Q4 2020 Earnings Call
Good day and welcome to the new relic fourth quarter in fiscal year 2020 earnings Conference call.
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Hi, I'd like to turn the call coincide with the Peter Goldmacher.
Vice President Investor Relations.
Please go ahead.
Thank you operator, good afternoon, and welcome to new Alex fourth quarter fiscal year 2020 earnings Conference call. Joining me today, our new relic CEO and founder.
CFO Mark.
Well.
My question.
Today's conference call contains forward looking statements any statement that repairs to expectations projections or other characterizations of cheap.
Including financial projections natural guidance given market conditions.
Looking statements.
All information provided in this conference call.
The date hereof, new relic assumes no obligation does not intend to update these forward looking statements except as required by law.
Transformation about factors that may cause actual results could differ materially some forward looking statements. Please refer to our earnings release issue today as well as the risks described our most recent form 10-Q.
<unk> filings with the FCC.
Copy. These documents may be obtained by visiting new routes Investor Relations website or do you have seen seems website.
Our commentary today will include non-GAAP financial measures, which we believe provided additional tool for investors to use in evaluating operating results and trends. However, these measures should not be considered in isolation from whereas a substitute for financial information prepared in accordance with GAAP reconciliations between.
Non-GAAP metrics, probably accordingly actual results can be found in our earnings release issued today.
At times, we may offer incremental metrics to provide greater insight into our business results.
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 that its website to access our earnings release issued today.
Materials that accompanying our earnings release periodically you see reports a webcast replay of today's call or to learn more about do well.
With that let me turn the call opening though.
Good afternoon, and thanks to all of you for joining today's call.
We are living an unprecedented times.
Let me try to be heard that in the last.
Two months.
Well actually is probably the never once all your station for email threat response.
This is the great true, we all know unsafe struggle and contend with everything we truly are living an unprecedented times.
And as it relates to software.
The world needs software more than ever software into life, but at the world.
And to make us more clear I'd like you all the take a thought experiment with me.
Massive this horrible virus covert 19 were actually coated 89 that is what if this virus hit the world.
New York 30 years ago.
At that point in time, you that was a virtual I know one to the world. There are few people like me struggling to get their 20 8-K modems to connect to a Bbs sort of AOL.
But for all intents and purposes, the Internet was a toy aside and not capable of doing much at all.
There was no online shopping there was no E commerce, there was no way to get this implies you need it delivered to you.
There's no way to deliver education online, there's no way for our kids to do the incredible an important work they need to do right now to to further their education to at home.
Oh, well with the help of a teacher.
Or or resource instantly available online there was no video conferencing.
Telephone calls for a very extensive long distance.
And so.
A world of Kobe at 89 would've been a disconnect at world that truly would've been paralyzed.
Yes here, we are finding our way true this incredibly difficult and yes unprecedented times.
No small part Shanxi software.
And you really commission is the instruments, the internet and help companies of all sizes organizations around the world deliver more perfect software.
We've always believed our niche mission with noble and important.
But now more than ever it's indispensable.
We do have customers in the E commerce vertical we have customers delivering online education, we have customers delivering video conferencing.
We even have customers that provide games and you have seen all of those segments. Their traffic has spiked an unprecedented an unexpected ways.
Without our platform.
These these facilities simply couldn't deliver the performance and availability people depend on now more than ever.
We help our customers like delivering.
Single scalable observe ability platform, we called new relic one.
New relic, one brings together the performance and operational data our customers need from their applications from their infrastructure.
From there and user experience.
And from there logs.
All in one place we deliver it in a beautiful you I called new relic one.
When you think about peas website.
And these web applications and these digital applications and what they need to do it's unfortunate don't just how much data how much telemetry.
Needs to be captured in order to accurately and completely measure if these digital properties.
It's not uncommon for a customer to send us a few hundred gigabytes inflammatory a month, that's a pretty small customer by our standards. We have some customers. That's kinda over three had a bite supplementary data every month.
That data could be coming from blogs, it couldn't be coming from the application it could be coming from the infrastructure where customers can tell you why you tell us is that they love that they can use new relic and only new relic as the single place to put it all it.
At this scale.
We built NRT be from the ground up to be Multitenant and work I had a bike scale.
Unlike other people who approached who.
Who built on some very fine open source database technologies. Both databases were all designed to work for a single tenant.
And therefore need to be individually managed and scale.
In a way that what didn't anticipate the kind of scale that we need to deliver for our customers today.
It's no secret that physical 20 wasn't very challenging year for new relic.
Anytime a company goes true difficult, but important work of preparing for the next 10 years investing for the future at the expense of doing more expedient things that could help us in the short term fair trade offs involved in short term pain that's involved.
And off and to be candid, it's it's a lot of work to align the company around those tough trade off calls.
So that was a natural course of what happened.
Going into fiscal 20.
And we didn't make it any easier ourselves as I've said in previous calls I think we could have executed better throughout most parts of the business as we went through that transitional year.
So in that sense I am thankful that 2020 is behind us and we have made the transition to new relic one.
And we are positioned now to establish ourselves for growth for the next 10 years I'm very confident in where we are today.
But it all starts with our people and I'm very excited about the new talent, we brought into our company because from remarkable new leaders that have joined you rally in the recent couple of quarters.
Most of you got an opportunity if you weren't came to our Investor day to see my Christiansen My Kids a world class executive He's brought a great sense of.
Clarity to the business he's helped US a line and simplify how we think about our business aligned the company around clear goals that everyone can articulate and he is driving a level of accountability and execution that is exactly what we need to try the coffee forward.
We've also brought a great international leader Dimitri Chen it's come into the A.P.J. team and doing a great job, let raising the game for that business I'm very proud at the work he's been doing which is probably in a fantastic new chief strategy officer. Her his name is Wayne crumble.
He actually was with a customer prior to joining new relic and and and I remember that from the moment I wasn't meant when he was kind of talent I wanted to work closely with and we're thankful that him as chief strategy Officer, New relic.
And Bill Staples joined US is impact it's been immense as our new chief product officer.
I am very confident that there was going to move the needle for a company and help us redefined the industry and take the company for it to even greater Heights.
On the product side, we shipped some incredible new products.
The first as new relic AI.
We're very excited to have this into market. After a very successful beta period, new relic AI is we believe the most powerful the most complete and iops offering in our space because we have the most cemetery data in our platform from all those metrics events logging traces and because.
How many customers today rely on your rally colors.
New relic he is the perfect complement for our larger customers to help them reduced Gilbert annoyed and do more proactive detection of anomaly can problems to predict production issues before they become outages.
So for our customers have seen 80 plus percent reduction in alert annoyed thanks to new relic AI, that's direct hard dollar savings that our customers can realize at a point in time, where many companies are gonna be looking at opportunities to say hard dollars.
The second thing we shipped very recently is new relic hedged with infinite Tracy I'm very excited about this capability.
As some of you have asked in the past.
About how microservices he containers that impacted how people think about ATM.
One of the things that customers have been asking for is the ability to what we call in the industry do tail based family. What it means is the ability to capture the slowest and the worst and the most and the erroneous transactions they flow through a complex application environment.
You really like edge does that.
But we do it in a special way that fully that's very much differentiates us from the competition.
Because our competitors require the custard install a piece of software in their environment to aggregate and inspect all those traces incentive to slow when erroneous ones back up to their cloud service.
That's a complex piece of single tenant software to the customer needs to manage an update.
And deal with.
It's 2020 or customers don't want to be managing their management software, new relic edge deliveries that capability in a multi tenant.
Sure. It makes that we manage we've deployed them in multiple cloud and regions. So that this logic fits.
As to where our customers run their software, but doesn't need to be managed by our customers. We believe this is unique in the industry. We believe it's exactly where customers want.
And it shows that nobody nobody can be relic in our core wheelhouse of ATM.
We're hard at work at a very exciting road map that I wish I could go into more detail for you right now.
But I can tell you. This I've never been more excited about your relics roadmaps are opportunity in our position to do great things and I am today.
A truly mean that.
Yeah before I hand, it off to Mike I'd like to share quote from the great Andy growth.
Andy said this.
Bad companies have destroyed by crises.
Good company survive them.
And great companies are improved but.
Now there's no question that Andy grow because one of the greatest Ceos in the history of technology and Intel is truly one of the great companies in the history of technology.
And so I think it would be premature.
For us to make that kinda declaration of new relic I'm biased kinda founder I believe were great company.
But here's how I want us to be just why did we do great things during the crisis of 220 20 to prove ourselves I believe we will.
Why do I believe that.
It really starts with and that's what our people and our core values we are bolt.
Passionate where accountable we're authentic and were connected.
And during times like this the core values truly matter there not just things you say and an annual kick off if you live in every day and companies do great things and crises.
During challenging times, we ask our people to do incredible things to deliver incredible results well still trying to be amazing parents in helping their kids with her E learning and and and dealing with a dog jumping into the room when they're in a meeting this is happening to everybody who's and it's working.
These days.
And at times like this great cultures do great things.
I'm proud to be around like I'm thankful for the great work that you all have done.
I'm very excited about where we're headed into the next year without I'm gonna handed over to Mike.
Thanks Lou.
Wed like to provide an update on four topics. These are topics that you've heard us discuss at our Investor day in December and at some conferences and divest investor events since December but I'll provide an update based on our results in Fourq you.
Those four topics our sales execution.
Selling the platform portfolio management and hiring.
And I'll start with sales execution as most of you know in Threeq you that ended in December we redefined some of our most important corporate objectives for the sales and customer success organization.
Those objectives were new a our AR.
Hundred K customers and renewal yield.
In addition, we simplified our customer segmentation simplified our selling motion.
We did a lot of training on the new product capabilities that we announced last fall.
And then finally, we did a reengineering of our renewal management system, what we call portfolio management.
All of that was done in Threeq Q and it was very important for us to carry that works through into for Q.
In addition in Fourq here, we ran a series of experiments in packaging, our products pricing and sales compensation.
So it was a lot of change in two quarters.
The organization responded quite well to those changes.
We felt very good in the beginning of our for Q as we went through January and February but.
But clearly we encountered a headwind as we move through March.
Stating the obvious the quarter would clearly have been better had we not had the pandemic and the beginning of a recession.
In some cases the impact of the pandemic into recession were clear we have customers in the airline industry, the hospitality industry and retail.
These customers clearly had lower requirements for application monitoring infrastructure monitoring and analyzing log data a than they did before these events here.
Fortunately these verticals in the aggregate or a small percentage of our business.
But in other cases, there was an impact it was less Claire sales cycles, where lengthening as people began working from home customers began imposing cost cutting programs and somewhere requesting extended and more flexible payment terms.
Having said that the financial impact on our results is difficult to quantify.
Well, we can say however is that the drivers of our business. The key drivers of our business digital transformation.
Cloud migration and operational resilience or a strong today as they were in 2019 and perhaps even stronger.
And we do believe that our improved execution will continue in fiscal 21 as we go through this year and beyond as we pursue our goal of getting to $1 billion of revenue. So that's a [noise] our sales execution.
So now let me talk about selling the platform.
In fiscal Threeq and Fourq you.
We focused our sales team on selling our platform the new relic, one observe ability platform.
We measure our success in selling the platform in a variety of ways.
Platform customers typically use all three of our important onramps application performance monitoring infrastructure monitoring and log analytics.
They also use the other essential capabilities of the platform. They send didn't data from third party sources.
They build their own custom applications on the platform, it's a programmable platform.
And finally these customers.
Have an agreement with new relic that provides full inflexible access to all of the capabilities of the platform.
What I can tell you is that our platform adoption the platform maturity of our customers was quite strong and for Q and we feel good about the direction and pace of platform adoption and we feel good about our sales teams ability to communicate to our customers.
Value of the new relic weren't observe ability platform.
So now let me talk about portfolio management.
At the end of for Q.
Our aggregate A.R.R. is $635 million.
As we've said we're in the middle of a pandemic and no economic recession.
So some of those customers the ones, who pay us that $635 million a year are experiencing severe business stress.
Some of them are likely to not need to renew their contracts at the same level in.
Fiscal 21 as they did in fiscal <unk> 20.
This fact shouldn't surprise anyone and we're not alone in having to deal with these challenges as.
Well, we can't tell you.
Is that we have built a portfolio management system.
That monitors customer usage of our products and customer health.
Identifies any risk based on a set of variables.
And it helps us execute repeatable mitigation plans when we identify risk.
So we work hard to improve that system every day monitor identify and mitigate.
And we will work with our customers to help them navigate any challenges that they are experiencing when we can work with them to help them with their new relic relationship.
Our number one priority when we're dealing with these challenges is to keep our customers.
Our number two priority is to preserve long term air are.
The impact of the pressure on renewal yield and the headwinds in new way, our our will undoubtedly put downward pressure on reported annualized dollar based net expansion rate and Mark will discuss that in his section.
Lastly, I'd like to talk about hiring.
Fortunately our company is in a strong position financially.
And our leadership team is very excited about our prospects at new relic. So we're in a strong position to attract exceptional talent to new relic, even in a challenging environment, we're still able to higher great people.
In the last few weeks, Jay Snyder joined Us as our chief customer Officer.
After a long and successful career at del any M.C. and prior to that at Peoplesoft and Accenture.
In addition.
Sema Kumar has joined our company as Chief Marketing Officer. She comes from service Channel sales Force NZ, M., where with an extensive experience in a variety of roles, including CMO product management product marketing and corporate marketing.
And finally, we've hired a new leader for our organization in AMEA. This person will be announced at the end of one Q.
So I hope this commentary in our perspective, it's helpful to you and now I'll pass it over to Mark to provide more of the financial details Mark.
Thanks, Mike, Let's review the financials before I discuss our perspective on fiscal 21.
Revenue for the fourth quarter was 160 million up 21% you every year and above our guidance range of between 154 to 156 million.
There are ending the fourth quarter was 636 million up 16.6% and inline with the guidance of 635 million in air Our fiscal 20, you make even December at our Investor day.
Total deferred revenue in the corner, what's 316 million up 33.5% and a bit ahead of our guidance for low 30% growth sequentially.
For the fourth quarter, our non-GAAP operating income was 3.5 million or 2% of revenue compared to 3.8 million for 3% of revenue in the year ago quarter.
A couple of dynamics the no first we accrued 1.7 million in bad debt this quarter to allow for the potential that some customers would have a hard time paying their bills.
While we aren't modeling those goals to eventually get paid there's reason to expect some of them well second and more important structurally as challenging as the current environment is we're still investing in the business. We're still very optimistic about the observed ability space and our ability to grow so our focus remains on growth over profitability.
Non-GAAP net income attributable to new relic per diluted share was 14 cents compared to 13 cents in the fourth quarter fiscal 19.
Turning to cash flow for Q4 cash provided by operating activities 61.8 million.
Free cash flow defined as cash used in operating activities minus capex and capitalized software development costs was 51.1 million.
As of March 31, we had 805 million in cash cash equivalents and short term investments our balance sheet up from 737 million last quarter.
For the full fiscal year revenue was 600 million up 25% fiscal 19.
Non-GAAP gross margins were 84% down from 85% last year.
Non-GAAP operating income was 25 million down from 30 million in fiscal 19.
Non-GAAP net income attributable to new relic per diluted share was 66 cents same at 66 cents reported last year.
Operating cash flow was 93.4 million compared to 169, a year ago and free cash flow was 28.6 million compared to 67.1 million last year.
In Q4, we added 67 paid business accounts with over 100, K and there are to ending year at 993 paid business accounts up almost 60% compared to a year ago and up from 926 last quarter.
It's number represents a mix of new customers coming in at more than 100, K as well as existing customers crossing that threshold.
This quarter, we generated 75% of our air our from accounts spending more than 100, Cade error that is up from 73% last quarter and 70% in the year ago quarter. We previously shared a metric with you around <unk> percent of business coming from enterprise accounts, but we believe this new metric based on aircraft from accounts, it's been more than 100 Kay.
Is more indicative of her larger business opportunity as it measures customers based on their stand rather than their size.
Our annualized dollar base net expansion rate in the quarter was 116% down from 131% from the year Dope hearing, but up from 109% last quarter and our best expansion rate for the year.
I want to spend a minute or to discussing gross margin gross margin in the fourth quarter. These are relatively consistent 84%. However, our expectation is that gross margin will come in for fiscal 21 at a high seventys.
This guidance represents the investment, we're making and moving to the public cloud actually sunset or data centers.
This is a significant undertaking that will take about three years to pull the execute but when the move to the public cloud is complete we go back to our near best in class gross margins in the low Eightys range.
Mechanically even though gross margins will come down for a period of time, we expect migration project will have a positive impact on cash flow in fiscal 21, as the savings and capital expenditures were more than offset the reduction in operating income.
Well, we feel it is a good long term financial decision the movies, primarily driven by strategic considerations as operating the public cloud is more perfectly aligned with almost every element of our business strategy.
Turning to guidance, while the current environment is challenging. It is also temporary we believe the opportunity for US is large and long live. So we're going to take advantage of our large cash balance you continue investing aggressively in the business.
Selling environment improves we will be ready with a large and well trained salesforce a quick some of the most compelling observers believe technology in the market.
In the near term however, visibility is poor and what we can see isn't very encouraging.
We're working through a challenging sales environment compounded by the unfortunate reality that a portion of our installed base, primarily smaller businesses cannot pay their bills. So is against this backdrop every reluctantly resend our air our guidance for fiscal 21, and you only give guidance for one corner time until visibility improves.
Our guidance or the first quarter fiscal 21 is as follows.
We are forecasting revenue of 158 to 160 million and a non-GAAP operating loss in between 3 million to breakeven. This would lead to non-GAAP net loss attributable to new relic per diluted share in the range or negative one tends to positive four cents.
In addition, we're forecasting a first quarter end of theory, there are to grow 13% to 14% year over year.
And with that I'd like to turn it back the operator queuing it.
Thank you and we will now begin the question and answer fashion to ask a question in a press star and then one on your patch can sad.
If you were using a speakerphone please pick up your handset before pressing Mccain.
Hi withdraw your question. Please press Star then too.
First question today is from Santa Chang of Morgan Stanley. Please go ahead.
Thank you for taking the questions and I hope everyone on T., New relic is doing well in the employees are doing well as well so much to dive into but I guess the first place to start is what you're sort of seen in the environment Mark if you could sort of walk us through.
End of quarter March do you see any sort of.
Benefits from customers, you know seeing a surgeon usage of other digital properties and then as we got through April and May what are the trends.
I've seen since then it because maybe to start there.
Sure. So you know that's actually handed entered the last couple of weeks a March the end of our fiscal year, obviously to the two most critical weeks a year for us that's when things slow down really hit a and B did see an impact I would say an adverse impact on armed customers, who might have been looking at a large.
Steel and decide to hold back and so we did see an impact there. We also saw an impact on customers very quickly looking to adapt their payment terms to go quarterly billing of annual you know just in cash preservation mode. So we did see that and I think it was it was all.
Pretty new going into into just into the end of March as we enter in April I think those trends continued to a certain extent or some of our customers are seeing a spike which is which is great and a in over there to the service and serve them well not asked me answer in April.
I think perfect on the small side, we saw in initially in April.
Comes from a cash collection standpoint April was very slow I think a lot of that was as companies were getting used to working at home I'm just going to monthly Bill run was that a weekly things like that but we did see that come back pretty nicely in early may in terms of people paying their bills and things so more comfortable in that regard.
Overall, though I would say we continue to see customers that are cautious about about their outlook going forward and and that's that's our cautious tone as we look out to two our first quarter and first out.
Understood and that's my follow up as I guess would be for it for Michael or for Lou.
I'm going to hopefully get out of this and.
The the overall surgically market seems to be doing continue to grow pretty fantastically, well and so with.
The big improvements in the platform and all the new product releases I think what a lot of us or try to understand is who's going to be consolidating bed with in hundred Kate type plus or accounts and who isn't and you know with the backdrop I think there was a report around this 30 different monitoring tools at some large enough.
Price corporations, it seems to cause us that's probably unsustainable over the long call. So I was wondering if you could sort of walk us through the points on why you won't be a consolidator of functionality and capability in this space I think maybe go into a more conservatives on spend environment.
Sure I'm happy to speak to that somebody's Lou.
I think we are internationally strong position to be that consolidator in it really starts with our platform. The data collection technology that we have which I think I shared a fair bit about at our Investor day, but it is unlike any of our competitors, we custom built a multitenant database to collect.
And then just literally petta bites of telemetry data from some of our customers. So there is no scale that we really can't handle.
In in our customer base or what we foresee for for the digital business as of today in the future and the fact that that's all going into one database, regardless of whether its infrastructure data or logs or a P.M. data. If you want to consolidate you don't want to consolidate to a vendor that has their different data going into different places and usually going into database.
Cases that were open designed to be running in a single tenant architecture and so they they run at a that performance and they any cost disadvantage. So you know there we're going to have more to share on this throughout the course the year, but we believe that the you know we have an opportune.
I'd because of the nature of our data collection kit capabilities to be the most ubiquitous telemetry data platform.
<unk> for it for our customers because it can operate the scale and because we can so cost effectively deliver that telemetry data capability.
Great and sounds exciting and congrats on the strong Q4.
Our next question is from Sterling Auty have J.P. Morgan. Please go ahead.
Yeah. Thanks, guys.
So looking at.
Your comments that you made in the guidance here for the June quarter, I want to make sure that I understand.
How you think it's gonna manifest itself in terms of the negative impact in terms of the customers that are paid more than the 100 K versus those spending less than 100 <unk> in other words is the impact disproportionately representative representative and those smaller customers.
Installing smart.
Well I think it it's it's we're seeing it a week's like <unk> in both.
At the low end, what smaller customers I think there there you know their business then disrupted dramatically and you know they've got to reduce their span and so what we're seeing as either either they can't pay much or their business gone down and so they'll they'll produce their bandwidth with new.
Well like a and then on the high end do you have some situations, where some situations where customers are reducing spend other where others where.
Deals when projects are just going take little bit longer time to manifest themselves, but I think I think we're seeing it in both segments in the good news is that we you know we don't see particularly in the in over 100 can you don't see people going to zero I don't see people, leaving that erotic franchise, but we're on.
Working with them, we understand there going to do challenges, we want to be good long term partners and so we'll work with them to to.
Just as as their business needs and and as Mike said in the prepared remarks, we're focused on long term a our long term relationship with these customers and we want to make sure we protect those and so that's that's the kind of the north star for Us.
Okay, and then one follow up so that's kind of the next I'll touch on what's happening in the current customer base. What are you seeing in terms activity levels in terms of being able to fill the top of funnel on a new sales leads and in particular, what's that experience like on some of the newer solutions they brought to market over the last six.
The nine months.
I'll give it gets better shot.
I would say that.
You know again, one of the one of the advantages. We do have is we have 16000 paying customers. So the vast majority of array or our new way our comes from those existing customers. So top of funnel is great and we did have a lot of new logos under 100.
Okay, and above 100, Kay and we're happy with that but we're really going to kinda power through this period of time and through F. for 21.
Selling more to our existing customers.
In this quarter, we saw terrific what I what I described in my earlier remarks platform adoption, where people are using you know all of the the three core onramps as we call them, a P.M., obviously, but good momentum and infrastructure and terrific momentum.
With logs, so they're they're using all of the capabilities with the platform, including the newer capabilities and looking at it as a plot true platform.
Got it thank you.
Our next question today as friends or anti when that Guy.
Hi.
Thank you for taking my question.
It's a kind of digging in on the customer side, you know that the year over year customer losses, or can you give us a sense of how much she feel that as you know competitive losses and then how much is just you know some distressed within the the customer base.
You know what I would say is.
Again, we have 16000 paying customers nearly a thousand over 100, Kay and we want to grow our customer count across that entire range of customers. Obviously as you heard we have a real focus on hundred K customers, but are smaller cut.
Customers.
Our still new relic customers and we want them to get value and have a great experience and we're making investments to improve the customer experience make it easy to try easy to buy and you know we do want to resume growth at the lower end of that.
Customer size in terms of their spend what I will say is although we've had a what I would describe as a slight decline in total customers. The aggregate A.R.R. for that decline at the low end is less than $5 million. So it although you've had a.
They have a dress down I would expect that to turn around and it and it's not a big dollar number in terms of there are.
All right just one follow up question on the investing fine.
Can you give us a sense of like hiring plans either near term for the next quarter and then for the whole year on it how much would be okay R&D oriented versus sales.
Sure. So we as I mentioned, we are investing for growth we feel like we do we have continued having very good long term opportunity ahead of us and we want to cap capitalize on that opportunity. So we'll be investing with continued to higher we've hired obviously everything's gone to occur.
Troll, but we've been able to do that and I'm currently seamlessly transition or that the hiring environment has definitely you know gone and worn in favor of companies like ours, who are hiring.
So we are continuing to do that will be we feel like will be hiring fairly steadily throughout the year.
It's across the board certainly R&D R&D.
So as a percentage of total spend last year kicked up a bit I would like discontinued see that go up we we have a lot great plans and we want to be able to execute on those on the sell side as well what you know we want to continue to add capacity you know the this these times will pass until we want to be well situated does.
As.
Yeah, if things continue to improve over the latter half of the year, Yeah, hopefully and then on the DNA side, we've got to continue improve our systems and things and so we're investing a best in there as well.
Thank you.
Our next question today is from right now like South of Barclays. Please go ahead.
Hey, Thanks for taking my question and the extra disclosure that was really helpful.
A wonderfully one for Mark Lou can you talk a little bit about what you're seeing in terms of customer understanding around.
<unk> ability and then we'd now talking a p. and infrastructure and logs and how that all needs to fit together I'm versus like the old word off.
Doing everything separately.
And then mark on the air our growth number that you gave us like frankly that was really helpful. What's the assumption, but how do you have to think about the kind of low up so versus actually higher gross churn like how do I you know kind of conceptually at least if you can quantify it kind of think about that number. Thank you.
Sure. So you know, how we think about or in our customers think about observer, Billy one one simplify way to think about it is.
Monitoring is the capability to tell you when you have a problem because it it watches the same thing continually and then tells you when that thing changes or goes into a bad state.
The differences observing is telling you why you have a problem by giving you the capability to ask questions. You didn't know you're going to need to ask is like because you're in real time, you're trying to solve a mystery word precious seconds count. So you need to have all the data at your disposal anything that can help you understand why there's a problem.
Two prevented outage or if having pretty good you're having outage to get things back up and running in its class possible you need an immense amount of data in the ability to ask any question of it in real time that data could be in logs or infrastructure metrics and so that's why we you know customers are kind of saying I don't want to go between tools.
And so we and other companies are kind of the advancing but the idea that all of these all these types of data should be provided by one vendor where we take a step further as we believe it's not only one vendor should be literally in the same database with the same query language. So that it's a seamless transition to ask the next question it whether it be in log area.
Unstructured data or application data and we believe that's unique an important to our customers.
Thank you.
In terms of the question you had on on a sell versus a churn for Q1, you know we expect it to be a larger impact on the churn then on the up sell and as I look at April and now were midway through May Lucky through April and May.
Are there new air our that we're seeing is is roughly in line with what we saw a year ago, we came into the quarter with with good pipelines, but as I said, we're where we are expecting close rates to be impacted but but the you know so new as it's been fairly consistent with last year, but on the churn we are seeing.
Pick up in churn, it's we think that will be the larger impact as we as we go through Q Q1.
Okay perfect. Thank you.
Right.
Our next question today will come from Robalo Baird. Please go ahead.
Great. Good afternoon, guys. Thanks, very much for taking my question appreciate it and.
And Peter welcome to you My first questions for Mike and then Mark I'd a quick follow up for you Mike at the Analyst Day last year, you laid out you know really detailed plan on it got focused on 100, K. our customers and nearly 67 added this quarter was solid in and you don't sound.
It's like would've been go even better had it not been for last few weeks or the corridor. I know you said your goal was to get to 100 at some point.
Quarterly run rate can you talk a little bit more about you know you mentioned lodge were strong could you talk a little bit more about somewhat a a platform usage and where you saw particular strength this quarter and you did mention in your prepared remarks that you had conducted some experiments in terms of packaging and pricing product and was one.
If you could elaborate on that a little bit.
Sure I you know obviously getting.
Customers to spend more than 100, K are getting new net new customers to come in above a 100 K you know we felt pretty good about that the gross numbers were good logs was a big help you know people are really beginning to look at it as a complete platform.
They are exploring the full range of capabilities that platform. They like the logs capabilities. So that was that was a help you know in this environment. We did have a few customers who are still customers, who dipped below 100, k. So that number that we report is a net and I would.
Say that had we not have you know won a number of EUR of customers dipping below the hundred K that we might have actually gotten a lot closer to our hundred target. So I'm, hoping that sometime over the course of that's why 21 as business regains momentum that we'll be able to get that hundred per.
Corridor or in terms of new hundred K customers I'm optimistic about that the entire organization understands that there's a as we have observed in working with our customers.
There's a fundamental difference when they get to that level of spend they're looking to you as a more important technology partner, they're looking to you to provide a broader range of capabilities and we want to be able to answer that call.
Great. Thanks, Mike and then Mark for you just on the gross margin side I know you guys aren't you know guiding to the here, but you mentioned <unk> that are the trend down to the high Seventys and <unk>.
How should we think about that is that something that happens kind of right away or how do how do we think about their trajectory of of that impact on the model. Thanks gentlemen.
Oh, Yeah, I think its and it'll it'll.
In that.
And down overtime of course market trend down overtime. This quarter, we're looking at probably about a 2 million dollar <unk> to gross margin and then dropped the bottom line.
But we expect to save more than that in capex without trends for the datacenter. So that will be positive cash impact and I think that'll that'll you know kind of go down over as the year goes on through Q4, and then we expect a high seventys margin in the next couple of years as well.
As we as we build out the data center, but there are two throughout the course of the project, we do see actual cash flow improvement over the life of the project as we will be saving worn capex that we'll be spending in a in gross costs.
Thanks again.
Our next question is from Yung Kim on price I'm glad Securities. Please go ahead.
Thank you so much congrats on a solid Q4 I'm just following following up on the previous question and you look at your pipeline.
Do you see continued trends toro towards larger deals, which should lead to continue increasing average.
Okay plus customers.
Do you see that metric kind of stabilize.
And then they need more growth will likely come from just simply higher number okay plus customers.
Just a real quick on what do you kind of thing around a platform pricing model you introduced last year.
I would say that were not.
Expecting a huge increased says in.
Average.
ER air our per hundred K customers.
Where we are getting the most traction is getting the.
Getting the distribution to cross the 100 case to be more uniform. So we have a lot to fill in around that average moving people up I think that that is you know from a math point of view more likely getting more hundred K customers moving the ones that we do.
Have up a bit and our models are basically forecasting that we have more hundred K customers, but at roughly the same air our average J.R.R. per hundred Kay.
In terms of sorry that second half of your question.
Just a question around platform pricing.
Yes.
We.
We have been are working on a number of tests I'll call them to encourage our customers to explore the full range of capabilities of the platform.
And so we try to a few different models for that in terms of how we do business with our customers you know what they pay us and how we give them flexibility to experimentally changed their consumption of the different capabilities that platform.
I'm really happy as I said in my earlier remarks, with how well that has been received by our customers and I think that over that you know over the rest of F White, 21, and and and beyond I expect to see many more of our customers and perhaps virtually all of our hundred cake.
Customers, having full platform access as they as they become a more.
More comfortable with the platform and its capabilities.
Thanks, So much on quick question for Mark on the expansion rate.
Is there a noticeable difference between a 100000 K plus customers.
But it's still below and what kind of trend.
Do you see.
<unk>.
Dow cells to be more material for okay, plus customers or terminate to be more noticeable for those customers.
Oh, okay.
Thanks.
Sure, Yes, so we definitely see a distinction between the two under hungry Kay.
That expansion rates tend to be quite a bit lower than that over 100 Kay.
And so.
That's that's we expect that continue that's one of the reasons, we really want to get the customer over 100, CLO that threshold because their behavior really challenged there more committed oh, so lower downgrade numbers as well as better expansion opportunities and we expect that that distinction to be it to continue.
But you know we're trying to improve both numbers, but ER, but obviously the one that's really driving there aren't driving our business is the number of to over 100 Kay.
Thank you so much.
Our next question today, it's from Sandler allow if you'd be yeah. Please go ahead.
Great. Thank you maybe to start <unk>, we talked quite a bit about you know the current demand environment and some of the challenges that into with that but maybe even taking it back a step I'm just curious what you're hearing from your customers in terms of their willingness to try out new technologies like some of the things introduced.
Like one you know the types of projects that they're working on or they rolling out new apps are they still going through digital transformations that potentially create opportunities for you that instrument those application shifting to the cloud you know, what's what's sort of the bigger picture that you're seeing out there and how that sort of trickle down to the demand for your products specifically.
You know this is Lou.
Yeah, there's like a short term to long term way to think about this long term. This is no unquestionably driving new habits for every one of the world to do more digitally than they have done in the past that could be in distance learning that could be in video conferencing it could be in <unk>.
Nothing and so and we have many of our customer seeing sudden spikes in usage and their thankful that new relic is there to help them handle that that that change and I know he's behavior, but because of the macroeconomic environment, it's not nestle turning into instant new business, depending on the nature that a company may have more traffic but.
May not may not have corresponding more revenue than in some of those cases so.
We believe that this just further.
Makes our mission and category more important than more and more exciting, but it doesn't necessarily translate to short term business benefits, but but we think that you know with it it does set us up well for for long term success in it assets companies move to the cloud to move to digital.
Maybe just one for mark.
I think about you know customers, who are looking to potentially downsize usage as they deal with the issues in their own businesses, how does that actually manifest isn't it a scenario, where you know you get they get kind of a three or six month.
Grace period, where yeah, they can reduce usage, but the expectation is that just scale backup is hopefully the world returns to normal or is it just a reset and and its indefinite in time horizon. What are what are the mechanics, there its customers come to another.
Sure I get it can be any of those out from the spectrum of some customers just want to go from annual to quarterly billing right. That's an easy one some people just want to go from that 30. The net 60 I you know those are pretty straightforward and relatively easy to do a at the other end of the spectrum you have customers, who literally can't pay for six months at.
And so we'll say Okay. Then you make up that payment when once you go live and can pay or at the.
Worst case would say right you got to use the the product for free for six months on than in past. When you can when you start up again and I will put some threshold around that milestones and things around that obviously, that's a huge impact to us and you know it's not something we want to do lightly but it can be all across that stacked.
And it's its really just understanding that customer understanding their needs well it seemed to be mindful, we thought we gotta business around as well.
Thank you.
Our next question will come from reach a l'oreal D.A. Davidson. Please go ahead.
Hey, guys. Thank you so I'm not sure if I take that question.
Yeah, I'll spend all say fault that.
Wanted to ask a little bit about but going back to the trend question. You know you disclosed at the analyst day off some of the metrics you're on your allocate costs, most no single or multi product. It's actually adoption just get a sense, so what what directionally be churn rate or even expansion rate for that matter.
Oh look like you know between single product customers.
Multi product customers et cetera.
Maybe alongside that you know as Mark you're talking about customers looking for maybe concessions business just struggling at what point does it make sense to start adding and kinda do quanex.
And at a discount for those types of customers to help increase the speaking that's not I've got a follow up.
Sure. So the you know when we look at it our best customers or customers that using our platform. That's our goal we've been making progress. There. We now have the end of March we had about 30% of our air are of that had access to all whole platform by one and RPP or some vehicle.
Or another that was another on about hot or new Air Art can keep work came from customers, who did have full platform axa.
When we look if those customers they brought adopt us more broadly they get a lot more value. They have more users no churn characteristics that are their expansion characteristics are better. So you know we feel like that that's where the customer and that's best for new relic. So we want to drive as many customers too.
Platform you know we could do it every one of our customers would have the whole platform.
And so that's that's our goal we got to reduce the friction you know everything from product to the go to market and Jane can make sure that it's easy for customers to go from you know a standstill two I've never heard me relative to adopting a platform and so that's what we're working hard at doing now.
In terms of you know, giving given <unk> offering customers. That's that's certainly part of the discussion when customers come to us.
And want to either downgrade or she you know it sort of try and get something else done I'm trying to give them. Some help but if you think about it a customer who is using the full platform. It's much less likely to come to you and say Oh I you know I want to reduce number host I have it. It's just safety at obviously they can use.
Stand on Big news spend across all our products. They are much more likely to be comfortable spending that as opposed to just taking a one off reduction their spend because a lot about you know they have a point solution and so that's why we're that's why we're driving these numbers and that's why pushing this and you know when it went to keep focuses on that as we go through this year.
I've got it that's helpful. I live in the guidance you talk about no growth of 13 before stop but that's the one I apologize if I'm missing.
Combined middle Bakken professionals anywhere, but what was the.
There are for a Q1.
20 of on and then it's not based on the old definition of air Odd I would place it looks like it's actually this year as it based on the new law that what could be at 6.2 of the partners one subscriptions.
Okay sure. So I will give you the the air are at the end of a lack of quarters for last year for fiscal 20 based on the old definition. The at the 636 comparable and that was at the end of Q1 two end of June last year, we were 563.
Right.
At the end of September end of Q2, we were 585.
At the end of Q3, we were up six so one.
And he ended Q4 as you just mentioned we're at 636.
So just from an apples to apples standpoint, those are the numbers that are a or numbers for last year.
We will be coming out with a reckons full reconciliation of these numbers to the new definition of of Erazno Y in general that includes just some some partner and support true air our and it's it's you know into six six ish million a year, obviously the quarter, but will be coming out of that but I wanted to give you those historical numbers.
Fourth perspective.
That's really helpful. Thank you so much.
Our next question is from Robert made Jackup Raymond James. Please go ahead.
Great. Thanks, just following up on a prior question would be curious if you could just walk us through some of the conversations you've had with customers in this environment as far as R&D goes what are they asking for in terms of the products that functionality and how that may have changed now go third.
Sure so our customers.
And most recently it's been in particular like how can I realize cost savings by standardizing on producing from the number tools I use standardizing on one platform that can replicate what I get from many vendors in many tools.
So so there's certainly.
You know, there's there's excitement that you know we've had logs in the market and that our logs offering is very fast and scalable and that the logs are more valuable when they're in the application context and when they're in a separate contacts that is not application aware.
So that's an example of hey, I eat it really at the end of the day, that's I think about how this market's evolving I.
I think it has.
We think about it lessens like these separate products for mobile monitoring and BRAF and browser monitoring an application monitoring and infrastructure monitoring said, we think of observer ability as just like full stack monitoring all of those things and we want to serve every engineer.
Make sure they've got the tools they need to ensure that whatever they're working on his bullet proof and delivers a great experience. So that's how we think about where we want to take it is we want every professional engineered to use the whole new relic platform. So that anybody who contributes code that can impact production has the tools they need to make sure that produce.
She works flawlessly.
That's helpful. Thank you just perhaps one more quick one for me I you saw an uptick in RPL. This quarter can you just give us some more color in some of the way that are driving your pipeline your.
Sure. So RPL generally for us in Q4 does pick up.
Our business is such that we do a lot of deals during the course of big year that are co term type deals and so we'll get a bump in air or maybe it supposed someone does an upgrade in December.
They'll just coming for three months to their billing cycle in March and then in March when their annual renewal coms, that's when they'll do the full 12 months so from an IPO standpoint.
That March deals not impact really are on our revenue on our way our but it does have an impact on archeo because of the but because of the 12 month. It had gone from a three month prepaid base 12 month and so that's one of the dynamics that drives a coupon number up a bit relative to other quarters.
Thanks, a lot.
Our next question will come from Barrick, what Cowen and company. Please go ahead.
Oh, great. Thanks for taking my questions can you give us your sense for how much your revenue comes from SMB and and how much from you know so to speak distressed verticals or not I guess just on the flip side.
Any verticals you'd call out that you'd seen incremental strength from in terms of revenue and bookings that sets a work from home, but I have one follow up.
I guess, what I would say is if you look across our 16000 paying customers.
There are small businesses that spend huge amounts on observe ability in the 100 K and at the high end of the hundred Kay.
Customer segment and there are very large companies that pay 25 to 50 K. per year. So you cannot look at our customer base and say the bottom end of the spend is SMB and the high end is big enterprise, Yeah, It's a little bit higher at.
Little bit more high enterprise Big enterprise at the top but there's big companies through the entire customer base and small companies that spend a lot that spend 100 care more with us.
So it's it's hard to make that distinction.
The up is it.
That's the way that I wouldn't describe it.
And on the on the depending on the under distress yeah on the distressed. So so yeah. You know we look at it heavily back into she's it's in that 10% to 15% range of of our installed base.
And then when you look at it verticals that yet you know are doing well I would say entertainment and gaming or certainly to that stand out as as you can imagine I don't think were alone and seeing that as people are sheltering in place.
[laughter] subscription entertainment and gaming AD supported businesses have yes, troubling negative impact.
Right right and that show My second question I guess more for for you Mark but could be out anyone but I mean, you guys had really nice upside on calculated billings you had a big acceleration at 200 carrier customers. What are your commentary certainly seems kinda more cautious than what the reported results would show so.
You just touch on kind of the delta between the tone in the resultant and maybe you know.
Typically on buildings, where there's some onetime factors on the deferred side that help you in the quarter.
[laughter] everyone's I wonder if he's going to be in terms in terms of the billings.
We were.
We were helped it was a strong quarter and we appreciate that so that was good I think you know after what we've been through last year, we went into the quarter with ER with just trying to set modest and achievable expectations.
So that was that was certainly one factor you know nothing I don't think there was anything unusual but as he said in the past billings, our billings quarter to quarter fluctuate quite a bit depending on on you know durations in terms and things like that so it was it was a good quarter, a and we're pleased with that.
On the on the other hand, as we look out this year, we want to be you know make sure. We're realistic about about the headwinds that are out there I think you know people are starting to because the economy starting to open up on the other hand, you know when you're going to be a V. A you an l. solution.
Pick your logo you know, there's there's there's certainly uncertainty about about that and.
You know we know we were making progress we feel like we had good momentum.
As we kind of came out of Q4, but but there's still work to do and and we acknowledge that and you don't want to keep our heads down and go after we still feel great about the long term opportunity, but in the near term, we still expect they're going to be some bumps along the way.
Got it makes sense. Thank you.
Our next question well come from Keith Bachman of Bank of Montreal. Please go ahead.
Hi, Thank you and I'll ask my questions concurrently.
First Mark I, just wanted to get your feedback on how we should be thinking about reported net retention.
This year it was up nicely in Q4 still down year over year, but as you balance the economy versus an improving product set.
I'm just wondering about how we should be thinking about that as it kinda should we be thinking flat year over year should be improving your year should being down year over year.
And Lou August go ahead and asked my second question to you is you talked about your AI capabilities, improving AI capabilities at the outset of the call. It just wondering if you can compare contrast versus what's out there today, particularly again.
Thanks, David Hanjin or any other capability and should we think about that is opening up new accounts or is that additive being able to to go ahead and sell to your existing accounts to be additive to your existing portfolio and that's that's it for me thanks very much.
So I'll take the a the expansion rate question first we think there is going to be an impact in the first half on both a upsells as well as churn.
And so we would point to a first half a decline in net expansion rate and then second half, we'll we'll see how things are going on you know given update later in the later this year about that.
Okay. When you say declining Mark you mean from the 116, though right.
I would say from year over year.
Okay. That's hard to Q4, 10, 10-Q, four tends to be strong and Ah, but well you know in somewhat seasonal.
Okay.
And then on the AI product <unk> you were excited to have it in the marketing.
Some of you May remember this came out of the acquisition of.
Great company called signify that we bought a buddy talking months ago.
So what we think is particularly differentiated by does it alert noise reduction and the fact that we have many customers that when something goes wrong. They don't get one alert you might get thousands and but you know it's it you can't just assume they're all the same thing and so you need to kind of use AI to sift through it all and reduce the noise and help you understand what really is going wrong.
We we think we've got the strongest capability in that particular area. We also have for many years, even starting back with radar, which I think I launch in 2015.
How technology to ought to be problem detection and resolution I think weve under marketed it we haven't quite told that story as well some other companies, but we do have great AI capabilities to.
Surface whats wrong and interesting in a normal to our customers to help accelerate their ability to troubleshoot and if you in a way to kind of look at it is like at the end the day Gardner did issue there of magic quadrant and also there their peer review and we ranked <unk> again, I think for the fourth it sort of work you're right. The number one peer reviewed product in our space.
Base has anything EM magic quadrant, and that's really important that's like the user saying what is your favorite product and we get the highest marks a year after year on that and a big part of that is I'm, sorry, I capabilities such as they are in combination with our ease of use make it easier to install these 20 problems as rapidly as Pat.
So born so we're proud of that accomplishment, but we have much more to do with the I'm very excited about the roadmap.
Okay. Thank you congratulations.
Ladies and gentlemen at this time, we will conclude the question and answer session and also concluded the new relic earnings Conference call. We thank you offer attending today's presentation.
And you may now disconnect here in line.
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