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
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Nine months ended Dec. 31, 2020 | Year-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 million | Prior year: $7.6 million | $71.0 million | Prior year: loss of $180.0 million |
| Net income (loss) | $18.4 million; diluted EPS $0.06 | Prior year: $1.8 million; diluted EPS $0.01 | $48.8 million; diluted EPS $0.17 | Prior 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.