Dynatrace ($DT)

Investment Analysis Clubs Saul’s Investing Discussions
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I have been away awhile, so not sure if this has been discussed. Relatively new IPO, which can be dangerous, but it actually has earnings. It monitors business critical applications both on-premise and in the cloud. It is moving to a subscription model, which we like.

In the September quarter, Dynatrace earnings doubled to 6 cents per share on a 27% increase in revenue to $129.4 million. Subscription revenue rose 41% to nearly $116 million. Sales growth is accelerating, which bolsters the bull case.
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While Dynatrace stock has a short history on the public markets, the company itself has a lengthy record in the application performance monitoring (APM) market. Waltham-Mass.-based Dynatrace has been around long enough to lead the APM market with around 13% share. This puts it ahead of the likes of Cisco Systems (CSCO) at 12%, New Relic (NEWR) at 11% and Splunk (SPLK) at 6%.

The firm’s roots are in supporting a customer’s internal, on-premise infrastructure. It offers software tools that measure and analyze the performance of business-critical applications. It stole a march on some other legacy APM players by migrating its software tools to a cloud-computing platform.

With competition on the rise, analysts say supporting both on-premise and cloud-based APM gives Dynatrace a broader appeal to customers. It’s steadily converting on-premise customers to subscription-based cloud products.

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Dynatrace vs New Relic vs Datadog

Puddin, I covered DT a bit as part of my deep dive into DDOG and its competition, back in mid December.
https://discussion.fool.com/a-datadog-technical-review-34363397…

If you wanted to pick one to own, DDOG stands head and shoulders above the others. DDOG is clearly the fastest grower of the bunch, in both revenue and new customers and customers spending more. Its price reflects that.

Here were the latest numbers I posted then of the top 3 in APM space.

  • NEWR: Rev 146M +27%, $NER 112% (-1200bps), Custs >100K 906 +15%, Gross Margin 83%, Market cap $4B.

  • DT: Rev 129M +27%, ARR +44%, Sub Rev +37%, Sub custs 1828 +100%, $NER >120%, Gross Margin 69%, Market cap $7B. [FYI 42% of that customer growth is from custs on their old platform (“Classic”) migrating.]. (I had 35% for sub rev before but checking again it was 37%.)

  • DDOG: Rev 96M +88% (and accelerating), $NER >130%, Custs 9500 +34%, Custs >100K 793 +93%, Gross Margin 76%, Market cap $10.6B.

New Relic has highest margins and highest rev but market cap is markedly under the others, with low cust growth and rapidly eroding $NER. I have read a bit on why NEWR is in the doldrums, and overall feeling is they were the leaders in APM but let up on the gas and let competition get ahead of them on features. They have a new platform, One, that began to rectify that.

DT tries the “simple” route for monitoring - their agent self identifies apps running, then establishes baseline via AI for you and detects anomalies from there. DT had a on-prem solution that is now migrated to SaaS, which is leading their growing 37% vs 27% overall. 42% of “new” custs are existing ones shifting to new SaaS platform. They should have done this earlier. It gave first New Relic, and now Datadog, a huge opening to take SaaS share early. But DT is now doing well.

DDOG, unlike DT, doesnt have a services segment as it isn’t needed - the agent is so easy to install, customers can onboard themselves. DDOG is “third place” in APM space per Gartner, yet is growing top line OVER TRIPLE THE GROWTH RATE of those top 2. And customers are spending more and more ($NER >130%, high spending custs grew 93%).

Lets extrapolate out growth in a simplistic fashion, taking current growth rate out a year. This is realistic to DDOG as growth is still accelerating, and probably fair to NEWR and DT, who are at least stable solid growers. Plus, to be overly conservative, let’s assume DT moves forward at nearer to their 37% that sub rev is showing (that is masked by Service rev), as ARR is growing faster.

DDOG at 88% rev growth will go from 96M per Q to 180M in a year.

DT at 37% goes from 129M to 177M.

NEWR at 27% goes from 146M to 185M.

DDOG catches up on revenue in a year, and likely never looks back from there as it will still be growing at double the rate from there.

DT may be a good investment, but I doubt the current 35% sub rev entices many here. The ARR growing faster may be showing that growth increases from here. But too many hypergrowth stories to pick from, growing NOW at 40-50% … and beyond…

-muji
long DDOG

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The interesting thing about Dynatrace is in their last quarter they significantly increased their S&M spend YOY to 78% of their revenues. Stock based compensation is way up. Not sure if this is related to their recent IPO. SEC filing footnotes should tell. Last year their S&M was 44% of revenues. So they are clearly spending a bunch of money to grow unless like I said it’s related to one Time IPO stock based compensation charges. But 78% of revenues is unprecedented for a company of DT’s size.

Maybe DDOG is causing this much of a problem insiders looking for an exit and they’re spending a bunch on S&M to sustain growth. It’s a very competitive space.

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Hey Muji

Since you have done a lot of the hardwork already, what would be your advice to someone who already has a small position with DT for the last couple of months before their financials hit next week? I’m currently up and have no love/loss for the company, so totally would be willing to take my gain and move it into another company such as DDOG or start a position with LVGO. Always tough to know what investors are believing will happen of course but figure since you’ve been following them longer, may have a say.

Thanks,

BarrelHaus

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Since you have done a lot of the hardwork already, what would be your advice to someone who already has a small position with DT?
…totally would be willing to take my gain and move it into another company such as DDOG or start a position with LVGO.

BarrelHaus,

We really can’t give advice here on how to manage your portfolio. In fact, it’s a board rule: https://discussion.fool.com/monday-morning-rules-of-the-board-34…

I think it was obvious Muji likes DDOG, but no one can evaluate for you:

  • the present valuation of DDOG
  • the present valuation of DT
  • your goals as an investor
  • your time horizon for investing
  • the myriad of other factors that have nothing to do with the companies

Should you stick with DT? Switch to DDOG? Keep a basket of both? Only you can decide these things.

Bear

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Thanks Bear, didn’t realize there was another location for Portfolio Management.

I own some of both, but as I have read through many discussions on this board, people say to get down to around 8-15 or so stocks and am currently around 17. So trying to just figure out which way to move dollars and such.

I recon i’m on my own in that regard but hey part of investing right.

Thanks for the info.

BarrelHaus

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Pddinhead, Muji,

Thank you for sharing your knowledge on DDOG and DT.

One question raised in my head - the DT is able to successfully get its on-prem customers to its cloud based subscription (btw-is that understanding correct?); is DT better positioned for hybrid cloud vs DDOG a better solution for pure cloud?

If thats true, would you think DT growth will accelerate from here?

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Thanks to muji for his usual outstanding work.

But i am persuaded most by 12x’s point regarding what i consider to be outrageous share based compensation. If it turns out to be a one year thing, with offsetting low SBC in subsequent years, i wouldn’t feel so strongly, but even the prior year SBC was a bit of an outlier to the high side.

The company products, markets, and leadership capability looked strong to me when i checked out the stock a few weeks back upon Bert’s write up. Then i went to the SEC filing and noted the seeming unrestrained, if not unprecedented, SBC.

Leadership looks more than capable to grow this company to much bigger levels and products and markets look excellent, but management’s inclination to value their fiduciary responsibility doesn’t measure up to my view of shareholder friendliness, and the future dilution already built in may be too much for current alpha seekers.

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One question raised in my head - the DT is able to successfully get its on-prem customers to its cloud based subscription (btw-is that understanding correct?); is DT better positioned for hybrid cloud vs DDOG a better solution for pure cloud?

With permission from the author (Beth Kindig) on her recent Dynatrace write-up; I am paraphrasing and not copying verbatim on this topic for the “sound bites” listed below:

  • Dynatrace has invested heavily since 2016 in a product roadmap that expands into multi-cloud and hybrid cloud; using AI to perform root cause analysis faster; pushing forward on AI powered analytics, self-learning AI, real time discovery, automated problem remediation and use of AI chatbots

  • 76% of companies surveyed indicate that they are committed to hybrid cloud due to the fact that it is more cost efficient, transparent and safe. Hybrid helps move the needle and move companies from on-premise into the cloud.

  • this Dynatrace initiative combined with the transitioning from a licensed based to subscription based model is in the sixth quarter of a 10-12 quarter transition period for the company according to the CEO; (HMC: Hence, this may explain some of the increased S&M spend that was referenced in this thread above. Getting out there and pounding the pavement to sell the subscription based model.)

  • transitioning to a hybrid cloud and subscription based service has resulted in dollar-based net expansion rate of 140%; better than Smartsheet at 130% and Alteryx at 131%. The net dollar expansion rate has increased along with the pivot to the cloud platform

  • transitioning to subscription model and cloud platform has resulted in increased operating margins and revenues (HMC: Although not at the levels required of investors on this board.)

  • Non-GAAP Operating margins are most recently 22% Q1 2020 up from 13% Q2 2019. The company is profitable on a non-GAAP basis.

  • Revenue growth was negative from 2017 to 2018 as the company absorbed costs of and focused energies on the transition to a hybrid cloud based subscription model. Revenue increased 8% from 2018 to 2019 and full year fiscal 2020 is expected to be up 24% compared to 2019 full year. (HMC: Is it fair to say that their revenue growth rate is expected to triple from 2019 to 2020? In other words, maybe they have invested in the transition and are now seeing the fruits of their labor and are now in the early stages of turning the corner and growing more aggressively?)

  • Since the recent IPO; they reduced debt on the balance sheet from $1 billion down to $540 million and they are cash flow positive to the tune of $27.7 million in the most recent quarter.

Just some input I can provide…I do not have a dog in the Dynatrace hunt; although I do have a Datadog in the APM hunt.

Long DDOG

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Hey hmc.

Not sure where you or Beth got $NER of 140% but it isn’t correct. It raised my sniff alarm upon reading it, as 140% $NER would be odd when sub rev is only 37% (assuming $NER is only for sub rev, as they are winding down license rev). Not impossible, but it would mean new customers are spending a lot less than existing customers and are being a drag on revenue growth rate, which would be quite alarming … even in this era of land-and-expand.

Going to latest Q transcript (thanks Fool): https://www.fool.com/earnings/call-transcripts/2019/10/31/dy…

“Once again, in Q2, our net expansion rate comfortably exceeded 120%. This is the sixth straight quarter we’ve exceeded this mark.”

So a simple view is existing custs were ~20% of rev growth and new custs were the other 17%.

In comparison, DDOG is $NER of >130% on rev growth of 88%, so existing custs are ~30% of that rev growth and new custs are 58%(!!). That is a great place to be.

-m

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Apologies Muji; I was simply restating information as contained in a report I had read. I went back to the source document and it does in fact state 140%. So the discrepancy is noted.

Long DDOG

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