NEW RELIC, INC. 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. In addition to our results determined in accordance withU.S. generally accepted accounting principles (GAAP), Non-GAAP Loss from Operations, a non-GAAP financial measure, is included in the section titled "Non-GAAP Financial Measures." This non-GAAP financial measure is not meant to be considered in isolation or as a substitute for, or superior to, comparable GAAP financial measures and should be read only in conjunction with our unaudited condensed consolidated financial statements prepared in accordance with GAAP. Our presentation of this non-GAAP financial measure may not be comparable to similar measures used by other companies. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP information and the GAAP-to-non-GAAP reconciliation included in the section titled "Non-GAAP Financial Measures," to more fully understand our business. OverviewNew 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, theNew 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 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 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 commitment contracts where they commit to an amount of spend over their contracted period in exchange for a discount on their usage pricing or "Pay as You Go" contracts where they are charged for usage in arrears. Our contracts are typically annual or multi-year in term length and are either billed upfront or in arrears. Usage in excess of the commitment is generally invoiced in arrears. We offer a free tier of ourNew 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 26 -------------------------------------------------------------------------------- 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. Our revenue for the three months endedDecember 31, 2022 and 2021 was$239.8 million and$203.6 million , respectively, representing year-over-year growth of 18%. For the nine months endedDecember 31, 2022 and 2021, our revenue was$683.1 million and$579.8 million , respectively, representing year-over-year growth of 18%. 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 toNew Relic of$26.0 million and$62.7 million for the three months endedDecember 31, 2022 and 2021, respectively, and$123.0 million and$194.9 million for the nine months endedDecember 31, 2022 and 2021, respectively. Our accumulated deficit as ofDecember 31, 2022 was$906.3 million . Internationally, we currently offer our products inEurope , theMiddle East , andAfrica ("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 18%, 11%, and 7%, respectively, of our revenue for the three months endedDecember 31, 2022 , and 16%, 10%, and 8%, respectively, of our revenue for the three months endedDecember 31, 2021 . Our revenue from those regions constituted 17%, 11%, and 7%, respectively, of our revenue for the nine months endedDecember 31, 2022 , and 16%, 10%, and 7%, respectively, of our revenue for the nine months endedDecember 31, 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 and Current Economic Conditions 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. We currently allow most of our employees to continue to work remotely if they prefer and as additional COVID-19 variants emerge, we will continue to evaluate our workforce strategies and operations, taking into consideration factors such as treatments, vaccine progress, and public health recommendations. We also continue to evaluate our real estate needs and have in the past made the decision to exit certain office space leases. As we continue to assess our return-to-office needs, we are planning to exit additional office space leases which could result in further losses associated with our real estate lease assets. Our revenue and deferred revenue have been, in part, negatively impacted by the slowdown in activity and uncertainty associated with the COVID-19 pandemic and the current economic conditions impacted by supply chain disruption, market volatility, inflation, rising interest rates, fluctuating currency exchange rates, and labor shortages, 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 and the current economic uncertainty continue to persist for an extended period of time. With the recent volatility of multiple major foreign currencies against theU.S. dollar, we are seeing more significant impact from exchange rates on our revenue growth and expenses in fiscal 2023 than in the previous fiscal year, and we expect the impact to be significant in the next quarter if we continue to experience similar or greater foreign currencies volatility against theU.S. dollar. Other factors affecting our performance are discussed below, although we caution you that the COVID-19 pandemic and the current economic conditions 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. Our pricing strategy, which relies primarily upon a per-user license fee and payment based on the quantity of data ingested, our revenue is closely tied to the usage of our platform. Together with this pricing strategy, we 27 --------------------------------------------------------------------------------
also have a robust free tier and improved self-service capabilities, which we expect to continue to result in an 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 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 our pricing strategy allows 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 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 December 31, 2022 , we had 15,700 Active
Customer Accounts, which is up 1,100 from 14,600 Active Customer Accounts for
the three-month period ended December 31, 2021 and is up 400 sequentially from
15,300 Active Customer Accounts for the three-month period ended September 30,
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 December 31, 2022 , we had 1,203 Active Customer
Accounts with trailing 12-month revenue greater than $100,000 , which was a 13%
increase compared to 1,064 for the three-month period ended December 31, 2021
and a 3% increase compared to 1,171 for the three-month period ended September
30, 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.
The percentage of our total revenue from Active Customer Accounts with trailing
12-month revenue greater than $100,000 was 84% for the three-month period ended
December 31, 2022 , compared to 81% for the three-month period ended December 31,
2021 and 83% for the three-month period ended September 30, 2022 .
Net Revenue Retention Rate. We believe the growth 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.
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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 increased year-over-year to 118% for the period ended
Key Components of Results of OperationsRevenue
For the periods presented, we offered access to our platform under consumption and subscription-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. 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$726.1 million and$706.1 million as ofDecember 31, 2022 andMarch 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 consumption and 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 Company's remaining performance obligations were$726.1 million as ofDecember 31, 2022 , of which the Company expects approximately 75% to be recognized as revenue in the 12 months endingDecember 31, 2023 based on historical customer consumption patterns. However, the amount and timing of revenue recognition are generally dependent upon customers' future consumption, which is inherently variable at customers' discretion and can extend beyond the original contract term in cases where customers are permitted to roll over unused capacity to future periods, generally on the purchase of additional capacity at renewal. 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 facilities as we transition to greater dependence on cloud hosting providers.
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.
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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. A significant majority of commissions are 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, and foreign exchange gains and losses.
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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 December 31, Nine Months Ended December 31,
2022 2021 2022 2021
(in thousands, except per share amounts)
Revenue $ 239,763 $ 203,591 $ 683,134 $ 579,769
Cost of revenue (1) 61,316 68,793 189,992 192,319
Gross profit 178,447 134,798 493,142 387,450
Operating expenses:
Research and development (1) 69,261 53,362 202,760 153,460
Sales and marketing (1) 95,477 97,723 296,100 293,603
General and administrative (1) 42,799 35,614 124,312 113,193
Total operating expenses 207,537 186,699 623,172 560,256
Loss from operations (29,090) (51,901) (130,030) (172,806)
Other income (expense):
Interest income 4,685 575 8,220 2,237
Interest expense (1,283) (1,228) (3,748) (3,682)
Other income (expense) 192 (268) 190 (647)
Loss before income taxes (25,496) (52,822) (125,368) (174,898) Income tax provision 1,116 763 1,002 816 Net loss$ (26,612) $
(53,585)
607 (9,121) 3,351 (19,175)
Net loss attributable to New Relic $ (26,005) $
(62,706)
$ (0.38) $
(0.96) $ (1.83)
64,983 67,229 64,203
share, basic and diluted
(1) Includes stock-based compensation expense as follows:
Three Months Ended December
31, Nine Months Ended December 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue $ 1,174 $ 1,382 $ 4,051 $ 3,757
Research and development 14,977 13,117 42,705 36,228
Sales and marketing 12,556 12,537 36,013 37,619
General and administrative (2) 11,972 10,755 32,644 39,945
Total stock-based compensation expense (3)
(2) Includes$9.6 million acceleration of share-based payment expense for the nine months endedDecember 31, 2021 for one of our executives due to his departure at the end ofJune 2021 . There was no corresponding expense for the nine months endedDecember 31, 2022 . (3) Includes$0.5 million stock-based compensation expense for the nine months endedDecember 31, 2021 due to the restructuring activities commenced inApril 2021 . There was no corresponding expense for the nine months endedDecember 31, 2022 . Refer to Note 15 - 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. 31 --------------------------------------------------------------------------------
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
(as a percentage of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue (1) 26 34 28 33
Gross profit 74 66 72 67
Operating expenses:
Research and development (1) 28 26 29 26
Sales and marketing (1) 40 49 43 51
General and administrative (1) 18 17 18 20
Total operating expenses 86 92 90 97
Loss from operations (12) (26) (18) (30)
Other income (expense):
Interest income 2 - 1 -
Interest expense (1) (1) (1) (1)
Other income (expense), net - - - -
Loss before income taxes (11) (27) (18) (31)
Income tax provision (benefit) - - - -
Net loss (11) % (27) % (18) % (31) %
Net loss and adjustment attributable to redeemable non-controlling interest
- (4) - (3)
Net loss attributable to New Relic (11) % (31) % (18) % (34) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
(as a percentage of revenue)
Cost of revenue - % 1 % 1 % 1 %
Research and development 6 6 6 6
Sales and marketing 6 6 5 6
General and administrative 5 5 5 7
Total stock-based compensation expense 17 % 18 % 17 % 20 %
Revenue
Three Months Ended December 31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
United States $ 152,518 $ 134,687 $ 17,831 13 % $ 443,691 $ 391,127 $ 52,564 13 %
EMEA 43,937 31,714 12,223 39 116,949 89,920 27,029 30
APAC 26,091 21,354 4,737 22 73,745 57,852 15,893 27
Other 17,217 15,836 1,381 9 48,749 40,870 7,879 19
Total revenue $ 239,763 $ 203,591 $ 36,172 18 % $ 683,134 $ 579,769 $ 103,365 18 %
Total revenue increased $36.2 million , or 18%, in the three months ended
December 31, 2022 compared to the same period of 2021. Our revenue from the
United States increased $17.8 million , or 13%, our revenue from EMEA increased
$12.2 million , or 39%, our revenue from APAC increased $4.7 million , or 22%, and
our revenue from other regions increased $1.4 million , or 9% in the three months
ended December 31, 2022 , compared to the same period of 2021, primarily as a
result of growth in our customer base and increase in consumption.
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Total revenue increased $103.4 million , or 18%, in the nine months ended
December 31, 2022 compared to the same period of 2021. Our revenue from the
United States increased $52.6 million , or 13%, our revenue from EMEA increased
$27.0 million , or 30%, our revenue from APAC increased $15.9 million , or 27%,
and our revenue from other regions increased $7.9 million , or 19% in the nine
months ended December 31, 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.
Cost of Revenue
Three Months Ended December
31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 61,316 $ 68,793 $ (7,477) (11) % $ 189,992 $ 192,319 $ (2,327) (1) %
Cost of revenue decreased $7.5 million , or 11%, in the three months ended
December 31, 2022 , compared to the same period of 2021. The decrease was
primarily due to a $14.9 million decrease in hosting-related costs, consulting,
and software expenses and a $1.5 million decrease in personnel-related costs.
The decrease was partially offset by a $9.3 million increase in allocated costs,
including facilities, depreciation, facilities exit costs, and the impairment of
certain acquired technologies.
Cost of revenue decreased $2.3 million , or 1%, in the nine months ended December
31, 2022 , compared to the same period of 2021. The decrease was primarily due to
a $9.0 million decrease in hosting-related costs, consulting, and software
expenses and a $0.5 million decrease in travel expenses. The decrease was
partially offset by a $4.2 million increase in allocated costs, including
facilities, depreciation, facilities exit costs, the impairment of certain
acquired technologies, a $2.4 million increase in personnel-related costs, and a
$0.5 million increase in other miscellaneous expenses.
Research and Development
Three Months Ended December
31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
Research and development $ 69,261 $ 53,362 $ 15,899 30 %
32 %
Research and development expenses increased$15.9 million , or 30%, in the three months endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily a result of an increase in personnel-related costs of$12.1 million , driven by an increase in headcount, salary and equity-based compensation, a$3.6 million increase in allocated costs, including facilities, depreciation, and facilities exit costs, and a$2.2 million increase in consulting and software expenses. The increase was partially offset by$2.0 million decrease in travel and other miscellaneous expenses. Research and development expenses increased$49.3 million , or 32%, in the nine months endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily a result of an increase in personnel-related costs of$38.0 million , driven by an increase in headcount, salary and equity-based compensation, a$7.5 million increase in allocated costs, including facilities, depreciation, and facilities exit costs, a$2.4 million increase in consulting and software expenses, and a$1.7 million increase in travel and other miscellaneous expenses. The increase was partially offset by a$0.3 million decrease in hosting service credits. Sales and Marketing Three Months Ended December 31, Change Nine Months Ended December 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Sales and marketing$ 95,477 $ 97,723 $ (2,246) (2) %$ 296,100 $ 293,603 $ 2,497 1 % Sales and marketing expenses decreased$2.2 million , or 2%, in the three months endedDecember 31, 2022 compared to the same period of 2021. The decrease was primarily a result of a$3.4 million decrease in personnel-related cost, a$2.3 million decrease in travel expenses, and a$0.9 million decrease in allocated costs, including facilities and depreciation. The decrease was partially offset by a$1.9 million increase in marketing programs, a$1.0 million increase in consulting and 33 --------------------------------------------------------------------------------
software expenses, and a
Sales and marketing expenses increased$2.5 million , or 1%, in the nine months endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily a result of a$8.4 million increase in marketing program expenses, a$6.1 million increase in travel expenses, and a$2.4 million increase in other miscellaneous expenses. The increase was partially offset by a$7.0 million decrease in personnel-related costs and a$6.9 million decrease in allocated costs, including facilities and depreciation. The decrease in personnel-related costs was due to the impact of higher restructuring costs that were incurred in the same period last year.
General and Administrative
Three Months Ended December
31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
General and administrative $ 42,799 $ 35,614 $ 7,185 20 % $ 124,312 $ 113,193 $ 11,119 10 %
General and administrative expenses increased$7.2 million , or 20%, in the three months endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily a result of an increase in personnel-related costs of$4.4 million driven by an increase in headcount, salary and equity-based compensation, a$2.5 million increase in allocated costs, including facilities, depreciation and lease exit expenses, a$0.7 million increase in travel expenses, and a$0.5 million increase in consulting and software. The increase was partially offset by a$1.0 million decrease in other miscellaneous expenses. General and administrative expenses increased$11.1 million , or 10%, in the nine months endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily a result of a$5.2 million increase in personnel-related costs driven by an increase in headcount, salary and equity-based compensation, a$3.7 million increase in travel expenses, a$1.6 million increase in allocated costs, including facilities, depreciation, and lease exit expenses, and a$0.6 million increase in consulting, software, and other miscellaneous expenses.
Other Income (Expense)
Three Months Ended December Nine Months Ended December
31, Change 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
Other income (expense) $ 3,594 $ (921) $ 4,515 490 % $ 4,662 $ (2,092) $ 6,754 323 %
Other income increased by
Other income increased by
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--------------------------------------------------------------------------------Provision for (Benefit from) Income Tax
Three Months Ended December 31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
Loss before income taxes $ (25,496) $ (52,822) $ 27,326 52 % $ (125,368) $ (174,898) $ 49,530 28 %
Effective tax rate (4.38) % (1.44) % (0.80) % (0.47) %
Income tax provision $ 1,116 $ 763 $ 353 46 % $ 1,002 $ 816 $ 186 23 %
We recognized an income tax expense of $1.1 million for the three months ended
December 31, 2022 as compared to an income tax expense of $0.8 million for the
same period of 2021. The change of $0.4 million , or 46%, was mostly related to
an increase in foreign taxes.
We recognized an income tax expense of $1.0 million for the nine months ended
December 31, 2022 as compared to an income tax expense of $0.8 million for the
same period of 2021. The change of $0.2 million , or 23%, was mostly related to
an increase in U.S. state taxes.
Net Loss and Adjustment Attributable to Redeemable Non-controlling Interest
Three Months Ended December 31, Change Nine Months Ended December 31, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
Net loss and adjustment
attributable to redeemable
non-controlling interest $ 607 $ (9,121) $ 9,728 107 % $ 3,351 $ (19,175) $ 22,526 117 %
Net loss and adjustment attributable to redeemable non-controlling interest
decreased by $9.7 million , or 107%, in the three months ended December 31, 2022 ,
compared to the same period of 2021. The decrease was related to the redeemable
non-controlling interest's associated loss and adjustment to estimated
redemption value of our joint venture in New Relic K.K.
Net loss and adjustment attributable to redeemable non-controlling interest
decreased by $22.5 million , or 117%, in the nine months ended December 31, 2022 ,
compared to the same period of 2021. The decrease was related to the redeemable
non-controlling interest's associated loss and adjustment to estimated
redemption value of our joint venture in New Relic K.K.
35
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Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted
accounting principles (GAAP), Non-GAAP Income (Loss) from Operations, a non-GAAP
financial measure, is included in the section titled "Non-GAAP Financial
Measures." This non-GAAP financial measure is not meant to be considered in
isolation or as a substitute for, or superior to, comparable GAAP financial
measures and should be read only in conjunction with our unaudited condensed
consolidated financial statements prepared in accordance with GAAP. Our
presentation of this non-GAAP financial measure may not be comparable to similar
measures used by other companies. We encourage investors to carefully consider
our results under GAAP, as well as our supplemental non-GAAP information and the
GAAP-to-non-GAAP reconciliation included in the section titled "Non-GAAP
Financial Measures," to more fully understand our business.
Non-GAAP Income (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 income (loss) from operations and non-GAAP net income (loss) attributable toNew Relic . We define non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable toNew 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) net loss and adjustment attributable to redeemable non-controlling interest, and (9) restructuring charges. We use non-GAAP financial measures, including non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable toNew 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 income (loss) from operations to non-GAAP income (loss) from operations and a reconciliation of GAAP net income (loss) attributable toNew Relic to non-GAAP net income (loss) attributable toNew Relic . We believe non-GAAP income (loss) from operations and non-GAAP net income (loss) attributable toNew 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. InMay 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%. EffectiveApril 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. 36 -------------------------------------------------------------------------------- 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 we do 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.
Net loss and adjustment to redeemable non-controlling interest. We allocate the net loss and adjust the value of redeemable non-controlling interest in connection with our joint venture in New Relic K.K. Starting from the period endedDecember 31, 2022 , we also include the net loss attributable to redeemable non-controlling interest as a non-GAAP item. As such, prior periods have been adjusted to reflect this change. We believe it is useful to exclude the net loss and 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. InApril 2021 , we commenced a restructuring plan to realign our cost structure to better reflect significant product and business model innovation over the prior 12 months. InAugust 2022 , we commenced a new restructuring plan to realign our cost structure with our business needs as we move to focus our resources on top priorities. As a result of each of these restructuring plans, we incurred charges of approximately$7.2 million and$12.6 million for the nine months endedDecember 31, 2022 and 2021, respectively, for employee terminations and other costs associated with the restructuring plans. We believe it is appropriate to exclude the restructuring charges because they are not indicative of our future operating results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP and may differ from non-GAAP financial measures used by other companies in our industry and exclude expenses that may have a material impact on our reported financial results. 37 -------------------------------------------------------------------------------- The following tables present our non-GAAP income (loss) from operations and our non-GAAP net income (loss) attributable toNew Relic and reconcile our GAAP income (loss) from operations to non-GAAP income (loss) from operations and our GAAP net income (loss) attributable toNew Relic to our non-GAAP net income (loss) attributable toNew Relic for the three and nine months endedDecember 31, 2022 and 2021 (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2022 2021 2022 2021 GAAP loss from operations$ (29,090) $
(51,901)
40,679 37,791 115,413 117,549
Plus: Amortization of purchased intangibles 4,467 2,006 9,050 5,358
Plus: Transaction costs related to acquisitions - - 929 361
Plus: Amortization of stock-based compensation
capitalized in software development costs 2,024 640 3,517 1,680
Plus: Lawsuit litigation cost and other expense - 59 88 59
Plus: Employer payroll tax on employee equity
incentive plans 619 956 2,231 2,552
Plus: Restructuring charges (1) - (151) 7,210 12,119
Non-GAAP income (loss) from operations $ 18,699 $ (10,600) $ 8,408 $ (33,128)
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
GAAP net loss attributable to New Relic $ (26,005) $
(62,706)
40,679 37,791 115,413 117,549
Plus: Amortization of purchased intangibles 4,467 2,006 9,050 5,358
Plus: Transaction costs related to acquisitions - - 929 361
Plus: Amortization of stock-based compensation
capitalized in software development costs 2,024 640 3,517 1,680
Plus: Lawsuit litigation cost and other expense - 59 88 59
Plus: Employer payroll tax on employee equity
incentive plans 619 956 2,231 2,552
Plus: Amortization of debt discount and issuance
costs 636 590 1,823 1,766
Plus: Net loss and adjustment to redeemable
non-controlling interest (2) (607) 9,121 (3,351) 19,175
Plus: Restructuring charges (1) - (151) 7,210 12,119
Non-GAAP net income (loss) attributable to
(1) For the nine months endedDecember 31, 2021 , restructuring related charge for the stock-based compensation expense of$0.5 million was included on its respective line items. There was no corresponding expense for the nine months endedDecember 31, 2022 . (2) Beginning from the period endedDecember 31, 2022 , net loss attributable to redeemable non-controlling interest is included in the non-GAAP reconciliation. As such, reclassifications have been made to prior periods to conform with the current presentation. Although we generated non-GAAP income from operations and non-GAAP net income attributable toNew Relic in the three and nine months endedDecember 31, 2022 , and although we expect that these numbers will improve over time with increased efficiencies, we have generated non-GAAP loss from operations and non-GAAP net loss attributable toNew Relic in prior recent periods.
Free Cash Flow
We define free cash flow, a non-GAAP financial measure, as GAAP net cash
provided by (used in) operating activities reduced by purchases of property and
equipment and capitalized software development costs. We believe information
regarding free cash flow provides useful supplemental information to investors.
38
--------------------------------------------------------------------------------The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Net cash used in operating activities $ (24,828) $ (19,197) $ (19,265) $ (46,328)
Capital expenditures (358) (351) (2,774) (3,177)
Capitalized software development costs (4,287) (3,359) (12,194) (9,406)
Free cash flow (Non-GAAP) $ (29,473) $ (22,907) $ (34,233) $ (58,911)
Net cash provided by investing activities $ 58,654 $ 11,687 $ 242,900 $ 16,885
Net cash provided by financing activities $ 1,932 $ 21,551 $ 14,496 $ 34,582
39
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Liquidity and Capital Resources
Nine Months Ended December 31,
2022 2021
(in thousands)
Cash used in operating activities $ (19,265) $ (46,328)
Cash provided by investing activities 242,900 16,885
Cash provided by financing activities 14,496 34,582
Net increase in cash, cash equivalents and restricted cash
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 onMay 1, 2023 . We may seek to repurchase a portion of our 0.5% Convertible Senior Notes pursuant to open market purchases or privately negotiated transactions in advance of their maturity date. 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 endedMarch 31, 2022 in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 (our "Annual Report"), as filed with theSecurities and Exchange Commission ("SEC"), onMay 17, 2022 . Operating Activities During the nine months endedDecember 31, 2022 , cash used in operating activities was$19.3 million as a result of a net loss of$126.4 million , adjusted by non-cash charges of$181.1 million and a change of$74.0 million in our operating assets and liabilities. The change in our operating assets and liabilities was the result of a$96.9 million decrease in deferred revenue, a$8.7 million increase in deferred contract acquisition and fulfillment costs, a$8.7 million decrease in lease liabilities, and a$3.8 million decrease in accounts payable. The decrease was offset by a$28.0 million decrease in account receivable, a$7.9 million decrease in lease right-of-use assets, a$5.3 million decrease in prepaid and other assets, and a$2.9 million increase in accrued compensation and benefits and other liabilities. During the nine months endedDecember 31, 2021 , cash used in operating activities was$46.3 million as a result of a net loss of$175.7 million , adjusted by non-cash charges of$185.9 million and a change of$56.5 million in our operating assets and liabilities. The change in our operating assets and liabilities was primarily the result of a$67.2 million decrease in deferred revenue, a$5.9 million decrease in lease liabilities, a$3.1 million increase in accounts receivable, a$3.0 million increase in prepaid and other assets, and a$1.7 million increase in deferred contract acquisition and fulfillment costs. This was partially offset by a$14.7 million increase in accrued compensation and benefits and other liabilities, a$6.7 million decrease in lease right-of-use assets, and a$2.9 million increase in accounts payable. 40 --------------------------------------------------------------------------------
Investing Activities
Cash provided by investing activities during the nine months endedDecember 31, 2022 was$242.9 million , primarily as a result of proceeds from the maturity and sale of short-term investments of$314.0 million and proceeds from sale of property and equipment of$1.8 million . This was partially offset by the purchase of short-term investments of$50.4 million , an increase in capitalization of software development costs of$12.2 million , purchases of property and equipment of$2.8 million , and a net payment of$7.5 million which was held back for an acquisition that occurred in the prior year. Cash provided by investing activities during the nine months endedDecember 31, 2021 was$16.9 million , primarily as a result of proceeds from the maturity and sale of short-term investments of$212.3 million . This was partially offset by purchases of short-term investments of$175.7 million , cash paid for acquisition, net of cash acquired, of$7.2 million , purchases of property and equipment of$3.2 million , and increases in capitalization of software development costs of$9.4 million .
Financing Activities
Cash provided by financing activities during the nine months endedDecember 31, 2022 was$14.5 million , which was the result of proceeds received from the purchase of shares of common stock pursuant to our employee stock purchase plan of$6.1 million and from the exercise of stock options of$8.4 million . Cash provided by financing activities during the nine months endedDecember 31, 2021 was$34.6 million , which was the result of proceeds received from the purchase of shares of common stock pursuant to our employee stock purchase plan of$5.4 million and from the exercise of stock options of$29.2 million . Critical Accounting Policies We prepare our consolidated financial statements in accordance withUnited 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 nine months ended
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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