424B4 1 d709327d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(b)(4)

Registration No. 333-200078

 

 

PROSPECTUS

 

5,000,000 Shares

 

LOGO

 

COMMON STOCK

 

 

 

New Relic, Inc. is offering 5,000,000 shares of common stock. This is our initial public offering and no public market currently exists for our shares.

 

 

 

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “NEWR.”

 

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

 

PRICE $23.00 A SHARE

 

 

      

Price to

Public

    

Underwriting
Discounts and
Commissions(1)

    

Proceeds to
New Relic

Per share

     $23.00      $1.61      $21.39

Total

     $115,000,000      $8,050,000      $106,950,000

 

(1)  

See “Underwriting” for a description of the compensation payable to the underwriters.

 

We have granted the underwriters the right to purchase up to an additional 750,000 shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and any state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on December 17, 2014.

 

 

 

MORGAN STANLEY   J.P. MORGAN
ALLEN & COMPANY LLC   UBS INVESTMENT BANK
JMP SECURITIES   RAYMOND JAMES

 

December 11, 2014


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     31   

Industry and Market Data

     32   

Use of Proceeds

     33   

Dividend Policy

     33   

Capitalization

     34   

Dilution

     36   

Selected Consolidated Financial Data

     38   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Letter from the Founder

     63   

Business

     64   
 

 

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

 

Until January 5, 2015 (25 days after the commencement of this offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “New Relic,” “the company,” “we,” “us,” and “our” in this prospectus refer to New Relic, Inc. and its subsidiaries.

 

NEW RELIC, INC.

 

Our Mission

 

Software is becoming the lifeblood of almost every organization, large and small, around the world. Our mission is to empower organizations to build the best modern software possible and to improve their business intelligence using the data flowing through and about that software. This software data contains massive amounts of information about customer behaviors, user experiences, and overall software performance. New Relic enables organizations to gain visibility into this data to make better, faster, data-driven decisions.

 

Overview

 

We are building a new category of enterprise software we call Software Analytics. Our cloud-based suite of products enables organizations to collect, store, and analyze massive amounts of software data in real time. We design all our products to be highly intuitive and frictionless; they are easy to deploy, and customers can rapidly, often within minutes, realize benefits and results. With our products, technology users can quickly find and fix performance problems as well as predict and 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. Software developers can build better applications faster, as they can see how their software will perform and is actually performing for end-users. As of September 30, 2014, we collected, stored, and analyzed over 690 billion data points daily across more than 4 million application instances and monitored user experiences on over a million website domains and from over one billion mobile application installs. As of September 30, 2014, we had over 250,000 users. We define a user as an email address associated with an account that has deployed our software code, called agents, and from which we receive data from at least one application. As of September 30, 2014, we had 10,590 paid business accounts.

 

Software has become critical to businesses and consumers worldwide, from online retailing to social networking to customer relationship management. This software is found in applications and throughout the architectures on which those applications run: servers, websites, operating systems, mobile devices, and other IT assets. The use of this software generates huge volumes of data, but historically, organizations collected and analyzed only a small fraction of this data due to technology and business constraints. Legacy software products were typically customized, expensive, required training, and were thus limited to business-critical applications within large organizations. As a result, the vast majority of software data has been underutilized.

 

We saw the opportunity for Software Analytics to empower technology and business users to make use of this underutilized software data. We provide developers with our agents to add to their applications and infrastructure quickly and easily. Our cloud-based, big data database collects and organizes our users’ data for analysis through a simple dashboard interface that users can easily configure to monitor their key metrics and quickly make queries using simple phrases. Our intuitive and frictionless product design results in users being able to quickly receive analysis of their data. With this visibility, developers can significantly improve the quality of their software, and business and technology users can get real-time insights into their data.

 

 

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Our Software Analytics solution is comprised of an integrated suite of products, a big data database, and an open platform. All of our products have a simple user interface, and require minimal training or integration. Our products for technology users focus on software performance management and monitoring and consist of New Relic APM, New Relic Mobile, New Relic Servers, New Relic Browser, and New Relic Synthetics. New Relic Insights provides big data analytics to both business and technology users that enable them to easily extract actionable information from the massive quantities of unstructured and structured data flowing through their software. New Relic Platform offers a plugin architecture including application programming interfaces, or APIs, and software development kits, or SDKs, for customers and partners to embed and extend our solution into their products. Today, there are over 475 New Relic Platform plugins to extend our functionality to other applications and infrastructures.

 

Our go-to-market strategy combines grassroots user adoption with both low-touch and high-touch sales approaches. Our products are easy to download and use, which has allowed us to build a large base of users and smaller organizations without an enterprise sales organization. We are building a direct enterprise sales and support operation in order to better market to and support these larger organizations, which represent a growing portion of our revenue.

 

We have achieved rapid customer adoption, high customer retention, and significant growth since our founding. For our fiscal years ended March 31, 2012, 2013, and 2014, our revenue was $11.7 million, $29.7 million, and $63.2 million, respectively, representing year-over-year growth of 154% from the fiscal year ended March 31, 2012 to the fiscal year ended March 31, 2013, and 113% from the fiscal year ended March 31, 2013 to the fiscal year ended March 31, 2014. For the six months ended September 30, 2013 and 2014, our revenue was $26.1 million and $48.0 million, respectively, representing year-over-year growth of 83%. We had net losses of $7.5 million, $22.5 million, and $40.2 million for our fiscal years ended March 31, 2012, 2013, and 2014, respectively, and $18.6 million and $19.4 million for the six months ended September 30, 2013 and 2014, respectively.

 

Industry Background

 

Importance of Software for Businesses and Consumers

 

Software has become a central element of business and consumer life. Businesses rely upon their software applications to interact with their customers, employees, and partners to increase revenue and improve operational efficiency. Businesses and consumers use software on a variety of devices in more of their day-to-day activities. Users increasingly expect their software to be fast and reliable, and they can quickly replace the applications they use if they are unsatisfied with their experience.

 

Advent of Cloud Architectures and SaaS

 

Historically, legacy on-premise architectures required companies to purchase and maintain the complete IT stack including storage, servers, networking, and applications. In contrast, cloud architectures enable companies to subscribe for and access computing resources as needed. This has provided a wide range of economic and technology benefits including applications that are easier to deploy, maintain, use, and integrate.

 

Explosion of Mobility

 

The greatly increased functionality of smartphones and tablets, and the ubiquity of high-bandwidth Internet access, have led to an explosion in mobile devices and mobile applications. These devices and the applications they run need to be supported by completely new software architectures that are fundamentally different and separate from legacy, on-premise IT architectures. Mobility has increased pressures on software performance and greatly expanded the variety, velocity, and volume of data available for analysis.

 

 

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Growing Importance of Developers

 

The increasing ubiquity of software has led to greater importance and roles for the developers who build and maintain that software. These developers are increasingly able to create and influence major technology trends such as adoption of cloud architectures, open source, and new programming languages and frameworks to improve the time-to-market and performance of their applications.

 

Emergence of Big Data Technologies for Unstructured and Structured Data

 

Historically, companies have relied on on-premise databases from vendors such as Oracle, IBM, and Microsoft. Over the past few years, a wide variety of technologies have been introduced to greatly increase the ability to collect and analyze the rapidly growing variety, velocity, and volume of data, commonly referred to as big data. Today, an increasing number of companies are investing in technology and personnel to gain a competitive advantage using big data to enable real-time, data-driven decisions.

 

New Complexities for Technology Users, Business Users, and Software Developers

 

Business and consumer applications are running on both cloud and legacy architectures and are built with a multitude of programming languages. This has created significant challenges and complexities for technology users, business users, and software developers. The success or failure of businesses is increasingly determined by the availability, accessibility, response time, and quality of their users’ experience.

 

Our Solution

 

We have developed our Software Analytics suite of products, big data database, and open platform to help technology and business users make real-time, data-driven decisions to improve business and IT performance. In addition, developers can build better software, build it faster, and keep it running optimally for end-user experiences. Our solution collects, stores, and analyzes vast quantities of unstructured and structured data flowing through and about our users’ software. We currently offer an integrated suite of seven products that we continue to enhance and expand:

 

   

New Relic APM: Application performance management

 

   

New Relic Mobile: Mobile application performance management

 

   

New Relic Servers: Server monitoring for cloud and data centers

 

   

New Relic Browser: End-user experience monitoring and performance monitoring

 

   

New Relic Synthetics: Software testing through simulated usage

 

   

New Relic Platform: Platform that extends our functionality into other applications

 

   

New Relic Insights: Real-time big data analytics for business managers

 

This suite of products uses a common infrastructure to enable customers to:

 

   

Collect. Our intelligent agents are software code that developers can easily deploy. These agents configure automatically to their particular IT environment and collect and send event and performance data securely to our proprietary cloud database.

 

   

Store. Data collected from our agents is stored in our highly secure and scalable cloud-based, big data database. Our database has been optimized to store unstructured and structured data as well as handle the analytics and queries that we believe are important to drive decision making.

 

   

Analyze. Our simple and intuitive user interface consists of a dashboard of graphical charts for key performance indicators, which are easily configurable and enable deep drill-down and root cause

 

 

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analysis. Our New Relic Insights product also includes a field for real-time ad-hoc queries with corresponding answers in a range of visual and graphical formats. We also intend to release platform features that enable users to create and publish customized data apps and make them available to non-technical business users.

 

Key Elements of Our Solution

 

   

Built on Cloud Architecture. We designed our products based on a cloud architecture and a SaaS delivery model. We are able to provide frequent updates to our software enabling us to continuously improve it to reflect technology developments.

 

   

Flexibility to Manage Cloud, Hybrid, and On-Premise Architectures. In addition to modern cloud architectures, our SaaS solution can also manage hybrid cloud and heterogeneous architectures, including on-premise software. Users are able to rapidly deploy our agents globally across their IT environment.

 

   

Built for Modern Software. We support a broad range of software development languages and frameworks as well as mobile operating systems. Our agents are easily embedded into applications built using all of these languages, without the need for customized coding.

 

   

Mobile Enabled. We provide a native mobile version of our Software Analytics products with nearly all functionality accessible and usable through mobile devices. Our products are designed to anticipate and handle the complexity of mobile architectures, such as mobile carrier performance and user location.

 

   

Big Data Database and Analytics. Our proprietary, cloud-based database leverages modern big data technologies that enable collection and storage of billions of events and metrics each day. Our database structure allows customers to easily build dashboards or make queries to deliver real-time insights.

 

   

Easy and Intuitive. We design our products to be simple, intuitive, and user-friendly. Users are able to learn, deploy, and begin using our products with minimal or no training, often within a few minutes.

 

   

Low Total Cost of Ownership. We price our products on a monthly subscription basis, with flexible pricing plans so each customer is only paying for the products and usage they are consuming. Our customers do not need to invest in additional hardware, infrastructure, or services to utilize our products.

 

   

Integrated Suite. Our suite currently consists of seven products that are integrated, share a common design and user interface, and access the same cloud-based database structure. Users can move seamlessly among different analytic categories and use cases for their software data.

 

   

Extensible Platform. We provide APIs and SDKs for customers, partners, and developers to easily build applications which integrate with and embed our product functionality into other applications.

 

   

Enterprise Scalability and Security. Our products are designed to be scalable and secure. As of September 30, 2014, we collected, stored, and analyzed over 690 billion data points per day. By default, our software data transmissions are encrypted in transit and stored in our secure tier 3 SSAE-16 certified data center. We also perform an annual SOC-2 type 2 audit.

 

Benefits of Our Solution

 

   

Technology Users. Technology users can more rapidly identify problems, isolate root causes, and address problems. Our analytics tools also enable them to predict and prevent future issues.

 

   

Business Users. Business users can use our products to obtain real-time analytics about their business.

 

   

Software Developers. Software developers can use our products to better monitor software performance to continuously improve it as well as fix and prevent problems.

 

 

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Our Market Opportunity

 

For technology users, we believe Gartner’s category of IT Operations Management, or ITOM, captures a subset of our market opportunity. According to Gartner, Inc., a global market research firm, the worldwide ITOM market was $19.1 billion in 2013 and is projected to grow to $27.9 billion in 2018. We believe this generally captures the purchases by larger enterprises of existing legacy solutions, but does not include the opportunity with smaller enterprises that cannot afford such solutions or potential deployments by larger enterprises made feasible by emerging solutions like ours.

 

We believe our market opportunity with business users is largely untapped. According to Gartner, the worldwide market for business intelligence software was $14.4 billion in 2013 and is projected to grow to $21.9 billion in 2018. However, we believe the majority of our market opportunity with business users exists with use cases for which a viable solution has not been historically available.

 

Our Growth Strategy

 

   

Maintain Our Technology Leadership. We will continue to invest in building the Software Analytics category. We plan to continue to improve our existing products as well as develop new products.

 

   

Deepen Existing Customer Relationships. We have observed that our accounts typically make an initial purchase for a specific and immediate need and then subsequently expand to additional users or applications. We make it simple for potential and existing accounts to try new applications.

 

   

Grow Our Base of Large and Small Customers. We plan to grow our base of paid business accounts from larger businesses through our direct sales organization. We also plan to grow our base of paid business accounts from smaller businesses by continuing our marketing and sales programs, partnerships, and grassroots adoption.

 

   

Increase Our Footprint. We currently offer and plan to continue offering free versions of our products so customers continue to spread our footprint rapidly and globally.

 

   

Expand Our Platform and Ecosystem. We intend to expand our offering of APIs and SDKs that allows partners to easily integrate with other applications and services as well as combine our application performance and event data with information from other sources.

 

   

Extend Our International Footprint. We are increasingly investing in our international operations and intend to invest in further expanding our footprint in international markets.

 

Risks Associated With Our Business

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

   

we have a history of losses and we expect our revenue growth rate to decline, and as our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability;

 

   

we have a limited operating history;

 

   

if we are not able to manage our growth and expansion, or if our business does not grow as we expect, our operating results may suffer;

 

   

our quarterly results may fluctuate, and our stock price and the value of your investment could decline substantially;

 

   

our business depends on our customers purchasing additional subscriptions and products from us and renewing their subscriptions;

 

 

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if we are not able to develop enhancements to our products, increase adoption and usage of our products, and introduce new products that achieve market acceptance, our business could 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; and

 

   

upon the closing of this offering, our directors, officers, and principal stockholders will beneficially own in the aggregate approximately 70.1% of our outstanding voting stock and will be able to exert significant control over matters subject to stockholder approval.

 

Corporate Information

 

We were formed in Delaware in September 2007 as New Relic Software, LLC. We converted from a Delaware limited liability company to a Delaware corporation and changed our name to New Relic, Inc. in February 2008. Our principal executive offices are located at 188 Spear Street, Suite 1200, San Francisco, California 94105, and our telephone number is (650) 777-7600. Our website address is www.newrelic.com. Information contained on or that can be accessed through our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

 

“New Relic,” the New Relic logo, and other trademarks or service marks of New Relic appearing in this prospectus are our property. This prospectus contains additional trade names, trademarks, and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

Implications of Being an Emerging Growth Company

 

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

   

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements.

 

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

 

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THE OFFERING

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

46,045,775 shares

 

Over-allotment option offered by us

750,000 shares

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $104.2 million (or approximately $120.2 million if the underwriters’ over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses.

 

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, thereby enabling access to the public equity markets by our employees and stockholders, obtain additional capital, and increase our visibility in the marketplace. We intend to use the net proceeds received from this offering for general corporate purposes, including headcount expansion, working capital, sales and marketing activities, product development, general and administrative matters, and capital expenditures. See “Use of Proceeds.”

 

Concentration of ownership

Upon the closing of this offering, our executive officers and directors and stockholders holding more than 5% of our capital stock, and their affiliates, will beneficially own, in the aggregate, approximately 70.1% of our outstanding shares of common stock.

 

New York Stock Exchange trading symbol

“NEWR”

 

The number of shares of common stock that will be outstanding after this offering is based on 41,045,775 shares outstanding as of September 30, 2014, and excludes:

 

   

8,251,617 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2014, with a weighted-average exercise price of $7.81 per share;

 

   

28,000 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of September 30, 2014, with an exercise price of $0.50 per share;

 

   

777,100 shares of common stock issuable upon the exercise of stock options granted after September 30, 2014, with an exercise price of $19.00 per share (which does not include the stock options and restricted stock units described below that were granted on the date that the registration statement of which this prospectus forms a part was declared effective);

 

   

678,619 shares of common stock issuable upon the exercise of stock options, with an exercise price of $23.00 per share, and 671,725 shares of common stock subject to vesting of restricted stock units, that were granted on the date that the registration statement of which this prospectus forms a part was declared effective;

 

 

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108,234 shares of common stock issued after September 30, 2014, and up to 141,766 additional shares of common stock that may subsequently be issued, in connection with our acquisition of Few Ducks, S.L., or Ducksboard;

 

   

5,618,383 shares of our common stock reserved for future issuance under our 2014 Equity Incentive Plan, or 2014 Plan (which (i) includes 618,383 shares of common stock as of September 30, 2014 reserved for future grants under our 2008 Equity Incentive Plan, or 2008 Plan, (ii) does not reflect the stock options and restricted stock units granted after September 30, 2014, as described above, and (iii) excludes an increase to the 2008 Plan reserve of 1,600,000 shares of common stock in November 2014, which shares, in the case of (i) and (iii), were added to the shares reserved for future issuance under our 2014 Plan upon effectiveness of that plan if the shares were not issued or subject to outstanding grants under the 2008 Plan at that time), which became effective at the time of execution of the underwriting agreement for this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive Compensation—Equity Incentive Plans;” and

 

   

1,000,000 shares of common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, or 2014 ESPP, which became effective upon the effectiveness of the registration statement of which this prospectus forms a part, and which contains provisions that automatically increase its share reserve each year.

 

Except as otherwise indicated, all information in this prospectus reflects and assumes:

 

   

the conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 24,879,907 shares of common stock immediately upon the closing of this offering, giving effect to the conversion price adjustment relating to our Series F convertible preferred stock described in “Description of Capital Stock”;

 

   

the conversion of an outstanding warrant to purchase 28,000 shares of our convertible preferred stock as of September 30, 2014 into a warrant to purchase the same number of shares of common stock upon the closing of this offering;

 

   

no exercise of outstanding options or warrants after September 30, 2014, except for the net exercise of an outstanding warrant for an aggregate of 12,193 shares of common stock;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur in connection with the closing of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 750,000 shares of common stock from us to cover over-allotments.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our historical consolidated financial data. We have derived the consolidated statements of operations data for the fiscal years ended March 31, 2012, 2013, and 2014 and the consolidated balance sheet data as of March 31, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, which in our opinion are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results we expect in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period. The following summary of consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended March 31,     Six Months Ended
September 30,
 
     2012     2013     2014     2013     2014  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

      

Revenue

   $ 11,663      $ 29,664      $ 63,174      $ 26,146      $ 47,974   

Cost of revenue(1)

     1,904        5,078        10,780        4,467        9,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,759        24,586        52,394        21,679        38,913   

Operating expenses:

          

Research and development(1)

     4,300        8,565        16,496        7,734        10,248   

Sales and marketing(1)

     10,748        28,365        58,156        25,007        37,635   

General and administrative(1)

     2,180        10,053        17,178        7,161        10,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,228        46,983        91,830        39,902        58,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,469     (22,397     (39,436     (18,223     (19,579

Other income (expense):

          

Interest income

     2        9        16        10        12   

Interest expense

     (10     (48     (64     (34     (29

Other (expense) income, net

     (65     (105     (741     (322     201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,542   $ (22,541   $ (40,225   $ (18,569   $ (19,395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (0.51   $ (1.49   $ (2.58   $ (1.20 )    $ (1.22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

     14,683        15,096        15,596        15,515        15,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

       $ (1.07     $ (0.48
      

 

 

     

 

 

 

Pro forma weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

         37,033          40,810   
      

 

 

     

 

 

 

 

 

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(1)  

Includes stock-based compensation expense as follows:

 

    

Year Ended March 31,

     Six Months Ended
September 30,
 
    

      2012      

    

      2013      

    

      2014      

    

      2013      

    

      2014      

 
    

(in thousands)

 

Cost of revenue

   $ 11       $ 212       $ 159       $ 58       $ 194   

Research and development

     126         1,620         1,425         988         457   

Sales and marketing

     143         2,060         1,373         390         1,904   

General and administrative

     323         4,794         3,263         2,003         1,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 603       $ 8,686       $ 6,220       $ 3,439       $ 4,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)  

See note 12 of the notes to our consolidated financial statements for a description of how we compute net loss per share attributable to common stockholders, basic and diluted, and pro forma net loss per share attributable to common stockholders, basic and diluted.

 

     As of September 30, 2014  
     Actual      Pro
Forma (1)
     Pro Forma As
Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 92,370       $ 92,370       $  196,534   

Working capital

     82,255         82,255         186,419   

Total assets

     143,462         143,462         247,626   

Deferred revenue

     15,732         15,732         15,732   

Convertible preferred stock warrant liability

     578             —           

Convertible preferred stock

     193,160                   

Total stockholders’ (deficit) equity

     (79,015)         114,723         218,887   

 

(1)  

The pro forma column in the consolidated balance sheet data table above reflects (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 24,879,907 shares of common stock which conversion will occur immediately upon the closing of this offering, giving effect to the conversion price adjustment relating to our Series F convertible preferred stock described in “Description of Capital Stock,” (ii) the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, and (iii) the net exercise of an outstanding warrant into an aggregate of 12,193 shares of common stock upon the closing of this offering, as if such conversion, reclassification, and net exercise had occurred on September 30, 2014.

(2)  

The pro forma as adjusted column gives effect to (i) the pro forma adjustments set forth above and (ii) the sale and issuance by us of 5,000,000 shares of common stock in this offering at the initial public offering price, after deducting the underwriting discounts and commissions and estimated offering expenses.

(3)  

Does not reflect our acquisition of Ducksboard for $2.3 million in cash and 108,234 shares of our common stock in October 2014, and up to 141,766 additional shares of our common stock that may subsequently be issued in connection with the acquisition.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. If any of the following risks are realized, in whole or in part, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

 

Risks Related to Our Business

 

We have a history of losses and we expect our revenue growth rate to decline. 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 of $7.5 million, $22.5 million, and $40.2 million in the fiscal years ended March 31, 2012, 2013, and 2014, respectively, and $18.6 million and $19.4 million in the six months ended September 30, 2013 and 2014, respectively. We had an accumulated deficit of $100.8 million at September 30, 2014. We expect to continue to expend substantial financial and other resources on, among other things:

 

   

investments in our research and development team, and the development of new products, features, and functionality;

 

   

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

 

   

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 being a public company.

 

These investments may not result in increased revenue or growth of our business. We also expect that our revenue growth rate will 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, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new products, determining prices for our products, 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.

 

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We have experienced rapid growth in recent periods and expect our growth to continue. If we are not able to manage this growth and expansion, or if our business does not grow as we expect, our operating results may suffer.

 

We have experienced rapid growth in our customer base and have expanded and intend to continue to significantly expand our operations. For example, our employee headcount has increased from 315 employees as of September 30, 2013 to 534 as of September 30, 2014, and we expect our headcount to continue to grow significantly. Our number of paid business accounts increased from 7,552 to 10,590 over the same period. In addition, we have established operations in Ireland and the United Kingdom, and, as a result of the acquisition of Ducksboard, we also have a subsidiary in Spain. This rapid growth has placed, and will continue to place, significant demands on our management and our operational, financial infrastructure, and company culture.

 

To manage this growth effectively, we must continue to improve our operational, financial, and management systems and controls by, among other things:

 

   

effectively attracting, training, and integrating a large number of new employees, particularly members of our management and sales teams;

 

   

further improving our key business systems, processes, and information technology infrastructure, including our data center, to support our business needs;

 

   

enhancing our information 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, or if we fail to 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 expand our customer base, 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 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 prospectus, many of which are outside of our control. If our quarterly 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.

 

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. The large majority of

 

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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, which is typically one month to one year. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. Some of our customers have elected not to renew their agreements with us and we cannot accurately predict future net expansion rates. Moreover, many of our customers with annual subscriptions have the right to cancel their agreements with three-months’ notice prior to the expiration 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 customer support, our prices, the prices of competing products, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels generally. These factors may also increase as our customer base grows 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 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. The success of any enhancement or new products depends on several factors, including timely completion, adequate quality testing, introduction, and market acceptance. Any new 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 business analytics 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 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 for our products.

 

We expect that we may need to change our pricing model from time to time. As new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, as we target selling our products to larger organizations, these larger organizations may demand substantial price concessions. As a result, in the future we may be required to 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 base and achieve broader market acceptance of our products.

 

Our ability to increase our customer base and achieve broader market acceptance of our products will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding

 

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our sales force, both domestically and internationally. We also plan to dedicate significant resources to sales and marketing programs, including Internet and other online advertising. For example, in the fiscal year ended March 31, 2014, sales and marketing expenses represented 92% of our revenue. The effectiveness of our online advertising has varied over time and may vary in the future due to competition. Moreover, we have historically sold most of our products to small and mid-sized businesses and we have relatively little experience selling our products to larger organizations. We are expanding our marketing and sales capabilities to target larger organizations but there is no guarantee that we will be successful attracting and maintaining these larger organizations as customers, and even if we are successful, these efforts may divert our resources away from and negatively impact our ability to attract and maintain small and mid-sized businesses as customers. All of these efforts will require us to invest significant financial and other resources. If we are unable to hire, develop, and retain talented sales personnel, if our new 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 base and achieve broader market acceptance of our products could be harmed.

 

If we are unable to increase 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. 

 

Historically, we have not focused our sales efforts on large enterprises. Our growth strategy is dependent, in part, upon increasing sales of our products to such 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. As we seek to increase our sales to large enterprise customers, we face longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales than we do with smaller customers. Large enterprise customers often begin to deploy our products on a limited basis, but nevertheless demand extensive configuration, integration services, and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment. In addition, our ability to successfully sell our products to large enterprises is dependent on us attracting and retaining 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 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.

 

Because users are able to configure our platform to collect and store personal information of their employees and end-users, privacy 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, including some personally identifiable information, and security breaches, computer malware, and computer hacking attacks could expose us to a risk of loss of this information, loss of business, severe reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and significant costs for 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 and other malicious Internet-based activity continue to increase generally. If our 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 base 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.

 

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If we are not able to detect and indicate activity on our platform that might be nefarious in nature, our customers could suffer harm. In such cases, we could face exposure, 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 expansion rates, financial condition, operating results, and reputation.

 

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

 

Personal privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions where we offer our products. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy and the use of the Internet as a commercial medium. Industry organizations also regularly adopt and advocate for new standards in this area. In the United States, these include rules and regulations promulgated under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies. 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 Data Protection Directive, or the Directive, established in the European Union and data protection legislation of the individual member states subject to the Directive. The Directive may be replaced in time with the pending European General Data Protection Regulation which may impose additional obligations and risk upon our business. In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. One example of such self-regulatory standards to which we may be contractually bound is the Payment Card Industry Data Security Standard, or PCI DSS. Further, to the extent we accept and handle credit card numbers, we may be subject to various aspects of the PCI DSS. In the event we fail to be compliant with the PCI DSS, fines and other penalties could result. Further, our customers may require us to comply with more stringent privacy and data security requirements. Because the interpretation and application of many privacy and data protection laws along with mandatory 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. 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, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, 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.

 

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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 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 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 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 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, including free trials of our products. If these marketing strategies fail to continue to generate sales opportunities, our ability to grow our revenue will be adversely affected.

 

We are dependent upon lead generation strategies, including our marketing strategy of offering free trials of our products, to generate sales opportunities. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. Many users never convert from the trial version to the paid version of our products. To the extent that users do not become, or we are unable to successfully attract 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 in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

 

The market for application performance monitoring is rapidly evolving, significantly fragmented, and highly competitive, with relatively low barriers to entry in some segments. Our competitors fall into four primary categories:

 

   

diversified technology companies such as HP, IBM, Microsoft, and Oracle;

 

   

large enterprise software and services companies such as BMC Software, CA, Inc., Compuware, Riverbed Technology, and SAP;

 

   

software performance providers such as AppDynamics and Splunk; and

 

   

companies offering analytics products competing with our New Relic Insights product, including Google and Webtrends.

 

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

 

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than our products. Our current and potential competitors may develop and market new technologies with comparable functionality to our products, 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 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, the change in the competitive landscape could also adversely affect our ability to compete effectively. 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.

 

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 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 simultaneously, denial of service attacks, 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 becomes more complex and our user traffic increases. If our products are unavailable or if our users are unable to access our products within a reasonable amount of time or at all, our business would be negatively affected. 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 a third-party data center hosting facility located in Chicago, Illinois. The continuous availability of our products depends on the operations of those facilities, on a variety of network service providers, on third-party vendors, and on our own site operations staff. We depend on our third-party facility provider’s ability to protect these 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 a facility, we could experience lengthy interruptions in our products 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

 

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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.

 

Defects or disruptions in our products could diminish demand for our products, harm our financial results, and subject us to liability.

 

Our customers use our products for important aspects of their businesses, and any errors, defects, or disruptions to our products or other performance problems with our products could hurt our brand and reputation and may damage our customers’ businesses. We provide regular product updates, which frequently contain undetected errors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities, and bugs in our products after they have been released and new errors in our existing products may be detected in the future. Real or perceived errors, failures, or bugs in our products 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. 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 data center hosting facility, provide enhanced levels of products to our customers, and reduce future costs of subscription revenue. In addition, we may need to add additional data centers or similar resources to support our growth. 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.

 

A component of our growth strategy involves the further expansion of our operations and customer base 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, including as a result of our recent acquisition of Barcelona-based Ducksboard, and future initiatives will 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;

 

   

regional data security and privacy laws and regulations and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;

 

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differing labor regulations, especially in the European Union, 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;

 

   

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 any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully, our business and operating results will suffer.

 

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; our President and Chief Operating Officer, Chris Cook; and our Chief Revenue Officer, Hilarie Koplow-McAdam; 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.

 

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 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

 

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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 base 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 Software Analytics 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, 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.

 

We may be sued by third parties 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. 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. See “Business—Legal Proceedings.” In the future, we may receive claims that our products and underlying technology infringe or violate the claimant’s intellectual property 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, 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 Software Analytics 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

 

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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 September 30, 2014, we only had one pending patent application and no issued patents. Despite the pending patent application, we may be unable to obtain any patent protection for our technology. In addition, 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 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. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may 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.

 

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, impair the functionality of our products, 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 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, we may be forced to reengineer or discontinue our products or incur additional costs. We cannot be certain that we have not incorporated open source software in our products in a manner that is inconsistent with our policies.

 

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, we may be contractually

 

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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 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 whether 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 third-party software developers.

 

We provide software that enables third-party software developers to build plugins that integrate with our products. We operate a community website for sharing these third-party plugins. This presents certain risks to our business, including:

 

   

third-party developers may not continue developing or supporting the plugins that they share on our community website;

 

   

we cannot provide any assurance that these plugins 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 for plugins developed by third-party software developers, and users may be left without support and potentially cease using our products if the third-party software developers do not provide support for these plugins; and

 

   

these third-party software developers may not possess the appropriate intellectual property rights to develop and share their plugins.

 

Many of these risks are not within our control to prevent, and our brand may be damaged if these plugins do not perform to our customers’ satisfaction and 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 operations.

 

We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, including the need to develop new products or enhance our existing products, enhance our operating infrastructure, possible acquisitions of complementary businesses and technologies, a decline in the level of subscriptions for our products, or

 

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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. 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. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. 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.

 

The estimates of market opportunity and forecasts of market growth included in this prospectus 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. The estimates and forecasts in this prospectus relating to the size and expected growth of our market may prove to be inaccurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled “Industry and Market Data.”

 

Unanticipated changes in our effective tax rate 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. Further, each jurisdiction has different rules and regulations governing sales and use, value added, and similar taxes, and these rules and regulations are subject to varying interpretations that change over time. Certain jurisdictions in which we did not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. In addition, we may be subject to income tax audits by many tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of SaaS-based companies. 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 will 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.

 

Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, 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, products, or technologies that we believe could complement or expand our products, enhance our technical capabilities, or otherwise offer growth opportunities. Any acquisition may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not the acquisitions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, 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

 

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acquired business due to changes in ownership, management, or otherwise. For example, we only recently completed our acquisition of Ducksboard, and substantially all of the acquisition and integration risks remain. Acquisitions, including our acquisition of Ducksboard, 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 acquisitions 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 be successful in entering into an agreement with any particular target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business, including Ducksboard, 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 face exposure to foreign currency exchange rate fluctuations.

 

We may in the future conduct transactions in currencies other than the U.S. dollar or the functional operating currency of the transactional entities. While we have historically transacted with customers and vendors in U.S. dollars, we have transacted in foreign currencies for subscriptions and may transact with customers 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 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. The revenue growth and potential profitability of our business depends on demand for software applications and products generally, and application performance monitoring specifically. In addition, our revenue is dependent on the number of users of our products. 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,

 

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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.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the federal securities laws, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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 will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or 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 will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” 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 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.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and 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.

 

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As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will 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.

 

As a result of becoming a public company, we will be obligated to implement and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We will be required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

 

We are currently evaluating our internal controls, identifying and remediating deficiencies in those internal controls, and documenting the results of our evaluation, testing, and remediation. We may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm, when required, is unable to attest to management’s report on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

 

As a public company, we will be required to disclose material changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

Risks Related to Ownership of Our Common Stock and this Offering

 

There has been no prior market for our common stock and an active market may not develop or be sustained and investors may not be able to resell their shares at or above the initial public offering price.

 

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. An active or liquid market in our common stock may not develop upon the closing of this offering or, if it does develop, it may not be sustainable.

 

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Our stock price may be volatile or may decline regardless of our operating performance resulting in substantial losses for investors purchasing shares in this offering.

 

The trading price of our common stock is likely to be volatile and could fluctuate widely regardless of our operating performance. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results;

 

   

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 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;

 

   

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, or third-party proprietary rights;

 

   

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;

 

   

any major change in our board of directors or management;

 

   

sales of shares of our common stock by us or our stockholders;

 

   

lawsuits threatened or filed 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.

 

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

 

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shares intend to sell their shares. After this offering, we will have outstanding 46,045,775 shares of our common stock, based on the number of shares outstanding as of September 30, 2014. This includes the shares to be sold in this offering, which may be resold in the public market immediately. The remaining 41,045,775 shares are currently restricted as a result of market stand-off agreements restricting their sale for 180 days after the date of this prospectus. In addition, substantially all of these shares are also subject to lock-up agreements with the underwriters. Morgan Stanley & Co. LLC may, in its sole discretion, permit our officers, directors, employees, and current security holders who are subject to lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

 

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. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

 

After this offering, the holders of an aggregate of 24,920,100 shares of our common stock as of September 30, 2014, including 28,000 shares issuable upon exercise of a warrant, will 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 also intend to register shares of common stock that we may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market stand-off or lock-up agreements.

 

Upon the closing of this offering, our directors, officers, and principal stockholders will beneficially own in the aggregate approximately 70.1% of our outstanding voting stock and will be able to exert significant control over matters subject to stockholder approval.

 

Upon the closing of this offering, our directors, officers, greater than 5% stockholders, and their respective affiliates will beneficially own in the aggregate approximately 70.1% of our outstanding voting stock, including 24.3% held by our founder, Chief Executive Officer, and director, Lewis Cirne. Therefore, after this offering these stockholders will continue to have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders will be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

If securities or industry analysts do not 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 will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or 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.

 

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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 to be effective in connection with this offering, 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;

 

   

establish 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 governed by 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.

 

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

 

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase the value of our business, which could cause our stock price to decline.

 

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

 

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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.

 

As a new investor, you will experience immediate and substantial dilution in the book value of the shares that you purchase in this offering.

 

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, at the initial public offering price, you will experience immediate dilution of $18.46 per share, the difference between the price per share you pay for our common stock and our pro forma net tangible book value per share as of September 30, 2014, after giving effect to the issuance of 5,000,000 shares of our common stock in this offering. See “Dilution.” Furthermore, investors purchasing shares of our common stock in this offering will only own approximately 10.9% of our outstanding shares of common stock after this offering even though the new investors’ aggregate investment will represent 36.8% of the total consideration received by us in connection with all initial sales of shares of our capital stock outstanding as of September 30, 2014, after giving effect to the issuance of 5,000,000 shares of our common stock in this offering. To the extent outstanding options or warrants to purchase our common stock are exercised, investors purchasing our common stock in this offering will experience further dilution.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus 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,” “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 prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our revenue, cost of revenue, gross profit, or gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;

 

   

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

   

our ability to attract and retain customers to use our products, and to optimize the pricing for our products;

 

   

the evolution of technology affecting our products and markets;

 

   

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

 

   

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

 

   

the attraction and retention of qualified employees and key personnel;

 

   

worldwide economic conditions and their impact on spending;

 

   

our ability to effectively manage our growth and future expenses;

 

   

our ability to maintain, protect, and enhance our intellectual property;

 

   

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

 

   

the increased expenses associated with being a public company; and

 

   

our use of the net proceeds from this offering.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus 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 section titled “Risk Factors” and elsewhere in this prospectus. 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 prospectus. 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 prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law.

 

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INDUSTRY AND MARKET DATA

 

This prospectus contains statistical data, estimates, and forecasts that are based on independent industry publications, such as those published by Gartner, Inc., International Data Corporation, and Evans Data Corp., or other publicly available information, as well as other information based on our internal sources. Although we believe that the third-party sources referred to in this prospectus are reliable, estimates as they relate to projections involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

Certain information in the text of this prospectus is contained in independent industry publications. The sources of these independent industry publications are provided below:

 

   

Evans Data, Global Developer Population and Demographic Study, 2013.

 

   

Gartner, Gartner Market Statistics, Forecast: Enterprise Software Markets, Worldwide, 2011-2018, 3Q14 Update, September 2014.

 

   

Gartner, Outsourcing Trends 2013: Growing IT Impact on the Business Drives New Sourcing Decisions, April 23, 2014.

 

   

IDC, Worldwide Smartphone 2014–2018 Forecast and Analysis, Doc #247140, March 2014.

 

   

IDC, Worldwide and U.S. Tablet Plus 2-in-1 2014–2018 Forecast, Doc #247350, March 2014.

 

   

IDC, Worldwide PC 2013–2017 Forecast Update: 2013 Year-End Review, Doc #246547, February 2014.

 

   

IDC, Worldwide Blackbook Version 4 2006-2017, Doc #246614, February 2014.

 

The Gartner Reports described herein, or the Gartner Reports, represent data, research opinion, or viewpoints published as part of a syndicated subscription service by Gartner and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $104.2 million, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds would be approximately $120.2 million, after deducting underwriting discounts and commissions and estimated offering expenses.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, thereby enabling access to the public equity markets by our employees and stockholders, obtain additional capital, and increase our visibility in the marketplace. We intend to use the net proceeds received from this offering primarily for general corporate purposes, including headcount expansion, working capital, sales and marketing activities, product development, general and administrative matters, and capital expenditures. We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this 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.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future, if at all. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, operating results, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2014 on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 24,879,907 shares of common stock, which conversion will occur immediately upon the closing of this offering, as if such conversion had occurred on September 30, 2014, giving effect to the conversion price adjustment relating to our Series F convertible preferred stock described in “Description of Capital Stock,” and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital and (ii) the net exercise of an outstanding warrant into an aggregate of 12,193 shares of common stock upon the closing of this offering; and

 

   

a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of 5,000,000 shares of common stock by us in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses.

 

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2014  
         Actual             Pro Forma         Pro Forma
As Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 92,370      $ 92,370      $ 196,534   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock warrant liability

   $ 578      $      $   

Convertible preferred stock, $0.001 par value: 24,961,092 shares authorized, 24,813,343 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     193,160                 

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 par value; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.001 par value; 55,000,000 shares authorized, 16,413,675 shares issued and 16,153,675 shares outstanding, actual; 100,000,000 shares authorized, 41,305,775 shares issued and 41,045,775 shares outstanding, pro forma; 100,000,000 shares authorized, 46,305,775 shares issued and 46,045,775 shares outstanding, pro forma as adjusted

     16        41        46   

Treasury stock – at cost (260,000 shares)

     (263     (263     (263

Additional paid-in capital

     22,078        215,791        319,950   

Accumulated deficit

     (100,846     (100,846     (100,846
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (79,015     114,723        218,887   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 114,723      $ 114,723      $ 218,887   
  

 

 

   

 

 

   

 

 

 

 

(1)  

Does not reflect our acquisition of Ducksboard for $2.3 million in cash and 108,234 shares of our common stock in October 2014, and up to 141,766 additional shares of our common stock that may subsequently be issued in connection with the acquisition.

 

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The number of shares of common stock that will be outstanding after this offering is based on 41,045,775 shares outstanding as of September 30, 2014, and excludes:

 

   

8,251,617 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2014, with a weighted-average exercise price of $7.81 per share;

 

   

28,000 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of September 30, 2014, with an exercise price of $0.50 per share;

 

   

777,100 shares of common stock issuable upon the exercise of stock options granted after September 30, 2014, with an exercise price of $19.00 per share (which does not include the stock options and restricted stock units described below that were granted on the date that the registration statement of which this prospectus forms a part was declared effective);

 

   

678,619 shares of common stock issuable upon the exercise of stock options, with an exercise price of $23.00 per share, and 671,725 shares of common stock subject to vesting of restricted stock units, that were granted on the date that the registration statement of which this prospectus forms a part was declared effective;

 

   

108,234 shares of common stock issued after September 30, 2014, and up to 141,766 additional shares of common stock that may subsequently be issued, in connection with our acquisition of Ducksboard;

 

   

5,618,383 shares of our common stock reserved for future issuance under our 2014 Plan (which (i) includes 618,383 shares of common stock as of September 30, 2014 reserved for future grants under our 2008 Plan, (ii) does not reflect the stock options and restricted stock units granted after September 30, 2014, as described above, and (iii) excludes an increase to the 2008 Plan reserve of 1,600,000 shares of common stock in November 2014, which shares, in the case of (i) and (iii), were added to the shares reserved for future issuance under our 2014 Plan upon effectiveness of that plan if the shares were not issued or subject to outstanding grants under the 2008 Plan at that time), which became effective at the time of execution of the underwriting agreement for this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive Compensation—Equity Incentive Plans;” and

 

   

1,000,000 shares of common stock reserved for issuance under our 2014 ESPP, which became effective upon the effectiveness of the registration statement of which this prospectus forms a part, and which contains provisions that automatically increase its share reserve each year.

 

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DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

 

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value as of September 30, 2014 was $102.8 million, or $6.37 per share. Our pro forma net tangible book value as of September 30, 2014 was $103.4 million, or $2.52 per share, based on the total number of shares of our common stock outstanding as of September 30, 2014, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 24,879,907 shares of common stock, which conversion will occur immediately upon the closing of the offering, giving effect to the conversion price adjustment relating to our Series F convertible preferred stock described in “Description of Capital Stock” and (ii) the net exercise of an outstanding warrant into an aggregate of 12,193 shares of common stock upon the closing of this offering.

 

After giving effect to the sale of 5,000,000 shares of common stock in this offering at the initial public offering price, and after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2014 would have been $209.1 million, or $4.54 per share. This represents an immediate increase in pro forma net tangible book value of $2.02 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $18.46 per share to investors purchasing shares of common stock in this offering at the initial public offering price. The following table illustrates this dilution:

 

Initial public offering price per share

      $ 23.00   

Pro forma net tangible book value per share as of September 30, 2014

   $ 2.52      

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     2.02      
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

        4.54   
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $ 18.46   
     

 

 

 

 

To the extent any outstanding options or warrants are exercised, new investors would experience further dilution.

 

The following table presents, as of September 30, 2014, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common stock and convertible preferred stock, cash received from the exercise of stock options, and the average price per share paid or to be paid to us at the initial public offering price, before deducting underwriting discounts and commissions and estimated offering expenses:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     41,045,775         89.1   $ 197,803,109         63.2   $ 4.82   

New investors

     5,000,000         10.9        115,000,000         36.8        23.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     46,045,775         100   $ 312,803,109         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. If the underwriters exercise their over-allotment option in full, the total consideration paid by new

 

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investors and total consideration paid by all stockholders would increase by approximately $17.3 million, the pro forma as adjusted net tangible book value per share would be $4.81 per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering would be $18.19 per share. Following such exercise, our existing stockholders would own 87.7% and our new investors would own 12.3% of the total number of shares of our common stock outstanding upon the closing of this offering.

 

The number of shares of common stock that will be outstanding after this offering is based on 41,045,775 shares outstanding as of September 30, 2014, and excludes:

 

   

8,251,617 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2014, with a weighted-average exercise price of $7.81 per share;

 

   

28,000 shares of common stock issuable upon the exercise of a convertible preferred stock warrant outstanding as of September 30, 2014, with an exercise price of $0.50 per share;

 

   

777,100 shares of common stock issuable upon the exercise of stock options granted after September 30, 2014, with an exercise price of $19.00 per share (which does not include the stock options and restricted stock units described below that were granted on the date that the registration statement of which this prospectus forms a part was declared effective);

 

   

678,619 shares of common stock issuable upon the exercise of stock options, with an exercise price of $23.00 per share, and 671,725 shares of common stock subject to vesting of restricted stock units, that were granted on the date that the registration statement of which this prospectus forms a part was declared effective;

 

   

108,234 shares of common stock issued after September 30, 2014, and up to 141,766 additional shares of common stock that may subsequently be issued, in connection with our acquisition of Ducksboard;

 

   

5,618,383 shares of our common stock reserved for future issuance under our 2014 Plan (which (i) includes 618,383 shares of common stock as of September 30, 2014 reserved for future grants under our 2008 Plan, (ii) does not reflect the stock options and restricted stock units granted after September 30, 2014, as described above, and (iii) excludes an increase to the 2008 Plan reserve of 1,600,000 shares of common stock in November 2014, which shares, in the case of (i) and (iii), were added to the shares reserved for future issuance under our 2014 Plan upon effectiveness of that plan if the shares were not issued or subject to outstanding grants under the 2008 Plan at that time), which became effective at the time of execution of the underwriting agreement for this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive Compensation—Equity Incentive Plans;” and

 

   

1,000,000 shares of common stock reserved for issuance under our 2014 ESPP, which became effective upon the effectiveness of the registration statement of which this prospectus forms a part, and which contains provisions that automatically increase its share reserve each year.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

We have derived the selected consolidated statements of operations data for the fiscal years ended March 31, 2012, 2013, and 2014 and the consolidated balance sheet data as of March 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the six months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments of a normal, recurring nature that are necessary for the fair presentation of the consolidated financial statements. The selected consolidated financial data below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period.

 

     Year Ended March 31,     Six Months Ended,
September 30,
 
     2012     2013     2014     2013     2014  
    

(in thousands, except per share data)

 

Consolidated Statements of Operations Data:

          

Revenue

   $ 11,663      $ 29,664      $ 63,174      $ 26,146      $ 47,974   

Cost of revenue(1)

     1,904        5,078        10,780        4,467        9,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,759        24,586        52,394        21,679        38,913   

Operating expenses:

          

Research and development(1)

     4,300        8,565        16,496        7,734        10,248   

Sales and marketing(1)

     10,748        28,365        58,156        25,007        37,635   

General and administrative(1)

     2,180        10,053        17,178        7,161        10,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,228        46,983        91,830        39,902        58,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,469     (22,397     (39,436     (18,223     (19,579

Other income (expense):

          

Interest income

     2        9        16        10        12   

Interest expense

     (10     (48     (64     (34     (29

Other (expense) income, net

     (65     (105     (741     (322     201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,542   $ (22,541   $ (40,225   $ (18,569   $ (19,395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (0.51   $ (1.49   $ (2.58   $ (1.20   $ (1.22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and  diluted(2)

     14,683        15,096        15,596     

 

15,515

  

    15,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

       $ (1.07     $ (0.48
      

 

 

     

 

 

 

Pro forma weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

         37,033          40,810   
      

 

 

     

 

 

 

 

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(1)  

Includes stock-based compensation expense as follows:

 

     Year Ended March 31,        Six Months Ended
September 30,
 
     2012        2013        2014        2013        2014  
     (in thousands)  

Cost of revenue

   $ 11         $ 212         $ 159         $ 58         $ 194   

Research and development

     126           1,620           1,425           988           457   

Sales and marketing

     143           2,060           1,373           390           1,904   

General and administrative

     323           4,794           3,263           2,003           1,611   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total stock-based compensation expense

   $ 603         $ 8,686         $ 6,220         $ 3,439         $ 4,166   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(2)  

See note 12 of the notes to our consolidated financial statements for a description of how we compute net loss per share attributable to common stockholders, basic and diluted, and pro forma net loss per share attributable to common stockholders, basic and diluted.

 

     As of March 31,     As of September 30,  
     2013     2014     2014  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 57,099      $ 19,453      $ 92,370   

Working capital

     51,116        8,026        82,255   

Total assets

     76,907        55,208        143,462   

Deferred revenue

     4,970        10,359        15,732   

Convertible preferred stock warrant liability

     112        830        578   

Total liabilities

     12,229        23,956        29,317   

Convertible preferred stock

     95,917        95,917        193,160   

Total stockholders’ deficit

     (31,239     (64,665     (79,015

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this prospectus. Our fiscal year ends on March 31.

 

Overview

 

We are building a new category of enterprise software we call Software Analytics. Our cloud-based suite of products enables organizations to collect, store, and analyze massive amounts of software data in real time. We design all our products to be highly intuitive and frictionless; they are easy to deploy, and customers can rapidly, often within minutes, realize benefits and results. With our products, technology users can quickly find and fix performance problems as well as predict and 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. Software developers can build better applications faster, as they can see how their software will perform and is actually performing for end-users. As of September 30, 2014, we collected, stored, and analyzed over 690 billion data points daily across more than 4 million application instances and monitored user experiences on over a million website domains and from over one billion mobile application installs. As of September 30, 2014, we had over 250,000 users. We define a user as an email address associated with an account that has deployed our software code, called agents, and from which we receive data from at least one application. As of September 30, 2014, we had 10,590 paid business accounts.

 

Since our formation in 2007, we have invested in building an integrated platform that enables organizations to collect, store and analyze massive amounts of data from their software in real time. We launched our first product offering, New Relic APM (Application Performance Management) for Ruby, in 2008. Since then, we broadened our product offerings to support a wide variety of programming languages and frameworks, with Java in 2009, PHP and .NET in 2010, and Python in 2011. In 2011, we released New Relic Servers to provide server monitoring for the cloud and data centers and New Relic Browser to provide user monitoring and browser experience reporting through all infrastructure layers from the browser to the server. In 2013, we released New Relic Mobile to support mobile by providing native mobile application performance management for the iOS and Android mobile operating systems. We also launched support for Node.js, a programming language, and New Relic Platform to enable third parties to integrate with our platform. In March 2014, we launched New Relic Insights to leverage big data analytics. In October 2014, we released New Relic Synthetics to enable our users to test their software through simulated usage.

 

We sell our products primarily through direct sales and marketing channels utilizing a wide range of online and offline sales and marketing activities. The majority of our users visit our website, create an account and deploy our software. Upon deployment, all users experience our full-featured products with a 14-day or 30-day free trial, enabling them to realize the benefits of our products, after which they have the option to purchase one or more of our subscription plans. During and after the trial period, our direct sales team engages with the user to convert the user into a paid business account. 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. Most of our customers to date have been small to medium-sized organizations, and many of our customers to date have made purchasing decisions without interacting with our sales or other personnel. For larger organizations, our sales team focuses on leveraging users in existing accounts to broaden our footprint across the organization.

 

We offer access to our suite of products under subscription plans that also include service and support. We offer a variety of pricing plans based on the particular product purchased by an account, based on the number of servers used, number of applications monitored or number of mobile devices monitored. Our plans typically have

 

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terms of one year, although some of our customers commit for shorter periods. We recognize revenue from subscription fees ratably over the service period. Most of our customers pay us on a monthly basis. As a result, our deferred revenue at any given period of time has historically been relatively low. As we begin to sell more to larger organizations, we expect to invoice more of our customers on a less frequent basis, and therefore, we expect our deferred revenue to increase 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 given period are directly correlated with our revenue growth.

 

We have grown rapidly in recent periods, with revenues for the fiscal years ended March 31, 2012, 2013, and 2014 of $11.7 million, $29.7 million, and $63.2 million, respectively, representing year-over-year growth of 154% from the fiscal year ended March 31, 2012 to the fiscal year ended March 31, 2013, and 113% from the fiscal year ended March 31, 2013 to the fiscal year ended March 31, 2014. For the six months ended September 30, 2013 and 2014, our revenue was $26.1 million and $48.0 million, respectively, representing year-over-year growth of 83%. 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 $7.5 million, $22.5 million, and $40.2 million in the fiscal years ended March 31, 2012, 2013, and 2014, respectively, and $18.6 million and $19.4 million for the six months ended September 30, 2013 and 2014, respectively. Our accumulated deficit as of September 30, 2014 was $100.8 million.

 

Our employee headcount has increased from 315 employees as of September 30, 2013 to 534 as of September 30, 2014, and our number of paid business accounts from 7,552 to 10,590 over the same period, and we plan to continue to aggressively invest in the growth of our business to take advantage of our market opportunity. We intend to continue to increase our investment in sales and marketing, as we further expand our sales teams, increase our marketing activities, and grow our international operations, particularly as we increase our focus on selling our products to larger organizations. Internationally, we currently offer our products in EMEA, or Europe, Middle East, and Africa, and APAC, or Asia-Pacific, as determined based on the billing address of our customers, and our revenue from those regions constituted 17% and 7%, respectively, of our revenue for the fiscal year ended March 31, 2014, and 15% and 8%, respectively, of our revenue for the fiscal year ended March 31, 2013. Our revenue from the EMEA and APAC regions constituted 19% and 8%, respectively, of our revenue for the six months ended September 30, 2014, and 17% and 7%, respectively, of our revenue for the six months ended September 30, 2013. 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, including through our October 2014 acquisition of Barcelona-based Ducksboard, pursuant to which we acquired all of the outstanding shares of Ducksboard for up to 250,000 shares of our common stock and $2.3 million in cash. To support the growth of our customer base, we also intend to increase our investment in our support organization and infrastructure. In addition, we plan to continue to invest in our research and development organization to enhance and further develop our products. 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. Due to our continuing investments to grow our business, in advance of and in preparation for, our expected increase in sales and expansion of our paid business accounts, we are continuing to incur expenses in the near term from which we may not realize any long-term benefit. 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.

 

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Factors Affecting Our Performance

 

Market Adoption of Our Products. We are defining a new category of software, which we refer to as Software Analytics. Our success is dependent on the market adoption of this emerging and unproven category of software, which may not yet be well understood by the market. 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 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. All 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 delivers 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 do this in several ways. As we improve our existing products 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.

 

Investment in Sales and Marketing. We expect to continue to invest aggressively in sales and marketing to drive additional revenue. In particular, we intend to focus our investment more heavily toward larger organizations, whereas to date, we have focused our sales and marketing efforts primarily on small to medium-sized organizations. 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 in these areas. As we also focus sales and marketing investments more heavily 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 strategic decisions:

 

Number of Paid Business Accounts. We believe that our ability to increase our number of paid business accounts is one indicator of our market penetration, the growth of our business and our potential future prospects. 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. Each of these is treated as a separate paid business account. The following table summarizes the number of paid business accounts at each quarter end:

 

    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 

Paid Business Accounts

    3,180        3,847        4,777        5,768        6,634        7,552        8,437        9,117        9,764        10,590   

 

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

 

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

 

Our dollar-based net expansion rate compares our recurring subscription revenue from customers from one period to the next. We measure our net expansion rate on a monthly basis because many of our customers change their subscriptions more frequently than quarterly or annually. To calculate our annually dollar-based net expansion rate, we first establish the base period monthly recurring revenue from all our customers at the end of a month. This represents the revenue we would contractually expect to receive from those 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 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 following table summarizes our annualized dollar-based net expansion rate for each quarter:

 

    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 

Dollar-Based Net Expansion Rate

    139.2     133.6     137.3     120.0     133.5     119.5     129.3     115.5     109.9     115.0

 

The quarterly fluctuations in our dollar-based net expansion rate noted in the table above 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 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 from larger enterprises versus small to medium-sized organizations will tend to increase our quarterly net expansion rate and a relative increase in the number or paid business accounts 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.

 

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, based on the number of servers used, 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 periods. We invoice most of our customers on a monthly basis. As a result, our deferred revenue has historically been relatively low. As we begin to sell more to larger organizations, we expect to invoice more of our customers on a less frequent basis, and therefore, we expect our deferred revenue to increase over time.

 

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 base and the number of products we offer.

 

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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 meet 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 the period when a customer contract is executed. 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 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 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.

 

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Other Income (Expense), Net

 

Other income (expense), net consists primarily of the re-valuation of our convertible preferred stock warrant liability, interest income, interest expense, foreign exchange gains and losses.

 

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. The period-to-period comparison of results is not necessarily indicative of results for future periods.

 

     Year Ended March 31,     Six Months Ended,
September 30,
 
     2012     2013     2014         2013             2014      
     (in thousands)  

Consolidated Statements of Operations Data:

          

Revenue

   $ 11,663      $ 29,664      $ 63,174      $ 26,146      $ 47,974   

Cost of revenue(1)

     1,904        5,078        10,780        4,467        9,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,759        24,586        52,394        21,679        38,913   

Operating expenses:

          

Research and development(1)

     4,300        8,565        16,496        7,734        10,248   

Sales and marketing(1)

     10,748        28,365        58,156        25,007        37,635   

General and administrative(1)

     2,180        10,053        17,178        7,161        10,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,228        46,983        91,830        39,902        58,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,469     (22,397     (39,436     (18,223     (19,579

Other income (expense):

          

Interest income

     2        9        16        10        12   

Interest expense

     (10     (48     (64     (34     (29

Other (expense) income, net

     (65     (105     (741     (322     201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,542   $ (22,541   $ (40,225   $ (18,569   $ (19,395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Includes stock-based compensation expense as follows:

 

     Year Ended March 31,      Six Months Ended
September 30,
 
         2012              2013              2014              2013              2014      
    

(in thousands)

 

Cost of revenue

   $ 11       $ 212       $ 159       $ 58       $ 194   

Research and development

     126         1,620         1,425         988         457   

Sales and marketing

     143         2,060         1,373         390         1,904   

General and administrative

     323         4,794         3,263         2,003         1,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 603       $ 8,686       $ 6,220       $ 3,439       $ 4,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Year Ended March 31,     Six Months Ended,
September 30,
 
         2012             2013             2014             2013             2014      
     (as a percentage of revenue)  

Consolidated Statements of Operations Data:

          

Revenue

     100     100     100     100     100

Cost of revenue

     16        17        17        17        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     84        83        83        83        81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     37        29        26        30        21   

Sales and marketing

     92        96        92        96        79   

General and administrative

     19        34        27        27        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     148        158        145        153        122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (64     (76     (62     (70     (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest income

                                   

Interest expense

                                   

Other (expense) income, net

     (1            (1     (1       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (65 %)      (76 %)      (63 %)      (71 %)      (41 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of Six Months Ended September 30, 2013 and 2014

 

Revenue

 

     Six Months Ended
September 30,
     Change  
     2013      2014      Amount          %      
     (dollars in thousands)  

United States

   $ 18,509       $ 32,134       $ 13,625         74

EMEA

     4,316         8,968         4,652         108   

APAC

     1,783         3,783         2,000         112   

Other

     1,538         3,089         1,551         101   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 26,146       $ 47,974       $ 21,828         83
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Revenue increased $21.8 million, or 83%, in the six months ended September 30, 2014 compared to the same period of 2013. The increase was a result of an increase in the number of paid business accounts, which increased from 7,552 at September 30, 2013 to 10,590 at September 30, 2014, and an increase in product adoption for existing paid business accounts. Our revenue from EMEA increased $4.7 million, or 108%, in the six months ended September 30, 2014 compared to the same period of 2013 and our revenue from APAC increased $2.0 million, or 112%, in the six months ended September 30, 2014 compared to the same period of 2013 as a result of an increase in the number of paid business accounts and an increase in product adoption for existing paid business accounts located in these geographic regions.

 

Cost of Revenue

 

     Six Months Ended         
     September 30,      Change  
     2013      2014      Amount          %      
     (dollars in thousands)  

Cost of Revenue

   $ 4,467       $ 9,061       $ 4,594         103

 

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Cost of revenue increased $4.6 million, or 103%, for the six months ended September 30, 2014 compared to the same period of 2013. The increase was primarily a result of an increase in personnel-related costs and to a lesser extent hosting-related costs necessary to support our growth, as well as an increase in payment processing costs due to the increase in revenue. Hosting-related costs, payment processing fees, depreciation, and amortization expense increased by $2.1 million, and personnel-related costs increased by $2.5 million, driven by higher headcount.

 

Research and Development

 

     Six Months Ended
September 30,
     Change  
             2013                       2014               Amount          %      
     (dollars in thousands)  

Research and development

   $ 7,734       $ 10,248       $ 2,514         33

 

Research and development expenses increased $2.5 million, or 33%, for the six months ended September 30, 2014 compared to the same period of 2013. The increase was primarily a result of an increase of $1.9 million in personnel-related costs, driven by higher headcount, a $0.3 million increase in spending on outside services, and a $0.3 million increase in facilities and related expenses.

 

Sales and Marketing

 

     Six Months Ended
September 30,
     Change  
             2013                       2014               Amount          %      
     (dollars in thousands)  

Sales and marketing

   $ 25,007       $ 37,635       $ 12,628         50

 

Sales and marketing expenses increased $12.6 million, or 50%, for the six months ended September 30, 2014 compared to the same period of 2013. The increase was primarily a result of an increase in personnel-related costs of $9.6 million, driven by higher headcount and an increase of sales commissions due to revenue growth, and an increase of $1.4 million in marketing programs. The remaining increase was due to an increase in consultant fees of $1.3 million and other miscellaneous expenses.

 

General and Administrative

 

     Six Months Ended
September 30,
     Change  
             2013                       2014               Amount          %      
     (dollars in thousands)  

General and administrative

   $ 7,161       $ 10,609       $ 3,448         48

 

General and administrative expenses increased $3.4 million, or 48%, for the six months ended September 30, 2014 compared to the same period of 2013. The increase in general and administrative expenses was primarily a result of an increase in personnel-related costs of $2.0 million, driven primarily by an increase in headcount. The remaining increase was due to an increase of $1.0 million in facilities and related expenses and other miscellaneous expenses, and $0.4 million in technology and software expenses.

 

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Other Income (Expense), Net

 

     Six Months Ended
September 30,
     Change  
             2013                      2014               Amount      %  
     (dollars in thousands)  

Other income (expense), net

   $ (346   $ 184       $ 530         (153 %) 

 

Other income was $0.2 million for the six months ended September 30, 2014, and other expense was $(0.3) million, for the six months ended September 30, 2013. The other income for the six months ended September 30, 2014 was primarily a result of a decrease in the fair value of our convertible preferred stock warrants.

 

Comparison of Fiscal Years Ended March 31, 2013 and 2014

 

Revenue

 

     Year Ended March 31,      Change  
         2013              2014          Amount          %      
     (dollars in thousands)  

United States

   $ 21,269       $ 43,903       $ 22,634         106

EMEA

     4,572         10,824         6,252         137   

APAC

     2,261         4,574         2,313         102   

Other

     1,562         3,873         2,311         148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 29,664       $ 63,174       $ 33,510         113
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Revenue increased $33.5 million, or 113%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase was a result of an increase in the number of paid business accounts, which increased from 5,768 at March 31, 2013 to 9,117 at March 31, 2014, and an increase in product adoption for existing paid business accounts. Our revenue from EMEA increased $6.3 million, or 137%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 and our revenue from APAC increased $2.3 million, or 102%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 as a result of an increase in the number of paid business accounts and an increase in product adoption for existing paid business accounts located in these geographic regions.

 

Cost of Revenue

 

     Year Ended March 31,      Change  
             2013                       2014               Amount      %  
     (dollars in thousands)  

Cost of revenue

   $ 5,078       $ 10,780       $ 5,702         112

 

Cost of revenue increased $5.7 million, or 112%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase was primarily a result of an increase in personnel-related costs and hosting-related costs necessary to support our growth, as well as an increase in payment processing costs due to the increase in revenue. Hosting-related costs, payment processing fees, and amortization expense increased by $2.7 million, and personnel-related costs increased by $2.8 million, driven by higher headcount.

 

Research and Development

 

     Year Ended March 31,      Change  
             2013                       2014               Amount      %  
     (dollars in thousands)  

Research and development

   $ 8,565       $ 16,496       $ 7,931         93

 

 

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Research and development expenses increased $7.9 million, or 93%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase was primarily a result of an increase of $5.8 million in personnel-related costs, driven by higher headcount, a $1.1 million increase in spending on outside services, and $0.7 million increase in rent expense. The remaining increase was due to travel expenses and other miscellaneous expenses.

 

Sales and Marketing

 

     Year Ended March 31,      Change  
         2013              2014          Amount      %  
     (dollars in thousands)  

Sales and marketing

   $ 28,365       $ 58,156       $ 29,791         105

 

Sales and marketing expenses increased $29.8 million, or 105%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase was primarily a result of an increase of personnel-related costs of $12.8 million, driven by higher headcount, an increase of sales commissions due to revenue growth, an increase of $12.4 million in advertising and marketing programs, and an increase of $2.6 million in office rent expense. The remaining increase was due to an increase in consultant fees of $0.5 million, an increase in travel expenses of $0.5 million, and other miscellaneous expenses.

 

General and Administrative

 

     Year Ended March 31,      Change  
         2013              2014          Amount      %  
     (dollars in thousands)  

General and administrative

   $ 10,053       $ 17,178       $ 7,125         71

 

General and administrative expenses increased $7.1 million, or 71%, in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase in general and administrative expenses was primarily a result of an increase of $5.5 million in legal fees, due to ongoing litigation, and accounting fees. In addition, personnel-related costs, excluding stock-based compensation expense resulting from transactions with existing investors, increased by $2.3 million, driven primarily by an increase in headcount. Increase in personnel-related costs was offset by a $1.5 million decrease in stock-based compensation expense due to a third-party tender offer and certain stock transactions in the fiscal year ended March 31, 2013. The remaining increase was due to an increase in rent expense of $0.6 million due to new facilities and an increase in insurance fees and other miscellaneous expenses.

 

Other Income (Expense), Net

 

     Year Ended March 31,     Change  
         2013             2014         Amount     %  
     (dollars in thousands)  

Other income (expense), net

   $ (144   $ (789   $ (645     448

 

Other expense increased $0.6 million in the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013. The increase was primarily a result of an increase in the fair value of our convertible preferred stock warrants.

 

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Comparison of Fiscal Years Ended March 31, 2012 and 2013

 

Revenue

 

     Year Ended March 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

Revenue

   $ 11,663       $ 29,664       $ 18,001         154

 

Revenue increased $18.0 million, or 154%, in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. This increase was primarily a result of an increase in the number of paid business accounts, which increased from 2,604 at March 31, 2012 to 5,768 at March 31, 2013, as well as our release of new products in the fiscal year ended March 31, 2013.

 

Cost of Revenue

 

     Year Ended March 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

Cost of revenue

   $ 1,904       $ 5,078       $ 3,174         167

 

Cost of revenue increased $3.2 million, or 167%, in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. The increase was primarily a result of an increase in personnel- and hosting-related costs necessary to support our growth. Personnel-related costs increased by $1.5 million, driven by higher headcount, and hosting-related costs increased by $1.0 million, primarily due to our increase in computing and network capacity to support the growth of our customer base. The remaining increase was primarily attributable to an increase in travel, recruiting, consultant fees, and other miscellaneous expenses.

 

Research and Development

 

     Year Ended March 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

Research and development

   $ 4,300       $ 8,565       $ 4,265         99

 

Research and development expenses increased $4.3 million, or 99%, in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. The increase was primarily a result of an increase of $3.3 million in personnel-related costs, driven by higher headcount. The remainder of the increase was primarily attributable to an increase in rent expense, travel, recruiting, consulting and other miscellaneous expenses.

 

Sales and Marketing

 

     Year Ended March 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

Sales and marketing

   $ 10,748       $ 28,365       $ 17,617         164

 

Sales and marketing expenses increased $17.6 million, or 164%, in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. The increase was primarily a result of an increase in personnel-related costs of $9.2 million, driven by an increase in headcount, and an increase in commission expenses, along with a $7.5 million increase in marketing programs and a $0.5 million increase in recruiting and travel expenses. The remainder of the increase was primarily attributable to an increase in facilities expenses and other miscellaneous expenses.

 

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Table of Contents

General and Administrative

 

     Year Ended March 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

General and administrative

   $ 2,180       $ 10,053       $ 7,873         361

 

General and administrative expenses increased $7.9 million, or 361%, in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. The increase was primarily a result of an increase of $6.5 million in personnel-related costs, driven primarily by an increase in stock-based compensation expense and, to a lesser extent, by higher headcount. The remainder of the increase was primarily attributable to an increase in consulting and professional fees of $0.7 million, as well as an increase in travel, facilities, insurance, and other miscellaneous expenses to support our growth.

 

Other Income (Expense), Net

 

     Year Ended March 31,     Change  
         2012             2013         Amount     %  
     (dollars in thousands)  

Other income (expense), net

   $ (73   $ (144   $ (71     97

 

Other expense, net increased $0.1 million in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012. The increase was primarily a result of a $0.1 million lease abandonment charge.

 

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Table of Contents

Quarterly Results of Operations

 

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the ten quarters in the period ended September 30, 2014, as well as the percentage that each line item represents of our revenue for each quarter. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles in the United States. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full fiscal year or any future period.

 

    Three Months Ended  
    Jun. 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sept. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
    (in thousands)  

Consolidated Statements of Operations Data:

 

Revenue

  $ 5,133      $ 6,649      $ 8,052      $ 9,830      $ 11,858      $ 14,288      $ 17,185      $ 19,843      $ 22,613      $ 25,361   

Cost of revenue(1)

    866        1,103        1,263        1,846        2,058        2,409        2,935        3,378        4,032        5,029   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    4,267        5,546        6,789        7,984        9,800        11,879        14,250        16,465        18,581        20,332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Research and development(1)

    1,456        1,281        1,793        4,035        3,133        4,601        4,478        4,284       
4,912
  
    5,336   

Sales and marketing(1)

    4,685        5,448        7,178        11,054        12,038        12,969        17,084        16,065       
18,616
  
    19,019   

General and administrative(1)

    967        1,256        1,561        6,269        2,606        4,555        4,396        5,621       
5,360
  
    5,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,108        7,985        10,532        21,358        17,777        22,125        25,958        25,970       
28,888
  
    29,604   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (2,841     (2,439     (3,743     (13,374     (7,977     (10,246     (11,708     (9,505    
(10,307

    (9,272

Other income (expense):

                   

Interest income

    1        1        1        6        5        5        3        3       
5
  
    7   

Interest expense

    (2     (15     (16     (15     (18     (16     (15     (15    
(15

    (14

Other (expense) income, net

    (3     (11     (12     (79     (190     (132     (181     (238     134        67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,845   $ (2,464   $ (3,770   $ (13,462   $ (8,180   $ (10,389   $ (11,901   $ (9,755   $ (10,183   $ (9,212
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Includes stock-based compensation expense as follows:

     Three Months Ended  
     Jun.  30,
2012
     Sept. 30,
2012
     Dec. 31,
2012
     Mar.  31,
2013
     Jun. 30,
2013
     Sept. 30,
2013
     Dec.  31,
2013
     Mar. 31,
2014
     Jun. 30,
2014
     Sep. 30,
2014
 
     (in thousands)  

Cost of revenue

   $ 4       $ 5       $ 11       $ 192       $ 27       $ 31       $ 43       $ 58       $ 93       $ 101   

Research and development

     44         64         92         1,420         98         890         206         231         202         255   

Sales and marketing

     54         65         100         1,841         178         212         609         374         849         1,055   

General and administrative

     172         233         242         4,147         229         1,775         426         833         787         824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 274       $ 367       $ 445       $ 7,600       $ 532       $ 2,908       $ 1,284       $ 1,496       $ 1,931       $ 2,235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
    Three Months Ended  
    Jun. 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sept. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
    (as a percentage of revenue)  

Consolidated Statements of Operations Data:

                   

Revenue

    100     100     100     100     100     100     100     100     100     100

Cost of revenue

    17        17        16        19        17        17        17        17        18        20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    83        83        84        81        83        83        83        83        82        80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Research and development

    28        19        22        41        26        32        26        22        22        21   

Sales and marketing

    91        82        89        112        102        91        99        81        82        75   

General and administrative

    19        19        19        64        22        32        26        28        24        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    138        120        131        217        150        155        151        131        128        117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (55     (37     (47     (136     (67     (72     (68     (48     (46     (37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                   

Interest income

                                                                     

Interest expense

                                                                     

Other (expense) income, net

                         (1     (2     (1     (1     (1     1          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (55 %)      (37 %)      (47 %)      (137 %)      (69 %)      (73 %)      (69 %)      (49 %)      (45 %)      (37 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Quarterly Revenue Trends

 

Our quarterly revenue increased in each period presented due to increased sales to new customers, as well as increasing sales to existing customers. We cannot assure you that this trend will continue, and we believe that we may experience seasonality in our business in the future.

 

Quarterly Gross Margin Trends

 

Our gross margin has remained relatively consistent over all periods presented, with the fluctuations primarily due to the timing and extent of our investments in our operations and global customer support personnel, hosting-related costs.

 

Quarterly Expense Trends

 

Research and development, sales and marketing, and general and administrative expenses generally increased sequentially over the periods as we increased our headcount to support continued investment in our products. The increase in personnel costs was related to increases in headcount, along with higher stock-based compensation expense. Expenses for the three months ended March 31, 2013 and the three months ended September 30, 2013 were unusually higher due to a tender offer that we conducted and secondary sales of common stock, which increased stock-based compensation expense. The decrease in sales and marketing expenses from the three months ended December 31, 2013 to the three months ended March 31, 2014 was primarily due to a non-recurring expense on a conference organized by us and secondary sales of common stock. We incurred nonrecurring expenses of $7.3 million and $2.2 million in the three months ended March 31, 2013 and the three months ended September 30, 2013, respectively, in connection with this tender offer and these secondary sales.

 

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Table of Contents

Liquidity and Capital Resources

 

     Year Ended March 31,     Six Months Ended
September 30,
 
     2012     2013     2014     2013     2014  
     (in thousands)  

Cash used in operating activities

   $ (5,133   $ (7,200   $ (20,713   $ (9,471   $ (13,174

Cash used in investing activities

     (2,132     (13,171     (17,227     (9,486     (10,389

Cash provided by financing activities

     15,028        60,022        294        118        96,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 7,763      $ 39,651      $ (37,646   $ (18,839   $ 72,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

To date, we have financed our operations primarily through private sales of equity securities. From our inception through September 30, 2014, we have completed several rounds of equity financing through the sale of shares of our Series A through Series F convertible preferred stock for total cash proceeds to us of $193.2 million. We believe that our existing cash and cash equivalents balance, together with the proceeds of this offering, 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, and the continued market acceptance of our products. 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.

 

Cash Used in Operating Activities

 

During the six months ended September 30, 2014, operating activities used $13.2 million in cash as a result of a net loss of $19.4 million, adjusted by non-cash charges of $7.6 million and a net decrease of $1.4 million in our net operating assets and liabilities. The net decrease in our net operating assets and liabilities was primarily the result of a $5.4 million increase in deferred revenue as a result of increased sales of subscriptions, and a $0.7 million increase in accrued compensation and benefits and other liabilities due to increased headcount. This net increase in our net operating assets and liabilities was partially offset by a $3.4 million increase in accounts receivable due to increased sales of subscriptions, a $3.5 million increase in prepaid expenses and other assets, and a $0.6 million decrease in accounts payable.

 

During the six months ended September 30, 2013, operating activities used $9.5 million in cash as a result of a net loss of $18.6 million, adjusted by non-cash charges of $5.7 million and a net increase of $3.4 million in our net operating assets and liabilities. The net increase in our net operating assets and liabilities was primarily the result of a $2.5 million increase in deferred revenue as a result of increased sales of subscriptions, a $1.5 million increase in accounts payable due to an increase in expenditures, a $1.1 million increase in accrued compensation and benefits and other liabilities due to increased headcount, and a $1.0 million increase in deferred rent due to new office leases. This net increase in our net operating assets and liabilities was partially offset by a $2.4 million increase in accounts receivable due to increased sales of subscriptions and a $0.3 million increase in prepaid expenses and other assets.

 

During the fiscal year ended March 31, 2014, operating activities used $20.7 million in cash as a result of a net loss of $40.2 million, adjusted by non-cash charges of $11.7 million and a net increase of $7.8 million in our net operating assets and liabilities. The net increase in our net operating assets and liabilities was primarily the result of a $5.4 million increase in deferred revenue as a result of increased sales of subscriptions, a $2.3 million increase in accounts payable due to increased expenditures, a $2.1 million increase in accrued compensation and benefits and other liabilities due to increased headcount, and a $1.9 million increase in deferred rent due to new

 

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office leases. This net increase in our net operating assets and liabilities was partially offset by a $3.0 million increase in accounts receivable due to increased sales of subscriptions and a $0.8 million increase in prepaid expenses and other assets.

 

During the fiscal year ended March 31, 2013, operating activities used $7.2 million in cash as a result of a net loss of $22.5 million, adjusted by non-cash charges of $10.7 million and a net increase of $4.6 million in our net operating assets and liabilities. The net increase in our net operating assets and liabilities was primarily the result of a $2.8 million increase in deferred revenue as a result of increased sales of subscriptions, a $2.0 million increase in deferred rent due to new office leases, a $1.2 million increase in accrued compensation and benefits and other liabilities due to increased headcount, and a $0.7 million increase in accounts payable due to increased expenditures. This net increase in our net operating assets and liabilities was partially offset by a $1.3 million increase in accounts receivable due to increased sales of subscriptions and a $0.8 million increase in prepaid expenses and other assets.

 

During the fiscal year ended March 31, 2012, operating activities used $5.1 million in cash as a result of a net loss of $7.5 million, adjusted by non-cash charges of $1.8 million and a net increase of $0.6 million in our net operating assets and liabilities. The net increase in our net operating assets and liabilities was primarily the result of a $1.6 million increase in deferred revenue as a result of increased sales of subscriptions, a $0.3 million increase in accrued compensation and benefits and other liabilities due to increased headcount, and a $0.2 million increase in accounts payable due to increased expenditures. This net increase in our net operating assets and liabilities was partially offset by a $0.9 million increase in accounts receivable due to increased sales of subscriptions and a $0.7 million increase in prepaid expenses and other assets.

 

Cash Used in Investing Activities

 

Cash used in investing activities during the fiscal years ended March 31, 2012, 2013, and 2014, and for the six months ended September 30, 2013 and 2014, was $2.1 million, $13.2 million, $17.2 million, $9.5 million, and $10.4 million, respectively, primarily as a result of increases in capital expenditures to purchase property and equipment to support additional office space and site operations, increases in capitalization of software development costs, and increases to restricted cash in relation to new office space.

 

Cash Provided by Financing Activities

 

Cash provided by financing activities for the fiscal years ended March 31, 2012 and 2013, and for the six months ended September 30, 2014, was $15.0 million, $60.0 million, and $96.5 million, respectively, and was primarily the result of proceeds from our sale of preferred stock, net of issuance costs, and the exercise of stock options. Cash provided by financing activities for the fiscal year ended March 31, 2014 and for the six months ended September 30, 2013 was $0.3 million and $0.1 million, respectively, and was primarily the result of the exercise of stock options.

 

Contractual Obligations and Commitments

 

Our principal contractual commitments primarily consist of obligations under leases for office space. As of March 31, 2014, the future non-cancelable minimum lease payments under these obligations, and our future non-cancelable minimum payments under our other contractual obligations, were as follows:

 

     Payments due by period  
     Total      Less than
1 year
     1 to 3
years
     3 to 5
years
     After 5
years
 
     (in thousands)  

Operating lease obligations

   $ 35,606       $ 5,573       $ 10,999       $ 11,367       $ 7,667   

Other obligations

     616         523         93                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,222       $ 6,096       $ 11,092       $ 11,367       $ 7,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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During the six months ended September 30, 2014, we entered into additional contractual obligations. Our total future non-cancelable minimum payments under these contractual obligations were, as of September 30, 2014, $13.4 million over nine years, which consisted of $10.1 million of operating leases and $3.3 million of other obligations.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2014 and September 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

 

Qualitative and Quantitative Disclosure 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 are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro. 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.

 

Interest Rate Risk

 

We had cash and cash equivalents of $57.1 million, $19.5 million, and $92.4 million as of March 31, 2013 and 2014 and September 30, 2014, respectively, consisting of bank deposits 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 $5.6 million as collateral for two letters of credit in favor of our landlords. The letters of credit carry a fixed interest rate of 1%.

 

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. 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 financial statements.

 

Inflation Risk

 

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

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

 

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The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

 

Revenue Recognition

 

We generate revenue from subscription-based arrangements that allow our customers to access our products. Our sales agreements have contract terms typically for one year in length or less.

 

We recognize revenue when the following criteria are met: (i) there is persuasive evidence of an arrangement; (ii) subscriptions have been or are being provided to the customer; (iii) the amount of fee to be paid by the customer is fixed and determinable; and (iv) collection is reasonably assured.

 

We recognize subscription revenue on a straight-line basis over the contractual period. Amounts that have been invoiced and that are due are recorded in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

 

Stock-Based Compensation Expense

 

We measure and recognize compensation expense related to stock-based transactions, including employee and non-employee director stock options, in our financial statements based on the fair value of the awards granted. We estimate the fair value of each option award on the grant date using the Black-Scholes option-pricing model and a single option award approach. We recognize stock-based compensation expense, net of forfeitures, over the requisite service periods of the awards, which is generally four years.

 

Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions we use in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

 

These assumptions and estimates are as follows:

 

   

Fair Value of Common Stock. Because our common stock is not yet publicly traded, we must estimate the fair value of common stock, as discussed in “—Common Stock Valuations” below.

 

   

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option-pricing model on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equivalent to that of the options for each option group.

 

   

Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. We base the expected term assumption on our historical exercise behavior combined with estimates of the post-vesting holding period.

 

   

Expected Volatility. We determine the price volatility factor based on the historical volatilities of our publicly traded peer group as we do not have a trading history for our common stock. Industry peers consist of several public companies in the technology industry that are similar to us in size, stage of life cycle, and financial leverage. We used the same set of peer group companies in all the relevant valuation estimates. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

   

Dividend Yield. The expected dividend assumption is based on our current expectations about our anticipated dividend policy. Consequently, we used an expected dividend yield of zero.

 

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The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine the fair value of our stock options as follows:

 

    Year Ended March 31,   Six Months
Ended September 30,
    2012   2013   2014   2013   2014
         

Fair value of common stock

  $1.01 – $2.98   $3.51 –$4.68   $6.54 –$18.83   $6.54 – $6.93   $16.93 – $17.51

Expected term (years)

  5 – 10   5 – 6   5 – 6   5 – 6   5 – 6

Expected volatility

  50 – 54%   50 – 53%   47 – 52%   50 – 52%   45 – 51%

Risk-free interest rate

  0.77 – 2.56%   0.67 – 0.97%   0.74 –1.87%   0.74 – 1.69%   1.55 – 2%

Dividend yield

  —     —     —     —     —  

 

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

 

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

 

Common Stock Valuations

 

Prior to this offering, the fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions used in the valuation models were based on future expectations combined with management judgment. Members of our board of directors and management team have extensive business, financial, and investing experience. Because there had been no public market for our common stock, the board of directors with input from management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of common stock as of the date of each option grant, including the following factors:

 

   

contemporaneous valuations performed by unrelated third-party specialists;

 

   

the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

   

our actual operating and financial performance;

 

   

our current business conditions and projections;

 

   

our hiring of key personnel and the experience of our management;

 

   

our history and the timing of the introduction of new products and services;

 

   

our stage of development;

 

   

our likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company, given prevailing market conditions;

 

   

the lack of marketability involving securities in a private company;

 

   

the market performance of comparable publicly traded companies; and

 

   

the U.S. and global capital markets conditions.

 

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In valuing our common stock, our board of directors determined the enterprise value, added net cash, and then allocated the equity value to each class of equity securities outstanding (preferred stock, common stock and options) initially using an option pricing method, or OPM. The board of directors determined the enterprise value of our business using the income approach and the market approach valuation methods.

 

The OPM treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference of the convertible preferred stock. The OPM uses the Black-Scholes option model to price the call option. Estimates of the volatility applied in the Black-Scholes option model were based on available information on the volatility of common stock of comparable, publicly traded companies. Additionally, we applied a discount for lack of marketability.

 

The income approach estimates the fair value of the enterprise based on the present value of our future estimated net cash flows and our residual value beyond the forecast period. The future net cash flows and residual value are discounted to their present value to reflect the risks inherent in us achieving these estimated net cash flows. The discount rate was based on a market-derived weighted average cost of capital.

 

In the market approach, we utilized the comparable company method which estimates the fair value based on a comparison of our size, growth, profitability and operating risks to comparable publicly-traded companies in a similar line of business. We selected other software public companies based on their similarity of business model, being primarily SaaS businesses. During the year, we expanded our peer group companies to include new publicly-traded companies and companies with similar growth profiles. From the comparable companies, we calculated business enterprise value, or BEV, to revenue multiples. In our valuations, we utilized the BEV multiples and applied it to the trailing 12 month’s revenues and to the forecasted next 12 month’s revenues. As some of the comparable companies were significantly larger and had different rates of revenue growth and profitability than us, we generally selected multiples that were near the median of these selected companies to account for our lower profitability and expected higher rates of revenue growth.

 

Beginning in September 2013, we utilized a combination of the OPM and the probability-weighted expected return method, or PWERM. Under the PWERM, the value of the common stock is estimated based on analysis of future values for the enterprise assuming various possible outcomes, such as timing as well as the rights of each share class. The future value was discounted to their present value using the discount rate applied in the income approach. Additionally, we applied a discount for lack of marketability.

 

In connection with the preparation of our financial statements for the fiscal year ended March 31, 2014, we estimated the fair value of our common stock for financial reporting purposes in light of our rapidly improving financial performance and