DYNATRACE, INC.

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DYNATRACE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

05/26/2022 | 07:57am EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form
10-K. 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" under Part I, Item
1A. in this Annual Report on Form 10-K. These risks and uncertainties could
cause actual results to differ materially from those projected in
forward-looking statements contained in this report or implied by past results
and trends. Our fiscal year ends on March 31. Our historical results are not
necessarily indicative of the results that may be expected for any period in the
future.

                                    Overview

We offer the market-leading software intelligence platform, purpose-built for
dynamic hybrid, multicloud environments. As enterprises and public sector
institutions embrace the cloud to effect their digital transformation, we
designed our unified platform to address the growing complexity faced by IT,
development, security, and business operations teams. With automation and
intelligence at its core, our platform delivers precise answers about the
performance and security of applications, the underlying infrastructure and the
experience of all users to enable teams to innovate faster, simplify cloud
complexity, collaborate more efficiently, and secure cloud-native applications.
We designed our platform to allow our customers to modernize and automate IT
operations, develop and release high quality software faster, and improve user
experiences for consistently better business outcomes. As a result, as of March
31, 2022, our products are trusted by more than 3,300 Dynatrace customers in
over 90 countries in diverse industries such as banking, insurance, retail,
manufacturing, travel and software.

We market Dynatrace® through a combination of our global direct sales team and a
network of partners, including cloud service providers (Amazon, Microsoft, and
Google), resellers and system integrators. We target the largest 15,000 global
accounts, which generally have annual revenues in excess of $1 billion.

We generate revenue primarily by selling subscriptions, which we define as (i)
Software-as-a-service ("SaaS") agreements, (ii) Dynatrace® term-based licenses,
for which revenue is recognized ratably over the contract term, (iii) Dynatrace®
perpetual licenses, which are recognized ratably over the term of the expected
optional maintenance renewals, which is generally three years, and (iv)
maintenance and support agreements.

We deploy our platform as a SaaS solution, with the option of retaining the data
in the cloud, or at the edge in customer-provisioned infrastructure, which we
refer to as Dynatrace® Managed. The Dynatrace® Managed offering allows customers
to maintain control of the environment where their data resides, whether in the
cloud or on-premises, combining the simplicity of SaaS with the ability to
adhere to their own data security and sovereignty requirements. Our Mission
Control functionality automatically upgrades all Dynatrace® instances and offers
on-premise cluster customers auto-deployment options that suit their specific
enterprise management processes.

Dynatrace® is an all-in-one platform, which is typically purchased by our
customers with the full-stack Application Performance Module and extended with
our Infrastructure Monitoring, Digital Experience Monitoring, Digital Business
Analytics, Application Security, or Cloud Automation Modules. Customers also
have the option to purchase the infrastructure monitoring module where the
full-stack APM is not required, with the ability to upgrade to the full-stack
APM when necessary. Our Dynatrace® platform has been commercially available
since 2016 and is the primary offering we sell. Dynatrace® customers increased
to more than 3,300 as of March 31, 2022 from approximately 2,900 as of March 31,
2021.

Our Classic products include AppMon, Classic Real User Monitoring, or RUM, Network Application Monitoring, or NAM, and Synthetic Classic. These products were sunset as of April 1, 2021.

COVID-19 Update


We continue to monitor, analyze, and respond to evolving developments regarding
the ongoing COVID-19 pandemic which has had significant impacts around the globe
and in many locations in which we operate. While the impacts have not caused a
material adverse financial impact to our business to date, the future impacts
remain uncertain. The extent to which the COVID-19 pandemic may impact our
business going forward will depend on numerous evolving factors that we cannot
reliably predict. These factors may adversely impact business spending on
technology as well as customers' ability to pay for our products and services on
an ongoing basis.
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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
ongoing 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 I, Item 1A for further discussion of the possible impact of the ongoing 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:


•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. We added 706 new
customers during the year ended March 31, 2022. In addition, we expect to
leverage our global partner ecosystem to add new customers in geographies where
we have direct coverage and work jointly with our partners. In other
geographies, such as Africa, Japan, the Middle East, and South Korea, we utilize
a multi-tier "master reseller" model.

•Increase penetration within existing customers.  We plan to continue to
increase penetration within our existing customers by expanding the breadth of
our platform capabilities to provide for continued cross-selling opportunities.
In addition, we believe the ease of implementation for Dynatrace® provides us
the opportunity to expand adoption within our existing customers, across new
customer applications, and into additional business units or divisions. We
sustained our Dynatrace® net expansion rate at or above 120% for the sixteenth
consecutive quarter.

•Enhance our strategic partner ecosystem.  Our strategic partners include
industry-leading global system integrators, software vendors, and cloud and
technology providers. We intend to continue to invest in our partner ecosystem,
with a particular emphasis on expanding our strategic alliances and
cloud-focused partnerships with global system integrators, including Deloitte
and DXC, and hyperscale cloud providers, including AWS, Microsoft Azure, Google
Cloud Platform, and Red Hat.

Key Metrics


In addition to our U.S. GAAP financial information, we monitor the following key
metrics to help us measure and evaluate the effectiveness of our operations:

                                                                                              As of
                        3/31/2022          12/31/2021          9/30/2021          6/30/2021          3/31/2021          12/31/2020          9/30/2020          6/30/2020

Total ARR (in
thousands)             $ 995,121          $  929,906          $ 863,863          $ 823,222          $ 774,090          $  721,995          $ 638,063          $ 601,376
Dynatrace® Net
Expansion Rate                120%+               120%+              120%+              120%+              120%+               120%+              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. Total ARR was $995 million as of March 31, 2022. Over
the past year, Total ARR has grown by $221 million, or 29%.

Dynatrace® Net Expansion Rate:  We define the Dynatrace® net expansion rate as
the ARR derived from the Dynatrace® platform at the end of a reporting period
for the cohort of Dynatrace® accounts as of one year prior to the date of
calculation, divided by the Dynatrace® ARR one year prior to the date of
calculation for that same cohort. Sustained our Dynatrace® net expansion rate at
or above 120% for the sixteenth consecutive quarter.
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                    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 "Critical Accounting Policies and Estimates-Revenue Recognition" 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 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 training their
personnel. We recognize the revenues associated with these professional services
on a time and materials basis as we deliver the services or provide the
training. We generally recognize the revenues associated with our services in
the period the services are performed, provided that collection of the related
receivable is reasonably assured.

Cost of Revenue


Cost of subscription.   Cost of subscription revenue includes all direct costs
to deliver and support our subscription products, including salaries, benefits,
share-based compensation and related expenses such as employer taxes,
third-party hosting fees related to our cloud services, allocated overhead for
facilities, IT, and amortization of internally developed capitalized software
technology. We recognize these expenses as they are incurred.

Cost of service. Cost of service revenue includes salaries, benefits, share-based compensation and related expenses such as employer taxes for our services organization, allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses as they are incurred.


Amortization of acquired technology.  Amortization of acquired technology
includes amortization expense for technology acquired in business combinations
and the Thoma Bravo Funds' acquisition of the Company in 2014. To the extent
significant future acquisitions are consummated, we expect that our amortization
of acquired technologies may increase due to additional non-cash charges
associated with the amortization of intangible assets acquired.

Gross Profit and Gross Margin


Gross profit is revenue less cost of revenue, and gross margin is gross profit
as a percentage of revenue. Gross profit has been and will continue to be
affected by various factors, including the mix of our 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 in absolute
dollars as we invest in research and development headcount to further strengthen
and enhance our solutions.
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Sales and marketing.  Sales and marketing expenses primarily 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 in absolute dollars as we continue to hire
additional sales and marketing personnel and invest in marketing programs.

General and administrative.  General and administrative expenses primarily
consist of the personnel and facility-related costs for our executive, finance,
legal, human resources and administrative personnel; and other corporate
expenses, including those associated with our ongoing public reporting
obligations. We anticipate continuing to incur additional expenses as we
continue to invest in the growth of our operations, as well as incur ongoing
costs of compliance associated with being a publicly traded company.

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

Restructuring and other.  Restructuring and other expenses primarily 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.

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, amortization of debt issuance costs, loss on debt
extinguishment and prepayment penalties.

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) foreign earnings taxed at rates higher than the U.S. statutory tax rate, (2)
the inability to realize certain tax benefits subject to a valuation allowance
in the U.S., (3) foreign withholding taxes, partially offset by (4) the vesting
of share-based compensation that generated excess tax benefits, and (5) the
utilization of U.S. foreign tax credits generated in the current year. We expect
this fluctuation in income tax rates, as well as its potential impact on our
results of operations, to continue.
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                             Results of Operations

The following tables set forth our results of operations for the periods presented:

                                                                                 Fiscal Year Ended March 31,
                                                     2022                                   2021                                   2020
                                          Amount             Percent             Amount             Percent             Amount              Percent
                                                                             (in thousands, except percentages)
Revenue:
Subscription                           $ 870,385                  94  %       $ 655,180                  93  %       $  487,817                  89  %
License                                       54                   -  %           1,446                   -  %           12,686                   3  %
Service                                   59,006                   6  %          46,883                   7  %           45,300                   8  %
Total revenue                            929,445                 100  %         703,509                 100  %          545,803                 100  %
Cost of revenue:
Cost of subscription                     111,646                  12  %          77,488                  11  %           73,193                  13  %
Cost of service                           45,717                   5  %          34,903                   5  %           39,289                   7  %
Amortization of acquired technology       15,513                   2  %          15,317                   2  %           16,449                   4  %
Total cost of revenue (1)                172,876                  19  %         127,708                  18  %          128,931                  24  %
Gross profit                             756,569                  81  %         575,801                  82  %          416,872                  76  %
Operating expenses:
Research and development (1)             156,342                  17  %         111,415                  16  %          119,281                  22  %
Sales and marketing (1)                  362,116                  39  %         245,487                  35  %          266,175                  49  %
General and administrative (1)           126,622                  14  %          92,219                  13  %          161,983                  30  %
Amortization of other intangibles         30,157                   3  %          34,744                   5  %           40,280                   7  %
Restructuring and other                       25                                     40                                   1,092
Total operating expenses                 675,262                                483,905                                 588,811
Income (loss) from operations             81,307                                 91,896                                (171,939)
Other expense, net                        (9,648)                               (14,043)                                (46,594)
Income (loss) before income taxes         71,659                                 77,853                                (218,533)
Income tax expense                       (19,208)                                (2,139)                               (195,284)
Net income (loss)                      $  52,451                              $  75,714                              $ (413,817)


_________________

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

                                                           Fiscal Year Ended March 31,
                                                  2022                 2021                2020
                                                                 (in thousands)
Cost of revenue                            $   12,863            $  7,307            $  18,685
Research and development                       21,316              11,684               38,670
Sales and marketing                            35,957              24,153               84,698
General and administrative                     29,400              14,640               80,425
Total share-based compensation expense     $   99,536            $ 57,784   

$ 222,478

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                   Fiscal Years Ended March 31, 2022 and 2021

Revenue

                      Fiscal Year Ended March 31,                    Change
                          2022                  2021          Amount        Percent
                                 (in thousands, except percentages)
Subscription    $      870,385               $ 655,180      $ 215,205         33  %
License                     54                   1,446         (1,392)       (96  %)
Service                 59,006                  46,883         12,123         26  %
Total revenue   $      929,445               $ 703,509      $ 225,936         32  %


Subscription

Subscription revenue increased by $215.2 million, or 33%, for the year ended
March 31, 2022, as compared to the year ended March 31, 2021, 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 year ended March 31, 2022
compared to 93% of total revenue for the year ended March 31, 2021.

License


License revenue decreased by $1.4 million, or 96%, for the year ended March 31,
2022, as compared to the year ended March 31, 2021, 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 $12.1 million, or 26%, for the year ended March 31,
2022, as compared to the year ended March 31, 2021. We generally recognize the
revenues associated with professional services as we deliver the services.

Cost of Revenue

                                                 Fiscal Year Ended March 31,                          Change
                                                   2022                  2021             Amount              Percent
                                                                  (in thousands, except percentages)
Cost of subscription                         $      111,646          $  77,488          $ 34,158                     44  %
Cost of service                                      45,717             34,903            10,814                     31  %
Amortization of acquired technology                  15,513             15,317               196                      1  %
Total cost of revenue                        $      172,876          $ 127,708          $ 45,168                     35  %


Cost of subscription

Cost of subscription increased by $34.2 million, or 44%, for the year ended
March 31, 2022 as compared to the year ended March 31, 2021. The increase is
primarily due to higher personnel costs to support the growth of our
subscription cloud-based offering of $19.5 million, higher cloud-based hosting
costs and subscriptions of $10.7 million, as well as higher share-based
compensation of $3.0 million. Partially offsetting this increase was $1.3
million in lower amortization due to the completion of amortization of certain
internally developed capitalized software technology.

Cost of service


Cost of service increased by $10.8 million, or 31%, for the year ended March 31,
2022 as compared to the year ended March 31, 2021. The increase is primarily the
result of higher personnel costs of $6.8 million, higher share-based
compensation of $2.6 million, and an increase in subscription costs of $1.0
million.

Amortization of acquired technologies

For the years ended March 31, 2022 and 2021, amortization of acquired technologies is primarily related to amortization expense for technology acquired in connection with Thoma Bravo's acquisition of us in 2014.

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Gross Profit and Gross Margin

                                                    Fiscal Year Ended March 31,                            Change
                                                   2022                      2021               Amount              Percent
                                                                     (in thousands, except percentages)
Gross profit:
Subscription                                 $    758,739                $ 577,692           $ 181,047                    31  %
License                                                54                    1,446              (1,392)                  (96  %)
Service                                            13,289                   11,980               1,309                    11  %
Amortization of acquired technology               (15,513)                 (15,317)               (196)                    1  %
Total gross profit                           $    756,569                $ 575,801           $ 180,768                    31  %
Gross margin:
Subscription                                           87  %                    88  %
License                                               100  %                   100  %
Service                                                23  %                    26  %
Amortization of acquired technology                  (100  %)                 (100  %)
Total gross margin                                     81  %                    82  %


Subscription

Subscription gross profit increased by $181.0 million, or 31%, during the year
ended March 31, 2022 compared to the year ended March 31, 2021. The increase in
gross profit is primarily due to the growth of the Dynatrace® platform by new
customers combined with existing customers expanding their use of our solutions.
Subscription gross margin decreased from 88% to 87% during the year ended March
31, 2022, compared to the year ended March 31, 2021, 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 $1.4 million, or 96%, during the year ended
March 31, 2022 compared to the year ended March 31, 2021. The decrease was the
result of a decline in sales of perpetual and term licenses for our Classic
products.

Service


Service gross profit increased by $1.3 million, or 11%, during the year ended
March 31, 2022 compared to the year ended March 31, 2021. Service gross margin
decreased from 26% to 23% during the year ended March 31, 2022 compared to the
year ended March 31, 2021. The increase in gross profit is primarily due to an
increase in service revenue driven by higher utilization of personnel. The
decrease in gross margin is primarily due to higher personnel and share-based
compensation costs.

Operating Expenses

                                                  Fiscal Year Ended March 31,                          Change
                                                    2022                  2021              Amount              Percent
                                                                    (in thousands, except percentages)
Operating expenses:
Research and development                      $      156,342          $ 111,415          $  44,927                    40  %
Sales and marketing                                  362,116            245,487            116,629                    48  %
General and administrative                           126,622             92,219             34,403                    37  %
Amortization of other intangibles                     30,157             34,744             (4,587)                  (13  %)
Restructuring and other                                   25                 40                (15)                  (38  %)
Total operating expenses                      $      675,262          $ 483,905          $ 191,357                    40  %


Research and development

Research and development expenses increased $44.9 million, or 40%, for the year
ended March 31, 2022 as compared to the year ended March 31, 2021. The increase
is primarily due to a 27% increase in headcount, resulting in increased
personnel and other costs to expand our product offerings of $26.4 million, and
higher share-based compensation of $9.6 million. Further contributing to the
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increase were higher cloud-based hosting costs of $4.1 million, increased
allocated overhead costs of $2.5 million to support the growth of the business
and related infrastructure, and higher travel expenses of $0.8 million as global
travel restrictions begin to decrease and as travel resumes.

Sales and marketing


Sales and marketing expenses increased by $116.6 million, or 48%, for the year
ended March 31, 2022, as compared to the year ended March 31, 2021, driven by a
24% increase in headcount which resulted in an increase of $54.4 million in
personnel costs, related share-based compensation of $11.8 million, and other
employee-related expenses of $5.3 million. Further contributing to the increase
were higher advertising and marketing costs of $29.0 million, higher
professional fees of $4.2 million, increased travel expenses related to global
restrictions lifting of $4.0 million, higher information technology costs of
$2.4 million, and increased allocated overhead costs of $1.5 million to support
the growth of the business and related infrastructure.

General and administrative


General and administrative expenses increased by $34.4 million, or 37%, for the
year ended March 31, 2022, as compared to the year ended March 31, 2021,
primarily due to a 40% increase in headcount which resulted in an increase of
$14.1 million in personnel costs, related share-based compensation of $14.8
million, and other employee-related expenses of $1.9 million. Further
contributing to the increase were higher professional fees of $1.1 million, and
increased travel expenses related to global restrictions lifting of $0.8
million.

Amortization of other intangibles


Amortization of other intangibles decreased by $4.6 million, or 13%, for the
year ended March 31, 2022 as compared to the year ended March 31, 2021. The
decrease 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 decreased by $4.4 million, or 31%, for the year ended March
31, 2022 as compared to the year ended March 31, 2021. The decline is primarily
the result of lower interest expense on our term loan as we had less principal
outstanding compared to last fiscal year.

Income Tax Expense


Income tax expense increased by $17.1 million resulting in an expense of $19.2
million for the year ended March 31, 2022, as compared to an expense of $2.1
million for the year ended March 31, 2021. This increase was primarily due to
the one-time impact of tax return to provision true-up benefits resulting from
changes in estimates to the reorganization transaction tax during fiscal year
2021.

                   Fiscal Years Ended March 31, 2021 and 2020

Revenue

                      Fiscal Year Ended March 31,                    Change
                          2021                  2020          Amount        Percent
                                 (in thousands, except percentages)
Subscription    $      655,180               $ 487,817      $ 167,363         34  %
License                  1,446                  12,686        (11,240)       (89  %)
Service                 46,883                  45,300          1,583          3  %
Total revenue   $      703,509               $ 545,803      $ 157,706         29  %


Subscription

Subscription revenue increased by $167.4 million, or 34%, for the year ended
March 31, 2021, as compared to the year ended March 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 93% of total revenue for the year ended March 31, 2021
compared to 89% of total revenue for the year ended March 31, 2020.
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License


License revenue decreased by $11.2 million, or 89%, for the year ended March 31,
2021, as compared to the year ended March 31, 2020, primarily due to 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 $1.6 million, or 3%, for the year ended March 31,
2021, as compared to the year ended March 31, 2020. We recognize the revenues
associated with professional services as we deliver the services.

Cost of Revenue

                                                 Fiscal Year Ended March 31,                          Change
                                                   2021                  2020             Amount              Percent
                                                                  (in thousands, except percentages)
Cost of subscription                         $       77,488          $  73,193          $  4,295                     6  %
Cost of service                                      34,903             39,289            (4,386)                  (11  %)
Amortization of acquired technology                  15,317             16,449            (1,132)                   (7  %)
Total cost of revenue                        $      127,708          $ 128,931          $ (1,223)                   (1  %)


Cost of subscription

Cost of subscription revenue increased by $4.3 million, or 6%, for the year
ended March 31, 2021, as compared to the year ended March 31, 2020. The increase
is primarily due to higher personnel costs to support the growth of our
subscription cloud-based offering of $9.7 million and cloud-based hosting costs
and software subscriptions of $7.4 million. Partially offsetting this increase
was lower share-based compensation of $8.3 million as well as decreases in costs
for data centers closed during fiscal 2021.

Cost of service


Cost of service revenue decreased by $4.4 million, or 11%, for the year ended
March 31, 2021, as compared to the year ended March 31, 2020. The decrease was
the result of lower share-based compensation of $3.1 million and decreased
travel costs of $2.1 million. Partially offsetting this decrease was increased
personnel costs.

Amortization of acquired technologies

For the years ended March 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.

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Gross Profit and Gross Margin

                                                    Fiscal Year Ended March 31,                             Change
                                                   2021                       2020               Amount              Percent
                                                                      (in thousands, except percentages)
Gross profit:
Subscription                                 $     577,692                $ 414,624           $ 163,068                    39  %
License                                              1,446                   12,686             (11,240)                  (89  %)
Service                                             11,980                    6,011               5,969                    99  %
Amortization of acquired technology                (15,317)                 (16,449)              1,132                    (7  %)
Total gross profit                           $     575,801                $ 416,872           $ 158,929                    38  %
Gross margin:
Subscription                                            88   %                   85  %
License                                                100   %                  100  %
Service                                                 26   %                   13  %
Amortization of acquired technology                   (100)  %                 (100  %)
Total gross margin                                      82   %                   76  %


Subscription

Subscription gross profit increased by $163.1 million, or 39%, during the year
ended March 31, 2021 compared to the year ended March 31, 2020. Subscription
gross margin increased from 85% to 88%, during the year ended March 31, 2021
compared to the year ended March 31, 2020. The increase was primarily due to the
growth of the Dynatrace® platform and lower share-based compensation.

License


License gross profit decreased by $11.2 million, or 89%, during the year ended
March 31, 2021 compared to the year ended March 31, 2020. The decrease was the
result of a decline in sales of perpetual and term licenses for our Classic
products.

Service


Service gross profit increased by $6.0 million, or 99%, during the year ended
March 31, 2021 compared to the year ended March 31, 2020. Service gross margin
increased from 13% to 26%, during the year ended March 31, 2021 compared to the
year ended March 31, 2020. Lower share-based compensation and travel costs
increased gross profit by $3.1 million and $2.1 million, respectively, compared
to last fiscal year.

Operating Expenses

                                                  Fiscal Year Ended March 31,                           Change
                                                    2021                  2020              Amount               Percent
                                                                    (in thousands, except percentages)
Operating expenses:
Research and development                      $      111,415          $ 119,281          $   (7,866)                   (7  %)
Sales and marketing                                  245,487            266,175             (20,688)                   (8  %)
General and administrative                            92,219            161,983             (69,764)                  (43  %)
Amortization of other intangibles                     34,744             40,280              (5,536)                  (14  %)
Restructuring and other                                   40              1,092              (1,052)                  (96  %)
Total operating expenses                      $      483,905          $ 588,811          $ (104,906)                  (18  %)


Research and development

Research and development expenses decreased by $7.9 million, or 7%, for the year
ended March 31, 2021, as compared to the year ended March 31, 2020. The decrease
is primarily attributable to higher share-based compensation of $27.0 million,
partially offset by a 24% increase in headcount and related allocated overhead,
resulting in increased personnel and other costs to expand our product offerings
of $15.3 million, and increased cloud-based hosting costs of $2.6 million.
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Sales and marketing


Sales and marketing expenses decreased by $20.7 million, or 8%, for the year
ended March 31, 2021, as compared to the year ended March 31, 2020. This
decrease was primarily due to lower share-based compensation of $60.5 million
and lower travel expenses of $11.1 million, partially offset by a 25% increase
in headcount, resulting in an increase of $31.2 million in personnel costs, and
increased advertising and marketing costs of $15.3 million.

General and administrative


General and administrative expenses decreased by $69.8 million, or 43%, for the
year ended March 31, 2021, as compared to the year ended March 31, 2020,
primarily due to a decrease in share-based compensation of $65.8 million and
lower transaction costs of $18.3 million primarily related to the initial public
offering completed in fiscal 2020. Partially offsetting this decrease was a 24%
increase in headcount, resulting in an increase of $7.4 million in personnel
costs, and increased professional fees of $3.5 million. Sponsor related costs
were zero and $1.6 million for the years ended March 31, 2021 and 2020,
respectively. Sponsor costs were reduced to zero as we stopped incurring these
costs upon completion of our initial public offering.

Amortization of other intangibles


Amortization of other intangibles decreased by $5.5 million, or 14%, for the
year ended March 31, 2021, as compared to the year ended March 31, 2020. The
decrease 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.

Restructuring and other

Restructuring expenses decreased by $1.1 million, or 96%, for the year ended March 31, 2021, as compared to the year ended March 31, 2020, due to costs incurred in the prior fiscal year for various restructuring activities to achieve our strategic and financial objectives including costs related to a restructuring program designed to align employee resources with our product offering and future plans.

Other Expense, Net


Other expense, net decreased by $32.6 million, or 70%, for the year ended March
31, 2021, as compared to the year ended March 31, 2020. The decrease in other
expense was primarily a result of lower interest expense on our term loans as we
had less principal outstanding compared to last fiscal year.

Income Tax Expense


Income tax expense decreased by $193.1 million resulting in an expense of $2.1
million for the year ended March 31, 2021, as compared to an expense of $195.3
million for the year ended March 31, 2020. This decrease was primarily due to
the tax expense resulting from our reorganization transaction, net of attributes
utilized, and related uncertain tax positions during fiscal 2020.

                        Liquidity and Capital Resources

As of March 31, 2022, we had $463.0 million of cash and cash equivalents and $44.4 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. In August 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.
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Our material cash requirements from known contractual and other obligations
consist of our long-term debt agreements, rent payments required under operating
lease agreements, and interest obligations on our term loan. As of March 31,
2022, total contractual commitments were $380.8 million, with $23.2 million
committed within the next twelve months. For further information see Notes 9 and
10 of the notes to the consolidated financial statements in this Annual Report.

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

Our Credit Facilities


As of March 31, 2022, the balance outstanding under our first lien term loan was
$281.1 million and is included in long-term debt on our consolidated balance
sheets. We had $44.4 million available under the revolving credit facility after
considering $15.6 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. At
March 31, 2022, we were in compliance with all applicable covenants pertaining
to the First Lien Credit Agreement. Our credit facilities are discussed further
in Note 9 of the notes to the consolidated financial statements in this Annual
Report.

Summary of Cash Flows

                                                                     Fiscal Year Ended March 31,
                                                            2022                 2021                 2020
                                                                            (in thousands)
Net cash provided by (used in) operating
activities(1)                                          $   250,917          $   220,436          $  (142,455)
Net cash used in investing activities                      (30,890)             (13,879)             (20,613)
Net cash (used in) provided by financing
activities                                                 (80,664)             (97,802)             329,392
Effect of exchange rate changes on cash and cash
equivalents                                                 (1,358)               3,037               (4,468)
Net increase in cash and cash equivalents              $   138,005          

$ 111,792 $ 161,856

_________________

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

                                                    Fiscal Year Ended March 31,
                                                 2022           2021          2020
                                                          (in thousands)
Cash paid for interest                       $    8,375      $ 12,475     

$ 39,568 Cash paid for (received from) tax, net $ 24,247 $ (7,337) $ 266,708



Operating Activities

For the year ended March 31, 2022, cash provided by operating activities was
$250.9 million as a result of net income of $52.5 million, and adjusted by
non-cash charges of $145.5 million and a change of $53.0 million in our
operating assets and liabilities. The non-cash charges are primarily comprised
of share-based compensation of $99.5 million and depreciation and amortization
of $56.9 million. The change in our net operating assets and liabilities was
primarily the result of an increase in deferred revenue of $162.2 million due to
seasonality in our sales cycle, which is higher in the third and fourth quarters
of our fiscal year, and an increase in accounts payable and accrued expenses of
$35.9 million driven by the timing of payments. These changes were partially
offset by an increase in accounts receivable of $108.8 million due to the timing
of receipts of payments from customers, an increase in deferred commissions of
$29.5 million due to commissions paid on new bookings, and an increase in
prepaid expenses and other assets of $8.1 million driven by the timing of
payments in advance of future services.

For the year ended March 31, 2021, cash provided by operating activities was
$220.4 million as a result of a net income of $75.7 million, and adjusted by
non-cash charges of $113.6 million and a change of $31.2 million in our
operating assets and liabilities. The non-cash charges are primarily comprised
of depreciation and amortization of $61.0 million and share-based compensation
of $57.8 million. The change in our net operating assets and liabilities was
primarily the result of an increase in deferred revenue of $96.5
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million due to seasonality in our sales cycle, which is higher in the third and
fourth quarters of our fiscal year, an increase in accounts payable and accrued
expenses of $26.6 million driven by the timing of payments, and a decrease in
prepaid expenses and other assets of $5.7 million driven by the timing of
payments in advance of future services. These changes were partially offset by
an increase in accounts receivable of $82.0 million due to the timing of
receipts of payments from customers and an increase in deferred commissions of
$16.3 million due to commissions paid on new bookings.

For the year ended March 31, 2020, cash used in operating activities was $142.5
million as a result of a net loss of $413.8 million, inclusive of a $255.8
million income tax payment related to the reorganization transactions, and
adjusted by non-cash charges of $248.7 million and a change of $22.7 million in
our operating assets and liabilities. The non-cash charges are primarily
comprised of share-based compensation of $222.5 million and depreciation and
amortization of $66.3 million, net of deferred income taxes of $46.2 million.
The change in our net operating assets and liabilities was primarily the result
of an increase in deferred revenue of $91.4 million due to higher subscription
sales and timing of amounts billed to customers compared to revenue recognized
during the same period, which were partially offset by an increase in deferred
commissions of $20.1 million due to commissions paid on new bookings. Further
contributing to the change was an increase in prepaid expenses and other assets
of $57.6 million related to an increase in income taxes refundable, an increase
in accounts payable and accrued expenses of $53.0 million driven by our growth
and the timing of payments, and an increase in accounts receivable of $44.0
million in line with higher sales and the timing of cash collections between the
two periods.

Investing Activities

Cash used in investing activities during the year ended March 31, 2022 was $30.9
million, as a result of purchases of property and equipment of $17.7 million and
two acquisitions made in the first half of fiscal 2022 of $13.2 million.

Cash used in investing activities during the year ended March 31, 2021 was $13.9
million, as a result of the purchases of property and equipment of $14.1 million
and capitalized software additions of $0.3 million, gross of $0.5 million of
derecognized software costs.

Cash used in investing activities during the year ended March 31, 2020 was $20.6
million, as a result of purchases of property and equipment of $19.7 million and
capitalized software additions of $0.9 million.

Financing Activities


Cash used in financing activities during the year ended March 31, 2022 was $80.7
million, primarily as a result of repayments of our term loans of $120.0
million, partially offset by proceeds from the exercise of our stock options of
$25.5 million and proceeds from our employee stock purchase plan of $13.9
million.

Cash used in financing activities during the year ended March 31, 2021 was $97.8
million, primarily as a result of repayments of our term loans of $120.0
million, partially offset by proceeds from the exercise of our stock options of
$13.1 million and proceeds from our employee stock purchase plan of $9.2
million.

Cash provided by financing activities during the year ended March 31, 2020 was
$329.4 million, primarily as a result of net proceeds from our initial public
offering of $590.3 million and a contribution received for our tax obligation
generated by our reorganization transactions of $265.0 million, which were
partially offset by repayments on our term loans of $515.2 million, settlement
of deferred offering costs of $5.0 million, and installments related to an
acquisition of $4.7 million.

                   Critical Accounting Policies and Estimates

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

We believe that the assumptions and estimates associated with revenue
recognition, share-based compensation, income taxes, and business combinations
have the greatest potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and
estimates. Accordingly, we believe these are the most critical to fully
understand and evaluate our financial condition and results of operations.

Revenue Recognition

We recognize revenue from contracts with customers using the five-step method described in Note 2 of the notes to our consolidated financial statements, included elsewhere in this Annual Report. At contract inception we evaluate whether two or more contracts

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should be combined and accounted for as a single contract and whether the
combined or single contract includes more than one performance obligation. We
combine contracts entered into at or near the same time with the same customer
if (i) we determine that the contracts are negotiated as a package with a single
commercial objective, (ii) the amount of consideration to be paid in one
contract depends on the price or performance of the other contract, or (iii) the
services promised in the contracts are a single performance obligation.

The identification of our performance obligations involves review and
consideration for the contractual terms, the implied rights of our customers, if
any, product demonstrations and published website and marketing materials. Our
performance obligations consist of (i) subscription and support services,
(ii) licenses for our Classic products, and (iii) professional and other
services. Contracts that contain multiple performance obligations require an
allocation of the transaction price to each performance obligation based on
their relative standalone selling price. We determine standalone selling price
("SSP") for all our performance obligations using observable inputs, such as
standalone sales and historical contract pricing. SSP is consistent with our
overall pricing objectives, taking into consideration the type of subscription
services and professional and other services. SSP also reflects the amount we
would charge for that performance obligation if it were sold separately in a
standalone sale, and the price we would sell to similar customers in similar
circumstances. We have determined that our pricing for software licenses and
subscription services is highly variable and we therefore allocate the
transaction price to those performance obligations using the residual approach.

In general, we satisfy the majority of our performance obligations over time as
we transfer the promised services to our customers. We review the contract terms
and conditions to evaluate (i) the timing and amount of revenue recognition,
(ii) the related contract balances, and (iii) our remaining performance
obligations. We also estimate the number of hours expected to be incurred based
on an expected hours approach that considers historical hours incurred for
similar projects based on the types and sizes of customers. These evaluations
require significant judgment that could affect the timing and amount of revenue
recognized.

Share-based Compensation

We historically issued Management Incentive Units ("MIUs") and Appreciation
Units ("AUs") under the Management Incentive Unit Plan, or the MIU Plan.
Following the IPO, we ceased granting awards under the MIU Plan, and all
outstanding awards were converted into shares of common stock, restricted stock,
and restricted stock units under the Amended and Restated 2019 Equity Incentive
Plan, or the 2019 Plan. Under the 2019 Plan, we have granted stock options,
restricted stock awards, and restricted stock units to certain key employees and
non-employee directors. For further information see Note 12 of the notes to the
consolidated financial statements in this Annual Report.

Compensation expense relating to share-based payments is recognized in earnings
using a fair-value measurement method. We use the straight-line attribution
method of recognizing compensation expense over the vesting period for service.
For performance-based restricted stock units that vest based upon continued
service and achievement of certain performance conditions, the compensation
expense is recognized over the requisite service period, if it is probable that
the performance condition will be satisfied, based on the accelerated
attribution method. Forfeitures are accounted for in the period in which the
awards are forfeited.

Subsequent to our IPO, the fair value of each new equity award and purchase
right under the ESPP is estimated on the date of grant. We estimate the fair
value of each option award and purchase right using the Black-Scholes
option-pricing model. The fair value of restricted stock and restricted stock
units is based on the closing price of our common stock as reported on the New
York Stock Exchange ("NYSE").

Our use of the Black-Scholes option-pricing model requires that we make
assumptions as to the volatility of our stock options and our purchase rights
under the ESPP, the expected term to expiration or a liquidity event, and the
risk-free interest rate for a period that approximates the expected term of our
stock options and purchase rights. The assumptions we use in our option-pricing
model represent management's best estimates. These estimates involve inherent
uncertainties and the application of management's judgment. If factors change
and different assumptions are used, our share-based compensation expense could
be materially different in the future. The assumptions and estimates are as
follows:

•Fair Value of Common Stock. We use the market closing price for our common
stock, as reported on the NYSE, to determine the fair value of our common stock
underlying the stock options and purchase rights at each grant date.

•Risk-Free Interest Rate. We determined the risk-free interest rate based on the
U.S. Treasury yield curve in effect at the time of grant for the expected life
of the award.

•Expected Term. The computation of expected term for the stock options is based
on the average period the stock options are expected to remain outstanding,
generally calculated as the midpoint of the stock options' remaining vesting
term and contractual expiration period, as we do not have sufficient historical
information to develop reasonable expectations about future exercise patterns
and post-vesting employment termination behavior. The computation of expected
term for the purchase rights under the ESPP is based on the offering period,
which is six months.
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•Expected Volatility. The computation of expected volatility is based on the
historical volatility of a group of publicly traded peer companies. We expect to
continue to do so until such time as we have adequate historical data regarding
the volatility of our traded stock price.

•Dividend Yield. We use a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future.


Prior to our IPO, the fair value of the MIUs and AUs were estimated on the date
of grant using the option-pricing model, or OPM, or a hybrid of the
probability-weighted expected return method and the option-pricing model, which
we referred to as the hybrid method. Use of the OPM model and hybrid method
required that we make assumptions as to the volatility of our equity awards, the
expected term to expiration or a liquidity event, and the risk-free interest
rate for a period that approximates the expected term of our equity awards. The
computation of expected volatility was based on the historical volatility of a
group of publicly traded peer companies. We used the simplified method
prescribed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to
calculate the expected term of units granted to employees and directors. We
based the expected term of options granted to non-employees on the contractual
term of the units. We determined the risk-free interest rate by reference to the
U.S. Constant Maturity Treasury yield curve in effect as of the valuation date
with the maturity matching the expected term.

Income Taxes


We account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax bases of assets and
liabilities and net operating loss and credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in the period that includes the enactment date. We have the ability
to permanently reinvest any earnings in our foreign subsidiaries and therefore
do not record a deferred tax liability on any outside basis differences in our
investments in subsidiaries.

We record net deferred tax assets to the extent we believe that these assets
will more likely than not be realized. These deferred tax assets are subject to
periodic assessments as to recoverability, and if it is determined that it is
more likely than not that the benefits will not be realized, valuation
allowances are recorded that would reduce deferred tax assets. In making such
determination, we consider all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations.

We account for uncertain tax positions based on those positions taken or
expected to be taken in a tax return. We determine if the amount of available
support indicates that it is more likely than not that the tax position will be
sustained on audit, including resolution of any related appeals or litigation
processes. We then measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon settlement. We adjust reserves for our
uncertain tax positions due to changing facts and circumstances. To the extent
that the final outcome of these matters is different than the amounts recorded,
such differences will impact our tax provision in our consolidated statements of
operations in the period in which such determination is made. Interest and
penalties related to uncertain income tax positions are included in the income
tax provision.

Business Combinations

We use our best estimates and assumptions to allocate the fair value of purchase
consideration to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. The excess of the fair value of
purchase consideration over the fair values of these identifiable assets and
liabilities is recorded as goodwill. We apply significant judgment in
determining the fair value of the intangible assets acquired, which involves the
use of significant estimates and assumptions with respect to future expected
cash flows, expected asset lives, discount rates, revenue growth rates, and
royalty rate. While we use our best estimates and judgments, our estimates are
inherently uncertain and subject to refinement. During the measurement period,
which may be up to one year from the acquisition date, we may record adjustments
to the fair value of these tangible and intangible assets acquired and
liabilities assumed, with the corresponding offset to goodwill. We continue to
collect information and reevaluate these estimates and assumptions quarterly and
record any adjustments to our preliminary estimates to goodwill provided that we
are within the measurement period. Upon the conclusion of the final
determination of the fair value of assets acquired or liabilities assumed during
the measurement period, any subsequent adjustments are included in our
consolidated statements of operations.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, of our accompanying audited consolidated financial statements included in this Annual Report for a description of recently issued accounting pronouncements.

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