Dynatrace, Inc. M&A announcement

Good morning, and thank you for joining us to discuss Dynatrace's planned acquisition of Arize. Joining me today are Rick McConnell, Chief Executive Officer, and Jim Benson, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements such as statements regarding the expected benefits of the proposed transaction, expected financial impacts, and deal timing. Actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in Dynatrace's SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. The forward-looking statements contained in this call represent Dynatrace's views on August 13, 2026. We assume no obligation to update these statements as a result of new information, future events, or circumstances.

We also mention a non-GAAP financial measure in today's comments and refer you to our August 5, 2026 earnings release for additional information and related definition. Please note we have included a supplemental presentation related to this morning's announcement on the investor relations website. With that, let me turn the call over to our Chief Executive Officer, Rick McConnell.

Thanks, Noelle, and thank you all for joining us on such short notice this morning. We are very excited to discuss with you our proposed acquisition of Arize, the category leader in AI observability. From a strategic standpoint, we believe this acquisition will increase our exposure to the high-growth AI observability market, extend our end-to-end observability leadership position, advance our AI observability roadmap, expand our reach with developers, accelerate our ARR growth, and add a world-class AI native team to Dynatrace. I'd like to cover a few of these areas in more depth to highlight our strategic rationale for this transaction, then turn it over to Jim to speak to some of the financial elements. We'll then open it up for your questions.

First, the acquisition of Arize expands our market opportunity and strengthens our leadership position in AI observability and evaluations, a large and rapidly emerging category that we expect to exceed $10 billion by 2030. AI observability spans the full life cycle of an AI-powered application from continuous evaluation before and after release, to real-time visibility into how LLMs, agents, and orchestration layers behave in production, to the impact they have on applications, infrastructure, and business outcomes. During our earnings call last week, I indicated three core questions that AI observability must address, beginning with, is it working? Just as with traditional workloads. The second question is new. Is it accurate? Is the AI model delivering output that can be trusted and relied upon with confidence? And the third, are my agentic systems delivering the outcomes for which they were built?

Enterprises are deploying agents to build software at a pace that wasn't possible before, and code must be built well, shipped safely, and run reliably. Gartner describes the difference in AI observability well in their innovation insight on AI observability from May of this year. They say AI systems fail differently from traditional software. A misconfigured application typically produces an error that is visible, traceable, and reproducible. An AI system can fail silently. It can generate confident, plausible-sounding outputs that are biased or factually wrong, with no corresponding alert in an infrastructure dashboard or application log. Back to our perspective, as AI evolves from simple prompts to autonomous multi-step systems and increasingly operates without a human in the loop, visibility becomes increasingly critical.

AI observability provides AI engineers, SREs, and platform teams with the insights they need to debug, optimize performance, control costs, and improve accuracy, helping to ensure AI-powered services remain reliable, efficient, and trustworthy. A second area I'd like to cover is that acquiring Arize will accelerate our own AI observability portfolio and roadmap. Through this acquisition, Dynatrace will have an even stronger end-to-end observability solution from pre-production to production. Arize adds leading capabilities in AI and agent evaluation, experimentation, and agentic workflow optimization across development and production. These complement Dynatrace's existing strengths in application and AI infrastructure of observability, model performance, and business impact. Together, these capabilities position Dynatrace to provide observability across the full AI stack, connecting model and agent quality with application performance, infrastructure health, AI usage and cost, and business outcomes. This is not a point solution.

It is a portfolio expansion that positions Dynatrace to better capture a greater share of AI spending in this rapidly emerging category. Third, Arize unlocks the developer audience for us. Through its widely adopted open source community, Arize has already earned the trust of AI developers who increasingly influence enterprise technology decisions. This acquisition will give Dynatrace direct access to this important audience while strengthening our position with AI-native companies. Arize's strong engagement with developers, coupled with Dynatrace's deep enterprise relationships and global reach, will create new opportunities to land, expand, and deliver greater value as customers operationalize AI. Through millions of monthly downloads of Arize's open source Phoenix platform, we believe there is a significant opportunity to accelerate ARR growth over time by further extending Dynatrace's reach into developer-led buying motions and AI-native workloads.

We have high confidence in our ability to sell our products together because numerous customers already use Dynatrace and Arize in unison, spanning industries from automotive to communications to e-commerce to financial services and more. We expect access to Dynatrace's customer base to further accelerate Arize's trajectory. Finally, to round out my remarks, as I mentioned, we are acquiring an exceptional team with deep AI expertise, strong roots in the Bay Area's AI ecosystem, and what we believe is a terrific cultural match for Dynatrace. We are excited to welcome Arize's co-founders, Jason and Aparna, along with the broader Arize team, to Dynatrace. We are focused on a thoughtful post-closing integration plan, and we intend to give the Arize team the runway to build on what they have created while leveraging Dynatrace's scale, engineering expertise, and global reach to accelerate product innovation and customer impact.

In summary, we are convinced that Arize is an excellent fit for Dynatrace. Adding Arize to the Dynatrace platform further reinforces our end-to-end leadership in the overall observability market and will create substantial customer and shareholder value. With that, I will turn it over to Jim to cover the financial aspects of this transaction.

Thanks, Rick. We are very excited about this acquisition. Under the terms of the agreement, we will acquire Arize for a total consideration of $915 million, subject to customary adjustments consisting of approximately $815 million in cash, as well as replacement equity awards for Arize employees joining Dynatrace. We have sufficient cash on hand, along with our existing credit facility, to fund the purchase price. In addition, our plan for ongoing share repurchases remains unchanged. We expect Arize to be immediately accretive to ARR growth and unlock significant cross-sell and up-sell across our combined customer bases. While Arize is a small company, it is rapidly growing, and we expect it to add approximately 200 basis points to the Dynatrace ARR growth rate in fiscal 2027. From a profitability perspective, we expect Arize to be approximately 175 basis points dilutive to Dynatrace non-GAAP operating margin in fiscal 2027.

With the anticipated synergies, we expect to generate incremental operating margin expansion from fiscal 2027 levels into fiscal 2028 and beyond. The acquisition remains subject to customary closing conditions, including regulatory approvals, and is expected to close by the end of September or in early October. Given this timing, we do not expect any material impact to the Q2 guidance we provided last week. We will provide a more detailed update to our fiscal 2027 guidance on our Q2 earnings call in early November. In summary, acquiring Arize represents a significant opportunity to accelerate Dynatrace's leadership in AI observability, strengthen our long-term growth profile, and create substantial value for both customers and shareholders. With that, I would like to open it up for questions.