Application performance monitoring software provider Dynatrace (NYSE:DT) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 34.8% year on year to $209.7 million. Dynatrace made a GAAP profit of $13.2 million, improving on its profit of $12.8 million, in the same quarter last year.
Dynatrace (DT) Q1 FY2022 Highlights:
- Revenue: $209.7 million vs analyst estimates of $203.4 million (3.08% beat)
- EPS (non-GAAP): $0.16 vs analyst estimates of $0.15 (9.2% beat)
- Revenue guidance for Q2 2022 is $220 million at the midpoint, above analyst estimates of $215.6 million
- The company lifted revenue guidance for the full year, from $892.5 million to $990 million at the midpoint, a 10.9% increase
- Free cash flow of $81 million, roughly flat from previous quarter
- Gross Margin (GAAP): 81.4%, in line with previous quarter
Founded in Austria in 2005, Dynatrace 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.
With the growing complexity of systems powering their businesses, it is increasingly harder for organizations to monitor the operational status of all their apps. Coupled with the increased reliance on digital-only solutions, monitoring systems are expected to play an important role in the future of the digital economy.
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 very strong over the last year, growing from quarterly revenue of $155.5 million, to $209.7 million.
And unsurprisingly, this was another great quarter for Dynatrace with revenue up an absolutely stunning 34.8% year on year. Quarter on quarter the revenue increased by $13.2 million in Q1, which was in line with Q4 2021. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.
Analysts covering the company are expecting the revenues to grow 25.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 81.4% in Q1.
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 a pressure from competition to lower prices.
Key Takeaways from Dynatrace's Q1 Results
With market capitalisation of $17.7 billion, more than $387.2 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 upgrade to the revenue outlook Dynatrace provided for the rest of the year. And we were also excited to see the really strong revenue growth. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $62.5 per share.
Is Now The Time?
When considering Dynatrace, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There is a number of reasons why we think Dynatrace is a great business. First, its revenue growth has been strong. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.
The market is certainly expecting long term growth from Dynatrace given its price to sales ratio based on the next twelve months is 19.1. Looking at the tech landscape today, Dynatrace's qualities stand out, and we like the stock at this price.