DYNATRACE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the section titled "Risk Factors" included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our fiscal year ends onMarch 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. 15 --------------------------------------------------------------------------------
OVERVIEW
We offer the market-leading software intelligence platform, purpose-built for dynamic multicloud environments. As organizations embrace the cloud to effect their digital transformation, our all-in-one intelligence platform is designed to address the growing complexity faced by technology and digital business teams. With automation and intelligence at its core, our platform delivers precise answers about the performance and security of applications, the underlying infrastructure and the experience of all users to enable teams to innovate faster, simplify cloud complexity, collaborate more efficiently, and secure cloud-native applications. We designed our platform to allow our customers to modernize and automate IT operations, develop and release high quality software faster, and improve user experiences for consistently better business outcomes. As a result, as ofDecember 31, 2021 , our products are trusted by over 3,200Dynatrace customers in over 90 countries in diverse industries such as banking, insurance, retail, manufacturing, travel and software. We market Dynatrace® through a combination of our global direct sales team and a network of partners, including cloud service providers (Amazon, Microsoft, and Google), resellers, and system integrators. We target the largest 15,000 global accounts, which generally have annual revenues in excess of$1 billion . We generate revenue primarily by selling subscriptions, which we define as (i) Software-as-a-service ("SaaS") agreements, (ii) Dynatrace® term-based licenses, for which revenue is recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses, which are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements. We deploy our platform as a SaaS solution, with the option of retaining the data in the cloud, or at the edge in customer-provisioned infrastructure, which we refer to as Dynatrace® Managed. The Dynatrace® Managed offering allows customers to maintain control of the environment where their data resides, whether in the cloud or on-premises, combining the simplicity of SaaS with the ability to adhere to their own data security and sovereignty requirements. Our Mission Control functionality automatically upgrades all Dynatrace® instances and offers on-premise cluster customers auto-deployment options that suit their specific enterprise management processes. Dynatrace® is an all-in-one platform, which is typically purchased by our customers with the full-stack Application Performance Module and extended with our Infrastructure Monitoring, Digital Experience Monitoring, Digital Business Analytics, Application Security, or Cloud Automation Modules. Customers also have the option to purchase the infrastructure monitoring module where the full-stack APM is not required, with the ability to upgrade to the full-stack APM when necessary. Our Dynatrace® platform has been commercially available since 2016 and is the primary offering we sell. Dynatrace® customers increased to more than 3,200 as ofDecember 31, 2021 from approximately 2,800 as ofDecember 31, 2020 . Our Classic products include AppMon, Classic Real User Monitoring, or RUM, Network Application Monitoring, or NAM, and Synthetic Classic. These products were sunset as ofApril 1, 2021 . COVID-19 Update The COVID-19 pandemic continues to evolve and have significant impacts around the globe and in many locations in which we operate. While the impacts have not caused a material adverse financial impact to our business to date, the future impacts remain uncertain. The extent to which the COVID-19 pandemic may impact our business going forward will depend on numerous evolving factors that we cannot reliably predict. These factors may adversely impact business spending on technology as well as customers' ability to pay for our products and services on an ongoing basis. While our revenue, customer retention, and earnings are relatively predictable as a result of our subscription-based business model, the effect, if any, of the COVID-19 pandemic would not be fully reflected in our results of operations and overall financial performance until future periods. Throughout the pandemic we have continued to make investments to support business growth and product development, including investments in research and development as we continue to introduce new products and applications to extend the functionality of our products, sales and marketing to support customer growth, and other critical functions to ensure the highest levels of customer service and support as well as ensuring that we maintain the required infrastructure to be a public company. We expect to continue to make these investments. See the section titled "Risk Factors" included under Part II, Item 1A for further discussion of the possible impact of the COVID-19 pandemic on our business. Key Factors Affecting Our Performance Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to: 16 -------------------------------------------------------------------------------- •Extend our technology and market leadership position. We intend to maintain our position as the market-leading software intelligence platform through increased investment in research and development and continued innovation. We expect to focus on expanding the functionality of Dynatrace® and investing in capabilities that address new market opportunities. We believe this strategy will enable new growth opportunities and allow us to continue to deliver differentiated high-value outcomes to our customers. •Grow our customer base. We intend to drive new customer growth by expanding our direct sales force focused on the largest 15,000 global accounts, which generally have annual revenues in excess of$1 billion . In addition, we expect to leverage our global partner ecosystem to add new customers in geographies where we have direct coverage and work jointly with our partners. In other geographies, such asAfrica ,Japan , theMiddle East ,Russia andSouth Korea , we utilize a multi-tier "master reseller" model. •Increase penetration within existing customers. We plan to continue to increase penetration within our existing customers by expanding the breadth of our platform capabilities to provide for continued cross-selling opportunities. In addition, we believe the ease of implementation for Dynatrace® provides us the opportunity to expand adoption within our existing customers, across new customer applications, and into additional business units or divisions. Our Dynatrace® net expansion rate has been above 120% for the last 15 quarters. •Enhance our strategic partner ecosystem. Our strategic partners include industry-leading system integrators, software vendors, and cloud and technology providers. We intend to continue to invest in our partner ecosystem, with a particular emphasis on expanding our strategic alliances and cloud-focused partnerships, such as AWS, Azure, Google Cloud Platform, Red Hat OpenShift, and Atlassian. Key Metrics In addition to ourU.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations: December 31, 2021 2020 Total ARR (in thousands)$ 929,906 $ 721,995 Dynatrace® Net Expansion Rate 120%+ 120%+ Annual Recurring Revenue "ARR": We define annual recurring revenue, or ARR, as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage. Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as the 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. KEY COMPONENTS OF RESULTS OF OPERATIONS Revenue Revenue includes subscriptions, licenses and services. Subscription. Our subscription revenue consists of (i) SaaS agreements, (ii) Dynatrace® term-based licenses which are recognized ratably over the contract term, (iii) Dynatrace® perpetual licenses that are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements. We typically invoice SaaS subscription fees and term licenses annually in advance and recognize subscription revenue ratably over the term of the applicable agreement, provided that all other revenue recognition criteria have been satisfied. Fees for our Dynatrace® perpetual licenses are generally billed up front. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates-Revenue Recognition" included in Part II, Item 7 of our Annual Report for more information. Over time, we expect subscription revenue will increase as a percentage of total revenue as we continue to focus on increasing subscription revenue as a key strategic priority. License. License revenue reflects the revenues recognized from sales of perpetual and term-based licenses of our Classic products that are sold only to existing customers. The license fee portion of Classic perpetual license arrangements is recognized up front assuming 17 -------------------------------------------------------------------------------- all revenue recognition criteria are satisfied. Classic term license fees are also recognized up front. Classic term licenses are generally billed annually in advance and perpetual licenses are billed up front. Service. Service revenue consists of revenue from helping our customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We generally recognize the revenues associated with our services in the period the services are performed, provided that collection of the related receivable is reasonably assured. Cost of Revenue Cost of subscription. Cost of subscription revenue includes all direct costs to deliver and support our subscription products, including salaries, benefits, share-based compensation and related expenses such as employer taxes, allocated overhead for facilities, IT, third-party hosting fees related to our cloud services, and amortization of internally developed capitalized software technology. We recognize these expenses as they are incurred. Cost of service. Cost of service revenue includes salaries, benefits, share-based compensation and related expenses such as employer taxes for our services organization, allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses as they are incurred. Amortization of acquired technology. Amortization of acquired technology includes amortization expense for technology acquired in business combinations and the Thoma Bravo Funds' acquisition of us in 2014. 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 license, subscription, and services and other revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors. Operating Expenses Personnel costs, which consist of salaries, benefits, bonuses, share-based compensation and, with regard to sales and marketing expenses, sales commissions, are the most significant component of our operating expenses. We also incur other non-personnel costs such as an allocation of our general overhead expenses. Research and development. Research and development expenses primarily consists of the cost of programming personnel. We focus our research and development efforts on developing new solutions, core technologies, and to further enhance the functionality, reliability, performance, and flexibility of existing solutions. We believe that our software development teams and our core technologies represent a significant competitive advantage for us, and we expect that our research and development expenses will continue to increase, as we invest in research and development headcount to further strengthen and enhance our solutions. Sales and marketing. Sales and marketing expenses primarily consists of personnel and facility-related costs for our sales, marketing, and business development personnel, commissions earned by our sales personnel and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase 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 due to growing our operations and being a public company, including higher legal, corporate insurance and accounting expenses. Amortization of other intangibles. Amortization of other intangibles primarily consists of amortization of customer relationships and capitalized software and tradenames. Restructuring and other. Restructuring and other expenses primarily consists of various restructuring activities we have undertaken to achieve strategic and financial objectives. Restructuring activities include, but are not limited to, product offering cancellation and termination of related employees, office relocation, administrative cost of structure realignment and consolidation of resources. 18 -------------------------------------------------------------------------------- Other Expense, Net Other expense, net consists primarily of interest expense and foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries. Interest expense, net of interest income, consists primarily of interest on our term loan facility and amortization of debt issuance costs. Income Tax Expense Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in boththe 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 theU.S. federal statutory rate mainly due to (1) differences in accounting and tax treatment of our share-based compensation, (2) differing tax rates and regulations in foreign jurisdictions, (3) tax benefits recognized from the US foreign derived intangibles deduction, and (4) foreign withholding taxes. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue. 19 -------------------------------------------------------------------------------- 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 EndedDecember 31, 2021 and 2020
Three Months Ended
2021 2020
Amount Percent Amount Percent
(in thousands, except percentages)
Revenue:
Subscription $ 226,290 94 % $ 170,308 93 %
License 2 - % 257 - %
Service 14,474 6 % 12,346 7 %
Total revenue 240,766 100 % 182,911 100 %
Cost of revenue:
Cost of subscription 28,284 11 % 20,382 11 %
Cost of service 12,232 5 % 8,907 5 %
Amortization of acquired technology 3,944 2 % 3,831 2 %
Total cost of revenue (1) 44,460 18 % 33,120 18 %
Gross profit 196,306 82 % 149,791 82 %
Operating expenses:
Research and development (1) 40,876 17 % 28,730 16 %
Sales and marketing (1) 94,033 39 % 64,829 35 %
General and administrative (1) 32,643 14 % 23,442 13 %
Amortization of other intangibles 7,539 3 % 8,685 5 %
Restructuring and other - (2)
Total operating expenses 175,091 125,684
Income from operations 21,215 24,107
Other expense, net (3,807) (929)
Income before income taxes 17,408 23,178
Income tax expense (2,821) (4,762)
Net income $ 14,587 $ 18,416 (1) Includes share-based compensation expense as follows:
Three Months Ended December 31,
2021 2020
(in thousands)
Cost of revenue $ 3,405 $ 2,066
Research and development 5,908 3,259
Sales and marketing 9,267 6,480
General and administrative 8,543 3,783
Total share-based compensation $ 27,123 $ 15,588
20
--------------------------------------------------------------------------------
Revenue
Three Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Subscription $ 226,290 $ 170,308 $ 55,982 33 %
License 2 257 (255) (99 %)
Service 14,474 12,346 2,128 17 %
Total revenue $ 240,766 $ 182,911 $ 57,855 32 %
Subscription
Subscription revenue increased by $56.0 million , or 33%, for the three months
ended December 31, 2021 , as compared to the three months ended December 31,
2020 , primarily due to the growing adoption of the Dynatrace® platform by new
customers combined with existing customers expanding their use of our solutions.
Our subscription revenue increased from 93% to 94% of total revenue for the
three months ended December 31, 2021 and 2020.
License
License revenue decreased by $0.3 million , or 99%, for the three months ended
December 31, 2021 , as compared to the three months ended December 31, 2020 ,
primarily due to the decline of sales of our Classic products to existing
customers as they convert to our Dynatrace® platform. We are no longer selling
our Classic products to new customers.
Service
Service revenue increased by $2.1 million , or 17%, for the three months ended
December 31, 2021 , as compared to the three months ended December 31, 2020 . We
recognize the revenues associated with professional services as we deliver the
services.
Cost of Revenue
Three Months Ended December
31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Cost of subscription $ 28,284 $ 20,382 $ 7,902 39 %
Cost of service 12,232 8,907 3,325 37 %
Amortization of acquired technology 3,944 3,831 113 3 %
Total cost of revenue $ 44,460 $ 33,120 $ 11,340 34 %
Cost of subscription
Cost of subscription increased $7.9 million , or 39%, for the three months ended
December 31, 2021 compared to the three months ended December 31, 2020 . The
increase is primarily due to higher personnel costs to support the growth of our
subscription cloud-based offering of $4.7 million and increased cloud-based
hosting costs and subscriptions of $2.6 million .
Cost of service
Cost of service increased by $3.3 million , or 37%, for the three months ended
December 31, 2021 , as compared to the three months ended December 31, 2020 . The
increase was primarily the result of higher personnel costs of $1.5 million and
higher share-based compensation of $1.4 million .
Amortization of acquired technologies
For the three months ended December 31, 2021 and 2020, amortization of acquired
technologies is primarily related to amortization expense for technology
acquired in connection with Thoma Bravo's acquisition of us in 2014.
21
--------------------------------------------------------------------------------Gross Profit and Gross Margin
Three Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscriptions $ 198,006 $ 149,926 $ 48,080 32 %
License 2 257 (255) (99 %)
Services 2,242 3,439 (1,197) (35 %)
Amortization of acquired technology (3,944) (3,831) (113) 3 %
Total gross profit $ 196,306 $ 149,791 $ 46,515 31 %
Gross margin:
Subscriptions 88 % 88 %
License 100 % 100 %
Services 15 % 28 %
Amortization of acquired technology (100 %) (100 %)
Total gross margin 82 % 82 %
Subscriptions
Subscriptions gross profit increased by $48.1 million , or 32%, during the three
months ended December 31, 2021 compared to the three months ended December 31,
2020 . Subscription gross margin remained consistent at 88% during the three
months ended December 31, 2021 and the three months ended December 31, 2020 . The
increase in gross profit is primarily due to the growing adoption of the
Dynatrace® platform by new customers.
License
License gross profit decreased by $0.3 million , or 99%, during the three months
ended December 31, 2021 compared to the three months ended December 31, 2020 .
The decrease was the result of a decline in sales of perpetual and term licenses
for our Classic products.
Services
Services gross profit decreased by $1.2 million , or 35%, to $2.2 million during
the three months ended December 31, 2021 compared to the three months ended
December 31, 2020 . Services gross margin was 15% for the three months ended
December 31, 2021 compared to 28% for the three months ended December 31, 2020 .
The decrease in gross profit and gross margin was driven by an increase in
share-based compensation of $1.4 million .
Operating Expenses
Three Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 40,876 $ 28,730 $ 12,146 42 %
Sales and marketing 94,033 64,829 29,204 45 %
General and administrative 32,643 23,442 9,201 39 %
Amortization of other intangibles 7,539 8,685 (1,146) (13 %)
Restructuring and other - (2) 2 (100 %)
Total operating expenses $ 175,091 $ 125,684 $ 49,407 39 %
22-------------------------------------------------------------------------------- Research and development Research and development expenses increased$12.1 million , or 42%, for the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 . The increase is due to a 26% increase in headcount, resulting in increased personnel costs to expand our product offerings of$6.6 million , higher share-based compensation of$2.6 million , increased cloud-based hosting costs of$1.4 million , and additional overhead costs of$0.8 million . Sales and marketing Sales and marketing expenses increased$29.2 million , or 45%, for the three months endedDecember 31, 2021 , as compared to the three months endedDecember 31, 2020 , due to a 28% increase in headcount and resulting in an increase of$13.8 million in personnel costs, increased advertising and marketing costs of$7.7 million , and higher share-based compensation of$2.8 million . Higher travel expenses related to global travel restrictions lifting of$1.4 million and higher employee-related expenses of$1.1 million also contributed to this increase. General and administrative General and administrative expenses increased$9.2 million , or 39%, for the three months endedDecember 31, 2021 , as compared to the three months endedDecember 31, 2020 , primarily due to increased personnel costs of$3.6 million , higher share-based compensation of$4.8 million , and higher professional fees of$0.5 million . Amortization of other intangibles Amortization of other intangibles decreased by$1.1 million , or 13%, for the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 . The decline is primarily the result of lower amortization for certain intangible assets that are amortized on a systematic basis that reflects the pattern in which the economic benefits of the intangible assets are estimated to be realized and the completion of amortization on certain intangibles. Other Expense, Net Other expense, net increased by$2.9 million , or 310%, for the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 . The increase in other expense was primarily a result of foreign currency transactions, partially offset by lower interest expense on our term loans due to the reductions in principal compared to the same quarter last fiscal year. Income Tax Expense Income tax expense for the three months endedDecember 31, 2021 of$2.8 million represented a$2.0 million decrease as compared to an expense of$4.8 million for the three months endedDecember 31, 2020 , primarily driven by a decrease in pre-tax income and additional share-based compensation tax windfall benefits. 23 --------------------------------------------------------------------------------
Comparison of the Nine Months Ended
Nine Months Ended
2021 2020
Amount Percent Amount Percent
(in thousands, except percentages)
Revenue:
Subscription $ 635,411 94 % $ 472,338 93 %
License 52 - % 1,337 - %
Service 41,397 6 % 33,330 7 %
Total revenue 676,860 100 % 507,005 100 %
Cost of revenue:
Cost of subscription 80,401 11 % 55,415 11 %
Cost of service 32,921 5 % 25,471 5 %
Amortization of acquired technology 11,638 2 % 11,487 2 %
Total cost of revenue (1) 124,960 18 % 92,373 18 %
Gross profit 551,900 82 % 414,632 82 %
Operating expenses:
Research and development (1) 113,509 17 % 79,747 16 %
Sales and marketing (1) 260,816 39 % 170,682 34 %
General and administrative (1) 91,254 13 % 67,079 13 %
Amortization of other intangibles 22,618 3 % 26,057 5 %
Restructuring and other 25 23
Total operating expenses 488,222 343,588
Income from operations 63,678 71,044
Other expense, net (9,303) (8,426)
Income before income taxes 54,375 62,618
Income tax expense (2,853) (13,858)
Net income $ 51,522 $ 48,760 (1) Includes share-based compensation expense as follows:
Nine Months Ended December 31,
2021 2020
(in thousands)
Cost of revenue $ 9,542 $ 5,430
Research and development 15,331 8,666
Sales and marketing 26,487 18,007
General and administrative 20,590 10,988
Total share-based compensation $ 71,950 $ 43,091
Revenue
Nine Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Subscriptions $ 635,411 $ 472,338 $ 163,073 35 %
License 52 1,337 (1,285) (96 %)
Services 41,397 33,330 8,067 24 %
Total revenue $ 676,860 $ 507,005 $ 169,855 34 %
24--------------------------------------------------------------------------------
Subscription
Subscription revenue increased by$163.1 million , or 35%, for the nine months endedDecember 31, 2021 , as compared to the nine months endedDecember 31, 2020 , primarily due to the growing adoption of the Dynatrace® platform by new customers combined with existing customers expanding their use of our solutions. Our subscription revenue increased to 94% of total revenue for the nine months endedDecember 31, 2021 compared to 93% of total revenue for the nine months endedDecember 31, 2020 . License License revenue decreased by$1.3 million , or 96%, for the nine months endedDecember 31, 2021 , as compared to the nine months endedDecember 31, 2020 , primarily due to the decline of sales of our Classic products to existing customers as they convert to our Dynatrace® platform. We are no longer selling our Classic products to new customers. Service Service revenue increased by$8.1 million , or 24%, for the nine months endedDecember 31, 2021 , as compared to the nine months endedDecember 31, 2020 . We recognize the revenues associated with professional services as we deliver the services. Cost of Revenue Nine Months Ended December 31, Change 2021 2020 Amount Percent (in thousands, except percentages) Cost of subscriptions$ 80,401 $ 55,415 $ 24,986 45 % Cost of services 32,921 25,471 7,450 29 % Amortization of acquired technology 11,638 11,487 151 1 % Total cost of revenue$ 124,960 $ 92,373 $ 32,587 35 % Cost of subscriptions Cost of subscriptions increased$25.0 million , or 45%, for the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 . The increase is primarily due to higher personnel costs to support the growth of our subscription cloud-based offering of$14.8 million and cloud-based hosting costs and subscriptions of$7.7 million as well as higher share-based compensation of$2.3 million . Cost of services Cost of services increased by$7.5 million , or 29%, for the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 . The increase was the result of higher personnel costs of$4.6 million , higher share-based compensation of$1.9 million , and subscription costs of$0.7 million . Amortization of acquired technologies For the nine months endedDecember 31, 2021 and 2020, amortization of acquired technologies is primarily related to amortization expense for technology acquired in connection withThoma Bravo's acquisition of the Company in 2014. 25 --------------------------------------------------------------------------------
Gross Profit and Gross Margin
Nine Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscriptions $ 555,010 $ 416,923 $ 138,087 33 %
License 52 1,337 (1,285) (96 %)
Services 8,476 7,859 617 8 %
Amortization of acquired technology (11,638) (11,487) (151) 1 %
Total gross profit $ 551,900 $ 414,632 $ 137,268 33 %
Gross margin:
Subscriptions 87 % 88 %
License 100 % 100 %
Services 20 % 24 %
Amortization of acquired technology (100 %) (100 %)
Total gross margin 82 % 82 %
Subscriptions
Subscriptions gross profit increased by $138.1 million , or 33%, during the nine
months ended December 31, 2021 compared to the nine months ended December 31,
2020 . Subscription gross margin decreased from 88% to 87% during the nine months
ended December 31, 2021 compared to the nine months ended December 31, 2020 . The
increase in gross profit is primarily due to the growing adoption of the
Dynatrace® platform by new customers combined with existing customers expanding
their use of our solutions. The decrease in gross margin is primarily due to
higher personnel and share-based compensation costs to support the growth of our
subscription cloud-based offering.
License
License gross profit decreased by $1.3 million , or 96%, during the nine months
ended December 31, 2021 compared to the nine months ended December 31, 2020 . The
decrease was the result of a decline in sales of perpetual and term licenses for
our Classic products.
Services
Services gross profit increased by $0.6 million , or 8%, during the nine months
ended December 31, 2021 compared to the nine months ended December 31, 2020 .
Services gross margin decreased from 24% to 20% during the nine months ended
December 31, 2021 compared to the nine months ended December 31, 2020 . The
increase in gross profit was primarily due to an increase in service revenue
driven by higher utilization of personnel. The decrease in gross margin was
primarily due to higher personnel and share-based compensation costs.
Operating Expenses
Nine Months Ended December 31, Change
2021 2020 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 113,509 $ 79,747 $ 33,762 42 %
Sales and marketing 260,816 170,682 90,134 53 %
General and administrative 91,254 67,079 24,175 36 %
Amortization of other intangibles 22,618 26,057 (3,439) (13 %)
Restructuring and other 25 23 2 9 %
Total operating expenses $ 488,222 $ 343,588 $ 144,634 42 %
26-------------------------------------------------------------------------------- Research and development Research and development expenses increased$33.8 million , or 42%, for the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 . The increase is primarily attributable to a 26% increase in headcount, resulting in increased personnel and other costs to expand our product offerings of$22.2 million , and higher share-based compensation of$6.7 million . Increased cloud-based hosting costs of$2.6 million also contributed to this increase. Sales and marketing Sales and marketing expenses increased$90.1 million , or 53%, for the nine months endedDecember 31, 2021 , as compared to the nine months endedDecember 31, 2020 , driven by a 28% increase in headcount, which resulted in an increase of$41.5 million in personnel costs, related share-based compensation of$8.5 million , and other employee-related expenses of$3.5 million . Further contributing to the increase were higher advertising and marketing costs of$24.9 million , increased travel expenses related to global restrictions lifting of$3.0 million , higher professional fees of$2.9 million , and higher cloud-based hosting costs of$1.8 million . General and administrative General and administrative expenses increased$24.2 million , or 36%, for the nine months endedDecember 31, 2021 , as compared to the nine months endedDecember 31, 2020 , primarily due to an increase in personnel costs of$10.1 million , higher share-based compensation of$9.6 million , increased professional fees of$2.1 million , higher facilities expenses of$1.9 million , and increased software and subscription costs of$1.2 million . Amortization of other intangibles Amortization of other intangibles decreased by$3.4 million , or 13%, for the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 . The decline is primarily the result of lower amortization for certain intangible assets that are amortized on a systematic basis that reflects the pattern in which the economic benefits of the intangible assets are estimated to be realized and the completion of amortization on certain intangibles. Other Expense, Net Other expense, net increased by$0.9 million , or 10%, for the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 . The increase in other expense was primarily a result of foreign currency transactions, partially offset by lower interest expense on our term loans as we had less principal outstanding compared to last fiscal year. Income Tax Expense Income tax expense for the nine months endedDecember 31, 2021 of$2.9 million represented an$11.0 million decrease as compared to an expense of$13.9 million for the nine months endedDecember 31, 2020 . This decrease was primarily driven by a decrease in year-to-date pre-tax income, additional share-based compensation tax windfall benefits, and a$2.1 million one-time benefit related to anticipated tax refunds resulting from a favorable Polish research and development ruling received inAugust 2021 . LIQUIDITY AND CAPITAL RESOURCES As ofDecember 31, 2021 , we had$408.7 million of cash and cash equivalents and$44.3 million available under our revolving credit facility. Since inception, we have financed our operations primarily through payments by our customers for use of our product offerings and related services and, to a lesser extent, the net proceeds we have received from sales of equity securities and borrowings on our term loan facilities. InAugust 2019 , we completed our initial public offering ("IPO") in which we issued and sold an aggregate of 38.9 million shares of common stock at a price of$16.00 per share. We received aggregate net proceeds of$585.3 million from the IPO, after underwriting discounts and commissions and payments of offering costs. Over the past three years, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company. Our historical expansion with customers has typically been achieved by executing additional contracts, each with unique pricing and anniversary dates. We are transitioning to a program that combines these contracts into one single, often multi-year contract per customer with one single anniversary date, which may result in variability in the timing and amounts of our billings which could impact the timing of our cash collections from period to period. 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 elsewhere in this Quarterly Report and our Annual Report. However, we believe that our existing cash, cash equivalents, short-term investment balances, funds available under our debt agreement, and cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. 27
--------------------------------------------------------------------------------
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected. Our Credit Facilities As ofDecember 31, 2021 , the balance outstanding under our first lien term loan was$311.1 million and is included in long-term debt on our condensed consolidated balance sheets. We had$44.3 million available under the revolving credit facility after considering$15.7 million of letters of credit outstanding. All of our obligations under our term loans are guaranteed by our existing and future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets. AtDecember 31, 2021 , we were in compliance with all applicable covenants pertaining to the First Lien Credit Agreement. Our credit facilities are discussed further in Note 6 of the notes to the condensed consolidated financial statements in this Quarterly Report.
© Edgar Online, source
