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NEW RELIC, INC.

(NEWR)
  Report
Delayed Nyse  -  04:00 2022-09-23 pm EDT
54.34 USD   -2.25%
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NEW RELIC, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/04/2022 | 05:25pm EDT
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 a software platform for customers to land all of their
telemetry data quickly and affordably in one place and derive actionable
insights from that data in a unified front-end application. This category of
software products is generally referred to as observability. Our customers use
our software platform to ensure that they can observe and operate all of the
components of their digital infrastructure and provide a quality digital
experience for their customers. With a unified front end, purpose built on top
of the world's most powerful telemetry data platform, the New Relic platform
helps our users get a comprehensive and consistent view of their digital estate.

At present, most observability software is targeted at a small subset of the
developer community that works in the "operate" phase of the developer
lifecycle. These engineers are primarily concerned with the availability of the
applications and infrastructure that are the primary components of a customer's
digital environment. However, a key component of our multi-year strategy is to
help all software developers realize the largely dormant value of telemetry
data. We fundamentally believe that telemetry data is valuable in all of the
phases of the developer lifecycle: plan, build, deploy and operate.

To deliver on this strategy, we make data ingest so affordable that customers
have no reservations about populating our data platform with their growing
amounts of telemetry data. We believe that engineers are attracted to very large
data sets, and over time we intend to introduce ways for engineers in the plan,
build and deploy phases of the developer lifecycle to realize significant value
from that data.

We have built a massively scalable proprietary telemetry data platform, which is
a unique competitive advantage and we are able to leverage that scale to offer
more cost-effective solutions. Our unified front end and data-centric approach
to observability gives our users a consistent and comprehensive view of their
digital environment. This is in contrast to most other vendors we compete
against that take an application-centric approach that forces users to toggle
between a variety of stand-alone applications on top of purpose-built databases,
effectively creating silos of data.

Our customers span the continuum from startups to the world's largest
corporations; the common thread among all of the users of our products is a
desire to offer their constituents a top-tier digital experience. We primarily
sell our platform on a consumption model; customers on this pricing model only
pay for data ingest and provisioned users. We engage with prospects and
customers directly through our field, inside sales teams and on our website, as
well as indirectly through channel partners. The majority of our customers are
on either "Pay as You Go" contracts where they are charged for usage in arrears,
or commitment contracts where they commit to a minimum spend over their
contracted period in exchange for a discount on their usage pricing. The
majority of our commitment contracts are one year in duration and are invoiced
upfront. When a customer consumes either data or users in excess of their
aggregate commitment, they are charged the same rate they negotiated in the
commitment, and are invoiced for incremental charges when their consumption
exceeds their commitment. When we enter into multi-year commitment contracts, we
typically invoice the customer on an annual basis.

We offer a free tier of our New Relic platform. As a result, our direct sales
prospects may be familiar with our platform and may already be using it in a
limited fashion. A core component of our growth strategy is to provide a
friction-free environment for developers to familiarize themselves with our
solutions, and then offer incremental opportunities to derive more value from
our products either by in-product support, or engaging with our technically
oriented customer adoption team.

We also generate revenue from services, which consist primarily of fees
associated with consulting and training services. Revenue from services accounts
for a de minimis amount of our total revenue. We expect to continue to invest in
our product and go-to-market organizations as we believe both the self-serve
nature of our products, and the customer specific
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attention from our technologists, play an important role in accelerating our customers' realization of the benefits of our platform, which helps drive customer retention and expansion.


Our revenue for the three months ended June 30, 2022 and 2021 was $216.5 million
and $180.5 million, respectively, representing year-over-year growth of 20%. We
continue 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 $50.2 million and $78.4 million for the
three months ended June 30, 2022 and 2021, respectively. Our accumulated deficit
as of June 30, 2022 was $833.5 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%, 11%, and 7%, respectively, of our revenue for the
three months ended June 30, 2022, and 16%, 10%, and 7%, respectively, of our
revenue for the three months ended June 30, 2021. 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.

                    Impact of the Ongoing COVID-19 Pandemic

The continuing effects of the COVID-19 pandemic are highly unpredictable and
could be significant, and the duration and extent to which they will impact our
future results of operations and overall financial performance remains
uncertain. 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, the successful rollout of vaccines and
the efficacy and durability of such vaccines, especially in light of the
emergence of new variant strains; 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.

Since July 1, 2021, a number of our offices in certain locations were re-opened
in limited capacities, and we may continue to selectively reopen certain of our
offices. If we reopen more offices, we expect to incur incremental expenses as
we resume onsite services and related in-office costs. While certain travel bans
and other restrictions that were implemented by federal, state, or local
authorities at the beginning of the pandemic have been relaxed, recently, due to
the proliferation of new variants, among other developments, some of these
restrictions have been re-imposed, and new restrictions may be implemented. We
are continuing 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, public acceptance, and efficacy
and durability 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. Other factors affecting our performance are discussed
below, although we caution you that the COVID-19 pandemic may also further
impact these factors.

                       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
further intensify in the future. We employ a land and expand 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 now relies primarily upon a per-user license fee
and payment based on the quantity of data ingested, we have more closely tied
our revenue to the usage of our platform. Together with this pricing strategy,
we also launched a new, robust free tier and improved self-service capabilities,
which we expect to result in a material increase in our ability to attract and
convert 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
                                       23
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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

We review the following key metrics to evaluate our business, measure our
performance, identify trends affecting our business, formulate business plans,
and make key strategic decisions. The calculation of the key operating metrics
discussed below may differ from other similarly titled metrics used by other
companies, securities analysts, or investors.

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 adoption 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, 2022, we had 15,100 Active Customer
Accounts, which is up from 14,100 Active Customer Accounts for the three-month
period ended June 30, 2021 and is up sequentially from 14,800 Active Customer
Accounts for the three-month period ended March 31, 2022.

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, 2022, we had 1,137 Active Customer
Accounts with trailing 12-month revenue over $100,000, which was an 18% increase
compared to 964 for the three-month period ended June 30, 2021 and a 3% increase
compared to 1,099 for the three-month period ended March 31, 2022.

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 compared to 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 83% for the three-month period ended June 30, 2022,
compared to 79% for the three-month period ended June 30, 2021 and 82% for the
three-month period ended March 31, 2022.

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
                                       24
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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 increased year-over-year to 120% for the period ended June 30, 2022, compared to 111% for the period ended June 30, 2021 and increased slightly quarter-over-quarter from 119% for the period ended March 31, 2022.

                    Key Components of Results of Operations

Revenue


For the periods presented, we offered access to our products and/or platform
under subscription and consumption-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 commitment plans
typically have terms of one year, although some of our customers commit for
shorter or longer periods; our Pay as You Go plans do not have a commitment.

Most of our revenue comes from contracts that are non-cancellable over the
contract term. Our shift to a consumption-based model allows our customers to
choose lower up-front commitments and to instead pay for their consumption in
excess of their commitments. Meanwhile, if consumption by our users exceeds
their up-front commitments, we would see an increase in the amount of revenue
that we recognize from those customers.

We have and may continue to experience volatility for our remaining performance
obligations and deferred revenue as a result of our shift to our consumption
pricing model. We had remaining performance obligations in the amount of $628.9
million and $706.1 million as of June 30, 2022 and March 31, 2022, 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
these factors, as well as our mix of subscription plans and billing frequencies,
we do not believe that changes in our remaining performance obligations and
deferred revenue in a given period are directly correlated with our revenue
growth in that period. The year over year decline in remaining performance
obligations is consistent with our transition from a subscription to a
consumption model.

Historically, we have received a higher volume of orders in the fourth fiscal
quarter of each year, and to a lesser extent our third fiscal quarter of each
year. As a result, we have historically seen higher cash collections in the
first and fourth fiscal quarters of each year, and our sequential growth in
remaining performance obligations has historically been highest in the fourth
fiscal quarter of each year, and to a lesser extent our third fiscal quarter of
each year. With our shift to a consumption based pricing model, we expect over
time that our revenue will more closely approximate our customer usage of our
products and services, and thereby our revenue may experience seasonal
fluctuations based upon our customer consumption patterns.

Cost of Revenue


Cost of revenue consists of expenses relating to hosting-related costs, salaries
and benefits of operations and global customer support personnel, data center
operations, depreciation and amortization, consulting costs, and payment
processing fees. Personnel related costs 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 expected growth
of our customer adoption and the number of products we offer, as customer usage
is expected to continue 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 are continuing to decrease 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, increased data ingest costs, as well as costs to maintain our
data center operations.

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 hosting-related costs, operations and global customer
support personnel, 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.
                                       25
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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.


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. With
our shift to a consumption model pricing strategy, a significant majority of
commissions are no longer capitalized and will instead mostly be expensed as
incurred. Previously commissions attributable to acquiring new customer
contracts were capitalized and amortized on a straight-line basis over the
anticipated period of benefit. Therefore, commission expenses will be larger
until we have fully recognized the remaining capitalized commissions expenses
from prior periods under our subscription model. 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 consumption-based business model
will be more efficient, and require 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, both in absolute dollars and as a percentage of our revenue,
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,
as a percentage of our revenue, 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.

                                       26
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                             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,

                                                                           2022                      2021

                                                                     (in thousands, except per share amounts)
Revenue                                                            $          216,459          $     180,484
Cost of revenue (1)                                                            63,893                 59,264
Gross profit                                                                  152,566                121,220
Operating expenses:
Research and development (1)                                                   64,769                 48,730
Sales and marketing (1)                                                       104,420                102,813
General and administrative (1)                                                 39,030                 43,565
Total operating expenses                                                      208,219                195,108
Loss from operations                                                          (55,653)               (73,888)
Other income (expense):
Interest income                                                                 1,110                    938
Interest expense                                                               (1,232)                (1,226)
Other expense                                                                    (209)                  (336)
Loss before income taxes                                                      (55,984)               (74,512)
Income tax provision (benefit)                                                    267                   (453)
Net loss                                                           $        

(56,251) $ (74,059) Net loss and adjustment attributable to redeemable non-controlling interest

                                                                        6,012                 (4,355)
Net loss attributable to New Relic                                 $          (50,239)         $     (78,414)
Net loss attributable to New Relic per share, basic and diluted    $            (0.76)         $       (1.24)
Weighted-average shares used to compute net loss per share, basic              66,421                 63,339

and diluted

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

                                                    Three Months Ended June 30,
                                                        2022                   2021

                                                          (in thousands)
Cost of revenue                              $        1,344                 $  1,072
Research and development                             13,286                   10,964
Sales and marketing                                  10,583                   11,534
General and administrative (2)                        9,669                 

18,617

Total stock-based compensation expense (3)   $       34,882                 

$ 42,187



(2) Includes $9.6 million acceleration of share-based payment expense for the
three months ended June 30, 2021 for one of our executives due to his departure
at the end of June 2021. There was no corresponding expense for the three months
ended June 30, 2022.
(3) Includes $0.5 million expense for the three months ended June 30, 2021 due
to the restructuring activities commenced in April 2021. There was no
corresponding expense for the three months ended June 30, 2022. Refer to Note 16
- Restructuring contained in the "Notes to Condensed Consolidated Financial
Statements" in Item 1 of Part I of this Quarterly Report on Form 10-Q for more
information.
                                       27
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Three Months Ended June 30,

                                                                          2022                      2021

                                                                           (as a percentage of revenue)
Revenue                                                                         100  %                    100  %
Cost of revenue (1)                                                              30                        33
Gross profit                                                                     70                        67
Operating expenses:
Research and development (1)                                                     30                        27
Sales and marketing (1)                                                          48                        57
General and administrative (1)                                                   18                        24
Total operating expenses                                                         96                       108
Loss from operations                                                            (26)                      (41)
Other income (expense):
Interest income                                                                   1                         1
Interest expense                                                                 (1)                       (1)
Other income (expense), net                                                       -                         -
Loss before income taxes                                                        (26)                      (41)
Income tax provision (benefit)                                                    -                         -
Net loss                                                                        (26) %                    (41) %

Net loss and adjustment attributable to redeemable non-controlling interest

                                                          3                        (2)
Net loss attributable to New Relic                                              (23) %                    (43) %


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

                                              Three Months Ended June 30,
                                                     2022                 2021

                                              (as a percentage of revenue)
Cost of revenue                                                  1  %      1  %
Research and development                                         6         6
Sales and marketing                                              5         6
General and administrative                                       4        10
Total stock-based compensation expense                          16  %     23  %


Revenue

                      Three Months Ended June 30,                  Change
                          2022                  2021          Amount         %

                                     (dollars in thousands)
United States   $      143,460               $ 123,035      $ 20,425        17  %
EMEA                    34,716                  28,165         6,551        23
APAC                    23,126                  17,193         5,933        35
Other                   15,157                  12,091         3,066        25
Total revenue   $      216,459               $ 180,484      $ 35,975        20  %


Total revenue increased $36.0 million, or 20%, in the three months ended June
30, 2022 compared to the same period of 2021. Our revenue from the United States
increased $20.4 million, or 17%, our revenue from EMEA increased $6.6 million,
or 23%, our revenue from APAC increased $5.9 million, or 35%, and our revenue
from other regions increased $3.1 million, or 25% in the three months ended June
30, 2022 compared to the same period of 2021, primarily as a result of growth in
our customer base and increase in consumption in addition to revenue recognized
from variable consideration.
                                       28
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Cost of Revenue

                         Three Months Ended June 30,                 Change
                             2022                   2021        Amount        %

                                      (dollars in thousands)
Cost of revenue   $       63,893                 $ 59,264      $ 4,629       8  %


Cost of revenue increased $4.6 million, or 8%, in the three months ended June
30, 2022 compared to the same period of 2021. The increase was primarily due to
a $5.1 million increase in hosting-related costs as a result of the additional
expenses incurred in connection with our public cloud migration as well as
increased data ingest costs. The remaining increase was due to a $1.9 million
increase in personnel-related costs, driven by an increase in headcount and
merit-based compensation and a $0.1 million increase in other miscellaneous
expenses which was partially offset by a $2.7 million decrease in depreciation
and amortization expense.

Research and Development

                                  Three Months Ended June 30,                  Change
                                      2022                   2021         Amount         %

                                                 (dollars in thousands)
Research and development   $       64,769                 $ 48,730      $ 16,039        33  %


Research and development expenses increased $16.0 million, or 33%, in the three
months ended June 30, 2022 compared to the same period of 2021. The increase was
primarily a result of an increase in personnel-related costs of $11.8 million,
driven by an increase in headcount and merit-based compensation, a $1.6 million
increase in travel expenses, a $1.4 million increase in allocated costs,
including facilities and depreciation, and a $1.3 million increase in other
miscellaneous expenses. The increase was partially offset by a $0.2 million
decrease in hosting service credits.

Sales and Marketing

                            Three Months Ended June 30,                 Change
                                2022                  2021         Amount        %

                                          (dollars in thousands)
Sales and marketing   $      104,420               $ 102,813      $ 1,607       2  %


Sales and marketing expenses increased $1.6 million, or 2%, in the three months
ended June 30, 2022 compared to the same period of 2021. The increase was
primarily a result of a $4.6 million increase in travel expenses and a $4.0
million increase in marketing programs. The increase was partially offset by a
$3.9 million decrease in personnel-related costs and a $3.2 million decrease in
allocated costs, including facilities and depreciation. The decrease in
personnel-related costs was due to the absence of restructuring costs that
occurred in the same period last year. This decrease was partially offset by an
increase in headcount and merit-based compensation and sales commissions expense
as a result of our shift to a consumption-business model, where the majority of
commissions are expensed as incurred, in addition to historical amortization
expense for commissions paid under our subscription-business model.

General and Administrative

                                    Three Months Ended June 30,                  Change
                                        2022                   2021         Amount         %

                                                   (dollars in thousands)
General and administrative   $       39,030                 $ 43,565      $ 

(4,535) (10) %



General and administrative expenses decreased $4.5 million, or 10%, in the three
months ended June 30, 2022 compared to the same period of 2021. The decrease was
primarily a result of a decrease in personnel-related costs of $5.3 million and
a $0.8 million decrease in allocated costs, including facilities and
depreciation expenses. The decrease in personnel-related cost was due to the
absence of an acceleration of share-based payment expense that occurred for the
same period last
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year, which was partially offset by an increase in headcount and merit-based
compensation. The overall decrease was partially offset by a $1.5 million
increase in travel expenses and a $0.7 million increase in other miscellaneous
expenses.

Other Income (Expense)
                        Three Months Ended June 30,                   Change
                              2022                    2021       Amount        %

                                      (dollars in thousands)
Other expense   $          (331)                    $ (624)     $  293        47  %

Other expense decreased by $0.3 million, or 47% in the three months ended June 30, 2022 compared to the same period of 2021. The decrease was primarily a result of a $0.2 million increase in interest income.

Provision for (Benefit from) Income Tax

                                         Three Months Ended June 30,                  Change
                                              2022                    2021       Amount        %

                                                       (dollars in thousands)
Income tax provision (benefit)   $         267                      $ (453) 

$ 720 159 %



We had an income tax expense of $0.3 million for the three months ended June 30,
2022 as compared to an income tax benefit of $0.5 million for the same period of
2021. The change of $0.7 million, or 159%, was mostly related to a one-time
income tax benefit recorded in fiscal year 2022 associated with the acquisition
of CodeStream.

Net Loss and Adjustment Attributable to Redeemable Non-controlling Interest

                                                                Three Months Ended June 30,                     Change
                                                                   2022                2021             Amount             %

                                                                           

(dollars in thousands) Net loss and adjustment attributable to redeemable non-controlling interest

                                     $       6,012          $ (4,355)         $ 10,367            238  %


Net loss and adjustment attributable to redeemable non-controlling interest
decreased by $10.4 million or 238%, in the three months ended June 30, 2022
compared to the same period of 2021. The decrease in loss and adjustment was
related to the redeemable non-controlling interest's adjustment to estimated
redemption value of our joint venture in New Relic K.K., partially offset by
share of associated losses.
                                       30
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                          Non-GAAP Financial Measures

Non-GAAP Loss 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 loss from operations and non-GAAP net loss attributable to New Relic.
We define non-GAAP loss from operations and non-GAAP net 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, (9) adjustment to redeemable non-controlling
interest, and (10) restructuring charges. We use non-GAAP financial measures,
including non-GAAP loss from operations and non-GAAP net 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 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 loss from operations and
a reconciliation of GAAP net loss attributable to New Relic to non-GAAP net loss
attributable to New Relic. We believe non-GAAP loss from operations and non-GAAP
net 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. 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.

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 we 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 are no longer presented in equity.
Similarly, the debt discount, which was equal to the carrying value of the
embedded conversion feature upon issuance, is no longer 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 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.

                                       31
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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. We adjust 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 $12.6 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 loss from operations and our non-GAAP
net loss attributable to New Relic and reconcile our GAAP loss from operations
to non-GAAP loss from operations and our GAAP net loss attributable to New Relic
to our non-GAAP net loss attributable to New Relic for the three months ended
June 30, 2022 and 2021 (in thousands):
                                                                      Three Months Ended June 30,
                                                                      2022                    2021
GAAP loss from operations                                       $      (55,653)         $     (73,888)
Plus: Stock-based compensation expense                                  34,882                 42,187

Plus: Amortization of purchased intangibles                              2,291                  1,676
Plus: Transaction costs related to acquisitions                              -                    361

Plus: Amortization of stock-based compensation capitalized in software development costs

                                                 745                    420
Plus: Lawsuit litigation cost and other expense                           (174)                     -
Plus: Employer payroll tax on employee equity incentive plans              752                    813
Plus: Restructuring charges (1)                                              -                 12,279
Non-GAAP loss from operations                                   $      

(17,157) $ (16,152)

Three Months Ended June 30,

                                                                        2022                    2021
GAAP net loss attributable to New Relic                           $      (50,239)         $     (78,414)
Plus: Stock-based compensation expense                                    34,882                 42,187

Plus: Amortization of purchased intangibles                                2,291                  1,676
Plus: Transaction costs related to acquisitions                                -                    361

Plus: Amortization of stock-based compensation capitalized in software development costs

                                                   745                    420
Plus: Lawsuit litigation cost and other expense                             (174)                     -
Plus: Employer payroll tax on employee equity incentive plans                752                    813
Plus: Amortization of debt discount and issuance costs                       593                    587
Plus: Adjustment to redeemable non-controlling interest                   (5,866)                 4,395
Plus: Restructuring charges (1)                                                -                 12,279

Non-GAAP net loss attributable to New Relic                       $      

(17,016) $ (15,696)

(1) Restructuring related charge for the stock-based compensation expense of $0.5 million is included on its respective line items.

                                       32
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Although we have generated non-GAAP income from operations and non-GAAP net
income attributable to New Relic in past quarters and although we expect that
these numbers will improve over time with increased efficiencies, we expect to
remain in a loss position in the near future as we continue to incur additional
expenses due to our public cloud migration and an increase in commission
expense. In prior periods, commissions were mostly capitalized and amortized in
future periods. Given our shift to a consumption model and our shift in pricing
strategy, a significant majority of commissions will no longer be capitalized
and will instead mostly be expensed as incurred.
                                       33
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                        Liquidity and Capital Resources
                                                                    Three Months Ended June 30,
                                                                    2022                    2021
                                                                           (in thousands)
Cash provided by operating activities                         $       43,009          $       9,872
Cash provided by (used in) investing activities                       (9,936)                 4,407
Cash provided by financing activities                                  1,725                  4,797

Net increase in cash, cash equivalents and restricted cash $ 34,798 $ 19,076

Sources of Cash and Material Cash Requirements


To date, we have financed our operations primarily through the issuance of the
Notes, private and public equity financings and customer payments. As disclosed
in Note 7 - 0.5% Convertible Senior Notes and Capped Call in the "Notes to
Condensed Consolidated Financial Statements" in Item 1 of Part I of this
Quarterly Report on Form 10-Q, our 0.5% Convertible Senior Notes and Capped Call
will mature on May 1, 2023. 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, capital expenditure
requirements, and debt retirement obligations for at least the next 12 months.

We believe we will meet longer-term expected future cash requirements and
obligations through a combination of cash flows from operating activities,
available cash balances, and issuance of equity or debt securities. 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.

Our material cash requirements consist of obligations under leases for office
space and purchase commitments and our 0.5% Convertible Senior Notes. 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 to our material cash requirements, as disclosed in our audited
consolidated financial statements for the fiscal year ended March 31, 2022 in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (our
"Annual Report"), as filed with the Securities and Exchange Commission ("SEC"),
on May 17, 2022.

Operating Activities

During the three months ended June 30, 2022, cash provided by operating
activities was $43.0 million as a result of a net loss of $56.3 million,
adjusted by non-cash charges of $53.0 million and a change of $46.3 million in
our operating assets and liabilities. The change in our operating assets and
liabilities was primarily the result of a $116.5 million decrease in accounts
receivable, a $2.7 million increase in accounts payable, and a $2.6 million
decrease in lease right-of-use assets. This was partially offset by a $65.9
million decrease in deferred revenue, a $4.6 million decrease in accrued
compensation and benefits and other liabilities, a $4.5 million decrease in
lease liabilities, a $0.4 million decrease in deferred contract acquisition and
fulfillment costs, and a $0.1 million increase in prepaid and other assets.

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.

Investing Activities

Cash used in investing activities during the three months ended June 30, 2022 was $9.9 million, primarily as a result of the purchase of short-term investments of $50.4 million, purchases of property and equipment of $1.3 million, and increases in

                                       34
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capitalization of software development costs of $3.4 million. This was partially
offset by the proceeds from the maturity and sale of short-term investments of
$44.2 million and proceeds from sale of property and equipment of $0.9 million.

Cash provided by investing activities during the three months ended June 30,
2021 was $4.4 million, primarily as a result of proceeds from the maturity and
sale of short-term investments of $40.5 million, partially offset by 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.

Financing Activities

Cash provided by financing activities during the three months ended June 30,
2022 was $1.7 million, which was the result of proceeds from the exercise of
stock options.

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.

                          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.

There have been no significant changes in our critical accounting policies and estimates during the three months ended June 30, 2022 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.

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