November 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 September 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 298,484,021 shares of common stock outstanding as of November 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 Septem ber 30, 2024 and March 31, 2024	2
	Condensed Consolidated Statements of Operations for the Three and Si x Months Ended September 30, 2024 and 2023	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Si x Months Ended Septem ber 30, 2024 and 2023	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended Septem ber 30, 2024 and 2023	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended Septem ber 30, 2024 and 2023	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Default Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
Signatures		60

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DYNATRACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	September 30, 2024		March 31, 2024
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	907,177	$	778,983
Short-term investments	97,834		57,891
Accounts receivable, net	303,341		602,739
Deferred commissions, current	106,554		98,935
Prepaid expenses and other current assets	68,672		66,749
Total current assets	1,483,578		1,605,297
Long-term investments	48,312		46,350
Property and equipment, net	52,649		53,325
Operating lease right-of-use assets, net	70,957		61,390
Goodwill	1,337,205		1,335,494
Intangible assets, net	31,701		50,995
Deferred tax assets, net	177,714		138,836
Deferred commissions, non-current	95,187		93,310
Other assets	32,350		24,782
Total assets	$	3,329,653	$	3,409,779

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	17,298	$	21,410
Accrued expenses, current	208,825		233,675

Deferred revenue, current	806,171		987,953
Operating lease liabilities, current	15,606		15,513
Total current liabilities	1,047,900		1,258,551
Deferred revenue, non-current	54,878		62,308
Accrued expenses, non-current	16,926		18,404
Operating lease liabilities, non-current	64,997		54,013
Deferred tax liabilities	996		1,013

Total liabilities	1,185,697		1,394,289
Commitments and contingencies (Note 10)
Shareholders' equity:
Common shares, $0.001 par value, 600,000,000 shares authorized, 298,519,163 and 296,962,547 shares issued and outstanding at September 30, 2024 and March 31, 2024, respectively	299		297
Additional paid-in capital	2,295,796		2,249,349
Accumulated deficit	(116,129)		(198,757)
Accumulated other comprehensive loss	(36,010)		(35,399)
Total shareholders' equity	2,143,956		2,015,490
Total liabilities and shareholders' equity	$	3,329,653	$	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 September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
Revenue:
Subscription	$	399,810	$	334,497	$	781,386	$	650,951
Service	18,319		17,203		35,963		33,635
Total revenue	418,129		351,700		817,349		684,586
Cost of revenue:
Cost of subscription	55,796		44,792		109,368		87,696
Cost of service	17,595		15,675		34,397		31,217
Amortization of acquired technology	4,393		3,900		8,772		7,798
Total cost of revenue	77,784		64,367		152,537		126,711
Gross profit	340,345		287,333		664,812		557,875

Operating expenses:
Research and development	95,366		74,084		182,944		140,366
Sales and marketing	144,224		127,605		289,330		252,722
General and administrative	48,953		44,748		93,931		83,843
Amortization of other intangibles	4,776		5,627		9,552		11,387

Total operating expenses	293,319		252,064		575,757		488,318
Income from operations	47,026		35,269		89,055		69,557
Interest income, net	12,850		8,509		25,625		15,655
Other expense, net	(2,038)		(3,075)		(4,073)		(2,823)
Income before income taxes	57,838		40,703		110,607		82,389
Income tax expense	(13,830)		(4,894)		(27,979)		(8,392)
Net income	$	44,008	$	35,809	$	82,628	$	73,997
Net income per share:
Basic	$	0.15	$	0.12	$	0.28	$	0.25
Diluted	$	0.15	$	0.12	$	0.27	$	0.25
Weighted average shares outstanding:
Basic	298,089		293,654		297,736		292,504
Diluted	301,373		297,794		301,714		297,492

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)


	Three Months Ended September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
Net income	$	44,008	$	35,809	$	82,628	$	73,997
Other comprehensive loss
Foreign currency translation adjustment	(1,055)		(474)		(1,277)		(1,891)
Unrealized gains on available-for-sale investments, net of taxes	766		—		666		—
Total other comprehensive loss	(289)		(474)		(611)		(1,891)
Comprehensive income	$	43,719	$	35,335	$	82,017	$	72,106

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Three Months Ended September 30, 2024
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders' Equity
	Shares	Amount
Balance, June 30, 2024	298,181	$	298	$	2,263,195	$	(160,137)	$	(35,721)	$	2,067,635
Other comprehensive loss	—	—		—		—		(289)		(289)
Restricted stock units vested	1,049	1		(1)		—		—		—


Exercise of stock options	198	1		4,557		—		—		4,558
Share-based compensation	—	—		71,703		—		—		71,703
Shares withheld for employee taxes	(74)	—		(3,660)		—		—		(3,660)
Repurchases of common stock	(835)	(1)		(39,998)		—		—		(39,999)
Net income	—	—		—		44,008		—		44,008
Balance, September 30, 2024	298,519	$	299	$	2,295,796	$	(116,129)	$	(36,010)	$	2,143,956



	Three Months Ended September 30, 2023
	Common Shares			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Shareholders’ Equity
	Shares	Amount
Balance, June 30, 2023	293,160	$	293	$	2,053,086	$	(315,201)	$	(33,246)	$	1,704,932
Other comprehensive loss	—	—		—		—		(474)		(474)
Restricted stock units vested	959	1		(1)		—		—		—



Exercise of stock options	175	—		3,429		—		—		3,429
Share-based compensation	—	—		57,958		—		—		57,958


Net income	—	—		—		35,809		—		35,809
Balance, September 30, 2023	294,294	$	294	$	2,114,472	$	(279,392)	$	(33,720)	$	1,801,654

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - In thousands)


	Six Months Ended September 30, 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	—	—		—		—		(611)		(611)
Restricted stock units vested	3,075	3		(3)		—		—		—

Issuance of common stock related to employee stock purchase plan	262	—		10,389		—		—		10,389
Exercise of stock options	399	1		8,772		—		—		8,773
Share-based compensation	—	—		129,360		—		—		129,360
Shares withheld for employee taxes	(252)	—		(11,966)		—		—		(11,966)
Repurchases of common stock	(1,928)	(2)		(90,105)		—		—		(90,107)
Net income	—	—		—		82,628		—		82,628
Balance, September 30, 2024	298,519	$	299	$	2,295,796	$	(116,129)	$	(36,010)	$	2,143,956



	Six Months Ended September 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	—	—		—		—		(1,891)		(1,891)
Restricted stock units vested	2,780	3		(3)		—		—		—

Issuance of common stock related to employee stock purchase plan	313	—		9,584		—		—		9,584
Exercise of stock options	790	1		16,618		—		—		16,619
Share-based compensation	—	—		98,476		—		—		98,476


Net income	—	—		—		73,997		—		73,997
Balance, September 30, 2023	294,294	$	294	$	2,114,472	$	(279,392)	$	(33,720)	$	1,801,654

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

DYNATRACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)


	Six Months Ended September 30,
	2024		2023
Cash flows from operating activities:
Net income	$	82,628	$	73,997
Adjustments to reconcile net income to cash provided by operations:
Depreciation	8,635		7,890
Amortization	19,356		19,207
Share-based compensation	129,360		98,476
Deferred income taxes	(39,059)		(35,166)

Other	3,133		3,019
Net change in operating assets and liabilities:
Accounts receivable	300,077		177,689
Deferred commissions	(7,166)		8,978
Prepaid expenses and other assets	(14,073)		(22,909)
Accounts payable and accrued expenses	(30,479)		(33,246)
Operating leases, net	1,465		1,333
Deferred revenue	(199,486)		(128,488)
Net cash provided by operating activities	254,391		170,780

Cash flows from investing activities:
Purchase of property and equipment	(6,871)		(13,017)

Acquisition of a business, net of cash acquired	(100)		(32,391)
Purchases of investments	(80,024)		—
Proceeds from sales and maturities of investments	40,375		—
Net cash used in investing activities	(46,620)		(45,408)

Cash flows from financing activities:


Payments of deferred consideration related to capitalized software additions	(1,656)		—
Proceeds from employee stock purchase plan	10,389		9,584
Proceeds from exercise of stock options	8,773		16,619
Repurchases of common stock	(90,107)		—
Taxes paid related to net share settlement of equity awards	(11,966)		—
Net cash (used in) provided by financing activities	(84,567)		26,203

Effect of exchange rates on cash and cash equivalents	4,990		(5,399)

Net increase in cash and cash equivalents	128,194		146,176

Cash and cash equivalents, beginning of period	778,983		555,348
Cash and cash equivalents, end of period	$	907,177	$	701,524

Supplemental cash flow data:
Cash paid for interest	$	365	$	420
Cash paid for tax, net	$	55,452	$	41,804

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 Davis® hypermodal artificial intelligence (“AI”) 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 September 30, 2024 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three and six months ended September 30, 2024 and 2023, statements of cash flows for the six months ended September 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 September 30, 2024, its results of operations for the three and six months ended September 30, 2024 and 2023, and its cash flows for the six months ended September 30, 2024 and 2023 are in accordance with U.S. GAAP. The results for the three and six months ended September 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 September 30,								Six Months Ended September 30,
	2024				2023				2024				2023
	Amount		%		Amount		%		Amount		%		Amount		%
North America	$	253,259	61	%	$	208,968	59	%	$	493,695	60	%	$	407,505	59	%
Europe, Middle East and Africa	102,135		24	%	87,764		25	%	200,126		25	%	170,913		25	%
Asia Pacific	37,654		9	%	31,189		9	%	73,927		9	%	60,997		9	%
Latin America	25,081		6	%	23,779		7	%	49,601		6	%	45,171		7	%
Total revenue	$	418,129			$	351,700			$	817,349			$	684,586

For the three and six months ended September 30, 2024 and 2023, the United States was the only country that represented more than 10% of the Company’s revenue, constituting $240.2 million and 57% and $197.8 million and 56% of total revenue during the three months ended September 30, 2024 and 2023, respectively, and $468.1 million and 57% and $385.8 million and 56% of total revenue during the six months ended September 30, 2024 and 2023, respectively.

Revenue recognized during the three months ended September 30, 2024 and 2023, which was included in the deferred revenue balance at the beginning of each respective period, was $369.1 million and $305.4 million, respectively. Revenue recognized during the six months ended September 30, 2024 and 2023, which was included in the deferred revenue balance at the beginning of each respective period, was $659.0 million and $532.9 million, respectively.

Remaining performance obligations

As of September 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $2,398.8 million, which consists of both billed consideration in the amount of $861.0 million and unbilled consideration in the amount of $1,537.7 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 September 30, 2024 and March 31, 2024, contract assets of $4.1 million and $5.2 million, respectively, were 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 of net assets, including $7.8 million of intangible assets, resulting in goodwill of $27.4 million. The fair value of certain acquired assets and assumed liabilities was finalized during the three months ended September 30, 2024.

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. 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 are being held by the Company to satisfy indemnification obligations and post-closing purchase price adjustments payable within 15 months after the acquisition date. During the six months ended September 30, 2024 the Company paid $0.1 million for a post-closing purchase price adjustment.

In connection with the acquisition of Runecast, $9.0 million of restricted stock awards (“RSAs”) will be issued to the previous owners subject to continuing employment and certain indemnification clauses. For the three and six months ended September 30, 2024, the Company recognized $0.9 million and $1.8 million of share-based compensation expense for the RSAs, respectively.

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 of net assets, including $7.5 million of 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):


	September 30, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	120,413	$	527	$	(19)	$	120,921
Corporate debt securities	14,404		130		(1)		$	14,533
Commercial paper	5,892		11		—		5,903
U.S. government agency securities	5,862		3		(2)		5,863
Total	$	146,571	$	671	$	(22)	$	147,220


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

The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as credit ratings, issuer-specific factors, current economic conditions, and reasonable and supportable forecasts. The Company does not intend to sell these investments nor is it more likely than not that the Company would be required to sell the security before its anticipated maturity. Based on the evaluation of available evidence, the Company does not believe any unrealized losses on its investments represent credit losses as of September 30, 2024 and March 31, 2024.

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):


	September 30, 2024		March 31, 2024
Due within one year	$	97,834	$	57,891
Due in one year through five years	47,938		46,248
Total	$	145,772	$	104,139

Effective January 1, 2024, the Company offers a non-qualified deferred compensation plan to eligible U.S. employees. The Company held $0.4 million and $0.1 million of mutual funds that are associated with this plan and were classified as restricted trading securities as of September 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 September 30, 2024 and March 31, 2024, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):


	September 30, 2024
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	625,010	$	—	$	—	$	625,010
U.S. treasury securities	—		1,448		—		1,448

Investments:
Mutual funds	374		—		—		374
U.S. treasury securities	—		119,473		—		119,473
Corporate debt securities	—		14,533		—		14,533
Commercial paper	—		5,903		—		5,903
U.S. agency securities	—		5,863		—		5,863
Total financial assets	$	625,384	$	147,220	$	—	$	772,604


	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 $13.2 million and $9.0 million for the three months ended September 30, 2024 and 2023, respectively, and $26.2 million and $16.5 million for the six months ended September 30, 2024 and 2023, respectively.

6. Goodwill and Other Intangible Assets, Net

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


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

Foreign currency impact	1,711
Balance, end of period	$	1,337,205

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


	Weighted Average Useful Life (in months)
		September 30, 2024		March 31, 2024
Capitalized software	103	$	218,754	$	218,529
Customer relationships	120	351,756		351,756
Trademarks and tradenames	120	55,003		55,003
Total intangible assets		625,513		625,288
Less: accumulated amortization		(593,812)		(574,293)
Total other intangible assets, net		$	31,701	$	50,995

Amortization of intangible assets totaled $9.7 million and $9.5 million for the three months ended September 30, 2024 and 2023, respectively, and $19.4 million and $19.2 million for the six months ended September 30, 2024 and 2023, respectively.

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 September 30, 2024 was 23.9% compared to 12.0% for the three months ended September 30, 2023. The Company’s effective tax rate for the six months ended September 30, 2024 was 25.3% compared to 10.2% for the six months ended September 30, 2023. The increase in the effective tax rate for both the three months ended September 30, 2024 and the six months ended September 30, 2024 was primarily due to a decrease in share-based compensation tax 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 September 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 September 30, 2024 and March 31, 2024. The Company had $399.2 million of availability under the Credit Facility as of September 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 $1.2 million and $1.4 million of unamortized debt issuance costs as of September 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 and other wholly owned subsidiaries 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 September 30, 2024, the Company was in compliance with all applicable covenants.

Interest expense

Interest expense, including amortization of debt issuance costs and original issuance discount, was $0.4 million for the three months ended September 30, 2024 and 2023, and $0.5 million and $0.8 million for the six months ended September 30, 2024 and 2023, 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 September 30, 2024, the weighted average remaining lease term was 6.2 years and the weighted average discount rate was 4.5%. The Company did not have any finance leases as of September 30, 2024.

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


	Three Months Ended September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
Operating lease expense	$	4,000	$	3,831	$	8,132	$	7,600
Short-term lease expense	$	726	$	507	$	1,327	$	1,006
Variable lease expense	$	324	$	344	$	811	$	732

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


	Six Months Ended September 30,
	2024		2023
Cash paid for amounts included in the measurement of lease liabilities	$	10,376	$	9,090
Operating lease assets obtained in exchange for new operating lease liabilities (1)	$	17,903	$	9,387

_________________

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

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


Fiscal Years Ending March 31,	Amount
2025	$	9,527
2026	17,585
2027	16,164
2028	11,461
2029	9,311
Thereafter	27,579
Total operating lease payments	91,627
Less: imputed interest	(11,024)
Total operating lease liabilities	$	80,603

As of September 30, 2024, the Company had commitments of $86.1 million for an operating lease that has not yet commenced, and therefore is not included in the right-of-use assets or operating lease liabilities. This operating lease is expected to commence during fiscal 2026 with a lease term of 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 and six months ended September 30, 2024, the Company repurchased and retired 0.8 million and 1.9 million shares of its common stock for a total of $40.0 million and $90.1 million, respectively. As of September 30, 2024, $409.9 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 September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
Cost of revenue	$	9,714	$	7,197	$	17,444	$	12,685
Research and development	26,607		18,177		48,187		31,441
Sales and marketing	20,750		18,877		36,772		32,876
General and administrative	14,632		13,707		26,957		21,474
Total share-based compensation	$	71,703	$	57,958	$	129,360	$	98,476

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 September 30, 2024, 56,826,675 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 six months ended September 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	(399)	21.97
Forfeited or expired	(49)	41.99
Balance, September 30, 2024	2,615	$	22.28	5.1	$	81,608
Options vested and expected to vest at September 30, 2024	2,615	$	22.28	5.1	$	81,608
Options vested and exercisable at September 30, 2024	2,597	$	22.10	5.1	$	81,525

As of September 30, 2024, the total unrecognized compensation expense related to non-vested stock options was $0.3 million and is expected to be recognized over a weighted average period of 0.5 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 six months ended September 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	—	—		5,872	47.75
Vested	—	—		(3,075)	48.34
Forfeited	—	—		(727)	48.30
Balance, September 30, 2024	142	$	49.05	11,922	$	47.92

RSUs outstanding as of September 30, 2024 were comprised of 10.7 million RSUs with only service conditions and 1.2 million RSUs with both service and performance or market-based conditions (“PSUs”).

During the six months ended September 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 maximum number of shares that may be earned is 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 September 30, 2024, the total unrecognized compensation expense related to unvested RSAs was $6.8 million and is to be recognized over a weighted average period of 2.4 years. As of September 30, 2024, the total unrecognized compensation expense related to unvested RSUs was $493.6 million and is expected to be recognized over a weighted average period of 2.2 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 six months ended September 30, 2024, 261,829 shares of common stock were purchased under the ESPP. As of September 30, 2024, 18,572,583 shares of common stock were available for future issuance under the ESPP.

As of September 30, 2024, there was approximately $1.1 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 September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
Numerator:
Net income	$	44,008	$	35,809	$	82,628	$	73,997
Denominator:
Weighted average shares outstanding, basic	298,089		293,654		297,736		292,504
Dilutive effect of share-based awards	3,284		4,140		3,978		4,988
Weighted average shares outstanding, diluted	301,373		297,794		301,714		297,492

Net income per share, basic	$	0.15	$	0.12	$	0.28	$	0.25
Net income per share, diluted	$	0.15	$	0.12	$	0.27	$	0.25

The effect of certain common share equivalents were excluded from the computation of weighted-average diluted shares outstanding for the three and six months ended September 30, 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 September 30,		Six Months Ended September 30,
	2024	2023	2024	2023
Stock options	101	144	108	152
Unvested RSAs and RSUs	2,897	4,304	644	2,926
Shares committed under ESPP	—	—	1	—

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):


	September 30, 2024		March 31, 2024
North America	$	37,134	$	35,339
Europe, Middle East and Africa	81,540		73,892
Asia Pacific	4,561		5,041
Latin America	371		443
Total long-lived assets, net	$	123,606	$	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 Davis® hypermodal AI 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.

Second-Quarter 2025 Financial Highlights

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

•Our annual recurring revenue (“ARR”) was $1,617 million as of September 30, 2024, which reflected 20% growth year-over-year;

•Total revenue and subscription revenue was $418 million and $400 million, respectively;

•We delivered GAAP income from operations of $47 million and non-GAAP income from operations(1) of $131 million; and

•Our net cash provided by operating activities and free cash flow(1) was $24 million and $20 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 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 September 30,
	2024		2023
	(in thousands, except percentages)
Total ARR	1,616,531		$	1,343,530
Year-over-year increase	20	%	26		%
Dollar-based net retention rate	112	%	114		%


	Three Months Ended September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)				(in thousands)
Non-GAAP income from operations(1)	$	130,669	$	106,435	$	244,919	$	198,510
Free cash flow(1)	20,138		34,127		247,520		157,763

(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 September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)				(in thousands)
GAAP income from operations	$	47,026	$	35,269	$	89,055	$	69,557
Share-based compensation	71,703		57,958		129,360		98,476
Employer payroll taxes on employee stock transactions	2,771		2,301		8,180		7,504
Amortization of intangibles	9,169		9,527		18,324		19,185
Transaction, restructuring, and other	—		1,380		—		3,788
Non-GAAP income from operations	$	130,669	$	106,435	$	244,919	$	198,510


	Three Months Ended September 30,				Six Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)				(in thousands)
Net cash provided by operating activities	$	23,650	$	36,877	$	254,391	$	170,780
Purchase of property and equipment	(3,512)		(2,750)		(6,871)		(13,017)
Capitalized software additions	—		—		—		—
Free cash flow	$	20,138	$	34,127	247,520		157,763

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, 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 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 Credit Facility (as defined later in this section), and amortization of debt issuance costs.

Other Expense, Net

Other expense, 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 September 30, 2024 and 2023


	Three Months Ended September 30,
	2024				2023
	Amount		Percent		Amount		Percent
	(in thousands, except percentages)
Revenue:
Subscription	$	399,810	96	%	$	334,497	95	%
Service	18,319		4	%	17,203		5	%
Total revenue	418,129		100	%	351,700		100	%
Cost of revenue:
Cost of subscription	55,796		14	%	44,792		13	%
Cost of service	17,595		4	%	15,675		4	%
Amortization of acquired technology	4,393		1	%	3,900		1	%
Total cost of revenue (1)	77,784		19	%	64,367		18	%
Gross profit	340,345		81	%	287,333		82	%

Operating expenses:
Research and development (1)	95,366		23	%	74,084		21	%
Sales and marketing (1)	144,224		34	%	127,605		36	%
General and administrative (1)	48,953		12	%	44,748		13	%
Amortization of other intangibles	4,776		1	%	5,627		2	%
Total operating expenses	293,319				252,064
Income from operations	47,026		11	%	35,269		10	%
Interest income, net	12,850				8,509
Other expense, net	(2,038)				(3,075)
Income before income taxes	57,838				40,703
Income tax expense	(13,830)				(4,894)
Net income	$	44,008			$	35,809

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


	Three Months Ended September 30,
	2024		2023
	(in thousands)
Cost of revenue	$	9,714	$	7,197
Research and development	26,607		18,177
Sales and marketing	20,750		18,877
General and administrative	14,632		13,707
Total share-based compensation	$	71,703	$	57,958

Revenue


	Three Months Ended September 30,				Change
	2024		2023		Amount		Percent
	(in thousands, except percentages)
Subscription	$	399,810	$	334,497	$	65,313	20	%
Service	18,319		17,203		1,116		6	%
Total revenue	$	418,129	$	351,700	$	66,429	19	%

Subscription

Subscription revenue increased by $65.3 million, or 20%, for the three months ended September 30, 2024 as compared to the three months ended September 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 $1.1 million, or 6%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was primarily due to timing of delivery of services.

Cost of Revenue

Three Months Ended September 30,

Change

2024

Form: 10-Q

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