What economic slowdown? This software company plans to add 30% to its sales team this year

As the U.S. Federal Reserve aggressively raises interest rates in an effort to slow the economy and tame inflation, a number of leading companies have come to a sharp halt in recent weeks. Of Metaplatforms at Selling powerbig tech freezes hiring, while You’re here and Coinbase announced upcoming layoffs in response to the economic downturn.

However, one company bucking the trend is a little-known cloud infrastructure company Dynatrace (DT 2.46%). In the company’s last quarterly update in May, CEO Rick McConnell said the goal was to grow the company’s direct sales force by 30% next year, after increasing its size by more than 30% last year. This position was reiterated in June during the Bank of America World Technology Conference. How is Dynatrace doing in the face of growing economic difficulties?

In-demand product improves hiring success

First, Dynatrace just wrapped up its 2022 fiscal year at the end of March, kicking off another 12-month period of rapid growth. Total revenue increased 32% to $929 million, and the company expects to achieve growth of at least 27% in the current fiscal year (taking into account the effects of exchange rate).

This rapid rate of growth alone may explain why the company believes it can increase the size of its sales force by another third over the next year. Infrastructure software is an easier sell as large organizations strive to migrate to more efficient operating models, and Dynatrace’s cloud and application monitoring platform is clearly in demand by mega- organizations to which it is addressed. In addition to growth in spending by existing customers, the company expects new customers to increase by around 15% to 20% this year.

But even in these uncertain times, Dynatrace isn’t the only software showing fantastic growth numbers. Employees have many options, and the current trend among many software companies is difficulty meeting hiring goals. And yet, McConnell told me shortly after his appearance at the Global Tech Conference that “April and May were great hiring months for us.”

All of this despite runaway inflation, a hawkish Fed and a deteriorating economic outlook causing many Dynatrace peers to be reluctant to make new hires.

The Value of Profitable Growth

But there’s surely more to this story than Dynatrace’s cloud management software being in high demand. There are undoubtedly several factors at play, but McConnell postulated that macroeconomic factors could be particularly important.

“Tech companies aren’t buying people at all costs like they seemed to be doing until the end of March. It creates a more rational market for people, and it will ensure that the top performers will be most attractive to join,” McConnell told me. He added that the “growth at all costs” mentality that has plagued some high-growth tech companies in recent years may finally be dead, thanks in large part to the Fed’s tightening of the economy’s screws.

And what about Dynatrace’s strong financial performance that makes it an attractive place to land a job amidst a global wall of worry? I would say, like McConnell, it’s because Dynatrace is a profitable company: free cash flow (FCF) was $234 million in fiscal year 2022, a very good margin of 25%. In fact, it has been striving to remain profitable since its IPO in 2019, rather than pursuing a position of growth first, profit second. And for fiscal year 2023, Dynatrace expects its FCF margin to increase to 29% or 30%. Many of his peers are currently trying to figure out how to make a profit now that their high-growth stocks are no longer popular with investors.

There’s more – Dynatrace also spends a lower than average amount on employee stock-based compensation. In the past year, it has distributed $99.5 million in stock, or just under 11% of revenue. Some tech companies pay much 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 attractive to many potential employees than good old cash.

Whatever the reasons, Dynatrace looks set to continue its rapid and steady growth streak this year, and hiring to support that trajectory remains healthy, while other tech companies are holding back. In my opinion, Dynatrace is an underrated and underfollowed cloud software name. I’m not saying it’s a buy at this point; it is currently trading for a premium of 49 times the 12-month FCF, and in this market that equates to continued high volatility. But at the very least, this company is definitely worth following.