Dynatrace, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2020, the first quarter of fiscal 2021. The financial statements are unaudited; comparative results are for the quarter ended June 30, 2019.
Business context and performance
Dynatrace sells a software intelligence platform for application performance, digital experience and multicloud infrastructure monitoring. It reported 2,458 Dynatrace platform customers, up from 1,578 a year earlier. Subscription revenue is the main revenue source and represented 93% of quarterly revenue.
| Metric | Quarter ended June 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $155.5 million | $122.6 million |
| Gross profit / gross margin | $127.0 million / 82% | $93.0 million / 76% |
| Operating income (loss) | $24.1 million | $(33.0) million |
| Net income (loss) | $12.9 million | $(49.2) million |
| Diluted earnings (loss) per share | $0.05 | $(0.21) |
| Cash provided by operating activities | $37.0 million | $34.2 million |
| Cash and cash equivalents, period end | $250.4 million | $57.5 million |
Financial position and liquidity
- Revenue grew 27% year over year, led by subscription revenue of $144.4 million, up 34%. License revenue fell 83% to $0.6 million as sales of legacy Classic products declined; service revenue was nearly flat at $10.5 million.
- Operating expenses declined 18% to $102.9 million. Management attributed much of the decrease to lower share-based compensation and travel, as well as the absence of prior-year IPO-related and sponsor costs. The company continued to increase headcount in research and development and sales and marketing.
- Operating cash flow was $37.0 million. Purchases of property and equipment and capitalized software totaled $4.5 million; cash flow after those investments was approximately $32.5 million. Cash increased $37.2 million during the quarter.
- At June 30, cash was $250.4 million, current assets were $441.9 million and current liabilities were $441.2 million. The company also had $44.6 million available under its revolving credit facility.
- Term-loan principal was $521.1 million ($510.5 million net of unamortized discount and issuance costs), bearing interest at an effective rate of 2.4% at quarter end and maturing in 2025. The company reported compliance with applicable credit covenants. Lease liabilities totaled $48.7 million after adoption of the new lease accounting standard.
- Remaining performance obligations were $856.8 million, of which the company expected to recognize 59% as revenue over the next twelve months. Dynatrace ARR was $563.5 million, total ARR was $601.4 million, and its reported Dynatrace net expansion rate was 120%+.
Material changes and unusual items
- Compared with the prior-year quarter, the company moved from operating and net losses to operating and net income. Gross margin increased six percentage points to 82%.
- Interest expense, net fell to $4.1 million from $19.2 million. Management cited lower interest expense on term loans; the prior-year period also included interest on related-party notes that were eliminated in connection with the 2019 reorganization.
- Dynatrace adopted ASC 842 leases on April 1, 2020, recognizing approximately $50.6 million of right-of-use assets and $50.7 million of lease liabilities at adoption. Adoption did not materially affect operating results or cash flows.
- On June 5, selling stockholders sold 34.5 million shares at $35 per share in a follow-on offering. Dynatrace received no proceeds. The filing notes related lock-up agreements ran through August 2, 2020, subject to exceptions.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management said it planned to continue investing in research and development, sales and marketing, customer support and public-company infrastructure, using operating cash flow to support growth.
- Management stated that the effects of COVID-19 on future results remained uncertain. Risks include weaker customer demand or payment capacity, delayed purchasing decisions, pricing concessions, shorter or smaller subscriptions and increased customer attrition. The company changed marketing and lead-generation spending and shifted events and most work to virtual or remote formats.
- Management believed existing cash, operating cash flow and available borrowing capacity would be sufficient for working capital and capital expenditures for at least the next twelve months.
- Disclosure controls and procedures were reported as not effective because of a material weakness in income-tax accounting, particularly review of the global tax provision and realizability of tax attributes. The company hired tax personnel and began remediation; the weakness had not yet been declared remediated.
- Other risks highlighted include competition, dependence on customer renewals and expansion, cloud-service availability and security, foreign exchange exposure, substantial debt and tax contingencies. Management reported no material legal proceedings and stated that ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the income-tax control weakness is remediated and whether tax estimates or deferred-tax-asset valuations require adjustment.
- Whether subscription growth, customer additions, ARR and net expansion remain resilient as COVID-19 and customer spending conditions evolve.
- Cash-flow trends, including the effects of advance billings, deferred revenue and collection timing, rather than relying on one quarter’s operating cash flow.
- Debt terms, interest-rate exposure, covenant compliance and the company’s capacity to service or refinance its term loan.
- Potential share supply following the selling-stockholder offering and expiration of lock-ups; the June offering itself did not raise capital for Dynatrace.