Summary
Dynatrace closed the third quarter of fiscal 2023, ended December 31, 2022, with GAAP revenue of $297.46 million, up 23.5% from the prior-year quarter. Gross profit rose 23.1% to $241.63 million. Operating income climbed 59.7% to $33.89 million. Net income was $15.03 million, up 3.0%, while diluted EPS held flat at $0.05. Gross margin slipped to 81.2%, down 0.3 percentage points. Operating margin improved to 11.4%, up 2.6 percentage points. Total ARR reached $1,163 million, and adjusted ARR growth was 29% year over year. The Dynatrace net expansion rate was 119%, versus 120%+ a year earlier.
Through the first nine months of fiscal 2023, revenue was $844.06 million, up 24.7% from the prior-year period. Gross profit increased 23.3% to $680.73 million. Operating income rose 15.2% to $73.38 million. Net income fell 46.3% to $27.67 million, and diluted EPS declined 44.4% to $0.10. Year-to-date gross margin was 80.6%, down 0.9 percentage points, and operating margin was 8.7%, down 0.7 percentage points. Cash generation remained a bright spot: operating cash flow for the nine months was $234.46 million, up 44.2%, while capital expenditures rose 32.8% to $15.62 million. In the quarter alone, operating cash flow was $61.96 million, up 1.8%, and capital expenditures were $4.39 million, up 5.6%. Current deferred revenue was $647.26 million, up 15.0%, and remaining performance obligations were $1.70 billion, up 21.1%.
Operationally, Dynatrace added customers, ending December 31, 2022 with more than 3,500, up from approximately 3,200 a year earlier. The company was named a Leader in The Forrester Wave Artificial Intelligence for IT Operations (AIOps), Q4 2022 report, and it also appeared as a Leader in the Gartner 2022 Magic Quadrant for Application Performance Monitoring and Observability. It was named a Customers' Choice in the 2022 Gartner Peer Insights Voice of the Customer for Application Performance Monitoring and Observability. Partner momentum is building. Dynatrace works with ten strategic global system integrators, and more than 500 individuals have been trained or certified on its platform. Early traction includes a seven-figure deal in Latin America. Business transacted through hyperscaler partners including AWS, Google Cloud, and Microsoft was more than 1.6x the same period last year on a trailing-twelve-month basis. The company also expanded its Grail data lakehouse to power business analytics, adding use cases such as order fulfillment and customer service activation.
Guidance points to continued growth but also to foreign exchange pressure. For the fourth quarter of fiscal 2023, management guided non-GAAP operating income to $71.5 million to $73.5 million, non-GAAP operating margin to 24%, non-GAAP net income to $65 million to $67 million, and non-GAAP net income per diluted share to $0.22 to $0.23. Diluted weighted average shares are expected to be 293 million to 294 million. For the full fiscal year 2023, the company guided total ARR to $1,216 million to $1,221 million, non-GAAP operating income to $285 million to $287 million, non-GAAP operating margin to 25%, non-GAAP net income to $255 million to $257 million, and non-GAAP net income per diluted share to $0.87 to $0.88. Free cash flow is guided to $315 million to $321 million. Management now expects the full-year fiscal 2023 foreign exchange impact to be approximately $30 million on ARR and approximately $45 million on revenue, down from prior expectations of approximately $60 million for each metric.
Risks include general economic and financial market conditions, currency fluctuations, the ability to maintain subscription revenue growth rates in future periods, market adoption of software intelligence solutions, the ability to differentiate the platform from competing products and technologies, and the ability to successfully recruit and retain highly-qualified personnel. The company also flagged the IRC Section 174 requirement to capitalize and amortize research and development expenses, which could increase U.S. cash taxes and reduce cash flows in fiscal year 2023 and future years. A shift toward single, often multi-year customer contracts may create variability in billings and the timing of cash collections. COVID-19 remains an uncertain factor.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2023 | Q2 FY2023 | QoQ | Q3 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $297.5M | $279.3M | +6.5% | $240.8M | +23.5% |
| Gross profit | $241.6M | $223.6M | +8.1% | $196.3M | +23.1% |
| Gross margin | 81.2% | 80.1% | +1.2 pp | 81.5% | -0.3 pp |
| Research & development | $53.4M | $51.9M | +2.9% | $40.9M | +30.7% |
| Sales & marketing | $111.5M | $104.7M | +6.5% | $94.0M | +18.6% |
| General & administrative | $36.2M | $40.1M | -9.6% | $32.6M | +11.0% |
| Total operating expenses | $207.7M | $203.2M | +2.2% | $175.1M | +18.6% |
| Operating income (loss) | $33.9M | $20.4M | +66.1% | $21.2M | +59.7% |
| Operating margin | 11.4% | 7.3% | +4.1 pp | 8.8% | +2.6 pp |
| Net income (loss) | $15.0M | $10.5M | +42.8% | $14.6M | +3.0% |
| Net margin | 5.0% | 3.8% | +1.3 pp | 6.1% | -1.0 pp |
| Diluted EPS | $0.05 | $0.04 | +$0.01 | $0.05 | ±$0.00 |
Risks
The filing states Dynatrace has observed increased economic uncertainty in the United States and abroad and lengthening sales cycles. Customers may delay or cancel discretionary software intelligence purchases, which could pressure revenue and renewals.
Dynatrace faces competition from observability, APM, infrastructure monitoring, and cloud provider point solutions, including Datadog, Splunk, Cisco, Broadcom, New Relic, AWS, Microsoft Azure, and Google Cloud Platform. Competitors may bundle offerings or have greater resources, creating pricing pressure.
MD&A states IRC Section 174 requires capitalizing and amortizing R&D expenses, which will increase U.S. federal and state cash taxes and reduce cash flows in fiscal 2023 and future years. For FY2023 year to date, income tax expense was $36.4 million, up $33.5 million from the prior-year year-to-date period, and net income was down 46.3%.
The filing says sales cycles can be long and unpredictable, the third fiscal quarter is typically largest, and a significant portion of transactions occur in the last two weeks of a quarter. This concentration can cause significant quarterly revenue and cash flow variability.
Future revenue depends on renewals and expansion, and customers have no obligation to renew. The Dynatrace Net Expansion Rate was 119% at December 31, 2022 compared with 120%+ at December 31, 2021.
Dynatrace entered a $400.0 million senior secured revolving credit facility in December 2022 with restrictive covenants and variable interest rates. As of December 31, 2022, $15.5 million of letters of credit were outstanding, and default could accelerate indebtedness and harm liquidity.
Growth depends on strategic partners including Deloitte, DXC, AWS, Microsoft Azure, Google Cloud Platform, and IBM Red Hat. Partners may compete with Dynatrace, terminate with limited notice, or fail to perform, which could limit sales and distribution.
Risk Factors disclose prior email phishing attacks that compromised a limited number of email accounts and exposure from SolarWinds Orion software. Because Dynatrace uses a multi-tenant platform, any security breach could potentially affect a significant number of customers.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Total ARR
Free Cash Flow
Net New ARR
Non-GAAP Operating Income
Adjusted ARR Growth
ARR (Constant Currency)
Dynatrace Customers
Summary, forecast, risks and KPIs are extracted from Dynatrace, Inc.'s SEC filings for Q3 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.