Dynatrace(DT) - 2020 Q4 - Annual Report

PART I Business Dynatrace offers an AI-powered software intelligence platform for multi-cloud environments, serving over 2,700 customers with rapid adoption - Dynatrace offers a software intelligence platform using AI and automation for multi-cloud environments, designed to simplify IT operations and improve user experiences[12] Key Business Metrics as of March 31, 2020 | Metric | Value | Growth (YoY) | | :--- | :--- | :--- | | Total Customers | > 2,700 | - | | Dynatrace® Customers | 2,373 | 74% | | Dynatrace® Net Expansion Rate | 123% | - | - The company's primary offering, the Dynatrace® platform, has been commercially available since 2016 and is the main driver of customer and revenue growth[26] - The company targets the largest 15,000 global enterprises, generally those with annual revenues exceeding $750 million, through a direct sales team and a network of partners[25] - The company estimates its total addressable market opportunity to be approximately $20 billion, calculated based on potential spending from the top 15,000 global enterprises[63] The Dynatrace Software Intelligence Platform The Dynatrace® platform is an all-in-one, automated solution integrating APM, AIOps, and analytics, leveraging proprietary AI for multi-cloud environments - The platform integrates APM, infrastructure monitoring, AIOps, DEM, and business analytics into a single, automated solution[72] - Core proprietary technologies include OneAgent® for automated data capture, SmartScape® for dependency mapping, and the Davis™ AI engine for AI-powered answers[73][74][75] - The platform offers flexible deployment as a SaaS solution or a 'Managed' offering where customers control their data environment, combining SaaS simplicity with data sovereignty[59][81] - In October 2019, the company introduced Digital Business Analytics, leveraging existing platform data to provide real-time business insights on conversions, orders, and customer segmentation, aiming to expand into the broader Analytics and Business Intelligence market[98] Competition Dynatrace faces diverse competition across APM, infrastructure monitoring, and cloud solutions, competing on automation and AI capabilities - The company competes directly or indirectly with a variety of vendors across different technology sectors[136] - Key competitor categories include[136][137] * APM vendors: Cisco AppDynamics, Broadcom, and New Relic * Infrastructure monitoring vendors: BMC, Datadog, and Nagios * DEM vendors: Akamai and Catchpoint * Public cloud providers: Offering point solutions * IT operations management, AIOps, and business intelligence providers - Principal competitive factors include automation, AI capabilities, product features, ease of deployment, and brand recognition[138] Risk Factors The company outlines significant risks to its business, operations, and stock value, including the COVID-19 pandemic, substantial debt, and intense competition - The effects of the COVID-19 pandemic on business operations, customer spending, and future financial performance are a primary and uncertain risk[149][151] - The company has substantial debt obligations of approximately $550.0 million as of March 31, 2020, with credit agreements that contain restrictive covenants impacting business operations[162] - A material weakness in internal control over financial reporting was identified related to the accounting for income taxes for the fiscal year ended March 31, 2020[318] - The company faces significant competition from APM vendors, infrastructure monitoring vendors, and large cloud providers, which could lead to pricing pressure and loss of market share[208][209] - Thoma Bravo beneficially owns a majority of the company's voting stock, making Dynatrace a "controlled company" and giving Thoma Bravo significant influence over corporate matters[324][329] Properties The company's corporate headquarters are in Waltham, MA, with primary R&D facilities in Austria, Poland, and Spain, and additional global offices - Corporate headquarters are in Waltham, MA, with primary R&D labs located in Austria, Poland, and Spain[351] Legal Proceedings The company is not currently party to any material litigation or claims that would adversely affect its business or financial condition - As of the report date, there are no material legal proceedings against the company[352] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Dynatrace's common stock began trading on the NYSE as "DT" on August 1, 2019, with no cash dividends paid or planned - The company's common stock has been listed on the NYSE under the symbol "DT" since its IPO on August 1, 2019[355] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future[357] Selected Financial Data This section provides selected consolidated financial data, showing a shift to subscription revenue, increasing total revenue, and a substantial net loss in fiscal 2020 Selected Consolidated Statements of Operations Data (in thousands) | Fiscal Year Ended March 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenue | $545,803 | $430,966 | $398,047 | | Subscription | $487,817 | $349,830 | $257,576 | | License | $12,686 | $40,354 | $98,756 | | Gross profit | $416,872 | $324,165 | $301,513 | | (Loss) income from operations | $(171,939) | $(72,707) | $(21,759) | | Net (loss) income | $(418,024) | $(116,194) | $9,222 | Selected Consolidated Balance Sheet Data (in thousands) | As of March 31, | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $213,170 | $51,314 | | Total assets | $2,042,080 | $1,811,366 | | Long-term debt, net | $509,985 | $1,011,793 | | Total shareholders' equity / member's deficit | $961,497 | $(390,258) | - Share-based compensation expense has increased dramatically, rising from $22.3 million in fiscal 2018 to $222.5 million in fiscal 2020[370] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong subscription revenue growth, increased operating expenses leading to a larger net loss, and improved liquidity post-IPO Annual Recurring Revenue (ARR) Trend (in thousands) | As of | 3/31/2020 | 3/31/2019 | | :--- | :--- | :--- | | Dynatrace® ARR | $527,830 | $282,815 | | Classic ARR | $44,928 | $120,459 | | Total ARR | $572,758 | $403,274 | - The Dynatrace® Net Expansion Rate has remained at or above 120% for eight consecutive quarters, reaching 123% as of March 31, 2020[26][401] Fiscal Year 2020 vs. 2019 Performance (in thousands) | Metric | FY 2020 | FY 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $545,803 | $430,966 | 27% | | Subscription Revenue | $487,817 | $349,830 | 39% | | Gross Profit | $416,872 | $324,165 | 29% | | Loss from Operations | $(171,939) | $(72,707) | 136% | | Net Loss | $(418,024) | $(116,194) | 260% | - The increase in net loss for FY2020 was driven by higher operating expenses (up 48%), including a $151.3 million increase in share-based compensation, and a $199.5 million income tax expense related to reorganization transactions[421][436][446] - The company used proceeds from its August 2019 IPO and a $265.0 million contribution from a related party to repay $515.2 million of its Term Loans[499] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rates, interest rates on variable-rate debt, and inflation - The primary market risks are foreign currency exchange fluctuations (especially the euro), interest rate changes on variable-rate debt, and inflation[544] - A significant portion of revenue is in U.S. dollars, but operating expenses are incurred in various currencies, creating exposure to exchange rate fluctuations[546] - As of March 31, 2020, the company had $521.1 million in variable-rate term loans, exposing it to interest rate risk. A hypothetical 10% change in interest rates is not expected to have a material impact[549] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for fiscal years 2018-2020, including Balance Sheets and Statements of Operations, with an unqualified auditor's opinion - The independent auditor, BDO USA, LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[551] Consolidated Balance Sheet Summary (in thousands) | As of March 31, | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $2,042,080 | $1,811,366 | | Goodwill | $1,270,733 | $1,270,120 | | Total Liabilities | $1,080,583 | $2,201,624 | | Long-term debt, net | $509,985 | $1,011,793 | | Total Shareholders' Equity | $961,497 | $(390,258) | Consolidated Statement of Operations Summary (in thousands) | For the Year Ended March 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue | $545,803 | $430,966 | $398,047 | | Gross Profit | $416,872 | $324,165 | $301,513 | | Loss from Operations | $(171,939) | $(72,707) | $(21,759) | | Net (Loss) Income | $(418,024) | $(116,194) | $9,222 | Controls and Procedures Management concluded that disclosure controls were ineffective as of March 31, 2020, due to a material weakness in income tax accounting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2020, due to a material weakness in internal control over financial reporting[759] - The material weakness relates to a lack of effective controls over the accounting for income taxes, including the preparation and review of the global tax provision and the assessment of deferred tax asset realizability[763] - A remediation plan is being developed, which includes hiring an International Tax Manager (completed in April 2020) and enhancing documentation and management review processes[764] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2020 Proxy Statement - The required information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[772] Executive Compensation Information regarding executive compensation is incorporated by reference from the forthcoming 2020 Proxy Statement - The required information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[773] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the forthcoming 2020 Proxy Statement - The required information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[774] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the forthcoming 2020 Proxy Statement - The required information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[776] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the forthcoming 2020 Proxy Statement - The required information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[777] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item lists the financial statements and exhibits filed with the Form 10-K[779][781]