Gartner estimates the global IT operations software market to grow at 7% CAGR to reach 37.5 billion by 2023 from $29 billion in 2019. Within the industry, Gartner expects enterprises to quadruple their Application Performance Management (APM) use over the period 2018 to 2021. It expects APM to reach 20% of all business applications by 2021. Dynatrace (NYSE: DT) is a leading player in the market that recently reported stellar quarterly results.
Dynatrace has had an interesting story exchanging its ownership across various hands over the past few years. It was originally set up in Linz, Austria in 2005 by Bernd Greifeneder. The company had received some initial funding from Bain Capital post which it relocated to Boston. In 2011, Dynatrace was bought out by Compuware for an estimated $256 million. Compuware acquired Dynatrace to expand its APM tools. A few years later, in 2014, private equity firm Thoma Bravo bought out Compuware for $2.4 billion.
The acquisition by Thoma Bravo was a big turning point for Dynatrace. Thoma Bravo’s management wanted Dynatrace to evaluate the potential of utilizing the cloud for its APM tools. Bernd Greifeneder was still with Dynatrace, and he took the next three months to establish a team of his best product folks. By May 2015, Bernd had come with a recommendation that Dynatrace be set up as an independent company starting from scratch to build an entirely new platform focused on the cloud. The transition was pivotal for Dynatrace.
Today Dynatrace is a leader in the global APM market. Its AI-based product provides answers about the performance of applications, the hybrid cloud infrastructure, and the experience of its customers’ users. Its software intelligence platform has been designed to help customers modernize and automate IT operations, develop and release high quality software faster, and improve user experiences for better business outcomes.
Dynatrace’s cloud pivot also involved its transition to a subscription-based model. For fiscal 2019, Dynatrace reported subscription revenues of $349.8 million, growing 81% over the year. Total revenues for the company reduced 8% over the year to $431 million as it moved to a subscription-based model. During the same period, net loss grew to $116.2 million compared with a net income of $9.2 million in fiscal 2018.
For the recently reported third quarter, Dynatrace’s revenues grew 25% to $143.3 million, ahead of the Street’s forecast of $114.7 million. Subscription and services revenue grew 36% to $139.4 million. License revenues were flat at $10.9 million. EPS grew from $0.02 a year ago to $0.10 and was ahead of the Street’s forecast of $0.07 for the quarter.
Among key metrics, Annual Recurring Revenue (ARR) rose 44% to $534.5, ahead of the market’s forecast of $514.5 million. It added 380 customers in the quarter to nearly 2,210 total platform customers.
Dynatrace expects to end the fourth quarter with revenues of $147-$148 million and an adjusted income of $0.08 per share. The market was looking for revenues of $144.8 million for the quarter. Dynatrace expects to end the year with revenues of $542.2-$543.2 million with an EPS of $0.28.
Dynatrace’s Partner Growth
Dynatrace continues to expand its market share through product innovation. During the recent quarter, it extended its AI-powered software intelligence to AWS hybrid clouds. The extension will allow Dynatrace to support AWS hybrid clouds while ensuring added data security. Dynatrace Software Intelligence platform has been designed to support modern hybrid environments. The integration with AWS Outposts will allow Dynatrace’s SaaS solution to offer flexible deployment options that provide customers with access to a fully managed solution that can monitor AWS workloads in the cloud and on-premises securely and efficiently.
Last quarter, it also announced its collaboration with Google and Microsoft on the OpenTelemetry project. OpenTelemetry is focused on providing standardized transaction-level observability through the generation, collection, and description of telemetry data for distributed cloud-native systems. As part of this initiative, Dynatrace will work with Google and Microsoft to define open standards-based observability and accelerate the reach of its Intelligence Platform.
Its stock is trading at $22.78 with a market capitalization of $6.2 billion. It had climbed to a peak of $37.06 last month. It was trading at $17.05 in October last year. Dynatrace had listed in August last year at $16 apiece at a valuation of $4.5 billion. Prior to the listing, Dynatrace had raised $21.9 million in funding from investors including Bain Capital Ventures and Bay Partners.