Dynatrace(US:DT)2023-11-01 16:00PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of financial condition and results of operations Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the three and six months ended September 30, 2023, and 2022, including balance sheets, statements of operations, comprehensive income, shareholders' equity, cash flows, and accompanying notes Condensed Consolidated Balance Sheets This section presents the unaudited condensed consolidated balance sheets as of September 30, 2023, and March 31, 2023 Key Balance Sheet Items (in thousands) | Account | September 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $701,524 | $555,348 | | Accounts receivable, net | $262,733 | $442,518 | | Goodwill | $1,309,549 | $1,281,812 | | Total assets | $2,782,160 | $2,765,347 | | Liabilities & Equity | | | | Deferred revenue, current | $677,837 | $811,058 | | Total liabilities | $980,506 | $1,160,478 | | Total shareholders' equity | $1,801,654 | $1,604,869 | Condensed Consolidated Statements of Operations This section details the unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2023, and 2022 Key Operating Results (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Subscription Revenue | $334,497 | $261,306 | $650,951 | $510,864 | | Total Revenue | $351,700 | $279,326 | $684,586 | $546,599 | | Gross Profit | $287,333 | $223,622 | $557,875 | $439,097 | | Income from Operations | $35,269 | $20,399 | $69,557 | $39,493 | | Net Income | $35,809 | $10,526 | $73,997 | $12,640 | | Diluted EPS | $0.12 | $0.04 | $0.25 | $0.04 | Condensed Consolidated Statements of Cash Flows This section presents the unaudited condensed consolidated statements of cash flows for the six months ended September 30, 2023, and 2022 Summary of Cash Flows (in thousands) | Activity | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $170,780 | $172,496 | | Net cash used in investing activities | ($45,408) | ($11,237) | | Net cash provided by (used in) financing activities | $26,203 | ($47,056) | | Net increase in cash and cash equivalents | $146,176 | $100,463 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures supporting the financial statements, covering significant accounting policies, revenue recognition, acquisitions, goodwill, income taxes, debt, leases, and share-based compensation Revenue by Geographic Region (Six Months Ended Sep 30) | Region | 2023 Revenue (in thousands) | 2023 % of Total | 2022 Revenue (in thousands) | 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | North America | $407,505 | 59% | $324,504 | 59% | | Europe, Middle East and Africa | $170,913 | 25% | $139,745 | 26% | | Asia Pacific | $60,997 | 9% | $53,541 | 10% | | Latin America | $45,171 | 7% | $28,809 | 5% | | Total Revenue | $684,586 | | $546,599 | | - On August 31, 2023, the Company acquired 100% of Rookout, Ltd., a provider of solutions for troubleshooting and debugging cloud-native applications, for a preliminary purchase consideration of $33.5 million4041 - As of September 30, 2023, the aggregate amount of remaining performance obligations was $1,793.9 million, of which the company expects to recognize 61% as revenue over the next twelve months38 - Total share-based compensation expense was $58.0 million for the three months and $98.5 million for the six months ended September 30, 2023, an increase from $40.7 million and $69.3 million in the respective prior-year periods68 Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides an overview of the business, key performance metrics, and a detailed analysis of financial results for the three and six months ended September 30, 2023, compared to the prior year periods, covering revenue, costs, profitability, liquidity, capital resources, and critical accounting policies, noting strong growth amidst a cautious macroeconomic environment Overview and Key Metrics Dynatrace delivered strong financial results in a dynamic macroeconomic environment, highlighted by significant growth in Annual Recurring Revenue (ARR), though customers remain cautious in their spending, leading to elongated sales cycles expected to persist through fiscal 2024 Key Performance Metrics | Metric | As of September 30, 2023 | As of September 30, 2022 | | :--- | :--- | :--- | | Total ARR (in thousands) | $1,343,530 | $1,064,951 | | Dollar-based Net Retention Rate | 114% | 120% | - For the three months ended September 30, 2023, Annual Recurring Revenue (ARR) grew 26% year-over-year to $1.344 billion82 - Management expects the elongation of sales cycles experienced in recent quarters to persist throughout fiscal 2024 due to continued macroeconomic uncertainty and tighter customer budget scrutiny84 Results of Operations The company provides a detailed comparison of its operational results for the three and six-month periods ending September 30, 2023, versus the same periods in 2022, with subscription revenue as the primary driver of growth, and operating expenses rising due to increased personnel costs in R&D and Sales & Marketing to support growth Revenue Comparison (Three Months Ended Sep 30) | Revenue Type | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscription | $334,497 | $261,306 | $73,191 | 28% | | Service | $17,203 | $18,020 | ($817) | -5% | | Total Revenue | $351,700 | $279,326 | $72,374 | 26% | Revenue Comparison (Six Months Ended Sep 30) | Revenue Type | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscription | $650,951 | $510,864 | $140,087 | 27% | | Service | $33,635 | $35,735 | ($2,100) | -6% | | Total Revenue | $684,586 | $546,599 | $137,987 | 25% | - For the three months ended Sep 30, 2023, Research and development expenses increased by $21.2 million (40%) due to higher personnel costs and share-based compensation Sales and marketing expenses increased by $22.3 million (21%) due to higher personnel costs, commissions, and advertising121122 Liquidity and Capital Resources As of September 30, 2023, Dynatrace had a strong liquidity position with $701.5 million in cash and cash equivalents and $387.9 million available under its revolving credit facility, with cash from operations for the first six months at $170.8 million, slightly down from $172.5 million in the prior year period, mainly due to changes in working capital - The company's cash and cash equivalents increased to $701.5 million as of September 30, 2023, from $555.3 million at March 31, 2023150 - Net cash provided by operating activities was $170.8 million for the six months ended September 30, 2023, compared to $172.5 million for the same period in 2022156158159 - Cash used in investing activities was $45.4 million, primarily for the $32.4 million acquisition of Rookout and $13.0 million in property and equipment purchases160 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures are related to foreign currency exchange rate fluctuations and interest rate changes, with a significant portion of revenue and expenses from international operations creating both translation and transaction exposure, and interest rate risk associated with cash equivalents and the variable-rate credit facility - The company is exposed to foreign currency risk as a significant portion of its revenues and expenses are from international operations170 Fluctuations in the U.S. dollar against other currencies, particularly the Euro, affect reported financial results171 - Interest rate risk exists from cash and cash equivalents of $701.5 million and the $400.0 million revolving credit facility, which bears interest at variable rates173 However, a hypothetical 10% change in interest rates is not expected to have a material impact174 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023, with no material changes to the internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023175 - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls177 PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, and other information, including officer trading plans and exhibits Legal Proceedings The company states that it is party to legal proceedings from time to time in the ordinary course of business but does not currently believe that the resolution of any such matters will have a material adverse effect on its business or financial condition - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business, operating results, or financial condition180 Risk Factors This section details numerous risks and uncertainties that could materially affect the company's business, including dependency on demand for observability solutions amid economic uncertainty, intense competition, the need for continuous innovation, potential security breaches, reliance on key personnel, and risks associated with international operations and data privacy regulations Risks Related to Our Business and Industry This subsection outlines risks including that rapid revenue growth may not be indicative of future performance, the business is dependent on demand for observability solutions which can be affected by adverse economic conditions leading to longer sales cycles, and significant competition exists from a variety of vendors - The company's business depends on overall demand for observability and security solutions, and adverse economic conditions have led to lengthening sales cycles and may negatively affect purchasing decisions191 - The markets in which the company competes are highly competitive and fragmented, with competition from APM, infrastructure, security, and open-source vendors, some of whom have greater resources206207 - Failure to innovate and develop solutions that respond to the rapidly changing needs of customers could harm the company's competitive position and business prospects193 Risks Related to Information Technology, Intellectual Property, and Data Security and Privacy This subsection details risks related to technology and data, including the potential for security breaches and cyberattacks, interruptions in SaaS solution delivery, real or perceived errors in the company's complex solutions, and potential infringement of third-party intellectual property rights - The company is a target for cybersecurity attacks, and a security incident could lead to unauthorized access to data, loss of intellectual property, and harm to its business and reputation227228 - The business depends on the continuous availability of its SaaS solutions, which are hosted on third-party cloud infrastructure (AWS, Azure, GCP)236 Any disruption from these providers could negatively impact service delivery238 - The company is subject to evolving and stringent privacy laws globally, such as GDPR and CCPA253 Failure to comply could result in significant proceedings, penalties, and damage to its reputation254 Risks Related to Legal, Regulatory, Accounting, and Tax Matters This subsection covers risks associated with legal, tax, and regulatory compliance, including potential changes in tax laws that could impact the effective tax rate, risks from global operations such as foreign currency fluctuations and geopolitical instability, and compliance with various international laws like export controls and anti-bribery statutes - As a multinational corporation, the company is subject to complex tax laws in numerous jurisdictions, and changes in these laws or their interpretation could adversely affect its effective tax rate and financial results259260261 - Global sales and operations expose the company to risks including foreign currency fluctuations, geopolitical instability (such as conflicts in Ukraine and Israel), and compliance with trade restrictions and anti-bribery laws like the FCPA269270271 - Because revenue from SaaS and term licenses is recognized ratably over the contract term, downturns in new sales may not be immediately reflected in operating results, making trends difficult to discern273 Risks Related to Our Common Stock This subsection discusses risks for investors in the company's common stock, including stock price volatility, the significant influence of its largest shareholder (Thoma Bravo), the dilutive effect of future stock issuances, and anti-takeover provisions in the company's charter and bylaws - The trading price of the company's common stock has been and may continue to be volatile293 - As of October 31, 2023, Thoma Bravo beneficially owned approximately 17.6% of the common stock, giving it significant influence over matters requiring stockholder approval297299 - The company does not intend to pay dividends, so a return on investment depends on the appreciation of the stock price303 Other Information This section discloses the adoption of Rule 10b5-1 trading arrangements by two company officers: Jim Benson (CFO) and Dan Zugelder (CRO), with these plans for the sale of shares to cover taxes upon the vesting of restricted stock units (RSUs) - On August 16, 2023, CFO Jim Benson adopted a Rule 10b5-1 trading plan to sell shares to cover taxes upon RSU vesting between December 2023 and September 2024318 - On September 12, 2023, CRO Dan Zugelder adopted a Rule 10b5-1 trading plan to sell the net shares from 32,771 RSUs vesting in December 2023319 Exhibits This section lists the exhibits filed with or incorporated by reference into the Form 10-Q, including the company's certificate of incorporation, bylaws, and officer certifications