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May 17, 2022, 4:13 p.m. EDT

10-K: NEW RELIC, INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part I, 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 believe we offer the lowest prices for data ingest in the industry; we can do this because 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







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product and go-to-market organizations as we believe both the self-serve nature of our products, and the customer specific 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 fiscal years ended March 31, 2022 and 2021 was $785.5 million and $667.6 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 to New Relic of $250.4 million and $192.6 million for the fiscal years ended March 31, 2022 and 2021, respectively. Our accumulated deficit as of March 31, 2022 was $783.3 million.

Internationally, we currently offer our products in Europe, the Middle East, and Africa, ("EMEA"); Asia-Pacific, ("APAC"); and other non-U.S. locations, as determined based on the billing address of our customers, and our revenue from those regions constituted 15%, 10%, and 7%, respectively, of our revenue for the fiscal year ended March 31, 2022, and 16%, 9%, and 6%, respectively, of our revenue for the fiscal year ended March 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.

Our employee headcount has increased to 2,217 employees as of March 31, 2022 from 2,168 as of March 31, 2021, and we plan to continue to invest aggressively in the growth of our business to take advantage of our market opportunity.

Impact of the Ongoing COVID-19 Pandemic

The COVID-19 pandemic continues to affect the U.S. and the world and has resulted in authorities implementing numerous and changing measures to contain the virus. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration of the pandemic, 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. As our offices reopen, 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 were relaxed earlier in the year, recently, due to the proliferation of the Omicron variant, 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 and public acceptance of treatments and vaccines progress, we continue to evaluate and refine our operational strategies. Our revenue and deferred revenue have been, in part, negatively impacted by the slowdown in activity associated with the COVID-19 pandemic, but at this point, the extent of any continuing impact to our financial condition or results of operations, including cash flows, is uncertain, particularly as the COVID-19 pandemic continues to persist for an extended period of time. 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.







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Retention and Expansion. A key factor in our success is the retention and expansion of our platform usage with our existing customers. In order for us to continue to grow our business, it is important to generate additional revenue from our existing customers, and we intend to do this in several ways. As we improve our existing products and platform capabilities and introduce new products, we believe that the demand for our products will generally grow. We also believe that there is a significant opportunity for us to increase our revenue from sales to our current customers as they become more familiar with our products and adopt our products to address additional business use cases. In addition, we believe the shift in our pricing strategy will allow sales resources to focus energy on helping customers increase their data ingestion and the number of users and use cases.

Key Operating Metrics

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 March 31, 2022, we had 14,800 Active Customer Accounts, which is up from 14,100 Active Customer Accounts for the three-month period ended March 31, 2021 and is up sequentially from 14,600 Active Customer Accounts for the three-month period ended December 31, 2021.

Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2021 Active Customer Accounts 14,800 14,600 14,300 14,100

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 March 31, 2022, we had 1,099 Active Customer Accounts with trailing 12-month revenue over $100,000, which was a 16% increase compared to 945 for the three-month period ended as of March 31, 2021 and a 3% increase compared to 1,064 for the three-month period ended December 31, 2021.

Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2021 Active Customer Accounts > $100,000 1,099 1,064 1,011 964

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 82% for the three-month period ended March 31, 2022, compared to 79% for the three-month period ended March 31, 2021 and 81% for the three-month period ended December 31, 2021.







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                                                       Mar 31, 2022        Dec 31, 2021        Sep 30, 2021        Jun 30, 2021
        Percentage of Active Customer Accounts >
        $100,000                                               82  %               81  %               81  %               79  %
        


Net Revenue Retention Rate. We believe the growth in use of our platform by our existing Active Customer Accounts is an important measure of the health of our business and our future growth prospects. We monitor our net revenue retention rate ("NRR") to measure this growth. We expect our NRR to increase when Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. We expect our NRR to decrease when Active Customer Accounts cease or reduce their usage of a product.

To calculate NRR, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior fiscal year. Next, we identify the measurement period as the 12-month period ending with the period reported and the prior comparison period as the corresponding period in the prior year. NRR is the quotient obtained by dividing the revenue generated from a cohort of Active Customer Accounts in the measurement period by the revenue generated from that same cohort in the prior comparison period.

Our NRR increased year-over-year to 119% for the period ended March 31, 2022 compared to 112% for the period ended March 31, 2021 and increased quarter-over-quarter from 116% for the period ended December 31, 2021.

Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2021 Net Revenue Retention Rate 119 % 116 % 112 % 111 %

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 $706.1 million and $726.8 million as of March 31, 2022 and March 31, 2021, respectively, consisting of both billed and unbilled consideration. Deferred revenue consists of billings or payments received in advance of revenue being recognized, and can fluctuate with changes in billing frequency and other factors. As a result of 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 growth of our customer adoption and the number of products we offer, as customer usage continues to grow. Additionally, we are continuing to build out services and functionality in the public cloud with a view to migrating our entire platform over time from third-party data center hosting Table of Contents

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.

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.







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Results of Operations For Fiscal Years Ended March 31, 2022 and 2021

The following tables summarize our consolidated statements of operations data for the fiscal years ended March 31, 2022 and March 31, 2021 and as a percentage of our revenue for those periods. For a discussion of our consolidated statement of operations data for the fiscal year ended March 31, 2020 and as a percentage of revenue for that period, see "Results of Operations for Fiscal Years Ended March 31, 2020, 2019, and 2018" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SEC on May 14, 2021, or our Fiscal 2021 Annual Report. For a discussion of our liquidity and capital resources for the fiscal year ended March 31, 2020, see "Liquidity and Capital Resources" in Part II, Item 7 of our Fiscal 2021 Annual Report. The period to period comparison of results is not necessarily indicative of results for future periods.







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May 17, 2022

COMTEX_407348867/2041/2022-05-17T16:13:04

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