Dynatrace (NYSE:DT) Q3 Sales Beat Estimates But Stock Drops

Jabin Bastian /
2022/02/02 6:49 am EST
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Application performance monitoring software provider Dynatrace (NYSE:DT) reported results ahead of analyst expectations in the Q3 FY2022 quarter, with revenue up 31.6% year on year to $240.7 million. However, guidance for the next quarter was less impressive, coming in at $246 million at the midpoint, being 0.22% below analyst estimates. Dynatrace made a GAAP profit of $14.5 million, down on its profit of $18.4 million, in the same quarter last year.

Is now the time to buy Dynatrace? Access our full analysis of the earnings results here, it's free.

Dynatrace (DT) Q3 FY2022 Highlights:

  • Revenue: $240.7 million vs analyst estimates of $234.5 million (2.67% beat)
  • EPS (non-GAAP): $0.18 vs analyst estimates of $0.16 (11.7% beat)
  • Revenue guidance for Q4 2022 is $246 million at the midpoint
  • Free cash flow of $59.1 million, up from $13 million in previous quarter
  • Gross Margin (GAAP): 81.5%, in line with same quarter last year

"Having completed my first quarter as CEO, I am very pleased with our third quarter performance, beating the high end of guidance across our key operating metrics driven by new logo additions and continued net expansion rate above 120%,” said Rick McConnell, Chief Executive Officer.

Founded in Austria in 2005, Dynatrace (NYSE:DT) provides companies with software that allows them to monitor the performance of their full technology stack, from software applications to the infrastructure they run on.

Software is eating the world, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical, and ever more complex. To solve the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the issues in real time.

Sales Growth

As you can see below, Dynatrace's revenue growth has been very strong over the last year, growing from quarterly revenue of $182.9 million, to $240.7 million.

Dynatrace Total Revenue

And unsurprisingly, this was another great quarter for Dynatrace with revenue up 31.6% year on year. But the growth did slow down a little compared to last quarter, as Dynatrace increased revenue by $14.4 million in Q3, compared to $16.6 million revenue add in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Dynatrace is expecting revenue to grow 25.1% year on year to $246 million, slowing down from the 30.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 24% over the next twelve months.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Dynatrace's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.5% in Q3.

Dynatrace Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Dynatrace to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Dynatrace is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from Dynatrace's Q3 Results

With a market capitalization of $15.6 billion, more than $408.7 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Dynatrace deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that Dynatrace's revenue guidance for the full year miss analyst's expectations and the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 9.41% on the results and currently trades at $51 per share.

Should you invest in Dynatrace right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.