DT Q3 2025: DPS customers consume 2x faster, boosting sub rev
- Accelerated consumption via DPS: Executives highlighted that DPS customers consume the platform at nearly 2x the rate of those on the legacy SKU-based model. This on-demand consumption dynamic not only drives higher subscription revenue growth but also has the potential to trigger earlier and larger customer expansions as usage exceeds contractual commitments.
- High-quality strategic pipeline and new logos: Despite lower unit additions, the Q&A emphasized that new logos are of high value, with average ARR per new logo exceeding $140,000, and a focused pipeline in strategic accounts such as Global IT 500 companies, which bodes well for future revenue expansion.
- Robust partner ecosystem traction: Management noted that an increasing share of new logo deals and revenue growth is being driven by partners—with over 50% of new logos originating from partner channels—enhancing the scalability and reach of the Dynatrace platform.
- Uncertainty from On-Demand Dynamics: The uncommitted nature of DPS on-demand consumption creates revenue timing variability that can delay ARR recognition, making it harder to forecast performance confidently.
- Weakness in New Logo Adds: Despite higher average ARR per new logo, there were concerns raised about a decline in new logo volume—especially in the commercial segment—which could signal future growth challenges.
- Sales Productivity and Execution Risks: The ongoing transition in the go-to-market strategy has yet to yield consistent productivity improvements, particularly in the commercial segment with an influx of new, less experienced reps, which poses execution risks.
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ARR & Tax Impact
Q: ARR and tax affect FY26 free cash flow?
A: Management explained that while Q4 net new ARR is modest and slightly below last year’s pace, the strategic IP transfer is producing a cash tax benefit that will ease the fiscal headwind, positively supporting free cash flow in FY26. -
DPS Consumption
Q: Is $7M on-demand ARR annualized?
A: They clarified that the $7 million on-demand consumption represents uncommitted ARR which, if annualized, indicates a headwind; however, timing variations mean future renewals and expansions will eventually offset this variability. -
On-Demand Q4 Dynamics
Q: What's Q4 on-demand consumption expected?
A: Management noted that on-demand usage is in the mid-single digits for Q4, driven by DPS customers burning through commitments early, with expectations that such consumption will continue to fuel subscription revenue growth. -
Retention Dynamics
Q: How does DPS affect net retention?
A: They explained that although on-demand consumption isn’t immediately recognized in net retention metrics, strong contract renewals and eventual expansions within multi-year DPS arrangements continue to uphold robust NRR. -
Metrics Evaluation
Q: Are ARR and NRR still valid metrics?
A: Management affirmed that ARR and NRR remain crucial, but must be evaluated alongside on-demand consumption, as the DPS model delays some ARR recognition while still driving overall subscription revenue growth. -
Sales Productivity
Q: What progress on sales productivity gains?
A: They indicated early signs of improved pipeline quality in strategic accounts, with new sales reps maturing and strengthened partner channels, even as they continue fine-tuning the commercial segment. -
DPS Expansion
Q: What triggers expansion in DPS contracts?
A: The answer was that expansion depends on how quickly customers exceed their annual commitments; sometimes an early repackage occurs if unit pricing improvements justify it, while often consumption simply resets with each contract year. -
AI Traction
Q: Which AI tool drives revenue growth?
A: Management highlighted that their advanced AI observability—including generative AI and inference tools—is a key tailwind, broadly adopted across industries and spurring greater platform usage. -
New Logos
Q: Are fewer new logos worrisome?
A: They stressed a focus on quality over quantity, noting that larger, strategic logos with high average ARR are being landed, ensuring robust long‑term growth despite a slight drop in overall logo count.
Research analysts covering Dynatrace.