DYNATRACE, INC. 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 onMarch 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 ofMarch 31, 2022 , our products are trusted by more than 3,300Dynatrace 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 ofMarch 31, 2022 from approximately 2,900 as ofMarch 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
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$1 billion . We added 706 new customers during the year endedMarch 31, 2022 . In addition, we expect to leverage our global partner ecosystem to add new customers in geographies where we have direct coverage and work jointly with our partners. In other geographies, such asAfrica ,Japan , theMiddle East , andSouth Korea , we utilize a multi-tier "master reseller" model. •Increase penetration within existing customers. We plan to continue to increase penetration within our existing customers by expanding the breadth of our platform capabilities to provide for continued cross-selling opportunities. In addition, we believe the ease of implementation for Dynatrace® provides us the opportunity to expand adoption within our existing customers, across new customer applications, and into additional business units or divisions. We sustained our Dynatrace® net expansion rate at or above 120% for the sixteenth consecutive quarter. •Enhance our strategic partner ecosystem. Our strategic partners include industry-leading global system integrators, software vendors, and cloud and technology providers. We intend to continue to invest in our partner ecosystem, with a particular emphasis on expanding our strategic alliances and cloud-focused partnerships with global system integrators, including Deloitte and DXC, and hyperscale cloud providers, including AWS, Microsoft Azure, Google Cloud Platform, and Red Hat.
Key Metrics
In addition to ourU.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations: As of 3/31/2022 12/31/2021 9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020 Total ARR (in thousands)$ 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 ofMarch 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. 41
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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 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) foreign earnings taxed at rates higher than theU.S. statutory tax rate, (2) the inability to realize certain tax benefits subject to a valuation allowance in theU.S. , (3) foreign withholding taxes, partially offset by (4) the vesting of share-based compensation that generated excess tax benefits, and (5) the utilization ofU.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. 43
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Results of OperationsThe 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
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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 endedMarch 31, 2022 , as compared to the year endedMarch 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$12.1 million , or 26%, for the year endedMarch 31, 2022 , as compared to the year endedMarch 31, 2021 . We generally recognize the revenues associated with professional services as we deliver the services. Cost of Revenue Fiscal Year Ended March 31, Change 2022 2021 Amount Percent (in thousands, except percentages) Cost of subscription$ 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 endedMarch 31, 2022 as compared to the year endedMarch 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 endedMarch 31, 2022 as compared to the year endedMarch 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
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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 endedMarch 31, 2022 compared to the year endedMarch 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$1.3 million , or 11%, during the year endedMarch 31, 2022 compared to the year endedMarch 31, 2021 . Service gross margin decreased from 26% to 23% during the year endedMarch 31, 2022 compared to the year endedMarch 31, 2021 . The increase in gross profit is primarily due to an increase in service revenue driven by higher utilization of personnel. The decrease in gross margin is primarily due to higher personnel and share-based compensation costs. Operating Expenses Fiscal Year Ended March 31, Change 2022 2021 Amount Percent (in thousands, except percentages) Operating expenses: Research and development$ 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 endedMarch 31, 2022 as compared to the year endedMarch 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 46
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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 endedMarch 31, 2022 , as compared to the year endedMarch 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 endedMarch 31, 2022 , as compared to the year endedMarch 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 endedMarch 31, 2022 as compared to the year endedMarch 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 endedMarch 31, 2022 as compared to the year endedMarch 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 endedMarch 31, 2022 , as compared to an expense of$2.1 million for the year endedMarch 31, 2021 . This increase was primarily due to the one-time impact of tax return to provision true-up benefits resulting from changes in estimates to the reorganization transaction tax during fiscal year 2021. Fiscal Years Ended March 31, 2021 and 2020 Revenue Fiscal Year Ended March 31, Change 2021 2020 Amount Percent (in thousands, except percentages) Subscription$ 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 endedMarch 31, 2021 , as compared to the year endedMarch 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 endedMarch 31, 2021 compared to 89% of total revenue for the year endedMarch 31, 2020 . 47
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License
License revenue decreased by$11.2 million , or 89%, for the year endedMarch 31, 2021 , as compared to the year endedMarch 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$1.6 million , or 3%, for the year endedMarch 31, 2021 , as compared to the year endedMarch 31, 2020 . We recognize the revenues associated with professional services as we deliver the services. Cost of Revenue Fiscal Year Ended March 31, Change 2021 2020 Amount Percent (in thousands, except percentages) Cost of subscription$ 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 endedMarch 31, 2021 , as compared to the year endedMarch 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 endedMarch 31, 2021 , as compared to the year endedMarch 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
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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 endedMarch 31, 2021 compared to the year endedMarch 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 endedMarch 31, 2021 compared to the year endedMarch 31, 2020 . Service gross margin increased from 13% to 26%, during the year endedMarch 31, 2021 compared to the year endedMarch 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 endedMarch 31, 2021 , as compared to the year endedMarch 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 . 49
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Sales and marketing
Sales and marketing expenses decreased by$20.7 million , or 8%, for the year endedMarch 31, 2021 , as compared to the year endedMarch 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 endedMarch 31, 2021 , as compared to the year endedMarch 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 endedMarch 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 endedMarch 31, 2021 , as compared to the year endedMarch 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
Other Expense, Net
Other expense, net decreased by$32.6 million , or 70%, for the year endedMarch 31, 2021 , as compared to the year endedMarch 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 endedMarch 31, 2021 , as compared to an expense of$195.3 million for the year endedMarch 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
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. 50
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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 ofMarch 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 ofMarch 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$15.6 million of letters of credit outstanding. All of our obligations under our term loans are guaranteed by our existing and future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets. AtMarch 31, 2022 , we were in compliance with all applicable covenants pertaining to the First Lien Credit Agreement. Our credit facilities are discussed further in Note 9 of the notes to the consolidated financial statements in this Annual Report. Summary of Cash Flows Fiscal Year Ended March 31, 2022 2021 2020 (in thousands) Net cash provided by (used in) operating activities(1)$ 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
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(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 Operating Activities For the year endedMarch 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 endedMarch 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 51
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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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 inthe 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 bySEC 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 theU.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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