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
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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 multicloud environments. As enterprises embrace the cloud to effect
their digital transformation, our all-in-one intelligence platform is designed
to address the growing complexity faced by technology and digital business
teams. With automatic and intelligent observability, our all-in-one platform
delivers precise answers about the performance and security of applications, the
underlying infrastructure and the experience of all users to enable
organizations to innovate faster, simplify cloud complexity, collaborate more
efficiently, and secure cloud-native applications. We designed our software
intelligence 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, 2021 , our products are trusted by approximately 2,900 Dynatrace customers in
90 countries in diverse industries such as banking, insurance, retail,
manufacturing, travel and software.
Since we began operations, we have been a leader within the application
performance monitoring and observability spaces. In 2014, we leveraged the
knowledge and experience of the same engineering team that founded Dynatrace to
develop a new platform, the Dynatrace Software Intelligence Platform, from the
ground up with automation and intelligence at its core to address the complexity
of modern, dynamic multiclouds and the applications that run on them.
We market Dynatrace® through a combination of our global direct sales team and a
network of partners, including resellers, system integrators, and managed
service providers. We target the largest 15,000 global enterprise 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 2,936 as of March 31, 2021 from 2,373 as of March 31, 2020 .
Our Classic products include AppMon, Classic Real User Monitoring, or RUM,
Network Application Monitoring, or NAM, and Synthetic Classic. As of April 2018 ,
these products are only available to customers who had previously purchased them
and were sunset as of April 1, 2021 .
Coronavirus (COVID-19) Impact
The extent to which the COVID-19 pandemic may impact our business going forward
will depend on numerous evolving factors that we cannot reliably predict. These
factors may adversely impact business spending on technology as well as
customers' ability to pay for our products and services on an ongoing basis.
While the broader implications of the COVID-19 pandemic on our results of
operations and overall financial performance remain uncertain, the COVID-19
pandemic and its adverse effects have become more prevalent in the locations
where we, our customers and partners conduct business. We may experience
curtailed customer demand that could adversely impact our business, results of
operations and overall financial performance in future periods. Specifically, we
may be impacted by changes in our customers' ability or willingness to purchase
our offerings; changes in the timing of our current or prospective customers'
purchasing decisions; pricing discounts or extended payment terms; reductions in
the amount or duration of customers' subscription contracts; or increased
customer attrition rates. While our revenue, customer retention, and earnings
are relatively predictable as a result of our subscription-based business model,
the effect, if any, of the COVID-19 pandemic would not be fully reflected in our
results of operations and overall financial performance until future periods.
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While the implications of the COVID-19 pandemic remain uncertain, we plan to
continue to make investments to support business growth. We believe that the
growth of our business is dependent on many factors, including our ability to
expand our customer base, develop new products and applications to extend the
functionality of our products, and provide a high level of customer service. We
expect to continue to invest in sales and marketing to support customer growth.
We also expect to continue to invest in research and development as we continue
to introduce new products and applications to extend the functionality of our
products. We also intend to maintain a high level of customer service and
support which we consider critical for our continued success. We also expect to
continue to incur general and administrative expenses to support our business
and to maintain the infrastructure required to be a public company. We intend to
use our cash flow from operations to fund these growth strategies and support
our business despite the potential impact from the COVID-19 pandemic. See the
section titled "Risk Factors" included under Part I, Item 1A for further
discussion of the possible impact of the COVID-19 pandemic on our business.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial
performance in the future to be, driven by our ability to:
•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 enterprise accounts,
which generally have annual revenues in excess of $1 billion . We added 584 new
customers during the year ended March 31, 2021 . 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 , Russia 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 enterprise customers,
across new customer applications, and into additional business units or
divisions. Our Dynatrace® net expansion rate has been above 120% for the last
twelve quarters.
•Enhance our strategic partner ecosystem. Our strategic partners include
industry-leading system integrators, software vendors, and cloud and technology
providers. We intend to continue to invest in our partner ecosystem, with a
particular emphasis on expanding our strategic alliances and cloud-focused
partnerships, such as AWS, Azure, Google Cloud Platform, Red Hat OpenShift, and
VMware Tanzu.
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
3/31/2021 12/31/2020 9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Number of Dynatrace®
Customers 2,936 2,794 2,594 2,458 2,373 2,208 1,828 1,578
Total ARR (in
thousands) $ 774,090 $ 721,995 $ 638,063 $ 601,376 $ 572,759 $ 534,491 $ 470,905 $ 437,622
Dynatrace® Net
Expansion Rate 120%+ 120%+ 120%+ 120%+ 120%+ 120%+ 120%+ 120%+
Dynatrace® Customers: We define the number of Dynatrace® customers at the end
of any reporting period as the number of accounts, as identified by a unique
account identifier, that generate at least $10,000 of Dynatrace® ARR as of the
reporting date. In infrequent cases, a single large organization may comprise
multiple customer accounts when there are distinct divisions, departments or
subsidiaries that operate and make purchasing decisions independently from the
parent organization. In cases where multiple customer accounts exist under a
single organization, each customer account is counted separately based on a
mutually exclusive accounting of ARR. As such, even though we target the largest
15,000 global enterprise accounts, there are more than 15,000 addressable
Dynatrace® customers. We believe that our ability to grow the number of
Dynatrace® customers is an indicator of our ability to drive market adoption of
our platform, as well as our ability to grow the business and generate future
subscription revenues.
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
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are billed in arrears based on product usage. Total ARR was $774 million as of
March 31, 2021 . Over the past year, Total ARR has grown by $201 million , or 35%.
This growth was the result of a $62 million increase in ARR from new customer
additions, a $128 million increase in ARR from the expansion of existing
customers on the Dynatrace® platform, and an $11 million increase in ARR as a
result of expansion at the time of conversion from our Classic customers, net of
churn.
Dynatrace® Net Expansion Rate: We define the Dynatrace® net expansion rate as
the Dynatrace® ARR at the end of a reporting period for the cohort of Dynatrace®
accounts as of one year prior to the date of calculation, divided by the
Dynatrace® ARR one year prior to the date of calculation for that same cohort.
Dynatrace® net expansion rate has been above 120% for 12 consecutive quarters.
Key Components of Results of OperationsRevenue
Revenue includes subscriptions, licenses and services.
Subscription. Our subscription revenue consists of (i) SaaS agreements,
(ii) Dynatrace® term-based licenses which are recognized ratably over the
contract term, (iii) Dynatrace® perpetual licenses that are recognized ratably
over the term of the expected optional maintenance renewals, which is generally
three years, and (iv) maintenance and support agreements. We typically invoice
SaaS subscription fees and term licenses annually in advance and recognize
subscription revenue ratably over the term of the applicable agreement, provided
that all other revenue recognition criteria have been satisfied. Fees for our
Dynatrace® perpetual licenses are generally billed up front. See the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies and Estimates-Revenue Recognition"
included in Part II, Item 7 of this Annual Report for more information. Over
time, we expect subscription revenue will increase as a percentage of total
revenue as we continue to focus on increasing subscription revenue as a key
strategic priority.
License. License revenue reflects the revenues recognized from sales of
perpetual and term-based licenses of our Classic products that are sold only to
existing customers. The license fee portion of Classic perpetual license
arrangements is recognized upfront 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 train their
personnel. We recognize the revenues associated with these professional services
on a time and materials basis as we deliver the services or provide the
training. We generally recognize the revenues associated with our services in
the period the services are performed, provided that collection of the related
receivable is reasonably assured.
Cost of Revenue
Cost of subscription. Cost of subscription revenue includes all direct costs
to deliver and support our subscription products, including salaries, benefits,
share-based compensation and related expenses such as employer taxes, allocated
overhead for facilities, IT, third-party hosting fees related to our cloud
services, and amortization of internally developed capitalized software
technology. We recognize these expenses as they are incurred.
Cost of service. Cost of service revenue includes salaries, benefits,
share-based compensation and related expenses such as employer taxes for our
services organization, allocated overhead for depreciation of equipment,
facilities and IT. We recognize these expenses as they are incurred.
Amortization of acquired technology. Amortization of acquired technology
includes amortization expense for technology acquired in business combinations
and the Thoma Bravo Funds' acquisition of us in 2014.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue, and gross margin is gross profit
as a percentage of revenue. Gross profit has been and will continue to be
affected by various factors, including the mix of our license, subscription, and
services and other revenue, the costs associated with third-party cloud-based
hosting services for our cloud-based subscriptions, and the extent to which we
expand our customer support and services organizations. We expect that our gross
margin will fluctuate from period to period depending on the interplay of these
various factors.
Operating Expenses
Personnel costs, which consist of salaries, benefits, bonuses, share-based
compensation and, with regard to sales and marketing expenses, sales
commissions, are the most significant component of our operating expenses. We
also incur other non-personnel costs such as an allocation of our general
overhead expenses.
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Research and development. Research and development expenses primarily consists
of the cost of programming personnel. We focus our research and development
efforts on developing new solutions, core technologies, and to further enhance
the functionality, reliability, performance and flexibility of existing
solutions. We believe that our software development teams and our core
technologies represent a significant competitive advantage for us and we expect
that our research and development expenses will continue to increase, as we
invest in research and development headcount to further strengthen and enhance
our solutions.
Sales and marketing. Sales and marketing expenses primarily consists of
personnel and facility-related costs for our sales, marketing, and business
development personnel, commissions earned by our sales personnel and the cost of
marketing and business development programs. We expect that sales and marketing
expenses will continue to increase as we continue to hire additional sales and
marketing personnel and invest in marketing programs.
General and administrative. General and administrative expenses primarily
consist of the personnel and facility-related costs for our executive, finance,
legal, human resources and administrative personnel; and other corporate
expenses, including those associated with our ongoing public reporting
obligations. We anticipate continuing to incur additional expenses due to
growing our operations and being a public company, including higher legal,
corporate insurance and accounting expenses.
Amortization of other intangibles. Amortization of other intangibles primarily
consists of amortization of customer relationships and capitalized software and
tradenames.
Restructuring and Other. Restructuring and other expenses primarily consists of
various restructuring activities we have undertaken to achieve strategic and
financial objectives. Restructuring activities include, but are not limited to,
product offering cancellation and termination of related employees, office
relocation, administrative cost of structure realignment and consolidation of
resources.
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) Benefit
Our income tax (expense) benefit, deferred tax assets and liabilities, and
liabilities for unrecognized tax benefits reflect management's best assessment
of estimated current and future taxes to be paid. We are subject to income taxes
in both the United States and numerous foreign jurisdictions. Significant
judgments and estimates are required in determining the consolidated income tax
expense.
Our income tax rate varies from the U.S. federal statutory rate mainly due to
(1) the impact of tax return to provision true-ups resulting from changes in
estimates to the reorganization transaction tax and the corresponding impact to
the uncertain tax positions, (2) differing tax rates and regulations in foreign
jurisdictions, (3) differences in accounting and tax treatment of our
share-based compensation, and (4) foreign withholding taxes. We expect this
fluctuation in income tax rates, as well as its potential impact on our results
of operations, to continue.
Immaterial Revision of Previously Issued Consolidated Financial Statements
During the fourth quarter of fiscal 2021, we identified an immaterial error in
the calculation of our income tax provision for the year ended March 31, 2020 .
Accordingly, the results for the year ended March 31, 2020 have been adjusted to
incorporate the revised amounts, where applicable, as further described in Note
7 of the notes to the consolidated financial statements in this Annual Report.
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Results of OperationsThe following tables set forth our results of operations for the periods presented:
Fiscal Year Ended March 31,
2021 2020 2019
Amount Percent Amount Percent Amount Percent
(in thousands, except percentages)Revenue: Subscription$ 655,180 93 %$ 487,817 89 %$ 349,830 81 % License 1,446 - % 12,686 3 % 40,354 9 % Service 46,883 7 % 45,300 8 % 40,782 10 % Total revenue 703,509 100 % 545,803 100 % 430,966 100 % Cost of revenue: Cost of subscription 77,488 11 % 73,193 13 % 56,934 13 % Cost of service 34,903 5 % 39,289 7 % 31,529 7 % Amortization of acquired technology 15,317 2 % 16,449 4 % 18,338 5 % Total cost of revenue (1) 127,708 18 % 128,931 24 % 106,801 25 % Gross profit 575,801 82 % 416,872 76 % 324,165 75 % Operating expenses: Research and development (1) 111,415 16 % 119,281 22 % 76,759 18 % Sales and marketing (1) 245,487 35 % 266,175 49 % 178,886 42 % General and administrative (1) 92,219 13 % 161,983 30 % 91,778 21 % Amortization of other intangibles 34,744 5 % 40,280 7 % 47,686 11 % Restructuring and other 40 1,092 1,763 Total operating expenses 483,905 588,811 396,872 Income (loss) from operations 91,896 (171,939) (72,707) Other expense, net (14,043) (46,594) (67,204) Income (loss) before income taxes 77,853 (218,533) (139,911) Income tax (expense) benefit (2,139) (195,284) 23,717 Net income (loss)$ 75,714 $ (413,817) $ (116,194) _________________
(1)Includes share-based compensation expense as follows:
Fiscal Year Ended March 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 7,307 $ 18,685 $ 5,777
Research and development 11,684 38,670 12,566
Sales and marketing 24,153 84,698 24,673
General and administrative 14,640 80,425 28,135
Total share-based compensation expense $ 57,784 $ 222,478
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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 .
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 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.
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 generally 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 and other 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 lower 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 year ended March 31, 2020 . 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.
Fiscal Years Ended March 31, 2020 and 2019
Revenue
Fiscal Year Ended March 31, Change
2020 2019 Amount Percent
(in thousands, except percentages)
Subscription $ 487,817 $ 349,830 $ 137,987 39 %
License 12,686 40,354 (27,668) (69 %)
Service 45,300 40,782 4,518 11 %
Total revenue $ 545,803 $ 430,966 $ 114,837 27 %
Subscription
Subscription revenue increased by $138.0 million , or 39%, for the year ended
March 31, 2020 , as compared to the year ended March 31, 2019 , 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 89% of total revenue for the year ended March 31, 2020
compared to 81% of total revenue for the year ended March 31, 2019 .
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License
License revenue decreased by $27.7 million , or 69%, for the year ended March 31,
2020 , as compared to the year ended March 31, 2019 , 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 $4.5 million , or 11%, for the year ended March 31,
2020 , as compared to the year ended March 31, 2019 . We recognize the revenues
associated with professional services as we deliver the services.
Cost of Revenue
Fiscal Year Ended March 31, Change
2020 2019 Amount Percent
(in thousands, except percentages)
Cost of subscription $ 73,193 $ 56,934 $ 16,259 29 %
Cost of service 39,289 31,529 7,760 25 %
Amortization of acquired technology 16,449 18,338 (1,889) (10 %)
Total cost of revenue $ 128,931 $ 106,801 $ 22,130 21 %
Cost of subscription
Cost of subscription revenue increased by $16.3 million , or 29%, for the year
ended March 31, 2020 compared to the year ended March 31, 2019 . The increase is
primarily due to higher share-based compensation of $9.0 million as well as
higher personnel costs to support the growth of our subscription cloud-based
offering.
Cost of service
Cost of service revenue increased by $7.8 million , or 25%, for the year ended
March 31, 2020 , as compared to the year ended March 31, 2019 . The increase was
the result of higher share-based compensation of $3.9 million as well as
increased personnel costs to support the increase in use of our consulting and
training services to support our new customers.
Amortization of acquired technologies
For the years ended March 31, 2020 and 2019, amortization of acquired
technologies includes $16.2 million and $17.7 million , respectively, of
amortization expense for technology acquired in connection with the Thoma Bravo
Funds' acquisition of us in 2014, with the remaining balance related primarily
to the Qumram acquisition in November 2017 .
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Gross Profit and Gross Margin
Fiscal Year Ended March 31, Change
2020 2019 Amount Percent
(in thousands, except percentages)
Gross profit:
Subscription $ 414,624 $ 292,896 $ 121,728 42 %
License 12,686 40,354 (27,668) (69 %)
Service 6,011 9,253 (3,242) (35 %)
Amortization of acquired technology (16,449) (18,338) 1,889 (10 %)
Total gross profit $ 416,872 $ 324,165 $ 92,707 29 %
Gross margin:
Subscription 85 % 84 %
License 100 % 100 %
Service 13 % 23 %
Amortization of acquired technology (100) % (100 %)
Total gross margin 76 % 75 %
Subscription
Subscription gross profit increased by $121.7 million , or 42%, during the year
ended March 31, 2020 compared to the year ended March 31, 2019 . Subscription
gross margin increased from 84% to 85%, during the year ended March 31, 2020
compared to the year ended March 31, 2019 .
License
License gross profit decreased by $27.7 million , or 69%, during the year ended
March 31, 2020 compared to the year ended March 31, 2019 . The decrease was the
result of a decline in sales of perpetual and term licenses for our Classic
products.
Service
Service gross profit decreased by $3.2 million , or 35%, during the year ended
March 31, 2020 compared to the year ended March 31, 2019 . Service gross margin
decreased from 23% to 13%, during the year ended March 31, 2020 compared to the
year ended March 31, 2019 . Higher share-based compensation costs decreased gross
profit by $3.9 million compared to the last fiscal year.
Operating Expenses
Fiscal Year Ended March 31, Change
2020 2019 Amount Percent
(in thousands, except percentages)
Operating expenses:
Research and development $ 119,281 $ 76,759 $ 42,522 55 %
Sales and marketing 266,175 178,886 87,289 49 %
General and administrative 161,983 91,778 70,205 76 %
Amortization of other intangibles 40,280 47,686 (7,406) (16 %)
Restructuring and other 1,092 1,763 (671) (38 %)
Total operating expenses $ 588,811 $ 396,872 $ 191,939 48 %
Research and development
Research and development expenses increased $42.5 million , or 55%, for the year
ended March 31, 2020 , as compared to the year ended March 31, 2019 . The increase
is primarily attributable to higher share-based compensation of $26.1 million
and a 20% increase in headcount and related allocated overhead, as well as other
costs to expand our product offerings of $8.1 million . Higher software and
maintenance expenses, primarily cloud-based hosting costs related to the
development of our cloud-based offering of $3.8 million also contributed to the
increase.
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Sales and marketing
Sales and marketing expenses increased $87.3 million , or 49%, for the year ended
March 31, 2020 , as compared to the year ended March 31, 2019 , primarily due to
higher share-based compensation of $60.0 million . Further contributing to the
increase was a 14% increase in headcount, resulting in an increase of
$23.1 million in personnel costs.
General and administrative
General and administrative expenses increased $70.2 million , or 76%, for the
year ended March 31, 2020 , as compared to the year ended March 31, 2019 ,
primarily due to an increase in share-based compensation of $52.3 million and
higher transaction costs of $12.8 million related to the initial public offering
completed in fiscal 2020. Further contributing to the increase was an increase
in personnel costs and insurance costs. Sponsor related costs were $1.6 million
and $4.9 million for the years ended March 31, 2020 and 2019, respectively.
Sponsor costs declined in 2020 because we stopped incurring these costs upon
completion of our initial public offering.
Amortization of other intangibles
Amortization of other intangibles decreased by $7.4 million , or 16%, for the
year ended March 31, 2020 , as compared to the year ended March 31, 2019 . 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 $0.7 million , or 38%, for the year ended
March 31, 2020 , as compared to the year ended March 31, 2019 , due to lower costs
incurred 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 $20.6 million , or 31%, for the year ended March
31, 2020 , as compared to the year ended March 31, 2019 . The decrease in other
expense was primarily a result of lower interest expense on our related party
promissory notes as described further in Note 17 with the consolidated financial
statements included herein.
Income Tax (Expense) Benefit
Income tax expense increased by $219.0 million resulting in an expense of $195.3
million for the year ended March 31, 2020 , as compared to an income tax benefit
of $23.7 million for the year ended March 31, 2019 . This change was primarily
due to an increase in income tax expense as a result of our reorganization
transactions during fiscal 2020.
Liquidity and Capital Resources
As of March 31, 2021 , we had $325.0 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 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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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 working capital and capital expenditure 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, 2021 , the balance outstanding under our first lien term loan was
$401.1 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, 2021 , 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,
2021 2020 2019
(in thousands)
Net cash provided by (used in) operating
activities(1) $ 220,436 $ (142,455) $ 147,141
Net cash used in investing activities (13,879) (20,613) (9,250)
Net cash (used in) provided by financing
activities (97,802) 329,392 (161,482)
Effect of exchange rate changes on cash and cash
equivalents 3,037 (4,468) (2,676)
Net increase (decrease) in cash and cash
equivalents $ 111,792 $ 161,856 $ (26,267)
_________________(1) Net cash provided by (used in) operating activities includes cash payments for interest and tax as follows:
Fiscal Year Ended March 31,
2021 2020 2019
(in thousands)
Cash paid for interest $ 12,475 $ 39,568 Operating Activities For the year endedMarch 31, 2021 , cash provided by operating activities was$220.4 million as a result of 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 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 57 -------------------------------------------------------------------------------- Table of Contents 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. For the year endedMarch 31, 2019 , cash provided by operating activities was$147.1 million as a result of a net loss of$116.2 million , adjusted by non-cash charges of$115.9 million and a change of$147.4 million in our operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of$80.1 million , share-based compensation of$71.2 million , and deferred income taxes of$34.2 million . The change in our net operating assets and liabilities was primarily the result of an increase in deferred revenue of$127.0 million due to the timing of billings and cash received in advance of revenue recognition primarily for subscription and support services and a decrease in accounts receivable of$18.0 million due to the timing of receipts of payments from customers, partially offset by an increase in deferred commissions of$20.0 million , and an increase in prepayments and other assets of$12.4 million . Investing Activities 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 the purchases of property and equipment of$19.7 million and capitalized software additions of$0.9 million . Cash used in investing activities during the year endedMarch 31, 2019 was$9.3 million , as a result of purchases of property and equipment of$7.4 million and capitalized software additions of$1.9 million . Financing Activities 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 . Cash used in financing activities during the year endedMarch 31, 2019 was$161.5 million , primarily as a result of payments to related parties of$1,177.0 million , repayments on our term loans of$83.9 million , debt issuance costs of$16.3 million and equity repurchases of$0.6 million , partially offset by$1,120.0 million in proceeds from term loans. Contractual Obligations and Commitments Under various agreements, we are obligated to make future cash payments. These include payments under our long-term debt agreements, rent payments required under operating lease agreements, interest obligations on our term loans, and other contractual commitments. 58 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our payments under contractual obligations as ofMarch 31, 2021 : Payments Due by Period Less than More than Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years (in thousands) Operating lease obligations$ 57,890 $ 12,290 $ 22,757 $ 12,637 $ 10,206 First Lien Term Loan - principal (1) 401,125 - - 401,125 - First Lien Term Loan - interest (2) 42,178 9,592 19,210 13,376 - Revolving credit facility (3) - - - - - Total$ 501,193 $ 21,882 $ 41,967 $ 427,138 $ 10,206 ________________ (1) The amounts included in the table above represent principal maturities only. (2) Amounts represent estimated future interest payments on borrowings under our First Lien Term Loan, which were estimated using the interest rate effective atMarch 31, 2021 multiplied by the principal outstanding onMarch 31, 2021 . The First Lien Term Loan consists of$401.1 million currently bearing interest at 2.4%. (3) As ofMarch 31, 2021 , we had no outstanding borrowings under our revolving credit facility,$15.6 million of letters of credit outstanding, and$44.4 million was available for borrowing under our revolving credit facility. As ofMarch 31, 2021 , we had accrued liabilities related to uncertain tax positions, which are reflected in our consolidated balance sheets. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be repaid. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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, goodwill, and impairment of
long-lived assets 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 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,
or 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.
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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, restricted stock units to certain key employees and
non-employee directors. For further information see Note 13 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. Forfeitures
are accounted for in the period in which the awards are forfeited.
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.
The following key assumptions were used to determine the fair value of the MIUs
and AUs during the years ended March 31, 2020 and 2019:
March 31, 2020 March 31, 2019
Expected volatility 35% - 55% 50% - 60%
Expected term (years) 0.5 - 1.25 1.0 - 1.5
Risk-free interest rate 1.86% - 2.09% 2.33% - 2.40%
Subsequent to our IPO, the fair value of each new equity award and purchase
right under the employee stock purchase plan 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 units and
restricted stock awards is based on the closing price of our common stock as
reported on the New York Stock Exchange .
Our use of the Black-Scholes option-pricing model requires that we make
assumptions as to the volatility of our stock options and purchase rights under
our 2019 Employee Stock Purchase Plan, or 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
under the ESPP. 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. 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. 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. We use a dividend yield of zero, as we do not
currently issue dividends, nor do we expect to do so in the future.
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The following key assumptions were used to determine the fair value of the stock
options granted during the years ended March 31, 2021 and 2020:
March 31, 2021 March 31, 2020
Expected volatility 39.3% - 39.8% 37.1% - 38.9%
Expected term (years) 6.1 6.1
Risk-free interest rate 0.4% - 1.1% 0.8% - 1.9%
The following key assumptions were used to determine the fair value of ESPP
purchase rights granted during the years ended
March 31, 2021 March 31, 2020
Expected volatility 35.9% - 55.5% 35.9 %
Expected term (years) 0.5 0.5
Risk-free interest rate 0.1% - 1.6% 1.6 %
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 which 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.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net
tangible and identified net assets acquired. Goodwill and intangible assets that
have indefinite lives are not amortized, but rather tested for impairment
annually, as of January 1 , or more often if and when events or circumstances
indicate that the carrying value may not be recoverable. Goodwill impairment, if
any, is determined by comparing the reporting unit's fair value to its carrying
value. An impairment loss is recognized in an amount equal to the excess of the
reporting unit's carrying value over its fair value, up to the amount of
goodwill allocated to the reporting unit. There were no impairments of goodwill
during the years ended March 31, 2021 , 2020, and 2019.
For the purpose of testing goodwill for impairment, all goodwill acquired in a
business combination is assigned to one or more reporting units. A reporting
unit represents an operating segment or a component within an operating segment
for which discrete financial information is available and is regularly reviewed
by segment management for performance assessment and resource allocation.
Components of similar economic characteristics are aggregated into one reporting
unit for the purpose of goodwill impairment assessment. Reporting units are
identified annually and re-assessed periodically for recent acquisitions or any
changes in segment reporting structure. We have determined that we operate as
one reporting unit.
The fair value of a reporting unit is generally determined using a combination
of the income approach and the market approach. For the income approach, fair
value is determined based on the present value of estimated future after-tax
cash flows, discounted at an appropriate risk-adjusted rate.
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Table of Contents We use our internal forecasts to estimate future after-tax cash flows and estimate the long-term growth rates based on our most recent views of the long-term outlook for each reporting unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the weighted average cost of capital. We adjust the discount rates for the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. For the market approach, we use a valuation technique in which values are derived based on valuation multiples of comparable publicly traded companies. We assess each valuation methodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately. Impairment of Long-Lived Assets Long-lived assets, including amortized intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. We estimate fair value using discounted cash flows and other market-related valuation models, including earnings multiples and comparable asset market values. If circumstances change or events occur to indicate that our fair market value has fallen below book value, then we will compare the estimated fair value of long-lived assets (including goodwill) to its book value. If the book value exceeds the estimated fair value, we will recognize the difference as an impairment loss in our consolidated statements of operations. We did not incur any impairment losses during the years endedMarch 31, 2021 , 2020, and 2019. 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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