Dynatrace, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022 (Dynatrace fiscal 2023 first quarter). Unaudited results are compared with the three months ended June 30, 2021. Dynatrace sells a software intelligence platform, primarily through recurring subscriptions.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $267.3 million | $209.7 million | +27% |
| Subscription revenue | $249.6 million | $196.5 million | +27% |
| Gross profit / margin | $215.5 million / 81% | $170.9 million / 81% | +26% profit; margin unchanged |
| Operating income | $19.1 million | $21.2 million | Down $2.1 million |
| Net income | $2.1 million | $13.3 million | Down $11.2 million |
| Diluted EPS | $0.01 | $0.05 | Down $0.04 |
| Operating cash flow | $143.1 million | $83.5 million | Up $59.6 million |
Subscription revenue was 93% of total revenue, compared with 94% a year earlier; services revenue rose 35% to $17.7 million. Management attributed subscription growth to new-customer adoption and expansion within existing accounts. Gross margin held at 81%, while service gross margin declined to 14% from 24%.
Operating expenses rose 31% to $196.4 million, including increases of 40% in research and development, 30% in sales and marketing, and 35% in general and administrative expense. Share-based compensation increased to $28.7 million from $19.3 million. The effective tax rate rose to 86% from 32%, primarily reflecting the requirement to capitalize and amortize research and development costs under IRC Section 174, with no offsetting deferred tax benefit recognized for those costs because of the U.S. valuation allowance. Other expense, net, was $4.4 million versus $1.5 million, primarily due to foreign-currency transactions.
Balance sheet and liquidity
At June 30, 2022, cash and cash equivalents were $571.3 million, up from $463.0 million at March 31, 2022. Current assets totaled $859.8 million and current liabilities $749.4 million. Operating cash flow was $143.1 million; investing cash outflow was $6.9 million and financing cash outflow was $20.1 million, including $30.0 million of term-loan repayments. Operating cash flow benefited from customer collections and lower prepaid expenses, partly offset by a $60.5 million decrease in deferred revenue, which management attributed to sales seasonality, and lower payables and accrued expenses.
Term-loan principal was $251.1 million, with a carrying amount of $244.4 million; the loan’s effective interest rate was 3.9%. The company had $44.6 million available under its revolving facility after $15.4 million of letters of credit. The term loan matures in August 2025 and the revolver in August 2023. The company reported compliance with applicable debt covenants. Management said existing cash, available borrowing capacity, and expected operating cash flow should cover requirements for at least the next 12 months.
Business indicators and period changes
- ARR was $1.031 billion at June 30, 2022, up from $823.2 million a year earlier. Net expansion rate remained at 120% or higher for the seventeenth consecutive quarter.
- Customer count exceeded 3,300, compared with approximately 3,000 a year earlier. Management reported that the platform was used in more than 90 countries.
- Remaining performance obligations were $1.530 billion, comprising $634.3 million billed and $895.3 million unbilled. The company expected to recognize 57% over the next 12 months.
- Revenue growth did not translate into higher operating or net income: operating expenses increased faster than gross profit, and the tax provision and foreign-exchange expense weighed on earnings.
- International customers represented 45% of revenue, versus 50% in the prior-year quarter. North America represented 59% of revenue versus 53%; U.S. revenue was $147.5 million, or 55% of total revenue.
Outlook, commentary, risks, and unusual items
The filing does not provide specific forward financial guidance. Management expects continued investment in research and development, sales and marketing, and customer support. It also cautioned that the quarter’s results are not necessarily indicative of full-year results. The company described its third fiscal quarter as typically its largest and noted seasonal billing patterns and potential variability as customer contracts are consolidated into longer, single-anniversary agreements.
- Management reported lengthening sales cycles and highlighted economic uncertainty, inflation, rising interest rates, and geopolitical disruption as potential pressures on customer spending and collections. The company suspended business in Russia and Belarus; it stated that the direct impact was not considered material at the time, but broader or prolonged disruption could affect results.
- COVID-19 effects remained uncertain. The company said the pandemic had not caused a material adverse financial impact to date, while warning of possible effects on customer spending, payment ability, and operations.
- Section 174 tax capitalization increased current taxable income and contributed to the unusually high quarterly effective tax rate. Management said the requirement, if not repealed or modified, would increase cash taxes and reduce cash flow in fiscal 2023 and future years.
- Foreign-currency movements affected results; the company reported no foreign-currency hedging program. It stated that a hypothetical 10% interest-rate change would not have had a material impact on the reported financial statements.
- Management disclosed no material pending legal proceedings. It also disclosed prior limited email-phishing compromises and said it did not believe the SolarWinds matter had materially affected its systems or operations, while noting uncertainties around future cyber and vendor risks.
- The CFO was expected to leave at the end of calendar 2022, and the company had begun a search for a successor.
- Contractual commitments totaled $349.2 million, with $21.2 million due within 12 months. The company also had $35.1 million in operating leases not yet commenced, excluded from recognized lease liabilities.
Important facts for investors to verify
- Whether ARR growth, customer expansion, and remaining performance obligations convert into recognized revenue and cash collections as expected.
- Whether expense growth, especially share-based compensation and sales and marketing costs, moderates enough to support operating-income growth.
- The continuing cash-tax effects of IRC Section 174 and any changes to tax law or the company’s valuation allowance.
- Cash-flow quality: operating cash flow benefited from collection and payment timing, while deferred revenue declined seasonally.
- Debt repayment, variable-rate exposure, covenant compliance, and the timing of the revolving facility’s 2023 maturity.
- Execution of the CFO transition and the company’s ability to manage hiring, sales cycles, competition, cybersecurity, privacy, and foreign-exchange risks.