In the large and ever-expanding cloud computing industry, Dynatrace (NYSE:DT) is a little-known name. However, the software platform's observability, analytics, and automation capabilities are becoming a key ingredient of many large organizations' digital transformation efforts. Dynatrace demonstrated this in its fiscal 2022 first-quarter report (which corresponds 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 during its last quarter, ending June 2021 with over 3,000 in total. The company's net expansion rate was at or over 120% for the 13th straight quarter, implying the average existing customer increased its spending 20% or more compared to a year ago as Dynatrace expands the capabilities of its platform. More than 40% of customers used three or more cloud modules, with those users generating average annual recurring revenue (ARR) of over $500,000. 

Someone inside a data center working on the equipment inside.

Image source: Getty Images.

As a result, Dynatrace's ARR and quarterly revenue handily exceeded 30%, and free cash flow notched a massive year-over-year increase as the company adds more customer usage and reaches a more efficient scale. 

Metric

3 Months Ended June 30, 2021

3 Months Ended June 30, 2020

YOY Change

Annual recurring revenue

$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.  

Multiple secular growth trends filling Dynatrace's sails

On the earnings call, CEO John Van Siclen discussed the multiple secular growth trends that are bringing the cloud industry to Dynatrace's high-tech services. First, digital transformation to 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 its customers execute on their technology goals. 

To help address the increasingly complex cloud needs of its users, the company is undertaking ongoing work to expand the number of modules available on its platform. The cloud app security module, which has been in trial with select customers, is one example. Feedback on this module's ability to protect cloud applications in development and deployment has been positive, and it's expected to start scaling within the existing customer base in the second half of this year. The infrastructure module -- which combines observability, log management, and AI-based assistance -- is currently Dynatrace's fastest-growing, with ARR growth of over 90% year over year in the last quarter. 

As for sales and marketing efforts, those expenses are back in the mid-30% range (as a percentage of revenue) to help expand awareness of the Dynatrace brand. Dynatrace is focused on marketing to the world's 15,000 largest organizations. When answering a question on whether the company might begin addressing smaller businesses, Van Siclen said nothing prevents Dynatrace from doing so. However, 70% of global IT spending currently comes from the largest 15,000 organizations, so that's where the focus is for now -- and there's still plenty of room to grow. 

Nevertheless, a high rate of profitability and a strengthening balance sheet (cash and equivalents increased some $62 million from three months ago to $387 million, and debt decreased $30 million to $362 million) give Dynatrace the flexibility to strategically expand and accelerate growth if it chooses (like via an acquisition). In the meantime, it expects to continue generating a 120% or better net expansion rate among existing customers and 15% to 20% new customer growth, to keep its total revenue expanding at about 30%. If you're invested in the cloud computing industry for the long haul, don't leave this under-the-radar stock out of your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.