Application performance monitoring software provider Dynatrace (NYSE: DT) reported Q2 CY2025 results topping the market’s revenue expectations, with sales up 19.6% year on year to $477.3 million. Guidance for next quarter’s revenue was better than expected at $486.5 million at the midpoint, 1% above analysts’ estimates. Its non-GAAP profit of $0.42 per share was 11.5% above analysts’ consensus estimates.

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StockStory’s Take

Dynatrace’s second quarter results drew a negative market reaction despite outperforming Wall Street’s expectations on revenue and profitability. Management attributed the quarter’s year-over-year growth to strong customer demand for its unified observability platform, with CEO Rick McConnell citing "robust expansion activity, particularly in North America and the global systems integrator channel," along with significant momentum in log management adoption. The company emphasized the success of its go-to-market changes from the prior year, which drove a higher number of large enterprise deals and deeper consumption of platform capabilities, especially among existing customers. However, management also acknowledged a lighter contribution from new customer additions, noting that expansion activity outweighed new logo growth this quarter.

Looking ahead, Dynatrace’s forward guidance reflects confidence in continued expansion within its existing enterprise base, driven by increased adoption of its Dynatrace Platform Subscription model and growing log management traction. CFO Jim Benson highlighted the company’s cautious approach to guidance, stating, "While demand remains strong, we continue to take a prudent approach to our outlook," pointing to the unpredictability of closing larger, strategic deals and ongoing macroeconomic and geopolitical uncertainty. Management expects expansion activity to remain a heavier mix of net new annual recurring revenue, citing a healthy pipeline of large deals and the continued shift toward integrated observability solutions.

Key Insights from Management’s Remarks

Management pointed to several drivers behind the Q2 performance, including accelerated log management adoption, expanded enterprise sales, and the impact of its new licensing model.

• Log management acceleration: Dynatrace’s log solution gained significant traction, with sequential quarterly consumption growth of 36% and over 100% year-over-year, attributed to investments in dedicated sales strike teams and integration within the unified platform. Management expects logs to reach $100 million in annualized consumption this year, as customers consolidate multiple log tools into Dynatrace’s ecosystem.
• Large deal expansion: The company closed 12 seven-figure annual contract value deals, with a pipeline of large, strategic enterprise opportunities up nearly 50% year-over-year. This activity was concentrated among Global 500 and large enterprise customers, reflecting targeted sales resource allocation.
• Platform subscription model adoption: Over 45% of customers, and 65% of annual recurring revenue, are now on the Dynatrace Platform Subscription (DPS) model. DPS customers adopt twice as many platform capabilities and consume at nearly double the rate compared to those on legacy contracts, driving higher net retention rates and faster expansion.
• Partner ecosystem strength: Global systems integrators (GSIs) played a role in more than half of the seven-figure deals and contributed to a tripling of ARR from the largest GSI partners. Management noted that partner-led sales now represent a meaningful portion of new business.
• Go-to-market changes bearing fruit: Sales segmentation changes made last year have produced a stronger mix of large enterprise expansions and a larger pipeline weighted toward expansion rather than new logo acquisition, with management noting "a heavier expansion mix this year just because of the health of the pipeline on expansions."

Drivers of Future Performance

Management’s outlook centers on continued enterprise expansion, further DPS adoption, and strong log management momentum, but acknowledges risk from large deal timing and macroeconomic factors.

• Enterprise expansion pipeline: The company anticipates expansion activity will remain a larger share of net new ARR due to the robust pipeline of large, strategic enterprise deals. Management believes this reflects the effectiveness of sales segmentation and increased focus on high-propensity customers, but cautioned that large deals come with increased timing variability and longer sales cycles.
• Log management as a growth lever: Dynatrace expects its log management solution to continue driving platform consumption, as customers pursue tool consolidation and seek integrated observability. Management sees this as a key differentiator, citing "logs as a core element of end-to-end observability" and emphasizing ongoing investments in this area.
• Macroeconomic caution: While demand signals remain strong, management is maintaining a prudent approach to full-year guidance, citing potential headwinds from macroeconomic and geopolitical uncertainty, as well as variability in closing large, strategic deals.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will watch (1) whether log management adoption continues to accelerate and reach management’s $100 million annualized target, (2) the pace and scale of large enterprise expansions, particularly among Global 500 customers, and (3) further penetration of the DPS licensing model. We will also monitor the impact of macroeconomic developments and the ability to sustain a healthy pipeline of new customer additions.

Dynatrace currently trades at $46.60, down from $50.55 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free).

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