February 2, 2022 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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 December 31, 2021


☐			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

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 285,744,612 shares of common stock outstanding as of January 31, 2022.

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 (“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.


PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2021	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2021 and 2020	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2021 and 2020	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended December 31, 2021 and 2020	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2021 and 2020	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Default Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DYNATRACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31, 2021		March 31, 2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	408,723	$	324,962
Accounts receivable, net	264,293		242,079
Deferred commissions, current	57,978		48,986
Prepaid expenses and other current assets	81,326		64,255
Total current assets	812,320		680,282
Property and equipment, net	41,984		36,916
Operating lease right-of-use assets, net	59,306		42,959
Goodwill	1,281,764		1,271,195
Other intangible assets, net	117,908		149,484
Deferred tax assets, net	16,390		16,811
Deferred commissions, non-current	58,086		48,638
Other assets	10,003		9,933
Total assets	$	2,397,761	$	2,256,218

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	22,256	$	9,621
Accrued expenses, current	116,154		119,527

Deferred revenue, current	563,045		509,272
Operating lease liabilities, current	11,700		9,491
Total current liabilities	713,155		647,911
Deferred revenue, non-current	30,937		47,504
Accrued expenses, non-current	20,046		16,072
Operating lease liabilities, non-current	52,976		38,203
Deferred tax liabilities	1,217		1,014
Long-term debt	303,415		391,913
Total liabilities	1,121,746		1,142,617
Commitments and contingencies (Note 8)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 285,701,744 and 283,130,238 shares issued and outstanding at December 31, 2021 and March 31, 2021, respectively	286		283
Additional paid-in capital	1,762,789		1,653,328
Accumulated deficit	(462,277)		(513,799)
Accumulated other comprehensive loss	(24,783)		(26,211)
Total shareholders' equity	1,276,015		1,113,601
Total liabilities and shareholders' equity	$	2,397,761	$	2,256,218

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited – In thousands, except per share data)


	Three Months Ended December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Revenue:
Subscription	$	226,290	$	170,308	$	635,411	$	472,338
License	2		257		52		1,337
Service	14,474		12,346		41,397		33,330
Total revenue	240,766		182,911		676,860		507,005
Cost of revenue:
Cost of subscription	28,284		20,382		80,401		55,415
Cost of service	12,232		8,907		32,921		25,471
Amortization of acquired technology	3,944		3,831		11,638		11,487
Total cost of revenue	44,460		33,120		124,960		92,373
Gross profit	196,306		149,791		551,900		414,632

Operating expenses:
Research and development	40,876		28,730		113,509		79,747
Sales and marketing	94,033		64,829		260,816		170,682
General and administrative	32,643		23,442		91,254		67,079
Amortization of other intangibles	7,539		8,685		22,618		26,057
Restructuring and other	—		(2)		25		23
Total operating expenses	175,091		125,684		488,222		343,588
Income from operations	21,215		24,107		63,678		71,044
Interest expense, net	(2,450)		(3,455)		(7,958)		(11,170)
Other (expense) income, net	(1,357)		2,526		(1,345)		2,744
Income before income taxes	17,408		23,178		54,375		62,618
Income tax expense	(2,821)		(4,762)		(2,853)		(13,858)
Net income	$	14,587	$	18,416	$	51,522	$	48,760
Net income per share:
Basic	$	0.05	$	0.07	$	0.18	$	0.17
Diluted	$	0.05	$	0.06	$	0.18	$	0.17
Weighted average shares outstanding:
Basic	284,722		281,010		283,773		280,057
Diluted	291,845		286,427		290,895		285,884

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)


	Three Months Ended December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Net income	$	14,587	$	18,416	$	51,522	$	48,760
Other comprehensive income (loss)
Foreign currency translation adjustment	692		(4,786)		1,428		(9,920)
Total other comprehensive income (loss)	692		(4,786)		1,428		(9,920)
Comprehensive income	$	15,279	$	13,630	$	52,950	$	38,840

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Three Months Ended December 31, 2021
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, September 30, 2021	285,025	$	285	$	1,723,056	$	(476,864)	$	(25,475)	$	1,221,002
Foreign currency translation								692		692
Restricted stock units vested	252	—								—

Issuance of common stock related to employee stock purchase plan	168	1		7,320						7,321
Exercise of stock options	257	—		5,311						5,311
Share-based compensation				27,123						27,123
Equity repurchases				(21)						(21)
Net income						14,587				14,587
Balance, December 31, 2021	285,702	$	286	$	1,762,789	$	(462,277)	$	(24,783)	$	1,276,015



	Three Months Ended December 31, 2020
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders’ Equity
	Shares	Amount
Balance, September 30, 2020	282,024	$	281	$	1,609,246	$	(559,169)	$	(23,239)	$	1,027,119
Foreign currency translation								(4,786)		(4,786)
Restricted stock units vested	229	—								—
Restricted stock awards forfeited	(7)	—								—
Issuance of common stock related to the employee stock purchase plan	172	—		5,603						5,603
Exercise of stock options	125	—		2,020						2,020
Share-based compensation				15,588						15,588
Equity repurchases				(11)						(11)
Net income						18,416				18,416
Balance, December 31, 2020	282,543	$	281	$	1,632,446	$	(540,753)	$	(28,025)	$	1,063,949

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Nine Months Ended December 31, 2021
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, March 31, 2021	283,130	$	283	$	1,653,328	$	(513,799)	$	(26,211)	$	1,113,601
Foreign currency translation								1,428		1,428
Restricted stock units vested	1,049	1		(1)						—
Restricted stock awards forfeited	(19)	—								—
Issuance of common stock related to employee stock purchase plan	372	1		13,913						13,914
Exercise of stock options	1,170	1		23,650						23,651
Share-based compensation				71,950						71,950
Equity repurchases				(51)						(51)

Net income						51,522				51,522
Balance, December 31, 2021	285,702	$	286	$	1,762,789	$	(462,277)	$	(24,783)	$	1,276,015



	Nine Months Ended December 31, 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	$	(589,819)	$	(18,105)	$	965,704
Foreign currency translation								(9,920)		(9,920)
Restricted stock units vested	1,035	—								—
Restricted stock awards forfeited	(103)	—								—
Issuance of common stock related to employee stock purchase plan	331	—		9,195						9,195
Exercise of stock options	427	—		6,849						6,849
Share-based compensation				43,091						43,091
Equity repurchases				(36)						(36)
Cumulative effects adjustment for ASU 2016-02 adoption						306				306
Net income						48,760				48,760
Balance, December 31, 2020	282,543	$	281	$	1,632,446	$	(540,753)	$	(28,025)	$	1,063,949

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)


	Nine Months Ended December 31,
	2021		2020
Cash flows from operating activities:
Net income	$	51,522	$	48,760
Adjustments to reconcile net income to cash provided by operations:
Depreciation	7,788		6,589
Amortization	34,682		39,046
Share-based compensation	71,950		43,091
Deferred income taxes	34		(3,014)
Other	2,872		(1,240)
Net change in operating assets and liabilities:
Accounts receivable	(22,362)		(37,693)
Deferred commissions	(19,581)		(6,380)
Prepaid expenses and other assets	(17,508)		25,920
Accounts payable and accrued expenses	10,987		14,891
Operating leases, net	683		599
Deferred revenue	41,545		3,996
Net cash provided by operating activities	162,612		134,565

Cash flows from investing activities:
Purchase of property and equipment	(11,768)		(8,868)
Capitalized software additions	—		(248)
Acquisition of businesses, net of cash acquired	(13,195)		—
Net cash used in investing activities	(24,963)		(9,116)

Cash flows from financing activities:
Repayment of term loans	(90,000)		(60,000)
Proceeds from employee stock purchase plan	13,913		9,195
Proceeds from exercise of stock options	23,650		6,849
Equity repurchases	(51)		(36)
Net cash used in financing activities	(52,488)		(43,992)

Effect of exchange rates on cash and cash equivalents	(1,400)		4,878

Net increase in cash and cash equivalents	83,761		86,335

Cash and cash equivalents, beginning of period	324,962		213,170
Cash and cash equivalents, end of period	$	408,723	$	299,505

Supplemental cash flow data:
Cash paid for interest	$	6,549	$	9,914
Cash paid for (received from) tax, net	$	12,902	$	(14,472)

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

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 December 31, 2021 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three and nine months ended December 31, 2021 and 2020, statements of cash flows for the nine months ended December 31, 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 December 31, 2021, its results of operations for the three and nine months ended December 31, 2021 and 2020, and its cash flows for the nine months ended December 31, 2021 and 2020 in accordance with U.S. GAAP. The results for the three and nine months ended December 31, 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, share-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.

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 condensed consolidated financial statements.

Recently issued accounting pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, with early adoption permitted. The Company plans to early adopt this standard in the fourth quarter of fiscal 2022 and does not expect the standard to have a material effect 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 December 31,								Nine Months Ended December 31,
	2021				2020				2021				2020
	Amount		%		Amount		%		Amount		%		Amount		%
North America	$	133,704	55	%	$	100,918	55	%	$	370,368	55	%	$	281,806	56	%
Europe, Middle East and Africa	71,102		30	%	55,945		31	%	207,493		31	%	154,868		30	%
Asia Pacific	24,927		10	%	20,643		11	%	71,002		10	%	56,854		11	%
Latin America	11,033		5	%	5,405		3	%	27,997		4	%	13,477		3	%
Total revenue	$	240,766			$	182,911			$	676,860			$	507,005

For the three and nine months ended December 31, 2021 and 2020, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $124.3 million and 52% and $94.2 million and 51% of total revenue during the three months ended December 31, 2021 and 2020, respectively, and $343.9 million and 51% and $263.3 million and 52% of total revenue for the nine months ended December 31, 2021 and 2020, respectively.

Deferred revenue

Revenues recognized during the three months ended December 31, 2021 and 2020, which was included in the deferred revenue balances at the beginning of each respective period, was $110.6 million and $87.1 million, respectively. Revenues recognized during the nine months ended December 31, 2021 and 2020 which was included in the deferred revenue balances at the beginning of each respective period, was $447.2 million and $339.5 million, respectively.

Remaining performance obligations

As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,402.0 million, which consists of both billed consideration in the amount of $594.0 million and unbilled consideration in the amount of $808.0 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 nine months ended December 31, 2021 consists of the following (in thousands):


	December 31, 2021
Balance, beginning of period	$	1,271,195
Goodwill from acquisitions (1)	10,374
Foreign currency impact	195
Balance, end of period	$	1,281,764

_________________

(1) The initial allocation of the purchase price from acquisitions was based on preliminary valuations and assumptions and is subject to change. The Company expects to finalize the allocation of the purchase prices within the measurement period.

Other intangible assets, net excluding goodwill consists of the following (in thousands):


	Weighted Average Useful Life (in months)
		December 31, 2021		March 31, 2021
Capitalized software	107	$	192,536	$	189,398
Customer relationships	120	351,555		351,555
Trademarks and tradenames	120	55,003		55,003
Total intangible assets		599,094		595,956
Less: accumulated amortization		(481,186)		(446,472)
Total other intangible assets, net		$	117,908	$	149,484

Amortization of other intangible assets totaled $11.6 million and $13.0 million for the three months ended December 31, 2021 and 2020, respectively, and $34.7 million and $39.0 million for the nine months ended December 31, 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 December 31, 2021 was 16% compared to 21% for the three months ended December 31, 2020. The Company’s effective tax rate for the nine months ended December 31, 2021 was 5% compared to 22% for the nine months ended December 31, 2020. The decrease in the effective tax rate for both the three months ended December 31, 2021 and 2020 and nine months ended December 31, 2021 and 2020 is primarily due to additional share-based compensation tax windfall benefits and a $2.1 million one-time benefit related to anticipated tax refunds resulting from a favorable Polish research and development ruling received by the Company in August 2021.

Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at December 31, 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 December 31, 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):


	December 31, 2021				March 31, 2021
	Amount		Effective Rate		Amount		Effective Rate
First Lien Term Loan	$	311,125	2.4	%	$	401,125	2.4	%
Revolving credit facility	—				—
Total principal	311,125				401,125
Unamortized discount and debt issuance costs	(7,710)				(9,212)
Total debt	303,415				391,913
Less: Current portion of long-term debt	—				—
Long-term debt	$	303,415			$	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 $15.7 million and $15.6 million letters of credit issued as of December 31, 2021 and March 31, 2021, respectively. The Company had $44.3 million and $44.4 million of availability under the Revolving Facility as of December 31, 2021 and March 31, 2021, 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 December 31, 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 December 31, 2021, the weighted average remaining lease term was 6.2 years and the weighted average discount rate was 5.7%. The Company does not have any finance leases as of December 31, 2021.

The Company has a sublease of a former office which expires in fiscal 2025. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $0.8 million and $1.0 million for the three months ended December 31, 2021 and 2020, respectively, and $1.9 million and $3.3 million for the nine months ended December 31, 2021 and 2020, respectively.

The following table presents information about leases on the condensed consolidated statements of operations (in thousands):


	Three Months Ended December 31,				Nine Months Ended December 31, 2021
	2021		2020		2021		2020
Operating lease expense (1)	$	2,838	$	2,640	$	7,919	$	8,022
Short-term lease expense	$	258	$	174	$	699	$	524
Variable lease expense	$	202	$	205	$	574	$	549

_________________

(1) Presented gross of sublease income.

The following table presents supplemental cash flow information about the Company’s leases (in thousands):


	Nine Months Ended December 31,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities	$	9,912	$	10,251
Operating lease assets obtained in exchange for new operating lease liabilities (1)	$	25,151	$	2,600

_________________

(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.

As of December 31, 2021, remaining maturities of lease liabilities were as follows (in thousands):


Fiscal Years Ending March 31,	Amount
2022	$	3,535
2023	14,987
2024	14,303
2025	11,323
2026	8,349
Thereafter	22,083
Total operating lease payments (1)	74,580
Less: imputed interest	(9,904)
Total operating lease liabilities	$	64,676

_________________

(1) Presented gross of sublease income.

As of December 31, 2021, the Company had commitments of $5.8 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 5 to 6 years.

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 December 31, 2021, 37,834,512 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 December 31, 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, 2021	8,393	$	21.31	8.6	$	226,438
Granted	115	52.86
Exercised	(1,170)	20.22
Forfeited	(244)	25.05
Balance, December 31, 2021	7,094	$	21.87	7.8	$	272,958
Options vested and expected to vest at December 31, 2021	7,094	$	21.87	7.8	$	272,958
Options vested and exercisable at December 31, 2021	2,674	$	19.68	7.7	$	108,749

As of December 31, 2021, the total unrecognized compensation expense related to non-vested stock options is $37.0 million and is expected to be recognized over a weighted average period of 1.9 years. The Company recognized $5.6 million and $4.5 million of share-based compensation expense related to stock options for the three months ended December 31, 2021 and 2020, respectively, and $14.9 million and $12.3 million of share-based compensation expense related to stock options for the nine months ended December 31, 2021 and 2020, respectively.

Restricted shares and units

The following table provides a summary of the changes in the number of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) for the period ended December 31, 2021:


	Number of RSAs	Weighted Average Grant Date Fair Value		Number of RSUs	Weighted Average Grant Date Fair Value
	(in thousands)	(per share)		(in thousands)	(per share)
Balance, March 31, 2021	728	$	16.00	3,041	$	24.44
Granted	—	—		3,269	51.29
Vested	(440)	16.00		(1,049)	24.24
Forfeited	(19)	16.00		(232)	33.51
Balance, December 31, 2021	269	$	16.00	5,029	$	41.52

RSUs outstanding as of December 31, 2021 were comprised of 4.0 million RSUs with only service conditions and 1.0 million RSUs with both service and performance conditions (“PSUs”).

During the three and nine months ended December 31, 2021, the Company granted PSUs to certain key employees that generally vest in three equal installments, with one-third of the PSUs eligible to vest on each of the first three anniversaries of the date of grant (the “Incentive PSUs”). The number of shares that may be earned pursuant to the Incentive PSUs is 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.

During the three and nine months ended December 31, 2021, the Company granted PSUs to certain key employees 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 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 PSUs are measured using the fair value at the date of grant and recorded over their respective vesting periods 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.

As of December 31, 2021, the total unrecognized compensation expense related to unvested restricted stock awards is $3.2 million and is expected to be recognized over a weighted average period of 0.8 years. As of December 31, 2021, the total unrecognized compensation expense related to unvested restricted stock units is $180.6 million and is expected to be recognized over a weighted average period of 2.5 years. The Company recognized $20.3 million and $9.6 million of share-based compensation expense related to restricted shares and units for the three months ended December 31, 2021 and 2020, respectively, and $53.4 million and $28.3 million of share-based compensation expense related to restricted shares and units for the nine months ended December 31, 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 nine months ended December 31, 2021, 371,740 shares of common stock were purchased under the ESPP. As of December 31, 2021, 11,187,354 shares of common stock were available for future issuance under the ESPP.

As of December 31, 2021, there was approximately $2.3 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 $1.2 million and $1.5 million of share-based compensation expense related to the ESPP for the three months ended December 31, 2021 and 2020, respectively, and $3.6 million and $2.5 million of share-based compensation expense related to the ESPP for the nine months ended December 31, 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 December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Cost of revenue	$	3,405	$	2,066	$	9,542	$	5,430
Research and development	5,908		3,259		15,331		8,666
Sales and marketing	9,267		6,480		26,487		18,007
General and administrative	8,543		3,783		20,590		10,988
Total share-based compensation	$	27,123	$	15,588	$	71,950	$	43,091

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 December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Numerator:
Net income	$	14,587	$	18,416	$	51,522	$	48,760
Denominator:
Weighted average shares outstanding, basic	284,722		281,010		283,773		280,057
Dilutive effect of stock-based awards	7,123		5,417		7,122		5,827
Weighted average shares outstanding, diluted	291,845		286,427		290,895		285,884

Net income per share, basic	$	0.05	$	0.07	$	0.18	$	0.17
Net income per share, diluted	$	0.05	$	0.06	$	0.18	$	0.17

The effect of certain common share equivalents were excluded from the computation of weighted average diluted shares outstanding for the three and nine months ended December 31, 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 December 31,		Nine Months Ended December 31,
	2021	2020	2021	2020
Stock options	147	2,185	167	1,777
Unvested RSAs and RSUs	49	6	67	31
Shares committed under ESPP	—	2	—	2

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):


	December 31, 2021		March 31, 2021
North America	$	14,636	$	12,129
Europe, Middle East and Africa	25,813		23,124
Asia Pacific	1,397		1,619
Latin America	138		44
Total property and equipment, net	$	41,984	$	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-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

Form: 10-Q

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