“We expect this DPS adoption to materialize over time in early expansions or on-demand consumption beyond customer commit levels.”

In context

“Rick McConnell (CEO): Thanks, Noelle, and good morning, everyone. Thank you for joining us for today's call. Dynatrace delivered a strong finish to fiscal 2025, having achieved several noteworthy milestones and accomplishments. Subscription revenue grew 20%. We surpassed $1.7 billion in ARR and $1 billion in DPS ARR. We expanded our non-GAAP operating margin by more than 100 basis points and our pretax free cash flow margin by roughly 250 basis points, emphasizing the strength of our balanced business model. We surpassed 4,000 customers and 5,000 employees. We announced major platform innovations, including Grail for GCP, observability for developers, preventive operations, cloud security posture management, AI-powered log management and analytics, and AI observability to name just a few. And we were consistently named a leader in all major analyst reports for observability and AI Ops over the past year. Today, I'm going to cover my perspective on the observability market, growth, tailwinds and opportunities, our agentic AI vision, and the growing criticality of business observability. Let's begin with the market. While we are clearly in an uncertain economic environment, we continue to see strength in the observability market as virtually all organizations aspire to have their software work perfectly, just as our vision imagines. And now more than ever, customers need to deliver improved productivity and a better user experience at lower costs, which is precisely our value proposition. As such, we see observability spending continuing to be a priority. Additionally, cloud growth remains healthy. Hyperscalers are now generating nearly $250 billion in annualized revenue growing in the mid-20s. And as organizations accelerate cloud and AI native initiatives, the need for AI-powered observability at scale has never been greater. We expect to see materially greater penetration in the coming year into hyperscaler workloads, where we expect the majority of observability market growth to occur, and we are innovating to capture this opportunity. Our next major platform release planned for June will further empower cloud and AI native teams to expand their AI Ops and preventive operations. These new capabilities will provide development teams with easy access to hyperscaler and Kubernetes telemetry, leverage Davis to analyze all data with AI assistance, and leverage Davis Copilot for remediation workflows or instant response. We believe these secular tailwinds will fuel an addressable market opportunity that we now size at $65 billion in observability and application security. Beyond these market dynamics, I'd like to talk next about four key Dynatrace growth drivers. Each of these represents an intentional area of focus to drive consumption growth across the Dynatrace platform. First, are the ongoing investments in our go-to-market efforts, including customer segmentation, partner enablement, and expanding our sales motion beyond application performance to include end-to-end observability and cloud modernization. We kicked off these initiatives at the beginning of fiscal 2025 and they continue to gain traction. We expect them to drive sales productivity gains in fiscal 2026. We've seen a consistent trend in total pipeline growth, driven primarily by strength in strategic accounts, where pipeline was up 45% compared to last year, highlighting the traction in our customer segmentation efforts. More than 80% of our ACV closed in the quarter were partner influenced, with over 40% of those coming from GSIs and hyperscalers. And the expansion of our sales motion beyond our proven land-and-expand approach resulted in more than 50% of our anchor deals in the quarter, driving end-to-end observability. These investments are gaining traction and contributed to large deal closures in the quarter, including 15 deals with incremental ACV of over $1 million. Second, our Dynatrace Platform Subscription or DPS licensing model continues to build momentum with over 40% of our customer base and more than 60% of ARR leveraging this approach as of the end of the fourth quarter. With access to the full platform, customers are adopting Dynatrace more broadly across their IT environments, resulting in increased consumption. We expect this DPS adoption to materialize over time in early expansions or on-demand consumption beyond customer commit levels. Third is the massive opportunity in log management. We believe the logs market remains ripe for disruption, given expensive legacy solutions that largely operate independently from existing observability tools and result in lower value. Our unique approach to log management and analytics integrates logs, traces, metrics, and other core observability and security data types into a single platform, providing a holistic view of the health of IT ecosystems. Combined with our AI approach, teams can derive greater value from logs faster and at lower cost. Leveraging Grail as our massively parallel processing data lake house, logs can then contribute near real-time insights at enormous scale. We are seeing strong adoption of our log management offering, with one-third of our customers now using this solution. The number of customers leveraging logs is up 18% compared to last quarter, plus nearly half of our new logos added in the fourth quarter are deploying logs in their initial implementation compared to roughly 20% in the same quarter last year. And finally, in what could arguably be our largest growth opportunity, the AI revolution is upon us. So I'd like to turn to that next. As you know, AI is evolving into a whole new era where systems can plan, make decisions, and take action autonomously. According to IDC, by 2029, AI-based software testing tools capable of writing 85% of tests will be augmented by AI agents and agentic workflows. And we expect that as much as 80% or more of developers' time is spent ensuring that code is running properly in production by securing debugging and optimizing it. In many ways, this is exactly what Dynatrace was purpose-built to enable, and it represents a massive opportunity. We were pleased to see that Forrester recently recognized Dynatrace as a leader in AIOps with the highest score in the Current Offering category. Our mission for many years has been to deliver answers and intelligent automation from data, well beyond dashboards and root cause analysis. Automation is enabled by an autonomous system that can recommend and then carry out actions based upon trustworthy, deterministic conclusions from context-rich data. And agentic AI is the architectural approach for that system. Indeed, our AI-native platform is what sets Dynatrace apart from our peers. And we believe that as a result of this market evolution, it will become an even bigger differentiator in the future. In fact, Dynatrace has been investing in advancing our capabilities to evolve into a fully agentic AI platform that can automatically remediate, protect, and optimize without the need for human intervention. A true agentic platform must be able to make intelligent decisions to act in real-time. We postulate this requires various core capabilities. You need a common data lake house to store all data types in context for accuracy, performance, and scale without manual tagging. You must be able to act in real time without limitations of predefined schemas or indexing. You need causation of data, not correlation, to deliver answers that are trustworthy and actionable. You need a combination of AI techniques, including causal, predictive, and generative AI to facilitate the discovery and prediction of issues to provide these answers. And in autonomously preventing and remediating issues as well as optimizing cloud-native workloads, an agentic AI system needs to delegate and handle tasks, not only on its own but also to an ecosystem of AI agents. We believe Dynatrace is uniquely positioned to lead in this space with Grail, our indexless schema-free lake house designed for real-time intelligent AI automation at scale. Today, we already provide knowledge, memory, reasoning, planning, and actioning to meet the heightened requirements of an agentic AI system. Our knowledge is fueled by one agent collecting all data types in context, normalized with our semantic dictionary, cleansed, protected, and then ingested through an open pipeline. Grail provides instant access to petabytes of short- and long-term data in context, the real-time memory to enable AI queries. Davis leverages the combination of causal, predictive, and generative AI to handle the reasoning. Davis AI copilot can then intelligently plan actions based on context and reasoning. And finally, our automation engine is able to take action, autonomously executing tasks and collaborating with third-party AI agents. We plan to continue to innovate aggressively to meet the needs of the rapidly evolving AI landscape. I'd like to next turn to business observability. As the AI landscape continues to evolve, so too have our customers' needs for a more sophisticated observability approach. They want more than technical analytics. Organizations want to use observability solutions to help them understand core business metrics. Business observability provides precise answers to help customers address not only operational issues, such as cost reduction and risk mitigation but also customer-centric issues such as optimizing user experience and driving profitability. A large cruise ship operator is utilizing Dynatrace to enhance the on-board experience for passengers. They focus on the core user experience, aiming to monitor and analyze microservices and technical analytics in depth. In many customer implementations, our platform is increasingly contributing to our differentiation. Only Dynatrace captures business events in relation to other data types, allowing for quick, easy queries, comprehensive visualization dashboards, and automation driven by business needs. I would like to welcome Steve McMahon as our new Chief Customer Officer, taking over from Matthias Dollentz-Scharer, who is retiring from the company. I wish Matthias well after an incredible decade with us, and I am thrilled with Steve's arrival, as his experience in observability and security at Splunk, CrowdStrike, and Zscaler provides an excellent foundation for his swift integration. To wrap up, our market opportunity is stronger than ever. We have several Dynatrace-specific drivers supporting our growth. We have a significantly differentiated AI-powered observability platform that is leading the way toward us delivering a highly differentiable agentic observability platform. We are increasingly bringing customers deep business insights, and we have a compelling business model which has enabled us to deliver a sustained balance of growth and profitability. Jim, over to you.”