Dynatrace, Inc. quarterly report, Q3 FY2021

Dynatrace, Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended December 31, 2020. Financial statements are unaudited. Dynatrace sells software intelligence and observability solutions, with revenue primarily from subscriptions.

Financial performance

MetricThree months ended Dec. 31, 2020Year-over-year changeNine months ended Dec. 31, 2020Year-over-year change
Revenue$182.9 million+28%$507.0 million+28%
Subscription revenue$170.3 million+33%$472.3 million+34%
Gross profit / margin$149.8 million / 82%Margin: 80% to 82%$414.6 million / 82%Margin: 75% to 82%
Operating income (loss)$24.1 millionPrior year: $7.6 million$71.0 millionPrior year: loss of $180.0 million
Net income (loss)$18.4 million; diluted EPS $0.06Prior year: $1.8 million; diluted EPS $0.01$48.8 million; diluted EPS $0.17Prior year: loss of $464.7 million; diluted loss per share $1.78

For the quarter, subscription revenue was 93% of total revenue, up from 90%. Classic product license revenue fell 93% to $0.3 million as customers migrate to the Dynatrace platform. Nine-month operating results benefited from lower share-based compensation and prior-year IPO-related expenses; comparisons also reflect a large prior-year tax charge related to the corporate reorganization.

Cash flow, liquidity and debt

  • Nine-month operating cash flow was $134.6 million, versus cash used of $207.1 million in the prior-year period. Investing used $9.1 million; financing used $44.0 million, including $60.0 million of term-loan repayments. Cash increased $86.3 million to $299.5 million.
  • Cash paid for interest was $9.9 million. Cash received for taxes was $14.5 million, compared with $268.3 million paid in the prior-year period, which included tax associated with the reorganization.
  • At December 31, 2020, long-term debt had $461.1 million principal outstanding and a $451.4 million carrying value. The term loan’s effective rate was 2.4%; it matures in August 2025. The company had no revolver borrowings, $44.2 million of availability and $15.8 million of letters of credit outstanding. It reported compliance with debt covenants.
  • Current assets were $574.5 million and current liabilities were $550.3 million. Current deferred revenue was $424.0 million. Management said cash, available borrowing capacity and operating cash flow should meet working capital and capital expenditure needs for at least 12 months.

Business indicators and outlook

  • Dynatrace customers increased to 2,794 from 2,208 a year earlier. ARR was $722.0 million, up from $534.5 million. Net expansion rate remained at 120% or higher.
  • Remaining performance obligations were $1,050.6 million; the company expected to recognize 58% as revenue over the next 12 months.
  • Management plans continued investment in research and development, sales and marketing, product development and customer support. The filing provides no numerical financial guidance.
  • Management said COVID-19’s future effects were uncertain and could affect customer demand, purchasing timing, contract size and duration, pricing, payment terms and attrition. It also cited economic conditions, competition, sales-cycle variability, customer retention and technology adoption as risks.

Material matters, contingencies and risks

  • Disclosure controls and procedures were reported as not effective due to a material weakness in income-tax accounting controls, especially review of the global tax provision and realizability of tax attributes. Remediation steps included hiring tax leaders and enhancing documentation and review; remediation was ongoing.
  • The company early adopted lease accounting in April 2020, recognizing operating lease assets and liabilities. At December 31, lease liabilities totaled $48.2 million, with $8.1 million of additional leases not yet commenced.
  • Management reported no material legal proceedings and believed ordinary-course legal matters would not materially affect financial condition or future operations. The filing also describes potential tax exposure related to prior taxable spin-offs; final tax liabilities could differ from estimates, and insurance has limitations.
  • Other stated risks include cybersecurity and service interruptions, privacy regulation, reliance on cloud providers and partners, foreign currency exposure, substantial indebtedness and Thoma Bravo’s significant influence. The company disclosed a SolarWinds-related review and said it did not then believe the incident had a material impact on its systems or operations.

Most important facts for investors to verify

  • Whether the income-tax control material weakness is remediated and whether the first required auditor attestation identifies further control issues.
  • Whether subscription growth, ARR, customer expansion and RPO conversion continue, particularly amid COVID-19 and competitive pressures.
  • Whether operating cash flow remains strong after considering collections, deferred revenue, customer payment timing and ongoing investment.
  • Debt repayment capacity, variable-rate exposure, covenant compliance and the effect of debt and lease commitments on liquidity.
  • Any updated assessment of the SolarWinds incident, other security events, or potential additional taxes from prior spin-offs.