Dynatrace, Inc. (DT) Earnings & Analysis

Latest quarter

Dynatrace reported Q2 FY2027 revenue of $579.9 million, up 17.4% from $493.8 million a year earlier, and its revenue and non-GAAP earnings per share beat the consensus. On the call, CFO Jim Benson said revenue and non-GAAP earnings per share also exceeded the high ends of the company’s guidance.

The company’s filing attributed subscription revenue growth to existing customers expanding their use of the platform and adoption by new customers. It said demand for product enablement and adoption services drove service revenue growth.

Dynatrace’s overall gross margin fell to 80.6% from 81.8% a year earlier. The filing attributed lower subscription gross margin primarily to higher cloud hosting costs as customers used more of the platform. Operating margin rose to 16.5% from 14.8%, while diluted earnings per share increased to $0.23 from $0.19. Dynatrace reported free cash flow of $41.1 million, compared with $27.8 million a year earlier.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Rick McConnell said quarterly net new annual recurring revenue was flat year over year as several large enterprise deals shifted into the second half. He said the opportunities remained active and several had already closed. CFO Jim Benson said net new ARR was below the company’s expectations, but that he remained confident in the full-year target.

Asked about the delays, Benson said large observability deals can require customers to decide how to consolidate tools and sequence changes involving other vendors. He said most delayed expansions involved customers considering early commitments rather than contracts that had reached renewal. Benson added that Arize had not caused customers to delay decisions.

Benson said a large group of customer renewals is due in the second half, with more weighted toward Q4. He expects that schedule to create expansion opportunities and to shift net new ARR toward Q4 relative to historical seasonality. He also said the trailing net retention rate declined sequentially as some late-stage expansions moved into the second half.

On usage, McConnell said platform consumption continued to grow and that AI customer cohorts were consuming at more than twice the rate of other customers. He said Dynatrace began charging for its AI agents in Q3 and was offering preview users the opportunity to move to paid usage. He also said the Arize acquisition, which closed in October, brings AI observability and evaluation capabilities and that cross-sell opportunities were already underway.

Asked about pricing as customers expand, Benson said larger usage commitments can warrant additional discounts, but the amount depends on each customer’s existing pricing and volume increase. He declined to give a broad discount assumption. McConnell said Dynatrace was considering pricing changes, including elements of its model that currently has no overage penalties.

Benson attributed the quarter’s non-GAAP operating margin performance partly to revenue and partly to the timing of expenses. He said capital allocation priorities include funding innovation and growth, including acquisitions, alongside share repurchases. McConnell also said the company had announced a partnership with CrowdStrike intended to support log management adoption.

Guidance

Benson said Dynatrace raised its standalone constant-currency outlook for total and subscription revenue growth and now expects both to grow 16.0% in FY2027, including the acquisition’s contribution. He said the company now expects a non-GAAP operating margin of 28.0% to 28.3%, including acquisition-related dilution.

Dynatrace projects non-GAAP diluted earnings per share of $1.88 to $1.90, down from its prior outlook; Benson attributed the change primarily to the convertible bond transaction. He said the company lowered its expected adjusted free cash flow margin to 26.0% and pre-tax free cash flow margin to 31.0%, reflecting the acquisition partly offset by favorable cash taxes.