“Full year ARR is now expected to be roughly $2 billion.”

In context

“James Martin Benson (Chief Financial Officer): 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 seven-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 the 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 twice the number of capabilities than those on a SKU-based model. They also consume at a much faster pace with consumption growth rates nearly twice 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 four quarters and recognize that amount ratably over that same period. The result of doing so, yields a one-time 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. For fiscal 2026, it 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 three 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 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 billion and $1.9 billion, 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 a non-GAAP operating margin of 29% and a 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 our 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.”