Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.25pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.57pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.07pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+14
incident+11
vulnerabilities+9
against+6
threats+5
Positive rising
progress+3
achieve+2
successful+1
success+1
greater+1
Risk Factors (Item 1A)
20,061 words
Item 1A. Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and accompanying notes.
Risks Related to Our Business and Our Industry
We have a limited operating history with our current business model, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.
We were founded in 2007, launched our first commercial product in 2008, launched our New Relic platform in 2019, and introduced our updated consumption-based model in fiscal year 2021. This limited operating history with our current business model limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth, data ingest growth, and other metrics should not be considered indicative of our future performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future products and platform capabilities, competition from other companies, acquiring and retaining customers, transition of customers onto our new buying programs, hiring, integrating, training and retaining skilled personnel, developing new products and platform capabilities, determining prices and pricing structures for our products and platform capabilities, expenses, and in forecasting accuracy. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are or change, or if we do not address these risks , our operating and financial results and our business could .
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
restructuring+13
arrears+4
termination+4
critical+3
impairment+2
Positive rising
efficiency+6
better+4
effective+3
improve+3
innovation+3
MD&A (Item 7)
10,648 words
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.
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 to, comparable GAAP financial measures and should be read only in conjunction with our 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.
We have limited experience with respect to determining the optimal prices and pricing structures for our products and have employed evolving pricing models, which subject us to challenges that could make it difficult for us to derive value from our customers and may adversely affect our operating results.
We have evolved our pricing models over time and we expect that they will continue to evolve. For example, in fiscal 2021, we updated our pricing strategy to calculate customer spend based upon their consumption. Customers may be charged upon their usage in arrears, which we refer to as “Pay as You Go,” or they may commit to a minimum spend over their contracted period in exchange for a discount on their usage pricing. Consumption under this model is measured by number of users and data ingested into our system, thereby collapsing what had previously been a number of different products priced in individualized ways into a simplified strategy that is intended to drive consumption across our platform.
We have seen that the transition to our consumption-based model has negatively impacted our revenue and deferred revenue for certain customers at the time of their renewal. For example, some customers have decided to take advantage of our consumption-based model and choose smaller upfront commitments in favor of spending on actual consumption in excess of committed amounts. Whether o ur consumption model will prove successful is subject to numerous uncertainties, including but not limited to: customer demand, renewal and expansion rates, our ability to further develop and scale infrastructure, the ability of our sales force to successfully execute new sales strategies, tax and accounting implications, pricing, our costs, and the product offerings and pricing models and strategies of our competitors. In addition, the metrics we use to gauge the status and success of our consumption pricing model may continue to evolve as significant trends emerge.
We have seen indications of acceptance of our consumption-based model from our customers and the market in general; however, if our pricing model fails to gain continued or broader customer and market acceptance, our business and results of operations could be harmed . In addition, our evolving pricing models may allow competitors with different pricing models to attract customers unfamiliar or uncomfortable with our pricing models, which would cause us to lose business or modify our pricing models, both of which could adversely affect our revenues and operating margins.
We expect that we will continue to evolve our pricing model, including as a result of global economic conditions, reductions in our customers’ spending levels generally, the introduction of new products and services, the evolution of existing products and services, or changes in how computing infrastructure is broadly consumed. We have introduced and expect to continue to introduce variations to our pricing models and other pricing programs that provide broader usage and cost predictability for our customers. Although we may believe that these pricing changes will drive net new customers, increase customer adoption, and support our transition to a consumption-based model, it is possible that they will not and may potentially cause confusion with our customers, which could negatively impact our business, revenue, and other financial
Table of Contents
results. If we have difficulty determining the appropriate price structure for our products, we may be required from time to time to further revise our pricing structure, increase billing frequency, or reduce our prices, which could adversely affect our business.
We have a history of losses and our revenue growth rate could decline over time. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability.
We have incurred net losses in each fiscal period since our inception, including net loss attributable to New Relic of $180.2 million, $250.4 million, and $192.6 million in the fiscal years ended March 31, 2023, 2022, and 2021, respectively. At March 31, 2023, we had an accumulated deficit of 963.6 million. We expect to continue to expend substantial financial and other resources on, among other things:
• investments in our research and development team, and the development of new platform offerings, capabilities, features, and functionality;
• expansion of our operations and infrastructure, both domestically and internationally;
• hiring of additional employees; and
• general administration, including legal, accounting, and other expenses related to our growing operations and infrastructure.
In addition, we are currently migrating our entire platform over time from third-party data center hosting facilities to public cloud hosting providers, and our costs and gross margins are significantly influenced by the prices we are able to negotiate with them, which in certain cases are also our competitors. These investments may not result in increased revenue or growth of our business. Our revenue growth rate experienced decline in previous periods and it could decline again over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and to achieve and sustain profitability. If we fail to achieve and sustain profitability, our operating results and business would be harmed.
Weakened global economic conditions, including market volatility, any downturn or recession, rising inflation and interest rates, and the economic and other impacts of geopolitical conflicts, may harm our industry, business, and results of operations.
Our overall performance depends in part on worldwide economic conditions. Global financial developments and downturns, even those seemingly unrelated to us or the information technology industry, may harm us. The United States and other key international economies are being impacted by supply chain disruption, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, actual or perceived instability in the banking system, including due to recent bank failures, inflation, rising interest rates, labor shortages and overall uncertainty with respect to the economy. Businesses may look, and in many cases are looking, to rationalize their spending in response to such factors, which could impact our sales and renewal rates and negatively impact our business. Further, global events, such as Russia’s invasion of Ukraine, may lead to or continue to result in disruption, instability, deterioration and volatility in global markets and industries that could negatively impact our business, financial condition and results of operations.
Furthermore, the revenue growth and potential profitability of our business depends on demand for software applications and products generally, and APM and our other offerings specifically. In addition, our revenue is dependent on the number of users of our products and the degree of adoption of such users with respect to our products and platform capabilities. Historically, during economic downturns there have been reductions in spending on information technology systems as well as pressure for extended billing terms and other financial concessions, which would limit our ability to grow our business and negatively affect our operating results. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our products, delay prospective customers’ purchasing decisions, reduce the value or duration of their commitments or amount of their spend, or affect renewal rates, all of which could harm our operating results.
We are exposed to foreign currency exchange rate fluctuations, which may harm our business and results of operations.
While we have historically transacted in U.S. dollars with substantially all of our customers and vendors, we have transacted in foreign currencies and will continue to transact in foreign currencies in the future. In addition, our international subsidiaries may maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our revenue and operating results as we convert these to U.S. dollars. Volatile market conditions arising from the macro environment have and may in the future result in significant changes in exchange rates, and with the recent volatility of multiple major foreign currencies against the U.S. dollar, we have seen more significant impact from exchange rates on our revenue growth and expenses in fiscal 2023
Table of Contents
than in the previous fiscal year, and we expect the impact to be sign ificant this year if we continue to experience similar or greater foreign currencies volatilityagainst the U.S. dollar. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.
In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
We have experienced significant growth in prior periods and our historical growth rates may not be indicative of our future growth. If we are not able to manage our growth and expansion, or if our business does not grow as we expect, our operating results may suffer.
We have experienced significant growth in our customer adoption and have expanded and may continue to significantly expand our operations, including our domestic and international employee headcount. This growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure and we may not be able to sustain revenue growth consistent with prior periods, or at all.
To manage our growth effectively, we must continue to improve our operational, financial, and management systems and controls by, among other things:
• effectively attracting, training, integrating, and retaining a large number of new employees, particularly members of our research and development teams and employees and consultants in jurisdictions outside of the United States;
• further improving our key business systems, processes, and information technology infrastructure, including our cloud services, to support our business needs;
• enhancing our information, training, and communication systems to ensure that our employees are well-coordinated and can effectively communicate with each other and our customers; and
• improving our internal control over financial reporting and disclosure controls and procedures to ensure timely and accurate reporting of our operational and financial results.
If we fail to manage our expansion, implement and transition to our new systems, implement improvements, or maintain effective internal controls and procedures, our costs and expenses may increase more than we plan and we may lose the ability to increase our customer adoption, enhance our existing solutions, develop new solutions, satisfy our customers, respond to competitive pressures, or otherwise execute our business plan. If we are unable to manage our growth, our operating results likely will be harmed.
Our business depends on our customers remaining on our platform and increasing their spend with us. Any decline in our customer expansions and renewals would harm our future operating results.
Our future success depends in part on our ability to retain and expand our platform usage with our current customers. If our customers do not remain on our platform or increase their spend with us, our revenue may decline, and our operating results may be harmed.
In addition, in order for us to maintain or improve our operating results, it is important that our customers renew their commitments or remain on our platform and increase their spend when the contract term expires. Many of our customers may start their accounts on a free tier and have no obligation to enter into a paid commitment or incur spend above the free tier. Our customers that enter into paid commitments have no obligation to renew after the expiration of the contractual term nor an obligation to remain on our platform and incur additional usage fees. Commitments are most often one year in length, and, our customers may renew for lower commitment amounts or instead use our Pay as You Go model, under which they are billed in arrears for their usage. To the extent we are not successful increasing customer budget available to spend on our products and services, whether through demonstrating our value or increasing their contractual commitment level in-line with their usage, there is no guarantee that our customers will grow their consumption with us. Also, in the past, some of our customers have elected not to renew their agreements with us, and we cannot accurately predict future net expansion rates. Moreover, certain legacy customers with annual subscriptions entered into prior to our consumption model have the right to cancel their
Table of Contents
agreements prior to the termination of the subscription term. Additionally, some customers have decided to remain and may continue to remain within the limitations of our free-tier or lower-priced offerings.
Our customer expansions and renewals may decline or fluctuate as a result of a number of factors, including: customer usage, customer satisfaction with our products and platform capabilities and customer support, our prices, including as a result of changes to our pricing strategy, the prices of competing products, mergers and acquisitions affecting our customer base, consolidation of affiliates’ multiple accounts into a single account, the effects of uncertain global economic conditions, including as a result of the global COVID-19 pandemic and Russia’s invasion of Ukraine, or reductions in our customers’ spending levels generally.
If we are not able to develop enhancements to our products, increase adoption and usage of our products, and introduce new products and capabilities that achieve market acceptance, our business could be harmed.
Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing products, increase adoption and usage of our products, and introduce new products and capabilities. The success of any enhancement or new products depends on several factors, including timely completion, competitive pricing, adequate quality testing, introduction, integration with existing technologies and our platform, and market acceptance. Any products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. If we are unable to successfullyenhance our existing products to meet customer requirements, increase adoption and usage of our products, or develop new products, our business and operating results will be harmed.
If customers do not expand their use of our products beyond the current predominant use cases, our ability to grow our business and operating results may be adversely affected.
Most of our customers currently use our products to support application performance management functions, and the majority of our revenue to date has been from our application performance management products. Our ability to grow our business depends in part on our ability to persuade current and future customers to expand their use of our software to additional use cases across our entire platform. If we fail to achieve market acceptance of our software, or if a competitor establishes a more widely adopted solution, our ability to grow our business and financial results will be adversely affected. In addition, as the amount of data stored for a given customer grows, that customer may have to limit or decrease usage in order to stay within budgeted amounts or lower their cost. If their fees grow significantly, customers may react adversely to this pricing model, particularly if they perceive that the value of our software has become eclipsed by such fees or otherwise.
Failure to effectively align our marketing and sales capabilities with our consumption pricing structure and increase sales efficiency could harm our ability to increase our customer adoption and achieve broader market acceptance of our products.
Our ability to increase our customer adoption and achieve broader market acceptance of our products will depend to a significant extent on our ability to align our marketing and sales capabilities with our consumption pricing structure and increase sales efficiency.
The effectiveness of our marketing programs has varied over time and may vary in the future due to competition, and we are continuously making adjustments to increase our emphasis on overall product experience and reorient our sales organization around customer success. All of these efforts have required and will continue to require us to invest significant resources. If we are unable to hire, develop, and retain talented sales personnel, if our sales personnel are unable to achievedesired productivity levels in a reasonable period of time or unable to successfully execute sales strategies in connection with our pricing model changes, or if our sales and marketing programs are not effective, our ability to increase our customer adoption and achieve broader market acceptance of our products could be harmed.
In particular, we may in the future need to further adjust our go-to-market cost structure and target metrics, particularly as they relate to how we structure, effect, and compensate our sales teams to become more efficient and effective at selling under the consumption-based model. Any adjustments in compensation structure could negatively affect the productivity of our sales teams, and there is no assurance that we will be able to successfully implement the adjustments in a timely or cost-effective manner, or that we will be able to realize all or any of the expected benefits from such adjustments.
If we are unable to develop and grow a broad base of high-spend customers, many of which we expect to be large enterprise customers, while mitigating the risks associated with serving such customers, our business, financial position, and results of operations may suffer.
Our growth strategy is dependent, in large part, upon developing and growing a broad base of high-spend customers, many of which we expect to be large enterprise customers. Sales to large customers involve risks that may not be present or that
Table of Contents
are present to a lesser extent with sales to smaller entities, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, enterprise customers may require considerable time to evaluate and test our applications and those of our competitors prior to making a purchase decision and placing an order. A number of factors influence the length and variability of our sales cycle, including the need to educate potential customers about the uses and benefits of our applications, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly from customer to customer, with sales to large enterprises typically taking longer to complete. Moreover, large enterprise customers often begin to deploy our products on a limited basis, but nevertheless demand extensive configuration, integration services, and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment.
In addition, our ability to improve our sales of products to large enterprises is dependent on us continuing to attract and retain sales personnel with experience in selling to large organizations. Also, because security breaches with respect to larger, high-profile enterprises are likely to be heavily publicized, there is increased reputational risk associated with serving such customers. If we are unable to continue to increase sales of our products to large enterprise customers while mitigating the risks associated with serving such customers, our business, financial position, and results of operations may suffer.
Our quarterly results may fluctuate and our recent operating results may not be a good indication of our future performance. If we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly financial results may fluctuate widely as a result of the risks and uncertainties described in this report, many of which are outside of our control. In addition, our pricing model may give rise to a number of risks reflected in risk factors titled “ We have limited experience with respect to determining the optimal prices and pricing structures for our products and have employed evolving pricing models, which subject us to challenges that could make it difficult for us to derive value from our customers and may adversely affect our operating results ” and “ If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected .” If our financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially.
We believe that quarter-to-quarter comparisons of our revenue, operating results, and cash flows may not be meaningful and should not be relied upon as an indication of future performance. If our revenue or operating results fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance we may provide, the price of our common stock could decline.
If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions, litigation, fines and penalties, disruptions of our business operations, reputational harm, loss of revenue or profits, loss of customers or sales, and other adverse consequences.
In the ordinary course of our business, we and the third parties upon which we rely, process, collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share proprietary, confidential, and sensitive data, including personal data, intellectual property, and trade secrets.
Cyber-attacks, malicious internet-based activity, online and offline fraud, and other similar activities threaten the confidentiality, integrity, and availability of proprietary, confidential, and sensitive data and information technology systems, and those of the third parties upon which we rely. Such threats are prevalent and continue to rise, are increasingly difficult to detect, and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminalthreat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including cyber-attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our goods and services.
We and the third parties upon which we rely are subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistentthreat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions,
Table of Contents
software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, and other similar threats.
In particular, severe ransomware attacks are becoming increasingly prevalent and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversions of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments. Remote work has become more common and has increased risks to our information technology systems and data, as more of our employees utilize network connections, computers and devices outside our premises or network, including working at home, while in transit and in public locations.
We rely on third-party service providers and technologies to operate critical business systems to process proprietary, confidential, and sensitive information in a variety of contexts, including, without limitation, cloud-based infrastructure, data center facilities, encryption and authentication technology, employee email, content delivery to customers, and other functions. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. If our third-party service providers experience a security incident or other interruption, we could experience adverse consequences. While we may be entitled to damages if our third-party service providers fail to satisfy their privacy or security-related obligations to us, any award may be insufficient to cover our damages, or we may be unable to recover such award. In addition, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems or the information technology systems of our third-party partners with whom we work. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Furthermore, we may discover security issues that were not found during due diligence of such acquired or integrated entities, and it may be difficult to integrate companies into our information technology environment and security program.
Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our proprietary, confidential, and sensitive data or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services.
We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific, industry-standard, or reasonable security measures to protect our information technology systems and proprietary, confidential, and sensitive data . While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We take steps to detect and remediate vulnerabilities, but we may not be able to detect and remediate all vulnerabilities because the threats and techniques used to exploit the vulnerability change frequently and are often sophisticated in nature. Therefore, such vulnerabilities could be exploited but may not be detected until after a security incident has occurred. These vulnerabilities pose material risks to our business. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. As we increase our customer adoption and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gainunauthorized access to our customers’ data. Additionally, with our transition to the flex-first model, we may face an increased risk of attempted security breaches and incidents. Moreover, if a high-profile security breach occurs with respect to another cloud platform provider, our customers and potential customers may lose trust in the security of cloud platforms generally, which could adversely impact our ability to retain existing customers or attract new ones.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences, such as government enforcement actions (for example, investigations, fines, penalties, audits, and inspections), additional reporting requirements and/or oversight, restrictions on processing sensitive information (including personal data), litigation (including class claims), indemnification obligations, negative publicity, reputational harm, monetary fund diversions, interruptions in our operations (including availability of data), financial loss, and other similar harms. Security incidents and attendant
Table of Contents
consequences may cause customers to stop using our platform, deter new customers from using our platform, and negatively impact our ability to grow and operate our business. If we are not able to detect and indicate activity on our platform that might be nefarious in nature or design processes or systems to reduce the impact of similar activity at a third-party service provider, our customers could sufferharm. In such cases, we could face exposure to legal claims, particularly if the customer suffered actual harm.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security incident, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claimsagainst us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our expansion rates, financial condition, operating results, and reputation.
In addition to experiencing a security incident, third parties may gather, collect, or infer sensitive information about us from public sources, data brokers, or other means that reveals competitively sensitive details about our organization and could be used to undermine our competitive advantage or market position.
The reliability and continuous availability of our platform is critical to our success. However, software such as ours can contain errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct, particularly when such vulnerabilities are first introduced or when new versions or enhancements of our platform, service, and products are released. Additionally, even if we are able to develop a patch or other fix to address such vulnerabilities, such fix may be difficult to push out to our customers or otherwise be delayed. Additionally, our business depends upon the appropriate and successful implementation of our platform by our customers. If our customers fail to use our platform according to our specifications, our customers may suffer a security incident on their own systems or other adverse consequences. Even if such an incident is unrelated to our security practices, it could result in our incurring significant economic and operational costs in investigating, remediating, and implementing additional measures to further protect our customers from their own vulnerabilities and could result in reputational harm.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, and changing customer needs, requirements, or preferences, our products may become less competitive.
The software industry is subject to rapid technological change, evolving industry standards and practices, and changing customer needs, requirements, and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop and sell new products that satisfy our customers and provide enhancements and new features for our existing products and platform capabilities that keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. Further, the value of our platform to customers increases to the extent they are able to use it for all of their telemetry data. We need to continue to invest in technologies, services, and partnerships that increase the ease with which customers can ingest data into our platform. If new technologies emerge that are able to deliver competitive products and applications at lower prices, more efficiently, more conveniently, or more securely, such technologies could adversely impact our ability to compete.
Our platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies, and we need to continuously modify and enhance our products and platform capabilities to adapt to changes and innovation in these technologies. If developers widely adopt new software platforms, we would have to develop new versions of our products and platform capabilities to work with those new platforms. This development effort may require significant engineering, marketing, and sales resources, all of which would affect our business and operating results. Any failure of our products and platform capabilities to operate effectively with future infrastructure platforms and technologies could reduce the demand for our products. If we are unable to respond to these changes in a cost-effective manner, our products may become less marketable and less competitive or obsolete, and our operating results may be negatively affected. Similarly, application stores such as those operated by Apple and Google, may change their technical requirements or policies in a manner that adversely impacts the way in which we or our partners or customers collect, use, and share data from users. If the use of our products does not comply with these requirements, customers may not be able to use our products for their intended purposes and our business could be harmed.
Table of Contents
We are dependent upon lead generation strategies to drive our sales and revenue. If these marketing strategies fail to continue to generate sales opportunities, our ability to grow our revenue will be adversely affected.
We are dependent upon lead generation strategies, including our expanded free tier offering, to generate sales opportunities. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. To the extent that we are unable to successfully attract and grow paying customers, we will not realize the intended benefits of these marketing strategies and our ability to grow our revenue will be adversely affected.
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The markets in which we compete are rapidly evolving, significantly fragmented, and highly competitive. Our observability platform combines functionality from numerous traditional product categories, and hence we compete in each of these categories with home-grown and open-source technologies, as well as a number of different vendors.
With respect to our unified Observability platform, we compete with vendors such as Datadog, Inc. and Dynatrace, Inc. Since our platform combines functionality from more than 30 traditional product categories, we compete in each of these categories with home-grown and open source technologies, as well as a number of different commercial vendors. For example, for APM, we compete with providers such as Cisco Systems, Inc. With respect to log management, we compete with Elastic NV and Splunk, Inc. With respect to infrastructure monitoring, we compete with diversified technology vendors such as International Business Machines Corporation, BMC Software, Inc. and CA, Inc. (a subsidiary of Broadcom, Inc.), and with native solutions from cloud providers such as Amazon Web Services, Inc., Microsoft Corporation, and Google LLC. In addition, we may increasingly choose to allow third-party hosting providers to offer our solutions directly through their customer marketplaces. An increasing number of sales through cloud provider marketplaces could reduce both the number of customers with whom we have direct commercial relationships as well as our profit margins on sales made through such marketplaces.
Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, larger budgets, and significantly greater resources than we do, and have the operating flexibility to bundle competing products and services with other software offerings at little or no perceived incremental cost, including offering them at a lower price as part of a larger sale. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices or with greater depth than our products. Our current and potential competitors may develop and market new technologies with comparable functionality to our products and platform capabilities, and this could lead to us having to decrease prices in order to remain competitive.
With the introduction of new technologies, the evolution of our products and platform capabilities and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our solutions, we may face additional competition. Additionally, some potential customers, particularly large organizations, may elect to develop their own internal products. If one or more of our competitors were to merge or partner with another of our competitors or another large diversified technology company, the change in the competitive landscape could also adversely affect our ability to compete effectively. For example, in March 2017, Cisco Systems, Inc. completed its purchase of AppDynamics, Inc., in November 2018, Broadcom Inc. completed its acquisition of CA, Inc., in October 2019, Splunk Inc. completed its acquisition of SignalFX, Inc., in September 2021, Dynatrace, Inc. acquired SpectX, and in November 2022, Datadog, Inc. completed its acquisition of Cloudcraft. If we are unable to maintain our current pricing or fail to gain market acceptance of our updated pricing strategy due to the competitive pressures, our margins will be reduced, and our operating results will be negatively affected. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business.
Due to differences between our legacy subscription-based model and our transition to a consumption-based model, we may not have visibility into our future financial position and results of operations.
We have historically employed a subscription-based model. As a result, for contracts entered into prior to our transition to a consumption-based model, we recognize revenue from customers ratably over the terms of their subscriptions. A portion of the revenue we report in each quarter is derived from the recognition of revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our
Table of Contents
rate of renewals, may not be fully reflected in our results of operations until future periods, such as the effects of the global COVID-19 pandemic on our results of operations in recent years.
Because our customers have flexibility in the timing of their consumption under our consumption-based model, we do not have the same visibility into the timing of revenue recognition as we did under the subscription-based model. There is a risk that customers will consume our platform at a different pace than we expect, and our actual results may differ from our forecasts.
Seasonality may cause fluctuations in our sales and operating results.
We have experienced seasonality in our sales and operating results in the past, and we believe that we will continue to experience seasonality in the future. Historically, we have received a higher volume of orders in the fourth fiscal quarter of each year, driven largely by contract renewals, 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 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. For example, in recent years, we have seen a seasonal decline in consumption usage on an aggregate basis around the Christmas holiday in mid-December that begins to recover in January as the users of our platform return to work. For customers under consumption-based models that exhibit this seasonal pattern, we would have a corresponding revenue decrease for the impacted period of seasonally reduced usage.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources.
Assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, which include variable consideration, stock-based compensation, and business combinations. For example, the calculations to derive variable consideration require a combination of quantitative and qualitative inputs, which include estimates of our customers’ future consumption and estimates regarding the collectability of consumption above committed amounts, that are based largely on an assessment of information (historical, current and forecasted) that is reasonably available to us at that time.
As a result, the timing of recognizing revenue in any given quarter, including the extent to which revenue from transactions in a given period may not be recognized until a future period, can be variable and difficult to predict and our results of operations may be adversely affected if such assumptions change or if actual circumstances differ from those in our assumptions. This could result in fluctuations in our revenue from period to period, which may make these comparisons less meaningful and make it difficult for us, securities analysts and investors to accurately forecast our revenue and operating results, which could cause our results of operations to differ from our financial outlook or the expectations of securities analysts and investors, potentially resulting in a decline in the market price of our common stock. In addition, our consumption-based model has only been in place since fiscal 2021 and we are continuing to refine our assumptions and estimates. As we continue to obtain more historical data, we expect that our ability to forecast and derive these estimates will improve over time.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our continued growth depends in part on the ability of our existing and potential customers to access our products and platform capabilities at any time and within an acceptable amount of time. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our products and platform capabilities simultaneously, denial or degradation of service attacks, computer viruses, natural disasters, climate change and extreme weather-related events, terrorism, war, telecommunications and electrical failures, cyberattacks or other security-related incidents. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our products and platform capabilities become more complex and our user traffic
Table of Contents
increases. If our products and platform capabilities are unavailable or if our users are unable to access our products and platform capabilities within a reasonable amount of time or at all, our business would be negatively affected. As we expand our business, our customers increasingly rely on our customer support personnel to realize the full benefits that our platform provides, and if we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our platform usage to existing and new customers could suffer, and our reputation with existing or potential customers could suffer. In addition, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
In addition, we currently serve our customers from third-party data centers and a combination of cloud hosting providers. The continuous availability of our products and platform capabilities depends on the operations of our data center facilities, on our cloud hosting providers, on a variety of network service providers, on third-party vendors, and on our own site operations staff. We depend on our third-party providers’ abilities to protect our data center facilities againstdamage or interruption from natural disasters, power or telecommunications failures, criminal acts, and similar events. If there are any lapses of service, damage to the facilities, or prolonged cloud hosting provider service disruptions or downtime affecting our platform, we could experience lengthy interruptions in our products and platform capabilities as well as delays and additional expenses in arranging new facilities and services. In addition, we are in the process of migrating our entire platform over time from third-party data center hosting facilities to public cloud hosting providers. After we complete this migration, we will rely extensively on these public cloud providers to provide our clients and their users with fast and reliable access to our products. Even with current and planned disaster recovery arrangements, which, to date, have not been tested in an actual crisis, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability, and cause us to issue credits or cause customers not to renew their commitments or increase their spend with us, any of which could harm our business.
We depend and rely on SaaS technologies and related services from third parties in order to operate critical functions of our business and interruptions or performance problems with these technologies or services may adversely affect our business and operating results.
We depend and rely on software-as-a-service, or SaaS, technologies and related services from third parties in order to operate critical functions of our business, including billing and order management, financial accounting services, and customer relationship management services. If these services become unavailable due to extended outages or interruptions, security vulnerabilities, or cyber-attacks, because they are no longer available on commercially reasonable terms or prices, or due to other unforeseen circumstances, our expenses could increase, our ability to manage these critical functions could be interrupted, and our processes for and ability to manage sales of our products, recognize revenue, and support our customers could be impaired, all of which could adversely affect our business and operating results.
Defects or disruptions in our products and platform capabilities could diminish demand, harm our financial results, and subject us to liability.
Our customers use our products and platform capabilities for important aspects of their businesses, and any errors, defects, or disruptions to our products and platform capabilities or other performance problems with our products and platform capabilities could hurt our brand and reputation and may damage our customers’ businesses. We provide regular product updates, which may contain undetectederrors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities, and bugs in our products and platform capabilities after they have been released and new errors in our existing products and platform capabilities may be detected in the future. Real or perceived errors, failures, or bugs in our products and platform capabilities could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for the losses that may result from claims arising from defects or disruptions in our products and platform capabilities. As a result, we could lose future sales and our reputation, and our brand could be harmed.
Our ongoing and planned investments in cloud hosting providers and expenditures on transitioning our services and customers from our data center hosting facilities to public cloud providers are expensive and complex, may result in a negative impact on our cash flows, and may negatively impact our financial results.
We have made and will continue to make substantial investments in our cloud hosting providers to support our growth and provide enhanced levels of products and platform capabilities to our customers. We have been continuing to decrease the amount of capital expenditures on hosting equipment for use in our data center hosting facilities as we transition to greater
Table of Contents
dependence on cloud hosting providers. If costs associated with cloud hosting services utilized to support our growth continue to be greater than originally expected or if we are required to make larger continuing investments in our data centers than we anticipated, the negative impact on our operating results would likely exceed our expectations. Furthermore, if we determine to no longer utilize our data centers and related property, and equipment sooner than planned, we may be forced to accelerate expense recognition as a result of the shorter estimated life of such assets. In addition, ongoing or future improvements to our cloud infrastructure may be more expensive than we anticipate, and may not yield the expected savings in operating costs or the expected performance benefits. We may not be able to maintain or achieve cost savings from our investments, which could harm our financial results.
We plan to continue to invest resources in connection with transitioning our customers and services to third-party cloud hosting providers and may encounter obstacles in completing the transition. Additionally, due to the difficulty in predicting usage of our cloud hosting providers related to customers recently migrated or customers to be migrated from our data centers, we may not be able to accurately forecast our expenditures on such cloud hosting services, which may increase the variability of our results of operations.
In addition, we may need to change our current operations infrastructure in order for us to achieveprofitability and scale our operations efficiently, which makes our future prospects even more difficult to evaluate. For example, in order to grow our sales in a financially sustainable manner, we may need to further customize our offering and modify our go-to-market strategy to reduce our operating and customer acquisition costs. If we fail to implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.
Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.
During the fiscal year ended March 31, 2023, we derived approximately 35% of our total revenue from customers outside the United States. A component of our growth strategy involves the further expansion of our operations and customer adoption internationally. Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic, and political risks that are different from those in the United States. We have limited operating experience in international markets, and we cannot assure you that our expansion efforts into international markets will be successful. Our international expansion efforts may not be successful in creating further demand for our products outside of the United States or in effectively selling our products in the international markets we enter. Our current international operations and future initiatives involve a variety of risks, including:
• changes in a specific country’s or region’s political or economic conditions;
• unexpected changes in regulatory requirements, taxes, or trade laws;
• economic and political uncertainty around the world, including uncertainty regarding U.S foreign and domestic policies;
• regional data security and privacy laws and regulations and the unauthorized use of, or access to, commercial and personal information;
• differing labor regulations where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;
• challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs;
• difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems, and regulatory systems;
• significant reliance upon, and potential disputes with, local business partners;
• increased travel, real estate, infrastructure, and legal compliance costs associated with international operations;
• currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we chose to do so in the future;
• limitations on our ability to repatriate earnings;
• the impact of public health epidemics on our employees, partners and customers, such as the coronavirus epidemic that has impacted various regions throughout the world in recent years;
• laws and business practices favoring local competitors, or general preferences for local vendors;
Table of Contents
• limited or insufficient intellectual property protection;
• exposure to liabilities under anti-corruption, export controls and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, and similar laws and regulations in other jurisdictions; and
• adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash or create other collection difficulties.
Our limited experience operating our business internationally increases the risk that recent and any potential future expansion efforts will not be successful. If substantial time and resources invested to expand our international operations do not result in a successful outcome, our operating results and business will suffer.
In addition, in February 2022, Russia launched a large-scale military attack on Ukraine. The invasion significantly amplified pre-existing geopolitical tensions. It is not possible to predict the full extent of the broader consequences of Russia’s ongoing invasion of Ukraine, including sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, currency exchange rates and financial markets. Our business, financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from such conflict.
If we lose key members of our management team or are unable to attract and retain executives and employees we need to support our operations and growth, our business may be harmed.
Our success and future growth depend largely upon the continued services of our executive officers and other key employees in the areas of research and development, marketing, sales, services, and general administrative functions. From time to time, there may be changes in our executive management team or other key employees resulting from the hiring or departure of these personnel. For example, in fiscal 2022, Lew Cirne, our founder and former Chief Executive Officer, transitioned from his role as Chief Executive Officer to Executive Chairman of our Board of Directors and Williams Staples, our former President and Chief Product Officer was promoted to Chief Executive Officer. In the first quarter of fiscal 2023, Mark Sachleben, our former Chief Financial Officer, retired from the position and transitioned into an advisory role at the company and David Barter became our Chief Financial Officer. In addition, Mark Dodds joined us as our Chief Revenue Officer in the second quarter of fiscal 2023.
Our executive officers and other key employees are employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. Any changes in our senior management team in particular, even in the ordinary course of business, may be disruptive to our business. While we seek to manage these transitions carefully, including by establishing strong processes and procedures and succession planning, such changes may result in a loss of institutional knowledge and cause disruptions to our business. In addition, new executive hires may fail to achieve any anticipated benefits. If our senior management team fails to work together effectively or execute our plans and strategies on a timely basis as a result of management turnover or otherwise, our business could be harmed.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers experienced in designing and developing software and SaaS, applications and experienced sales professionals. If we are unable to attract such personnel in locations where we are located, we may need to hire in other locations as well as consider alternative flexible work options, which may add to the complexity and costs of our business operations. Complexities in hiring a nd the need for flexible work arrangements increased during the COVID-19 pandemic. We h ave from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications, especially during the period of heightened employee attrition in the U.S. and other countries in recent years. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, or experiences significant volatility, it may adversely affect our ability to recruit and retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.
If we fail to enhance our brand, or to do so in a cost-effective manner, our ability to expand our customer adoption will be impaired and our financial condition may suffer.
We believe that our development of the New Relic brand is critical to achieving widespread awareness of our existing and future solutions, and, as a result, is important to attracting new customers and retaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our
Table of Contents
brand will depend largely on the effectiveness of our marketing efforts, including our ability to do so in a cost-effective manner, and on our ability to provide reliable and useful products at competitive prices. In the past, our efforts to build our brand have involved significant expenses, and we may have to expend significant resources again in the future in connection with brand promotion and marketing activities. Brand promotion and marketing activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand.
If we cannot continue to maintain and develop our corporate culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success, and our business may be harmed.
We believe that our corporate culture has been a critical component to our success. We have invested substantial time and resources in building our team. As we grow and mature as a public company, and as we continue to expand internationally and adopt more flexible work arrangements, we may find it difficult to continue to maintain and develop our corporate culture. There have been changes in our senior executive management team resulting from the hiring, promotion, or departure of these personnel, and we expect to also recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to the creation of new management systems and processes and differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to continue to adapt our corporate culture and work environments to such changing circumstances. Any failure to preserve our culture could negatively affect our future success, including our ability to recruit and retain personnel and effectively focus on and pursue our corporate objectives.
Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our operating results and financial condition.
We have in the past acquired or invested in, and may in the future seek to acquire or invest in businesses, joint ventures, products and platform capabilities, or technologies that we believe could complement or expand our products and platform capabilities, enhance our technical capabilities, or otherwise offer growth opportunities. For example, in the third quarter of fiscal 2021, we acquired Pixie Labs Inc., a company that provides a next generation machine intelligence observability solution for developers using Kubernetes, in the first quarter of fiscal 2022, we acquired CodeStream Inc., a company that provides an integrated developer collaboration platform, and in the second quarter of fiscal 2023, we acquired K2 Cyber Security Inc., a company that provides a differentiated, signatureless approach to vulnerability and hack detection. Any acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products and platform capabilities, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management, or otherwise. These transactions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Any such transactions that we are able to complete may not result in any synergies or other benefits we had expected to achieve, which could result in impairment charges that could be substantial. In addition, we may not be able to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner. These transactions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if the resulting business from such a transaction fails to meet our expectations, our operating results, business, and financial condition may suffer or we may be exposed to unknown risks or liabilities.
We provide service level commitments under some of our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused portion of our contractual commitments or face contract terminations, which could adversely affect our revenue.
Some of our customer agreements provide service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our products and platform capabilities, we may be contractually obligated to provide these customers with service credits or refunds for prepaid amounts related to unused portion of our contractual commitments, or we could face contract terminations. Our revenue could be significantly affected if we sufferunscheduleddowntime that exceeds the allowed downtimes under our agreements with our customers. Any extended service outages could adversely affect our reputation, revenue, and operating results.
Table of Contents
If third parties, such as customers, partners and third-party software developers fail to maintain interoperability, availability, or privacy compliance controls in the integrations and applications that they provide, our services that rely upon such integrations may have less value to customers, become less marketable, or less competitive, and our brand and financial performance could be harmed.
We provide software that enables customers, partners and third-party software developers to build integrations and applications with our products and extend the functionality of our platform capabilities. This presents certain risks to our business, including:
• customers, partners and third-party developers may not continue developing or supporting the integrations and applications that they provide or they may favor a competitor’s or their own competitive offerings over ours;
• we cannot provide any assurance that these integrations and applications meet the same quality standards that we apply to our own development efforts, and, to the extent they contain bugs, defects, or security risks, they may create disruptions in our customers’ use of our software or negatively affect our brand;
• we do not currently provide support or warranties related to the functionality, security, and integrity of the data transmission or processing for integrations and applications developed by customers, partners and third-party software developers, and users may seek warranties or be left without support and potentially cease using our products if the developers do not provide warranties or support for their integrations and applications; and
• these customers, partners and third-party software developers may not possess the appropriate intellectual property rights to develop and share their integrations and applications or the legal basis and privacy and security compliance measures to process or control personal information that flows through our systems.
While many of these risks are not within our control to prevent, our brand and financial performance could be harmed if these integrations and applications do not perform to our customers’ satisfaction and if that dissatisfaction is attributed to us.
Sales to government entities and highly regulated organizations are subject to a number of challenges and risks.
We may sell to U.S. federal, state, and local, as well as foreign, governmental agency customers, as well as to customers in highly regulated industries such as financial services, telecommunications and healthcare. Sales to such entities are subject to a number of challenges and risks. Selling to such entities can be highly competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government contracting requirements may change and in doing so restrict our ability to sell into the government sector until we have attained the revised certification. Government demand and payment for our products are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delaysadversely affecting public sector demand for our products.
Further, governmental and highly regulated entities may demand contract terms that differ from our standard arrangements and are less favorable than terms agreed with private sector customers. Such entities may have statutory, contractual, or other legal rights to terminate contracts with us or our partners for convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition and results of operations.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
As of our fiscal year ended March 31, 2023, we had U.S. federal and state net operating losses of approximately $650.7 million and $423.4 million, respectively. Other than federal net operating losses arising in tax years beginning after December 31, 2017, the federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in 2035 and 2024, respectively. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the 2017 federal income tax law, as modified by the federal tax law changes enacted in March 2020, federal net operating losses incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but, for taxable years beginning after December 31, 2020, the deductibility of such federal net operating losses is limited. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. In addition, for state income tax purposes, there may be periods during which the use of net operating losses is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Table of Contents
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories and in non-U.S. countries. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of federal income tax law changes, changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and other changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.
Risks Related to Laws and Regulations
We are subject to stringent and rapidly changing U.S. and foreign laws, regulations, rules, industry standards, contractual obligations, policies, and other obligations relating to data privacy and security. Our actual or perceived failure to comply with such obligations by us, our customers, or third parties with whom we work could lead to regulatory investigations or actions, litigation, fines and penalties, disruptions of our business operations, reputational harm, loss of customers or sales, and other adverse business consequences.
In the ordinary course of business, we process personal data and other proprietary, confidential, and sensitive data, including business data, trade secrets, intellectual property, and sensitive third-party data. Our data processing activities may subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contractual requirements, and other obligations relating to data privacy and security.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and other similar laws (e.g., wiretapping laws). For example, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the data privacy, security, and transmission of individually identifiable health information. As another example, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM”) and the Telephone Consumer Protection Act of 1991 (“TCPA”) impose specific requirements on communications with customers. For example, the TCPA imposes various consumer consent requirements and other restrictions on certain telemarketing activity and other communications with consumers by phone, fax or text message. TCPA violations can result in significant financial penalties, including penalties or criminalfines imposed by the Federal Communications Commission or fines of up to $1,500 per violation imposed through private litigation or by state authorities. As another example, the California Consumer Privacy Act of 2018 (“CCPA”) applies to personal data of consumers, business representatives, and employees, and requires businesses to provide specific disclosures in privacy notices and honor requests of California residents to exercise certain privacy rights. The CCPA provides for civil penalties of up to $7,500 per violation and allows private litigants affected by certain data breaches to recover significant statutory damages. In addition, the California Privacy Rights Act of 2020 (“CPRA”) expands the CCPA’s requirements, including by adding a new right for individuals to correct their personal data and establishing a new regulatory agency to implement and enforce the law. Other states, such as Virginia and Colorado, have also passed comprehensive data privacy and security laws, and similar laws are being considered in several other states, as well as at the federal and local levels. These developments further complicate compliance efforts, and increase legal risk and compliance costs for us, the third parties upon whom we rely, and our customers.
Outside the United States, an increasing number of laws, regulations, and industry standards may govern data privacy and security. For example, the European Union’s General Data Protection Regulation (“EU GDPR”), the United Kingdom’s GDPR (“UK GDPR”), Brazil’s General Data Protection Law (Lei Geral de Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018), and China’s Personal Information Protection Law (“PIPL”) impose strict requirements for processing personal data. For example, under the EU GDPR, companies may face temporary or definitive bans on data processing and other corrective actions, personal data, fines of up to the greater of 20 million Euros or 4% of their global annual revenues, whichever is great, or private litigation related to processing of personal data brought by classes of data subjects or consumer protection organizations authorized at law to represent their interests. In Canada, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and various related provincial laws, as well as Canada’s Anti-Spam Legislation (“CASL”), may apply to our operations and our operations in Australia may subject us to Australia’s Privacy Act of 1988. We also have operations in Japan, Singapore, South Korea, Israel, and India and may be subject to new and emerging data privacy regimes in Asia, such as Japan’s Act on the Protection of Personal Information, Singapore’s Personal Data Protection Act, South Korea’s Personal Information Protection Act, Israel’s Protection of Privacy Law, 5741-1981, and India’s proposed Digital Personal Data
Table of Contents
Protection Bill. Additionally, several states and localities have enacted measures related to the use of artificial intelligence and machine learning in products and services. For example, in Europe, there is a proposed regulation related to artificial intelligence (“AI”) that, if adopted, could impose onerous obligations related to the use of AI-related systems. We may have to change our business practices to comply with such obligations.
In the ordinary course of business, we may transfer personal data from Europe and other jurisdictions to the United States or other countries. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal data to other countries. In particular, the European Economic Area (“EEA”) and the United Kingdom (“UK”) have significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although there are currently various mechanisms that may be used to transfer personal data from the EEA and UK to the United States in compliance with law, such as the EEA and UK’s standard contractual clauses, these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the United States.
If there is no lawful manner for us to transfer personal data from the EEA, the UK or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctionsagainst our processing or transferring of personal data necessary to operate our business. Additionally, companies that transfer personal data out of the EEA and UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators, individual litigants, and activist groups. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers out of Europe for allegedlyviolating the GDPR’s cross-border data transfer limitations.
In addition to data privacy and security laws, we are contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. For example, we may also be subject to the Payment Card Industry Data Security Standard (“PCI DSS”). The PCI DSS requires companies to adopt certain measures to ensure the security of cardholder information, including using and maintaining firewalls, adopting proper password protections for certain devices and software, and restricting data access. Noncompliance with PCI-DSS can result in penalties ranging from $5,000 to $100,000 per month by credit card companies, litigation, damage to our reputation, and revenue losses. We also rely on vendors to process payment card data, who may be subject to PCI DSS, and our business may be negatively affected if our vendors are fined or suffer other consequences as a result of PCI DSS noncompliance.
We are also bound by contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. For example, certain privacy laws, such as the GDPR and the CCPA, require our customers to impose specific contractual restrictions on their service providers. We publish privacy policies, marketing materials and other statements, such as compliance with certain certifications or self-regulatory principles, regarding data privacy and security. If these policies, materials or statements are found to be deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to investigation, enforcement actions by regulators or other adverse consequences.
Obligations related to data privacy and security are quickly changing, becoming increasingly stringent, and creating regulatory uncertainty. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources, which may necessitate changes to our services, information technologies, systems, and practices and to those of any third parties that process personal data on our behalf. In addition, these obligations may require us to change our business model. We may at times fail (or be perceived to have failed) in our efforts to comply with our data privacy and security obligations. Moreover, despite our efforts, our personnel or third parties on whom we rely may fail to comply with such obligations, which could negatively impact our business operations.
If we or the third parties on which we rely fail, or are perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar), litigation (including class-action claims); additional reporting requirements and/or oversight, bans on processing personal data, and orders to destroy or not use personal data. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers, interruptions or stoppages in our business operations (including, interruptions or stoppages of data collection needed to train our algorithms, inability to process personal data or to operate in certain
Table of Contents
jurisdictions, limited ability to develop or commercialize our products, expenditure of time and resources to defend any claim or inquiry, adverse publicity, or substantial changes to our business model or operations.
We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate these controls.
Our products are subject to U.S. export controls, and we incorporate encryption technology into certain of our products. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export authorization for our products, when applicable, could harm our international sales and adversely affect our revenues. Compliance may also create delays in the introduction of our product releases in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export of our products to some countries altogether. If we fail to comply, we could be subject to both civil and criminalpenalties, including substantial fines, possible incarceration for employees and managers for willful violations, and the possible loss of export or import privileges. For example, following Russia’s invasion of Ukraine in February 2022, the United States and other countries announced sanctions against Russia and Belarus, which include restrictions on selling or importing goods, services, or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business, and financial organizations in Russia and Belarus, and the United States and other countries could impose wider sanctions and take other actions as the conflict continues to escalate. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.
We are subject to the tax laws of various jurisdictions, which are subject to unanticipated changes and to interpretation, which could harm our future results.
We are subject to income taxes in the United States and foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, the valuation of deferred tax assets and liabilities, and changes in federal, state, or international tax laws and accounting principles.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.
Further, each jurisdiction has different rules and regulations governing sales and use, value added, and similar taxes, and these rules and regulations are subject to varying interpretations that change over time. Certain jurisdictions in which we did not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. In addition, we may be subject to income tax audits by many tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of SaaS-based companies. In addition, the COVID-19 pandemic and resulting use of flexible work policies may increase the probability of payroll tax audits. Any tax assessments, penalties, and interest, or future requirements may adversely affect our results of operations. Moreover, imposition of such taxes on us going forward would effectively increase the cost of our products to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.
In addition, the application of the tax laws of various jurisdictions, including the United States, to our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences. As we operate in numerous taxing jurisdictions, the application of tax laws can also be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. For instance, it is not uncommon for taxing authorities in different countries to have conflicting views, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property.
Further, the Organization for Economic Co-Operation and Development (“OECD”) has been working on a project to act to prevent what it refers to as base erosion and profit shifting (“BEPS”). Most recently, the OECD, through an association of almost 140 countries known as the “inclusive framework,” has announced a consensus to address, among other things,
Table of Contents
perceived challenges presented by global digital commerce (“Pillar 1”) and the perceived need for a minimum global effective tax rate of 15% (“Pillar 2”). On December 15, 2022, the European Union formally adopted the Pillar Two Directive and EU member states are expected to enact the Pillar Two Directive into domestic law by December 31, 2023. Other countries are taking similar actions. We are evaluating developments to determine whether Pillar 2 will materially impact our financial position in the future. Any material change in tax laws or policies, or their interpretation, resulting from BEPS initiatives could result in a higher effective tax rate on our earnings and have an adverse effect on our financial condition, results of operations, and cash flows.
Risks Related to Our Intellectual Property
We may incur significant costs due to claims for allegedinfringement of proprietary rights.
There is considerable patent, copyright, trademark, trade secret, and other intellectual property development activity in our industry. Our success depends in part on not infringing upon the intellectual property rights of others and how we prepare for and handle claims of infringement. From time to time, our competitors or other third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. We may receive claims that our products, platform capabilities, and underlying technology infringe or violate the claimant’s intellectual property rights. In addition, agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them in the event of claims of infringement of certain proprietary rights. Any claims or litigation, regardless of merit, could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products and platform capabilities, or require that we comply with other unfavorable terms.
Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. We expect that the occurrence of infringementclaims is likely to grow as the market for our products grows. Accordingly, our exposure to damages resulting from infringementclaims could increase and this could further exhaust our financial and management resources.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success depends to a significant degree on our ability to protect our proprietary technology and our brand. We rely on a combination of trademarks, trade secret laws, patent, copyrights, service marks, contractual restrictions, and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed. In addition, defending our intellectual property rights might entail significant expense. Any patents, trademarks, or other intellectual property rights that we obtain may be challenged by others or invalidated through administrative process or litigation. As of March 31, 2023, we had 51 issued patents in the United States and abroad and 26 patent applications pending in the United States and abroad. Despite our issued patents and pending patent applications, we may be unable to maintain or obtain patent protection for our technology. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfullychallenged by third parties. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our products and platform capabilities and use information that we regard as proprietary to create products and services that compete with ours. Effective patent, trademark, copyright, and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. As we expand our international activities, our exposure to unauthorized copying and use of our products and platform capabilities and proprietary information will likely increase. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other parties. No assurance can be given that these agreements will be effective in controlling access to and distribution of our proprietary information. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products and platform capabilities.
Table of Contents
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology againstunauthorized copying or use, as well as any costlylitigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products and platform capabilities, impair the functionality of our products and platform capabilities, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our products, or injure our reputation.
Our reliance upon open source software could negatively affect our ability to sell our products and subject us to possible litigation.
We rely heavily upon open source software for the operation of our products and platform capabilities and expect to continue to do so in the future. During fiscal 2021, we strengthened this commitment when we announced that we are making our agents, integrations, and SDKs available under an open source license, and that we are standardizing our future observability offerings in OpenTelemetry, a Cloud Native Computing Foundation project that is an emerging standard for software instrumentation. As a result of our use of open source software in our offerings, as well as our contributions of code to open source software projects, we, including companies that we have acquired, may face claims from others claiming ownership of, or seeking to enforce the terms of, incompatible or conflicting licenses or other rights. This may include a demand to release the open source software, derivative works, or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license, or require us to devote additional research and development resources to change our platform, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the software we utilize change, additional licenses from third parties may be required or we may be forced to reengineer or discontinue our products and platform capabilities or incur additional costs. In addition, open source licensors generally do not provide warranties, support, indemnity, or assurance of title or controls on origin of the software which may lead to greater risks. Likewise, some open source projects have known security and other vulnerabilities and architectural instabilities and are provided on an “as-is” basis which, if not properly addressed, could negatively affect the performance of our product. While we have established processes to help alleviate these risks, we cannot assure that these measures will reduce or completely shield us from these risks. Moreover, we cannot be certain that we, including companies that we have acquired, have not incorporated software in our products and platform capabilities in a manner that is inconsistent with the terms of the applicable proprietary rights that may govern their use, or our own policies and procedures.
Our continued shift to increase reliance upon open source software will also present increased risk from the standpoint of competition. Because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely. Anyone may obtain access to the source code for our open source features and then redistribute it (either in a modified or unmodified form), and we may be unable to prevent our competitors or others from using such software source code for competitive purposes, or for commercial or other purposes beyond what we intended. For instance, our conversion of the license terms for our agents, integrations and SDKs from our historical proprietary licenses to open source licenses may allow the use of our previous proprietary code with competitor’s platforms. Additionally, we make the source code of our proprietary features publicly available, which may enable others to compete more effectively. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies, due to the permissions allowed under open source licensing. It is possible for competitors to develop their own software, including software based on our products, potentially reducing the demand for our services.
Risks Related to Ownership of Our Common Stock
Our stock price has been and will likely continue to be subject to fluctuations, which may be volatile and due to factors beyond our control.
The market price of our common stock is subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, factors that could cause fluctuations in the market price of our common stock include the following:
• actual or anticipated fluctuations in our operating results;
Table of Contents
• seasonal and end-of-quarter concentration of our transactions and variations in the number and size of transactions that close in a particular quarter;
• the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
• failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates and publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
• ratings changes by any securities analysts who follow our company;
• actions instituted by activist shareholders or others that could disrupt our ongoing business, divert resources, increase our expenses, and distract our management;
• announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
• changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
• price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;
• changes in accounting standards, policies, guidelines, interpretations, or principles;
• actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
• changes in our pricing models and practices or those of our competitors;
• developments or disputes concerning our intellectual property or our products and platform capabilities, or third-party proprietary rights;
• cybersecurity attacks or incidents;
• announced or completed acquisitions of businesses or technologies by us or our competitors;
• new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;
• changes in our board of directors or management;
• announced or completed equity or debt transactions involving our securities;
• sales of shares of our common stock by us, our officers, directors, or other stockholders;
• lawsuits filed or threatenedagainst us; and
• other events or factors, including those resulting from war, incidents of terrorism, public health epidemics or pandemics, bank failures, or responses to any of these events or factors.
In addition, the market for technology stocks and the stock markets in general have experienced extreme price and volume fluctuations. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. M oreover, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty associated with the global economic conditions and the global COVID-19 pandemic. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business, results of operations, financial condition, and cash flows. A decline in the value of our common stock, including as a result of one or more factors set forth above, may result in substantial losses for our stockholders.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. Additionally, the shares of common stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans, as well as shares issuable upon vesting of restricted stock awards, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. We have also
Table of Contents
registered shares of common stock that we may issue under our employee equity incentive plans. Accordingly, these shares may be able to be sold freely in the public market upon issuance as permitted by any applicable vesting requirements.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
• authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;
• require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
• specify that special meetings of our stockholders can be called only by the Chair of our board of directors, our Chief Executive Officer, or by our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors;
• establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
• provide that our board of directors is divided into three classes, with each class serving three-year staggered terms, until our 2023 annual meeting of stockholders when the classes will be fully phased out;
• prohibit cumulative voting in the election of directors;
• provide that our directors may be removed only for cause until our 2023 annual meeting of stockholders;
• provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
• require the approval of our board of directors or the holders of at least sixty-six and two-thirds percent (66 2/3%) of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the U.S. federal district courts will be the exclusive forums for the adjudication of certain disputes, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for:
• any derivative action or proceeding brought on our behalf;
• any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee of New Relic to us or our stockholders;
• any action asserting a claim against us or any of our directors, officers, or other employees arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and
• any action asserting a claim against us or any of our directors, officers, or other employees that is governed by the internal affairs doctrine.
Table of Contents
Our amended and restated bylaws further provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act of 1933, as amended, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters for any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of any future debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.
If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline. In addition, independent industry analysts, such as Gartner and Forrester, often provide reviews of our products and platform capabilities, as well as those of our competitors, and perception of our offerings in the marketplace may be significantly influenced by these reviews. We have no control over what these industry analysts report, and because industry analysts may influence current and potential customers, our brand could be harmed if they do not provide a positive review of our products and platform capabilities or view us as a market leader.
General Risk Factors
Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, especially in a volatile economic environment. Our estimates and forecasts relating to the size and expected growth of our market may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.
Natural disasters and other events beyond our control could harm our business.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and thus could have a strongnegative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortag es, pandemics, including the ongoing COVID-19 pandemic, e ffects of climate change, extreme weather, flooding and other events beyond our control. We rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted products, and sales activities. The west coast of the United States contains active earthquake zones and this area has also historically experienced, and is projected to continue to experience, climate-related events including drought and water scarcity, flooding, warmer temperatures, wildfires and air quality impacts and power shut-offs associated with wildfire prevention. Although we maintain crisis management and disaster response plans, in the event of a major
Table of Contents
earthquake, hurricane or other extreme weather event, or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our product development, lengthy interruptions in service, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.
Climate change and related environmental issues could have a material adverse impact on our business, financial condition and results of operations.
Climate change-related events, such as increased frequency and severity of storms, floods, wildfires, droughts, hurricanes, freezing conditions, and other natural disasters, may have an increasingly adverse impact on our business, financial condition and results of operations. Our major sites in California are vulnerable to such climate change effects, which have caused regional short-term systemic failures in the U.S. and elsewhere. For example, in California, increasing intensity of drought throughout the state and annual periods of wildfire danger increase the probability of planned power outages in the communities where we work and live. While this danger has a low-assessed risk of disrupting normal business operations, it has the potential to impact employees’ abilities to stay connected effectively. Climate-related events, including the increasing frequency of extreme weather events and their impact on critical infrastructure in the U.S. and internationally, have the potential to disrupt our business, the business of our third-party suppliers, and/or the business of our customers, and may cause us to experience higher attrition, losses, and additional costs to maintain or resume operations. Regulatory developments and changing market dynamics regarding climate change may also impact adversely our business, financial condition and results of operations.
The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. GAAP from the adoption of recently issued accounting standards and other non-financial reporting standards could materially affect our financial position and results of operations.
We prepare our financial statements in accordance with GAAP, which is subject to interpretation or changes by the FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future, which may have a significant effect on our financial results. Any difficulties in implementation of changes in accounting principles, including the ability to modify our accounting systems, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. In addition, certain choices in the method of implementation of any new standard that may be adopted may have an adverse impact on our potential as an acquirer or an acquiree in a business combination.
In addition, as we identify Environmental, Social and Governance (“ESG”) topics for voluntary disclosure and work to align with the recommendations of the Sustainability Accounting Standards Board (“SASB”) and our own ESG materiality assessment, we have made and, in the future may continue to make or expand, our disclosures in these areas. Statements about our ESG initiatives and goals, and progressagainst those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. If our ESG-related data, processing and reporting are incomplete or inaccurate, or if we fail to achieveprogress on our metrics on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs. If additional capital is not available, we may have to delay, reduce, or cease certain investments.
We may in the future require additional capital to operate our business and respond to business opportunities that may arise, including the need to develop new products and platform capabilities or enhance our existing products and platform capabilities, enhance our operating infrastructure, protect our intellectual property, pursue possible acquisitions of complementary businesses and technologies, respond to a decline in the level of adoption or usage of our platform, or address other circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, especially in light of recent volatility and disruptions in the debt and equity markets. Any debt financing obtained by us could involve restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions, and could require us to use a portion of our cash flows to make debt service payments, which could place us at a competitive disadvantage relative to our less leveraged peers. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock, including registration rights. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to support our business and to respond to business challenges could be significantly limited, and our business, operating results, financial condition, and prospects could be harmed.
Table of Contents
The requirements of being a public company and a growing and increasingly complex organization may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the New York Stock Exchange, and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increases demand on our systems and resources.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies or as market practices develop. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
From time to time, public companies are subject to campaigns by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases, management changes or sales of assets or the entire company. If stockholders attempt to effect such changes or acquire control over us, responding to such actions would be costly, time-consuming and disruptive, which could adversely affect our results of operations, financial results and the value of our common stock. These factors could also make it more difficult for us to attract and retain qualified employees, executive officers and members of our board of directors.
superior
Overview
New Relic is an “all-in-one” observability platform that enables our customers to plan, build, deploy, and operate their critical digital infrastructure by harnessing the power of data. Our observability platform combines metrics, events, logs, traces, and other telemetry data with our proprietary stack of analytical tools to rapidly generate actionable, fact-based insights. Our customers use our platform to improve uptime, reliability, and operational efficiency, in order to optimize the digital experience for their customers as well as within their organizations. Our goal is to enable our customers to leverage the power of data-driven analytics to monitor, debug, and improve the performance and security of all their digital infrastructure across the organization.
While most observability software is targeted toward a small subset of developers that focuses on the “operate” phase, we believe that telemetry data is also critical to the rest of the software lifecycle, including the planning, building, and deployment phases. The New Relic platform differentiates itself by targeting the broader software development productivity market, helping them realize the value of largely dormant telemetry data that is wasted if not cultivated and analyzed in context. Our all-in-one observability platform helps remove the silos that plague organizations, empowering them to better understand their entire digital infrastructures in order to improve speed of innovation, operational excellence, system reliability, and cost management.
We host our applications and serve all our customers through a combination of cloud service providers and to a lesser extent our data centers whose infrastructure is managed by third parties. We continue to build out services and functionality in the public cloud with a goal to migrate our entire platform to the public cloud by the end of fiscal year 2024. At March 31, 2023, we have migrated the majority of our platform and 100% of our customer data ingest to the public cloud. We expect this migration to reduce our cost of revenue due to the reduction in hosting-related costs. Additionally, this strategy provides us flexibility to service customers in new and emerging regions and scale our deployment capabilities. We maintain a formal and comprehensive security program designed to ensure the security and integrity of our data, protect against security threats or data breaches, and prevent unauthorized access to the data of our customers. Our technology uses multi-tenant architecture, enabling all our customers to share the same version of our products and platform capabilities while securely partitioning their data.
Historically, our platform was sold on a subscription-based model. Since fiscal year 2021, we have been focused on shifting to a consumption-based model, and our revenues are now largely derived from consumption-based plans. We primarily sell our platform on a consumption-based model that directly relates the value our customers receive from our platform to what they pay for it in a manner that is highly intuitive and predictable for them. Customers on this pricing model pay for data ingest and provisioned users. For the fiscal year ended March 31, 2023, 45% of our consumption-based revenues were derived from fees paid for data ingest and 55% were derived from fees paid for provisioned users. We engage with prospects and customers directly through our in-house sales teams and on our website, as well as indirectly through channel partners. Approximately 35% of our customers are on commitment contracts where they commit to an amount of spend over their contracted period in
Table of Contents
exchange for a discount on their usage pricing, and approximately 65% of our customers are on “Pay as You Go” contracts where they are charged for usage in arrears. Customers on committed contracts represent more than 90% of our total fiscal year 2023 revenue. Our contracts are typically annual or multi-year in term length and are either billed upfront or in arrears. Our average contract term length is one year. Usage in excess of the commitment is generally invoiced in arrears. Some customers still contract under subscription-based plans. We expect to phase out most subscription-based plans as contract periods end and those contracts renew onto one of our consumption-based plans.
We offer a free tier of our New Relic platform as part of our go-to-market strategy to encourage users to try our services and create a pipeline for paid customers. 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 additional value from our products either by in-product support, or engaging with our technically oriented customer adoption team.
Our revenue for the fiscal years ended March 31, 2023 and 2022 was $925.6 million and $785.5 million, respectively, representing year-over-year growth of 18%. Our gross margin for the fiscal years ended March 31, 2023 and 2022 was 73% and 67%, respectively, primarily driven by the transition of our platform from local data centers to public cloud hosting providers. 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 $180.2 million and $250.4 million for the fiscal years ended March 31, 2023 and 2022, respectively. Our accumulated deficit as of March 31, 2023 was $963.6 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 17%, 11%, and 7%, respectively, of our revenue for the fiscal year ended March 31, 2023, and 15%, 10%, and 7%, respectively, of our revenue for the fiscal year ended March 31, 2022. We believe there is an opportunity to increase our international revenue overall and as a proportion of our total revenue. As a result, we are increasingly investing in our international operations and intend to further expand our footprint in international markets. We plan to leverage commercial partnerships to expand our international footprint and believe commercial partnerships will be a highly effective way to accelerate international market penetration and lower new customer acquisition costs than had we pursued international expansion without these partnerships.
Our employee headcount has increased to 2,663 employees as of March 31, 2023 from 2,217 as of March 31, 2022. The increase in employee headcount was driven by our expansion plans where we hired additional team members primarily in research and development. We plan to continue to invest aggressively in the growth of our business to take advantage of our market opportunity.
Impact of the Current Economic Conditions and Macroeconomic Events
Our results of operations, including future revenue growth, will continue to be materially impacted by unfavorable market conditions in the United States and abroad that historically have reduced or disrupted the timing of business investments and spending on information technology. These unfavorable conditions and events currently include the lingering uncertainty of the global COVID-19 pandemic and the slowdown in economic activity caused by supply chain disruption, increasing inflation and interest rates, labor shortages, and Russia’s invasion of Ukraine. At this point, the extent of any continuing impact to our financial condition or results of operations, including cash flows, is uncertain, particularly as these current economic conditions continue to persist for an extended period of time. While there is some recent volatility in multiple major foreign currencies against the U.S. dollar, the impact of exchange rates on our operating results is not projected to be material. Other factors affecting our performance are discussed below, although we caution you that the current economic conditions and macroeconomic events may also further impact these factors.
We currently allow our employees to continue to work remotely if they prefer, and we will continue to evaluate our workforce strategies and operations, taking into consideration factors such as treatments, vaccine progress, and public health recommendations. We have committed to reducing our global real estate footprint as part of our Flex First philosophy that enables employees to operate in a flexible work environment. In March 2023, we approved an additional restructuring plan , consisting primarily of real estate lease termination and other associated costs. As a result of this and previously announced restructuring plans, we incurred charges of approximately $39.1 million and $12.6 million for the twelve months ended March 31, 2023 and 2022, respectively, which are described in further detail below.
Table of Contents
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.
Product-Led Innovation and Growth. We believe we have the most intuitive and powerful observability platform in the industry and have a proven track record of innovation in our industry. We intend to build upon that reputation by continuing to broaden the capabilities and features of our platform so more engineers can use it more often. In addition, we intend to drive significant product awareness, demand, adoption, and growth in new accounts by accelerating our self-service product marketing and sales initiatives. Our free tier of service encourages users to try our platform, and our product-led self-service model enables customers to increase the value they receive from the platform by adding additional data, users, and use cases. The easy-to-use, intuitive nature of our platform allows us to engage with these potential new customers in a more cost effective manner, which significantly reduces our customer acquisition costs.
International Growth. International markets present a significant opportunity for us to land new customers for our platform. We believe that leveraging commercial partnerships is a highly effective way to acquire new customers at low acquisition costs, while enabling these customers to realize value from our observability platform more rapidly. We intend to develop new relationships and leverage our existing relationships with distributors, resellers, service partners, hyperscalers, and global system integrators to grow our sales pipeline and drive new use cases as more businesses around the world accelerate their cloud native journey. Our ability to successfully expand within international markets will have a significant impact on our future operating performance.
Pricing Strategy. Since introducing our consumption-based model in fiscal year 2021, our customers have responded favorably. With our consumption-based model, our customers are charged based on actual usage, and we price all telemetry sources at the same rate without overagepenalties. This removes barriers to adoption as it easily allows our customers to plan usage and forecast spend. We also offer varying commitment plans to best meet the needs of our customers, irrespective of size and maturity. As the power of our platform continues to grow and we help our customers solve their problems, we believe our customers will increase the number of users and the amount of data ingested into our platform. As such, we believe that our shift from a subscription-based pricing plan to a consumption-based pricing plan will better meet the needs of our customers and increase our ability to attract and convert free users into new paying customers. For the fiscal year ended March 31, 2023, approximately 76% of our revenues pertained to consumption-based pricing plans.
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 a customer ramps on our platform, we transition to a more traditional direct sales, or sales-led, model to help the customer expand the use of our platform and the value they receive. Our existing customer base consists of more than 16,000 paid customers across multiple industry verticals and regions, providing us with a large market opportunity to grow our revenue by facilitating greater platform engagement and addressing new use cases. Our ability to retain existing customers and expand their usage of our platform will significantly impact our future revenues and revenue growth.
Cloud Optimization and Other Efficiency Initiatives. We have identified and are in the process of implementing several key initiatives for expanding our operating margin. For example, we have been optimizing our infrastructure by migrating from our own data centers to a significantly more efficient public cloud model to better match our growing demand and our operating costs. We have also begun leveraging the strengths of multiple cloud providers to gainefficiencies for our platform and our cost structure. As of March 31, 2023, we have migrated the majority of our platform to the public cloud, and we expect to complete this migration by the end of fiscal year 2024. Additionally, as we have continued to develop and expand our consumption-based model, we have gainedcritical insights into the varying components of the cost of the data, which has enabled us to better align our pricing and drive gross margins. Our ability to effectively identify and implement these efficiency initiatives will significantly impact our future operating expenses and gross margin.
Table of Contents
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. For clarity, one customer with several individual accounts at its subsidiary levels would be collectively recognized as one Active Customer Account. 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, 2023, we had 16,000 Active Customer Accounts, which is up from 14,800 Active Customer Accounts for the three-month period ended March 31, 2022 and is up sequentially from 15,700 Active Customer Accounts for the three-month period ended December 31, 2022.
Mar 31, 2023
Dec 31, 2022
Sep 30, 2022
Jun 30, 2022
Active Customer Accounts
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 greateropportunity 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, 2023, we had 1,229 Active Customer Accounts with trailing 12-month revenue over $100,000, which was a 12% increase compared to 1,099 for the three-month period ended as of March 31, 2022 and a 2% increase compared to 1,203 for the three-month period ended December 31, 2022.
Mar 31, 2023
Dec 31, 2022
Sep 30, 2022
Jun 30, 2022
Active Customer Accounts > $100,000
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 85% for the three-month period ended March 31, 2023, compared to 82% for the three-month period ended March 31, 2022 and 84% for the three-month period ended December 31, 2022.
Mar 31, 2023
Dec 31, 2022
Sep 30, 2022
Jun 30, 2022
Percentage of Active Customer Accounts > $100,000
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.
Table of Contents
To calculate NRR, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior fiscal year. Next, we identify the measurement period as the 12-month period ending with the period reported and the prior comparison period as the corresponding period in the prior year. NRR is the quotient obtained by dividing the revenue generated from a cohort of Active Customer Accounts in the measurement period by the revenue generated from that same cohort in the prior comparison period.
Our NRR decreased year-over-year to 118% for the period ended March 31, 2023 compared to 119% for the period ended March 31, 2022 and remained consistent quarter-over-quarter from 118% for the period ended December 31, 2022.
Mar 31, 2023
Dec 31, 2022
Sep 30, 2022
Jun 30, 2022
Net Revenue Retention Rate
Key Components of Results of Operations
Revenue
We primarily contract with our customers under consumption-based plans. These consumption-based plans tightly align the value our customers receive from our platform with what our customers ultimately pay. Customers on these consumption-based plans pay for data ingest and provisioned users. We have been contracting with our customers under consumption-based plans since fiscal year 2021. Our current revenues are largely derived from these plans. Prior to fiscal year 2021, we primarily contracted with our customers under subscription-based plans. The majority of our customers contract with us under committed spend contracts where they commit to an amount of spend over the contracted period in exchange for a discount on usage pricing or contract with us under “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 billed upfront or in arrears. Usage in excess of the commitment is generally invoiced in arrears. Some customers still contract under subscription-based plans. We expect to phase out most subscription-based plans as contract periods end and those contracts renew onto one of our consumption-based plans.
We have and may continue to experience volatility from our remaining performance obligations and deferred revenue as a result of our shift to a consumption-based model. We had remaining performance obligations of $808.1 million and $706.1 million as of March 31, 2023 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 the mix of consumption-based and subscription-based 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.
Our remaining performance obligations were $808.1 million as of March 31, 2023, of which we expect approximately 73% to be recognized as revenue in the 12 months ending March 31, 2024 based on historical customer consumption patterns. However, the amount and timing of revenue recognized from our remaining performance obligations are generally dependent upon customers’ future consumption, which is inherently variable 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 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, and have largely migrated our platform from third-party data center hosting facilities to public cloud hosting providers. While the transition to cloud hosting providers is largely complete, we are continuing to increase our efficiency regarding public cloud usage. We expect our transition to the public cloud to shift our hosting-related costs to a more variable cost structure rather than a fixed cost structure.
Table of Contents
Gross Profit and Margin
Gross profit is equal to 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. As we have largely transitioned our platform to the public cloud, gross margin has increased during the fiscal year ended March 31, 2023. We expect additional efficiency in our cloud usage and for gross margin to continue increasing in the fiscal year ending March 31, 2024 as we continue to close legacy data centers and scale our public cloud usage to reduce costs.
Operating Expenses
Personnel-related 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 increasing our platform’s functionality by adding new products and features while enhancing the ease of use of our existing products. In the fiscal year ended March 31, 2023, we had nine major product launches and enhancements and expect to have a similar number of major product launches and enhancements in fiscal year 2024 based on our product roadmap. 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. 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 activities, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future.
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 sales commissions are currently expensed as incurred. Previously, sales commissions attributable to acquiring new customer contracts were capitalized and amortized on a straight-line basis over the anticipated period of benefit. Therefore, sales commission expenses are expected to be greater than sales commission payouts until the remaining capitalized amounts from prior periods have been fully expensed. Sales and marketing expenses also include the costs of our marketing and brand awareness programs, including our free tier offering.
In our transition to the consumption-based model, our go-to-market operations have become more efficient, and have required less investment, than in our former more traditional subscription-based model. As we continue to transition our business to the consumption-based model, we are focusing on further sales efficiency. In furtherance of this strategy shift, we have reduced our spending in sales and marketing and reallocated those funds to increase our investment in 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 initiatives.
General and Administrative . General and administrative expenses consist primarily of personnel costs for our administrative, legal, human resources, information technology, finance 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. Although we expect our general and administrative expenses to remain flat or decrease modestly as a percentage of our revenue over the long term, we expect our general and administrative expenses to continue to increase in absolute dollars for the immediate future as we continue to scale our business. General and administrative expense as a percentage of our revenue may fluctuate from period to period depending on how rapidly we decide to scale our business.
Other Income (Expense)
Other income (expense), consists of interest income, primarily due to income earned on money market funds and short-term investments, offset by interest expense due on the 0.5% Convertible Senior Notes, and gains and losses from transactions denominated in a currency other than the functional currency.
Table of Contents
Results of Operations For Fiscal Years Ended March 31, 2023 and 2022
The following tables summarize our consolidated statements of operations for the fiscal years ended March 31, 2023 and March 31, 2022 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, 2021 and as a percentage of revenue for that period, see “Results of Ope rations for Fiscal Years Ended March 31, 2021, 2020, and 2019” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 , filed with the SEC on May 17, 2022, or our Fiscal 2022 Annual Report. For a discussion of our liquidity and capital resources for the fiscal year ended March 31, 2021 , see “Liquidity and Capital Resources” in Part II, Item 7 of our Fiscal 2022 Annual Report. The period to pe riod comparison of results is not necessarily indicative of results for future periods.
Fiscal Year Ended March 31,
(in thousands)
Consolidated Statements of Operations Data:
Revenue
Cost of revenue (1)
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other expense, net
Loss before income taxes
Income tax provision
Net loss
Net loss and adjustment attributable to redeemable non-controlling interest
Net loss attributable to New Relic
(1) Includes stock-based compensation expense as follows:
Fiscal Year Ended March 31,
(in thousands)
Cost of revenue
Research and development
Sales and marketing
General and administrative (2)
Total stock-based compensation expense (3)
(2) Includes $9.6 million acceleration of share-based payment expense for the fiscal year ended March 31, 2022 for one of our executives due to his departure at the end of June 2021. There was no corresponding expense for the twelve months ended March 31, 2023.
(3) Includes $0.5 million expense for the fiscal year ended March 31, 2022 due to the restructuring activities commenced in April 2021. There was no corresponding expense for the twelve months ended March 31, 2023. Refer to Note 18 — Restructuring contained in the “Notes to Consolidated Financial Statements” in Item 8 of Part II of this Annual Report on Form 10-K for more information.
Table of Contents
Fiscal Year Ended March 31,
(as a percentage of revenue)
Revenue
Cost of revenue (1)
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Income tax provision
Net loss
Net loss and adjustment attributable to redeemable non-controlling interest
Net loss attributable to New Relic
(1) Includes stock-based compensation expense as follows:
Fiscal Year Ended March 31,
(as a percentage of revenue)
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
Revenue
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
United States
EMEA
APAC
Other
Total revenue
Revenue increased $140.1 million, or 18%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. Our revenue from the United States increased $69.1 million, or 13%, our revenue from EMEA increased $39.0 million, or 32%, our revenue from APAC increased $20.3 million, or 25%, and our revenue from other regions increased $11.7 million, or 21% in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022, primarily as a result of growth in our customer base and increase in customer consumption.
Table of Contents
Cost of Revenue
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Cost of revenue
Cost of revenue decreased $9.9 million, or 4%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The decrease was primarily attributable to a $15.6 million decrease in hosting-related costs, consulting, and software expenses driven by our transition from third-party data center hosting facilities to public cloud hosting providers as well as credits received from our public cloud hosting providers. The decrease was partially offset by a $4.5 million increase in allocated costs, including lease restructuring costs, the impairment of certain acquired technologies, and a $1.4 million increase in personnel-related costs.
Gross Profit and Margin
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Gross profit
Gross margin %
Gross profit increased $150.0 million, or 28%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The increase was primarily attributable to an increase in our revenues driven by growth in our customer base and increase in customer consumption, and a reduction in our cost of revenue driven by our transition to public cloud hosting providers, as well as other factors discussed above.
Research and Development
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Research and development
Research and development expenses increased $63.4 million, or 30%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The increase was primarily attributable to an increase in personnel-related costs of $49.9 million, driven by an increase in headcount and compensation-related expenses and a $10.3 million increase in allocated costs, including lease restructuring, facilities, and depreciation costs. The remaining increase was driven by a $2.4 million increase in software subscription and consulting expenses and a $1.3 million increase in travel expenses.
Sales and Marketing
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Sales and marketing
Sales and marketing expenses increased $6.1 million, or 2%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The increase was attributable to a $8.4 million increase in marketing programs, a $7.2 million increase in travel expenses, and a $1.7 million increase in other miscellaneous expenses. The increase was offset by a $6.4 million decrease in personnel-related costs, a $3.7 million decrease in allocated costs, including facilities and depreciation expenses, and a $1.2 million decrease in consulting and software expense. The decrease in personnel-related costs was driven by the impact of higher commission amortization expenses incurred in the same period last year when we first shifted to a consumption-business model from our subscription-business model.
Table of Contents
General and Administrative
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
General and administrative
General and administrative expenses increased $37.2 million, or 24%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The increase was primarily attributable to a $23.2 million increase in allocated costs, mostly lease restructuring, and a $9.5 million increase in personnel-related costs, driven by an increase in headcount and compensation-related expenses. The remaining increase was attributable to a $3.3 million increase in travel expenses and a $1.2 million increase in other miscellaneous expenses.
Other Income (Expense)
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Other income (expense)
Other income increased by $12.5 million, or 388%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The increase was primarily attributable to a $11.5 million increase in interest income due to higher interest rates and a $1.0 million decrease in interest and other expenses.
Provision for Income Tax
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Loss before income taxes
Effective tax rate
Income tax provision
Income tax expense increased $2.6 million, or 797%, from $0.3 million in the fiscal year ended March 31, 2022 to $2.9 million in the fiscal year ended March 31, 2023. The increase was primarily attributable to an increase in U.S. tax due to a one-time benefit recorded during fiscal year 2022 related to the acquisition of CodeStream, Inc. and an increase in foreign tax expense related to uncertain tax positions.
Net Loss and Adjustment Attributable to Redeemable Non-controlling Interest
Fiscal Year Ended March 31,
Change
Amount
(dollars in thousands)
Net loss and adjustment attributable to redeemable non-controlling interest
Net loss and adjustment attributable to redeemable non-controlling interest decreased by $16.9 million or 92%, in the fiscal year ended March 31, 2023 compared to the fiscal year ended March 31, 2022. The decrease in loss and adjustment was attributable to the redeemable non-controlling interest’s adjustment to estimated redemption value of our joint venture in New Relic K.K., partially offset by our share of associated losses.
Table of Contents
Non-GAAP Financial Measures
Non-GAAP Gross Margin, Non-GAAP Income (Loss) From Operations, and Non-GAAP Net Income (Loss)
To supplement our consolidated financial statements presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross margin, non-GAAP income (loss) from operations and non-GAAP net income (loss). We define non-GAAP gross margin, non-GAAP income (loss) from operations and non-GAAP net income (loss) 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, and (8) restructuring charges. We use non-GAAP financial measures, including non-GAAP gross margin, non-GAAP income (loss) from operations and non-GAAP net income (loss), 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 gross margin to non-GAAP gross margin, a reconciliation of GAAP income (loss) from operations to non-GAAP income (loss) from operations, and a reconciliation of GAAP net income (loss) to non-GAAP net income (loss). We believe non-GAAP gross margin, non-GAAP income (loss) from operations, and non-GAAP net income (loss) 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. Amortization of purchased intangibles varies in amount and frequency and is significantly impacted by the timing and size of our acquisitions. We find it useful to exclude these non-cash charges from our operating expenses to assist in budgeting, planning, and forecasting future periods. The use of intangible assets contributed to our revenues during the periods presented and will also contribute to our revenues in future periods. Amortization of purchased intangible assets will recur in future periods.
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 wa s 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 we do not consider such amounts to be part of the ongoing operation of our business.
Table of Contents
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.
Restructuring charges. In April 2021, we commenced a restructuring plan to realign our cost structure to better reflect significant product and business model innovation. In August 2022, we commenced a restructuring plan to realign our cost structure with our business needs as we moved to focus our resources on top priorities, and in March 2023, we approved a new restructuring plan in connection with the reduction of our global real estate footprint in line with our Flex First philosophy. As a result of each of these restructuring plans, we incurred charges of approximately $39.1 million and $12.6 million for the twelve months ended March 31, 2023 and 2022, respectively. For the quarter ended March 31, 2023, we incurred restructuring charges of approximately $31.8 million consisting primarily of real estate lease terminations and other associated costs. 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.
Table of Contents
The following tables present our non-GAAP gross margin, non-GAAP income (loss) from operations and our non-GAAP net income (loss) and reconcile our GAAP gross margin to non-GAAP gross margin, GAAP loss from operations to non-GAAP income (loss) from operations and our GAAP net loss to our non-GAAP net income (loss) for the three months ended and fiscal year ended March 31, 2023 and 2022 (in thousands):
Three Months Ended March 31,
Fiscal Year Ended March 31,
GAAP gross profit
Plus: Stock-based compensation expense
Plus: Amortization of purchased intangibles
Plus: Amortization of stock-based compensation capitalized in software development costs
Plus: Employer payroll tax on employee equity incentive plans
Plus: Restructuring charges (1)
Non-GAAP gross profit
GAAP gross margin
Non-GAAP adjustments
Non-GAAP gross margin
Three Months Ended March 31,
Fiscal Year Ended March 31,
GAAP loss from operations
Plus: Stock-based compensation expense
Plus: Amortization of purchased intangibles
Plus: Transaction costs related to acquisitions
Plus: Amortization of stock-based compensation capitalized in software development costs
Plus: Lawsuit litigation cost and other expense
Plus: Employer payroll tax on employee equity incentive plans
Plus: Restructuring charges (1)
Non-GAAP income (loss) from operations
Three Months Ended March 31,
Fiscal Year Ended March 31,
GAAP net loss
Plus: Stock-based compensation expense
Plus: Amortization of purchased intangibles
Plus: Transaction costs related to acquisitions
Plus: Amortization of stock-based compensation capitalized in software development costs
Plus: Lawsuit litigation cost and other expense
Plus: Employer payroll tax on employee equity incentive plans
Plus: Amortization of debt discount and issuance costs
Plus: Restructuring charges (1)
Non-GAAP net income (loss)
(1) For the fiscal year ended March 31, 2022, a 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 fiscal year ended March 31, 2023.
Non-GAAP income (loss) from operations and non-GAAP net income (loss) for the periods presented reflects the same trends discussed above in “Results of Operations.” Although we have generated non-GAAP income from operations and non-GAAP net income in the three and twelve months ended March 31, 2023, and although we expect that these numbers will
Table of Contents
improve over time with increased efficiencies, we have generated non-GAAP loss from operations and non-GAAP net loss 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.
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 March 31,
Fiscal Year Ended March 31,
Net cash provided by operating activities
Capital expenditures
Capitalized software development costs
Free cash flow (Non-GAAP)
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Liquidity and Capital Resources
Fiscal Year Ended March 31,
(in thousands)
Cash provided by operating activities
Cash provided by (used in) investing activities
Cash provided by financing activities
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. Senior Convertible Debt , our 0.5% Convertible Senior Notes matured on May 1, 2023, and were paid in cash on the due 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 and capital expenditure requirements 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 as of March 31, 2023 consisted of obligations under leases for office space and purchase commitments and our 0.5% Convertible Senior Notes.
Table of Contents
As of March 31, 2023, material cash requirements for future periods were as follows:
Payments due by period
Total
Less than
1 year
years
years
After
5 years
(in thousands)
Principal amount payable on the Notes (1)
Operating lease obligations (2)
Purchase obligations (3)
Total
(1) For additional information regarding the Notes, refer to Note 7 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) Consists of future minimum lease payments under non-cancelable operating leases for office space.
(3) Consists of future minimum payments under non-cancelable purchase commitments primarily related to hosting services and software subscriptions.
As of March 31, 2023, we had accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet. These accrued liabilities are not reflected in the table above, as it is unclear when these liabilities will be paid.
Operating Activities
During the fiscal year ended March 31, 2023, cash provided by operating activities was $53.8 million, which was an increase of $50.1 million, or 1,384%, from cash provided by operating activities of $3.6 million during the fiscal year ended March 31, 2022. The increase in cash provided by operating activities was primarily driven by the following:
• Decrease in net loss of $53.3 million resulting from increased revenues from new active customers and increased consumption spending.
• Increase in non-cash charges of $21.1 million, primarily driven by an increase of $34.7 million related to the write-off of long-lived assets as part of our restructuring efforts, and an increase of $7.0 million in stock-based compensation expense. This was partially offset by a decrease of $22.7 million in depreciation and amortization expense.
• Decrease in cash flow from changes in operating assets and liabilities of $24.3 million, primarily driven by the decrease of $47.7 million in deferred revenue, decrease of $13.4 million in the change in accounts payable, decrease of $12.1 million in the change in deferred contract acquisition costs, and decrease of $7.8 million in accrued compensation and benefits and other liabilities. The decrease in cash flow from changes in operating assets and liabilities was partially offset by an increase of $44.0 million in the change in net accounts receivables for the period, an increase of $14.3 million in the change in prepaid expenses and other assets, an increase of $4.7 million in the change in lease liabilities, and an increase of $3.1 million in the change in lease right-of-use assets.
Investing Activities
Cash provided by investing activities during the fiscal year ended March 31, 2023 was $279.9 million, and was primarily a result of proceeds from the maturity and sale of short-term investments of $355.6 million and proceeds from the sale of property and equipment of $2.2 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 $16.9 million, purchases of property and equipment of $3.1 million, and a net payment of $7.5 million which was held back for an acquisition that occurred in the prior year.
Cash used in investing activities during the fiscal year ended March 31, 2022 was $19.8 million, primarily as a result of purchases of short-term investments of $301.1 million, increases in capitalization of software development costs of $12.7 million, cash paid for acquisitions of $7.2 million, and purchases of property and equipment of $5.8 million. These were offset by proceeds from the maturity of short-term investments of $305.9 million and sale of property and equipment of $1.0 million.
Financing Activities
Cash provided by financing activities during the fiscal year ended March 31, 2023 was $23.4 million, primarily as a result of proceeds from our employee stock purchase plan of $13.6 million and proceeds from exercise of employee stock options of $9.8 million.
Table of Contents
Cash provided by financing activities during the fiscal year ended March 31, 2022 was $44.1 million, primarily as a result of proceeds from exercise of employee stock options of $31.9 million and proceeds from our employee stock purchase plan of $12.3 million.
Critical Estimates
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.
We believe that accounting policies requiring estimates, assumptions, and judgments have the most significant impact on our consolidated financial statements, as described below.
Revenue Recognition
We generate revenue from consumption-based and subscription-based agreements that allow customers to access our platform over the internet as a service. We typically sell (1) a subscription-based agreement for a committed contractual amount that is apportioned ratably over the term of the subscription period, (2) a consumption-based agreement for a committed contractual amount where the committed contractual amount is drawn down as usage occurs and may or may not include a usage overage component, and (3) a consumption-based arrangement that is billed based on usage (“Pay as You Go”).
We recognize usage above the commitment for consumption-based agreements as revenue either as usage occurs or ratably over time based on an estimate of total usage above the commitment. We estimate total usage above the commitment using historical data together with forward looking factors to project usage for the remaining term of the contract. The estimated consumption-based revenues are constrained to the amount we expect to be entitled to receive in exchange for providing access to our platform. Revenue from subscription-based agreements is recognized on a ratable basis over the contractual subscription period of the agreement.
Business Combinations
We make certain judgments to determine whether transactions should be accounted for as acquisitions of assets or as business combinations. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain identifiable assets and liabilities include, but are not limited to, future expected cash flows from acquired contracts, technology, useful lives, and discount rates. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Software Development Costs
We capitalize certain development costs incurred in connection with our internal use software and website. These capitalized costs are primarily related to our software tools that are hosted by us and accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Maintenance costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years.
We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the
Table of Contents
ongoing value of capitalized assets, or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
Restructuring Charges
We recognize liabilities for contract exit-related and employee separation costs related to certain restructuring activities. For future costs related to contracts without future benefit or contract terminations, we recognize a liability at estimated fair value at the earlier of contract termination or the cease-use date. We recognize other contract exit-related costs as incurred. We recognize employee separation costs, including one-time termination benefits, as liabilities measured at their estimated fair value at the time of communication to employees, unless future service is required, in which case we recognize the costs ratably over the future service period. Ongoing termination benefits are recognized as liabilities and measured at their estimated fair value when the amount of such benefits are probable and reasonably estimable.
We make certain judgments and estimates with respect to the timing and amount of our restructuring liabilities using the best information available at the time of recognition. While we use our best estimate for timing and amounts, our estimates can change when the underlying facts and circumstances change subsequent to the date the original liability was recorded. If actual results differ, or if we determine revised estimates are necessary, we may record additional liabilities or reverse a portion of existing liabilities. If our restructuring activities impact our long-lived assets, we assess those impacted assets for recoverability, and may recognize an impairment or accelerate depreciation and amortization reflecting the shortened useful lives for the associated assets.
Recent Accounting Pronouncements
See Note 1, Description of Business and Summary of Significant Accounting Policies , of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8.
