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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 December 31, 2023
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 116
Waltham,Massachusetts02451
(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 295,999,246 shares of common stock outstanding as of February 6, 2024.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding:
our future financial performance, including our expectations regarding key factors driving future performance, our revenue, annual recurring revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, and billing/revenue mix;
our ability to navigate the current macroeconomic environment;
anticipated trends in our business and in the markets in which we operate;
our ability to anticipate market needs and successfully develop new and enhanced solutions to meet those needs;
the evolution of technology affecting our offerings, platform and markets, including our plans to continue evolving our technology capabilities;
our plans to continue investing in research and development and driving innovation to meet customers’ needs and grow our customer base;
our ability to maintain and expand our customer base and our partner ecosystem;
our expectations regarding the evolving competitive environment;
our plans to invest in future growth opportunities that we expect will drive long-term value;
our ability to sell our offerings and expand internationally;
our ability to hire and retain necessary qualified employees to grow our business and expand our operations; and
our ability to adequately protect our intellectual property.
These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this Quarterly Report that are not historical facts and statements identified by words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation, the risks set forth in the summary below, in Part II, Item 1A. entitled “Risk Factors” in this Quarterly Report, and in our other SEC filings. We assume no obligation to update any forward-looking statements contained in this Quarterly Report as a result of new information, future events or otherwise.




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. Please see Part II, Item 1A. entitled “Risk Factors” in this Quarterly Report for a discussion of risks that we believe are material. These risks and uncertainties include, but are not limited to, the following:
We have experienced rapid revenue growth in recent periods, which may not be indicative of our future growth.
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.
Market adoption of the solutions that we offer 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 observability and security solutions and therefore reduced spending on those solutions or overall adverse economic conditions may negatively affect our business, operating results, and financial condition.
If we fail to innovate and do not 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.
If we are unable to acquire new customers or retain and expand our relationships with existing customers, our future revenues and operating results will be harmed.
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.
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.





1


PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 2023March 31, 2023
(unaudited)
Assets
Current assets:
Cash and cash equivalents$782,649 $555,348 
Accounts receivable, net361,653 442,518 
Deferred commissions, current90,059 83,029 
Prepaid expenses and other current assets52,301 37,289 
Total current assets1,286,662 1,118,184 
Property and equipment, net49,408 53,576 
Operating lease right-of-use assets, net65,895 68,074 
Goodwill1,312,691 1,281,812 
Other intangible assets, net54,118 63,599 
Deferred tax assets, net129,119 79,822 
Deferred commissions, non-current79,724 86,232 
Other assets21,596 14,048 
Total assets$2,999,213 $2,765,347 
Liabilities and shareholders' equity
Current liabilities:
Accounts payable$13,230 $21,953 
Accrued expenses, current171,929 188,380 
Deferred revenue, current757,141 811,058 
Operating lease liabilities, current16,288 15,652 
Total current liabilities958,588 1,037,043 
Deferred revenue, non-current38,508 34,423 
Accrued expenses, non-current29,918 29,212 
Operating lease liabilities, non-current58,002 59,520 
Deferred tax liabilities321 280 
Total liabilities1,085,337 1,160,478 
Commitments and contingencies (Note 9)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 295,777,477 and 290,411,108 shares issued and outstanding at December 31, 2023 and March 31, 2023, respectively
296 290 
Additional paid-in capital2,186,766 1,989,797 
Accumulated deficit(236,701)(353,389)
Accumulated other comprehensive loss(36,485)(31,829)
Total shareholders' equity1,913,876 1,604,869 
Total liabilities and shareholders' equity$2,999,213 $2,765,347 
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 December 31,Nine Months Ended December 31,
2023202220232022
Revenue:
Subscription$348,294 $279,152 $999,245 $790,016 
Service16,802 18,304 50,437 54,039 
Total revenue365,096 297,456 1,049,682 844,055 
Cost of revenue:
Cost of subscription46,888 36,891 134,584 105,393 
Cost of service16,744 15,044 47,961 46,264 
Amortization of acquired technology4,237 3,889 12,035 11,669 
Total cost of revenue67,869 55,824 194,580 163,326 
Gross profit297,227 241,632 855,102 680,729 
Operating expenses:
Research and development80,102 54,531 220,468 156,847 
Sales and marketing132,723 112,292 385,445 323,313 
General and administrative43,232 34,354 127,075 107,485 
Amortization of other intangibles5,451 6,573 16,838 19,719 
Restructuring and other(1)(5)(1)(15)
Total operating expenses261,507 207,745 749,825 607,349 
Income from operations35,720 33,887 105,277 73,380 
Interest income (expense), net10,605 (4,787)26,260 (7,475)
Other (expense) income, net(3,901)1,617 (6,724)(1,847)
Income before income taxes42,424 30,717 124,813 64,058 
Income tax benefit (expense)267 (15,691)(8,125)(36,392)
Net income$42,691 $15,026 $116,688 $27,666 
Net income per share:
Basic
$0.14 $0.05 $0.40 $0.10 
Diluted
$0.14 $0.05 $0.39 $0.10 
Weighted average shares outstanding:
Basic
294,869 287,957 293,295 287,120 
Diluted
299,246 291,228 298,335 290,803 
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 December 31,Nine Months Ended December 31,
2023202220232022
Net income$42,691 $15,026 $116,688 $27,666 
Other comprehensive loss
Foreign currency translation adjustment(2,765)(5,133)(4,656)(2,835)
Total other comprehensive loss(2,765)(5,133)(4,656)(2,835)
Comprehensive income$39,926 $9,893 $112,032 $24,831 
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 December 31, 2023
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders' Equity
SharesAmount
Balance, September 30, 2023294,294 $294 $2,114,472 $(279,392)$(33,720)$1,801,654 
Foreign currency translation(2,765)(2,765)
Restricted stock units vested864 1 (1) 
Issuance of common stock related to employee stock purchase plan221 1 9,887 9,888 
Exercise of stock options398 — 7,586 7,586 
Share-based compensation54,822 54,822 
Net income42,691 42,691 
Balance, December 31, 2023295,777 $296 $2,186,766 $(236,701)$(36,485)$1,913,876 
Three Months Ended December 31, 2022
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders’ Equity
SharesAmount
Balance, September 30, 2022287,813 $288 $1,874,488 $(448,708)$(24,391)$1,401,677 
Foreign currency translation(5,133)(5,133)
Restricted stock units vested463 — — — 
Restricted stock awards forfeited(1)— — 
Issuance of common stock related to the employee stock purchase plan287 — 9,179 9,179 
Exercise of stock options399 1 10,769 10,770 
Share-based compensation35,504 35,504 
Net income15,026 15,026 
Balance, December 31, 2022288,961 $289 $1,929,940 $(433,682)$(29,524)$1,467,023 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - In thousands)
Nine Months Ended December 31, 2023
Common SharesAdditional 
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Shareholders' Equity
SharesAmount
Balance, March 31, 2023290,411 $290 $1,989,797 $(353,389)$(31,829)$1,604,869 
Foreign currency translation(4,656)(4,656)
Restricted stock units vested3,644 4 (4) 
Issuance of common stock related to employee stock purchase plan5341 19,471 19,472 
Exercise of stock options1,188 1 24,204 24,205 
Share-based compensation153,298 153,298 
Net income116,688 116,688 
Balance, December 31, 2023295,777 $296 $2,186,766 $(236,701)$(36,485)$1,913,876 
Nine Months Ended December 31, 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 translation(2,835)(2,835)
Restricted stock units vested1,727 2 (2) 
Restricted stock awards forfeited(15)— — 
Issuance of common stock related to employee stock purchase plan553 — 17,806 17,806 
Exercise of stock options6431 15,101 15,102 
Share-based compensation104,853 104,853 
Equity repurchases(15)(15)
Net income27,666 27,666 
Balance, December 31, 2022288,961 $289 $1,929,940 $(433,682)$(29,524)$1,467,023 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6


DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – In thousands)
Nine Months Ended December 31,
20232022
Cash flows from operating activities:
Net income$116,688 $27,666 
Adjustments to reconcile net income to cash provided by operations:
Depreciation
11,781 9,012 
Amortization
29,067 31,566 
Share-based compensation
153,298 104,853 
Deferred income taxes
(49,579)2,057 
Loss on extinguishment of debt 5,925 
Other
7,016 3,114 
Net change in operating assets and liabilities:
Accounts receivable
83,444 40,314 
Deferred commissions
874 (17,198)
Prepaid expenses and other assets
(27,437)29,616 
Accounts payable and accrued expenses
(24,022)19,365 
Operating leases, net
1,253 (36)
Deferred revenue
(55,946)(21,796)
Net cash provided by operating activities
246,437 234,458 
Cash flows from investing activities:
Purchase of property and equipment
(16,662)(15,625)
Capitalized software additions
(4,655) 
Acquisition of a business, net of cash acquired(32,297) 
Net cash used in investing activities
(53,614)(15,625)
Cash flows from financing activities:
Repayment of term loans
 (281,125)
Debt issuance costs (1,949)
Proceeds from employee stock purchase plan
19,472 17,806 
Proceeds from exercise of stock options24,205 15,102 
Equity repurchases
 (15)
Net cash provided by (used in) financing activities
43,677 (250,181)
Effect of exchange rates on cash and cash equivalents(9,199)(9,168)
Net increase (decrease) in cash and cash equivalents227,301 (40,516)
Cash and cash equivalents, beginning of period555,348 462,967 
Cash and cash equivalents, end of period$782,649 $422,451 
Supplemental cash flow data:
Cash paid for interest$656 $6,867 
Cash paid for (received from) tax, net$61,758 $(20,335)
Non-cash investing and financing activities:
Capitalized software additions in accounts payable and accrued expenses$6,686 $ 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7


DYNATRACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    Description of the Business
Business
Dynatrace, Inc. (“Dynatrace”, or the “Company”) designed its unified observability and security platform with analytics and automation at its core to address the growing complexity faced by technology and digital business teams as these enterprises further embrace the cloud to effect their digital transformation. Artificial intelligence and continuous automation deliver precise answers about the performance and security of applications, the underlying infrastructure, and the experience of its customers’ users that enable 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 2024, for example, refer to the fiscal year ending March 31, 2024.
2.    Significant Accounting Policies
Basis of presentation and consolidation
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of December 31, 2023 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three and nine months ended December 31, 2023 and 2022, statements of cash flows for the nine months ended December 31, 2023 and 2022, 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 include all normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of December 31, 2023, its results of operations for the three and nine months ended December 31, 2023 and 2022, and its cash flows for the nine months ended December 31, 2023 and 2022 in accordance with U.S. GAAP. The results for the three and nine months ended December 31, 2023 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, 2023 (the “Annual Report”).
Reclassification
During the fourth quarter of fiscal 2023, the Company refined its methodology used to allocate depreciation expense for certain property and equipment to better align the expense with the related use of property and equipment. This change in allocating depreciation expense has been applied retrospectively to April 1, 2022, and had no impact on the Company’s income from operations and net income. Prior period amounts have been reclassified to conform to the current period presentation.
8


The following table presents the effect of the reclassification and the impact on the Company’s condensed consolidated statements of operations (in thousands):
Three Months Ended December 31, 2022Nine Months Ended December 31, 2022
Previous MethodCurrent MethodEffect of ChangePrevious MethodCurrent MethodEffect of Change
Research and development$53,411 $54,531 $1,120 $153,800 $156,847 $3,047 
Sales and marketing111,524 112,292 768 321,208 323,313 2,105 
General and administrative36,242 34,354 (1,888)112,637 107,485 (5,152)
Net income15,026 15,026  27,666 27,666  
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, to the audited consolidated financial statements in the Company’s Annual Report. There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report that have had a material impact on its condensed consolidated financial statements and related notes.
Recently issued accounting pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in the income tax rate reconciliation table and disaggregates the income taxes paid by jurisdiction. ASU 2023-09 will be effective for annual periods beginning after December 15, 2024, which will be the Company’s fiscal 2026. The Company is currently evaluating the impact of the ASU on its income tax disclosures within the consolidated financial statements and related disclosures.
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 December 31,Nine Months Ended December 31,
2023202220232022
Amount%Amount%Amount%Amount%
North America$217,661 60 %$179,438 60 %$625,166 60 %$503,942 60 %
Europe, Middle East and Africa89,816 25 %73,182 25 %260,729 25 %212,927 25 %
Asia Pacific33,943 9 %28,311 9 %94,940 9 %81,852 10 %
Latin America23,676 6 %16,525 6 %68,847 6 %45,334 5 %
Total revenue$365,096 $297,456 $1,049,682 $844,055 
For the three and nine months ended December 31, 2023 and 2022, the United States was the only country that represented more than 10% of the Company’s revenue in any period, constituting $206.1 million and 56% and $169.7 million and 57% of total revenue during the three months ended December 31, 2023 and 2022, respectively, and $591.9 million and 56% and $475.5 million and 56% of total revenue during the nine months ended December 31, 2023 and 2022, respectively.
9


Deferred revenue
Revenue recognized during the three months ended December 31, 2023 and 2022, which was included in the deferred revenue balance at the beginning of each respective period, was $311.5 million and $253.1 million, respectively. Revenue recognized during the nine months ended December 31, 2023 and 2022, which was included in the deferred revenue balance at the beginning of each respective period, was $712.3 million and $569.3 million, respectively.
Remaining performance obligations
As of December 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,956.4 million, which consists of both billed consideration in the amount of $795.6 million and unbilled consideration in the amount of $1,160.8 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 60% of the total remaining performance obligations as revenue over the next 12 months and the remainder thereafter.
Contract assets
As of December 31, 2023 and March 31, 2023, contract assets of $11.5 million and $0.4 million, respectively, are included in accounts receivable, net, on the Company’s condensed consolidated balance sheets.
4.     Acquisitions
On August 31, 2023, the Company acquired 100% of the outstanding equity of Rookout, Ltd. (“Rookout”). Rookout is a provider of enterprise-ready and privacy-aware solutions that enable developers to troubleshoot and debug actively running code in Kubernetes-hosted cloud-native applications. This acquisition expands the Company’s unified observability and security platform from the addition of Rookout’s technology and experienced team.
The preliminary purchase consideration of Rookout was $33.4 million, after considering certain adjustments, and was paid from cash on hand. The preliminary purchase consideration is subject to a final post-closing adjustment.
The acquisition of Rookout has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their estimate fair value as of the acquisition date. The purchase consideration was allocated to the tangible assets and liabilities acquired as of the acquisition date, with the excess recorded to goodwill as shown below (in thousands).
Assets acquired:
Cash and cash equivalents$1,152 
Accounts receivable, prepaid and other assets342 
Property and equipment46 
Intangible asset7,800 
Total assets acquired$9,340 
Liabilities assumed:
Accounts payable, accrued and other liabilities2,242 
Deferred revenue1,064 
Total liabilities assumed$3,306 
Net assets acquired6,034 
Fair value of consideration transferred33,414 
Goodwill$27,380 
The fair value of assets and liabilities acquired may change as additional information is received during the measurement period. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.
Goodwill is primarily attributable to expected synergies and acquired skilled workforce. The goodwill was allocated to the Company’s one reporting unit. The Company identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology was $7.8 million, which was based on a valuation using the income approach and is classified as capitalized software on the condensed consolidated balance sheet. The estimated useful life of the developed technology is seven years. The acquired goodwill and intangible asset were not deductible for tax purposes.
10


The operating results of Rookout from the date of acquisition, which are not material, have been included in the Company’s condensed consolidated statements of operations. The transaction costs related to the Rookout acquisition were $0.1 million and $2.5 million for the three and nine months ended December 31, 2023, respectively, and are included in general and administrative expense on the condensed consolidated statements of operations.
5.    Goodwill and Other Intangible Assets, Net
Changes in the carrying amount of goodwill for the nine months ended December 31, 2023 consists of the following (in thousands):
December 31, 2023
Balance, beginning of period$1,281,812 
Goodwill from Rookout acquisition27,380 
Foreign currency impact3,499 
Balance, end of period$1,312,691 

Other intangible assets, net, excluding goodwill, consists of the following (in thousands):
Weighted
Average 
Useful Life
(in months)
December 31, 2023March 31, 2023
Capitalized software107$211,643 $191,863 
Customer relationships120351,555 351,555 
Trademarks and tradenames12055,003 55,003 
Total intangible assets618,201 598,421 
Less: accumulated amortization(564,083)(534,822)
Total other intangible assets, net$54,118 $63,599 
Amortization of other intangible assets totaled $9.9 million and $10.5 million for the three months ended December 31, 2023 and 2022, respectively, and $29.1 million and $31.6 million for the nine months ended December 31, 2023 and 2022, respectively.
On November 9, 2023, the Company entered into a license agreement with an application security provider for certain software and developed technology for $10.0 million, of which $3.4 million was paid at closing and the remainder is to be paid over 12 quarterly installments of $0.6 million. Additionally, the Company capitalized $0.3 million in related transaction costs for a total consideration of $10.3 million, which is classified as capitalized software on the condensed consolidated balance sheet. As of December 31, 2023, the Company has paid $3.7 million for the licensed software and developed technology. The licensed software and developed technology will be amortized over its useful life.
6.    Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended December 31, 2023 was (0.6)% compared to 51.1% for the three months ended December 31, 2022. The Company’s effective tax rate for the nine months ended December 31, 2023 was 6.5% compared to 56.8% for the nine months ended December 31, 2022. The decrease in the effective tax rate for both the three months ended December 31, 2023 and the nine months ended December 31, 2023 was primarily due to an increase in share-based compensation windfall benefits, additional tax benefits related to the deferred tax asset resulting from capitalized research and development expenses under Section 174 of the Internal Revenue Code recognized in the current year due to the reversal of the U.S. valuation allowance as of March 31, 2023, and the reversal of an unrecognized tax benefit in the U.S.
7.    Long-term Debt
On December 2, 2022, the Company entered into a Credit Agreement for a senior secured revolving credit facility (the “Credit Facility”) in an aggregate amount of $400.0 million. The Credit Facility has sublimits for swing line loans up to $30.0 million and for the issuance of standby letters of credit in a face amount up to $45.0 million. The Credit Facility will mature on December 2, 2027. As of December 31, 2023 and March 31, 2023, there were no amounts outstanding under the Credit Facility. There were $12.1 million and $15.5 million of letters of credit issued as of December 31, 2023 and March 31, 2023, respectively. The Company had $387.9 million and $384.5 million of availability under the Credit Facility as of December 31, 2023 and March 31, 2023, respectively.
11


Borrowings under the Credit Facility are available in U.S. dollars, Euros, Pounds Sterling and Canadian Dollars, with a sublimit of $100.0 million for non-U.S. dollar-denominated borrowings. Borrowings under the Credit Agreement currently bear interest at (i) the Term Secured Overnight Financing Rate plus 0.10%, (ii) the Adjusted Euro Interbank Offer Rate, (iii) the Canadian Dollar Offered Rate, (iv) the Base Rate, as defined per the Credit Agreement, or (v) the Sterling Overnight Index Average, in each case plus an applicable margin as defined per the Credit Agreement. Interest payments are due quarterly, or more frequently, based on the terms of the Credit Agreement.
The Company incurs fees with respect to the Credit Facility, including (i) a commitment fee ranging from 0.175% to 0.35% per annum, dependent on the Company’s leverage ratio, as defined per the Credit Agreement, of the unused commitment under the Credit Facility, (ii) a fronting fee of 0.125% per annum of the face amount of each letter of credit, (iii) a participation fee equal to the applicable margin, as defined per the Credit Agreement, applied to the daily average face amount of letters of credit, and (iv) customary administrative fees.
Debt issuance costs of $1.9 million were incurred in connection with the Credit Facility. The debt issuance costs are included within “Other assets” in the condensed consolidated balance sheets and are being amortized into interest expense over the contractual term of the Credit Facility. There were $1.5 million and $1.8 million of unamortized debt issuance costs as of December 31, 2023 and March 31, 2023, respectively.
Pursuant to the Credit Agreement, obligations owed under the Credit Facility are secured by a first priority security interest on substantially all assets of Dynatrace LLC, a wholly owned subsidiary of the Company, including a pledge of the capital stock and other interests of certain subsidiaries. Under certain circumstances, the guarantees may be released without action by, or consent of, the holder of the Credit Facility. The Credit Agreement contains customary affirmative and negative covenants, including financial covenants that require the Company to maintain specified financial ratios. At December 31, 2023, the Company was in compliance with all applicable covenants.
First lien credit facilities
The Company’s former First Lien Credit Agreement, as amended, provided for a term loan facility (the “First Lien Term Loan”) in an aggregate principal amount of $950.0 million and a senior secured revolving credit facility (the “Revolving Facility”), in an aggregate amount of $60.0 million. The Revolving Facility included a $25.0 million letter of credit sub-facility. Borrowings under the First Lien Term Loan and Revolving Facility bore 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 maturity date on the First Lien Term Loan and Revolving Facility was August 23, 2025 and August 23, 2023, respectively, with payment due in full on the maturity date. Interest payments were due quarterly, or more frequently, based on the terms of the credit agreement.
During the three months ended December 31, 2022, the Company terminated the First Lien Credit Agreement and repaid all outstanding borrowings, including accrued interest. The Company recognized a loss on debt extinguishment of $5.9 million within “Interest expense, net” in the condensed consolidated statements of operations for the three and nine months ended December 31, 2022.
8.    Leases
The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2024 to 2033. As of December 31, 2023, the weighted average remaining lease term was 5.9 years and the weighted average discount rate was 4.5%. The Company did not have any finance leases as of December 31, 2023.
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 December 31, 2023 and 2022, and $1.7 million for the nine months ended December 31, 2023 and 2022.
The following table presents information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended December 31,Nine Months Ended December 31,

2023202220232022
Operating lease expense (1)
$3,911 $3,246 $11,511 $9,241 
Short-term lease expense$505 $450 $1,550 $1,299 
Variable lease expense $410 $281 $1,103 $659 
_________________
(1) Presented gross of sublease income.
12


The following table presents supplemental cash flow information about the Company’s leases (in thousands):
Nine Months Ended December 31,
20232022
Cash paid for amounts included in the measurement of lease liabilities$13,935 $11,590 
Operating lease assets obtained in exchange for new operating lease liabilities (1)
$9,973 $20,656 
_________________
(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.
As of December 31, 2023, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31,Amount
2024$5,023 
202517,976 
202614,610 
202713,331 
20288,961 
Thereafter23,618 
Total operating lease payments (1)
83,519 
Less: imputed interest(9,229)
Total operating lease liabilities$74,290 
_________________
(1) Presented gross of sublease income.
As of December 31, 2023, the Company had commitments of $78.8 million for operating leases that have not yet commenced and therefore are not included in the right-of-use assets or operating lease liabilities. These operating leases are expected to commence during fiscal 2025 through 2026 with a weighted average lease term of 10 years.
9.    Commitments and Contingencies
Legal matters
The Company is, from time to time, party to legal proceedings and subject to claims in the ordinary course of business. Although the outcome of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the resolution of any such matters will not have a material adverse effect on its business, operating results, financial condition, or cash flows.
10.    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, adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which was subsequently approved by the Company’s stockholders and was later amended and restated by the Board in January 2021.
The Company initially reserved 52,000,000 shares of common stock 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 automatically increases each April 1, beginning on April 1, 2020, by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of December 31, 2023, 50,228,181 shares of common stock were available for future issuance under the 2019 Plan.
13


Stock options
The following table summarizes activity for stock options during the nine months ended December 31, 2023:
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, 20234,636 $22.25 6.5$94,565 
Exercised(1,188)20.38 
Forfeited or expired(67)39.49 
Balance, December 31, 20233,381 $22.57 5.8$108,627 
Options vested and expected to vest at December 31, 20233,381 $22.57 5.8$108,627 
Options vested and exercisable at December 31, 20233,162 $21.49 5.7$104,987 
As of December 31, 2023, the total unrecognized compensation expense related to non-vested stock options was $2.6 million and is expected to be recognized over a weighted average period of 0.6 years. The Company recognized $1.3 million and $4.6 million of share-based compensation expense related to stock options for the three months ended December 31, 2023 and 2022, respectively, and $7.0 million and $13.8 million of share-based compensation expense related to stock options for the nine months ended December 31, 2023 and 2022, 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 nine months ended December 31, 2023:
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, 20234 $16.00 8,836 $41.76 
Granted  5,732 51.78 
Vested(4)16.00 (3,644)40.43 
Forfeited  (589)44.32 
Balance, December 31, 2023 $ 10,335 $47.65 
RSUs outstanding as of December 31, 2023 were comprised of 9.3 million RSUs with only service conditions and 1.0 million RSUs with both service and performance conditions (“PSUs”).
During the nine months ended December 31, 2023, 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, 2024. 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 200% 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 key employee remains employed by the Company through the applicable vesting date.
As of December 31, 2023, the total unrecognized compensation expense related to unvested restricted stock units was $413.7 million and is to be recognized over a weighted average period of 2.2 years. The Company recognized $52.1 million and $29.0 million of share-based compensation expense related to restricted shares and units for the three months ended December 31, 2023 and 2022, respectively, and $141.4 million and $85.7 million of share-based compensation expense related to restricted shares and units for the nine months ended December 31, 2023 and 2022, respectively.
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Employee Stock Purchase Plan
In July 2019, the Board adopted, and the Company’s stockholders approved, the 2019 Employee Stock Purchase Plan (“ESPP”). The Company offers, sells and issues 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 consists of six-month purchase periods. On each purchase date, eligible employees purchase shares of the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock on the offering date or (2) the fair market value of the Company’s common stock on the purchase date. For the nine months ended December 31, 2023, 534,022 shares of common stock were purchased under the ESPP. As of December 31, 2023, 15,864,787 shares of common stock were available for future issuance under the ESPP.
As of December 31, 2023, there was $2.9 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 $1.9 million of share-based compensation expense related to the ESPP for the three months ended December 31, 2023 and 2022, respectively, and $4.9 million and $5.4 million of share-based compensation expense related to the ESPP for the nine months ended December 31, 2023 and 2022, respectively.
Share-based compensation
The following table summarizes the components of total share-based compensation expense included in the condensed consolidated financial statements for each period presented (in thousands):
Three Months Ended December 31,Nine Months Ended December 31,
2023202220232022
Cost of revenue$6,975 $4,285 $19,660 $13,410 
Research and development18,678 11,057 50,119 29,339 
Sales and marketing15,947 13,385 48,823 37,399 
General and administrative13,222 6,777 34,696 24,705 
Total share-based compensation$54,822 $35,504 $153,298 $104,853 
11.    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. The dilutive effect of stock-based awards is calculated by application of the treasury stock method. An anti-dilutive impact is an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
Three Months Ended December 31,Nine Months Ended December 31,
2023202220232022
Numerator:
Net income$42,691 $15,026 $116,688 $27,666 
Denominator:
Weighted average shares outstanding, basic294,869 287,957 293,295 287,120 
Dilutive effect of stock-based awards4,377 3,271 5,040 3,683 
Weighted average shares outstanding, diluted299,246 291,228 298,335 290,803 
Net income per share, basic$0.14 $0.05 $0.40 $0.10 
Net income per share, diluted$0.14 $0.05 $0.39 $0.10 
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The effect of certain common share equivalents were excluded from the computation of weighted-average diluted shares outstanding for the three and nine months ended December 31, 2023 and 2022 as inclusion would have resulted in anti-dilution. A summary of these weighted-average anti-dilutive common share equivalents is provided in the table below (in thousands):
Three Months Ended December 31,Nine Months Ended December 31,
2023202220232022
Stock options 123 1,613 144 1,785 
Unvested RSAs and RSUs265 2,316 446 1,197 
Shares committed under ESPP10 10 12 1 
12.    Geographic Information
Revenue
Revenues by geography are based on legal jurisdiction. See Note 3, Revenue Recognition, for a disaggregation of revenue by geographic region.
Property and equipment, net
The following table presents net property and equipment by geographic region for the periods presented (in thousands):
December 31, 2023March 31, 2023
North America$16,237 $22,124 
Europe, Middle East and Africa31,310 29,142 
Asia Pacific1,672 2,194 
Latin America189 116 
Total property and equipment, net$49,408 $53,576 
13.    Subsequent Events
On January 26, 2024, the Company entered into a definitive agreement to acquire a 100% equity interest in Runecast Solutions Limited (“Runecast”) for $37.5 million of preliminary consideration, subject to customary post-closing adjustments. The Company intends to acquire Runecast utilizing a combination of cash on hand and common stock. Runecast is a provider of software solutions that provide insights for security compliance, vulnerability assessment, and configuration management for complex, on-premises, hybrid and multi-cloud IT environments. Closing of the proposed transaction is subject to customary closing conditions.
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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 in 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
Dynatrace offers a unified observability and security platform with analytics and automation at its core, purpose-built for dynamic, hybrid, multicloud environments. Our comprehensive solutions help global organizations simplify cloud complexity, innovate faster, and do more with less in the modern cloud.
As enterprises and public sector institutions embrace modern cloud environments as the underlying foundation of their digital transformations, we believe that the scale, growing complexity, and dynamic nature of these environments are rapidly making solutions such as the Dynatrace® platform mandatory instead of optional for many organizations. Our Dynatrace platform combines the only fully unified end-to-end solution for comprehensive observability and continuous runtime application security together with advanced artificial intelligence for IT operations (“AIOps”) to provide answers and intelligent automation from data at enormous scale. This approach enables IT, development, security, and business operations teams to modernize and automate operations, deliver software faster and more securely, and provide better digital experiences.
We take Dynatrace to market through a combination of our global direct sales team and a network of partners, including global system integrators (“GSIs”), cloud providers (such as Amazon Web Services (“AWS”), Microsoft Azure (“Azure”), and Google Cloud Platform “GCP”)), resellers and technology alliance partners. We target the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion, which we believe see more value from our integrated full-stack platform.
All of our offerings leverage the Dynatrace observability and security platform to provide application performance monitoring (“APM”), runtime application security, infrastructure monitoring, log management and analytics, digital experience monitoring (“DEM”), digital business analytics, and cloud automation in an easy-to-use, highly automated, all-in-one solution.
We generate revenue primarily by selling subscriptions, which we define as Software-as-a-Service (“SaaS”) agreements, Dynatrace term-based licenses, Dynatrace perpetual licenses, and maintenance and support agreements.
The majority of our customers deploy Dynatrace as a SaaS solution to get the latest Dynatrace features and updates with greatly reduced administrative effort. Our SaaS solution provides customers with the ability to scale up and down rapidly, without having to purchase, provision, and manage their hardware. We also provide options to deploy our platform at the edge in customer-provisioned infrastructure, which we refer to as Dynatrace Managed. This offering allows customers the flexibility 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 center automatically upgrades all Dynatrace instances and offers on-premises cluster customers auto-deployment options that suit their specific enterprise management processes.
Our Dynatrace platform has been commercially available since 2016 and is the primary offering we sell.
Third-Quarter 2024 Financial Highlights
Our financial results for the three months ended December 31, 2023 show balanced growth and profitability, reflecting our continued ability to execute successfully in a dynamic market environment and demonstrating the durability of our business model.
Our annual recurring revenue (“ARR”) was $1,425 million as of December 31, 2023, which reflected 23% growth year-over-year;
Total revenue and subscription revenue for the three months ended December 31, 2023 was $365 million and $348 million, respectively; and
We delivered an operating margin of 10% for the three months ended December 31, 2023.
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We believe in a disciplined and balanced approach to operating our business. We plan to continue driving innovation to meet customers’ needs and grow our customer base. We also plan to invest in future growth opportunities that we expect will drive long-term value, while leveraging our global partner ecosystem, optimizing costs, and improving efficiency and profitability.
We believe this approach is even more important at this time as we navigate a rapidly evolving and uncertain macroeconomic environment, which can include geopolitical considerations, fluctuations in credit, equity, and foreign currency markets, changes in inflation, interest rates, consumer confidence and spending, and other factors that may affect the buying patterns of our customers and prospective customers, including the size of transactions and length of sales cycles. Although macroeconomic uncertainty persists, we remain confident in our ability to execute in this environment. Please see the section titled “Risk Factors” included under Part II, Item 1A for further discussion of the possible impact of macroeconomic conditions on our business and regarding fluctuations in our annual and quarterly operating results.
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 unified observability and security platform that utilizes analytics and automation at its core through increased investment in research and development and continued innovation. We expect to focus on expanding the functionality of our unified Dynatrace platform and investing in capabilities that address new market opportunities. We also plan to continue evolving our predictive, causal, and generative AI capabilities to drive differentiation through precise answers and broad-based automation. We believe this strategy will enable new growth opportunities and allow us to continue to deliver differentiated high-value outcomes to our customers.
Grow our customer base. We intend to drive new customer growth by expanding our direct sales force focused on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion. In addition, we plan to leverage our global partner ecosystem to add new customers in geographies where we have direct coverage and work jointly with our partners.
Increase penetration within existing customers. We plan to continue to increase the penetration within our existing customers by establishing new and deeper relationships within our customers’ organizations and expanding the breadth of our platform capabilities to provide for continued cross-selling opportunities. In addition, we believe the ease of implementation for Dynatrace provides us the opportunity to expand adoption within our existing enterprise customers, across new customer applications, and into additional business units or divisions. Once customers are on the Dynatrace platform, we have seen dollar-based net retention rate expansion due to the ease of use and power of our platform.
Enhance our strategic partner ecosystem. We intend to continue to invest in our strategic partner ecosystem, with a particular emphasis on cloud-focused partnerships with GSIs and hyperscaler cloud providers. These strategic partners continually work with their customers to help them digitally transform their businesses and reduce cloud complexity. By working more closely with strategic partners, our objective is to participate in digital transformation projects earlier in the purchasing cycle and enable customers to establish more resilient cloud deployments from the start.
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:
As of December 31,
20232022
Total ARR (in thousands)1,425,284 1,162,591 
Dollar-based Net Retention Rate113 %119 %
Annual Recurring Revenue: 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.
Dollar-based Net Retention Rate: We define the dollar-based net retention rate as the Dynatrace ARR at the end of a reporting period for the cohort of Dynatrace accounts as of one year prior to the date of calculation, divided by the Dynatrace ARR one year prior to the date of calculation for that same cohort. Our dollar-based net retention rate reflects customer renewals, expansion, contraction and churn, and excludes the benefit of Dynatrace ARR resulting from the conversion of Classic products to the Dynatrace platform. Dollar-based net retention rate is presented on a constant currency basis.
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Key Components of Results of Operations
Revenue
Revenue includes subscriptions 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.
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 the Thoma Bravo Funds’ acquisition of our company in 2014, business combinations and asset acquisitions. 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 and service 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, including facilities, IT, and other costs.
During the fourth quarter of fiscal 2023, we refined our methodology used to allocate depreciation expense for certain property and equipment to better align the expense with the related use of the property and equipment. This has been retrospectively applied to periods beginning on April 1, 2022. See Note 2, Significant Accounting Policies, of our condensed consolidated financial statements included in this Quarterly Report for a description of the reclassification.
Research and development. Research and development expenses primarily consist 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.
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Sales and marketing. Sales and marketing expenses primarily consist 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 primarily associated with other transactional activities and 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 consist 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.
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest income primarily from money market funds, bank deposits, and certificates of deposits, interest expense on our former term loan facility, fees on our revolving credit facility, loss on debt extinguishment and amortization of debt issuance costs.
Other (Expense) Income, Net
Other (expense) income, net, consists primarily of foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries.
Income Tax Expense
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Our income tax rate varies from the U.S. federal statutory rate mainly due to (1) the foreign derived intangibles deduction, (2) the generation of U.S. foreign tax credits, and (3) share-based compensation windfalls, partially offset by (4) foreign withholding taxes, (5) nondeductible executive compensation, and (6) foreign earnings taxed at rates higher than the U.S. statutory tax rate. 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 eliminated 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. This law change increases our U.S. federal and state cash taxes and reduces cash flows in fiscal year 2024 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 December 31, 2023 and 2022
Three Months Ended December 31,
20232022
AmountPercentAmountPercent
(in thousands, except percentages)
Revenue:
Subscription$348,294 95 %$279,152 94 %
Service16,802 %18,304 %
Total revenue365,096 100 %297,456 100 %
Cost of revenue:
Cost of subscription46,888 13 %36,891 13 %
Cost of service16,744 %15,044 %
Amortization of acquired technology4,237 %3,889 %
Total cost of revenue (1)
67,869 19 %55,824 19 %
Gross profit297,227 81 %241,632 81 %
Operating expenses:
Research and development (1)
80,102 22 %54,531 18 %
Sales and marketing (1)
132,723 36 %112,292 38 %
General and administrative (1)
43,232 12 %34,354 12 %
Amortization of other intangibles5,451 %6,573 %
Restructuring and other(1)(5)
Total operating expenses261,507 207,745 
Income from operations35,720 33,887 
Interest income (expense), net10,605 (4,787)
Other (expense) income, net(3,901)1,617 
Income before income taxes42,424 30,717 
Income tax benefit (expense)267 (15,691)
Net income$42,691 $15,026 
(1)  Includes share-based compensation expense as follows:
Three Months Ended December 31,
20232022
(in thousands)
Cost of revenue$6,975 $4,285 
Research and development18,678 11,057 
Sales and marketing15,947 13,385 
General and administrative13,222 6,777 
Total share-based compensation$54,822 $35,504 
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Revenue
Three Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Subscription$348,294 $279,152 $69,142 25 %
Service16,802 18,304 (1,502)(8 %)
Total revenue$365,096 $297,456 $67,640 23 %
Subscription
Subscription revenue increased by $69.1 million, or 25%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022, primarily due to the growth of the Dynatrace platform by adding new customers combined with existing customers expanding their use of our solutions.
Service
Service revenue decreased by $1.5 million, or 8%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022. The decrease was primarily due to timing of delivery of services.
Cost of Revenue
Three Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Cost of subscription$46,888 $36,891 $9,997 27 %
Cost of service16,744 15,044 1,700 11 %
Amortization of acquired technology4,237 3,889 348 %
Total cost of revenue$67,869 $55,824 $12,045 22 %
Cost of subscription
Cost of subscription increased by $10.0 million, or 27%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. The increase was primarily due to higher personnel costs of $4.0 million to support the growth of our subscription cloud-based offering and higher share-based compensation of $2.0 million. Also contributing to the increase were increased overhead costs of $2.0 million and higher cloud-based hosting costs and subscriptions of $2.0 million.
Cost of service
Cost of service increased by $1.7 million, or 11%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022. The increase was primarily the result of higher share-based compensation of $0.7 million and higher professional fees of $0.7 million.
Amortization of acquired technology
For the three months ended December 31, 2023 and 2022, amortization of acquired technology was primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of our company in 2014.
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Gross Profit and Gross Margin
Three Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Gross profit:  
Subscription$301,406$242,261$59,145 24 %
Service583,260(3,202)(98 %)
Amortization of acquired technology(4,237)(3,889)(348)%
Total gross profit$297,227$241,632$55,595 23 %
Gross margin:
Subscription87 %87 %
Service— %18 %
Amortization of acquired technology(100 %)(100 %)
Total gross margin81 %81 %
Subscription
Subscription gross profit increased by $59.1 million, or 24%, during the three months ended December 31, 2023 compared to the three months ended December 31, 2022 and subscription gross margin remained consistent at 87%. The increase in gross profit was primarily due to subscription revenue growth.
Service
Service gross profit decreased by $3.2 million, or 98%, during the three months ended December 31, 2023 compared to the three months ended December 31, 2022. Service gross margin was nearly zero for the three months ended December 31, 2023 compared to 18% for the three months ended December 31, 2022. The decreases in gross profit and gross margin were primarily due to timing of delivery of services.
Operating Expenses
Three Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Operating expenses:
Research and development$80,102 $54,531 $25,571 47 %
Sales and marketing132,723 112,292 20,431 18 %
General and administrative43,232 34,354 8,878 26 %
Amortization of other intangibles5,451 6,573 (1,122)(17 %)
Restructuring and other(1)(5)(80 %)
Total operating expenses$261,507 $207,745 $53,762 26 %
Research and development
Research and development expenses increased by $25.6 million, or 47%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022. The increase was due to increased personnel and other costs of $11.5 million to expand our product offerings and higher share-based compensation of $7.6 million. Also contributing were higher overhead costs of $4.8 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 $20.4 million, or 18%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022, primarily driven by an increase in personnel costs of $12.6 million and higher share-based compensation of $2.6 million. Further contributing to the increase were higher commissions of $3.0 million and increased overhead costs of $2.5 million.
General and administrative
General and administrative expenses increased $8.9 million, or 26%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022, primarily due to an increase in share-based compensation of $6.4 million and other personnel costs of $5.8 million. Further contributing to this increase were increased cloud-based hosting costs and subscriptions of $1.7 million, higher IT and facility expenses of $1.3 million, primarily related to new offices and expansions, and higher professional fees of $1.2 million. Partially offsetting this increase were overhead costs of $8.9 million.
Amortization of other intangibles
Amortization of other intangibles decreased by $1.1 million, or 17%, for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022. The decrease was 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.
Interest Income (Expense), Net
Interest income, net of $10.6 million for the three months ended December 31, 2023 compared to an expense of $4.8 million for the three months ended December 31, 2022. The change was primarily the result of higher interest income on cash and cash equivalents and lower interest expense due to the reduction in debt.
Other (Expense) Income, Net
Other expense, net, of $3.9 million for the three months ended December 31, 2023 compared to income of $1.6 million for the three months ended December 31, 2022. The change was primarily the result of foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries.
Income Tax Benefit (Expense)
Income tax benefit of $0.3 million for the three months ended December 31, 2023 represented a $16.0 million decrease as compared to an expense of $15.7 million for the three months ended December 31, 2022. This decrease was primarily due to an increase in share-based compensation windfall benefits; additional tax benefits related to the deferred tax asset resulting from capitalized research and development expenses under Section 174 of the IRC, recognized in the current year due to the reversal of the U.S. valuation allowance as of March 31, 2023; and the reversal of an unrecognized tax benefit in the U.S.
24


Comparison of the Nine Months Ended December 31, 2023 and 2022
Nine Months Ended December 31,
20232022
AmountPercentAmountPercent
(in thousands, except percentages)
Revenue:
Subscription$999,245 95 %$790,016 94 %
Service50,437 %54,039 %
Total revenue1,049,682 100 %844,055 100 %
Cost of revenue:
Cost of subscription134,584 13 %105,393 13 %
Cost of service47,961 %46,264 %
Amortization of acquired technology12,035 %11,669 %
Total cost of revenue (1)
194,580 19 %163,326 19 %
Gross profit855,102 81 %680,729 81 %
Operating expenses:
Research and development (1)
220,468 21 %156,847 19 %
Sales and marketing (1)
385,445 37 %323,313 38 %
General and administrative (1)
127,075 12 %107,485 13 %
Amortization of other intangibles16,838 %19,719 %
Restructuring and other(1)(15)
Total operating expenses749,825 607,349 
Income from operations105,277 73,380 
Interest income (expense), net26,260 (7,475)
Other expense, net(6,724)(1,847)
Income before income taxes124,813 64,058 
Income tax expense(8,125)(36,392)
Net income$116,688 $27,666 
(1)  Includes share-based compensation expense as follows:
Nine Months Ended December 31,
20232022
(in thousands)
Cost of revenue$19,660 $13,410 
Research and development50,119 29,339 
Sales and marketing48,823 37,399 
General and administrative34,696 24,705 
Total share-based compensation$153,298 $104,853 
Revenue
Nine Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Subscriptions$999,245 $790,016 $209,229 26 %
Services50,437 54,039 (3,602)(7 %)
Total revenue$1,049,682 $844,055 $205,627 24 %
25


Subscription
Subscription revenue increased by $209.2 million, or 26%, for the nine months ended December 31, 2023, as compared to the nine months ended December 31, 2022, 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 decreased by $3.6 million, or 7%, for the nine months ended December 31, 2023 as compared to the nine months ended December 31, 2022. The decrease was primarily due to timing of delivery of services.
Cost of Revenue
Nine Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Cost of subscription$134,584 $105,393 $29,191 28 %
Cost of service47,961 46,264 1,697 %
Amortization of acquired technology12,035 11,669 366 %
Total cost of revenue$194,580 $163,326 $31,254 19 %
Cost of subscription
Cost of subscription increased $29.2 million, or 28%, for the nine months ended December 31, 2023 as compared to the nine months ended December 31, 2022. The increase was primarily due to higher personnel costs of $12.8 million to support the growth of our subscription cloud-based offering and higher share-based compensation of $5.4 million. Also contributing to the increase were increased cloud-based hosting costs and subscriptions of $5.8 million and increased overhead costs of $5.4 million to support the growth of the business and related infrastructure.
Cost of service
Cost of service increased $1.7 million, or 4%, for the nine months ended December 31, 2023 as compared to the nine months ended December 31, 2022, primarily due to increased professional fees of $1.8 million and higher share-based compensation of $0.9 million. Partially offsetting this increase were lower personnel costs of $1.0 million.
Amortization of acquired technologies
For the nine months ended December 31, 2023 and 2022, amortization of acquired technologies was primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of our company in 2014.











26


Gross Profit and Gross Margin
Nine Months Ended December 31,Change
20232022AmountPercent
(in thousands, except percentages)
Gross profit:  
Subscription$864,661$684,623$180,038 26 %
Services2,4767,775(5,299)(68 %)
Amortization of acquired technology(12,035)(11,669)(366)%
Total gross profit$855,102