Dynatrace, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended June 30, 2021; comparisons are with the three months ended June 30, 2020 unless stated otherwise. Amounts below are in U.S. dollars.
Business context
Dynatrace sells a software intelligence and observability platform for multicloud environments. Revenue is predominantly subscription-based. The company reported 3,018 customers, up from 2,458 a year earlier, and said its Classic products were sunset as of April 1, 2021 and are no longer sold to new customers.
Financial and operating metrics
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $209.7 million | $155.5 million | Up 35% |
| Subscription revenue | $196.5 million | $144.4 million | Up 36%; 94% of revenue |
| Gross profit / gross margin | $170.9 million / 81% | $127.0 million / 82% | Profit up 35%; margin down 1 point |
| Operating income / margin | $21.2 million / 10.1% | $24.1 million / 15.5% | Income down 12% |
| Net income | $13.3 million | $12.9 million | Up 3% |
| Diluted net income per share | $0.05 | $0.05 | Unchanged |
| Operating cash flow | $83.5 million | $37.0 million | Up $46.5 million |
| Cash and cash equivalents | $387.2 million at June 30 | $325.0 million at March 31 | Up $62.3 million |
| Long-term debt, carrying value | $362.4 million | $391.9 million at March 31 | Down $29.5 million |
ARR was $823.2 million, compared with $601.4 million a year earlier. Net expansion rate remained above 120%. Remaining performance obligations were $1.252 billion; the company expected to recognize 57% over the next 12 months.
Current assets were $638.0 million and current liabilities were $598.9 million. The company also had $44.4 million available on its revolving facility, after $15.6 million of letters of credit. Term-loan principal was $371.1 million, carried at an effective rate of 2.4%; the loan matures in August 2025. The company repaid $30.0 million of term-loan principal during the quarter and reported compliance with applicable covenants.
Material changes versus the prior-year quarter
- Subscription growth drove the 35% increase in total revenue; subscription revenue rose to 94% of the total. Service revenue increased 25% to $13.2 million, while license revenue fell 92% to $0.05 million as sales of legacy Classic products declined.
- Operating expenses rose 46% to $149.7 million, led by sales and marketing, up 64%, and research and development, up 48%. Management attributed increases primarily to hiring, marketing investment, and higher share-based compensation.
- Operating margin contracted to 10.1% from 15.5%, while gross margin declined to 81% from 82%. Share-based compensation increased to $19.3 million from $12.7 million.
- Operating cash flow increased, but was significantly affected by a $110.1 million reduction in accounts receivable associated with customer-payment timing. Lower deferred revenue and payments of accrued expenses partly offset that benefit.
- Other expense improved, primarily due to lower term-loan interest expense and foreign-currency transaction gains. The effective tax rate was 32%, versus 36%.
Outlook, risks, and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said existing cash, available borrowing capacity, and expected operating cash generation should be sufficient for working capital and capital expenditures for at least the next 12 months.
- Management expects continued investment in research and development, sales and marketing, and customer support. It cautioned that interim results are not necessarily indicative of full-year results.
- COVID-19 had not caused a material adverse financial impact to date, according to the company, but future effects remained uncertain, including possible impacts on customer spending, renewals, sales cycles, and collections.
- The company retained a valuation allowance against certain deferred tax assets. Management said a significant release may become possible within 12 months if sufficient positive evidence emerges, but timing and amount are uncertain.
- Risks highlighted include competition and the ability to sustain growth, customer retention and expansion, execution of product development and sales strategy, cybersecurity and service interruptions, privacy regulation, foreign exchange, and debt obligations. The company disclosed prior phishing incidents affecting a limited number of email accounts and use of SolarWinds Orion; it said it did not then believe the SolarWinds matter had materially affected its systems or operations.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2021. A previously identified material weakness related to income-tax accounting was reported as remediated in fiscal 2021.
Important facts for investors to verify
- Whether ARR growth, customer additions, and net expansion above 120% continue, and how much growth comes from new versus existing customers.
- Whether operating-expense growth moderates and margins recover as subscription revenue scales; note the quarter’s increased share-based compensation.
- How much of the operating-cash-flow increase reflects recurring cash generation versus the timing of receivable collections and deferred-revenue movements.
- Progress on debt repayment, interest costs, and covenant compliance, alongside planned investment and liquidity needs.
- Any developments affecting customer demand or renewals, cybersecurity and privacy exposure, COVID-19 impacts, and the potential deferred-tax-valuation-allowance release.