his prepared remarks. So we are optimistic. The only thing I would say with that is that we do know that the timing of when large deals closed can be variable. And so we just wanted to make sure that we apply a bit of prudence in the guide for that. We'll see how things play out, but that hopefully gives you a bit of color.

I'd just add to that, that in our D1 organization, which is our services and customer success organization, they are more focused than ever on driving consumption of the platform and the consumption of the platform is, of course, then driving some of this pipeline around strategic enterprises to enable us to get to 50% growth year-over-year in that pipeline, even greater growth in the $1 million plus category of ACV deals. So it really is a concerted company effort spanning from our sales go-to-market all the way through our marketing efforts and inclusive of our services efforts as well.

Our next question is from Patrick Colville with Scotiabank.

This one is for Rick and -- Rick or Jim. This change to ODC and the kind of rev rec. Can you just go through the other metrics though impacted by this? I mean you touched in the prepared remarks that in the quarter, and fiscal '26 bottom line has seen a tailwind. But what about the -- what about top line metrics like NRR, like did they see a benefit from this ODC rev rec change?

Yes. No, there's no impact for any other metric relative to this revenue accounting estimate change. That has only to do with revenue recognition. But what I will say is relative to DPS, which you know, ODC -- I bring you back to our contracting vehicle of Dynatrace Platform subscription. We talked about the fact that it's over 45% of our customers now, over 65% of our ARR. And the metrics, Patrick, those customers that are on DPS. I mentioned they consume more of the platform, nearly 2x a customer that's on a SKU-based contract. They consume nearly 2x the number of capabilities. They have much higher NRR. They have much higher renewal rates. They have much -- so across the board, get them on DPS, as Rick said, have our teams drive consumption and ultimately, it will either manifest itself and customers consuming earlier, which will either be an ODC or they will expand earlier. And I'd say we are very confident in where we're at, and we're going to continue to make more traction in that area.

So just to be very clear, since I know it can be somewhat confusing, ODC is not at all impacting ARR or NRR.

It impacts no metric other than revenue.

Our next question is from Matt Hedberg with RBC Capital Markets.

Congrats on the results. Realizing DPS contracts are typically 3 years. I'm wondering if you're seeing anything different with this year's DPS cohort versus last year. And anything different about ODC as last year's cohort sort of like moving to year 2?

It's a good question, Matt. I'd say the cohort classes, as I mentioned before, they're all going to behave differently. You are 100%. This is the second year of -- we have our first cohort class of Q1 '26 lab that has gone through there -- I'm sorry, Q1 '25 was the first cohort class. That cohort class is now in their second year. We now have the new cohort class. They do behave differently. I've mentioned before that ODCs can be heavily weighted and are heavily weighted relative to a small number of customers and so that's no different this quarter than it was last year. The good news is, I'd say customers continue to consume at a rapid rate on the platform, and we continue to see ODC at a reasonable clip. But yes, the behavior is different, but the behavior still is customers that are on a DPS contract, whether they're in their first cohort class or their second are consuming at a very rapid rate.

Our next question is from Sanjit Singh with Morgan Stanley.

In your comments, Rick, and as you sort of -- we go through the Q&A, I think definitely sends a lot of optimism and you guys feeling pretty good about the go-to-market changes. I'm trying to like dig into like how the go-to-market changes are like manifesting? And you mentioned the strategic account pipeline up 50%. Is there any way to compare that, like, say, if we wind back to this time last year, is that an improvement versus this time last year? And how are the composition of deals, whether from a deal size perspective or the number of product perspective, any way to sort of contextualize like how the deals are changing. And I think -- the other thing I would add is that we've talked about large deal uncertainty in the past you guys famously signed a $100 million TCV deal a couple of years ago. Are we saying that there's more of these types of deals in the pipeline driven by some of the go-to-market changes that you guys have been implementing over the past several quarters?

So I'll take a crack at that, and Rick can comment. It's a great question, Sanjit. I would say that it's not surprising that versus last year, we had just made the changes early last year. So in Q1, you wouldn't have expected necessarily the growth in pipeline and the growth in deal size is relative to the changes that we made because it was still early. So it is a significant improvement from where we were last year, both in pipeline and the deal sizes. And in particular, the area that we made the investments in, which we had talked about, we were making investments in higher propensity to spend customers, largely the Global 500 and then secondarily, within the kind of below that in the large enterprises. So it is a significant change from where we were last Q1. And I would say probably not surprising because of where we put resources. They were large customers. large complex environments, where there's a lot of spend on observability with multiple tools. So the fact that we're seeing growing deal sizes and growing pipeline probably isn't a surprise. You are right that I think I talked about it maybe 1.5 years ago as an emerging trend. We're seeing this continue to build. So the good news is expansion activity with large deals is growing. I'd say the caution with that is it takes a while. It takes a while for these deals to close and timing uncertainty is really something that we try to factor into the guide.

And I would say, Sanjit, just to add to that, if we really replay the clock a couple of years ago, it was an APM motion. It was one of selling applications and a land and expand fashion really around apps. Fast-forward to our third-generation platform that we have today. This is a comprehensive end-to-end platform. It is inclusive of Grail. It has all data types factored in. As I mentioned in my prepared remarks, it is addressing applications infrastructure, log management, really is monitoring application security and so on. And the result of this is sales motion that's expanded quite broadly over these last couple of years to be more focused on end-to-end observability more focused on cloud and AI native, which is a strong and emerging area of growth for us. And the result is really manifested in the first quarter numbers. You see log growth and acceleration that's material. You see DPS now at 65% plus of overall ARR. You see partner growth with strong performance out of the GSIs and co-sell with hyperscalers of north of 50%. And you see the pipeline growth, especially in the strategic pipeline and the higher-end pipeline that's growing faster than that. So the indicators that we wanted to see, we're beginning to see in the numbers and the resulting in the performance you saw in the first quarter.

Our next question is from Will Power with Robert W. Baird.

I guess I want to come back a little bit perhaps to the previous question. I mean it sounds like you're clearly kind of reaping some of the benefits of the go-to-market changes put in place about 1.5 years ago or so. Maybe you could just share any more color on kind of where we are in that journey. Is there anything with respect to sales tenure or sales productivity? I'm just trying to figure out how much more there might be still to go as we kind of move through this year and over the next 12 months, what's still in front of us, some of those go-to-market changes?

Yes. I mean those go-to-market changes, you're right. Well, they've been in place for a little over a year. So they are maturing. As we talked about last year that the reps that we added, we added throughout the year. So we still -- our rep tenure is still a little weighted more so than historical levels to younger tenured reps. But I think the expectation is, as the year progresses, you'll see an improvement in that tenure. And we've certainly seen that reps that are more tenured produce more. So as Rick outlined, we feel really good about the changes. The way you see those changes manifest initially is in growing the pipeline. We are seeing that. But the second way you see that is in deal closures, you're actually starting to see deal closures that I think are a manifestation of some of these changes. We're very optimistic about the changes. We think that they're starting to show up in the results. And we'll have to see how the year progresses, and we'll give you an update along the way.

Our next question is from Kash Rangan with Goldman Sachs.

Rick, I have to say that your moves transforming the GTM transforming the product approach with AI have really started to pay off. So nice job on that. As you look at the success of the company with the new approach to DPS, what are your learnings that you can take away from things that have worked and that you could put to work in an amplified manner as you broadly institutionalize the transformation to more consumption. That's one bigger picture question. Second is, what are you hearing? What's the mark-to-market on tariff talk with your customer base and prospecting?

I mean on the DPS front, I think the main learning was that we were constraining our customers, and this is now dating back a few years ago to our legacy pricing model, we were constraining our customers in growing based on a legacy pricing model that forced separate contracting across all the individual modules, and it wasn't providing them access with the comprehensive platform. What DPS does, as we made note in many prior calls, is to provide full access to the platform and allow consumption draw down, and this is accelerated consumption of the individual modules and capabilities. It's also accelerated overall consumption growth. In our view, to your point on consumption cash is just that, that consumption ultimately, we do believe drives either incremental ARR or early it drives ODC. So the benefit of this overall cycle is that it is overall accretive to ARR and revenue over the course of time. And we believe that we're beginning to realize that now that we're sitting at 65% of ARR on DPS. So that's the DPS question. On tariffs, I would say we've seen very little impact from tariffs thus far. We continue to plan and forecast with a cautious outlook on macro just because those changes are very hard to predict as you all are more than aware. So we take a cautious outlook, and we'll see how they evolve and how the impact occurs, if it occurs over time. But we haven't seen substantial -- we haven't seen substantial impact at this juncture.

Our next question is from Mark Murphy with JPMorgan.

This is Noah on for Mark Murphy. You noted that the enterprise pipeline, I think, is up about 50%, and that log management remains a major opportunity, reiterating the $100 million milestone. Can you unpack how much of that pipeline strength is being driven by log-related demand specifically or potentially other adjacent solutions?

So relative to the breakdown of the pipeline that I would say we're continuing to see more and more interest in logs. So I'd say more of the pipeline gets weighted to kind of log areas. And as Rick outlined in kind of just comment earlier that the play that is working really, really well for Dynatrace, you mentioned the 3 plays that we had outlined around end-to-end observability, your traditional land with APM and then cloud native, the play that is really resonating and we're getting really good traction as an end-to-end observability. And in end-to-end observability, it almost always includes the discussion about logs. So we're seeing not just activity with logs, but when you have an end-to-end discussion, logs is almost always included in that.

Our next question is from Mike Cikos with Needham & Company.

Just to circle up on the ODC comments again. But I appreciate the disclosures around this accounting treatment here and the updated forecast for, call it, $8 million to $9 million per quarter over the rest of the year. If I strip out the $7 million onetime true-up in Q1. We still shake out somewhere around that $30 million that you guys were expecting for the full year. So I just wanted to see Q1, it sounds like ODC adjusted for that true-up was in line with expectations. That's the first part. And then the second part, as far as these ODC customers, are you seeing customers really renew at this point? And if they are, what does that look like?

Yes. So the simple answer to your first question is, yes, we are actually maintaining the $30 million. The $30 million is still unchanged, the $4 million that we did in Q1 under our as-incurred treatment was roughly in line with our expectations. We increased the full year, as I mentioned, in a range to $35 to $40 million, and that's largely because of this accounting estimate change. But relative to customers that we have a mixed bag. We have some customers that will go into ODC, some customers that will go into an early expansion. I would not say the large expansions that we saw in the quarter were driven by customers that early expanded versus ODC, that wasn't necessarily the nature of those customers. So I think more of the expansion activity that was healthy in the quarter was just driven by broader end-to-end observability deals and not necessarily driven by someone that was overconsuming their commitment.

Our next question is from Andrew Sherman with TD Cowen.

Congrats. Jim, the NRR of 111% was a nice uptick. Now that DPS is 60% of ARR, is there any reason why we wouldn't see NRR continue to increase a little bit throughout the year.

Yes, I mean, it's a good question. I do think whether it expands during the year, we'll have to see how it plays out. What I would say is given the pipeline health that I mentioned and the pipeline being pretty weighted to expansion activity. We have a very large and healthy pipeline and expansion. I would expect this year the expansions to probably be a heavier mix of our net new ARR than it has been historically. I think historically, it's been 1/3 new logos and 2/3 of expansions, I would expect that might be a little bit heavier to expansion this year just because of the health of the pipeline on expansions.

Our next question is from Brent Thill with Jefferies.

Just on AI, there was a view about last year that many enterprises were confused and trying to figure things out. They seem to be on a bigger route and making better decisions. Do you think this is starting to aid and help in some of the decisions that you're seeing and fall through in your own core business? How would you characterize just the enterprise AI adoption demand? And what tailwind that's starting to add to your business?

I would say it's accelerating. There's more and more discussion about internal use certainly more and more discussions that I'm having with customers on an increasingly frequent basis around utilization of AI in observability use cases. As I mentioned in my earlier remarks, we're spending a lot of time on AI utilization as we have in the platform for a long time but also extending that to agentic AI. We are already delivering predictive operations that integrates with causal and predictive AI along with integrating that to our automation engine to enable automated response. We have posted our MCP server to GitHub, which has been downloaded now thousands of times by developers to use in their IDEs and their development environments. Those MCP server capabilities are integrating into our overall Dynatrace platform and therefore, enabling that access by developers. And finally, that's leading into a foundational approach to agentic AI, where we're really driving the integration not into just Dynatrace agents, but also third-party agents to be able to execute to create a truly autonomous system. So we're all over it, and we think that this is going to be a very, very critical evolution in the observability industry that we believe that we're well poised to take advantage of.

Our next question is from Keith Bachman with BMO Capital Markets.

I actually wanted to discuss the competitive landscape and seeing given the expansion of your portfolio the dynamics surrounding it seems to be a market consolidated to 2 primary vendors. What do you think the current dynamics of the market suggests about the competitive landscape? I know Brent asked about the growth of AI, your logs, fundamentals. And in particular, if we think about open-source solutions and how customers may be looking at that, one of your competitors deals with startups, including AIs and it sort of understood they may be going -- one of their customers may be going more towards do-it- yourself and/or leveraging some open-source technologies. What are you guys seeing? If I break it down into the 2 parts, it seems like your net retention rate is steady, but what about some of the deals that are more new greenfield? Are you seeing any changes there in the competitive dynamics particularly from open-source projects. And then, Jim, just a quickie for you. Your free cash flow was strong this quarter, certainly above our estimates by a reasonable amount. Anything that you want us to keep in mind as we look for the next 3 quarters, you didn't change the free cash flow guidance for the year despite strong results. So anything you want to call out or ask us to keep in mind for our free cash flow targets for the year.

Thanks, Keith, I'll take the first part, let Jim take the second part. On the competitive environment, just to be crisp about it, obviously, a lot always going on in a competitive environment. What we would say is no substantial change over what we have seen a quarter ago or even a couple of quarters ago in terms of who we tend to see in the market, who are competing against and in which in wage customer segments, I would say there has been little to no leakage that we've observed to open source at this juncture. Jim, do you want to take that?

Yes. And I'd say on free cash flow, Keith, that as we've shared before, that free cash flow is always going to be strong in our first and fourth quarters just given the seasonality of when we actually have bookings and then you see collections activity. So it will be strong in the first quarter and the fourth quarter, it will be light in the second and the third quarter. So I don't expect it to be materially different than what it is historically. And we maintain the -- we tried -- we maintain the guide. There is a little bit of a headwind, I would say, on ARR, which obviously manifests itself in billings. But there is a -- I'm sorry, the tailwind, there is a headwind on spending. We have a very large percentage of our expense base that is in euros. And so we just felt it was appropriate to just maintain the guide to account for some foreign exchange headwinds on spend.

Our next question is from Brad Reback with Stifel.

Great. Just building on the hyperscaler comment a minute ago. Can you remind us how your business skews? Does it skew more towards Azure? Or is it fairly evenly weighted across the 3?

It skews more towards AWS, but we are seeing growing traction with Azure in particular.

Great.

We do have our third-generation platform, Brad, now on all 3 major hyperscaler platforms. So we're really quite indifferent as to how it proceeds. So its really customer driven.

Our next question is from Joshua Tilton with Wolfe Research.

This is Patrick on for Josh. I wanted to touch on the new logo adds in the quarter, which were down quite a bit year-over-year and sequentially. And it sounds like maybe the pipeline on the new logo side is a little weaker or at least relative to the expansion opportunities. Can you just comment on why that is? And should we think about this as sort of the new run rate this year? Or anything to call out related to what you might be doing to improve those customer adds going forward?

Yes. It's a good question. New logos were a little bit lighter. As I mentioned earlier that I do think we're going to have a heavier expansion mix this year. And I think it is a bit of the nature of the beast or some of the segmentation changes we have, where we made changes with installed base accounts with reps, we're getting earlier traction with expansions. So reps will sell what is easiest to sell within the installed base pipeline. And so we are seeing the pipeline kind of weighted towards deals like that. The new logo pipeline is healthy. It's -- so I'd say that would I prefer maybe a different mix than what we're seeing? Maybe. But I feel pretty good about the overall health of the pipeline. And whether it comes in as an expansion or whether it comes in as new logo, I'd say that's just a mix question, and you're going to have some quarters where new logos are strong and you're going to have some quarters with new logos or not. I think the important thing on new logos that we've talked about is making sure that the customers that you're bringing on that you land them at the right size. We find if you land them at the right size, and we know roughly 90% of our customers roughly land. On a DPS contract, you land them over $100,000 of propensity to expand is much greater. And so the focus is more on the quality of the land than necessarily the units.

Our next question is from Miller Jump with Truist Securities.

Great. So obviously, it's early on this, but I'm just curious if there's any contribution to pipeline and early assessment you could give us on the rollout of the strike teams. And maybe as we think about opportunities for additional strike teams down the road, what are the key criteria that you're using to determine if the strike team is beneficial to the technology?

Yes. So I mean, what I would say is we are already seeing an impact of the strike teams, notably with logs. I would say we're seeing progress with the 2 strike teams that we do have, which is logs and security, but we have seen notable traction in logs. And Rick commented on that in his prepared remarks. And I'd say the criteria is more the -- what is the product, what is the familiarity with the sales organization, what is our ability for something that is newer to get traction with people that are steep in that particular product area versus someone that's maybe more a generalist across product categories. So I'd say right now, it's logs. Right now, it's application security. We'll see if there are newer areas. And I'd say the criteria is do we think that those teams helping customers will accelerate consumption and then two, those teams working with our sales organization to accelerate productivity of deals and deal activity.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Rick for closing remarks.

Well, thank you all for your engaged questions and ongoing support. As always, to close, we are off to a strong start to fiscal 2026. We have many tailwinds, logs, DPS, partners, pipeline growth, end-to-end observability that we are very enthusiastic about as we look ahead. We look forward to connecting with you at our events over the coming months, and we wish you all a very good day.