Summary
- Dynatrace reported a solid quarter and guided up 2Q and for the full year. Management provided upbeat assessment of its position in the market, driven by Digital Transformation and product consolidation.
- Digital Transformation is accelerating and this will likely drive Dynatrace’s business, given that the complexity of the IT systems is increasing across the board.
- Company guided Net Expansion Rate to be above 120% for the remainder of the fiscal year, above 115% the company forecasted last quarter.
- We expect Dynatrace to add more logos than expected, sell more to existing customers driven by enterprises looking to consolidate multiple point products which are expensive and difficult to manage.
- The lukewarm market response after results provides a buying opportunity. Investors should buy in small increments given the high valuation as well as the current volatility in the market.
Dynatrace (DT) reported solid quarter with revenue coming in ahead of consensus estimate by $5.5 million or 3.7% beat and EPS beat of $0.03 or 30% ahead of estimate of $0.10. The company also guided ahead of estimates for both 2Q21 and for the full year fiscal 2021. Company guided F2Q21 revenue in the $159-161 million range or at the midpoint $6.0 million ahead of prior consensus estimate of $154 million and EPS was in the $0.09-0.10 range versus prior consensus of $0.10. Despite guiding up, we still believe the estimates are conservative and a repeat beat and raise is in the offing when the company reports results in October, making the stock a buy in our opinion.
More importantly, the Annual Recurring Revenue is up 39% Y/Y and is driven by addition of new logos (85 this quarter) and up-sell of more products to its existing customer base. Impressively, the ARR per customer is now $229K, up from about $200K last year. The company believes this could be north of $1 million, if the company is able to sell more products to its customers. With the company mainly selling Application Performance Monitoring tools, we believe the opportunity to sell additional solution sets such as Information Monitoring, Digital Experience Monitoring and AIOPS remains high. CEO John Van Siclen noted that many enterprises are looking to consolidate multiple point products which are not only costly to buy in these tough macro-economic times, but also difficult to manage. In addition, multiple point products do not give full visibility into the entire stack, given that data is siloed by various products.
Mr. Van Siclen on the earnings call noted that Digital Transformation continues to accelerate in many enterprises, driven by mandated work from home and the movement of workloads to the cloud. Mr. Van Siclen pointed to a survey conducted by Fortune Magazine in May, noting that “75% of CEOs anticipate accelerating their digital transformation projects” this year. Digital Transformation makes the IT systems much more complex since enterprises are using hybrid-multi-cloud strategy to run their applications. This means that some applications for instance are running in Amazon (AMZN) AWS, Google (GOOG) (NASDAQ:GOOGL) GCP or Microsoft (MSFT) Azure and some applications still remain on-premises. On top of this, enterprises are also using newer software technologies such as Containers, Kubernetes clusters to orchestrate the Containers, in addition to traditional virtualized applications. All of these mean complexity and if an application running on such an infrastructure has a bug, it is very difficult to debug and get to the root cause of the problem. In such a scenario, having a single tool that can be deployed both on-premises as well as on various clouds that can handle both containerized and non-containerized workloads is essential. This is what Dynatrace does very well. Please refer to more details about the capabilities of Dynatrace in our past write up on SA.
