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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, 2022
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: (781530-1000

N/A
(Former name, former address and former fiscal year, if changed since last report)
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 an emerging growth company. See the definitions 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 287,339,714 shares of common stock outstanding as of August 1, 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, 2022 (“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;
our ability to service our debt obligations; and
certain macroeconomic factors facing the global economies, including rising inflation and changing interest rates.
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 (UNAUDITED)

DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, 2022March 31, 2022
(unaudited)
Assets
Current assets:
Cash and cash equivalents$571,345 $462,967 
Accounts receivable, net191,836 350,666 
Deferred commissions, current61,182 62,601 
Prepaid expenses and other current assets35,439 72,188 
Total current assets859,802 948,422 
Property and equipment, net45,782 45,271 
Operating lease right-of-use assets, net53,369 58,849 
Goodwill1,280,511 1,281,876 
Other intangible assets, net95,008 105,736 
Deferred tax assets, net26,368 28,106 
Deferred commissions, non-current59,245 63,435 
Other assets10,564 9,615 
Total assets$2,430,649 $2,541,310 
Liabilities and shareholders' equity
Current liabilities:
Accounts payable$4,795 $22,715 
Accrued expenses, current114,214 141,556 
Deferred revenue, current617,969 688,554 
Operating lease liabilities, current12,402 12,774 
Total current liabilities749,380 865,599 
Deferred revenue, non-current16,352 25,783 
Accrued expenses, non-current28,182 19,409 
Operating lease liabilities, non-current46,682 52,070 
Deferred tax liabilities 85 
Long-term debt, net244,427 273,918 
Total liabilities1,085,023 1,236,864 
Commitments and contingencies (Note 8)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 287,259,306 and 286,053,276 shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively
287 286 
Additional paid-in capital1,830,782 1,792,197 
Accumulated deficit(459,234)(461,348)
Accumulated other comprehensive loss(26,209)(26,689)
Total shareholders' equity1,345,626 1,304,446 
Total liabilities and shareholders' equity$2,430,649 $2,541,310 
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,
20222021
Revenue:
Subscription$249,558 $196,520 
License 50 
Service17,715 13,170 
Total revenue267,273 209,740 
Cost of revenue:
Cost of subscription32,738 24,982 
Cost of service15,168 10,021 
Amortization of acquired technology3,892 3,830 
Total cost of revenue51,798 38,833 
Gross profit215,475 170,907 
Operating expenses:
Research and development48,482 34,725 
Sales and marketing105,015 80,482 
General and administrative36,321 26,922 
Amortization of other intangibles6,573 7,540 
Restructuring and other(10)26 
Total operating expenses196,381 149,695 
Income from operations19,094 21,212 
Interest expense, net(2,175)(2,857)
Other (expense) income, net(2,250)1,311 
Income before income taxes14,669 19,666 
Income tax expense
(12,555)(6,372)
Net income$2,114 $13,294 
Net income per share:
Basic
$0.01 $0.05 
Diluted
$0.01 $0.05 
Weighted average shares outstanding:
Basic
286,203 282,661 
Diluted
290,024 288,988 
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,
20222021
Net income$2,114 $13,294 
Other comprehensive income (loss)
Foreign currency translation adjustment480 (1,658)
Total other comprehensive income (loss)480 (1,658)
Comprehensive income$2,594 $11,636 
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, 2022
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders' Equity
SharesAmount
Balance, March 31, 2022286,053 $286 $1,792,197 $(461,348)$(26,689)$1,304,446 
Foreign currency translation480 480 
Restricted stock units vested886 1 (1) 
Restricted stock awards forfeited(14)— — 
Issuance of common stock related to employee stock purchase plan266  8,627 8,627 
Exercise of stock options68 — 1,275 1,275 
Share-based compensation28,695 28,695 
Equity repurchases(11)(11)
Net income2,114 2,114 
Balance, June 30, 2022287,259 $287 $1,830,782 $(459,234)$(26,209)$1,345,626 
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 the 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 
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,
20222021
Cash flows from operating activities:
Net income$2,114 $13,294 
Adjustments to reconcile net income to cash provided by operations:
Depreciation
2,798 2,475 
Amortization
10,571 11,512 
Share-based compensation
28,695 19,252 
Other
2,748 (796)
Net change in operating assets and liabilities:
Accounts receivable
151,404 110,079 
Deferred commissions
2,079 (2,631)
Prepaid expenses and other assets
33,096 (1,453)
Accounts payable and accrued expenses
(29,815)(27,376)
Operating leases, net
(142)131 
Deferred revenue
(60,450)(41,015)
Net cash provided by operating activities
143,098 83,472 
Cash flows from investing activities:
Purchase of property and equipment
(6,906)(2,954)
Acquisition of businesses, net of cash acquired (3,543)
Net cash used in investing activities
(6,906)(6,497)
Cash flows from financing activities:
Repayment of term loans
(30,000)(30,000)
Proceeds from employee stock purchase plan
8,627 6,593 
Proceeds from exercise of stock options1,275 7,886 
Equity repurchases
(11)(14)
Net cash used in financing activities
(20,109)(15,535)
Effect of exchange rates on cash and cash equivalents(7,705)816 
Net increase in cash and cash equivalents108,378 62,256 
Cash and cash equivalents, beginning of period462,967 324,962 
Cash and cash equivalents, end of period$571,345 $387,218 
Supplemental cash flow data:
Cash paid for interest$2,066 $2,370 
Cash (received from) paid for tax, net$(31,542)$7,306 
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”) 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 2023, for example, refer to the fiscal year ended March 31, 2023.
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.
There were no new recently issued accounting pronouncements that were expected to have a material impact on the condensed consolidated financial statements and related notes.
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of June 30, 2022 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three months ended June 30, 2022 and 2021, statements of cash flows for the three months ended June 30, 2022 and 2021, 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, 2022, its results of operations for the three months ended June 30, 2022 and 2021, and its cash flows for the three months ended June 30, 2022 and 2021 in accordance with U.S. GAAP. The results for the three months ended June 30, 2022 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, 2022 (“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, income taxes, equity-based compensation expense, 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.
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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.
Reclassification
Certain reclassifications of prior period amounts have been made in the Company’s condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
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,
20222021
Amount%Amount%
North America$156,749 59 %$112,772 53 %
Europe, Middle East and Africa70,148 26 %67,044 32 %
Asia Pacific26,095 10 %22,136 11 %
Latin America14,281 5 %7,788 4 %
Total revenue$267,273 $209,740 
For the three months ended June 30, 2022 and 2021, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $147.5 million and 55% and $104.5 million and 50% of total revenue during the three months ended June 30, 2022 and 2021, respectively.
Deferred revenue
Revenues recognized during the three months ended June 30, 2022 and 2021, which were included in the deferred revenue balances at the beginning of each respective period, was $258.5 million and $185.1 million, respectively.
Remaining performance obligations
As of June 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,529.6 million, which consists of both billed consideration in the amount of $634.3 million and unbilled consideration in the amount of $895.3 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, 2022 consists of the following (in thousands):
June 30, 2022
Balance, beginning of period$1,281,876 
Foreign currency impact(1,365)
Balance, end of period$1,280,511 
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Other intangible assets, net excluding goodwill consists of the following (in thousands):
Weighted
Average 
Useful Life
(in months)
June 30, 2022March 31, 2022
Capitalized software107$191,682 $191,900 
Customer relationships120351,555 351,555 
Trademarks and tradenames12055,003 55,003 
Total intangible assets598,240 598,458 
Less: accumulated amortization(503,232)(492,722)
Total other intangible assets, net$95,008 $105,736 
Amortization of other intangible assets totaled $10.6 million and $11.5 million for the three months ended June 30, 2022 and 2021, 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, 2022 was 86% compared to 32% for the three months ended June 30, 2021. The increase in the effective tax rate for the three months ended June 30, 2022 is primarily due to a change to Internal Revenue Code (“IRC”) Section 174 which became effective for tax years beginning on or after January 1, 2022. Under the new rules, the Company is required to capitalize and amortize research and development expenses over five years for research activities conducted in the U.S. and over fifteen years for research activities conducted outside of the U.S. The capitalization of research and development expenses resulted in an increase to the Company’s taxable income and foreign derived intangible income (“FDII”), resulting in a corresponding increase in the Company’s FDII deduction. However, no tax benefit is recognized for the deferred tax asset established for these capitalized research and development expenses due to the Company’s valuation allowance position in the U.S.

Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at June 30, 2022, 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, 2022 relates primarily to capitalized development costs, share-based compensation, accrued interest 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 ability to generate U.S. taxable earnings and utilization of deferred tax assets.
6.    Long-term Debt
Long-term debt consists of the following (in thousands, except percentages):
June 30, 2022March 31, 2022
AmountEffective RateAmountEffective Rate
First Lien Term Loan $251,125 3.9 %$281,125 2.7 %
Revolving credit facility  
Total principal251,125 281,125 
Unamortized discount and debt issuance costs(6,698)(7,207)
Total debt244,427 273,918 
Less: Current portion of long-term debt  
Long-term debt$244,427 $273,918 
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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 $15.4 million and $15.6 million letters of credit issued as of June 30, 2022 and March 31, 2022, respectively. The Company had $44.6 million and $44.4 million of availability under the Revolving Facility as of June 30, 2022 and March 31, 2022, respectively.
Borrowings under the First Lien Term Loan and the Revolving Facility currently bear interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 1.25% per annum, or (ii) LIBOR plus 2.25% per annum. The Company has satisfied all required principal payments under the First Lien Term Loan and the remainder is due at maturity. Interest payments are due quarterly, or more frequently, based on the terms of the credit agreement.
The Company incurs fees with respect to the Revolving Facility, including (i) a commitment fee of 0.25% per annum of unused commitments under the Revolving Facility, (ii) facility fees equal to the applicable margin in effect for Eurodollar Rate Loans, as defined per the credit agreement, times the average daily stated amount of letters of credit, (iii) a fronting fee equal to either (a) 0.125% per annum on the stated amount of each letter of credit or (b) such other rate per annum as agreed to by the parties subject to the letters of credit, and (iv) customary administrative fees.
All of the indebtedness under the First Lien Credit Agreement is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. The First Lien Credit Agreement contains customary negative covenants. At June 30, 2022, 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 2023 to 2032. As of June 30, 2022, the weighted average remaining lease term was 5.8 years and the weighted average discount rate was 5.2%. The Company does not have any finance leases as of June 30, 2022.
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 $0.6 million for the three months ended June 30, 2022 and 2021, respectively.
The following table presents information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended June 30,

20222021
Operating lease expense (1)
$2,924 $2,469 
Short-term lease expense$364 $195 
Variable lease expense $269 $161 
_________________
(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,
20222021
Cash paid for amounts included in the measurement of lease liabilities$3,844 $3,191 
Operating lease assets obtained in exchange for new operating lease liabilities (1)
$116 $7,533 
_________________
(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.
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As of June 30, 2022, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31,Amount
2023$11,222 
202414,404 
202511,418 
20268,552 
20277,655 
Thereafter13,393 
Total operating lease payments (1)
66,644 
Less: imputed interest(7,560)
Total operating lease liabilities$59,084 
_________________
(1) Presented gross of sublease income.
As of June 30, 2022, the Company had commitments of $35.1 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, 2023 through March 31, 2025, with lease terms ranging from 3 to 10 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 June 30, 2022, 45,109,077 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, 2022:
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, 20226,968 $21.87 7.6$176,839 
Exercised(68)18.79 
Forfeited or expired(368)24.33 
Balance, June 30, 20226,532 $21.77 6.8$117,968 
Options vested and expected to vest at June 30, 20226,532 $21.77 6.8$117,968 
Options vested and exercisable at June 30, 20223,627 $20.36 6.3$69,870 
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As of June 30, 2022, the total unrecognized compensation expense related to non-vested stock options is $24.0 million and is expected to be recognized over a weighted average period of 1.5 years. The Company recognized $5.2 million and $4.7 million of share-based compensation expense related to stock options for the three months ended June 30, 2022 and 2021, 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 June 30, 2022:
Number of
 RSAs
Weighted Average
Grant Date Fair Value
Number of RSUsWeighted Average
Grant Date Fair Value
(in thousands)(per share)(in thousands)(per share)
Balance, March 31, 2022202 $16.00 5,180 $42.43 
Granted  4,714 40.60 
Vested(116)16.00 (886)39.87 
Forfeited(14)16.00 (379)42.48 
Balance, June 30, 202272 $16.00 8,629 $41.61 
RSUs outstanding as of June 30, 2022 were comprised of 7.5 million RSUs with only service conditions and 1.1 million RSUs with both service and performance conditions (“PSUs”).
During the three months ended June 30, 2022, the Company granted PSUs to certain key employees that vest 33% one year after the grant date and the remaining 67% vest ratably on a quarterly basis over the following two 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, 2023. 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 33% of the earned Annual PSUs vesting on the first anniversary of the grant date, and with the remaining 67% vesting in eight equal quarterly installments over the following two years, and provided that the executive officer remains employed by the Company through the applicable vesting date.
As of June 30, 2022, the total unrecognized compensation expense related to unvested restricted stock awards is $1.0 million and is expected to be recognized over a weighted average period of 0.6 years. As of June 30, 2022, the total unrecognized compensation expense related to unvested restricted stock units is $322.9 million and is expected to be recognized over a weighted average period of 2.6 years. The Company recognized $22.0 million and $13.5 million of share-based compensation expense related to restricted shares and units for the three months ended June 30, 2022 and 2021, respectively.
Employee Stock Purchase Plan
In July 2019, the Board 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, 2022, 265,681 shares of common stock were purchased under the ESPP. As of June 30, 2022, 13,782,205 shares of common stock were available for future issuance under the ESPP.
As of June 30, 2022, there was approximately $3.6 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 $1.5 million and $1.1 million of share-based compensation expense related to the ESPP for the three months ended June 30, 2022 and 2021, respectively.
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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,
20222021
Cost of revenue$3,890 $2,652 
Research and development7,285 3,967 
Sales and marketing10,076 7,608 
General and administrative7,444 5,025 
Total share-based compensation$28,695 $19,252 
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,
20222021
Numerator:
Net income$2,114 $13,294 
Denominator:
Weighted average shares outstanding, basic286,203 282,661 
Dilutive effect of stock-based awards3,821 6,327 
Weighted average shares outstanding, diluted290,024 288,988 
Net income per share, basic$0.01 $0.05 
Net income per share, diluted$0.01 $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, 2022 and 2021 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,
20222021
Stock options 889 318 
Unvested RSAs and RSUs2,274 32 
Shares committed under ESPP10 3 
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.
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Property and equipment, net
The following tables present property and equipment by geographic region for the periods presented (in thousands):
June 30, 2022March 31, 2022
North America$16,848 $15,462 
Europe, Middle East and Africa26,727 28,195 
Asia Pacific2,054 1,429 
Latin America153 185 
Total property and equipment, net$45,782 $45,271 
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 hybrid, multicloud environments. As enterprises and public sector institutions embrace the cloud to effect their digital transformation, we designed our unified platform to address the growing complexity faced by IT, development, security, and business operations 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, 2022, our products are trusted by more than 3,300 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 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 more than 3,300 as of June 30, 2022 from approximately 3,000 as of June 30, 2021.
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COVID-19 Update
We continue to monitor, analyze, and respond to evolving developments regarding the ongoing COVID-19 pandemic which 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 ongoing 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.
See the section titled “Risk Factors” included under Part II, Item 1A for further discussion of the possible impact of the ongoing 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 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, 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 customers, across new customer applications, and into additional business units or divisions. We sustained our Dynatrace® net expansion rate at or above 120% for seventeen consecutive quarters.
Enhance our strategic partner ecosystem. Our strategic partners include industry-leading global 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 with global system integrators, including Deloitte and DXC, and hyperscaler cloud providers, including AWS, Microsoft, Azure, Google Cloud Platform, and Red Hat.
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,
20222021
Total ARR (in thousands)$1,031,284 $823,222 
Dynatrace® Net Expansion Rate
120%+120%+
Annual Recurring Revenue “ARR”: We define annual recurring revenue (“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
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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 ARR derived from the Dynatrace® platform 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. We present Dynatrace® net expansion rate on a constant currency basis to provide a framework for assessing how our business performed excluding the effects of foreign currency rate fluctuations.
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. Our Classic products were sunset as of April 1, 2021.
Service. Service revenue consists of revenue from helping our customers deploy our software in highly complex operational environments and training 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, third-party hosting fees related to our cloud services, allocated overhead for facilities, IT, 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 the Company in 2014. To the extent significant future acquisitions are consummated, we expect that our amortization of acquired technologies may increase due to additional non-cash charges associated with the amortization of intangible assets acquired.
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 subscription, 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.
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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 in absolute dollars as we invest in research and development headcount to further strengthen and enhance our solutions.
Sales and marketing. Sales and marketing expenses primarily consists of personnel and facility-related costs for our sales, marketing, and business development personnel, commissions earned by our sales personnel and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase in absolute dollars 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 as we continue to invest in the growth of our operations, as well as incur ongoing costs of compliance associated with being a publicly traded company.
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) foreign earnings taxed at rates higher than the U.S. statutory tax rate, (2) the inability to realize certain tax benefits subject to a valuation allowance in the U.S., (3) foreign withholding taxes, partially offset by (4) the foreign derived intangibles deduction, and (5) the utilization of U.S. foreign tax credits generated in the current year. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue.
Internal Revenue Code (“IRC”) Section 174
For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section 174. Although Congress is considering legislation that would repeal or defer this capitalization and amortization requirement, it is not certain that this provision will be repealed or otherwise modified. If the requirement is not repealed or replaced, it will increase our U.S. federal and state cash taxes and reduce cash flows in fiscal year 2023 and future years.
Share-based compensation
The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which our share price differs from the grant price of the share-based awards vesting or exercised in that period, we will recognize excess tax benefits or deficiencies that will impact our effective tax rate. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on our share price, which we do not control, and a decline in our share price could significantly increase our effective tax rate and adversely affect our financial results.
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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, 2022 and 2021
Three Months Ended June 30,
20222021
AmountPercentAmountPercent
(in thousands, except percentages)
Revenue:
Subscription$249,558 93 %$196,520 94 %
License— — %50 — %
Service17,715 %13,170 %
Total revenue267,273 100 %209,740 100 %
Cost of revenue:
Cost of subscription32,738 12 %24,982 12 %
Cost of service15,168 %10,021 %
Amortization of acquired technology3,892 %3,830 %
Total cost of revenue (1)
51,798 19 %38,833 19 %
Gross profit215,475 81 %170,907 81 %
Operating expenses:
Research and development (1)
48,482 18 %34,725 17 %
Sales and marketing (1)
105,015 39 %80,482 38 %
General and administrative (1)
36,321 14 %26,922 13 %
Amortization of other intangibles6,573 %7,540 %
Restructuring and other(10)26 
Total operating expenses196,381 149,695 
Income from operations19,094 21,212 
Other expense, net(4,425)(1,546)
Income before income taxes14,669 19,666 
Income tax expense(12,555)(6,372)
Net income$2,114 $13,294 
(1)  Includes share-based compensation expense as follows:
Three Months Ended June 30,
20222021
(in thousands)
Cost of revenue$3,890 $2,652 
Research and development7,285 3,967 
Sales and marketing10,076 7,608 
General and administrative7,444 5,025 
Total share-based compensation$28,695 $19,252 
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Revenue
Three Months Ended June 30,Change
20222021AmountPercent
(in thousands, except percentages)
Subscription$249,558 $196,520 $53,038 27 %
License— 50 (50)(100 %)
Service17,715 13,170 4,545 35 %
Total revenue$267,273 $209,740 $57,533 27 %
Subscription
Subscription revenue increased by $53.0 million, or 27%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to the growing adoption of the Dynatrace® platform by new customers combined with existing customers expanding their use of our solutions.
Service
Service revenue increased by $4.5 million, or 35%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. We generally recognize the revenues associated with professional services as we deliver the services.
Cost of Revenue
Three Months Ended June 30,Change
20222021AmountPercent
(in thousands, except percentages)
Cost of subscription$32,738 $24,982 $7,756 31 %
Cost of service15,168 10,021 5,147 51 %
Amortization of acquired technology3,892 3,830 62 %
Total cost of revenue$51,798 $38,833 $12,965 33 %
Cost of subscription
Cost of subscription increased by $7.8 million, or 31%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase is primarily due to higher personnel costs to support the growth of our subscription cloud-based offering of $3.5 million and increased cloud-based hosting costs of $1.7 million. Also contributing to this increase were increased allocated overhead costs of $1.0 million, higher travel costs of $0.8 million, as well as higher share-based compensation of $0.4 million.
Cost of service
Cost of service increased by $5.1 million, or 51%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase is primarily the result of higher personnel costs of $2.9 million and higher share-based compensation of $0.8 million. Also contributing to this increase were increased travel costs of $0.5 million.
Amortization of acquired technologies
For the three months ended June 30, 2022 and 2021, 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
20222021AmountPercent
(in thousands, except percentages)
Gross profit:  
Subscription$216,820$171,538$45,282 26 %
License50(50)(100 %)
Service2,5473,149(602)(19 %)
Amortization of acquired technology(3,892)(3,830)(62)%
Total gross profit$215,475$170,907$44,568 26 %
Gross margin:
Subscription87 %87 %
License— %100 %
Service14 %24 %
Amortization of acquired technology(100 %)(100 %)
Total gross margin81 %81 %
Subscription
Subscription gross profit increased by $45.3 million, or 26%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Subscription gross margin remained consistent at 87% during the three months ended June 30, 2022 and the three months ended June 30, 2021. The increase in gross profit is primarily due to the growth of the Dynatrace® platform by new customers combined with existing customers expanding their use of our solutions.
Service
Service gross profit decreased by $0.6 million, or 19%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Service gross margin was 14% for the three months ended June 30, 2022 compared to 24% for the three months ended June 30, 2021. The decrease in gross profit and gross margin is primarily due to higher share-based compensation of $0.8 million.
Operating Expenses
Three Months Ended June 30,Change
20222021AmountPercent
(in thousands, except percentages)
Operating expenses:
Research and development$48,482 $34,725 $13,757 40 %
Sales and marketing105,015 80,482 24,533 30 %
General and administrative36,321 26,922 9,399 35 %
Amortization of other intangibles6,573 7,540 (967)(13 %)
Restructuring and other(10)26 (36)(138 %)
Total operating expenses$196,381 $149,695 $46,686 31 %
Research and development
Research and development expenses increased by $13.8 million, or 40%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase is due to a 27% increase in headcount, resulting in increased personnel and other costs of $5.4 million to expand our product offerings and higher share-based compensation of $3.3 million. Further contributing to the increase were increased allocated overhead costs of $2.3 million to support the growth of the business and related infrastructure, higher travel expenses of $0.9 million, and higher cloud-based hosting costs and subscriptions of $0.8 million.
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Sales and marketing
Sales and marketing expenses increased by $24.5 million, or 30%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, driven by a 30% increase in headcount, which resulted in an increase in personnel costs of $12.2 million and related share-based compensation of $2.5 million. Further contributing to the increase were $6.1 million of travel expenses primarily related to our annual sales kick-off event held in person, higher costs related to partner fees and enablement of $2.3 million, increased allocated overhead costs of $1.3 million to support the growth of the business and related infrastructure, and higher information technology costs of $1.0 million.
General and administrative
General and administrative expenses increased $9.4 million, or 35%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 37% increase in headcount, which resulted in an increase in personnel costs of $4.5 million, as well as share-based compensation of $2.4 million. Further contributing to the increase were higher professional fees of $1.9 million, higher IT and facility expenses of $1.9 million primarily related to new offices and expansions, increased cloud-based hosting costs and subscriptions of $1.2 million, other employee-related expenses of $1.2 million, and increased travel expenses of $0.5 million.
Amortization of other intangibles
Amortization of other intangibles decreased by $1.0 million, or 13%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The decrease 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 increased by $2.9 million, or 186%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase is primarily the result of foreign currency transactions, partially offset by lower interest expense on our term loan as we had less principal outstanding compared to the same quarter last fiscal year.
Income Tax Expense
Income tax expense for the three months ended June 30, 2022 of $12.6 million represented a $6.2 million increase as compared to an expense of $6.4 million for the three months ended June 30, 2021. This increase was primarily due to effects of the new requirement under Section 174 of the IRC to capitalize and amortize research and development expenses in the U.S., generating current tax expense with no offsetting deferred tax benefit due to our valuation allowance position.
Liquidity and Capital Resources
As of June 30, 2022, we had $571.3 million of cash and cash equivalents and $44.6 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. 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.
Our material cash requirements from known contractual and other obligations consist of our long-term debt agreements, rent payments required under operating lease agreements, and interest obligations on our term loan. As of June 30, 2022, total contractual commitments were $349.2 million, with $21.2 million committed within the next twelve months. For further information see Notes 6 and 7 of the notes to the condensed consolidated financial statements in this Quarterly Report.
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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” under Part II, Item 1A in this Quarterly Report and our Annual Report. However, we believe that our existing cash, cash equivalents, funds available under our debt agreement, and cash generated from operations, will be sufficient to meet our cash requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.
Our Credit Facilities
As of June 30, 2022, the balance outstanding under our first lien term loan was $251.1 million and is included in long-term debt on our condensed consolidated balance sheets. We had $44.6 million available under the revolving credit facility after considering $15.4 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, 2022, 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,
20222021
(in thousands)
Cash provided by operating activities (1)
$143,098 $83,472 
Cash used in investing activities(6,906)(6,497)
Cash used in financing activities(20,109)(15,535)
Effect of exchange rate changes on cash and cash equivalents(7,705)816 
Net increase in cash and cash equivalents$108,378 $62,256 
(1) Net cash provided by operating activities includes cash payments for interest and tax as follows:
Three Months Ended June 30,
20222021
(in thousands)
Cash paid for interest$2,066 $2,370 
Cash (received from) paid for tax, net$(31,542)$7,306 
Operating Activities
For the three months ended June 30, 2022, cash provided by operating activities was $143.1 million as a result of net income of $2.1 million, and adjusted by non-cash charges of $44.8 million and a change of $96.2 million in our operating assets and liabilities. The non-cash charges are primarily comprised of share-based compensation of $28.7 million and depreciation and amortization of $13.4 million. The change in our net operating assets and liabilities was primarily the result of a decrease in accounts receivable of $151.4 million due to the timing of receipts of payments from customers and a decrease in prepaid expenses and other assets of $33.1 million driven by timing of payments in advance of future services. Partially offsetting this was a decrease in deferred revenue of $60.5 million due to seasonality in our sales cycle, which is higher in the third and fourth quarters of our fiscal year, and a decrease in accounts payable and accrued expenses of $29.8 million driven by timing of payments.
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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 a decrease in deferred commissions of $2.6 million due to commissions paid on new bookings.
Investing Activities
Cash used in investing activities during the three months ended June 30, 2022 was $6.9 million as a result of the purchases of property and equipment.
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.
Financing Activities
Cash used in financing activities during the three months ended June 30, 2022 was $20.1 million, primarily as a result of repayments of our term loan of $30.0 million, partially offset by proceeds from our employee stock purchase plan of $8.6 million and proceeds from the exercise of our stock options of $1.3 million.
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.
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.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 2, “Significant Accounting Policies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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 international operations have provided and are expected to provide a significant portion of our consolidated revenue and expenses in U.S. dollars. 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.
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Translation exposure
Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar, depending on the circumstances. As a result, our consolidated revenues and expenses are affected and will continue to be affected by changes in the U.S. dollar against major foreign currencies, particularly the Euro. Fluctuations in foreign currencies impact the amount of total assets, liabilities, earnings and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. In particular, the strengthening of the U.S. dollar generally will reduce the reported amount of our foreign-denominated cash and cash equivalents, total revenues and total expenses that we translate into U.S. dollars and report in our condensed consolidated financial statements. These gains or losses are recorded as a component of accumulated other comprehensive loss within shareholders’ equity.
Transaction exposure
We transact business in multiple currencies. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates on transactions denominated in currencies other than the functional currencies of our subsidiaries. These gains or losses are recorded within “Other (expense) income, net” in our condensed consolidated statements of operations.
Interest Rate Risk
We had cash and cash equivalents of $571.3 million and $463.0 million as of June 30, 2022 and March 31, 2022, 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.
As of June 30, 2022, we also had in place a $60.0 million revolving credit facility, with availability of $44.6 million, and $251.1 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 3.9% at June 30, 2022. 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 and Exchange Act of 1934 (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, 2022, 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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
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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 ongoing COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which the pandemic and any related economic downturn 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 IT infrastructures, 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.
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.
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Our 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.
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, 2021 to the year ended March 31, 2022, our subscription revenue grew 33% from $655.2 million to $870.4 million, respectively. From the three months ended June 30, 2021 to the three months ended June 30, 2022, our subscription revenue grew 27% from $196.5 million to $249.6 million, 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.
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:
fluctuations in the demand for our solutions, and the timing of purchases by our customers, and the length of the sales cycles, particularly larger purchases;
fluctuations in the rate of utilization by customers of the cloud to manage their business needs, or a slow-down in the migration of enterprise systems to the cloud;
the impact of recessionary pressures or uncertainties in global economy or in the economies of the countries in which we operate on our customer’s purchasing decisions and the length of our sales cycles:
our ability to attract new customers and retain existing customers;
our ability to expand into new geographies and markets, including the business intelligence, data analytics, and application security markets;
the budgeting cycles and internal purchasing priorities of our customers;
changes in customer renewal rates, churn and our ability to cross-sell additional solutions to our existing customers and our ability to up-sell additional quantities of previously purchased products to existing customers;
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the seasonal buying patterns of our customers;
the payment terms and contract term length associated with our product sales and their effect on our billings and free cash flow;
changes in customer requirements or market needs;
the emergence of significant privacy, data protection, systems and application security or other threats, regulations or requirements applicable to the use of enterprise systems or cloud-based systems that we are not prepared to meet or that require additional investment by us;
changes in the demand and growth rate of the market for software intelligence, monitoring, application security, and analytics solutions;
our ability to anticipate or respond to changes in the competitive landscape, or improvements in the functionality of competing solutions that reduce or eliminate one or more of our competitive advantages;
our ability to timely develop, introduce and gain market acceptance for new solutions and product enhancements;
our ability to adapt and update our products and solutions on an ongoing and timely basis in order to maintain compatibility and efficacy with the frequently changing and expanding variety of software and systems that our products are designed to monitor;
our ability to maintain and expand our relationships with strategic technology partners, who own, operate and offer the major platforms on which applications operate, with which we must interoperate and remain compatible, and from which we must obtain certifications and endorsements in order to maintain credibility and momentum in the market;
our ability to control costs, including our operating expenses;
our ability to efficiently complete and integrate any acquisitions or business combinations that we may undertake in the future;
general economic, industry and market conditions, both domestically and in our foreign markets, including regional or geopolitical conflicts or other disruptions to commerce;
the emergence of new technologies or trends in the marketplace, or a change in the trends that are important to our strategy and the value of our platform in the marketplace;
foreign currency exchange rate fluctuations;
the timing of revenue recognition for our customer transactions, and the effect of the mix of time-based licenses, SaaS subscriptions and perpetual licenses on the timing of revenue recognition;
extraordinary expenses, such as litigation or other dispute-related settlement payments; and
future accounting pronouncements or changes in our accounting policies.
Any one of the factors referred to above or the cumulative effect of some of the factors referred to above may result in our operating results being below our expectations and the expectations of securities analysts and investors and any guidance that we may provide, or may result in significant fluctuations in our quarterly and annual operating results, including fluctuations in our key performance indicators. This variability and unpredictability could result in our failure to meet our business plan or the expectations of securities analysts or investors for any period. In addition, a significant percentage of our operating expenses are fixed in nature in the short term and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.
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.
The utilization of software intelligence solutions, such as the Dynatrace® platform, for observability, application performance monitoring, digital experience monitoring, infrastructure monitoring, AIOps, business intelligence and analytics, and application security is relatively new. We believe our future success will depend in large part on the growth, if any, in the demand for software intelligence solutions, particularly the demand for enterprise-wide solutions and our ability to provide solutions that meet such ever-evolving needs. We currently target the markets for observability, application performance monitoring (“APM”), infrastructure monitoring, AIOps, digital experience monitoring, business intelligence and analytics and application security. It is difficult to predict customer demand, adoption, churn and renewal rates for our new and existing solutions, the rate at which existing customers expand their usage of our solutions, the size and growth rate of the market for our solutions. Expansion in our addressable market depends on a number of factors, including the continued and growing reliance of enterprises on software applications to manage and drive critical
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business functions and customer interactions, increased use of microservices and containers, as well as the continued proliferation of mobile applications, large data sets, cloud computing and the Internet of Things. If our solutions do not achieve widespread adoption, we are not able to develop new solutions that meet customer needs or there is a reduction in demand for software intelligence solutions generally, it could result in reduced customer purchases, reduced renewal rates and decreased revenue, any of which will adversely affect our business, operating results and financial condition.
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.
Our business depends on the overall demand for software intelligence solutions, particularly demand from mid- to large-sized accounts worldwide, and the purchase of our solutions by such organizations is often discretionary. In recent months, we have observed increased economic uncertainty in the United States and abroad and lengthening sales cycles. In an economic downturn or during periods of economic or political instability, we believe that our customers or prospects may reduce their operating or IT budgets, which could cause them to defer or forego purchases of software intelligence solutions, including ours. Customers may delay or cancel IT projects or seek to lower their costs by renegotiating vendor contracts or renewals. To the extent purchases of software intelligence solutions are perceived by existing customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general IT spending. Weak or turbulent global economic conditions or a reduction in software intelligence spending, even if general economic conditions remain unaffected, could adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our solutions, reduced subscription renewals and lower revenue. In addition, any negative economic effects or instability resulting from changes in the political environment and international relations in the United States or other key markets as well as resulting regulatory or tax policy changes may adversely affect our business and financial results.
As the market for software intelligence solutions is new and continues to develop, trends in spending remain unpredictable and subject to reductions due to the changing technology environment and customer needs as well as uncertainties about the future.
The effects of the ongoing COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which the pandemic and any related economic downturn will impact our future results of operations and overall financial performance remains uncertain.
The global COVID-19 pandemic, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It also disrupted the normal operations of many businesses, including our business, and many of our customers’ businesses.
As a result of the ongoing COVID-19 pandemic, we limited occupancy or temporarily closed our global offices, and suspended or limited company-related travel. A majority of all Dynatrace employees globally are continuing to work from home for a substantial portion of the time, and we changed many previously in-person employee, customer or industry events to virtual-only, such as our annual Sales Kickoff and Perform 2021. We also changed how we spend on marketing and lead generation activities, putting an increased focus on digital, on-line marketing and lead generation. More recently, we are returning to in-person events, such as Sales Kickoff 2022, where a large number of our employees are gathered in a single venue and may be exposed to or infected by the coronavirus, which could have a negative impact on our productivity.
The conditions caused by the ongoing COVID-19 pandemic may affect our customers’ and prospective customers’ businesses, and may have an adverse impact on their ability or willingness to spend on software platforms or purchase our offerings or the timing of their purchasing decisions. The impact of the ongoing COVID-19 pandemic on our customers or prospective customers could also result in pricing discounts or extended payment terms; reductions in the amount or duration of customers’ subscription contracts or term licenses; or increase customer attrition rates. All of the foregoing could adversely affect our future sales, operating results and overall financial performance.
While the Federally-imposed vaccine mandate has been rendered unenforceable, in the event that we are in the future required by the laws of the countries and jurisdictions within which we operate to ensure that significant portions of our employees within those jurisdictions are fully vaccinated, some of our employees who fail or refuse to comply may be suspended or terminated or they may resign their employment, which could have a negative impact on our productivity, employee morale, sales, operating results and overall financial performance. If we fail to comply with these requirements, our sales within those jurisdictions could be negatively impacted, and we could be exposed to additional legal claims.
The duration and extent of the impact from the ongoing COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the continued transmission rate of the virus, the extent and effectiveness of current and future containment actions including actions that are mandated by local, regional and national governments, agencies and health authorities,
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the disruption caused by such actions, the efficacy of vaccines and rates of vaccination in various states and countries, the emergence of coronavirus variants, and the impact of these and other factors on our employees, customers, partners, vendors and the global economy. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
To the extent the ongoing COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including, in particular, risks related to our ability to secure customer renewals, the addition of new customers and increased revenue from existing customers, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations.
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.
The market for software intelligence solutions is at an early stage of development and is characterized by constant change and innovation, and we expect it to continue to rapidly evolve. Moreover, many of our customers operate in industries characterized by changing technologies and business models, which require them to develop and manage increasingly complex software application and IT infrastructure environments. Our future success, if any, will be based on our ability to consistently provide our customers with a unified, real-time view into the performance of their software applications and IT infrastructure, provide notification and prioritization of degradations and failures, perform root cause analysis of performance issues, and analyze the quality of their end users’ experiences and the resulting impact on their businesses and brands. If we do not respond to the rapidly changing needs of our customers by developing and making available new solutions and solution enhancements that can address evolving customer needs on a timely basis, our competitive position and business prospects will be harmed.
In addition, the process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We believe that we must continue to dedicate significant resources to our research and development efforts, including significant resources to developing new solutions and solution enhancements before knowing whether the market will accept them. For example, we made significant investments in our new application security offering. Our new solutions and solution enhancements, including our new application security offering, could fail to attain sufficient market acceptance for many reasons, including:
delays in developing and releasing new solutions or enhancements to the market;
delays or failures to provide updates to customers to maintain compatibility between Dynatrace® and the various applications and platforms being used in the customers’ applications and multicloud environments;
failures to accurately predict market or customer demands;
inability of our sales and marketing teams or those of our partners to sell solutions for new markets and product categories;
defects, errors or failures in the design or performance of our new solutions or solution enhancements;
negative publicity about the performance or effectiveness of our solutions;
the introduction or anticipated introduction of competing products by our competitors; and
the perceived value of our solutions or enhancements relative to their cost.
In addition to developing new solutions or enhancements using internal resources, we may acquire technologies from a third party, or acquire another company. Such acquisition(s) could be unsuccessful for a variety of reasons, require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations. For a description of risks related to potential acquisitions, see below under “Risks Related to Legal, Regulatory, Accounting, and Tax Matters”.
To the extent we are not able to continue to execute on our business model to timely and effectively develop or acquire and market applications to address these challenges and attain market acceptance, our business, operating results and financial condition will be adversely affected.
Further, we may make changes to our solutions that our customers do not value or find useful. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our solutions. If our new solutions, enhancements or pricing strategies do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue may decline or grow more slowly than expected and the negative impact on our operating results may be particularly acute, and we may not receive a return on our investment in the upfront research and development, sales and marketing and other expenses we incur in connection with new solutions or solution enhancements.
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In addition, should customers incur damages as a result of our solutions’ failure to perform as expected, for example by failing to detect security risks, the affected customer(s) may seek to terminate their contracts with or recover their damages from us and we may be exposed to reputational harm.
If our platform and solutions do not effectively interoperate with our customers’ existing or future IT infrastructures, installations of our solutions could be delayed or canceled, which would harm our business.
Our success depends on the interoperability of our platform and solutions with third-party operating systems, applications, cloud platform, data and devices that we have not developed and do not control. Any changes in such operating systems, applications, cloud platforms, data or devices that degrade the functionality of our platform or solutions or give preferential treatment to competitive software could adversely affect the adoption and usage of our platform. We may not be successful in adapting our platform or solutions to operate effectively with these systems, applications, cloud platforms, data or devices. If it is difficult for our customers to access and use our platform or solutions, or if our platform or solutions cannot connect a broadening range of applications, data and devices, then our customer growth and retention may be harmed, and our business and operating results could be adversely affected.
Multicloud deployments utilize multiple third-party platforms and technologies, and these technologies are updated to new versions at a rapid pace. As a result, we deliver frequent updates to our solutions designed to maintain compatibility and support for our customers’ changing technology environments and ensure our solutions’ ability to continue to monitor the customer’s applications. If our solutions fail to work with any one or more of these technologies or applications, or if our customers fail to install the most recent updates and versions of our solutions that we offer, our solutions will be unable to continuously monitor our customer’s critical business applications.
Ensuring that our solutions are up-to-date and compatible with the technology and multicloud platforms utilized by our customers is critical to our success. We have formed alliances with many technology and cloud platform providers to provide updates to our solutions to maintain compatibility. We work with technology and cloud platform providers to understand and align updates to their product roadmaps and engage in early access and other programs to ensure compatibility of our solutions with the technology vendor’s generally available release. If our relations with our technology partners degrades or ceases we may be unable to deliver these updates, or if our customers fail to install the most recent updates and versions of our solutions that we offer, then our customers’ ability to benefit from our solution may decrease significantly and, in some instances, may require the customer to de-install our solution due to the incompatibility of our solution with the customer’s applications.
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.
To continue to grow our business, it is important that we continue to attract new customers to purchase and use our solutions. Our success in attracting new customers depends on numerous factors, including our ability to:
offer a compelling software intelligence platform and solutions;
execute our sales and marketing strategy;
effectively identify, attract, on-board, train, develop, motivate and retain new sales, marketing, professional services and support personnel in the markets we pursue;
develop or expand relationships with technology partners, systems integrators, resellers, online marketplaces and other partners including hyperscalers such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, IBM Red Hat and others, some of which may also compete with us;
expand into new geographies and markets, including the business intelligence and data analytics market;
deploy our platform and solutions for new customers; and
provide quality customer support and professional services.
Our customers have no obligation to renew their maintenance, SaaS and/or term-license agreements, and our customers may decide not to renew these agreements with a similar contract period, at the same prices and terms or with the same or a greater number of licenses. Although our customer retention rate has historically been strong, some of our customers have elected not to renew their agreements with us, and it is difficult to accurately predict long-term customer retention, churn and expansion rates. Our customer retention and expansion rates may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our solutions platform, our customer support and professional services, our prices and pricing plans, the competitiveness of other software products and services, reductions in our customers’ spending levels, user adoption of our solutions, deployment success, utilization rates by our customers, new product releases and changes to our product offerings. If our customers do not renew their maintenance,
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SaaS and/or term-license agreements, or renew on less favorable terms, our business, financial condition and operating results may be adversely affected.
Our ability to increase revenue also depends in part on our ability to increase deployment of our solutions by existing customers. Our ability to increase sales to existing customers depends on several factors, including their experience with implementing and using our platform and the existing solutions they have implemented, their ability to integrate our solutions with existing technologies, and our pricing model. A failure to increase sales to existing customers could adversely affect our business, operating results and financial condition.
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.
Our ability to increase our customer base and achieve broader market acceptance of our solutions will depend to a significant extent on the ability of our sales and marketing organizations to work together to drive our sales pipeline and cultivate customer and partner relationships to drive revenue growth. We have invested in and plan to continue expanding our sales and marketing organizations, both domestically and internationally. We also plan to dedicate significant resources to sales and marketing programs, including lead generation activities and brand awareness campaigns, such as our industry events, webinars and user events with an increased investment in digital or online activities. If we are unable to effectively identify, hire, on-board, train, develop, motivate and retain talented sales personnel or marketing personnel or if our new sales personnel or marketing personnel or online investments are unable to achieve desired productivity levels in a reasonable period of time, our ability to increase our customer base and achieve broader market acceptance of our applications could be harmed.
We face significant competition, which may adversely affect our ability to add new customers, retain existing customers and grow our business.
The markets in which we compete are highly competitive, fragmented, evolving, complex and defined by rapidly changing technology and customer demands, and we expect competition to continue to increase in the future. A number of companies, some of which are larger and have more resources than we do, have developed or are developing products and services that currently, or in the future may, compete with some or all of our solutions. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and our failure to increase, or loss of, market share, any of which could adversely affect our business, operating results and financial condition.
We compete either directly or indirectly with observability vendors such as Datadog and Splunk, application performance monitoring vendors such as Cisco, Broadcom, and New Relic, infrastructure monitoring vendors such as Datadog and Nagios, Digital Experience Management vendors such as Akamai and Catchpoint, point solutions from cloud providers such as Amazon Web Services (“AWS”), Microsoft Azure, and Google Cloud Platform, and other business intelligence and monitoring and analytics providers that provide some portion of the services that we provide. Our competitors may have longer-term and more extensive relationships with our existing and potential customers that provide them with an advantage in competing for business with those customers. Further, to the extent that one of our competitors establishes or strengthens a cooperative relationship with, or acquires one or more software application performance monitoring, data analytics, compliance or network visibility vendors, it could adversely affect our ability to compete.
We may also face competition from companies entering our market, which has a relatively low barrier to entry in some segments, including large technology companies that could expand their platforms or acquire one of our competitors. Many existing and potential competitors enjoy substantial competitive advantages, such as:
larger sales and marketing budgets and resources;
access to larger customer bases which often provide incumbency advantages;
broader global distribution and presence;
the ability to bundle competitive offerings with other products and services;
greater brand recognition and longer operating histories;
lower labor and development costs;
greater resources to make acquisitions;
larger and more mature intellectual property portfolios; and
substantially greater financial, technical, management and other resources.
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Additionally, in certain circumstances, and particularly among large technology companies that have complex and large software application and IT infrastr