Q2 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to New relic second quarter fiscal 2020, <unk> earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

You acquire any further assistance. Please press star Zero I would now like to hand over the conference to your speaker today, Tony we're getting with Investor Relations. Thank you. Please go ahead.

Thank you operator, good afternoon, and welcome to new relic second quarter fiscal year 2020, <unk> earnings Conference call.

Joining me today, our new rocks, founder and CEO , Lucerne, <unk> and CFO Mark talked about.

Today's conference call contains forward looking statements.

Statements that referred to expectations projections or other characterizations of future events, including financial projections and future market conditions is a forward looking statement.

All information provided in this conference call is as of the date hereof, a new relic assumes no obligation and does not intend to update these forward looking statements except as required by law.

All information about factors that may cause actual results to differ materially the forward looking statements. Please refer to our earnings release issued today as well as the rest described in our most recent Form 10-Q and subsequent filings with the FCC.

Copies of these documents may be obtained by visiting new routes Investor relations website or the Fccs website.

Our commentary today will include non-GAAP financial measures, which we believe provide an additional tool for investors to use in evaluating ongoing operating results and trends. However, these measures cannot be considered in isolation from whereas the substitute for financial information prepared in accordance with gap.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today.

At times, we may offer incremental metrics to provide greater insight into our business or results.

This additional detail maybe onetime in nature, and we may or may not provide an update in the future on these metrics.

I encourage you to visit the Investor Relations section of new relics website to access our earnings release issued today supplemental materials that accompany our earnings release periodic FCC reports, a webcast replay of todays call or to learn more about new relic.

With that let me turn the call over to live.

Thank you Tony and good afternoon to everyone joining today's call.

Since our beginning you real exhibition has driven us to instrument digital world and establish the standards I wish all software and its impact can be measured and improved.

Well the first half of the year was challenging I am pleased with the perseverance and steadfast focus demonstrated by our company over this period.

This was evident in September at our future stock user conference, where we relieved advanced platform capabilities.

Like logs, new relic tracers and new relic metrics. We also added program ability to the new relic, one platform, which gives our customers and partners the ability to win to build entirely new applications on top of the new relic, one platform, enabling them to integrate business data increased seamless workflows on our platform to drive.

Real time actionable insights.

We see program ability as a platform to finding capability and litmus test of the in service will be platform in other words, it's not a platform unless application development is supported.

Unlike dashboard only solutions our platform enabled software to be built and share combining them severability ambitious metrics to deliver unique digital customer experiences connecting technical customer experience and business data in visualizations tailored to the unique business needs and integrating our customers workflows have nearly limitless use cases.

Which we see as a competitive advantage for our company.

With our recent enhancements the new relic, one observer ability platform became open enabling our customers to bring an Asian based and open telemetry data connected allowing our customers to see relationships between their systems and programmable empowering our customers and partners to build entirely new applications on top of new relic.

To drive their digital business.

Since our product organization moves in the general manager model, our innovation throughput has exceeded my expectations and I was proud to open our futurestack user event by announcing a record number of new innovations and ask for years.

These new products delivered on new relic, one raised our pay product count to 10 and highlight the merits of converging our development focus around this common powerful platform.

We believe we have executed well on our strategic imperatives outlined during our last earnings call accessibility and program ability and we are acutely focused on driving better results from our go to market organization in the second half the initial phase of establishing regional go to market hierarchy is complete and we expect to be in a position today.

Better leverage our scale significant installed base and the entire observatory ability platform going forward.

We then strengthened our leadership team on October 1st by welcoming my Christiansen to an operating role that new relic as president and COO.

Mike is a seasoned executive with deep familiarity not only with our space, but our company has the know how and experience required to drive us beyond a billion an annual revenue. He also adds capacity to our team, which affords me the bandwidth to allocate the majority of my time to driving strategic product initiatives.

With these changes in place coffee expansion over observe ability platform I'm increasingly confident in our ability to execute in the second half. In fact, we are experiencing early signs of success with accounts that participate in beta version of our newest platform capabilities.

In one particular case, our team was able to expand a mid six figure accounts in the social technology sector to a multimillion dollar customer.

The incumbent environment involved a typical sprawl or competitors home grown metrics logging built on the Elasticsearch stack and an open source visualization tool.

The value proposition of standardizing on new relic was driven by the power of new relic, one the customer accreted to applications through our program ability capabilities recognized far superior scalability, and then deployed our law that metric and trace offerings while in beta.

I believe deals of this caliber our scale will do the organizational and haven't enhancements. We made this year along with the broader field enablement that accompanies the general availability of our new offerings.

As we shift our focus for the second half our key initiatives are enabling the field to sell the open connected and programmable platform to further penetrate our significant installed base.

Productivity of our customer solutions group.

And further differentiating our durability platform by expanding the library of programmable template offerings to foster development, adding context, the new relic logs and moving the new relic AI products and GA status.

I'll now turn to call over to Mark to provide color on the financials.

Thanks, Lou now turning to the financials revenue was 145.8 million for the second quarter up 27% year over year and above the high end of our guidance range.

We ended Q2 with 906 paid business accounts with Ala over $100000 up 15% compared to a year ago. This growth represents both new logos landed as well as installed base expansions derived from increased usage expanded application coverage and the cross sell additional products.

Our annual U.S dollar base net expansion rate in Q2 was 112% compared to 124% from a year ago period. The decrease was in line or expectations and driven by a lower amount of upsell activity this quarter relative to our total installed base.

The end of Q2 enterprise business was approximately 62% if they are up around 56% as are the same period last year.

In terms of geographic split U.S. revenue was 99.3 million for the quarter up 27% year over year, well non U.S. revenue for the quarter grew to 46.6 million also up 27% year over year.

For Q2, our non-GAAP gross margin was 84%.

non-GAAP operating income was 11.2 million or 8% of revenue compared to 9.7 million were 8% of revenue in the same quarter last year.

This result was above our guidance due to a number of conservative expense assumptions and FX benefit and lower personnel expenses, Although we had a strong hiring quarter with over 150 net new hires to start dates of our new hires were generally backend loaded.

Overall, our non-GAAP net income attributable to new relic per diluted share was 24 cents compared to 20 cents in the same quarter last year.

Turning to cash flow cash from operations was 9 million.

Free cash flow defined as cash from operations minus capital expenditures and capitalized software development costs was negative 8 million.

And your balance sheet, we ended the second quarter with approximately 772 million of cash cash equivalents in short term investments are from last quarter's 769 million total.

Elsewhere on the balance sheet, our total deferred revenue ended the quarter at 233 million up 22% year over year, but down 9% sequentially. This result was below our initial range of a sequential decline in the low to mid single digits when calibrated to the full year revenue outlook update provided in September 16th we were near the bottom that range.

Some of the factors that impacted Q2 deferred revenue include aggressive model assumptions, which have since been refined as well and slightly lower sales attainment and it didn't quarter invoicing change from million dollar account.

Now I will turn into our outlook for the third quarter and full fiscal year 2020.

For the third quarter ending December 31st we expect revenue to be in the range of 148 million to 150 million.

We expect non-GAAP operating income of three to 4 million. This would lead to non-GAAP net income attributable to new relic per diluted share and the range of 12 to 13 cents.

We expect deferred revenue to increase on a percentage basis in the low single digit sequentially as we work to build market awareness and increased sales productivity.

For the full fiscal year 2020, we expect revenue to range from 588 to five or 93 million.

We expect non-GAAP operating income of 21 to 25 million. This should lead to non-GAAP net income attributable to new relic per diluted share in the range of 60 to 67 cents.

Before moving to Q in a I'd like to provide the Boeing to assist with modeling the remainder of the year and revenue beyond fiscal 20.

Regarding this fiscal year, we're maintaining gross margin outlook and update the following items.

Cash from operations, we expect to be between 90, and 100 million, which is down from 100 to 110 million.

Free cash flow, we expect to be between 30, and 35 million, which is down from 40 to 50 million and capital expenditures, we expect to be between 55, and 60 million, which is up from 50 to 55 million.

Looking beyond this year, we refining our 1 billion dollar objective from a run rate basis attached Q4 fiscal 22 to a full year 1 billion dollar revenue total in fiscal 2003 at our upcoming analyst and Investor Day on December 12, we provide a fiscal 23 target operating model calibrated to $1 billion of annual rent.

No.

In summary, we saw improved overall performance in Q2 and are working to accelerate growth. We anticipate continued improvements to the second half and into fiscal 21 has been able to field in order to broaden the adoption or a platform.

And with that I'd like to open the call for questions. Operator. Please go ahead.

As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound or Husky. Please standby only compiled acuity Ross.

Your first question comes from Ittai Kidron with Oppenheimer. Your line is open.

Hey, guys I guess, just a question for both fuel.

Both of you guys I'm I'm, just kind of trying to.

Hi, Lou what you saw what do you said about and tried to focus on the productivity of the customer solutions group a guys.

A bunch of new product coming out and then about March your comments about slightly lower silver came in in the quarter. How do you feel at this point about the training of the Salesforce, how capable our day in pushing the new products and maybe you can also talk about.

How even the processes from the learning process, what kind of out your prepared productivity wise would you expect over the next two three quarters.

Great question seems high I'll take the first part of it let mark provide some color.

You know, we introduced an awful lot of innovations and capabilities at Futurestack and as I said in the prepared remarks, I'm very I'm very pleased with the execution. Apart work has has delivered and so we're very focused on enablement and there is an awful lot of new capability to enable our field on and that's going on pretty.

Well, but it's not an instant transfer of knowledge and understanding to two to take that out to the market and so it's it's a top priority for us to enable well and while we enable with so many with the breadth of our platform. The specification of our platform I think there is an opportunity to do it intelligently, which ought to.

Result in more efficiencies in our CSG organization so.

I'd say, it's it's a top area of focus where early on if we're in we're very pleased with how our customers are responding to the innovations that is definitely resonating with what the Mark is looking for and they see differentiation in it.

And now we absolutely need to focus on being efficient and taking it to two to market through a well and able to go to market team.

Got it and then just as a follow up.

No Mike is on the job officially only a month I guess at this point, but he has been there for quite some time any first impressions on what changes has been implementing or how are you thinking about doing things a little bit differently internally that they have been up until now.

Mike Mike has ramped up very rapidly because as you mentioned he has actually been involved with the company for nearly 10 years now over nine years, so, but even that having been said he spent an awful lot of time I think he's visited about six new relic offices in in Oh literally around the world.

Including including our Asia European office, as well as North America, and he is quickly getting the speed and.

And we're going he's going to go into some depth as to his initial impressions and thoughts as to how we think about growing our business at our analyst day coming up.

But I'm really pleased with the energy, bringing in the idea is free and I'm very excited about.

How this partnership is developing.

That's great good luck guys.

Your next question comes from.

<unk> with Morgan Stanley Your line is open.

Thank you for taking the question we will have a question for you going into the second half split job you've at least a lot of products this quarter, but going into your big expansion quarters, where your larger customers are I wanted to get a sense from the perspective of the customer about how they think about renewing their new relic contracted healthy expanding.

Is it a function of them them sort of looking at the product road map and saying these guys released a bunch of coal interesting stuff.

It looks like we're future proof or do you really does have to sell them on the sort of capabilities. The program ability stuff you've announced this quarter today, one is probably a sense of how much of the lift is in terms of executing in the second half on on the renewal base.

Oh, it's great question size, it I'd say it varies a bit depending on what we're talking about that we released.

For example, with logs that's an established market, it's more about demand capture I think than anything else in that we're pleasantly surprise for us.

Suddenly pleased with how how.

How you are customer is hard to talk to us and two way to evaluate and use our logging product.

Well how fast it is they love how easy it is to use and administer hassle free really compared to an on premise or nothing ramp to think about indexing.

And of course, they love that is integrated with our with our ATM, which is we believe best in class. So so that's it that's the nature of a product where.

Customers are eager to talk about expanding then erratic relationship with that at the table by something like program ability, which is literally new nobody's done anything like this in our category that takes time for our customers to understand discovery think about the use cases and adopt we're very pleased with the customers that have done that we're seeing.

Signs of stickiness and engagement, particularly on him moments of truth like launch days or game days are important moments, they're turning to program ability to really make sure that there are moments of truth, they understand exactly what they need to see in their business, but that's kind of take longer I think for cuts to fully develop in terms of.

Being broadly adopted and broadly understood.

And that's fine that's a that's really a strategic that we're thinking about that that bears out over a longer period of time. So you know as we look at across all the things we deliver we can sort of plot each of those things on on that spectrum.

But there's no doubt in my mind that with what we have now we've got a minute energized.

Salesforce and enterprise customer base that are thrilled about what we've been delivering so now it's time to really execute.

Got it and maybe just one quick follow up on sort of the same topic as we sort of come up on the midpoint of the current quarter you talked about some early proof points I guess my question as to what extent is the macro environment.

A factor where a hindrance in terms of Youre on outlook look into Q3 in Q4 and ultimately what do you want to execute upon was was there any squeamishness in terms of the demand environment from a from a from a from a lack of microenvironment perspective that you saw in this quarter, that's continuing into the into the current quarter.

No no not really to speak of it you know.

The overriding forces are that these massive.

Tailwinds around cloud around.

The move into the digital economy to Dev ops. These are all things that work in our favor that we think current year outsize compared to all potential macro.

Issues may or may not exist. So so we're not seeing that as a major factor today.

Or in the quarter either.

Your next question comes from Michael Turits with Raymond James Your line is open.

Hey, guys good evening.

Mark.

Good.

Little bit on infrastructure side. This is.

Tom.

Made a lot of change this year.

Including I think moving to more visualization dashboard extensibility third parties et cetera, So how far along the process are you at and then how much uptick are you getting and and I would add you also talked about.

And the salesforce to handle that as well.

Oh, we're really pleased with the progress we made an infrastructure on the product side in particular, new relic metrics really address it a key requirements Mark it was asking from us to two to have a more complete infrastructure offering it allows any customer that's using promethium.

Which is an increasingly popular technology for monitoring virtually anything in the infrastructure environment to direct we send that into new relic, one that we can natively handle.

And so that's that's a key capability that really ups. Our game. So we think we effectively have close the competitive gaps.

We have with other companies on infrastructure and we're starting to see nice signs of some wins.

In the infrastructure space heads up with other companies that have more of a hit an infrastructure.

History, so, but but we recognize that we gotta could keep the focus on it we have a rich history and ATM I'm until we're continuing to invest in enabling our field two to two do big infrastructure deals and release about platform deal. So now that we have logging.

And infrastructure with those gaps closed and the ATM together all in one platform and that platform having significant.

Differentiation, particularly with program ability. We think we've you know we think of this is winning on the platform and that includes a when large infrastructure deployments.

Thanks.

Can you give us more detail on a shortfall relative to deferred revenue you called out a number of factors.

To clarify bit aggressive modeling assumptions.

Our sales attainment and then it sounds like invoicing change and on a lot or is that part of.

I have a general trend towards.

Shorter invoicing that may be going below one year.

Sure. So yeah, we did call those factors yeah, the lower sales attainment relative forecast that was a three to 4 million dollar shortfall. So that has always had an impact.

We did have some aggressive modeling assumptions around renewals co terms.

Yeah and duration in fact durations been the it's been going up pretty steadily over the last number of years. This quarter. It in fact declined slightly and so that that had an impact and then on the invoicing we were seeing more push back.

In terms of renewals customers wanting to pay a willingness to pay your upfront I think you go back a few years ago customers routinely paid three years up front. You know then he they went to one year. We are seeing push back on that we had a customer that multimillion dollar customer that you know just would not pay.

Will not pay out you upfront anymore, and so that that also had an impact.

And we we're not willing to to get financial incentives to make up that shortfall since we do expect them to pay over time.

And you know that interesting about the macro question as I agree I totally agree with loser sponsor about that on other hand. It there may be some manifestations of that in terms of larger companies and their their willingness to pre pay full year and multiple multiple years or upfront.

Very helpful. Thanks.

Your next question comes from Jack Andrews, with Needham and company. Your line is open.

Good afternoon, Thanks for taking my question.

I was wondering when you think about greenfield opportunities in this market and you are approaching.

Central new customers with the value proposition of new relic one.

The buyer now approaching within these organizations that.

Can make the decision to potentially standardize on your platform.

You know it does vary by deal size and I would mention that it was an improved quarter on number of 100 K customers for so let's take the segment, whereas the hundred Kay and customer and and deal approve or they tend to be like a VP of engineering and our VP of ops.

And well off in the not there in the digital business side right. So they're they're involved with.

Digital projects that may or may not be tightly aligned with ita BBA.

And they and so they've got some level of autonomy, but they they certainly have a.

Hi level connection point between the development team and the sorry team and often developers carry the pager for example, so so that's why I'm, having having a connection to those roles or it is an important in that and our plot price are well aligned for building bridges between the development team in the operation.

His team and so they align often under a VP of engineering too.

Who may report to a CTO and so the CTL gets involved when the deal gets more to like 500 can up and and then and then and then when we get to the million dollar in up then we start to talk but I T standard and cross divisional.

Sorts of relationships and that's where we're where we do build a relationship with with the team who wants to standardize on new relic and make it their platform of choice.

Either for ATM more for the whole product suite.

And and and that's where we get involved with with the centralized function.

Appreciate the color if I could ask a follow up question to Mark.

Well just wondering is there any impact that we should be thinking about to your margin structure just.

With the simultaneous running of both new relic, one and your.

Listing platform currently.

You know term in terms of gross margin profile.

We we don't see we don't see of a meaningful difference in those two.

And so he is getting the guidance for that year and in you know we're comfortable that that we can be just as efficient this new relic one as a as the as previously and I think that is important to clarify.

Is that new relic, one really is a new user interface onto the exact same data that we've been collecting with our with our previous generation user interfaces. So it's a way to unify all the data collected into the new relic cloud.

In a simplified unified user interface and so that's why there's there's almost negligible impact on our in our hosting cost or anything like that it's not like our new database historian new types of data. It's in fact, a way to to simplify what customers are already sending into the new relic cloud and what and one of the nice things to know about that.

That's why and you always want to such an easy on ramp for our customers. They don't need to install anything new word to adopt any.

New SK used to get new relic, one is just a new and improved view on what the data they've already been sending us.

Got it thanks for taking my questions.

Your next question comes from Jennifer Lowe.

Yes. Your line is open.

Great. Thank you.

First I just I guess this would be a clarification question, but following up on Michael Turits. His line of questioning when I look.

At the prepared remarks.

Around deferred revenue Theres, the comment that says well calibrated the full year revenue outlook provided in September we were near the bottom of that range and I'm, assuming that range was the prior guidance for deferred revenue, which you came in lower then so can you just just sort of clarify that and then how given that the full year.

Revenue guidance didn't move but you were at the lower end on deferred in Q2, how do we sort of reconcile those things and get comfort that that you have that visibility stones that full year revenue target.

Yeah. So when we when we took our our revenue guide down in September .

Obviously that had a you know that was based on our outlook for the for this for Q2 and Q3 in Q4, primarily for Q2 in Q3 since the you know that those that business has an impact on revenue in Q in this year, whereas Q4 does not much and so.

Obviously as that revenue came down our our.

Our deferred expectations were lowered.

And in terms of in terms of the where we where we stand going forward. We've given the guide for for this current quarter and I think if you if you look at the implied billings.

Growth numbers, if you look at the latest 12 month implied billings numbers I think you'll see.

Growth in the in that 20, low Twentys I believe it is a and then if you look at our billings numbers.

Project, our deferred for Q3, and you look at that that billings.

In two to billings number you're looking at a you know kind of high single digits a.

Slight acceleration in that regard and so when when we look at you know all these numbers together and we look at a you know project our revenue for the second half of the year, we do feel like we have good visibility into into that.

Okay, Great and then just one more for me.

The last earnings call you you talked about the net dollar retention being you know up quarter over quarter, but still down year over year, you didn't sort of provide a similar comment on this call you know as we think about the back half of the or how should we think about I mean, given all of the impressive products that are coming out.

Now and now you're in market with a lot of these you should we assume that starts to to return to more of a normalized rate over the next couple of quarters or should still be depressed as we think through the back half.

It really we're very excited about the products I think we were seeing good early indications of success. There those are going to take time to really penetrate and and filter into the numbers and so I think you know while will help certainly the back of that fear I think the real impact of those.

New products will be in fiscal 21.

From a dollar base expansion rate generally speaking the back half of the year from a new air our standpoint tends to be strong for us. We have the Q3. This is just you know the calendar year end and then our Q4 in March on the other hand, our renewal base tends to be very large in Q3 in Q4, and so just with a.

Constant renewal rate, you've got you've got a higher level higher level of churn in those two quarters and so you've got somewhat competing.

Metrics in terms of driving that number.

Our our view is that we do we do feel like our dollar.

Based expansion rate should tend to improve over the course of the year.

So in the back on the back half of the year, we are looking for improvement in the second half.

You know, but but we're not giving any any firm guidance on that.

Great. Thank you.

Your next question comes from Sterling Auty with Jpmorgan. Your line is open.

Yes, Thanks, Hi, guys I apologize you covered it.

Between calls, but specifically to.

The new solutions that you've introduced into the market over the last couple of months, what's been kind of the initial feedback that you've got in and what are the next milestones that we should be looking for the new relic one rollout.

Okay.

Hey, Sterling.

I'm happy to talk about product as many times anyone like.

So I'd say the Mark response, the solutions as enthusiastic at at our Futurestack Conference for example, I talked to.

Our top 15, or so customers in North America.

And literally 100% viewed program ability as strategic to them.

And it's the first time, we've ever gotten all 15 of our customers to agree on something when we've asked for feedback you can imagine some a largest companies in the world there, they're demanding but that they help us execute better so that was great. It's an example, but.

I'd say the market is responding well to our logging offering they see it has differentiated and they they love that it's all in the same places are our world class ATM offering in our amazing infrastructure product. So that's resonating well and then as I look.

<unk> towards the future of the year there was a lot of interest in new relic, AI, which we announced as in beta but has yet to go GA.

And specifically the the capability of new relic AI to reduce alert noise by 80%.

So our customers when things go wrong and production they don't get one alert they might get a dozen and that's very confusing to our customers and then the worst case they start to ignore alerts if they get to noisy.

And so you really key I offers a compelling value proposition to them that they are eager to adopt.

And then.

Payback is positive from the from the customers in the beta so we've got more shelf software to to deliver during this fiscal year end.

And we're excited to see that kind of market too.

Well it makes sense and one follow up.

Disclose the non ATM card business in the quarter.

Oh, we didn't specifically called that out Sterling the numbers.

We are in the mid Thirtys.

And for overall and insights and infrastructure continued to be the two leading non HCM products coming in a high teens.

One of the things, we're finding is that more and more customers are embracing the platform and a you know from from our standpoint, that's great. That's it provides a lot more value to the customer that's how they get the most dive more products is by adopting the entire platform and so you know when they do adopt the whole platform. It gets.

To be an allocation question of an internal allocation, how we want to you know what we want to put toward the toward other products and so from our standpoint, we look at things like usage.

Deployment.

Data ingest things like that to get some some.

Sense of how the other products are doing those accounts, but the actual percentage of non APPM starts to become less and less meaningful I would say in terms of the overall over our overall business is doing but what we are seeing is things like attach rates customers, who have multiple products and customers have the entire products suite and all.

Platform you continue to increase.

Got it thank you.

Your next question comes from Mohit <unk> with Barclays. Your line is open.

Thanks, guys for taking my question.

This quarter.

I wanted to dig into the.

Retention rate.

I know you have on.

Question before but obviously some progress versus Q1.

But if we if we look at new business. So you mentioned that in second half you expect.

Mentioned sort of like short trajectory booming whether improvement, but I'm wondering if you can comment on new business, Oh, I'm sort of the ups and it's always a new business this quarter and what gives you confidence that you can sort of like sustained momentum at least on new business.

In the second and then I just want to push.

Sure with regards to new business candidly, what we've done over the last two years strategically is focus much of our gross have growth efforts on a small number of our largest customers are among our customers are the largest potential you've seen that in a reflection of the number of customers they spend more than $1 million with us.

That's growing at a steady clip, particularly over the last two years.

And one of the things.

That.

We feel like we need to adjust in that model is to focus more on new business, specifically hundred K customers. So now we have 900 customers, who spend 100 K with us.

And that's a healthy and growing number but we want to really increase that number I'm. We feel like if you're 100 came you really subscriber that's a meaningful relationship virtually all of them use at least three of our products.

So they tend to be stickier, they tend to grow faster and so rather than focus on the relatively small number of customers that might go from a million to a million a half I'm in a given period of time, let's focus on developing a much larger cohort of customers that spend.

At least 100, K with new relic and many of them are in the customer base today spending less than 100 K.

But we also need to focus on landing hundred K customers to when you're going to see that as an area of focus I'm, particularly with with Mike onboard Kietzman talking with the team and with me about it and we all agree that's that's an exciting new way for us to think about the business in the you know going forward.

Understood Thanks for the quarter.

My follow up question on the EMEA business. This quarter. So you mentioned that you had a new sales leader that started who started on.

In Q1, just wondering if again.

What are you seeing initially.

Any macro issues you want to.

Sort of like highlight because we view, obviously hearing from other window the whole macro situation.

Thanks.

Yeah. So so to me Oh, yeah, Yeah, Yeah, we had two liter start in Q1, yeah, I think he's he's very quickly move to establish a you know his team his leadership team and and is is I would say, we're making good progress in the blocking and tackling of.

Building that business and you know this Q2 s always a difficult quarter in EMEA.

And he is still pretty early for him, but I think.

What we see is him doing the right things and he's got a good team in place now and he is driving driving the team to do you know to do the exists what you'd expect with good sales execution building pipeline really focusing a focusing the group on the message.

He takes a market and so I think he's he's making good progress, but but obviously it takes time for those things to really establish in a and then show up in the numbers.

In terms of the of the overall macro market in EMEA I think it's similar to last quarter, where.

We hear a lot about you know externally we hear a lot about it from our customers I would say, we we don't hear that much about it.

And when do you look at the projects, we're working on the new digital initiatives. The move to the you know the digital economy projects like those tend to get funding and.

I think that's that's our view is that the.

Those will be those would be the although last to be caught versus some of the other places that that folks made they look to cut spending.

In the on the amount of adapt downturns like downturn.

Understood. Thanks.

Your next question comes from Chris Merwin with Goldman Sachs. Your line is open.

Okay. Thank you.

I wanted ask about containers.

Maybe just talk a bit.

About how you're investing in your capabilities there to monitor workloads.

You are running on containers and to the extent that you're seeing a further shift in the and then the customer base tours containers, how if at all is that impacting the competitive dynamics for you all.

We've we've.

Our customers had been using containers for several years now, we do incredibly well and containerized environments.

And in fact, we actually strengthen our capability containers at Futurestack by one of the many.

Things, we launched on the new relic, one platform than any customer can install for free as an improved.

Container explore and visualize it allows them to look at the health of.

An unlimited number of containers and at massive scale and correlate that with application.

Health and of course correlated with the health of the underlying host that the containers running on so that continues to improve and we feel good about we feel great about how on the migration and containers just increases the need to associate the applications health with the infrastructure that is running on.

Great and then as it relates to hiring you can you talk a bit about where most of these new hires will sit whether that's in R&D or sales and marketing.

Yeah, given some of the convergence going on I mean, how do you think about the right level of investment in R&D in the business going forward.

Yeah. So we had a terrific quarter from hiring snap on I think was a record quarter with over 150 net new.

And there there are costs the company, obviously, we focus a.

A lot on R&D and then they go to market work and we've we've seen that a you know it we can we can to attract great talent and continue to do that.

We expect to continue invest there.

And you know going looking forward, we we plan to continue to grow a higher aggressively and that will be across the board, but specifically I think when you've always got to get sales capacity and head of head of future years and on the on the R&D side, we want to make sure we continue the.

So you get great talent, there overall, we've bumped up our R&D spending this year as a percentage of revenue and.

I think we're looking out I think we've seen great returns on that.

We should continue to see opportunities to invest their best there and so if anything I think we will be more likely to be.

To be bumping up our R&D spending than than anything else.

Great. Thanks, so much.

Your next question comes from Oliver with Baird. Your line is open.

Great. Thanks for taking my question guys Lou one for you you mentioned in your prepared remarks, the yacht Social software company that had moved from six figure to multiple seven figures and had done a new relic one.

Can you run one was curious if you could provide a little bit more color on that progression from kind of initial our use of some of the new relic one features.

In beta up to the paid conversion <unk>, what that timeline felt like for you.

And then what that means in terms of how you look at some of your other large customers how long it might take to begin to monetize that and I just had a quick follow up as well. Thanks.

Sure I'd love to give more color. So this particular customer we had.

Great conversation with them over the course of Q2 in the summer about that standardizing on our platform. They recognize say that the this fall of lots of different tools was working counter to their goal to deliver great customer experience and to move faster.

And they're an innovative company and they they understood the power of.

Being able to develop their own capabilities on new relic, one so that.

There was really no exception case.

That would prevent them from seeing everything they do you just see in one platform and that was a big thing that that attracts them to it and and so they adopted program ability they adopted our our metrics capability, our opening tracing capability and then they then they started adopting logs in their aggressively using our logs and my favorite part about it is a different part of this come.

Tony that was.

Less familiar with new relic during the course of that discussion.

They are informed that that in New York on with the new standard and two weeks before a major launch a major launch they moved from a combination of open source technologies.

Onto the new relic platform and they developed the custom view they wanted to going from no familiarity with our platform to building their own software on top our platform in the final two weeks before making a major launch and and the usage of that custom softer. They built themselves was the highest of anything that we saw.

Our new relic, one program ability because it was.

It was specific to their business they knew what they needed to see it was an important moment there are launching an important piece of software and it was it was worthwhile for them to spend a little bit at times programming on your about one show exactly what they did the launch was a huge success.

And it was a huge for their business and that was a huge success for us and our reputation within a company. So I do want to tell that story not only on this call, but more importantly to the rest of our sales team. So they understand that when customers understand the power of our platform they build strategic relationships and that's what drives the growth of our business.

Great. That's that's really helpful. Thanks, Lou and then just my one follow up was just for clarification. There has been a lot of good questions.

And color on.

Salesforce and the progress that that might have been making.

So far but I just wanted to clarify one thing in your prepared remarks, Lou you said, Doug the initial phase of establishing the regional sales force and I just wanted to understand.

You got second phase, just something more than getting familiar with the products and getting them in People's Panton bags or is there something else about the actual regional adjustment to the salesforce that still has to happen and if so what is that thank you guys. No. No. We don't anticipate any like you know regional changes or you know adjustment to the model how were or.

Nice or anything like that.

You know, what we've completed that move toward to regional.

Integrated sales forces that was the right decision. It's more now where we are we are in the process of fully enabling our sellers to convey the value proposition of these new products, we've delivered and more importantly, the value proposition of the entire platform because the markets certainly wants this they don't want to jump from.

An ATM product to a different long product they want to see logs in context, which is why we're having so many customers come to us to try a logging product.

And they want.

The the the infrastructure capabilities also in the same place and they love that we are delivering that I'm, particularly with adding new relic metrics to the mix. So.

It's really about enabling our sales force to tell the story and and and and take to market the capabilities that we felt.

Your next question comes from Derrick Wood with Cowen and company. Your line is open.

Thanks.

I wanted to drill down into the motions around upgrades new relic one.

I know you guys have said, you're letting customers upgrade at their own speed, but it seems like you're kind of running two tracks in terms of getting customers adopter innovation. One is upgrading the core onto the new platform and one for the new product adoption. So I know, it's early but you've seen any kind of trend in behavior whether customers.

To adopt the new product Spurs men do the core upgrade or vice versa or at the same time any color there would be helpful.

So just as a reminder, with it I wouldn't call it an upgrade to new rather one that because that implies for installing new software or you're taking some new action on.

You are simply using an alternative higher level view that new relic one provides into the very same telemetry, where we're collecting into our existing products.

And the one and we've we've improved our dashboard and capability in particular, so that's where there's like a a direct overlap of functionality between well, we haven't new relic, one and what we havent new relic insights.

And so for the customers that are using new relic one for dashboards.

They're engaging longer there they're logging in more often we're seeing great signs of adoption and so now we're fully confident with with brand new relic, one is and what the feedback received from our customers the metrics were seeing.

That we're ready to turn it on as the default home page of what you see when you log into new relic.

And historically that default home page has been our ATM product so.

That ought to happen, we expect that to happen sometime within the next 90 days and and so when that happens we will expect increased usage of that coupled with that of course other reasons to go to new relic one beyond it being the default home pages of course, the capabilities only available new relic one that includes logs that includes.

Our kubernetes cluster explore.

It includes global search in and and our metrics being able to visualize the metrics. We cut we collect with new relic metrics. So those are reasons for people to come to new relic, one because they can only get it there and that's also part of why we see.

The increased organic usage, but now it's time to just turn it on and make it something that people see when they log in and that ought to drive even more usage and standardization around it.

Your next question comes from Gary Powell with Deutsche Bank. Your line is open.

Great. Thanks for taking a question.

Maybe a couple of again.

Yes, I know this might some obvious I guess, we then we've been talking about changes in the competitive environment that effort over the last 612 months.

On the last earnings call.

Have you seen any meaningful changes this past quarter again, how do you feel on the visibility you have today.

Relative to earlier this year.

I would say that the competitive dynamic environment is largely unchanged since last quarter. When we talked about it. However, you noted with what we released in September so towards the end up the quarter and too late to have an impact on on on the numbers that we've talked about today.

But we believe that and what we're seeing from the customer feedback is that.

Our competitive position is much much stronger.

And we feel like we've effectively close the competitive gaps that we've had with some of the competitors, particularly on infrastructure dash boarding.

And now with with program ability and actually with some of the capabilities and our logging product. We've created we've created new gaps of of our own that that that put us ahead of our competitors and some meaningful ways. So we feel better about our compares competitive position today than we did 90 days ago. Thanks to the hard work on the product teams, but as I've mentioned.

We now have to focus on enabling the field, so that our customers understand the capabilities.

And can make the right choice and standardizing on new relic one.

Your next question comes from Keith Bachman with Bank of Montreal. Your line is open.

Hi, I had two questions if I could.

The first is for Mark Mark I know you guys.

Our uncomfortable with billings and even guidance.

But this is probably the most important metrics for investors. So if you think about Q4, you've already provided guidance for Q3, which is December Q4 for the March quarter.

In the last two years, you've grown 47 and 40% sequentially.

Is there any kind of metric that you want to provide to get investors thinking about calibrating their models associated with Q4 in particular I assume.

You would suggest that sequential growth exhibited the last two years would be meaningfully under.

What youve done and that's why 18 19.

But at least one to provide you with the formed at least give some directional comments help investors calibrate that I want to come back to lose if I could.

Yeah, I think at this point.

We're not really ready to give additional guidance in into the Q4 numbers Q4 as it is as any software Q4 tends to be a strong corridor.

We expect that to be no different for us this year.

I think we'll provide more guidance in December at our analyst day, we'll talk a little bit more about that.

But at this point I think we're going to we're going to we're going to hold off we did give the the.

Guidance in terms of revenue target for fiscal 2000 3 billion on revenue fiscal 2003, So I think to the extent Weve you want something beyond sort of near term that's the milepost we've put out.

Okay, well, let me come back to Lou in that regard because Lou you've talked a little bit about a few things, but I want to.

Come back and try to at least get some feedback on how long. So for instance, if I look at what you've guided for.

For Q3, and I'm guessing for Q4 as well your billings are actually going to be down pretty meaningfully year over year.

And new relic is is thereby meaningfully underperforming the mark.

Introduced or late to the market your competitive positioning.

Has been impaired as a consequence.

And so how long do you think this journey is that you're asking investors to stick around to you get to just to pick a number kind of meaning mean mid teens kind of billings growth rate.

Because frankly, that's the more important metric than the revenue growth rate. How long is this journey is this a year is two years.

No we're not prepared to speak to specific timeframe I will tell you that.

You know we make decisions we make at this company are entirely from a lens of long term, what's being the best interest of the company in our shareholders and as you know I am the largest one so I care deeply about this.

And we always like.

To see great progress sooner rather than later and we are focused and earn we're working focus with urgency, but always with a favorite over the long term or the short term I'll give you. An example of that we could have been in the market a year ago, perhaps if we rushed on logging and the best way to rush and logging would have bye.

By a company I'm, probably based on elastic searching go out with a me too product that would have had you inferior performance inferior usability, we took longer to deliver logging on top of NR DB and the feedback we're hearing from our customers is the differentiation is compelling now I would have liked to have executed better to deliver.

For logging on top of our core data technology sooner and that's something that we talked about last quarter I'm very pleased with improvement in execution, we've done but that doesn't change. The fact that we have the mindset of delivering the best capabilities.

And and doing it right. So that we have more sustainable competitive advantage program ability as an example of a capability that we believe will deliver sustainable competitive advantage and so.

That has required us to be a little.

Patient and for our investors to show some patients to and we understand that.

But but I feel like we're through the worst of it on this we've we've now delivered on those capabilities and you're seeing US you know I've talked about your okay, I coming too so.

We are now in the market with these products were encouraged by what customers are saying and and you know I can't give you more specifics on what quarter when does it hit a certain number but but we feel good about what we delivered.

Your next question comes from jewelry with D.A. Davidson Your line is open.

Hey, guys that thanks for taking my questions first just wanted to ask about kind of the revised outlook Mark I. Appreciate you talking about the new kind of long term model and not to get to ahead at analyst day next month, but I mean look if I just look at the numbers based on guidance right now where we're looking at a CAGR of somewhere in the 19% range over the new.

Next three years versus effectively the 16% revenue growth that you're guiding to in Q4.

Maybe just help us understand what's it what is it that's giving you confidence in the implied acceleration. So it's across more than 1 billion in revenue and EPS by 23, and I've got a quick follow up thanks.

Yeah, I think the.

You know the changes we're making it we've got we've got a he as we've talked a lot about on this call. The new products releases that we've done the continued product innovations that are coming out in the roadmap.

We feel like that not only as has allowed us to catch up but in some ways leapfrog Arkham competitors.

We've got a you know we've got now Mike in place, whose is working hard driving us forward and we're working on on the go to market. That's the next phase right. We first have to reintroduce the products next phase. It's enabled the sales organization get them focus to give them the proper messaging and get out there.

Okay and start to drive drive the deals and when we look at the growth rate of the market.

And we look at what what we.

Expect to do and want to do.

We feel confident that we can we can hit those objectives.

Certainly you know, we put that target out there for billion dollars.

I think if if you know if I look at objective Lee and say how fast the market growing I think our our aspirations are certainly to do more than that but you know what willing what we're committing to is is the billion dollars in 23.

Your next question comes from Steve.

Bush your line is open.

Great. Thanks for squeezing me I've got one quick one for Mark in one product question.

Mark can you just give us any sort of granularity on where the sales for.

Her.

Relative to the variance with your assumption.

It was a it was.

A combination of the expansion and and new.

And it was you know it's fairly it was fairly broad across the geos.

No no one region or new work fashions stood out.

Okay and was there anything systematic you think.

Behind that.

Kind of your points I'd like wanting to change certain aspects of your assumptions.

And then I'll give a quick product.

My last.

Nothing nothing that I would point do again, a lot of little things and improvements that we want to make that we think we can make an have made in some cases.

Got it okay great.

And then Lou.

About.

On a similar Derek question.

Ask about.

The new relic infrastructure product.

Versus what you're not providing what metrics and the kubernetes explore.

Is there any overlap here that that could.

The sales needs to learn how to sell these things together or.

We could go to market or the product called pretty much completely complimentary how how did not work.

They align well on the attached well so I think it's fine and theres not a heavy lift to our new skill set required in order to enable our field a field to too.

You know have infrastructure reaches full potential.

Your next question comes from Erik Suppiger with JMP Securities. Your line is open.

Yes, you would you had mentioned earlier that you were seeing more of the.

Standard standardized telemetry adoption.

Can you talk a little bit about any trends that you're seeing on that front.

Certainly so you know people are adapting promethium pre people using current that east Oh, the open telemetry initiative for tracing.

Are all things that customers are asking about now what what we hear particularly enterprise is that they're going to have some of all of that and then they're also going to want agent based technology because.

For example, with opened tracing Thats an area that you need to call in order to to get the visibility one and enterprises may want to do that in some other applications, but they have thousands of applications. They want to manage with one platform and so they want agents for.

Most of their stuff quite frankly, and we're the best that at providing the broader set of agents to see inside software, but they want to complement that with with technologies like open tracing which historically meant they would select a different a platform for foreseeing the open tracing stuff and now they don't need to choose they can put it all in one place in new relic one.

There are no further questions at this time I'll now turn the call back over to management for closing remarks.

Great well I want to thank you all for listening and more important want to think that now 2000 relics around the world.

You are working very hard we there's a much more to do but I'm very pleased with the innovations that the company's delivered and now it's time to take them to our customers to help them be successful.

We now have the only observer to build a platform because there's not a platform unless you can build software on it and we're the only one of its nature.

And that our customers care about that.

And so we're training our people to take this the world and and and we're excited about as potential and for those of you.

Masters analysts, we look forward to seeing you at our analyst and Investor Day on December 12 to New York. So thank you.

This concludes today's conference call you may now disconnect.