dt-20220930

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 September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-39010

Dynatrace, Inc.

(Exact name of Registrant as specified in its charter)


Delaware		47-2386428
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1601 Trapelo Road, Suite 116		02451
Waltham	MA
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (781) 530-1000

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 class

Trading
Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 287,852,993 shares of common stock outstanding as of October 31, 2022.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements of historical fact included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended March 31, 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;

•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;

•our expectations regarding the potential impact of the novel coronavirus (“COVID-19”) pandemic, or other future health pandemics and any related economic downturns, on our business, operations, and the markets in which we and our partners and customers operate; 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.


PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2022 and March 31, 2022	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended S eptember 30, 2022 and 2021	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2022 and 2021	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended Sept ember 30, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended Septemb er 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Default Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
Signatures		60

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DYNATRACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2022		March 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	563,430	$	462,967
Accounts receivable, net	185,728		350,666
Deferred commissions, current	62,861		62,601
Prepaid expenses and other current assets	39,259		72,188
Total current assets	851,278		948,422
Property and equipment, net	45,717		45,271
Operating lease right-of-use assets, net	61,374		58,849
Goodwill	1,279,535		1,281,876
Other intangible assets, net	84,380		105,736
Deferred tax assets, net	24,958		28,106
Deferred commissions, non-current	60,292		63,435
Other assets	14,451		9,615
Total assets	$	2,421,985	$	2,541,310

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	4,587	$	22,715
Accrued expenses, current	129,976		141,556

Deferred revenue, current	561,474		688,554
Operating lease liabilities, current	12,876		12,774
Total current liabilities	708,913		865,599
Deferred revenue, non-current	16,950		25,783
Accrued expenses, non-current	25,243		19,409
Operating lease liabilities, non-current	54,255		52,070
Deferred tax liabilities	—		85
Long-term debt, net	214,947		273,918
Total liabilities	1,020,308		1,236,864
Commitments and contingencies (Note 8)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 287,812,653 and 286,053,276 shares issued and outstanding at September 30, 2022 and March 31, 2022, respectively	288		286
Additional paid-in capital	1,874,488		1,792,197
Accumulated deficit	(448,708)		(461,348)
Accumulated other comprehensive loss	(24,391)		(26,689)
Total shareholders' equity	1,401,677		1,304,446
Total liabilities and shareholders' equity	$	2,421,985	$	2,541,310

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited – In thousands, except per share data)


	Three Months Ended September 30,				Six Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Subscription	$	261,306	$	212,601	$	510,864	$	409,121
License	—		—		—		50
Service	18,020		13,753		35,735		26,923
Total revenue	279,326		226,354		546,599		436,094
Cost of revenue:
Cost of subscription	35,764		27,135		68,502		52,117
Cost of service	16,052		10,668		31,220		20,689
Amortization of acquired technology	3,888		3,864		7,780		7,694
Total cost of revenue	55,704		41,667		107,502		80,500
Gross profit	223,622		184,687		439,097		355,594

Operating expenses:
Research and development	51,907		37,908		100,389		72,633
Sales and marketing	104,669		86,301		209,684		166,783
General and administrative	40,074		31,689		76,395		58,611
Amortization of other intangibles	6,573		7,539		13,146		15,079
Restructuring and other	—		(1)		(10)		25
Total operating expenses	203,223		163,436		399,604		313,131
Income from operations	20,399		21,251		39,493		42,463
Interest expense, net	(513)		(2,651)		(2,688)		(5,508)
Other (expense) income, net	(1,214)		(1,299)		(3,464)		12
Income before income taxes	18,672		17,301		33,341		36,967
Income tax (expense) benefit	(8,146)		6,340		(20,701)		(32)
Net income	$	10,526	$	23,641	$	12,640	$	36,935
Net income per share:
Basic	$	0.04	$	0.08	$	0.04	$	0.13
Diluted	$	0.04	$	0.08	$	0.04	$	0.13
Weighted average shares outstanding:
Basic	287,190		283,923		286,699		283,295
Diluted	290,601		291,177		290,433		290,254

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)


	Three Months Ended September 30,				Six Months Ended September 30,
	2022		2021		2022		2021
Net income	$	10,526	$	23,641	$	12,640	$	36,935
Other comprehensive income
Foreign currency translation adjustment	1,818		2,394		2,298		736
Total other comprehensive income	1,818		2,394		2,298		736
Comprehensive income	$	12,344	$	26,035	$	14,938	$	37,671

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Three Months Ended September 30, 2022
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, June 30, 2022	287,259	$	287	$	1,830,782	$	(459,234)	$	(26,209)	$	1,345,626
Foreign currency translation								1,818		1,818
Restricted stock units vested	378	1		(1)						—


Exercise of stock options	176	—		3,057						3,057
Share-based compensation				40,654						40,654
Equity repurchases				(4)						(4)
Net income						10,526				10,526
Balance, September 30, 2022	287,813	$	288	$	1,874,488	$	(448,708)	$	(24,391)	$	1,401,677



	Three Months Ended September 30, 2021
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders’ Equity
	Shares	Amount
Balance, June 30, 2021	284,218	$	284	$	1,687,044	$	(500,505)	$	(27,869)	$	1,158,954
Foreign currency translation								2,394		2,394
Restricted stock units vested	301	—								—
Restricted stock awards forfeited	(19)	—								—

Exercise of stock options	525	1		10,453						10,454
Share-based compensation				25,575						25,575
Equity repurchases				(16)						(16)
Net income						23,641				23,641
Balance, September 30, 2021	285,025	$	285	$	1,723,056	$	(476,864)	$	(25,475)	$	1,221,002

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Six Months Ended September 30, 2022
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, March 31, 2022	286,053	$	286	$	1,792,197	$	(461,348)	$	(26,689)	$	1,304,446
Foreign currency translation								2,298		2,298
Restricted stock units vested	1,264	2		(2)						—
Restricted stock awards forfeited	(14)	—								—
Issuance of common stock related to employee stock purchase plan	266	—		8,627						8,627
Exercise of stock options	244	—		4,332						4,332
Share-based compensation				69,349						69,349
Equity repurchases				(15)						(15)
Net income						12,640				12,640
Balance, September 30, 2022	287,813	$	288	$	1,874,488	$	(448,708)	$	(24,391)	$	1,401,677



	Six Months Ended September 30, 2021
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders’ Equity
	Shares	Amount
Balance, March 31, 2021	283,130	$	283	$	1,653,328	$	(513,799)	$	(26,211)	$	1,113,601
Foreign currency translation								736		736
Restricted stock units vested	797	1		(1)						—
Restricted stock awards forfeited	(19)	—								—
Issuance of common stock related to employee stock purchase plan	204	—		6,593						6,593
Exercise of stock options	913	1		18,339						18,340
Share-based compensation				44,827						44,827
Equity repurchases				(30)						(30)
Net income						36,935				36,935
Balance, September 30, 2021	285,025	$	285	$	1,723,056	$	(476,864)	$	(25,475)	$	1,221,002

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)


	Six Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	12,640	$	36,935
Adjustments to reconcile net income to cash provided by operations:
Depreciation	5,746		5,049
Amortization	21,068		23,057
Share-based compensation	69,349		44,827

Other	4,484		1,010
Net change in operating assets and liabilities:
Accounts receivable	153,512		92,314
Deferred commissions	(3,618)		(6,347)
Prepaid expenses and other assets	25,128		(16,456)
Accounts payable and accrued expenses	(14,428)		(9,118)
Operating leases, net	44		401
Deferred revenue	(101,429)		(69,904)
Net cash provided by operating activities	172,496		101,768

Cash flows from investing activities:
Purchase of property and equipment	(11,237)		(7,612)

Acquisition of businesses, net of cash acquired	—		(13,004)
Net cash used in investing activities	(11,237)		(20,616)

Cash flows from financing activities:
Repayment of term loans	(60,000)		(60,000)
Proceeds from employee stock purchase plan	8,627		6,593
Proceeds from exercise of stock options	4,332		18,339
Equity repurchases	(15)		(30)
Net cash used in financing activities	(47,056)		(35,098)

Effect of exchange rates on cash and cash equivalents	(13,740)		(697)

Net increase in cash and cash equivalents	100,463		45,357

Cash and cash equivalents, beginning of period	462,967		324,962
Cash and cash equivalents, end of period	$	563,430	$	370,319

Supplemental cash flow data:
Cash paid for interest	$	4,743	$	4,560
Cash (received from) paid for tax, net	$	(23,567)	$	12,382

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

DYNATRACE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of the Business

Business

Dynatrace, Inc. (“Dynatrace”, or the “Company”) 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.

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.

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 September 30, 2022 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three and six months ended September 30, 2022 and 2021, statements of cash flows for the six months ended September 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 September 30, 2022, its results of operations for the three and six months ended September 30, 2022 and 2021, and its cash flows for the six months ended September 30, 2022 and 2021 in accordance with U.S. GAAP. The results for the three and six months ended September 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 allowance for credit losses, the fair value of tangible and intangible assets acquired, the 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.

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.

3. Revenue Recognition

Disaggregation of revenue

The following table is a summary of the Company’s total revenue by geographic region (in thousands, except percentages):


	Three Months Ended September 30,								Six Months Ended September 30,
	2022				2021				2022				2021
	Amount		%		Amount		%		Amount		%		Amount		%
North America	$	167,755	60	%	$	123,892	54	%	$	324,504	59	%	$	236,664	54	%
Europe, Middle East and Africa	69,597		25	%	69,347		31	%	139,745		26	%	136,391		31	%
Asia Pacific	27,446		10	%	23,939		11	%	53,541		10	%	46,075		11	%
Latin America	14,528		5	%	9,176		4	%	28,809		5	%	16,964		4	%
Total revenue	$	279,326			$	226,354			$	546,599			$	436,094

For the three and six months ended September 30, 2022 and 2021, the United States was the only country that represented more than 10% of the Company’s revenue in any period, constituting $158.3 million and 57% and $115.1 million and 51% of total revenue during the three months ended September 30, 2022 and 2021, respectively, and $305.8 million and 56% and $219.6 million and 50% of total revenue during the six months ended September 30, 2022 and 2021, respectively.

Deferred revenue

Revenue recognized during the three months ended September 30, 2022 and 2021, which was included in the deferred revenue balance at the beginning of each respective period, was $192.0 million and $151.6 million, respectively. Revenue recognized during the six months ended September 30, 2022 and 2021, which was included in the deferred revenue balance at the beginning of each respective period, was $425.7 million and $336.7 million, respectively.

Remaining performance obligations

As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,534.0 million, which consists of both billed consideration in the amount of $578.4 million and unbilled consideration in the amount of $955.6 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 six months ended September 30, 2022 consists of the following (in thousands):


	September 30, 2022
Balance, beginning of period	$	1,281,876

Foreign currency impact	(2,341)
Balance, end of period	$	1,279,535

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


	Weighted Average Useful Life (in months)
		September 30, 2022		March 31, 2022
Capitalized software	107	$	191,508	$	191,900
Customer relationships	120	351,555		351,555
Trademarks and tradenames	120	55,003		55,003
Total intangible assets		598,066		598,458
Less: accumulated amortization		(513,686)		(492,722)
Total other intangible assets, net		$	84,380	$	105,736

Amortization of other intangible assets totaled $10.5 million and $11.6 million for the three months ended September 30, 2022 and 2021, respectively, and $21.1 million and $23.1 million for the six months ended September 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 September 30, 2022 was 43.6% compared to negative 36.6% for the three months ended September 30, 2021. The Company’s effective tax rate for the six months ended September 30, 2022 was 62.1% compared to 0.1% for the six months ended September 30, 2021. The increase in the effective tax rate for both the three months ended September 30, 2022 and 2021 and the six months ended September 30, 2022 and 2021 is primarily due to a decrease in share-based compensation windfall benefits as well as effects of the new requirement under Section 174 of the Internal Revenue Code (“IRC”) to capitalize and amortize research and development expenses in 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. The effective tax rate for the six months ended September 30, 2021 also included a $2.1 million one-time benefit related to anticipated tax refunds resulting from a favorable Polish research and development ruling.

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


	September 30, 2022				March 31, 2022
	Amount		Effective Rate		Amount		Effective Rate
First Lien Term Loan	$	221,125	5.4	%	$	281,125	2.7	%
Revolving credit facility	—				—
Total principal	221,125				281,125
Unamortized discount and debt issuance costs	(6,178)				(7,207)
Total debt	214,947				273,918
Less: Current portion of long-term debt	—				—
Long-term debt	$	214,947			$	273,918

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 $15.1 million and $15.6 million letters of credit issued as of September 30, 2022 and March 31, 2022, respectively. The Company had $44.9 million and $44.4 million of availability under the Revolving Facility as of September 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 September 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 2033. As of September 30, 2022, the weighted average remaining lease term was 6.0 years and the weighted average discount rate was 5.0%. The Company does not have any finance leases as of September 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 $0.5 million for both the three months ended September 30, 2022 and 2021, and $1.1 million for both the six months ended September 30, 2022 and 2021.

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


	Three Months Ended September 30,				Six Months Ended September 30,
	2022		2021		2022		2021
Operating lease expense (1)	$	3,071	$	2,612	$	5,995	$	5,081
Short-term lease expense	$	429	$	238	$	851	$	433
Variable lease expense	$	164	$	386	$	376	$	547

_________________

(1) Presented gross of sublease income.

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


	Six Months Ended September 30,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities	$	7,563	$	6,513
Operating lease assets obtained in exchange for new operating lease liabilities (1)	$	13,713	$	22,877

_________________

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

As of September 30, 2022, remaining maturities of lease liabilities were as follows (in thousands):


Fiscal Years Ending March 31,	Amount
2023	$	7,724
2024	15,830
2025	13,327
2026	10,484
2027	9,684
Thereafter	19,125
Total operating lease payments (1)	76,174
Less: imputed interest	(9,043)
Total operating lease liabilities	$	67,131

_________________

(1) Presented gross of sublease income.

As of September 30, 2022, the Company had commitments of $25.1 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 2 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 September 30, 2022, 44,261,855 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 September 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, 2022	6,968	$	21.87	7.6	$	176,839

Exercised	(244)	17.82
Forfeited or expired	(399)	25.12
Balance, September 30, 2022	6,325	$	21.82	6.5	$	86,079
Options vested and expected to vest at September 30, 2022	6,325	$	21.82	6.5	$	86,079
Options vested and exercisable at September 30, 2022	3,942	$	20.60	6.1	$	57,495

As of September 30, 2022, the total unrecognized compensation expense related to non-vested stock options is $19.7 million and is expected to be recognized over a weighted average period of 1.2 years. The Company recognized $4.0 million and $4.6 million of share-based compensation expense related to stock options for the three months ended September 30, 2022 and 2021, respectively, and $9.2 million and $9.3 million of share-based compensation expense related to stock options for the six months ended September 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 September 30, 2022:


	Number of RSAs	Weighted Average Grant Date Fair Value		Number of RSUs	Weighted Average Grant Date Fair Value
	(in thousands)	(per share)		(in thousands)	(per share)
Balance, March 31, 2022	202	$	16.00	5,180	$	42.43
Granted	—	—		5,680	40.62
Vested	(150)	16.00		(1,264)	38.70
Forfeited	(14)	16.00		(510)	42.93
Balance, September 30, 2022	38	$	16.00	9,086	$	41.71

RSUs outstanding as of September 30, 2022 were comprised of 8.0 million RSUs with only service conditions and 1.1 million RSUs with both service and performance conditions (“PSUs”).

During the six months ended September 30, 2022, the Company granted PSUs to certain key employees that generally 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 September 30, 2022, the total unrecognized compensation expense related to unvested restricted stock awards is $0.5 million and is expected to be recognized over a weighted average period of 0.5 years. As of September 30, 2022, the total unrecognized compensation expense related to unvested restricted stock units is $323.0 million and is expected to be recognized over a weighted average period of 2.5 years. The Company recognized $34.7 million and $19.6 million of share-based compensation expense related to restricted shares and units for the three months ended September 30, 2022 and 2021, respectively, and $56.7 million and $33.1 million of share-based compensation expense related to restricted shares and units for the six months ended September 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 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 six months ended September 30, 2022, 265,681 shares of common stock were purchased under the ESPP. As of September 30, 2022, 13,782,205 shares of common stock were available for future issuance under the ESPP.

As of September 30, 2022, there was approximately $1.5 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 $2.0 million and $1.3 million of share-based compensation expense related to the ESPP for the three months ended September 30, 2022 and 2021, respectively, and $3.5 million and $2.4 million of share-based compensation expense related to the ESPP for the six months ended September 30, 2022 and 2021, respectively.

Share-based compensation

The following table summarizes the components of total share-based compensation expense included in the condensed consolidated financial statements for each period presented (in thousands):


	Three Months Ended September 30,				Six Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	5,235	$	3,485	$	9,125	$	6,137
Research and development	10,997		5,456		18,282		9,423
Sales and marketing	13,938		9,612		24,014		17,220
General and administrative	10,484		7,022		17,928		12,047
Total share-based compensation	$	40,654	$	25,575	$	69,349	$	44,827

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 September 30,				Six Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net income	$	10,526	$	23,641	$	12,640	$	36,935
Denominator:
Weighted average shares outstanding, basic	287,190		283,923		286,699		283,295
Dilutive effect of stock-based awards	3,411		7,254		3,734		6,959
Weighted average shares outstanding, diluted	290,601		291,177		290,433		290,254

Net income per share, basic	$	0.04	$	0.08	$	0.04	$	0.13
Net income per share, diluted	$	0.04	$	0.08	$	0.04	$	0.13

The effect of certain common share equivalents were excluded from the computation of weighted-average diluted shares outstanding for the three and six months ended September 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 September 30,		Six Months Ended September 30,
	2022	2021	2022	2021
Stock options	892	148	1,070	159
Unvested RSAs and RSUs	2,089	23	1,217	27

11. Geographic Information

Revenue

Revenues by geography are based on legal jurisdiction. Refer to Note 3, “Revenue Recognition” for a disaggregation of revenue by geographic region.

Property and equipment, net

The following table presents property and equipment by geographic region for the periods presented (in thousands):


	September 30, 2022		March 31, 2022
North America	$	18,560	$	15,462
Europe, Middle East and Africa	24,654		28,195
Asia Pacific	2,373		1,429
Latin America	130		185
Total property and equipment, net	$	45,717	$	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 September 30, 2022, our products are trusted by more than 3,400 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 3,400 as of September 30, 2022 from approximately 3,100 as of September 30, 2021.

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.

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, or other future health pandemics and any related economic downturns, 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 have sustained our Dynatrace® net expansion rate at or above 120% for eighteen 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:


	September 30,
	2022	2021
Total ARR (in thousands)	1,064,951	863,863
Dynatrace® Net Expansion Rate	120%+	120%+

Annual Recurring Revenue “ARR”: We define ARR as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage.

Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as the 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. Beginning in fiscal 2023, this calculation excludes the headwind associated with the Dynatrace perpetual license ARR given diminishing impact of perpetual license ARR. 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.

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 cost