10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 5, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-39010
(Exact name of Registrant as specified in its Charter)
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer Identification No.) |
|
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (617 ) 530-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading
Symbol(s)
|
Name of each exchange on which registered |
||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
|||
☒ |
Smaller reporting company |
|||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 280,456,811 shares of common stock outstanding as of September 5, 2019.
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 2019 |
March 31, 2019 |
||||||
(unaudited) |
|||||||
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
$ |
|||||
Accounts receivable, net of allowance for doubtful accounts of $3.3 million and $3.4 million as of June 30, 2019 and March 31, 2019, respectively |
|||||||
Deferred commissions, current |
|||||||
Prepaid expenses and other current assets |
|||||||
Total current assets |
|||||||
Property and equipment, net |
|||||||
Goodwill |
|||||||
Other intangible assets, net |
|||||||
Deferred tax assets, net |
|||||||
Deferred commissions, non-current |
|||||||
Other assets |
|||||||
Total assets |
$ |
$ |
|||||
Liabilities and member's deficit |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ |
$ |
|||||
Accrued expenses, current |
|||||||
Current portion of long-term debt |
|||||||
Deferred revenue, current |
|||||||
Payable to related party |
|||||||
Total current liabilities |
|||||||
Deferred revenue, non-current |
|||||||
Accrued expenses, non-current |
|||||||
Deferred tax liabilities, net |
|||||||
Long-term debt, net of current portion |
|||||||
Total liabilities |
|||||||
Commitments and contingencies (Note 9) |
|||||||
Member's deficit: |
|||||||
Common units, no par value, 100 units authorized, issued and outstanding |
|||||||
Additional paid-in capital |
( |
) |
( |
) |
|||
Accumulated deficit |
( |
) |
( |
) |
|||
Accumulated other comprehensive (loss) |
( |
) |
( |
) |
|||
Total member's deficit |
( |
) |
( |
) |
|||
Total liabilities and member's deficit |
$ |
$ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited – Dollars in thousands, except per share amounts)
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Revenues: |
|||||||
Subscriptions |
$ |
$ |
|||||
License |
|||||||
Services |
|||||||
Total revenue |
|||||||
Cost of revenues: |
|||||||
Cost of subscriptions |
|||||||
Cost of services |
|||||||
Amortization of acquired technology |
|||||||
Total cost of revenues |
|||||||
Gross profit |
|||||||
Operating expenses: |
|||||||
Research and development |
|||||||
Sales and marketing |
|||||||
General and administrative |
|||||||
Amortization of other intangibles |
|||||||
Restructuring and other |
|||||||
Total operating expenses |
|||||||
Loss from operations |
( |
) |
( |
) |
|||
Interest expense, net |
( |
) |
( |
) |
|||
Other, net |
|||||||
Loss before income taxes |
( |
) |
( |
) |
|||
Income tax benefit |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Net loss per share: |
|||||||
Basic and diluted |
$ |
( |
) |
$ |
( |
) |
|
Weighted average shares outstanding: |
|||||||
Basic and diluted |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited - In thousands)
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Other comprehensive income (loss) |
|||||||
Foreign currency translation adjustment, net of tax |
( |
) |
|||||
Total other comprehensive income (loss) |
( |
) |
|||||
Comprehensive loss |
$ |
( |
) |
$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S DEFICIT
(Unaudited - Dollars in thousands)
Common Units |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive (Loss) |
Member's Deficit |
||||||||||||||||||
Units |
Amount |
|||||||||||||||||||||
Balance, March 31, 2019 |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||||||
Foreign currency translation, net of tax |
||||||||||||||||||||||
Equity repurchases |
( |
) |
( |
) |
||||||||||||||||||
Net loss |
( |
) |
( |
) |
||||||||||||||||||
Balance, June 30, 2019 |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||||||
Balance, March 31, 2018 |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||||||
Foreign currency translation, net of tax |
( |
) |
( |
) |
||||||||||||||||||
Transfers to related parties |
( |
) |
( |
) |
||||||||||||||||||
Equity repurchases |
( |
) |
( |
) |
||||||||||||||||||
Net loss |
( |
) |
( |
) |
||||||||||||||||||
Balance, June 30, 2018 |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – In thousands)
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Cash flows from operating activities: |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Adjustments to reconcile net loss to cash provided by operations: |
|||||||
Depreciation |
|||||||
Amortization |
|||||||
Share-based compensation |
|||||||
Deferred income taxes |
( |
) |
( |
) |
|||
Other |
|||||||
Net change in operating assets and liabilities: |
|||||||
Accounts receivable |
|||||||
Deferred commissions |
( |
) |
( |
) |
|||
Prepaid expenses and other assets |
( |
) |
( |
) |
|||
Accounts payable and accrued expenses |
( |
) |
( |
) |
|||
Deferred revenue |
|||||||
Net cash provided by operating activities |
|||||||
Cash flows from investing activities: |
|||||||
Purchase of property and equipment |
( |
) |
( |
) |
|||
Capitalized software additions |
( |
) |
( |
) |
|||
Net cash used in investing activities |
( |
) |
( |
) |
|||
Cash flows from financing activities: |
|||||||
Repayment of term loans |
( |
) |
|||||
Payments to related parties |
( |
) |
|||||
Equity repurchases |
( |
) |
( |
) |
|||
Installments related to acquisition |
( |
) |
|||||
Net cash used in financing activities |
( |
) |
( |
) |
|||
Effect of exchange rates on cash and cash equivalents |
( |
) |
|||||
Net increase (decrease) in cash and cash equivalents |
( |
) |
|||||
Cash and cash equivalents, beginning of period |
|||||||
Cash and cash equivalents, end of period |
$ |
$ |
|||||
Supplemental cash flow data: |
|||||||
Cash paid for interest |
$ |
$ |
|||||
Cash paid for (received from) tax |
$ |
$ |
( |
) |
|||
Non-cash financing activities: |
|||||||
Transactions with related parties |
$ |
$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DYNATRACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Description of the Business |
Business
Dynatrace, Inc. (“Dynatrace”, or the “Company”) offers a software intelligence platform, purpose-built for the enterprise cloud. As enterprises embrace the cloud as the means for digital transformation, the Company’s all-in-one intelligence platform addresses the growing complexity that technology and digital business teams face. The Company’s platform does so by utilizing artificial intelligence and advanced automation to provide answers, not just data, about the performance of applications, the underlying hybrid cloud infrastructure, and the experience of its customers’ users. The Company designed its software intelligence platform to allow its customers to modernize and automate IT operations, develop and release higher quality software faster, and deliver superior user experiences.
Thoma Bravo (“TB”), a private equity investment firm, completed its acquisition of Compuware Corporation on December 15, 2014. Following the acquisition, Compuware Corporation was restructured following which Compuware Parent, LLC became the owner of Dynatrace Holding Corporation (“DHC”), under which the Compuware and Dynatrace businesses were separated, establishing Dynatrace as a standalone business. Following the corporate reorganization described below, Dynatrace became wholly owned by Dynatrace, Inc. (formerly Dynatrace Holdings LLC).
Fiscal year
The Company’s fiscal year ends on March 31. References to Fiscal 2020, for example, refer to the fiscal year ended March 31, 2020.
2.
|
Significant Accounting Policies |
Basis of presentation and consolidation
Prior to July 30, 2019, Dynatrace Holdings LLC, a Delaware limited liability company, was an indirect equity holder of DHC that indirectly and wholly owned Dynatrace, LLC. On July 31, 2019, Dynatrace Holdings LLC (i) converted into a Delaware corporation with the name Dynatrace, Inc. and (ii) through a series of corporate reorganization steps, became the parent company of DHC. Additionally, as part of the reorganization, two wholly owned subsidiaries of DHC, Compuware Corporation and SIGOS LLC, were spun out from the corporate structure to the DHC shareholders. As a result of these transactions, DHC is a wholly owned indirect subsidiary of Dynatrace, Inc. These reorganization steps are collectively referred to as the “reorganization.” In connection with the reorganization, the equity holders of Compuware Parent, LLC received units of Dynatrace Holdings LLC in exchange for their equity interests in Compuware Parent, LLC based on the fair value of a unit of Dynatrace Holdings LLC on July 30, 2019, which was determined to be $16.00 per unit by a committee of the board of managers of Dynatrace Holdings LLC, and all of the outstanding units of Dynatrace Holdings LLC then converted into shares of Dynatrace, Inc.
The reorganization was completed between entities that have been under common control since December 15, 2014. Therefore, these financial statements retroactively reflect DHC and Dynatrace Holdings LLC on a consolidated basis for the periods presented. The spin-offs of Compuware Corporation and SIGOS LLC from DHC have been accounted for retroactively as a change in reporting entity and accordingly, these financial statements exclude their accounts and results.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in the accompanying financial statements. The income tax amounts in the accompanying consolidated financial statements have been calculated based on a separate return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.
As described in Note 14, the consolidated financial statements reflect the debt and debt service associated with subordinated demand promissory notes payable of DHC to a related party. The financial statements also reflect certain expenses incurred by DHC related to Dynatrace for certain functions including shared services, which are immaterial to these financial statements. These attributed expenses were allocated to Dynatrace on the basis of direct usage when identifiable, and for resources indirectly used by Dynatrace, allocations were based on a proportional cost allocation methodology, to reflect estimated usage by Dynatrace. Management considers the allocation methodology and results to be reasonable for all periods presented. However, the financial information presented in these financial statements may not reflect the consolidated financial position, operating results and cash flows of Dynatrace had the Dynatrace business been a separate stand-alone entity during the periods presented. Actual costs that would have been incurred if Dynatrace had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas.
7
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of June 30, 2019 and the interim condensed consolidated statements of operations, statements of member’s deficit, and statements of cash flows for the three months ended June 30, 2019 and 2018, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of June 30, 2019 and its results of operations and cash flows for the three months ended June 30, 2019 and 2018 in accordance with U.S. GAAP. The results for the three months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
The accompanying interim unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles included in the Company’s prospectus dated July 31, 2019 (“Prospectus”) and as filed with the SEC on August 1, 2019 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes as of March 31, 2019 and 2018 included in the Prospectus.
There have been no changes to the Company’s significant accounting policies described in the Company’s Prospectus that have had a material impact on its condensed consolidated financial statements and related notes.
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition and establishes a new revenue standard. This new standard is based on the principle that revenue is recognized to depict the transfer of control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The FASB has also issued several amendments to the new standard which were designed to clarify and simplify the adoption process.
In preparation for adoption of the new standard, the Company updated its accounting policies, systems, internal controls and processes. The Company adopted Topic 606 as of April 1, 2018 using the full retrospective method, which required adjustments to the historical financial information for fiscal years 2017 and 2018 to be consistent with the new standard. The Company recorded a net decrease to member’s accumulated deficit of $25.9 million as of April 1, 2016 as a result of the transition. The most significant impacts of the standard relate to the timing of revenue recognition for arrangements involving licenses and sales commissions. Under the new revenue standard, term licenses of the Company’s Classic products and the associated maintenance are considered separate performance obligations. This results in revenue associated with these term licenses being recognized upon delivery of the license rather than over the contractual term. Perpetual licenses and term license related to Dynatrace Software and the associated maintenance which includes when-and-if-available updates have been determined to be combined performance obligations and are recognized ratably over the longer of the term or useful life of the license. Additionally, some deferred revenue, primarily from arrangements involving term licenses, was never recognized as revenue and instead is now a part of the cumulative effect adjustment within accumulated deficit. Finally, the Company is required to capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, over the remaining contractual term or over an expected period of benefit, which the Company has determined to be approximately three years .
The Company applied the following practical expedients permitted under Topic 606: for all reporting periods presented before the date of initial adoption, the Company has elected not to disclose the amount of the transaction price allocated to the remaining performance obligations or provide an explanation of when the Company expects to recognize that amount as revenue. Additionally, the Company has also elected not to separately evaluate each contract modification that occurred before the initial adoption date. The Company has elected not to assess whether a contract has a significant financing component if it expects at contract inception that the period between payment and the transfer of products or services will be one year or less.
Recently issued accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments supersede current lease requirements in Topic 840 which require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This new guidance is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those periods, except for emerging growth companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to elect this new transition guidance upon adoption of the standard on April 1, 2020. The Company will use the package of practical expedients which allows Dynatrace to not (1) reassess
8
whether any expired or existing contracts are considered or contain leases; (2) reassess the lease classification for any expired or existing leases; and (3) reassess the initial direct costs for any existing leases. Adoption of the standard is expected to result in the recognition of the right-of-use assets and lease liabilities for operating leases. The Company is currently evaluating the effects the standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently evaluating the effects the standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2020, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently evaluating the effects the standard will have on its consolidated financial statements.
3.
|
Revenue Recognition |
The Company elected to early adopt ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers, effective April 1, 2018, using the full retrospective transition method.
The Company derives revenue from sales of software licenses, subscriptions, maintenance and support, and professional services together in contracts with its customers, which include end-customers and channel partners. Revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for these services.
Contract modifications are assessed to determine (i) if the additional goods and services are distinct from the goods and services in the original arrangement; and (ii) if the amount of the consideration expected for the added goods and services reflects the stand-alone selling price of those goods and services, as adjusted for contract-specific circumstances. A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract, which the Company accounts for on a prospective basis as a termination for contract specific circumstances. The Company’s additional goods and services offered have historically been distinct. If such additional goods and services reflect their stand-alone selling price, the Company accounts for the modification as a separate contract. If such additional goods and services do not reflect their stand-alone selling price, the Company accounts for the modification prospectively as a termination of the existing contract and the creation of a new contract.
Disaggregation of revenue
The following table is a summary of the Company’s total revenues by geographic region (in thousands, except percentages):
Three Months Ended June 30, |
|||||||||||||
2019 |
2018 |
||||||||||||
Amount |
% |
Amount |
% |
||||||||||
North America |
$ |
% |
$ |
% |
|||||||||
Europe, Middle East and Africa |
% |
% |
|||||||||||
Asia Pacific |
% |
% |
|||||||||||
Latin America |
% |
% |
|||||||||||
Total revenue |
$ |
$ |
For the three months ended June 30, 2019 and 2018, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $67.4 million and 55 %, and $52.7 million and 54 %, respectively, of total revenue.
Deferred revenue
Revenues recognized from amounts included in deferred revenue as of March 31, 2019 and 2018 were $101.1 million and $74.3 million during the three months ended June 30, 2019 and 2018, respectively.
9
Remaining performance obligations
As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $613.9 million, which consists of both billed consideration in the amount of $375.6 million and unbilled consideration in the amount of $238.3 million that the Company expects to recognize as subscription revenue. The Company expects to recognize 57 % of this amount as revenue over the next twelve months and the remainder thereafter.
4.
|
Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consisted of the following (in thousands):
June 30, 2019 |
March 31, 2019 |
||||||
Prepaid expenses |
$ |
$ |
|||||
Income taxes refundable |
|||||||
Other |
|||||||
Prepaid expenses and other current assets |
$ |
$ |
5.
|
Goodwill and Other Intangible Assets, net |
Changes in the carrying amount of goodwill, including from the Company’s formation and acquisitions occurring prior to fiscal 2019, on a consolidated basis for the three months ended June 30, 2019 consist of the following (in thousands):
June 30, 2019 |
|||
Balance, beginning of period |
$ |
||
Goodwill from acquisitions |
|||
Foreign currency impact |
|||
Balance, end of period |
$ |
Intangible assets, net excluding goodwill consist of (in thousands):
Weighted
Average
Useful Life
(in months)
|
|||||||||
June 30, 2019 |
March 31, 2019 |
||||||||
Capitalized software |
$ |
$ |
|||||||
Customer relationships |
|||||||||
Trademarks and tradenames |
|||||||||
Total intangible assets |
|||||||||
Less: accumulated amortization |
( |
) |
( |
) |
|||||
Total intangible assets, net |
$ |
$ |
Amortization of other intangible assets totaled $15.1 million and $18.3 million for the three months ended June 30, 2019 and 2018, respectively.
6. Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to loss from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended June 30, 2019 was 6 % compared to 13 % for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 and 2018 was lower than the U.S. federal statutory tax rate primarily because of non-deductible share-based compensation.
Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at June 30, 2019, a valuation allowance continues to be recorded against certain deferred tax assets based upon the conclusion that it was more likely than not they would not be realized. The valuation allowance at June 30, 2019 relates primarily to foreign tax credits and net operating losses.
10
Other matters
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporation income taxation and include reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”). The Company recognized the tax effects of the Tax Act in the fiscal year ended 2018 and recorded $50.0 million in tax benefit which relates almost entirely to the remeasurement of deferred tax liabilities to the 21% tax rate. The effects of ongoing provisions of the Tax Act, including global intangible low-taxed income (GILTI) and base-erosion and anti-abuse tax (BEAT), are accounted for in the income tax provision.
7. Accrued Expenses
Accrued expenses, current consisted of the following (in thousands):
June 30, 2019 |
March 31, 2019 |
||||||
Accrued employee - related expenses |
$ |
$ |
|||||
Accrued tax liabilities |
|||||||
Accrued restructuring |
|||||||
Accrued professional fees |
|||||||
Accrued installments for acquisition |
|||||||
Income taxes payable |
|||||||
Other |
|||||||
Total accrued expenses, current |
$ |
$ |
Accrued expenses, non-current consisted of the following (in thousands):
June 30, 2019 |
March 31, 2019 |
||||||
Share-based compensation |
$ |
$ |
|||||
Other |
|||||||
Total accrued expenses, non-current |
$ |
$ |
8.
|
Long-term Debt |
On August 23, 2018, the Company entered into the First Lien Credit Agreement to provide for a term loan commitment (the “First Lien Term Loan”) in which the Company borrowed an aggregate principal amount of $950.0 million, which matures on August 23, 2025. Borrowings under the First Lien Term Loan currently bear interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 2.0 % per annum, or (ii) LIBOR plus 3.0 % per annum, if the net leverage ratio remains below 4.35 to 1.00 and are subject to an increase if the net leverage ratio is higher than 4.35 to 1.00 or a decrease if there is an initial public offering. Interest payments are due quarterly, or more frequently, based on the terms of the credit agreement. Principal payments required under the First Lien Term Loan are approximately $2.4 million per quarter, commencing on March 31, 2019, with the remainder due at maturity.
On August 23, 2018, the Company entered into the Second Lien Credit Agreement to provide for a second term loan commitment (the “Second Lien Term Loan”) in which the Company borrowed an aggregate principal amount of $170.0 million. Borrowings under the Second Lien Term Loan bear interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 6.00 % per annum, or (ii) LIBOR plus 7.00 % per annum. The maturity date on the Second Lien Term Loan is August 23, 2026, with principal payment due in full on the maturity date. Interest payments are due quarterly, or more frequently, based on the terms of the credit agreement. The First Lien Term Loan and Second Lien Term Loan are collectively referred to as the “Term Loans”.
The Term Loans require prepayments in the case of certain events including: property or asset sale in excess of $5.0 million, proceeds in excess of $5.0 million from an insurance settlement, or proceeds from a new debt agreement. An additional prepayment may be required under the First Lien Term Loan related to excess cash flow for the respective measurement periods.
All of the indebtedness under the Term Loans is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. The Term Loans contain customary negative covenants. At June 30, 2019, the Company was in compliance with all applicable covenants pertaining to the Term Loans.
Debt issuance costs and original issuance discount of $15.5 million were incurred in connection with the entry into the Term Loans. These debt issuance costs and original issuance discount will be amortized into interest expense over the contractual term of the Term Loans. The Company recognized approximately $0.5 million of amortization of debt issuance costs and original issuance discount for the three months ended June 30, 2019 which is included in the accompanying consolidated statements of operations. There was no amortization
11
of debt issuance costs and original issuance discount for the three months ended June 30, 2018. At June 30, 2019, the Company had an aggregate principal amount outstanding of $928.6 million and $88.7 million for the First Lien Term Loan and Second Lien Term Loan, respectively, bearing interest at 5.4 % and 9.4 %, respectively. At March 31, 2019, the Company had an aggregate principal amount outstanding of $947.6 million and $88.7 million for the First Lien Term Loan and Second Lien Term Loan, respectively, bearing interest at 5.7 % and 9.5 %, respectively. At June 30, 2019 and March 31, 2019, the Company had $13.9 million and $14.3 million, respectively, of unamortized debt issuance costs and original issuance discount which is recorded as a reduction of the debt balance on the Company’s condensed consolidated balance sheets.
Revolving Facility
The First Lien Credit Agreement further provided for a revolving credit facility (the “Revolving Facility”) in an aggregate amount of $60.0 million, which matures on August 23, 2023. Borrowings under the Revolving Facility currently bear interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 2.0 % per annum, or (ii) LIBOR plus 3.0 % per annum, if the net leverage ratio remains below 4.35 to 1.00 and are subject to an increase if the net leverage ratio is higher than 4.35 to 1.00 or a decrease if the net leverage ratio is lower than 3.85 to 1.00 or if there is an initial public offering. The Revolving Facility includes a $15.0 million letter of credit sub-facility.
The Company incurs fees with respect to the Revolving Facility, including (i) a commitment fee of 0.375 % per annum of unused commitments under the Revolving Facility, subject to an adjustment based on the First Lien Term Loan net leverage ratio or if there is an initial public offering, (ii) facility fees equal to the applicable margin in effect for Eurodollar Rate Loans, as defined per the credit agreement, times the average daily stated amount of letters of credit, (iii) a fronting fee equal to either (a) 0.125 % per annum on the stated amount of each letter of credit or (b) such other rate per annum as agreed to by the parties subject to the letters of credit, and (iv) customary administrative fees.
All of the indebtedness under the Revolving Facility is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors.
Debt issuance costs of $0.8 million were incurred in connection with the entry into the Revolving Facility. These debt issuance costs are amortized into interest expense over the contractual term of the loan. The Company recognized an immaterial amount of amortization of debt issuance costs for the three months ended June 30, 2019 which is included in the accompanying consolidated statements of operations. There was no amortization of debt issuance costs and original issuance discount for the three months ended June 30, 2018. There were $0.7 million of unamortized debt issuance costs included as a reduction of the debt balance on the accompanying consolidated balance sheets as of June 30, 2019 and March 31, 2019, respectively.
The Revolving Facility contains customary negative covenants and does not include any financial maintenance covenants other than a springing minimum net leverage ratio not exceeding 7.50 to 1.00 on the last day of any fiscal quarter, which will be tested only upon the occurrence of an event of default or certain other conditions as specified in the agreement. At June 30, 2019, the Company was in compliance with all applicable covenants pertaining to the Revolving Facility.
As of June 30, 2019 and March 31, 2019, there were no amounts outstanding under the Revolving Facility, and there were $0.5 million of letters of credit issued. The Company had $59.5 million of availability under the Revolving Facility as of June 30, 2019 and March 31, 2019, respectively.
9.
|
Commitments and Contingencies |
Tax liability
In connection with the initial public offering completed after this quarter-end, the Company undertook a series of transactions to spin out two wholly owned businesses from the corporate structure. These transactions generated a taxable gain upon their occurrence which will be payable by the Company or its affiliates. On July 31, 2019, Compuware Corporation distributed $265 million to the Company to fund the majority of the tax liability pursuant to an agreement with the Company. The Company is currently computing the tax liability which will be paid in accordance with federal and state estimated payment requirements.
Commitment for operating leases
The Company’s commitments for various operating lease agreements related to office space for various periods that extend through as late as fiscal 2030. Total rent payments under these agreements were approximately $3.3 million and $2.7 million for the three months ended June 30, 2019 and 2018, respectively. Certain of these lease agreements contain provisions for renewal options and escalation clauses.
12
Legal matters
From time to time, the Company may be a party to lawsuits and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, these matters, individually and in the aggregate, will not have a material adverse effect on the financial condition and results of the future operations of the Company.
10.
|
Member’s Deficit |
Dynatrace Holdings LLC was reorganized on April 1, 2015 and had 100 common units as of June 30, 2019 and March 31, 2019. In connection with the reorganization transactions described in Note 2, an additional 241,028,731 common units of Dynatrace Holdings LLC were issued and subsequently exchanged for 241,028,831 shares of common stock. This amount of additional common units includes 14,804,226 common units issued upon the exchange of vested Management Incentive Units (“MIUs”) and Appreciation Units (“AUs”).
11.
|
Share-based Compensation |
Compuware Parent LLC’s board of directors (the “Board”) has authorized the issuance of 21.5 million MIUs and 1.0 million AUs to certain executive officers and key employees. The MIUs and AUs consist of two types of units which are classified as performance-vested units and time-vested units.
Performance-vested units include four performance targets which vest 25 % after each fiscal year end, upon the Board’s confirmation that the performance target was met for such fiscal year. These units have a requisite service period that varies based on the grant date, but the service period begins on the grant date and ends on achievement of the final fiscal year performance target. The performance criterion for vesting of performance units has been based on the Company’s EBITDA compared to the target established and approved for each fiscal year. Units that are vested based upon performance for any given year for which the target was not met shall not vest, and are subject to repurchase by the Company, Compuware Parent LLC, or TB at any time; provided, that if the target is not met for a given year, but the target for the subsequent year is met, the unvested performance-based units for the previous year shall become vested when the target for the subsequent year was met.
Time-vested units vest at 25 % one year after grant date (or one year after the vesting start date, if different) and the remaining 75 % vest ratably over a 36 -month period. These units have a requisite service period of 48 months (or the period from the grant until three years from the date that the first 25 % vested) and can be repurchased by the Company, Compuware Parent LLC, or TB at any time.
Total compensation expense related to the MIUs and AUs for the respective periods is presented in the table below (in thousands).
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Cost of revenues |
$ |
$ |
|||||
Research and development |
|||||||
Sales and marketing |
|||||||
General and administrative |
|||||||
Total share-based compensation expense |
$ |
$ |
The following table shows the MIU activity for the three months ended June 30, 2019:
Number of Units |
Weighted Average
Participation
Threshold
|
Fair Value |
||||||||
MIUs outstanding as of March 31, 2019 |
$ |
$ |
||||||||
Units granted during the period |
||||||||||
Units exchanged for AUs during the period |
( |
) |
||||||||
Units forfeited/repurchased during the period |
( |
) |
||||||||
MIUs outstanding as of June 30, 2019 |
$ |
$ |
||||||||
MIUs vested as of June 30, 2019 |
13
The following table shows the AU activity for the three months ended June 30, 2019:
Number of Units |
Weighted Average
Participation
Threshold
|
Fair Value |
||||||||
AUs outstanding as of March 31, 2019 |
$ |
$ |
||||||||
Units converted from MIUs |
||||||||||
Units granted during the period |
||||||||||
Units forfeited/repurchased during the period |
( |
) |
||||||||
AUs outstanding as of June 30, 2019 |
$ |
$ |
||||||||
AUs vested as of June 30, 2019 |
The fair value of the equity units underlying the MIUs and AUs has historically been determined by the board of directors as there was no public market for the equity units. The board of directors determines the fair value of the Company’s equity units by considering a number of objective and subjective factors including: the valuation of comparable companies, the Company’s operating and financial performance, the lack of liquidity of common stock, and general and industry specific economic outlook, amongst other factors.
The participation threshold is determined by the Board, based on the fair market value on the grant issuance date upon vesting or settlement, the value associated with the MIU is the difference between the fair market value of the unit and the associated participation threshold. Upon vesting or settlement, the value associated with the MIU is the difference between the fair value of the unit and the associated participation threshold. The awards are marked to market at the balance sheet date. The weighted average grant date fair value of units granted during the three months ended June 30, 2019 and 2018 was $7.71 and $2.45 , respectively.
The following key assumptions were used to determine the fair value of the MIUs and AUs for the three months ended June 30, 2019 and 2018:
June 30, 2019 |
June 30, 2018 |
|||
Expected dividend yield |
||||
Expected volatility |
35% - 55% |
% |
||
Expected term (years) |
0.5 - 1.25 |
|||
Risk-free interest rate |
1.86% - 2.09% |
% |
At June 30, 2019, there was $25.0 million of total unrecognized compensation cost related to granted and unvested MIU and AU units. That cost is expected to be recognized over a weighted average period of 0.5 - 1.25 years. The total fair value of vested units during the three months ended June 30, 2019 and 2018 was $133.0 million and $35.1 million, respectively.
12.
|
Net Loss Per Share |
For the three months ended June 30, 2019 and 2018, basic and diluted net loss per share have been retrospectively adjusted to reflect the conversion of equity in connection with the reorganization transactions described in Note 2. Basic and diluted net loss per share was derived from a unit conversion factor of $16.00 per share as determined by the board of managers of Dynatrace Holdings LLC on July 30, 2019.
The following table sets forth the computation of basic and diluted net loss per share (dollars in thousands, except per share data):
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Numerator: |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Denominator: |
|||||||
Weighted average shares outstanding, basic and diluted |
|||||||
Net loss per share, basic and diluted |
$ |
( |
) |
$ |
( |
) |
14
The effect of certain common share equivalents were excluded from the computation of weighted average diluted shares outstanding for the three months ended June 30, 2019 and 2018 as inclusion would have resulted in anti-dilution. A summary of these anti-dilutive common share equivalents is provided in the table below:
Three Months Ended June 30, |
|||||
2019 |
2018 |
||||
Unvested equity awards |
On August 1, 2019, after this quarter end, the Company completed its initial public offering in which the Company issued and sold 38.9 million shares of common stock at a price to the public of $16.00 per share. These shares are included in the common stock outstanding as of that date. Refer to Note 16 for additional information.
13. Related Party Transactions
The Company had agreements with Thoma Bravo, LLC for financial and management advisory services. The Company incurred $1.2 million related to these services during the three months ended June 30, 2019 and 2018. The related expense is reflected in “General and administrative” expense in the condensed consolidated statements of operations.
The Company had payments to directors of $0.1 million during both the three months ended June 30, 2019 and 2018. Additionally, directors had 1.5 million and 2.3 million MIUs outstanding at June 30, 2019 and March 31, 2019, respectively.
During the three months ended June 30, 2018, the Company had transfers to related parties of $1.4 million which are included in “Additional paid-in capital” in the condensed consolidated balance sheets. During the three months ended June 30, 2018, the Company transferred cash to related parties of $80.4 million related to debt service and shared costs. Other related party settlements resulted in a decrease in payables to related parties of $2.9 million for the three months ended June 30, 2018.
14. Related Party Debt
On April 1, 2015, the Company entered into $1.8 billion in subordinated demand promissory notes payable to Compuware Corporation (“Compuware”), a related party. The promissory notes were established in connection with Compuware’s external debt financing. All payments of principal and interest are payable on the earliest to occur of (i) demand by the holder, (ii) June 1, 2023 and (iii) the date of acceleration of the promissory notes as a result of the occurrence of an event of default. The Company may prepay the promissory notes at any time without penalty. As a result of the August 23, 2018 financing transaction, as described in Note 8, “Long-term Debt”, the amount was reduced by the net proceeds of the financing obtained by Dynatrace LLC, leaving $597.2 million in principal and interest outstanding at March 31, 2019. At June 30, 2019 and March 31, 2019, the Company had principal outstanding of $478.5 million, included in the condensed consolidated balance sheets as “Payable to related party.” At June 30, 2019 and March 31, 2019, the Company accrued interest on the promissory notes of $121.7 million, at a rate of 2.55 % per annum, and $118.7 million, at a rate of 2.72 % per annum, respectively, included in “Payable to related party” in the condensed consolidated balance sheets. For the three months ended June 30, 2019 and 2018, interest expense on the promissory notes were $3.1 million and $10.7 million, respectively, and is included in the condensed consolidated statements of operations in “Interest expense, net.” In connection with the spin-off, the corresponding receivable at Compuware was contributed to the Company and eliminated.
15.
|
Geographic Information |
Revenue
Revenues by geography are based on legal jurisdiction. Refer to Note 3, “Revenue Recognition” for a disaggregation of revenue by geographic region.
Property and equipment, net
The following tables present property and equipment by geographic region for the periods presented (in thousands):
June 30, 2019 |
March 31, 2019 |
||||||
North America |
$ |
$ |
|||||
Europe, Middle East and Africa |
|||||||
Asia Pacific |
|||||||
Latin America |
|||||||
Total property and equipment, net |
$ |
$ |
15
16.
|
Subsequent Events |
Initial Public Offering
On August 1, 2019, the Company completed its initial public offering (“IPO”), in which it sold and issued 38.9 million shares of common stock, inclusive of the underwriters’ option to purchase additional shares that was exercised in full, at an issue price of $16.00 per share. The Company received a total of $622.0 million in gross proceeds from the offering, or approximately $590.3 million in net proceeds after deducting approximately $31.7 million for underwriting discounts, commissions and estimated offering-related expenses. A portion of the net proceeds from the offering were used to repay $297.7 million in borrowings outstanding under the First Lien Credit Agreement and $88.8 million in borrowings outstanding under the Second Lien Credit Agreement. In connection with the voluntary prepayment of the Second Lien Credit Agreement, the Company paid a $0.9 million prepayment fee.
The IPO also included the sale of 2.1 million shares of common stock, inclusive of the underwrites’ option to purchase additional shares that was exercised in full, by selling stockholders. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.
Upon the closing of the IPO, all 199,063,838 shares of Class A Common Stock that were outstanding immediately prior to the closing of such offering converted on a one -for-one basis into shares of common stock in accordance with the terms of the certificate of incorporation. In addition, the Company converted $671.4 million of principal and accrued and unpaid yield on the preferred stock into 41,964,993 shares of common stock equal to the result of the accrued and unpaid dividends on each share of Class A Common Stock, divided by $16.00 per share.
2019 Equity Incentive Plan
In July 2019, the Company’s board of directors, upon the recommendation of the compensation committee of the board of directors, adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which was subsequently approved by the Company’s shareholders. The 2019 Plan became effective on July 30, 2019. The 2019 Plan replaced the Company’s Management Incentive Unit program, or the MIU Plan and, in connection with the Spin-Off Transactions, outstanding awards granted under the MIU Plan were converted into shares of common stock, restricted stock, and restricted stock units, which will be granted under the 2019 Plan. At the time of conversion, the MIUs and AUs will cease to be classified as liability awards and a compensation charge will be recognized over the remaining vesting period based on the fair value of the awards at the date of conversion.
The Company initially reserved 52,000,000 shares of common stock, or the Initial Limit, for the issuance of awards under the 2019 Plan. The 2019 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each April 1, beginning on April 1, 2020, by 4 % of the outstanding number of shares of our common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee, or the Annual Increase. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.
Employee Stock Purchase Plan
In July 2019, the board of directors adopted, and the Company’s stockholders approved, the 2019 Employee Stock Purchase Plan (the “ESPP”) for the issuance of up to a total of 6,250,000 shares of common stock, subject to an increase. The Company expects to offer, sell and issue shares of common stock under this ESPP from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under this ESPP. The Company has not issued any shares of common stock under the ESPP.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
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 dated July 31, 2019 (Prospectus) and as filed with the SEC 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.
17
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 founded Dynatrace 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 hybrid 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) 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 as a full-stack package and extended with our DEM offering. Customers also have the option to purchase infrastructure monitoring only where the full-stack is not required, with the ability to upgrade to the full-stack when necessary. Our Dynatrace® platform has been commercially available since 2016 and has become the primary offering we sell. Dynatrace® customers increased to 1,578 as of June 30, 2019 from 733 as of June 30, 2018.
Our Classic products include AppMon, Classic Real User Monitoring, or RUM, Network Application Monitoring, or NAM, and Synthetic Classic. As of April 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 by expanding our direct sales force focused on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $750.0 million. 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. 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.
|
18
• |
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 our U.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
Number of Dynatrace® Customers |
1,578 |
733 |
|||||
Dynatrace® ARR (in thousands) |
$ |
326,298 |
$ |
118,371 |
|||
Classic ARR (in thousands) |
$ |
111,324 |
$ |
187,732 |
|||
Total ARR (in thousands) |
$ |
437,622 |
$ |
306,103 |
|||
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
Revenues
Net revenues include subscriptions, licenses and services.
Subscriptions. 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.
19
License. License revenues reflect the revenues recognized from sales of perpetual and term-based licenses of our Classic products that are sold primarily to existing customers. A majority of our license revenues consists of revenues from perpetual licenses, under which we recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee up front. Term licenses are generally billed annually in advance and perpetual licenses are billed up front.
Services. Services 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 subscriptions. Cost of subscription revenues 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 services. Cost of services revenues 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 Thoma 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 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 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 structure realignment and consolidation of resources.
20
Other Income (Expense), Net
Other income (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 the modification and partial extinguishment of debt and prepayment penalties.
Income Tax Benefit
Our income tax benefit, 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) 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.
21
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, 2019 and 2018
Three Months Ended June 30, |
|||||||||||||
2019 |
2018 |
||||||||||||
Amount |
Percent |
Amount |
Percent |
||||||||||
(in thousands, except percentages) | |||||||||||||
Revenues: |
|||||||||||||
Subscriptions |
$ |
108,128 |
88 |
% |
$ |
77,924 |
79 |
% |
|||||
License |
3,784 |
3 |
% |
11,079 |
11 |
% |
|||||||
Services |
10,638 |
9 |
% |
9,218 |
10 |
% |
|||||||
Total revenue |
122,550 |
100 |
% |
98,221 |
100 |
% |
|||||||
Cost of revenues: |
|||||||||||||
Cost of subscriptions |
16,177 |
13 |
% |
13,132 |
13 |
% |
|||||||
Cost of services |
8,809 |
7 |
% |
6,895 |
7 |
% |
|||||||
Amortization of acquired technology |
4,557 |
4 |
% |
4,664 |
5 |
% |
|||||||
Total cost of revenues (1)
|
29,543 |
24 |
% |
24,691 |
25 |
% |
|||||||
Gross profit |
93,007 |
76 |
% |
73,530 |
75 |
% |
|||||||
Operating expenses: |
|||||||||||||
Research and development (1)
|
25,659 |
21 |
% |
17,896 |
18 |
% |
|||||||
Sales and marketing (1)
|
58,215 |
48 |
% |
42,509 |
43 |
% |
|||||||
General and administrative (1)
|
31,882 |
26 |
% |
19,881 |
20 |
% |
|||||||
Amortization of other intangibles |
10,142 |
8 |
% |
12,049 |
12 |
% |
|||||||
Restructuring and other |
115 |
410 |
|||||||||||
Total operating expenses |
126,013 |
92,745 |
|||||||||||
Loss from operations |
(33,006 |
) |
(19,215 |
) |
|||||||||
Other expense, net |
(19,092 |
) |
(7,824 |
) |
|||||||||
Loss before income taxes |
(52,098 |
) |
(27,039 |
) |
|||||||||
Income tax benefit |
2,943 |
3,483 |
|||||||||||
Net loss |
$ |
(49,155 |
) |
$ |
(23,556 |
) |
(1) Includes share-based compensation expense as follows:
Three Months Ended June 30, |
|||||||
2019 |
2018 |
||||||
(in thousands) |
|||||||
Cost of revenue |
$ |
3,309 |
$ |
1,084 |
|||
Research and development |
7,127 |
2,418 |
|||||
Sales and marketing |
15,104 |
4,463 |
|||||
General and administrative |
15,885 |
5,233 |
|||||
Total share-based compensation |
$ |
41,425 |
$ |
13,198 |
22
Revenues
Three Months Ended June 30, |
Change |
|||||||||||||
2019 |
2018 |
Amount |
Percent |
|||||||||||
(in thousands, except percentages) | ||||||||||||||
Subscriptions |
$ |
108,128 |
$ |
77,924 |
$ |
30,204 |
39 |
% |
||||||
License |
3,784 |
11,079 |
(7,295 |
) |
(66 |
)% |
||||||||
Services |
10,638 |
9,218 |
1,420 |
15 |
% |
|||||||||
Total revenue |
$ |
122,550 |
$ |
98,221 |
$ |
24,329 |
25 |
% |
Subscriptions
Subscription revenue increased by $30.2 million, or 39%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 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 88% of total revenue for the three months ended June 30, 2019 compared to 79% of total revenue for the three months ended June 30, 2018.
License
License revenue decreased by $7.3 million, or 66%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 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.
Services
Services revenue increased by $1.4 million, or 15%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. We recognize the revenues associated with professional services on a time and material basis or as we deliver the services, provide the training or when the service term has expired.
Cost of Revenues
Three Months Ended June 30, |
Change |
|||||||||||||
2019 |
2018 |
Amount |
Percent |
|||||||||||
(in thousands, except percentages) | ||||||||||||||
Cost of subscriptions |
$ |
16,177 |
$ |
13,132 |
$ |
3,045 |
23 |
% |
||||||
Cost of services |
8,809 |
6,895 |
1,914 |
28 |
% |
|||||||||
Amortization of acquired technology |
4,557 |
4,664 |
(107 |
) |
(2 |
)% |
||||||||
Total cost of revenue |
$ |
29,543 |
$ |
24,691 |
$ |
4,852 |
20 |
% |
Cost of subscriptions
Cost of subscriptions increased $3.0 million, or 23%, for the three months ended June 30, 2019 compared to the three months ended June 30, 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 $1.6 million.
Cost of services
Cost of services increased by $1.9 million, or 28%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 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 and higher share-based compensation of $0.6 million.
Amortization of acquired technologies
For the three months ended June 30, 2019 and 2018, amortization of acquired technologies is primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of us in 2014.
23
Gross Profit and Gross Margin
Three Months Ended June 30, |
Change |
|||||||||||||
2019 |
2018 |
Amount |
Percent |
|||||||||||
(in thousands, except percentages) | ||||||||||||||
Gross profit: |
||||||||||||||
Subscriptions |
$ |
91,951 |
$ |
64,792 |
$ |
27,159 |
42 |
% |
||||||
License |
3,784 |
11,079 |
(7,295 |
) |
(66 |
)% |
||||||||
Services |
1,829 |
2,323 |
(494 |
) |
(21 |
)% |
||||||||
Amortization of acquired technology |
(4,557 |
) |
(4,664 |
) |
107 |
(2 |
)% |
|||||||
Total gross profit |
$ |
93,007 |
$ |
73,530 |
$ |
19,477 |
26 |
% |
||||||
Gross margin: |
||||||||||||||
Subscriptions |
85 |
% |
83 |
% |
||||||||||
License |
100 |
% |
100 |
% |
||||||||||
Services |
17 |
% |
25 |
% |
||||||||||
Amortization of acquired technology |
(100 |
)% |
(100 |
)% |
||||||||||
Total gross margin |
76 |
% |
75 |
% |
Subscriptions
Subscriptions gross profit increased by $27.2 million, or 42%, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Subscription gross margin increased from 83% to 85%, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
License
License gross profit decreased by $7.3 million, or 66%, during the three months ended June 30, 2019 compared to the three months ended June 30, 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 $0.5 million, or 21%, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Services gross margin decreased from 25% to 17% during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Operating Expenses
Three Months Ended June 30, |
Change |
|||||||||||||
2019 |
2018 |
Amount |
Percent |
|||||||||||
(in thousands, except percentages) |
||||||||||||||
Operating expenses: |
||||||||||||||
Research and development |
$ |
25,659 |
$ |
17,896 |
$ |
7,763 |
43 |
% |
||||||
Sales and marketing |
58,215 |
42,509 |
15,706 |
37 |
% |
|||||||||
General and administrative |
31,882 |
19,881 |
12,001 |
60 |
% |
|||||||||
Amortization of other intangibles |
10,142 |
12,049 |
(1,907 |
) |
(16 |
)% |
||||||||
Restructuring and other |
115 |
410 |
(295 |
) |
(72 |
)% |
||||||||
Total operating expenses |
$ |
126,013 |
$ |
92,745 |
$ |
33,268 |
36 |
% |
Research and development
Research and development expenses increased $7.8 million, or 43%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The increase is primarily attributable to higher share-based compensation of $4.7 million, a 15% increase in headcount and related allocated overhead, resulting in increased personnel and other costs to expand our product offerings of $1.8
24
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 $15.7 million, or 37%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, primarily due to higher share-based compensation of $10.6 million. Further contributing to the increase was a 16% increase in headcount, resulting in an increase of $4.6 million in personnel costs.
General and administrative
General and administrative expenses increased $12.0 million, or 60%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, primarily due to an increase in share-based compensation of $10.7 million and transaction costs of $2.6 million related to the initial public offering completed after this quarter-end which were partially offset by lower professional fees. Sponsor related costs were approximately $1.2 million for each of the three months ended June 30, 2019 and 2018.
Amortization of other intangibles
Amortization of other intangibles decreased by $1.9 million, or 16%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 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.
Restructuring and other
Restructuring expenses decreased by $0.3 million, or 72%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, due to lower costs incurred for various restructuring activities to achieve our strategic and financial objectives, lower facility exit charges in relation to plans to optimize our U.S. offices, and lower costs related to a restructuring program designed to align employee resources with our product offering and future plans.
Other Expense, Net
Other expense, net increased by $11.3 million, or 144%, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The increase in other expense was primarily a result of interest expense on our Term Loans entered into in the second quarter of fiscal 2019. See section titled “Liquidity and Capital Resources.”
Income Tax Benefit
Income tax benefit decreased by $0.5 million to $2.9 million for the three months ended June 30, 2019, as compared to an income tax benefit of $3.5 million for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 was 6% compared to 13% in the same period for 2018. The decrease in our effective tax rate is primarily due to a higher proportion of the loss for the three months ended June 30, 2019 being attributable to non-deductible share-based compensation.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2019, we had $57.5 million of cash and cash equivalents and $59.5 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.
We have 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.
25
Our Credit Facilities
In anticipation of separation from Compuware Corporation, on August 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 lessor of $15.0 million and the aggregate unused amount of the revolving credit facility then in effect. The first lien term loan and second lien term loan mature on August 23, 2025 and August 23, 2026, respectively, and the revolving credit facility matures on August 23, 2023.
As of June 30, 2019, the balance outstanding under the Term Loans was $1,017.3 million and is included in long-term debt on our consolidated balance sheet. We had $59.5 million available under the revolving credit facility and $0.5 million of letters of credit outstanding.
All of our obligations under the 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.
Summary of Cash Flows
Three Months Ended June 30, |
||||||||
2019 |
2018 |
|||||||
(in thousands) |
||||||||
Cash provided by operating activities (1)
|
$ |
34,167 |
$ |
58,560 |
||||
Cash used in investing activities |
(4,484 |
) |
(2,133 |
) |
||||
Cash used in financing activities |
(23,747 |
) |
(80,497 |
) |
||||
Effect of exchange rate changes on cash and cash equivalents |
203 |
(1,899 |
) |
|||||
Net increase (decrease) in cash and cash equivalents |
$ |
6,139 |
$ |
(25,969 |
) |
(1) Net cash provided by operating activities includes cash payments for interest as follows:
Three Months Ended June 30, |
||||||||
2019 |
2018 |
|||||||