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Dynatrace (NYSE:DT) Surprises With Q2 Sales, Reconfirms Guidance


Full Report / October 27, 2021
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Application performance monitoring software provider Dynatrace (NYSE:DT) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 34.2% year on year to $226.3 million. Guidance was in line with expectations with next quarter revenues guided to $234 million, or 0.25% above analyst estimates. Dynatrace made a GAAP profit of $23.6 million, improving on its profit of $17.4 million, in the same quarter last year.

Dynatrace (DT) Q2 FY2022 Highlights:

  • Revenue: $226.3 million vs analyst estimates of $220.6 million (2.58% beat)
  • EPS (non-GAAP): $0.18 vs analyst estimates of $0.16 (13.4% beat)
  • Revenue guidance for Q3 2022 is $234 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $916 million at the midpoint
  • Free cash flow of $13 million, down 83.8% from previous quarter
  • Gross Margin (GAAP): 81.5%, in line with 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.

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.

Sales Growth

As you can see below, Dynatrace's revenue growth has been very strong over the last year, growing from quarterly revenue of $168.5 million, to $226.3 million.

Dynatrace Total Revenue

And unsurprisingly, this was another great quarter for Dynatrace with revenue up an absolutely stunning 34.2% year on year. On top of that, revenue increased $16.6 million quarter on quarter, a very strong improvement on the $13.2 million increase in Q1 2022, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 24.7% over the next twelve months, although estimates are likely to change post earnings.

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, licences, technical support and other necessary running expenses was at 81.5% in Q2.

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 a pressure from competition to lower prices.

Key Takeaways from Dynatrace's Q2 Results

With a market capitalization of $22 billion, more than $370.3 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.

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. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $77.7 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 are a number of reasons why we think Dynatrace is a great business. First, 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.

The market is certainly expecting long term growth from Dynatrace given its price to sales ratio based on the next twelve months is 22.3. But looking at the tech landscape today, Dynatrace's qualities stand out and we still like it at this price.

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