Summary
Dynatrace closed the December 2021 quarter with revenue of $240.77 million, up 31.6% from the prior-year quarter. Year-to-date revenue through the first nine months of fiscal 2022 reached $676.86 million, up 33.5%. Annual recurring revenue was $930 million, up 29% year over year, or 32% after adjusting for currency. Subscription revenue of $226 million rose 33% as reported, or 34% on a constant currency basis, and accounted for 94% of total revenue.
Profitability moved the other way. Gross profit rose 31.1% to $196.31 million in the quarter, yet gross margin slipped to 81.5% from 81.9%. Operating income fell 12.0% to $21.22 million from $24.11 million, and operating margin landed at 8.8%, down 4.4 percentage points from 13.2%. Net income dropped 20.8% to $14.59 million from $18.42 million, and diluted EPS eased to $0.05 from $0.06. The year-to-date picture is mixed. Net income of $51.52 million rose 5.7%, and diluted EPS of $0.18 compared with $0.17, but operating income of $63.68 million was down 10.4%. Spending explains much of the squeeze. Research and development costs rose 42% and sales and marketing costs rose 45% in the quarter, both driven by headcount growth and higher share-based compensation.
Cash generation was uneven. Operating cash flow for the quarter was $60.84 million, down 17.5% from $73.72 million a year earlier. Through nine months, operating cash flow of $162.61 million was up 20.8%. Capital expenditures rose 68.4% to $4.16 million in the quarter and 32.7% to $11.77 million year to date. Unlevered free cash flow was $59.2 million, compared with $74.0 million in the prior-year quarter. Deferred revenue of $563.04 million was up 32.8%, and remaining performance obligations of $1.40 billion were up 33.4%, both signs that booked business keeps building.
The go-to-market engine kept adding customers. Dynatrace signed 206 new logos in the quarter and 501 year to date, up 22% from the same period last year. More than 44% of new customers started with three or more modules, against 33% a year earlier. The Log4j vulnerability drove a 10x increase in proofs of concept for application security. Partners influenced more than half of new transactions closed in the quarter, and new ARR transacted through hyperscaler partnerships more than tripled. Chief Executive Rick McConnell, in his first quarter in the role, pointed to the new logo additions and a net expansion rate above 120%. The customer count moved past 3,200 from roughly 2,800 a year earlier.
Guidance points to steady growth with heavier investment. For the fourth quarter of fiscal 2022, Dynatrace expects total revenue growth of 25% to 26% as reported, or 27% to 28% in constant currency, subscription revenue growth of 26% to 27% as reported, non-GAAP operating income of $51.5 million to $53.5 million, and non-GAAP net income per diluted share of $0.15 to $0.16. The company also raised its full-year fiscal 2022 outlook, with ARR of $990 million to $996 million, non-GAAP operating income of $228 million to $230 million, non-GAAP net income per diluted share of $0.66 to $0.67, and unlevered free cash flow of $268 million to $275 million at a margin of 29% to 30%. The guidance rests on foreign exchange rates as of December 31, 2021.
Risks remain. The company lists the pandemic's effect on demand and on customers' ability to pay, its ability to sustain subscription revenue growth, its substantial debt load, market adoption of software intelligence, competition, hiring and retention of staff, and the volatility of its share price. Management also flagged that moving customers onto a single, often multi-year contract with one anniversary date could make billings and cash collections lumpier from period to period.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $240.8M | $226.4M | +6.4% | $182.9M | +31.6% |
| Gross profit | $196.3M | $184.7M | +6.3% | $149.8M | +31.1% |
| Gross margin | 81.5% | 81.6% | -0.1 pp | 81.9% | -0.4 pp |
| Research & development | $40.9M | $37.9M | +7.8% | $28.7M | +42.3% |
| Sales & marketing | $94.0M | $86.3M | +9.0% | $64.8M | +45.0% |
| General & administrative | $32.6M | $31.7M | +3.0% | $23.4M | +39.3% |
| Total operating expenses | $175.1M | $163.4M | +7.1% | $125.7M | +39.3% |
| Operating income (loss) | $21.2M | $21.3M | -0.2% | $24.1M | -12.0% |
| Operating margin | 8.8% | 9.4% | -0.6 pp | 13.2% | -4.4 pp |
| Net income (loss) | $14.6M | $23.6M | -38.3% | $18.4M | -20.8% |
| Net margin | 6.1% | 10.4% | -4.4 pp | 10.1% | -4.0 pp |
| Diluted EPS | $0.05 | $0.08 | -$0.03 | $0.06 | -$0.01 |
Risks
Operating income declined 12.0% in the quarter and 10.4% year to date even as revenue rose 31.6% and 33.5%, respectively, and operating margin fell 4.4 percentage points in the quarter and 4.6 percentage points year to date. MD&A attributes pressure to sales and marketing expenses up 45% and research and development expenses up 42% in the quarter.
Risk factors state sales cycles range from several months to over a year, the third fiscal quarter is typically the largest, and a significant portion of transactions occur in the last two weeks of a quarter. The transition to single multi-year contracts with one anniversary date may increase variability in billings, deferred revenue, RPO and cash collections.
Dynatrace faces significant competition from observability vendors such as Datadog and Splunk, application performance monitoring vendors such as Cisco, Broadcom and New Relic, and cloud providers AWS, Microsoft Azure and Google Cloud Platform. Competitive pressure could result in pricing pressure, reduced margins and increased sales and marketing expenses.
The company hosts its Dynatrace solutions primarily on AWS, and AWS can terminate the agreement on 30 days' prior written notice for material uncured breach. A prolonged AWS service disruption or termination would interrupt customer access and require significant delays and expense to re-architect or move to another cloud infrastructure.
The company has experienced email phishing attacks that compromised a limited number of email accounts and used SolarWinds Orion software affected by SUNBURST malicious code. Because the platform is multi-tenant, a security breach could affect a significant number of customers and lead to GDPR fines, litigation and reputational damage.
Dynatrace relies on partners including hyperscalers such as AWS, Microsoft Azure, Google Cloud Platform and IBM Red Hat to market, sell and distribute its applications. If these partnerships fail or are terminated, or if partners favor competing products, the company's ability to grow will be harmed.
Competition for skilled personnel is intense, particularly in Europe where research and development operations are concentrated; MD&A reports research and development headcount up 26% and sales and marketing headcount up 28% for the quarter ended December 31, 2021. Failure to attract, retain and motivate personnel could impede growth and increase compensation costs.
At December 31, 2021, the company had more than $300 million of aggregate indebtedness, including $311.1 million under its first lien term loan. Credit agreement covenants limit dividends, acquisitions, capital expenditures and other actions, and a covenant breach or cash flow decline could lead to default and acceleration.
Other expense, net increased 310% in the quarter ended December 31, 2021 compared to the prior-year quarter, primarily due to foreign currency transactions. Foreign exchange fluctuations could continue to cause volatility in other expense and net income.
The company previously identified a material weakness in internal control over financial reporting related to accounting for income taxes, specifically realizability of tax attributes. Remediation was completed as of March 31, 2021, but additional material weaknesses could cause misstatements or failure to meet reporting obligations.
Thoma Bravo beneficially owned 29.5% of outstanding common stock as of December 31, 2021 and has significant influence over stockholder votes, board composition and change-of-control transactions. This concentration may delay or prevent transactions other stockholders deem favorable.
The company made two acquisitions in the first half of fiscal 2022 for $13.2 million and may pursue more. Acquisitions could disrupt operations, divert management attention, and expose the company to integration, data security and regulatory risks.
Demand for software intelligence solutions is discretionary and may be reduced during economic downturns or periods of instability, leading customers to delay or cancel IT projects, seek price concessions, or reduce renewals. The COVID-19 pandemic continues to create uncertainty around customer spending and payment ability.
The company made significant investments in its new application security offering, but new solutions may fail to achieve market acceptance due to delays, defects, competition, or inability of sales teams to sell into new categories. Failure could impair competitive position and revenue growth.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Dynatrace Net Expansion Rate
Total customers
Unlevered Free Cash Flow
ARR
New Logos Added
ARR (Constant Currency)
Summary, forecast, risks and KPIs are extracted from Dynatrace, Inc.'s SEC filings for Q3 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.