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Dynatrace (NYSE:DT) Q4 Sales Beat Estimates


Full Report / June 24, 2022
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Application performance monitoring software provider Dynatrace (NYSE:DT) reported Q4 FY2022 results topping analyst expectations, with revenue up 28.5% year on year to $252.5 million. However, guidance for the next year was less impressive, coming in at $1.15 billion million at the midpoint, being 1.05% below analyst estimates. Dynatrace made a GAAP profit of $929 thousand, down on its profit of $26.9 million, in the same quarter last year.

Dynatrace (DT) Q4 FY2022 Highlights:

  • Revenue: $252.5 million vs analyst estimates of $120.9 million (2.44% beat)
  • EPS (non-GAAP): $0.17 vs analyst estimates of $0.15 (11.1% beat)
  • Revenue guidance for Q1 2023 is $262.2 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for upcoming financial year 2023 is $1.15 billion at the midpoint, missing analyst estimates by 1.05% and predicting 23.7% growth (vs 32.3% in FY2022)
  • Free cash flow of $82.3 million, up 39.1% from previous quarter
  • Gross Margin (GAAP): 81%, down from 82% 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.

Sales Growth

As you can see below, Dynatrace's revenue growth has been very strong over the last year, growing from quarterly revenue of $196.5 million, to $252.5 million.

Dynatrace Total Revenue

This quarter, Dynatrace's quarterly revenue was once again up a very solid 28.5% year on year. But the growth did slow down a little compared to last quarter, as Dynatrace increased revenue by $11.8 million in Q4, compared to $14.4 million revenue add in Q3 2022. 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 25% year on year to $262.2 million, slowing down from the 34.8% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.15 billion at the midpoint, growing 23.7% compared to 32.3% increase in FY2022.

Profitability

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% in Q4.

Dynatrace Gross Margin (GAAP)

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 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 $82.3 million in Q4, roughly the same as last year.

Dynatrace Free Cash Flow

Dynatrace has generated $235.7 million in free cash flow over the last twelve months, an impressive 25.3% of revenues. This extremely high FCF margin is a result of Dynatrace asset lite business model 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 Q4 Results

With a market capitalization of $9.37 billion Dynatrace is among smaller companies, but its more than $462.9 million in cash and positive free cash flow over the last twelve months give us confidence that Dynatrace has the resources it needs to pursue a high growth business strategy.

It was good to see Dynatrace deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that Dynatrace's revenue guidance for the full year missed analyst's expectations. Overall, it seems to us that this was a complicated quarter for Dynatrace. The company currently trades at $41 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. Its revenue growth has been strong. 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.

Dynatrace's price to sales ratio based on the next twelve months is 8.3x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. 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 $59.1 per share right before these results, implying that they saw upside in buying Dynatrace even in the short term.

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