Dynatrace, Inc. — Form 10-Q Summary
Business context and reporting period. Dynatrace provides a software intelligence platform for multicloud environments. This filing covers the quarter and six months ended September 30, 2020, the second quarter of fiscal 2021; comparisons are to the corresponding 2019 periods. The interim financial statements are unaudited.
Key financial results
| Metric | Three months ended Sept. 30, 2020 | Six months ended Sept. 30, 2020 |
|---|---|---|
| Revenue | $168.6 million; up 30% year over year | $324.1 million; up 29% |
| Subscription revenue | $157.7 million; up 36%; 94% of revenue | $302.0 million; up 35%; 93% of revenue |
| Gross profit / margin | $137.9 million / 82%, versus $89.8 million / 69% | $264.8 million / 82%, versus $182.8 million / 73% |
| Operating income (loss) | $22.8 million, versus a loss of $154.5 million | $46.9 million, versus a loss of $187.5 million |
| Net income (loss) | $17.5 million, or $0.06 per diluted share, versus a loss of $417.3 million | $30.3 million, or $0.11 per diluted share, versus a loss of $466.5 million |
| Operating cash flow | Not presented for the quarter alone | $60.8 million provided, versus $218.2 million used |
At September 30, cash and cash equivalents were $248.4 million, compared with $213.2 million at March 31, 2020. First-lien term loan principal was $491.1 million; reported long-term debt, net of unamortized costs, was $480.9 million. The company had $44.4 million available on its revolving facility and reported compliance with its debt covenants. Current assets were $461.1 million and current liabilities $451.5 million.
Other operating indicators: Dynatrace-platform customers rose to 2,594 from 1,828 a year earlier; platform ARR was $607.6 million versus $376.8 million, and total ARR was $638.1 million versus $470.9 million. Net expansion rate remained above 120%. Remaining performance obligations were $880.0 million, of which the company expected to recognize 59% over the next 12 months.
Material changes versus the prior comparable period
- Subscription-led growth drove higher revenue, while legacy license revenue declined 84% for the quarter and 83% for the six-month period as Classic-product sales continued to recede.
- Gross margin improved materially. Operating expenses fell 53% for the quarter and 41% for the six months, largely because the prior-year periods included substantially higher share-based compensation, including a $145.3 million charge related to award modifications in the 2019 reorganization.
- Prior-year net losses also included a $255.8 million non-recurring tax expense tied to the reorganization. Accordingly, the year-over-year swing to net income is not solely indicative of underlying operating improvement.
- Operating cash flow improved to positive $60.8 million for the six months. The period included a $62.8 million decrease in deferred revenue, attributed to billing seasonality, partly offset by cash inflow from lower accounts receivable.
- The company repaid $30.0 million of term-loan principal during the six months. Debt was down from $521.1 million principal at March 31 to $491.1 million at September 30.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management said it plans to keep investing in research and development, sales and marketing, and customer support, using operating cash flow to support growth. It believed existing cash, available borrowing capacity and expected operating cash flow would meet working-capital and capital-expenditure needs for at least 12 months.
- COVID-19: Management said the pandemic’s future effects were uncertain. Potential impacts include weaker demand or delayed purchasing, discounts or extended payment terms, shorter or smaller subscriptions, and increased customer attrition. The company reported changing marketing and lead-generation spending and shifting employees and events to remote formats.
- Control weakness: Disclosure controls were deemed ineffective because of a material weakness in income-tax accounting, particularly preparation and review of the global tax provision and assessment of deferred-tax-asset realizability. The company hired tax executives and enhanced documentation and review, but remediation was ongoing and not yet demonstrated as effective.
- Tax judgments: A valuation allowance remained on certain deferred tax assets. The company also disclosed potential exposure if final taxes related to the taxable Compuware spin-off differ from estimates or are challenged; it said insurance coverage has limitations and the SIGOS spin-off was not insured.
- Accounting change: Dynatrace early adopted lease accounting Topic 842 on April 1, 2020, recognizing $50.6 million of right-of-use assets and $50.7 million of lease liabilities at adoption; it said the change had no material impact on operations or cash flows.
- Legal and other risks: The company reported no material pending legal proceedings. Principal disclosed risks include pandemic and economic uncertainty, competition, customer retention and sales-cycle variability, cloud-service interruptions and cybersecurity, foreign exchange, and substantial debt obligations.
Important facts for investors to verify
- Whether subscription growth, ARR growth and customer expansion persist, and how much growth reflects new customers versus expansion within existing accounts.
- Whether the improvement in margins and profitability continues as share-based compensation and other prior-year comparability effects normalize.
- How seasonality and deferred-revenue movements affect operating cash flow, billings and liquidity in subsequent quarters.
- Progress in remediating the material weakness in income-tax controls, including whether management later concludes controls are effective.
- Debt repayment capacity, variable-rate exposure and covenant compliance, alongside the company’s stated liquidity needs.
- Any material change in COVID-19-related customer demand, renewal behavior, pricing or payment terms, and any resolution of tax uncertainty associated with the prior reorganization.