Dynatrace(US:DT)2025-08-06 10:34PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited Q2 2025 financials show total revenue at $477.3 million, net income at $48.0 million, and operating cash flow at $269.7 million Condensed Consolidated Balance Sheets | Balance Sheet Highlights (In thousands) | June 30, 2025 (unaudited) | March 31, 2025 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,247,381 | $1,017,039 | | Total current assets | $1,851,819 | $1,931,461 | | Goodwill | $1,343,839 | $1,336,435 | | Total assets | $4,080,935 | $4,139,678 | | Liabilities & Equity | | | | Deferred revenue, current | $1,002,189 | $1,087,518 | | Total current liabilities | $1,232,517 | $1,381,286 | | Total liabilities | $1,382,649 | $1,518,530 | | Total shareholders' equity | $2,698,286 | $2,621,148 | Condensed Consolidated Statements of Operations | Income Statement Highlights (In thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :--- | :--- | :--- | | Subscription Revenue | $457,507 | $381,576 | | Total revenue | $477,349 | $399,220 | | Gross profit | $392,140 | $324,467 | | Income from operations | $62,338 | $42,029 | | Net income | $47,955 | $38,620 | | Diluted net income per share | $0.16 | $0.13 | Condensed Consolidated Statements of Cash Flows | Cash Flow Highlights (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $269,692 | $230,741 | | Net cash used in investing activities | ($8,448) | ($35,595) | | Net cash used in financing activities | ($43,854) | ($42,810) | | Net increase in cash and cash equivalents | $230,342 | $151,332 | | Cash and cash equivalents, end of period | $1,247,381 | $930,315 | Notes to Condensed Consolidated Financial Statements - As of June 30, 2025, the company had remaining performance obligations of $2,918.9 million, of which 53% is expected to be recognized as revenue over the next 12 months36 - The effective tax rate for the three months ended June 30, 2025, was 41.1%, a significant increase from 26.8% in the prior-year period, primarily due to the intra-entity IP transfer to Switzerland which impacted the GILTI inclusion46 - In May 2024, the company announced a share repurchase program for up to $500 million; during the quarter ended June 30, 2025, 0.9 million shares were repurchased for $45.0 million, with $282.4 million remaining available for future repurchases5758 - Total share-based compensation expense increased to $71.9 million for the quarter, up from $57.7 million in the same period last year59 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports strong Q1 FY2026 results with ARR growing 18% to $1.82 billion and total revenue up 20% to $477 million, driven by technology leadership and customer expansion Key Metrics and Financial Highlights | Key Metric | As of/For Quarter Ended June 30, 2025 | As of/For Quarter Ended June 30, 2024 | | :--- | :--- | :--- | | Total ARR | $1,822.2 million | $1,540.6 million | | ARR Year-over-year increase | 18% | 19% | | Dollar-based net retention rate | 111% | 112% | | Non-GAAP income from operations | $143.1 million | $114.3 million | | Free cash flow | $262.0 million | $227.4 million | - The company's strategy focuses on extending its technology leadership, expanding relationships with existing customers, growing its customer base among the largest 15,000 global enterprises, and leveraging its strategic partner ecosystem90 Results of Operations | Revenue Component (In thousands) | Q1 FY2026 (Ended June 30, 2025) | Q1 FY2025 (Ended June 30, 2024) | Change (%) | | :--- | :--- | :--- | :--- | | Subscription | $457,507 | $381,576 | +20% | | Service | $19,842 | $17,644 | +12% | | Total Revenue | $477,349 | $399,220 | +20% | - The 20% increase in subscription revenue was driven by existing customers expanding their use of the platform and adoption by new customers, with variable on-demand consumption revenue also increasing by $9.1 million122 | Expense Component (In thousands) | Q1 FY2026 (Ended June 30, 2025) | Q1 FY2025 (Ended June 30, 2024) | Change (%) | | :--- | :--- | :--- | :--- | | Cost of subscription | $65,018 | $53,572 | +21% | | Research and development | $108,172 | $87,578 | +24% | | Sales and marketing | $165,314 | $145,106 | +14% | | General and administrative | $56,304 | $44,978 | +25% | - Operating expenses increased primarily due to higher personnel costs, including share-based compensation, from headcount growth across R&D, sales, and G&A to support business expansion132133134 - Amortization of acquired technology and other intangibles decreased significantly by $3.5 million and $4.8 million respectively, as certain assets became fully amortized during fiscal 2025127135 Liquidity and Capital Resources - As of June 30, 2025, the company's principal sources of liquidity included $1.25 billion in cash and cash equivalents, $149.7 million in investments, and $399.0 million available under its credit facility140 - Net cash provided by operating activities increased by $39.0 million to $269.7 million for the quarter, primarily driven by higher collections from revenue growth150 - The company repurchased $45.0 million of its common stock during the quarter under its $500 million share repurchase program147 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency and interest rate fluctuations, with significant international operations and cash holdings, but expects no material impact from a 10% rate change - Foreign Currency Risk: The company has significant international operations, exposing it to both translation risk (converting foreign subsidiary financials to USD) and transaction risk (transactions in non-functional currencies), with the Euro being a particularly significant currency159160161 - Interest Rate Risk: Risk stems from interest-earning assets ($1.25 billion in cash/equivalents and $149.7 million in investments) and potential borrowings under its $400 million variable-rate credit facility, though a hypothetical 10% change in interest rates is not expected to have a material impact162163 Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of June 30, 2025, the company's disclosure controls and procedures were effective in ensuring that information required to be disclosed is recorded, processed, and reported in a timely manner165 - No changes occurred during the quarter ended June 30, 2025, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting166 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings but does not anticipate a material adverse effect on its business or financial condition - The company states that it is not currently party to any legal proceedings that it believes would have a material adverse effect on its business169 Item 1A. Risk Factors The company faces various risks including growth volatility, intense competition, innovation demands, cybersecurity threats, reliance on cloud infrastructure, and global legal and macroeconomic uncertainties Risks Related to Our Business and Industry - Recent rapid revenue growth may not be indicative of future performance, and operating results can fluctuate significantly due to factors like customer demand, sales cycles, and economic conditions171173 - The business faces significant competition from a variety of vendors, including those with greater brand recognition, larger customer bases, and more substantial financial resources193197 - Success depends on the ability to innovate and respond to rapidly changing customer needs and technologies, including AI, and failure to do so could harm the company's competitive position181182 - The business relies on maintaining successful relationships with partners, including global system integrators (GSIs) and hyperscalers (AWS, Azure, GCP), for sales and distribution202 Risks Related to Information Technology, IP, and Data Security and Privacy - The company is a target for cybersecurity attacks, and any security breaches or compromises could harm its reputation, brand, and operating results, and lead to significant financial exposure216218 - The business depends on third-party cloud infrastructure providers (hyperscalers like AWS, Azure, GCP), and any service disruptions or outages from these providers could adversely affect the delivery of its SaaS solutions225226 - The company faces risks of IP infringement claims from third parties, which could result in significant costs, and must also protect its own proprietary technology and IP rights to maintain its competitive advantage228232 - Failure to comply with evolving and stringent global privacy laws (such as GDPR and CCPA) and regulations concerning AI could result in significant penalties, proceedings, and damage to the company's reputation240241 Risks Related to Legal, Regulatory, Accounting, and Tax Matters - As a multinational corporation, the company is subject to complex tax laws in numerous jurisdictions; changes in these laws, such as the OECD's Pillar Two minimum tax, or adverse audit outcomes could impact its effective tax rate and financial results245250251 - Global sales and operations expose the company to risks including foreign currency fluctuations, geopolitical instability (e.g., conflicts in Ukraine and Israel), trade restrictions, and compliance with laws like the FCPA252254 - The company's solutions are subject to U.S. and international export/import controls and economic sanctions, which could impair its ability to compete in international markets if not properly managed274 Risks Related to Our Common Stock - The trading price of the company's common stock has been and may continue to be volatile due to market conditions, operating results, and other factors280 - The share repurchase program is not guaranteed to be fully consummated or enhance stockholder value and could increase stock price volatility while diminishing cash reserves287 - The company does not intend to pay dividends, so a return on investment depends entirely on the appreciation of the stock price288 - Anti-takeover provisions in the company's charter and bylaws, such as a classified board and supermajority voting requirements, could discourage or delay a change in control289 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 904,609 shares at an average price of $49.76 under its publicly announced program during Q2 2025 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | 334,468 | $44.11 | | May 2025 | 291,210 | $51.61 | | June 2025 | 278,931 | $54.60 | | Total | 904,609 | $49.76 | - On May 15, 2024, the company announced a share repurchase program for up to $500 million of its common stock, which does not have a time limit299 Item 5. Other Information Three company insiders, including the CEO, adopted Rule 10b5-1 trading arrangements for future share sales during the quarter - CEO Rick McConnell adopted a Rule 10b5-1 trading plan on June 12, 2025, for the sale of 90,000 shares, with transactions scheduled from September 11, 2025, through July 31, 2026303 Item 6. Exhibits This section lists exhibits filed with or incorporated by reference into the Form 10-Q, including corporate documents and officer certifications