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 Company recognized the cumulative effect of applying ASC 606 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.”

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 the new standard was recognized on April 1, 2018. See below for the impact of adopting 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 new 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 Consolidated Financial Statements

Select 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):



	March 31, 2019
	As Reported			Balances without adoption of ASC 606			Effect of Change Higher (Lower)
Assets:
Deferred contract acquisition costs	$	27,161		$	—		$	27,161
Deferred contract acquisition costs, non-current	$	26,218		$	—		$	26,218
Liabilities:
Deferred revenue, current	$	267,000		$	268,379		$	(1,379	)
Deferred revenue, non-current	$	4,597		$	4,552		$	45
Stockholders' Equity:
Accumulated deficit	$	(305,569	)	$	(360,550	)	$	54,981

Select 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):



	Twelve Months Ended March 31,
	2019
	As Reported			Balances without adoption of ASC 606			Effect of Change Higher (Lower)
Revenue	$	479,225		$	477,875		$	1,350
Sales and marketing	$	257,066		$	269,882		$	(12,816	)
Loss from operations	$	(33,106	)	$	(47,272	)	$	14,166
Net loss attributable to New Relic	$	(40,893	)	$	(55,059	)	$	14,166
Net loss per share, basic and diluted	$	(0.72	)	$	(0.97	)	$	0.25

Select 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):



	Twelve Months Ended March 31,
	2019
	As Reported			Balances without adoption of ASC 606		Effect of Change Higher (Lower)
Depreciation and amortization	$	53,794		$	27,943	$	25,851
Deferred contract acquisition costs	$	(38,667	)	$	—	$	(38,667	)
Net cash provided by operating activities	$	115,517		$	115,517	$	—

Disaggregation of Revenue

For disaggregated revenue by geography, refer to Note 15—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
March 31, 2019	$	267,000	$	4,597

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 year ended March 31, 2019, which was included in the deferred revenue balances at the beginning of the period, was $189.4 million. The satisfaction of performance obligations typically lags behind payments received in substantially all of our subscription arrangements, 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 year ended March 31, 2019.

Deferred Commission Costs (Contract Acquisition Costs)

In connection with the adoption of ASC 606, 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. During the year ended March 31, 2019, amortization from amounts capitalized was $25.9 million, and amounts expensed as incurred were $9.0 million. The Company had no impairment loss in relation to costs capitalized.

Remaining Performance Obligations

The Company’s contracts with customers generally include one main performance obligation, which is access to our SaaS-based products and platform. Within our main performance obligation, each service is generally considered a distinct stand-ready obligation that is recognized over the contract term based on the passage of time. As of March 31, 2019, the unrecognized transaction price related to remaining performance obligations was $498.3 million. The Company expects to recognize more than 93% of the remaining performance obligations over the next 24 months, with the remainder recognized thereafter.

Modification

From time to time the Company modifies contracts with its customers. These modifications generally result in an extension of the contract term and/or increase in the subscription product. These modifications are generally accounted for as a termination of the old contract and a creation of a new contract because the additional performance obligations are considered distinct and priced at stand-alone selling price. During the year ended March 31, 2019, the impact of modification has not been significant.