As the U.S. Federal Reserve aggressively hikes interest rates in an attempt to slow the economy and get inflation back under control, a number of high-profile companies have slammed on the brakes in recent weeks. From Meta Platforms to Salesforce, big tech is putting a freeze on hiring, while Tesla and Coinbase have announced upcoming layoffs in response to the economic slowdown.
One company bucking the trend, though, is little-known cloud infrastructure company Dynatrace (DT 4.12%). During the company's last quarterly update in May, CEO Rick McConnell said the goal was to grow the company's direct sales force 30% in the next year -- after increasing its size by over 30% in this past year. That stance was reiterated in June at the Bank of America Global Technology Conference. How is Dynatrace pulling this off in the face of rising economic difficulty?
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In-demand product makes for better hiring success
First off, Dynatrace just completed its 2022 fiscal year at the end of March, notching another 12-month stretch of fast growth. Total revenue increased 32% to $929 million, and the company expects to achieve at least 27% growth in the current fiscal year (when backing out the effects of foreign currency exchange rates).
That fast pace of growth alone may explain why the company thinks it can increase the size of its sales staff by another third in the next year. Infrastructure software is easier to sell as large organizations scramble to migrate over to more efficient operating models, and Dynatrace's cloud and application monitoring platform is clearly in demand among the mega-organizations it caters to. Besides growth in spending among existing customers, the company expects an increase in new customer count of about 15% to 20% this year.
But even in these uncertain times, Dynatrace isn't the only software outfit putting up fantastic growth numbers. Employees have lots of options out there, and the going trend among many software companies has been difficulty in meeting hiring goals. And yet McConnell told me shortly after his appearance at the Global Tech Conference that "April and May were tremendous hiring months for us."
All of this is in spite of roaring inflation, a hawkish Fed, and a deteriorating economic outlook forcing many of Dynatrace's peers to second-guess making new hires.
The value of profitable growth
But surely there's more to this story than Dynatrace's cloud management software being in high demand. There are no doubt multiple factors at play, but McConnell posited that macroeconomic factors could be especially important.
"Companies in tech are not buying people out at all costs like they seemed to be through the end of March. That creates a more rational marketplace for people, and that is going to result in the strongest performers being the most attractive to join," McConnell told me. He added that the "growth at all costs" mentality that has been rampant among some high-growth tech companies the last couple of years may finally be dead, thanks in no small part to the Fed tightening the screws on the economy.
And what about Dynatrace's strong financial performance makes it an attractive place to land a job amid a global wall of worry? I'd argue, as would McConnell, that it's because Dynatrace is a profitable company: Free cash flow (FCF) was $234 million in fiscal 2022, a very healthy 25% margin. In fact, it's striven to remain profitable since its initial public offering in 2019, rather than pursue a grow-first, profit-later stance. And for fiscal 2023, Dynatrace anticipates its FCF margin will expand to 29% or 30%. Many of its peers are currently trying to figure out how to turn a profit now that their high-growth stocks are out of favor among investors.
There's more -- Dynatrace also spends a below-average amount on employee stock-based compensation. In the last year, it doled out $99.5 million in stock comp, or just under 11% of revenue. Some tech outfits pay out far higher amounts of stock-based compensation -- 20% or more. With many tech stocks sinking like a stone in recent months, higher variable compensation in company stock is likely less appealing to many would-be employees than good old cash.
Whatever the reasons, Dynatrace looks poised to continue its fast-and-steady growth streak this year, and hiring to support that trajectory remains healthy, while other tech companies tap the brakes. In my opinion, Dynatrace is an underrated and underfollowed cloud software name. I'm not saying it's a buy at this point; it trades for a premium 49 times trailing-12-month FCF right now, and in this market, that equates to ongoing elevated volatility. But at the very least, this company is certainly worth a follow.
