Dynatrace Inc Q3 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matt Hedberg - RBC - Analyst : Great. Congrats on the results. Jim, we're getting questions on the on-demand piece. So I wanted to kind of ask a little bit of a question there. It seems to be ramping rapidly, which I think is a good thing for long-term adoption of DPS. I guess when you think about your Q4 guidance assumptions, do you have any sense for what's your -- what's implied there for on-demand in 4Q? And I know it's early, but when we think about next year, how should we sort of -- what's the conceptual framework we're thinking about on-demand for fiscal '26 as we think about ARR next year?

Question: Will Power - Baird - Analyst : Okay. Great. Rick, I want to come back to some of the introductory comments around AI. You laid out a nice suite of tools that are designed to help on AI fronts, whether it's observing LLMs or helping with agentic work. I guess, I wonder if you could just help highlight, where are you seeing the most traction today? And is agentic AI something that's starting to benefit you and what's the outlook there? And is there any way just to kind of help conceptualize revenue or ARR contribution around all that?

Question: Keith Bachman - BMO Capital Markets - Analyst : I have a question maybe just sneak in a clarification. If I look at your ARR guidance implied for Q4, if I'm doing the math right quickly, it suggests sort of a mid-60s numbers again in terms of net new, which is down year-over-year. And I know you said -- I think you said that the DPS contracts or the consumption-based element maybe is mid-single digits, but it's still declining year-over-year pursuant to your guidance. I just want to see if there's anything you can help us understand because it sort of starts the jumping off point as we begin to fine-tune our models for FY26. And then just a clarification, Jim, I know you said you'd give us more help on taxes. But just philosophically, as we think about '26, we're trying to set our free cash flow. Is the change -- is the cash tax impact just broadly -- is it a help, hurt or neutral, just to help us think about our free cash flow estimates for '26.

Question: Pinjalim Bora - JP Morgan - Analyst : Congrats on the quarter. Jim, I just wanted to understand the NRR dynamics one more time, if you might. It seems like the DPS tool overages has increased, you said $7 million last quarter. I think you said low single digits or something like that. So that is a headwind to ARR, I understand. But that $7 million is a quarterly number. So the headwind to ARR, would that be an annualized number? And then obviously, from the last quarter, you would have caught up with some of those contracts, which should be a tailwind to ARR, if you have. But it seems like you might not have caught up in three months, it can take maybe more than that. So I'm trying to understand what is the net of this? Because NRR did downtick sequentially. And I'm trying to understand if you net it out, is that 100%, the downtick from last quarter, is that 100% because of this dynamic would you say?

Question: Mike Cikos - Needham & Company - Analyst : I just wanted to cycle back on the go-to-market changes that you guys announced earlier this year and just get an update. I wanted to get a sense of where we are in recognizing the sales productivity gains from those changes? And really, what gives management here the confidence? Because I know in Rick's prepared remarks, he had cited the fact that you guys are looking to accelerate this transition. Can you give us an order of magnitude on that front?

Question: Sanjit Singh - Morgan Stanley - Analyst : Rick, I hope you feel better. Coming back to some of the color, Jim, that you provided on the structure of the DPS contract. That was super helpful, noting that they're multiyear contracts. I guess the question is, what's going to be the triggering event for an expansion, if let's say a customer is in sort of year one of DPS, their renewal is not for another two-plus years. How do you sort of see that? How do you sort of see that playing out? And I guess the context here is within these sort of year 1, year two, year three dynamics, are there step-ups in commitments? Or are they sort of like $1 million in year one, $1 million in year two, $1 million in year three? Just a little bit more clarity on what the average DPS contract is sort of constructed.

Question: Andrew Nowinski - Wells Fargo - Analyst : It sounds like you're seeing a lot of positive tailwinds as it relates to most of the leading indicators in your business with the pipeline improving. I think you said more traction through partners and more business transacted through partners. But if you look at the new logo adds, I guess they were down year-over-year. Is that related to the commercial segment weakness you talked about? Or is there something else going on there?

Question: Koji Ikeda - Bank of America - Analyst : So just from a real high level, just trying to understand, is ARR and NRR, as it's defined today, no longer the right metrics to gauge the health of the business? Maybe why or why not from a long-term perspective? And then with on-demand becoming a much bigger part of the story, is there a way to maybe talk about qualitatively, how subscription NRR compares to reported NRR? Maybe how DPS NRR compares to subscription NRR, if you could.