Application performance monitoring software provider Dynatrace (NYSE: DT) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 16.9% year on year to $445.2 million. Its non-GAAP EPS of $0.33 per share was 9.1% above analysts’ consensus estimates.

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StockStory’s Take

Dynatrace’s first quarter results reflected growing customer adoption of its AI-powered observability platform and continued expansion into enterprise accounts. CEO Rick McConnell highlighted the increasing role of large deal closures and noted that over 80% of annual contract value closed in the quarter was partner-influenced, particularly through global system integrators and hyperscalers. Management attributed incremental growth to the broader adoption of the Dynatrace Platform Subscription (DPS) licensing model, which allows customers to utilize a wider array of platform features. CFO James Benson emphasized the rising average annual recurring revenue per customer, now well over $400,000, as evidence of the platform’s expanding footprint within client environments. New product traction in log management and ongoing investments in sales productivity and partner enablement were also cited as key contributors to the quarter’s performance.

Looking ahead, Dynatrace’s guidance for the next quarter and the upcoming year is grounded in expectations of continued growth in AI-driven observability and broader platform adoption. Management sees the market’s shift toward cloud-native and AI-native workloads as central to future expansion, with McConnell stating, "As organizations accelerate cloud and AI native initiatives, the need for AI-powered observability at scale has never been greater." CFO James Benson pointed to the company’s evolving focus on consumption-based growth, driven by dedicated teams aimed at increasing product adoption. While management remains optimistic about the secular trends supporting demand, they are also cautious, acknowledging the potential for extended sales cycles and heightened budget scrutiny among enterprise customers. Investments in R&D, sales capacity, and partnership programs are expected to support long-term profitability and top-line growth.

Key Insights from Management’s Remarks

Management attributed the quarter’s revenue shortfall to a mix of uncommitted on-demand consumption patterns and longer enterprise sales cycles, but emphasized notable progress in platform adoption and AI product expansion.

• DPS Licensing Adoption: The Dynatrace Platform Subscription (DPS) model continued to gain traction, now accounting for over 40% of the customer base and more than 60% of annual recurring revenue. Management reported that DPS customers adopt significantly more features and exhibit higher consumption rates, which they believe will drive future expansion revenue.

• Log Management Acceleration: Dynatrace’s log management solution saw rapid uptake, with over one-third of customers now using the product—an 18% increase over the prior quarter. Nearly half of new customers implemented log management at the outset, and management expects this business to grow by over 100% in the coming year, underpinned by the Grail data lakehouse technology.

• Partner-Driven Sales Expansion: Over 80% of closed contract value was influenced by partners, notably global system integrators and hyperscalers. Management highlighted that these relationships provide greater reach and are crucial as workloads shift to cloud environments, with strategic accounts showing a 45% pipeline increase year over year.

• AI and Agentic Observability: The company outlined its continued investment in agentic AI, aiming to enable autonomous system remediation and optimization without human intervention. CEO Rick McConnell described advances in AI-native platform capabilities as a key differentiator, especially as enterprise customers seek to automate more operational workflows.

• Go-to-Market Enhancements: Dynatrace introduced “strike teams” focused on driving adoption in key areas such as logs, application security, and digital experience monitoring. These dedicated teams are measured on consumption and are intended to support the company’s transition toward a more usage-based revenue model.

Drivers of Future Performance

Dynatrace’s outlook is shaped by the anticipated expansion of cloud and AI-native workloads, increased product consumption, and ongoing investment in platform innovation.

• AI-Powered Product Expansion: Management plans to accelerate investment in AI observability and preventive operations, anticipating that these enhancements will drive broader adoption among development teams and differentiate Dynatrace in a rapidly evolving market.

• Consumption-Focused Growth Model: The company is increasing its emphasis on consumption-based revenue streams, supported by dedicated adoption and customer success teams. Management expects this approach to result in higher usage volumes, though it may introduce variability in short-term revenue recognition as customers shift to on-demand consumption patterns.

• Enterprise Sales Cycle and Budget Scrutiny: While secular trends remain favorable, management flagged a cautious outlook due to extended sales cycles and increasing budget scrutiny among large enterprise clients. This dynamic may affect the timing of new bookings but is expected to be offset by growing partner influence and expansion within existing accounts.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will focus on (1) the pace of DPS adoption and its impact on customer expansion rates, (2) the growth trajectory of log management and AI-driven observability solutions, and (3) the effectiveness of partner-led sales motions, particularly with hyperscalers and global system integrators. Progress in application security adoption and continued innovation in AI automation will also be important indicators of Dynatrace’s ability to maintain momentum.

Dynatrace currently trades at a forward price-to-sales ratio of 8.4×. In the wake of earnings, is it a buy or sell? See for yourself in our full research report (it’s free).

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