1、Equity Research 26 August 2019 CORE Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Inve
2、stors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 45.Restricted-Internal U.S.Software A Tale of Two Cities in IT Monitoring;Initiate Dynatrace at OW and New Relic at EW Differen
3、t Fortunes in an Evolving IT Monitoring Industry:We are initiating coverage of Dynatrace(OW)and New Relic(EW),competitors in the large$30bn IT monitoring/operations industry.We see different prospects for the two against a backdrop of evolving secular trends,including platform consolidation and adop
4、tion of hybrid cloud and next-gen architectures such as containers and microservices.We believe that Dynatrace is well positioned to deliver accelerating growth at scale coming out of its platform reinvention and subscription transition.On the other hand,New Relic will likely continue to see some di
5、sruption as it evolves its product portfolio to better address the competitive and secular headwinds.Market Convergence Toward an All-In-One Suite Creating a Broad Competitive Battleground:Monitoring different aspects of IT(applications,infrastructure,logs and network)has become mission-critical due
6、 to the business imperative of managing increasing IT complexity.At the same time,these key pillars are converging due to the gradual shift toward platform buying,leading to turf wars between IT monitoring vendors across these pillars.We have already seen evidence of this broadening competitive land
7、scape,with vendors moving toward an all-in-one-suite via consolidation(e.g.Cisco/AppDynamics,Splunk/SignalFX,Elastic/Opbeat)or organic innovation(Dynatrace).Initiate Dynatrace at OW and$30 PT Differentiated Platform Addressing the Market Evolution:Dynatraces next-gen,hybrid platform was built from t
8、he ground up to address the market convergence,with best-in-breed APM complemented by logs,infrastructure,and network monitoring to deliver an integrated IT monitoring portfolio.We see key product innovations such as the Dynatrace OneAgent architecture positioning the company well against its compet
9、itors.We expect upside to the typically conservative IPO model estimates and also believe the company warrants a valuation multiple in line with other high-growth infrastructure names such as MDB and ESTC.Hence,we are initiating coverage with an OW rating and$30 PT(15x CY20E revenue).Initiate New Re
10、lic at EW and$63 PT Likely to Stay in the Penalty Box for a While:We believe New Relic missed the product cycle its competitors like Dynatrace have gone through over the last few years.While its new platform(New Relic One)is a step in the right direction,it is in the very early stages of customer ad
11、option and we would expect some competitive disruption in the mid-term,as evidenced in the disappointing fiscal 1Q20 results.While currently trading at an inexpensive valuation level(4.6x CY20E revenue),we expect the stock to remain in the penalty box with investors for a while.Hence,we are assuming
12、 coverage at EW rating with a$63 PT(5x our CY20E revenue).INITIATING COVERAGE U.S.Software POSITIVE Unchanged For a full list of our ratings,price targets and earnings in this report,please see table on page 2 U.S.Software Raimo Lenschow,CFA+1 212 526 2712 BCI,US Mohit Gogia+1 212 526 1053 BCI,US Ba
13、rclays|U.S.Software 26 August 2019 2 Summary of our Ratings,Price Targets and Earnings Estimates in this Report Company Rating Price Price Target EPS FY1(E)EPS FY2(E)Old New 23-Aug-19 Old New%Chg Old New%Chg Old New%Chg U.S.Software Pos Pos Dynatrace,Inc.(DT)N/A OW 23.90 N/A 30.00-N/A 0.18-N/A 0.27-
14、New Relic,Inc.(NEWR)N/A EW 58.50 N/A 63.00-N/A 0.59-N/A 0.73-Source:Barclays Research.Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estim
15、ates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight;UW:Underweight;RS:Rating Suspended Industry View:Pos:Positive;Neu:Neutral;Neg:Negative Valuation Methodology and Risks U.S.Software Dynatrace,Inc.(DT)Valuation Methodology:Our price target of$30 is based on EV/CY20E revenue multipl
16、e of 15x and CY20E revenue of$601mn.Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target:Competitive headwinds and slower than expected adoption of the companys platform may pressure future growth prospects.The company may also see higher churn converting custom
17、ers from its classic to new platform,resulting in lower than expected ARR growth.New Relic,Inc.(NEWR)Valuation Methodology:Our price target of$63 is based on EV/CY20E revenue multiple of 5x and CY20E revenue of$701mn.Risks which May Impede the Achievement of the Barclays Research Valuation and Price
18、 Target:Continued execution issues and competitive headwinds may pressure the companys future growth prospects.The companys new platform may not see the expected level of adoption,which may result in lower revenue and free cash flow.On the other hand,better than expected adoption of the new platform
19、 and lower competitive pressure may result in upside to valuation multiple and estimates.Source:Barclays Research.Barclays|U.S.Software 26 August 2019 3 U.S.Software Industry View:POSITIVE Dynatrace,Inc.(DT)Stock Rating:OVERWEIGHT Income statement($mn)2019A 2020E 2021E 2022E CAGR Price(23-Aug-2019)U
20、SD 23.90 Price Target USD 30.00 Why Overweight?We believe Dynatrace has a differentiated platform and is well positioned to address the secular trends in IT monitoring.We would expect accelerating growth prospects for the company as it comes out of its platform and subscription transition.Upside cas
21、e USD 44.00 The company can see growth tailwinds from a faster than antipcipated conversion and new customer adoption of its next-gen platform.Our upside case is based on a 20%increase in CY20 revenue and 18x revenue multiple.Downside case USD 17.00 Competitive headwinds may pressure the companys gr
22、owth trajectory.Our downside case is based on a 20%decrease in CY20 revenue and 11x revenue multiple.Upside/Downside scenarios Revenue 431 513 638 807 23.3%EBITDA(adj)93 121 150 198 28.6%Operating profit(adj)79 109 137 182 32.1%Pre-tax income-140-167-3 15 N/A Net income(adj)32 53 87 124 57.4%EPS(adj
23、)($)0.12 0.18 0.27 0.37 44.2%Diluted shares(mn)255.2 297.7 321.7 331.6 9.1%DPS($)0.00 0.00 0.00 0.00 N/A Margin and return data Average EBITDA(adj)margin(%)21.5 23.5 23.5 24.5 23.3 Operating margin(adj)(%)18.3 21.1 21.5 22.5 20.9 Pre-tax margin(%)-32.5-32.5-0.5 1.8-15.9 Net(adj)margin(%)7.4 10.3 13.
24、6 15.4 11.7 ROIC(%)-9.7-7.6 1.6 2.5-3.3 ROA(%)N/A N/A N/A N/A N/A ROE(%)N/A N/A N/A N/A N/A Balance sheet and cash flow($mn)CAGR Net PP&E 18 30 37 42 33.2%Goodwill 1,270 1,270 1,270 1,270 0.0%Cash and equivalents 51 56 105 182 52.5%Total assets 1,811 1,812 1,874 1,988 3.2%Short and long-term debt 1,
25、021 538 410 250-37.4%Other long-term liabilities 0 0 0 0 N/A Total liabilities 2,202 1,135 1,147 1,170-19.0%Net debt/(funds)970 483 304 68-58.7%Shareholders equity-390 678 727 818 N/A Change in working capital 221 146 171 207-2.3%Cash flow from operations 147 133 198 257 20.4%Capital expenditure-7-2
26、3-19-21 N/A Free cash flow 185 157 199 251 10.7%Valuation and leverage metrics Average P/E(adj)(x)N/A N/A 88.8 63.7 76.3 EV/sales(x)16.8 14.1 11.3 9.0 12.8 EV/EBITDA(adj)(x)77.8 59.9 48.1 36.6 55.6 Equity FCF yield(%)2.3 1.5 2.3 3.0 2.3 Dividend yield(%)0.0 0.0 0.0 0.0 0.0 Net debt/EBITDA(adj)(x)3.8
27、 3.0 2.4 1.8 2.7 Total debt/capital(%)161.8 44.3 36.0 23.4 66.4 Selected operating metrics CAGR License revenue($mn)40.4 9.6 0.8 0.0-100.0%Maintenance revenue N/A N/A N/A N/A N/A Services revenue N/A N/A N/A N/A N/A Deferred revenue 365.7 494.6 629.1 800.6 29.8%Source:Company data,Barclays Research
28、Note:FY End Mar Barclays|U.S.Software 26 August 2019 4 U.S.Software Industry View:POSITIVE New Relic,Inc.(NEWR)Stock Rating:EQUAL WEIGHT Income statement($mn)2019A 2020E 2021E 2022E CAGR Price(23-Aug-2019)USD 58.50 Price Target USD 63.00 Why Equal Weight?We believe New Relic has a differentiated APM
29、 platform but has work to do in terms of rounding out its portfolio.We believe shares will continue to trade at a discount to peers given the recent execution and competitive issues.Upside case USD 87.00 Better than expected adoption of the companys new platform may provide tailwinds to growth.Our u
30、pside case is based on a 20%increase in CY20 revenue and 6x revenue multiple.Downside case USD 42.00 Competitive headwinds may pressure the companys growth trajectory.Our downside case is based on a 20%decrease in CY20 revenue and 4x revenue multiple.Upside/Downside scenarios Revenue 479 604 736 894
31、 23.1%EBITDA(adj)82 95 121 173 28.4%Operating profit(adj)30 24 58 112 55.0%Pre-tax income-41-73-37 3 N/A Net income(adj)40 36 46 88 30.6%EPS(adj)($)0.66 0.59 0.73 1.39 27.8%Diluted shares(mn)59.8 61.0 62.4 63.7 2.2%DPS($)0.00 0.00 0.00 0.00 N/A Margin and return data Average EBITDA(adj)margin(%)17.1
32、 15.7 16.4 19.4 17.1 Operating margin(adj)(%)6.3 4.0 7.9 12.5 7.7 Pre-tax margin(%)-8.6-12.1-5.1 0.3-6.4 Net(adj)margin(%)8.3 5.9 6.2 9.9 7.6 ROIC(%)-4.3-6.4-2.8 1.1-3.1 ROA(%)N/A N/A N/A N/A N/A ROE(%)N/A N/A N/A N/A N/A Balance sheet and cash flow($mn)CAGR Net PP&E 81 74 71 72-3.8%Goodwill 42 42 4
33、2 42 0.0%Cash and equivalents 234 256 336 466 25.8%Total assets 1,090 1,266 1,433 1,690 15.7%Short and long-term debt 406 426 430 434 2.3%Other long-term liabilities 0 0 0 0 N/A Total liabilities 738 913 1,048 1,230 18.6%Net debt/(funds)-339-370-447-573 N/A Shareholders equity 352 353 385 459 9.2%Ch
34、ange in working capital 32 18 40 52 18.2%Cash flow from operations 116 101 139 193 18.6%Capital expenditure-48-55-59-63 N/A Free cash flow 67 46 81 130 24.8%Valuation and leverage metrics Average P/E(adj)(x)88.1 99.2 80.2 42.2 77.4 EV/sales(x)6.8 5.4 4.4 3.6 5.1 EV/EBITDA(adj)(x)39.8 34.4 27.0 18.8
35、30.0 Equity FCF yield(%)1.9 1.3 2.2 3.5 2.2 Dividend yield(%)0.0 0.0 0.0 0.0 0.0 Net debt/EBITDA(adj)(x)-4.4-3.8-3.0-2.1-3.3 Total debt/capital(%)53.5 54.7 52.8 48.6 52.4 Selected operating metrics CAGR License revenue N/A N/A N/A N/A N/A Maintenance revenue N/A N/A N/A N/A N/A Services revenue N/A
36、N/A N/A N/A N/A Deferred revenue 271.6 358.5 480.4 648.5 33.7%Source:Company data,Barclays Research Note:FY End Mar Barclays|U.S.Software 26 August 2019 5 CONTENTS EXECUTIVE SUMMARY.6 A Tale of Two Cites in the Evolving IT Monitoring Market.6 INDUSTRY OVERVIEW.7 IT Monitoring Tools are a Business Im
37、perative.7 Breaking Down the Four Key Pillars of IT Monitoring.9 Trends to Watch in IT Monitoring Landscape.13$30bn Addressable Market Opportunity.18 COMPANY OVERVIEW DYNATRACE.22 Platform Reinvention from Classic to Next-Gen Dynatrace.22 OneAgent Architecture Creates a Technological Moat.23 Platfor
38、m and Go-To-Market Overview Well Positioned for the Market Convergence.26 COMPANY OVERVIEW NEW RELIC.28 Cloud-Native Monitoring Vendor with an APM Veteran at the Helm.28 Platform Overview Pivoting to an Entity-Based Data Model.29 SMB Roots,but Focused on Moving Upmarket.31 FINANCIAL PROFILE DYNATRAC
39、E.33 Revenue Build Driven by Next-Gen Dynatrace and Classic ARR.33 Profitability and Cash Flow Highlights.34 FINANCIAL PROFILE NEW RELIC.36 LT Target Model Based on Enterprise and SMB ARR Segments.36 Spotlight on Billings Growth and Expansion Rate Post the Disappointing Q1.36 VALUATION FRAMEWORK.38
40、Upside to Estimates and Multiple for Dynatrace,Expect New Relic to Stay in the Penalty Box for a While.38 FINANCIALS DYNATRACE.40 FINANCIALS NEW RELIC.43 Barclays|U.S.Software 26 August 2019 6 EXECUTIVE SUMMARY A Tale of Two Cites in the Evolving IT Monitoring Market Given the rapid pace of change i
41、n IT and the direct business costs of IT downtime,monitoring the health and performance of different IT components has become mission-critical for businesses.At the same time,secular trends we discuss below have resulted in an evolving market opportunity across the four key pillars of IT monitoring
42、applications,infrastructure,network,and logs.Public Cloud Migration Demands New Innovations or Even Reinvention:Migration of workloads to public cloud,while also maintaining an on-premise footprint,has resulted in increasingly hybrid IT environments,which call for a fundamentally different and cloud
43、-native approach to IT monitoring.Convergence toward an All-In-One Suite:The key pillars of IT monitoring are converging,resulting in a need for an end-to-end IT monitoring suite.We have seen vendors address this trend by either consolidation(e.g.Cisco/AppDynamics,Splunk/SignalFX,Elastic/Opbeat)or o
44、rganically building out their portfolio(Dynatrace).The above trends are providing tailwinds to the broader IT operations market,which is expected to grow from$30bn in 2019 to reach$46bn by 2023 per Gartner(5-year CAGR of 10%).Dynatrace and New Relic are competitors in this market,but we believe have
45、 different prospects based on their product and competitive positioning.Next-Gen Dynatrace Platform Well Positioned to Address the Market Evolution;Initiative at OW Dynatrace launched its next-gen platform in 2016,which is meant to address the market evolution.The company has always been a leading A
46、PM provider,but its new platform integrates best-in-class APM capabilities with integrated infrastructure,logs,and network monitoring.We also believe the companys OneAgent architecture is a key technological differentiator petitors as it takes away the friction of monitoring disparate IT technologie
47、s and dynamically changing environments(as is the case with todays hybrid cloud architectures).Along with the platform transition,we would expect the company to execute well on its subscription transition and deliver accelerating growth prospects due to a positive mix shift from license to recurring
48、 revenues(29%CY20E subscription growth).Overall,we see upside to both the current valuation multiple and potential for positive estimate revisions,and are initiating coverage with an OW/Pos rating and PT of$30.Our PT is based on 15x CY20E revenue,in line with other high-growth infrastructure softwar
49、e names such as MDB and ESTC.New Relic Looking to Catch up on the Product Cycle,Expect to Remain in the Penalty Box;Initiate at EW New Relic has been a leading APM vendor for SMBs(while gradually moving up-market),but we believe missed the product cycle to better address the market competitive lands
50、cape.The company launched an initial version of its new platform,New Relic One,which is a step in the right direction in our view.However,the company has more work to do and the customer adoption will also take some time to ramp up.We would expect some disruption in the mid-term(as evidenced in Q1 r