Observability software pioneer Dynatrace Wednesday morning reported fiscal Q3 revenue and profit that both topped Wall Street's expectations, but had recurring revenue that was less than Wall Street wanted. 

The company also offered an outlook for revenue this quarter that was just slightly below consensus. The report sent Dynatrace shares down by 18% for the day. 

In an interview withZDNetvia Zoom, CEO Rick McConnell remarked, "the company is doing great, I am thrilled to be here," adding that the company's market for observabiilty and app security is "alive and well."

This was McConnell's first quarter running the company. The stock drop was a rough welcome. McConnell took it in stride. "A fairly finicky market, to say the least," as he described it.

McConnell took over in December from retiring CEO John Van Siclen, who had run the company for thirteen years. Prior to that, he spent over a decade at bandwidth pioneer Akamai Technologies, where he served as president, in addition to building up the security business from nothing to a billion in annual sales. Prior to that, he spent eight years at Cisco Systems after the networker acquired his startup, Latitude Communications, a pioneer in audio conferencing communications infrastructure.

"The market for everything at the top-most, intergalactic level of digital transformation spend, all the way down through our more-specific spend in observability and app security, is alive and well," says McConnell.

Revenue in the three months ended in December rose 32%, year over year, to$240.8 million, yielding a net profit of 18 cents a share.

Analysts had been modeling$234.5 million and 16 cents per share.

"We are growing [revenue] in the mid-30s, and we think there's an opportunity to accelerate growth," said McConnell, "so that's what we're setting about, and we'll figure out how to do."

The focus of investors' concern on Wednesday was the company's "annualized recurring revenue," an average of monthly sales extrapolated out twelve months. Dynatrace considers ARR the best measure of the company's progress on a quarterly basis. 

That number rose by 29%, to$930 million, and was below below Wall Street's consensus for$941 million. The company noted that if not for the fact of a rising U.S. dollar, the ARR would have been higher, totaling$951 million and 32% growth. In addition to the currency effect, the company's ARR growth was reduced by 4.5 percentage points because of its older, perpetual licenses are being grandfathered out as the company moves customers to modern subscriptions. Without that fall-off, the ARR rate of growth, year-over-year, would have been 36%.

"To pick apart our results for 36% constant-currency growth being somewhat disappointing is quite incredible," said McConnell.

McConnell reiterated that there is an opportunity for things to accelerate with investment.

"And the end of the day, we have got to find a way to make sure that we can communicate we are a mid-30s [percent revenue] grower, we are very excited about the business opportunity in front of us, and if anything, we believe that the market is ripe for added or increased investment, and that is what we are trying to go deliver over the coming quarters, and that's really the core of the message." 

The company also raised its ARR outlook to a range of 30% to 31% from a prior forecast range of 29% to 30%. The affect of currency will again make that growth lower this year, in a range of 28% to 29%, the company said. That amounts to$990 million to$996 million, below consensus of$994 milliion.

There is also the effect of the perpetual-license business falloff again weighing on ARR, the company said. Excluding both effects, the constant currency growth of ARR will be 33% to 34%, the company said.

What gives McConnell confidence in growth going forward is a roaring market for software tools. 

"The market for everything at the top-most, intergalactic level of digital transformation spend, all the way down through our more-specific spend in observability and app security, is alive and well," he said. 

In addition, all the levers of the business are moving in the right direction, said McConnell: "Our module sales, platform sales, infrastructure sales, are going very well, we're achieving all our internal KPIs and goals, we achieved guidance in every area, and we took up guidance."

McConnell said he especially loves coming to a company of the size of Dynatrace, nearing$1 billion in annual revenue. "I really love the billion to five-billion range," he said. His first company, Latitude, when it was bought by Cisco in 2004 for$56 million, had only about that much in annual revenue at the time.

"I had a blast, it was so fun to take a sub-$1 billion business, and generate a$5 billion business and took market leadership."

Similarly, when McConnell left Cisco to go to Akamai, he helped develop the company from a billion dollars in annual revenue to almost$3.5 billion annually. 

McConnell sees the same opportunity now. "In Dynatrace, I joined at a billion, and I feel exactly the same way, exactly the same passion, which is that Dynatrace is not optional, for our customers it is indispensible becasue that is how they run their businesses."  

For the current quarter, the company forecast revenue of$245 million to$247 million, and EPS of 15 cents to 16 cents. That compares to consensus for$246.6 million and 15 cents.

For the full year, the company sees revenue in a range of$922 million to$924 million, and EPS of 66 cents to 67 cents. That is up from a prior forecast of$913 million to$919 million and 63 cents to 65 cents. Wall Street consensus stands at$925.7 million and a 66-cent profit per share.

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