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Dynatrace: Dynamite or Datadog's Puppy?
An article by • Published Mar 20, 2021
Dynatrace Inc. $DT has materially outperformed the software/SaaS peer group since the mid-February sell-off, down only 5% versus the $SKYY (First Trust Cloud Computing ETF) down 13% and peers such as $ESTC down 30% in just a few weeks.
"Value" SaaS has held in on a relative basis - $DT fits that mold with 30% growth and 30% FCF margins at a "reasonable" 17x FY22 valuation (beginning 4/1/2021).

What Does Dynatrace Do?

Dynatrace Inc offers software intelligence platform for the enterprise cloud. The Company has designed its software intelligence platform to allow customers to modernize and automate information technology (IT) operations. Its product Dynatrace is able to provide real-time actionable insights about the performance of customers’ entire software ecosystem by integrating high fidelity, Web-scale data mapping its dependencies in real-time, and analyzing them with an open, deterministic artificial intelligence (AI) engine. Dynatrace has designed to maximize flexibility and control of the rich monitoring data captured and analyzed by platform.
Multi-cloud observability
Global 15,000 focus
$1 billion-plus target customer size
Enterprise sales approach, no mid-market focus
Module cross-selling (33% using 3-modules vs 24% a year ago)
Partnerships with GCP, AWS, Azure
Subscription revenue growing > 30%
FY21 FCF Margin guide = 32%

Investor Concerns: Competition, Crowded Markets and the Datadog Threat

Management Responds
Kasthuri Gopalan Rangan•Goldman Sachs Group, Inc., Research Division•Analyst As a direct segue to that, the way you answered the question, curious to get your thoughts, and I think I've asked you this question a couple of times before. And -- what seems to be a cluttered landscape from the investor perspective? What's the best way to think about how Dynatrace is different from, say, Datadog or Splunk or Elastic or New Relic or what have you? John W. Van Siclen•Dynatrace, Inc.•CEO & Director Well, I think there's -- it depends a little bit on who the sort of competitive -- competitor is in the space. But I think that the biggest one relative to sort of the SMB sort of freemium kind of players is we work with customers at a different scale. $1 billion-plus customers, many of them that are digitally transforming have multiple generations of technology. So there's a hybrid component to their multi-cloud environment. Their scale and complexity is much greater. They have hundreds and hundreds of developers, dozens and dozens of applications, all running in one big multi-cloud environment. And that scale and complexity and sort of dynamism and frequency of change, just requires a different set of automation, analytics and intelligence, then if you have a single app, you have the architect who built it, and all he wants is just give me some observability tools so I can see everything that's going on and I'll figure it out. Our customers -- that's beyond what a team can do. So that's a big part relative to sort of the SMB and departmental guys. There are -- somebody that's sort of say larger, that's enterprise focused, most of the ones we see there are, here's the data I have added, let your scientists -- your data scientists go after it. Maybe I'll give you some starting points to help accelerate, but they're not really purpose-built enough to get rapid time to value. And it's -- again, it's okay early in the cloud because you're trying to explore your learning, et cetera. But when you start to scale, you don't want to get bogged down and trying to do it yourself. You really want a platform that automates and accelerates what I already know I need to do. Because I'm a bank or I'm a logistics company or I'm insurance or I'm an airline. I don't want to get sort of bogged down on being a monitoring company, too, or an observability company, too. So again, purpose-built sort of foundational use cases that then I can extend rather than have to do it all from scratch, really powerful. So put those 2 together, sort of automation and analytics plus purpose-built for specific known use cases, you need, whether it's applications or infrastructure, user experience, et cetera, really powerful combination for our enterprise customers.
DT has the best adjusted Rule-of-40 (Revenue Growth + FCF Margin) of its peer group
Management has indicated recently it will accelerate sales hiring to go after the opportunity in front of the company and suggested the math works out to > 25% growth near-term versus longer-term target of 25%
Kevin C. Burns•Dynatrace, Inc.•CFO, Treasurer & Secretary Yes. No, if you think about the business and the building blocks of the business over time, obviously -- and sort of the inputs to that, the first is sales productivity. And I think underpinning some of those are not just the 25% to 30% sales capacity growth that John talked about, but it's also the fact that we do believe, over time, we can get higher productivity out of our sales organization as they mature and as they're no longer working on the conversions. So those are sort of underlying that. And then we talked about the building blocks to ARR growth, right? And those are 2. It's pretty straightforward, right? The first is the number of new logos that we can add to the franchise. Q3, we grew that 10% year-over-year. Q4, we said that's going to -- that growth rate will accelerate. And we've also talked about a 15% to 20% new logo growth as we move the business forward. You couple that with 120% net expansion rate, you do the math, and that ARR number is above that 25% long-term target that we talked about. So -- but we're very optimistic about the business. A lot of things moved, a lot across the board in the right direction this quarter. Everything sort of stepped up. We're optimistic that, that can continue as we move forward in the fourth quarter. I'm not -- we're not going to come off of our long-term numbers at this point, but we look forward to updating you after our Q4 numbers and talk about the trajectory of the business going into '22 then.

Risks

Datadog $DDOG and others come 'Up' market
General competition in Observability, APM, Logging, Security
Technological risks
Market / SaaS multiple risk

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