Revenue Recognition

The Company offers a comprehensive suite of products delivered on its open and extensible cloud-based platform that enable organizations to collect, store and analyze massive amounts of data in real time so they can better operate their applications and infrastructure and improve their digital customer experience. The Company generates revenue by selling subscription-based arrangements that allow its customers to access its cloud-based platform.

The Company determines revenue recognition through the following steps: (i) identification of the contract, or contracts with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations in the contract, and (v) recognition of revenue, when, or as, the Company satisfies a performance obligation.

Subscription revenue is recognized on a ratable basis over the contractual subscription period of the arrangement beginning when or as control of the promised goods or services is transferred to the customer. Deferred revenue consists of billings or payments received in advance of revenue being recognized.

ASC 606 Adoption Impact

The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining contracts. Previously, the Company recorded commissions as sales and marketing expenses as incurred. Under the new standard, the Company capitalizes incremental commissions related to initial contracts and amortizes such costs over the expected period of benefit, which the Company has determined to be three years. With regards to incremental commissions related to renewal contracts, the Company has adopted the practical expedient to expense such commissions as incurred, as the commission paid on renewals are commensurate and the contract periods are generally one year or less. The Company has adopted ASC 606 in the first quarter of fiscal year 2019 using the modified retrospective approach and applied the standard to all contracts as of April 1, 2018. The cumulative effect of applying this standard was recognized on April 1, 2018. See below for the impact of adopting this standard.

The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of accumulated deficit at April 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods prior to adoption, ASC 605. In connection with the adoption of ASC 606, the Company also adopted ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to ASC 606 and ASC 340-40 as the “new standard.”

Adoption of the new standard resulted in changes to the Company’s accounting policies for revenue recognition, commissions and deferred commissions as discussed below. The Company recorded a net reduction to the opening balance of accumulated deficit of $40.8 million as of April 1, 2018 due to the cumulative impact of adopting the new standard. The primary impact of adopting the new standard relates to the deferral of $40.6 million in incremental commission costs of obtaining subscription contracts. Under ASC 605, the Company recorded commissions as sales and marketing expenses as incurred. Under the new standard, the Company capitalizes incremental commissions related to initial contracts and amortizes these costs over a period of benefit determined to be three years. The remaining impact of adopting the standard is immaterial.

Practical Expedients and Exemptions

The Company applied ASC 606 using the following practical expedients: (i) costs of obtaining contracts with customers are expensed when the amortization period would have been one year or less; and (ii) contract acquisition costs are calculated based on a portfolio of contracts with similar characteristics instead of on a contract-by-contract analysis.

Impact on the Condensed Consolidated Financial Statements

Select condensed consolidated balance sheet line items, which reflects the adoption impact of the new standard as reported, as well as the impact of adoption, are as follows (in thousands):



	December 31,
	2018
	As Reported			Balances without adoption of ASC 606			Effect of Change Higher (Lower)
Assets:
Deferred contract acquisition costs, current	$	25,275		$	—		$	25,275
Deferred contract acquisition costs, non-current	24,487			—			24,487
Liabilities:
Deferred revenue, current	$	200,231		$	201,286		$	(1,055	)
Deferred revenue, non-current	6,638			6,624			14
Stockholders' equity:
Accumulated deficit	$	(288,727	)	$	(339,920	)	$	51,193

Select condensed consolidated statement of operations line items, which reflects the adoption of the new standard, as reported, as well as the impact of adoption, are as follows (in thousands, except per share information):



	Three Months Ended December 31,									Nine Months Ended December 31,
	2018									2018
	As Reported			Balances without adoption of ASC 606			Effect of Change Higher (Lower)			As Reported			Balances without adoption of ASC 606			Effect of Change Higher (Lower)
Revenue	$	124,011		$	123,603		$	408		$	347,128		$	346,339		$	789
Sales and marketing	66,461			$	70,083		$	(3,622	)	185,091			$	194,290		$	(9,199	)
Loss from operations	$	(8,540	)	$	(12,570	)	$	4,030		$	(17,706	)	$	(27,694	)	$	9,988
Net loss attributable to New Relic	$	(10,103	)	$	(14,133	)	$	4,030		$	(24,054	)	$	(34,042	)	$	9,988
Net loss per share, basic and diluted	$	(0.18	)	$	(0.25	)	$	0.07		$	(0.42	)	$	(0.60	)	$	0.18

Select condensed consolidated cash flow line items, which reflects the adoption of the new standard as reported, as well as the impact of adoption, are as follows (in thousands):



	Nine Months Ended December 31,
	2018
	As Reported			Balances without adoption of ASC 606		Effect of Change Higher (Lower)
Depreciation and amortization	$	38,585		$	20,095	$	18,490
Deferred contract acquisition costs	$	(27,689	)	$	—	$	(27,689	)
Net cash provided by operating activities	$	66,896		$	66,896	$	—

Disaggregation of Revenue

For disaggregated revenue by geography, refer to Note 13—Revenue by Geographic Location.

Contract Balances

The following table provides information about deferred revenue (in thousands):



	Deferred Revenue
	Current		Non-Current
April 1, 2018	$	188,860	$	1,182
December 31, 2018	200,231		6,638

The Company receives payments from customers based upon billing cycles. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company’s right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues the Company has recognized in excess of the amount it has billed to the customer is considered to be a contract asset. Contract assets are immaterial, and as a result, the Company has no asset impairment charges related to contract assets in the period. Deferred revenue represents considerations received from customers in excess of revenues recognized.

Revenue recognized during the three and nine months ended December 31, 2018, which was included in the deferred revenue balances at the beginning of the period, was $90.5 million and $169.3 million, respectively. The satisfaction of performance obligations typically lags behind payments received under the new standard, which may lead to an increase in the Company’s deferred revenue balance over time. Movements between contract assets and receivables was not significant during the three and nine months ended December 31, 2018.

Deferred Commission Costs (Contract Acquisition Costs)

In connection with the adoption of ASC 340-40, the Company is required to capitalize certain contract acquisition costs primarily consisting of commissions. As of April 1, 2018, the date of adoption of ASC 340-40, the Company had $40.6 million capitalized in deferred contract acquisition costs related to contracts where the benefit period had not yet expired. In the three and nine months ended December 31, 2018, amortization from amounts capitalized was $6.7 million and $18.5 million, respectively, and amounts expensed as incurred were $2.3 million and $5.5 million, respectively. The Company had no impairment loss in relation to costs capitalized.

Remaining Performance Obligations

As of December 31, 2018, the unrecognized transaction price related to remaining performance obligations was $415.7 million. The Company expects to recognize more than 93% of the remaining performance obligations over the next 24 months, with the remainder recognized thereafter.