New Relic (NEWR), an applications and infrastructure observability platform, is transitioning from a subscription based business model to a consumption based model. Customers can pay as they go, receiving a bill for the amount of data loaded into the New Relic Platform after the fact. Or they can commit to a minimum over a defined period of time which New Relic realizes ratably over time. In its latest 10-K, New Relic also revealed the shift will also change how it accounts for sales commissions:

“In future periods, with our shift to a consumption model and shift in pricing strategy, we expect that the majority of commissions will no longer be capitalized and will instead mostly be expensed as incurred.”

Until it’s lapped annually, the change will negatively impact operating margins. Our analysis indicates the change would have reduced operating income by approximately $22, $21, and $19 million in the years 2021, 2020, and 2019 respectively. If the change had been in place during the prior three years, New Relic’s reported operating losses would have been higher by approximately 12.8%, 24.5%, and 57.4%.

Historically, New Relic has been less aggressive than SaaS peers in how it accounts for sales commissions. Prior to this change, New Relic amortized sales commissions over three years whereas consumption based companies like Snowflake amortize commissions over five years.