Dynatrace Earnings: Strong Sales Growth Remains a Bright Spot Even as Macro Pressures Persist

We are maintaining our $44 fair value estimate for narrow-moat Dynatrace DT after the firm kicked off fiscal 2024 with strong financial results marginally above our estimates. At the same time, we believe the macro uncertainty, manifesting in elongated sales cycles, remains a drag on the firm’s near-term financial prospects. On the bright side, we remain impressed by Dynatrace’s proven ability to strongly execute on its land-and-expand model despite the tough macro. We believe that as Dynatrace attracts and expands more customers, it is able to entrench itself further into its customers’ ecosystems, thereby increasing the switching costs that have helped build an economic moat around its business. With shares trading around $51, down notably after the earnings release, we view Dynatrace’s shares as trading in our 3-star range and see them as fairly valued.

Dynatrace started fiscal 2024 with strong sales growth, with quarterly sales clocking in at $333 million, up 25% year over year in constant currency and marginally ahead of our above-consensus $331 million estimate. The firm’s annual recurring revenue, which is a better measure of financial performance for software-as-a-service companies, expanded 25% year over year to $1.294 billion. While the firm’s net retention rate dipped 400 basis points year over year to 116%, we still view it as a strong indicator of the firm’s continued ability to upsell existing customers via additional module sales.

Similarly, Dynatrace also showed strength in landing new customers, with new customer count expanding 15% year over year in the first quarter. Impressively, more than 60% of Dynatrace’s new customers adopted Dynatrace’s platforms with three or more modules. Multimodule customers are valuable for software companies as they are not only less likely to churn, but they also tend to have a higher customer lifetime value.