August 7, 2024 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2024


☐			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
Waltham,	Massachusetts	02451
(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 297,905,424 shares of common stock outstanding as of August 5, 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 or compromises 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.


PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2024 and March 31, 20 24	2
	Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 202 4 and 2023	3
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended June 30 , 2024 and 2023	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended June 30, 2024 and 2023	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2024 and 2023	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Default Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures		55

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)


	June 30, 2024		March 31, 2024
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	930,315	$	778,983
Short-term investments	82,210		57,891
Accounts receivable, net	244,996		602,739
Deferred commissions, current	99,478		98,935
Prepaid expenses and other current assets	67,442		66,749
Total current assets	1,424,441		1,605,297
Long-term investments	54,711		46,350
Property and equipment, net	51,212		53,325
Operating lease right-of-use assets, net	71,480		61,390
Goodwill	1,334,954		1,335,494
Intangible assets, net	41,159		50,995
Deferred tax assets, net	160,458		138,836
Deferred commissions, non-current	89,441		93,310
Other assets	29,806		24,782
Total assets	$	3,257,662	$	3,409,779

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	3,895	$	21,410
Accrued expenses, current	169,899		233,675

Deferred revenue, current	862,084		987,953
Operating lease liabilities, current	15,350		15,513
Total current liabilities	1,051,228		1,258,551
Deferred revenue, non-current	52,178		62,308
Accrued expenses, non-current	19,572		18,404
Operating lease liabilities, non-current	66,055		54,013
Deferred tax liabilities	994		1,013

Total liabilities	1,190,027		1,394,289
Commitments and contingencies (Note 10)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 298,215,657 and 296,962,547 shares issued and outstanding at June 30, 2024 and March 31, 2024, respectively	298		297
Additional paid-in capital	2,263,195		2,249,349
Accumulated deficit	(160,137)		(198,757)
Accumulated other comprehensive loss	(35,721)		(35,399)
Total shareholders' equity	2,067,635		2,015,490
Total liabilities and shareholders' equity	$	3,257,662	$	3,409,779

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 June 30,
	2024		2023
Revenue:
Subscription	$	381,576	$	316,454
Service	17,644		16,432
Total revenue	399,220		332,886
Cost of revenue:
Cost of subscription	53,572		42,904
Cost of service	16,802		15,542
Amortization of acquired technology	4,379		3,898
Total cost of revenue	74,753		62,344
Gross profit	324,467		270,542

Operating expenses:
Research and development	87,578		66,282
Sales and marketing	145,106		125,117
General and administrative	44,978		39,095
Amortization of other intangibles	4,776		5,760

Total operating expenses	282,438		236,254
Income from operations	42,029		34,288
Interest income, net	12,775		7,146
Other (expense) income, net	(2,035)		252
Income before income taxes	52,769		41,686
Income tax expense	(14,149)		(3,498)
Net income	$	38,620	$	38,188
Net income per share:
Basic	$	0.13	$	0.13
Diluted	$	0.13	$	0.13
Weighted average shares outstanding:
Basic	297,358		291,325
Diluted	300,966		296,387

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 June 30,
	2024		2023
Net income	$	38,620	$	38,188
Other comprehensive loss
Foreign currency translation adjustment	(222)		(1,417)
Unrealized losses on available-for-sale investments, net of taxes	(100)		—
Total other comprehensive loss	(322)		(1,417)
Comprehensive income	$	38,298	$	36,771

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 June 30, 2024
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, March 31, 2024	296,963	$	297	$	2,249,349	$	(198,757)	$	(35,399)	$	2,015,490
Other comprehensive loss	—	—		—		—		(322)		(322)
Restricted stock units vested	2,026	2		(2)		—		—		—

Issuance of common stock related to employee stock purchase plan	262	—		10,389		—		—		10,389
Exercise of stock options	201	—		4,215		—		—		4,215
Shares withheld for employee taxes	(178)	—		(8,306)		—		—		(8,306)
Repurchases of common stock	(1,093)	(1)		(50,107)		—		—		(50,108)
Share-based compensation	—	—		57,657		—		—		57,657
Net income	—	—		—		38,620		—		38,620
Balance, June 30, 2024	298,181	$	298	$	2,263,195	$	(160,137)	$	(35,721)	$	2,067,635



	Three Months Ended June 30, 2023
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders’ Equity
	Shares	Amount
Balance, March 31, 2023	290,411	$	290	$	1,989,797	$	(353,389)	$	(31,829)	$	1,604,869
Other comprehensive loss	—	—		—		—		(1,417)		(1,417)
Restricted stock units vested	1,821	2		(2)		—		—		—


Issuance of common stock related to the employee stock purchase plan	313	—		9,584		—		—		9,584
Exercise of stock options	615	1		13,189		—		—		13,190
Share-based compensation	—	—		40,518		—		—		40,518

Net income	—	—		—		38,188		—		38,188
Balance, June 30, 2023	293,160	$	293	$	2,053,086	$	(315,201)	$	(33,246)	$	1,704,932

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)


	Three Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	38,620	$	38,188
Adjustments to reconcile net income to cash provided by operations:
Depreciation	4,305		3,916
Amortization	9,672		9,681
Share-based compensation	57,657		40,518
Deferred income taxes	(22,649)		(19,327)

Other	1,601		(154)
Net change in operating assets and liabilities:
Accounts receivable	355,441		204,228
Deferred commissions	2,121		8,545
Prepaid expenses and other assets	(8,064)		(16,426)
Accounts payable and accrued expenses	(78,265)		(39,641)
Operating leases, net	1,791		277
Deferred revenue	(131,489)		(95,902)
Net cash provided by operating activities	230,741		133,903

Cash flows from investing activities:
Purchase of property and equipment	(3,359)		(10,267)

Acquisition of a business, net of cash acquired	(100)		—
Purchases of investments	(40,886)		—
Proceeds from sales and maturities of investments	8,750		—
Net cash used in investing activities	(35,595)		(10,267)

Cash flows from financing activities:


Payments of deferred consideration related to capitalized software additions	(552)		—
Proceeds from employee stock purchase plan	10,389		9,584
Proceeds from exercise of stock options	4,215		13,190
Repurchases of common stock	(48,556)		—
Taxes paid related to net share settlement of equity awards	(8,306)		—
Net cash (used in) provided by financing activities	(42,810)		22,774

Effect of exchange rates on cash and cash equivalents	(1,004)		(1,055)

Net increase in cash and cash equivalents	151,332		145,355

Cash and cash equivalents, beginning of period	778,983		555,348
Cash and cash equivalents, end of period	$	930,315	$	700,703

Supplemental cash flow data:
Cash paid for interest	$	184	$	212
Cash paid for tax, net	$	24,918	$	13,151

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

DYNATRACE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of the Business

Business

Dynatrace, Inc. (“Dynatrace”, or the “Company”) offers the only end-to-end platform that combines broad and deep observability and continuous runtime application security with advanced artificial intelligence (“AI”) for IT operations to provide answers and intelligent automation from data at an enormous scale. The Company’s comprehensive solutions help IT, development, security, and business operations teams at global organizations modernize and automate cloud operations, deliver software faster and more securely, and provide significantly improved digital experiences.

Fiscal year

The Company’s fiscal year ends on March 31. References to fiscal 2025, for example, refer to the fiscal year ending March 31, 2025.

2. Significant Accounting Policies

Basis of presentation and consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

Unaudited interim consolidated financial information

The accompanying interim condensed consolidated balance sheet as of June 30, 2024 and the interim condensed consolidated statements of operations, statements of comprehensive income, statements of shareholders’ equity, and statement of cash flows for the three months ended June 30, 2024 and 2023 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 June 30, 2024 and its results of operations and cash flows for the three months ended June 30, 2024 and 2023 are in accordance with U.S. GAAP. The results for the three months ended June 30, 2024 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, 2024 (the “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 amounts reported in the condensed consolidated financial statements and accompanying notes. Management 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 assets acquired and liabilities assumed in business combinations, 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. Management bases these estimates on historical experiences and on various other assumptions that the Company believes are reasonable. 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 November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and application of all segment disclosure requirement to entities with a single reportable segment. ASU 2023-07 is effective for the Company’s annual periods beginning fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. The Company is currently evaluating the impact ASU 2023-07 will have on its financial statement disclosures.

In December 2023, the FASB issued 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 ASU 2023-09 on its financial statement 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 June 30,
	2024				2023
	Amount		%		Amount		%
North America	$	240,437	60	%	$	198,537	60	%
Europe, Middle East and Africa	97,990		25	%	83,149		25	%
Asia Pacific	36,273		9	%	29,808		9	%
Latin America	24,520		6	%	21,392		6	%
Total revenue	$	399,220			$	332,886

The United States was the only country that represented more than 10% of the Company’s revenue, constituting $227.9 million and 57% and $188.0 million and 56% of total revenue during the three months ended June 30, 2024 and 2023, respectively.

Revenue recognized during the three months ended June 30, 2024 and 2023, which was included in the deferred revenue balance at the beginning of each respective period, was $358.3 million and $297.3 million, respectively.

Remaining performance obligations

As of June 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $2,322.9 million, which consists of both billed consideration in the amount of $914.3 million and unbilled consideration in the amount of $1,408.6 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 55% of the total remaining performance obligations as revenue over the next 12 months and the remainder thereafter.

Contract assets

As of June 30, 2024 and March 31, 2024, contract assets of $5.1 million and $5.2 million, respectively, are included in accounts receivable, net, on the Company’s condensed consolidated balance sheets.

4. Business Combinations

Rookout, Ltd.

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 expanded the Company’s unified observability and security platform from the addition of Rookout’s technology and experienced team. The purchase consideration of Rookout was $33.4 million, after considering certain adjustments, and was paid from cash on hand.

The fair value of the purchase price was allocated to the identifiable assets acquired and liabilities assumed as of the acquisition date, with the excess recorded to goodwill. The Company acquired $6.0 million net assets, including $7.8 million of intangible assets, resulting in goodwill of $27.4 million. The preliminary fair value of certain acquired assets and assumed liabilities are subject to subsequent adjustment as additional information is obtained to finalize certain components of working capital and deferred income taxes.

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.

Runecast Solutions Limited

On March 1, 2024, the Company acquired a 100% equity interest in Runecast Solutions Limited (“Runecast”). 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. This acquisition expanded the Company’s unified observability and security platform from the addition of Runecast’s technology and experienced team.

The preliminary purchase consideration consisted of $26.1 million cash paid at closing and $2.3 million in deferred cash payments. The deferred cash payments will be held by the Company to satisfy indemnification obligations and post-closing purchase price adjustments payable within 15 months after the acquisition date. During the three months ended June 30, 2024, the Company paid $0.1 million for the post-closing purchase price adjustment.

In connection with the acquisition of Runecast, per the purchase agreement, $9.0 million of restricted stock awards (“RSAs”) will be issued to the previous owners subject to continuing employment and certain indemnification clauses. The RSAs are considered share-based compensation expense and $0.9 million was recognized in the three months ended June 30, 2024.

The fair value of the purchase price was allocated to the identifiable assets acquired and assumed acquired as of the acquisition date, with the excess recorded to goodwill. The Company acquired $3.2 million net assets, including $7.5 million intangible assets, resulting in goodwill of $25.2 million. The preliminary fair value of assets acquired and liabilities assumed may change as additional information is received during the measurement period.

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 and customer relationships as the acquired intangible assets. The estimated fair value of the developed technology and customer relationships was $7.3 million and $0.2 million, respectively, which was based on a valuation using the income approach. The estimated useful lives of the developed technology and customer relationships is seven years and four years, respectively. The acquired goodwill and intangible assets were not deductible for tax purposes.

5. Investments and Fair Value Measurements

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of the Company’s available-for-sale investments, including those securities classified within “Cash and cash equivalents” in the condensed consolidated balance sheets (in thousands):


	June 30, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	128,232	$	1	$	(336)	$	127,897
Commercial paper	10,807		—		(9)		10,798
Corporate debt securities	9,007		—		(16)		8,991
U.S. government agency securities	1,500		—		—		1,500
Total	$	149,546	$	1	$	(361)	$	149,186


	March 31, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	149,978	$	—	$	(229)	$	149,749

The fair values of available-for-sale investments, excluding those securities classified within “Cash and cash equivalents” in the condensed consolidated balance sheets, by remaining contractual maturity are as follows (in thousands):


	June 30, 2024		March 31, 2024
Due within one year	$	82,210	$	57,891
Due in one year through five years	54,462		46,248
Total	$	136,672	$	104,139

Effective January 1, 2024, the Company offers a non-qualified deferred compensation plan to eligible U.S. employees. The Company holds $0.2 million and $0.1 million of mutual funds that are associated with this plan and are classified as restricted trading securities as of June 30, 2024 and March 31, 2024, respectively. These securities are not included in the tables above but are included as investments in the condensed consolidated balance sheets.

The following tables present the Company’s financial assets that have been measured at fair value on a recurring basis as of June 30, 2024 and 2023, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):


	June 30, 2024
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	620,300	$	—	$	—	$	620,300
U.S. treasury securities	—		8,545		—		8,545
Commercial paper	—		3,970		—		3,970
Investments:
Mutual funds	249		—		—		249
U.S. treasury securities	—		119,352		—		119,352
Commercial paper	—		6,828		—		6,828
Corporate debt securities	—		8,991		—		8,991
U.S. agency securities	—		1,500		—		1,500
Total financial assets	$	620,549	$	149,186	$	—	$	769,735


	March 31, 2024
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	477,102	$	—	$	—	$	477,102
U.S. treasury securities	—		45,610		—		45,610
Investments:
Mutual funds	102		—		—		102
U.S. treasury securities	—		104,139		—		104,139
Total financial assets	$	477,204	$	149,749	$	—	$	626,953

The Company recorded interest income from its cash, cash equivalents, and investments of $12.9 million and $7.5 million for the three months ended June 30, 2024 and 2023, respectively.

6. Goodwill and Other Intangible Assets, Net

Changes in the carrying amount of goodwill for the three months ended June 30, 2024 consists of the following (in thousands):


	June 30, 2024
Balance, beginning of period	$	1,335,494

Foreign currency impact	(540)
Balance, end of period	$	1,334,954

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


	Weighted Average Useful Life (in months)
		June 30, 2024		March 31, 2024
Capitalized software	103	$	218,350	$	218,529
Customer relationships	120	351,756		351,756
Trademarks and tradenames	120	55,003		55,003
Total intangible assets		625,109		625,288
Less: accumulated amortization		(583,950)		(574,293)
Total other intangible assets, net		$	41,159	$	50,995

Amortization of intangible assets totaled $9.7 million for the three months ended June 30, 2024 and 2023.

7. Income Taxes

The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended June 30, 2024 was 26.8% compared to 8.4% for the three months ended June 30, 2023. The increase in the effective tax rate for the three months ended June 30, 2024 was primarily due to a decrease in share-based compensation benefits.

8. Long-term Debt

On December 2, 2022, the Company entered into a Credit Agreement for a senior secured revolving credit facility (as amended to date, 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 June 30, 2024 and March 31, 2024, there were no amounts outstanding under the Credit Facility. There were $0.8 million of letters of credit issued as of June 30, 2024. The Company had $399.2 million of availability under the Credit Facility as of June 30, 2024 and March 31, 2024.

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 Facility currently bear interest at (i) the Term Secured Overnight Financing Rate plus 0.10%, (ii) the Adjusted Euro Interbank Offer Rate, (iii) the Canadian Overnight Repo Rate Average, (iv) the Base Rate, as defined per the Credit Facility, 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 Facility.

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 Facility, 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 Facility, 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 $1.3 million and $1.4 million of unamortized debt issuance costs as of June 30, 2024 and March 31, 2024, respectively.

Pursuant to the Credit Facility, 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 equity interests of certain subsidiaries. Under certain circumstances, the guarantees may be released without action by, or consent of, the administrative agent of the Credit Facility. The Credit Facility contains customary affirmative and negative covenants, including financial covenants that require the Company to maintain specified financial ratios. At June 30, 2024, the Company was in compliance with all applicable covenants.

Interest expense

For the three months ended June 30, 2024 and 2023, the Company recognized $0.1 million and $0.4 million in interest expense and amortization of debt issuance costs and original issuance discount, respectively.

9. Leases

The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2025 to 2035. As of June 30, 2024, the weighted average remaining lease term was 6.4 years and the weighted average discount rate was 4.5%. The Company did not have any finance leases as of June 30, 2024.

The Company had a sublease of a former office which expired in the three months ended June 30, 2024. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $0.2 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively.

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


	Three Months Ended June 30,
	2024		2023
Operating lease expense (1)	$	4,132	$	3,769
Short-term lease expense	$	601	$	435
Variable lease expense	$	487	$	453

_________________

(1) Presented gross of sublease income.

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


	Three Months Ended June 30,
	2024		2023
Cash paid for amounts included in the measurement of lease liabilities	$	5,190	$	4,488
Operating lease assets obtained in exchange for new operating lease liabilities (1)	$	16,505	$	7,254

_________________

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

As of June 30, 2024, remaining maturities of lease liabilities were as follows (in thousands):


Fiscal Years Ending March 31,	Amount
2025	$	13,911
2026	16,487
2027	15,437
2028	11,154
2029	9,054
Thereafter	26,950
Total operating lease payments	92,993
Less: imputed interest	(11,588)
Total operating lease liabilities	$	81,405

As of June 30, 2024, the Company had commitments of $83.6 million for operating leases that have not yet commenced, and therefore are not included in the right-of-use assets or operating lease liabilities. These operating leases are expected to commence during fiscal 2025 through fiscal 2026, with lease terms ranging from 2 to 10 years.

10. 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.

11. Shareholders’ Equity

Share Repurchase Program

In May 2024, the Company announced a share repurchase program for up to $500 million of common stock. The share repurchase program does not have a time limit, does not obligate the Company to acquire a specific number of shares, and may be suspended, modified, or terminated at any time, without prior notice. Repurchases may be made from time to time on the open market, pursuant to 10b5-1 trading plans, or by other legally permissible means.

For the three months ended June 30, 2024, the Company repurchased and retired approximately 1.1 million shares of its common stock at an average price of $45.84 for a total of $50.1 million, of which $1.6 million has not been settled in cash as of June 30, 2024. As of June 30, 2024, $449.9 million remained available for future repurchases.

12. Share-based Compensation

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


	Three Months Ended June 30,
	2024		2023
Cost of revenue	$	7,730	$	5,488
Research and development	21,580		13,264
Sales and marketing	16,022		13,999
General and administrative	12,325		7,767
Total share-based compensation	$	57,657	$	40,518

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 by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of June 30, 2024, 56,830,006 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 three months ended June 30, 2024:


	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, 2024	3,063	$	22.56	5.6	$	73,903

Exercised	(201)	20.90
Forfeited or expired	(20)	44.35
Balance, June 30, 2024	2,842	$	22.53	5.1	$	63,998
Options vested and expected to vest at June 30, 2024	2,842	$	22.53	5.1	$	63,998
Options vested and exercisable at June 30, 2024	2,806	$	22.21	5.1	$	63,935

As of June 30, 2024, the total unrecognized compensation expense related to non-vested stock options was $0.5 million and is expected to be recognized over a weighted average period of 0.6 years.

Restricted shares and units

The following table provides a summary of the changes in the number of RSAs and restricted stock units (“RSUs”) for the three months ended June 30, 2024:


	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, 2024	142	$	49.05	9,852	$	48.17
Granted	—	—		5,542	47.66
Vested	—	—		(2,026)	49.30
Forfeited	—	—		(469)	49.16
Balance, June 30, 2024	142	$	49.05	12,899	$	47.74

RSUs outstanding as of June 30, 2024 were comprised of 11.6 million RSUs with only service conditions and 1.3 million RSUs with both service and performance or market-based conditions (“PSUs”).

During the three months ended June 30, 2024, the Company granted PSUs that contain financial performance conditions (the “Financial PSUs”) and PSUs based on relative total stockholder return performance (the “rTSR PSUs”). Both the Financial PSUs and rTSR PSUs are not earned if the applicable threshold percentage of the specific metric is not achieved. The overall number of shares that may be earned shall not exceed 200% of the target award. The PSUs are also subject to time-based vesting and are contingent upon the employee remaining employed by the Company or one of its subsidiaries through the applicable vesting date.

The Financial PSUs 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 number of shares that may be earned pursuant to the Financial PSUs is based on specific Company metrics related to the Company’s fiscal year ending March 31, 2025.

The rTSR PSUs generally vest 33% annually after the grant date. The number of shares that may be earned pursuant to the rTSR PSUs is based on the Company’s stock price performance relative to companies that are the constituents of the Russell 3000 index over performance periods of one, two, and three fiscal years that began on April 1, 2024.

As of June 30, 2024, the total unrecognized compensation expense related to unvested RSAs is $7.8 million and is to be recognized over a weighted average period of 2.6 years. As of June 30, 2024, the total unrecognized compensation expense related to unvested RSUs was $557.8 million and is expected to be recognized over a weighted average period of 2.3 years.

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 three months ended June 30, 2024, 261,829 shares of common stock were purchased under the ESPP. As of June 30, 2024, 18,572,583 shares of common stock were available for future issuance under the ESPP.

As of June 30, 2024, there was approximately $2.5 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.

13. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):


	Three Months Ended June 30,
	2024		2023
Numerator:
Net income	$	38,620	$	38,188
Denominator:
Weighted average shares outstanding, basic	297,358		291,325
Dilutive effect of stock-based awards	3,608		5,062
Weighted average shares outstanding, diluted	300,966		296,387

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

The effect of certain common share equivalents were excluded from the computation of weighted-average diluted shares outstanding for the three months ended June 30, 2024 and 2023 as inclusion would have resulted in anti-dilution. A summary of these weighted-average anti-dilutive common share equivalents is provided in the table below (in thousands):


	Three Months Ended June 30,
	2024	2023
Stock options	124	220
Unvested RSAs and RSUs	2,012	1,507
Shares committed under ESPP	2	13

14. Geographic Information

Revenue

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

Long-lived assets, net

The following table presents the Company’s net long-lived assets, which consists of property and equipment, net, and operating lease right-of-use asset, net, by geographic region for the periods presented (in thousands):


	June 30, 2024		March 31, 2024
North America	$	38,337	$	35,339
Europe, Middle East and Africa	79,364		73,892
Asia Pacific	4,611		5,041
Latin America	380		443
Total long-lived assets, net	$	122,692	$	114,715

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. We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United State of America (“U.S. GAAP”) and applicable rules and regulation of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. 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 Form 10-K for the fiscal year ended March 31, 2024 (the “Annual Report”). 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 the only end-to-end unified platform that combines broad and deep observability and continuous runtime application security with advanced AI for IT operations to provide answers and intelligent automation from data at an enormous scale. Our comprehensive solutions help IT, development, security, and business operations teams at global organizations modernize and automate cloud operations, deliver software faster and more securely, and provide significantly improved digital experiences.

Many of the world’s largest organizations trust the Dynatrace platform to accelerate digital transformation. We have been seeing increased demand for large, strategic deals in which customers’ business criteria drive broader technology architecture decisions. At the same time, workloads continue migrating to the cloud as customers seek the agility, flexibility, and rapid technology advancements that can prove elusive in on-premises data center environments. AI has been sweeping across industries and exploding in relevancy and criticality as organizations desire significant advancements in innovation, productivity, and performance. The escalating cybersecurity threat landscape is also increasing the need for more sophisticated protection. The confluence of these megatrends in dynamic hybrid, multicloud environments brings a scale and frequency of change that is exponentially greater than that of just a few years ago. As enterprises and public sector institutions embrace modern cloud environments as the underlying foundation of their business and 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.

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, 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.

We generate revenue primarily by selling subscriptions, which we define as Software-as-a-Service (“SaaS”) agreements, term-based licenses, 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. We also provide options to deploy our platform in customer-provisioned infrastructure.

Under our Dynatrace Platform Subscription ("DPS”) model, which provides customers with more modern pricing with flexibility and transparency, a customer makes a minimum annual spend commitment at the platform level and then consumes that commitment based on actual usage and a straightforward rate card. Any platform capability can be used in any quantity at any time based on the customer’s evolving needs.

The Dynatrace platform has been commercially available since 2016 and is the primary offering we sell.

First-Quarter 2025 Financial Highlights

Our financial highlights for the three months ended June 30, 2024 were:

•Our annual recurring revenue (“ARR”) was $1,541 million as of June 30, 2024, which reflected 19% growth year-over-year;

•Total revenue and subscription revenue was $399 million and $382 million, respectively;

•We delivered GAAP income from operations of $42 million and non-GAAP income from operations(1) of $114 million; and

•Our net cash provided by operating activities and free cash flow(1) was $227 million and $231 million, respectively.

(1) Non-GAAP financial measure. For additional information, please see the “Key Metrics” section below for applicable definitions and the “Non-GAAP Financial Results” section below for a reconciliation to the most directly comparable GAAP financial measure.

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 the current 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. In the ongoing dynamic macroeconomic landscape, we continue to factor a challenging climate. We have seen resiliency in our industry and we remain confident in our ability to execute in this environment. Please see the section titled “Risk Factors” included under Part II, Item 1A of this Quarterly Report 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 through increased investment in research and development, and innovation. We plan to expand the functionality of our end-to-end Dynatrace platform and invest in capabilities that address new market opportunities. We also plan to evolve our AI capabilities to drive differentiation. We believe this strategy will enable new growth opportunities and allow us to deliver differentiated high-value outcomes to our customers.

•Expand and strengthen our relationships with existing customers. We plan to establish new and deeper relationships within our existing customers’ organizations (notably, development teams) and expand the breadth of our platform capabilities to provide for expansion opportunities. In addition, we believe the ease of implementation of Dynatrace provides us with the opportunity to expand adoption within our existing enterprise customers, across new customer applications, and into additional business units or divisions. While still in its early stages, we also believe that our DPS licensing model will drive further expansion opportunities for customers that prefer the flexibility and predictability of pricing under that model.

•Grow our customer base. We intend to drive new customer growth through a focus on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion and more complex IT ecosystems and cloud environments. In particular, we are increasing the focus of our sales force on the largest 500 global companies and strategic enterprise accounts. In addition, we plan to expand our reach internationally to what we believe are large, mostly untapped markets for our company, while leveraging our sector specialization globally.

•Leverage our strategic partner ecosystem. We intend to invest in our strategic partner ecosystem, with a particular emphasis on building cloud-focused, loyal and comprehensive 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

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:


	As of June 30,
	2024		2023
	(in thousands, except percentages)
Total ARR	1,540,631		1,293,895
Year-over-year increase	19	%	25	%
Dollar-based net retention rate	112	%	116	%


	Three Months Ended June 30,
	2024		2023
	(in thousands)
Non-GAAP income from operations(1)	$	114,250	$	92,075
Free cash flow(1)	$	227,382	$	123,636

(1) Non-GAAP financial measure. For additional information, please see the applicable definitions below and the “Non-GAAP Financial Results” section below for a reconciliation to the most directly comparable GAAP financial measure.

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.

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. Beginning in fiscal 2023, we began to exclude the headwind associated with the Dynatrace perpetual license ARR given the diminishing impact of perpetual license ARR. We believe that eliminating the perpetual license headwind results in a dollar-based net retention rate metric that better reflects Dynatrace’s ability to expand existing customer relationships. Dollar-based net retention rate is presented on a constant currency basis.

Non-GAAP income from operations: We define non-GAAP income from operations as GAAP income from operations adjusted for the following items: share-based compensation; employer payroll taxes on employee stock transactions; amortization of intangibles; transaction, restructuring and other non-recurring or unusual items that may arise from time to time.

Free cash flow: We define free cash flow as the net cash provided by or used in operating activities less capital expenditures, reflected as purchase of property and equipment and capitalized software additions in our financial statements.

Non-GAAP Financial Results

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP income from operations and free cash flow. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons and liquidity. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance, and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Our non-GAAP financial measures may not provide information that is directly comparable to similarly titled metrics provided by other companies.

The tables below provide a reconciliation of our non-GAAP income from operations and free cash flow to their most directly comparable GAAP measure.


	Three Months Ended June 30,
	2024		2023
	(in thousands)
GAAP income from operations	$	42,029	$	34,288
Share-based compensation	57,657		40,518
Employer payroll taxes on employee stock transactions	5,409		5,203
Amortization of intangibles	9,155		9,658
Transaction, restructuring, and other	—		2,408
Non-GAAP income from operations	$	114,250	$	92,075


	Three Months Ended June 30,
	2024		2023
	(in thousands)
Net cash provided by operating activities	$	230,741	$	133,903
Purchase of property and equipment	(3,359)		(10,267)
Capitalized software additions	—		—
Free cash flow	$	227,382	$	123,636

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, bonuses, share-based compensation and related expenses such as employer taxes, third-party hosting fees related to our cloud services, allocated overhead for depreciation, facilities, and 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, bonuses, share-based compensation, and related expenses such as employer taxes for our services organization, and allocated overhead for depreciation, 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 depreciation, facilities, IT, and other costs.

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.

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.

Amortization of other intangibles. Amortization of other intangibles primarily consists of amortization of customer relationships and capitalized software and tradenames.

Interest Income, Net

Interest income, net, consists primarily of interest income, primarily from money market funds, bank deposits, debt securities held as investments and certificates of deposits, fees on our revolving credit facility, 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 and, (2) the generation of U.S. foreign tax credits, partially offset by (3) foreign withholding taxes, (4) nondeductible executive compensation, and (5) 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 has increased our U.S. federal and state cash taxes and reduced cash flows since fiscal year 2024.

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.

Pillar Two proposal

Many countries have enacted or are in the process of enacting laws based on the Pillar Two proposal relating to a 15% global minimum tax issued by the Organization for Economic Cooperation and Development (“OECD”). For fiscal year 2025, we expect to meet the Transitional Country-by-Country (CbCR) Safe Harbor rules for most, if not all, the jurisdictions that have adopted the rules. Based on the guidance available thus far, we do not expect these provisions to have a material impact on our consolidated financial statements. We will continue to monitor ongoing developments and evaluate any potential impact on future periods.

Results of Operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

Comparison of the Three Months Ended June 30, 2024 and 2023


	Three Months Ended June 30,
	2024				2023
	Amount		Percent		Amount		Percent
	(in thousands, except percentages)
Revenue:
Subscription	$	381,576	96	%	$	316,454	95	%
Service	17,644		4	%	16,432		5	%
Total revenue	399,220		100	%	332,886		100	%
Cost of revenue:
Cost of subscription	53,572		13	%	42,904		13	%
Cost of service	16,802		5	%	15,542		5	%
Amortization of acquired technology	4,379		1	%	3,898		1	%
Total cost of revenue (1)	74,753		19	%	62,344		19	%
Gross profit	324,467		81	%	270,542		81	%

Operating expenses:
Research and development (1)	87,578		22	%	66,282		20	%
Sales and marketing (1)	145,106		36	%	125,117		38	%
General and administrative (1)	44,978		11	%	39,095		12	%
Amortization of other intangibles	4,776		1	%	5,760		2	%
Total operating expenses	282,438				236,254
Income from operations	42,029		11	%	34,288		10	%
Interest income, net	12,775				7,146
Other (expense) income, net	(2,035)				252
Income before income taxes	52,769				41,686
Income tax expense	(14,149)				(3,498)
Net income	$	38,620			$	38,188

(1) Includes share-based compensation expense as follows:


	Three Months Ended June 30,
	2024		2023
	(in thousands)
Cost of revenue	$	7,730	$	5,488
Research and development	21,580		13,264
Sales and marketing	16,022		13,999
General and administrative	12,325		7,767
Total share-based compensation	$	57,657	$	40,518

Revenue


	Three Months Ended June 30,				Change
	2024		2023		Amount		Percent
	(in thousands, except percentages)
Subscription	$	381,576	$	316,454	$	65,122	21	%
Service	17,644		16,432		1,212		7	%
Total revenue	$	399,220	$	332,886	$	66,334	20	%

Subscription

Subscription revenue increased by $65.1 million, or 21%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, 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 increased by $1.2 million, or 7%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was primarily due to timing of delivery of services.

Cost of Revenue


	Three Months Ended June 30,				Change
	2024		2023		Amount		Percent
	(in thousands, except percentages)
Cost of subscription	$	53,572	$	42,904	$	10,668	25	%
Cost of service	16,802		15,542		1,260		8	%
Amortization of acquired technology	4,379		3,898		481		12	%
Total cost of revenue	$	74,753	$	62,344	$	12,409	20	%

Cost of subscription

Cost of subscription increased by $10.7 million, or 25%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was primarily due to higher personnel costs of $3.1 million to support the growth of our subscription cloud-based offering and higher share-based compensation of $1.7 million. Also contributing to the increase were higher cloud-based hosting costs of $3.2 million and software subscription costs of $1.5 million to support the growth of the business and related infrastructure and higher depreciation expense of $0.6 million.

Cost of service

Cost of service increased by $1.3 million, or 8%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was primarily the result of higher share-based compensation of $0.5 million and higher software subscription costs of $0.4 million.

Amortization of acquired technology

Amortization of acquired technology increased by $0.5 million, or 12%, and includes amortization expense for technology acquired in the Thoma Bravo Funds’ acquisition of our company in 2014, business combinations, and asset acquisitions.

Gross Profit and Gross Margin


	Three Months Ended June 30,						Change
	2024			2023			Amount		Percent
	(in thousands, except percentages)
Gross profit:
Subscription	$	328,004		$	273,550		$	54,454	20	%
Service	842			890			(48)		(5	%)
Amortization of acquired technology	(4,379)			(3,898)			(481)		12	%
Total gross profit	$	324,467		$	270,542		$	53,925	20	%
Gross margin:
Subscription	86		%	86		%
Service	5		%	5		%
Amortization of acquired technology	(100		%)	(100		%)
Total gross margin	81		%	81		%

Subscription

Subscription gross profit increased by $54.5 million, or 20%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and subscription gross margin remained consistent at 86%. The increase in gross profit was primarily due to the growth of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions.

Service

Service gross profit decreased slightly during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and service gross margin remained consistent at 5%. The decrease in gross profit was primarily due to higher share-based compensation expense.

Operating Expenses


	Three Months Ended June 30,				Change
	2024		2023		Amount		Percent
	(in thousands, except percentages)
Operating expenses:
Research and development	$	87,578	$	66,282	$	21,296	32	%
Sales and marketing	145,106		125,117		19,989		16	%
General and administrative	44,978		39,095		5,883		15	%
Amortization of other intangibles	4,776		5,760		(984)		(17	%)
Total operating expenses	$	282,438	$	236,254	$	46,184	20	%

Research and development

Research and development expenses increased by $21.3 million, or 32%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was due to increased personnel costs of $9.8 million to expand our product offerings and higher share-based compensation of $8.3 million. Also contributing were higher software subscription costs of $1.8 million and cloud-based hosting costs of $1.1 million.

Sales and marketing

Sales and marketing expenses increased by $20.0 million, or 16%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily driven by an increase in personnel costs of $10.8 million and higher share-based compensation of $2.0 million. Further contributing to the increase were higher commissions of $3.0 million, increased partner fees of $2.5 million, and increased software subscription costs of $2.0 million.

General and administrative

General and administrative expenses increased $5.9 million, or 15%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to an increase in other personnel costs of $6.8 million and higher share-based compensation of $4.6 million. Partially offsetting this increase was a decrease in software subscription expense of $3.5 million and lower professional fees of $2.4 million.

Amortization of other intangibles

Amortization of other intangibles decreased by $1.0 million, or 17%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. 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, Net

Interest income, net, was $12.8 million for the three months ended June 30, 2024 compared to $7.1 million for the three months ended June 30, 2023. The increase in interest income was primarily the result of higher interest rates on our cash, cash equivalents, and investments.

Other (Expense) Income, Net

Other expense, net, was $2.0 million for the three months ended June 30, 2024 compared to income of $0.3 million for the three months ended June 30, 2023. 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 Expense

Income tax expense increased by $10.6 million resulting in an expense of $14.1 million for the three months ended June 30, 2024 as compared to an expense of $3.5 million for the three months ended June 30, 2023. This increase was primarily due to an expected decrease in share-based compensation benefits.

Liquidity and Capital Resources

We have historically maintained a disciplined and balanced approach to optimizing costs and improving the efficiency and profitability of our business, while continuing to invest in future growth opportunities that we expect will drive long-term value. Our principal sources of liquidity are cash and cash equivalents, marketable securities (investments) and cash provided by operating activities. From time to time, we may borrow under our revolving credit facility. As of June 30, 2024, we had $930.3 million of cash and cash equivalents, $136.9 million of investments, consisting of U.S. Treasury securities, commercial paper, corporate debt securities, and U.S. agency securities that have maturities between one and 30 months, and $399.2 million available under our revolving credit facility.

We have historically financed our operations primarily through payments by our customers for use of our product offerings and related services and, to a lesser extent, the net proceeds we have received from sales of equity securities.

Over the past three years, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.

Our billings and revenue mix may vary over time due to a number of factors, including the mix of subscriptions and services and the contract length of our customer agreements. Such variability in the timing and amounts of our billings could impact the timing of our cash collections from period to period.

Our material cash requirements from known contractual and other obligations consist of our rent payments required under operating lease agreements and non-cancelable purchase obligations for cloud hosting support. As of June 30, 2024, total contractual commitments were $387.7 million, with $113.7 million committed within the next 12 months.

Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in the section titled “Risk Factors” included under Part I, Item 1A of this Quarterly Report. However, we believe that our existing cash, cash equivalents, investments, funds available under our revolving credit facility, and cash generated from operations, will be sufficient to meet our cash requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

Share Repurchase Program

We announced a share repurchase program for up to $500.0 million of common stock on May 15, 2024. For the three months ended June 30, 2024, we repurchased and retired approximately 1.1 million shares of our common stock at an average price of $45.84 for a total of $50.1 million, of which $1.6 million has not been settled in cash as of June 30, 2024. As of June 30, 2024, $449.9 million remained available for future repurchases. For additional information, please see Part II, Item 2 of this Quarterly Report.

Our Credit Facilities

In December 2022, we entered into a senior secured revolving credit facility in an aggregate amount of $400.0 million (as amended to date, the “Credit Facility”). As of June 30, 2024, we had $399.2 million available under the Credit Facility with $0.8 million of letters of credit outstanding. As of June 30, 2024, we were in compliance with all applicable covenants pertaining to the Credit Facility. The Credit Facility is discussed further in Note 8, Long-term Debt, of the condensed consolidated financial statements in this Quarterly Report.

Summary of Cash Flows


	Three Months Ended June 30,
	2024		2023
	(in thousands)
Cash provided by operating activities (1)	$	230,741	$	133,903
Cash used in investing activities	(35,595)		(10,267)
Cash (used in) provided by financing activities	(42,810)		22,774
Effect of exchange rate changes on cash and cash equivalents	(1,004)		(1,055)
Net increase in cash and cash equivalents	$	151,332	$	145,355

(1) Net cash provided by operating activities includes cash payments for interest and tax as follows:


	Three Months Ended June 30,
	2024		2023
	(in thousands)
Cash paid for interest	$	184	$	212
Cash paid for tax, net	$	24,918	$	13,151

Operating Activities

For the three months ended June 30, 2024, cash provided by operating activities was $230.7 million as a result of net income of $38.6 million, and adjusted by non-cash charges of $50.6 million and a change of $141.5 million in our operating assets and liabilities. The non-cash charges were primarily comprised of share-based compensation of $57.7 million and depreciation and amortization of $14.0 million, partially offset by deferred income taxes of $22.6 million. The change in our net operating assets and liabilities was primarily the result of a decrease in accounts receivable of $355.4 million due to the timing of receipts of payments from customers, partially offset by a decrease in deferred revenue of $131.5 million due to seasonality in our sales cycle, which is higher in the third and fourth quarters of our fiscal year, a decrease in accounts payable and accrued expenses of $78.3 million driven by timing of payments, including the payments of our annual bonus plans and year-end commissions, and an increase in prepaid expenses and other assets of $8.1 million driven by the timing of payments in advance of future services.

For the three months ended June 30, 2023, cash provided by operating activities was $133.9 million as a result of net income of $38.2 million, and adjusted by non-cash charges of $34.6 million and a change of $61.1 million in our operating assets and liabilities. The non-cash charges were primarily comprised of share-based compensation of $40.5 million, depreciation and amortization of $13.6 million, partially offset by deferred income taxes of $19.3 million. The change in our net operating assets and liabilities was primarily the result of a decrease in accounts receivable of $204.2 million due to the timing of receipts of payments from customers and a decrease in deferred commissions of $8.5 million due to commissions paid on new bookings. Partially offsetting this was a decrease in deferred revenue of $95.9 million due to seasonality in our sales cycle, which is higher in the third and fourth quarters of our fiscal year, a decrease in accounts payable and accrued expenses of $39.6 million driven by timing of payments, and an increase in prepaid expenses and other assets of $16.4 million driven by the timing of payments in advance of future services.

Investing Activities

Cash used in investing activities during the three months ended June 30, 2024 was $35.6 million, primarily as a result of purchases of investments, net of sales and maturities, of $32.1 million and purchases of property and equipment of $3.4 million.

Cash used in investing activities during the three months ended June 30, 2023 was $10.3 million as a result of purchases of property and equipment.

Financing Activities

Cash used in financing activities during the three months ended June 30, 2024 was $42.8 million, primarily as a result of repurchases of common stock of $48.6 million and taxes paid related to net share settlement of equity awards of $8.3 million, partially offset from proceeds from our employee stock purchase plan of $10.4 million and proceeds from the exercise of our stock options of $4.2 million.

Cash provided by financing activities during the three months ended June 30, 2023 was $22.8 million, as a result of proceeds from the exercise of our stock options of $13.2 million and proceeds from our employee stock purchase plan of $9.6 million.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

There have been no significant changes in our critical accounting policies and estimates during the three months ended June 30, 2024 as compared to the critical accounting policies and estimates disclosed in our Annual Report. For a full discussion of these estimates and policies, see “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 2, Significant Accounting Policies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk

Our international operations have provided and are expected to continue to provide a significant portion of our consolidated revenues and expenses that we report in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our results of operations or cash flows, and to date, we have not engaged in any hedging strategies with respect to foreign currency transactions. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates, and we may choose to engage in the hedging of foreign currency transactions in the future.

Translation exposure

Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar, depending on the circumstances. As a result, our consolidated revenues and expenses are affected and will continue to be affected by changes in the U.S. dollar against major foreign currencies, particularly the Euro. Fluctuations in foreign currencies impact the amount of total assets, liabilities, earnings and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. In particular, the strengthening of the U.S. dollar generally will reduce the reported amount of our foreign-denominated cash and cash equivalents, total revenues and total expenses that we translate into U.S. dollars and report in our condensed consolidated financial statements. These gains or losses are recorded as a component of accumulated other comprehensive loss within shareholders’ equity.

Transaction exposure

We transact business in multiple currencies. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates on transactions denominated in currencies other than the functional currencies of our subsidiaries. These gains or losses are recorded within “Other (expense) income, net” in our condensed consolidated statements of operations.

Interest Rate Risk

As of June 30, 2024, we had cash and cash equivalents of $930.3 million, consisting primarily of money market funds, bank deposits, and highly liquid investments with an original maturity of three months of less, and investments of $136.9 million, consisting of U.S. Treasury securities, commercial paper, corporate debt securities, and U.S. agency securities. These interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

As of June 30, 2024, we also had the Credit Facility in place, with availability of $399.2 million. The Credit Facility bears interest based on (i) the Term Secured Overnight Financing Rate plus 0.10%, (ii) the Adjusted Euro Interbank Offer Rate, (iii) the Canadian Overnight Repo Rate Average, (iv) the Base Rate, as defined per the Credit Facility, or (v) the Sterling Overnight Index Average, in each case plus an applicable margin, as defined in the Credit Agreement. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of June 30, 2024, were effective and provided reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more

people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are, 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, we currently believe that the resolution of any such matters will not have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, legal proceedings and claims can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Industry

We have experienced rapid revenue growth in recent periods, which may not be indicative of our future growth.

We have experienced rapid revenue growth in recent periods. Our annual revenue grew 23% in the year ended March 31, 2024 compared to the prior year. Our revenue for the three months ended June 30, 2024 grew 20% compared to the prior-year period. This revenue growth may not be indicative of our future revenue growth, and we may not be able to sustain revenue growth consistent with recent history, or at all. We believe our ability to continue to increase our revenue depends on several factors, including, but not limited to:

•our ability to attract new customers and retain and increase sales to existing customers;

•our ability to continue to expand customer adoption and usage of our Dynatrace platform;

•our ability to develop our existing platform, introduce new solutions, and enhance and improve existing solutions on our platform;

•continued growth of cloud-based services and solutions;

•our ability to continue to develop offerings and solutions that our customers prefer over those of our competitors;

•our ability to hire and retain sufficient numbers of sales and marketing, research and development, and general and administrative personnel; and

•our ability to expand into new geographies and markets, including the business intelligence, data analytics, and application security markets, and expand our global operations.

If we are unable to achieve any of these, our revenue growth could be adversely affected.

Our quarterly and annual operating results may be adversely affected due to a variety of factors, which could make our future results difficult to predict.

Our annual and quarterly revenue and operating results have fluctuated significantly in the past and may vary significantly in the future due to a variety of factors, many of which are outside of our control. Our financial results in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. If our revenues, earnings, or operating results fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance that we may provide, the price of our

common stock could decline. We may not be able to accurately predict our future billings, revenues, earnings, or operating results. Some of the important factors that may cause our operating results to fluctuate from quarter to quarter or year to year include:

•fluctuations in the demand for our solutions, the timing of purchases by our customers, and the length of the sales cycles, particularly for larger purchases;

•fluctuations in the rate of utilization by customers of the cloud to manage their business needs, or a slowdown in the migration of enterprise systems to the cloud;

•the impact of recessionary pressures or uncertainties in the global economy, or in the economies of the countries in which we operate, on our customers’ purchasing decisions and the length of our sales cycles;

•our ability to attract new customers and retain existing customers;

•our ability to expand into new geographies and markets, including the business intelligence, data analytics, and application security markets;

•the budgeting cycles and internal purchasing priorities of our customers;

•changes in go-to-market strategy, customer renewal rates, churn, and our ability to cross-sell additional solutions to our existing customers and our ability to up-sell additional quantities of previously purchased offerings to existing customers;

•the seasonal buying patterns of our customers;

•the payment terms and contract term length associated with our product sales and their effect on our billings and free cash flow;

•changes in customer requirements or market needs;

•the emergence of significant privacy, data protection, systems and application security or other threats, regulations, or requirements applicable to the use of enterprise systems or cloud-based systems that we are not prepared to meet or that require additional investment by us;

•changes in the demand and growth rate of the markets for observability, application security, analytics, and AI-enabled solutions;

•our ability to anticipate or respond to changes in the competitive landscape, or improvements in the functionality of competing solutions that reduce or eliminate one or more of our competitive advantages;

•our ability to timely develop, introduce, and gain market acceptance for new solutions and product enhancements;

•our ability to adapt and update our offerings and solutions on an ongoing and timely basis in order to maintain compatibility and efficacy with the frequently changing and expanding variety of software and systems that our offerings are designed to monitor;

•our ability to maintain and expand our relationships with strategic technology partners that own, operate, and offer the major platforms on which applications operate, with which we must interoperate and remain compatible, and from which we must obtain certifications and endorsements in order to maintain credibility and momentum in the market;

•our ability to control costs, including our operating expenses;

•our ability to efficiently complete and integrate any acquisitions or business combinations that we may undertake in the future;

•general economic, industry, and market conditions, both domestically and in our foreign markets, including regional or geopolitical conflicts or other disruptions to commerce;

•the emergence of new technologies or trends in the marketplace, or a change in the trends that are important to our strategy and the value of our platform in the marketplace;

•foreign currency exchange rate fluctuations;

•the timing of revenue recognition for our customer transactions, and the effect of the mix of subscriptions and services on the timing of revenue recognition;

•extraordinary expenses, such as litigation or other dispute-related settlement payments; and

•future accounting pronouncements or changes in our accounting policies.

Any one of the factors referred to above or the cumulative effect of some of the factors referred to above may result in our operating results being below our expectations and the expectations of securities analysts and investors and any guidance that we may provide, or may result in significant fluctuations in our quarterly and annual operating results, including fluctuations in our key performance indicators. This variability and unpredictability could result in our failure to meet our business plan or the expectations of securities analysts or investors for any period. In addition, a significant percentage of our operating expenses are fixed in nature in the short term and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

Market adoption of the solutions that we offer is relatively new and may not grow as we expect, which may harm our business and prospects.

The utilization of solutions that we offer on the Dynatrace platform is relatively new. We believe our future success will depend in large part on the growth, if any, in the demand for observability and security solutions that utilize analytics and automation at their core, particularly the demand for enterprise-wide solutions and our ability to provide solutions that meet such ever-evolving needs. We currently target the markets for infrastructure observability, application observability, security protection, security analytics, digital experience, business analytics, and automation. It is difficult to predict customer demand, adoption, churn, and renewal rates for our new and existing solutions, the rate at which existing customers expand their usage of our solutions, and the size and growth rate of the market for our solutions. Expansion in our addressable market depends on a number of factors, including the continued and growing reliance of enterprises on software applications to manage and drive critical business functions and customer interactions, increased use of microservices and containers, as well as the continued proliferation of mobile applications, large data sets, cloud computing, and the Internet of Things. If our solutions do not achieve widespread adoption, we are not able to develop new solutions that meet customer needs, or there is a reduction in demand for observability and security solutions generally, it could result in reduced customer purchases, reduced renewal rates, and decreased revenue, any of which will adversely affect our business, operating results, and financial condition.

Our business is dependent on overall demand for 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.

Our business depends on the overall demand for observability and security solutions, particularly demand from mid- to large-sized accounts worldwide, and the purchase of our solutions by such organizations is often discretionary. Over the last year, we have observed global economic uncertainty at times as well as lengthening sales cycles. In an economic downturn or during periods of economic or political instability, we believe that our customers or prospects may reduce their operating or IT budgets, which could cause them to defer or forego purchases of observability and security solutions, including ours. Customers may delay or cancel IT projects or seek to lower their costs by renegotiating vendor contracts or renewals. To the extent purchases of observability and security solutions are perceived by existing customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general IT spending. Weak or turbulent global economic conditions or a reduction in observability and security spending, even if general economic conditions remain unaffected, could adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our solutions, reduced subscription renewals, and lower revenue. Moreover, any potential U.S. federal government shutdown resulting from budgetary decisions, a prolonged continuing resolution, breach of the federal debt ceiling, a potential U.S. sovereign default, and uncertainty surrounding the 2024 U.S. Presidential election may increase uncertainty and volatility in the global economy and financial markets. In addition, any negative economic effects or instability resulting from changes in the political environment and international relations in the United States or other key markets as well as resulting regulatory or tax policy changes may adversely affect our business and financial results.

As the market for observability and security solutions is relatively new and continues to develop, trends in spending remain unpredictable and subject to reductions due to the changing technology environment and customer needs as well as uncertainties about the future.

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.

The markets for observability and security solutions are characterized by constant change and innovation, and we expect them to continue to rapidly evolve. Moreover, many of our customers operate in industries characterized by changing technologies and business models, which require them to develop and manage increasingly complex software application and IT infrastructure environments. Our future success, if any, will be based on our ability to consistently provide our customers with an end-to-end, near real-time view into the performance of their software applications and IT infrastructure, provide notification and prioritization of degradations and failures, perform root cause analysis of performance issues, and analyze the quality of their end users’ experiences and the resulting impact on their businesses and brands. If we do not respond to the rapidly changing needs of our customers by developing and making available new solutions and solution enhancements that can address evolving customer needs on a timely

basis, our competitive position and business prospects will be harmed, and our revenue growth and margins could decline.

In addition, the process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We believe that we must continue to dedicate significant resources to our research and development efforts, including significant resources to developing new solutions and solution enhancements before knowing whether the market will accept them. For example, we have made significant investments in our new application security offering and in developing our GrailTM core technology, AutomationEngine, and AppEngine. We have also expanded our Davis® AI engine to create the observability and security industry’s first hypermodal AI, converging fact-based, predictive, and causal AI insights with new generative AI capabilities. Our new solutions and solution enhancements could fail to attain sufficient market acceptance for many reasons, including:

•delays in developing and releasing new solutions or enhancements to the market;

•delays or failures to provide updates to customers to maintain compatibility between Dynatrace and the various applications and platforms being used in the customers’ applications and multicloud environments;

•failures to accurately predict market or customer demands, priorities, and practices, including other technologies utilized by customers in their environments and partners that they prefer to work with;

•the introduction or anticipated introduction of competing products by existing and emerging competitors;

•flaws in our go-to-market strategy, as well as the inability of our sales and marketing teams or those of our partners to sell solutions for new markets and product categories;

•defects, errors, or failures in the design or performance of our new solutions or solution enhancements;

•negative publicity about the performance or effectiveness of our solutions; and

•the perceived value of our solutions or enhancements relative to their cost.

In addition to developing new solutions or enhancements using internal resources, we may acquire technologies from a third party, or acquire another company. Any acquisition of this type could be unsuccessful for a variety of reasons, require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our results of operations. For a description of some of the risks related to potential acquisitions, please see the risk below entitled “We may acquire other businesses, products, or technologies in the future which could require significant management attention, disrupt our business or result in operating difficulties, dilute stockholder value, and adversely affect our results of operations.”

To the extent that we are not able to continue to execute on our business model to timely and effectively develop or acquire and market applications to address these challenges and attain market acceptance, our business, operating results, and financial condition will be adversely affected.

Further, we may make changes to our solutions that our customers do not value or find useful. We may also discontinue certain features, begin to charge for certain features that are currently free, or increase fees for any of our features or usage of our solutions. If our new solutions, enhancements, or pricing strategies do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue may decline or grow more slowly than expected and the negative impact on our operating results may be particularly acute, and we may not receive a return on our investment in the upfront research and development, sales and marketing, and other expenses that we incur in connection with new solutions or solution enhancements.

If our platform and solutions do not effectively interoperate with our customers’ existing or future IT infrastructures, installations of our solutions could be delayed or canceled, which would harm our business.

Our success depends on the interoperability of our platform and solutions with third-party operating systems, applications, cloud platforms, data, and devices that we have not developed and do not control. Any third-party changes that degrade the functionality of our platform or solutions or give preferential treatment to competitive software could adversely affect the adoption and usage of our platform. We may not be successful in adapting our platform or solutions to operate effectively with these systems, applications, cloud platforms, data, or devices. If it is difficult for our customers to access and use our platform or solutions, or if our platform or solutions cannot connect a broadening range of systems, applications, cloud platforms, data, and devices, then our customer growth and retention may be harmed, and our business and operating results could be adversely affected.

Multicloud deployments utilize multiple third-party platforms and technologies, and these technologies are updated to new versions at a rapid pace. As a result, we deliver frequent updates to our solutions designed to maintain compatibility and support for our customers’ changing technology environments and ensure our solutions’ ability to continue to monitor customers’ applications. If our solutions fail to work with any one or more of these technologies or applications, or if our customers fail to install the most recent updates and versions of our solutions that we offer, our solutions will be unable to continuously monitor our customers’ critical business applications.

Ensuring that our solutions are up-to-date and compatible with the technology and multicloud platforms utilized by our customers is critical to our success. We have formed alliances with many technology and cloud platform providers to provide updates to our solutions to maintain compatibility. We work with technology and cloud platform providers to understand and align updates to their product roadmaps and engage in early access and other programs to ensure compatibility of our solutions with the technology vendor’s generally available release. If our relations with our technology partners degrades or ceases, we may be unable to deliver these updates, or if our customers fail to install the most recent updates and versions of our solutions that we offer, then our customers’ ability to benefit from our solution may decrease significantly and, in some instances, may require the customer to de-install our solution due to the incompatibility of our solution with the customer’s applications.

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.

To continue to grow our business, we need to attract new customers and increase deployment, usage, and consumption of our solutions by existing customers. Our success in attracting new customers and expanding our relationships with existing customers depends on numerous factors, including our ability to:

•offer a compelling, end-to-end observability and security platform, together with advanced AI for IT operations that provides answers and intelligent automation from data at an enormous scale;

•design and execute our sales and marketing strategy;

•effectively identify, attract, onboard, train, develop, motivate, and retain new sales, marketing, professional services, and support personnel in the markets we pursue;

•develop or expand relationships with technology partners, systems integrators, resellers, online marketplaces, and other partners, including strategic alliances and cloud-focused partnerships with GSIs, including Accenture, Deloitte, DXC, and Kyndryl, and hyperscalers such as AWS, GCP, Azure, and others, some of which may also compete with us;

•expand into new geographies and markets, including the business intelligence and data analytics market;

•deploy our platform and solutions for new customers; and

•provide quality customer support and professional services.

Our customers have no obligation to renew their agreements, and our customers may decide not to renew these agreements with a similar contract period, at the same prices and terms or with the same or a greater number of licenses. Although our customer retention rate has historically been strong, some of our customers have elected not to renew their agreements with us, and it is difficult to accurately predict long-term customer retention, churn and expansion rates. Our customer retention and expansion rates may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our solutions platform, our customer support and professional services, changes to our go-to-market strategy, our prices and pricing plans, the competitiveness of other software products and services, reductions in our customers’ spending levels, customer concerns about macroeconomic trends, user adoption of our solutions, deployment success, utilization rates by our customers, new product releases and changes to our product offerings. For example, when we updated our go-to-market strategy earlier this year, more than 30% of our customer accounts transitioned to new sales representatives. It is difficult to predict whether these changes will achieve their desired effects and a negative impact on retention and other results is possible. If our customers do not renew their agreements, or renew on less favorable terms, our business, financial condition, and operating results may be adversely affected.

Our ability to increase sales to existing customers depends on several factors, including their experience with implementing and using our platform and the existing solutions they have implemented, their ability to integrate our solutions with existing technologies, and our pricing models, including our DPS licensing model. A failure to increase sales to existing customers could adversely affect our business, operating results, and financial condition.

Failure to effectively expand our sales and marketing capabilities could harm our ability to execute on our business plan, increase our customer base, and achieve broader market acceptance of our applications.

Our ability to increase our customer base and achieve broader market acceptance of our solutions will depend to a significant extent on the ability of our sales and marketing organizations to work together to drive our sales pipeline and cultivate customer and partner relationships to drive revenue growth. We have invested in and plan to continue expanding our sales and marketing organizations, both in the United States and internationally. We also plan to dedicate significant resources to sales and marketing programs, including lead generation activities and brand awareness campaigns, such as our industry events, webinars, and user events with an increased investment in digital or online activities. If we are unable to effectively identify, hire, onboard, train, develop, motivate, and retain talented sales personnel or marketing personnel or if our new sales personnel or marketing personnel, online investments are unable to achieve desired productivity levels in a reasonable period of time, or if we do not create an effective strategy for our personnel to execute, our ability to increase our customer base and achieve broader market acceptance of our offerings could be harmed.

We face significant competition, which may adversely affect our ability to add new customers, retain existing customers, and grow our business.

The markets in which we compete are highly competitive, fragmented, evolving, complex, and defined by rapidly changing technology (including, without limitation, new and evolving uses of AI) and customer needs, and we expect competition to continue to increase in the future. A number of companies, some of which are larger and have more resources than we do, have developed or are developing products and services that currently, or in the future may, compete with some or all of our solutions. We have also been expanding the scope of our solutions to include new offerings and we increasingly compete with other companies in new and adjacent markets. Competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and our failure to increase, or loss of, market share, any of which could adversely affect our business, operating results, and financial condition.

We compete either directly or indirectly with infrastructure monitoring vendors, APM vendors, log management vendors, DEM vendors, security vendors, open source and commercial open source vendors, point solutions from public cloud providers, and IT operations management and business intelligence providers with offerings that cover some portion of the capabilities that we provide. Further, to the extent that one of our competitors establishes or strengthens a cooperative relationship with, or acquires one or more software APM, data analytics, compliance, or network visibility vendors, it could adversely affect our ability to compete. We may also face competition from companies entering our market, which has a relatively low barrier to entry in some segments, including large technology companies that could expand their platforms or acquire one of our competitors. For example, Cisco acquired Splunk earlier this year.

Many existing and potential competitors enjoy substantial competitive advantages, such as:

•greater brand recognition and longer operating histories;

•longer-term and more extensive relationships with existing and potential customers, and access to larger customer bases, which often provide incumbency advantages;

•broader global distribution and presence;

•larger sales and marketing budgets and resources;

•the ability to integrate or bundle competitive offerings with other products, offerings and services;

•lower labor and development costs;

•greater resources to make acquisitions;

•larger and more mature intellectual property portfolios; and

•substantially greater financial, technical, management and other resources.

Additionally, in certain circumstances, and particularly among large technology companies that have complex and large software application and IT infrastructure environments, customers may elect to build in-house solutions to address their observability and security needs. Any such in-house solutions could leverage open source software, and therefore be made generally available at little or no cost.

These competitive pressures in our markets or our failure to compete effectively may result in fewer customers, price reductions, fewer orders, reduced revenue and gross profit, and loss of market share. Any failure to meet and address these factors could materially and adversely affect our business, operating results, and financial condition.

If the prices we charge for our solutions and services are unacceptable to our customers, our operating results will be harmed.

As the market for our solutions matures, or as new or existing competitors introduce new products, offerings, or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at prices that are consistent with our current pricing model and operating budget. If this were to occur, it is possible that we would have to change our pricing model or reduce our prices, which could harm our revenue, gross margin, and operating results. Pricing decisions may also impact the mix of adoption among our licensing and subscription models, and negatively impact our overall revenue. Moreover, large global accounts, which we expect will account for a large portion of our business in the future, may demand substantial price concessions. If we are, for any reason, required to reduce our prices, our revenue, gross margin, profitability, financial position, and cash flow may be adversely affected.

We expect our billings and revenue mix to vary over time, which could harm our gross margin, cash flows, and operating results.

Our billings and revenue mix may vary over time due to a number of factors, including the mix of subscriptions and services and the contract length of our customer agreements. Our gross margins, cash flows, and operating results could also be harmed by further changes in billings and revenue mix and costs, together with numerous other factors, including entry into new lower margin markets or growth in lower margin markets, entry into markets with different pricing and cost structures, pricing discounts, increased price competition, and in response to macroeconomic conditions. Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our revenues, billings, gross margin, and operating results. This variability and unpredictability could result in our failure to meet internal expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline.

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.

In addition to our sales force, we rely on partners, including our strategic partners, to increase our sales and distribution of our software and services. We also have independent software vendor partners whose integrations may increase the breadth of the ecosystem in which our solutions can operate, and the size of the market that our solutions can address. We also have partnerships with GSIs, including Accenture, Deloitte, DXC, and Kyndryl, and hyperscalers such as AWS, GCP, and Azure, on which many of our customers depend, and through which our customers may be able to procure and deploy our solutions. We are dependent on these partner relationships to contribute to enabling our sales growth. We expect that our future growth will be increasingly dependent on the success of our partners and our partner relationships, and if those partnerships do not provide such benefits, our ability to grow our business will be harmed. If we are unable to scale our partner relationships effectively, or if our partners are unable to serve our customers effectively, we may need to expand our services organization, which could adversely affect our results of operations.

Our agreements with our partners are generally non-exclusive, meaning our partners may offer products from several different companies to their customers or have their products or technologies also interoperate with products and technologies of other companies, including products that compete with our offerings. Moreover, some of our partners also compete with us, and if our partners do not effectively market and sell our offerings, choose to use greater efforts to market and sell their own products or those of our competitors or fail to meet the needs of our customers, our ability to grow our business and sell our offerings will be harmed. Many of our customers are also customers of hyperscalers such as AWS, GCP, and Azure. If our solutions fail to interoperate effectively with the hyperscalers’ products, or if our partnerships with one or more of these hyperscalers are not successful or are terminated, our ability to sell additional products or offerings to these customers and our ability to grow our business will be harmed. Furthermore, our partners may cease marketing our offerings with limited or no notice and with little or no penalty, and new partners could require extensive training and may take several months or more to achieve productivity. The loss of a substantial number of our partners, our possible inability to replace them or our failure to recruit additional partners could harm our results of operations. Our partner structure could also subject us to lawsuits or reputational harm if, for example, a partner misrepresents the functionality of our offerings to customers or violates applicable laws or our corporate policies.

We believe the Dynatrace brand is integral to our future success and if we fail to cost-effectively maintain and enhance awareness of our company, our business and competitive position may be harmed.

We believe that maintaining and enhancing the Dynatrace brand and increasing market awareness of our company and our solutions are critical to achieving broad market knowledge of our existing and future solutions. Increasing awareness is important to attract and retain customers, partners, and employees, particularly as we continue to introduce new capabilities and enhancements and expand internationally. In addition, independent industry analysts, such as Gartner and Forrester, often provide reviews of our solutions, as well as those of our competitors, and perception of our solutions in the marketplace may be significantly influenced by these reviews. We have no control over what these or other industry analysts report, and because industry analysts may influence current and potential customers, our brand could be harmed if they do not provide a positive review of our solutions or view us as a market leader.

The successful promotion of the Dynatrace brand and the market’s awareness of our solutions and platform will depend largely upon our ability to continue to offer and market enterprise-grade observability and security solutions, share our thought leadership, and continue to differentiate our solutions successfully from those of our competitors. We have invested, and expect to continue to invest, substantial resources to promote and maintain our brand and generate sales leads, both in the United States and internationally, but there is no guarantee that our awareness strategies will enhance the recognition of our brand or lead to increased sales. If our efforts to promote and maintain our brand are not cost effective or successful, our operating results and our ability to attract and retain customers, partners and employees may be adversely affected. In addition, even if our brand recognition and customer loyalty increase, this may not result in increased sales of our solutions or higher revenue.

Our sales cycles can be long, unpredictable and vary seasonally, which can cause significant variation in the number and size of transactions that close in a particular quarter.

Many of our customers are large enterprises, whose purchasing decisions, budget cycles and constraints, and evaluation processes are unpredictable and out of our control. During recessionary times, or when there is volatility or uncertainty in the global economy or in the economies of the countries in which we operate, our sales cycles may be elongated and our customers’ purchasing decisions may be delayed or cancelled. In addition, we are experiencing, and we may continue to experience, an increase in the number of large, strategic deals where customers are looking to make broader observability architecture decisions. These deals come with a higher degree of variability, longer sales cycles, greater uncertainty of completing the sale, and specially negotiated terms. The length of our sales cycle, from initial evaluation to payment for our subscriptions, can range from several months to over a year and can vary substantially from customer to customer. Our sales efforts involve significant investment of resources in field sales, partner development, marketing, and educating our customers about the use, technical capabilities, and benefits of our platform and services. Customers often undertake a prolonged evaluation process, which frequently involves not only our platform, but also those of other companies or the consideration of internally developed alternatives, including those using open source software. Some of our customers initially deploy our platform on a limited basis, with no guarantee that they will deploy our platform widely enough across their organization to justify our substantial pre-sales investment. As a result, it is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to our existing customers.

We have experienced seasonal and end-of-quarter concentration of our transactions and variations in the number and size of transactions that close in a particular quarter, which impacts our ability to grow revenue over the long term and plan and manage cash flows and other aspects of our business and cost structure. Our transactions vary by quarter, with the third and fourth fiscal quarters typically being our largest. In addition, within each quarter, a significant portion of our transactions occur in the last two weeks of that quarter. Large individual sales may also occur in quarters subsequent to those we anticipate, which may make it difficult to forecast our expected sales cycle. If expectations for our business turn out to be inaccurate, our revenue growth may be adversely affected over time and we may not be able to adjust our cost structure on a timely basis and our cash flows and results of operations may suffer.

Our ability to succeed depends on the experience and expertise of our senior management team. If we are unable to attract, retain, and motivate our leadership team, our business, operating results, and prospects may be harmed.

Our ability to succeed depends in significant part on the experience and expertise of our senior management team. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives. In the last two years, we hired a new Chief Revenue Officer, Chief Marketing Officer, Chief Legal Officer, Chief People Officer and Chief Accounting Officer, among other leadership changes.

All members of our senior management team are employed on an at-will basis, which means that they are not contractually obligated to remain employed with us and could terminate their employment with us at any time (subject to any applicable notice periods). Accordingly, and despite our efforts to retain our senior management team, they could terminate their employment with us at any time, which could disrupt our operations and negatively impact employee morale and our culture. After their termination, such person could go to work for one of our competitors after the expiration of any applicable non-compete period, and the restrictions on non-competition may in any case be difficult to enforce depending on the circumstances. The loss of members of our senior management team, particularly if closely grouped, could disrupt our operations, negatively impact employee morale and our culture, and adversely affect our ability to formulate and execute our business plan and thus, our business, operating results, and prospects could be adversely affected. If we fail to develop effective succession plans for our senior management team, and to identify, recruit, onboard, train and integrate strategic hires, our business, operating results, and financial condition could be adversely affected.

We rely on highly skilled personnel and if we are unable to attract, retain, or motivate substantial numbers of qualified personnel or expand and train our personnel, we may not be able to grow effectively.

Our success largely depends on the talents and efforts of key technical, sales, and marketing employees and our future success depends on our continuing ability to efficiently and effectively identify, hire, onboard, train, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry is intense, and often leads to significant increased compensation and other personnel costs. In addition, competition for employees with experience in our industry can be intense, particularly in Europe, where our research and development operations are concentrated and where other technology companies compete for management and engineering talent. Our continued ability to compete and grow effectively depends on our ability to attract substantial numbers of qualified new employees and to retain and motivate our existing employees.

Any failure to offer high-quality customer support and professional services may adversely affect our relationships with our customers and our financial results.

We typically bundle customer support with arrangements for our solutions and offer professional services for implementation and training. In deploying and using our platform and solutions, our customers may require the assistance of our services teams to resolve complex technical and operational issues. Increased customer demand for support, without corresponding revenue, could increase costs and adversely affect our operating results. We may also be unable to respond quickly enough to accommodate short-term increases in customer demand for support. If we fail to meet our service level commitments, which relate to uptime or response times, or if we suffer extended periods of unavailability for our solutions, we may be contractually obligated to provide these customers with service credits or we could face contract terminations and be required to provide refunds of prepaid unused fees. Our sales are highly dependent on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer support and professional services, or a market perception that we do not maintain high-quality product support or services, could adversely affect our reputation, and our ability to sell our solutions to existing and new customers.

We believe that our corporate culture has contributed to our success, and if we cannot successfully maintain our culture as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture.

We believe that a critical component to our success has been a focus on maintaining an entrepreneurial and innovative corporate culture. We believe our culture has contributed significantly to our abilities to innovate and develop new technologies and attract and retain employees. We have spent substantial time and resources in building our team while maintaining this corporate culture. Over our last two fiscal years, our total employee headcount as of March 31, 2024 increased 32% compared to our total headcount as of March 31, 2022 and we also expanded our international employee presence. The addition of new employees from different business backgrounds in different geographic locations, and the significant number of employees who work either on a hybrid or remote basis may make it difficult for us to maintain our corporate culture. If our culture is negatively affected, our ability to support our growth and innovation may diminish.

Our credit facility contains restrictions that impact our business and expose us to risks that could adversely affect our liquidity and financial condition.

In 2022, we entered into a senior secured revolving credit facility in the aggregate amount of $400.0 million. As of June 30, 2024, we had $399.2 million available under the credit facility with $0.8 million of letters of credit outstanding. The actual amounts of our debt servicing payments vary based on the amounts of indebtedness outstanding, the applicable interest accrual periods and the applicable interest rates and fee margins, which vary based on prescribed formulas. The credit facility contains various customary covenants (including a financial covenant requiring compliance with a maximum leverage ratio) that are operative so long as our credit facility remains outstanding.

If we are unable to generate sufficient cash flow or otherwise to obtain the funds necessary to make required payments under our credit facility, or if we fail to comply with the various covenants and other requirements of our set forth in the credit facility, we could default under our credit facility. Our credit facility also contains provisions that trigger repayment obligations or an event of default upon a change of control, as well as various representations and warranties which, if breached, could lead to an event of default. Any such default that is not cured or waived could result in an acceleration of indebtedness then outstanding under our credit facility, an increase in the applicable interest rates under our credit facility, and a requirement that our subsidiaries that have guaranteed our credit facility pay the obligations in full, and would permit the lenders to exercise remedies with respect to all of the collateral that is securing our credit facility, including substantially all of our and the subsidiary guarantors’ assets. We cannot be certain that our future operating results will be sufficient to ensure compliance with the covenants in our credit facility or to remedy any defaults under our credit facility. In the event of any default and related acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments. Any such default could have a material adverse effect on our liquidity, financial condition, and results of operations.

Form: 10-Q

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