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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, 2021
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)  
Delaware47-2386428
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1601 Trapelo Road, Suite 11602451
WalthamMA
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (617530-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per shareDTNew 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 filerAccelerated filer
Non-accelerated filerSmaller 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 284,286,347 shares of common stock outstanding as of July 26, 2021.



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, 2021 (“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 novel coronavirus, or 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 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.




1


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

DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, 2021March 31, 2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents$387,218 $324,962 
Accounts receivable, net134,003 242,079 
Deferred commissions, current50,987 48,986 
Prepaid expenses and other current assets65,838 64,255 
Total current assets638,046 680,282 
Property and equipment, net37,841 36,916 
Operating lease right-of-use asset, net48,338 42,959 
Goodwill1,275,133 1,271,195 
Other intangible assets, net137,993 149,484 
Deferred tax assets, net17,012 16,811 
Deferred commissions, non-current50,001 48,638 
Other assets9,735 9,933 
Total assets$2,214,099 $2,256,218 
Liabilities and shareholders' equity
Current liabilities:
Accounts payable$3,431 $9,621 
Accrued expenses, current98,955 119,527 
Deferred revenue, current486,066 509,272 
Operating lease liabilities, current10,420 9,491 
Total current liabilities598,872 647,911 
Deferred revenue, non-current33,683 47,504 
Accrued expenses, non-current16,349 16,072 
Operating lease liabilities, non-current42,823 38,203 
Deferred tax liabilities1,014 1,014 
Long-term debt362,404 391,913 
Total liabilities1,055,145 1,142,617 
Commitments and contingencies (Note 8)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 284,217,750 and 283,130,238 shares issued and outstanding at June 30, 2021 and March 31, 2021, respectively
284 283 
Additional paid-in capital1,687,044 1,653,328 
Accumulated deficit(500,505)(513,799)
Accumulated other comprehensive loss(27,869)(26,211)
Total shareholders' equity1,158,954 1,113,601 
Total liabilities and shareholders' equity$2,214,099 $2,256,218 
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,
20212020
Revenue:
Subscription$196,520 $144,357 
License50 638 
Service13,170 10,513 
Total revenue209,740 155,508 
Cost of revenue:
Cost of subscription24,982 16,706 
Cost of service10,021 8,010 
Amortization of acquired technology3,830 3,826 
Total cost of revenue38,833 28,542 
Gross profit170,907 126,966 
Operating expenses:
Research and development34,725 23,505 
Sales and marketing80,482 49,163 
General and administrative26,922 21,527 
Amortization of other intangibles7,540 8,686 
Restructuring and other26 (21)
Total operating expenses149,695 102,860 
Income from operations21,212 24,106 
Interest expense, net(2,857)(4,113)
Other income, net1,311 19 
Income before income taxes19,666 20,012 
Income tax expense
(6,372)(7,147)
Net income$13,294 $12,865 
Net income per share:
Basic
$0.05 $0.05 
Diluted
$0.05 $0.05 
Weighted average shares outstanding:
Basic
282,661 279,069 
Diluted
288,988 284,309 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3


DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - In thousands)
Three Months Ended June 30,
20212020
Net income$13,294 $12,865 
Other comprehensive loss
Foreign currency translation adjustment(1,658)(2,342)
Total other comprehensive loss(1,658)(2,342)
Comprehensive income$11,636 $10,523 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - In thousands)
Three Months Ended June 30, 2021
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders' Equity
SharesAmount
Balance, March 31, 2021283,130 $283 $1,653,328 $(513,799)$(26,211)$1,113,601 
Foreign currency translation(1,658)(1,658)
Restricted stock units vested496 1 (1) 
Issuance of common stock related to employee stock purchase plan204 — 6,593 6,593 
Exercise of stock options388 — 7,886 7,886 
Share-based compensation19,252 19,252 
Equity repurchases(14)(14)
Net income13,294 13,294 
Balance, June 30, 2021284,218 $284 $1,687,044 $(500,505)$(27,869)$1,158,954 
Three Months Ended June 30, 2020
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders’ Equity
SharesAmount
Balance, March 31, 2020280,853 $281 $1,573,347 $(589,819)$(18,105)$965,704 
Foreign currency translation(2,342)(2,342)
Restricted stock units vested132 — — 
Restricted stock awards forfeited(88)— — 
Issuance of common stock related to employee stock purchase plan159 — 3,592 3,592 
Share-based compensation12,672 12,672 
Equity repurchases(13)(13)
Cumulative effects adjustment for ASU 2016-02 adoption306 306 
Net income12,865 12,865 
Balance, June 30, 2020281,056 $281 $1,589,598 $(576,648)$(20,447)$992,784 
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,
20212020
Cash flows from operating activities:
Net income$13,294 $12,865 
Adjustments to reconcile net income to cash provided by operations:
Depreciation
2,475 1,590 
Amortization
11,512 13,019 
Share-based compensation
19,252 12,672 
Deferred income taxes
(2)(175)
Other
(794)466 
Net change in operating assets and liabilities:
Accounts receivable
110,079 64,265 
Deferred commissions
(2,631)2,229 
Prepaid expenses and other assets
(1,453)275 
Accounts payable and accrued expenses
(27,376)(23,212)
Operating leases, net
131 311 
Deferred revenue
(41,015)(47,297)
Net cash provided by operating activities
83,472 37,008 
Cash flows from investing activities:
Purchase of property and equipment
(2,954)(4,418)
Capitalized software additions
 (131)
Acquisition of business, net of cash acquired(3,543) 
Net cash used in investing activities
(6,497)(4,549)
Cash flows from financing activities:
Repayment of term loans
(30,000) 
Proceeds from employee stock purchase plan
6,593 3,592 
Proceeds from exercise of stock options7,886  
Equity repurchases
(14)(13)
Net cash (used in) provided by financing activities
(15,535)3,579 
Effect of exchange rates on cash and cash equivalents816 1,169 
Net increase in cash and cash equivalents62,256 37,207 
Cash and cash equivalents, beginning of period324,962 213,170 
Cash and cash equivalents, end of period$387,218 $250,377 
Supplemental cash flow data:
Cash paid for interest$2,370 $3,763 
Cash paid for tax, net$5,403 $10,127 
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 an observability platform, purpose-built for modern multicloud environments. The Company designed its all-in-one Dynatrace® Software Intelligence Platform 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 deliver precise answers about the performance and security of applications, the underlying infrastructure, and the experience of its customers’ users that enables organizations to innovate faster, operate more efficiently, and improve user experiences for consistently better business outcomes.
Fiscal year
The Company’s fiscal year ends on March 31. References to fiscal 2022, for example, refer to the fiscal year ended March 31, 2022.
2.    Significant Accounting Policies
Basis of presentation and consolidation
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.
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of June 30, 2021 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three months ended June 30, 2021 and 2020, statements of cash flows for the three months ended June 30, 2021 and 2020, 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, 2021, its results of operations for the three months ended June 30, 2021 and 2020, and its cash flows for the three months ended June 30, 2021 and 2020 in accordance with U.S. GAAP. The results for the three months ended June 30, 2021 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, 2021 (“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, valuation of long-lived assets, the period of benefit for deferred commissions and material rights, equity-based compensation expense, income taxes, and 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.
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.
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Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted the new standard on a prospective basis as of April 1, 2021. The adoption did not have a material impact on the 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,
20212020
Amount%Amount%
North America$112,772 53 %$87,377 56 %
Europe, Middle East and Africa67,044 32 %47,071 30 %
Asia Pacific22,136 11 %16,940 11 %
Latin America7,788 4 %4,120 3 %
Total revenue$209,740 $155,508 
For the three months ended June 30, 2021 and 2020, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $104.5 million and 50% and $82.0 million and 53% of total revenue during the three months ended June 30, 2021 and 2020, respectively.
Deferred revenue
Revenues recognized during the three months ended June 30, 2021 and 2020 which was included in the deferred revenue balances at the beginning of each respective period, was $199.5 million and $146.3 million, respectively.
Remaining performance obligations
As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,252.0 million, which consists of both billed consideration in the amount of $519.7 million and unbilled consideration in the amount of $732.3 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 57% of this amount as revenue over the next twelve months and the remainder thereafter.
4.    Goodwill and Other Intangible Assets, Net
Changes in the carrying amount of goodwill on a consolidated basis for the three months ended June 30, 2021 consists of the following (in thousands):
June 30, 2021
Balance, beginning of period$1,271,195 
Goodwill from acquisitions (1)
3,524 
Foreign currency impact414 
Balance, end of period$1,275,133 
_________________
(1) The initial allocation of the purchase price from acquisition was based on preliminary valuations and assumptions and is subject to change. The Company expects to finalize the allocation of the purchase price within the measurement period.
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Other intangible assets, net excluding goodwill consists of the following (in thousands):
Weighted
Average 
Useful Life
(in months)
June 30, 2021March 31, 2021
Capitalized software107$189,438 $189,398 
Customer relationships120351,555 351,555 
Trademarks and tradenames12055,003 55,003 
Total intangible assets595,996 595,956 
Less: accumulated amortization(458,003)(446,472)
Total other intangible assets, net$137,993 $149,484 
Amortization of other intangible assets totaled $11.5 million and $13.0 million for the three months ended June 30, 2021 and 2020, respectively.
5.    Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income 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, 2021 was 32% compared to 36% for the three months ended June 30, 2020.
Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at June 30, 2021, 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, 2021 relates primarily to accrued interest, capitalized development costs, and foreign tax credits. Given the Company’s current earnings and anticipated future earnings, it is reasonably possible that within the next twelve months sufficient positive evidence may become available to allow the Company to conclude that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets. However, the exact timing and amount of the valuation allowance release are subject to change based on the Company’s growth and profitability.
6.    Long-term Debt
Long-term debt consists of the following (in thousands, except percentages):
June 30, 2021March 31, 2021
AmountEffective RateAmountEffective Rate
First Lien Term Loan $371,125 2.4 %$401,125 2.4 %
Revolving credit facility  
Total principal371,125 401,125 
Unamortized discount and debt issuance costs(8,721)(9,212)
Total debt362,404 391,913 
Less: Current portion of long-term debt  
Long-term debt$362,404 $391,913 
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. There were $15.6 million letters of credit issued as of both June 30, 2021 and March 31, 2021. The Company had $44.4 million of availability under the Revolving Facility as of both June 30, 2021 and March 31, 2021.
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
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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, 2021, the Company was in compliance with all applicable covenants.
7.    Leases
The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2022 to 2032. As of June 30, 2021, the weighted average remaining lease term was 5.8 years and the weighted average discount rate was 7.1%. The Company does not have any finance leases as of June 30, 2021.
The Company also has subleases of former offices which expire at various dates from fiscal 2022 to fiscal 2025. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $0.6 million and $1.2 million for the three months ended June 30, 2021 and 2020, respectively.
The following table presents information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended June 30,

20212020
Operating lease expense (1)
$2,469 $2,643 
Short-term lease expense$195 $68 
Variable lease expense $161 $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,
20212020
Cash paid for amounts included in the measurement of lease liabilities$3,191 $3,032 
Operating lease assets obtained in exchange for new operating lease liabilities (1)
$7,533 $ 
_________________
(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.

As of June 30, 2021, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31,Amount
2022$9,809 
202312,906 
202411,800 
20258,642 
20265,987 
Thereafter14,418 
Total operating lease payments (1)
63,562 
Less: imputed interest(10,319)
Total operating lease liabilities$53,243 
_________________
(1) Presented gross of sublease income.
As of June 30, 2021, the Company had commitments of $6.6 million for operating leases that have not yet commenced, and therefore are not included in the right-of-use assets or operating lease liabilities. These operating leases are expected to commence during the fiscal years ended March 31, 2022 and March 31, 2023, with lease terms ranging from 2 to 10 years.
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8.    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.
9.    Share-based Compensation
Amended and Restated 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, as amended and restated (the “2019 Plan”) which was subsequently approved by the Company’s shareholders and was later amended and restated by the Board in January 2021.
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, 2021, 38,554,389 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, 2021:
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, 20218,393 $21.31 8.6$226,438 
Granted92 51.41 
Exercised(388)19.62 
Forfeited(96)20.44 
Balance, June 30, 20218,001 $21.75 8.3$293,405 
Options vested and expected to vest at June 30, 20218,001 $21.75 8.3$293,405 
Options vested and exercisable at June 30, 20212,322 $19.25 8.2$90,955 
As of June 30, 2021, the total unrecognized compensation expense related to non-vested stock options is $47.3 million and is expected to be recognized over a weighted average period of 2.4 years. The Company recognized $4.7 million and $3.3 million of share-based compensation expense related to stock options for the three months ended June 30, 2021 and 2020, respectively.
Restricted shares and units
During the first three months of fiscal 2022, the Company granted an aggregate of 2,364,462 restricted stock units (“RSUs”) to certain key employees and non-employee directors. The total grants consisted of: (i) 1,560,662 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 three years, (ii) 295,900 performance-based restricted stock units that vest 33.3% on a yearly basis over three years (the “Incentive PSUs”), and (iii) 507,900 performance-based restricted stock units that vest 25% one year after the grant date and the remaining 75% vest ratably on a quarterly basis over the following three years (the “Annual PSUs”).
The Incentive PSUs vest in three equal installments, with one-third of the Incentive PSUs eligible to vest on each of the first three anniversaries of the date of grant, subject to the Company’s achievement of specific company metrics, and provided that the executive officer remains employed by the Company through the applicable vesting date. No Incentive PSUs will vest with respect to any year if the Company fails to achieve 95% of the applicable target for that year, and the overall number of shares that may be issued pursuant to the Incentive PSUs with respect to any year shall not exceed 150% of the target award for such year. The Incentive PSUs are not carried forward from year to year; if the Incentive PSUs are not earned in any given year, they are terminated for that year.
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The number of shares that may be earned pursuant to the Annual PSUs is based on specific company metrics related to the Company’s fiscal year ending March 31, 2022. No Annual PSUs will be earned with respect to any metric if the applicable “threshold” percentage of the specific metric is not achieved, and the overall number of shares that may be earned shall not exceed 150% of the target award. Once the Annual PSUs are earned, they are then also subject to time-based vesting, with 25% of the earned Annual PSUs vesting on the first anniversary of the grant date, and with the remaining 75% vesting in twelve equal quarterly installments over the following three years, and provided that the executive officer remains employed by the Company through the applicable vesting date.
Compensation expense for the Incentive PSUs and Annual PSUs is measured using the fair value at the date of grant and recorded over the vesting period of three or four years, respectively, under the graded-vesting attribution method and may be adjusted over the vesting period based on interim estimates of performance against the pre-set objectives.
The following table provides a summary of the changes in the number of restricted shares for the period ended June 30, 2021:
Number of Shares of
Restricted Stock Awards
Weighted Average
Grant Date Fair Value
Number of Restricted Stock UnitsWeighted Average
Grant Date Fair Value
(in thousands)(per share)(in thousands)(per share)
Balance, March 31, 2021728 $16.00 3,041 $24.44 
Granted  2,364 46.89 
Vested(260)16.00 (496)25.46 
Forfeited  (85)23.78 
Balance, June 30, 2021468 $16.00 4,824 $35.35 
As of June 30, 2021, the total unrecognized compensation expense related to unvested restricted stock is $6.6 million and is expected to be recognized over a weighted average period of 1.2 years. As of June 30, 2021, the total unrecognized compensation expense related to unvested restricted stock units is $160.3 million and is expected to be recognized over a weighted average period of 2.8 years. The Company recognized $13.5 million and $8.8 million of share-based compensation expense related to restricted shares and units for the three months ended June 30, 2021 and 2020, respectively.
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”). 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 six-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, 2021, 204,016 shares of common stock were purchased under the ESPP. As of June 30, 2021, 11,355,078 shares of common stock were available for future issuance under the ESPP.
As of June 30, 2021, there was approximately $2.1 million of unrecognized share-based compensation related to the ESPP that is expected to be recognized over the remaining term of the current offering period. The Company recognized $1.1 million and $0.5 million of share-based compensation expense related to the ESPP for the three months ended June 30, 2021 and 2020, respectively.
Share-based compensation
The following table summarizes the components of total share-based compensation expense included in the condensed consolidated financial statements for each period presented (in thousands):
Three Months Ended June 30,
20212020
Cost of revenue$2,652 $1,498 
Research and development3,967 2,418 
Sales and marketing7,608 5,405 
General and administrative5,025 3,351 
Total share-based compensation expense$19,252 $12,672 
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10.    Net Income Per Share
Basic net income per share is calculated by dividing the net income for the period by the weighted-average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net income per share includes the dilutive effect of common share equivalents and is calculated using the weighted-average number of common shares and the common share equivalents outstanding during the reporting period. An anti-dilutive impact is an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
Three Months Ended June 30,
20212020
Numerator:
Net income$13,294 $12,865 
Denominator:
Weighted average shares outstanding, basic282,661 279,069 
Dilutive effect of stock-based awards6,327 5,240 
Weighted average shares outstanding, diluted288,988 284,309 
Net income per share, basic$0.05 $0.05 
Net income per share, diluted$0.05 $0.05 
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, 2021 and 2020 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,
20212020
Stock options 318 1,200 
Unvested restricted stock and RSUs32 3 
Shares committed under ESPP3 61 
11.    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, 2021March 31, 2021
North America$12,469 $12,129 
Europe, Middle East and Africa23,778 23,124 
Asia Pacific1,505 1,619 
Latin America89 44 
Total property and equipment, net$37,841 $36,916 
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-
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Q and our Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our fiscal year ends on March 31. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period.
OVERVIEW
We offer the market-leading software intelligence platform, purpose-built for dynamic multicloud environments. As organizations embrace the cloud to effect their digital transformation, our all-in-one intelligence platform is designed to address the growing complexity faced by technology and digital business teams. With automation and intelligence at its core, our platform delivers precise answers about the performance and security of applications, the underlying infrastructure and the experience of all users to enable teams to innovate faster, simplify cloud complexity, collaborate more efficiently, and secure cloud-native applications. We designed our platform to allow our customers to modernize and automate IT operations, develop and release high quality software faster, and improve user experiences for consistently better business outcomes. As a result, as of June 30, 2021, our products are trusted by approximately 3,000 Dynatrace customers in over 90 countries in diverse industries such as banking, insurance, retail, manufacturing, travel and software.
We market Dynatrace® through a combination of our global direct sales team and a network of partners, including cloud service providers (Amazon, Microsoft, and Google), resellers, and system integrators. We target the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion.
We generate revenue primarily by selling subscriptions, which we define as (i) Software-as-a-service (“SaaS”) agreements, (ii) Dynatrace® term-based licenses, for which revenue is recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses, which are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements.
We deploy our platform as a SaaS solution, with the option of retaining the data in the cloud, or at the edge in customer-provisioned infrastructure, which we refer to as Dynatrace® Managed. The Dynatrace® Managed offering allows customers to maintain control of the environment where their data resides, whether in the cloud or on-premises, combining the simplicity of SaaS with the ability to adhere to their own data security and sovereignty requirements. Our Mission Control functionality automatically upgrades all Dynatrace® instances and offers on-premise cluster customers auto-deployment options that suit their specific enterprise management processes.
Dynatrace® is an all-in-one platform, which is typically purchased by our customers with the full-stack Application Performance Module and extended with our Infrastructure Monitoring, Digital Experience Monitoring, Digital Business Analytics, Application Security, or Cloud Automation Modules. Customers also have the option to purchase the infrastructure monitoring module where the full-stack APM is not required, with the ability to upgrade to the full-stack APM when necessary. Our Dynatrace® platform has been commercially available since 2016 and is the primary offering we sell. Dynatrace® customers increased to 3,018 as of June 30, 2021 from 2,458 as of June 30, 2020.
Our Classic products include AppMon, Classic Real User Monitoring, or RUM, Network Application Monitoring, or NAM, and Synthetic Classic. These products are only available to customers who had previously purchased them and were sunset as of April 1, 2021.
COVID-19 Update
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. The pandemic has had significant impacts around the globe and in many locations in which we operate. While the impacts have not caused a material adverse financial impact to our business to date, the future impacts remain uncertain. The extent to which the COVID-19 pandemic may impact our business going forward will depend on numerous evolving factors that we cannot reliably predict. These factors may adversely impact business spending on technology as well as customers’ ability to pay for our products and services on an ongoing basis. While our revenue, customer retention, and earnings are relatively predictable as a result of our subscription-based business model, the effect, if any, of the COVID-19 pandemic would not be fully reflected in our results of operations and overall financial performance until future periods.
Throughout the pandemic we have continued to make investments to support business growth and product development, including investments in research and development as we continue to introduce new products and applications to extend the functionality of our products, sales and marketing to support customer growth, and other critical functions to ensure the highest levels of customer service and support as well as ensuring that we maintain the required infrastructure to be a public company. We expect to continue to make these investments.
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See the section titled “Risk Factors” included under Part II, Item 1A for further discussion of the possible impact of the COVID-19 pandemic on our business.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Extend our technology and market leadership position. We intend to maintain our position as the market-leading software intelligence platform through increased investment in research and development and continued innovation. We expect to focus on expanding the functionality of Dynatrace® and investing in capabilities that address new market opportunities. We believe this strategy will enable new growth opportunities and allow us to continue to deliver differentiated high-value outcomes to our customers.
Grow our customer base. We intend to drive new customer growth by expanding our direct sales force focused on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion. In addition, we expect to leverage our global partner ecosystem to add new customers in geographies where we have direct coverage and work jointly with our partners. In other geographies, such as Africa, Japan, the Middle East, Russia and South Korea, we utilize a multi-tier “master reseller” model.
Increase penetration within existing customers. We plan to continue to increase penetration within our existing customers by expanding the breadth of our platform capabilities to provide for continued cross-selling opportunities. In addition, we believe the ease of implementation for Dynatrace® provides us the opportunity to expand adoption within our existing enterprise customers, across new customer applications, and into additional business units or divisions. Our Dynatrace® net expansion rate has been above 120% for the last 13 quarters.
Enhance our strategic partner ecosystem. Our strategic partners include industry-leading system integrators, software vendors, and cloud and technology providers. We intend to continue to invest in our partner ecosystem, with a particular emphasis on expanding our strategic alliances and cloud-focused partnerships, such as AWS, Azure, Google Cloud Platform, Red Hat OpenShift, and Atlassian.
Key Metrics
In addition to our U.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:
June 30,
20212020
Number of Dynatrace® Customers
3,018 2,458 
Total ARR (in thousands)$823,222 $601,376 
Dynatrace® Net Expansion Rate
120%+120%+
Dynatrace® Customers: We define the number of Dynatrace® customers at the end of any reporting period as the number of accounts, as identified by a unique account identifier, that generate at least $10,000 of Dynatrace® ARR as of the reporting date. In infrequent cases, a single large organization may comprise multiple customer accounts when there are distinct divisions, departments or subsidiaries that operate and make purchasing decisions independently from the parent organization. In cases where multiple customer accounts exist under a single organization, each customer account is counted separately based on a mutually exclusive accounting of ARR. As such, even though we target the largest 15,000 global enterprise accounts, there are more than 15,000 addressable Dynatrace® customers.
Annual Recurring Revenue “ARR”: We define annual recurring revenue, or ARR, as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage.
Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as the Dynatrace® ARR at the end of a reporting period for the cohort of Dynatrace® accounts as of one year prior to the date of calculation, divided by the Dynatrace® ARR one year prior to the date of calculation for that same cohort.
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KEY COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue includes subscriptions, licenses and services.
Subscription. Our subscription revenue consists of (i) SaaS agreements, (ii) Dynatrace® term-based licenses which are recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses that are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements. We typically invoice SaaS subscription fees and term licenses annually in advance and recognize subscription revenue ratably over the term of the applicable agreement, provided that all other revenue recognition criteria have been satisfied. Fees for our Dynatrace® perpetual licenses are generally billed up front. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates-Revenue Recognition” included in Part II, Item 7 of our Annual Report for more information. Over time, we expect subscription revenue will increase as a percentage of total revenue as we continue to focus on increasing subscription revenue as a key strategic priority.
License. License revenue reflects the revenues recognized from sales of perpetual and term-based licenses of our Classic products that are sold only to existing customers. The license fee portion of Classic perpetual license arrangements is recognized up front assuming all revenue recognition criteria are satisfied. Classic term license fees are also recognized up front. Classic term licenses are generally billed annually in advance and perpetual licenses are billed up front.
Service. Service revenue consists of revenue from helping our customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We generally recognize the revenues associated with our services in the period the services are performed, provided that collection of the related receivable is reasonably assured.
Cost of Revenue
Cost of subscription. Cost of subscription revenue includes all direct costs to deliver and support our subscription products, including salaries, benefits, share-based compensation and related expenses such as employer taxes, allocated overhead for facilities, IT, third-party hosting fees related to our cloud services, and amortization of internally developed capitalized software technology. We recognize these expenses as they are incurred.
Cost of service. Cost of service revenue includes salaries, benefits, share-based compensation and related expenses such as employer taxes for our services organization, allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses as they are incurred.
Amortization of acquired technology. Amortization of acquired technology includes amortization expense for technology acquired in business combinations and the Thoma Bravo Funds’ acquisition of us in 2014.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of revenue. Gross profit has been and will continue to be affected by various factors, including the mix of our license, subscription, and services and other revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors.
Operating Expenses
Personnel costs, which consist of salaries, benefits, bonuses, share-based compensation and, with regard to sales and marketing expenses, sales commissions, are the most significant component of our operating expenses. We also incur other non-personnel costs such as an allocation of our general overhead expenses.
Research and development. Research and development expenses primarily consists of the cost of programming personnel. We focus our research and development efforts on developing new solutions, core technologies, and to further enhance the functionality, reliability, performance, and flexibility of existing solutions. We believe that our software development teams and our core technologies represent a significant competitive advantage for us, and we expect that our research and development expenses will continue to increase, as we invest in research and development headcount to further strengthen and enhance our solutions.
Sales and marketing. Sales and marketing expenses primarily consists of personnel and facility-related costs for our sales, marketing, and business development personnel, commissions earned by our sales personnel and the cost of marketing and business development
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programs. We expect that sales and marketing expenses will continue to increase as we continue to hire additional sales and marketing personnel and invest in marketing programs.
General and administrative. General and administrative expenses primarily consist of the personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel; and other corporate expenses, including those associated with our ongoing public reporting obligations. We anticipate continuing to incur additional expenses due to growing our operations and being a public company, including higher legal, corporate insurance and accounting expenses.
Amortization of other intangibles. Amortization of other intangibles primarily consists of amortization of customer relationships and capitalized software and tradenames.
Restructuring and Other. Restructuring and other expenses primarily consists of various restructuring activities we have undertaken to achieve strategic and financial objectives. Restructuring activities include, but are not limited to, product offering cancellation and termination of related employees, office relocation, administrative cost of structure realignment and consolidation of resources.
Other Expense, Net
Other expense, net consists primarily of interest expense and foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries. Interest expense, net of interest income, consists primarily of interest on our term loan facility and amortization of debt issuance costs.
Income Tax Expense
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Our income tax rate varies from the U.S. federal statutory rate mainly due to (1) the impact of tax return provision true-ups resulting from changes in estimates to the reorganization transaction tax and the corresponding impact to uncertain tax positions, (2) differing tax rates and regulations in foreign jurisdictions, (3) differences in accounting and tax treatment of our share-based compensation, and (4) foreign withholding taxes. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue.
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RESULTS OF OPERATIONS
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
Comparison of the Three Months Ended June 30, 2021 and 2020
Three Months Ended June 30,
20212020
AmountPercentAmountPercent
(in thousands, except percentages)
Revenue:
Subscription$196,520 94 %$144,357 93 %
License50 — %638 — %
Service13,170 %10,513 %
Total revenue209,740 100 %155,508 100 %
Cost of revenue:
Cost of subscription24,982 12 %16,706 11 %
Cost of service10,021 %8,010 %
Amortization of acquired technology3,830 %3,826 %
Total cost of revenue (1)
38,833 19 %28,542 18 %
Gross profit170,907 81 %126,966 82 %
Operating expenses:
Research and development (1)
34,725 17 %23,505 15 %
Sales and marketing (1)
80,482 38 %49,163 32 %
General and administrative (1)
26,922 13 %21,527 14 %
Amortization of other intangibles7,540 %8,686 %
Restructuring and other26 (21)
Total operating expenses149,695 102,860 
Income from operations21,212 24,106 
Other expense, net(1,546)(4,094)
Income before income taxes19,666 20,012 
Income tax expense(6,372)(7,147)
Net income$13,294 $12,865 
(1)  Includes share-based compensation expense as follows:
Three Months Ended June 30,
20212020
(in thousands)
Cost of revenue$2,652 $1,498 
Research and development3,967 2,418 
Sales and marketing7,608 5,405 
General and administrative5,025 3,351 
Total share-based compensation$19,252 $12,672 
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Revenue
Three Months Ended June 30,Change
20212020AmountPercent
(in thousands, except percentages)
Subscription$196,520 $144,357 $52,163 36 %
License50 638 (588)(92 %)
Service13,170 10,513 2,657 25 %
Total revenue$209,740 $155,508 $54,232 35 %
Subscription
Subscription revenue increased by $52.2 million, or 36%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily due to the growing adoption of the Dynatrace® platform by new customers combined with existing customers expanding their use of our solutions. Our subscription revenue increased to 94% of total revenue for the three months ended June 30, 2021 compared to 93% of total revenue for the three months ended June 30, 2020.
License
License revenue decreased by $0.6 million, or 92%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily due to the decline of sales of our Classic products to existing customers as they convert to our Dynatrace® platform. We are no longer selling our Classic products to new customers.
Service
Service revenue increased by $2.7 million, or 25%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. We recognize the revenues associated with professional services as we deliver the services.
Cost of Revenue
Three Months Ended June 30,Change
20212020AmountPercent
(in thousands, except percentages)
Cost of subscription$24,982 $16,706 $8,276 50 %
Cost of service10,021 8,010 2,011 25 %
Amortization of acquired technology3,830 3,826 — %
Total cost of revenue$38,833 $28,542 $10,291 36 %
Cost of subscription
Cost of subscription increased $8.3 million, or 50%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase is primarily due to higher personnel costs to support the growth of our subscription cloud-based offering of $5.0 million, increased cloud-based hosting costs and subscriptions of $2.5 million, and higher share-based compensation of $0.9 million.
Cost of service
Cost of service increased by $2.0 million, or 25%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. The increase was the result of higher personnel costs of $1.8 million and higher share-based compensation of $0.2 million.
Amortization of acquired technologies
For the three months ended June 30, 2021 and 2020, amortization of acquired technologies is primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of us in 2014.
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Gross Profit and Gross Margin
Three Months Ended June 30,Change
20212020AmountPercent
(in thousands, except percentages)
Gross profit:  
Subscriptions$171,538 $127,651 $43,887 34 %
License50 638 (588)(92 %)
Services3,149 2,503 646 26 %
Amortization of acquired technology(3,830)(3,826)(4)— %
Total gross profit$170,907 $126,966 $43,941 35 %
Gross margin:
Subscriptions87 %88 %
License100 %100 %
Services24 %24 %
Amortization of acquired technology(100 %)(100 %)
Total gross margin81 %82 %
Subscriptions
Subscriptions gross profit increased by $43.9 million, or 34%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Subscription gross margin decreased from 88% to 87% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase in gross profit is primarily due to the growing adoption of the Dynatrace® platform by new customers.
License
License gross profit decreased by $0.6 million, or 92%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The decrease was the result of a decline in sales of perpetual and term licenses for our Classic products.
Services
Services gross profit increased by $0.6 million, or 26%, to $3.1 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Services gross margin was 24% for the three months ended June 30, 2021 as well as the three months ended June 30, 2020.
Operating Expenses
Three Months Ended June 30,Change
20212020AmountPercent
(in thousands, except percentages)
Operating expenses:
Research and development$34,725 $23,505 $11,220 48 %
Sales and marketing80,482 49,163 31,319 64 %
General and administrative26,922 21,527 5,395 25 %
Amortization of other intangibles7,540 8,686 (1,146)(13 %)
Restructuring and other26 (21)47 (224 %)
Total operating expenses$149,695 $102,860 $46,835 46 %
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Research and development
Research and development expenses increased $11.2 million, or 48%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. The increase is due to a 30% increase in headcount and related allocated overhead, resulting in increased personnel and other costs to expand our product offerings of $7.6 million, higher share-based compensation of $1.5 million, and increased cloud-based hosting costs of $0.5 million.
Sales and marketing
Sales and marketing expenses increased $31.3 million, or 64%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, due to a 24% increase in headcount, resulting in an increase of $14.3 million in personnel costs, increased advertising and marketing costs of $9.9 million, and higher share-based compensation of $2.2 million. Higher employee-related expenses of $1.7 million, higher professional fees of $1.3 million, and increased travel-related expenses related to global restrictions lifting of $0.6 million also contributed to this increase.
General and administrative
General and administrative expenses increased $5.4 million, or 25%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily due to increased personnel costs of $3.3 million, higher share-based compensation of $1.7 million, and higher depreciation costs of $0.7 million.
Amortization of other intangibles
Amortization of other intangibles decreased by $1.1 million, or 13%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. The decline is primarily the result of lower amortization for certain intangible assets that are amortized on a systematic basis that reflects the pattern in which the economic benefits of the intangible assets are estimated to be realized and the completion of amortization on certain intangibles.
Other Expense, Net
Other expense, net decreased by $2.5 million, or 62%, for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. The decrease in other expense was primarily a result of lower interest expense on our term loans due to the reductions in principal compared to the same quarter last fiscal year, as well as gains on foreign currency transactions.
Income Tax Expense
Income tax expense for the three months ended June 30, 2021 of $6.4 million represented a $0.7 million decrease as compared to an expense of $7.1 million for the three months ended June 30, 2020, primarily driven by additional share-based compensation tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2021, we had $387.2 million of cash and cash equivalents and $44.4 million available under our revolving credit facility. Since inception, we have financed our operations primarily through payments by our customers for use of our product offerings and related services and, to a lesser extent, the net proceeds we have received from sales of equity securities and borrowings on our term loan facilities. In August 2019, we completed our IPO in which we issued and sold an aggregate of 38.9 million shares of common stock at a price of $16.00 per share. We received aggregate net proceeds of $585.3 million from the IPO, after underwriting discounts and commissions and payments of offering costs. Over the past three years, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.
Our historical expansion with customers has typically been achieved by executing additional contracts, each with unique pricing and anniversary dates. We are transitioning to a program that combines these contracts into one single, often multi-year contract per customer with one single anniversary date, which may result in variability in the timing and amounts of our billings which could impact the timing of our cash collections from period to period.
Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in the section titled “Risk Factors” included elsewhere in this Quarterly Report and our Annual Report. However, we believe that our existing cash, cash equivalents, short-term investment balances, funds available under our debt agreement, and cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
21


Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.
Our Credit Facilities
As of June 30, 2021, the balance outstanding under our first lien term loan was $371.1 million and is included in long-term debt on our condensed consolidated balance sheets. We had $44.4 million available under the revolving credit facility after considering $15.6 million of letters of credit outstanding. All of our obligations under our term loans are guaranteed by our existing and future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets. At June 30, 2021, we were in compliance with all applicable covenants pertaining to the First Lien Credit Agreement. Our credit facilities are discussed further in Note 6 of the notes to the condensed consolidated financial statements in this Quarterly Report.
Summary of Cash Flows
Three Months Ended June 30,
20212020
(in thousands)
Cash provided by operating activities (1)
$83,472 $37,008 
Cash used in investing activities(6,497)(4,549)
Cash (used in) provided by financing activities(15,535)3,579 
Effect of exchange rate changes on cash and cash equivalents816 1,169 
Net increase in cash and cash equivalents$62,256 $37,207 
(1) Net cash provided by operating activities includes cash payments for interest and tax as follows:
Three Months Ended June 30,
20212020
(in thousands)
Cash paid for interest$2,370 $3,763 
Cash paid for tax, net$5,403 $10,127 
Operating Activities
For the three months ended June 30, 2021, cash provided by operating activities was $83.5 million as a result of net income of $13.3 million, and adjusted by non-cash charges of $32.4 million and a change of $37.7 million in our operating assets and liabilities. The non-cash charges are primarily comprised of share-based compensation of $19.3 million and depreciation and amortization of $14.0 million. The change in our net operating assets and liabilities was primarily the result of a decrease in accounts receivable of $110.1 million due to the timing of receipts of payments from customers. Partially offsetting this was a decrease in deferred revenue of $41.0 million due to the timing of billings in advance of revenue recognition primarily for subscription sales, a decrease in accounts payable and accrued expenses of $27.4 million driven by timing of payments, and an increase in deferred commissions of $2.6 million due to commissions paid on new bookings.
For the three months ended June 30, 2020, cash provided by operating activities was $37.0 million as a result of a net income of $12.9 million, and adjusted by non-cash charges of $27.6 million and a change of $3.4 million in our operating assets and liabilities. The non-cash charges are primarily comprised of share-based compensation of $12.7 million and depreciation and amortization of $14.6 million. The change in our net operating assets and liabilities was primarily the result of a decrease in deferred revenue of $47.3 million due to the timing of billings in advance of revenue recognition primarily for subscription sales and a decrease in accounts payable and accrued expenses of $23.2 million driven by timing of payments, which were partially offset by a decrease in accounts receivable of $64.3 million due to the timing of receipts of payments from customers.
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Investing Activities
Cash used in investing activities during the three months ended June 30, 2021 was $6.5 million, as a result of an acquisition made in the first quarter of the fiscal year of $3.5 million and the purchases of property and equipment of $3.0 million.
Cash used in investing activities during the three months ended June 30, 2020 was $4.5 million, as a result of purchases of property and equipment of $4.4 million and capitalized software additions of $0.1 million.
Financing Activities
Cash used in financing activities during the three months ended June 30, 2021 was $15.5 million, primarily as a result of repayments of our term loans of $30.0 million, partially offset by proceeds from our employee stock purchase plan of $6.6 million and proceeds from the exercise of our stock options of $7.9 million.
Cash provided by financing activities during the three months ended June 30, 2020 was $3.6 million, primarily as a result of proceeds from our employee stock purchase plan of $3.6 million .
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Under various agreements, we are obligated to make future cash payments. These include payments under our long-term debt agreements, rent payments required under operating lease agreements, interest obligations on our term loans, and other contractual commitments.
The following table summarizes our payments under contractual obligations as of June 30, 2021 (in thousands):
Payments Due by Period
TotalLess than
1 Year
1 to 3 Years3 to 5 YearsMore than
5 Years
Operating lease obligations$63,562 $9,809 $24,706 $14,629 $14,418 
First Lien Term Loan - principal (1)
371,125 — — 371,125 — 
First Lien Term Loan - interest (2)
36,745 8,859 17,741 10,145 — 
Revolving credit facility (3)
— — — — — 
Total$471,432 $18,668 $42,447 $395,899 $14,418 
(1) The amounts included in the table above represent principal maturities only.
(2) Amounts represent estimated future interest payments on borrowings under our First Lien Term Loan, which were estimated using the interest rate effective at June 30, 2021 multiplied by the principal outstanding on June 30, 2021. The First Lien Term Loan consists of $371.1 million currently bearing interest at 2.4%.
(3) As of June 30, 2021, we had no outstanding borrowings under our revolving credit facility, $15.6 million of letters of credit outstanding, and $44.4 million was available for borrowing under our revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
For a full discussion of these estimates and policies, see “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
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RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Significant Accounting Policies” to our condensed consolidated financial statements included in Part I, Item 1 included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial condition, and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries in its local currency. Due to our international operations, we have foreign currency risks related to operating expense denominated in currencies other than the U.S. dollar, particularly the Euro. Additionally, fluctuations in foreign currencies impact the amount of total assets, liabilities, and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect our operating results as expressed in U.S. dollars.
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates because, although substantially all of our revenue is generated in U.S. dollars, our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, Europe and Asia. Our results of operations and cash flows could therefore be adversely affected in the future due to changes in foreign exchange rates. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our results of operations or cash flows, and to date, we have not engaged in any hedging strategies with respect to foreign currency transactions. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates, and we may choose to engage in the hedging of foreign currency transactions in the future.
Interest Rate Risk
We had cash and cash equivalents of $387.2 million and $325.0 million as of June 30, 2021 and March 31, 2021, respectively, consisting of bank deposits, commercial paper, and money market funds. These interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.
At June 30, 2021, we also had in place a $60.0 million revolving credit facility, with availability of $44.4 million, and $371.1 million in term loans. The revolving credit facility and the term loan bear interest based on the adjusted LIBOR rate, as defined in the agreement, plus an applicable margin, equivalent to 2.4% at June 30, 2021. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of June 30, 2021, were effective and provided reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not currently a party to, nor is our property currently subject to, any material legal proceedings, nor are we involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations. We are not aware of any governmental inquiries or investigations into our business.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.
Summary of the Material Risks Associated with Our Business
Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks and uncertainties include, but are not limited to, the following:
We have experienced rapid subscription revenue growth in recent periods, and our recent growth rates may not be indicative of our future growth.
Market adoption of software intelligence solutions for observability, application performance monitoring, digital experience monitoring, infrastructure monitoring, AIOps, business intelligence and analytics and application security is relatively new and may not grow as we expect, which may harm our business and prospects.
Our business is dependent on overall demand for software intelligence solutions and therefore reduced spending on software intelligence solutions or overall adverse economic conditions may negatively affect our business, operating results and financial condition.
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
If we cannot successfully execute on our strategy and continue to develop and effectively market solutions that anticipate and respond to the needs of our customers, our business, operating results and financial condition may suffer.
If our platform and solutions do not effectively interoperate with our customers’ existing or future technology stacks, installations of our solutions could be delayed or canceled, which would harm our business.
Our future revenues and operating results will be harmed if we are unable to acquire new customers, if our customers do not renew their contracts with us, or if we are unable to expand sales to our existing customers or develop new solutions that achieve market acceptance.
25


Failure to effectively expand our sales and marketing capabilities could harm our ability to execute on our business plan, increase our customer base and achieve broader market acceptance of our applications.
We face significant competition which may adversely affect our ability to add new customers, retain existing customers and grow our business.
If we are unable to maintain successful relationships with our partners, or if our partners fail to perform, our ability to market, sell and distribute our applications and services will be limited, and our business, operating results and financial condition could be harmed.
Security breaches, computer malware, computer hacking attacks and other security incidents could harm our business, reputation, brand and operating results.
Real or perceived errors, failures, defects or vulnerabilities in our solutions could adversely affect our financial results and growth prospects.
Our substantial level of indebtedness could materially and adversely affect our financial condition.
Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harm our business, operating results and financial condition.
We previously identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
Thoma Bravo has significant influence over matters requiring stockholder approval, which may have the effect of delaying or preventing changes of control or limiting the ability of other stockholders to approve transactions they deem to be in their best interest.
Risks Related to Our Business and Industry
We have experienced rapid subscription revenue growth in recent periods, and our recent growth rates may not be indicative of our future growth.
We have experienced rapid subscription revenue growth in recent periods. From the year ended March 31, 2019 to the year ended March 31, 2020, our subscription revenue grew 39% from $349.8 million to $487.8 million, respectively. From the year ended March 31, 2020 to the year ended March 31, 2021, our subscription revenue grew 34% from $487.8 million to $655.2 million, respectively. From the three months ended June 30, 2020 to the three months ended June 30, 2021, our subscription revenue grew 36% from $144.4 million to $196.5 million, respectively. From the year ended March 31, 2019 to the year ended March 31, 2020, subscription revenue as a percentage of total revenue grew from 81% to 89%, respectively. From the year ended March 31, 2020 to the year ended March 31, 2021, subscription revenue as a percentage of total revenue grew from 89% to 93% respectively. From the three months ended June 30, 2020 to the three months ended June 30, 2021, subscription revenue as a percentage of total revenue grew from 93% to 94%, respectively. This subscription revenue growth may not be indicative of our future subscription revenue growth and we may not be able to sustain revenue growth consistent with recent history, or at all. We believe our ability to continue to increase our revenue depends on a number of factors, including, but not limited to:
our ability to attract new customers and retain and increase sales to existing customers;
our ability to continue to expand customer adoption of our Dynatrace® platform;
our ability to develop our existing platform and introduce new solutions on our platform;
continued growth of cloud-based services and solutions;
our ability to continue to develop and offer products and solutions that are superior to those of our competitors;
our ability to retain customers;
our ability to expand into new geographies and markets, including the business intelligence, data analytics, and application security markets; and
our ability to hire and retain sufficient numbers of sales and marketing, research and development and general and administrative personnel, and expand our global operations.
If we are unable to achieve any of these requirements, our subscription revenue growth will be adversely affected.
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Our quarterly and annual operating results may be adversely affected due to a variety of factors, which could make our future results difficult to predict.
Our annual and quarterly revenue and operating results have fluctuated significantly in the past and may vary significantly in the future due to a variety of factors, many of which are outside of our control. Our financial results in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. If our revenues, earnings or operating results fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance that we may provide, the price of our common stock could decline. We may not be able to accurately predict our future billings, revenues, earnings or operating results. Some of the important factors that may cause our operating results to fluctuate from quarter to quarter or year to year include: