Dynatrace(DT) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of the company's financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (Unaudited) The unaudited financial statements reflect significant post-IPO balance sheet improvements and a widened net loss due to reorganization expenses Condensed Consolidated Balance Sheets Post-IPO, the balance sheet shows a stronger financial position with increased cash, halved liabilities, and positive shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 (unaudited) | Mar 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $188,555 | $51,314 | | Total current assets | $411,444 | $213,218 | | Goodwill | $1,270,650 | $1,270,120 | | Total assets | $1,988,307 | $1,811,366 | | Liabilities & Equity | | | | Total current liabilities | $449,233 | $950,901 | | Long-term debt, net | $540,236 | $1,011,793 | | Payable to related party | $— | $597,150 | | Total liabilities | $1,089,117 | $2,201,624 | | Total shareholders' equity / member's deficit | $899,190 | ($390,258) | Condensed Consolidated Statements of Operations Q3 2019 saw net income improvement driven by subscription revenue, while the nine-month net loss widened due to increased operating and tax expenses Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $143,298 | $114,690 | $395,226 | $314,798 | | Subscription Revenue | $128,518 | $91,661 | $352,451 | $251,974 | | Gross profit | $114,593 | $88,867 | $297,432 | $237,948 | | Income (loss) from operations | $7,555 | ($3,578) | ($179,974) | ($49,063) | | Net income (loss) | $1,763 | ($22,102) | ($464,726) | ($85,596) | | Diluted EPS | $0.01 | ($0.09) | ($1.78) | ($0.36) | Condensed Consolidated Statements of Cash Flows Nine-month cash flow saw significant operating cash outflow due to a tax payment, offset by IPO-driven financing activities, resulting in a net cash increase Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($207,096) | $84,933 | | Net cash used in investing activities | ($15,872) | ($5,656) | | Net cash provided by (used in) financing activities | $360,264 | ($103,467) | | Net increase (decrease) in cash | $137,241 | ($26,725) | | Cash and cash equivalents, end of period | $188,555 | $50,856 | - A significant cash outflow for the nine months ended Dec 31, 2019 was a $268.3 million tax payment, compared to only $3.5 million in the prior year period. This payment was related to the corporate reorganization[26] - Financing activities were driven by $590.3 million in net proceeds from the IPO and a $265.0 million contribution for taxes, offset by $485.2 million in term loan repayments[26] Notes to Condensed Consolidated Financial Statements Notes detail the corporate reorganization, IPO, significant equity award modification expense, debt repayment, and a substantial tax liability - The company completed its IPO on August 1, 2019, issuing 38.9 million shares and receiving net proceeds of approximately $585.3 million[38] - As of December 31, 2019, the company had $800.3 million in remaining performance obligations, with 57% expected to be recognized as revenue over the next twelve months[67] - In connection with the reorganization, outstanding MIU and AU awards were converted into common stock, restricted stock, and RSUs, resulting in a modification charge and recognition of $145.3 million in incremental stock compensation expense for the nine months ended Dec 31, 2019[99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlights strong Dynatrace® platform adoption, customer growth, and ARR increase, with Q3 operating income turnaround, though nine-month net loss widened due to IPO-related expenses Overview and Key Metrics The company's strategy drives significant growth in Dynatrace® customers and Annual Recurring Revenue, maintaining a strong dollar-based net expansion rate Key Performance Metrics | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Number of Dynatrace® Customers | 2,208 | 1,149 | | Dynatrace® ARR (in thousands) | $465,885 | $226,976 | | Classic ARR (in thousands) | $68,605 | $145,341 | | Total ARR (in thousands) | $534,490 | $372,317 | | Dynatrace® Dollar-Based Net Expansion Rate | > 120% | > 120% | - The company's strategy is to drive new customer growth by expanding its direct sales force focused on the largest 15,000 global enterprise accounts[140] Results of Operations Q3 revenue grew 25% with strong subscription growth and operating income, but nine-month net loss widened significantly due to IPO-related share-based compensation and tax expenses Revenue Comparison - Three Months Ended Dec 31 (in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscriptions | $128,518 | $91,661 | $36,857 | 40% | | License | $3,895 | $12,064 | ($8,169) | (68)% | | Services | $10,885 | $10,965 | ($80) | (1)% | | Total revenue | $143,298 | $114,690 | $28,608 | 25% | Revenue Comparison - Nine Months Ended Dec 31 (in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscriptions | $352,451 | $251,974 | $100,477 | 40% | | License | $10,424 | $32,805 | ($22,381) | (68)% | | Services | $32,351 | $30,019 | $2,332 | 8% | | Total revenue | $395,226 | $314,798 | $80,428 | 26% | - For the nine months ended Dec 31, 2019, total share-based compensation expense was $209.7 million, a significant increase from $42.3 million in the prior year period, primarily impacting Sales & Marketing and General & Administrative expenses[196] Liquidity and Capital Resources Post-IPO, liquidity significantly improved with increased cash and debt repayment, despite substantial operating cash outflow due to a reorganization-related tax payment - The company's cash position increased to $188.6 million as of Dec 31, 2019, primarily due to IPO proceeds[222] - During the second quarter of fiscal 2020, the company repaid all outstanding borrowings under the second lien term loan[226] Contractual Obligations as of Dec 31, 2019 (in thousands) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $67,228 | $14,207 | $20,064 | $16,253 | $16,704 | | First Lien Term Loan - principal | $551,125 | $— | $— | $— | $551,125 | | First Lien Term Loan - interest | $143,612 | $25,491 | $50,842 | $50,912 | $16,367 | | Total | $761,965 | $39,698 | $70,906 | $67,165 | $584,196 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency and variable interest rates, but management does not anticipate a material impact from a 10% change in either - The company has foreign currency risk related to operating expenses, particularly in the euro. As of December 31, 2019, $41.6 million of cash was held in foreign currencies[246] - The company is exposed to interest rate risk on its $551.1 million term loan, which bears interest at a variable rate based on LIBOR. A hypothetical 10% change in interest rates is not expected to have a material impact[251] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective[254] - No material changes were made to the internal control over financial reporting during the quarter ended December 31, 2019[255] PART II - OTHER INFORMATION This section provides disclosures on legal proceedings, risk factors, equity sales, defaults, and other required information Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings expected to adversely affect its financial condition or operations - The company reports that it is not currently a party to any material legal proceedings[258] Item 1A. Risk Factors The company faces various risks including sustaining growth, debt obligations, tax liabilities from spin-off, intense competition, and compliance with global regulations - The company's rapid subscription revenue growth may not be indicative of future growth, which depends on attracting new customers and expanding sales to existing ones[261] - The company's substantial debt of approximately $551.1 million contains restrictive covenants that could limit operational flexibility and pose risks to liquidity[264] - The spin-off of Compuware was a taxable transaction, resulting in an estimated tax liability of $255.8 million. The company is solely responsible for any taxes owed in excess of this amount[269][271] - The company faces significant competition from established vendors like Cisco AppDynamics, Broadcom, and New Relic, as well as infrastructure monitoring vendors like Datadog and cloud providers like AWS and Azure[278] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and IPO proceeds use remains consistent with the final prospectus - There were no unregistered sales of equity securities in the period[306] - The planned use of proceeds from the IPO has not materially changed[307] Item 3. Defaults Upon Senior Securities The company reports no defaults on senior securities - None[308] Item 4. Mine Safety Disclosures This section is not applicable as the company has no mine safety disclosures - None[310] Item 5. Other Information The company reports no other information - None[311] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents and Sarbanes-Oxley Act certifications