Dynatrace (DT)

Application performance monitoring software provider Dynatrace (NYSE:DT) announced better-than-expected revenue in Q1 CY2025, with sales up 16.9% year on year to $445.2 million. On top of that, next quarter’s revenue guidance ($467.5 million at the midpoint) was surprisingly good and 3% above what analysts were expecting. Its non-GAAP profit of $0.33 per share was 9.1% above analysts’ consensus estimates.

Company Overview

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.

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.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Dynatrace grew its sales at a decent 22.3% compounded annual growth rate. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, Dynatrace reported year-on-year revenue growth of 16.9%, and its $445.2 million of revenue exceeded Wall Street’s estimates by 2.4%. Company management is currently guiding for a 17.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.6% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is admirable and indicates the market is forecasting success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Dynatrace’s ARR punched in at $1.73 billion in Q1, and over the last four quarters, its growth was solid as it averaged 17.6% year-on-year increases. This performance aligned with its total sales growth, reflecting the company’s ability to maintain strong customer relationships and secure longer-term commitments. Its growth also contributes positively to Dynatrace’s predictability and valuation, as investors typically prefer businesses with recurring revenue.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Dynatrace is efficient at acquiring new customers, and its CAC payback period checked in at 37.6 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Dynatrace’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 81.9% gross margin over the last year. That means Dynatrace only paid its providers $18.11 for every $100 in revenue.

Dynatrace’s gross profit margin came in at 80.9% this quarter, down 1.4 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Dynatrace has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 10.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Dynatrace’s operating margin rose by 1.6 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Dynatrace generated an operating profit margin of 9.6%, up 3.6 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Dynatrace has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 25.4% over the last year, quite impressive for a software business.

Dynatrace’s free cash flow clocked in at $145.5 million in Q1, equivalent to a 32.7% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts’ consensus estimates show they’re expecting Dynatrace’s free cash flow margin of 25.4% for the last 12 months to remain the same.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Dynatrace is a profitable, well-capitalized company with $1.11 billion of cash and $75.36 million of debt on its balance sheet. This $1.04 billion net cash position is 6.5% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Dynatrace’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance exceeded Wall Street’s estimates. On the other hand, its billings slightly missed. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 10.9% to $56 immediately after reporting.

Updated: June 23, 2025 at 10:12 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are definitely a lot of things to like about Dynatrace. To kick things off, its revenue growth was solid over the last three years. On top of that, Dynatrace’s admirable gross margin indicates excellent unit 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 12 months is 8.5x. Looking at the software landscape right now, Dynatrace trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $63.85 on the company (compared to the current share price of $55), implying they see 16.1% upside in buying Dynatrace in the short term.