Q2 2021 New Relic Inc Earnings Call

[music].

Provide a brief opening remarks, and then we'll just dive right into your questions.

During this call we will make forward looking statements, including about our our business outlook and strategies, which we based on our predictions and expectations as of today are actual results could differ materially due to the number of risks and uncertainties, including the risk factors in our most recent tend to an upcoming.

In queue to be filed with the SEC.

I'd like to think.

First off <unk> <unk> was in line with our guidance, but a little softer than we had hoped.

We saw a significant number of customers take advantage of the entitlements that we offer at which effectively be delayed some deals that.

The good news is we are seeing our customers put a lot more data into our telemetry data platform, which review as a leading indicators.

Spending intentions.

In fact, our new ARR in Q2.

And regarding churn, we continue to see a substantial ports.

Of our installed base in the hospitality travel and leisure industry struggle and.

So we hope we can get.

Virtually a complete transfer in one.

Renewal cycle.

Got it and then and then maybe a follow up just trying to get some help with some like for like math on the new pricing model. If you had a a deal as kind of the same value on an annual basis bombing.

And obviously over the course of the 12 month period their spend would be up from what it was in prior periods. So that's what we're looking at very closely is this is this.

Really the rate of consumption that our customers will be will be achieving and how that changes overtime and that's that's what that's going to be one of the biggest driving factors as we go forward.

Got it thank you.

The next question is from Jack Andrews of Needham. Please go ahead.

Hi, good afternoon, a tonnage for Chuck Thanks.

The total spend at this time and we anticipate it will continue to grow but given the maturity of the full seconds evidently products and the price point that we can command for that it will continue to make up the majority of spend her customers.

Great. Thank you and can you provide some details on the changes you've made to your sales team in quota plan to solve the two commercial skills are there any differences in accord between Tom concentrate their platform and applied intelligence and How're you incentive I think new lands during the the new packaging scheme.

We it's Mike we didn't did not make changes to the quota plans as a result of this.

Launch of the product.

This is a say Mike please take that yes.

Okay. Thank you that's helpful and already looks really promising one quick follow up.

Im Rob Oliver of Baird. Please go ahead.

We had.

The capacity we've done we did a lot of great training to get people.

Prepared to be able to present this new model to the market we had the biggest.

Two q. pipeline ever we just if we just struggled to close at the levels that we we wanted to close and.

Our expectation is we are gaining momentum we are getting comfortable with how to present this to the customers. So work with we expect to improve that in Threeq Q.

With respect to the loss side, we continue to see pressure from from the pandemic and the economy on some customer sectors, we've talked about travel hospitality.

Them to rise as we get more comfortable with that with that process.

So so I think that's been that's been good good verification of what we thought coming in in terms of the data increase I think there are two things we want to we want to look at or talk.

Talk about one is the overall level of data ingest and Lou mentioned that early on we've been talking about that we're seeing our customers send us more data and I think a lot of that is is due to.

The entitlement that we offered there are other things to the free tier and things like that but but once one of the critical metrics. We want to look at is what happens when a customer signs up on a new relic one pricing deal.

And so we look at the customers all the co quarter customers. The first cohort that was signed up at the end of September 30th they're all of a sudden there on the new pricing.

New new where like one they are often going and then we want to look at what's happening to their data and just because they're they're they're paying for data and just right away right. The other folks in still in the.

And replaces what previously cost thousands of dollars in subscription cost per year.

And we're doing that because we believe we are really in the early days of lives that have visibility and we want to encourage every developer including tens of millions of developers today to make observed ability part of their daily workflow without any strings attached.

We're really encouraged by the early signs of success the free tier we anticipated that.

Hope manage their data ingests with more precision to to fine tune their consumption of our platform.

And they can see that by the hour as in you rarely customers. So I think that offering to customers that flexibility in that transparency again will attract more customers.

And will result in better growth or business.

Long term as as we complete our transition.

To the cloud.

And we we focus on.

Many ideas, we have to further improve B R.

The cost of ingesting data, we think that we can.

Return to that the gross margins in the 80% range and so that is a long term goal.

Even a medium term goal I'd say, but but we will have more to report on that after we get through the current quarter.

Okay. Thank you.

The next question is from Sterling Audi of J P. Morgan. Please go ahead.

Hi, guys isn't that on for Sterling. Thanks for taking the question.

Looking through the shareholder letter.

Notice you guys were talking about some customers didn't have enough time to understand the changes from going from a subscription to a consumption based model.

Was wondering how long do you think it'll take for customers to understand the implications.

In addition, how much of the revenue in this quarter was driven by this new pricing model relative to subscription.

Thanks.

So we.

Obviously, we announced this and had a.

A relatively short window.

To educate customers on this new model and begin to convert them over to this new model.

And.

The.

In some cases.

Customers had approval processes or there are already in negotiations underway and it was just.

Was too difficult to.

To actually transition to to the new model. So we simply renewed them on the on the existing.

Model the legacy model.

About three quarters.

September deals where.

The new model and since that we closed September that number's been going up pretty significantly. So I think it was just a I would describe it as you came out with a new announcement.

Business was underway in many cases, and we wanted to make a transition, but we didn't want to force customers in this quarter. If if it was if it was too complicated or too challenging for them to do that.

Going forward, we expect that virtually all of our customers will train all of our customers will transition to this new model.

Great books very helpful. And then just one follow up just kind of unpacking some of the moving parts on there are.

So you've talked about some of the churn this quarter the free perpetual tier.

The decision to offer existing customers.

To use.

The <unk>.

Unlimited use for the product.

How do you think about those moving parts.

In terms of how it relates to driving are are acceleration.

How should we think about those moving parts going forward and air. Thanks.

Going forward as users and data.

Right, we want to get more.

More users using the platform.

More sending us more data sending is different types of data using all of the capabilities of the platform. So our focus with our cost existing customer and and new customers is to get him on the platform, let them experienced the platform understand how it can help them and growing users and day.

<unk>.

Great. Thanks, guys is probably we're entertaining what also that.

Component of of Arin's, obviously loft there are in the quarter and we do expect that to improve in the current quarter.

On an absolute dollars data system, therefore substantially.

A percentage basis.

And the next question is from Robert and a deck of Raymond Jane. Please go ahead.

They're sitting there and they got budget pressures they've got a lot of uncertainty in the external environment and they're saying what do I want to do how much do I want to commit and spent.

From our standpoint, that's an easy conversation to have to say just commit what you're comfortable committing.

Because.

It's all about what you're consuming and so that that number could be 15% could go up could go down a little bit but again. The critical thing is once they once dread that transaction has been completed and what happens then and we want to make sure that they really enjoy getting all that data that they give.

US more data that continues to grow and then the user's grow as well and so again.

It's different than and just want to emphasize I would have different that consumption mentality is worse.

Where we had been which is.

All scripture mentality.

Got it just wanted to follow up for me with the longer sales cycles. This quarter have you heard any customer pushback or is it just really timing with customers currently just enjoying the open entitled Let's say you're offering.

We have not real not heard customer pushback.

In many cases, there are still a bit of a negotiation, it's like any commercial transaction, but this has been very well received by a customer base and when you think about it as I said earlier three quarters of the September deals were on the new model, that's worth virtually zero notice right we.

They had a renewal or they were doing a deal we converted them to the new model in 30 days, that's a pretty powerful statement and it's increasing from there.

Great. Thanks, a lot.

The next question is from received your Lauria of da David. Please go ahead.

Hey, guys. Thanks, Thanks, so much for taking my questions.

Two here first.

Going back to the AWS partnership, obviously, not nice to see that.

Would you anticipate maybe building out similar sort of partnerships are integrations with the other hyperscale cloud platforms and how should we be thinking about the potential there and then I've got a a follow up.

The short answer is yes.

Short answers, yes, we.

We actually run today on AWS, but we also run on Google and IBM and are having conversations with Microsoft. So we do believe in a multi cloud world and we need to have similar partnerships with the other players.

And I got it right.

<unk>.

Our strategy is to reach every professional developer with our it's our ability platform and.

And we want to meet them, where they are with an experienced said flawlessly integrates.

Our mission is we want to be even more seamlessly integrated with those cloud providers offerings. They may have that have some overlap with ours. So that's good what we're trying to strive for and what's driving it it's like our customers.

That will ultimately lead to have your customers, which will be more users more gigabytes of data and then revenue growth.

Got it got that that's helpful.

And then I just wanted to square back to to the Q3 revenue guidance.

Sure sure and I know, we walk through a lot of the puts and takes but maybe just wanted to make a little bit more specific so.

We're calling for a sequential decline in revenue from from Q2 to Q3.

In spite of the fact that you are going to are are actually being up next quarter, an error has been.

Flat to slightly up this quarter can you maybe walk us through the assumptions that you have modeled in the queue three outlook and.

How much related to churn and downgrades and how much of that is just general conservatism given the unknown in the environment, maybe help us kind of walk through higher getting to that.

Sort of range and you've got it us to on the revenue side. Thanks.

Sure so from a from an Enron to revenue conversion standpoint, most of our deals come in at the end of the quarter right everyone quarter linearity. Unfortunately, that's not generally the way it works right. Most of the businesses in last month account for the last couple of weeks of the quarter, So incremental IRR in a certain period.

Tends to drive revenue in the swallowing period as opposed to the current period. So if you want to look at a revenue chain revenue changed in Q3 verse cute too.

Really look to the incremental IRR that we achieved in queue too.

As the driver for the revenue growth in Q3, and you can see that was that was generally flat.

The other thing is.

As we as we move to this model.

And right now a very small percentage.

Total of our total business is on this.

On our new model, but more and more will be moving that direction and that.

I think there is there is a lag in in when people are consuming and when that revenue shows up in your in your top line and it also doesn't necessarily translate perfectly too too error right because.

To spend level is what's important.

Important as opposed to the commitment level so those factors.

Either along with uncertainty around the overall environment, let us catch the guy.

Titled So helpful. Thank you.

The next question is from Eric Suffragette.

With JMP security. Please go ahead.

Hello, Eric is your phone muted.

Yeah can you hear me there.

Can you hear me, yes, we can hear Ya yeah, yes, we can do about that.

I'd be curious about the 10 fold increase in the in the.

Customers for the free tear.

Where do you think those customers are coming from.

Customers that are.

Using their own organic.

Absorbability technologies or are they coming from other other competitors.

And then I have a follow up.

Yes, we believe.

Still most of our business to win is Greenfield.

Developers, who have not yet begun embracing absorbability, but want to and for making the focus of course.

One of the major challenges the customers have.

Is the proliferation of both open source and commercial solutions that offer.

Capabilities and part, but not the kind of full stack visibility relic offers and so.

We believe by offering this platform.

Approach with the pricing model the advantages in terms of standardizing on new relic for all of your Absorbability needs will attract both.

Customers, who are using competitive products, but most importantly be the most comprehensive solution for new customers in new developers.

Okay.

Then.

On the AWS relationship.

I don't think I've heard of.

Of your competitors talking about five year relationships can you just talk a little bit about the exclusivity or nature.

But.

Relationship as it would.

Would compare to have some of the others are are working with AWS.

It's not exclusive.

It is a I would describe it as a a serious commitment from both companies to build a.

Important partnership for product integration and go to market.

And that isn't a one quarter to quarter, one year commitment we wanted to make make it clear that this was a long term commitment and important part of our business going forward and we're prepared to make that make a five year plan.

And they were they were happy with that I don't know how that compares to our competitors but.

This is this is.

Probably our most important strategic relationship at this point.

Very good thank you.

The next question is from Keith Backman of BMO capital markets. Please go ahead.

Hi, This is Dan on for Keith Thanks for taking my question.

And your prepared remarks to discuss the higher data.

Question rates, but can you maybe talk about what you are seeing in terms of monitoring second and third tier applications versus more mission critical applications. Thanks.

It's a good question I don't think we have hard data handy on it but.

What I can speak to.

My understanding of the trend is.

Applications are composed of many many interconnected sheriff and it's stunning.

To see how interdependent interconnected things are so what people might think it was at first tier application.

The countries often discover boy it has a dependency on something they didn't think of his first year, but now bye bye dependency is and.

And so the.

The way they often discover that God is on our platform and so they have a desire to basically see everything that runs in production particular anything that starts with the customer interaction right and.

You take one of our customers have.

It's a major global apparel company and.

Got.

Question of our business is online and and so the number of systems involved.

And delivering that apparel from our customer is mind boggling and it just drives a tremendous amount of furniture data into our platform.

This concludes our questions question.

Yeah Yeah.

I guess.

Four jump either I just wanted to jump ask you. A question that was mentioned earlier I tried to jump in and of course, the the 2023 days of ear on mute Haunted me, but I just want to get back to the gross margin question briefly and our our transition and migration to the cloud as you know we're going through that.

We were.

We were pleased with the data and gesture growing but of course that puts pressure on margins are.

Gration is moving very nicely and we are confident in our in our.

Ultimate.

Medium term trail back to the 80 percentage range gross margins, but given the increased data that we're seeing in this year, we expect gross margins for the full year to be in the mid seventies or so earlier guide of I think it was the upper seventies. So just wanted to wanted to get that out there and then also just talk.

Another comment around the the movement and metrics, we've been getting a lot of questions about this from investors into just want to.

The expansion rate that I talked about.

Which is really ALR, driven we're going to be looking at a net revenue retention internet consumption retention expansion rate going forward, we'll we'll be talking about that and gradually transitioning to that as we go through the next quarter's as we get more and more hysterics, Derek spherical data with more customers on.

On a new pricing so.

We'll be talking about that a lot more going forward and so you can prefer that future quarters announcements.

This concludes our question and answer session I would like to turn the conference back over to an attorney for closing remarks.

I think I. Thank you all for joining to call today I know, it's a very busy.

Evening, many companies are delivering their results.

Short version we.

Conviction in the strategy that we that we launched last summer.

We realize we're very early in that transition and so we don't have an awful lot of data.

But the early that we have gives us encouragement that.

The market has demand for this approach.

And that is differentiated and it's resonating well with customer.

But that there's a lot of policy, we need to do an execution more smoother customer base over.

And moved from being.

Scripture oriented consumption oriented, but but these are all the right moves really.

Will will result in the kind of growth rates that we aspire to open company.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.