Dynatrace: An analysis

Dynatrace is another high profile SaaS company that went public in 2019 under “DT” for 16$ per share valuing the company at $4.5B. First day of trading saw the shares rise 49% to around 23$ per share.

Evolution of Dynatrace

Dynatrace has had a very circuitous route to where it stands today. It started in 2005 originally and remained a private company raising from Bain Capital Ventures and Bay Partners across a $5 million 2007 Series A, a $12.9 million 2008 Series B, and a small 2011 venture round of just $4 million. It got acquired by Compuware for 256M in 2011. Compuware was a public company until tech private equity investor Thoma Bravo bought it in 2014 for $2.5 billion and took it private. Thoma Bravo decided to spin out Dynatrace, Compuware’s crown jewel, as its own company under CEO John Van Siclen and take it public in 2019. Even after the IPO, Thoma Bravo has a controlling stake (52.1% of voting power) in the company. As a side note, BMC software bought Compuware from Thoma Bravo $2B in March this year. This will one of the very few PE backed firms that have gone public.

Product Strength

The Dynatrace Software Intelligence Platform consists of an automatic instrumentation technology called OneAgent, a real-time dependency mapping system we call SmartScape, a transaction-centric code analysis technology called PurePath, and an artificial intelligence engine called Davis for instant answers to degradations in service, anomalies in behavior, and user impact. Dynatrace simplifies the complexity of the enterprise cloud for cloud architects, application teams and operations teams, while providing actionable insights that accelerate cloud migrations, cloud adoption, and DevOps success.

The most popular product by far is the APM offering. Dynatrace has been actively embedding artificial intelligence into its platform as part of an AIOps model that empowers operations teams with deeper insight into application performance, underlying hybrid cloud infrastructure and the user experience. Other products include infrastructure monitoring product.

Financial Mettle

Dynatrace went for an IPO in the midst of a transition from mainly license based on-prem revenues to SaaS. Some stats:

• Dynatrace had $431 million in revenue in the fiscal year ending March 31.
• Subscription or SaaS based product revenue now accounts for 81% of the total revenue, up from 57% in 2017. Subscription revenue saw a rise of 36% yoy while license revenue fell 59%. Total revenue has been growing at 8.3% yoy.
• More than 2,600 customers in 80 countries growing 92% yoy and industries spanning banking, insurance, retail, manufacturing, travel, and software.
• Dollar based net expansion rate was more than 120% as of December 31, 2019. For comparison, this was 146% for Datadog, 112% for New Relic. For more retention rate analysis, check out this post by Alex Clayton.
• The company’s revenue, though, hasn’t recently led to profits. The company recorded a $116 million loss over the past year that was mostly driven by investment in R&D, compensation for employees, sales and marketing expenses and interest expenses.
• Gross margin of 80.8% and net margin 18.3% for year ending 2019.
• On a net basis, the company has a little over $500 million in debt.

Customer and Revenue Breakdown

As mentioned earlier, around 81% of the total revenue now comes from subscriptions. The older license based revenue is completely from enterprises with at least $750+ million revenue.

[Edit: turns out the previous graph I had, there was no way to verify the source of data. Attaching a new graph from the IDC study on market share. Thanks to Soham Banerjee for the data!]

Competition Dynamics

Dynatrace has about 3% market share of the APM market.

New Relic

Clearly New Relic still has a huge lead in terms of number of customers. However, Dynatrace’s business skews more towards large enterprises while New Relic’s customer base sees more adoption in smaller enterprises and mid-market firms. This completely aligns with the bottom up growth strategy that New Relic forayed into the devtools space.

In some sense, Dynatrace’s APM offering is more state of the art with the AI engine built in. Cloud infrastructure is becoming increasingly complex as companies look to adopt containers on a larger scale. New Relic failed to capture this trend of intelligent monitoring products to provide answers instead of data. New Relic has also been ramping up its APM offering to support some newer platforms like Kubernetes. New Relic has reported average annualized recurring revenue (ARR) of more than $140,000 for its 2,300-plus enterprise paid accounts, Dynatrace estimates it had an average ARR of $430,000 to $435,000 as of June 30 for its 1,560 to 1,570 customers.

Cisco AppDynamics

Cisco’s App Dynamics acquisition of $3.7 billion in 2017 has only proven how hot this market is. However, Cisco AppDynamics has been focussing a lot more on the older technology stack and integration with its networking infrastructure.

Datadog

Originally just an infrastructure monitoring tool, Datadog has rapidly expanded into APM, log management, networking monitoring, RUM and many more. Datadog recorded $360 million revenue in 2019 with a growth rate of 83% yoy. The company is trying to boost sales via cross selling its products. Datadog is definitely a formidable competitor to watch out for.

Cloud providers like AWS, GCP

While cloud adoption has helped increase subscription revenue for Dynatrace, cloud providers have their own APM offerings. Overall the adoption of cloud is a larger positive than the competition offered by these cloud providers.

Outlook for the Future

Revenue growth has been slow for Dynatrace overall because of the declining license based revenue stream. License based revenue will probably go down to nearly 0 within the next couple of quarters which means revenue growth will completely follow the growth for the subscription based revenue which is around 35%. Gross margins have also shown a growth from 80.3% to 82.3%. The company spends the most on sales and marketing (~40% of revenue) and its sales efficiency is also low as explained by Astasia Myers in this post.

According to the filings, Dynatrace is going to target the 15000+ largest enterprises ($750+ million ARR) which puts its market size at about $18 billion.

That said, the APM and infrastructure monitoring space is getting more and more heated with not just big players but also new entrants.