Dynatrace Earnings: Strong Finish to Fiscal 2023 as Sales and Profitability Exceed Our Estimates

We are raising our fair value estimate for narrow-moat Dynatrace DT to $44 from $40 due to it finishing fiscal 2023 with financial results above our estimates and the time value of money following our annual model roll. We remain impressed by Dynatrace’s ability to navigate a challenging macro environment as it continues to add new logos and maintains a strong upsell motion for existing customers. We believe that Dynatrace’s proven land-and-expand strategy during a period where clients are seeking to optimize costs underscores the strong switching costs associated with its platform. With shares around $46, down 1% on May 17, we believe Dynatrace’s shares are fairly valued.

Dynatrace’s sales clocked in at $314 million, up 25% year over year as reported and ahead of our above-consensus estimate of $306 million. The firm’s adjusted annual recurring revenue, or ARR, grew 29% year over year to $1.25 billion with a net expansion rate of around 119%. Adding to this ARR expansion, we are impressed by Dynatrace’s ability to land new customers with bigger deals out of the gate—65% of its new customers adopted Dynatrace’s platforms with three or more modules, up from 50% a year ago. Along with immediate financial benefits such as a higher ARR, we believe Dynatrace’s more efficient new-logo sales motion will have long-term benefits as customers that adopt multiple modules of a vendor’s platform tend to be stickier and have larger lifetime values.

On the margin front, Dynatrace’s adjusted operating margin expanded 200 basis points year over year to 25% for the quarter. We believe Dynatrace has plenty of room for margin expansion in the out-years as it scales up.

Management expects around $327 million (at the midpoint of guidance) of revenue for the upcoming quarter with adjusted EPS expected to be around $0.22. Both estimates are roughly in line with our prior estimates, and we don’t foresee Dynatrace having any difficulties meeting these targets.