Summary
Dynatrace closed the second quarter of fiscal 2022 with total revenue of $226.35 million, up 34.3% from the prior-year quarter. Subscription revenue reached $213 million, up 35%, and represented 94% of total revenue. Annualized recurring revenue was $864 million, up 35% year over year, or 34% on a constant currency basis. The company ended September 30, 2021 with more than 3,100 Dynatrace customers, up from approximately 2,600 a year earlier, and its net expansion rate stayed above 120% for the fourteenth consecutive quarter. Remaining performance obligations were $1.25 billion, up 42.4% from the prior-year quarter, and current deferred revenue was $461.44 million, up 32.0%.
Gross profit for the quarter was $184.69 million, up 34.0%, with gross margin of 81.6%, down 0.2 percentage points from the prior-year quarter. Operating income fell to $21.25 million, down 6.9%, and operating margin was 9.4%, down 4.2 percentage points. The gap between revenue growth and operating profit came from heavy spending. Sales and marketing expenses rose 52% to $86.3 million, research and development rose 38% to $37.9 million, and general and administrative rose 43% to $31.7 million. Net income was $23.64 million, up 35.3%, helped by a $6.3 million income tax benefit that included a $2.1 million one-time benefit tied to a favorable Polish research and development ruling. Diluted EPS was $0.08, up from $0.06 in the prior-year quarter. On a non-GAAP basis, operating income was $61 million and non-GAAP EPS was $0.18.
Cash generation was mixed. Operating cash flow for the quarter was $18.30 million, down 23.3% from the prior-year quarter, while year-to-date operating cash flow was $101.77 million, up 67.2%. Capital expenditures were $4.66 million in the quarter, up 135.0%, and $7.61 million year to date, up 18.9%. Unlevered free cash flow was $11.7 million, down from $33.0 million a year earlier. The company held $370.3 million of cash and cash equivalents at September 30, 2021 and repaid $60.0 million of term loans during the first half. It also completed the acquisition of SpectX and made two acquisitions totaling $13.0 million in the first half.
Guidance points to slower reported growth ahead. For the third quarter of fiscal 2022, Dynatrace expects total revenue growth of 27% to 28% as reported, or 28% to 29% on a constant currency basis, and subscription revenue growth of 29% to 30% as reported. Non-GAAP operating income is guided to $54 million to $56 million, non-GAAP net income to $45.5 million to $47.5 million, and non-GAAP net income per diluted share to $0.16. For the full fiscal year 2022, the company raised its outlook. It now expects total ARR of $986 million to $996 million, 27% to 29% growth as reported, total revenue growth of 30% to 31% as reported, and subscription revenue growth of 31% to 32% as reported. Full-year non-GAAP operating income is guided to $219 million to $226 million, non-GAAP net income to $185 million to $191 million, and non-GAAP net income per diluted share to $0.63 to $0.65. Total unlevered free cash flow is expected to be $263 million to $275 million, or 29% to 30% of revenue. The ARR, total revenue and subscription revenue full-year ranges each reflect an increase of 250 basis points from prior midpoint guidance.
The risk list is familiar but worth tracking. Dynatrace flagged the ongoing COVID-19 pandemic and its uncertain effect on technology spending and on customers' ability to pay. Other named risks include maintaining subscription revenue growth rates, servicing a substantial level of indebtedness, market adoption of software intelligence solutions, competition, and recruiting and retaining qualified personnel. The MD&A also notes a shift toward combining multiple customer contracts into a single multi-year contract with one anniversary date, which could add variability to billings and the timing of cash collections. The term loan balance was $341.1 million at September 30, 2021, bearing interest at 2.3%, with $44.5 million available under the revolving credit facility. Headcount growth across research and development, sales and marketing, and general and administrative is the main reason operating margin compressed even as revenue climbed.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2022 | Q1 FY2022 | QoQ | Q2 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $226.4M | $209.7M | +7.9% | $168.6M | +34.3% |
| Gross profit | $184.7M | $170.9M | +8.1% | $137.9M | +34.0% |
| Gross margin | 81.6% | 81.5% | +0.1 pp | 81.8% | -0.2 pp |
| Research & development | $37.9M | $34.7M | +9.2% | $27.5M | +37.8% |
| Sales & marketing | $86.3M | $80.5M | +7.2% | $56.7M | +52.2% |
| General & administrative | $31.7M | $26.9M | +17.7% | $22.1M | +43.3% |
| Total operating expenses | $163.4M | $149.7M | +9.2% | $115.0M | +42.1% |
| Operating income (loss) | $21.3M | $21.2M | +0.2% | $22.8M | -6.9% |
| Operating margin | 9.4% | 10.1% | -0.7 pp | 13.5% | -4.1 pp |
| Net income (loss) | $23.6M | $13.3M | +77.8% | $17.5M | +35.3% |
| Net margin | 10.4% | 6.3% | +4.1 pp | 10.4% | +0.1 pp |
| Diluted EPS | $0.08 | $0.05 | +$0.03 | $0.06 | +$0.02 |
Risks
Demand for software intelligence is discretionary and tied to IT budgets; an economic downturn or instability could cause customers to delay or cancel purchases, renegotiate contracts, and reduce renewals. MD&A states COVID-19 future impacts remain uncertain and could affect business spending on technology and customers' ability to pay.
Operating income decreased 6.9% and operating margin decreased 4.2 percentage points for the quarter ended September 30, 2021 versus the prior-year quarter, while sales and marketing expenses rose 52% and research and development expenses rose 38%. If expense growth outpaces revenue growth, profitability could be further pressured.
The market is highly competitive and fragmented, with competitors including Datadog, Splunk, Cisco, Broadcom, New Relic, Akamai, Catchpoint, and cloud providers such as AWS, Microsoft Azure, and Google Cloud Platform. Larger competitors may bundle offerings, have greater resources, and exert pricing pressure.
Future revenue depends on acquiring new customers, renewing contracts, and expanding sales to existing customers. Although Dynatrace net expansion rate has been above 120% for the last 14 quarters and customers grew to more than 3,100 as of September 30, 2021, retention and expansion rates may decline.
Security breaches could affect a significant number of customers because the platform is multi-tenant. The company has experienced email phishing attacks that compromised a limited number of email accounts and used SolarWinds Orion software during the SUNBURST incident, though it does not believe that matter had a material impact at this time.
Sales cycles are long, unpredictable, and seasonal, with the third fiscal quarter typically the largest and a significant portion of transactions closing in the last two weeks of a quarter. This concentration makes revenue growth and cash flow planning difficult.
Failure to effectively expand sales and marketing capabilities could harm growth. Sales and marketing expenses increased 52% for the quarter and 58% year to date, and headcount grew 29% year to date, so failure of new personnel to reach productivity could hurt results.
The company relies on partners including AWS, Google Cloud Platform, Microsoft Azure, and IBM Red Hat, some of which also compete with it. If these partnerships fail, terminate, or do not effectively market Dynatrace offerings, sales growth could be harmed.
At September 30, 2021, the company had approximately $350.0 million of aggregate indebtedness, including $341.1 million under its first lien term loan facility. Credit agreement covenants restrict dividends, acquisitions, capital expenditures, and other actions, and a default could accelerate repayment obligations.
The company previously identified a material weakness in internal control over financial reporting related to accounting for income taxes, which was remediated as of March 31, 2021. It may identify additional material weaknesses, and as a non-emerging growth company it must now comply with Section 404 of the Sarbanes-Oxley Act.
Thoma Bravo beneficially owned 29.6% of issued and outstanding common stock as of September 30, 2021, giving it significant influence over board composition, mergers, capital raising, and charter amendments. This concentration may delay or prevent changes of control and presents potential conflicts of interest.
The company is transitioning to a program that combines contracts into one single, often multi-year contract per customer with one anniversary date, which may cause variability in the timing and amounts of billings, deferred revenue, and remaining performance obligations. The transition away from perpetual licenses also reduces deferred revenue.
Success depends on senior management and highly skilled technical, sales, and marketing personnel, with intense competition for employees in Europe where research and development operations are concentrated. The company experienced a 32% increase in research and development headcount year to date, increasing retention and compensation risk.
US federal government vaccine guidelines could require the company to ensure substantially all US employees are fully vaccinated; employees who fail or refuse to comply may be suspended, terminated, or resign, potentially harming productivity, morale, sales, and US Federal government business.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Dynatrace Net Expansion Rate
Unlevered Free Cash Flow
Dynatrace Customers
Summary, forecast, risks and KPIs are extracted from Dynatrace, Inc.'s SEC filings for Q2 FY2022 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.