Started a Position in Dynatrace

I started building a position in Dynatrace recently and am intrigued. Bert has written on the name a few times and it has been mentioned here a bit as well. Here’s a little information about the company and why I started a position.

Dynatrace is in the observability market - a very hot area of IT currently. Reference DataDog as the prime example. The company began in 2005 and went public in 2019. The CEO has been at the helm since 2008 (IIRC).

About 2 years ago, the company redesigned their platform for the cloud. They’ve also transitioned from a licensed to subscription based model that is 98% complete based on revenues.

I’m not capable of providing first hand knowledge on their solutions compared to others, but Gartner rates them at the very top right of their magic quadrant today. Bert has suggested Dynatrace’s success is at least part and parcel to New Relic’s recent stumbles. From what I’ve read, Dynatrace seems very well situated in their space that consists of larger clients. Dynatrace claims a customer TAM of 15,000 and is currently about 15% of the way there and plenty of growth remains within the current cohort.

Dynatrace claims some 2% to 5% of applications are monitored and observed today and while they do have some customers in the 20% to 30% range, they believe that will grow to closer to 50% for most over time.

Dynatrace’s single platform works for all cloud, all on-Prem or hybrid which does seem to be a significant selling point for their solutions. Comparisons to DataDog especially considering growth rates will enter one’s mind undoubtedly. Dynatrace is selling to a higher profile client on average that requires multi-faceted functionality. The average ARR per customer is now $220,000 and the typical land is in the $100,000 range. One should not expect the same trajectory of growth between the two companies.

Following are the reasons why I am excited about the company:

ARR has been growing around 43% for the past 4 quarters. Subscription plus services has been growing at a steady 36% to 37%. Gartner rates Dynatrace very high. Gross margins are excellent. Revenue growth will begin to track closer to ARR growth especially as their license component becomes zero (that is very close). And finally, the company is incredibly profitable!. Operating margins are +25% or thereabouts - yes that was a “+” sign and not a misprint. FCF yield is also extremely high at around 30%. Those are incredible metrics!

I’d be interested to hear what others have to say on Dynatrace and let me know of any questions on the above.

A.J.

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I am new to this board and I have seen bert’s name tossed around quite a bit, but nobody by that name post recently. I’m curious if you could share the account so that I could look through some prior insights.

Also, this sounds like a very intriguing position to start. I’m definitely going to look into it even though it’s revenue growth is not typically what I use as my cutoff.

Recently, I have been using a screen for SaaS companies (rev growth > 40, Gross margin>70) and then I have been using is revenue growth % x gross margin % product to rank the remaining companies.

The companies were as followed: 5/14 made saul’s portfolio.
Ddog
Zm
Crwd
Work
Smar
Ayx
Net
Fvrr
Bill
Cldr
Okta
Plan
Estc
Mdb

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Bert Hochfeld – Seekingalpha analyst with an interesting backstory (search that site as alluded to in Saul’s Knowledge base #1. It is a good place to start).

Mike

Bert’s investment page:
https://tickertarget.com/

Without being redundant; I too began a position in Dynatrace a number of months ago; pre-Covid and have recently added to my starter position on strength.

With the permission of the author (i.e. Beth Kindig) I will summarize or paraphrase a number of points discussed in her write-up from late January '20. Based on the timing of the report, some of the information may be slightly dated, but perhaps you will find it informative. Obviously, we all look at dated items such as this report through our “Pre-Covid” and “Post-Covid” glasses.

**Dynatrace (DT)**

- Dynatrace launched in 2006; purchased by Compuware in 2011; a private equity firm (Thomas Bravo) bought 
  Compuware in 2014 and spun off Dynatrace as a private company after merging it with Keynote, then went 
  public in August '19 and price pulled back in December '19 when Thomas Bravo should share down from 71% 
  ownership to 61%. 
- Premium Application Performance Management (APM) software company
- Product geared towards AI powered analytics, self-learning AI, real-time discovery, automated problem 
  remediation, use of AI chatbots
- As of 2018; claims to have 8.8% of APM market behind Cisco AppDynamics (11.2%) and New Relic (10.3%); 
  (*HMC: I Googled in an effort to find more recent data; no luck.*)
- Offering an all-in-one cloud platform sold as a package rather than separate modules; Real time 
  topology (*HMC: No idea, had to Google this term*), AI algorithms to monitor applications, 
  infrastructure and business operations.
- DT calling card is Full-stack observability for a comprehensive approach to business observability
- Main revenue growth driver is full-stack cloud monitoring platform; representing 80% of ARR, up from 
  only 39% of ARR a year ago(*HMC: I'm okay with math so I think I can say that is a 105% increase* 
 *YoY*)
- Subscriptions and services combine for 98% of revenue; licensing is 2%
- Subscription transition is positively impacting operating margins.  Non-GAAP Operating Margin 
  comparisons = Q1 2019 13%, Q1 2020 22%, Q 22020 23%
- Focused on large enterprise accounts; greater than $750M Annual Revenue, results in average account 
  totalling more than $200K ARR per customer.
- Sponsored case study showed Dyntrace returns up to 311% ROI over 3 years, 6 month payback
- Dynatrace product roadmap utilizes multi-cloud and hybrid cloud using AI to perform analysis faster
- Dynatrace is positioned to take advantage of the growth in hybrid cloud
- At the time of report, Dynatrace was reporting 23% Operating Margins, Non-GAAP profitability of EPS 
  $0.06, with negative GAAP EPS -$1.58, total revenue growth of 27% YoY, with ARR increasing 44%

The question to play out for Dynatrace is whether or not the subscription growth is going to pick up the overall revenue growth moving forward and will the Dynatrace full-stack platform be the engine that transforms Dynatrace from a licensing model to a subscription model.  At this point, a good sign is that the dollar based net retention rate is 140%, which has been increasing as Dynatrace continues its pivot to the cloud.
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A.J. I mentioned it on the board and started a position in it earlier a while back, and the board wasn’t too fond of it. I held it a while, and it wasn’t growing at the rate of my other holdings, so I eventually sold it to start a position in COUP. Personally I like the company and the stock, but it wasn’t growing at the rate of my others, so I cut ties.

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I just read Bert’s SA article on DT. I think this company is early stages of growth with significant tailwinds due to Covid 19.

I plan to start a small initial position in Tuesday so that I can start following this company a little more seriously.