Dynatrace (DT, Financial) experienced a notable rise after surpassing its Q4 (March) adjusted EPS and sales projections and announcing its inaugural $500 million repurchase program, representing about 4% of its market cap. The company, a provider of security and observability software for mapping and monitoring applications and IT infrastructure, had faced a period of stagnant trading after a significant drop post-Q3 (December) earnings. The modest expectations set for this quarter allowed the positive results to shine through despite some ongoing challenges.
For FY25 (March), DT projected earnings and revenue below market expectations, aiming for an EPS of $1.26-1.29 and revenues between $1.64 billion and $1.66 billion. This represents year-over-year growth of approximately 6% and 15%, respectively, marking a slowdown from FY24. The company also anticipates a deceleration in annualized recurring revenue (ARR) growth to 15-16% for FY25. Management's conservative outlook is influenced by several large strategic deals that are expected to contribute to long-term growth but introduce increased variability in the short term, pushing the $100 million ARR milestone from the end of FY25 to sometime in FY26.
Despite these projections, the demand environment remains robust, and DT's pipeline continues to grow faster than ARR. The company is well-positioned to benefit from ongoing vendor consolidation, which is expected to lead to more significant strategic deals over time.
- Q4 highlights included an adjusted EPS of $0.30, beating the forecast of $0.26-0.28, and revenues of $380.8 million, up 21.1% year-over-year and above the expected $372-377 million. ARR also grew by 21%, reaching $1.5 billion.
- A key driver of the strong Q4 performance was larger strategic deals facilitated by vendor consolidation. DT added 168 new logos during the quarter, with a total of nearly 700 for the year, and closed a record 18 deals above $1.0 million in annual contract value (ACV), including a landmark nine-figure deal.
- DT's competitive edge is further highlighted by a gross retention rate in the mid-90s, and once a deal is signed, customers tend to quickly expand their usage, as evidenced by the average ARR per customer increasing to $400K in Q4.
While DT's Q4 results were strong and demonstrated stability in the macroeconomic environment, the company's cautious FY25 guidance, reflecting ongoing budget scrutiny and extended sales cycles, suggests potential challenges in achieving 2024's peak stock prices in the near term.
