Dynatrace's (NYSE:DT) Q3 Sales Top Estimates But Stock Drops 14.9%

Full Report / February 08, 2024

Application performance monitoring software provider Dynatrace (NYSE:DT) beat analysts' expectations in Q3 FY2024, with revenue up 22.7% year on year to $365.1 million. The company expects next quarter's revenue to be around $374.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.32 per share, improving from its profit of $0.25 per share in the same quarter last year.

Dynatrace (DT) Q3 FY2024 Highlights:

  • Revenue: $365.1 million vs analyst estimates of $357.7 million (2.1% beat)
  • Billings: $437.6 million vs. analyst estimates of $442.9 million (1.2% miss)
  • EPS (non-GAAP): $0.32 vs analyst estimates of $0.28 (14.5% beat)
  • Revenue Guidance for Q4 2024 is $374.5 million at the midpoint, roughly in line with what analysts were expecting
  • ARR Guidance for full year 2024 is $1,490 million at the midpoint, below expectations of $1,499 million
  • Free Cash Flow of $67.36 million, up 97.4% from the previous quarter
  • Gross Margin (GAAP): 81.4%, down from 82.5% in the same quarter last year
  • Market Capitalization: $17.86 billion

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.

Dynatrace is essentially a monitoring system that aims to detect performance issues in a company's technology (for example, their booking systems) before inefficiencies or bottlenecks end up impacting customers. It can use artificial intelligence to automatically identify (or at least guess at) the root cause of a problem. On top of that, Dynatrace can help automate mitigation procedures where necessary, ensuring a timely reaction to any problem.

Dynatrace was acquired by Compuware the same year it was founded. In 2014, it gained its independence again, under the leadership of John van Siclen, its previous and subsequent CEO.

Dynatrace gives engineers visibility across the whole computing environment, whether cloud or on-premise, and allows them to see how everything is connected. This also allows an AI engine to provide causation-based answers and proactive, actionable insights.

Cloud Monitoring

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 this challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with the visibility to troubleshoot issues in real-time.

Dynatrace faces a number of competitors in the performance monitoring space, both large corporations, such as Datadog (NASDAQ:DDOG), Splunk (NASDAQ:SPLK), New Relic (NYSE:NEWR) and up and coming startups, such as Better Stack.

Sales Growth

As you can see below, Dynatrace's revenue growth has been strong over the last two years, growing from $240.8 million in Q3 FY2022 to $365.1 million this quarter.

Dynatrace Total Revenue

This quarter, Dynatrace's quarterly revenue was once again up a very solid 22.7% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $13.4 million in Q3 compared to $18.81 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Dynatrace is expecting revenue to grow 19.1% year on year to $374.5 million, slowing down from the 24.5% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 17.8% over the next 12 months before the earnings results announcement.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.4% 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, sales and marketing, and general administrative overhead. Despite its recent drop, Dynatrace still has an excellent gross margin that allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Dynatrace's free cash flow came in at $67.36 million in Q3, up 17% year on year.

Dynatrace Free Cash Flow

Dynatrace has generated $339.6 million in free cash flow over the last 12 months, an eye-popping 25.4% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Dynatrace's Q3 Results

It was good to see Dynatrace beat analysts' revenue expectations this quarter. However, billings missed. And while full-year revenue guidance came in higher than Wall Street's estimates, full year ARR (annual recurring revenue) came in below expectations. Also, its gross margin fell. Zooming out, we think this was a mixed quarter but with software stocks that are often expensive from a valuation perspective, small misses can lead to big disappointments. The stock is down 14.9% after reporting, trading at $51.61 per share.

Is Now The Time?

When considering an investment in Dynatrace, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Dynatrace is a good business. We'd expect growth rates to moderate from here, but its . On top of that, its impressive gross margins indicate excellent business economics and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Dynatrace's price-to-sales ratio based on the next 12 months of 11.3x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about Dynatrace and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $62.36 per share right before these results (compared to the current share price of $51.61), implying they saw upside in buying Dynatrace in the short term.

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