Dynatrace Inc

(Unaudited)

1. Description of the Business

Business

Dynatrace, Inc. (“Dynatrace”, or the “Company”) offers the only end-to-end platform that combines broad and deep observability and continuous runtime application security with advanced artificial intelligence (“AI”) for IT operations to provide answers and intelligent automation from data at an enormous scale. The Company’s 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.

Fiscal year

The Company’s fiscal year ends on March 31. References to fiscal 2025, for example, refer to the fiscal year ending March 31, 2025.

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 June 30, 2024 and the interim condensed consolidated statements of operations, statements of comprehensive income, statements of shareholders’ equity, and statement of cash flows for the three months ended June 30, 2024 and 2023 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 June 30, 2024 and its results of operations and cash flows for the three months ended June 30, 2024 and 2023 are in accordance with U.S. GAAP. The results for the three months ended June 30, 2024 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, 2024 (the “Annual Report”).

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 amounts reported in the condensed consolidated financial statements and accompanying notes. Management 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 assets acquired and liabilities assumed in business combinations, 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. Management bases these estimates on historical experiences and on various other assumptions that the Company believes are reasonable. 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 November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and application of all segment disclosure requirement to entities with a single reportable segment. ASU 2023-07 is effective for the Company’s annual periods beginning fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. The Company is currently evaluating the impact ASU 2023-07 will have on its financial statement disclosures.

In December 2023, the FASB issued 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 ASU 2023-09 on its financial statement 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):

The United States was the only country that represented more than 10% of the Company’s revenue, constituting $227.9 million and 57% and $188.0 million and 56% of total revenue during the three months ended June 30, 2024 and 2023, respectively.

Revenue recognized during the three months ended June 30, 2024 and 2023, which was included in the deferred revenue balance at the beginning of each respective period, was $358.3 million and $297.3 million, respectively.

Remaining performance obligations

As of June 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $2,322.9 million, which consists of both billed consideration in the amount of $914.3 million and unbilled consideration in the amount of $1,408.6 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 55% of the total remaining performance obligations as revenue over the next 12 months and the remainder thereafter.

Contract assets

As of June 30, 2024 and March 31, 2024, contract assets of $5.1 million and $5.2 million, respectively, are included in accounts receivable, net, on the Company’s condensed consolidated balance sheets.

4. Business Combinations

Rookout, Ltd.

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 expanded the Company’s unified observability and security platform from the addition of Rookout’s technology and experienced team. The purchase consideration of Rookout was $33.4 million, after considering certain adjustments, and was paid from cash on hand.

The fair value of the purchase price was allocated to the identifiable assets acquired and liabilities assumed as of the acquisition date, with the excess recorded to goodwill. The Company acquired $6.0 million net assets, including $7.8 million of intangible assets, resulting in goodwill of $27.4 million. The preliminary fair value of certain acquired assets and assumed liabilities are subject to subsequent adjustment as additional information is obtained to finalize certain components of working capital and deferred income taxes.

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.

Runecast Solutions Limited

On March 1, 2024, the Company acquired a 100% equity interest in Runecast Solutions Limited (“Runecast”). 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. This acquisition expanded the Company’s unified observability and security platform from the addition of Runecast’s technology and experienced team.

The preliminary purchase consideration consisted of $26.1 million cash paid at closing and $2.3 million in deferred cash payments. The deferred cash payments will be held by the Company to satisfy indemnification obligations and post-closing purchase price adjustments payable within 15 months after the acquisition date. During the three months ended June 30, 2024, the Company paid $0.1 million for the post-closing purchase price adjustment.

In connection with the acquisition of Runecast, per the purchase agreement, $9.0 million of restricted stock awards (“RSAs”) will be issued to the previous owners subject to continuing employment and certain indemnification clauses. The RSAs are considered share-based compensation expense and $0.9 million was recognized in the three months ended June 30, 2024.

The fair value of the purchase price was allocated to the identifiable assets acquired and assumed acquired as of the acquisition date, with the excess recorded to goodwill. The Company acquired $3.2 million net assets, including $7.5 million intangible assets, resulting in goodwill of $25.2 million. The preliminary fair value of assets acquired and liabilities assumed may change as additional information is received during the measurement period.

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 and customer relationships as the acquired intangible assets. The estimated fair value of the developed technology and customer relationships was $7.3 million and $0.2 million, respectively, which was based on a valuation using the income approach. The estimated useful lives of the developed technology and customer relationships isseven years andfour years, respectively. The acquired goodwill and intangible assets were not deductible for tax purposes.

5. Investments and Fair Value Measurements

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of the Company’s available-for-sale investments, including those securities classified within “Cash and cash equivalents” in the condensed consolidated balance sheets (in thousands):

The fair values of available-for-sale investments, excluding those securities classified within “Cash and cash equivalents” in the condensed consolidated balance sheets, by remaining contractual maturity are as follows (in thousands):

Effective January 1, 2024, the Company offers a non-qualified deferred compensation plan to eligible U.S. employees. The Company holds $0.2 million and $0.1 million of mutual funds that are associated with this plan and are classified as restricted trading securities as of June 30, 2024 and March 31, 2024, respectively. These securities are not included in the tables above but are included as investments in the condensed consolidated balance sheets.

The following tables present the Company’s financial assets that have been measured at fair value on a recurring basis as of June 30, 2024 and 2023, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

The Company recorded interest income from its cash, cash equivalents, and investments of $12.9 million and $7.5 million for the three months ended June 30, 2024 and 2023, respectively.

6. Goodwill and Other Intangible Assets, Net

Changes in the carrying amount of goodwill for the three months ended June 30, 2024 consists of the following (in thousands):

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

Amortization of intangible assets totaled $9.7 million for the three months ended June 30, 2024 and 2023.

7. 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 June 30, 2024 was 26.8% compared to 8.4% for the three months ended June 30, 2023. The increase in the effective tax rate for the three months ended June 30, 2024 was primarily due to a decrease in share-based compensation benefits.

8. Long-term Debt

On December 2, 2022, the Company entered into a Credit Agreement for a senior secured revolving credit facility (as amended to date, 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 June 30, 2024 and March 31, 2024, there wereno amounts outstanding under the Credit Facility. There were $0.8 million of letters of credit issued as of June 30, 2024. The Company had $399.2 million of availability under the Credit Facility as of June 30, 2024 and March 31, 2024.

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 Facility currently bear interest at (i) the Term Secured Overnight Financing Rate plus 0.10%, (ii) the Adjusted Euro Interbank Offer Rate, (iii) the Canadian Overnight Repo Rate Average, (iv) the Base Rate, as defined per the Credit Facility, 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 Facility.

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 Facility, 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 Facility, 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 $1.3 million and $1.4 million of unamortized debt issuance costs as of June 30, 2024 and March 31, 2024, respectively.

Pursuant to the Credit Facility, 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 equity interests of certain subsidiaries. Under certain circumstances, the guarantees may be released without action by, or consent of, the administrative agent of the Credit Facility. The Credit Facility contains customary affirmative and negative covenants, including financial covenants that require the Company to maintain specified financial ratios. At June 30, 2024, the Company was in compliance with all applicable covenants.

Interest expense

For the three months ended June 30, 2024 and 2023, the Company recognized $0.1 million and $0.4 million in interest expense and amortization of debt issuance costs and original issuance discount, respectively.

9. Leases

The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2025 to 2035. As of June 30, 2024, the weighted average remaining lease term was 6.4 years and the weighted average discount rate was 4.5%. The Company did not have any finance leases as of June 30, 2024.

The Company had a sublease of a former office which expired in the three months ended June 30, 2024. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $0.2 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively.

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 June 30, 2024, remaining maturities of lease liabilities were as follows (in thousands):

As of June 30, 2024, the Company had commitments of $83.6 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 fiscal 2026, with lease terms ranging from 2 to 10 years.

10. 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.

11. Shareholders’ Equity

Share Repurchase Program

In May 2024, the Company announced a share repurchase program for up to $500 million of common stock. The share repurchase program does not have a time limit, does not obligate the Company to acquire a specific number of shares, and may be suspended, modified, or terminated at any time, without prior notice. Repurchases may be made from time to time on the open market, pursuant to 10b5-1 trading plans, or by other legally permissible means.

For the three months ended June 30, 2024, the Company repurchased and retired approximately 1.1 million shares of its common stock at an average price of $45.84 for a total of $50.1 million, of which $1.6 million has not been settled in cash as of June 30, 2024. As of June 30, 2024, $449.9 million remained available for future repurchases.

12. 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):

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 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 June 30, 2024,56,830,006 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 three months ended June 30, 2024:

As of June 30, 2024, the total unrecognized compensation expense related to non-vested stock options was $0.5 million and is expected to be recognized over a weighted average period of 0.6 years.

Restricted shares and units

The following table provides a summary of the changes in the number of RSAs and restricted stock units (“RSUs”) for the three months ended June 30, 2024:

RSUs outstanding as of June 30, 2024 were comprised of 11.6 million RSUs with only service conditions and 1.3 million RSUs with both service and performance or market-based conditions (“PSUs”).

During the three months ended June 30, 2024, the Company granted PSUs that contain financial performance conditions (the “Financial PSUs”) and PSUs based on relative total stockholder return performance (the “rTSR PSUs”). Both the Financial PSUs and rTSR PSUs are not earned if the applicable threshold percentage of the specific metric is not achieved. The overall number of shares that may be earned shall not exceed 200% of the target award. The PSUs are also subject to time-based vesting and are contingent upon the employee remaining employed by the Company or one of its subsidiaries through the applicable vesting date.

The Financial PSUs generally vest 33%one year after the grant date and the remaining 67% vest ratably on a quarterly basis over the followingtwo years. The number of shares that may be earned pursuant to the Financial PSUs is based on specific Company metrics related to the Company’s fiscal year ending March 31, 2025.

The rTSR PSUs generally vest 33% annually after the grant date. The number of shares that may be earned pursuant to the rTSR PSUs is based on the Company’s stock price performance relative to companies that are the constituents of the Russell 3000 index over performance periods of one, two, and three fiscal years that began on April 1, 2024.

As of June 30, 2024, the total unrecognized compensation expense related to unvested RSAs is $7.8 million and is to be recognized over a weighted average period of 2.6 years. As of June 30, 2024, the total unrecognized compensation expense related to unvested RSUs was $557.8 million and is expected to be recognized over a weighted average period of 2.3 years.

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 three months ended June 30, 2024,261,829 shares of common stock were purchased under the ESPP. As of June 30, 2024,18,572,583 shares of common stock were available for future issuance under the ESPP.

As of June 30, 2024, there was approximately $2.5 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.

13. Net Income Per Share

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 months ended June 30, 2024 and 2023 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):

14. Geographic Information

Revenue

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

Long-lived assets, net

The following table presents the Company’s net long-lived assets, which consists of property and equipment, net, and operating lease right-of-use asset, net, by geographic region for the periods presented (in thousands):