6ca1bcfb-1977-41c8-a084-07f790a54db0_Dynatrace-Premium-Research.pdf
Dynatrace Premium Research
Dynatrace
Dynatrace is a premium application management software company that ranks high on product evaluations by Gartner and Forrester. The company claimed 8.8% of the APM market in 2018, placing the company in third place behind New Relic at 10.3% and Cisco’s AppDynamics at 11.2%. The company is ahead of IBM at 8% and Broadcom at 7.6% of the APM market.
The all-in-one cloud platform is priced higher than other APM products and is sold as a package rather than as separate modules. The offerings include real-time topology and AI algorithms to monitor applications, infrastructure and business operations.
In 2016, Dynatrace launched a full-stack cloud monitoring platform. The platform is now the main driver of growth at 80% of annual recurring revenue, up from 75% of total annual recurring revenue last quarter, and up from 39% a year ago. Subscriptions and services combined make up 98% of revenue compared to licensing at 2%.
Dynatrace is seeing the positive effects of transitioning to the subscription-based model in its operating margin. The non-GAAP operating margin grew from 13% in fiscal Q1 2019 to 22% in fiscal Q1 2020, ending in August. The most current non-GAAP operating margin in fiscal Q2 2020 was 23%.
Dynatrace is focused on large, enterprise accounts with greater than $750 million in annual revenue. This is reflected in the company’s average account totaling over $200,000 ARR per customer.
Product
Please refer to the Datadog Premium Research report for more information on the APM market including information on competitors New Relic and AppDynamics. t for more information on the APM market including information on competitors New Relic and AppDynamics.
Dynatrace’s product road map is geared towards exceeding Cisco’s AppDynamics and New Relic in AI-powered analytics, such as self-learning AI, real-time discovery, automated problem remediation and the use of AI chatbots.
Full-stack observability is another area where Dynatrace stands out. Rather than offer infrastructure monitoring or application monitoring separately, the company has developed a more comprehensive approach to business observability. In a recent earnings call, Dynatrace stated the company was four years ahead of the competition in full-stack observability, which helps return business value to its customers.
In a sponsored case study, Dynatrace returns up to 311% ROI over three years to its customers with the investment paid back in six months.
Hybrid cloud
Dynatrace’s product roadmap includes expanding into multi-cloud and hybrid cloud and using purpose-built AI to perform root cause analysis faster.
Hybrid cloud is a technology that enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud. Companies prefer hybrid cloud because it is cost-efficient, transparent, and safe. Hybrid essentially helps to push many companies off the fence in deciding between cloud and on-premise.
According to a recent study, 76% of companies are committed to hybrid cloud. This is the main catalyst for why Microsoft Azure has gained in popularity against the heavyweight Amazon’s AWS as Microsoft set out to specialize in hybrid cloud in 2016. (I’ve hammered this point home a few times on Microsoft). It’s important to pay close attention to this trend as hybrid will be a driver for the remaining growth in cloud.
Fundamentals
As stated, Dynatrace is reporting 23% non-GAAP operating margins since moving to an all-in-one cloud monitoring platform. The company is profitable on a non-GAAP basis at $0.06 in the most recent quarter, yet has reported negative GAAP EPS of -$1.58.
Total revenue increased 27% year-over-year in the most recent quarter with subscriptions and services growth exceeding this at 37% YoY and annual recurring revenue increasing 44%.
The question that is worthy of speculation, is if the subscription growth of 37-47% is going to pick up the overall revenue growth in the forward year as the Dynatrace platform eclipses the classic products at 80% versus 20%. Subscription and services also far exceed licensing at 98% versus 2%.
The company is projecting full year fiscal 2020 revenue to be between $533 million and $535 million. This is up from $431 million in fiscal 2019, or 24% growth.
As of now, the company is not projecting the kind of rampant growth that the more popular cloud software stock report although revenue growth has been steadily increasing since the 2016 product pivot. Revenue growth was negative from 2017-2018 as the company absorbed the transition and was at 8% year-over-year growth from 2018-2019.
The CEO believes the company is in the sixth quarter of a 10-12 quarter transition from the licensing model to the subscription model. The dollar-based net expansion rate of 140% is well above the cloud software benchmark, which is a very good sign for future revenue growth. This is higher than any cloud software subscription company that reported net retention in 2018 with the previous leaders being Smartsheet at 130% and Alteryx at 131%. Netdollar expansion rates measure whether the growth from the existing customer base offsets any losses. Typically, these numbers will decline over time. With Dynatrace, the number has increased due to the pivot to cloud platform.
Non-GAAP operating income is expected to be in the range of $119 million to $121 million. This will put non-GAAP EPS at $0.23 to $0.24 for the fiscal year ending in March.
There was nearly $1 billion in debt on the balance sheet, but this has steadily improved over the last year with the help of the IPO. Following the public offering, which produced $590 million in net proceeds, the current debt balance is $540 million. Cash flow for fiscal Q2 was $27.2 million, and $174 million on trailing 12-month basis.
According to Dynatrace’s S-1 Filing, the addressable market is $18 billion. Gartner places the addressable market for global IT operations software at $29 billion with compound annual growth rate of 6.7% to $37.5 million in 2023.
Notable Price Volatility & Upcoming Lockup
Expiration
Dynatrace launched in 2006 and raised $22 million before Compuware bought the company in 2011. The private equity firm, Thoma Bravo, bought Compuware for $2.5 billion in 2014 and spun Dynatrace off as a private company after merging Dynatrace with Keynote, another APM company in Thoma Bravo’s portfolio.
After the company went public in August, Thoma Bravo reduced its stake from 71% at the IPO to 61% over the course of a week in December. The stock price fell 12% during this time with the offering from Thoma Bravo of
27.5 million shares.
Most importantly, the company’s lock-up period will expire on January 28th. The company reports quarterly earnings the following day on January 29th. One of the current trends in this IPO market is for lock-up expirations to result in a short-term drawdown in stock price.
Technical Analysis
By Knox Ridley
Just under 6 months ago, Dynatrace (DT) listed on the NYSE at $16. Following the recent, hot IPO trends, DT closed on the first day of trading 49% above its IPO price at $23.85. Notably, shares opened at $25.50.
However, unlike the broad market that continued to rally in the back half of 2019, DT then began a 36% drawdown that bottomed just above its IPO listing price at $17.13.
Basic Technical Analysis
Using basic Technical Analysis, we can follow the initial downtrend with the price and MACD using the downward sloping, blue-dashed lines in the chart above. The MACD signaled long before the bottom that the momentum was fading.
Notice the green arrow sloping up on the chart. As the MACD was making higher lows, price was making lower lows. This is the type of positive divergence that we see before a bottom. The trend reversed when both price and the MACD broke through the blue downward sloping lines shown on the chart, as DT began to make higher highs and higher lows for the first time since going public.
Since then, Dynatrace has been in a standard uptrend. It’s worth noting that DT broke above the all-time high at $26.90 this year. This is a sign of strength that we want to see prior to initiating a long position.
Just like on the way down, we can use the same trendline tools to gauge the health of the current uptrend. The MACD signaled weakness prior to the actual recent top. As the price was making new highs, the MACD was making lower highs, which is a sign of fading momentum. The RSI, MACD and price all followed their own internal trendlines in unison, highlighted in blue. Recently, all three have broken these trends, which is a sign that a possible reversal is underway.
Elliott Wave Analysis
Using Elliott Wave, we can get a clearer idea of what the structure of Dynatrace is telling us. The initial downtrend followed a standard 3-wave structure, where the C wave unfolded in a final 5-wave impulse before bottoming. Since a reversal at $17.13, the uptrend broke out to new highs, which takes a larger degree downtrend off the table for now.
We have a clear 5-waves up off the bottom, which is highlighted by the green roman numerals. These waves coincided with the standard Fibonacci levels that make up a 5-wave uptrend – e.g., 3rd waves typically break at the 161.8%extension of waves 1 and 2, and the 5th wave terminates around the 200% extension.
This would now put us in a larger degree 2nd wave, which will be confirmed if Dynatrace breaks through $26.50 level. Above this region, and DT could press higher, extending for its final 5th wave towards the $30 region before we see a larger degree pullback.
If Dynatrace breaks support to confirm the 2nd wave scenario, I’ll look between the 38.2% retrace level, around $25, and the 61.8% retrace level, around $22, to initiate a position.
If this is the structure we are dealing with, expect the 3rd wave up to take us to new highs and beyond. However, if DT closes below $19.25, I will consider this a failed impulse and stop out of any long position.