Summary
GAAP results for Dynatrace's fiscal 2023 second quarter, ended September 30, 2022, showed solid top-line growth alongside weaker profitability. Total revenue was $279.3 million, up 23.4% from the prior-year quarter. Gross profit was $223.6 million, up 21.1%, while gross margin was 80.1%, down 1.5 percentage points. Operating income was $20.4 million, down 4.0% from the prior-year quarter, and operating margin was 7.3%, down 2.1 percentage points. Net income was $10.5 million, down 55.5% from the prior-year quarter, and diluted EPS was $0.04, down 50.0%. Cost of revenue grew faster than revenue, driven by higher personnel costs, cloud hosting costs, and share-based compensation. The MD&A tied the swing in tax expense to a decrease in share-based compensation windfall benefits and to a one-time tax benefit recorded in the prior-year quarter.
Non-GAAP results looked stronger. Total ARR was $1,065 million, with adjusted ARR growth of 33% year over year. Non-GAAP operating income was $72.9 million, non-GAAP operating margin was 26%, and non-GAAP EPS was $0.22. Free cash flow was $25.1 million. The company added 164 new logos in the quarter and reported a net expansion rate above 120% for the eighteenth consecutive quarter. Dynatrace had more than 3,400 customers as of September 30, 2022, up from approximately 3,100 a year earlier. It launched its core Grail technology inside the Dynatrace Platform, expanded its partnership with DXC Technology, and was named a Leader in the 2022 ISG Provider Lens for cloud-native observability and cloud-native security.
Cash generation improved. Operating cash flow was $29.4 million in the quarter, up 60.7% from the prior-year quarter. Year to date, operating cash flow was $172.5 million, up 69.5%. Capital expenditures were $4.3 million, down 7.0% from the prior-year quarter. The current portion of deferred revenue was $561.5 million, up 21.7% from a year earlier, and remaining performance obligations were $1.53 billion, up 22.4%. The MD&A said deferred revenue fell over the six months because of seasonality in the sales cycle, which is heavier in the third and fourth quarters of the fiscal year. It also noted a shift to a single, often multi-year contract per customer with one anniversary date, which could create variability in the timing and amounts of billings and cash collections.
Guidance points to a more cautious near term. For the third quarter of fiscal 2023, Dynatrace guided non-GAAP operating income to $71.5 million to $73.5 million, non-GAAP operating margin to 25.5%, and non-GAAP EPS to $0.21 to $0.22. For the full fiscal year, the company guided total ARR to $1,164 million to $1,172 million, adjusted ARR growth of 24%, non-GAAP operating income to $273 million to $279 million, non-GAAP operating margin of 24.5%, non-GAAP net income to $237.5 million to $242.5 million, non-GAAP EPS of $0.81 to $0.83, and free cash flow of $308 million to $321 million. The full-year ARR midpoint was reduced by $52 million from prior guidance, and adjusted ARR growth was cut to 24% from a prior range of 27% to 28%. Non-GAAP operating income guidance was raised by $20 million at the midpoint, while full-year revenue guidance was lowered.
FX and the macro backdrop are the main risks. Management said observability demand remains durable but that the company is not immune to the macro environment, so it is taking a more cautious approach to ARR growth in the back half of fiscal 2023. Dynatrace estimated a full-year fiscal 2023 FX headwind of approximately $60 million on ARR, up from prior quarter expectations of approximately $40 million, and approximately $60 million on revenue, up from prior expectations of approximately $47 million. Other disclosed risks include COVID-19 uncertainty, competition, the ability to maintain subscription revenue growth, customer adoption, recruiting and retaining staff, and stock price volatility. The MD&A also warned that Section 174 of the Internal Revenue Code will raise U.S. federal and state cash taxes and reduce cash flows in fiscal 2023 and future years. Separately, Dynatrace named Jim Benson as CFO effective November 15, 2022, succeeding Kevin Burns, who will stay on through a transition period.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $279.3M | $267.3M | +4.5% | $226.4M | +23.4% |
| Gross profit | $223.6M | $215.5M | +3.8% | $184.7M | +21.1% |
| Gross margin | 80.1% | 80.6% | -0.6 pp | 81.6% | -1.5 pp |
| Research & development | $51.9M | $48.5M | +7.1% | $37.9M | +36.9% |
| Sales & marketing | $104.7M | $105.0M | -0.3% | $86.3M | +21.3% |
| General & administrative | $40.1M | $36.3M | +10.3% | $31.7M | +26.5% |
| Total operating expenses | $203.2M | $196.4M | +3.5% | $163.4M | +24.3% |
| Operating income (loss) | $20.4M | $19.1M | +6.8% | $21.3M | -4.0% |
| Operating margin | 7.3% | 7.1% | +0.2 pp | 9.4% | -2.1 pp |
| Net income (loss) | $10.5M | $2.1M | +397.9% | $23.6M | -55.5% |
| Net margin | 3.8% | 0.8% | +3.0 pp | 10.4% | -6.7 pp |
| Diluted EPS | $0.04 | $0.01 | +$0.03 | $0.08 | -$0.04 |
Risks
Risk Factors state that in recent months Dynatrace has observed increased economic uncertainty in the United States and abroad and lengthening sales cycles; customers may defer or forego discretionary software intelligence purchases, renegotiate vendor contracts, or reduce IT budgets, which could pressure revenue and renewals.
Sales cycles can range from several months to over a year, the third fiscal quarter is typically largest, and a significant portion of transactions occur in the last two weeks of each quarter; MD&A also notes the transition to one single, often multi-year contract per customer with one anniversary date may increase variability in billings and cash collections.
Gross margin was down 1.5 pp for FY2023 Q2 vs FY2022 Q2 and operating margin was down 2.1 pp; MD&A attributes higher cost of subscription and service to higher personnel, cloud hosting, and share-based compensation, and net income was down 55.5% for the quarter.
MD&A highlights IRC Section 174 requiring capitalization and amortization of R&D expenses for tax years beginning on or after January 1, 2022, which it says will increase U.S. federal and state cash taxes and reduce cash flows in fiscal 2023 and future years; income tax expense for the six months ended September 30, 2022 was $20.7 million vs approximately zero prior year, and net income was down 65.8% year to date.
Risk Factors identify significant competition from observability, APM, infrastructure monitoring, and cloud provider point solutions, naming Datadog, Splunk, Cisco, Broadcom, New Relic, Akamai, Catchpoint, AWS, Microsoft Azure, and Google Cloud Platform; some competitors have larger budgets and can bundle offerings, and customers may build in-house open-source alternatives.
Future growth increasingly depends on partners including Deloitte, DXC, AWS, Google Cloud Platform, Microsoft Azure, and IBM Red Hat; agreements are generally non-exclusive, some partners compete with Dynatrace, and failure of hyperscaler partnerships or interoperability could harm sales.
Dynatrace has experienced email phishing attacks that compromised a limited number of email accounts and used SolarWinds Orion software during the SUNBURST incident; because it uses a multi-tenant platform, any breach could affect a significant number of customers, and remote work increases security risks.
Customers can configure the platform to collect and store confidential, personal, or proprietary information; if customers fail to provide adequate notice or obtain consent, Dynatrace could face litigation, regulatory action, and GDPR fines, and statements about security features could lead to unfair or deceptive trade practice claims.
Success depends on senior management and highly skilled technical, sales, and marketing personnel; all senior management are employed at-will, competition in Europe for R&D talent is intense, and increased compensation costs could harm results.
The transition to one single, often multi-year contract per customer with one single anniversary date may result in variability in the timing and amounts of billings, which could impact deferred revenue and remaining performance obligations; transition away from perpetual licenses will continue to reduce deferred revenue.
At September 30, 2022, Dynatrace had approximately $250.0 million of aggregate indebtedness, including $221.1 million outstanding under its first lien term loan; variable-rate borrowings expose it to continued interest rate increases, and covenants restrict dividends, acquisitions, capital expenditures, and other actions.
Share-based compensation was $40.7 million for FY2023 Q2 vs $25.6 million for FY2022 Q2, and $69.3 million year to date vs $44.8 million prior-year YTD; MD&A notes tax effects can significantly impact the effective tax rate and share price declines could increase the effective tax rate and adversely affect financial results.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Total ARR
Free Cash Flow
Dynatrace Net Expansion Rate
Total customers
Non-GAAP Operating Income
Adjusted ARR Growth
New Logos Added
ARR (Constant Currency)
Summary, forecast, risks and KPIs are extracted from Dynatrace, Inc.'s SEC filings for Q2 FY2023 (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 2, 2026.