Dynatrace(DT) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements for Dynatrace, Inc. as of September 30, 2019, reflecting the impact of its IPO and corporate reorganization Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2019, reflects significant changes from the IPO and reorganization, including increased assets and a shift to positive shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 (unaudited) | March 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $211,696 | $51,314 | | Total current assets | $355,558 | $213,218 | | Goodwill | $1,270,163 | $1,270,120 | | Total assets | $1,932,822 | $1,811,366 | | Liabilities & Equity | | | | Total current liabilities | $381,093 | $950,901 | | Long-term debt, net | $569,789 | $1,011,793 | | Total liabilities | $1,046,540 | $2,201,624 | | Total shareholders' equity / member's deficit | $886,282 | ($390,258) | Condensed Consolidated Statements of Operations Total revenue grew 27% year-over-year to $129.4 million, but a significant net loss of $417.3 million was driven by increased operating expenses and a one-time tax expense Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Subscription Revenue | $115,805 | $82,389 | | Total Revenue | $129,378 | $101,887 | | Gross Profit | $89,832 | $75,551 | | Loss from Operations | ($154,523) | ($26,270) | | Net Loss | ($417,334) | ($39,938) | | Net Loss Per Share | ($1.58) | ($0.17) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $218.2 million, primarily due to net loss and a large tax payment, offset by $390.3 million from IPO financing activities Cash Flow Summary for Six Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($218,228) | $76,160 | | Net cash used in investing activities | ($10,322) | ($4,043) | | Net cash provided by (used in) financing activities | $390,269 | ($77,609) | | Net increase (decrease) in cash | $160,382 | ($7,848) | - Cash paid for taxes was exceptionally high at $264.1 million for the six months ended September 30, 2019, compared to just $2.1 million in the prior year period, significantly impacting operating cash flow[27] Notes to Condensed Consolidated Financial Statements The notes detail accounting policies and significant events, including the IPO, corporate reorganization, adoption of ASC 606, and the impact of share-based compensation and tax liabilities - On August 1, 2019, the company completed its IPO, receiving approximately $585.3 million in net proceeds after deducting underwriting discounts and offering-related expenses[40] - As of September 30, 2019, the company had remaining performance obligations of $653.3 million, of which 58% is expected to be recognized as revenue over the next twelve months[66] - The corporate reorganization and spin-off of two businesses generated a taxable gain, resulting in an estimated tax expense of $255.8 million The company received a $265 million distribution from Compuware to fund this liability[89] - In connection with the reorganization, outstanding Management Incentive Units (MIUs) and Appreciation Units (AUs) were modified, resulting in the recognition of $145.3 million in incremental stock compensation expense[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting strong Dynatrace® platform growth, increased subscription revenue, and the impact of higher operating expenses and IPO proceeds on net loss and liquidity Overview and Key Metrics Dynatrace provides a software intelligence platform, focusing on its Dynatrace® platform, which shows significant ARR growth and customer expansion, alongside a decline in Classic product ARR - The company's strategy is to target the largest 15,000 global enterprise accounts and drive adoption of its all-in-one Dynatrace® platform[131][134] Key Performance Metrics | Metric | September 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Number of Dynatrace® Customers | 1,828 | 899 | | Dynatrace® ARR (in thousands) | $376,816 | $159,949 | | Classic ARR (in thousands) | $94,090 | $166,490 | | Total ARR (in thousands) | $470,906 | $326,439 | | Dynatrace® Dollar-Based Net Expansion Rate | > 120% | 120% | Results of Operations Total revenue increased 27% YoY to $129.4 million, but a significant net loss of $417.3 million resulted from a 140% surge in operating expenses, primarily due to share-based compensation and a one-time tax expense Revenue Comparison - Three Months Ended September 30 (in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscriptions | $115,805 | $82,389 | $33,416 | 41% | | License | $2,745 | $9,662 | ($6,917) | (72)% | | Services | $10,828 | $9,836 | $992 | 10% | | Total Revenue | $129,378 | $101,887 | $27,491 | 27% | - Operating expenses for the three months ended September 30, 2019, were significantly impacted by share-based compensation of $154.7 million, compared to $23.0 million in the same period of 2018[166] - Income tax expense for the three months ended September 30, 2019, was $248.4 million, primarily due to a $255.8 million tax expense resulting from the company's reorganization transactions[189] Liquidity and Capital Resources As of September 30, 2019, the company had $211.7 million in cash, with IPO proceeds used to fund operations, make a large tax payment, and repay debt, ensuring sufficient liquidity for the next twelve months - The company ended the period with $211.7 million in cash and cash equivalents and $48.2 million available under its revolving credit facility[218] - During the second quarter of fiscal 2020, the company repaid all outstanding borrowings under its Second Lien Term Loan[222] Contractual Obligations as of September 30, 2019 (in thousands) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $69,807 | $14,910 | $20,414 | $16,857 | $17,626 | | First Lien Term Loan - principal | $581,125 | — | — | — | $581,125 | | First Lien Term Loan - interest | $170,019 | $28,889 | $57,620 | $57,699 | $25,811 | | Total | $820,951 | $43,799 | $78,034 | $74,556 | $624,562 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign currency exchange rates, especially the Euro, and interest rate fluctuations on its $581.1 million variable-rate debt, though management does not anticipate a material effect from a 10% change - The company has foreign currency risk related to operating expenses denominated in currencies other than the U.S. dollar, mainly the Euro[243] - The company is exposed to interest rate risk on its $581.1 million in term loans, which bear interest at variable rates based on LIBOR or an Alternative Base Rate[247] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[251] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings that would adversely affect its financial condition or results of operations - As of the filing date, Dynatrace is not involved in any material legal proceedings[255] Item 1A. Risk Factors This section outlines significant business risks, including the sustainability of subscription revenue growth, substantial debt obligations, potential tax liabilities from spin-offs, intense competition, and the challenge of converting Classic product customers - The company's substantial debt of approximately $581.1 million contains restrictive covenants that could impact business operations and liquidity[261] - The spin-offs of Compuware and SIGOS are taxable transactions While Compuware distributed $265.0 million to cover an estimated tax liability of $255.8 million, the final tax amount could be materially different and Dynatrace is solely responsible for any excess[266][268] - The company faces significant competition from application performance monitoring vendors (Cisco AppDynamics, Broadcom, New Relic), infrastructure monitoring vendors (Datadog), and point solutions from major cloud providers (AWS, Azure, Google Cloud)[275] - A key business risk is the potential loss of customers and ARR if they do not convert from the company's Classic products, which still comprised 20% of Total ARR as of September 30, 2019[274] Other Items (Items 2, 3, 4, 5, 6) This section covers remaining disclosures, including no unregistered sales of equity securities, no material change in IPO proceeds use, no defaults on senior securities, and no mine safety disclosures - There has been no material change in the planned use of proceeds from the company's initial public offering as described in the final prospectus dated July 31, 2019[304] - The company reports no unregistered sales of equity securities, defaults upon senior securities, or mine safety disclosures for the period[303][305][307]