Application performance monitoring software provider Dynatrace (NYSE:DT) reported Q2 FY2024 results exceeding Wall Street analysts' expectations, with revenue up 25.9% year on year to $351.7 million. The company also expects next quarter's revenue to be around $357.5 million, roughly in line with what analysts were expecting. Turning to EPS, Dynatrace made a non-GAAP profit of $0.31 per share, improving from its profit of $0.22 per share in the same quarter last year.
Dynatrace (DT) Q2 FY2024 Highlights:
- Revenue: $351.7 million vs analyst estimates of $344.5 million (2.09% beat)
- EPS (non-GAAP): $0.31 vs analyst estimates of $0.27 (17% beat)
- Revenue Guidance for Q3 2024 is $357.5 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed its revenue guidance for the full year of $1.41 billion at the midpoint
- Free Cash Flow of $34.1 million, down 72.4% from the previous quarter
- Gross Margin (GAAP): 81.7%, in line with the 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 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.
As you can see below, Dynatrace's revenue growth has been strong over the last two years, growing from $226.4 million in Q2 FY2022 to $351.7 million this quarter.
This quarter, Dynatrace's quarterly revenue was once again up a very solid 25.9% year on year. Quarter on quarter, its revenue increased by $18.8 million in Q2, which was roughly in line with the Q1 2024 increase. This steady growth shows that the company can maintain a strong growth trajectory.
Next quarter's guidance suggests that Dynatrace is expecting revenue to grow 20.2% year on year to $357.5 million, slowing down from the 23.5% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 18.3% 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 81.7% in Q2.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Dynatrace's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Dynatrace is controlling its costs and not under pressure from its competitors to lower prices.
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 $34.1 million in Q2, up 36.1% year on year.
Dynatrace has generated $329.8 million in free cash flow over the last 12 months, an impressive 25.7% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Dynatrace's Q2 Results
With a market capitalization of $13 billion, a $701.5 million cash balance, and positive free cash flow over the last 12 months, we're confident that Dynatrace has the resources needed to pursue a high-growth business strategy.
It was good to see Dynatrace beat analysts' revenue expectations this quarter. We also enjoyed seeings strong free cash flow. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 9.01% after reporting and currently trades at $48.41 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 revenue growth has been solid over the last two years. 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.
The market is certainly expecting long-term growth from Dynatrace given its price to sales ratio based on the next 12 months is 8.6x. 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 $55.6 per share right before these results, implying that they saw upside in buying Dynatrace even in the short term.
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