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-Q and our prospectus. 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 onMarch 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. SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements of historical fact included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "may," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading "Risk Factors" included in this Quarterly Report. These forward-looking statements are based on management's current beliefs, based on currently available information, as to the outcome and timing of future events. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about: • our future financial performance, including our expectations regarding our
revenue, annual recurring revenue, gross profit or gross margin, operating
expenses, ability to generate cash flow, revenue mix and ability to
maintain future profitability;
• anticipated trends and growth rates in our business and in the markets in
which we operate;
• our ability to convert our customers from our Classic products to our
Dynatrace® platform;
• our ability to maintain and expand our customer base and our partner network;
• our ability to sell our applications and expand internationally;
• our ability to anticipate market needs and successfully develop new and
enhanced solutions to meet those needs;
• our ability to hire and retain necessary qualified employees to grow our
business and expand our operations;
• the evolution of technology affecting our applications, platform and markets;
• our ability to adequately protect our intellectual property; and
• our ability to service our debt obligations;
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled "Risk Factors" in the prospectus datedDecember 5, 2019 (Prospectus) and as filed with theSEC and "Risk Factors" in Part II, Item 1A in this Quarterly Report and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. 21 --------------------------------------------------------------------------------
OVERVIEW
We offer the market-leading software intelligence platform, purpose-built for the enterprise cloud. As enterprises 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. Our platform utilizes artificial intelligence at its core and advanced automation to provide answers, not just data, about the performance of applications, the underlying hybrid cloud infrastructure and the experience of our customers' users. We designed our software intelligence platform to allow our customers to modernize and automate IT operations, develop and release high quality software faster, and improve user experiences for better business outcomes. Since we began operations, we have been a leader within the application performance monitoring space. In 2014, we leveraged the knowledge and experience of the same engineering team that foundedDynatrace to develop a new platform, the Dynatrace Software Intelligence Platform, from the ground up with a dynamic, AI-powered infrastructure to handle web-scale applications across multi-cloud platforms. We market Dynatrace® through a combination of our global direct sales team and a network of partners, including resellers, system integrators, and managed service providers. We target the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of$750.0 million . We generate revenue primarily by selling subscriptions, which we define as (i) Software-as-a-service ("SaaS") agreements, (ii) Dynatrace® term-based licenses, which are 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-premise, combining the simplicity of SaaS with the ability to adhere to their own data security and sovereignty requirements. Our Mission Control center 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 Digital Experience Monitoring and/or Digital Business Analytics 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 has become the primary offering we sell. Dynatrace® customers increased to 2,208 as ofDecember 31, 2019 from 1,149 as ofDecember 31, 2018 . Our Classic products include AppMon, Classic Real User Monitoring, or RUM, Network Application Monitoring, or NAM, and Synthetic Classic. As ofApril 2018 , these products are only available to customers who had previously purchased them. AppMon, Classic RUM, and NAM are deployed using customer-provisioned infrastructure, either on-premise or in the cloud, while Synthetic Classic is a SaaS-based application. 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 byexpanding our direct sales force focused on the largest 15,000 global
enterprise accounts, which generally have annual revenues in excess of
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 , theMiddle East ,Russia andSouth 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 expandadoption within our existing enterprise customers, across new customer
applications, and into additional business units or divisions. Once
customers are on the Dynatrace® platform, we have seen significant
dollar-based net expansion due to the ease of use and power of our new
platform.
22--------------------------------------------------------------------------------
• 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 Pivotal Cloud Foundry.
Key Metrics In addition to ourU.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations: December 31, 2019 2018 Number of Dynatrace® Customers 2,208 1,149 Dynatrace® ARR (in thousands)$ 465,885 $ 226,976 Classic ARR (in thousands)$ 68,605 $ 145,341 Total ARR (in thousands)$ 534,490 $ 372,317
Dynatrace® Dollar-Based 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. We believe that our ability to grow the number of Dynatrace® customers is an indicator of our ability to drive market adoption of our platform, as well as our ability to grow the business and generate future subscription revenues. Dynatrace® ARR: We define Dynatrace® annualized recurring revenue, or ARR, as the daily revenue of all term-based Dynatrace® 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. Classic ARR: We define classic annualized recurring revenue as the daily revenue of all classic 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. Total ARR: We define Total 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 Total ARR any revenues derived from month-to-month agreements and/or product usage overage billings. Dynatrace® Dollar-Based Net Expansion Rate: We define the Dynatrace® dollar-based 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. This calculation excludes the benefit of Dynatrace® ARR resulting from the conversion of Classic products to the Dynatrace® platform, as well as any upsell generated at the time of conversion. 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 revenue recognition criteria have been satisfied. Fees for our Dynatrace® perpetual licenses are generally billed up front. See the section titled "Critical Accounting Policies and Estimates-Revenue Recognition" 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. 23 -------------------------------------------------------------------------------- License. License revenue reflects the revenues recognized from sales of perpetual and term-based licenses of our Classic products that are sold primarily to existing customers. The license fee portion of perpetual license arrangements are recognized upfront assuming all revenue recognition criteria are satisfied. Term license fees are also recognized up front. 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 Revenues 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 andThoma Bravo's 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, stock-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 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 consists 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 preparation for the initial public offering. 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, acquired technology, 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. 24 -------------------------------------------------------------------------------- Interest Expense, Net Interest 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, amortization of debt issuance costs, loss on debt extinguishment and prepayment penalties. Income Tax Benefit (Expense) Income tax benefit (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 boththe 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 theU.S. federal statutory rate mainly due to (1) differing tax rates and regulations in foreign jurisdictions, (2) differences in accounting and tax treatment of our stock-based compensation, and (3) foreign withholding taxes. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue. 25 -------------------------------------------------------------------------------- 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 EndedDecember 31, 2019 and 2018 Three Months Ended December 31, 2019 2018 Amount Percent Amount Percent (in thousands, except percentages) Revenue: Subscription$ 128,518 90 %$ 91,661 80 % License 3,895 3 % 12,064 11 % Service 10,885 7 % 10,965 9 % Total revenue 143,298 100 % 114,690 100 % Cost of revenue: Cost of subscription 16,297 11 % 13,534 12 % Cost of service 8,584 6 % 7,731 7 % Amortization of acquired technology 3,824 3 % 4,558 4 % Total cost of revenue (1) 28,705 20 % 25,823 23 % Gross profit 114,593 80 % 88,867 77 % Operating expenses: Research and development (1) 22,517 16 % 17,643 15 % Sales and marketing (1) 52,400 37 % 43,275 38 % General and administrative (1) 21,883 15 % 19,672 17 % Amortization of other intangibles 10,039 7 % 11,879 10 % Restructuring and other 199 (24 ) Total operating expenses 107,038 92,445 Income (loss) from operations 7,555 (3,578 ) Other expense, net (5,928 ) (21,206 ) Income (loss) before income taxes 1,627 (24,784 ) Income tax benefit 136 2,682 Net income (loss)$ 1,763 $ (22,102 )
(1) Includes share-based compensation expense as follows:
Three Months Ended December 31,
2019 2018
(in thousands)
Cost of revenue $ 1,317 $ 476
Research and development 2,173 1,009
Sales and marketing 6,707 2,179
General and administrative 3,316 2,393
Total share-based compensation $ 13,513 $ 6,057
26--------------------------------------------------------------------------------
Revenue
Three Months Ended December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Subscriptions $ 128,518 $ 91,661 $ 36,857 40 %
License 3,895 12,064 (8,169 ) (68 )%
Services 10,885 10,965 (80 ) (1 )%
Total revenue $ 143,298 $ 114,690 $ 28,608 25 %
Subscription
Subscription revenue increased by $36.9 million , or 40%, for the three months
ended December 31, 2019 , as compared to the three months ended December 31,
2018 , 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 90% of total revenue for the three months
ended December 31, 2019 compared to 80% of total revenue for the three months
ended December 31, 2018 .
License
License revenue decreased by $8.2 million , or 68%, for the three months ended
December 31, 2019 , as compared to the three months ended December 31, 2018 ,
primarily due to 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 decreased by $0.1 million , or 1%, for the three months ended
December 31, 2019 , as compared to the three months ended December 31, 2018 . We
recognize the revenues associated with professional services as we deliver the
services.
Cost of Revenue
Three Months Ended December
31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Cost of subscriptions $ 16,297 $ 13,534 $ 2,763 20 %
Cost of services 8,584 7,731 853 11 %
Amortization of acquired technology 3,824 4,558 (734 ) (16 )%
Total cost of revenue $ 28,705 $ 25,823 $ 2,882 11 %
Cost of subscriptions
Cost of subscriptions increased $2.8 million , or 20%, for the three months ended
December 31, 2019 compared to the three months ended December 31, 2018 . The
increase is primarily due to higher personnel costs to support the growth of our
subscription cloud-based offering as well as higher share-based compensation of
$0.5 million .
Cost of services
Cost of services increased by $0.9 million , or 11%, for the three months ended
December 31, 2019 , as compared to the three months ended December 31, 2018 . The
increase was the result of increased personnel costs to support the increase in
use of our consulting and training services to support our new customers as well
as higher share-based compensation of $0.3 million .
Amortization of acquired technologies
For the three months ended December 31, 2019 and 2018, amortization of acquired
technologies is primarily related to amortization expense for technology
acquired in connection with Thoma Bravo's acquisition of the Company in 2014.
27
--------------------------------------------------------------------------------Gross Profit and Gross Margin
Three Months Ended December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscriptions $ 112,221 $ 78,127 $ 34,094 44 %
License 3,895 12,064 (8,169 ) (68 )%
Services 2,301 3,234 (933 ) (29 )%
Amortization of acquired technology (3,824 ) (4,558 ) 734 (16 )%
Total gross profit $ 114,593 $ 88,867 $ 25,726 29 %
Gross margin:
Subscriptions 87 % 85 %
License 100 % 100 %
Services 21 % 29 %
Amortization of acquired technology (100 )% (100 )%
Total gross margin 80 % 77 %
Subscriptions
Subscriptions gross profit increased by $34.1 million , or 44%, during the three
months ended December 31, 2019 compared to the three months ended December 31,
2018 . Subscription gross margin increased from 85% to 87% during the three
months ended December 31, 2019 compared to the three months ended December 31,
2018 .
License
License gross profit decreased by $8.2 million , or 68%, during the three months
ended December 31, 2019 compared to the three months ended December 31, 2018 .
The decrease was the result of a decline in sales of perpetual and term licenses
for our Classic products.
Services
Services gross profit decreased by $0.9 million , or 29%, during the three months
ended December 31, 2019 compared to the three months ended December 31, 2018 .
Services gross margin decreased from 29% to 21% during the three months ended
December 31, 2019 compared to the three months ended December 31, 2018 primarily
due to increased personnel costs to support the increase in use of our
consulting and training services to support our new customers and higher
share-based compensation of $0.3 million .
Operating Expenses
Three Months Ended
December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 22,517 $ 17,643 $ 4,874 28 %
Sales and marketing 52,400 43,275 9,125 21 %
General and administrative 21,883 19,672 2,211 11 %
Amortization of other intangibles 10,039 11,879 (1,840 ) (15 )%
Restructuring and other 199 (24 ) 223 (929 )%
Total operating expenses $ 107,038 $ 92,445 $ 14,593 16 %
28-------------------------------------------------------------------------------- Research and development Research and development expenses increased$4.9 million , or 28%, for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 . The increase is primarily attributable to a 21% increase in headcount and related allocated overhead, resulting in increased personnel and other costs to expand our product offerings of$2.4 million , higher share-based compensation of$1.2 million , and increased software and maintenance expenses, primarily cloud-based hosting costs related to the development of our cloud-based offering of$0.8 million . Sales and marketing Sales and marketing expenses increased$9.1 million , or 21%, for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 , due to higher share-based compensation of$4.5 million combined with a 19% increase in headcount, resulting in an increase of$4.5 million in personnel costs. General and administrative General and administrative expenses increased$2.2 million , or 11%, for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 , primarily due to an increase in share-based compensation of$0.9 million and higher professional fees of$0.6 million related to various compliance initiatives. The remainder is primarily due to an increase in personnel costs as well as higher insurance costs which were partially offset by lower transaction costs related to our initial public offering completed in the second quarter of fiscal 2020. Sponsor related costs were zero and$1.2 million for the three months endedDecember 31, 2019 and 2018, respectively. Amortization of other intangibles Amortization of other intangibles decreased by$1.8 million , or 15%, for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 . 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. Restructuring and other Restructuring expenses decreased by$0.2 million for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 , due to higher costs incurred for various restructuring activities to achieve our strategic and financial objectives including costs related to a restructuring program designed to align employee resources with our product offering and future plans. Other Expense, Net Other expense, net decreased by$15.3 million , or 72%, for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 . The decrease in other expense was primarily a result of lower interest expense on our Term Loans as we had less principal outstanding compared to the same quarter last fiscal year. Further contributing to the decrease was lower interest expense on our related party promissory notes as described further in Note 14 within the condensed consolidated financial statements included herein. Income Tax Benefit Income tax benefit decreased by$2.5 million to$0.1 million for the three months endedDecember 31, 2019 , compared to an income tax benefit of$2.7 million for the three months endedDecember 31, 2018 . This decrease was primarily due to lower interest expense and other deductible costs in the three months endedDecember 31, 2019 . 29 --------------------------------------------------------------------------------
Comparison of the Nine Months Ended
Nine Months Ended December 31,
2019 2018
Amount Percent Amount Percent
(in thousands, except percentages)
Revenue:
Subscription $ 352,451 89 % $ 251,974 80 %
License 10,424 3 % 32,805 10 %
Service 32,351 8 % 30,019 10 %
Total revenue 395,226 100 % 314,798 100 %
Cost of revenue:
Cost of subscription 55,930 14 % 40,922 13 %
Cost of service 29,240 7 % 22,148 7 %
Amortization of acquired technology 12,624 4 % 13,780 4 %
Total cost of revenue (1) 97,794 25 % 76,850 24 %
Gross profit 297,432 75 % 237,948 76 %
Operating expenses:
Research and development (1) 94,772 24 % 55,229 18 %
Sales and marketing (1) 210,581 53 % 130,667 42 %
General and administrative (1) 140,718 36 % 64,764 21 %
Amortization of other intangibles 30,242 8 % 35,892 11 %
Restructuring and other 1,093 459
Total operating expenses 477,406 287,011
Loss from operations (179,974 ) (49,063 )
Other expense, net (39,408 ) (46,964 )
Loss before income taxes (219,382 ) (96,027 )
Income tax (expense) benefit (245,344 ) 10,431
Net loss $ (464,726 ) $ (85,596 ) (1) Includes share-based compensation expense as follows:
Nine Months Ended December 31,
2019 2018
(in thousands)
Cost of revenue $ 17,346 $ 3,466
Research and development 36,679 7,590
Sales and marketing 78,592 14,640
General and administrative 77,067 16,589
Total share-based compensation $ 209,684 $ 42,285
30
--------------------------------------------------------------------------------
Revenue
Nine Months Ended December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Subscriptions $ 352,451 $ 251,974 $ 100,477 40 %
License 10,424 32,805 (22,381 ) (68 )%
Services 32,351 30,019 2,332 8 %
Total revenue $ 395,226 $ 314,798 $ 80,428 26 %
Subscription
Subscription revenue increased by $100.5 million , or 40%, for the nine months
ended December 31, 2019 , as compared to the nine months ended December 31, 2018 ,
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 89% of total revenue for the nine months
ended December 31, 2019 compared to 80% of total revenue for the nine months
ended December 31, 2018 .
License
License revenue decreased by $22.4 million , or 68%, for the nine months ended
December 31, 2019 , as compared to the nine months ended December 31, 2018 ,
primarily due to 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 $2.3 million , or 8%, for the nine months ended
December 31, 2019 , as compared to the nine months ended December 31, 2018 . We
recognize the revenues associated with professional services as we deliver the
services.
Cost of Revenue
Nine Months Ended December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Cost of subscriptions $ 55,930 $ 40,922 $ 15,008 37 %
Cost of services 29,240 22,148 7,092 32 %
Amortization of acquired technology 12,624 13,780 (1,156 ) (8 )%
Total cost of revenue $ 97,794 $ 76,850 $ 20,944 27 %
Cost of subscriptions
Cost of subscriptions increased $15.0 million , or 37%, for the nine months ended
December 31, 2019 compared to the nine months ended December 31, 2018 . The
increase is primarily due to higher share-based compensation of $9.8 million as
well as higher personnel costs to support the growth of our subscription
cloud-based offering.
Cost of services
Cost of services increased by $7.1 million , or 32%, for the nine months ended
December 31, 2019 , as compared to the nine months ended December 31, 2018 . The
increase was the result of higher share-based compensation of $4.1 million and
increased personnel costs to support the increase in use of our consulting and
training services to support our customers.
Amortization of acquired technologies
For the nine months ended December 31, 2019 and 2018, amortization of acquired
technologies is primarily related to amortization expense for technology
acquired in connection with Thoma Bravo's acquisition of the Company in 2014.
31
--------------------------------------------------------------------------------Gross Profit and Gross Margin
Nine Months Ended December 31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscriptions $ 296,521 $ 211,052 $ 85,469 40 %
License 10,424 32,805 (22,381 ) (68 )%
Services 3,111 7,871 (4,760 ) (60 )%
Amortization of acquired technology (12,624 ) (13,780 ) 1,156 (8 )%
Total gross profit $ 297,432 $ 237,948 $ 59,484 25 %
Gross margin:
Subscriptions 84 % 84 %
License 100 % 100 %
Services 10 % 26 %
Amortization of acquired technology (100 )% (100 )%
Total gross margin 75 % 76 %
Subscriptions
Subscriptions gross profit increased by $85.5 million , or 40%, during the nine
months ended December 31, 2019 compared to the nine months ended December 31,
2018 . Subscription gross margin remained flat at 84% during the nine months
ended December 31, 2019 and the nine months ended December 31, 2018 .
License
License gross profit decreased by $22.4 million , or 68%, during the nine months
ended December 31, 2019 compared to the nine months ended December 31, 2018 . The
decrease was the result of a decline in sales of perpetual and term licenses for
our Classic products.
Services
Services gross profit decreased by $4.8 million , or 60%, during the nine months
ended December 31, 2019 compared to the nine months ended December 31, 2018 .
Services gross margin decreased from 26% to 10% during the nine months ended
December 31, 2019 compared to the nine months ended December 31, 2018 .
Negatively impacting gross profit margin was $4.1 million of higher share-based
compensation compared to the same period last fiscal year.
Operating Expenses
Nine Months Ended December
31, Change
2019 2018 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 94,772 $ 55,229 $ 39,543 72 %
Sales and marketing 210,581 130,667 79,914 61 %
General and administrative 140,718 64,764 75,954 117 %
Amortization of other intangibles 30,242 35,892 (5,650 ) (16 )%
Restructuring and other 1,093 459 634 138 %
Total operating expenses $ 477,406 $ 287,011 $ 190,395 66 %
Research and development
Research and development expenses increased $39.5 million , or 72%, for the nine
months ended December 31, 2019 , as compared to the nine months ended December
31, 2018 . The increase is primarily attributable to higher share-based
compensation of $29.1 million ,
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a 21% increase in headcount and related allocated overhead, resulting in
increased personnel and other costs to expand our product offerings of $5.3
million , and increased software and maintenance expenses, primarily cloud-based
hosting costs related to the development of our cloud-based offering of $2.3
million .
Sales and marketing
Sales and marketing expenses increased $79.9 million , or 61%, for the nine
months ended December 31, 2019 , as compared to the nine months ended December
31, 2018 , primarily due to higher share-based compensation of $64.0 million
combined with a 19% increase in headcount, resulting in an increase of $13.2
million in personnel costs.
General and administrative
General and administrative expenses increased $76.0 million , or 117%, for the
nine months ended December 31, 2019 , as compared to the nine months ended
December 31, 2018 , primarily due to an increase in share-based compensation of
$60.5 million and higher transaction costs of $12.7 million related to the
initial public offering completed in the second quarter of fiscal 2020. Further
contributing to the increase was an increase in personnel costs and insurance
costs. Sponsor related costs were $1.6 million and $3.7 million for the nine
months ended December 31, 2019 and 2018, respectively.
Amortization of other intangibles
Amortization of other intangibles decreased by $5.7 million , or 16%, for the
nine months ended December 31, 2019 , as compared to the nine months ended
December 31, 2018 . 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.
Restructuring and other
Restructuring expenses increased by $0.6 million , or 138%, for the nine months
ended December 31, 2019 , as compared to the nine months ended December 31, 2018 ,
due to higher costs incurred for various restructuring activities to achieve our
strategic and financial objectives including costs related to a restructuring
program designed to align employee resources with our product offering and
future plans.
Other Expense, Net
Other expense, net decreased by $7.6 million , or 16%, for the nine months ended
December 31, 2019 , as compared to the nine months ended December 31, 2018 . The
decrease in other expense was primarily a result of lower interest expense on
our related party promissory notes as described further in Note 14 within the
condensed consolidated financial statements included herein.
Income Tax (Expense) Benefit
Income tax benefit decreased by $255.8 million to an income tax expense of
$245.3 million for the nine months ended December 31, 2019 , compared to an
income tax benefit of $10.4 million for the nine months ended December 31, 2018 .
This decrease was primarily due to an increase in income tax expense of $255.8
million as a result of our reorganization transactions during the second quarter
of fiscal 2020. The effective tax rate for the nine months ended December 31,
2019 was negative 112% compared to 11% in the same period for 2018. The increase
in our effective tax rate is primarily due to the income tax expense recorded as
a result of the reorganization transactions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2019 , we had $188.6 million of cash and cash equivalents and
$48.2 million available under our revolving credit facility. We have financed
our operations primarily through cash generated from operations. We believe that
our existing cash, cash equivalents, and short-term investment balances,
together with cash generated from operations, will be sufficient to meet our
working capital and capital expenditure requirements for at least the next
twelve months.
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.
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Prior to the initial public offering, we financed operations primarily through license fees, subscription fees, consulting and training fees. Our principal uses of cash are funding operations, capital expenditures, debt payments and interest expense. 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 Credit Facilities In anticipation of separation fromCompuware Corporation , onAugust 23, 2018 , we entered into a Senior Secured First Lien Credit Agreement and a Senior Secured Second Lien Credit Agreement, or our Term Loans, consisting of a$950.0 million first lien term loan and a$170.0 million second lien term loan, each agreement made by and among the Company,Dynatrace Intermediate LLC , a wholly-owned subsidiary, as Guarantor,Jefferies Finance LLC , as Administrative Agent and Collateral Agent, and certain lending parties. The First Lien Credit Agreement further provided a$60.0 million revolving credit facility which includes a letter of credit sub-facility with an aggregate limit equal to the lesser of$15.0 million and the aggregate unused amount of the revolving credit facility then in effect. The first lien term loan matures onAugust 23, 2025 and the revolving credit facility matures onAugust 23, 2023 . During the second quarter of fiscal 2020, we repaid all outstanding borrowings, including accrued interest, under the second lien term loan. As ofDecember 31, 2019 , the balance outstanding under our first lien term loan was$551.1 million and is included in long-term debt on our condensed consolidated balance sheet. We had$48.2 million available under the revolving credit facility and$11.8 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.
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