Dynatrace(US:DT)2024-11-07 11:45PART I - FINANCIAL INFORMATION This section details the company's unaudited financial statements, management's analysis, market risks, and internal controls Condensed Consolidated Financial Statements (Unaudited) These unaudited statements detail Dynatrace's financial position, operations, and cash flows, highlighting revenue growth, increased net income, and strong operating cash flow Condensed Consolidated Balance Sheets Total assets decreased slightly to $3.33 billion, while total liabilities decreased to $1.19 billion, and shareholders' equity increased to $2.14 billion Condensed Consolidated Balance Sheets (in thousands) | Account | September 30, 2024 | March 31, 2024 | | :--- | :--- | :--- | | Total Assets | $3,329,653 | $3,409,779 | | Total current assets | $1,483,578 | $1,605,297 | | Goodwill | $1,337,205 | $1,335,494 | | Total Liabilities | $1,185,697 | $1,394,289 | | Total current liabilities | $1,047,900 | $1,258,551 | | Deferred revenue, current | $806,171 | $987,953 | | Total Shareholders' Equity | $2,143,956 | $2,015,490 | Condensed Consolidated Statements of Operations Total revenue grew 19% to $418.1 million (three months) and $817.3 million (six months), driven by 20% subscription revenue growth, leading to increased net income Three Months Ended September 30 (in thousands) | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $418,129 | $351,700 | 19% | | Subscription Revenue | $399,810 | $334,497 | 20% | | Gross Profit | $340,345 | $287,333 | 18% | | Income from Operations | $47,026 | $35,269 | 33% | | Net Income | $44,008 | $35,809 | 23% | | Diluted EPS | $0.15 | $0.12 | 25% | Six Months Ended September 30 (in thousands) | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $817,349 | $684,586 | 19% | | Subscription Revenue | $781,386 | $650,951 | 20% | | Gross Profit | $664,812 | $557,875 | 19% | | Income from Operations | $89,055 | $69,557 | 28% | | Net Income | $82,628 | $73,997 | 12% | | Diluted EPS | $0.27 | $0.25 | 8% | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $254.4 million, while financing activities shifted to a $84.6 million cash outflow due to common stock repurchases Six Months Ended September 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $254,391 | $170,780 | | Net cash used in investing activities | ($46,620) | ($45,408) | | Net cash (used in) provided by financing activities | ($84,567) | $26,203 | | Net increase in cash and cash equivalents | $128,194 | $146,176 | - The significant shift in financing activities from providing cash to using cash was primarily driven by $90.1 million in repurchases of common stock during the six months ended September 30, 202418 Notes to Condensed Consolidated Financial Statements These notes detail key accounting policies, revenue by geography, acquisition specifics, goodwill, share-based compensation, and the share repurchase program status Revenue by Geographic Region (Six Months Ended Sep 30) | Region | 2024 Revenue (in thousands) | 2023 Revenue (in thousands) | | :--- | :--- | :--- | | North America | $493,695 (60%) | $407,505 (59%) | | Europe, Middle East and Africa | $200,126 (25%) | $170,913 (25%) | | Asia Pacific | $73,927 (9%) | $60,997 (9%) | | Latin America | $49,601 (6%) | $45,171 (7%) | - As of September 30, 2024, remaining performance obligations (RPO) totaled $2.40 billion, of which the company expects to recognize 55% as revenue over the next 12 months30 - The company acquired Runecast Solutions Limited in March 2024 for a preliminary purchase consideration of $26.1 million in cash and $2.3 million in deferred payments, resulting in $25.2 million of goodwill353638 - In May 2024, the company announced a $500 million share repurchase program. As of September 30, 2024, it had repurchased 1.9 million shares for $90.1 million, with $409.9 million remaining available6061 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's performance, highlighting 20% ARR growth to $1.62 billion, detailing revenue and expense changes, liquidity, and capital resources Overview and Key Metrics Dynatrace provides a unified observability and security platform, with key metrics showing Annual Recurring Revenue (ARR) reaching $1.62 billion, a 20% year-over-year increase - The company's strategy focuses on extending technology leadership, expanding relationships with existing customers, growing the customer base among the largest global enterprises, and leveraging its strategic partner ecosystem89 Key Performance Metrics as of September 30 | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total ARR | $1,616,531 thousand | $1,343,530 thousand | | Year-over-year increase | 20% | 26% | | Dollar-based net retention rate | 112% | 114% | Results of Operations This section provides a comparative analysis of operations, showing 20% subscription revenue growth driven by customer expansion, alongside increased operating expenses due to personnel costs - For the three months ended Sep 30, 2024, subscription revenue increased by $65.3 million (20%) due to growth of the Dynatrace platform with new and existing customers127 - Cost of subscription for the three-month period increased by $11.0 million (25%), primarily due to a $4.2 million increase in cloud-hosting costs and a $5.0 million increase in personnel costs130 - Research and development expenses for the six-month period increased by $42.6 million (30%), mainly from a $38.2 million rise in personnel costs (including $16.7 million in share-based compensation) to expand platform functionality157 - Sales and marketing expenses for the six-month period grew by $36.6 million (14%), driven by a $23.4 million increase in personnel costs and a $5.9 million increase in partner costs and professional fees158 Liquidity and Capital Resources Dynatrace's liquidity includes $907.2 million in cash and $146.1 million in investments, with $254.4 million net cash from operations and $90.1 million used for share repurchases - The company's primary liquidity sources are $907.2 million in cash and cash equivalents, $146.1 million in investments, and $399.2 million available under its Credit Facility163 - Net cash provided by operating activities for the six months ended Sep 30, 2024 was $254.4 million, an increase from $170.8 million in the prior year, driven by higher net income and favorable changes in working capital, particularly accounts receivable172174 - Cash used in financing activities was $84.6 million, primarily due to $90.1 million in common stock repurchases under the new program178 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, especially the Euro, and interest rate changes, with no current hedging strategies - The company's primary market risks are foreign currency exchange rate fluctuations and interest rate changes183 - Significant international operations expose the company to foreign currency risk, particularly with the Euro, affecting reported revenues and expenses. The company does not currently hedge this exposure185186 - Interest rate risk applies to the company's $907.2 million in cash and cash equivalents and $146.1 million in investments. A hypothetical 10% change in interest rates is not expected to have a material impact188 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2024190 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls191 PART II - OTHER INFORMATION This section covers other important information, including detailed risk factors and disclosures regarding equity security sales and use of proceeds Risk Factors This section outlines significant risks across business, technology, legal, and stock-related areas, including competition, security, regulatory challenges, and stock price volatility Risks Related to Business and Industry The company faces business and industry risks including unpredictable growth, intense competition, the need for continuous innovation, long sales cycles, and reliance on key personnel - Rapid revenue growth in recent periods (19% for the six months ended Sep 30, 2024) may not be indicative of future growth195196 - The company faces significant competition from a fragmented and evolving market, including infrastructure monitoring vendors, APM vendors, security vendors, and large technology companies like Cisco, which recently acquired Splunk219220 - The business depends on attracting new customers and expanding relationships with existing ones, which is influenced by the effectiveness of its sales strategy, partner relationships (including with GSIs and hyperscalers), and the ability to provide quality support214215 - Sales cycles can be long and unpredictable, often ranging from several months to over a year, with seasonality peaking in the third and fourth fiscal quarters230231 Risks Related to Information Technology, IP, and Data Security Risks include cybersecurity attacks, reliance on third-party cloud providers, software vulnerabilities, intellectual property infringement claims, and challenges in protecting its own IP - The company is a target for cybersecurity attacks; a security breach on its multi-tenant platform could affect a significant number of customers and lead to financial loss, litigation, and reputational damage240241 - The business depends on the continuous operation of its SaaS solutions hosted on third-party cloud infrastructure (AWS, Azure, GCP), and any disruption from these providers could negatively impact service delivery and harm the business248251 - The company faces risks of intellectual property infringement lawsuits from competitors and others, which could result in substantial costs, royalty payments, or the need to redesign solutions255256258 - Use of open-source software could impose limitations on the ability to commercialize solutions, and contributions to open-source projects may limit the ability to enforce its own patent rights265268 Risks Related to Legal, Regulatory, Accounting, and Tax Matters Global operations expose the company to complex tax laws, currency fluctuations, and geopolitical risks, while its ratable revenue recognition model can delay the impact of sales downturns - As a multinational corporation, the company is subject to complex and changing tax laws in numerous jurisdictions, which could impact its effective tax rate and results276280 - Revenue from customers outside the U.S. represented 43% of total revenue for the six months ended Sep 30, 2024, exposing the company to risks from currency fluctuations, geopolitical instability, and varying legal requirements282 - The company's ratable revenue recognition policy for subscriptions means that a decline in new or renewed contracts in a single quarter will negatively affect revenue in future quarters288289 Risks Related to Our Common Stock Risks related to common stock include price volatility, potential dilution from future issuances, the non-guaranteed share repurchase program, and anti-takeover provisions - The trading price of the common stock is volatile and can be influenced by factors such as operating results, competitor announcements, and overall market conditions311312 - The share repurchase program of up to $500 million is not guaranteed to be completed and could increase stock price volatility while diminishing cash reserves318319 - The company has never paid dividends and does not anticipate paying any in the foreseeable future, meaning returns depend on stock price appreciation320 - Anti-takeover provisions, such as a classified board and supermajority voting requirements, could delay or prevent a change in control321322 Unregistered Sales of Equity Securities and Use of Proceeds During Q2 FY2025, the company repurchased 834,763 shares for $40.0 million under its $500 million share repurchase program, with $409.9 million remaining Issuer Purchases of Equity Securities (Q2 FY2025) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | Jul 2024 | 291,230 | $43.97 | $437,082 thousand | | Aug 2024 | 205,400 | $47.98 | $427,224 thousand | | Sep 2024 | 338,133 | $51.23 | $409,893 thousand | | Total | 834,763 | $47.90 | $409,893 thousand |