Application performance monitoring software provider Dynatrace (NYSE:DT) announced better-than-expected results in the Q3 FY2023 quarter, with revenue up 23.5% year on year to $297.4 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $305.5 million at the midpoint, 4.65% above what analysts were expecting. Dynatrace made a GAAP profit of $15 million, improving on its profit of $14.5 million, in the same quarter last year.
Dynatrace (DT) Q3 FY2023 Highlights:
- Revenue: $297.4 million vs analyst estimates of $284.7 million (4.46% beat)
- EPS (non-GAAP): $0.25 vs analyst estimates of $0.21 (17.1% beat)
- Revenue guidance for Q4 2023 is $305.5 million at the midpoint, above analyst estimates of $291.9 million
- Free cash flow of $57.5 million, up 129% from previous quarter
- Gross Margin (GAAP): 81.2%, down from 83.1% same quarter last year
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.
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.
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.
As you can see below, Dynatrace's revenue growth has been strong over the last two years, growing from quarterly revenue of $182.9 million in Q3 FY2021, to $297.4 million.
This quarter, Dynatrace's quarterly revenue was once again up a very solid 23.5% year on year. On top of that, revenue increased $18.1 million quarter on quarter, a very strong improvement on the $12 million increase in Q2 2023, which shows acceleration of growth, and is great to see.
Guidance for the next quarter indicates Dynatrace is expecting revenue to grow 20.9% year on year to $305.5 million, slowing down from the 28.5% 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 15.5% over the next twelve months.
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 81.2% in Q3.
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.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Dynatrace's free cash flow came in at $57.5 million in Q3, roughly the same as last year.
Dynatrace has generated $301.2 million in free cash flow over the last twelve months, an impressive 27.4% of revenues. This robust FCF margin is a result of Dynatrace asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Dynatrace's Q3 Results
With a market capitalization of $11 billion, more than $422.4 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.
We were impressed by the very optimistic revenue guidance Dynatrace provided for the next quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 2.75% on the results and currently trades at $39.5 per share.
Is Now The Time?
Dynatrace may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Dynatrace is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long term growth from Dynatrace given its price to sales ratio based on the next twelve months is 8.8x. There are definitely 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.The Wall St analysts covering the company had a one year price target of $43.1 per share right before these results, implying that they saw upside in buying Dynatrace even in the short term.
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