# Dynatrace, Inc. (DT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Dynatrace, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1773383/000177338323000055/dt-20230331.htm
Accession: 0001773383-23-000055
Filing date: 2023-05-25
Report date: 2023-03-31
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/fy2022/ (FY 2022)
Next year: /company/DT/mda/fy2024/ (FY 2024)

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 a unified observability and security platform with analytics and automation at its core, purpose-built for dynamic, hybrid, multicloud environments. Our comprehensive solutions help global organizations simplify cloud complexity, innovate faster, and do more with less in the modern cloud.

As enterprises and public sector institutions embrace modern cloud environments as the underlying foundation of their 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. Our Dynatrace® platform combines the only fully unified end-to-end solution for comprehensive observability and continuous runtime application security together with advanced AIOps to provide answers and intelligent automation from data at enormous scale. This approach enables IT, development, security, and business operations teams to modernize and automate operations, deliver software faster and more securely, and provide better digital experiences.

We take Dynatrace® to market through a combination of our global direct sales team and a network of partners, including global system integrators, cloud providers (such as AWS, Azure, and GCP), 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.

All of our offerings leverage the Dynatrace® observability and security platform to provide APM, runtime application security, infrastructure monitoring, log management and analytics, DEM, digital business analytics, and cloud automation in an easy-to-use, highly automated, all-in-one solution.

We generate revenue primarily by selling subscriptions, which we define as SaaS agreements, Dynatrace® term-based licenses, Dynatrace® 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. Our SaaS solution provides customers with the ability to scale up and down rapidly, without having to purchase, provision, and manage their hardware. We also provide options to deploy our platform at the edge in customer-provisioned infrastructure, which we refer to as Dynatrace Managed. This offering allows customers the flexibility to maintain control of the environment where their data resides, whether in the cloud or on-premises, combining the simplicity of SaaS with the ability to adhere to their own data security and sovereignty requirements. Our Mission Control center automatically upgrades all Dynatrace® instances and offers on-premises cluster customers auto-deployment options that suit their specific enterprise management processes.

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

Fiscal 2023 Financial Highlights

We delivered strong fiscal 2023 financial results in a dynamic macroeconomic environment, demonstrating the durability of our business model.

•Our annual recurring revenue (“ARR”) was $1,247 million as of March 31, 2023, which reflected 25% growth year-over-year;

•For the full year ended March 31, 2023, we were once again profitable and delivered solid operating income;

•As of March 31, 2023, we had approximately $555 million of cash and cash equivalents and no long-term debt; and

•Dynatrace® customers increased to more than 3,600 as of March 31, 2023 from approximately 3,300 as of March 31, 2022.

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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 a rapidly evolving and uncertain 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. While we continue to close deals, customers continue to be cautious in their spending, with tighter budget scrutiny. We expect that the elongation of sales cycles that we experienced in the second half of our fiscal 2023 will persist throughout our fiscal 2024. Although macroeconomic uncertainty persists, 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.

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 continued innovation. We expect to focus on expanding the functionality of our unified Dynatrace® and investing in capabilities that address new market opportunities. We also plan to continue evolving our causal AI capabilities to drive differentiation through precise answers and broad-based automation. We believe this strategy will enable new growth opportunities and allow us to continue to deliver differentiated high-value outcomes to our customers.

•Grow our customer base. We intend to drive new customer growth by expanding our direct sales force focused on the largest 15,000 global enterprise accounts, which generally have annual revenues in excess of $1 billion. In addition, we plan to leverage our global partner ecosystem to add new customers in geographies where we have direct coverage and work jointly with our partners.

•Increase penetration within existing customers. We plan to continue to increase the penetration within our existing customers by establishing new and deeper relationships within our customers’ organizations (notably, development teams) and expanding the breadth of our platform capabilities to provide for continued cross-selling opportunities. In addition, we believe the ease of implementation for Dynatrace® provides us the opportunity to expand adoption within our existing enterprise customers, across new customer applications, and into additional business units or divisions. Once customers are on the Dynatrace® platform, we have seen significant dollar-based net retention rate expansion due to the ease of use and power of our platform.

•Enhance our strategic partner ecosystem. We intend to continue to invest in our strategic partner ecosystem, with a particular emphasis on cloud-focused 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.

Key Metrics

In addition to our U.S. GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:

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[[/GREPCENT_TABLE]]

Annual Recurring Revenue (“ARR”): 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. Total ARR was $1,247 million as of March 31, 2023. Over the past year, Total ARR has grown by $252 million, or 25%.

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

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ARR given the diminishing impact of perpetual license ARR. We believe that eliminating the perpetual license headwind will result 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 (and previously included licenses, as discussed below).

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.

During the fourth quarter of fiscal 2023, we reclassified license revenue, which is recognized from sales of perpetual and term-based licenses of our Classic products, of $0.1 million and $1.5 million for the years ended March 31, 2022 and 2021, respectively, from “License” to “Subscription” revenue. There was no revenue from Classic products for the year ended March 31, 2023. Our Classic products were sunset as of April 1, 2021, and thereafter were only sold to existing customers. Prior periods have been revised to conform to the current period presentation. See Note 2, Significant Accounting Policies, of our audited consolidated financial statements included in this Annual Report for a description of the change in presentation.

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

Cost of Revenue

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

Cost of service. Cost of service revenue includes salaries, benefits, share-based compensation and related expenses such as employer taxes for our services organization, allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses as they are incurred.

Amortization of acquired technology. Amortization expense for technology acquired in the Thoma Bravo Funds’ acquisition of the Company in 2014 and business combinations. 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 and other revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors.

Operating Expenses

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

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

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periods beginning on April 1, 2022. See Note 2, Significant Accounting Policies, of our audited consolidated financial statements included in this Annual Report for a description of the reclassification.

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

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

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

Restructuring and other. Restructuring and other expenses primarily consist of various restructuring activities we have undertaken to achieve strategic and financial objectives. Restructuring activities include, but are not limited to, product offering cancellation and termination of related employees, office relocation, administrative cost of structure realignment, and consolidation of resources.

Other Expense, Net

Other expense, net, consists primarily of interest expense and foreign currency realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency, including balances between subsidiaries. Interest expense, net of interest income, consists primarily of interest on our former term loan facility, fees on our revolving credit facility, loss on debt extinguishment, and amortization of debt issuance costs.

Income Tax Expense

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in 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) a change in the Company’s assessment of realization of certain tax benefits previously subject to a valuation allowance in the U.S., (2) the generation of U.S. foreign tax credits, and (3) the foreign derived intangibles deduction, partially offset by (4) foreign withholding taxes, and (5) an increase in uncertain tax positions. 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 eliminates 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 fifteen years for research activities performed outside the United States pursuant to IRC Section 174. This law change will increase our U.S. federal and state cash taxes and reduce 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:

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[[/GREPCENT_TABLE]]

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Fiscal Years Ended March 31, 2023 and 2022

Revenue

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[[/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 March 31, 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.

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 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.

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Gross Profit and Gross Margin

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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 March 31, 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 higher personnel and share-based compensation costs.

Operating Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased $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 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 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.

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General and administrative

General and administrative expenses increased by $23.4 million, or 18%, 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 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.

Other Expense, Net

Other expense, net, decreased by $6.8 million, or 71%, for the year ended March 31, 2023 as compared to the year ended March 31, 2022. The decline was primarily the result of lower interest expense due to the reduction in debt. The loss on our debt extinguishment was also slightly offset by interest income.

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.

Fiscal Years Ended March 31, 2022 and 2021

Revenue

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[[/GREPCENT_TABLE]]

Subscription

Subscription revenue increased by $213.8 million, or 33%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021, primarily due to the growing adoption of the Dynatrace® platform by new customers combined with existing customers expanding their use of our solutions. Our subscription revenue increased to 94% of total revenue for the year ended March 31, 2022 compared to 93% of total revenue for the year ended March 31, 2021.

Service

Service revenue increased by $12.1 million, or 26%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. We recognize the revenues associated with professional services as we deliver the services.

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Cost of Revenue

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[[/GREPCENT_TABLE]]

Cost of subscription

Cost of subscription revenue increased by $34.2 million, or 44%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. The increase was primarily due to higher personnel costs to support the growth of our subscription cloud-based offering of $19.5 million, higher cloud-based hosting costs and subscriptions of $10.7 million, as well as higher share-based compensation of $3.0 million. Partially offsetting this increase was $1.3 million in lower amortization due to the completion of amortization of certain internally developed capitalized software technology.

Cost of service

Cost of service revenue increased by $10.8 million, or 31%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. The increase was primarily the result of higher personnel costs of $6.8 million, higher share-based compensation of $2.6 million, and an increase in subscription costs of $1.0 million.

Amortization of acquired technologies

For the years ended March 31, 2022 and 2021, 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]]
[["","Fiscal Year Ended March 31,","","Change"],["","2022","","2021","","Amount","","Percent"],["","(in thousands, except percentages)"],["Gross profit:"],["Subscription","$","758,793","","","$","579,138","","","$","179,655","","","31","%"],["Service","13,289","","","11,980","","","1,309","","","11","%"],["Amortization of acquired technology","(15,513)","","","(15,317)","","","(196)","","","1","%"],["Total gross profit","$","756,569","","","$","575,801","","","$","180,768","","","31","%"],["Gross margin:"],["Subscription","87","%","","88","%"],["Service","23","%","","26","%"],["Amortization of acquired technology","(100)","%","","(100","%)"],["Total gross margin","81","%","","82","%"]]
[[/GREPCENT_TABLE]]

Subscription

Subscription gross profit increased by $179.7 million, or 31%, during the year ended March 31, 2022 compared to the year ended March 31, 2021. 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. Subscription gross margin decreased from 88% to 87% during the year ended March 31, 2022 compared to the year ended March 31, 2021, primarily due to higher personnel and share-based compensation costs to support the growth of our subscription cloud-based offering.

Service

Service gross profit increased by $1.3 million, or 11%, during the year ended March 31, 2022 compared to the year ended March 31, 2021. Service gross margin decreased from 26% to 23%, during the year ended March 31, 2022 compared to the year ended March 31,

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2021. The increase in gross profit was primarily due to an increase in service revenue driven by higher utilization of personnel. The decrease in gross margin was primarily due to higher personnel and share-based compensation costs.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,","","Change"],["","2022","","2021","","Amount","","Percent"],["","(in thousands, except percentages)"],["Operating expenses:"],["Research and development","$","156,342","","","$","111,415","","","$","44,927","","","40","%"],["Sales and marketing","362,116","","","245,487","","","116,629","","","48","%"],["General and administrative","126,622","","","92,219","","","34,403","","","37","%"],["Amortization of other intangibles","30,157","","","34,744","","","(4,587)","","","(13","%)"],["Restructuring and other","25","","","40","","","(15)","","","(38","%)"],["Total operating expenses","$","675,262","","","$","483,905","","","$","191,357","","","40","%"]]
[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased by $44.9 million, or 40%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. The increase was primarily due to increased personnel and other costs to expand our product offerings of $26.4 million, and higher share-based compensation of $9.6 million. Also contributing to the increase were higher cloud-based hosting costs of $4.1 million, increased allocated overhead costs of $2.5 million to support the growth of the business and related infrastructure, and higher travel expenses of $0.8 million as global travel restrictions began to decrease and as travel resumed.

Sales and marketing

Sales and marketing expenses increased by $116.6 million, or 48%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021, driven by increased personnel costs of $54.4 million, related share-based compensation of $11.8 million, and other employee-related expenses of $5.3 million. Also contributing to the increase were higher advertising and marketing costs of $29.0 million, higher professional fees of $4.2 million, increased travel expenses related to global restrictions lifting of $4.0 million, higher information technology costs of $2.4 million, and increased allocated overhead costs of $1.5 million to support the growth of the business and related infrastructure.

General and administrative

General and administrative expenses increased by $34.4 million, or 37%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021, primarily due to increased personnel costs of $14.1 million, related share-based compensation of $14.8 million, and other employee-related expenses of $1.9 million. Also contributing to the increase were higher professional fees of $1.1 million, and increased travel expenses related to global restrictions lifting of $0.8 million.

Amortization of other intangibles

Amortization of other intangibles decreased by $4.6 million, or 13%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. 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.

Other Expense, Net

Other expense, net, decreased by $4.4 million, or 31%, for the year ended March 31, 2022, as compared to the year ended March 31, 2021. The decline was primarily the result of lower interest expense on our former term loan as we had less principal outstanding compared to the prior fiscal year.

Income Tax Expense

Income tax expense increased by $17.1 million resulting in an expense of $19.2 million for the year ended March 31, 2022, as compared to an expense of $2.1 million for the year ended March 31, 2021. This increase was primarily due to the one-time impact of tax return to provision true-up benefits resulting from changes in estimates to the reorganization transaction tax during fiscal year 2021.

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Liquidity and Capital Resources

As of March 31, 2023, we had $555.3 million of cash and cash equivalents and $384.5 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, 2023, total contractual commitments were $244.4 million, with $78.8 million committed within the next twelve months. For further information regarding our contractual commitments, see Note 11, Commitments and Contingencies, of our audited consolidated financial statements included in this Annual Report.

Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in the section titled “Risk Factors” included under Part I, Item 1A. However, we believe that our existing cash, cash equivalents, 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 twelve months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, timing and extent of spending to support our growth strategy, and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

Our Credit Facilities

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, 2023, we had $384.5 million available under the Credit Facility with $15.5 million of letters of credit outstanding. As of March 31, 2023, we were in compliance with all applicable covenants pertaining to the Credit Facility. The Credit Facility is discussed further in Note 9, 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,"],["","","2023","","2022","","2021"],["","","(in thousands)"],["Net cash provided by operating activities(1)","","$","354,885","","","$","250,917","","","$","220,436"],["Net cash used in investing activities","","(21,540)","","","(30,890)","","","(13,879)"],["Net cash used in financing activities","","(232,344)","","","(80,664)","","","(97,802)"],["Effect of exchange rate changes on cash and cash equivalents","","(8,620)","","","(1,358)","","","3,037"],["Net increase in cash and cash equivalents","","$","92,381","","","$","138,005","","","$","111,792"]]
[[/GREPCENT_TABLE]]

_________________

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

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2023","","2022","","2021"],["","","(in thousands)"],["Cash paid for interest","","$","7,109","","","$","8,375","","","$","12,475"],["Cash (received from) paid for tax, net","","$","(14,311)","","","$","24,247","","","$","(7,337)"]]
[[/GREPCENT_TABLE]]

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Operating Activities

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 in advance of future service. 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 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 driven by the timing of payments in advance of future services.

For the year ended March 31, 2021, cash provided by operating activities was $220.4 million as a result of a net income of $75.7 million, and adjusted by non-cash charges of $113.6 million and a change of $31.2 million in our operating assets and liabilities. The non-cash charges were primarily comprised depreciation and amortization of $61.0 million and share-based compensation of $57.8 million. The change in our net operating assets and liabilities was primarily the result of an increase in deferred revenue of $96.5 million due to to seasonality in our sales cycle, which is higher in the third and fourth quarters of our fiscal year, an increase in accounts payable and accrued expenses of $26.6 million driven by the timing of payments, and a decrease in prepaid expenses and other assets of $5.7 million driven by the timing of payments in advance of future services. These changes were partially offset by an increase of $82.0 million due to the timing of receipts of payments from customers and an increase in deferred commissions of $16.3 million due to commissions paid on new bookings.

Investing Activities

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 the purchases of property and equipment of $17.7 million and two acquisitions made in the first half of fiscal 2022 of $13.2 million.

Cash used in investing activities during the year ended March 31, 2021 was $13.9 million as a result of purchases of property and equipment of $14.1 million and capitalized software additions of $0.3 million, gross of $0.5 million of derecognized software costs.

Financing Activities

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.

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.

Cash used in financing activities during the year ended March 31, 2021 was $97.8 million, primarily as a result of repayments of our term loans of $120.0 million, partially offset by proceeds from the exercise of our stock options of $13.1 million and proceeds from our employee stock purchase plan of $9.2 million.

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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 of the notes to our consolidated financial statements, included elsewhere in this Annual Report. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We combine contracts entered into at or near the same time with the same customer if (i) we determine that the contracts are negotiated as a package with a single commercial objective, (ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract, or (iii) the services promised in the contracts are a single performance obligation.

The identification of our performance obligations involves review and consideration for the contractual terms, the implied rights of our customers, if any, product demonstrations and published website and marketing materials. Our performance obligations consist of (i) subscription and support services 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 financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. We have the ability to permanently reinvest any earnings in our foreign subsidiaries and therefore do not record a deferred tax liability on any outside basis differences in our investments in subsidiaries.

We record net deferred tax assets to the extent we believe that these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability, and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded that would reduce deferred tax assets. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

We account for uncertain tax positions based on those positions taken or expected to be taken in a tax return. We determine if the amount of available support indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. We then measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances. To the extent that

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the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our consolidated statements of operations in the period in which such determination is made. Interest and penalties related to uncertain income tax positions are included in the income tax provision.

Business Combinations

We use our best estimates and assumptions to allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We apply significant judgment in determining the fair value of the intangible assets acquired, which involves the use of significant estimates and assumptions with respect to future expected cash flows, expected asset lives, discount rates, revenue growth rates, and royalty rate. While we use our best estimates and judgments, our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the final determination of the fair value of assets acquired or liabilities assumed during the measurement period, any subsequent adjustments are included in our consolidated statements of operations.

Recent Accounting Pronouncements

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