Dynatrace(US:DT)2020-07-30 22:59PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) The company's unaudited statements show significant revenue growth and a shift from net loss to net income year-over-year Condensed Consolidated Balance Sheets Total assets remained stable at approximately $2.05 billion, while a decrease in liabilities boosted shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | March 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $250,377 | $213,170 | | Goodwill | $1,270,986 | $1,270,733 | | Total assets | $2,046,830 | $2,042,080 | | Liabilities & Equity | | | | Deferred revenue, current | $352,803 | $384,060 | | Long-term debt | $510,452 | $509,985 | | Total liabilities | $1,058,253 | $1,080,583 | | Total shareholders' equity | $988,577 | $961,497 | Condensed Consolidated Statements of Operations Total revenue increased 27% to $155.5 million, driving a significant turnaround from an operating loss to operating income Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Total revenue | $155,508 | $122,550 | | Subscription Revenue | $144,357 | $108,128 | | Gross profit | $126,966 | $93,007 | | Income (loss) from operations | $24,106 | $(33,006) | | Net income (loss) | $12,865 | $(49,155) | | Diluted EPS | $0.05 | $(0.21) | Condensed Consolidated Statements of Cash Flows Net cash from operations was $37.0 million, contributing to a $37.2 million net increase in cash and cash equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,008 | $34,167 | | Net cash used in investing activities | $(4,549) | $(4,484) | | Net cash provided by (used in) financing activities | $3,579 | $(23,747) | | Net increase in cash and cash equivalents | $37,207 | $6,139 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses strong performance driven by platform adoption, revenue growth, and improved profitability despite COVID-19 uncertainties Overview and COVID-19 Impact The company's software intelligence platform drives subscription revenue, though the COVID-19 pandemic presents future uncertainty - The company's Dynatrace® platform is its primary offering, with the customer count growing from 1,578 to 2,458 year-over-year as of June 30, 2020109 - Management notes that the full impact of the COVID-19 pandemic on financial results is uncertain and may not be fully reflected until future periods, potentially affecting customer spending, purchasing decisions, and attrition rates111113 Key Metrics The company highlights strong growth in customer numbers, Total Annual Recurring Revenue (ARR), and a stable Net Expansion Rate Key Performance Metrics | Metric | June 30, 2020 | June 30, 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Number of Dynatrace® Customers | 2,458 | 1,578 | +56% | | Dynatrace® ARR | $563,479 thousand | $326,298 thousand | +73% | | Total ARR | $601,376 thousand | $437,622 thousand | +37% | | Dynatrace® Net Expansion Rate | 120%+ | 120%+ | Stable | Results of Operations Revenue grew 27% and gross margin expanded, while a significant reduction in share-based compensation drove operating profitability Revenue by Type (in thousands) | Revenue Type | Q1 FY2021 | Q1 FY2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscription | $144,357 | $108,128 | $36,229 | 34% | | License | $638 | $3,784 | $(3,146) | (83)% | | Service | $10,513 | $10,638 | $(125) | (1)% | | Total revenue | $155,508 | $122,550 | $32,958 | 27% | - Total operating expenses decreased by $23.2 million (18%) YoY, primarily driven by a $28.7 million reduction in share-based compensation expense across all departments143158 - The company's gross margin improved from 76% to 82% year-over-year, reflecting the higher mix of subscription revenue and improved subscription gross margin154 Liquidity and Capital Resources The company maintains sufficient liquidity through cash reserves, credit facilities, and operating cash flow to meet its obligations - The company's primary sources of liquidity are cash on hand ($250.4 million), availability under its revolving credit facility ($44.6 million), and cash flows from operations167 Summary of Cash Flows (in thousands) | Activity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Cash provided by operating activities | $37,008 | $34,167 | | Cash used in investing activities | $(4,549) | $(4,484) | | Cash provided by (used in) financing activities | $3,579 | $(23,747) | Contractual Obligations Summary (in thousands) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $60,284 | $12,768 | $21,112 | $14,838 | $11,566 | | First Lien Term Loan - principal | $521,125 | — | — | — | $521,125 | | First Lien Term Loan - interest | $66,048 | $12,830 | $25,660 | $25,695 | $1,863 | | Total | $647,457 | $25,598 | $46,772 | $40,533 | $534,554 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks stem from foreign currency exchange rates and interest rate fluctuations on its variable-rate debt - Primary market risks are foreign currency exchange (mainly Euro-denominated expenses) and interest rate fluctuations on its variable-rate debt187188 - The company's term loan of $521.1 million bears interest based on the adjusted LIBOR rate plus a margin, equivalent to 2.4% at June 30, 2020191 Item 4. Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in internal control over financial reporting related to income taxes - Disclosure controls and procedures were deemed ineffective as of June 30, 2020, due to a material weakness in internal control over financial reporting194 - The material weakness relates to ineffective controls over accounting for income taxes, particularly the realizability of deferred tax assets like foreign tax credits195 - Remediation efforts are underway, including hiring senior tax personnel (VP of Tax and International Tax Manager) and improving review processes197 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings - As of the reporting date, Dynatrace is not involved in any material legal proceedings202 Item 1A. Risk Factors Key business risks include the impact of COVID-19, competition, substantial debt, and significant shareholder influence - The COVID-19 pandemic poses a significant risk, with potential impacts on customer spending, purchasing decisions, and attrition rates, the full extent of which remains uncertain204206 - The company has substantial debt ($521.1 million term loan as of June 30, 2020) with covenants that restrict its ability to incur more debt, make acquisitions, and pay dividends217218 - Competition is a major risk, with competitors including Cisco AppDynamics, Broadcom, New Relic, and Datadog, as well as point solutions from major cloud providers like AWS and Azure263264 - Thoma Bravo holds significant influence, owning 41.4% of common stock as of June 30, 2020, which allows it to influence board composition and major corporate decisions381382 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred, and the use of IPO proceeds remains unchanged - There were no unregistered sales of equity securities in the quarter ended June 30, 2020402 - The planned use of proceeds from the IPO has not materially changed403 Item 3. Default Upon Senior Securities The company reports no defaults upon senior securities during the period - No defaults upon senior securities occurred405 Item 5. Other Information No other material information was disclosed for the reporting period - No other information was disclosed under this item408 Item 6. Exhibits This section lists all exhibits filed with the report, including certifications and corporate documents - Exhibits filed include corporate governance documents, officer certifications (Rule 13a-14(a) and Section 906), and interactive data files (XBRL)410