UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, ~~D. C.~~D.C. 20549

FORM 10-Q

(Mark One)



ý☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~September 30, 2019



¨☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36766

New Relic, Inc.

(Exact name of registrant as specified in its charter)



Delaware						26-2017431
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

188 Spear Street, Suite 1200

San Francisco, California 94105

(Address of principal executive offices, including zip code)

(650) 777-7600

(Registrant’s telephone number, including area code)

__________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

NEWR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ý☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

~~Large accelerated filer~~

☒

~~Accelerated filer~~

☐

Non-accelerated filer

☐~~(Do not check if a small reporting company)~~

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒

As of ~~January 26, 2018,~~October 30, 2019, there were ~~55,441,340~~58,787,479 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

NEW RELIC, INC.

Form 10-Q Quarterly Report

TABLE OF CONTENTS


					Page
Special Note Regarding Forward-Looking Statements					2
PART I. FINANCIAL INFORMATION

			~~Page~~
~~Special Note Regarding Forward-Looking Statements~~ Item 1.		2
~~PART I. FINANCIAL INFORMATION~~

~~Item 1.~~	Financial Statements (Unaudited)	3

			Condensed Consolidated Balance Sheets as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017~~2019	3

			Condensed Consolidated Statements of Operations for the Three and ~~Nine~~ Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~2016~~2018	4

			Condensed Consolidated Statements of Comprehensive Loss for the Three and ~~Nine~~ Six Months Ended ~~December 31, 2017~~Septem ber 30, 2019 and ~~2016~~2018	5

			Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended Se ptember 30, 2019 and 2018	6

			Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ended ~~December 31, 2017~~September 30, 2019 and ~~2016~~2018	67

			Notes to Condensed Consolidated Financial Statements	78

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	1520

Item 3.			Quantitative and Qualitative ~~Disclosure~~Disclosures About Market Risk	2732

Item 4.			Controls and Procedures	2833

PART II. OTHER INFORMATION

Item 1.			Legal Proceedings	2934

Item 1A.			Risk Factors	2934

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	4755

Item 3.			Defaults Upon Senior Securities	4755

Item 4.			Mine Safety Disclosures	4755

Item 5.			Other Information	4755

Item 6.			Exhibits	4856

			Signatures	4957

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “would,” “shall,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•our future financial performance, including our revenue, cost of revenue, gross profit, gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain GAAP (as defined below) and non-GAAP profitability;

•our key operating metrics;

•use and limitations of non-GAAP financial measures;

•the sufficiency of our cash and cash equivalents to meet our working capital, capital ~~expenditure,~~expenditures, and liquidity needs;

•our ability to attract and retain customers to use our products, to optimize the pricing for our products, to expand our sales to our customers, and to convince our existing customers to renew subscriptions;

•our growth strategy, including increasing usage within our installed base, addition of new customers, penetration of international markets, and expansion of our platform and capabilities;

•the evolution of technologies affecting our products and markets;

•our ability to innovate and provide a superior user experience and our intentions and strategy with respect thereto;

•our ability to successfully penetrate enterprise markets;

•our ability to successfully expand in our existing markets and into new markets, including international markets;

•the attraction and retention of key personnel;

•our ability to effectively manage our growth and future expenses;

•our ability to maintain, protect, and enhance our intellectual ~~property;~~property rights;

•worldwide economic conditions and their impact on spending; and

•our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations.

We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEW RELIC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	December 31,			March 31,
	2017			2017				September 30, 2019		March 31, 2019
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	125,237		$	88,305		Cash and cash equivalents	$	242,407	$	234,356
Short-term investments	107,799			118,101			Short-term investments	529,068		510,372
Accounts receivable, net of allowance for doubtful accounts of $1,075 and $1,117, respectively	52,676			62,032
Accounts receivable, net of allowance for doubtful accounts of $2,153 and $2,457, respectively							Accounts receivable, net of allowance for doubtful accounts of $2,153 and $2,457, respectively	76,954		120,605
Prepaid expenses and other current assets	9,431			8,169			Prepaid expenses and other current assets	17,029		21,838
Deferred contract acquisition costs							Deferred contract acquisition costs	29,331		27,161
Total current assets	295,143			276,607			Total current assets	894,789		914,332
Property and equipment, net	52,572			50,728			Property and equipment, net	100,742		80,742
Restricted cash	8,202			8,115			Restricted cash	5,658		8,805
Goodwill	11,828			11,828			Goodwill	41,512		41,512
Intangible assets, net	1,508			2,499			Intangible assets, net	12,975		13,855
Other assets	5,740			2,492
Deferred contract acquisition costs, non-current							Deferred contract acquisition costs, non-current	26,349		26,218
Lease right-of-use assets							Lease right-of-use assets	61,766		—
Other assets, non-current							Other assets, non-current	6,580		4,763
Total assets	$	374,993		$	352,269		Total assets	$	1,150,371	$	1,090,227
Liabilities and stockholders’ equity
Liabilities, redeemable non-controlling interest and stockholders’ equity							Liabilities, redeemable non-controlling interest and stockholders’ equity
Current liabilities:							Current liabilities:
Accounts payable	$	3,737		$	6,522		Accounts payable	$	19,502	$	10,249
Accrued compensation and benefits	18,092			15,935			Accrued compensation and benefits	22,805		23,537
Other current liabilities	6,904			7,607			Other current liabilities	14,057		14,572

Deferred revenue	134,889			125,269			Deferred revenue	233,176		267,000
Lease liabilities							Lease liabilities	7,780		—
Total current liabilities	163,622			155,333			Total current liabilities	297,320		315,358
Convertible senior notes, net							Convertible senior notes, net	416,341		405,937
Lease liabilities, non-current							Lease liabilities, non-current	61,513		—
Deferred rent, non-current	8,159			8,272			Deferred rent, non-current	—		11,025
Deferred revenue, non-current	453			1,135			Deferred revenue, non-current	39		4,597
Other liabilities, non-current	709			685			Other liabilities, non-current	1,184		947
Total liabilities	172,943			165,425			Total liabilities	776,397		737,864
Commitments and contingencies (Note 5)
Commitments and contingencies (Note 10)							Commitments and contingencies (Note 10)
Redeemable non-controlling interest							Redeemable non-controlling interest	2,814		2,733
Stockholders’ equity:							Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized at December 31, 2017 and March 31, 2017; 55,657 shares and 53,539 shares issued at December 31, 2017 and March 31, 2017, respectively; and 55,397 shares and 53,279 shares outstanding at December 31, 2017 and March 31, 2017, respectively	56			53
Common stock, $0.001 par value; 100,000 shares authorized at September 30, 2019 and March 31, 2019; 59,036 shares and 58,366 shares issued at September 30, 2019 and March 31, 2019; and 58,776 shares and 58,106 shares outstanding at September 30, 2019 and March 31, 2019							Common stock, $0.001 par value; 100,000 shares authorized at September 30, 2019 and March 31, 2019; 59,036 shares and 58,366 shares issued at September 30, 2019 and March 31, 2019; and 58,776 shares and 58,106 shares outstanding at September 30, 2019 and March 31, 2019	59		58
Treasury stock - at cost (260 shares)	(263		)	(263		)	Treasury stock - at cost (260 shares)	(263)		(263)
Additional paid-in capital	501,004			447,314			Additional paid-in capital	708,761		654,759
Accumulated other comprehensive loss	(229		)	(96		)
Accumulated other comprehensive income							Accumulated other comprehensive income	1,955		645
Accumulated deficit	(298,518		)	(260,164		)	Accumulated deficit	(339,352)		(305,569)
Total stockholders’ equity	202,050			186,844			Total stockholders’ equity	371,160		349,630
Total liabilities and stockholders’ equity	$	374,993		$	352,269
Total liabilities, redeemable non-controlling interest and stockholders’ equity							Total liabilities, redeemable non-controlling interest and stockholders’ equity	$	1,150,371	$	1,090,227

See notes to condensed consolidated financial statements.

NEW RELIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,							Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016				2019		2018		2019		2018
Revenue	$	91,827		$	68,096		$	256,610		$	190,143		Revenue	$	145,815	$	114,896	$	286,825	$	223,117
Cost of revenue	15,671			12,627			46,342			36,060			Cost of revenue	25,149		18,447		48,762		35,497
Gross profit	76,156			55,469			210,268			154,083			Gross profit	120,666		96,449		238,063		187,620
Operating expenses:													Operating expenses:
Research and development	18,154			14,377			54,686			45,087			Research and development	34,132		23,962		68,471		46,565
Sales and marketing	51,393			43,458			152,015			122,626			Sales and marketing	80,157		61,142		157,007		118,630
General and administrative	14,596			11,578			42,843			32,647			General and administrative	23,278		16,880		46,378		31,591
Total operating expenses	84,143			69,413			249,544			200,360			Total operating expenses	137,567		101,984		271,856		196,786
Loss from operations	(7,987		)	(13,944		)	(39,276		)	(46,277		)	Loss from operations	(16,901)		(5,535)		(33,793)		(9,166)
Other income (expense):													Other income (expense):
Interest income	534			325			1,503			796			Interest income	4,011		3,259		8,151		5,104
Interest expense	(21		)	(21		)	(64		)	(63		)	Interest expense	(5,888)		(5,597)		(11,707)		(8,263)
Other income (expense), net	(45		)	(280		)	117			(517		)	Other income (expense), net	315		(435)		3,293		(1,277)
Loss before income taxes	(7,519		)	(13,920		)	(37,720		)	(46,061		)	Loss before income taxes	(18,463)		(8,308)		(34,056)		(13,602)
Income tax provision (benefit)	210			(37		)	634			23
Income tax provision													Income tax provision	660		225		624		546
Net loss	$	(7,729	)	$	(13,883	)	$	(38,354	)	$	(46,084	)	Net loss	$	(19,123)	$	(8,533)	$	(34,680)	$	(14,148)
Net loss per share, basic and diluted	$	(0.14	)	$	(0.27	)	$	(0.70	)	$	(0.90	)
Net loss attributable to redeemable non-controlling interest													Net loss attributable to redeemable non-controlling interest	509		197		897		197
Net loss attributable to New Relic													Net loss attributable to New Relic	$	(18,614)	$	(8,336)	$	(33,783)	$	(13,951)
Net loss attributable to New Relic per share, basic and diluted													Net loss attributable to New Relic per share, basic and diluted	$	(0.32)	$	(0.15)	$	(0.58)	$	(0.25)
Weighted-average shares used to compute net loss per share, basic and diluted	55,196			52,328			54,534			51,297			Weighted-average shares used to compute net loss per share, basic and diluted	58,372		56,706		58,161		56,446

See notes to condensed consolidated financial statements.

NEW RELIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016
Net loss $ (7,729 ) $ (13,883 ) $ (38,354 ) $ (46,084 )
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of tax (135 ) (86 ) (133 ) (87 )
Comprehensive loss $ (7,864 ) $ (13,969 ) $ (38,487 ) $ (46,171 )


	Three Months Ended September 30,						Six Months Ended September 30,
	2019		2018		2019		2018
Net loss attributable to New Relic	$	(18,614)	$	(8,336)	$	(33,783)	$	(13,951)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net of tax	(186)		(303)		1,310		(249)
Comprehensive loss	$	(18,800)	$	(8,639)	$	(32,473)	$	(14,200)

See notes to condensed consolidated financial statements.

NEW RELIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Three Months Ended September 30, 2019																														Three Months Ended September 30, 2018
	Common Stock					Additional Paid-In Capital		Treasury Stock							Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit	Total Stockholders’ Equity		Common Stock					Additional Paid-In Capital			Treasury Stock					Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total Stockholders’ Equity
	Shares	Amount					Shares			Amount										Shares		Amount					Shares			Amount
Balance at beginning of period	58,655	$	58	$	678,533	260		$	(263)		$	2,141	$	(320,738)	$	359,731	56,758	57		$	575,110	260	$	(263)	$	(270)		$	(270,286)		$	304,348
Issuance of common stock upon exercise of stock options	37	—		783		—		—			—		—		783		131	—		3,198		—	—		—			—			3,198
Issuance of common stock for vested restricted stock units	227	1		(1)		—		—			—		—		—		227	—		—		—	—		—			—			—
Issuance of common stock related to employee stock purchase plan	117	—		5,933		—		—			—		—		5,933		83			4,887		—	—		—			—			4,887
Stock-based compensation expense	—	—		23,513		—		—			—		—		23,513		—	—		14,053		—	—		—			—			14,053
Other comprehensive loss, net	—	—		—		—		—			(186)		—		(186)		—	—		—		—	—		(303)			—			(303)
Net loss attributable to New Relic	—	—		—		—		—			—		(18,614)		(18,614)		—	—		—		—	—		—			(8,336)			(8,336)
Balance at end of period	59,036	$	59	$	708,761	260		$	(263)		$	1,955	$	(339,352)	$	371,160	57,199	$	57	$	597,248	260	$	(263)	$	(573)		$	(278,622)		$	317,847


	Six Months Ended September 30, 2019																														Six Months Ended September 30, 2018
	Common Stock					Additional Paid-In Capital		Treasury Stock							Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit	Total Stockholders’ Equity		Common Stock					Additional Paid-In Capital			Treasury Stock					Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total Stockholders’ Equity
	Shares	Amount					Shares			Amount										Shares		Amount					Shares			Amount
Balance at beginning of period	58,366	$	58	$	654,759	260		$	(263)		$	645	$	(305,569)	$	349,630	56,213	56		$	521,119	260	$	(263)	$	(324)		$	(305,484)		$	215,104
Issuance of common stock upon exercise of stock options	121	—		3,054		—		—			—		—		3,054		455	1		9,016		—	—		—			—			9,017
Issuance of common stock for vested restricted stock units	432	1		(1)		—		—			—		—		—		448	—		—		—	—		—			—			—
Issuance of common stock related to employee stock purchase plan	117	—		5,933		—		—			—		—		5,933		83	—		4,887		—	—		—			—			4,887
Stock-based compensation expense	—	—		45,016		—		—			—		—		45,016		—	—		25,272		—	—		—			—			25,272
Other comprehensive income (loss), net	—	—		—		—		—			1,310		—		1,310		—	—		—		—	—		(249)			—			(249)
Net loss attributable to New Relic	—	—		—		—		—			—		(33,783)		(33,783)		—	—		—		—	—		—			(13,951)			(13,951)
Equity component of convertible senior notes, net of issuance costs	—	—		—		—		—			—		—		—		—	—		100,136		—	—		—			—			100,136
Purchase of capped calls	—	—		—		—		—			—		—		—		—	—		(63,182)		—	—		—			—			(63,182)
Cumulative effect adjustment for ASU 2014-09 adoption	—	—		—		—		—			—		—		—		—	—		—		—	—		—			40,813			40,813
Balance at end of period	59,036	$	59	$	708,761	260		$	(263)		$	1,955	$	(339,352)	$	371,160	57,199	$	57	$	597,248	260	$	(263)	$	(573)		$	(278,622)		$	317,847

See notes to condensed consolidated financial statements.

NEW RELIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended December 31,							Six Months Ended September 30,
	2017			2016				2019		2018
Cash flows from operating activities:							Cash flows from operating activities:
Net loss attributable to New Relic							Net loss attributable to New Relic	$	(33,783)	$	(13,951)
Net loss attributable to redeemable non-controlling interest (Note 3)							Net loss attributable to redeemable non-controlling interest (Note 3)	(897)		(197)
Net loss:	$	(38,354	)	$	(46,084	)	Net loss:	$	(34,680)	$	(14,148)
Adjustments to reconcile net loss to net cash provided by operating activities:							Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	17,306			13,356			Depreciation and amortization	37,268		24,823
Stock-based compensation expense	29,778			23,719			Stock-based compensation expense	44,546		24,860
Amortization of debt discount and issuance costs							Amortization of debt discount and issuance costs	10,404		7,292
Gain on lease modification							Gain on lease modification	(3,006)		—
Other	498			822			Other	(1,465)		588
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	9,223			(6,478		)
Accounts receivable, net							Accounts receivable, net	43,651		23,345
Prepaid expenses and other assets	(4,438		)	(1,651		)	Prepaid expenses and other assets	368		724
Deferred contract acquisition costs							Deferred contract acquisition costs	(18,038)		(17,415)
Lease right-of-use assets							Lease right-of-use assets	17,512		—
Accounts payable	(829		)	1,125			Accounts payable	3,208		1,960
Accrued compensation and benefits and other liabilities	2,475			3,307			Accrued compensation and benefits and other liabilities	275		4,570
Lease liabilities							Lease liabilities	(16,157)		—
Deferred revenue	8,938			18,169			Deferred revenue	(38,382)		639
Deferred rent	(504		)	3,052			Deferred rent	—		976
Net cash provided by operating activities	24,093			9,337			Net cash provided by operating activities	45,504		58,214
Cash flows from investing activities:							Cash flows from investing activities:
Purchases of property and equipment	(17,577		)	(16,601		)	Purchases of property and equipment	(31,570)		(14,255)
Increase in restricted cash	(87		)	—
Purchases of short-term investments	(78,074		)	(116,285		)	Purchases of short-term investments	(263,321)		(496,229)
Proceeds from sale and maturity of short-term investments	88,232			126,113			Proceeds from sale and maturity of short-term investments	247,379		76,683
Capitalized software development costs	(3,054		)	(3,075		)	Capitalized software development costs	(3,053)		(3,062)
Net cash used in investing activities	(10,560		)	(9,848		)	Net cash used in investing activities	(50,565)		(436,863)
Cash flows from financing activities:							Cash flows from financing activities:
Investment from redeemable non-controlling interest							Investment from redeemable non-controlling interest	978		3,596
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $11,582							Proceeds from issuance of convertible senior notes, net of issuance costs paid of $11,582	—		488,669
Purchase of capped call related to convertible senior notes							Purchase of capped call related to convertible senior notes	—		(63,182)
Proceeds from employee stock purchase plan	3,029			2,504			Proceeds from employee stock purchase plan	5,933		4,887
Proceeds from exercise of employee stock options	20,370			12,263			Proceeds from exercise of employee stock options	3,054		8,998
Net cash provided by financing activities	23,399			14,767			Net cash provided by financing activities	9,965		442,968
Net increase in cash and cash equivalents	36,932			14,256
Cash and cash equivalents, beginning of period	88,305			65,914
Cash and cash equivalents, end of period	$	125,237		$	80,170
Net increase in cash, cash equivalents and restricted cash							Net increase in cash, cash equivalents and restricted cash	4,904		64,319
Cash, cash equivalents and restricted cash at beginning of period							Cash, cash equivalents and restricted cash at beginning of period	243,161		140,681
Cash, cash equivalents and restricted cash at end of period							Cash, cash equivalents and restricted cash at end of period	$	248,065	$	205,000
Supplemental disclosure of cash flow information:							Supplemental disclosure of cash flow information:

Cash paid for interest and income taxes	$	358		$	226		Cash paid for interest and income taxes	$	1,894	$	457
Noncash investing and financing activities:							Noncash investing and financing activities:
Property and equipment purchased but not yet paid	$	256		$	2,534		Property and equipment purchased but not yet paid	$	13,100	$	6,878

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Description of Business and Summary of Significant Accounting Policies

Description of Business—New Relic, Inc. (the “Company” or “New Relic”) was ~~founded in 2007 and~~ incorporated in Delaware on February 20, ~~2008.~~2008, when it converted from a Delaware limited liability company called New Relic Software, LLC, which was formed in Delaware in September 2007. The Company is a ~~software-as-a-service~~ provider of ~~digital intelligence products~~an integrated, multi-tenant, cloud-based observability and analytics platform that ~~allow~~enables users to ~~monitor software~~collect, store and ~~infrastructure performance and measure end-user activities across desktop and mobile devices with applications deployed~~analyze massive amounts of data in the cloud or in a data center. New Relic’s digital intelligence products and platform capabilities enable software developers, IT operations, and business users to better understand their digital business.real time.

Basis of Presentation—These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2019, as filed with the SEC on May ~~18, 2017~~15, 2019 (the “Annual Report”). There have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on its condensed consolidated financial statements and related notes.

In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, stockholders’ equity and cash flows for the interim ~~periods,~~period, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending March 31, ~~2018.~~2020. The condensed consolidated balance sheet as of March 31, ~~2017~~2019 included herein was derived from the audited financial statements as of that date.

Use of Estimates—The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of purchased intangible assets and goodwill, fair value of debt and equity components related to the 0.5% convertible senior notes due 2023 (the “Notes”), whether an arrangement is or contains a lease, the discount rate used for operating leases, useful lives of purchased intangible assets, unrecognized tax benefits, expected benefit period for deferred commissions and the capitalization and estimated useful life of the Company’s software development costs.

These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.

Concentration of Risk—There ~~were~~was no ~~customers~~customer that represented more than 10% of the Company’s accounts receivable balance as of ~~December 31, 2017. One customer represented 12% of the Company’s accounts receivable balance as of~~September 30, 2019 or March 31, ~~2017.~~2019. There were no customers that individually exceeded 10% of the Company’s revenue during the three ~~and nine~~or six months ended ~~December 31, 2017~~September 30, 2019 or ~~2016.~~2018.

~~Short-term Investments—Short-term investments consist~~

Summary of commercial paper, certificates of deposit, U.S. treasury securities, U.S. agency securities, and corporate debt securities and are classified as available-for-sale securities. The Company has classified its investments as current based onSignificant Accounting Policies—Except for the ~~nature of the investments and their availability~~accounting policies for ~~use in current operations. Available-for-sale securities are carried at fair value with unrealized gains and losses reported~~operating leases that were updated as a ~~component~~result of ~~accumulated other comprehensive income, while realized gains and losses are reported within~~adopting Accounting Standards Update (ASU) 2016-02, Leases,regarding Accounting Standards Codification Topic 842 (“ASC 842”), there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the statement of operations. The Company reviews its debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial position and near-term prospects of the issuer, and the Company’s intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s amortized-cost basis. If the Company determines that an other-than-temporary decline exists in one of these securities, the respective investment would be written down to fair value. For debt securities, the portion of the write-down related to credit loss would be recognized as other income, net in the condensed consolidated statement of operations. Any portion not related to credit loss would be included in accumulated other comprehensive income (loss). The Company did not identify any investments as other-than-temporarily impaired as of December 31, 2017 andfiscal year ended March 31, ~~2017.~~

~~Business Combinations~~—The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its 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, its estimates are inherently uncertain and subject to refinement. As a result, during the

~~measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed,~~2019, filed with the corresponding offset to goodwill to the extent that the Company identifies 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 the Company’s condensed consolidated statements of operations. There has been no such adjustment as of December 31, 2017.

~~Goodwill—Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is evaluated~~SEC on May 15, 2019. See Note 9—Leases for ~~impairment annually in the third quarter~~a summary of the Company’s fiscal year, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. Since inception through December 31, 2017, the Company has not had any goodwill impairment.new accounting policies under ASC 842.

~~Intangible Assets~~—Intangible assets consist of identifiable intangible assets, primarily developed technology, resulting from the Company’s acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives.

~~Recent~~Recently Issued Accounting Pronouncements~~—In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ The new guidance provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. The new guidance will be effective for the Company in its fiscal year beginning April 1, 2018. The guidance may be applied retrospectively to each prior period presented (full retrospective method), or with the cumulative effect recognized as of the date of initial adoption (modified retrospective method). The Company currently intends to adopt Topic 606 using the modified retrospective approach in the first quarter of fiscal year 2019. As the Company continues to assess the new standard along with industry trends and internal progress, the Company may adjust its implementation plan accordingly. Not Yet Adopted

The Company anticipates that the significant impacts of adopting Topic 606 will include the deferral of incremental commission costs of obtaining contracts and additional disclosure requirements. Currently, the Company records commissions as sales and marketing expenses as incurred. Under the new standard, the Company will capitalize incremental commissions related to initial contracts over the expected period of benefit. The Company has not yet concluded the amortization period of these capitalized costs, which will affect the classification and magnitude of the deferred costs at each reporting period. The Company will continue to quantify the effects of adopting Topic 606 on its condensed consolidated financial statements, including the impact on its revenue as well as the changes discussed above.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~, which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard will be effective for the Company in the fiscal year beginning April 1, 2019; early adoption is permitted. The amendments require a modified retrospective approach with optional practical expedients. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements.

~~In March 2016, the FASB Issued ASU No. 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2018. Upon adoption, the Company recognized all of the previously unrecognized excess tax benefits related to stock awards using the modified retrospective transition method. These excess tax benefits, recognized upon adoption, were recorded as a deferred tax asset, which was then fully offset by the U.S. federal and state deferred tax asset valuation allowance resulting in no impact to the accumulated deficit. Without the valuation allowance, the Company’s deferred tax asset would have increased by $39.5 million. All future excess tax benefits resulting from the settlement of stock awards will be recorded to the income tax provision.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The updated guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statement of income. The update to the standard will be effective for the Company in the fiscal year beginning April 1, 2020; early adoption is permitted in the fiscal

year beginning April 1, 2019. The Company has not yet adopted ASU 2016-13 and is currently evaluating the effect the standard will have on its condensed consolidated financial statements.

In ~~May~~January 2017, the FASB issued ASU ~~2017-09,~~ ~~Compensation—Stock Compensation~~2017-04, Intangibles—Goodwill and Other (Topic ~~718)~~350): ~~Scope of Modification Accounting,~~Simplifying the Test for Goodwill Impairment, which ~~amends~~eliminates Step 2 from the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The new guidance will begoodwill impairment test. This standard is effective for goodwill impairment tests performed by the Company in ~~its~~the fiscal year beginning April 1, ~~2018.~~2020; early adoption is permitted. The Company ~~is currently evaluating the impact of~~has not yet adopted ASU 2017-04 and does not believe that this standard will have a material impact on its condensed consolidated financial ~~statements.~~statements or disclosures.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The effective date is the first quarter of fiscal year 2021, with early adoption permitted for the removed disclosures and delayed adoption permitted until fiscal year 2021 for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company has not yet adopted ASU 2018-13 and is currently evaluating the effect the standard will have on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes current guidance related to accounting for leases. This new guidance requires lessees to recognize most leases on their balance sheets as lease right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. In July 2018, the FASB also issued ASU No. 2018-11, Leases (Topic 842). The ASU provides an optional transition method that entities can use when adopting the standard and a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met.

The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company adopted ASC 842 on April 1, 2019 using a modified retrospective method, under which financial results reported in periods prior to April 1, 2019 were not adjusted. The Company elected the package of transition practical expedients, which among other things, does not require reassessment of historical lease classifications of leases in place as of April 1, 2019.

The effect of adopting ASC 842 resulted in the recognition of lease right-of-use assets and corresponding lease liabilities on the Company’s condensed consolidated balance sheet. As of June 30, 2019, the first quarter of adoption, the aggregate balance of lease right-of-use assets and lease liabilities was $64.2 million and $71.6 million, respectively. The standard did not affect the Company’s condensed consolidated statement of operations or cash flows.

In June 2018, the FASB issued ASU 2018-07, regarding Compensation—Stock Compensation (Topic 718), which largely aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company adopted this standard on April 1, 2019. The adoption did not have a significant impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, regarding Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company adopted the standard on April 1, 2019. The adoption did not have a significant impact on its condensed consolidated financial statements.

2. Business Combinations

SignifAI, Inc.

On January 25, 2019, the Company acquired all outstanding stock of SignifAI, Inc. (“SignifAI”), an event intelligence company specializing in artificial intelligence and machine learning. The aggregate purchase price of $36.3 million consisted of $25.1 million in cash and 143,861 shares of Company common stock with an aggregate fair value of approximately $11.9 million. The fair value of the consideration transferred was determined based on an $82.69 per share price of the Company’s common stock. The total purchase price was allocated to the developed technology acquired, net liabilities assumed, deferred taxes related to net operating loss carryforwards and a deferred tax liability related to the developed technology. The excess purchase price was recorded as goodwill, as set forth below. The acquisition has been accounted for as a business combination.

The business combination did not have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not been presented.

Per the terms of the merger agreement, all share-based payment awards were accelerated and paid for in cash. The cash consideration paid for unvested share-based payment awards of $0.8 million was recognized as compensation expense separate from the business combination. The acquisition also included a holdback arrangement with certain employees of SignifAI, totaling approximately 152,840 shares of the Company’s common stock, contingent upon such employees’ continued employment with the Company. The fair value of these awards, which are subject to the recipients’ continued service, was $12.6 million and was excluded from the aggregate purchase price. These awards will be recognized as stock-based compensation expense over the remaining vesting period which ranges from 24 months to 36 months.

The following table presents the purchase price allocation related to the acquisition (in thousands):



Cash consideration paid	$	25,119
Fair value of common shares issued	$	24,535
Total consideration	$	49,654
Post-business combination compensation expense	$	(12,639)
Cash paid to settle unvested stock options	$	(764)
Total purchase price	$	36,251
Net liabilities assumed	$	259
Deferred tax liabilities	$	2,289
Deferred tax assets	$	(1,721)
Developed technology acquired	$	(10,900)
Goodwill	$	26,178

CoScale NV

On October 9, 2018, the Company acquired certain assets of CoScale NV (“CoScale”), a public limited liability company organized and existing under the laws of Belgium that provides solutions for monitoring the performance of software container environments for $6.3 million in cash. The Company held back approximately $0.9 million from the aggregate purchase price. Of the total purchase price, $2.9 million was allocated to acquired technology with an estimated useful life of three years, with the excess $3.4 million of the purchase price over the fair value of intangible assets acquired recorded as goodwill. The acquisition has been accounted for as a business combination under the acquisition method. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities, and is not deductible for tax purposes. The business combination did not have a material impact on the condensed consolidated financial statements and therefore historical and proforma disclosures have not been presented.

3. Joint Venture

On July 13, 2018, the Company entered into an agreement with Japan Cloud Computing L.P. (“JCC”) and M30 LLC (collectively, the Investors) to engage in the investment, organization, management and operation of New Relic K.K., a Japanese subsidiary of the Company that is focused on the sale of the Company’s products and services in Japan. On August 21, 2018, the Investors initially contributed approximately $3.6 million ($396,000,000 Japanese Yen) in exchange for 40% of the outstanding common stock of New Relic K.K. On August 21, 2019, the Company and Investors additionally contributed approximately $1.5 million (156,000,000 Japanese Yen) and approximately $1.0 million (104,000,000 Japanese Yen), respectively, to subscribe to additional shares. As of September 30, 2019, the Company owned approximately 60% of the outstanding common stock in New Relic K.K.

All of the common stock held by the Investors may be callable by the Company or puttable by the Investors upon certain contingent events. Should the call or put option be exercised, the redemption value would be determined based on a prescribed formula derived from the discrete revenues of New Relic K.K. and the Company and may be settled, at the Company’s discretion, with Company stock or cash. As a result of the put right available to the redeemable non-controlling interest holders in the future, the redeemable non-controlling interest in New Relic K.K. is classified outside of permanent equity in the Company’s consolidated balance sheet as of September 30, 2019, and the balance is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest’s share of earnings or losses, or its estimated redemption value. The resulting changes in the estimated redemption amount are recorded within retained earnings or, in the

absence of retained earnings, additional paid-in-capital. The estimated redemption value of the call/put option embedded in the redeemable non-controlling interest was $0 at September 30, 2019.

The following table summarizes the activity in the redeemable non-controlling interest for the period indicated below:


Balance as of April 1, 2019	$	2,733
Investment by redeemable non-controlling interest	978
Net loss attributable to redeemable non-controlling interest	(897)
Balance as of September 30, 2019	$	2,814

4. Fair Value Measurements

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017~~2019 based on the three-tier fair value hierarchy (in thousands):


	Fair Value Measurements as of December 31, 2017									Fair Value Measurements as of September 30, 2019
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Cash and cash equivalents:									Cash and cash equivalents:
Money market funds	$	42,280	$	—	$	—	$	42,280	Money market funds	$	126,909	$	—	$	—	$	126,909
Commercial paper	—		6,486		—		6,486		Commercial paper	—		6,793		—		6,793
U.S. treasury securities	2,997		—		—		2,997
U.S. government agencies	—		3,925		—		3,925

Short-term investments:									Short-term investments:
Certificates of deposit	—		25,601		—		25,601		Certificates of deposit	—		33,867		—		33,867
Commercial paper	—		12,648		—		12,648		Commercial paper	—		15,883		—		15,883
Corporate notes and bonds	—		15,837		—		15,837		Corporate notes and bonds	—		40,592		—		40,592
U.S. treasury securities	18,937		—		—		18,937		U.S. treasury securities	429,111		—		—		429,111
U.S. government agencies	—		34,776		—		34,776		U.S. government agencies	—		9,615		—		9,615
Restricted cash:									Restricted cash:
Money market funds	8,202		—		—		8,202		Money market funds	5,658		—		—		5,658
Total	$	72,416	$	99,273	$	—	$	171,689	Total	$	561,678	$	106,750	$	—	$	668,428
Included in cash and cash equivalents							$	55,688	Included in cash and cash equivalents							$	133,702
Included in short-term investments							$	107,799	Included in short-term investments							$	529,068
Included in restricted cash							$	8,202	Included in restricted cash							$	5,658

	Fair Value Measurements as of March 31, 2017									Fair Value Measurements as of March 31, 2019
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Cash and cash equivalents:									Cash and cash equivalents:
Money market funds	$	36,180	$	—	$	—	$	36,180	Money market funds	$	133,239	$	—	$	—	$	133,239
Commercial paper	—		5,441		—		5,441		Commercial paper	—		9,973		—		9,973
U.S. government agencies	—		2,600		—		2,600

Short-term investments:									Short-term investments:
Certificates of deposit	—		28,210		—		28,210		Certificates of deposit	—		24,726		—		24,726
Commercial paper	—		10,549		—		10,549		Commercial paper	—		37,071		—		37,071
Corporate notes and bonds	—		17,378		—		17,378		Corporate notes and bonds	—		27,259		—		27,259
U.S. treasury securities	11,276		—		—		11,276		U.S. treasury securities	402,091		—		—		402,091
U.S. government agencies	—		50,688		—		50,688		U.S. government agencies	—		19,225		—		19,225
Restricted cash:									Restricted cash:
Money market funds	8,115		—		—		8,115		Money market funds	8,805		—		—		8,805
Total	$	55,571	$	114,866	$	—	$	170,437	Total	$	544,135	$	118,254	$	—	$	662,389
Included in cash and cash equivalents							$	44,221	Included in cash and cash equivalents							$	143,212
Included in short-term investments							$	118,101	Included in short-term investments							$	510,372
Included in restricted cash							$	8,115	Included in restricted cash							$	8,805

There were no transfers between fair value measurement levels during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016.~~2018.

Gross unrealized gains or losses for cash equivalents and short-term investments as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017~~2019 were not significant. As of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, there were no0 securities that were in an unrealized loss position for more than 12 months.

The following table classifies the Company’s available-for-sale short-term investments by contractual maturities as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017~~2019 (in thousands):


	December 31, 2017		March 31, 2017			September 30, 2019		March 31, 2019
Due within one year	$	92,163	$	92,874	Due within one year	$	317,454	$	346,768
Due in one to two years	15,636		25,227
Due after one year and within three years					Due after one year and within three years	211,614		163,604
Total	$	107,799	$	118,101	Total	$	529,068	$	510,372

For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

Convertible Senior Notes

As of September 30, 2019, the fair value of the 0.50% convertible senior notes due 2023 (the “Notes”) was $427.2 million. The fair value was determined based on the quoted price of the Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy.

5. Deferred Commissions

The balances of deferred costs to obtain customer contracts were $55.7 million and $53.4 million as of September 30, 2019 and March 31, 2019, respectively. In the three months ended September 30, 2019 and 2018, amortization from amounts capitalized was $8.1 million and $6.1 million, respectively. In the six months ended September 30, 2019 and 2018 amortization from amounts capitalized was $15.7 million and $11.8 million, respectively. In the three months ended September 30, 2019 and 2018 amounts expensed as incurred were $2.7 million and $1.7 million, respectively. In the six months ended September 30, 2019 and 2018 amounts expensed as incurred were $4.6 million and $3.2 million, respectively. The Company had 0 impairment loss in relation to costs capitalized.

6. Property and Equipment

Property and equipment, net, consisted of the following (in thousands):


	December 31, 2017			March 31, 2017				September 30, 2019		March 31, 2019
Computers, software, and equipment	$	8,023		$	7,060		Computers, software, and equipment	$	12,476	$	11,245
Site operation equipment	36,396			25,874			Site operation equipment	92,326		66,727
Furniture and fixtures	2,375			1,770			Furniture and fixtures	4,692		3,990
Leasehold improvements	31,943			30,586			Leasehold improvements	38,050		40,541
Capitalized software development costs	36,199			32,618			Capitalized software development costs	46,451		43,063
Total property and equipment	114,936			97,908			Total property and equipment	193,995		165,566
Less: accumulated depreciation and amortization	(62,364		)	(47,180		)	Less: accumulated depreciation and amortization	(93,253)		(84,824)
Total property and equipment, net	$	52,572		$	50,728		Total property and equipment, net	$	100,742	$	80,742

Depreciation and amortization expense related to property and equipment was ~~$5.5~~$12.5 million and ~~$4.6~~$5.9 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and ~~$16.3~~$20.6 million and ~~$12.6~~$12.2 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively.

4.7. 0.5% Convertible Senior Notes and Capped Call

In May 2018, the Company issued $500.25 million in aggregate principal amount of Notes in a private offering, including an additional $65.25 million aggregate principal amount of such Notes pursuant to the exercise in full of the initial purchasers’ over-allotment option. The Notes are the Company’s senior unsecured obligations and bear interest at a fixed rate of 0.5% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2018. The Notes will mature on May 1, 2023, unless earlier converted or repurchased. Each $1,000 principal amount of the

Notes will initially be convertible into 9.02 shares of the Company’s common stock (the “Conversion Option”), which is equivalent to an initial conversion price of approximately $110.81 per share. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding November 1, 2022, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2018 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 5 consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the Notes on each such trading day; or (3) upon the occurrence of specified corporate events as set forth in the indenture governing the Notes. On or after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the indenture governing the Notes. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate, in certain circumstances, for a holder who elects to convert its Notes in connection with such a corporate event. During the three and six months ended September 30, 2019, the conditions allowing holders of the Notes to convert had not been met. The Notes were therefore not convertible during the three and six months ended September 30, 2019 and were classified as long-term debt for such period.

In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the Conversion Option was $102.5 million and was determined by deducting the fair value of the liability component from the proceeds received upon issuance of the Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Notes over the liability component (the “Debt Discount”) and the debt issuance costs are amortized to interest expense over the contractual term of the Notes at an effective interest rate of 5.74%. This rate is inclusive of the issuance costs.

In accounting for the debt issuance costs of $11.6 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds of the Notes. Issuance costs attributable to the liability component were $9.2 million and will be amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $2.4 million and netted with the equity component in additional paid-in capital.

The net carrying amount of the liability component of the Notes was as follows (in thousands):


	September 30, 2019		March 31, 2019
Principal	$	500,250	$	500,250
Unamortized debt discount	(76,760)		(86,374)
Unamortized issuance costs	(7,149)		(7,939)
Net carrying amount	$	416,341	$	405,937

Interest expense related to the Notes was as follows (in thousands):


	Three Months Ended September 30,						Six Months Ended September 30,
	2019		2018		2019		2018
Amortization of debt discount	$	4,838	$	4,593	$	9,614	$	6,767
Amortization of issuance costs	401		357		790		524
Contractual interest expense	626		625		1,251		924
Total interest expense	$	5,865	$	5,575	$	11,655	$	8,215

In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls each have an initial strike price of approximately $110.81 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $173.82 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce potential dilution to holders of the Company’s common stock upon any conversion of the Notes and/or offset any cash payments New Relic is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $63.2 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital. The net impact related to stockholders’ equity has been included in additional paid-in capital and was a result of the issuance costs of $2.4 million and the purchase of capped calls noted above in the amount of $63.2 million.

8. Goodwill and Purchased Intangibles Assets

There were no changes to the carrying amount of goodwill for the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2019.

Purchased intangible assets subject to amortization as of ~~December 31, 2017 consist~~September 30, 2019 consisted of the following (in thousands):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	$	18,716	$	(5,741)	$	12,975

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount
Developed technology $ 4,900
$ (3,392 ) $ 1,508

Purchased intangible assets subject to amortization as of March 31, ~~2017 consist~~2019 consisted of the following (in thousands):

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount
Developed technology $ 4,900
$ (2,401 ) $ 2,499


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	$	18,716	$	(4,861)	$	13,855

Amortization expense of purchased intangible assets was ~~$0.2~~$0.5 million and $0.2 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and ~~$1.0~~$0.9 million and ~~$0.7~~$0.4 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016, respectively.~~

2018.

Estimated future amortization expense as of ~~December 31, 2017 is~~September 30, 2019 was as follows (in thousands):


Fiscal Years Ending March 31,	Estimated Future Amortization Expense
2020 (remaining six months)	$	617
2021	4,605
2022	4,119
2023	3,634
	$	12,975

9. Leases

Fiscal Years Ending March 31, Estimated Future Amortization Expense
2018 (remaining 3 months) $ 196
2019 787
2020 525
$ 1,508

~~5. Commitments and Contingencies~~

~~Leases~~—The Company leases office space under non-cancelable operating ~~lease agreements,~~leases, which expire from ~~2018 through 2027.~~

On November 1, 2017, the Company entered into a lease amendment (the “Amendment”) with 188 Spear Street LLC, the landlord of the building which is located at 188 Spear Street, San Francisco, California,2020 to ~~early renew and extend the term~~2028. All of its ~~current operating lease through July 2027. The landlord has agreed to provide the Company with a construction allowance of approximately $2.6 million.~~

~~Deferred Rent—Certain of the Company’s~~office leases are classified as operating leases ~~contain rent holidays, allowances, and rent escalation provisions. For these leases, the Company recognizes the related rental~~with lease expense recognized on a straight-line basis over the ~~life~~lease term.

Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of ~~the~~ lease from the date the Company takes possession of the office and records the difference between amounts charged to operations and amounts paid as deferred rent. These rent holidays, allowances, and rent escalations are considered in determining the straight-line expense to be recordedpayments over the lease term. As these leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of ~~December 31, 2017~~lease payments. The Company considers information including, but not limited to, the lease term, the Company's credit rating and ~~March 31, 2017, $8.9 million~~interest rates of similar debt instruments with comparable credit ratings. The lease right-of-use assets are also increased by any lease prepayments made and ~~$9.2 million~~reduced by any lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that the Company will exercise the extension option.

The Company’s operating leases typically include nonlease components such as common-area maintenance costs. The Company has elected to include nonlease components with lease payments for the purpose of calculating lease right-of-use

assets and liabilities, to the extent that they are fixed. Nonlease components that are not fixed are expensed as incurred as variable lease payments.

Leases with a term of one year or less are not recognized on the Company’s condensed consolidated balance sheet.

The following table presents information about leases on the condensed consolidated balance sheet (in thousands):


	September 30, 2019
Assets
Lease right-of-use-assets	$	61,766
Liabilities
Lease liabilities	$	7,780
Lease liabilities, non-current	61,513
Total operating lease liabilities	$	69,293

As of September 30, 2019, the weighted average remaining lease term was ~~recorded as deferred rent, respectively.~~7.2 years and the weighted average discount rate was 6.7%.

The following table presents information about leases on its condensed consolidated statement of operations (in thousands):


	Three Months Ended September 30, 2019		Six Months Ended September 30, 2019
Operating lease expense	$	3,674	$	7,670
Short-term lease expense	311		532
Variable lease expense	645		1,390

Rent expense ~~net of sublease income,~~ for operating leases was ~~$3.1~~$3.8 million and ~~$2.4~~$7.6 million for the three and six months ended ~~December 31, 2017 and 2016, respectively, and $8.4 million and $7.3 million for~~September 30, 2018, respectively.

The following table presents supplemental cash flow information about the ~~nine months ended December 31, 2017 and 2016, respectively.~~Company’s leases (in thousands):

~~Future minimum~~


	Six Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	6,212
Operating lease assets obtained in exchange for new lease liabilities	1,586

As of September 30, 2019, remaining maturities of lease ~~payments under non-cancelable operating leases as of December 31, 2017~~liabilities were as follows (in thousands):


Fiscal Years Ending March 31,	Operating Leases
2020 (remaining six months)	$	5,453
2021	12,701
2022	11,846
2023	12,207
2024	11,300
2025	9,710
Thereafter	24,562
Total operating lease payments	$	87,779
Less imputed interest	(18,486)
Total operating lease liabilities	$	69,293

The table above excludes future payments of $6.5 million related to signed leases that have not yet commenced. These operating leases are expected to commence during 2020 with lease terms of 7.5 to 8.0 years.

Fiscal Years Ending March 31, Operating Leases
2018 (remaining 3 months) $ 3,357
2019 13,088
2020 14,339
2021 14,601
2022 14,739
Thereafter 59,507
Total minimum future lease payments $ 119,631
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019, and under previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on its operating leases, as of March 31, 2019, were as follows (in thousands):


Fiscal Years Ending March 31,	Operating Leases
2020	$	16,374
2021	16,155
2022	15,620
2023	16,105
2024	13,484
Thereafter	32,849
Total minimum future lease payments	$	110,587

10. Commitments and Contingencies

Purchase Commitments—As of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, the Company had purchase commitments of ~~$24.7~~$36.5 million and ~~$29.9~~$33.5 million, respectively, primarily related to data center, cloud and hosting services.

~~Legal Proceedings~~Other Contingencies—~~From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business, and may be subject to third-party infringement claims.~~

On November 5, 2012, CA, Inc. filed suit against the Company in the United States District Court, Eastern District of New York for alleged patent infringement. CA, Inc.’s complaint against the Company claims that certain aspects of the Company’s products infringe certain patents held by CA, Inc. Discovery is complete in the case, and the court has ruled on summary judgment motions filed by both parties. A trial date has not been set as of December 31, 2017. The Company cannot at this time predict the likely outcome of this proceeding or estimate the amount or range of loss or possible loss that may arise from it. The Company has not accrued any loss related to the outcome of this case as of December 31, 2017.

In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. To date, the Company has not incurred any costs as a result of such obligations and has not accrued any liabilities related to such obligations in the condensed consolidated financial statements. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their respective capacities. The Company does not currently believe there is a reasonable possibility that a loss may have been incurred under these indemnification obligations. To date, there have been no claims under any such indemnification provisions.

6.11. Common Stock and Stockholders’ Equity

Employee Stock Purchase Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective in December 2014. The ESPP initially reserved and authorized the issuance of up to 1,000,000 shares of common stock. The ESPP provides that the number of shares reserved and available for issuance under the ESPP automatically increases each April, beginning on April 1, 2015, by the lesser of 500,000 shares, 1% of the number of the Company’s common stock shares issued and outstanding on the immediately preceding March 31, or such lesser number of shares as determined by the Company’s board of directors. For ~~each of~~ the ~~three and nine~~six months ended ~~December 31, 2017, 101,493~~September 30, 2019, 117,115 shares of common stock were purchased under the ESPP. For ~~each of~~ the ~~three and nine~~six months ended ~~December 31, 2016, 118,658~~September 30, 2018, 82,851 shares of common stock were purchased under the ESPP. Stock-based compensation expense recognized related to the ESPP was ~~$0.6~~$1.5 million and ~~$0.5~~$1.1 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and ~~$1.6~~$2.7 million and ~~$1.4~~$1.5 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively. As of ~~December 31, 2017,~~September 30, 2019, there were ~~2,046,251~~2,656,874 shares available for issuance under the ESPP.

2008 Equity Incentive Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the 2008 Equity Incentive Plan, ~~(the “2008 Plan”)~~or the 2008 Plan, in February 2008. The 2008 Plan was terminated in connection with the Company’s initial public offering (“IPO”), and accordingly, no0 shares are available for future issuance under this plan. The 2008 Plan continues to govern outstanding awards granted thereunder.

2014 Equity Incentive Plan—The Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), which became effective in December 2014. The 2014 Plan serves as the successor to the Company’s 2008 Plan. The 2014 Plan initially reserved and authorized the issuance of 5,000,000 shares of the Company’s common stock. Additionally, shares not issued or subject to outstanding grants under the 2008 Plan upon its termination became available under the 2014 Plan, resulting in a total of 5,184,878 available shares under the 2014 Plan as of the effective date of the 2014 Plan. Pursuant to the terms of the 2014 Plan, any shares subject to outstanding stock options or other stock awards under the 2008 Plan that (i) expire or terminate for any reason prior to exercise or settlement, (ii) are

forfeited because of the failure to meet a contingency or condition required to vest such shares or otherwise return to the Company or (iii) are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award will become available for issuance pursuant to awards granted under the 2014 Plan. The 2014 Plan provides that the number of shares reserved and available for issuance under the plan automatically increases each April 1, beginning on April 1, 2015, by 5% of the outstanding number of shares of the Company’s common stock shares issued and outstanding on the immediately preceding March 31, or such lesser number of shares as determined by the Company’s board of directors. As of ~~December 31, 2017,~~September 30, 2019, there were ~~9,821,601~~13,162,855 shares available for issuance under the 2014 Plan.

The following table summarizes the Company’s stock option and RSU award activities for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 (in thousands, except ~~per share~~exercise price, contractual term and fair value information):


	Options Outstanding										RSUs Outstanding
	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value		Number of Shares	Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - April 1, 2019	2,751	$	35.10	6.3	$	176,002	2,419	$	76.34	3.0	$	238,734
Stock options granted	273	91.94
RSUs granted							521	82.25
Stock options exercised	(121)	25.22			7,872
RSUs vested							(432)	61.85
Stock options canceled/forfeited	(43)	67.87
RSUs canceled/forfeited							(212)	75.54
Outstanding - September 30, 2019	2,860	$	40.45	5.6	$	85,051	2,296	$	80.48	2.7	$	141,140

Options Outstanding RSUs Outstanding

Number
of Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic Value
Number
of Shares

Weighted-
Average
Grant Date
Fair Value

Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic Value
Outstanding - April 1, 2017 4,607
$ 17.49
7.1 $ 90,339
1,978
$ 29.32
2.8 $ 73,309
Stock options granted 475
45.27

RSUs granted 1,001
45.59

Stock options exercised (1,386 ) 14.67
42,151

RSUs vested (587 ) 30.89

Stock options canceled/forfeited (246 ) 26.20

RSUs canceled/forfeited (354 ) 32.02

Outstanding - December 31, 2017 3,450
$ 21.83
6.8 $ 124,015
2,038
$ 36.40
2.7 $ 117,718

Stock-Based Compensation Expense—~~Aggregate stock-based~~Stock-based compensation expense ~~for employees and nonemployees~~ was ~~$9.9~~$23.4 million and ~~$8.1~~$13.8 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and ~~$29.8~~$44.5 million and ~~$23.7~~$24.9 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively. Cost of revenue, research and development, sales and marketing, and general and administrative expenses were as follows (in thousands):


	Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended September 30,						Six Months Ended September 30,
	2017		2016		2017		2016			2019		2018		2019		2018
Cost of revenue	$	587	$	475	$	1,716	$	1,369	Cost of revenue	$	1,300	$	895	$	2,522	$	1,588
Research and development	2,959		2,390		9,100		7,453		Research and development	7,434		3,858		14,462		7,121
Sales and marketing	3,933		3,479		12,114		9,650		Sales and marketing	10,533		6,028		19,592		10,818
General and administrative	2,454		1,774		6,848		5,247		General and administrative	4,091		3,052		7,970		5,333
Total stock-based compensation expense	$	9,933	$	8,118	$	29,778	$	23,719	Total stock-based compensation expense	$	23,358	$	13,833	$	44,546	$	24,860

As of ~~December 31, 2017,~~September 30, 2019, unrecognized stock-based compensation cost related to outstanding unvested stock options was $16.8 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years. As of December 31, 2017, unrecognized stock-based compensation cost related to outstanding unvested stock units was $67.9$26.6 million, which is expected to be recognized over a weighted-average period of approximately 2.7 years. As of September 30, 2019, unrecognized stock-based compensation cost related to outstanding unvested stock units was $166.8 million, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

7.12. Deferred Revenue and Performance Obligations

During the three months ended September 30, 2019 and 2018, $113.1 million and $83.2 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively, and $183.2 million and $131.5 million during the six months ended September 30, 2019 and 2018, respectively.

The aggregate unrecognized transaction price of remaining performance obligations as of September 30, 2019 was $465.1 million. The Company expects to recognize more than 96% of the balance as revenue in the next 24 months following September 30, 2019 and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.

13. Income Taxes

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are ~~expected~~ to be reinvested indefinitely.

The Company recorded an income tax provision of ~~$0.2~~$0.7 million and ~~an income tax benefit of $37,000~~$0.2 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and an income tax provision of $0.6 million and ~~$23,000~~$0.5 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, related to foreign income taxes and state minimum taxes. Based on the available ~~objective~~objectively verifiable evidence during the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, the Company believes it is more likely than not that the tax benefits of the U.S. losses and New Relic K.K losses incurred during the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 may not be realized. Accordingly, the Company did not record the tax benefits offor U.S. losses and New Relic K.K losses incurred during the three and ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2019. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months. The primary ~~difference~~differences between the effective tax rate and the ~~local~~ statutory tax rate ~~relates~~relate to the change of valuation allowance, on the ~~Company’s U.S. losses, foreign~~effects of stock-based compensation and research tax ~~rate differences, and amortization of a deferred charge associated with the intercompany transfer of intellectual property from prior periods.~~credits.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into federal law, which among other changes reduces the federal corporate tax rate to 21%. The Company does not expect the TCJA to have a material impact on its condensed consolidated financial statements due to its valuation allowance in the U.S., which nets deferred tax balances to zero. Based on the Company’s analysis, deferred tax assets have been revalued from 34% to 21% with a corresponding offset to the valuation allowance and any other potential taxes arising due to the TCJA will result in reductions to its net operating loss

and valuation allowance. The Company will continue to analyze the TCJA to assess the full effects on the Company’s financial results, including disclosures, for its fiscal year ending March 31, 2018.

8.14. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee share-based awards and warrants. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options and unvested restricted common stock. As the Company had net losses for each of the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, all potential common shares were determined to be anti-dilutive, resulting in basic and diluted net loss per share being equal. Additionally, the 4.5 million shares underlying the conversion option in the Notes were not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive. The Notes were not convertible as of September 30, 2019. The Company expects to settle the principal amount of the Notes in cash and therefore will use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The following table sets forth the computation of net loss per share, basic and diluted (in thousands, except per share amounts):


	Three Months Ended December 31,						Nine Months Ended December 31,							Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016				2019		2018		2019		2018
Numerator:													Numerator:
Net loss	$	(7,729	)	$	(13,883	)	$	(38,354	)	$	(46,084	)
Net loss attributable to New Relic													Net loss attributable to New Relic	$	(18,614)	$	(8,336)	$	(33,783)	$	(13,951)
Denominator:													Denominator:
Weighted average shares used to compute net loss per share, basic and diluted	55,196			52,328			54,534			51,297			Weighted average shares used to compute net loss per share, basic and diluted	58,372		56,706		58,161		56,446
Net loss per share—basic and diluted	$	(0.14	)	$	(0.27	)	$	(0.70	)	$	(0.90	)
Net loss attributable to New Relic per share—basic and diluted													Net loss attributable to New Relic per share—basic and diluted	$	(0.32)	$	(0.15)	$	(0.58)	$	(0.25)

The following outstanding options, unvested shares, and ESPP shares were excluded (as common stock equivalents) from the computation of diluted net loss per common share for the periods presented as their effect would have been antidilutive (in thousands):


	As of September 30,
		2019		2018
Options to purchase common stock	2,860		3,037
Restricted stock units	2,296		2,092
ESPP shares	55		26
	5,211		5,155

As of December 31,
2017 2016
Options to purchase common stock 3,450
4,931
Restricted stock units 2,038
2,080
ESPP shares 99
104
Common stock reserved for issuance in connection with acquisition —
43
5,587
7,158

9.15. Revenue by Geographic Location

The following table shows the Company’s revenue by geographic areas, as determined based on the billing address of its customers (in thousands):


	Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended September 30,						Six Months Ended September 30,
	2017		2016		2017		2016			2019		2018		2019		2018
United States	$	62,966	$	46,084	$	175,765	$	128,806	United States	$	99,264	$	78,297	$	195,871	$	152,368
EMEA	16,732		13,036		47,225		36,043		EMEA	25,735		21,271		50,903		41,215
APAC	6,918		5,080		19,025		14,443		APAC	13,027		9,116		25,148		17,470
Other	5,211		3,896		14,595		10,851		Other	7,789		6,212		14,903		12,064
Total revenue	$	91,827	$	68,096	$	256,610	$	190,143	Total revenue	$	145,815	$	114,896	$	286,825	$	223,117

Substantially all of the Company’s long-lived assets were attributable to operations in the United States as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017.~~2019.

16. Subsequent Event

On October 31, 2019, the Company acquired certain assets of IOpipe, Inc., a company that provides monitoring tools for serverless applications, for $5.1 million in cash. The Company will hold back $850 thousand from the aggregate purchase price. The Company expects to record goodwill arising from the acquisition. The amount of goodwill is not expected to be deductible for tax purposes. The fair value of intangible assets and acquired assets and liabilities will be determined as of the acquisition date but are still being evaluated as of the date of this report.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part II, Item 1A “Risk Factors” included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled “Special Note Regarding Forward-Looking Statements” in this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments, except as required by law.

Overview

~~We help~~New Relic is a strategic observability platform that companies ~~see~~use to monitor, manage, and operate their digital ~~business~~businesses. Our mission is to instrument, measure, and improve the Internet to help our customers create more ~~clearly.~~perfect software, experiences, and businesses. Our ~~cloud-based~~observability platform and suite of products ~~which we call the New Relic Digital Intelligence Platform,~~ enables ~~organizations~~users to collect, store, and analyze massive amounts of data in real ~~time so they can better understand~~time.

We offer our customers a fully integrated software solution that provides visibility into every layer of the modern software stack, from infrastructure to the end-user experience, with an application-centric perspective. We believe that the application tier is the most strategic layer for delivering business value in modern software stacks, since the application is closest to the end-user. Our cloud-based observability platform is open and connected, with out-of-the-box curated experiences for our customers, enabling them to scale to meet the ever-changing needs of their ~~application~~business. In addition, our platform is programmable, which allows users to go beyond our curated experiences to build specific use cases with their data as well.

We employ a land, expand, and ~~infrastructure performance, improve their digital customer experience,~~standardize go-to-market strategy, which combines grassroots user adoption with both customized low-touch and ~~achieve business success.~~high-touch sales approaches. We ~~design all~~often land in new accounts to support grassroots projects, and because our products ~~to be highly intuitive and frictionless; they~~ are easy to ~~deploy,~~download and ~~customers can rapidly,~~use, users within larger organizations often grow our footprint within ~~minutes, realize benefits and results. Software developers can build better applications faster,~~their companies, as they can see how their software will perform and is actually performing for end-users. IT operations teams can use our products to quickly find and fix performance problems as well as prevent future issues. Business users such as product managers can get answers to how their new product launch is being received, or how a pricing change impacted customer retention, without waiting for help from IT. For each of these audiences—software developers, IT operations, and business users—we aim to beincrease the ~~first, best place to look to understand their digital business.~~

We were founded in 2007 and we launched our first product offering, New Relic APM (Application Performance Management), in 2008. Since then, we have broadened our product offerings to support a wide variety of programming languages and frameworks and have added a number of ~~additional products~~applications monitored and ~~platform capabilities that now form~~expand their use of our products. This allows customers to develop into accounts with hundreds of users across multiple roles, each accessing a common set of data through the New Relic ~~Digital Intelligence Platform. For example, in 2013, we released New Relic Mobile~~Platform to support mobile by providing native mobile application performance management for the iOS and Android mobile operating systems; in 2014, we released New Relic Browser to improve browser-side performance, New Relic Synthetics to enable our users to test their software through simulated usage and New Relic Insights to leverage big data analytics; and in 2016, we released New Relic Infrastructure to providedeliver real-time visibility into ~~critical configuration changes that affect a company’s cloud infrastructure.~~

~~We sell our products primarily through direct sales and marketing channels utilizing a wide range~~the operations of online and offline sales and marketing activities. The majority of our users visit our website, create an account, and deploy our software. Many users initially subscribe to one of our products to address a particular use case and broaden the usage of our products as they become more familiar with our products. For larger mid-market and enterprise organizations, our sales team focuses on leveraging users in existing accounts to expand our product users and usage across the organization. Although enterprise organizations constitute a minority of our total paid business accounts, we anticipate that the revenue we receive from enterprise paid business accounts will over time provide a significant majority of our overall revenue.

We offer access to the New Relic Digital Intelligence Platform under subscription plans that also include service and support. Our plans typically have terms of one year, although some of our customers commit for shorter or longer periods. We recognize revenue from subscription fees ratably over the service period. Historically, most of our customers have paid us on a monthly basis. As a result, our deferred revenue at any given period of time has been relatively low. In recent periods we have secured an increased percentage of multi-year commitments, which has grown as we have sold more to larger organizations. Because we generally invoice many of these larger organizations less frequently, our deferred revenue has increased over time, and we expect it to continue to increase on a year-over-year basis. However, due to our mix of subscription plans and billing frequencies, we do not believe that changes in our deferred revenue in a given period are directly correlated with our revenue growth.their digital business.

We have grown rapidly in recent periods, with revenue for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016~~2018 of ~~$91.8~~$145.8 million and ~~$68.1~~$114.9 million, respectively, representing year-over-year growth of ~~35%~~27%. For the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, our revenue was ~~$256.6~~$286.8 million and ~~$190.1~~$223.1 million, respectively, representing year-over-year growth of ~~35%~~29%. We expect that the rate of growth in our revenue will continue to decline over the long term as our business scales, even if our revenue continues to grow in absolute terms. We have continued to make significant expenditures and investments,

including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net losses in each period since our inception, including net losses of ~~$7.7~~$18.6 million and ~~$13.9~~$8.3 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, and ~~$38.4~~$33.8 million and ~~$46.1~~$14.0 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively. Our accumulated deficit as of ~~December 31, 2017~~September 30, 2019 was ~~$298.5 million.~~$339.4 million

Internationally, we currently offer our products in Europe, Middle East, and Africa, or EMEA; Asia-Pacific, or APAC; and other non-U.S. locations, as determined based on the billing address of our customers, and our revenue from those regions constituted 18%, 8%9%, and 6%5%, respectively, of our revenue for the three months ended ~~December 31, 2017,~~September 30, 2019, and 19%, 7%8%, and 6%5%, respectively, of our revenue for the three months ended ~~December 31, 2016.~~September 30, 2018. Our revenue from those regions constituted 18%, ~~7%,~~9% and 6%5%, respectively, of our revenue for the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, and ~~19%~~18%, 8%, and 6%5%, respectively, of our revenue for the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2018. We believe there is further opportunity to increase our international revenue overall and as a proportion of our revenue, and we are increasingly investing in our international operations and intend to invest in further expanding our footprint in international markets.

Our employee headcount has increased to ~~1,253~~1,949 employees as of ~~December 31, 2017~~September 30, 2019 from ~~1,032 employees~~1,519 as of ~~December 31, 2016~~September 30, 2018 and we plan to continue to invest aggressively in the growth of our business to take advantage of our market opportunity. For example, we intend to continue to increase our investment in sales and marketing, including further expanding our sales teams, increasing our marketing activities, and growing our international operations, particularly as we increase our sales to

larger organizations. In addition, we plan to continue to invest in research and development to enhance and further develop our products and platform capabilities.

While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We are continuing to incur expenses in the near term as we continue to invest in the growth of our sales and expansion of paid business accounts. However, we may not realize any long-term benefit from these investments in the growth of our business. In addition, any investments that we make in sales and marketing or other areas will occur in advance of our experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas. As a result, we have never achieved profitability and we do not expect to be profitable for the foreseeable future. Further, our reported revenue, operating results, and cash flows for a given period may not be indicative of future results due to our limited operating history and fluctuations in the number of new employees, the rate of our expansion, the timing of expenses we incur to grow our business and operations, levels of competition, and market demand for our products.

Factors Affecting Our Performance

Market Adoption of Our Products.We ~~are defining~~continue to define a ~~new~~ category of enterprise software ~~which we refer~~that is designed to ~~as digital intelligence.~~make every aspect of modern software and infrastructure observable. Our success, including our rate of customer expansions and renewals, is dependent on the market adoption of this ~~emerging~~ category of software, the market for which ~~may not yet be well understood by~~is rapidly evolving, significantly fragmented, and highly competitive. With the ~~market.~~introduction of new technologies, the evolution of our products and platform capabilities and new market entrants, competition has intensified and we expect competition to intensify in the future. For the foreseeable future, we expect that our revenue growth will be primarily driven by the pace of adoption and penetration of our products and we will incur significant expenses associated with educating the market about the benefits of our products.

~~Increasing the Number~~Retention of ~~Paid Business Accounts.~~ Our future growth is dependent on our ability to increase the number of accounts that pay us to use our products. Many users experience our products with a free trial after which they have the option to purchase one or more of our subscription plans. We believe that we have a significant competitive advantage as our users experience the ease of installation and the full set of features that our products deliver during the free trial period.

~~Retention~~ and Expansion within Paid Business Accounts. A key factor in our success is the retention and expansion of our subscription agreements with our existing customers. In order for us to continue to grow our business, it is important to generate additional revenue from our existing customers, and we intend to do this in several ways. As we improve our existing products and platform capabilities and introduce new products, we believe that the demand for our products will generally grow. We also believe that there is a significant opportunity for us to increase the number of subscriptions we sell to our current customers as they become more familiar with our products and adopt our products to address additional business use cases. Over the last several years, our focus has shifted from an increase in the total number of paid business accounts to an increase in the annual recurring revenue from our existing and largest paid business accounts. Accordingly, today we view our paid business accounts with annual recurring revenue over $100,000 as a strong indicator of our business, and our success depends in part on our ability to retain and expand within our paid business accounts.

Investment in Sales and ~~Marketing.~~Marketing. We expect to continue to invest aggressively in sales and marketing to drive additional revenue. Any investments that we make in sales and marketing will occur in advance of our experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources. As we continue to focus sales and marketing investments ~~more heavily~~primarily towards large organizations, this may require more of our resources. In addition, we expect our sales cycle to be longer and less predictable with respect to larger customers, which may delay realization of future sales. We also intend to increase our sales and marketing investment in international markets, ~~such as Europe,~~ and those markets may take longer and be more costly to develop than the U.S. market.

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:

~~Number of Paid Business Accounts and~~ Number of Paid Business Accounts with Annual Recurring Revenue over $100,000. We believe that ~~our ability to increase~~ our number of paid business accounts with annual recurring revenue over $100,000 is ~~one~~an indicator of our business as it relates to the acquisition of larger accounts within our overall customer base, including our market penetration ~~the growth~~ of larger mid-market and enterprise customers, as well as deeper penetration into our ~~business and our potential future prospects.~~existing customer base. We define the number of paid business accounts at the end of any particular period as the number of accounts at the end of the period, as identified by a unique account identifier, for which we have recognized revenue on the last day of the period indicated. A single organization or customer may have multiple paid business accounts for separate divisions, segments, or subsidiaries. We round the number of total paid business accounts that we report as of a particular date down to the nearest hundred. We had over 16,600 paid business accounts as of December 31, 2017, compared to over 14,900 as of December 31, 2016. We expect the rate at which we add paid business accounts to decrease over time as we scale our business, but it may fluctuate from period to period as a result of the introduction of alternative pricing options for our products or other factors.

As a subset of this metric, we believe that our number of paid business accounts with annual recurring revenue over $100,000 is one indicator of our business as it relates to the acquisition of larger accounts within our overall customer base, including our market penetration of larger mid-market and enterprise customers, as well as deeper penetration into our existing customer base. For this purpose, we define annual recurring revenue as the revenue we would contractually expect to receive from those customers over the following 12 months, without any increase or reduction in any of their subscriptions. We had ~~629~~906 paid business accounts with annual recurring revenue over $100,000 as of ~~December 31, 2017,~~September 30, 2019, which was a ~~31.6%~~15.3% increase compared to ~~478~~786 as of ~~December 31, 2016.~~September 30, 2018. We believe this increase reflects our continued ~~focus of a greater proportion of our~~ sales and marketing ~~efforts~~focus on larger mid-market and enterprise customers. ~~As with our total paid business accounts,~~This growth rate has decreased in recent periods and we expect the growth rate at which we add paid business accounts with annual recurring revenue over $100,000 to continue to decrease over time as a result of deeper penetration into the enterprise market.

Percentage of Annualized Recurring Revenue from Enterprise Paid Business Accounts.We believe that our ability to increase the percentage of annualized recurring revenue from enterprise paid business accounts relative to our overall business is an important indicator of our success with respect to our focus in recent periods to improve our market penetration with enterprise companies. We define an enterprise paid business account as a paid business account that we measure to have over 1,000 employees. Growth or reduction reflected in this figure would include, in addition to the acquisition, loss or consolidation of enterprise paid business accounts, any changes we make to the categorization of existing paid business accounts, for example to reflect that they have expanded beyond the employee threshold and have thus become an enterprise paid business account, which we review periodically.

Our percentage of annualized recurring revenue from enterprise paid business accounts was ~~52%~~62% as of ~~December 31, 2017,~~September 30, 2019, compared to ~~44%~~56% as of ~~December 31, 2016.~~September 30, 2018. We expect the percentage of annualized recurring revenue from enterprise paid business accounts to continue to increase over time. However, because of the size of our large installed base and potential seasonality in regard to selling into enterprise customers, we believe the percentage may not move significantly from quarter to quarter and we expect the rate of increase in the percentage of enterprise paid business accounts to moderate over time.

Annualized Revenue per Average Paid Business Account. We believe that our annualized revenue per average paid business account is another indicator of our business as it relates to the acquisition of larger accounts within our overall customer base, including our market penetration of larger mid-market and enterprise customers, as well as deeper penetration into our existing customer base. We define our annualized revenue per average paid business account as the annualized revenue for the current period divided by the average of the number of paid business accounts at the end of the current period and the end of the prior period. We round down our annualized revenue per average paid business account to the nearest $500.

Our annualized revenue per average paid business account for the quarter ended ~~December 31, 2017~~September 30, 2019 grew to over ~~$22,500,~~$34,500, which was an increase of ~~25.0%~~30.2% compared to over ~~$18,000~~$26,500 for the quarter ended ~~December 31, 2016.~~September 30, 2018. We believe this increase reflects our continued focus on larger mid-market and enterprise customers. We have experienced ~~a decrease~~an increase in the rate of growth of our annualized revenue per average paid business account ~~and~~year-over-year but we expect ~~the~~this rate to decrease ~~to continue~~ over time as our business scales and we introduce alternative pricing options for our products.

Dollar-Based Net Expansion Rate. Our ability to generate revenue is dependent on our ability to maintain and grow our relationships with our existing customers. We track our performance in this area by measuring our dollar-based net expansion rate. Our dollar-based net expansion rate increases when customers increase their use of our products, use additional

products, or upgrade to a higher subscription tier. Our dollar-based net expansion rate is reduced when customers ~~decrease their use of~~cease using our products, use fewer products, or downgrade to a lower subscription tier.

Our dollar-based net expansion rate compares our recurring subscription revenue from ~~paid business accounts~~customers from one period to the next. We measure our dollar-based net expansion rate on a monthly basis because many of our customers change their subscriptions more frequently than quarterly or annually. To calculate our annual dollar-based net expansion rate, we first establish the base period monthly recurring revenue from all our ~~paid business accounts~~customers at the end of a month. This represents the revenue we would contractually expect to receive from those ~~paid business accounts~~customers over the following month, without any increase or reduction in any of their subscriptions. We then (i) calculate the actual monthly recurring revenue from those same ~~paid business accounts~~customers at the end of that following month; then (ii) divide that following month’s recurring revenue by the base month’s recurring revenue to arrive at our monthly net expansion rate; then (iii) calculate a quarterly net expansion rate by compounding the net expansion rates of the three months in the quarter; and then (iv) calculate our annualized net expansion rate by compounding our quarterly net expansion rate over an annual period.

The quarterly fluctuations in our dollar-based net expansion rate are primarily driven by transactions within a particular quarter in which certain ~~paid business accounts from~~ larger subscription customers either significantly upgrade or significantly downgrade their subscriptions and by increased sales to existing ~~paid business accounts~~customers in particular quarters due to sales and marketing campaigns in a particular quarter. In addition, we believe that the composition of our customer base also has an impact on the net expansion rate, such that a relative increase in the number of ~~paid business accounts~~customers from larger enterprises versus small to medium-sized organizations will tend to increase our quarterly net expansion rate, while a relative increase in the number ~~or paid business accounts~~of customers from small to medium-sized organizations versus larger enterprises will tend to decrease the quarterly net expansion rate, as smaller businesses tend to cancel subscriptions more frequently than larger enterprises. This rate is also impacted by factors including, but not limited to, new product introductions, promotional activity, mix of customer size, and the variable timing of renewals.

Our annualized dollar-based net expansion rate ~~increased~~declined to ~~125.2%~~112.4% for the three-month period ended ~~December 31, 2017~~September 30, 2019 from ~~124.6%~~123.7% for the three-month period ended ~~December 31, 2016. In the three-month period ended December 31, 2017, we saw comparable churn rates relative to the same period in the prior year, but~~September 30, 2018, as a ~~modestly higher~~result of lower amount of upsell activity relative to our total installed ~~base.~~base than the comparable period in the prior year.

Key Components of Results of Operations

Revenue

We offer access to our products under subscription plans that include service and support for one or more of our products. For our paying customers, we offer a variety of pricing plans based on the particular product purchased by an account, number of servers monitored, number of applications monitored, or number of mobile devices monitored. Our plans typically have terms of one year, although some of our customers commit for shorter or longer periods. Historically, most of our customers have paid us on a monthly basis. As a result, our deferred revenue at any given period of time ~~has~~had been relatively low. ~~As we have increased our~~Due to the increase of sales to ~~larger organizations,~~large enterprises, which we ~~have increasingly been invoicing our customers on a~~generally invoice less ~~frequent basis, and therefore, we expect~~frequently, our deferred revenue tohas increased in absolute terms over time. As our business scales, the rate of growth in our deferred revenue has declined and we

expect this rate will continue to ~~increase on~~decline over time. However, due to our mix of subscription plans and billing frequencies, we do not believe that changes in our deferred revenue in a ~~year-over-year basis.~~given period are directly correlated with our revenue growth.

Additionally, we expect our business ~~to continue~~ to become more seasonal as mid-market and enterprise customers start to represent a larger percentage of our revenues. The first two quarters of each fiscal year usually have lower or potentially negative sequential deferred revenue growth than the third and fourth fiscal quarters, during which we generally benefit from a larger renewal pool and opportunity to upsell existing customers. As a result, over time we could potentially see stronger sequential revenue results in our fourth and first fiscal quarters as our deferred revenue is recognized. We expect that this seasonality will continue to affect our sales and operating results in the future, which can make it difficult to achieve sequential growth in certain financial metrics or could result in sequential declines on a quarterly basis.

Further, in the past, we have experienced end-of-quarter concentration of our transactions and variations in the number and size of transactions that close in a particular quarter. Our transactions vary by quarter, and within each quarter, a significant portion of our transactions typically close in the last two weeks of that quarter. If we are unable to close one or more large individual transactions in a particular period, or if an expected transaction is delayed until a subsequent period, we expect that our results of operations for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be harmed.

Cost of Revenue

Cost of revenue consists of expenses relating to data center operations, hosting-related costs, payment processing fees, depreciation and amortization, consulting costs, and salaries and benefits of operations and global customer support personnel. Salaries and benefits costs associated with our operations and global customer support personnel consist of salaries, benefits, bonuses, and stock-based compensation. We plan to continue increasing the capacity, capability, and reliability of our infrastructure to support the growth of our customer adoption and the number of products we offer, ~~and therefore expect a corresponding increase in our cost of revenue.~~

as customer usage continues to grow.

Gross Profit and Margin

Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has been, and will continue to be, affected by a number of factors, including the timing and extent of our investments in our operations and global customer support personnel, hosting-related costs, and the amortization of capitalized software. We expect that our gross margin will decline modestly over the long term, although we expect our gross margin to fluctuate from period to period as a result of these factors.

Operating Expenses

Personnel costs, which consist of salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expenses, sales commissions, are the most significant component of our operating expenses. We also incur other non-personnel costs such as an allocation of our general overhead expenses.

Research and Development. Research and development expenses consist primarily of personnel costs and an allocation of our general overhead expenses. We continue to focus our research and development efforts on adding new features and products, and increasing the functionality and enhancing the ease of use of our existing products. We capitalize the portion of our software development costs that meets the criteria for capitalization.

We plan to continue to hire employees for our engineering, product management, and design teams to support our research and development efforts. As a result, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our research and development expenses to decrease modestly as a percentage of our revenue over the long term, although our research and development expenses may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our research and development expenses.

Sales and Marketing. Sales and marketing expenses consist of personnel costs for our sales, marketing, and business development employees and executives. Commissions are ~~expensed in~~considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period ~~when a customer contract is executed.~~of benefit. Sales and marketing expenses also include the costs of our marketing and brand awareness programs.

We plan to continue investing in sales and marketing globally by increasing the number of our sales personnel, expanding our domestic and international marketing activities, building brand awareness, and sponsoring additional marketing events. We expect our sales and marketing expenses to continue to increase in absolute dollars and continue to be our largest

operating expense category for the foreseeable future. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our sales and marketing expenses.

General and Administrative. General and administrative expenses consist primarily of personnel costs for our administrative, legal, human resources, information technology, finance and accounting employees, and executives. Also included are non-personnel costs, such as ~~external~~ 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. ~~We also expect that we will continue to incur additional general and administrative expenses as a result of being a publicly traded company.~~ As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our general and administrative expenses to decrease modestly as a percentage of our revenue over the long term, although our general and administrative expense may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our general and administrative expenses, such as litigation costs.

Other Income ~~Net~~(Expense)

Other income ~~net~~(expense) consists primarily of interest income, interest expense, ~~and~~ foreign exchange gains and ~~losses.~~losses, and gains on lease modifications.

Results of Operations

The following tables summarize our consolidated statements of operations data for the periods presented and as a percentage of our revenue for those periods.


	Three Months Ended September 30,						Six Months Ended September 30,
	2019		2018		2019		2018

	(in thousands, except per share amounts)
Revenue	$	145,815	$	114,896	$	286,825	$	223,117
Cost of revenue (1)	25,149		18,447		48,762		35,497
Gross profit	120,666		96,449		238,063		187,620
Operating expenses:
Research and development (1)	34,132		23,962		68,471		46,565
Sales and marketing (1)	80,157		61,142		157,007		118,630
General and administrative (1)	23,278		16,880		46,378		31,591
Total operating expenses	137,567		101,984		271,856		196,786
Loss from operations	(16,901)		(5,535)		(33,793)		(9,166)
Other income (expense):
Interest income	4,011		3,259		8,151		5,104
Interest expense	(5,888)		(5,597)		(11,707)		(8,263)
Other income (expense), net	315		(435)		3,293		(1,277)
Loss before income taxes	(18,463)		(8,308)		(34,056)		(13,602)
Income tax provision	660		225		624		546
Net loss	$	(19,123)	$	(8,533)	$	(34,680)	$	(14,148)
Net loss attributable to redeemable non-controlling interest	509		197		897		197
Net loss attributable to New Relic	$	(18,614)	$	(8,336)	$	(33,783)	$	(13,951)
Net loss attributable to New Relic per share, basic and diluted	$	(0.32)	$	(0.15)	$	(0.58)	$	(0.25)
Weighted-average shares used to compute net loss per share, basic and diluted	58,372		56,706		58,161		56,446

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


	Three Months Ended September 30,						Six Months Ended September 30,
	2019		2018		2019		2018

	(in thousands)
Cost of revenue	$	1,300	$	895	$	2,522	$	1,588
Research and development	7,434		3,858		14,462		7,121
Sales and marketing	10,533		6,028		19,592		10,818
General and administrative	4,091		3,052		7,970		5,333
Total stock-based compensation expense	$	23,358	$	13,833	$	44,546	$	24,860


	Three Months Ended December 31,						Nine Months Ended December 31,							Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016				2019		2018		2019		2018

	(in thousands, except per share data)													(as a percentage of revenue)
Revenue	$	91,827		$	68,096		$	256,610		$	190,143		Revenue	100	%	100	%	100	%	100	%
Cost of revenue (1)	15,671			12,627			46,342			36,060			Cost of revenue (1)	17		16		17		16
Gross profit	76,156			55,469			210,268			154,083			Gross profit	83		84		83		84
Operating expenses:													Operating expenses:
Research and development (1)	18,154			14,377			54,686			45,087			Research and development (1)	23		21		24		21
Sales and marketing (1)	51,393			43,458			152,015			122,626			Sales and marketing (1)	56		53		55		53
General and administrative (1)	14,596			11,578			42,843			32,647			General and administrative (1)	16		15		16		14
Total operating expenses	84,143			69,413			249,544			200,360			Total operating expenses	95		89		95		88
Loss from operations	(7,987		)	(13,944		)	(39,276		)	(46,277		)	Loss from operations	(12)		(5)		(12)		(4)
Other income (expense):													Other income (expense):
Interest income	534			325			1,503			796			Interest income	3		3		3		2
Interest expense	(21		)	(21		)	(64		)	(63		)	Interest expense	(4)		(5)		(4)		(4)
Other income (expense), net	(45		)	(280		)	117			(517		)	Other income (expense), net	—		—		1		(1)
Loss before income taxes	(7,519		)	(13,920		)	(37,720		)	(46,061		)	Loss before income taxes	(13)		(7)		(12)		(7)
Income tax provision (benefit)	210			(37		)	634			23
Income tax provision													Income tax provision	—		—		—		—
Net loss	$	(7,729	)	$	(13,883	)	$	(38,354	)	$	(46,084	)	Net loss	(13)	%	(7)	%	(12)	%	(7)	%
Net loss per share, basic and diluted	$	(0.14	)	$	(0.27	)	$	(0.70	)	$	(0.90	)
Weighted-average shares used to compute net loss per share, basic and diluted	55,196			52,328			54,534			51,297
Net loss attributable to redeemable non-controlling interest													Net loss attributable to redeemable non-controlling interest	—		—		—		—
Net loss attributable to New Relic													Net loss attributable to New Relic	(13)	%	(7)	%	(12)	%	(7)	%


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

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


	Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended September 30,						Six Months Ended September 30,
	2017		2016		2017		2016			2019		2018		2019		2018

	(in thousands)									(as a percentage of revenue)
Cost of revenue	$	587	$	475	$	1,716	$	1,369	Cost of revenue	1	%	1	%	1	%	1	%
Research and development	2,959		2,390		9,100		7,453		Research and development	5		3		5		3
Sales and marketing	3,933		3,479		12,114		9,650		Sales and marketing	7		5		7		5
General and administrative	2,454		1,774		6,848		5,247		General and administrative	3		3		3		2
Total stock-based compensation expense	$	9,933	$	8,118	$	29,778	$	23,719	Total stock-based compensation expense	16	%	12	%	16	%	11	%

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016

(as a percentage of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue (1) 17
19
18
19
Gross profit 83
81
82
81
Operating expenses:
Research and development (1) 20
21
22
24
Sales and marketing (1) 56
64
59
64
General and administrative (1) 16
17
17
17
Total operating expenses 92
102
98
105
Loss from operations (9 ) (21 ) (16 ) (24 )
Other income (expense):
Interest income 1
1
1
—
Interest expense —
—
—
—
Other income (expense), net —
—
—
—
Loss before income taxes (8 ) (20 ) (15 ) (24 )
Income tax provision (benefit) —
—
—
—
Net loss (8 %) (20 %) (15 %) (24 %)


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

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016

(as a percentage of revenue)
Cost of revenue 1 % 1 % 1 % 1 %
Research and development 3
4
4
4
Sales and marketing 4
5
5
5
General and administrative 3
2
2
2
Total stock-based compensation expense 11 % 12 % 12 % 12 %

Revenue


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%
	(dollars in thousands)
United States	$	99,264	$	78,297	$	20,967	27	%	$	195,871	$	152,368	$	43,503	29	%
EMEA	25,735		21,271		4,464		21		50,903		41,215		9,688		24
APAC	13,027		9,116		3,911		43		25,148		17,470		7,678		44
Other	7,789		6,212		1,577		25		14,903		12,064		2,839		24
Total revenue	$	145,815	$	114,896	$	30,919	27	%	$	286,825	$	223,117	$	63,708	29	%

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
United States $ 62,966
$ 46,084
$ 16,882
37 % $ 175,765
$ 128,806
$ 46,959
36 %
EMEA 16,732
13,036
3,696
28
47,225
36,043
11,182
31
APAC 6,918
5,080
1,838
36
19,025
14,443
4,582
32
Other 5,211
3,896
1,315
34
14,595
10,851
3,744
35
Total revenue $ 91,827
$ 68,096
$ 23,731
35 % $ 256,610
$ 190,143
$ 66,467
35 %

~~Revenue~~Total revenue increased ~~$23.7~~$30.9 million, or ~~35%~~27%, in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase was ~~a result of an increase in the number of paid business accounts and~~primarily due to an increase in product adoption by existing paid business accounts. Our revenue from EMEA increased ~~$3.7~~$4.5 million, or ~~28%~~21%, in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016,~~2018, and our revenue from APAC increased ~~$1.8~~$3.9 million, or ~~36%~~43%, in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016,~~2018, as a result of ~~an increase in the number of~~new paid business accounts and an increase in product adoption by existing paid business accounts located in these geographic regions.

Revenue increased ~~$66.5~~$63.7 million, or ~~35%~~29%, in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase was ~~a result of an increase in the number of paid business accounts and~~primarily due to an increase in product adoption

by existing paid business accounts. Our revenue from EMEA increased ~~$11.2~~$9.7 million, or ~~31%~~24%, in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016,~~2018, and our revenue from APAC increased ~~$4.6~~$7.7 million, or ~~32%~~44%, in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016,~~2018, as a result of ~~an increase in the number of~~new paid business accounts and an increase in product adoption by existing paid business accounts located in these geographic regions.

Cost of Revenue

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
Cost of revenue $ 15,671
$ 12,627
$ 3,044
24 % $ 46,342
$ 36,060
$ 10,282
29 %


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%

	(dollars in thousands)
Cost of revenue	$	25,149	$	18,447	$	6,702	36	%	$	48,762	$	35,497	$	13,265	37	%

Cost of revenue increased ~~$3.0~~$6.7 million, or ~~24%~~36%, in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase was primarily athe result of an increase in ~~personnel-related costs~~depreciation expense and amortization expense of $3.6 million, increased hosting-related costs necessary to support our growth, an increase in amortization expense related to capitalized software development costs, and an increase in payment processing costs due to the increase in revenue. Hosting-related costs, depreciation expense, amortization expense, and payment processing fees of $2.3 million, primarily due to increased ~~by $1.7 million. Personnel-related~~operating costs to support revenue growth, and increased ~~by $1.3~~personnel-related costs of $0.8 million, driven by higher headcount.

Cost of revenue increased ~~$10.3~~$13.3 million, or ~~29%~~37%, in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase was primarily athe result of an increase in ~~personnel-related costs~~depreciation expense and amortization expense of $6.1 million, increased hosting-related costs necessary to support our growth, an increase in amortization expense related to capitalized software development costs, and an increase in payment processing costs due to the increase in revenue. Hosting-related costs, depreciation expense, amortization expense, and payment processing fees of $4.3 million, primarily due to increased ~~by $6.3 million. Personnel-related~~operating costs to support revenue growth, and increased ~~by $4.0~~personnel-related costs of $2.9 million, driven by higher headcount.

Research and Development

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
Research and development $ 18,154
$ 14,377
$ 3,777
26 % $ 54,686
$ 45,087
$ 9,599
21 %


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%

	(dollars in thousands)
Research and development	$	34,132	$	23,962	$	10,170	42	%	$	68,471	$	46,565	$	21,906	47	%

Research and development expenses increased ~~$3.8~~$10.2 million, or ~~26%~~42%, in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase was primarily ~~a result of an increase of $3.3 million in personnel-related costs, driven by higher headcount, $0.4 million increase in hosting costs, and a $0.1 million increase of other miscellaneous expenses.~~

~~Research and development expenses increased $9.6 million, or 21%, in~~ the nine months ended December 31, 2017 compared to the same period of 2016. The increase was primarily a result of an increase of $8.4 million in personnel-related costs, driven by higher headcount. The remaining increase was primarily due to a $0.9 million increase in software subscription expenses and a $0.3 million increase in depreciation expense.

~~Sales and Marketing~~

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
Sales and marketing $ 51,393
$ 43,458
$ 7,935
18 % $ 152,015
$ 122,626
$ 29,389
24 %

~~Sales and marketing expenses increased $7.9 million, or 18%, in the three months ended December 31, 2017 compared to the same period of 2016. The increase was primarily a~~ result of an increase in personnel-related costs of ~~$7.8 million, driven by higher headcount, and a $0.1 million increase of other miscellaneous expenses.~~

Sales and marketing expenses increased $29.4 million, or 24%, in the nine months ended December 31, 2017 compared to the same period of 2016. The increase was primarily a result of an increase in personnel-related costs of $27.0 million, driven by higher headcount. The remaining increase was primarily due to a $1.6 million increase in travel expenses, and a $0.8 million increase in software subscription expenses.

~~General and Administrative~~

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
General and administrative $ 14,596
$ 11,578
$ 3,018
26 % $ 42,843
$ 32,647
$ 10,196
31 %

General and administrative expenses increased $3.0 million, or 26%, in the three months ended December 31, 2017 compared to the same period of 2016. The increase in general and administrative expenses was primarily a result of an increase in personnel-related costs of $1.6$9.1 million, driven by an increase in headcount. The remaining increase was ~~primarily~~ due to ~~a $0.9 million increase in consultant expenses and a $0.5 million~~an increase in facilities ~~expenses.~~and depreciation expenses of $0.9 million and an increase in travel expenses of $0.2 million.

~~General~~Research and ~~administrative~~development expenses increased ~~$10.2~~$21.9 million, or ~~31%~~47%, in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016.~~2018. The increase ~~in general and administrative expenses~~ was primarily athe result of an increase in personnel-related costs of ~~$4.7~~ $20.5

million, driven by an increase in headcount. The remaining increase was ~~primarily~~ due to ~~a $3.9 million increase in consultant expenses, a $1.1 million~~an increase in facilities and depreciation expenses of $0.9 million and aan increase in travel expenses of $0.5 million.

Sales and Marketing


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%

	(dollars in thousands)
Sales and marketing	$	80,157	$	61,142	$	19,015	31	%	$	157,007	$	118,630	$	38,377	32	%

Sales and marketing expenses increased $19.0 million, or 31%, in the three months ended September 30, 2019 compared to the same period of 2018. The increase was primarily the result of an increase of personnel-related costs of $14.4 million, driven by higher headcount and an increase of sales commissions due to revenue growth. The remaining increase was due to an increase in software subscription ~~expenses.~~and consulting expenses of $2.3 million, an increase in facilities and depreciation expenses of $1.6 million, an increase in travel expenses of $0.4 million, and an increase in expenses related to marketing programs of $0.3 million.

Sales and marketing expenses increased $38.4 million, or 32%, in the six months ended September 30, 2019 compared to the same period of 2018. The increase was primarily the result of an increase of personnel-related costs of $32.8 million, driven by higher headcount and an increase of sales commissions due to revenue growth. The remaining increase was due to an increase in software subscription and consulting expenses of $2.3 million, an increase in travel expenses of $1.7 million, and an increase in facilities and depreciation expenses of $1.6 million.

General and Administrative


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%

	(dollars in thousands)
General and administrative	$	23,278	$	16,880	$	6,398	38	%	$	46,378	$	31,591	$	14,787	47	%

General and administrative expenses increased $6.4 million, or 38%, in the three months ended September 30, 2019 compared to the same period of 2018. The increase was primarily the result of an increase in personnel-related costs of $4.1 million, driven by an increase in headcount. The remaining increase was due to an increase in facilities and depreciation expenses of $1.6 million, an increase in software subscription and consulting expenses of $0.5 million, and an increase in travel expenses of $0.2 million.

General and administrative expenses increased $14.8 million, or 47%, in the six months ended September 30, 2019 compared to the same period of 2018. The increase was primarily the result of an increase in personnel-related costs of $10.1 million, driven by an increase in headcount, and a $1.8 million increase in legal, tax, and accounting fees. The remaining increase was due to an increase in facilities and depreciation expenses of $1.6 million, an increase in software subscription and consulting expenses of $1.0 million, and an increase in travel expenses of $0.3 million.

Other Income ~~Net~~(Expense)

Three Months Ended December 31, Change Nine Months Ended December 31, Change
2017 2016 Amount % 2017 2016 Amount %

(dollars in thousands)
Other income, net $ 468
$ 24
$ 444
1,850 % $ 1,556
$ 216
$ 1,340
620 %


	Three Months Ended September 30,						Change						Six Months Ended September 30,				Change
	2019		2018		Amount		%		2019		2018		Amount		%

	(dollars in thousands)
Other income (expense)	$	(1,562)	$	(2,773)	$	1,211	44	%	$	(263)	$	(4,436)	$	4,173	94	%

Other income (expense), net increased by ~~$0.4~~$1.2 million in the three months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016,~~2018. The increase was primarily due to an increase in interest income earned on higher cash and ~~$1.3~~short-term investment balances, partially offset by an increase in interest expense related to the 0.50% convertible senior notes due 2023, or the Notes.

Other income (expense), net increased by $4.2 million in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 compared to the same period of ~~2016. These increases were~~2018, primarily due to a ~~result of~~$3.0 million lease modification gain. The remaining increase was due to an increase in

interest income earned on higher cash and short-term investment balances, partially offset by an increase in interest ~~income.~~expense related to the Notes.

Non-GAAP Financial Measures

Non-GAAP Income ~~(Loss)~~ From Operations

To supplement our condensed consolidated financial statements presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP income ~~(loss)~~ from ~~operations.~~operations and non-GAAP net income attributable to New Relic. We define non-GAAP income ~~(loss)~~ from operations and non-GAAP net income attributable to New Relic as the respective GAAP balance, adjusted ~~for:~~for, as applicable: (1) stock-based compensation expense, (2) lease exit costs and accelerated depreciation, (3) amortization of stock-based compensation capitalized in software development costs, ~~(3)~~(4) the amortization of purchased intangibles, ~~(4) the transaction costs related to acquisition,~~ (5) ~~lawsuit litigation expense, and (6)~~ employer payroll tax expense on equity incentive plans ~~as applicable.~~and (6) amortization of debt discount and issuance costs, and in certain periods, (7) the transaction costs related to acquisitions (8) lawsuit litigation cost and otherexpense, and (9) gain or loss from lease modification. We use non-GAAP income ~~(loss)~~ from operations and non-GAAP net income attributable to New Relic internally to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe ~~the measure is~~these measures are useful to investors, as a supplement to GAAP measures, in evaluating our operational performance. We have provided below a reconciliation of GAAP loss from operations to non-GAAP income from operations and a reconciliation of GAAP net loss to non-GAAP net income attributable to New Relic.

We use non-GAAP financial measures, including non-GAAP income from operations and non-GAAP net income attributable to New Relic, internally to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. In addition, our bonus opportunity for eligible employees and executives is based in part on non-GAAP income (loss) from operations.

We believe non-GAAP income ~~(loss)~~ from operations isand non-GAAP net income attributable to New Relic are useful to investors and others in assessing our operating performance due to the following factors:

Stock-based compensation expense and amortization of stock-based compensation capitalized in software development costs. We utilize share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of ~~its~~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.

~~The amortization~~Lease exit costs and accelerated depreciation. We entered into an agreement to exit the lease of our 123 Mission premises in San Francisco, California. In connection with this agreement and subsequent relocation, we accelerated depreciation and other expenses associated with the remaining lease term. We believe it is useful to exclude this depreciation and these other expenses because we do not consider such amounts to be part of the ongoing operation of our business.

Amortization of purchased intangibles and ~~the~~ transaction costs related to ~~acquisition.~~ acquisitions. We view amortization of purchased intangible assets as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period. Similarly, we view ~~acquisition related~~acquisition-related expenses as events that are not necessarily reflective of operational performance during a period.

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.

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 Notes, which bear interest at an annual fixed rate of 0.5%. The effective interest rate of the Notes was 5.74%. This is a result of the debt discount

recorded for the conversion feature that is required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and 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.

Gain or loss from lease modification. We may incur a gain or loss from modification related to lease agreements. We believe it is useful to exclude such charges or benefits because we do not consider such amounts to be part of the ongoing operation of our business and because of the singular nature of benefit or charge from such events.

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 ~~be different~~differ from non-GAAP financial measures used by other companies in our industry and exclude expenses that may have a material impact on our reported financial results.

The following ~~table presents~~tables present our non-GAAP income ~~(loss)~~ from operations and ~~reconciles~~our non-GAAP net income attributable to New Relic and reconcile our GAAP loss from operations to non-GAAP income ~~(loss)~~ from operations and our GAAP net loss attributable to New Relic to our non-GAAP net income attributable to New Relic for the three ~~and nine~~ months ended ~~December 31, 2017~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended December 31,						Nine Months Ended December 31,							Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016				2019		2018		2019		2018
GAAP loss from operations	$	(7,987	)	$	(13,944	)	$	(39,276	)	$	(46,277	)	GAAP loss from operations	$	(16,901)	$	(5,535)	(33,793)		$	(9,166)
Plus: Stock-based compensation	9,933			8,118			29,778			23,719
Plus: Lawsuit litigation	—			44			—			48
Plus: Stock-based compensation expense													Plus: Stock-based compensation expense	23,358		13,833		44,546		24,860
Plus: Lease exit costs and accelerated depreciation													Plus: Lease exit costs and accelerated depreciation	3,641		—		3,641		—
Plus: Amortization of purchased intangibles	196			266			990			766			Plus: Amortization of purchased intangibles	440		197		880		394
Plus: Transaction costs related to acquisition													Plus: Transaction costs related to acquisition	—		330		—		330
Plus: Amortization of stock-based compensation capitalized in software development costs	228			190			702			524			Plus: Amortization of stock-based compensation capitalized in software development costs	227		174		434		363
Plus: Lawsuit litigation cost and other expense													Plus: Lawsuit litigation cost and other expense	—		—		1,521		—
Plus: Employer payroll tax on employee equity incentive plans	309			403			1,557			1,553			Plus: Employer payroll tax on employee equity incentive plans	386		660		1,304		1,595
Non-GAAP income (loss) from operations	$	2,679		$	(4,923	)	$	(6,249	)	$	(19,667	)
Non-GAAP income from operations													Non-GAAP income from operations	$	11,151	$	9,659	$	18,533	$	18,376


	Three Months Ended September 30,						Six Months Ended September 30,
	2019		2018		2019		2018
GAAP net loss attributable to New Relic	$	(18,614)	$	(8,336)	$	(33,783)	$	(13,951)
Plus: Stock-based compensation expense	23,358		13,833		44,546		24,860
Plus: Lease exit costs and accelerated depreciation	3,641		—		3,641		—
Plus: Amortization of purchased intangibles	440		197		880		394
Plus: Transaction costs related to acquisition	—		330		—		330
Plus: Amortization of stock-based compensation capitalized in software development costs	227		174		434		363
Plus: Lawsuit litigation cost and other expense	—		—		1,521		—
Plus: Employer payroll tax on employee equity incentive plans	386		660		1,304		1,595
Plus: Amortization of debt discount and issuance costs	5,239		4,952		10,404		7,292
Less: Gain on lease modification	—		—		(3,006)		—
Non-GAAP net income attributable to New Relic	$	14,677	$	11,810	$	25,941	$	20,883

Non-GAAP income ~~(loss)~~ from operations and non-GAAP net income attributable to New Relic for the periods presented reflects the same trends discussed above in “Results of Operations.” Although overall expenses were higher than the same periods presented in the prior fiscal year, expense as a percentage of revenue decreased significantly. As a result, we generated non-GAAP income from operations for the first time in the third quarter of fiscal 2018. We anticipate we will continue to ~~maintain~~generate non-GAAP income from operations and non-GAAP net income attributable to New Relic in future periods.

Liquidity and Capital Resources


	Nine Months Ended December 31,							Six Months Ended September 30,
	2017			2016				2019		2018

	(in thousands)							(in thousands)
Cash provided by operating activities	$	24,093		$	9,337		Cash provided by operating activities	$	45,504	$	58,214
Cash used in investing activities	(10,560		)	(9,848		)	Cash used in investing activities	(50,565)		(436,863)
Cash provided by financing activities	23,399			14,767			Cash provided by financing activities	9,965		442,968
Net increase in cash and cash equivalents	$	36,932		$	14,256
Net increase in cash, cash equivalents and restricted cash							Net increase in cash, cash equivalents and restricted cash	$	4,904	$	64,319

To date, we have financed our operations primarily through the issuance of our convertible senior notes, private and public equity financings and customer payments for subscription services. We believe that our existing cash, cash equivalents, and short-term investment balances, together with cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, seasonality of our billing activities, the timing and extent of spending to support our growth strategy, ~~and~~ the continued market acceptance of our ~~products.~~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 to raise additional funds from equity or debt securities in order to meet those capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

Operating Activities

During the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, cash provided by operating activities was ~~$24.1~~$45.5 million as a result of a net loss of ~~$38.4~~$34.7 million, adjusted by non-cash charges of ~~$47.6~~$87.7 million and a change of ~~$14.9~~$7.5 million in our operating assets and liabilities. The change in our operating assets and liabilities was primarily the result of a ~~$9.2~~$38.4 million decrease in deferred revenue, a $18.0 million increase in deferred contract acquisition costs, and a $16.2 million decrease in lease liabilities. This was partially offset by a $43.7 million decrease in accounts receivable, ~~an $8.9~~a $17.5 million decrease in lease right-of-use assets, a $3.2 million increase in ~~deferred revenue,~~accounts payable, a $0.4 million decrease in prepaid expenses and other current assets, and a ~~$2.5~~$0.3 million increase in accrued compensation and benefits and other liabilities. ~~This was partially offset by a $4.4 million increase in prepaid expenses and other assets, a $0.8 million decrease in accounts payable, and a $0.5 million decrease in deferred rent.~~

During the ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2018, cash provided by operating activities was ~~$9.3~~$58.2 million as a result of a net loss of ~~$46.1~~$14.1 million, adjusted by non-cash charges of ~~$37.9~~$57.6 million and a change of ~~$17.5~~$14.8 million in our operating assets and liabilities. The change in our operating assets and liabilities was primarily the result of ~~an $18.2~~a $23.3 million ~~increase~~decrease in ~~deferred revenue due to increased sales of subscriptions to our products,~~accounts receivable, a ~~$3.3~~$4.6 million increase in accrued compensation and benefits and other liabilities, a ~~$3.1~~$2.0 million increase in accounts payable, a $0.7 million decrease in prepaid expenses and other current assets and a $0.6 million increase in deferred ~~rent, and a $1.1 million increase in accounts payable.~~revenue. This was partially offset by a ~~$6.5~~$17.4 million increase in ~~accounts receivable and a $1.7 million increase in prepaid expenses and other assets.~~deferred commissions.

Investing Activities

Cash used in investing activities during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 was ~~$10.6~~$50.6 million, primarily as a result of purchases of short-term investments of ~~$78.1~~$263.3 million, purchases of property and equipment of ~~$17.6~~$31.6 million, and increases in capitalization of software development costs of $3.1 million. This was partially offset by proceeds from the maturity and sale of short-term investments of ~~$88.2~~$247.4 million.

Cash used in investing activities during the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2018 was ~~$9.8~~$436.9 million, primarily as a result of purchases of short-term investments of ~~$116.3~~$496.2 million, purchases of property and equipment of ~~$16.6~~$14.3 million, and increases in capitalization of software development costs of $3.1 million. This was partially offset by proceeds from the maturity and sale of short-term investments of ~~$126.1~~$76.7 million.

Financing Activities

Cash provided by financing activities during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 was ~~$23.4~~$10.0 million, which was the result of proceeds from the exercise of stock options ~~and~~of $3.1 million, proceeds from the purchase of shares of common stock pursuant to our employee stock purchase ~~plan.~~plan of $5.9 million, and proceeds from the investment from our redeemable non-controlling interest of $1.0 million.

Cash provided by financing activities during the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2018 was ~~$14.8~~$443.0 million, which was the result of net proceeds from the issuance of convertible senior notes of $488.7 million, proceeds from the exercise of stock options ~~and~~of $9.0 million, proceeds from the purchase of shares of common stock pursuant to our employee stock purchase ~~plan.~~plan of $4.9 million, and proceeds from the investment from our redeemable non-controlling interest of $3.6 million. This was partially offset by purchases of the capped call of $63.2 million related to the Notes.

Contractual Obligations and Commitments

Our principal contractual commitments primarily consist of obligations under leases for office space and purchase commitments. Except as set forth in Note 59 — Leases and Note 10 — Commitments and Contingencies contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q, there were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements for the fiscal year ended March 31, ~~2017~~2019 in our Annual Report.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in accordance with GAAP. In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates.

~~There~~Except for updates to our accounting policies related to the adoption of ASU 2016-02,Leases (Topic 842) (“ASC 842”), there have been no significant changes in our critical accounting policies and estimates during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2019, or our Annual Report, as filed with the Securities and Exchange Commission, or SEC, on May ~~18, 2017.~~15, 2019.

Recent Accounting Pronouncements

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ ~~The new guidance provides principles for recognizing revenue to which an entity expects to be entitled for the transfer~~See Note 1, Description of promised goods or services to customers. The new guidance will be effective for us in our fiscal year beginning April 1, 2018. The guidance may be applied retrospectively to each prior period presented (full retrospective method), or with the cumulative effect recognized asBusiness and Summary of the date of initial adoption (modified retrospective method). We currently intend to adopt Topic 606 using the modified retrospective approach in our first quarter of fiscal year 2019. As we continue to assess the new standard along with industry trends and internal progress, we may adjust our implementation plan accordingly.

We anticipate the significant impacts of adopting Topic 606 will include the deferral of incremental commission costs of obtaining contracts and additional disclosure requirements. Currently, we record commissions as sales and marketing expenses as incurred. Under the new standard, we will capitalize incremental commissions related to initial contracts over the expected period of benefit. We have not yet concluded the amortization period of these capitalized costs, which will affect the classification and magnitude of the deferred costs at each reporting period. We will continue to quantify the effects of adopting Topic 606 on our condensed consolidated financial statements, including the impact on our revenue as well as the changes discussed above.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~, which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard will be effective for usSignificant Accounting Policies contained in the ~~fiscal year beginning~~

~~April~~“Notes to Condensed Consolidated Financial Statements” in Item 1 ~~2019; early adoption is permitted. The amendments require a modified retrospective approach with optional practical expedients. We are currently evaluating the impact~~of Part I of this ~~standard~~Quarterly Report on ~~our condensed consolidated financial statements.~~Form 10-Q.

~~In March 2016, the FASB Issued ASU No. 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this standard in our first quarter of fiscal year 2018. Upon adoption, we recognized all of the previously unrecognized excess tax benefits related to stock awards using the modified retrospective transition method. These excess tax benefits, recognized upon adoption, were recorded as a deferred tax asset, which was then fully offset by our U.S. federal and state deferred tax asset valuation allowance resulting in no impact to our accumulated deficit. Without the valuation allowance, our deferred tax asset would have increased by $39.5 million. All future excess tax benefits resulting from the settlement of stock awards will be recorded to the income tax provision.

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, which amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The updated guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statement of income. The update to the standard will be effective for us in the fiscal year beginning April 1, 2020; early adoption is permitted in the fiscal year beginning April 1, 2019. We are currently evaluating the effect the standard will have on our condensed consolidated financial statements.

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,~~ which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The new guidance will be effective for us in our fiscal year beginning April 1, 2018. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

Our subscription agreements are primarily denominated in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the ~~Euro.~~Euro and Japanese Yen. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our historical consolidated financial statements.

Interest Rate Risk

We had cash and cash equivalents of ~~$125.2~~$242.4 million as of ~~December 31, 2017,~~September 30, 2019, consisting of bank deposits, commercial paper, and money market funds. These interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant. We ~~also had no outstanding debt for any of the periods presented. We~~ have an agreement to maintain cash balances at a financial institution of no less than ~~$8.0~~$5.7 million as collateral for ~~three~~several letters of credit in favor of our landlords. The letters of credit carry a fixed interest rate of 1%.

We had short-term investments of ~~$107.8~~$529.1 million as of ~~December 31, 2017,~~September 30, 2019, consisting of certificates of deposit, commercial paper, corporate notes and bonds, U.S. treasury securities, and U.S. agency securities. Our investments in marketable securities are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

In March 2018, we issued $500.25 million aggregate principal amount of the Notes. The fair value of the Notes is subject to interest rate risk, market risk and other factors due to the conversion feature in the Notes. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules ~~13a- 15(e)~~13a-15(e) and ~~15d- 15(e)~~15d-15(e) under the ~~Securities~~ Exchange ~~Act of 1934, as amended (the “Exchange Act”))~~Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~December 31, 2017,~~September 30, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

Effective April 1, 2019, we adopted ASC 842 using the modified retrospective method, and recorded a balance sheet adjustment on the date of adoption. As a result, we implemented internal controls to ensure that we have adequately evaluated our lease agreements and properly assessed the impact of ASC 842 on our financial statements. We do not expect significant changes to our internal control over financial reporting due to the adoption of ASC 842. There ~~was~~were no ~~change~~other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended ~~December 31, 2017~~September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On November 5, 2012, CA, Inc. filed ~~an action~~suit against us in the ~~U.S.~~United States District Court, ~~for the~~ Eastern District of New York ~~alleging~~for alleged patent infringement. CA, Inc.’s complaint claimed that ~~we willfully~~certain aspects of our products infringe certain ~~of its U.S. patents.~~patents held by CA, Inc. ~~asserts that~~On July 20, 2019, we and Avago Technologies International Sales Pte. Limited, an affiliate of CA, Inc., entered into a ~~portion of our application performance management software –~~settlement agreement pursuant to which the ~~.NET~~parties resolved, settled and ~~Java agents – infringes certain~~released all claims of those patents. Among other things, CA, Inc. has sought permanent injunctive relief against us and damages in an amount to be determined at trial. Specifically, CA, Inc. alleges in the complaint that we willfully infringe certain CA, Inc. United States Patents, including U.S. Patent Nos. 7,225,361 B2, or the ’361 patent, 7,512,935 B1, or the ’935 patent, and 7,797,580 B2, or the ’580 patent. Discovery is complete in the case, and the court has ruled on summary judgment motions filed by both parties. On April 8, 2015, the court granted CA, Inc.’s partial summary judgment motion seeking to estop New Relic from contesting the validity of the ’361 and ’580 patents. On September 28, 2015, the court granted New Relic’s partial summary judgment motion as to non-infringement of the ’935 patent by the Java and .NET agents, and denied summary judgment as to invalidity of the ’935 patent. Following the court’s summary judgment rulings, the only remaining claims for infringement in this litigation are CA, Inc.’s assertions that the Java agent infringes asserted claims of the ’361 and ’580 patents. A trial date is not currently set.

We intend to continue to contest this lawsuit vigorously. If this matter has an adverse outcome, it may have an impact on our financial position, results from operations, and cash flows. Should CA, Inc. prevail on its claims, we could be required to pay substantial damages for past sales of such products, enjoined from using and selling such products if a license or other right to continue selling our products is not made available to us, and required to pay substantial ongoing royalties and comply with unfavorable terms if such a license is made available to us. Any of these outcomes could result in a material adverse effect on our business. However, we cannot at this time predict the likely outcome of this proceeding or estimate the amount or range of loss or possible loss that may arise from it. Even if we were to prevail, litigation is costly and time-consuming, and could divert the attention of our management and key personnel from our business operations and dissuade potential customers from purchasing our products, either of which could materially harm our business.

~~During the course of litigation, we anticipate announcements of the results of hearings and motions, and other interim developments~~ related to the litigation ~~which our competitors could try~~without any admission by any party as to ~~use to their competitive advantage~~the merits of the other party’s claims. The case was dismissed by ~~creating uncertainty amongst our customers. If securities analysts or investors regard these announcements as negative,~~ the ~~market price of our common stock may decline.~~court on July 25, 2019.

In addition, from time to time, we are involved in legal proceedings and are subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. This description includes any material changes to and supersedes the description of the risk factors disclosed in Part I, Item 1A of our Annual Report. We have marked with an asterisk (*) those risks described below that reflect material substantive changes from the risks disclosed in Part I, Item 1A of our Annual Report.

The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and accompanying notes.

We have a history of losses and we expect our revenue growth rate to ~~continue to decline.~~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 ~~losses~~loss attributable to New Relic of ~~$38.4~~$33.8 million and ~~$46.1~~$14.0 million in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively. At ~~December 31, 2017,~~September 30, 2019, we had an accumulated deficit of ~~$298.5~~$339.4 million. We expect to continue to expend substantial financial and other resources on, among other things:

•sales and marketing, including expanding our direct sales organization and marketing programs, particularly for larger customers;

•investments in our research and development team, and the development of new products, 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.

These investments may not result in increased revenue or growth of our business. WeOur revenue growth rate has declined in recent periods and we expect that ~~our revenue growth rate~~it will continue to decline over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and to achieve and sustain profitability. If we fail to achieve and sustain profitability, our operating results and business would be harmed.

We have a limited operating history, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.

We were founded in 2007 and launched our first commercial product in 2008. This limited operating history limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future

products and platform capabilities, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new products and platform capabilities, determining prices and pricing structures for our products and platform capabilities, unforeseen expenses, and challenges in forecasting accuracy. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change, or if we do not address these risks successfully, our operating and financial results and our business could suffer.

We have experienced significant growth in recent periods and ~~expect~~ our recent growth ~~to continue.~~rates may not be indicative of our future growth. If we are not able to manage ~~this~~our growth and expansion, or if our business does not grow as we expect, our operating results may suffer. *

We have experienced significant growth in our customer adoption and have expanded and intend to continue to significantly expand our operations, including our domestic and international employee headcount. This growth has placed, and will continue to place, significant demands on our management and our operational and financial ~~infrastructure.~~infrastructure and we may not be able to sustain revenue growth consistent with recent periods, or at all.

To manage ~~this~~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 sales and marketing teams and employees and consultants in jurisdictions outside of the United States;

•further improving our key business systems, processes, and information technology infrastructure, including our and third-party hosted data centers, 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 purchasing additional subscriptions and products from us and renewing their subscriptions. Any decline in our customer expansions and renewals would harm our future operating results. *

Our future success depends in part on our ability to sell more subscriptions and additional products to our current customers. If our customers do not purchase additional subscriptions and products from 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 enter into paid subscriptions and renew their subscriptions when the contract term expires. Many of our customers start their accounts on a free trial and have no obligation to begin a paid subscription. Our customers that enter into paid subscriptions have no obligation to renew their subscriptions after the expiration of their subscription period. Subscription periods are most often one year in length, ~~but~~and in recent fiscal years we have secured an increased percentage of ~~multi-year~~longer-duration commitments ~~with respect~~as we have sold more to ~~new paid business accounts.~~larger organizations. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. 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 have the right to cancel their agreements prior to the termination of the subscription term.

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, the prices of competing products, mergers and acquisitions affecting our customer base, consolidation of affiliates’ multiple paid business accounts into a single paid business account, the effects of global economic conditions, or reductions in our customers’ spending levels generally. These factors may also be exacerbated if, consistent with our growth strategy, our customer base continues to grow to encompass larger enterprises.

If we are not able to develop enhancements to our products, increase adoption and usage of our products, and introduce new products and capabilities that achieve market acceptance, our business could be harmed. *

Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing products, increase adoption and usage of our products, and introduce new products and capabilities. The success of any enhancement or new products depends on several factors, including timely completion, competitive pricing, adequate quality testing, introduction, integration with existing technologies and our platform, and market acceptance. Any products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. If we are unable to successfully enhance our existing products to meet customer requirements, increase adoption and usage of our products, or develop new products, our business and operating results will be harmed.

If customers do not expand their use of our products beyond the current predominant use cases, our ability to grow our business and operating results may be adversely affected. *

Most of our customers currently use our products to support application performance management functions, and the majority of our revenue to date has been from our application performance management products. Our ability to grow our business depends in part on our ability to persuade current and future customers to expand their use of our software to additional use cases, such as infrastructure monitoring and customer usage analytics. 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 agree to higher subscription fees for certain of our software or limit the amount of data stored in order to stay within the limits of its existing subscription. 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.

We have limited experience with respect to determining the optimal prices and pricing structures for our products. *

We expect that we may need to change our pricing model from time to time, including as a result of global economic conditions, reductions in our customers’ spending levels generally or changes in how computing infrastructure is broadly consumed. Similarly, as we introduce new products or services, or as a result of the evolution of our existing products and services, we may have difficulty determining the appropriate price structure for our products. In addition, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers or retain existing customers at the same price or based on the same pricing model as we have used historically. Moreover, as we continue to target selling our products to larger organizations, these larger organizations may demand substantial price concessions. As a result, we may be required from time to time to revise our pricing structure or reduce our prices, which could adversely affect our business.

Failure to effectively expand our marketing and sales capabilities 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 expand our marketing and sales operations, with an emphasis on continuing to improve our ability to target sales to large enterprise organizations. We plan to continue expanding our sales force, both domestically and internationally. We also dedicate significant resources to sales and marketing programs, including online advertising and field marketing programs. For example, during the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, sales and marketing expenses represented ~~59%~~55% of our revenue. The effectiveness of our marketing programs has varied over time and may vary in the future due to competition. All of these efforts have required and will continue to require us to invest significant financial and other resources. If we are unable to hire, develop, and retain talented sales personnel, if our sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or 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.

If we are unable to continue to increase the sales of our solutions to large enterprises 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 the continued increase of sales to large enterprises. Sales to large customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, enterprise customers may require considerable time to evaluate and test our applications and those of our competitors prior to making a purchase decision and placing an order. A number of factors influence the length and

variability of our sales cycle, including the need to educate potential customers about the uses and benefits of our applications, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly from customer to customer, with sales to large enterprises typically taking longer to complete. Moreover, large enterprise customers often begin to deploy our products on a limited basis, but nevertheless demand extensive configuration, integration services, and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment. In addition, if we are unable to close one or more large individual transactions in a particular period, or if an expected transaction is delayed until a subsequent period, our results of operations for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be harmed.

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 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. If our financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially.

We believe that quarter-to-quarter comparisons of our revenue, operating results, and cash flows may not be meaningful and should not be relied upon as an indication of future performance. If our revenue or operating results fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance we may provide, the price of our common stock could decline.

Because users are able to configure our platform to collect and store confidential, personal or proprietary information, security concerns could result in additional cost and liability to us or inhibit sales of our products. *

Our operations involve protection of our intellectual property, along with the storage and transmission and processing of our customers’ proprietary data, which customers might choose to have include some personally identifiable ~~information,~~information. While we have developed systems and processes to protect the integrity, confidentiality and security of our customers’ data, our security measures or those of our third-party service providers could fail and result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data. Any security breaches, computer malware, ~~and~~ computer hacking, cyber-attacks, ransomware, phishing attacks and other social engineering schemes, denial or degradation of service attacks, unauthorized access or use, device theft, and other types of security incidents experienced by us or our third-party services providers, could expose us to a risk of loss of ~~this~~confidential, personal or proprietary information, loss of business, severe reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, demands, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and significant costs for investigation, remediation and incentives offered to customers or other business partners in an effort to maintain business relationships after a breach and other liabilities.

Cyber-attacks, intrusions and other malicious Internet-based activity, including by computer hackers, foreign governments and cyber terrorists, continue to increase ~~generally.~~generally as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The costs to us to investigate and mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity and other harm to our business and our competitive position. If our products or security measures are perceived as weak or actually compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials, or otherwise, our customers may curtail or stop using our products, our reputation could be damaged, our business may be harmed, and we could incur significant liability. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer adoption and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data. Moreover, if a high-profile security breach occurs with respect to another cloud

platform provider, our customers and potential customers may lose trust in the security of cloud platforms generally, which could adversely impact our ability to retain existing customers or attract new ones.

If we are not able to detect and indicate activity on our platform that might be nefarious in nature or design processes or systems to reduce the impact of similar activity at a third-party service provider, our customers could suffer harm. In such cases, we could face exposure to legal claims, particularly if the customer suffered actual harm. We cannot assure you that any limitations of liability provisions in our contracts for a security lapse or breach would be enforceable or

adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our expansion rates, financial condition, operating results, and reputation.

Changes in privacy and security laws, regulations, and standards may cause our business to suffer. *

We are subject to federal, state, and ~~international~~foreign laws, regulations and standards relating to the collection, use, retention, security, transfer and ~~transfer~~other processing of personally identifiable information. The regulatory framework for privacy and security issues worldwide is rapidly evolving and as a result implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. We publicly post documentation regarding our practices concerning the processing, use, and disclosure of data. Any failure by us, our suppliers, or other parties with whom we do business to comply with this documentation or with other federal, state, or ~~international~~foreign regulations could result in investigations and/or proceedings against us by governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. In the United States, these include enforcement actions in response to rules and regulations promulgated under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies. In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards with which we must legally comply or that contractually apply to us, like the Payment Card Industry Data Security Standard, or PCI DSS. If we fail to follow these security standards, such as those set forth in the PCI DSS, even if no customer information is compromised, we may incur significant fines or experience a significant increase in costs.

Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including but not limited to the European Union, or EU. The EU’s data protection landscape is currently unstable, resulting in possible significant operational costs for internal compliance and risk to our business. While we have taken steps to mitigate the impact on us, such as implementing standard contractual clauses and self-certifying under the EU-US Privacy Shield, the efficacy and longevity of these mechanisms remains uncertain. In addition,For example, the EU has adopted the General Data Protection Regulation, or GDPR, which ~~is scheduled to go~~went into effect inon May 25, 2018 and contains ~~numerous requirements and changes from existing EU law, including more~~ robust obligations on data processors and heavier documentation requirements for data protection compliance programs by companies. Specifically, the GDPR ~~will introduce~~introduced numerous privacy-related changes for companies operating in the EU, including greater control for data subjects (e.g., the “right to be forgotten”), increased data portability for EU consumers, data breach notification requirements, and increased fines. In particular, under the GDPR, fines of up to 20 million euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of the GDPR’s requirements. The GDPR requirements apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information. The global data protection landscape is rapidly evolving, resulting in possible significant operational costs for internal compliance and risk to our business. For example, we rely upon the EU-U.S. Privacy Shield framework and EU Standard Contractual Clauses (also called “Model Clauses”) in our data export agreements as legal bases for transferring personal data outside of the European Economic Arena, or EEA. Both of these frameworks are subject to ongoing review by governmental bodies and legal challenges which may result in a ruling that the industry-standard measures we, and other companies, have taken are no longer sufficient. As a result, in the future we may need to take additional measures to ensure compliance with respect to our transfers of personal data outside of the EEA.

In addition to the GDPR, the European Commission also has another draft regulation in the approval process that focuses on a person’s right to conducting a private life (in contrast to GDPR, which focuses on protection of personal data). The proposed legislation, known as the Regulation on Privacy and Electronic Communications, or ePrivacy Regulation, would replace the current ePrivacy Directive. However, the timeline for adoption and implementation remains unclear. The ePrivacy Regulation is expected to provide protections for those using communications services (for example, protections against online tracking technologies), impose enhanced consent requirements, and contain other requirements and obligations which may increase our compliance burden and negatively impact our product offerings and our relationships with our customers.

Complying with foreign data protection laws like the GDPR and the ePrivacy Regulation (when it becomes effective) may cause us to incur substantial operational costs or require us to change our business practices. Despite our ~~efforts to bring practices into~~ compliance ~~before the effective date of the GDPR,~~efforts, we may not be successful in achieving compliance either due to internal or external factors such as resource allocation

limitations or a lack of vendor cooperation. ~~Non-compliance~~Any actual or perceived non-compliance could result in proceedings against us by governmental entities, customers, data subjects, or others. We may also experience difficulty retaining or obtaining new European or multi-national customers due to the legal requirements, compliance cost, potential risk exposure, and uncertainty for these entities, and we may experience significantly increased liability with respect to these customers pursuant to the terms set forth in our engagements with them. We may find it necessary to establish systems to maintain personal data originating from the EU in the European Economic Area or protect a person’s privacy, which may involve substantial expense and distraction from other aspects of our business. In the meantime, there could be uncertainty as to how to comply with EU privacy law.

Domestic laws in this area are also complex and developing rapidly. Many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security and data breaches. Laws in 48all 50 states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands require businesses to provide notice to customers ~~whose~~following certain types of security breaches affecting personally identifiable ~~information has been disclosed as a result of a data breach, including New Mexico, which enacted its data breach notification law in April 2017.~~information. The laws are not consistent, and compliance in the event of a widespread data breach is costly. ~~Further, states~~States are also constantly amending existing laws, requiring attention to frequently changing regulatory requirements. ~~Additionally, in August 2017, Delaware amended its~~For example, California recently enacted the California Consumer Privacy Act, or CCPA, which is expected to take effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach ~~notification law~~litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in ~~order~~the United States, which could increase our potential liability and adversely affect our business. Similar privacy legislation has been proposed in a number of states and at the federal level. In addition to ~~expand what constitutes “personal information”,~~government activity, privacy advocacy groups and industry groups have adopted and are considering the adoption of various self-regulatory standards and codes of conduct that, if applied to ~~require breach notification to the Delaware Attorney General,~~our or our customers’ businesses, may place additional burdens on us and ~~to require the provision of credit monitoring in certain circumstances. In October 2017, a new~~

~~Nevada law took effect that requires website~~our customers, which may further reduce demand for our subscriptions and ~~online service operators to post a privacy notice on their websites regarding the company’s privacy practices. Nevada is the third state to have such a privacy policy requirement.~~harm our business.

Because the interpretation and application of many privacy and data protection laws along with contractually imposed industry standards are uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our products and platform capabilities. If so, in addition to the possibility of fines, lawsuits, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our products and platform capabilities, which could have an adverse effect on our business. Any inability by us to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies or our contracts governing our processing of personal information, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and foreign countries. If we are not able to adjust to changing laws, regulations, and standards related to the Internet, our business may be harmed.

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. 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.

We are dependent upon lead generation strategies to drive our sales and revenue. If these marketing strategies fail to continue to generate sales opportunities, our ability to grow our revenue will be adversely affected.

We are dependent upon lead generation strategies to generate sales opportunities. 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 ~~market~~markets in which we participate isare intensely competitive, and if we do not compete effectively, our operating results could be harmed. *

The ~~market for application and infrastructure performance monitoring is~~markets in which we compete are rapidly evolving, significantly fragmented, and highly competitive, with relatively low barriers to entry in some segments. Our ~~competitors fall into four primary categories:~~observability platform combines functionality from numerous traditional product categories, and hence we compete in each of these categories with home-grown and open-source technologies, as well as a number of different vendors.

With respect to application performance monitoring, we compete with providers such as AppDynamics, Inc. (an operating division of Cisco Systems, Inc.)~~, Datadog,~~ and Dynatrace, Inc.~~, Dynatrace LLC,~~ With respect to log management, we compete with Elastic NV and Splunk Inc.;

With respect to infrastructure monitoring, we compete with diversified technology ~~companies~~vendors such as International Business Machines Corporation, ~~Microsoft Corporation, and Oracle Corporation;~~

~~large enterprise software and service companies such as~~ BMC Software, Inc. and CA, Inc. (a subsidiary of Broadcom, Inc.); ~~and~~

~~companies offering analytics products competing~~ with ~~our New Relic Insights product, including~~native solutions from cloud providers such as Amazon Web Services, Inc., Microsoft Corporation, and Google LLC; and with independent vendors such as DataDog, Inc.

Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, larger budgets, and significantly greater resources than we do, and have the operating flexibility to bundle competing products and services with other software offerings at little or no perceived incremental cost, including offering them at a lower price as part of a larger sale. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices or with greater depth than our products. Our current and potential competitors may develop and market new technologies with comparable functionality to our products and platform capabilities, and this could lead to us having to decrease prices in order to remain competitive.

With the introduction of new technologies, the evolution of our products and platform capabilities and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our solutions, we may face additional competition. Additionally, some potential customers, particularly large enterprises, may elect to develop their own internal products. If one or more of our competitors were to merge or partner with another of our competitors or another large diversified technology company, the change in the competitive landscape could also adversely affect our ability to compete effectively. For example, in March 2017, Cisco Systems, Inc. completed its purchase of AppDynamics, Inc., in November 2018, Broadcom Inc. completed its acquisition of CA, Inc., and, in October 2019, Splunk Inc. completed its acquisition of SignalFX, Inc. If we are unable to maintain our current pricing 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.

Because we recognize revenue from our subscriptions over the subscription term, downturns or upturns in new sales and renewals may not be immediately reflected in our operating results and may be difficult to discern. *

We generally recognize revenue from customers ratably over the terms of their subscriptions. A portion of the revenue we report in each quarter is derived from the recognition of revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the life of the agreement with our customer. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. In future periods we expect that the way in which we recognize this revenue will be impacted by Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers,” or Topic 606. Please see the risk factor under the heading “The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. generally accepted accounting principles, or GAAP, from the adoption of recently issued accounting standards could materially affect our financial position and results of operations.~~” for more information.~~

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 increasingly experience seasonality in the future as we continue to target larger enterprise customers. The first two quarters of each fiscal year usually have lower or potentially negative sequential deferred revenue growth than the third and fourth fiscal quarters, during which we generally benefit from a larger renewal base and opportunity to up-sell existing customers. We believe that this results from the procurement, budgeting, and deployment cycles of many of our customers, particularly our enterprise customers, which tend to have a concentration of increased activity in the periods surrounding the change of the ~~company’s~~Company’s fiscal year. As a result, over time we could potentially see stronger sequential revenue results in our fourth and first fiscal quarters as our deferred revenue is recognized. We expect that this seasonality will continue to affect our sales and operating results in the future, which can make it difficult to achieve sequential growth in certain financial metrics or could result in sequential declines on a quarterly basis. Accordingly, historical patterns should not be considered indicative of our future sales activity or performance.

Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results. *

Our continued growth depends in part on the ability of our existing and potential customers to access our products and platform capabilities at any time and within an acceptable amount of time. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users

accessing our products and platform capabilities simultaneously, denial or degradation of service attacks, computer viruses, natural disasters, terrorism, war, telecommunications and electrical failures, cyberattacks or other security related incidents. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our products and platform capabilities become more complex and our user traffic increases. If our products and platform capabilities are unavailable or if our users are unable to access our products and platform capabilities within a reasonable amount of time or at all, our business would be negatively affected. ToAs 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 subscriptions 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 located in the Chicago, Illinois area and, to a lesser extent, through our European Region in Germany and a combination of cloud hosting providers. The continuous availability of our products and platform capabilities depends on the operations of our ~~Chicago~~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 ~~Chicago~~ data center facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts, and similar events. If there are any lapses of service or damage to the facilities, we could experience lengthy interruptions in our products and platform capabilities as well as delays and additional expenses in arranging new facilities and services. 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 subscriptions, 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 undetected errors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities, and bugs in our products and platform capabilities after they have been released and new errors in our existing products and platform capabilities may be detected in the future. Real or perceived errors, failures, or bugs in our products and platform capabilities could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for the ~~any~~ losses that may result from claims arising from defects or disruptions in our products and platform capabilities. As a result, we could lose future sales and our reputation, and our brand could be harmed.

Our ongoing and planned investments in data center hosting facilities 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 new equipment to support growth at our Chicago area data center hosting facilities and ~~to launch a new~~the expansion of our European ~~data center,~~Region in Germany (which launched in October 2018), provide enhanced levels of products and platform capabilities to our customers, and potentially reduce future costs of subscription revenue. In addition, we may need to add additional data centers or similar resources to support our growth or as a result of regulatory requirements that may be applicable to us. We have also invested in a combination of cloud hosting providers to serve our customers for certain portions of our service. Ongoing or future improvements to our cloud infrastructure may be more expensive than we anticipate, and may not yield the expected savings in operating costs or the expected performance benefits. We may not be able to maintain or achieve cost savings from our investments, which could harm our financial results.

We may need to change our current operations infrastructure in order for us to achieve profitability and scale our operations efficiently, which makes our future prospects even more difficult to evaluate. For example, in order to grow sales to commercial and enterprise customers 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 six months ended September 30, 2019, we derived approximately 32% 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;

•laws and business practices favoring local competitors, or general preferences for local vendors;

•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.

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 criminal penalties, including substantial fines, possible incarceration for employees and managers for willful violations, and the possible loss of export or import privileges. 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.

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. 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. The loss of one or more of our executive officers, especially our Chief Executive Officer, Lewis Cirne, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business. We also are dependent on the continued service of our existing software engineers because of the complexity of our products and platform capabilities.

In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel in the San Francisco Bay Area and the Portland area, where our headquarters and the majority of our research and development personnel are located, respectively, and in other locations where we maintain offices, is intense, especially for engineers experienced in designing and developing software and ~~software-as-a-service, or~~ SaaS, applications and experienced sales professionals. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. 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 ~~digital intelligence~~ solutions, and, as a result, is important to attracting new customers and maintaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our 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. Brand promotion 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 maintain 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, we may find it difficult to maintain our corporate culture. 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 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. Any such 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 may ~~be sued by third parties~~incur significant costs due to claims for alleged infringement of ~~their~~ 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. For example, we are currently party to a suit brought against us by CA, Inc. that alleges, among other things, that we have infringed on certain patents held by CA, Inc. For more information about these proceedings, see Part II, Item 1 “Legal Proceedings.” In the future, weWe 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 infringement claims is likely to grow as the market for ~~digital intelligence~~our products grows. Accordingly, our exposure to damages resulting from infringement claims 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 ~~December 31, 2017, we had one issued patent, eight patent applications pending, and two trademark registrations for “New Relic”~~September 30, 2019, in the United States, ~~as well as~~we had seven issued patents, fourteen patent applications pending, eight trademark registrations, and five trademark applications. Concurrently, outside of the United States, we had six issued patents, two completed Patent Cooperation Treaty applications, ~~and~~fifteen patent applications pending, including four Patent Cooperation Treaty applications, eleven trademark registrations, and ~~two~~seventeen trademark ~~applications for “New Relic” outside of the United States.~~applications. Despite our issued ~~patent~~patents and pending patent applications, we may be unable to maintain or obtain patent protection for our technology. In addition, our existing ~~patent~~patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged 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 is 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.

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 against unauthorized copying or use, as well as any costly litigation 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 use of open source software could negatively affect our ability to sell our products and subject us to possible litigation.

We use open source software in our products and platform capabilities and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of 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 open source 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. WeIn 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. Additionally, 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, and we may be unable to prevent our competitors or others from using such contributed software source code. While we have established processes to help alleviate these risks, we

cannot assure that these measures will reduce or completely shield from these risks. Moreover, we cannot be certain that we have not incorporated open source software in our products and platform capabilities in a manner that is inconsistent with the terms of the applicable license or our ~~policies.~~

policies and procedures.

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 subscriptions 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 subscriptions, or we could face contract terminations. Our revenue could be significantly affected if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any extended service outages could adversely affect our reputation, revenue, and operating results.

If the market for our technology delivery model and SaaS develops more slowly than we expect, our growth may slow or stall, and our operating results would be harmed.

The market for SaaS business software is less mature than the market for traditional on-premise software applications, and the adoption rate of SaaS business software may be slower among subscribers in industries with heightened data security interests or business practices requiring highly-customizable application software. Our success will depend to a substantial extent on the widespread adoption of SaaS business software in general, but we do not know to what extent the trend of adoption of SaaS solutions will continue in the future. In particular, many organizations have invested substantial personnel and financial resources to integrate legacy software into their businesses over time, and some have been reluctant or unwilling to migrate to SaaS. It is difficult to predict customer adoption rates and demand for our products, the future growth rate and size of the SaaS business software market, or the entry of competitive applications. The expansion of the SaaS business software market depends on a number of factors, including the cost, performance, and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. If SaaS business software does not continue to achieve market acceptance, or there is a reduction in demand for SaaS business software caused by a lack of customer acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending, it would result in decreased revenue and our business would be adversely affected.

~~Our future performance depends in part on support from~~If third parties, such as customers, partners and third-party software ~~developers.~~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 ~~plugins that integrate~~integrations and applications with our products and extend the functionality of our platform capabilities. ~~We operate a community website for sharing these third-party plugins.~~ This presents certain risks to our business, including:

•customers, partners and third-party developers may not continue developing or supporting the ~~plugins~~integrations and applications that they ~~share on our community website;~~provide or they may favor a competitor’s or their own competitive offerings over ours;

•we cannot provide any assurance that these ~~plugins~~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 ~~plugins~~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 ~~third-party software~~ developers do not provide warranties or support for their integrations and applications; and

•these ~~plugins;~~customers, partners and

~~these~~ third-party software developers may not possess the appropriate intellectual property rights to develop and share their ~~plugins.~~integrations and applications or the legal basis and privacy and security compliance measures to process or control personal data that flows through our systems.

While many of these risks are not within our control to prevent, our brand ~~may~~and financial performance could be ~~damaged~~harmed if these ~~plugins~~integrations and applications do not perform to our customers’ satisfaction and if that dissatisfaction is attributed to us.

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 subscriptions for our products, or other ~~unforeseen~~ circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. 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.~~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.~~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.

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. 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.

We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur substantially more debt, which may adversely affect our operations and financial results. *

As of September 30, 2019, we had $500.25 million (undiscounted) principal amount of indebtedness under our 0.50% convertible senior notes due 2023, or the Notes. Our indebtedness may:

•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;

•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;

•require us to use a substantial portion of our cash flow from operations to make debt service payments;

•limit our flexibility to plan for, or react to, changes in our business and industry;

•place us at a competitive disadvantage compared to our less leveraged competitors; and

•increase our vulnerability to the impact of adverse economic and industry conditions.

Further, the indenture governing the Notes does not restrict our ability to incur additional indebtedness and we and our subsidiaries may incur substantial additional indebtedness in the future, subject to the restrictions contained in any future debt instruments existing at the time, some of which may be secured indebtedness.

Servicing our debt will require a significant amount of cash. We may not have sufficient cash flow from our business to pay our substantial debt, and we may not have the ability to raise the funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a fundamental change, which could adversely affect our business and results of operations.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the amounts payable under the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Further, holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a “fundamental change” (as defined in the indenture governing the Notes, or the indenture) before the maturity date at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes being surrendered or pay cash with respect to Notes being converted.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record non-cash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.

In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are included in the denominator for purposes of calculating diluted earnings per share. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.

The capped call transactions may affect the value of the Notes and our common stock.

In connection with the pricing of the Notes, we entered into capped call transactions with certain financial institutions. The capped call transactions are expected generally to reduce or offset the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.

In connection with establishing their initial hedges of the capped call transactions, these financial institutions or their respective affiliates likely purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. These financial institutions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Notes and prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Notes.

The potential effect, if any, of these transactions and activities on the price of our common stock or the Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

Provisions in the indenture for the Notes may deter or prevent a business combination that may be favorable to our stockholders.

If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

Furthermore, the indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.

Conversion of the Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress the price of our common stock.

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes and the potential dilution is not reduced or offset by the capped call transactions we entered into. The Notes may become in the future convertible at the option of their holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

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.

For example, the recent U.S. tax legislation enacted in December 2017 represents a significant overhaul of the U.S. federal tax code. This tax legislation significantly reduced the U.S. statutory corporate tax rate and made other changes that could have a favorable impact on our overall U.S. federal tax liability in a given period. However, the tax legislation also included a number of provisions, including, but not limited to, the limitation or elimination of various deductions or credits (including for interest expense and for performance-based compensation under Section 162(m)), the imposition of taxes on certain cross-border payments or transfers, the changing of the timing of the recognition of certain income and deductions or their character, and the limitation of recovery of asset basis under certain circumstances, that could significantly and adversely affect our U.S. federal income tax liability in the event we become profitable in the future. The legislation also made significant changes to the tax rules applicable to insurance companies and other entities with which we do business. We are continuing to evaluate the overall impact of this tax legislation on our operations and U.S. federal income tax position.

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. The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, Inc. may increase that risk by increasing states’ ability to assert taxing jurisdiction on out-of-state retailers. 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. 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.

The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. generally accepted accounting principles, or GAAP, from the adoption of recently issued accounting 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 Financial Accounting Standards Board, or 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. For example, in May 2014, the FASB issued Topic 606, which supersedes nearly all existing revenue recognition guidance under GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. This new standard is effective for our interim and annual periods beginning April 1, 2018, and we anticipate the new standard to have a significant impact on our deferred commissions asset and the related amortization expense. We are continuing to evaluate the impact of the adoption of this standard on our condensed consolidated financial statements and our preliminary assessments are subject to change. Refer to Note 1 in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the new guidance and its potential impact on us. Adoption of this standard and anyAny 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 ~~the~~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.

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, ~~2017,~~2019, we had U.S. federal and state net operating losses of approximately ~~$313.8~~$518.0 million and ~~$161.4~~$270.0 million, respectively. ~~The~~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 ~~2028.~~2028 and 2022, respectively. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the ~~newly enacted~~2017 federal income tax law, federal net operating losses incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the ~~newly enacted~~2017 federal tax law. 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.

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. 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 the newly enacted federal income tax law, changes in the mix of our profitability from state to state, 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 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.

We may face exposure to foreign currency exchange rate fluctuations.

While we have historically transacted in U.S. dollars with substantially all of our customers and vendors, we have transacted in foreign currencies and may transact in foreign currencies in the future. In addition, any international subsidiaries will 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 due to transactional and translational remeasurement that is reflected in our earnings. 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.

Weakened global economic conditions may harm our industry, business, and results of operations. *

Our overall performance depends in part on worldwide economic conditions. Global financial developments and downturns seemingly unrelated to us or the information technology industry may harm us. The United States and other key international economies have been impacted in the past by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy. In particular, the decision by voters in the United Kingdom to leave the EU has resulted in significant and wide-ranging economic effects across multiple markets. The withdrawal of the United Kingdom from the EU will take effect on the earlier of the effective date of the withdrawal agreement or January 31, 2020, unless the United Kingdom opts to remain in the EU or the deadline is extended by the EU. It appears likely that this withdrawal will continue to involve lengthy negotiations between the United Kingdom and EU Member States to determine the future terms of the United Kingdom’s relationship with the EU and the wider European Economic Area, and it is possible that these negotiations will fail, leading to a "no-deal" Brexit. The U.K. government is currently exploring ways to end the uncertainty over Brexit, including the possibility of a general election in the short-term. A withdrawal could, among other outcomes, disrupt the free movement of goods, services, and people between the United Kingdom and the EU, undermine bilateral cooperation in key policy areas, ~~and~~ significantly disrupt trade between the United Kingdom and the ~~EU.~~EU, and lead to a period of considerable uncertainty in relation to global financial and banking markets. In addition, a withdrawal could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace or replicate. If the United Kingdom and the EU are unable to negotiate acceptable withdrawal terms or if other EU member states pursue withdrawal, barrier-free access between the United Kingdom and other EU member states or among the European Economic Area overall could be diminished or eliminated. As a result of this uncertainty, global financial markets could experience significant volatility, which could adversely affect the market price of our common stock. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility. Given the lack of comparable precedent, it is unclear what financial, trade, and legal implications the withdrawal of the United Kingdom from the EU would have and how such withdrawal would affect us.

The revenue growth and potential profitability of our business depends on demand for software applications and products generally, and application performance monitoring and our other ~~digital intelligence~~ 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 ~~digital intelligence~~ 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 subscriptions, or affect renewal rates, all of which could harm our operating results.

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 strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics, 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. Although we maintain crisis management and disaster response plans, in the event of a major earthquake, hurricane, 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.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, 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 increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight is required. We are required to disclose changes made in our internal control and procedures on a quarterly basis and we are required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could adversely affect

our business and operating results. Although we have already hired additional employees and have engaged outside consultants to assist us in complying with these requirements, we may need to hire more employees in the future or engage additional outside consultants, which will increase our operating expenses.

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. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

Being a public company and the aforementioned rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

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.

Our ~~quarterly results may fluctuate, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.~~

~~Our~~ stock price has been, ~~subject to fluctuations,~~ 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. Since shares of our common stock were sold in our ~~IPO~~initial public offering in December 2014 at a price of $23.00 per share, the reported high and low sales prices of our common stock ~~has~~have ranged from ~~$60.85~~$114.78 to $20.39 through ~~December 31, 2017.~~September 30, 2019. 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;

•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;

•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, such as the adoption of FASB issued Topic 606, the new revenue recognition standard;~~principles;

•actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

•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 threatened against us; and

•other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

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. 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. Further, the Notes may become in the future convertible at the option of their holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. 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. Moreover, some holders of shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. We have also 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.

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.

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 our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;

•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;

•prohibit cumulative voting in the election of directors;

•provide that our directors may be removed only for cause;

•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 seventy-five percent (75%) 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 will be the exclusive forum 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.

This exclusive-forum provision would not apply to suits brought to enforce a duty or liability created by the Securities Act of 1933, as amended, the Exchange Act or any claim for which the U.S. federal courts have exclusive jurisdiction. This exclusive-forum provision 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. If a court were to find this exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Unregistered Sales of Equity Securities~~

In October 2017, we issued 43,092 shares of our common stock to four accredited investors as part of the consideration for our October 2014 acquisition of Ducksboard. We believe these transactions were exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder or Regulation S promulgated under the Securities Act. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about our company.

~~Use of Proceeds from Registered Securities~~

On December 17, 2014, we closed our IPO of 5,750,000 shares of our common stock, including 750,000 shares of common stock from the full exercise of the option to purchase additional shares granted to the underwriters, at a price to the public of $23.00 per share. The offer and sale of all of the shares in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-200078), which was declared effective by the SEC on December 11, 2014.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on December 12, 2014 pursuant to Rule 424(b)(4). Pending the uses described, we have invested the net proceeds from the offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

~~Purchases of Equity Securities by the Issuer and Affiliated Purchasers~~

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit

No.

Description of Exhibit

Incorporated by Reference

Filed

Herewith

Exhibit
No.

Description of Exhibit

Incorporated by Reference

Filed
Herewith

Form

File No.

Exhibit

File Date

Form

File No.

Exhibit

File Date

Filed
Herewith

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

10-K

001-36766

3.1

May 28, 2015

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

10-K

001-36766

3.1

May 28, 2015

3.2

Amended and Restated Bylaws of the Registrant.

S-1

333-200078

3.4

November 10, 2014

3.2

Amended and Restated Bylaws of the Registrant.

S-1

333-200078

3.4

November 10, 2014

10.1

Fifth Amendment to Lease by and between the Registrant and 188 Spear Street LLC, dated as of December 29, 2017.

10.1

2014 Equity Incentive Plan and related form agreements.

10.2

Form of Extension to Change in Control and Severance Agreement.

10.2

Separation and Transition Agreement and General Release between the Registrant and James Gochee, dated September 13, 2019.

10.3

Offer Letter between the Registrant and Michael Christenson, dated as of September 15, 2019.

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1(1)

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1(1)

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

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XBRL Taxonomy Extension Schema Document

101.SCH

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XBRL Taxonomy Extension Definition Linkbase Document

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~~(1)~~

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act of 1933, as amended, irrespective of any general incorporation language contained in any such filing.

(1)The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act of 1933, as amended, irrespective of any general incorporation language contained in any such filing.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			NEW RELIC, INC.
Date:	~~February 6, 2018~~November 5, 2019
		By:	/s/ Mark Sachleben
			Mark Sachleben
			Chief Financial Officer
			(Principal Financial and Accounting Officer and Duly Authorized Signatory)



Fiscal Years Ending March 31,	Estimated Future Amortization Expense
2018 (remaining 3 months)	$	196
2019	787
2020	525
	$	1,508



	As of December 31,
	2017	2016
Options to purchase common stock	3,450	4,931
Restricted stock units	2,038	2,080
ESPP shares	99	104
Common stock reserved for issuance in connection with acquisition	—	43
	5,587	7,158