Dynatrace, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2019 (the second quarter of fiscal 2020; fiscal year ends March 31). Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context
Dynatrace sells a software intelligence platform for enterprise applications and cloud environments. Subscription offerings are increasingly central to the business; the company no longer sells its Classic products to new customers. Dynatrace completed its IPO on August 1, 2019, and a corporate reorganization spun Compuware and SIGOS out of its structure. Prior-period financial statements were recast to exclude those businesses.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Total revenue | $129.4; up 27% year over year | $251.9; up 26% |
| Subscription revenue | $115.8; up 41% | $223.9; up 40% |
| License revenue | $2.7; down 72% | $6.5; down 69% |
| Service revenue | $10.8; up 10% | $21.5; up 13% |
| Gross profit / margin | $89.8 / 69% (74% in prior year) | $182.8 / 73% (75% in prior year) |
| Operating loss | $154.5 | $187.5 |
| Net loss | $417.3; $1.58 per diluted share | $466.5; $1.86 per diluted share |
| Operating cash flow | Not reported separately for the quarter | Cash used: $218.2, versus $76.2 provided in prior year |
At September 30, cash and cash equivalents were $211.7, compared with $51.3 at March 31. First-lien term-loan principal was $581.1 (carrying value, net of debt costs, was $569.8); the second-lien loan was fully repaid during the quarter. No revolving-facility borrowings were outstanding; $48.2 of the $60.0 facility was available, with $11.8 of letters of credit issued. Current assets were $355.6 and current liabilities $381.1. Deferred revenue totaled $369.5, current and non-current combined.
Changes and drivers
- Subscription growth reflected adoption of the Dynatrace platform by new customers and greater use by existing customers. Subscription revenue rose to 90% of quarterly revenue from 81% a year earlier.
- Dynatrace platform customers increased to 1,828 from 899. Total ARR was $470.9, up from $326.4; Dynatrace ARR was $376.8 and Classic ARR was $94.1. Dynatrace dollar-based net expansion exceeded 120%.
- Classic license revenue declined as customers migrated to the subscription-oriented platform. Classic ARR fell to $94.1 from $166.5, while its share of total ARR declined to 20% from 51%.
- Quarterly operating expenses rose 140% to $244.4. Share-based compensation was $154.7 for the quarter and $196.2 for the half-year, including $145.3 of incremental expense associated with converting legacy incentive awards in the reorganization. Quarterly G&A also included $10.8 of IPO-related costs.
- Quarterly subscription gross margin declined to 80% from 83%; service gross margin was negative 9% versus positive 24%, reflecting higher compensation and staffing costs. Total gross margin decreased five percentage points.
Cash, debt, outlook and risks
- Six-month financing cash flow was $390.3, primarily reflecting IPO proceeds and a $265.0 contribution from Compuware toward reorganization-related taxes, partly offset by $455.2 of term-loan repayments. Investing cash use was $10.3.
- Six-month operating cash use included $264.1 of cash taxes paid and $27.4 of cash interest. Management said cash, cash equivalents and expected operating cash generation should cover working capital and capital spending for at least the next 12 months.
- The company recorded $248.4 of income tax expense in the quarter and $245.5 for the half-year, primarily reflecting the $255.8 estimated tax expense from the taxable reorganization. Compuware’s $265.0 contribution was intended to fund some or all of that liability; the final tax amount could differ.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expects investment in R&D, sales and marketing, and the partner ecosystem to continue; it also anticipates higher costs as a public company.
- Key risks include sustaining subscription growth and customer expansion, converting Classic customers, competition and pricing pressure, cloud-service interruptions and cybersecurity incidents, international and currency exposure, and servicing variable-rate debt. The company reported compliance with applicable debt covenants, no material legal proceedings, and no off-balance-sheet arrangements.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether platform adoption, ARR growth and customer expansion can continue to offset declining Classic ARR and license revenue.
- How much of the reported loss and expense growth reflects recurring operating costs versus IPO/reorganization items and share-based compensation.
- The final tax liability for the taxable spin-offs and whether Compuware’s contribution fully covers it.
- Operating cash generation after the unusually large tax payments, and the company’s capacity to meet debt interest and other commitments.
- Future gross-margin trends, particularly subscription hosting and service delivery costs, and the effect of continued hiring and equity compensation.