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Welcome to Dynatrace, Inc.'s Fiscal Third Quarter 2026 Earnings Call. At this time, all participants will be in listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I will turn the conference over to Noelle Faris, Vice President, Investor Relations. You may now begin.

Good morning, and thank you for joining Dynatrace, Inc.'s third quarter Fiscal 2026 earnings conference call. Joining me today are Rick McConnell, Chief Executive Officer, and James Benson, Chief Financial Officer. Before we get started, 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, Inc.'s SEC filings, including our most recent quarterly report on Form 10-Q and annual report on Form 10-K. The forward-looking statements contained in this call represent the company's views on February 9, 2026. 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. Thank you for joining today's call. Dynatrace, Inc. delivered very strong third quarter fiscal 2026 results, exceeding our guidance across every metric. Through this fiscal year, we have driven a stabilization of ARR growth at 16%, three quarters of consistent double-digit net new ARR growth, annualized logs consumption that has now surpassed $100 million, a strong balance sheet, and healthy cash flow generation that have allowed us to double the size of our share repurchase program while still investing aggressively in innovation and finally, an increased ARR of 125 basis points at the midpoint that puts us on track to achieve $2 billion in ARR by 2026. Our sustained strength underscores the increasing importance of observability to the software ecosystem, accelerated demand for our end-to-end platform, and successful execution of our go-to-market strategy. James Benson will share more details about our Q3 financial performance and guidance in a moment. In the meantime, I would like to start with some highlights from our annual customer conference, Perform, illustrating the substantial evolution and differentiation of the Dynatrace, Inc. platform in capturing the AI opportunity, along with several customer and partner advancements. Perform 2026, which took place just two weeks ago, was an invigorating event where we hosted roughly 2,000 people in person, including customers, prospects, and partners, plus thousands more virtually. If you were not able to join us, I encourage you to watch the replay of our main stage presentations. Each year, Perform offers the opportunity to examine the larger forces shaping our industry. And this year, the shift is more profound than ever. I shared two primary takeaways from my opening keynote. First, observability is entering a new era, one in which it is foundational to resilient software and dependable AI environments. Second, Dynatrace, Inc. is unique in its ability to combine trustworthy deterministic AI with agentic AI to deliver reliable autonomous outcomes. And this is why we see Dynatrace, Inc. as the AI-powered observability platform for autonomous operations. Let's unpack this a bit. To start, in 2023, the AI market was estimated to be less than $200 billion, and it is now on a path to be nearly $5 trillion in the next seven years. Meanwhile, cloud and AI-native workloads are exploding. Hyperscaler growth continues to climb, now approaching $300 billion in annualized revenue from AWS, Azure, and GCP alone, growing in the high twenties. That level of growth at this kind of scale is simply unprecedented. But this astonishing scale and growth are also accelerating the challenges our customers face every day. As we have often stated in the past, workloads and data are exploding along with a massive increase in their complexity. Tools are fragmented, and it is often difficult to know whether AI results can be trusted. And without trustworthy insights, organizations understandably are hesitant to automate. One ramification of all this has become abundantly clear: AI-powered observability has become essential in an AI-first world. The question then becomes, how do organizations harness the value of observability to help deliver on the promise of AI? Dynatrace, Inc. exists for this moment. We are already helping organizations realize increased value from AI. We have been driving to this point for many years, from initially enabling organizations to be reactive to issues, to proactive through automated root cause analysis, to predictive by adding machine learning and anomaly detection, allowing customers to anticipate and resolve issues before they become customer impacting. This is our quest to help customers deliver software that works perfectly. Our third-generation platform is fully available and built for the complexity and incredible scale of modern cloud and AI-native environments. Its advancements allow us to look ahead, predict issues, and build resilience directly into the fabric of an organization. So what makes Dynatrace, Inc. unique? Our differentiation is integrated deeply into the platform's architecture. And it comes down to three things: Grail, SmartScape, and AI. First is Grail, our massively parallel processing data lakehouse and the only analytics engine purpose-built to process exabytes of observability and security data in real-time while preserving full context. This is not a general-purpose data store retrofitted for observability. Grail was architected from the ground up for modern software, where a single transaction can traverse hundreds of services across multiple clouds. In the agentic era, where every AI-driven transaction can be unique and unpredictable, real-time contextual processing is essential. Logs are a great example of why this architecture matters. When logs are unified with traces, metrics, events, sessions, and other telemetry in the same platform, they do not just add volume. They add decisive context. Once customers experience the increased value and lower cost of having logs in context with other data types, they are eager to replace their legacy logs tooling. That is why we are delighted to have exceeded the $100 million logs consumption threshold with current growth of over 100% year-over-year. Our second major differentiator is SmartScape, our real-time dependency graph that continuously maps the entire technology stack. SmartScape builds a living topology model that understands not just what exists, but how everything connects and impacts everything else. So the platform always has the current context of the environment itself. And third is AI. And this is where the first two converge. Grail provides unified data at scale, and SmartScape provides the topology and context. Together, they enable our causal and predictive AI, proven in the most demanding enterprise environments and continuously evolving to deliver optimal outcomes. This leads to our announcement at Perform of Dynatrace Intelligence, one of the biggest innovations in our history. Dynatrace Intelligence is the industry's first agentic operation system built for modern software ecosystems. By fusing our deterministic AI foundation with agentic AI across an ecosystem of agents, Dynatrace Intelligence delivers AI-powered observability that organizations can trust. With Dynatrace Intelligence at its core, our platform is purpose-built for the agentic era, enabling a future where AI-powered observability can help customers auto-prevent, auto-remediate, and auto-optimize. Similar to Grail, Dynatrace Intelligence is embedded in the platform and is not sold as a separate SKU. It is available to every customer today. We expect to monetize it in two ways. First, through increased platform usage as customers adopt AI assistance across teams, driving greater use of Grail. And second, through usage-based agentic execution, where AI-driven actions are delivered through workflows and ecosystem integrations. The durability of infrastructure software comes from deeply engineered data planes and AI control planes that operate in highly dynamic production environments. Dynatrace, Inc. has developed broad domain expertise and is uniquely positioned with Grail, SmartScape, and Dynatrace Intelligence that is built directly into the back of the platform. Each of these capabilities is complex in its own right but magnified in the Dynatrace, Inc. platform as they are designed to operate as one system, applying AI to deliver answers and automation in environments that constantly shift in composition and workflow. This foundation has been built over years of operating at scale in real-world production environments, making the Dynatrace, Inc. platform both highly differentiated and difficult to reproduce quickly or safely. We therefore strongly view broad-based AI expansion as a tailwind for Dynatrace, Inc. AI-assisted development with our Vibe coding code copilots, AI-driven software delivery compresses release cycles and increases the rate of change across already complex enterprise stacks. That raises operational risk unless teams have an observability control plane with closed-loop feedback to protect reliability and user experience. And as AI-driven systems become more probabilistic, outputs vary and issues can be harder to reproduce. AI does not reduce the need for observability. Rather, it makes observability essential for trusted insights and automation so organizations can operate with confidence. I would like to turn next to our customers. At Perform, more than 70 customers shared how the Dynatrace, Inc. platform has become an indispensable component of their software environments. Here are just a few of their incredible stories. One of the largest airlines shared how they are using Dynatrace, Inc. to help them deliver 31% better reliability, 75% fewer incidents, and a 10% reduction in mean time to resolution, leading the industry in on-time departures and arrivals for two years in a row. Canadian communications giant Telus shared how they are using AI to move from firefighting to proactive reliability, reducing the average time to resolve issues from forty minutes to five minutes. Vodafone shared how they are using AI to modernize operations at massive scale, migrating more than 2,500 users, 8,500 dashboards, and eight terabytes of daily log ingest from their legacy log provider to Dynatrace, Inc. in just two months. And Nationwide shared how Dynatrace, Inc. has helped them reduce priority one incidents by 74%. In addition, customers expressed very strong interest in our strategic collaboration with ServiceNow to advance autonomous IT operations and scale intelligent automation. At Perform, ServiceNow's EVP and GM of technology workflow products reinforced our better together vision, highlighting use cases of how customers can integrate with Dynatrace, Inc. to get greater efficiencies in their teams, accelerate agentic initiatives, and drive automation with confidence. In an agentic world, engaging in and integrating with an ecosystem of partners, including our long-standing relationships with global system integrators and hyperscalers, will be mandatory. And we are investing to deepen and broaden those relationships. In Q3, we announced deeper technical engagements with all of the major hyperscalers. We are integrating with Amazon Bedrock agent core, embedding Dynatrace, Inc. with Azure's SRE agent, and serving as the launch partner for GCP Gemini command line interface extensions and Gemini Enterprise. Finally, as the velocity of software development continues to accelerate, we have advanced our strategy to extend left to developers with the acquisition of DevCycle last month. Built on open feature, an open-source initiative originally created by Dynatrace, Inc., DevCycle is a feature management platform that helps developers, SREs, and platform teams bring progressive delivery for AI-native applications directly into the Dynatrace, Inc. platform. This solution will enable customers to accelerate their ability to release features in a controlled manner and remediate issues faster. To wrap up, we have seen impressive customer momentum over the last several quarters with dozens of 7-figure wins, rapid logs expansion, and customers standardizing on our platform for end-to-end observability. And we have delivered extraordinary innovation with Dynatrace Intelligence and the evolution of the Dynatrace, Inc. platform to deliver significant customer value. This momentum is a testament to our unique ability to provide precise and trustworthy answers that serve as the foundation for autonomous operations in delivering resilient software and reliable AI. As I hope you can tell from my remarks, we are highly enthusiastic about our opportunity ahead. James, over to you.

Thank you, Rick. And good morning, everyone. Q3 marked another quarter of strong execution as we once again surpassed the high end of guidance across all our key metrics, showcasing the growing demand for our leading AI-powered observability platform and the durability of our balanced business model. As Rick mentioned, we achieved three consecutive quarters of double-digit net new ARR growth, record new logo ARR, and we surpassed our goal of $100 million in annualized consumption for our log management solution. The combination of our ongoing go-to-market maturity and execution, the increasing necessity of observability in an agentic AI world, our leadership position in the market, and our unified platform differentiation give us confidence that the momentum in the business will continue as we look ahead. Our conviction in the business is further evident in the board's authorization of a new $1 billion share repurchase program. That is double the size of our inaugural program. I will share more information on that later in my remarks. Now let's review the third quarter results in more detail. As the business has evolved with the introduction of DPS, we have continued to look for ways to provide investors with the best KPIs of our performance. Given what we have learned as DPS has matured, and with the changes in the on-demand consumption accounting treatment, going forward, we will focus on ARR and its underlying growth driver, net new ARR. This is the primary metric that drives our subscription revenue, and it's how we measure and track the business internally. Turning now to ARR, we ended the quarter at $1.97 billion, representing 16% growth and demonstrating stabilization of ARR growth for three straight quarters. Q3 net new ARR was $75 million adjusted for foreign exchange movements, coming in well above our expectations. Net new ARR was up 11% from a year ago and represents the third consecutive quarter of double-digit growth. This strong performance was driven by both new logo ARR and steady expansion ARR, including a number of 7-figure end-to-end observability deals. In Q3, we added 164 new logos to the Dynatrace, Inc. platform. The average ARR per new logo was over $160,000 on a trailing twelve-month basis. We continue to target landing with high-quality new logos that have a greater propensity to expand. The average land size in Q3 was particularly robust at over $200,000 and helped drive new logo ARR over 21% of a robust Q3 of fiscal 2025. Our value proposition continues to resonate with enterprise customers that are outgrowing their existing DIY or commercial tooling solutions. They are seeking business value from tool consolidation and coming to Dynatrace, Inc. for the depth, breadth, and automation of our unified AI-powered observability platform. Once customers experience the benefits of the Dynatrace, Inc. platform, they are often quick to expand their usage. Average ARR per customer continues to grow and is now nearly $500,000, highlighting the continued adoption of the platform and value we provide to customers. As we have said in the past, 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 medium to long term. Gross retention rate in Q3 remained in the mid-90s, demonstrating the strategic relevance of the Dynatrace, Inc. platform. The platform is mission-critical to our customers' operations. Net retention rate or NRR on a trailing twelve-month basis was 111% in the third quarter, consistent with the prior two quarters. As Rick mentioned, we continue to see broader usage and deeper penetration of capabilities across the platform. Notably in log management, which remains our fastest-growing product category and surpassing the $100 million annualized consumption milestone we set for ourselves. With our log strike team in place now for nine months, and our selling motion continuing to mature, we expect logs to be an ongoing source of significant ARR growth. Moving on to revenue. Total revenue for Q3 was $515 million, and subscription revenue was $493 million, both up 16% and exceeding the high end of guidance by 150 basis points driven by strong net new ARR. Turning to profitability, Non-GAAP operating margin was 30%, exceeding the top end of guidance by nearly 100 basis points driven mostly by revenue upside flowing through to the bottom line. Non-GAAP net income was $135 million or $0.44 per diluted share, $0.02 above the high end of our guidance. We generated $27 million of free cash flow in the third quarter. Due to seasonality and variability in billings quarter to quarter, we believe it is best to view free cash flow over a trailing twelve-month period. On a trailing twelve-month basis, free cash flow was $463 million or 24% of revenue. As a reminder, this includes over a 600 basis point impact related to cash taxes. Pre-tax free cash flow on a trailing twelve-month basis was 30% of revenue. Finally, as of today, we have substantially completed the $500 million share repurchase program announced in May 2024. In Q3, we increased the pace of our repurchases, buying back 3.5 million shares for $160 million at an average price of just over $45 per share. We believe the strength of our balance sheet and cash flow generation afford us the ability to continue to strategically invest in R&D innovation for our customers while also returning capital to shareholders. We announced today our board has authorized a new $1 billion share repurchase program. This program is the largest in our company's history and double the size of our previous program. And underscores our confidence in the business, our conviction in the long-term growth opportunities, and view that our shares are undervalued. We intend to be active buyers in the market at current levels. Moving now to guidance. The demand environment for observability remains robust, and the growth drivers fueling the business continue to trend positively. The landscape is benefiting from secular tailwinds of end-to-end observability, cloud modernization, and AI workload proliferation. Our go-to-market strategy continues to build momentum and consistency as evidenced by three consecutive quarters of consistent double-digit net new ARR growth. Our DPS licensing model continues to enable broader adoption and increased usage of the platform. Logs continue to be a significant source of growth for both our installed base and new logos. The combination of these strong underlying growth trends gives us conviction in the ongoing momentum of the business. As a result, we are raising full-year guidance across the board. Starting with ARR, we are raising ARR growth guidance 125 basis points to a range of 15.5% to 16%. And expect to surpass our next milestone of delivering over $2 billion in ARR. The high end of this ARR range implies another quarter of double-digit net new ARR growth. Moving to revenue. We are raising total revenue and subscription revenue growth guidance by 75 basis points at the midpoint to 16% growth. Turning to the bottom line, we are raising full-year non-GAAP operating income guidance by $9 million and free cash flow by $13 million. This translates to a non-GAAP operating margin of 29% and free cash flow margin of 26%. Finally, we are raising non-GAAP EPS guidance to a range of $1.67 to $1.69 per diluted share, representing an increase of $0.05 at the midpoint of the range. This non-GAAP EPS is based on an expected diluted share count of 304 million shares. In summary, we are very pleased with our Q3 and continued momentum through fiscal 2026. We are focused on executing to close the year out strong. And with that, we will open the line for questions. Operator?

Thank you. We will now be conducting a question and answer session. I ask you to please limit yourself to one question to allow as many analysts as possible to ask questions. Thank you. Our first question is from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Hey, good morning, and congrats on a great quarter. My question was if you think about what you see in the client base in terms of understanding how your automation story is coming together, how it's important to kind of bring all the different data sources together in one place. What does it mean in terms of engagement level with clients, etcetera? Are we seeing an ongoing kind of bigger kind of debate about, like, or a bigger momentum they are building? What do you see in the pipeline in terms of deal size, etcetera? Just kind of seeing how that momentum is ongoing. Thank you.

Hey, Raimo. Thanks so much for the question. I guess where I would start is end-to-end observability is what we are seeing as being very, very strong in terms of a sales play and momentum at the moment. This is where our customers are looking to expand. They are realizing that there are extraordinary tools for all. That there is a lack of expense management in that and poor outcomes. And so this is, I would say, the number one area where we are seeing momentum in the business is precisely that. And as you look to an AI-first world that's coming, it becomes even more pervasive. The end-to-end observability is a mandatory foundation to be driving those kinds of outcomes.

Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.

Yes. Thank you for taking the question. Congrats on the stabilization in ARR growth for the last several quarters. I wanted to ask a follow-up on Raimo's question. In a world where agents are doing a lot of the investigating and the triaging on incidents versus human site reliability engineers, there's sort of two questions there. What's the pace of that change? Like, how realistic are we going to see that sort of environment in the next couple of years? And then two, from a product perspective, how does that change observability and how does that change, you know, how customers will use Dynatrace, Inc.?

Hey, Sanjit. So in terms of pace of change, I think that there is still a lot of apprehension about just how much conviction organizations have in driving AI and AI outcomes. So I think it's going to evolve over a period of time. Having said that, I do think that there is a significant change in observability as we look to the future and that it really becomes, in our view, the control plane for enterprise AI. And what I mean by that is simply that observability becomes foundational to this agentic action. Without deterministic AI, without assuredness of understanding what the baseline problem is, and, of course, we use the notion of answers, not guesses here, you simply cannot take agentic action. So the steps that we see that organizations have to go through are, number one, you have to get the end-to-end observability because that's where you get the broadest, most concrete outcomes and answers. Number two, you then use that deterministic AI to develop an understanding of what actions need to be taken. And then number three, and only then, can agentic AI take over, cut some action, and probably only with a portion of the actions required for auto-protection, auto-remediation, and auto-optimization. So it is going to be a journey, but that journey is beginning today, and that journey begins with end-to-end observability followed by leverage of deterministic AI as a mission foundation for agentic AI to follow.

Our next question comes from the line of Gray Powell with BTIG. Please proceed with your question.

Okay. Great. Thanks for taking the question. So, yeah, it was really good to see log monitoring consumption past the $100 million mark this quarter. I guess a couple of questions there. Like, how quickly has that materialized over the last year? I know that there was sort of a new iteration that you came out with in late 2024. And then what are your next milestones for the product?

Thanks for the question, Gray. Again, we're very pleased. We told you last quarter that we were on the precipice of hitting this milestone, and we exceeded it. Our logs business is continuing to grow north of 100%. So by far the fastest-growing product category in the business. You're right that we've seen a significant step function increase in the acceleration of the business from last fall to now. Last fall was when we were able to get the logs product use case complete. We had the product packaging and pricing right. That evolved a little bit in the following quarter. So you saw our step function increase, and it continues to exceed our expectations. Relative to the next milestone, we have initially set our next milestone publicly. I can tell you that it will be a significant source of new ARR. We're seeing this already. Rick mentioned these end-to-end observability deals. Nearly all of them have logs embedded with them. So we expect this to be a huge source of ARR growth for the business going forward.

Our next question is from the line of Will Power with Baird. Please proceed with your question.

Great. Thank you. Yes, I guess I'd echo the congratulations on the results. Great to see the ARR growth stabilizing, the strength in net new ARR. As we think about the net new ARR trends, the consumption commentary you just provided, the logs opportunity, the AI opportunity. Maybe help us think about the puts and takes that could contribute to ARR perhaps accelerating as we move into fiscal 2027? How do we think about that?

I'll take that, Will. Good question. Again, we're focused on continuing the momentum. As I said in my prepared remarks, third consecutive quarter of double-digit net new ARR growth, stabilizing ARR at 16%. If you look at the high end of our guide, it suggests that continues into Q4. So four quarters of stabilizing growth for ARR and four quarters of double-digit ARR growth. We've said that our objective is to show an in ARR. Obviously, we'll have to continue to execute like we have. The go-to-market momentum continues. We continue to benefit from large-scale end-to-end observability deals. So the changes we made are manifesting themselves in the results. We're seeing traction with partners. I'm not going to provide guidance on this call. I can tell you we're very optimistic about the momentum in the business. We'll have to see. Come May, what the guide is, but our objective is to build an acceleration in the top-line growth.

The next question is from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Yes. Hey, guys. Thanks so much for taking the question here. Jim, in your prepared remarks, you mentioned net new ARR and ARR are the core foundations and the building blocks of growth. But last quarter, you did give a new metric, you know, annualized platform consumption dollar growth rate of 20% plus. I wonder if you could share how that metric compared this quarter compared to fiscal second quarter. Is it directionally higher? Is it the same? Or is it lower than the 20% plus that you gave last quarter? Thank you.

It's a good question. We've shared a lot of KPIs, and we've tried to share KPIs as investors try to understand our journey with DPS. Which was certainly get them on the platform, allow them to access the platform, all offerings, and that's playing out nicely. So relative to consumption, consumption continues to grow north of 20%. So consumption is growing very healthy, consistently higher than ARR growth.

The next question is from the line of Ryan MacWilliams with Wells Fargo. Please proceed with your question.

Hey, it's Deshaun on for Ryan MacWilliams. This year you've talked about some of the strength in large deals and large deal pipeline. Is there any update you could provide on how those large deals are progressing? And maybe whether your incremental confidence on those deals coming through has changed in the past couple of months?

Sure. I'll take that. I think what I talked about in Q2 was we continue to see a robust pipeline. That pipeline is very weighted to large deals, deals over half a million, deals over a million. And that makes sense relative to the go-to-market changes we made last year. That we were focused on these accounts that had a large or high propensity to spend. I think what you're seeing, you saw in the Q3 results that we built consistency in close rates of these large deals. Our expectation in Q4 is you'll see that again. So I think what we've done is we build consistency in our execution. You're seeing that through the first three quarters. The expectation in the fourth quarter at the high end of our guidance, you'll see that again. And it's heavily driven by this continued trend of very large enterprises looking to vendors to consolidate on, and Dynatrace, Inc. is in a very good position. You saw even new logos, new logos, five of our new logos were over a million dollars. So this is bold things existing customers and new logos, looking to Dynatrace, Inc. to be their provider of choice as this trend continues.

I would just add to that also that we see AI as an enormous tailwind to the observability business overall. You have to have observability in order to drive an AI-first world. We believe that fundamentally. And the result of that is that you have to have end-to-end observability to get the best outcomes, the best underlying analytics, and insights to be able to take agentic action. So as the world shifts toward a move of autonomous operations, observability becomes foundational, and end-to-end observability is fundamental to maximizing the success of that type of deployment.

Our next question comes from the line of Eric Heath with KeyBanc. Proceed with your question.

Hey, Rick, Jim, thanks for taking the question. I guess what stood out to me that was most impressive was the fiscal 4Q net new ARR guidance, a strong lift from what you're expecting previously. So just maybe an extension of the prior question. Hey, Eric. Could you just speak up a little bit?

Yeah. Any better?

That's a little bit better. Thank you.

Okay. Yeah. So just to the question. So the fiscal 4Q, net new ARR guide was a strong lift from what you were expecting previously. Just an extension from the prior question, your response there, any more detail you could share on what has given you the confidence in the outlook, maybe some assumptions on the close rates in those large end-to-end deals? Thanks.

Yeah. I mean, one of the things I talked about in the last call is we had very healthy close rates in the first half of the year. We saw healthy close rates in Q3. I'd say our visibility of the pipeline here, especially near term, is quite strong. That doesn't mean we expect to get every deal. But we do believe that we have very good line of sight to be able to deliver against this guide, the range that we're providing. So I think some of it is visibility. And I think it's also what I think is a continued improvement in our go-to-market maturity around having an ability to call the ball on some of these large deals. I think our ability to do that continues to improve.

The next question is from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Thank you. Good morning. I wanted to ask about new logo growth. Jim, you had called out that I think you had 164 new logos. Solid growth there. And yet if I look at the numbers, it appears you're still getting about 70% of your ARR coming from existing clients, 30% is coming from new logos. And I'm just wondering, is that the way we should be thinking about it as we look out over the next year? I think investors have some worry that, you know, the existing customer base may not sustain growth for a period of time. And so trying to understand how you might be able to expand your new logo growth and particularly maybe going not to small business, but maybe expanding the TAM a little bit. As you talked about, AI is foundational, so maybe that presents some opportunities for a broader customer audience. At the same time, there are solutions out there that are less expensive that require more work, and I'm not sure how DPS would fit into, you know, that a facilitator of new logos or is it a hindrance in that you got to make a little bit larger commitment? But just maybe talk about how we should be thinking about new logo growth over the next couple of years? Thank you.

So I'd say near term, Keith, one, I would say we're very pleased with the new logo momentum that we're having. In particular, there is a lot of momentum with just customers that are looking to Dynatrace, Inc. to consolidate fragmented tools on. So we continue to make good traction there. You should expect in the near term, kind of over the next year, that it'll be a call it roughly one-third new logo, two-thirds expansions. I would clarify. We are not even close to exhausting our ability to expand within our installed base. You know, we continue to grow. We almost have a half a million dollars now per customer. So and we have many, many million-dollar customers. So the propensity to expand is still pretty material. But near term, I think we're going to be roughly one-third, two-thirds. We do look at that, Keith, relative to what are the different velocity motions you can do to maybe land a little bit lower. I think in this cloud AI-native world, that's probably an area we continue to get some traction in. But near term, you should expect kind of the mix that I just mentioned.

I would just add that with sensibly the completion of the third-generation platform that is now out there, it does enable us to do a much better job of tuning and targeting to different personas, SRE, platform engineering, particular developers. At our Perform conference a couple of weeks ago, we had a full developer day, with a ton of developers working on the product and the solution overall. We just did the DevCycle transaction, which enables us to extend left further with regard to feature management. So you can expect us to be leaning into development teams and developers as an added persona with a primary intent of generating over the course of time new logo momentum and unit volume. Not just in ACV, which is what Jim was referring to, by way of a record quarter in Q3.

The next question comes from the line of Matthew Hedberg with RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my questions, guys. Congrats on the consistency. Really good to see. I guess for either of you, I wanted to ask about the competitive environment. I guess both from smaller vendors like Cronosphere getting acquired, but I know investors are also worried that large language model providers, at some point, might do everything in software. I mean, just given that concern, you know, how do you think about the competitive risk from some of these frontier model providers as well?

Hi, Matt. A lot in that question. Let me start with the first part, which is some of the acquisitions in the industry. And I would just say as we look at Cronosphere and Observe others, we really don't see them in the market very often on a direct competitive basis for us. Simply because of our target segment typically being in the global 15,000 largest accounts on the planet, and what they're looking for is end-to-end observability. And many of these solutions that you mentioned really have point solutions either focused on logs or focused on metrics. But really not an end-to-end solution that's at all comprehensive to be able to compete against Dynatrace, Inc. at that level. So we always are paranoid about competition. We're looking at moving chess pieces, especially as larger players get into the market. And so we're very observant of that, but at the same time, these smaller players haven't really been competitive in the past. With respect to this dialogue around LLMs replicating observability, that's a longer answer and something that we've been spending a lot of time thinking about to try to give you a succinct response to it. I would say number one, we view there to be a very sizable difference between enterprise software with standard workflows and infrastructure software like ours with highly dynamic workflows requiring variable evaluation of billions of interconnected data points. Secondly, as I mentioned earlier, we really do see observability as the control plane for enterprise AI. We don't believe that you can easily replace observability through vibe coding or an LLM instantiation. That can do the same thing that we do. Third, we really see our focus and our moat really as being architectural and that code-based. We have a platform with SmartScape, with Grail, with Dynatrace Intelligence, not just individual point products, and the interaction of those becomes quite sophisticated. We have AI increasing complexity across LLMs and agentic systems, not reducing it. And then finally, we built an extraordinary amount of domain expertise over more than a decade of evaluation of AI workflows or work based upon the AI analytics that we complete. And we do believe that grounding AI actions in a deterministic and explainable system is much more powerful than using and relying only on probabilistic models. So there's a lot to be had in there in terms of additional conversation, but the net of that is we see Dynatrace, Inc. as a very, very durable solution over the course of the long term for the overall environment we see for managing enterprise AI instantiations.

The next question comes from the line of Patrick Edwin Colville with Scotiabank. Please proceed with your question.

Thanks. Rick and Jim. And I thought your answer just then was really fascinating. I guess I just want to pivot back to the question earlier on the 4Q guide. I mean, I'm calculating the updated guide implies 22% net new ARR growth in constant currency in 4Q, which if I'm calculating that correctly, I mean, that would be the biggest net new ARR guide for a long, long time. So just can you just circle back? What gives you confidence there? Because I know that's the number one question we're going to be receiving. Like, why does Dynatrace, Inc. have confidence in that number?

Well, I'll start with why we have confidence in the number and then clarify what the guide is as far as the growth rate. We have confidence in the number because our pipeline is incredibly robust. We continue to have significant demand for durability. And so the change we made on the go-to-market side is playing out. So we have good visibility. So our visibility is what drives our conviction. That's one. I'd say relative to the guide, and this probably is just, you know, puts and takes relative to FX, that at the high end of the guide, it would imply another quarter of double-digit growth. It's not twenty, it's like in the kind of a 10 or 11% in the fourth quarter. Relative to the guide. But still quite robust, again, four quarters of double-digit net new ARR growth, which has continued in building momentum in the business.

Our next question is from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Thanks. Couple of small ones. First of all, you could give us an update on how your security strike teams are doing, if there's any progress there? And then Rick, I want to go back to your answer about LLMs and what they can do to observability. So the opportunity is very clear. Again, just on the cost side, you just announced Dynatrace Intelligence, which sounds fascinating. I guess, logically speaking, it would seem that customers would find this as the way to interact with your system longer term. I guess the question is, again, could agents, third-party agents, disintermediate you and actually replace Dynatrace Intelligence, and third-party agents can do that. And somehow again, get step removed from the customer system working in the background, and the customer is only engaging with third-party agents to interact with your system. Wouldn't that disintermediate the value that you bring to your customers?

Hey, Ittai. On security, it continues to be an important business for us. It's growing nicely. We said that it would take us to get to the $100 million level than logs. A few quarters back. But we see ongoing progress there. We do see the ongoing convergence of security and observability, so no change there. And our security strategy remains to be focused on the observability buyer as opposed to the CISO where we have relationships today. So that continues to be our strategy, our focus, and our evolution of security and the security strike team. On the overall LLM environment, I think I covered it relatively completely. I would only add that no, we don't see it as highly likely that an LLM is going to be able to replicate Dynatrace, Inc. for all the reasons I described. In particular, we see that in a highly variable environment that is playing out on a day-to-day basis with all of these interconnections within that environment in large enterprises that it would be very, very difficult for any AI piece of solution or piece of software to replicate that environment for all the reasons I described.

The next question is from the line of Michael Joseph Cikos with Needham. Please proceed with your question.

Great. Thanks for taking the questions here, guys. It was great to get some of the data points around average land and new logo growth, etcetera. But maybe for Jim, I want to ask about DBNRR with the stabilization we've been able to demonstrate here at the 111. Can you help us think through where we are in driving an improvement in this metric just given the go-to-market maturity that you are talking to and these end-to-end observability deals as well as where are we in that DPS renewal cycle? That would be terrific. Thank you so much.

Thanks, Mike. So again, we're pleased to see a continued stabilization in dollar-based net retention rate at 1.11. I think I mentioned this in the past that our sales organization is focused on maximizing bookings. So you're going to have some quarters where you're more new logo heavy. You're going to have some quarters where you're expansion heavy. But I would say, Mike, we are still in the building phase. You mentioned DPS. That in fiscal 2027 will be kind of your first full three-year cohort classes coming, you know, your, you know, so that you'll have a one-year, two-year, and three-year cohort classes. So there is a building momentum going into fiscal 2027. That to the extent we can continue to execute, you should see an inflection in that metric.

The next question is from the line of Brad Reback with Stifel. Please proceed with your question.

Great. Thanks. Rick, in an increasingly agentic world, do you feel you'll need to evolve your pricing kind of paradigm in order to properly monetize? Thanks.

It's a good question, Brad. You know, the way that, the way that articulated in my prepared remarks and the way that we see it evolving is that we monitor the agentic world in two ways. Number one, through increased workloads and increased overall usage of the platform through Grail, through SmartScape, and in delivery of the analytics that we provide on an all-day, everyday basis. Secondly, is we do expect to monetize directly agentic workloads. So with a combination of those two elements, we do believe that there is direct monetization of the agentic AI element. If you look at Dynatrace Intelligence overall, it really does have both components. Number one, it has the component deterministic AI to evaluate what's happening in your environment with certainty and through causation and context. We then take those answers and then deliver those into an AI environment that is agentic in nature, where either a Dynatrace agent or a third-party agent through an ecosystem that is essentially orchestrated by Dynatrace, Inc. can take action, and it is through that agentic workflow that we can provide additional monetization.

Our next question is from the line of William Miller Jump with Choice Securities. Please proceed with your question.

Hey, great. Thank you for taking my question. I know you are guiding to 27% right now, but I was just hoping to understand how you're thinking about hiring as we zoom out. Specifically, curious if there's AI efficiencies that you're potentially getting on headcount or if some of the initiatives you've talked about are causing you to lean in further on hiring maybe in the year ahead? Thanks.

Yeah. We're not going to guide here for fiscal 2027, but I can tell you that your point about leveraging AI for internal productivity is something we continue to leverage within Dynatrace, Inc. And so in that regard, that will continue. That will certainly be a source of kind of moderating hiring in certain areas, whether they be customer support, G&A, driving more sales productivity. I think it's necessarily going to be a driver of us not hiring in the R&D space, even though we're leveraging heavily AI within that realm as well to make our developers more productive. So we'll continue to hire in R&D notably. And then I'd say hiring thereafter is going to be kind of more moderated.

The next question is from the line of Andrew Michael Sherman with TD Cowen. Please proceed with your question.

Hey, guys. Thanks. Jim, great to hear of the 20% plus consumption growth continued. How should we think about the gap of that between ARR and revenue growth? What drives the convergence of those two over and what timeframe would that look like?

Yeah. It's a good question. We've gotten that. That was one of the reasons why in our prepared remarks I didn't comment on consumption growth. It's very healthy, DPS is playing out the way we expected. I would say there is going to be there is certainly a lag between growing at those rates and seeing it manifest itself in an expansion. Sometimes you see an early expansion. Sometimes you do not. So I'd say that, you know, there's no simple answer to that. I'd say there isn't an elongated time period between consumption growth and then seeing ARR acceleration that comes thereafter. But, you know, again, the whole premise of getting customers onto the platform for DPS is get them to consume more. Consuming more means they're getting more value. More value means likely an early expansion because they're trialing something that maybe they weren't using before. And so even when consumption growth is healthy, there are other reasons why customers expand. They expand because there's entirely new use cases that they're looking at. And so you again look at our performance around driving double-digit net new ARR growth. Our expectation is we want to continue to do that going into fiscal 2027.

Thank you. Our final question will be from the line of Brent Thill with Jefferies. Please proceed with your question.

Great. Thanks. Just on the go-to-market side, if you can maybe talk through the plans on the sales hiring front, rep capacity, how you're seeing, obviously, you're getting great productivity, good to see the good results. But maybe you could just walk through what you're seeing there and what you're expecting to do in terms of the overall distribution adds over the next year?

I'll take that. We continue to drive improvements in sales rep productivity. So we will continue to hire reps. It's important to remind investors that it's not just reps that drive this productivity. We've continued to get significant traction with leveraging our partner channels, notably GSIs, and the hyperscalers continue to be a source of continued improvement in productivity per rep. So hiring will continue. Have more to say about what we're going to do in that space in the Q4 call, but that's what you should expect as you think about fiscal 2027.

Thanks very much to you all. That brings us to the end of our call. We very much appreciate your engaged questions, your ongoing support. To close, we believe that observability is becoming increasingly critical to the overall software ecosystem. And delivering reliable software and AI. We have very strong conviction as we entered Q4 with momentum headed into FY27. We are enthusiastic about what we see ahead from a customer standpoint and from the number of personas engaged in and requiring observability solutions to deliver the outcomes they seek. We very much look forward to connecting with you at IR events over the coming months. And we wish you all a very good day. Thank you.