Dynatrace Inc

(Unaudited)

1. Description of the Business

Business

Dynatrace, Inc. (“Dynatrace”, or the “Company”) designed its unified observability and security platform with analytics and automation at its core to address the growing complexity faced by technology and digital business teams as these enterprises further embrace the cloud to effect their digital transformation. Artificial intelligence and continuous automation deliver precise answers about the performance and security of applications, the underlying infrastructure, and the experience of its customers’ users that enable organizations to innovate faster, operate more efficiently, and improve user experiences for consistently better business outcomes.

Fiscal year

The Company’s fiscal year ends on March 31. References to fiscal 2024, for example, refer to the fiscal year ending March 31, 2024.

2. Significant Accounting Policies

Basis of presentation and consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

Unaudited interim consolidated financial information

The accompanying interim condensed consolidated balance sheet as of December 31, 2023 and the interim condensed consolidated statements of operations, statements of comprehensive income, and statements of shareholders’ equity for the three and nine months ended December 31, 2023 and 2022, statements of cash flows for the nine months ended December 31, 2023 and 2022, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of December 31, 2023, its results of operations for the three and nine months ended December 31, 2023 and 2022, and its cash flows for the nine months ended December 31, 2023 and 2022 in accordance with U.S. GAAP. The results for the three and nine months ended December 31, 2023 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (the “Annual Report”).

Reclassification

During the fourth quarter of fiscal 2023, the Company refined its methodology used to allocate depreciation expense for certain property and equipment to better align the expense with the related use of property and equipment. This change in allocating depreciation expense has been applied retrospectively to April 1, 2022, and had no impact on the Company’s income from operations and net income. Prior period amounts have been reclassified to conform to the current period presentation.

The following table presents the effect of the reclassification and the impact on the Company’s condensed consolidated statements of operations (in thousands):

Use of estimates

The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, the Company makes estimates with respect to the stand-alone selling price for each distinct performance obligation in customer contracts with multiple performance obligations, the allowance for credit losses, the fair value of tangible and intangible assets acquired, the valuation of long-lived assets, the period of benefit for deferred commissions and material rights, income taxes, equity-based compensation expense, and the determination of the incremental borrowing rate used for operating lease liabilities, among other things. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

Significant accounting policies

The Company’s significant accounting policies are discussed in Note 2, Significant Accounting Policies, to the audited consolidated financial statements in the Company’s Annual Report. There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report that have had a material impact on its condensed consolidated financial statements and related notes.

Recently issued accounting pronouncements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in the income tax rate reconciliation table and disaggregates the income taxes paid by jurisdiction. ASU 2023-09 will be effective for annual periods beginning after December 15, 2024, which will be the Company’s fiscal 2026. The Company is currently evaluating the impact of the ASU on its income tax disclosures within the consolidated financial statements and related disclosures.

3. Revenue Recognition

Disaggregation of revenue

The following table is a summary of the Company’s total revenue by geographic region (in thousands, except percentages):

For the three and nine months ended December 31, 2023 and 2022, the United States was the only country that represented more than 10% of the Company’s revenue in any period, constituting $206.1 million and 56% and $169.7 million and 57% of total revenue during the three months ended December 31, 2023 and 2022, respectively, and $591.9 million and 56% and $475.5 million and 56% of total revenue during the nine months ended December 31, 2023 and 2022, respectively.

Deferred revenue

Revenue recognized during the three months ended December 31, 2023 and 2022, which was included in the deferred revenue balance at the beginning of each respective period, was $311.5 million and $253.1 million, respectively. Revenue recognized during the nine months ended December 31, 2023 and 2022, which was included in the deferred revenue balance at the beginning of each respective period, was $712.3 million and $569.3 million, respectively.

Remaining performance obligations

As of December 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,956.4 million, which consists of both billed consideration in the amount of $795.6 million and unbilled consideration in the amount of $1,160.8 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 60% of the total remaining performance obligations as revenue over the next 12 months and the remainder thereafter.

Contract assets

As of December 31, 2023 and March 31, 2023, contract assets of $11.5 million and $0.4 million, respectively, are included in accounts receivable, net, on the Company’s condensed consolidated balance sheets.

4. Acquisitions

On August 31, 2023, the Company acquired 100% of the outstanding equity of Rookout, Ltd. (“Rookout”). Rookout is a provider of enterprise-ready and privacy-aware solutions that enable developers to troubleshoot and debug actively running code in Kubernetes-hosted cloud-native applications. This acquisition expands the Company’s unified observability and security platform from the addition of Rookout’s technology and experienced team.

The preliminary purchase consideration of Rookout was $33.4 million, after considering certain adjustments, and was paid from cash on hand. The preliminary purchase consideration is subject to a final post-closing adjustment.

The acquisition of Rookout has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their estimate fair value as of the acquisition date. The purchase consideration was allocated to the tangible assets and liabilities acquired as of the acquisition date, with the excess recorded to goodwill as shown below (in thousands).

The fair value of assets and liabilities acquired may change as additional information is received during the measurement period. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.

Goodwill is primarily attributable to expected synergies and acquired skilled workforce. The goodwill was allocated to the Company’sone reporting unit. The Company identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology was $7.8 million, which was based on a valuation using the income approach and is classified as capitalized software on the condensed consolidated balance sheet. The estimated useful life of the developed technology isseven years. The acquired goodwill and intangible asset were not deductible for tax purposes.

The operating results of Rookout from the date of acquisition, which are not material, have been included in the Company’s condensed consolidated statements of operations. The transaction costs related to the Rookout acquisition were $0.1 million and $2.5 million for the three and nine months ended December 31, 2023, respectively, and are included in general and administrative expense on the condensed consolidated statements of operations.

5. Goodwill and Other Intangible Assets, Net

Changes in the carrying amount of goodwill for the nine months ended December 31, 2023 consists of the following (in thousands):

Other intangible assets, net, excluding goodwill, consists of the following (in thousands):

Amortization of other intangible assets totaled $9.9 million and $10.5 million for the three months ended December 31, 2023 and 2022, respectively, and $29.1 million and $31.6 million for the nine months ended December 31, 2023 and 2022, respectively.

On November 9, 2023, the Company entered into a license agreement with an application security provider for certain software and developed technology for $10.0 million, of which $3.4 million was paid at closing and the remainder is to be paid over 12 quarterly installments of $0.6 million. Additionally, the Company capitalized $0.3 million in related transaction costs for a total consideration of $10.3 million, which is classified as capitalized software on the condensed consolidated balance sheet. As of December 31, 2023, the Company has paid $3.7 million for the licensed software and developed technology. The licensed software and developed technology will be amortized over its useful life.

6. Income Taxes

The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended December 31, 2023 was (0.6)% compared to 51.1% for the three months ended December 31, 2022. The Company’s effective tax rate for the nine months ended December 31, 2023 was 6.5% compared to 56.8% for the nine months ended December 31, 2022. The decrease in the effective tax rate for both the three months ended December 31, 2023 and the nine months ended December 31, 2023 was primarily due to an increase in share-based compensation windfall benefits, additional tax benefits related to the deferred tax asset resulting from capitalized research and development expenses under Section 174 of the Internal Revenue Code recognized in the current year due to the reversal of the U.S. valuation allowance as of March 31, 2023, and the reversal of an unrecognized tax benefit in the U.S.

7. Long-term Debt

On December 2, 2022, the Company entered into a Credit Agreement for a senior secured revolving credit facility (the “Credit Facility”) in an aggregate amount of $400.0 million. The Credit Facility has sublimits for swing line loans up to $30.0 million and for the issuance of standby letters of credit in a face amount up to $45.0 million. The Credit Facility will mature on December 2, 2027. As of December 31, 2023 and March 31, 2023, there wereno amounts outstanding under the Credit Facility. There were $12.1 million and $15.5 million of letters of credit issued as of December 31, 2023 and March 31, 2023, respectively. The Company had $387.9 million and $384.5 million of availability under the Credit Facility as of December 31, 2023 and March 31, 2023, respectively.

Borrowings under the Credit Facility are available in U.S. dollars, Euros, Pounds Sterling and Canadian Dollars, with a sublimit of $100.0 million for non-U.S. dollar-denominated borrowings. Borrowings under the Credit Agreement currently bear interest at (i) the Term Secured Overnight Financing Rate plus 0.10%, (ii) the Adjusted Euro Interbank Offer Rate, (iii) the Canadian Dollar Offered Rate, (iv) the Base Rate, as defined per the Credit Agreement, or (v) the Sterling Overnight Index Average, in each case plus an applicable margin as defined per the Credit Agreement. Interest payments are due quarterly, or more frequently, based on the terms of the Credit Agreement.

The Company incurs fees with respect to the Credit Facility, including (i) a commitment fee ranging from 0.175% to 0.35% per annum, dependent on the Company’s leverage ratio, as defined per the Credit Agreement, of the unused commitment under the Credit Facility, (ii) a fronting fee of 0.125% per annum of the face amount of each letter of credit, (iii) a participation fee equal to the applicable margin, as defined per the Credit Agreement, applied to the daily average face amount of letters of credit, and (iv) customary administrative fees.

Debt issuance costs of $1.9 million were incurred in connection with the Credit Facility. The debt issuance costs are included within “Other assets” in the condensed consolidated balance sheets and are being amortized into interest expense over the contractual term of the Credit Facility. There were $1.5 million and $1.8 million of unamortized debt issuance costs as of December 31, 2023 and March 31, 2023, respectively.

Pursuant to the Credit Agreement, obligations owed under the Credit Facility are secured by a first priority security interest on substantially all assets of Dynatrace LLC, a wholly owned subsidiary of the Company, including a pledge of the capital stock and other interests of certain subsidiaries. Under certain circumstances, the guarantees may be released without action by, or consent of, the holder of the Credit Facility. The Credit Agreement contains customary affirmative and negative covenants, including financial covenants that require the Company to maintain specified financial ratios. At December 31, 2023, the Company was in compliance with all applicable covenants.

First lien credit facilities

The Company’s former First Lien Credit Agreement, as amended, provided for a term loan facility (the “First Lien Term Loan”) in an aggregate principal amount of $950.0 million and a senior secured revolving credit facility (the “Revolving Facility”), in an aggregate amount of $60.0 million. The Revolving Facility included a $25.0 million letter of credit sub-facility. Borrowings under the First Lien Term Loan and Revolving Facility bore interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 1.25% per annum, or (ii) LIBOR plus 2.25% per annum. The maturity date on the First Lien Term Loan and Revolving Facility was August 23, 2025 and August 23, 2023, respectively, with payment due in full on the maturity date. Interest payments were due quarterly, or more frequently, based on the terms of the credit agreement.

During the three months ended December 31, 2022, the Company terminated the First Lien Credit Agreement and repaid all outstanding borrowings, including accrued interest. The Company recognized a loss on debt extinguishment of $5.9 million within “Interest expense, net” in the condensed consolidated statements of operations for the three and nine months ended December 31, 2022.

8. Leases

The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2024 to 2033. As of December 31, 2023, the weighted average remaining lease term was 5.9 years and the weighted average discount rate was 4.5%. The Company did not have any finance leases as of December 31, 2023.

The Company has a sublease of a former office which expires in fiscal 2025. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $0.6 million for the three months ended December 31, 2023 and 2022, and $1.7 million for the nine months ended December 31, 2023 and 2022.

The following table presents information about leases on the condensed consolidated statements of operations (in thousands):

(1)Presented gross of sublease income.

The following table presents supplemental cash flow information about the Company’s leases (in thousands):

(1)Includes the impact of new leases as well as remeasurements and modifications of existing leases.

As of December 31, 2023, remaining maturities of lease liabilities were as follows (in thousands):

(1)Presented gross of sublease income.

As of December 31, 2023, the Company had commitments of $78.8 million for operating leases that have not yet commenced and therefore are not included in the right-of-use assets or operating lease liabilities. These operating leases are expected to commence during fiscal 2025 through 2026 with a weighted average lease term of 10 years.

9. Commitments and Contingencies

Legal matters

The Company is, from time to time, party to legal proceedings and subject to claims in the ordinary course of business. Although the outcome of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the resolution of any such matters will not have a material adverse effect on its business, operating results, financial condition, or cash flows.

10. Share-based Compensation

Amended and Restated 2019 Equity Incentive Plan

In July 2019, the Company’s board of directors (the “Board”), upon the recommendation of the compensation committee of the Board, adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which was subsequently approved by the Company’s stockholders and was later amended and restated by the Board in January 2021.

The Company initially reserved 52,000,000 shares of common stock for the issuance of awards under the 2019 Plan. The 2019 Plan provides that the number of shares reserved and available for issuance under the plan automatically increases each April 1, beginning on April 1, 2020, by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of December 31, 2023,50,228,181 shares of common stock were available for future issuance under the 2019 Plan.

Stock options

The following table summarizes activity for stock options during the nine months ended December 31, 2023:

As of December 31, 2023, the total unrecognized compensation expense related to non-vested stock options was $2.6 million and is expected to be recognized over a weighted average period of 0.6 years. The Company recognized $1.3 million and $4.6 million of share-based compensation expense related to stock options for the three months ended December 31, 2023 and 2022, respectively, and $7.0 million and $13.8 million of share-based compensation expense related to stock options for the nine months ended December 31, 2023 and 2022, respectively.

Restricted shares and units

The following table provides a summary of the changes in the number of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) for the nine months ended December 31, 2023:

RSUs outstanding as of December 31, 2023 were comprised of 9.3 million RSUs with only service conditions and 1.0 million RSUs with both service and performance conditions (“PSUs”).

During the nine months ended December 31, 2023, the Company granted PSUs to certain key employees that generally vest 33%one year after the grant date and the remaining 67% vest ratably on a quarterly basis over the followingtwo years (the “Annual PSUs”). The number of shares that may be earned pursuant to the Annual PSUs is based on specific company metrics related to the Company’s fiscal year ending March 31, 2024. No Annual PSUs will be earned with respect to any metric if the applicable “threshold” percentage of the specific metric is not achieved, and the overall number of shares that may be earned shall not exceed 200% of the target award. Once the Annual PSUs are earned, they are then also subject to time-based vesting, with 33% of the earned Annual PSUs vesting on the first anniversary of the grant date, and with the remaining 67% vesting ineight equal quarterly installments over the followingtwo years, and provided that the key employee remains employed by the Company through the applicable vesting date.

As of December 31, 2023, the total unrecognized compensation expense related to unvested restricted stock units was $413.7 million and is to be recognized over a weighted average period of 2.2 years. The Company recognized $52.1 million and $29.0 million of share-based compensation expense related to restricted shares and units for the three months ended December 31, 2023 and 2022, respectively, and $141.4 million and $85.7 million of share-based compensation expense related to restricted shares and units for the nine months ended December 31, 2023 and 2022, respectively.

Employee Stock Purchase Plan

In July 2019, the Board adopted, and the Company’s stockholders approved, the 2019 Employee Stock Purchase Plan (“ESPP”). The Company offers, sells and issues shares of common stock under this ESPP from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under this ESPP. The ESPP provides forsix-month offering periods and each offering period consists ofsix-month purchase periods. On each purchase date, eligible employees purchase shares of the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock on the offering date or (2) the fair market value of the Company’s common stock on the purchase date. For the nine months ended December 31, 2023,534,022 shares of common stock were purchased under the ESPP. As of December 31, 2023,15,864,787 shares of common stock were available for future issuance under the ESPP.

As of December 31, 2023, there was $2.9 million of unrecognized share-based compensation related to the ESPP that is expected to be recognized over the remaining term of the current offering period. The Company recognized $1.5 million and $1.9 million of share-based compensation expense related to the ESPP for the three months ended December 31, 2023 and 2022, respectively, and $4.9 million and $5.4 million of share-based compensation expense related to the ESPP for the nine months ended December 31, 2023 and 2022, respectively.

Share-based compensation

The following table summarizes the components of total share-based compensation expense included in the condensed consolidated financial statements for each period presented (in thousands):

11. Net Income Per Share

Basic net income per share is calculated by dividing the net income for the period by the weighted-average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net income per share includes the dilutive effect of common share equivalents and is calculated using the weighted-average number of common shares and the common share equivalents outstanding during the reporting period. The dilutive effect of stock-based awards is calculated by application of the treasury stock method. An anti-dilutive impact is an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):

The effect of certain common share equivalents were excluded from the computation of weighted-average diluted shares outstanding for the three and nine months ended December 31, 2023 and 2022 as inclusion would have resulted in anti-dilution. A summary of these weighted-average anti-dilutive common share equivalents is provided in the table below (in thousands):

12. Geographic Information

Revenue

Revenues by geography are based on legal jurisdiction. See Note 3, Revenue Recognition, for a disaggregation of revenue by geographic region.

Property and equipment, net

The following table presents net property and equipment by geographic region for the periods presented (in thousands):

13. Subsequent Events

On January 26, 2024, the Company entered into a definitive agreement to acquire a 100% equity interest in Runecast Solutions Limited (“Runecast”) for $37.5 million of preliminary consideration, subject to customary post-closing adjustments. The Company intends to acquire Runecast utilizing a combination of cash on hand and common stock. Runecast is a provider of software solutions that provide insights for security compliance, vulnerability assessment, and configuration management for complex, on-premises, hybrid and multi-cloud IT environments. Closing of the proposed transaction is subject to customary closing conditions.