In the large and growing cloud computing industry, Dynatrace (NYSE: DT) is a little-known name. However, the observability, analysis, and automation capabilities of the software platform are becoming an important part of many large companies’ digital transformation efforts. Dynatrace demonstrated this in its report for the first quarter of fiscal year 2022 (corresponding to the second quarter of calendar year 2021). This under-the-radar technologist is still a long-term buy-and-hold in my book.

Fast and steady progress in the last quarter

Dynatrace said it added 135 new customers in the most recent quarter, which ended June 2021 with a total of over 3,000. The company’s net expansion rate was at or above 120% for the 13th straight quarter, suggesting the average existing customer has increased spending 20% ​​or more year over year as Dynatrace expands its platform’s capabilities. More than 40% of customers were using three or more cloud modules, with those users having an average annual recurring revenue (ARR) of over $ 500,000.

Image source: Getty Images.

As a result, Dynatrace’s ARR and quarterly revenue slightly exceeded 30%, and free cash flow soared year over year as the company adds more customer usage and reaches a more efficient scale.

Metric

3 months to June 30, 2021

3 months to June 30, 2020

YOY change

Annual recurring sales

$ 823 million

$ 601 million

37%

revenue

$ 210 million

$ 156 million

35%

Free cash flow

$ 80.5 million

$ 32.5 million

148%

Data source: Dynatrace. YOY = year-over-year.

Several long-term growth trends fill Dynatrace’s sails

On the results conference call, CEO John Van Siclen discussed the many long-term growth trends that are driving the cloud industry to high-tech services from Dynatrace. First, the digital transformation towards cloud-based operations is accelerating in the wake of the pandemic. Business agility is key, and cloud applications and AI can help. From automakers to healthcare providers to energy companies, Dynatrace’s offering can help customers meet their technology goals.

In order to meet the increasingly complex cloud requirements of its users, the company is continuously working to expand the number of modules available on its platform. One example is the cloud app security module that is being tested by selected customers. The feedback on this module’s ability to protect cloud applications in development and deployment has been positive and is expected to scale within the existing customer base in the second half of this year. The infrastructure module – which combines observability, log management and AI-based support – is currently Dynatrace’s fastest growing module, with ARR growth of over 90% year over year in the most recent quarter.

In terms of sales and marketing efforts, that spend is back in the mid-range of 30% (as a percentage of sales) to increase awareness of the Dynatrace brand. Dynatrace focuses on marketing to the 15,000 largest companies in the world. When answering a question about whether the company could start targeting smaller businesses, Van Siclen said there was nothing stopping Dynatrace from doing so. However, 70% of global IT spending currently comes from the 15,000 largest companies, so this is where the focus right now is – and there is still plenty of room for growth.

That said, high profitability and a strengthened balance sheet (cash increased $ 62 million from three months ago to $ 387 million and debt decreased $ 30 million to $ 362 million) gives Dynatrace the flexibility to expand strategically and accelerate growth if it so desires (such as via an acquisition). In the meantime, the company expects to continue to achieve a net expansion rate of 120% or more with existing customers and 15-20% growth with new customers to keep total revenue at around 30%. If you’ve been investing in the cloud computing industry long term, don’t leave this under-the-radar stock out of your portfolio.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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