Application performance monitoring software provider Dynatrace (NYSE:DT) announced better-than-expected results in the Q2 FY2023 quarter, with revenue up 23.4% year on year to $279.3 million. The company expects that next quarter's revenue would be around $284.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Dynatrace made a GAAP profit of $10.5 million, down on its profit of $23.6 million, in the same quarter last year.
Dynatrace (DT) Q2 FY2023 Highlights:
- Revenue: $279.3 million vs analyst estimates of $273.2 million (2.22% beat)
- EPS (non-GAAP): $0.40 vs analyst estimates of $0.18 ($0.22 beat)
- Revenue guidance for Q3 2023 is $284.5 million at the midpoint, below analyst estimates of $286.8 million
- The company reconfirmed revenue guidance for the full year, at $1.12 billion at the midpoint
- Free cash flow of $25 million, down 81.5% from previous quarter
- Gross Margin (GAAP): 80%, down from 83.2% 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 $168.5 million in Q2 FY2021, to $279.3 million.
This quarter, Dynatrace's quarterly revenue was once again up a very solid 23.4% year on year. But the growth did slow down a little compared to last quarter, as Dynatrace increased revenue by $12 million in Q2, compared to $14.6 million revenue add in Q1 2023. 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 18.1% year on year to $284.5 million, slowing down from the 31.6% 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 19.9% 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 80% in Q2.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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.
Cash Is King
If you follow 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 $25 million in Q2, up 83.8% year on year.
Dynatrace has generated $302.8 million in free cash flow over the last twelve months, an impressive 29.1% 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 Q2 Results
With a market capitalization of $9.81 billion Dynatrace is among smaller companies, but its more than $563.4 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was good to see Dynatrace outperform Wall St’s revenue expectations this quarter. And we were also glad to see good growth. On the other hand, guidance was on the lower side of the analyst estimates. Overall, this quarter's results were ok. The company is up 1.93% on the results and currently trades at $34.85 per share.
Is Now The Time?
Dynatrace may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Dynatrace is a good 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 8.0x. There is 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.The Wall St analysts covering the company had a one year price target of $47.3 per share right before these results, implying that they saw upside in buying Dynatrace even in the short term.
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