DYNATRACE, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. When reviewing
the discussion below, you should keep in mind the substantial risks and
uncertainties that could impact our business. In particular, we encourage you to
review the risks and uncertainties described in the section titled "Risk
Factors" included elsewhere in this Form 10-
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Q and our Annual Report on Form 10-K. These risks and uncertainties could cause
actual results to differ materially from those projected in forward-looking
statements contained in this report or implied by past results and trends. Our
fiscal year ends on March 31 . Our historical results are not necessarily
indicative of the results that may be expected for any period in the future, and
our interim results are not necessarily indicative of the results we expect for
the full fiscal year or any other period.
OVERVIEW
We offer the market-leading software intelligence platform, purpose-built for
dynamic multicloud environments. As organizations embrace the cloud to effect
their digital transformation, our all-in-one intelligence platform is designed
to address the growing complexity faced by technology and digital business
teams. With automation and intelligence at its core, our platform delivers
precise answers about the performance and security of applications, the
underlying infrastructure and the experience of all users to enable teams to
innovate faster, simplify cloud complexity, collaborate more efficiently, and
secure cloud-native applications. We designed our platform to allow our
customers to modernize and automate IT operations, develop and release high
quality software faster, and improve user experiences for consistently better
business outcomes. As a result, as of June 30, 2021 , our products are trusted by
approximately 3,000 Dynatrace customers in over 90 countries in diverse
industries such as banking, insurance, retail, manufacturing, travel and
software.
We market Dynatrace® through a combination of our global direct sales team and a
network of partners, including cloud service providers (Amazon, Microsoft, and
Google), resellers, and system integrators. We target the largest 15,000 global
enterprise accounts, which generally have annual revenues in excess of $1
billion .
We generate revenue primarily by selling subscriptions, which we define as (i)
Software-as-a-service ("SaaS") agreements, (ii) Dynatrace® term-based licenses,
for which revenue is recognized ratably over the contract term, (iii) Dynatrace®
perpetual licenses, which are recognized ratably over the term of the expected
optional maintenance renewals, which is generally three years, and (iv)
maintenance and support agreements.
We deploy our platform as a SaaS solution, with the option of retaining the data
in the cloud, or at the edge in customer-provisioned infrastructure, which we
refer to as Dynatrace® Managed. The Dynatrace® Managed offering allows customers
to maintain control of the environment where their data resides, whether in the
cloud or on-premises, combining the simplicity of SaaS with the ability to
adhere to their own data security and sovereignty requirements. Our Mission
Control functionality automatically upgrades all Dynatrace® instances and offers
on-premise cluster customers auto-deployment options that suit their specific
enterprise management processes.
Dynatrace® is an all-in-one platform, which is typically purchased by our
customers with the full-stack Application Performance Module and extended with
our Infrastructure Monitoring, Digital Experience Monitoring, Digital Business
Analytics, Application Security, or Cloud Automation Modules. Customers also
have the option to purchase the infrastructure monitoring module where the
full-stack APM is not required, with the ability to upgrade to the full-stack
APM when necessary. Our Dynatrace® platform has been commercially available
since 2016 and is the primary offering we sell. Dynatrace® customers increased
to 3,018 as of June 30, 2021 from 2,458 as of June 30, 2020 .
Our Classic products include AppMon, Classic Real User Monitoring, or RUM,
Network Application Monitoring, or NAM, and Synthetic Classic. These products
are only available to customers who had previously purchased them and were
sunset as of April 1, 2021 .
COVID-19 Update
In March 2020 , the World Health Organization declared the COVID-19 outbreak to
be a global pandemic. The pandemic has had significant impacts around the globe
and in many locations in which we operate. While the impacts have not caused a
material adverse financial impact to our business to date, the future impacts
remain uncertain. The extent to which the COVID-19 pandemic may impact our
business going forward will depend on numerous evolving factors that we cannot
reliably predict. These factors may adversely impact business spending on
technology as well as customers' ability to pay for our products and services on
an ongoing basis. While our revenue, customer retention, and earnings are
relatively predictable as a result of our subscription-based business model, the
effect, if any, of the COVID-19 pandemic would not be fully reflected in our
results of operations and overall financial performance until future periods.
Throughout the pandemic we have continued to make investments to support
business growth and product development, including investments in research and
development as we continue to introduce new products and applications to extend
the functionality of our products, sales and marketing to support customer
growth, and other critical functions to ensure the highest levels of customer
service and support as well as ensuring that we maintain the required
infrastructure to be a public company. We expect to continue to make these
investments.
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See the section titled "Risk Factors" included under Part II, Item 1A for
further discussion of the possible impact of the COVID-19 pandemic on our
business.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial
performance in the future to be, driven by our ability to:
•Extend our technology and market leadership position. We intend to maintain our
position as the market-leading software intelligence platform through increased
investment in research and development and continued innovation. We expect to
focus on expanding the functionality of Dynatrace® and investing in capabilities
that address new market opportunities. We believe this strategy will enable new
growth opportunities and allow us to continue to deliver differentiated
high-value outcomes to our customers.
•Grow our customer base. We intend to drive new customer growth by expanding our
direct sales force focused on the largest 15,000 global enterprise accounts,
which generally have annual revenues in excess of $1 billion . In addition, we
expect to leverage our global partner ecosystem to add new customers in
geographies where we have direct coverage and work jointly with our partners. In
other geographies, such as Africa , Japan , the Middle East , Russia and South
Korea , we utilize a multi-tier "master reseller" model.
•Increase penetration within existing customers. We plan to continue to increase
penetration within our existing customers by expanding the breadth of our
platform capabilities to provide for continued cross-selling opportunities. In
addition, we believe the ease of implementation for Dynatrace® provides us the
opportunity to expand adoption within our existing enterprise customers, across
new customer applications, and into additional business units or divisions. Our
Dynatrace® net expansion rate has been above 120% for the last 13 quarters.
•Enhance our strategic partner ecosystem. Our strategic partners include
industry-leading system integrators, software vendors, and cloud and technology
providers. We intend to continue to invest in our partner ecosystem, with a
particular emphasis on expanding our strategic alliances and cloud-focused
partnerships, such as AWS, Azure, Google Cloud Platform, Red Hat OpenShift, and
Atlassian.
Key Metrics
In addition to our U.S. GAAP financial information, we monitor the following key
metrics to help us measure and evaluate the effectiveness of our operations:
June 30,
2021 2020
Number of Dynatrace® Customers 3,018 2,458
Total ARR (in thousands) $ 823,222 $ 601,376
Dynatrace® Net Expansion Rate 120%+ 120%+
Dynatrace® Customers: We define the number of Dynatrace® customers at the end of
any reporting period as the number of accounts, as identified by a unique
account identifier, that generate at least $10,000 of Dynatrace® ARR as of the
reporting date. In infrequent cases, a single large organization may comprise
multiple customer accounts when there are distinct divisions, departments or
subsidiaries that operate and make purchasing decisions independently from the
parent organization. In cases where multiple customer accounts exist under a
single organization, each customer account is counted separately based on a
mutually exclusive accounting of ARR. As such, even though we target the largest
15,000 global enterprise accounts, there are more than 15,000 addressable
Dynatrace® customers.
Annual Recurring Revenue "ARR": We define annual recurring revenue, or ARR, as
the daily revenue of all subscription agreements that are actively generating
revenue as of the last day of the reporting period multiplied by 365. We exclude
from our calculation of ARR any revenues derived from month-to-month agreements
and/or product usage overage billings, where customers are billed in arrears
based on product usage.
Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as
the Dynatrace® ARR at the end of a reporting period for the cohort of Dynatrace®
accounts as of one year prior to the date of calculation, divided by the
Dynatrace® ARR one year prior to the date of calculation for that same cohort.
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KEY COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue includes subscriptions, licenses and services.
Subscription. Our subscription revenue consists of (i) SaaS agreements, (ii)
Dynatrace® term-based licenses which are recognized ratably over the contract
term, (iii) Dynatrace® perpetual licenses that are recognized ratably over the
term of the expected optional maintenance renewals, which is generally three
years, and (iv) maintenance and support agreements. We typically invoice SaaS
subscription fees and term licenses annually in advance and recognize
subscription revenue ratably over the term of the applicable agreement, provided
that all other revenue recognition criteria have been satisfied. Fees for our
Dynatrace® perpetual licenses are generally billed up front. See the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies and Estimates-Revenue Recognition"
included in Part II, Item 7 of our Annual Report for more information. Over
time, we expect subscription revenue will increase as a percentage of total
revenue as we continue to focus on increasing subscription revenue as a key
strategic priority.
License. License revenue reflects the revenues recognized from sales of
perpetual and term-based licenses of our Classic products that are sold only to
existing customers. The license fee portion of Classic perpetual license
arrangements is recognized up front assuming all revenue recognition criteria
are satisfied. Classic term license fees are also recognized up front. Classic
term licenses are generally billed annually in advance and perpetual licenses
are billed up front.
Service. Service revenue consists of revenue from helping our customers deploy
our software in highly complex operational environments and train their
personnel. We recognize the revenues associated with these professional services
on a time and materials basis as we deliver the services or provide the
training. We generally recognize the revenues associated with our services in
the period the services are performed, provided that collection of the related
receivable is reasonably assured.
Cost of Revenue
Cost of subscription. Cost of subscription revenue includes all direct costs to
deliver and support our subscription products, including salaries, benefits,
share-based compensation and related expenses such as employer taxes, allocated
overhead for facilities, IT, third-party hosting fees related to our cloud
services, and amortization of internally developed capitalized software
technology. We recognize these expenses as they are incurred.
Cost of service. Cost of service revenue includes salaries, benefits,
share-based compensation and related expenses such as employer taxes for our
services organization, allocated overhead for depreciation of equipment,
facilities and IT. We recognize these expenses as they are incurred.
Amortization of acquired technology. Amortization of acquired technology
includes amortization expense for technology acquired in business combinations
and the Thoma Bravo Funds' acquisition of us in 2014.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue, and gross margin is gross profit
as a percentage of revenue. Gross profit has been and will continue to be
affected by various factors, including the mix of our license, subscription, and
services and other revenue, the costs associated with third-party cloud-based
hosting services for our cloud-based subscriptions, and the extent to which we
expand our customer support and services organizations. We expect that our gross
margin will fluctuate from period to period depending on the interplay of these
various factors.
Operating Expenses
Personnel costs, which consist of salaries, benefits, bonuses, share-based
compensation and, with regard to sales and marketing expenses, sales
commissions, are the most significant component of our operating expenses. We
also incur other non-personnel costs such as an allocation of our general
overhead expenses.
Research and development. Research and development expenses primarily consists
of the cost of programming personnel. We focus our research and development
efforts on developing new solutions, core technologies, and to further enhance
the functionality, reliability, performance, and flexibility of existing
solutions. We believe that our software development teams and our core
technologies represent a significant competitive advantage for us, and we expect
that our research and development expenses will continue to increase, as we
invest in research and development headcount to further strengthen and enhance
our solutions.
Sales and marketing. Sales and marketing expenses primarily consists of
personnel and facility-related costs for our sales, marketing, and business
development personnel, commissions earned by our sales personnel and the cost of
marketing and business development
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programs. We expect that sales and marketing expenses will continue to increase
as we continue to hire additional sales and marketing personnel and invest in
marketing programs.
General and administrative. General and administrative expenses primarily
consist of the personnel and facility-related costs for our executive, finance,
legal, human resources and administrative personnel; and other corporate
expenses, including those associated with our ongoing public reporting
obligations. We anticipate continuing to incur additional expenses due to
growing our operations and being a public company, including higher legal,
corporate insurance and accounting expenses.
Amortization of other intangibles. Amortization of other intangibles primarily
consists of amortization of customer relationships and capitalized software and
tradenames.
Restructuring and Other. Restructuring and other expenses primarily consists of
various restructuring activities we have undertaken to achieve strategic and
financial objectives. Restructuring activities include, but are not limited to,
product offering cancellation and termination of related employees, office
relocation, administrative cost of structure realignment and consolidation of
resources.
Other Expense, Net
Other expense, net consists primarily of interest expense and foreign currency
realized and unrealized gains and losses related to the impact of transactions
denominated in a foreign currency, including balances between subsidiaries.
Interest expense, net of interest income, consists primarily of interest on our
term loan facility and amortization of debt issuance costs.
Income Tax Expense
Our income tax expense, deferred tax assets and liabilities, and liabilities for
unrecognized tax benefits reflect management's best assessment of estimated
current and future taxes to be paid. We are subject to income taxes in both the
United States and numerous foreign jurisdictions. Significant judgments and
estimates are required in determining the consolidated income tax expense.
Our income tax rate varies from the U.S. federal statutory rate mainly due to
(1) the impact of tax return provision true-ups resulting from changes in
estimates to the reorganization transaction tax and the corresponding impact to
uncertain tax positions, (2) differing tax rates and regulations in foreign
jurisdictions, (3) differences in accounting and tax treatment of our
share-based compensation, and (4) foreign withholding taxes. We expect this
fluctuation in income tax rates, as well as its potential impact on our results
of operations, to continue.
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RESULTS OF OPERATIONS
The following tables set forth our results of operations for the periods
presented. The period-to-period comparison of financial results is not
necessarily indicative of financial results to be achieved in future periods.
Comparison of the Three Months Ended June 30, 2021 and 2020
Three Months Ended June 30,
2021 2020
Amount Percent Amount Percent
(in thousands, except percentages)
Revenue:
Subscription $ 196,520 94 % $ 144,357 93 %
License 50 - % 638 - %
Service 13,170 6 % 10,513 7 %
Total revenue 209,740 100 % 155,508 100 %
Cost of revenue:
Cost of subscription 24,982 12 % 16,706 11 %
Cost of service 10,021 5 % 8,010 5 %
Amortization of acquired technology 3,830 2 % 3,826 2 %
Total cost of revenue (1) 38,833 19 % 28,542 18 %
Gross profit 170,907 81 % 126,966 82 %
Operating expenses:
Research and development (1) 34,725 17 % 23,505 15 %
Sales and marketing (1) 80,482 38 % 49,163 32 %
General and administrative (1) 26,922 13 % 21,527 14 %
Amortization of other intangibles 7,540 4 % 8,686 6 %
Restructuring and other 26 (21)
Total operating expenses 149,695 102,860
Income from operations 21,212 24,106
Other expense, net (1,546) (4,094)
Income before income taxes 19,666 20,012
Income tax expense (6,372) (7,147)
Net income $ 13,294 $ 12,865 (1) Includes share-based compensation expense as follows:
Three Months Ended June 30,
2021 2020
(in thousands)
Cost of revenue $ 2,652 $ 1,498
Research and development 3,967 2,418
Sales and marketing 7,608 5,405
General and administrative 5,025 3,351
Total share-based compensation $ 19,252 $ 12,672
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Revenue
Three Months Ended June 30, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Subscription $ 196,520 $ 144,357 $ 52,163 36 %
License 50 638 (588) (92 %)
Service 13,170 10,513 2,657 25 %
Total revenue $ 209,740 $ 155,508 $ 54,232 35 %
Subscription
Subscription revenue increased by $52.2 million , or 36%, for the three months
ended June 30, 2021 , as compared to the three months ended June 30, 2020 ,
primarily due to the growing adoption of the Dynatrace® platform by new
customers combined with existing customers expanding their use of our solutions.
Our subscription revenue increased to 94% of total revenue for the three months
ended June 30, 2021 compared to 93% of total revenue for the three months ended
June 30, 2020 .
License
License revenue decreased by $0.6 million , or 92%, for the three months ended
June 30, 2021 , as compared to the three months ended June 30, 2020 , primarily
due to the decline of sales of our Classic products to existing customers as
they convert to our Dynatrace® platform. We are no longer selling our Classic
products to new customers.
Service
Service revenue increased by $2.7 million , or 25%, for the three months ended
June 30, 2021 , as compared to the three months ended June 30, 2020 . We recognize
the revenues associated with professional services as we deliver the services.
Cost of Revenue
Three Months Ended June 30, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Cost of subscription $ 24,982 $ 16,706 $ 8,276 50 %
Cost of service 10,021 8,010 2,011 25 %
Amortization of acquired technology 3,830 3,826 4 - %
Total cost of revenue $ 38,833 $ 28,542 $ 10,291 36 %
Cost of subscription
Cost of subscription increased $8.3 million , or 50%, for the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 . The increase is
primarily due to higher personnel costs to support the growth of our
subscription cloud-based offering of $5.0 million , increased cloud-based hosting
costs and subscriptions of $2.5 million , and higher share-based compensation of
$0.9 million .
Cost of service
Cost of service increased by $2.0 million , or 25%, for the three months ended
June 30, 2021 , as compared to the three months ended June 30, 2020 . The increase
was the result of higher personnel costs of $1.8 million and higher share-based
compensation of $0.2 million .
Amortization of acquired technologies
For the three months ended June 30, 2021 and 2020, amortization of acquired
technologies is primarily related to amortization expense for technology
acquired in connection with Thoma Bravo's acquisition of us in 2014.
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Three Months Ended June 30, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscriptions $ 171,538 $ 127,651 $ 43,887 34 %
License 50 638 (588) (92 %)
Services 3,149 2,503 646 26 %
Amortization of acquired technology (3,830) (3,826) (4) - %
Total gross profit $ 170,907 $ 126,966 $ 43,941 35 %
Gross margin:
Subscriptions 87 % 88 %
License 100 % 100 %
Services 24 % 24 %
Amortization of acquired technology (100 %) (100 %)
Total gross margin 81 % 82 %
Subscriptions
Subscriptions gross profit increased by $43.9 million , or 34%, during the three
months ended June 30, 2021 compared to the three months ended June 30, 2020 .
Subscription gross margin decreased from 88% to 87% during the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 . The
increase in gross profit is primarily due to the growing adoption of the
Dynatrace® platform by new customers.
License
License gross profit decreased by $0.6 million , or 92%, during the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 . The
decrease was the result of a decline in sales of perpetual and term licenses for
our Classic products.
Services
Services gross profit increased by $0.6 million , or 26%, to $3.1 million during
the three months ended June 30, 2021 compared to the three months ended June 30,
2020 . Services gross margin was 24% for the three months ended June 30, 2021 as
well as the three months ended June 30, 2020 .
Operating Expenses
Three Months Ended June 30, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 34,725 $ 23,505 $ 11,220 48 %
Sales and marketing 80,482 49,163 31,319 64 %
General and administrative 26,922 21,527 5,395 25 %
Amortization of other intangibles 7,540 8,686 (1,146) (13 %)
Restructuring and other 26 (21) 47 (224 %)
Total operating expenses $ 149,695 $ 102,860 $ 46,835 46 %
20-------------------------------------------------------------------------------- Research and development Research and development expenses increased$11.2 million , or 48%, for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 . The increase is due to a 30% increase in headcount and related allocated overhead, resulting in increased personnel and other costs to expand our product offerings of$7.6 million , higher share-based compensation of$1.5 million , and increased cloud-based hosting costs of$0.5 million . Sales and marketing Sales and marketing expenses increased$31.3 million , or 64%, for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 , due to a 24% increase in headcount, resulting in an increase of$14.3 million in personnel costs, increased advertising and marketing costs of$9.9 million , and higher share-based compensation of$2.2 million . Higher employee-related expenses of$1.7 million , higher professional fees of$1.3 million , and increased travel-related expenses related to global restrictions lifting of$0.6 million also contributed to this increase. General and administrative General and administrative expenses increased$5.4 million , or 25%, for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 , primarily due to increased personnel costs of$3.3 million , higher share-based compensation of$1.7 million , and higher depreciation costs of$0.7 million . Amortization of other intangibles Amortization of other intangibles decreased by$1.1 million , or 13%, for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 . The decline is primarily the result of lower amortization for certain intangible assets that are amortized on a systematic basis that reflects the pattern in which the economic benefits of the intangible assets are estimated to be realized and the completion of amortization on certain intangibles. Other Expense, Net Other expense, net decreased by$2.5 million , or 62%, for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 . The decrease in other expense was primarily a result of lower interest expense on our term loans due to the reductions in principal compared to the same quarter last fiscal year, as well as gains on foreign currency transactions. Income Tax Expense Income tax expense for the three months endedJune 30, 2021 of$6.4 million represented a$0.7 million decrease as compared to an expense of$7.1 million for the three months endedJune 30, 2020 , primarily driven by additional share-based compensation tax benefits. LIQUIDITY AND CAPITAL RESOURCES As ofJune 30, 2021 , we had$387.2 million of cash and cash equivalents and$44.4 million available under our revolving credit facility. Since inception, we have financed our operations primarily through payments by our customers for use of our product offerings and related services and, to a lesser extent, the net proceeds we have received from sales of equity securities and borrowings on our term loan facilities. InAugust 2019 , we completed our IPO in which we issued and sold an aggregate of 38.9 million shares of common stock at a price of$16.00 per share. We received aggregate net proceeds of$585.3 million from the IPO, after underwriting discounts and commissions and payments of offering costs. Over the past three years, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company. Our historical expansion with customers has typically been achieved by executing additional contracts, each with unique pricing and anniversary dates. We are transitioning to a program that combines these contracts into one single, often multi-year contract per customer with one single anniversary date, which may result in variability in the timing and amounts of our billings which could impact the timing of our cash collections from period to period. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in the section titled "Risk Factors" included elsewhere in this Quarterly Report and our Annual Report. However, we believe that our existing cash, cash equivalents, short-term investment balances, funds available under our debt agreement, and cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. 21
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Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected. Our Credit Facilities As ofJune 30, 2021 , the balance outstanding under our first lien term loan was$371.1 million and is included in long-term debt on our condensed consolidated balance sheets. We had$44.4 million available under the revolving credit facility after considering$15.6 million of letters of credit outstanding. All of our obligations under our term loans are guaranteed by our existing and future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets. AtJune 30, 2021 , we were in compliance with all applicable covenants pertaining to the First Lien Credit Agreement. Our credit facilities are discussed further in Note 6 of the notes to the condensed consolidated financial statements in this Quarterly Report.
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