Docoh
Loading...

NEWR New Relic

Filed: 3 Aug 21, 8:00pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36766
_________________________________________________
New Relic, Inc.
(Exact name of registrant as specified in its charter) 
_________________________________________________
Delaware 26-2017431
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
188 Spear Street, Suite 1000
San Francisco, California 94105
(Address of principal executive offices, including zip code)
(650) 777-7600
(Registrant’s telephone number, including area code)
__________________________________________________________________   
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per shareNEWR New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
  Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 30, 2021, there were 64,847,793 shares of the registrant’s common stock, par value $0.001 per share, outstanding.



NEW RELIC, INC.
Form 10-Q Quarterly Report
TABLE OF CONTENTS
 
 Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “New Relic,” “we,” “Company,” “us,” and “our” refer to New Relic, Inc. and its subsidiaries. “New Relic,” the New Relic logo, and other trademarks or service marks of New Relic that may appear in this Quarterly Report on Form 10-Q are the property of the Company. This Quarterly Report on Form 10-Q contains additional trade names, trademarks, and service marks of other companies. The Company does not intend its use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of the Company by, these other companies, and all such third-party trade names, trademarks, and service marks are the property of their respective owners.




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “would,” “shall,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
 
the impact of natural disasters and actual or threatened public health emergencies, such as the COVID-19 pandemic;
our future financial performance, including our revenue, cost of revenue, gross profit, gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain GAAP (as defined below) and non-GAAP profitability;
our key operating metrics;
use and limitations of non-GAAP financial measures;
the sufficiency of our cash and cash equivalents to meet our working capital, capital expenditure, and liquidity needs;
our ability to attract and retain customers to use our products, to optimize the pricing for our products, to expand our sales to our customers, and to convince our existing customers to remain on our platform and increase their spend with us;
our product and pricing strategies and their anticipated impacts on our business and results of operations;
our growth strategy, including increasing usage within our installed base, addition of new customers, penetration of international markets, and expansion of our platform and capabilities;
the evolution of technologies affecting our products and markets;
our ability to innovate and provide a superior user experience and our intentions and strategy with respect thereto;
our ability to successfully expand in our existing markets and into new markets, including international markets;
the attraction and retention of key personnel;
our ability to effectively manage our growth and future expenses;
our ability to maintain, protect, and enhance our intellectual property rights;
worldwide economic conditions and their impact on spending; and
our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations.
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
2


SELECTED RISKS AFFECTING OUR BUSINESS

Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the following:
We have limited experience with respect to determining the optimal prices and pricing strategies for our products.
The ongoing global coronavirus (“COVID-19”) pandemic could harm our business and results of operations.
We have a history of losses and our revenue growth rate could continue to decline over time, and as our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability.
We have a limited operating history with our current business model, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.
If we are not able to manage our growth and expansion, or if our business does not grow as we expect, our operating results may suffer.
Our business depends on our customers remaining on our platform and increasing their spend with us.
If we are not able to develop enhancements to our products, increase adoption and usage of our products, and introduce new products that achieve market acceptance, our business could be harmed.
If customers do not expand their use of our products beyond the current predominant use cases, our ability to grow our business and operating results may be adversely affected.
Our quarterly results may fluctuate, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, and changing customer needs, requirements, or preferences, our products may become less competitive.
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be harmed.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our ongoing and planned investments in data center hosting facilities and expenditures on cloud hosting providers are expensive and complex, may result in a negative impact on our cash flows, and may negatively impact our financial results.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our reliance upon open source software could negatively affect our ability to sell our products and subject us to possible litigation.
If we lose key members of our management team or are unable to attract and retain executives and employees we need to support our operations and growth, our business may be harmed.
If we cannot continue to maintain and develop our corporate culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success.
Changes in privacy and security laws, regulations, and standards may cause our business to suffer.
We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase our borrowing costs.
Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.
We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate these controls.
3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW RELIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 June 30, 2021March 31, 2021
Assets
Current assets:
Cash and cash equivalents$259,897 $240,821 
Short-term investments557,223 575,254 
Accounts receivable, net of allowances of $2,464 and $2,633, respectively
93,477 174,027 
Prepaid expenses and other current assets22,172 21,944 
Deferred contract acquisition costs33,032 36,210 
Total current assets965,801 1,048,256 
Property and equipment, net84,645 91,308 
Restricted cash5,642 5,642 
Goodwill163,677 144,253 
Intangible assets, net21,610 12,986 
Deferred contract acquisition costs, non-current25,707 32,579 
Lease right-of-use assets55,034 57,425 
Other assets, non-current5,976 6,170 
Total assets$1,328,092 $1,398,619 
Liabilities, redeemable non-controlling interest and stockholders’ equity
Current liabilities:
Accounts payable$27,631 $24,171 
Accrued compensation and benefits32,319 37,196 
Other current liabilities15,779 19,174 
Deferred revenue316,458 373,594 
Lease liabilities7,714 7,886 
Total current liabilities399,901 462,021 
Convertible senior notes, net495,893 449,380 
Lease liabilities, non-current57,578 59,924 
Deferred revenue, non-current1,044 1,674 
Other liabilities, non-current15,789 8,256 
Total liabilities970,205 981,255 
Commitments and contingencies (Note 10)00
Redeemable non-controlling interest 7,744 3,389 
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized at June 30, 2021 and March 31, 2021; 64,966 shares and 64,019 shares issued at June 30, 2021 and March 31, 2021; and 64,706 shares and 63,759 shares outstanding at June 30, 2021 and March 31, 2021
64 64 
Treasury stock - at cost (260 shares)
(263)(263)
Additional paid-in capital962,512 1,001,309 
Accumulated other comprehensive loss(850)(19)
Accumulated deficit(611,320)(587,116)
Total stockholders’ equity350,143 413,975 
Total liabilities, redeemable non-controlling interest and stockholders’ equity$1,328,092 $1,398,619 
See notes to condensed consolidated financial statements.
4


NEW RELIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 Three Months Ended June 30,
 20212020
Revenue$180,484 $162,585 
Cost of revenue59,264 33,273 
Gross profit121,220 129,312 
Operating expenses:
Research and development48,730 40,844 
Sales and marketing102,813 85,136 
General and administrative43,565 29,434 
Total operating expenses195,108 155,414 
Loss from operations(73,888)(26,102)
Other income (expense):
Interest income938 2,781 
Interest expense(1,226)(6,104)
Other expense(336)(395)
Loss before income taxes(74,512)(29,820)
Income tax provision (benefit)(453)332 
Net loss$(74,059)$(30,152)
Net loss and adjustment attributable to redeemable non-controlling interest(4,355)396 
Net loss attributable to New Relic$(78,414)$(29,756)
Net loss attributable to New Relic per share, basic and diluted$(1.24)$(0.50)
Weighted-average shares used to compute net loss per share, basic and diluted63,339 59,927 
See notes to condensed consolidated financial statements.

5


NEW RELIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 Three Months Ended June 30,
 20212020
Net loss attributable to New Relic$(78,414)$(29,756)
Other comprehensive loss:
Unrealized loss on available-for-sale securities(831)(759)
Comprehensive loss$(79,245)$(30,515)
See notes to condensed consolidated financial statements.

6


NEW RELIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Three Months Ended June 30, 2021Three Months Ended June 30, 2020
Common StockAdditional
Paid-In
Capital
Treasury StockAccumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
Common StockAdditional
Paid-In
Capital
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmountSharesAmountSharesAmount
Balance at beginning of period64,019 $64 $1,001,309 260 $(263)$(19)$(587,116)$413,975 60,098 $60 $780,479 260 $(263)$4,869 $(394,506)$390,639 
Effect of adoption of ASU 2020-06— — (100,136)— — — 54,210 (45,926)— — — — — — — — 
Issuance of common stock upon exercise of stock options192 — 4,832 — — — — 4,832 50 — 1,474 — — — — 1,474 
Issuance of common stock for vested restricted stock units354 — — — — — 354 — — — — — — — 
Issuance of common stock related to employee stock purchase plan— — — — — — — — — — — — — 
Issuance of common stock related to acquisition of business401 13,487 — — — — 13,487 — — — — — — — — 
Stock-based compensation expense— — 43,020 — — — — 43,020 — — 31,259 — — — — 31,259 
Other comprehensive loss, net— — — — — (831)— (831)— — — — — (759)— (759)
Net loss attributable to New Relic— — — — — — (78,414)(78,414)— — — — — — (29,756)(29,756)
Balance at end of period64,966 $64 $962,512 260 $(263)$(850)$(611,320)$350,143 60,502 $60 $813,212 260 $(263)$4,110 $(424,262)$392,857 

See notes to condensed consolidated financial statements.
7


NEW RELIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months Ended June 30,
 20212020
Cash flows from operating activities:
Net loss attributable to New Relic$(78,414)$(29,756)
Net loss and adjustment attributable to redeemable non-controlling interest (Note 3)4,355 (396)
Net loss:$(74,059)$(30,152)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization23,025 21,051 
Stock-based compensation expense42,187 31,208 
Amortization of debt discount and issuance costs587 5,466 
Other(922)(222)
Changes in operating assets and liabilities, net of acquisition of business:
Accounts receivable, net80,550 36,065 
Prepaid expenses and other assets18 (3,155)
Deferred contract acquisition costs(190)(9,388)
Lease right-of-use assets2,692 (2,249)
Accounts payable4,894 (3,923)
Accrued compensation and benefits and other liabilities(8,627)5,573 
Lease liabilities(2,517)1,347 
Deferred revenue(57,766)(16,473)
Net cash provided by operating activities9,872 35,148 
Cash flows from investing activities:
Purchases of property and equipment(2,226)(8,225)
Cash paid for acquisition, net of cash acquired(7,192)
Purchases of short-term investments(23,828)(73,422)
Proceeds from sale and maturity of short-term investments40,513 13,100 
Capitalized software development costs(2,860)(3,668)
Net cash provided by (used in) investing activities4,407 (72,215)
Cash flows from financing activities:
Proceeds from exercise of employee stock options4,797 1,424 
Net cash provided by financing activities4,797 1,424 
Net increase (decrease) in cash, cash equivalents and restricted cash19,076 (35,643)
Cash, cash equivalents and restricted cash at beginning of period246,463 298,164 
Cash, cash equivalents and restricted cash at end of period$265,539 $262,521 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets:
Cash and cash equivalents$259,897 $256,879 
Restricted cash5,642 5,642 
Total cash, cash equivalents and restricted cash$265,539 $262,521 
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes$1,890 $1,415 
Noncash investing and financing activities:
Property and equipment purchased but not yet paid$$1,265 
Issuance of common stock for the acquisition of business$13,487 $
Acquisition holdback$7,250 $
See notes to condensed consolidated financial statements.
8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.Description of Business and Summary of Significant Accounting Policies
New Relic, Inc. (the “Company” or “New Relic”) was incorporated in Delaware on February 20, 2008, when it converted from a Delaware limited liability company called New Relic Software, LLC, which was formed in Delaware in September 2007. The Company delivers the observability platform for engineers to plan, build, deploy and operate more perfect software. New Relic One is the Company’s purpose-built offering for customers to land all of their telemetry data quickly and affordably in one place, and to translate that data into actionable insights.
Basis of Presentation —These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, as filed with the SEC on May 14, 2021 (the “Annual Report”).
In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, stockholders’ equity and cash flows for the interim period, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending March 31, 2022. The condensed consolidated balance sheet as of March 31, 2021 included herein was derived from the audited financial statements as of that date.
Use of Estimates—The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of purchased intangible assets and goodwill, fair value of debt and equity components related to the 0.5% convertible senior notes due 2023 (the “Notes”), useful lives of purchased intangible assets, unrecognized tax benefits, expected benefit period for deferred commissions, incremental borrowing rate used for operating lease liabilities, and the capitalization and estimated useful life of the Company’s software development costs.
These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from management’s estimates.
COVID-19—The COVID-19 pandemic has resulted in a global slowdown of economic activity that is expected to continue and which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. The Company’s revenue and deferred revenue have been negatively impacted by the slowdown in activity associated with the COVID-19 pandemic, but at this point, the extent of any continuing impact to the Company’s financial condition or results of operations is uncertain, particularly as the COVID-19 pandemic continues to persist for an extended period of time, and as of the date of issuance of these financial statements, management is not aware of any specific event or circumstance that would require an update to estimates and judgments or revising the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained, and will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.
Concentration of Risk—There was one customer that represented more than 10% of the Company’s accounts receivable balance as of June 30, 2021 and no customers that represented more than 10% of the Company’s accounts receivable balance as of March 31, 2021. There was no customer that individually exceeded 10% of the Company’s revenue during the three months ended June 30, 2021 or 2020.
Revenue Recognition—The Company generates revenue from subscription-based arrangements and usage-based arrangements that allow customers to access its products and/or platform. The Company determines revenue recognition through the following steps:
identification of the contract, or contracts with a customer;
9


identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue, when, or as, the Company satisfies a performance obligation.
Revenue from subscription-based arrangements is recognized on a ratable basis over the contractual subscription period of the arrangement beginning when or as control of the promised goods or services is transferred to the customer.
Beginning in the second quarter of fiscal 2021, the Company started offering usage-based pricing to its customers. Customers have the option to be charged upon their incurred usage in arrears (“Pay as You Go”), or they may commit to a minimum spend over their contracted period (“Annual Pool of Funds”). Revenue related to Pay as You Go contracts are recognized based on the customers’ actual usage. Revenue related to Annual Pool of Funds contracts are recognized on a ratable basis over the contract period including an estimate of the usage above the minimum commitment. The estimated usage-based revenues are constrained to the amount the Company expects to be entitled to receive in exchange for providing access to its platform.
Recently Issued Accounting Pronouncements Not Yet Adopted
There have been no new accounting pronouncements issued during the three months ended June 30, 2021 that are of significance to the Company.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Accounting for Convertible Instruments and Contract on an Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This will result in more convertible debt instruments being accounted for as a single liability instrument and more convertible preferred stock being accounted for as a single equity instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (“EPS”) and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards.
The Company early adopted ASU 2020-06 effective April 1, 2021, using the modified retrospective basis. Adoption resulted in a $54.2 million decrease to the opening balance of accumulated deficit, a $100.1 million decrease to the opening balance of additional paid-in capital, and a $45.9 million increase to the opening balance of the Notes, net on the consolidated balance sheet.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The Company adopted this standard on April 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements or disclosures.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company adopted this standard on April 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The Company adopted this standard on April 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.

10


2.    Business Combinations
CodeStream Inc.
On June 8, 2021, the Company acquired all of the equity interests in CodeStream Inc. (“CodeStream”), a company that provides an integrated developer collaboration platform. The aggregate purchase price of $28.6 million consisted of approximately $15.1 million in cash (of which the Company held back approximately $7.3 million from the aggregate purchase price for 18 months after the transaction closing date, and which has been accrued as a long-term liability) and 202,561 shares of the Company’s common stock with an aggregate fair value of approximately $13.5 million. The fair value of the consideration transferred was determined based on a $66.58 per share price of the Company’s common stock on the closing date of the acquisition.
The total purchase price was allocated to the developed technology acquired with an estimated useful life of three years, net assets assumed, and a deferred tax liability related to the developed technology. The excess purchase price was recorded as goodwill, as set forth below. Goodwill generated from the acquisition is attributable to expected synergies from future growth and is not deductible for tax purposes.
The following table presents the purchase price allocation related to the acquisition (in thousands):
Cash consideration$15,140 
Fair value of common shares$26,768 
Total consideration$41,908 
Post-business combination compensation expense$(13,282)
Total purchase price$28,626 
Net assets assumed$(113)
Deferred tax liabilities$1,211 
Developed technology acquired$(10,300)
Goodwill$19,424 
The acquisition has been accounted for as a business combination in accordance with ASC 805. The estimated fair value of developed technology acquired of $10.3 million was determined through the use of a third-party valuation firm using cost approach methodology. The direct transaction costs of the acquisition have been accounted for separately from the business combination and expensed as incurred. Total direct transaction costs incurred by the Company were $0.4 million, which were included in general and administrative expenses in the Company’s condensed consolidated statement of operations for the three months ended June 30, 2021. The Company paid $0.8 million in acquisition-related expenses incurred by CodeStream related to CodeStream’s advisors which were included as part of the purchase consideration. The business combination did not have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not been presented.
The acquisition also included a holdback arrangement with certain employees of CodeStream, totaling approximately 199,492 shares of the Company’s common stock, contingent upon their continued employment with the Company. The fair value of these awards, which are subject to the recipients’ continued service, was $13.3 million and was excluded from the aggregate purchase price. These awards will be recognized as stock-based compensation expense over the vesting period, which is 42 months.
Pixie Labs Inc.
On December 22, 2020, the Company acquired all of the equity interests in Pixie Labs Inc., a company that provides a next-generation machine intelligence observability solution for developers using Kubernetes. The aggregate purchase price of $107.9 million consisted of approximately $45.6 million in cash (of which $15.0 million is being held in escrow for 12 months after the transaction closing date) and 884,269 shares of the Company’s common stock with an aggregate fair value of approximately $62.4 million. The fair value of the consideration transferred was determined based on a $70.53 per share price of the Company’s common stock. Of the total purchase price, $4.8 million was allocated to acquired technology with an estimate useful life of three years, net assets assumed, and a deferred tax liability related to the developed technology. The excess $99.1 million of the purchase price over the fair value of the intangible assets acquired was recorded as goodwill. The acquisition has been accounted for as a business combination under the acquisition method. The business combination did not
11


have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not been presented.
IOpipe, Inc.
On October 31, 2019, the Company acquired certain assets of IOpipe, Inc., a company that provides monitoring tools for serverless applications, for $5.1 million in cash. The Company held back approximately $0.9 million from the aggregate purchase price which has been accrued as a liability. Of the total purchase price, $1.5 million was allocated to acquired technology with an estimated useful life of three years with the excess $3.6 million of the purchase price over the fair value of the intangible assets acquired recorded as goodwill. The acquisition has been accounted for as a business combination under the acquisition method. Goodwill and other intangibles generated from the acquisition are attributable to expected synergies from future growth and potential future monetization opportunities, and are deductible for tax purposes. The business combination did not have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not been presented.

3.     Joint Venture
On July 13, 2018, the Company entered into an agreement with Japan Cloud Computing L.P. and M30 LLC (collectively, the “Investors”) to engage in the investment, organization, management and operation of New Relic K.K., a Japanese subsidiary of the Company that is focused on the sale of the Company’s products and services in Japan. On August 21, 2018, the investors initially contributed approximately $3.6 million (396,000,000 Japanese Yen) in exchange for 40% of the outstanding common stock of New Relic K.K. On August 21, 2019, the Company and Investors additionally contributed approximately $1.5 million (156,000,000 Japanese Yen) and approximately $1.0 million (104,000,000 Japanese Yen), respectively, to subscribe to additional shares. As of June 30, 2021, the Company owned approximately 60% of the outstanding common stock in New Relic K.K.
All of the common stock held by the Investors may be callable by the Company or puttable by the Investors upon certain contingent events. Should the call or put option be exercised, the redemption value would be determined based on a prescribed formula derived from the discrete revenues of New Relic K.K. and the Company and may be settled, at the Company’s discretion, with Company stock or cash. As a result of the put right available to the redeemable non-controlling interest holders in the future, the redeemable non-controlling interest in New Relic K.K. is classified outside of permanent equity in the Company’s consolidated balance sheet as of June 30, 2021, and the balance is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest’s share of earnings or losses, or its estimated redemption value. Accordingly, the Company adjusted the redeemable non-controlling interest by $4.4 million at June 30, 2021.
The following table summarizes the activity in the redeemable non-controlling interest for the periods indicated below:
Three Months Ended June 30,
20212020
Balance, beginning of period$3,389 $1,669 
Net loss attributable to redeemable non-controlling interest (40)(396)
Adjustment to redeemable non-controlling interest4,395 
Balance, end of period$7,744 $1,273 
12


4.     Fair Value Measurements
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of June 30, 2021 and March 31, 2021 based on the three-tier fair value hierarchy (in thousands):
Fair Value Measurements as of June 30, 2021
 Level 1Level 2Level 3Total
Cash and cash equivalents:
Money market funds$119,534 $$$119,534 
Short-term investments:
Certificates of deposit43,193 43,193 
Commercial paper15,083 15,083 
Corporate notes and bonds42,508 42,508 
U.S. treasury securities456,439 456,439 
Restricted cash:
Money market funds5,642 5,642 
Total$581,615 $100,784 $$682,399 
Included in cash and cash equivalents$119,534 
Included in short-term investments$557,223 
Included in restricted cash$5,642 
 Fair Value Measurements as of March 31, 2021
 Level 1Level 2Level 3Total
Cash and cash equivalents:
Money market funds$101,626 $$$101,626 
Short-term investments:
Certificates of deposit48,099 48,099 
Commercial paper11,681 11,681 
Corporate notes and bonds39,873 39,873 
U.S. treasury securities475,601 475,601 
Restricted cash:
Money market funds5,642 5,642 
Total$582,869 $99,653 $$682,522 
Included in cash and cash equivalents$101,626 
Included in short-term investments$575,254 
Included in restricted cash$5,642 
There were no transfers between fair value measurement levels during the three months ended June 30, 2021 and 2020.
The Company invests in certificates of deposit, commercial paper, corporate debt securities, U.S. treasury securities, and U.S. agency securities, which are classified as available-for-sale securities.
13


The following table presents the Company’s available-for-sale securities as of June 30, 2021 (in thousands):
Available-for-sale Investments as of June 30, 2021
Amortized CostUnrealized GainsUnrealized LossesFair Value
Short-term investments:
Certificates of deposit$43,201 $14 $(22)$43,193 
Commercial paper15,072 11 15,083 
Corporate notes and bonds42,364 165 (21)42,508 
U.S. treasury securities455,730 934 (225)456,439 
Total available-for-sale investments$556,367 $1,124 $(268)$557,223 
The following table presents the Company’s available-for-sale securities as of March 31, 2021 (in thousands):
Available-for-sale Investments as of March 31, 2021
Amortized CostUnrealized GainsUnrealized LossesFair Value
Short-term investments:
Certificates of deposit$48,100 $18 $(19)$48,099 
Commercial paper11,676 11,681 
Corporate notes and bonds39,620 261 (8)39,873 
U.S. treasury securities474,171 1,575 (145)475,601 
Total available-for-sale investments$573,567 $1,859 $(172)$575,254 
As of June 30, 2021 and March 31, 2021, securities that were in an unrealized loss position for more than 12 months were not significant. In addition, the Company did not consider any available-for-sale securities to be impaired as of June 30, 2021 and March 31, 2021.
The following table classifies the Company’s available-for-sale short-term investments by contractual maturities as of June 30, 2021 and March 31, 2021 (in thousands):
June 30, 2021March 31, 2021
Due within one year$306,103 $299,032 
Due after one year and within three years251,120 276,222 
Total$557,223 $575,254 
For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.
Convertible Senior Notes
As of June 30, 2021, the fair value of the Notes was $448.7 million. The fair value was determined based on the quoted price of the Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy.

5.     Contract Acquisition Costs
The Company capitalizes certain contract acquisition costs primarily consisting of commissions. The balances of deferred costs to obtain customer contracts were $58.7 million and $68.8 million as of June 30, 2021 and March 31, 2021, respectively. In the three months ended June 30, 2021 and 2020, amortization from amounts capitalized was $10.2 million and $9.0 million, respectively. In the three months ended June 30, 2021 and 2020, amounts expensed as incurred were $14.1 million and $3.4 million, respectively. The Company had 0 impairment loss in relation to costs capitalized.

14


6.     Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
June 30, 2021March 31, 2021
Computers, software, and equipment$14,567 $14,270 
Site operation equipment83,148 87,479 
Furniture and fixtures5,772 5,758 
Leasehold improvements49,700 49,751 
Capitalized software development costs69,740 66,451 
Total property and equipment222,927 223,709 
Less: accumulated depreciation and amortization(138,282)(132,401)
Total property and equipment, net$84,645 $91,308 
Depreciation and amortization expense related to property and equipment was $10.8 million and $10.5 million for the three months ended June 30, 2021 and 2020, respectively.

7.    0.5% Convertible Senior Notes and Capped Call
In May 2018, the Company issued $500.25 million in aggregate principal amount of Notes in a private offering, including $65.25 million in aggregate principal amount of Notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional Notes. The Notes are the Company’s senior unsecured obligations and bear interest at a fixed rate of 0.5% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2018. The Notes will mature on May 1, 2023, unless earlier converted or repurchased. Each $1,000 principal amount of the Notes will initially be convertible into 9.0244 shares of the Company’s common stock (the “Conversion Option”), which is equivalent to an initial conversion price of approximately $110.81 per share. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the indenture governing the Notes. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate, in certain circumstances, for a holder who elects to convert its Notes in connection with such a corporate event. During the three months ended June 30, 2021, the conditions allowing holders of the Notes to convert have not been met. The Notes were therefore not convertible during the three months ended June 30, 2021 and were classified as long-term debt for such period.
The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding November 1, 2022, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2018 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 5 consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the Notes on each such trading day; or (3) upon the occurrence of specified corporate events as set forth in the indenture governing the Notes. On or after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes.
In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the Conversion Option was $102.5 million and was determined by deducting the fair value of the liability component from the proceeds received upon issuance of the Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Notes over the liability component (the “Debt Discount”) and the debt issuance costs were amortized to interest expense over the contractual term of the Notes at an effective interest rate of 5.74%. This rate is inclusive of the issuance costs.
15


In accounting for the debt issuance costs of $11.6 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds of the Notes. Issuance costs attributable to the liability component were $9.2 million and were amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $2.4 million and netted with the equity component in additional paid-in capital.
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain financial institutions (the “Capped Calls”). The Capped Calls each have an initial strike price of approximately $110.81 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $173.82 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce potential dilution to holders of the Company’s common stock upon any conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $63.2 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital. The net impact related to stockholders’ equity has been included in additional paid-in capital and was a result of the issuance costs of $2.4 million and the purchase of Capped Calls noted above in the amount of $63.2 million.
Effective April 1, 2021 the Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contract on an Entity’s Own Equity. As a result of the adoption, the Conversion Option of $102.5 million and issuance costs of $2.4 million previously attributable to the equity component will no longer be presented in equity. Similarly, the debt discount, which is equal to the carrying value of the embedded conversion feature upon issuance, will no longer be amortized into income as interest expense over the life of the instrument. This resulted in a $54.2 million decrease to the opening balance of accumulated deficit, a $100.1 million decrease to the opening balance of additional paid-in capital, and a $45.9 million increase to the opening balance of the Notes, net on the consolidated balance sheet.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
June 30, 2021March 31, 2021
Principal$500,250 $500,250 
Unamortized debt discount(46,378)
Unamortized issuance costs(4,357)(4,492)
Net carrying amount$495,893 $449,380 
Interest expense related to the Notes was as follows (in thousands):
Three Months Ended June 30,
20212020
Amortization of debt discount$$5,030 
Amortization of issuance costs587 436 
Contractual interest expense625 625 
Total interest expense$1,212 $6,091 

8.     Goodwill and Purchased Intangibles Assets
The changes in the carrying amount of goodwill for the three months ended June 30, 2021 consisted of the following (in thousands):
Goodwill as of March 31, 2021$144,253 
Goodwill acquired19,424 
Goodwill as of June 30, 2021$163,677 
16


Purchased intangible assets subject to amortization as of June 30, 2021 consisted of the following (in thousands):
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Developed technology$30,416 $(8,806)$21,610 
Purchased intangible assets subject to amortization as of March 31, 2021 consisted of the following (in thousands):
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Developed technology$20,116 $(7,130)$12,986 
Amortization expense of purchased intangible assets was $1.7 million and $1.3 million for the three months ended June 30, 2021 and 2020, respectively and is included in cost of revenue on the Company’s condensed consolidated statements of operations.
Estimated future amortization expense as of June 30, 2021 was as follows (in thousands):
Fiscal Years Ending March 31,Estimated Future Amortization Expense
2022 (remaining nine months)$6,260 
20239,000 
20244,633 
20251,717 
$21,610 

9.     Leases
The Company leases office space under non-cancelable operating leases, which expire from 2021 to 2031. All of its office leases are classified as operating leases with lease expense recognized on a straight-line basis over the lease term.
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As these leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company considers information including, but not limited to, the lease term, the Company's credit rating and interest rates of similar debt instruments with comparable credit ratings. The lease right-of-use assets are also increased by any lease prepayments made and reduced by any lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that the Company will exercise the extension option.
The Company’s operating leases typically include nonlease components such as common-area maintenance costs. The Company has elected to include nonlease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Nonlease components that are not fixed are expensed as incurred as variable lease payments.
Leases with a term of one year or less are not recognized on the Company’s condensed consolidated balance sheet.
The following table presents information about leases on the condensed consolidated balance sheet (in thousands):
June 30, 2021March 31, 2021
Assets
Lease right-of-use-assets$55,034 $57,425 
Liabilities
Lease liabilities$7,714 $7,886 
Lease liabilities, non-current57,578 59,924 
Total operating lease liabilities$65,292 $67,810 
As of June 30, 2021, the weighted average remaining lease term was 6.0 years and the weighted average discount rate was 6.9%.
17


The following table presents information about leases on its condensed consolidated statement of operations (in thousands):
Three Months Ended June 30,
20212020
Operating lease expense$3,473 $3,388 
Short-term lease expense150 228 
Variable lease expense 632 699 
The following table presents supplemental cash flow information about the Company’s leases (in thousands):
Three Months Ended June 30,
20212020
Cash paid for amounts included in the measurement of lease liabilities$3,810 $4,484 
Operating lease assets obtained in exchange for new lease liabilities (1)4,411 
(1) Includes the impact of new leases as well as remeasurements and modifications to existing leases.
As of June 30, 2021, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31,Operating Leases
2022 (remaining nine months)$8,408 
202314,268 
202413,358 
202511,738 
202611,936 
202712,542 
Thereafter8,417 
Total operating lease payments$80,667 
Less imputed interest(15,375)
Total operating lease liabilities$65,292 
10.    Commitments and Contingencies
Purchase Commitments—As of June 30, 2021 and March 31, 2021, the Company had purchase commitments of $464.5 million and $494.6 million, respectively, primarily related to data center, cloud and hosting services.
In September 2020, the Company entered into an agreement with a public cloud hosting provider, under which it now has a total five-year minimum commitment of $500.0 million, which is included in the commitment balance as of June 30, 2021 above.
Other Contingencies—In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. To date, the Company has not incurred any costs as a result of such obligations and has not accrued any liabilities related to such obligations in the consolidated financial statements. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their respective capacities. The Company does not currently believe there is a reasonable possibility that a loss may have been incurred under these indemnification obligations. To date, there have been no claims under any such indemnification provisions.

18


11.    Common Stock and Stockholders’ Equity
Employee Stock Purchase Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective in December 2014. The ESPP initially reserved and authorized the issuance of up to 1,000,000 shares of common stock. The ESPP provides that the number of shares reserved and available for issuance under the ESPP automatically increases each April, beginning on April 1, 2015, by the lesser of 500,000 shares, 1% of the number of the Company’s common stock shares issued and outstanding on the immediately preceding March 31, or such lesser number of shares as determined by the Company’s board of directors. For the three months ended June 30, 2021, 0 shares of common stock were purchased under the ESPP. Stock-based compensation expense recognized related to the ESPP was $0.9 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, 3,201,577 shares of common stock were available for issuance under the ESPP.
2008 Equity Incentive Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the 2008 Equity Incentive Plan, or the 2008 Plan, in February 2008. The 2008 Plan was terminated in connection with the Company’s initial public offering (“IPO”), and accordingly, 0 shares are available for future issuance under this plan. The 2008 Plan continues to govern outstanding awards granted thereunder.
2014 Equity Incentive Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), which became effective in December 2014. The 2014 Plan serves as the successor to the Company’s 2008 Plan. The 2014 Plan initially reserved and authorized the issuance of 5,000,000 shares of the Company’s common stock. Additionally, shares not issued or subject to outstanding grants under the 2008 Plan upon its termination became available under the 2014 Plan, resulting in a total of 5,184,878 available shares under the 2014 Plan as of the effective date of the 2014 Plan. Pursuant to the terms of the 2014 Plan, any shares subject to outstanding stock options or other stock awards under the 2008 Plan that (i) expire or terminate for any reason prior to exercise or settlement, (ii) are forfeited because of the failure to meet a contingency or condition required to vest such shares or otherwise return to the Company or (iii) are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award will become available for issuance pursuant to awards granted under the 2014 Plan. The 2014 Plan provides that the number of shares reserved and available for issuance under the plan automatically increases each April 1, beginning on April 1, 2015, by 5% of the outstanding number of shares of the Company’s common stock shares issued and outstanding on the immediately preceding March 31, or such lesser number of shares as determined by the Company’s board of directors. As of June 30, 2021, there were 14,310,072 shares available for issuance under the 2014 Plan.
The following table summarizes the Company’s stock option, restricted stock unit (“RSU”), and performance unit (“PSU”) award activities for the three months ended June 30, 2021 (in thousands, except exercise price, contractual term and fair value information):
 Options OutstandingRSUs OutstandingPSUs Outstanding
 Number of SharesWeighted- Average Exercise PriceWeighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic ValueNumber of SharesWeighted- Average Grant Date Fair ValueWeighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic ValueNumber of SharesWeighted- Average Grant Date Fair ValueWeighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic Value
Outstanding - April 1, 20212,718 $50.55 6.2$48,064 3,293 $67.76 2.8$202,459 112 $99.05 2.0$6,884 
Granted1,558 59.46 241 82.89 
Exercised/vested(192)25.24 7,235 (354)65.77 (33)99.05 
Canceled/forfeited(131)71.16 (510)66.71 — 
Outstanding - June 30, 20212,395 $51.44 5.6$49,335 3,987 $64.82 3.0$267,008 320 $86.88 2.5$21,459 
PSUs granted under the 2014 Plan are contingent upon the achievement of pre-determined market and service conditions. The number of shares of common stock to be issued at vesting will range from 0% to 200% of the target number based on the Company’s total shareholder return (“TSR”) relative to the performance of peer companies for each measurement period, over a one-year, two-year cumulative, and three-year cumulative period. If these market conditions are not met but service conditions are met, the PSUs will not vest; however, any stock-based compensation expense recognized to date will not be reversed. The Company uses a Monte Carlo simulation model to determine the fair value of its PSUs and recognizes expense using the accelerated attribution method over the requisite service period.
19


Stock-Based Compensation Expense—Stock-based compensation expense for employees and nonemployees was $42.2 million and $31.2 million for the three months ended June 30, 2021 and 2020. Cost of revenue, research and development, sales and marketing, and general and administrative expenses were as follows (in thousands):
 Three Months Ended June 30,
 20212020
Cost of revenue$1,072 $1,502 
Research and development10,964 8,804 
Sales and marketing11,534 13,308 
General and administrative (1)
18,617 7,594 
Total stock-based compensation expense (2)
$42,187 $31,208 
(1) Includes $9.6 million acceleration of share-based payment expense for one of the Company’s executives due to his departure at the end of June 2021.
(2) Includes $0.5 million expense for the three months ended June 30, 2021 due to the restructuring activities commenced in April 2021. Refer to Note 16. Restructuring for more information.
As of June 30, 2021, unrecognized stock-based compensation cost related to outstanding unvested stock options was $17.4 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years. As of June 30, 2021, unrecognized stock-based compensation cost related to outstanding unvested stock units was $290.4 million, which is expected to be recognized over a weighted-average period of approximately 3.0 years. As of June 30, 2021, unrecognized stock-based compensation cost related to PSUs was $21.5 million, which is expected to be recognized over a weighted-average period of approximately 2.5 years.

12.    Accounts Receivable, Deferred Revenue and Performance Obligations
In a response to the COVID-19 pandemic, the Company performed additional procedures to evaluate the creditworthiness of its customers and assess collectability of accounts. Using a current expected credit loss model, the Company determined that, while there may be a delay in collections due to the downturn in economic activity, there has not been a material impact to the risk of credit loss on accounts receivables as of June 30, 2021.
The Company receives payments from customers based upon billing cycles. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company’s right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues the Company has recognized in excess of the amount it has billed to the customer is considered to be a contract asset. Contract assets were $4.1 million and $0.3 million as of June 30, 2021 and June 30, 2020, respectively. The Company has no asset impairment charges related to contract assets for the periods presented. Deferred revenue represents consideration received from customers in excess of revenues recognized.
The following table presents the changes to the Company’s deferred revenue (in thousands):
Three Months Ended June 30,
20212020
Deferred revenue, beginning of period$375,268 $316,327 
Contributions from contract asset1,541 215 
Billings121,177 145,897 
Revenue recognized(180,484)(162,585)
Deferred revenue, end of period$317,502 $299,854 
For the three months ended June 30, 2021 and 2020, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate unrecognized transaction price of remaining performance obligations as of June 30, 2021 was $654.3 million. The Company expects to recognize more than 93% of the balance as revenue in the 24 months following June 30, 2021 and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that
20


has not yet been recognized and does not include contract amounts which are cancellable by the customer and amounts associated with optional renewal periods.

13.    Income Taxes
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely.
The Company recorded an income tax benefit of $0.5 million and provision of $0.3 million for the three months ended June 30, 2021 and 2020, respectively, related to foreign income taxes, research tax credits, and the tax benefit from the acquisition of CodeStream related to the partial release of valuation allowance. Based on the available objective evidence during the three months ended June 30, 2021, the Company believes it is more likely than not that the tax benefits of U.S. and Japan losses incurred during the three months ended June 30, 2021 may not be realized. Accordingly, the Company did not record the tax benefits of U.S. and Japan losses incurred during the three months ended June 30, 2021. The primary difference between the effective tax rate and the statutory tax rate relates to the valuation allowance on the U.S. and Japan losses, foreign tax rate differences, generation of research tax credits, and the tax benefit from the acquisition of CodeStream.

14.    Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee share-based awards and warrants. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options and unvested restricted common stock. As the Company had net losses for each of the three months ended June 30, 2021 and 2020, all potential common shares were determined to be anti-dilutive, resulting in basic and diluted net loss per share being equal. Additionally, the 4.5 million shares underlying the Conversion Option in the Notes were not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive. The Notes were not convertible as of June 30, 2021. 
ASU 2020-06 eliminates the treasury stock method and instead requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share when the instruments may be settled in cash or shares. The required use of the if-converted method did not impact the diluted net loss per share as the Company was in a net loss position.
The following table sets forth the computation of net loss per share, basic and diluted (in thousands, except per share amounts):
 Three Months Ended June 30,
 20212020
Numerator:
Net loss attributable to New Relic$(78,414)$(29,756)
Denominator:
Weighted average shares used to compute net loss per share, basic and diluted63,339 59,927 
Net loss attributable to New Relic per share—basic and diluted$(1.24)$(0.50)
21


The following outstanding options, unvested shares, and ESPP shares were excluded (as common stock equivalents) from the computation of diluted net loss per common share for the periods presented as their effect would have been antidilutive (in thousands):
 As of June 30,
20212020
Options to purchase common stock2,395 3,254 
RSUs3,987 4,370 
PSUs320 112 
ESPP shares89 117 
6,791 7,853 

15.    Revenue by Geographic Location
The following table shows the Company’s revenue by geographic areas, as determined based on the billing address of its customers (in thousands):
 Three Months Ended June 30,
 20212020
United States$123,035 $112,410 
EMEA28,165 25,196 
APAC17,193 14,965 
Other12,091 10,014 
Total revenue$180,484 $162,585 
Substantially all of the Company’s long-lived assets were attributable to operations in the United States as of June 30, 2021 and March 31, 2021.
16.    Restructuring
On April 6, 2021, the Company commenced a restructuring plan to realign its cost structure to better reflect significant product and business model innovation over the past 12 months. As a result of the restructuring plan, the Company incurred charges of approximately $12.8 million for employee terminations and other costs associated with the restructuring plan. Most of these charges consisted of cash expenditures and stock-based compensation expense which were recognized and mostly paid off in the first quarter of fiscal 2022.
The following table shows the Company’s restructuring charges for the three months ended June 30, 2021 (in thousands):
Three Months Ended June 30, 2021
Severance and other employee costsStock-based compensationAsset impairmentTotal
Sales and marketing$10,965 $406 $104 $11,475 
General and administrative1,183 87 26 1,296 
Total$12,148 $493 $130 $12,771 

22


Item 2. 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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 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 Part II, Item 1A “Risk Factors” included elsewhere in this report. 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. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled “Special Note Regarding Forward-Looking Statements” in this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments, except as required by law.
Overview
New Relic delivers the observability platform for engineers to plan, build, deploy and operate more perfect software. We offer a comprehensive suite of products delivered on an open and extensible cloud-based platform that enables organizations to collect, store and analyze massive amounts of data in real time so they can better operate their applications and infrastructure and improve their digital customer experience.
New Relic One is our purpose-built offering for customers to land all of their telemetry data quickly and affordably in one place, and to translate that data into actionable insights. We believe a truly unified front-end that sits on top of a single database helps our users avoid complexity and confusion that would be associated with relying instead upon multiple different but related products.
Our revenue for the three months ended June 30, 2021 and 2020 was $180.5 million and $162.6 million, respectively, representing year-over-year growth of 11%. Although we have experienced substantial revenue growth in historical periods, we have had difficulty maintaining our historical growth rates as our business has scaled, even in the periods where our revenue grew in absolute terms. Meanwhile, we have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net losses in each period since our inception, including net losses attributable to New Relic of $78.4 million and $29.8 million for the three months ended June 30, 2021 and 2020, respectively. Our accumulated deficit as of June 30, 2021 was $611.3 million.
Internationally, we currently offer our products in Europe, the Middle East, and Africa, (“EMEA”); Asia-Pacific, (“APAC”); and other non-U.S. locations, as determined based on the billing address of our customers, and our revenue from those regions constituted 16%, 10%, and 7%, respectively, of our revenue for the three months ended June 30, 2021, and 16%, 9%, and 6%, respectively, of our revenue for the three months ended June 30, 2020. We believe there is an opportunity to increase our international revenue overall and as a proportion of our revenue, and we are increasingly investing in our international operations and intend to invest in further expanding our footprint in international markets.     
Our employee headcount has decreased to 1,934 employees as of June 30, 2021 from 2,232 as of June 30, 2020, partially as a result of the restructuring plan we implemented in April 2021 to realign our cost structure and resources.
The COVID-19 pandemic continues to affect the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration of the pandemic; impact on our customers and our sales cycles; impact on our customer, employee, and industry events; impact on our employee recruitment and attrition; and effect on our vendors, all of which remain uncertain and cannot be predicted at this time.
We will continue to actively monitor the situation and have taken and may take further actions that alter our business operations as may be required or recommended by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. As the development, distribution and public acceptance of treatments and vaccines progress, we continue to evaluate and refine our operational strategies. Our revenue and deferred revenue have been, in part, negatively impacted by the slowdown in activity associated with the COVID-19 pandemic, but at this point, the extent of any continuing impact to our financial condition or results of operations, including cash flows, is uncertain, particularly as the COVID-19 pandemic continues to persist for an extended period of time. Furthermore, due to our historical reliance upon a subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Other factors affecting our performance are discussed below, although we caution you that the COVID-19 pandemic may also further impact these factors.
23


In addition, on July 30, 2020, we announced an updated pricing strategy that prices customer spend based upon their consumption; customers may be charged upon their usage in arrears, which we refer to as “Pay as You Go,” or they may commit to a minimum spend over their contracted period in exchange for a discount on their usage pricing, which we refer to as “Annual Pool of Funds.” Consumption under this model is measured by the number of users and data ingested into our system, thereby collapsing what had previously been a number of different products priced in individualized ways into a simplified strategy that is intended to drive consumption across our platform. Although we have seen, in the near term, that this transition has had a negative impact on our results of operations, we believe that this pricing model transition will continue to increase our new and existing customer adoption and allow us to better retain and expand within our existing customer accounts over the long term, and thereby have a positive impact on sales and marketing productivity. However, due to our historical reliance upon a subscription-based business model, improvement in the market adoption of our products due to this pricing model transition would not be fully reflected in our results of operations until future periods.
On April 6, 2021, we announced a restructuring plan to realign our cost structure to better reflect the significant product and business model innovation that occurred over the past 12 months. We expect that go-to-market operations in our consumption-based business model will be more efficient, thus requiring less investment, than our former more traditional subscription model. In furtherance of this strategy shift, we have reallocated some spending to increase our investment on research and development. We believe these initiatives will better align resources to provide further operating flexibility and position the business for its long-term success.
Factors Affecting Our Performance
Market Adoption of Our Platform. Our success, including our rate of customer expansions and renewals, is dependent on the market adoption of our platform. With the introduction of new technologies, the evolution of our platform and new market entrants, competition has intensified and we expect competition to intensify in the future. We employ a land, expand, and standardize business model centered around offering a platform that is open, connected and programmable. We believe that we have built a highly differentiated platform and we intend to continue to invest in building additional offerings, features and functionality that expand our capabilities and facilitate the extension of our platform to new use cases. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion. Our ability to improve market adoption of our platform will also depend on a number of other factors, including the competitiveness and pricing of our products, offerings of our competitors, success of international expansion, and effectiveness of our sales and marketing efforts. With the shift in our pricing strategy, which will now rely primarily upon a per-user license fee and payment based on the quantity of data ingested, we will be more closely tying our revenue to the usage of our platform. Together with our new pricing strategy, we also launched a new, robust free tier and improved self-service capabilities, which we expect to result in a material increase to our marketing opportunities in converting free users into new paying customers.
Retention and Expansion. A key factor in our success is the retention and expansion of our platform usage with our existing customers. In order for us to continue to grow our business, it is important to generate additional revenue from our existing customers, and we intend to do this in several ways. As we improve our existing products and platform capabilities and introduce new products, we believe that the demand for our products will generally grow. We also believe that there is a significant opportunity for us to increase our revenue from sales to our current customers as they become more familiar with our products and adopt our products to address additional business use cases. In addition, we believe the shift in our pricing strategy will allow sales resources to focus energy on helping customers increase their data ingestion and the number of users and use cases.
Key Operating Metrics
The pricing changes announced in the second quarter of fiscal 2021 shifted our business model away from a reliance upon subscription-based revenue to a reliance upon consumption-based revenue.
As such, beginning with this fiscal quarter ended June 30, 2021, we retired annual recurring revenue (“ARR”) and all of our traditional subscription-based key operating metrics that rely upon ARR. In place of ARR and ARR-derived metrics, we are providing metrics that we believe provide better insight into our business now that we are entering into contracts that rely primarily upon consumption-based revenue. We believe the change in methodology and focus on consumption-based metrics provide improved disclosures for our investors by better aligning our key operating metrics with our financial statements and will provide a better representation of these important components of our operating model and business performance as we continue to grow our business. The calculation of the key operating metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.
24


Number of Active Customer Accounts. We believe that the number of Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, aggregated at the parent hierarchy level, for which we have recognized any revenue in the fiscal quarter. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a parent organization that has created a new Active Customer Account, this new Active Customer Account is combined with, and revenue from this new Active Customer Account is included with, the original Active Customer Account. In addition, our Active Customer Accounts metric is subject to adjustments for acquisitions, consolidations, spin-offs, and other market activity. We round the number of Active Customer Accounts that we report as of a particular date down to the nearest hundred.
For the three-month period ended June 30, 2021, we had 14,100 Active Customer Accounts, which is down from 15,400 Active Customer Accounts for the three-month period ended June 30, 2020 and remained flat sequentially from the three-month period ended March 31, 2021.
Number of Active Customer Accounts with Revenue Greater than $100,000. Large customer relationships generally lead to scale and operating leverage in our business model. Compared with smaller customers, large customers present a greater opportunity for us to sell additional capacity because they often have larger budgets, a wider range of potential use cases, and greater potential for migrating new workloads to our platform over time. As a measure of our ability to scale with our customers and attract large enterprises to our platform, we count the number of Active Customer Accounts for which we have recognized greater than $100,000 in revenue in the trailing 12-months.
For the three-month period ended June 30, 2021, we had 964 Active Customer Accounts with trailing 12-month revenue over $100,000, which was a 12% increase compared to 862 for the three-month period ended as of June 30, 2020 and a 2% increase compared to 945 for the three-month period ended March 31, 2021.
Percentage of Revenue from Active Customer Accounts Greater than $100,000. In addition to the number of Active Customer Accounts with revenue greater than $100,000, we also look at our percentage of overall revenue we receive from those accounts in any given quarter as an indicator of our relative performance when selling to our large customer relationships or our smaller revenue accounts. An increase in the percentage of revenue reflects relative higher growth in our large customer relationships, whereas a decrease in the percentage reflects relative higher growth in our performance with smaller revenue customers.
Our percentage of revenue from Active Customers with trailing 12-month revenue greater than $100,000 was 79% for the three-month period ended June 30, 2021, compared to 76% for the three-month period ended June 30, 2020 and 79% for the three-month period ended March 31, 2021.
Net Revenue Retention Rate. We believe the growth in use of our platform by our existing Active Customer Accounts is an important measure of the health of our business and our future growth prospects. We monitor our net revenue retention rate (“NRR”) to measure this growth. We expect our NRR to increase when Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. We expect our NRR to decrease when Active Customer Accounts cease or reduce their usage of a product.
To calculate NRR, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior fiscal year. Next, we identify the measurement period as the 12-month period ending with the period reported and the prior comparison period as the corresponding period in the prior year. NRR is the quotient obtained by dividing the revenue generated from a cohort of Active Customer Accounts in the measurement period by the revenue generated from that same cohort in the prior comparison period.
Our NRR decreased to 111% for the period ended June 30, 2021 from 122% for the period ended June 30, 2020 and from 112% for the period ended March 31, 2021. The decrease was expected in part due to historical customer churn and in part due to our shift to consumption pricing.
25


Key Components of Results of Operations
Revenue
For the periods presented, we offered access to our products and/or platform under subscription and usage-based plans that include service and support for one or more of our products. For our paying customers, we offer a variety of pricing plans based on the particular product purchased. Our plans typically have terms of one year, although some of our customers commit for shorter or longer periods.
Most of our revenue comes from contracts that are non-cancellable over the contract term. We had remaining performance obligations in the amount of $654.3 million and $726.8 million as of June 30, 2021 and March 31, 2021, respectively, consisting of both billed and unbilled consideration.
Deferred revenue consists of billings or payments received in advance of revenue being recognized, and can fluctuate with changes in billing frequency and other factors. As a result of our mix of subscription plans and billing frequencies, we do not believe that changes in our deferred revenue in a given period are directly correlated with our revenue growth in that period.
The first two quarters of each fiscal year usually have lower or potentially negative sequential remaining performance obligations and deferred revenue growth than the third and fourth fiscal quarters, during which we generally benefit from a larger renewal pool and opportunity to upsell existing customers. As a result, over time we have seen stronger sequential revenue results in our fourth and first fiscal quarters as our deferred revenue is recognized. We expect that this seasonality will continue to affect our sales and operating results in the future, as a portion of our overall revenue continues to be derived from our subscription-based contracts that remain in our install base, which can make it difficult to achieve sequential growth in certain financial metrics or could result in sequential declines on a quarterly basis as we continue to convert our customers to the new consumption model.
With our shift in pricing strategy, we may experience additional variation from the seasonality trends we have seen in the past for revenue, remaining performance obligations, and deferred revenue. Our shift to a consumption model will allow our customers to choose lower up-front commitments and to instead pay for their consumption in excess of their commitments. In addition, when we recognize variable consideration, we accelerate the drawdown of deferred revenue, if applicable. Furthermore, because our sales representatives are now compensated based on customers’ level of consumption, there may be less incentive to obtain early renewals. Should all of these occur as we expect, we may experience downward pressure on our remaining performance obligations and deferred revenue. Meanwhile, in the event our customers’ consumption usage exceeds their up-front commitments in a meaningful amount, we would expect to see a step up in revenue growth. In addition, our transactions vary by quarter, and within each quarter, a significant portion of our transactions typically close in the last two weeks of that quarter. In the past, prior to our shift in pricing strategy, if we were unable to close one or more transactions in a particular period, or if an expected transaction was delayed until a subsequent period, our results of operations for that period and for any future periods may have been harmed. However, since our change in pricing strategy, we expect less financial impact from end-of-quarter concentration of our transactions.
In addition, our revenue and deferred revenue have been negatively impacted, in part, by the slowdown in activity associated with the COVID-19 pandemic as well as by our change in pricing strategy announced on July 30, 2020. Meanwhile, although we have seen indications of improved market acceptance of our platform and new pricing strategy, due to our historical reliance upon a subscription-based business model, improvement in the market adoption of our products due to this pricing model transition would also not be fully reflected in our results of operations until future periods.
Cost of Revenue
Cost of revenue consists of expenses relating to data center operations, hosting-related costs, payment processing fees, depreciation and amortization, consulting costs, and salaries and benefits of operations and global customer support personnel. Salaries and benefits costs associated with our operations and global customer support personnel consist of salaries, benefits, bonuses, and stock-based compensation. We plan to continue increasing the capacity, capability, and reliability of our infrastructure to support the growth of our customer adoption and the number of products we offer, as customer usage continues to grow. Additionally, we are continuing to build out services and functionality in the public cloud with a view to migrating our entire platform over time from third-party data center hosting facilities to public cloud hosting providers. We have decreased the amount of capital expenditures on hosting equipment for use in our data center hosting facilities as we transition to greater dependence on cloud hosting providers. This public cloud migration has resulted and will continue to result in significant increased costs in the short term as we are incurring cloud migration costs as well as costs to maintain our data center operations.
26


Gross Profit and Margin
Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has been, and will continue to be, affected by a number of factors, including the timing and extent of our investments in our operations and global customer support personnel, hosting-related costs, and the amortization of capitalized software. Although we expect our gross margin to fluctuate from period to period as a result of these factors, our recent public cloud migration and, to a lesser extent, our pricing transition, have contributed to lower gross margins and we expect to continue to experience additional downward pressure on margins in the short-term.
Operating Expenses
Personnel costs, which consist of salaries, benefits, bonuses, stock-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.
Research and Development. Research and development expenses consist primarily of personnel costs and an allocation of our general overhead expenses. We continue to focus our research and development efforts on adding new features and products, and increasing the functionality and enhancing the ease of use of our existing products. We capitalize the portion of our software development costs that meets the criteria for capitalization.
We plan to continue to hire employees for our engineering, product management, and design teams to support our research and development efforts. As a result, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future. Although our research and development expenses may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our research and development expenses.
Sales and Marketing. Sales and marketing expenses consist of personnel costs for our sales, marketing, and business development employees and executives. Commissions are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period of benefit. With our shift to a consumption model and shift in pricing strategy, we expect that a significant majority of commissions will no longer be capitalized and will instead mostly be expensed as incurred. Sales and marketing expenses also include the costs of our marketing and brand awareness programs, including our free tier offering.
We expect that go-to-market operations in our new consumption-based business model will be more efficient, and requires less investment, than in our former more traditional subscription model. In furtherance of this strategy shift, we have reallocated some spending from sales and marketing to increase our investment on research and development. While we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, our sales and marketing expenses may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our sales and marketing expenses.
General and Administrative. General and administrative expenses consist primarily of personnel costs for our administrative, legal, human resources, information technology, finance and accounting employees, and executives. Also included are non-personnel costs, such as legal and other professional fees.
We plan to continue to expand our business both domestically and internationally, and we expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our general and administrative expenses to remain flat or decrease modestly as a percentage of our revenue over the long term, although our general and administrative expense may fluctuate from period to period depending on the timing and extent of our general and administrative expenses, such as litigation or accounting costs.
Other Income (Expense)
Other income (expense) consists primarily of interest income, interest expense, foreign exchange gains and losses, and gains on lease modifications.

27


Results of Operations
The following tables summarize our consolidated statements of operations data for the periods presented and as a percentage of our revenue for those periods.
 Three Months Ended June 30,
 20212020
 (in thousands, except per share amounts)
Revenue$180,484 $162,585 
Cost of revenue (1)59,264 33,273 
Gross profit121,220 129,312 
Operating expenses:
Research and development (1)48,730 40,844 
Sales and marketing (1)102,813 85,136 
General and administrative (1)43,565 29,434 
Total operating expenses195,108 155,414 
Loss from operations(73,888)(26,102)
Other income (expense):
Interest income938 2,781 
Interest expense(1,226)(6,104)
Other expense(336)(395)
Loss before income taxes(74,512)(29,820)
Income tax provision (benefit)(453)332 
Net loss$(74,059)$(30,152)
Net loss and adjustment attributable to redeemable non-controlling interest(4,355)396 
Net loss attributable to New Relic$(78,414)$(29,756)
Net loss attributable to New Relic per share, basic and diluted$(1.24)$(0.50)
Weighted-average shares used to compute net loss per share, basic and diluted63,339 59,927 
(1) Includes stock-based compensation expense as follows:
 Three Months Ended June 30,
 20212020
 (in thousands)
Cost of revenue$1,072 $1,502 
Research and development10,964 8,804 
Sales and marketing11,534 13,308 
General and administrative (2)
18,617 7,594 
Total stock-based compensation expense (3)
$42,187 $31,208 
(2) Includes $9.6 million acceleration of share-based payment expense for one of our executives due to his departure at the end of June 2021.
(3) Includes $0.5 million expense for the three months ended June 30, 2021 due to the restructuring activities commenced in April 2021. Refer to Note 16. Restructuring for more information.
28


 Three Months Ended June 30,
 20212020
 (as a percentage of revenue)
Revenue100 %100 %
Cost of revenue (1)33 20 
Gross profit67 80 
Operating expenses:
Research and development (1)27 25 
Sales and marketing (1)57 53 
General and administrative (1)24 18 
Total operating expenses108 96 
Loss from operations(41)(16)
Other income (expense):
Interest income
Interest expense(1)(4)
Other income (expense), net— — 
Loss before income taxes(41)(18)
Income tax provision— — %
Net loss(41)%(18)%
Net loss and adjustment attributable to redeemable non-controlling interest(2)— 
Net loss attributable to New Relic(43)%(18)%
 (1) Includes stock-based compensation expense as follows:
 Three Months Ended June 30,
 20212020
 (as a percentage of revenue)
Cost of revenue%%
Research and development
Sales and marketing
General and administrative10 
Total stock-based compensation expense23 %19 %
Revenue
Three Months Ended June 30,Change
20212020Amount%
 (dollars in thousands)
United States$123,035 $112,410 $10,625 %
EMEA28,165 25,196 2,969 12 
APAC17,193 14,965 2,228 15 
Other12,091 10,014 2,077 21 
Total revenue$180,484 $162,585 $17,899 11 %
Total revenue increased $17.9 million, or 11%, in the three months ended June 30, 2021 compared to the same period of 2020. Our revenue from the United States increased $10.6 million, or 9%, our revenue from EMEA increased $3.0 million, or 12%, our revenue from APAC increased $2.2 million, or 15%, and our revenue from other regions increased $2.1 million, or 21% in the three months ended June 30, 2021 compared to the same period of 2020, primarily as a result of growth in the existing customer base.
29


Cost of Revenue
 Three Months Ended June 30,Change
 20212020Amount%
 (dollars in thousands)
Cost of revenue$59,264 $33,273 $25,991 78 %
Cost of revenue increased $26.0 million, or 78%, in the three months ended June 30, 2021 compared to the same period of 2020. The increase was primarily a result of a $27.4 million increase in hosting-related costs as a result of the additional expenses incurred in connection with our public cloud migration. The remaining increase was due to an increase in depreciation and amortization expense of $0.6 million as a result of site equipment at our third-party data centers. This was partially offset by a $2.2 million decrease in personnel-related costs and a $0.1 million decrease in payment processing fees.
Research and Development
 Three Months Ended June 30,Change
 20212020Amount%
 (dollars in thousands)
Research and development$48,730 $40,844 $7,886 19 %
Research and development expenses increased $7.9 million, or 19%, in the three months ended June 30, 2021 compared to the same period of 2020. The increase was primarily a result of an increase in personnel-related costs of $6.6 million, driven by headcount and merit-based compensation increases. The remaining increase was mostly due to a $1.1 million increase in facilities and depreciation expenses.
Sales and Marketing
 Three Months Ended June 30,Change
 20212020Amount%
 (dollars in thousands)
Sales and marketing$102,813 $85,136 $17,677 21 %
Sales and marketing expenses increased $17.7 million, or 21%, in the three months ended June 30, 2021 compared to the same period of 2020. The increase was primarily a result of an increase in personnel-related costs of $10.8 million, driven by severance charges resulting from the restructuring activities commenced in April 2021. The remaining increase was due to a $2.9 million increase in allocated costs, including facilities, depreciation, and costs associated with our free tier offering, a $2.8 million increase in marketing programs, a $1.5 million increase in software subscription and consulting expenses, and a $1.2 million increase in travel expenses as COVID-19 travel restrictions ease.
General and Administrative
 Three Months Ended June 30,Change
 20212020Amount%
 (dollars in thousands)
General and administrative$43,565 $29,434 $14,131 48 %
General and administrative expenses increased $14.1 million, or 48%, in the three months ended June 30, 2021 compared to the same period of 2020. The increase was primarily a result of an increase in personnel-related costs of $12.2 million, driven by a $10.2 million stock-based compensation charge mostly from the acceleration of share-based payment expense for one of our executives due to his departure from the company at the end of June 2021. The remaining increase was due to a $1.4 million increase in legal and accounting expenses, a $0.3 million increase in software subscription and consulting expenses, and a $0.1 million increase in travel expense.
30


Other Income (Expense)
 Three Months Ended June 30,Change
 20212020Amount%
 (dollars in thousands)
Other expense$(624)$(3,718)$3,094 (83)%
Other expense decreased by $3.1 million, or 83% in the three months ended June 30, 2021 compared to the same period of 2020. The decrease was primarily due to a decrease in interest expense for our convertible debt due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contract on an Entity’s Own Equity.
Provision for (Benefit from) Income Tax
 Three Months Ended June 30,Change
20212020Amount%
 (dollars in thousands)
Income tax provision (benefit)$(453)$332 $(785)236 %
We had an income tax benefit of $0.5 million for the three months ended June 30, 2021 as compared to an income tax expense of $0.3 million for the same period of 2020. The change of $0.8 million, or 236%, was mostly due to the income tax benefit recognized as a result of our CodeStream acquisition.
Net Loss and Adjustment Attributable to Redeemable Non-controlling Interest
 Three Months Ended June 30,Change
20212020Amount%
 (dollars in thousands)
Net loss and adjustment attributable to redeemable non-controlling interest$(4,355)$396 $(4,751)1,200 %
Net loss and adjustment attributable to redeemable non-controlling interest decreased by $4.8 million or 1,200%, in the three months ended June 30, 2021 compared to the same period of 2020. The decrease is related to the redeemable non-controlling interest’s adjustment to estimated redemption value of our joint venture in New Relic K.K. offset by share of associated losses.
31


Non-GAAP Financial Measures
Non-GAAP (Loss) Income From Operations    
To supplement our consolidated financial statements presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable to New Relic. We define non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable to New Relic as the respective GAAP balance, adjusted for, as applicable: (1) stock-based compensation expense, (2) amortization of stock-based compensation capitalized in software development costs, (3) the amortization of purchased intangibles, (4) employer payroll tax expense on equity incentive plans, (5) amortization of debt discount and issuance costs, (6) the transaction costs related to acquisitions, (7) lawsuit litigation cost and other expense, (8) gain or loss from lease modification, and (9) adjustment to redeemable non-controlling interest. We use non-GAAP financial measures, including non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable to New Relic, internally to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. In addition, our bonus opportunity for eligible employees and executives is based in part on non-GAAP income (loss) from operations.
We believe these measures are useful to investors, as a supplement to GAAP measures, in evaluating our operational performance. We have provided below a reconciliation of GAAP loss from operations to non-GAAP income (loss) from operations and a reconciliation of GAAP net loss attributable to New Relic to non-GAAP net income (loss) attributable to New Relic. We believe non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable to New Relic are useful to investors and others in assessing our operating performance due to the following factors:
Stock-based compensation expense and amortization of stock-based compensation capitalized in software development costs. We utilize share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of our stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.
Amortization of purchased intangibles and transaction costs related to acquisitions. We view amortization of purchased intangible assets as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period. Similarly, we view acquisition-related expenses as events that are not necessarily reflective of operational performance during a period.
Employer payroll tax expense on equity incentive plans. We exclude employer payroll tax expense on equity incentive plans as these expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise. As a result, these taxes may vary in any particular period independent of the financial and operating performance of our business.
Amortization of debt discount and issuance costs. In May 2018, we issued $500.25 million of our 0.50% convertible senior notes due 2023 (the “Notes”), which bear interest at an annual fixed rate of 0.5%. The effective interest rate of the Notes was 5.74%. Effective April 1, 2021 the Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contract on an Entity’s Own Equity. As a result of the adoption, the debt conversion option and debt issuance costs previously attributable to the equity component will no longer be presented in equity. Similarly, the debt discount, which is equal to the carrying value of the embedded conversion feature upon issuance, will no longer be amortized into income as interest expense over the life of the instrument. This resulted in a $54.2 million decrease to the opening balance of accumulated deficit, a $100.1 million decrease to the opening balance of additional paid-in capital, and a $45.9 million increase to the opening balance of the Notes, net on the consolidated balance sheet. The debt issuance costs were amortized as interest expense. The expense for the amortization of debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense will provide for a more useful comparison of our operational performance in different periods.
Transaction costs related to acquisitions. We may from time to time incur direct transaction costs related to acquisitions. We believe it is useful to exclude such charges because it does not consider such amounts to be part of the ongoing operation of our business.
Lawsuit litigation cost and other expense. We may from time to time incur charges or benefits related to litigation that are outside of the ordinary course of our business. We believe it is useful to exclude such charges or benefits because we do not
32


consider such amounts to be part of the ongoing operation of our business and because of the singular nature of the claims underlying the matter.
Gain or loss from lease modification. We may incur a gain or loss from modification related to lease agreements. We believe it is useful to exclude such charges or benefits because we do not consider such amounts to be part of the ongoing operation of our business and because of the singular nature of benefit or charge from such events.
Adjustment to redeemable non-controlling interest. In fiscal year 2021, we made an adjustment to the value of redeemable non-controlling interest in connection with our joint venture in New Relic K.K. We believe it is useful to exclude the adjustment to redeemable non-controlling interest because it may not be indicative of our future operating results and that investors benefit from an understanding of our operating results without giving effect to this adjustment.
Restructuring charges. In April 2021, we commenced a restructuring plan to realign our cost structure to better reflect significant product and business model innovation over the past 12 months. As a result of the restructuring plan, we incurred charges of approximately $12.8 million for employee terminations and other costs associated with the restructuring plan. Most of these charges consisted of cash expenditures and stock-based compensation expense and were recognized in the first quarter of fiscal 2022. We believe it is appropriate to exclude the restructuring charges because they are not indicative of our future operating results.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP and may differ from non-GAAP financial measures used by other companies in our industry and exclude expenses that may have a material impact on our reported financial results.
The following tables present our non-GAAP income (loss) from operations and our non-GAAP net income (loss) attributable to New Relic and reconcile our GAAP loss from operations to non-GAAP income (loss) from operations and our GAAP net loss attributable to New Relic to our non-GAAP net income (loss) attributable to New Relic for the three months ended June 30, 2021 and 2020 (in thousands):
 Three Months Ended June 30,
 20212020
GAAP loss from operations$(73,888)$(26,102)
Plus: Stock-based compensation expense42,187 31,208 
Plus: Amortization of purchased intangibles1,676 1,276 
Plus: Transaction costs related to acquisitions361 — 
Plus: Amortization of stock-based compensation capitalized in software development costs420 239 
Plus: Employer payroll tax on employee equity incentive plans813 948 
Plus: Restructuring charges (1)
12,279 — 
Non-GAAP income (loss) from operations$(16,152)$7,569 
 Three Months Ended June 30,
 20212020
GAAP net loss attributable to New Relic$(78,414)$(29,756)
Plus: Stock-based compensation expense42,187 31,208 
Plus: Amortization of purchased intangibles1,676 1,276 
Plus: Transaction costs related to acquisitions361 — 
Plus: Amortization of stock-based compensation capitalized in software development costs420 239 
Plus: Employer payroll tax on employee equity incentive plans813 948 
Plus: Amortization of debt discount and issuance costs587 5,466 
Plus: Adjustment to redeemable non-controlling interest4,395 — 
Plus: Restructuring charges (1)
12,279 — 
Non-GAAP net income (loss) attributable to New Relic$(15,696)$9,381 
(1) Restructuring related charge for the stock-based compensation expense of $0.5 million is included on its respective line items.
33


Non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable to New Relic for the periods presented reflects the same trends discussed above in “Results of Operations.” Although we have generated non-GAAP income from operations and non-GAAP net income attributable to New Relic in past quarters and while we expect with increased efficiencies for these numbers to improve, we expect to remain in a loss position in the near future as we continue to incur additional expenses during our public cloud migration and due to an increase in commission expense. In prior periods, commissions were mostly capitalized and amortized in future periods. With our shift to a consumption model and shift in pricing strategy, a significant majority of commissions will no longer be capitalized and will instead mostly be expensed as incurred.

34


Liquidity and Capital Resources
 Three Months Ended June 30,
 20212020
 (in thousands)
Cash provided by operating activities$9,872 $35,148 
Cash provided by (used in) investing activities4,407 (72,215)
Cash provided by financing activities4,797 1,424 
Net increase (decrease) in cash, cash equivalents and restricted cash$19,076 $(35,643)
To date, we have financed our operations primarily through the issuance of the Notes, private and public equity financings and customer payments. We believe that our existing cash, cash equivalents, and short-term investment balances, together with cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the timing of our public cloud migration and the related decreased spending on capital expenditures, the introduction of new and enhanced products, seasonality of our billing activities, the timing and extent of spending to support our growth strategy, the continued market acceptance of our products, and competitive pressures. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies and intellectual property rights. We may need or choose to raise additional funds from equity or debt securities in order to meet those capital requirements. 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.
Operating Activities
During the three months ended June 30, 2021, cash provided by operating activities was $9.9 million as a result of a net loss of $74.1 million, adjusted by non-cash charges of $64.9 million and a change of $19.1 million in our operating assets and liabilities. The change in our operating assets and liabilities was primarily the result of a $80.6 million decrease in accounts receivable, a $4.9 million increase in accounts payable, and a $2.7 million decrease in lease right-of-use assets. This was partially offset by a $57.8 million decrease in deferred revenue, a $8.6 million decrease in accrued compensation and benefits and other liabilities, and a $2.5 million decrease in lease liabilities.
During the three months ended June 30, 2020, cash provided by operating activities was $35.1 million as a result of a net loss of $30.2 million, adjusted by non-cash charges of $57.5 million and a change of $7.8 million in our operating assets and liabilities. The change in our operating assets and liabilities was primarily the result of a $36.1 million decrease in accounts receivable, a $5.6 million increase in accrued compensation and benefits and other liabilities due to increased headcount, and a $1.3 million increase in lease liabilities. This was partially offset by a $16.5 million decrease in deferred revenue, a $9.4 million increase in deferred contract acquisition costs, a $3.9 million decrease in accounts payable, a $3.2 million increase in prepaid expenses and other assets, and a $2.2 million increase in lease right-of-use assets.
Investing Activities
Cash used in investing activities during the three months ended June 30, 2021 was $4.4 million, primarily as a result of purchases of short-term investments of $23.8 million, cash paid for acquisition, net of cash acquired, of $7.2 million, purchases of property and equipment of $2.2 million, and increases in capitalization of software development costs of $2.9 million. This was partially offset by proceeds from the maturity and sale of short-term investments of $40.5 million.
Cash used in investing activities during the three months ended June 30, 2020 was $72.2 million, primarily as a result of purchases of short-term investments of $73.4 million, purchases of property and equipment of $8.2 million, and increases in capitalization of software development costs of $3.7 million. This was partially offset by proceeds from the maturity and sale of short-term investments of $13.1 million.
Financing Activities
Cash provided by financing activities during the three months ended June 30, 2021 was $4.8 million, which was the result of proceeds from the exercise of stock options.
35


Cash provided by financing activities during the three months ended June 30, 2020 was $1.4 million, which was the result of proceeds from the exercise of stock options.
Contractual Obligations and Commitments
Our principal contractual commitments primarily consist of obligations under leases for office space and purchase commitments. Except as set forth in Note 9 — Leases and Note 10 — Commitments and Contingencies contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q, there were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements for the fiscal year ended March 31, 2021 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (our “Annual Report”), as filed with the Securities and Exchange Commission, (“SEC”), on May 14, 2021.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, (“GAAP”). In the preparation of these consolidated financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates.
Except for the early adoption of ASU 2020-06, Accounting for Convertible Instruments and Contract on an Entity’s Own Equity (Subtopic 815-40), there have been no significant changes in our critical accounting policies and estimates during the three months ended June 30, 2021 as compared to the critical accounting policies and estimates described in our Annual Report.
Recent Accounting Pronouncements
See Note 1, Description of Business and Summary of Significant Accounting Policies contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our subscription and usage-based agreements are primarily denominated in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and Japanese Yen. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our historical consolidated financial statements.
Interest Rate Risk
We had cash and cash equivalents of $259.9 million as of June 30, 2021, consisting of bank deposits and money market funds. These interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant. We have an agreement to maintain cash balances at a financial institution of no less than $5.6 million as collateral for several letters of credit in favor of our landlords. The letters of credit carry a fixed interest rate of 1%.
We had short-term investments of $557.2 million as of June 30, 2021, consisting of certificates of deposit, commercial paper, corporate notes and bonds, and U.S. treasury securities. Our investments in marketable securities are made for capital
36


preservation purposes. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.
A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
In March 2018, we issued $500.25 million aggregate principal amount of the Notes. The fair value of the Notes is subject to interest rate risk, market risk and other factors due to the conversion feature in the Notes. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized issuance on our balance sheet, and we present the fair value for required disclosure purposes only.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
37


PART II — OTHER INFORMATION

Item 1. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. This description includes any material changes to and supersedes the description of the risk factors disclosed in Part I, Item 1A of our Annual Report. We have marked with an asterisk (*) those risks described below that reflect material substantive changes from the risks disclosed in Part I, Item 1A of our Annual Report.
The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and accompanying notes.
Risks Related to Our Business and Our Industry
We have limited experience with respect to determining the optimal prices and pricing structures for our products and have employed evolving pricing models, which subject us to challenges that could make it difficult for us to derive value from our customers and may adversely affect our operating results. *
We have evolved our pricing models over time and we expect that they will continue to evolve. For example, we have offered a variety of pricing plans based on the particular product purchased by an account, number of servers monitored, number of applications monitored, or number of mobile devices monitored; and we offer access to our products under subscription plans that include service and support for one or more of our products. However, on July 30, 2020, we announced an updated pricing strategy that prices customer spend based upon their consumption; customers may be charged upon their usage in arrears, which we refer to as “Pay as You Go,” or they may commit to a minimum spend over their contracted period in exchange for a discount on their usage pricing, which we refer to as “Annual Pool of Funds.” Consumption under this model is measured by number of users and data ingested into our system, thereby collapsing what had previously been a number of different products priced in individualized ways into a simplified strategy that is intended to drive consumption across our platform.
This updated pricing strategy may ultimately result in a higher total cost to our customers generally as data volumes increase over time, or may cause our customers to limit or decrease usage in order to stay within budgeted amounts or lower their costs, making it more difficult for us to compete in our markets or negatively impacting our financial results. We have seen that the pricing transition has negatively impacted our revenue and deferred revenue for certain customers at the time of their renewal. For example, some customers have decided to take advantage of our new pricing model and choose smaller upfront commitments in favor of spending on actual consumption in excess of committed amounts. Whether our pricing model transition will prove successful is subject to numerous uncertainties, including but not limited to: customer demand, renewal and expansion rates, our ability to further develop and scale infrastructure, the ability of our sales force to successfully execute new sales strategies, tax and accounting implications, pricing, and our costs. In addition, the metrics we use to gauge the status and success of our pricing model transition may continue to evolve over the course of the transition as significant trends emerge. For example, beginning with the fiscal quarter ended June 30, 2021, we retired annual recurring revenue (“ARR”) and all of our traditional subscription-based key operating metrics that rely upon ARR. In place of ARR and ARR-derived metrics, we are providing metrics that we believe provide better insight into our business now that we are entering into contracts that rely primarily upon consumption-based revenue.
38


We have seen indications of acceptance of our pricing model from our customers and the market in general; however if our pricing model fails to gain continued or broader customer and market acceptance, our business and results of operations could be harmed. In addition, our evolving pricing models may allow competitors with different pricing models to attract customers unfamiliar or uncomfortable with our pricing models, which would cause us to lose business or modify our pricing models, both of which could adversely affect our revenues and operating margins.
We expect that we will continue to evolve our pricing model, including as a result of global economic conditions; reductions in our customers’ spending levels generally; the introduction of new products and services; the evolution of existing products and services; or changes in how computing infrastructure is broadly consumed. We have introduced and expect to continue to introduce variations to our pricing models and other pricing programs that provide broader usage and cost predictability for our customers. Although we may believe that these pricing changes will drive net new customers, increase customer adoption, and support our transition to a new model, it is possible that they will not and may potentially cause confusion with our customers, which could negatively impact our business, revenue, and other financial results. If we have difficulty determining the appropriate price structure for our products, we may be required from time to time to further revise our pricing structure or reduce our prices, which could adversely affect our business.
The ongoing global coronavirus (“COVID-19”) pandemic could harm our business and results of operations. *
The COVID-19 pandemic continues to impact worldwide economic activity and financial markets and has resulted in authorities implementing numerous measures to contain the virus. In light of the ongoing uncertainty relating to the COVID-19 pandemic and in compliance with shelter-in-place orders and other government executive orders directing that all non-essential businesses close their physical operations, we have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and the communities in which we operate, which could negatively impact our business. These measures include temporarily requiring employees to work remotely, suspending all non-essential travel worldwide for our employees, canceling, postponing or holding virtually sponsored events and discouraging employee attendance at industry events and in-person work-related meetings. While we have a distributed workforce and our employees are accustomed to working remotely, our workforce is not normally fully remote and our employees travel frequently to establish and maintain relationships with one another and with our customers, partners and investors. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the COVID-19 pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration of the pandemic and the successful rollout of vaccines; impact on our customers and our sales cycles; impact on our customer, employee, and industry events; and effect on our vendors, all of which are uncertain and cannot be predicted at this time. In addition, COVID-19 may disrupt the operations of our customers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows. Our revenue and deferred revenue have been negatively impacted, in part, by the slowdown in activity associated with the COVID-19 pandemic, but at this point, the extent of the impact to our financial condition or results of operations, including cash flows, is uncertain, particularly as the COVID-19 pandemic continues to persist for an extended period of time. Furthermore, due to our historical reliance on a subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Meanwhile, our shift to consumption-based pricing contracts, where the revenue we receive is tied to our customers’ actual usage of our products, may further exacerbate the uncertainty with respect to the revenue we receive from our customers. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section.
We have a history of losses and our revenue growth rate could continue to decline over time. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability. *
We have incurred net losses in each fiscal period since our inception, including net loss attributable to New Relic of $78.4 million and $29.8 million in the three months ended June 30, 2021 and 2020, respectively. At June 30, 2021, we had an accumulated deficit of $611.3 million. We expect to continue to expend substantial financial and other resources on, among other things:
investments in our research and development team, and the development of new platform offerings, capabilities, features, and functionality;
expansion of our operations and infrastructure, both domestically and internationally;
hiring of additional employees; and
39


general administration, including legal, accounting, and other expenses related to our growing operations and infrastructure.
These investments may not result in increased revenue or growth of our business. Our revenue growth rate has declined in recent periods and could continue to decline over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and to achieve and sustain profitability. If we fail to achieve and sustain profitability, our operating results and business would be harmed.
We have a limited operating history with our current business model, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.
We were founded in 2007, launched our first commercial product in 2008, launched our New Relic One platform in 2019, and introduced our updated pricing strategy in July 2020. This limited operating history with our current business model limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future products and platform capabilities, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new products and platform capabilities, determining prices and pricing structures for our products and platform capabilities, unforeseen expenses, and challenges in forecasting accuracy. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change, or if we do not address these risks successfully, our operating and financial results and our business could suffer.
We have experienced significant growth in prior periods and our historical growth rates may not be indicative of our future growth. If we are not able to manage our growth and expansion, or if our business does not grow as we expect, our operating results may suffer.
We have experienced significant growth in our customer adoption and have expanded and intend to continue to significantly expand our operations, including our domestic and international employee headcount. This growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure and we may not be able to sustain revenue growth consistent with prior periods, or at all.
To manage our growth effectively, we must continue to improve our operational, financial, and management systems and controls by, among other things:
effectively attracting, training, integrating, and retaining a large number of new employees, particularly members of our research and development teams and employees and consultants in jurisdictions outside of the United States;
further improving our key business systems, processes, and information technology infrastructure, including our and third-party hosted data centers and cloud services, to support our business needs;
enhancing our information, training, and communication systems to ensure that our employees are well-coordinated and can effectively communicate with each other and our customers; and
improving our internal control over financial reporting and disclosure controls and procedures to ensure timely and accurate reporting of our operational and financial results.
If we fail to manage our expansion, implement and transition to our new systems, implement improvements, or maintain effective internal controls and procedures, our costs and expenses may increase more than we plan and we may lose the ability to increase our customer adoption, enhance our existing solutions, develop new solutions, satisfy our customers, respond to competitive pressures, or otherwise execute our business plan. If we are unable to manage our growth, our operating results likely will be harmed.
Our business depends on our customers remaining on our platform and increasing their spend with us. Any decline in our customer expansions and renewals would harm our future operating results. *
Our future success depends in part on our ability to retain and expand our platform usage with our current customers. If our customers do not remain on our platform or increase their spend with us, our revenue may decline, and our operating results may be harmed.
40


In addition, in order for us to maintain or improve our operating results, it is important that our customers renew their commitments or remain on our platform and increase their spend when the contract term expires. Many of our customers may start their accounts on a free tier and have no obligation to enter into a paid commitment or incur spend above the free tier. Our customers that enter into paid commitments have no obligation to renew after the expiration of the contractual term nor an obligation to remain on our platform and incur additional usage fees. Commitments are most often one year in length, and, our customers may renew for lower commitment amounts or instead use our Pay as You Go model, under which they are billed in arrears for their usage. In the past, some of our customers have elected not to renew their agreements with us, and we cannot accurately predict future net expansion rates. Moreover, certain legacy customers with annual subscriptions entered into prior to our pricing announcement on July 30, 2020 have the right to cancel their agreements prior to the termination of the subscription term. Additionally, some customers have decided and may continue to remain within the limitations of our new free-tier or lower-priced offerings. Customers also have canceled or reduced, and may continue to cancel or reduce, their commitments as a result of the impact of the COVID-19 pandemic on their businesses.
Our customer expansions and renewals may decline or fluctuate as a result of a number of factors, including: customer usage, customer satisfaction with our products and platform capabilities and customer support, our prices, including as a result of changes to our pricing strategy, the prices of competing products, mergers and acquisitions affecting our customer base, consolidation of affiliates’ multiple accounts into a single account, the effects of global economic conditions, including as a result of the COVID-19 pandemic, or reductions in our customers’ spending levels generally.
If we are not able to develop enhancements to our products, increase adoption and usage of our products, and introduce new products and capabilities that achieve market acceptance, our business could be harmed.
Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing products, increase adoption and usage of our products, and introduce new products and capabilities. The success of any enhancement or new products depends on several factors, including timely completion, competitive pricing, adequate quality testing, introduction, integration with existing technologies and our platform, and market acceptance. Any products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. If we are unable to successfully enhance our existing products to meet customer requirements, increase adoption and usage of our products, or develop new products, our business and operating results will be harmed.
If customers do not expand their use of our products beyond the current predominant use cases, our ability to grow our business and operating results may be adversely affected.
Most of our customers currently use our products to support application performance management functions, and the majority of our revenue to date has been from our application performance management products. Our ability to grow our business depends in part on our ability to persuade current and future customers to expand their use of our software to additional use cases across our entire platform. If we fail to achieve market acceptance of our software, or if a competitor establishes a more widely adopted solution, our ability to grow our business and financial results will be adversely affected. In addition, as the amount of data stored for a given customer grows, that customer may have to limit or decrease usage in order to stay within budgeted amounts or lower their cost. If their fees grow significantly, customers may react adversely to this pricing model, particularly if they perceive that the value of our software has become eclipsed by such fees or otherwise.
Failure to effectively align our marketing and sales capabilities with our new pricing structure and increase sales efficiency could harm our ability to increase our customer adoption and achieve broader market acceptance of our products.
Our ability to increase our customer adoption and achieve broader market acceptance of our products will depend to a significant extent on our ability to align our marketing and sales capabilities with our new pricing structure and increase sales efficiency. In connection with our restructuring plan, we are realigning our cost structure to better reflect significant product and business model innovation with the expectation that go-to-market operations in our new consumption-based business model will be more efficient, thus requiring less investment, than in our former more traditional subscription model.
The effectiveness of our marketing programs has varied over time and may vary in the future due to competition, and we are continuously making adjustments to increase our emphasis on overall product experience and reorient our sales organization around customer success. All of these efforts have required and will continue to require us to invest significant resources. If we are unable to hire, develop, and retain talented sales personnel, if our sales personnel are unable to achieve desired productivity levels in a reasonable period of time or unable to successfully execute sales strategies in connection with our pricing model changes, or if our sales and marketing programs are not effective, our ability to increase our customer adoption and achieve broader market acceptance of our products could be harmed.
41


In particular, we may in the future need to further adjust our go-to-market cost structure and target metrics, particularly as they relate to how we structure, effect, and compensate our sales teams to become more efficient and effective at selling under the consumption-based business model. Any adjustments in compensation structure could negatively affect the productivity of our sales teams, and there is no assurance that we will be able to successfully implement the adjustments in a timely or cost-effective manner, or that we will be able to realize all or any of the expected benefits from such adjustments.
If we are unable to develop and grow a broad base of high-spend customers, many of which we expect to be large enterprise customers, while mitigating the risks associated with serving such customers, our business, financial position, and results of operations may suffer. *
Our growth strategy is dependent, in large part, upon developing and growing a broad base of high-spend customers, many of which we expect to be large enterprise customers. Sales to large customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, enterprise customers may require considerable time to evaluate and test our applications and those of our competitors prior to making a purchase decision and placing an order. A number of factors influence the length and variability of our sales cycle, including the need to educate potential customers about the uses and benefits of our applications, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly from customer to customer, with sales to large enterprises typically taking longer to complete. Moreover, large enterprise customers often begin to deploy our products on a limited basis, but nevertheless demand extensive configuration, integration services, and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment.
In addition, our ability to improve our sales of products to large enterprises is dependent on us continuing to attract and retain sales personnel with experience in selling to large organizations. Also, because security breaches with respect to larger, high-profile enterprises are likely to be heavily publicized, there is increased reputational risk associated with serving such customers. If we are unable to continue to increase sales of our products to large enterprise customers while mitigating the risks associated with serving such customers, our business, financial position, and results of operations may suffer.
Our quarterly results may fluctuate, especially as we are transitioning our pricing model, and our recent operating results may not be a good indication of our future performance. If we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly financial results may fluctuate widely as a result of the risks and uncertainties described in this report, many of which, such as the COVID-19 pandemic, are outside of our control. In addition, given our increasing reliance on consumption to drive revenue, our pricing model transition may give rise to a number of risks reflected in risk factor titled “We have limited experience with respect to determining the optimal prices and pricing structures for our products and have employed evolving pricing models, which subject us to challenges that could make it difficult for us to derive value from our customers and may adversely affect our operating results.” If our financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially.
We believe that quarter-to-quarter comparisons of our revenue, operating results, and cash flows may not be meaningful and should not be relied upon as an indication of future performance. If our revenue or operating results fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance we may provide, the price of our common stock could decline.
Because users are able to configure our platform to collect and store confidential, personal or proprietary information, security concerns could result in additional cost and liability to us or inhibit sales of our products.
Our operations involve protection of our intellectual property, along with the storage and transmission and processing of our customers’ proprietary data, which customers might choose to have include some personally identifiable information. While we have developed systems and processes to protect the integrity, confidentiality and security of our customers’ data, our security measures or those of our third-party service providers could fail and result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data. Any security breaches, computer malware, computer hacking, cyber-attacks, ransomware, phishing attacks and other social engineering schemes, denial or degradation of service attacks, unauthorized access or use, device theft, and other types of security incidents experienced by us or our third-party services providers, could expose us to a risk of loss of confidential, personal or proprietary information, loss of business, severe reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, demands, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and
42


significant costs for investigation, remediation and incentives offered to customers or other business partners in an effort to maintain business relationships after a breach and other liabilities.
Cyber-attacks, intrusions and other malicious Internet-based activity including by computer hackers, foreign governments and cyber terrorists, continue to increase generally as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The costs to us to investigate and mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity and other harm to our business and our competitive position. If our products or security measures are perceived as weak or actually compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials, or otherwise, our customers may curtail or stop using our products, our reputation could be damaged, our business may be harmed, and we could incur significant liability. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer adoption and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data. Additionally, with so many of our employees now working remotely due to the COVID-19 pandemic, we may face an increased risk of attempted security breaches and incidents, such as the recently reported cybersecurity attack on SolarWinds and a large number of its customers. Moreover, if a high-profile security breach occurs with respect to another cloud platform provider, our customers and potential customers may lose trust in the security of cloud platforms generally, which could adversely impact our ability to retain existing customers or attract new ones.
If we are not able to detect and indicate activity on our platform that might be nefarious in nature or design processes or systems to reduce the impact of similar activity at a third-party service provider, our customers could suffer harm. In such cases, we could face exposure to legal claims, particularly if the customer suffered actual harm. We cannot assure you that any limitations of liability provisions in our contracts for a security lapse or breach would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our expansion rates, financial condition, operating results, and reputation.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, and changing customer needs, requirements, or preferences, our products may become less competitive.
The software industry is subject to rapid technological change, evolving industry standards and practices, and changing customer needs, requirements, and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop and sell new products that satisfy our customers and provide enhancements and new features for our existing products and platform capabilities that keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. Further, the value of our platform to customers increases to the extent they are able to use it for all of their telemetry data. We need to continue to invest in technologies, services, and partnerships that increase the ease with which customers can ingest data into our platform. If new technologies emerge that are able to deliver competitive products and applications at lower prices, more efficiently, more conveniently, or more securely, such technologies could adversely impact our ability to compete.
Our platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies, and we need to continuously modify and enhance our products and platform capabilities to adapt to changes and innovation in these technologies. If developers widely adopt new software platforms, we would have to develop new versions of our products and platform capabilities to work with those new platforms. This development effort may require significant engineering, marketing, and sales resources, all of which would affect our business and operating results. Any failure of our products and platform capabilities to operate effectively with future infrastructure platforms and technologies could reduce the demand for our products. If we are unable to respond to these changes in a cost-effective manner, our products may become less marketable and less competitive or obsolete, and our operating results may be negatively affected. Similarly, application stores such as those operated by Apple and Google, may change their technical requirements or policies in a manner that adversely impacts the way in which we or our partners or customers collect, use, and share data from users. If the use of our products does not comply with these requirements, customers may not be able to use our products for their intended purposes and our business could be harmed.
43


We are dependent upon lead generation strategies to drive our sales and revenue. If these marketing strategies fail to continue to generate sales opportunities, our ability to grow our revenue will be adversely affected.
We are dependent upon lead generation strategies to generate sales opportunities. For example, in connection with our pricing changes announced July 30, 2020, we introduced an expanded free tier offering of our product. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. To the extent that we are unable to successfully attract and grow paying customers, we will not realize the intended benefits of these marketing strategies and our ability to grow our revenue will be adversely affected.
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The markets in which we compete are rapidly evolving, significantly fragmented, and highly competitive. Our observability platform combines functionality from numerous traditional product categories, and hence we compete in each of these categories with home-grown and open-source technologies, as well as a number of different vendors.
With respect to application performance monitoring, we compete with providers such as AppDynamics, Inc. (an operating division of Cisco Systems, Inc.) and Dynatrace, Inc. With respect to log management, we compete with Elastic NV and Splunk Inc. With respect to infrastructure monitoring, we compete with diversified technology vendors such as International Business Machines Corporation, BMC Software, Inc. and CA, Inc. (a subsidiary of Broadcom, Inc.); with native solutions from cloud providers such as Amazon Web Services, Inc., Microsoft Corporation, and Google LLC; and with independent vendors such as Datadog, Inc.
Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, larger budgets, and significantly greater resources than we do, and have the operating flexibility to bundle competing products and services with other software offerings at little or no perceived incremental cost, including offering them at a lower price as part of a larger sale. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices or with greater depth than our products. Our current and potential competitors may develop and market new technologies with comparable functionality to our products and platform capabilities, and this could lead to us having to decrease prices in order to remain competitive.
With the introduction of new technologies, the evolution of our products and platform capabilities and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our solutions, we may face additional competition. Additionally, some potential customers, particularly large organizations, may elect to develop their own internal products. If one or more of our competitors were to merge or partner with another of our competitors or another large diversified technology company, the change in the competitive landscape could also adversely affect our ability to compete effectively. For example, in March 2017, Cisco Systems, Inc. completed its purchase of AppDynamics, Inc., in November 2018, Broadcom Inc. completed its acquisition of CA, Inc., and, in October 2019, Splunk Inc. completed its acquisition of SignalFX, Inc. If we are unable to maintain our current pricing or fail to gain market acceptance of our updated pricing strategy due to the competitive pressures, our margins will be reduced, and our operating results will be negatively affected. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business.
Due to our previous subscription-based pricing model and our recent transition to a consumption-based pricing model, we may not have visibility into our financial position and results of operations.
We have historically employed a subscription-based model and for contracts entered into prior to our new pricing model announcement on July 30, 2020, we recognize revenue from customers ratably over the terms of their subscriptions. A portion of the revenue we report in each quarter is derived from the recognition of revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. As a result, due to this historical reliance on a subscription-based business model, the effects of the COVID-19 pandemic to date were not fully reflected in our results of operations until later periods.
Further, on July 30, 2020, we announced a new pricing model that prices customer spend based upon their consumption. Because our customers now have flexibility in the timing of their consumption, we do not have the same
44


visibility into the timing of revenue recognition as we would under a subscription-based model. There is a risk that customers will consume our platform at a different pace than we expect, and our actual results may differ from our forecasts. Meanwhile, although we have seen indications of improved market acceptance of our platform and new pricing strategy, due to our historical reliance upon a subscription-based business model, improvement in the market adoption of our products due to this pricing model transition would also not be fully reflected in our results of operations until future periods.
Seasonality may cause fluctuations in our sales and operating results.
We have experienced seasonality in our sales and operating results in the past, and we believe that we will continue to experience seasonality in the future. The first two quarters of each fiscal year usually have lower or potentially negative remaining performance obligations and sequential deferred revenue growth than the third and fourth fiscal quarters, during which we generally benefit from a larger renewal base and opportunity to up-sell existing customers. We believe that this results from the procurement, budgeting, and deployment cycles of many of our customers, which tend to have a concentration of increased activity in the periods surrounding the change of the Company’s fiscal year. As a result, over time we could potentially see stronger sequential revenue results in our fourth and first fiscal quarters as our deferred revenue is recognized. We expect that this seasonality will continue to affect our sales and operating results in the future, as a portion of our overall revenue continues to be derived from our subscription-based contracts that remain in our install base, which can make it difficult to achieve sequential growth in certain financial metrics or could result in sequential declines on a quarterly basis as we continue to convert our customers to the new consumption model. However, with our shift in pricing strategy, we may experience additional variation from the seasonality trends we have seen in the past for revenue, remaining performance obligations, and deferred revenue. Accordingly, historical patterns should not be considered indicative of our future sales activity or performance.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our continued growth depends in part on the ability of our existing and potential customers to access our products and platform capabilities at any time and within an acceptable amount of time. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our products and platform capabilities simultaneously, denial or degradation of service attacks, computer viruses, natural disasters, terrorism, war, telecommunications and electrical failures, cyberattacks or other security related incidents. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our products and platform capabilities become more complex and our user traffic increases. If our products and platform capabilities are unavailable or if our users are unable to access our products and platform capabilities within a reasonable amount of time or at all, our business would be negatively affected. As we expand our business, our customers increasingly rely on our customer support personnel to realize the full benefits that our platform provides, and if we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our platform usage to existing and new customers could suffer, and our reputation with existing or potential customers could suffer. In addition, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
In addition, we currently serve our customers from third-party data centers and a combination of cloud hosting providers. The continuous availability of our products and platform capabilities depends on the operations of our data center facilities, on our cloud hosting providers, on a variety of network service providers, on third-party vendors, and on our own site operations staff. We depend on our third-party providers’ abilities to protect our data center facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts, and similar events. If there are any lapses of service, damage to the facilities, or prolonged cloud hosting provider service disruptions or downtime affecting our platform, we could experience lengthy interruptions in our products and platform capabilities as well as delays and additional expenses in arranging new facilities and services. In addition, we are in the process of migrating our entire platform over time from third-party data center hosting facilities to public cloud hosting providers. After we complete this migration, we will rely extensively on these public cloud providers to provide our clients and their users with fast and reliable access to our products. Even with current and planned disaster recovery arrangements, which, to date, have not been tested in an actual crisis, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability, and cause us to issue credits or cause customers not to renew their commitments or increase their spend with us, any of which could harm our business.
45


We depend and rely on SaaS technologies and related services from third parties in order to operate critical functions of our business and interruptions or performance problems with these technologies or services may adversely affect our business and operating results.
We depend and rely on software-as-a-service, or SaaS, technologies and related services from third parties in order to operate critical functions of our business, including billing and order management, financial accounting services, and customer relationship management services. If these services become unavailable due to extended outages or interruptions, security vulnerabilities, or cyber-attacks, because they are no longer available on commercially reasonable terms or prices, or due to other unforeseen circumstances, our expenses could increase, our ability to manage these critical functions could be interrupted, and our processes for and ability to manage sales of our products, recognize revenue, and support our customers could be impaired, all of which could adversely affect our business and operating results.
Defects or disruptions in our products and platform capabilities could diminish demand, harm our financial results, and subject us to liability.
Our customers use our products and platform capabilities for important aspects of their businesses, and any errors, defects, or disruptions to our products and platform capabilities or other performance problems with our products and platform capabilities could hurt our brand and reputation and may damage our customers’ businesses. We provide regular product updates, which may contain undetected errors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities, and bugs in our products and platform capabilities after they have been released and new errors in our existing products and platform capabilities may be detected in the future. Real or perceived errors, failures, or bugs in our products and platform capabilities could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for the losses that may result from claims arising from defects or disruptions in our products and platform capabilities. As a result, we could lose future sales and our reputation, and our brand could be harmed.
Our ongoing and planned investments in data center hosting facilities and expenditures on cloud hosting providers are expensive and complex, may result in a negative impact on our cash flows, and may negatively impact our financial results.
We have made and, until our migration to public cloud hosting providers is complete, we will continue to make substantial investments in our data center hosting facilities to support our growth and provide enhanced levels of products and platform capabilities to our customers. We recently decreased the amount of capital expenditures on hosting equipment for use in our data center hosting facilities as we transition to greater dependence on cloud hosting providers but expect to continue to incur significant expense to operate and maintain our data centers. If we are required to make larger investments in our data center hosting facilities than we anticipated or if costs associated with cloud hosting services utilized to support our growth continue to be greater than originally expected, the negative impact on our operating results would likely exceed our expectations. Furthermore, if we determine to no longer utilize our data centers and related property, and equipment sooner than planned, we may be forced to accelerate expense recognition as a result of the shorter estimated life of such assets. In addition, ongoing or future improvements to our cloud infrastructure may be more expensive than we anticipate, and may not yield the expected savings in operating costs or the expected performance benefits. We may not be able to maintain or achieve cost savings from our investments, which could harm our financial results.
We may need to change our current operations infrastructure in order for us to achieve profitability and scale our operations efficiently, which makes our future prospects even more difficult to evaluate. For example, in order to grow our sales in a financially sustainable manner, we may need to further customize our offering and modify our go-to-market strategy to reduce our operating and customer acquisition costs. If we fail to implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.