Dynatrace Earnings: Strong Top-Line Growth and Focus on Profitability Amid Macro Pressures

We are maintaining our $44 fair value estimate for narrow-moat Dynatrace DT after the firm finished its second quarter of fiscal 2024 with results and guidance slightly above our prior expectations. Much like previous quarters, macro pressures continued to weigh on financial results and the company’s near-term outlook as customers scrutinize their IT spending amidst macroeconomic uncertainty. Despite the macro pressures, we remain impressed by the firm’s ability to maintain a healthy net retention rate, add new customers, and increase profitability during this period. From a long-term perspective, we continue to view Dynatrace as a strong player in the observability space and have a positive outlook on the company’s long-term financial prospects. Shares traded slightly up after the earnings report, and we view them as fairly valued.

Dynatrace finished the second quarter with sales of $352 million, up 26% year over year. The firm’s annual recurring revenue, or ARR, which we believe is a better measure of financial performance for SaaS companies, also grew 26% year over year to $1.34 billion. While net retention has come under pressure due to existing clients slowing down spending on Dynatrace’s platform amid macro uncertainty, we view the firm’ net retention of 114% as strong considering the current environment.

We remain impressed by Dynatrace’s ability to land new clients despite the macro pressures. The company added 160 new customers this quarter, roughly the same as the number of additions in the year-ago quarter. Encouragingly, ARR per new customer expanded 18% year over year to $140,000, indicating Dynatrace’s ability to land larger deals at the onset before expanding revenue through these clients over time.