Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

July 30, 2020

Documents

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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, 2020
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 
Dynatrace, Inc.
(Exact name of Registrant as specified in its Charter)  
Delaware
47-2386428
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
1601 Trapelo Road, Suite 116
02451
Waltham
MA
 
(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
Common stock, par value $0.001 per share
 
DT
 
New York Stock Exchange

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
 
☐
Non-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 281,070,901 shares of common stock outstanding as of July 26, 2020.


 
 
 
 
 
 
 
 


1

PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
June 30, 2020
 
March 31, 2020
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
250,377

 
$
213,170

Accounts receivable, net
93,763

 
157,058

Deferred commissions, current
39,080

 
38,509

Prepaid expenses and other current assets
58,716

 
61,188

Total current assets
441,936

 
469,925

Property and equipment, net
33,673

 
31,508

Operating lease right-of-use asset, net
44,209

 
—

Goodwill
1,270,986

 
1,270,733

Other intangible assets, net
188,717

 
201,592

Deferred tax assets, net
21,181

 
20,460

Deferred commissions, non-current
37,778

 
39,736

Other assets
8,350

 
8,126

Total assets
$
2,046,830

 
$
2,042,080

 
 
 
 
Liabilities and shareholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,767

 
$
11,112

Accrued expenses, current
74,907

 
93,728

Deferred revenue, current
352,803

 
384,060

Operating lease liabilities, current
9,712

 
—

Total current liabilities
441,189

 
488,900

Deferred revenue, non-current
49,580

 
60,711

Accrued expenses, non-current
18,062

 
20,987

Operating lease liabilities, non-current
38,970

 
—

Long-term debt
510,452

 
509,985

Total liabilities
1,058,253

 
1,080,583

Commitments and contingencies (Note 10)


 


Shareholders' equity:
 
 
 
Common shares, $0.001 par value, 600,000,000 shares authorized, 281,055,994 and 280,853,040 shares issued and outstanding at June 30, 2020 and March 31, 2020, respectively
281

 
281

Additional paid-in capital
1,589,598

 
1,573,347

Accumulated deficit
(580,855
)
 
(594,026
)
Accumulated other comprehensive loss
(20,447
)
 
(18,105
)
Total shareholders' equity
988,577

 
961,497

Total liabilities and shareholders' equity
$
2,046,830

 
$
2,042,080

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited – In thousands, except per share data)
 
Three Months Ended June 30,
 
2020
 
2019
Revenue:
 
 
 
Subscription
$
144,357

 
$
108,128

License
638

 
3,784

Service
10,513

 
10,638

Total revenue
155,508

 
122,550

Cost of revenue:
 
 
 
Cost of subscription
16,706

 
16,177

Cost of service
8,010

 
8,809

Amortization of acquired technology
3,826

 
4,557

Total cost of revenue
28,542

 
29,543

Gross profit
126,966

 
93,007

 
 
 
 
Operating expenses:
 
 
 
Research and development
23,505

 
25,659

Sales and marketing
49,163

 
58,215

General and administrative
21,527

 
31,882

Amortization of other intangibles
8,686

 
10,142

Restructuring and other
(21
)
 
115

Total operating expenses
102,860

 
126,013

Income (loss) from operations
24,106

 
(33,006
)
Interest expense, net
(4,113
)
 
(19,186
)
Other income, net
19

 
94

Income (loss) before income taxes
20,012

 
(52,098
)
Income tax (expense) benefit
(7,147
)
 
2,943

Net income (loss)
$
12,865

 
$
(49,155
)
Net income (loss) per share:
 
 
 
Basic
$
0.05

 
$
(0.21
)
Diluted
$
0.05

 
$
(0.21
)
Weighted average shares outstanding:
 
 
 
Basic
279,069

 
237,693

Diluted
284,309

 
237,693

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - In thousands)
 
Three Months Ended June 30,
 
2020
 
2019
Net income (loss)
$
12,865

 
$
(49,155
)
Other comprehensive (loss) income
 
 
 
Foreign currency translation adjustment, net of tax
(2,342
)
 
1,837

Total other comprehensive (loss) income
(2,342
)
 
1,837

Comprehensive income (loss)
$
10,523

 
$
(47,318
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


4

DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY / MEMBER’S DEFICIT
(Unaudited - In thousands)
 
Three Months Ended June 30, 2020
 
Common Shares
 
Additional 
Paid-In Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Shareholders' Equity
Shares
 
Amount
Balance, March 31, 2020
280,853

 
$
281

 
$
1,573,347

 
$
(594,026
)
 
$
(18,105
)
 
$
961,497

Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
(2,342
)
 
(2,342
)
Restricted stock units vested
132

 
—

 
 
 
 
 
 
 
—

Restricted stock awards forfeited
(88
)
 
—

 
 
 
 
 
 
 
—

Issuance of common stock related to employee stock purchase plan
159

 
—

 
3,592

 
 
 
 
 
3,592

Share-based compensation
 
 
 
 
12,672

 
 
 
 
 
12,672

Equity repurchases
 
 
 
 
(13
)
 
 
 
 
 
(13
)
Cumulative effects adjustment for ASU 2016-02 adoption
 
 
 
 
 
 
306

 
 
 
306

Net income
 
 
 
 
 
 
12,865

 
 
 
12,865

Balance, June 30, 2020
281,056

 
$
281

 
$
1,589,598

 
$
(580,855
)
 
$
(20,447
)
 
$
988,577

 
Three Months Ended June 30, 2019
 
Common Units
 
Additional 
Paid-In Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Member’s Deficit
Units
 
Amount
Balance, March 31, 2019
—

 
$
—

 
$
(184,546
)
 
$
(176,002
)
 
$
(29,710
)
 
$
(390,258
)
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
1,837

 
1,837

Equity repurchases
 
 
 
 
(53
)
 
 
 
 
 
(53
)
Net loss
 
 
 
 
 
 
(49,155
)
 
 
 
(49,155
)
Balance, June 30, 2019
—

 
$
—

 
$
(184,599
)
 
$
(225,157
)
 
$
(27,873
)
 
$
(437,629
)
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,

2020

2019
Cash flows from operating activities:




Net income (loss)
$
12,865


$
(49,155
)
Adjustments to reconcile net income (loss) to cash provided by operations:





Depreciation
1,590


2,034

Amortization
13,019


15,081

Share-based compensation
12,672


41,425

Deferred income taxes
(175
)

(8,877
)
Other
466


416

Net change in operating assets and liabilities:





Accounts receivable
64,265


34,116

Deferred commissions
2,229


(720
)
Prepaid expenses and other assets
275


(924
)
Accounts payable and accrued expenses
(23,212
)

(8,464
)
Operating leases, net
311

 
—

Deferred revenue
(47,297
)

9,235

Net cash provided by operating activities
37,008


34,167







Cash flows from investing activities:





Purchase of property and equipment
(4,418
)

(4,151
)
Capitalized software additions
(131
)

(333
)
Net cash used in investing activities
(4,549
)

(4,484
)






Cash flows from financing activities:





Repayment of term loans
—


(19,000
)
Proceeds from employee stock purchase plan
3,592

 
—

Equity repurchases
(13
)

(53
)
Installments related to acquisition
—


(4,694
)
Net cash provided by (used in) financing activities
3,579


(23,747
)






Effect of exchange rates on cash and cash equivalents
1,169


203







Net increase in cash and cash equivalents
37,207


6,139







Cash and cash equivalents, beginning of period
213,170


51,314

Cash and cash equivalents, end of period
$
250,377


$
57,453







Supplemental cash flow data:





Cash paid for interest
$
3,763


$
15,738

Cash paid for tax
$
10,127


$
2,052

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 multicloud environments. The Company’s all-in-one intelligence platform is designed to address the growing complexity faced by technology and digital business teams as these enterprises further embrace the cloud to effect their digital transformation. The Company’s platform does so by utilizing artificial intelligence at its core and continuous 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 high quality software faster, and improve user experiences for better business outcomes.
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 2021, for example, refer to the fiscal year ended March 31, 2021.
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 (“Compuware”) and SIGOS LLC (“SIGOS”), 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 222,021,708 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. Additionally, 19,525,510 units of Dynatrace Holdings LLC were issued upon exchange of Dynatrace, LLC Management Incentive Units (“MIUs”) and Appreciation Units (“AUs”) for a total of 241,547,218 outstanding units in Dynatrace Holdings LLC immediately prior to the closing of the Company’s initial public offering (“IPO”).
The reorganization was completed between entities that have been under common control since December 15, 2014. Therefore, these condensed consolidated financial statements retroactively reflect DHC and Dynatrace, Inc. 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 condensed consolidated financial statements exclude their accounts and results.
The condensed 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 condensed consolidated financial statements.
As described in Note 14, prior to the reorganization the condensed consolidated financial statements reflected the debt and debt service associated with subordinated demand promissory notes payable to a related party. The condensed consolidated financial statements also reflect certain expenses incurred by the Company for certain functions including shared services for the periods prior to the reorganization, which are immaterial to these condensed consolidated financial statements. These 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 condensed consolidated financial statements may not reflect the consolidated financial position, operating results and cash flows of Dynatrace had the Dynatrace business been a separate

7

stand-alone entity during all of 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.
Initial Public Offering
On August 1, 2019, the Company completed its initial public offering, in which it sold and issued 38,873,174 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 $585.3 million in net proceeds after deducting approximately $36.7 million for underwriting discounts, commissions and offering-related expenses.
Prior to the closing of the IPO, the 241,547,218 outstanding units of Dynatrace Holdings, LLC were converted on a one-for-one basis into shares of common stock in accordance with the terms of the certificate of incorporation.
Follow-on offering by selling stockholders
On June 5, 2020, the Company completed a follow-on offering for the sale of 34,500,000 shares of common stock by selling stockholders, inclusive of the underwriters’ option to purchase additional shares that was exercised in full, at an offering price of $35.00 per share. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of June 30, 2020 and the interim condensed consolidated statements of operations, statements of shareholders’ equity / member’s deficit for the three months ended June 30, 2020 and 2019, statements of cash flows for the three months ended June 30, 2020 and 2019, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and includes all normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of June 30, 2020, its results of operations for the three months ended June 30, 2020 and 2019, and its cash flows for the three months ended June 30, 2020 and 2019 in accordance with U.S. GAAP. The results for the three months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 (“Annual Report”).
Use of estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, the Company makes estimates with respect to the stand-alone selling price for each distinct performance obligation in customer contracts with multiple performance obligations, the uncollectible accounts receivable, the fair value of tangible and intangible assets acquired, and liabilities assumed in a business combination, valuation of long-lived assets, equity-based compensation expense and income taxes, the determination of the incremental borrowing rate used for operating lease liabilities, among other things. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
In March 2020, the World Health Organization declared the recent outbreak of the novel coronavirus disease, or COVID-19, a global pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on the Company’s customers and its sales cycles, which are uncertain and cannot be predicted. As of the date of the condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments or a revision of the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.
Significant accounting policies
The Company’s significant accounting policies are discussed in Note 2, “Significant Accounting Policies” in the Company’s Annual Report. There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report that have had a material impact on its condensed consolidated financial statements and related notes except for updates resulting from the adoption of Topic 842, as discussed below.

8

Leases
Leases arise from contractual obligations that convey the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At the inception of the contract, the Company determines if an arrangement contains a lease based on whether there is an identified asset and whether the Company controls the use of the identified asset. The Company also determines the classification of that lease, between financing and operating, at the lease commencement date. The Company accounts for and allocates consideration to the lease and non-lease components as a single lease component.
A right-of-use asset represents the Company's right to use an underlying asset and a lease liability represents the Company's obligation to make payments during the lease term. Right-of-use assets are recorded and recognized at commencement for the lease liability amount, adjusted for initial direct costs incurred and lease incentives received. Lease liabilities are recorded at the present value of the future lease payments over the lease term at commencement. The discount rate used to determine the present value is the incremental borrowing rate unless the interest rate implicit in the lease is readily determinable. As the implicit rate for the operating leases is generally not determinable, the Company uses an incremental borrowing rate as the discount rate at the lease commencement date to determine the present value of lease payments. The Company determines the discount rate of the leases by considering various factors, such as the credit rating, interest rates of similar debt instruments of entities with comparable credit ratings, jurisdictions, and the lease term.
The Company’s operating leases typically include non-lease components such as common-area maintenance costs, utilities, and other maintenance costs. The Company has elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
The Company's lease terms may include options to extend or terminate the lease. The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the Company will exercise those options. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company's right-of-use assets are included in “Operating lease right-of-use asset, net” and the current and non-current portions of the lease liabilities are included in “Operating lease liabilities, current” and “Operating lease liabilities, non-current,” respectively, on the condensed consolidated balance sheets. The Company does not record leases with terms of 12 months or less on the condensed consolidated balance sheets. Lease expense is recognized on a straight-line basis over the expected lease term.
Reclassification
Certain reclassifications of prior period amounts have been made in the Company’s condensed consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Recently adopted 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 certain emerging growth companies and smaller reporting companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2020.
The Company early adopted the new standard as of April 1, 2020 and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit as of the adoption date. The Company elected the optional transition approach to not apply Topic 842 in the comparative periods presented. The Company elected the package of practical expedients to not 1) reassess 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. The adoption of Topic 842 resulted in the recognition of total right-of-use assets of $50.6 million, total lease liabilities of $50.7 million, and a cumulative effect adjustment to accumulated deficit of $0.3 million as of the adoption date, with the most significant impact related to the office space leases. Additionally, the Company derecognized $3.3 million in deferred rent upon adoption of this standard which was offset against the right-of-use asset. The adoption of Topic 842 did not have a material impact to the consolidated statements of operations or consolidated statements of cash flows.
The Company has updated the accounting policies, systems, processes and internal controls, and have allocated internal and external resources to assist during the implementation efforts.

9

Recently issued accounting pronouncements
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, except for emerging growth companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2022. The Company does not expect the standard to have a material effect on its condensed 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 condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the effects the standard will have on its condensed consolidated financial statements.
3.
Revenue Recognition
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,
 
2020
 
2019
 
Amount
 
%
 
Amount
 
%
North America
$
87,377

 
56
%
 
$
71,197

 
58
%
Europe, Middle East and Africa
47,071

 
30
%
 
33,501

 
27
%
Asia Pacific
16,940

 
11
%
 
14,436

 
12
%
Latin America
4,120

 
3
%
 
3,416

 
3
%
Total revenue
$
155,508

 
 
 
$
122,550

 
 

For the three months ended June 30, 2020 and 2019, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $82.0 million and 53%, and $67.4 million and 55% of total revenue during the three months ended June 30, 2020 and 2019, respectively.
Deferred revenue
Revenues recognized from amounts included in deferred revenue as of March 31, 2020 and 2019 were $146.3 million and $101.1 million during the three months ended June 30, 2020 and 2019, respectively.
Remaining performance obligations
As of June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $856.8 million, which consists of both billed consideration in the amount of $402.4 million and unbilled consideration in the amount of $454.4 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 59% of this amount as revenue over the next twelve months and the remainder thereafter.

10

4.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
June 30, 2020
 
March 31, 2020
Prepaid expenses
$
15,086

 
$
13,189

Income taxes refundable
43,095

 
47,489

Other
535

 
510

Prepaid expenses and other current assets
$
58,716

 
$
61,188


5.
Goodwill and Other Intangible Assets, Net
Changes in the carrying amount of goodwill on a consolidated basis for the three months ended June 30, 2020 consist of the following (in thousands):
 
June 30, 2020
Balance, beginning of period
$
1,270,733

Foreign currency impact
253

Balance, end of period
$
1,270,986


Intangible assets, net excluding goodwill consist of (in thousands):
 
Weighted
Average 
Useful Life
(in months)
 
 
 
 
June 30, 2020
 
March 31, 2020
Capitalized software
107
 
$
189,708

 
$
189,554

Customer relationships
120
 
351,555

 
351,555

Trademarks and tradenames
120
 
55,003

 
55,003

Total intangible assets
 
 
596,266

 
596,112

Less: accumulated amortization
 
 
(407,549
)
 
(394,520
)
Total intangible assets, net
 
 
$
188,717

 
$
201,592


Amortization of other intangible assets totaled $13.0 million and $15.1 million for the three months ended June 30, 2020 and 2019, respectively.
6.    Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income (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, 2020 was 36% compared to 6% for the three months ended June 30, 2019. The effective tax rate was higher than the U.S. statutory tax rate for the three months ended June 30, 2020 because of the valuation allowance on certain deferred tax assets as well as 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, 2020, a valuation allowance continues to be recorded against certain deferred tax assets based upon the conclusion that it was more likely than not that these assets would not be realized. The valuation allowance at June 30, 2020 relates primarily to share-based compensation, capitalized development costs, and foreign tax credits.

11

7.    Accrued Expenses
Accrued expenses, current consisted of the following (in thousands):
 
June 30, 2020
 
March 31, 2020
Accrued employee - related expenses
$
33,238

 
$
40,687

Accrued tax liabilities
13,215

 
13,350

Accrued restructuring
—

 
1,065

Accrued professional fees
2,851

 
2,103

Income taxes payable
11,951

 
20,756

Other
13,652

 
15,767

Total accrued expenses, current
$
74,907

 
$
93,728


8.
Long-term Debt
The Company’s long-term debt consists of the following:
 
June 30, 2020
 
March 31, 2020
 
Amount
 
Effective Rate
 
Amount
 
Effective Rate
 
(in thousands, except percentages)
First Lien Term Loan
$
521,125

 
2.4
%
 
$
521,125

 
3.2
%
Revolving credit facility
—

 
 
 
—

 
 
Total principal
521,125

 
 
 
521,125

 
 
Unamortized discount and debt issuance costs
(10,673
)
 
 
 
(11,140
)
 
 
Total debt
510,452

 
 
 
509,985

 
 
Less: Current portion of long-term debt
—

 
 
 
—

 
 
Long-term debt
$
510,452

 
 
 
$
509,985

 
 

First lien credit facilities
The Company’s First Lien Credit Agreement, as amended, provides for a term loan facility, or the First Lien Term Loan, in an aggregate principal amount of $950.0 million and a senior secured revolving credit facility, or the Revolving Facility, in an aggregate amount of $60.0 million. The Revolving Facility includes a $25.0 million letter of credit sub-facility. The First Lien Term Loan and Revolving Facility mature on August 23, 2025 and August 23, 2023, respectively. As of June 30, 2020 and March 31, 2020, there were $15.4 million and $15.3 million letters of credit issued, respectively. The Company had $44.6 million and $44.7 million of availability under the Revolving Facility as of June 30, 2020 and March 31, 2020, respectively.
Borrowings under the First Lien Term Loan and 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 1.25% per annum, or (ii) LIBOR plus 2.25% per annum. The Company has satisfied all required principal payments under the First Lien Term Loan and the remainder is due at maturity. Interest payments are due quarterly, or more frequently, based on the terms of the credit agreement.
The Company incurs fees with respect to the Revolving Facility, including (i) a commitment fee of 0.25% per annum of unused commitments under the Revolving Facility, (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 First Lien Credit Agreement 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 First Lien Credit Agreement contains customary negative covenants. At June 30, 2020, the Company was in compliance with all applicable covenants pertaining to the First Lien Credit Agreement.
9.
Leases
The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2021 to 2030. As of June 30, 2020, the weighted average remaining lease term was 5.7 years and the weighted average discount rate was 7.6%. The Company does not have any finance leases as of June 30, 2020.

12

The Company also has subleases of former offices which expire at various dates from fiscal 2021 to fiscal 2025. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $1.2 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively.
The following table presents information about leases on its condensed consolidated statement of operations (in thousands):
 
 
Three Months Ended
June 30, 2020
Operating lease expense (1)
 
$
2,643

Short-term lease expense
 
$
68

Variable lease expense
 
$
200

_________________
(1) Presented gross of sublease income.
The following table presents supplemental cash flow information about the Company’s leases (in thousands):
 
 
Three Months Ended
June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
 
$
3,032

Operating lease assets obtained in exchange for new operating lease liabilities
 
$
—


As of June 30, 2020, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31,
 
Amount
2021
 
$
12,768

2022
 
10,646

2023
 
10,466

2024
 
9,374

2025
 
5,464

Thereafter
 
11,566

Total operating lease payments (1)
 
60,284

Less: imputed interest
 
(11,602
)
Total operating lease liabilities
 
$
48,682

_________________
(1) Presented gross of sublease income.
As of June 30, 2020, the Company had commitments of $5.0 million for an office space operating lease that has not yet commenced, and therefore is not included in the right-of-use asset or operating lease liability. This operating lease is expected to commence during the fiscal year ended March 31, 2021 and with a lease term of 10 years.

13

As previously disclosed in the Company’s Annual Report, and under previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on its operating leases, as of March 31, 2020, were as follows (in thousands):
Fiscal Years Ending March 31,
 
Amount
2021
 
$
14,210

2022
 
11,663

2023
 
11,235

2024
 
10,864

2025
 
8,020

Thereafter
 
16,331

Total future contractual payments (1)
 
$
72,323

_________________
(1) Presented gross of sublease income.
Under ASC 840, total rent expense under operating leases during the three months ended June 30, 2019 was $3.3 million.
10.
Commitments and Contingencies
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.
11.
Share-based Compensation
2019 Equity Incentive Plan
In July 2019, the Company’s board of directors (the “Board”), 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 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 the Company’s common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of June 30, 2020, 30,148,242 shares of common stock were available for future issuance under the 2019 Plan.
Stock options
The following table summarizes activity for stock options during the period ended June 30, 2020:
 
Number of Options
 
Weighted Average
Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
(in thousands)
 
(per share)
 
(years)
 
(in thousands)
Balance, March 31, 2020
7,147

 
$
16.26

 
9.3
 
$
54,423

Granted
2,070

 
32.83

 
 
 
 
Exercised
—

 
—

 
 
 
 
Forfeited
(171
)
 
16.44

 
 
 
 
Balance, June 30, 2020
9,046

 
$
20.05

 
9.3
 
$
185,890

Options vested and exercisable at June 30, 2020
—

 
$
—

 
0.0
 
$
—


As of June 30, 2020, the total unrecognized compensation expense related to non-vested stock options granted is $60.1 million and is expected to be recognized over a weighted average period of 3.3 years. For the three months ended June 30, 2020, the Company recognized $3.3 million of share-based compensation expense related to stock options.
Restricted shares and units
During the first three months of fiscal 2021, the Company granted an aggregate of 1,128,049 restricted stock units to certain key employees and non-employee directors. The total grants consisted of 1,128,049 time-based restricted stock units that vest 25% one year after the grant date and the remaining 75% vest ratably on a quarterly basis over 3 years.

14

The following table provides a summary of the changes in the number of restricted shares for the period ended June 30, 2020:
 
Number of Shares of
Restricted Stock Awards
 
Weighted Average
Grant Date Fair Value
 
Number of Restricted Stock Units
 
Weighted Average
Grant Date Fair Value
 
(in thousands)
 
(per share)
 
(in thousands)
 
(per share)
Balance, March 31, 2020
1,984

 
$
16.00

 
3,123

 
$
16.39

Granted
—

 
—

 
1,128

 
32.88

Vested
(650
)
 
16.00

 
(132
)
 
16.00

Forfeited
(88
)
 
16.00

 
(82
)
 
16.59

Balance, June 30, 2020
1,246

 
$
16.00

 
4,037

 
$
21.01


As of June 30, 2020, the total unrecognized compensation expense related to unvested restricted stock is $17.8 million and is expected to be recognized over a weighted average period of 1.7 years. As of June 30, 2020, the total unrecognized compensation expense related to unvested restricted stock units is $74.9 million and is expected to be recognized over a weighted average period of 3.1 years. For the three months ended June 30, 2020, the Company recognized $8.8 million of share-based compensation expense related to restricted shares and units.
Employee Stock Purchase Plan
In July 2019, the board of directors adopted, and the Company’s shareholders approved, the 2019 Employee Stock Purchase Plan (“ESPP”) for the issuance of up to a total of 6,250,000 shares of common stock, subject to automatic annual increases. 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 ESPP provides for 6-month offering periods beginning May 15 and November 15 of each year, and each offering period will consist of six-month purchase periods. On each purchase date, eligible employees will purchase shares of the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock on the offering date or (2) the fair market value of the Company’s common stock on the purchase date. For the three months ended June 30, 2020, 159,066 shares of common stock were purchased under the ESPP. As of June 30, 2020, 8,899,464 shares of common stock were available for future issuance under the ESPP.
As of June 30, 2020, there was approximately $0.8 million of unrecognized stock-based compensation related to the ESPP that is expected to be recognized over the remaining term of the current offering period. For the three months ended June 30, 2020, the Company recognized $0.5 million of share-based compensation expense related to the ESPP.
Share-based compensation
The following table summarizes the components of total share-based compensation expense included the condensed consolidated financial statements for each period presented (in thousands):
 
Three Months Ended June 30,
 
2020
 
2019
Cost of revenue
$
1,498

 
$
3,309

Research and development
2,418

 
7,127

Sales and marketing
5,405

 
15,104

General and administrative
3,351

 
15,885

Total share-based compensation expense
$
12,672

 
$
41,425


12.
Net Income (Loss) Per Share
On August 1, 2019, the Company completed its IPO in which the Company issued and sold 38,873,174 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.
For the three months ended June 30, 2019, basic and diluted net income (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 income (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.

15

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
 
Three Months Ended June 30,
 
2020
 
2019
Numerator:
 
 
 
Net income (loss)
$
12,865

 
$
(49,155
)
Denominator:
 
 
 
Weighted average shares outstanding, basic
279,069

 
237,693

Dilutive effect of stock-based awards
5,240

 
—

Weighted average shares outstanding, diluted
284,309

 
237,693

 
 
 
 
Net income (loss) per share, basic
$
0.05

 
$
(0.21
)
Net income (loss) per share, diluted
$
0.05

 
$
(0.21
)

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, 2020 and 2019 as inclusion would have resulted in anti-dilution. A summary of these weighted-average anti-dilutive common share equivalents is provided in the table below (in thousands):
 
Three Months Ended June 30,
 
2020
 
2019
Stock options
1,200

 
—

Unvested restricted stock and RSUs
3

 
—

Shares committed under ESPP
61

 
—

Unvested equity awards
—

 
4,998


13.    Related Party Transactions
The Company had agreements with Thoma Bravo, LLC for financial and management advisory services that terminated on August 1, 2019. The Company did not incur any expense related to these services during the three months ended June 30, 2020 and incurred $1.2 million during the three months ended June 30, 2019. The related expense is reflected in “General and administrative” expense in the condensed consolidated statements of operations.
14.    Related Party Debt
On April 1, 2015, the Company entered into $1.8 billion in subordinated demand promissory notes payable to Compuware, a former related party. The promissory notes were established in connection with Compuware’s external debt financing. Interest expense on the promissory notes was zero and $3.1 million for the three months ended June 30, 2020 and 2019, respectively, and is included in the condensed consolidated statements of operations in “Interest expense, net.” In connection with the reorganization during the second quarter of fiscal 2020, the corresponding receivable at Compuware was contributed to the Company and the payable to related party was 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.

16

Property and equipment, net
The following tables present property and equipment by geographic region for the periods presented (in thousands):
 
June 30, 2020
 
March 31, 2020
North America
$
12,242

 
$
11,296

Europe, Middle East and Africa
19,792

 
18,590

Asia Pacific
1,594

 
1,564

Latin America
45

 
58

Total property and equipment, net
$
33,673

 
$
31,508


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 Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our fiscal year ends on March 31. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period.
SPECIAL NOTE REGARDING 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 elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended March 31, 2020 (“Annual 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;
•
our expectations regarding the potential impact of the COVID-19 pandemic on our business, operations, and the markets in which we and our partners and customers operate;
•
anticipated trends and growth rates in our business and in the markets in which we operate;
•
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

17

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 Annual Report 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.
OVERVIEW
We offer the market-leading software intelligence platform, purpose-built for dynamic multicloud environments. 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 continuous 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. As a result, as of June 30, 2020, our products are trusted by more than 2,700 customers in over 80 countries in diverse industries such as banking, insurance, retail, manufacturing, travel and software.
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 multicloud 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 million.
We generate revenue primarily by selling subscriptions, which we define as (i) Software-as-a-service (“SaaS”) agreements, (ii) Dynatrace® term-based licenses, for which revenue is recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses, which are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements.
We deploy our platform as a SaaS solution, with the option of retaining the data in the cloud, or at the edge in customer-provisioned infrastructure, which we refer to as Dynatrace® Managed. The Dynatrace® Managed offering allows customers to maintain control of the environment where their data resides, whether in the cloud or on-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 2,458 as of June 30, 2020 from 1,578 as of June 30, 2019.
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.
Coronavirus (COVID-19) Impact
In December 2019, an outbreak of a novel strain of the coronavirus (“COVID-19”) was reported in China, in January 2020 the World Health Organization (“WHO”) declared the outbreak a Public Health Emergency of International Concern, and in March 2020 WHO declared the outbreak a global pandemic. The extent to which the COVID-19 pandemic may impact our business going forward will depend on numerous evolving factors that we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact business spending on technology as well as customers' ability to pay for our products and services on an ongoing basis. At this point, the extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain. The economic consequences of the COVID-19 pandemic have been challenging for certain customers and prospects. We have changed how we spend on marketing and lead generation activities. While the broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain, the COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers and partners conduct business. We may

18

experience curtailed customer demand that could adversely impact our business, results of operations and overall financial performance in future periods. Specifically, we may be impacted by changes in our customers’ ability or willingness to purchase our offerings; changes in the timing of our current or prospective customers’ purchasing decisions; pricing discounts or extended payment terms; reductions in the amount or duration of customers’ subscription contracts; or increased customer attrition rates. While our revenue, customer retention, and earnings are relatively predictable as a result of our subscription-based business model, the effect, if any, of the COVID-19 pandemic would not be fully reflected in our results of operations and overall financial performance until future periods. While the implications of the COVID-19 pandemic remain uncertain, we plan to continue to make investments to support business growth. We believe that the growth of our business is dependent on many factors, including our ability to expand our customer base, develop new products and applications to extend the functionality of our products, and provide a high level of customer service. We expect to continue to invest in sales and marketing to support customer growth. We also expect to continue to invest in research and development as we continue to introduce new products and applications to extend the functionality of our products. We also intend to maintain a high level of customer service and support which we consider critical for our continued success. We also expect to continue to incur general and administrative expenses to support our business and to maintain the infrastructure required to be a public company. We intend to use our cash flow from operations to fund these growth strategies and support our business despite the potential impact from the COVID-19 pandemic. See the section titled “Risk Factors” included in Part II, Item 1A included in this Quarterly Report for further discussion of the possible impact of the COVID-19 pandemic on our business.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
•
Extend our technology and market leadership position. We intend to maintain our position as the market-leading software intelligence platform through increased investment in research and development and continued innovation. We expect to focus on expanding the functionality of Dynatrace® and investing in capabilities that address new market opportunities. We believe this strategy will enable new growth opportunities and allow us to continue to deliver differentiated high-value outcomes to our customers.
•
Grow our customer base. We intend to drive new customer growth by expanding our direct sales force focused on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $750 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.
•
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 VMware Tanzu.
Key Metrics
In addition to our U.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:
 
June 30,
 
2020
 
2019
Number of Dynatrace® Customers
2,458

 
1,578

Dynatrace® ARR (in thousands)
$
563,479

 
$
326,298

Total ARR (in thousands)
$
601,376

 
$
437,622

Dynatrace® Net Expansion Rate
120%+

 
120%+

Dynatrace® Customers: We define the number of Dynatrace® customers at the end of any reporting period as the number of accounts, as identified by a unique account identifier, that generate at least $10,000 of Dynatrace® ARR as of the reporting date. In infrequent cases, a single large organization may comprise multiple customer accounts when there are distinct divisions, departments or subsidiaries that operate and make purchasing decisions independently from the parent organization. In cases where multiple customer accounts exist

19

under a single organization, each customer account is counted separately based on a mutually exclusive accounting of ARR. As such, even though we target the largest 15,000 global enterprise accounts, there are more than 15,000 addressable Dynatrace® customers.
Annual Recurring Revenue “ARR”: We define annual recurring revenue, or ARR, as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage.
Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as the Dynatrace® ARR at the end of a reporting period for the cohort of Dynatrace® accounts as of one year prior to the date of calculation, divided by the Dynatrace® ARR one year prior to the date of calculation for that same cohort. This calculation excludes the benefit of Dynatrace® ARR resulting from the conversion of Classic products to the Dynatrace® platform.
KEY COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue includes subscriptions, licenses and services.
Subscription. Our subscription revenue consists of (i) SaaS agreements, (ii) Dynatrace® term-based licenses which are recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses that are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements. We typically invoice SaaS subscription fees and term licenses annually in advance and recognize subscription revenue ratably over the term of the applicable agreement, provided that all other revenue recognition criteria have been satisfied. Fees for our Dynatrace® perpetual licenses are generally billed up front. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates-Revenue Recognition” included in Part II, Item 7 of our Annual Report for more information. Over time, we expect subscription revenue will increase as a percentage of total revenue as we continue to focus on increasing subscription revenue as a key strategic priority.
License. License revenue reflects the revenues recognized from sales of perpetual and term-based licenses of our Classic products that are sold primarily to existing customers. The license fee portion of perpetual license arrangements is 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 Revenue
Cost of subscription. Cost of subscription revenue includes all direct costs to deliver and support our subscription products, including salaries, benefits, share-based compensation and related expenses such as employer taxes, allocated overhead for facilities, IT, third-party hosting fees related to our cloud services, and amortization of internally developed capitalized software technology. We recognize these expenses as they are incurred.
Cost of service. Cost of service revenue includes salaries, benefits, share-based compensation and related expenses such as employer taxes for our services organization, allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses as they are incurred.
Amortization of acquired technology. Amortization of acquired technology includes amortization expense for technology acquired in business combinations and the Thoma Bravo Funds’ acquisition of us in 2014.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of revenue. Gross profit has been and will continue to be affected by various factors, including the mix of our license, subscription, and services and other revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors.

20

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 our ongoing public reporting obligations. We anticipate continuing to incur additional expenses due to growing our operations and being a public company, including higher legal, corporate insurance and accounting expenses.
Amortization of other intangibles. Amortization of other intangibles primarily consists of amortization of customer relationships, 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.
Other Expense, Net
Other expense, net consists primarily of interest expense and foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries. Interest expense, net of interest income, consists primarily of interest on our term loan facility, amortization of debt issuance costs, loss on debt extinguishment and prepayment penalties.
Income Tax (Expense) Benefit
Our income tax (expense) 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, 2020 and 2019
 
Three Months Ended June 30,
2020
 
2019
Amount
 
Percent
 
Amount
 
Percent
(in thousands, except percentages)
Revenue:
 
 
 
 
 
 
 
Subscription
$
144,357

 
93
%
 
$
108,128

 
88
%
License
638

 
0
%
 
3,784

 
3
%
Service
10,513

 
7
%
 
10,638

 
9
%
Total revenue
155,508

 
100
%
 
122,550

 
100
%
Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription
16,706

 
11
%
 
16,177

 
13
%
Cost of service
8,010

 
5
%
 
8,809

 
7
%
Amortization of acquired technology
3,826

 
2
%
 
4,557

 
4
%
Total cost of revenue (1)
28,542

 
18
%
 
29,543

 
24
%
Gross profit
126,966

 
82
%
 
93,007

 
76
%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
23,505

 
15
%
 
25,659

 
21
%
Sales and marketing (1)
49,163

 
32
%
 
58,215

 
48
%
General and administrative (1)
21,527

 
14
%
 
31,882

 
26
%
Amortization of other intangibles
8,686

 
6
%
 
10,142

 
8
%
Restructuring and other
(21
)
 
 
 
115

 
 
Total operating expenses
102,860

 
 
 
126,013

 
 
Income (loss) from operations
24,106

 
 
 
(33,006
)
 
 
Other expense, net
(4,094
)
 
 
 
(19,092
)
 
 
Income (loss) before income taxes
20,012

 
 
 
(52,098
)
 
 
Income tax (expense) benefit
(7,147
)
 
 
 
2,943

 
 
Net income (loss)
$
12,865

 
 
 
$
(49,155
)
 
 
                       
(1)  Includes share-based compensation expense as follows:
 
Three Months Ended June 30,
 
2020
 
2019
 
(in thousands)
Cost of revenue
$
1,498

 
$
3,309

Research and development
2,418

 
7,127

Sales and marketing
5,405

 
15,104

General and administrative
3,351

 
15,885

Total share-based compensation
$
12,672

 
$
41,425


22

Revenue
 
Three Months Ended June 30,
 
Change
2020
 
2019
 
Amount
 
Percent
(in thousands, except percentages)
Subscription
$
144,357

 
$
108,128

 
$
36,229

 
34
 %
License
638

 
3,784

 
(3,146
)
 
(83
)%
Service
10,513

 
10,638

 
(125
)
 
(1
)%
Total revenue
$
155,508

 
$
122,550

 
$
32,958

 
27
 %
Subscription
Subscription revenue increased by $36.2 million, or 34%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, 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 93% of total revenue for the three months ended June 30, 2020 compared to 88% of total revenue for the three months ended June 30, 2019.
License
License revenue decreased by $3.1 million, or 83%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, 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 June 30, 2020, as compared to the three months ended June 30, 2019. We recognize the revenues associated with professional services as we deliver the services.
Cost of Revenue
 
Three Months Ended June 30,
 
Change
2020
 
2019
 
Amount
 
Percent
(in thousands, except percentages)
Cost of subscription
$
16,706

 
$
16,177

 
$
529

 
3
 %
Cost of service
8,010

 
8,809

 
(799
)
 
(9
)%
Amortization of acquired technology
3,826

 
4,557

 
(731
)
 
(16
)%
Total cost of revenue
$
28,542

 
$
29,543

 
$
(1,001
)
 
(3
)%
Cost of subscription
Cost of subscription increased $0.5 million, or 3%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase is primarily due to higher personnel costs to support the growth of our subscription cloud-based offering, partially offset by lower share-based compensation of $1.4 million.
Cost of service
Cost of service decreased by $0.8 million, or 9%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease was the result of lower share-based compensation of $0.4 million and travel costs of $0.5 million, partially offset by higher personnel costs.
Amortization of acquired technologies
For the three months ended June 30, 2020 and 2019, 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.

23

Gross Profit and Gross Margin
 
Three Months Ended June 30,
 
Change
2020
 
2019
 
Amount
 
Percent
(in thousands, except percentages)
Gross profit:
  

 
 
 
 
 
 
Subscriptions
$
127,651

 
$
91,951

 
$
35,700

 
39
 %
License
638

 
3,784

 
(3,146
)
 
(83
)%
Services
2,503

 
1,829

 
674

 
37
 %
Amortization of acquired technology
(3,826
)
 
(4,557
)
 
731

 
(16
)%
Total gross profit
$
126,966

 
$
93,007

 
$
33,959

 
37
 %
Gross margin:
 
 
 
 
 
 
 
Subscriptions
88
 %
 
85
 %
 
 
 
 
License
100
 %
 
100
 %
 
 
 
 
Services
24
 %
 
17
 %
 
 
 
 
Amortization of acquired technology
(100
)%
 
(100
)%
 
 
 
 
Total gross margin
82
 %
 
76
 %
 
 
 
 
Subscriptions
Subscriptions gross profit increased by $35.7 million, or 39%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Subscription gross margin increased from 85% to 88% during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
License
License gross profit decreased by $3.1 million, or 83%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The decrease was the result of a decline in sales of perpetual and term licenses for our Classic products.
Services
Services gross profit increased by $0.7 million, or 37%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Services gross margin increased from 17% to 24% during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Lower share-based compensation costs increased gross profit by $0.4 million compared to the same quarter last year.
Operating Expenses
 
Three Months Ended June 30,
 
Change
 
2020
 
2019
 
Amount
 
Percent
 
(in thousands, except percentages)
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
23,505

 
$
25,659

 
$
(2,154
)
 
(8
)%
Sales and marketing
49,163

 
58,215

 
(9,052
)
 
(16
)%
General and administrative
21,527

 
31,882

 
(10,355
)
 
(32
)%
Amortization of other intangibles
8,686