Dynatrace Q2 Revenue Rises 17%; Arize Reshapes FY2027 Outlook

Dynatrace (NYSE: DT) reported 17% year-over-year growth in fiscal second-quarter revenue on a constant-currency basis and updated its full-year outlook to include the acquisition of Arize. The deal is expected to add about 200 basis points to fiscal 2027 annual recurring revenue growth, while reducing the company’s non-GAAP operating margin by approximately 175 basis points.

Total revenue for the quarter ended in fiscal 2027 reached $580 million, up 17% in constant currency. Subscription revenue rose at the same rate to $553 million and represented 95% of total revenue, underscoring the recurring nature of Dynatrace’s business.

Annual recurring revenue increased 16% year over year, both as reported and in constant currency, to $2.21 billion. Constant-currency net new ARR was $70 million, unchanged from the year-earlier quarter. The company reported a dollar-based net retention rate of 109% and a gross retention rate in the mid-90% range.

For the 12 months through the second quarter, Dynatrace posted a non-GAAP operating margin of 29%. Adjusted free cash flow totaled $593 million, representing 27% of revenue, while pre-tax adjusted free cash flow was $716 million, or 33% of revenue. The trailing-12-month non-GAAP gross margin was 83%, including an 86% subscription gross margin.

Arize expands AI observability offering

Dynatrace said its acquisition of Arize is intended to give customers greater visibility and control across the AI lifecycle, spanning pre-production and production environments. The combined offering is designed to cover AI infrastructure, data and retrieval pipelines, model operations, large-language-model output quality, AI agents and workflows, and the business impact of AI applications.

The acquisition forms part of Dynatrace’s broader push toward autonomous operations. Its platform combines the Grail data lakehouse, Smartscape real-time dependency mapping and Dynatrace Intelligence, an agentic operations system intended to support automated diagnosis, forecasting and preventive action.

The company also highlighted log management and analytics as an expanding part of the platform, with annualized consumption reaching $200 million. Dynatrace said it serves about 15,000 customers across more than 35 countries through direct sales and partner channels.

Full-year growth outlook increases as profitability guidance falls

Dynatrace now expects fiscal 2027 ARR of $2.393 billion to $2.413 billion, compared with its previous range of $2.359 billion to $2.379 billion. That represents projected constant-currency growth of 17.5% to 18.5%, up from the prior 15.5% to 16.5% range. Arize is expected to contribute about $40 million of ARR.

Full-year revenue is forecast at $2.330 billion to $2.340 billion, compared with the previous $2.306 billion to $2.320 billion range. Subscription revenue is expected to be between $2.227 billion and $2.237 billion, up from the prior range of $2.206 billion to $2.220 billion. Both revenue measures are projected to grow 16% in constant currency, with Arize expected to contribute approximately $16 million.

The acquisition is expected to weigh on near-term profitability. Dynatrace reduced its fiscal 2027 non-GAAP operating income outlook to $653 million to $661 million from $682 million to $690 million. The corresponding margin forecast declined to 28% to 28.25% from 29.5% to 29.75%.

Adjusted free cash flow is now expected to be $600 million to $605 million, with a 26% margin, compared with the previous forecast of $610 million to $615 million and a 26.5% margin. Non-GAAP diluted earnings are projected at $1.88 to $1.90 per share, down from the prior $1.97 to $1.99 range.

Foreign exchange is expected to reduce fiscal 2027 ARR by approximately $20 million and revenue by about $6 million relative to constant-currency results. That represents an incremental headwind of about $6 million to ARR and $2 million to revenue compared with the company’s previous guidance.

For the fiscal third quarter, Dynatrace expects revenue of $591 million to $596 million and subscription revenue of $567 million to $572 million. Non-GAAP operating income is projected at $152 million to $157 million, corresponding to a 26% margin, while non-GAAP diluted earnings are expected to range from $0.44 to $0.45 per share.

The outlook depends in part on Dynatrace’s ability to integrate Arize and realize the anticipated benefits of the transaction. The company also identified demand and adoption trends, competition, product innovation, customer retention and expansion, partner relationships, AI-related execution, cybersecurity threats, foreign exchange movements, and economic and geopolitical uncertainty as factors that could affect future results.