# Dynatrace, Inc. (DT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Dynatrace, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1773383/000177338324000076/dt-20240331.htm
Accession: 0001773383-24-000076
Filing date: 2024-05-23
Report date: 2024-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DT/
All MD&A years: /company/DT/mda/
Previous year: /company/DT/mda/fy2023/ (FY 2023)
Next year: /company/DT/mda/fy2025/ (FY 2025)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the section titled “Risk Factors” under Part I, Item 1A. in this Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our fiscal year ends on March 31. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Dynatrace offers the only end-to-end unified platform that combines broad and deep observability and continuous runtime application security with advanced AI for IT operations to provide answers and intelligent automation from data at an enormous scale. Our comprehensive solutions help IT, development, security, and business operations teams at global organizations modernize and automate cloud operations, deliver software faster and more securely, and provide significantly improved digital experiences.

Many of the world’s largest organizations trust the Dynatrace platform to accelerate digital transformation. We have been seeing increased demand for large, strategic deals in which customers’ business criteria drive broader technology architecture decisions. At the same time, workloads continue migrating to the cloud as customers seek the agility, flexibility, and rapid technology advancements that can prove elusive in on-premises data center environments. AI has been sweeping across industries and exploding in relevancy and criticality as organizations desire significant advancements in innovation, productivity, and performance. The escalating cybersecurity threat landscape is also increasing the need for more sophisticated protection. The confluence of these megatrends in dynamic hybrid, multicloud environments brings a scale and frequency of change that is exponentially greater than that of just a few years ago. As enterprises and public sector institutions embrace modern cloud environments as the underlying foundation of their business and digital transformations, we believe that the scale, growing complexity, and dynamic nature of these environments are rapidly making solutions such as the Dynatrace platform mandatory instead of optional for many organizations.

We take Dynatrace to market through a combination of our global direct sales team and a network of partners, including GSIs, cloud providers, resellers and technology alliance partners. We target the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion, which we believe see more value from our integrated full-stack platform.

We generate revenue primarily by selling subscriptions, which we define as SaaS agreements, term-based licenses, perpetual licenses, and maintenance and support agreements. The majority of our customers deploy Dynatrace as a SaaS solution to get the latest Dynatrace features and updates with greatly reduced administrative effort. We also provide options to deploy our platform in customer-provisioned infrastructure.

During our fiscal 2024, we introduced a new version of the DPS licensing model which provides customers with more modern pricing with flexibility and transparency. Under the DPS model, a customer makes a minimum annual spend commitment at the platform level and then consumes that commitment based on actual usage and a straightforward rate card. Any platform capability can be used in any quantity at any time based on the customer’s evolving needs.

The Dynatrace platform has been commercially available since 2016 and is the primary offering we sell.

Fiscal 2024 Financial Highlights

We delivered strong fiscal 2024 financial results in a dynamic macroeconomic environment, demonstrating the durability of our business model.

•Our annual recurring revenue (“ARR”) was $1,504 million as of March 31, 2024, which reflected 21% growth year-over-year;

•For the full year ended March 31, 2024, we were once again profitable and delivered solid operating income;

•As of March 31, 2024, we had approximately $883 million of cash, cash equivalents, and investments and no long-term debt; and

•Dynatrace customers increased to approximately 4,000 as of March 31, 2024 from approximately 3,600 as of March 31, 2023.

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We believe in a disciplined and balanced approach to operating our business. We plan to continue driving innovation to meet customers’ needs and grow our customer base. We also plan to invest in future growth opportunities that we expect will drive long-term value, while leveraging our global partner ecosystem, optimizing costs, and improving efficiency and profitability.

We believe this approach is even more important at this time as we navigate the current macroeconomic environment, which can include geopolitical considerations, fluctuations in credit, equity, and foreign currency markets, changes in inflation, interest rates, consumer confidence and spending, and other factors that may affect the buying patterns of our customers and prospective customers, including the size of transactions and length of sales cycles. In the ongoing dynamic macroeconomic landscape, we continue to factor a challenging climate. We have seen resiliency in our industry and we remain confident in our ability to execute in this environment. Please see the section titled “Risk Factors” included under Part I, Item 1A for further discussion of the possible impact of macroeconomic conditions on our business and regarding fluctuations in our annual and quarterly operating results.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

•Extend our technology and market leadership position. We intend to maintain our position as the market-leading unified observability and security platform through increased investment in research and development, and innovation. We plan to expand the functionality of our end-to-end Dynatrace platform and investing in capabilities that address new market opportunities. We also plan to evolve our AI capabilities to drive differentiation. We believe this strategy will enable new growth opportunities and allow us to deliver differentiated high-value outcomes to our customers.

•Expand and strengthen our relationships with existing customers. We plan to establish new and deeper relationships within our existing customers’ organizations (notably, development teams) and expand the breadth of our platform capabilities to provide for expansion opportunities. In addition, we believe the ease of implementation of Dynatrace provides us with the opportunity to expand adoption within our existing enterprise customers, across new customer applications, and into additional business units or divisions. While still in its early stages, we also believe that our DPS licensing model will drive further expansion opportunities for customers that prefer the flexibility and predictability of pricing under that model.

•Grow our customer base. We intend to drive new customer growth through a focus on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion and more complex IT ecosystems and cloud environments. In particular, we are increasing the focus of our sales force on the largest 500 global companies and strategic enterprise accounts. In addition, we plan to expand our reach internationally to what we believe are large, mostly untapped markets for our company, while leveraging our sector specialization globally.

•Leverage our strategic partner ecosystem. We intend to invest in our strategic partner ecosystem, with a particular emphasis on building cloud-focused, loyal and comprehensive partnerships with GSIs and hyperscaler cloud providers. These strategic partners continually work with their customers to help them digitally transform their businesses and reduce cloud complexity. By working more closely with strategic partners, our objective is to participate in digital transformation projects earlier in the purchasing cycle and enable customers to establish more resilient cloud deployments from the start.

Recent Developments

On May 15, 2024, we announced a share repurchase program for up to $500 million of common stock. We are not obligated to acquire a specific number of shares. The repurchase program does not have a time limit and may be suspended, modified, or terminated at any time, without prior notice. We plan on funding repurchases with our current cash and cash equivalents and future cash flows.

Key Metrics

In addition to our U.S. GAAP financial information, we use the following key metrics to help us measure and evaluate our business and performance and to help us identify trends affecting our operations.

[[GREPCENT_TABLE]]
[["","As of March 31,"],["","2024","","2023","","2022"],["Total ARR (in thousands)","$","1,503,819","","","$","1,246,681","","","$","995,121"],["Dollar-based Net Retention Rate","111%","","119%","","120%+"]]
[[/GREPCENT_TABLE]]

Annual Recurring Revenue: We define ARR as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage.

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Dollar-based Net Retention Rate: We define the dollar-based net retention rate as the Dynatrace ARR at the end of a reporting period for the cohort of Dynatrace accounts as of one year prior to the date of calculation, divided by the Dynatrace ARR one year prior to the date of calculation for that same cohort. Our dollar-based net retention rate reflects customer renewals, expansion, contraction and churn, and excludes the benefit of Dynatrace ARR resulting from the conversion of Classic products to the Dynatrace platform. Beginning in fiscal 2023, we began to exclude the headwind associated with the Dynatrace perpetual license ARR given the diminishing impact of perpetual license ARR. We believe that eliminating the perpetual license headwind results in a dollar-based net retention rate metric that better reflects Dynatrace’s ability to expand existing customer relationships. Dollar-based net retention rate is presented on a constant currency basis.

Key Components of Results of Operations

Revenue

Revenue includes subscriptions and services.

Subscription. Our subscription revenue consists of (i) SaaS agreements, (ii) Dynatrace term-based licenses which are recognized ratably over the contract term, (iii) Dynatrace perpetual licenses that are recognized ratably over the term of the expected optional maintenance renewals, which is generally three years, and (iv) maintenance and support agreements. We typically invoice SaaS subscription fees and term licenses annually in advance and recognize subscription revenue ratably over the term of the applicable agreement, provided that all other revenue recognition criteria have been satisfied. Fees for our Dynatrace perpetual licenses are generally billed up front. See the section titled “Critical Accounting Policies and Estimates—Revenue Recognition” for more information.

Service. Service revenue consists of revenue from helping our customers deploy our software in highly complex operational environments and training their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We generally recognize the revenues associated with our services in the period the services are performed, provided that collection of the related receivable is reasonably assured.

Cost of Revenue

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

Cost of service. Cost of service revenue includes salaries, bonuses, 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 the Thoma Bravo Funds’ acquisition of our company in 2014, business combinations and asset acquisitions. To the extent significant future acquisitions are consummated, we expect that our amortization of acquired technologies may increase due to additional non-cash charges associated with the amortization of intangible assets acquired.

Gross Profit and Gross Margin

Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of revenue. Gross profit has been and will continue to be affected by various factors, including the mix of our subscription and service revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors.

Operating Expenses

Personnel costs, which consist of salaries, benefits, bonuses, share-based compensation and, with regard to sales and marketing expenses, sales commissions, are the most significant component of our operating expenses. We also incur other non-personnel costs, such as an allocation of our general overhead expenses, including depreciation of equipment, facilities, IT, and other costs.

During the fourth quarter of fiscal 2023, we refined our methodology used to allocate depreciation expense for certain property and equipment to better align the expense with the related use of the property and equipment. This has been retrospectively applied to fiscal 2023. See Note 2, Significant Accounting Policies, of our audited consolidated financial statements included in this Annual Report for further information.

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Research and development. Research and development expenses primarily consist of the cost of programming personnel. We focus our research and development efforts on developing new solutions, core technologies, and to further enhance the functionality, reliability, performance and flexibility of existing solutions. We believe that our software development teams and our core technologies represent a significant competitive advantage for us and we expect that our research and development expenses will continue to increase in absolute dollars as we invest in research and development headcount to further strengthen and enhance our solutions.

Sales and marketing. Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing, and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to hire additional sales and marketing personnel and invest in marketing programs.

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

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

Interest Income (Expense), Net

Interest income (expense), net, consists primarily of interest income primarily from money market funds, bank deposits, debt securities held as investments and certificates of deposits, interest expense on our former term loan facility, fees on our revolving credit facility, loss on debt extinguishment and amortization of debt issuance costs.

Other (Expense) Income, Net

Other (expense) income, net, consists primarily of foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries.

Income Tax (Expense) Benefit

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Our income tax rate varies from the U.S. federal statutory rate mainly due to (1) the foreign derived intangibles deduction, (2) the generation of U.S. foreign tax credits, and (3) share-based compensation windfalls, partially offset by (4) foreign withholding taxes, (5) nondeductible executive compensation, and (6) foreign earnings taxed at rates higher than the U.S. statutory rate. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue.

Internal Revenue Code (“IRC”) Section 174

For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section 174. This law change increases our U.S. federal and state cash taxes and reduces cash flows in fiscal year 2024 and future years.

Share-based compensation

The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which our share price differs from the grant price of the share-based awards vesting or exercised in that period, we will recognize excess tax benefits or deficiencies that will impact our effective tax rate. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on our share price, which we do not control, and a decline in our share price could significantly increase our effective tax rate and adversely affect our financial results.

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Results of Operations

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

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[[/GREPCENT_TABLE]]

_________________

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

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,"],["","2024","","2023","","2022"],["","(in thousands)"],["Cost of revenue","$","26,622","","","","","$","18,383","","","","","$","12,863"],["Research and development","69,543","","","","","41,406","","","","","21,316"],["Sales and marketing","65,762","","","","","51,147","","","","","35,957"],["General and administrative","46,969","","","","","35,938","","","","","29,400"],["Total share-based compensation expense","$","208,896","","","","","$","146,874","","","","","$","99,536"]]
[[/GREPCENT_TABLE]]

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Fiscal Years Ended March 31, 2024 and 2023

Revenue

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,","","Change"],["","2024","","2023","","Amount","","Percent"],["","(in thousands, except percentages)"],["Subscription","$","1,359,354","","","$","1,083,330","","","$","276,024","","","25","%"],["Service","71,176","","","75,200","","","(4,024)","","","(5","%)"],["Total revenue","$","1,430,530","","","$","1,158,530","","","$","272,000","","","23","%"]]
[[/GREPCENT_TABLE]]

Subscription

Subscription revenue increased by $276.0 million, or 25%, for the year ended March 31, 2024, as compared to the year ended March 31, 2023, primarily due to the growing adoption of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions. Changes in foreign currency exchange rates positively impacted our revenue by $14.1 million.

Service

Service revenue decreased by $4.0 million, or 5%, for the year ended March 31, 2024, as compared to the year ended March 31, 2023. The decrease was primarily due to timing of delivery of services.

Cost of Revenue

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Cost of subscription

Cost of subscription increased by $40.3 million, or 28%, for the year ended March 31, 2024 as compared to the year ended March 31, 2023. The increase was primarily due to higher personnel costs of $15.5 million to support the growth of our subscription cloud-based and higher share-based compensation expense of $7.0 million. Also contributing to the increase were higher cloud-based hosting costs and subscriptions of $12.2 million to support the growth of the business and related infrastructure and higher depreciation expense of $3.1 million.

Cost of service

Cost of service increased by $2.5 million, or 4%, for the year ended March 31, 2024 as compared to the year ended March 31, 2023. The increase was primarily the result of increased professional fees of $2.7 million and higher share-based compensation expense of $1.3 million. Slightly offsetting this increase were third-party professional services of $1.5 million.

Amortization of acquired technologies

For the years ended March 31, 2024 and 2023, amortization of acquired technologies was primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of our company in 2014.

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Gross Profit and Gross Margin

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Subscription

Subscription gross profit increased by $235.7 million, or 25%, during the year ended March 31, 2024 compared to the year ended March 31, 2023. Subscription gross margin decreased from 87% to 86% of total gross margin during the years ended March 31, 2024 and March 31, 2023. The increase in gross profit was primarily due to the growth of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions.

Service

Service gross profit decreased by $6.6 million, or 53%, during the year ended March 31, 2024 compared to the year ended March 31, 2023. Service gross margin decreased from 16% to 8% of total gross margin during the year ended March 31, 2024 compared to the year ended March 31, 2023. The decrease in gross profit and gross margin was primarily due to higher personnel and share-based compensation expense.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,","","Change"],["","2024","","2023","","Amount","","Percent"],["","(in thousands, except percentages)"],["Operating expenses:"],["Research and development","$","304,739","","","$","218,349","","","$","86,390","","","40","%"],["Sales and marketing","534,233","","","448,015","","","86,218","","","19","%"],["General and administrative","174,412","","","150,172","","","24,240","","","16","%"],["Amortization of other intangibles","22,293","","","26,292","","","(3,999)","","","(15","%)"],["Total operating expenses","$","1,035,677","","","$","842,828","","","$","192,849","","","23","%"]]
[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased $86.4 million, or 40%, for the year ended March 31, 2024 as compared to the year ended March 31, 2023. The increase was primarily due to increased personnel and other costs to expand our product offerings of $51.8 million, and higher share-based compensation expense of $28.1 million. Also contributing to the increase were higher cloud-based hosting costs of $7.2 million.

Sales and marketing

Sales and marketing expenses increased by $86.2 million, or 19%, for the year ended March 31, 2024, as compared to the year ended March 31, 2023, primarily driven by increased personnel costs of $50.4 million and higher share-based compensation expense of $14.6 million. Also contributing to the increase was higher commission expense of $14.4 million and increased advertising costs of $8.8 million.

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General and administrative

General and administrative expenses increased by $24.2 million, or 16%, for the year ended March 31, 2024, as compared to the year ended March 31, 2023, primarily due to higher share-based compensation expense of $11.0 million. Also contributing to the increase were higher professional fees of $7.9 million and higher IT expenses of $6.3 million.

Amortization of other intangibles

Amortization of other intangibles decreased by $4.0 million, or 15%, for the year ended March 31, 2024 as compared to the year ended March 31, 2023. The decrease was 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.

Interest Income (Expense), Net

Interest income, net, was $37.3 million for the year ended March 31, 2024, compared to an expense of $3.4 million for the year ended March 31, 2023. The change was primarily the result of higher interest rates on our cash, cash equivalents, and investments coupled with lower interest expense due to the repayment of outstanding debt in fiscal year 2023.

Other (Expense) Income, Net

Other expense, net, increased by $11.3 million for the year ended March 31, 2024 as compared to the year ended March 31, 2023. The change was primarily the result of foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries.

Income Tax (Expense) Benefit

Income tax benefit decreased by $18.3 million resulting in an expense of $0.3 million for the year ended March 31, 2024, as compared to a benefit of $18.0 million for the year ended March 31, 2023. For the year ended March 31, 2024, a reversal of uncertain tax position resulted in a benefit of $14.8 million. For the year ended March 31, 2023, the net reduction of the valuation allowance recorded against global deferred tax assets results in a benefit of $32.6 million.

Fiscal Years Ended March 31, 2023 and 2022

Revenue

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,","","Change"],["","2023","","2022","","Amount","","Percent"],["","(in thousands, except percentages)"],["Subscription","$","1,083,330","","","$","870,439","","","$","212,891","","","24","%"],["Service","75,200","","","59,006","","","16,194","","","27","%"],["Total revenue","$","1,158,530","","","$","929,445","","","$","229,085","","","25","%"]]
[[/GREPCENT_TABLE]]

Subscription

Subscription revenue increased by $212.9 million, or 24%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022, primarily due to the growing adoption of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions. Changes in foreign currency exchange rates negatively impacted our revenue by $41.9 million. Our subscription revenue remained consistent at 94% of total revenue for the years ended March 31, 2023 and 2022.

Service

Service revenue increased by $16.2 million, or 27%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022. We generally recognize the revenues associated with professional services as we deliver the services. The increase was in line with the growing adoption of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions.

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Cost of Revenue

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[[/GREPCENT_TABLE]]

Cost of subscription

Cost of subscription increased by $32.8 million, or 29%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022. The increase was primarily due to higher personnel costs to support the growth of our subscription cloud-based offering of $17.1 million and higher cloud-based hosting costs and subscriptions of $6.2 million. Also contributing to the increase were higher share-based compensation expense of $4.6 million and increased allocated overhead costs of $3.2 million.

Cost of service

Cost of service increased by $17.2 million, or 38%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022. The increase was primarily the result of higher personnel and resourcing costs of $12.3 million. Also contributing to the increase were increased advertising costs of $1.3 million, increased allocated overhead costs of $1.2 million, and higher share-based compensation expense of $0.9 million.

Amortization of acquired technologies

For the years ended March 31, 2023 and 2022, amortization of acquired technologies was primarily related to amortization expense for technology acquired in connection with Thoma Bravo’s acquisition of our company in 2014.

Gross Profit and Gross Margin

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Subscription

Subscription gross profit increased by $180.1 million, or 24%, during the year ended March 31, 2023 compared to the year ended March 31, 2022. Subscription gross margin remained consistent at 87% of total gross margin during the years ended March 31, 2023 and 2022. The increase in gross profit was primarily due to the growth of the Dynatrace platform by new customers combined with existing customers expanding their use of our solutions.

Service

Service gross profit decreased by $1.0 million, or 7%, during the year ended March 31, 2023 compared to the year ended March 31, 2022. Service gross margin decreased from 23% to 16% of total gross margin during the year ended March 31, 2023 compared to the year ended March 31, 2022. The decrease in gross profit and gross margin was primarily due to the higher personnel and share-based compensation costs.

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Operating Expenses

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,","","Change"],["","2023","","2022","","Amount","","Percent"],["","(in thousands, except percentages)"],["Operating expenses:"],["Research and development","$","218,349","","","$","156,342","","","$","62,007","","","40","%"],["Sales and marketing","448,015","","","362,116","","","85,899","","","24","%"],["General and administrative","150,172","","","126,647","","","23,525","","","19","%"],["Amortization of other intangibles","26,292","","","30,157","","","(3,865)","","","(13","%)"],["Total operating expenses","$","842,828","","","$","675,262","","","$","167,566","","","25","%"]]
[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased by $62.0 million, or 40%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022. The increase was primarily due to increased personnel and other costs to expand our product offerings of $29.2 million, and higher share-based compensation expense of $20.1 million. Also contributing to the increase were higher allocated overhead costs of $9.8 million, higher travel expenses of $1.6 million, and increased cloud-based hosting costs of $1.5 million.

Sales and marketing

Sales and marketing expenses increased by $85.9 million, or 24%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022, primarily driven by increased personnel costs of $51.7 million and higher share-based compensation expense of $15.2 million. Also contributing to the increase were increased travel expenses of $9.0 million, higher commissions of $8.8 million, and higher allocated overhead costs of $7.0 million.

General and administrative

General and administrative expenses increased by $23.5 million, or 19%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022, primarily due to increased personnel costs of $19.9 million and higher share-based compensation expense of $6.5 million. Also contributing to the increase were higher professional fees of $5.6 million, and higher IT and facilities expenses of $4.1 million related to new offices and expansions. Partially offsetting the increase were increased corporate allocations, in part due to the allocation of depreciation and amortization.

Amortization of other intangibles

Amortization of other intangibles decreased by $3.9 million, or 13%, for the year ended March 31, 2023, as compared to the year ended March 31, 2022. The decrease was 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.

Interest Expense, Net

Interest expense, net, was $3.4 million for the year ended March 31, 2023 compared to $10.2 million for the year ended March 31, 2022. The decline was primarily the result of higher interest income on cash and cash equivalents and lower interest expense due to the reduction in debt. The loss on our debt extinguishment was also slightly offset by interest income.

Other Income, Net

Other income, net, was $0.6 million for the year ended March 31, 2023, as compared to $0.5 million for the year ended March 31, 2022. The change was primarily the result of foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries.

Income Tax Benefit (Expense)

Income tax expense decreased by $37.2 million resulting in a benefit of $18.0 million for the year ended March 31, 2023, as compared to an expense of $19.2 million for the year ended March 31, 2022. This decrease was primarily due to a $32.6 million net reduction to the valuation allowance recorded against global deferred tax assets.

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Liquidity and Capital Resources

We have historically maintained a disciplined and balanced approach to optimizing costs and improving the efficiency and profitability of our business, while continuing to invest in future growth opportunities that we expect will drive long-term value. Our principal sources of liquidity are cash and cash equivalents, marketable securities (investments) and cash provided by operating activities. From time to time, we may borrow under our revolving credit facility. As of March 31, 2024, we had $779.0 million of cash and cash equivalents, $104.2 million in investments, consisting of U.S. Treasury securities that have maturities between one and 28 months, and $399.2 million available under our revolving credit facility.

We have historically 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.

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 billings and revenue mix may vary over time due to a number of factors, including the mix of subscriptions and services and the contract length of our customer agreements. Such variability in the timing and amounts of our billings could impact the timing of our cash collections from period to period.

Our material cash requirements from known contractual and other obligations consist of our rent payments required under operating lease agreements and non-cancelable purchase obligations for cloud hosting support. As of March 31, 2024, total contractual commitments were $421.4 million, with $156.2 million committed within the next 12 months. For further information regarding our contractual commitments, see Note 13, Commitments and Contingencies, of our audited consolidated financial statements included in this Annual Report.

On May 15, 2024, we announced a share repurchase program for up to $500 million of common stock. For additional information, see the "Overview - Recent Developments" section of this management's discussion and analysis.

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, investments, funds available under our revolving credit facility, and cash generated from operations, will be sufficient to meet our cash requirements for at least the next 12 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 Facility

In December 2022, we entered into a senior secured revolving credit facility in an aggregate amount of $400.0 million (the “Credit Facility”). As of March 31, 2024, we had $399.2 million available under the Credit Facility with $0.8 million of letters of credit outstanding. As of March 31, 2024, we were in compliance with all applicable covenants pertaining to the Credit Facility. The Credit Facility is discussed further in Note 11, Long-term Debt, of our audited consolidated financial statements included in this Annual Report.

Summary of Cash Flows

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2024","","2023","","2022"],["","","(in thousands)"],["Net cash provided by operating activities(1)","","$","378,109","","","$","354,885","","","$","250,917"],["Net cash used in investing activities","","(193,048)","","","(21,540)","","","(30,890)"],["Net cash provided by (used in) financing activities","","50,663","","","(232,344)","","","(80,664)"],["Effect of exchange rate changes on cash and cash equivalents","","(12,089)","","","(8,620)","","","(1,358)"],["Net increase in cash and cash equivalents","","$","223,635","","","$","92,381","","","$","138,005"]]
[[/GREPCENT_TABLE]]

_________________

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

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[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2024","","2023","","2022"],["","","(in thousands)"],["Cash paid for interest","","$","851","","","$","7,109","","","$","8,375"],["Cash paid for tax (received from), net","","$","81,360","","","$","(14,311)","","","$","24,247"]]
[[/GREPCENT_TABLE]]

Operating Activities

For the year ended March 31, 2024, cash provided by operating activities was $378.1 million as a result of net income of $154.6 million, and adjusted by non-cash charges of $215.1 million and a change of $8.3 million in our operating assets and liabilities. The non-cash charges were primarily comprised of share-based compensation of $208.9 million and depreciation and amortization of $54.9 million, partially offset by deferred income taxes of $59.9 million. The change in our net operating assets and liabilities was primarily the result of an increase in deferred revenue of $202.2 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 $37.9 million driven by the timing of payments. These changes were partially offset by an increase in accounts receivable of $161.9 million due to the timing of receipts of payments from customers, an increase in prepaid expenses and other assets of $47.4 million driven by timing of payments made in advance of future service, and an increase in deferred commissions of $23.5 million due to commissions paid on new bookings.

For the year ended March 31, 2023, cash provided by operating activities was $354.9 million as a result of net income of $108.0 million, and adjusted by non-cash charges of $148.9 million and a change of $92.1 million in our operating assets and liabilities. The non-cash charges were primarily comprised of share-based compensation of $146.9 million and depreciation and amortization of $54.6 million, partially offset by deferred income taxes of $53.5 million. The change in our net operating assets and liabilities was primarily the result of an increase in deferred revenue of $145.5 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 $58.7 million driven by the timing of payments, and a decrease in prepaid expenses and other assets of $26.8 million driven by timing of an income tax refund and timing of payments made in advance of future services. These changes were partially offset by an increase in accounts receivable of $94.9 million due to the timing of receipts of payments from customers and an increase in deferred commissions of $45.2 million due to commissions paid on new bookings.

For the year ended March 31, 2022, cash provided by operating activities was $250.9 million as a result of a 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 were 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 made in advance of future services.

Investing Activities

Cash used in investing activities during the year ended March 31, 2024 was $193.0 million as a result of purchases of investments of $104.2 million, cash paid for business combination acquisitions of $57.1 million, purchases of property and equipment of $26.5 million, and capitalized software additions of $5.3 million.

Cash used in investing activities during the year ended March 31, 2023 was $21.5 million as a result of purchases of property and equipment.

Cash used in investing activities during the year ended March 31, 2022 was $30.9 million as a result of purchases of property and equipment of $17.7 million and cash paid for business combination acquisitions of $13.2 million.

Financing Activities

Cash provided by financing activities during the year ended March 31, 2024 was $50.7 million as a result of proceeds from the exercise of our stock options of $31.2 million and proceeds from our employee stock purchase plan of $19.5 million.

Cash used in financing activities during the year ended March 31, 2023 was $232.3 million, primarily as a result of repayments of our term loans of $281.1 million, partially offset by proceeds from the exercise of our stock options of $32.9 million and proceeds from our employee stock purchase plan of $17.8 million.

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

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, 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, Significant Accounting Policies, of our audited consolidated financial statements included 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 and (ii) 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 (“SSP”). We determine 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.

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 consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and income tax bases of assets and liabilities and net operating loss and tax 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.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred taxes will not be realized. 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 record uncertain tax positions on a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon

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ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

Business Combinations

We use our best estimates and assumptions to allocate the fair value of purchase price to the assets acquired and liabilities assumed. The excess of the fair value of purchase price over the fair values of the identifiable assets and liabilities is recorded as goodwill. We apply judgment in determining the fair value of the intangible assets acquired, which involves the use of estimates and assumptions with respect to future expected cash flows, expected asset lives, discount rates, revenue growth rates, and royalty rates. Management bases these estimates on historical experience and various other assumptions that we believe are reasonable. 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.

Recent Accounting Pronouncements

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