Q3 2021 New Relic Inc Earnings Call

[music].

Good day and welcome to the new relic third quarter fiscal year 2021 earnings conference call.

All participants will be in listen only mode.

After todays presentation, there will be an opportunity to ask questions.

If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Please note this event is being recorded.

Now I'd like to turn the conference over to Peter Goldmacher, Vice President Investor Relations. Please go ahead.

Thank you operator, hi, everyone. Thanks for joining our Q3 fiscal 'twenty one earnings call.

We published the letter on our Investor Relations website, a little less than an hour ago and hope you all had a chance to read our letter together with today's earnings press release because of the level of detail. We provided across the two documents today's call will begin with Lew providing brief opening remarks, and then we'll dive right into your questions.

During the call we will make forward looking statements, including about our business outlook, new strategies, which we based on our predictions and expectations as of today.

Our actual results could differ materially due to the number of risks and uncertainties, including the risk factors in our most recent 10-K and upcoming 10-Q to be filed with the SEC.

Also during this call we will discuss certain non-GAAP financial measures, we have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results.

And finally this call in its entirety is being webcast from our Investor Investor Relations website, and an audio replay will be available there in a few hours with that I'd like to turn it over to Lou.

Thanks, Peter and good afternoon, everyone and thank you for joining us for our third quarter fiscal 'twenty one earnings call.

Joining me today are CFO, mark back of it and our President and Chief product Officer Bill Staples.

Before we get the Q&A I wanted to make a few comments about the quarter and the journey we're on at the company.

I encourage you to read our Investor letter, which we published today in conjunction with the press release and it we expressed some important updates that we're making across our company to better serve our customers from.

The beginning you relative to exist to help developers build more perfect software, that's an important and noble mission and we're just getting started.

We want to empower every professional developer around the world estimated to be $28 million today and growing rapidly with easy access of the power of observer ability.

Part of their daily workflows.

Yes.

Over the past year, we've made important changes to our go to market and product strategy all of in service of simplifying the observer ability market and our financial results for the third quarter reflect the early response from customers to these changes.

Specifically there are three key areas I want to highlight.

We are orienting every part of our business to focus on the customer every team across new relic has a renewed focus on delivering increased value to our customers.

Our product team.

We have completely re imagined our entire platform experience.

Our go to market teams introduced new pricing packaging net sales motion and.

And our customer success piece of transformed our Onboarding and training all of the service of making it easier for our customers to try buy and growth with the new relic one platform.

The second items, beginning with the launch of new relic, one price pricing much like we are transitioning to a consumption business model.

In this new model customers loved that they are paying for what they use and if they have complete visibility into their spend at no surprise sales or penalty no shelfware and a very high correlation between price and value of.

This is resonating with our customers.

And third we are continuing to make adjustments as we innovate ex U.

The progress through this important transition we will continue to learn from our customers and useful of learnings to refine our price and go to market.

We've fundamentally transformed our product sales and customer success strategy and we continue to make changes of the name of better serving our customers.

Okay.

On a personal note I want to congratulate Bill Staples, who was recently promoted to president and the issue to his responsibilities as chief product officer.

Since joining me relative a year ago, Bill has had a tremendous impact on our business serving as the chief architect of our product the corporate strategy, including the launch of new relic, one last summer and our true the transition to a consumption business models.

I also want to thank my Christiansen, who after serving for president and CFO for the past year and a half of it.

Moving into the advisor role and remaining of director of the company in.

2019 of I asked like the step into an operating role to help me in the DJ operations of the company, whose main focus with the add more structure into our business and to help us build out our business strategy with this complete if the size of stepped down from the day to day operations role at the end of Q4, you will remain on our board and continue with the strategic adviser to me starting in April.

In summary, while we're pleased with your own early momentum and feel good about our path forward. It's important to note that we're just getting started executing on a consumption model will continue to focus on making it easier for our customers to do business with us and get more value from new relic one.

With that let's move to Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to.

To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Yeah.

The first question today comes from.

Kingsley Crane Aaron Berg. Please go ahead.

Good afternoon, thanks for taking my questions sort.

So really appreciate the extensive detail and the letter of dressing the transformation from the subscription model to a consumption model and why it's so much more than just a revenue model transition of <unk>.

All of it's still early days could you share with us some of what you've learned over the past few months of his either most surprised you whether you found the most valuable.

Certainly I think one of the key learnings.

For some customers they love to consume cash paid to step up to the large commitment that would show up in New York.

Hum.

Because they have a good understanding of what the conjunction will look like over the next year and they like those unit economics wherever theres a meaningful portion of our customers.

That has the full intent to continue to grow with us, but we'd prefer to find out for a smaller upfront commitment which shows up in some of what they are.

But they have the they have a few things that they prefer does that leave from that decision.

First off they have an easier of internal approval process for that.

Second day, they they know they're not going to overpay.

And it's important to note that many of our model. Unlike some other models in our space. There is no penalty for Overconsuming, it's not like if you go up obviously of the mountain all of a sudden the unit economics getting a lot worse.

It's a customer friendly model, where they can have confidence that if they if they do sign up for a lower commitment they are still going to get.

If they won't get penalized for that for consuming at a higher rate.

And given the uncertainty that's going on broadly.

Really hard to predict what the consumption may be a year out of.

Further in some of them so they prefer to get and pay as they go.

For that overage. So so that's one of the things we learned and we're fine with again because.

Two of our point on the consumption model and we continue to focus on driving customer value of.

Our customers are going to send us more data and they're going to add more users and also the primary mechanisms by which we.

Recognized revenue and so so we.

We like that and say can we focus on those fundamentals, we expect to see from our customers grow with us the nice to show up in our top line.

All of that makes perfect sense of I liked. The example of in the letter of too about the non traditional applications like parking meters and pricing standards of thought there.

It was interesting. So last question would be are the commentary on the changes to sales incentives in fiscal 'twenty, two including eliminating incentives for upfront of women's health is more important so.

How quickly can we expect the sales force to adopt to be the kinds of changes and should we be expecting any gypsum productivity per rep.

Well, we've been signaling for a sales force for some time that we're moving occupancy obviously the signaling more than signaling that we're moving to this model, but we've been signaling to the sales force, but the compensation plans for next year will.

Well, we're really aligned well with our with the customer success and new relic success.

So we've been preparing them for that.

That having been said we're still in the pit.

A period of transition and during the time of transition some people. They may decide not to take the next step of the journey of whereas the.

Others will will be five skus.

To you on that journey. So so we're managing through that changes.

And we're prepared for that.

But we absolutely are focused on setting ourselves up for success next year in particular, as we align of our compensation plans with with the <unk>.

Function of model that were committed to.

Okay.

I can I could just add to that low.

And it's not going to be abrupt we've done some modifications this year and in the fourth quarter as we had in the fourth quarter, where were you kind of softening the the collectively all of the abruptness of it by by starting to transition those those plans into what there'll be next year. So we as we said we've been.

Waiting on this for quite a while and and we've already started that transition as we as we go through the rest of this year.

Okay. That's very helpful. All right. Thanks again guys.

Okay.

The next question comes from Tim <unk> of Morgan Stanley. Please go ahead.

Thank you for taking the questions and and Hello to everyone on the team.

Good quarter in Q3, I had a couple of questions that I wanted us to work through first I wanted to get prepared for what we should expect over the next several quarters in terms of this consumption model. So Mark I was hoping you could walk me through.

What do you think the impact is going to be in terms of revenue maybe its in terms of the air are in terms of customers committing to a lower level of initial commitment and then what is the team's hypothesis on how long it will take for actual consumption.

The exceed contracted assumption of any sort of.

Modeling or simulations have done around around that behavior of that'd be very helpful.

Yeah sure.

Happy to go through that and I guess I'll start with just the you know the IRR guidance in Q4.

As we mentioned is going to be flat.

Vs Q3, and that's I'm sure people have some questions around that and even internally we too when you. When you first look at that I think it can be surprising when we look at our business. We say, we just came off of a good Q3.

We look at our business, how we're doing relative to our objectives, where we want to be in the transition transition et cetera.

It feels like things are going it's going well and and relative to last Q4 et cetera, why is that number flat and kind of what's going on and and first of all I'd say there are three primary reasons why is that the the guidance is flat for Q4 the.

First is the change in model.

The second is large deal dynamics.

And the third is entitlements and let me go through through all three of those a little bit and.

A long winded answer to the question, but I think it's important for folks to really understand this and so when we look at the change in model. If you think about our business.

The reported you know call it $670 million you kind of 67 7 million of of Air. Our Q4 is our biggest renewal quarter and so you say you know 25 30 per cent of our renewals.

The business is coming up for renewals in Q4.

175 to one of call it $200 million of.

Business, that's going to be renewed in this quarter.

Under our old model.

With that one of the that would've renewed at a higher rate of higher level of subscription do you look at last Q4, we had 116%.

The dollar based net expansion rate.

And that says that that $200 million in renewals would have grown by 32 couple of call it $30 million and got round numbers that $200 million in an era of of growing to $230 million in error.

And what we're saying is now as we move here of this model.

That $200 million a day our R.

He is going to a new.

At $200 million in commitments.

And so that's the $30 million Delta.

Right, there and we're fine with that.

Because customers are more comfortable committing to less and they expect to spend.

We're confident that these customers are getting in there using the product they are embracing the platform and we're confident that their spend is going to grow over the course of the year, but it's going to be on their terms, they're gonna be paying for what they are using much more customer friendly and focused model and so their spend will increase over time.

But unlike the era, where we'd see that bump in revenue right away starting in April.

We're going to recognize the revenue according to the how they're consuming and and we'll recognize the revenue until they hit their their commitment level and then it'll be exceeding the collection of lateral will get most of that bump in revenue in the latter half of the year.

And so we think it's it's Q3 Q4 is the second half of the year, where that consumption revenue starts to pick up and really starts to improve the overall economic can start.

The start to improve the overall revenue line and we think that's where it starts to kick in.

Now the the second met in the.

The second bullet point I mentioned around the yeah. There are a number of this quarter was the large deal dynamics.

In this quarter.

We have two large customers and for various reasons they want they're not comfortable because they wanted to use their overall level of commitment.

This happened last quarter, we mentioned in the Investor letter there are $4 million and in this quarter. We of these two customers just in the low eight figures and these are two customers that are huge users of new relic.

We're going to continue to be new your new relic of users in fiscal 'twenty, two and in fact over the last 12 months their consumptions of actually been increase it.

But they're just not comfortable with that commitment. So these are customers, where the E. R. R is going to be down they're going to be consuming that that commitment.

And then any increases will be backend loaded in the year.

That looks like the revenue side of things.

And then the third factor affecting IRR is.

The guidance is entitlements.

If you remember we opened up our platform, where we announced the new platform in August and we said everything to use as much as they want the free through December.

And that had the effect of of depressing results in Q2 in September if people said why would I pay for more when that games of a free so that depressed Q Q2, a little bit added a bit of a boost into Q3. It also pulled forward. Some of the deals that may have happened in Q4 into Q3 into the December quarter were.

People wanted to take advantage of the.

That entitlement on the.

And you know what we outside of what's gonna be an exploration. So those are those of the Packers, but overall I think it's it's the latter half of this year, where we think this transition every period, what kind of Ive worked its way through and we'll start to see.

The the benefits and the and the ongoing consumption increases hit the top line.

Thank you Mark for that for the detailed explanation I had a couple of just the follow ups of based on some of your answer.

Hypothetical customer like in the traditional subscription model if they sign of called by the contract.

It was sort of recognized straight line, but let's say the actual consumption on a run rate basis happens in month, three or four of the 12 by the contract should you expect the revenue recognition to the accelerated that early or do they have to sort of.

Surpassed their total initial commitment before any sort of ex SaaS revenue is recognized.

This gets into starting to get into the details of revenue recognition and variable consideration, which we put a little bit about that in the letter and happy to talk to the anyone about that.

Okay separately, but in general right.

In general we would recognize.

We have to estimate what we think their usage is going to be over the over the life of the car.

The term so over the 12 month term and recognize it roughly in connection.

Try and try and smooth it out over the course of the remaining contract so with the customer and keep it in month three a month for really starts exceeding they're they're they're.

There.

Planned usage, we were probably recognize a portion of that.

Starting you know in month, three and went for.

But of course, we don't know is it going to go down of the future of day. So so it's it's it's really towards the end of the contract where we get a lot more confidence of what their actual spend is going to be so in general I would say the bulk of the increase of recognized nice late in the late in the term they don't have they don't they.

Don't have it have consumed their full commitment before we start to do that but in general the backend loaded.

I appreciate it Mark and then the last one I promise I'll yield the floor.

In terms of.

In terms of of how you guys are thinking about metrics in the sort of transition period have you guys given any thought to giving things like user accounts or data ingest or something.

Something to give a sense of how the consumption behavior is happening because it seems like the metrics whether its <unk> of revenue might be might not be giving the true picture of the the underlying growth of the business.

Yeah, we've we've thought a lot of about that we are.

We've got a lot of new metrics in the in the company since the since we've done this and and from a public standpoint, we talked about net revenue retention and I'll talk about that of a letter of debt and we gave an example, there for our larger customers, we will be including that for our customer base as we go forward as a as a key.

Trick starting next year.

And in the in.

Next in Q1 in the spring.

Yeah, and otherwise, it's really about data ingest and users and the data ingest. We've we've talked about that gave some some information about that last quarter of this quarter, we talked about that data ingest year over year grew about 70% last year and when you look at the chart on the.

The Investor letter you can see that there was an inflection point as it is growing you know once we introduced new relic one in the summer time and just last quarter. It grew in the you know 15 per cent range in the quarter and so that's something we look at very closely and and and then the youth.

Our growth what's happening with the user growth, we haven't made any definitive decisions about which of those metrics, we're gonna be Inc.

Disclosing publicly.

We have to do that we recognize those are important things and ER and we want to do is we wanted to do it right and we want to make sure we have enough data to be comfortable with the with the underlying trends were still pretty early in the model and so we're still continuing to learn but we definitely have to.

I'll have to figure out and make sure that we disclose enough to to get people comfortable with the underlying trends.

Understood Mark I appreciate the thoughts.

The next question is from Jennifer low of UBS. Please go ahead.

Great. Thank you, maybe just talk a little bit on standard question and you know how we should think about this playing out.

True through the next day it into the next fiscal year, you know it sounds like we should if we look at the the growth guidance for Q4, it sounds like it's probably still a couple of quarters after that before you'd really see any meaningful inflection in the grocery as these contracts take time to season through is that is that a reasonable expectation.

And or could we see it happens sooner or how should we just think about you know when the growth rate bottoms and when it starts to climb back up.

I would I think it's.

It's the second half of next year before it starts before it starts coming back up and once we're there it's similar to the transition of folks who went from two of subscription model from a license of non Prime you go through the transition period and you have this dynamic of of the the era of.

<unk> based revenue falling off in the consumption revenue not yet picking up so in the areas that trough.

And I think you know the pay it depends on how quickly folks are consuming and you know relative.

Relative to their upfront commitments and things like that but we feel like it's the the second half of fiscal 'twenty, two where that starts to turn upward.

Yeah.

And then just in the shareholder letter there was a reference that you.

You know in the September month, you talked about last quarter that there was a 15 expense per cent expansion.

The conversion to the new contract and that was a little of it was last seen of zero per cent in Q3, and I'm curious I know theres a lot of variability in that you know how much of that difference is due to just bigger numbers average across the bigger population, causing of different result versus something strategically different in the way we're approaching customers on those.

Conversions.

I would say there there's something too.

There are a couple of large customers had a big impact there.

On the other hand, we are seeing something across the board and this is one of the learnings of Lew alluded to in the in the first question.

And where we've we realize that customers are much more comfortable committing below their projected spend particularly when the you.

The the the the you know.

The penalty for committing more is you'd have shelfware the penalties for green grass is you pay at the same rate.

Which is you know it is.

Logical then logically the drive people down to the bidding a little bit below what they what they expect to use we went in thinking that customers would commit to between 80 and 120% of their expected usage.

We're finding is some customers commit more but only in the case, where theyre already blowing through what their what they've already.

After four of those customers then we will commit to a higher number in other case in most cases, they're going to commit to a lower number than they expect to use in Q2, I think we were more involved and learning and we were pushing skill to get that uptick we had just rolled it out.

We still had to go to Mark mutation of even internally the senior levels. We were still kind of focused on this let's get of let's get an uptick what we realize is you know when youre looking for transactional efficiency.

And customer friendliness, it's much better to basically let the customer decide.

And to help help them understand the dynamics and work through that but ultimately let the customer decide and customers are more comfortable under committed and you know I think that is true.

Keeping in line with with what we want to do which is the customer friendly we're okay with that because of the key thing is what happens after they signed that agreement how does their consumption track and that's what we want to follow and that's what we want to keep seeing growth.

Okay.

Just one last one from me I'm just.

Just looking at the at the operating income guidance for Q4, I know you. There was some of the references to being a bit behind plan on AWS spending and maybe catching that up in Q4 of them. You know you also referenced maybe some sales compensation designed to make them whole given the transition how should we think about the puts and takes.

Feeding into the operating margin guidance for Q4, and how that might play out even beyond Q4.

Yeah. So the the primary driver there is our is our cloud migration of the cloud and the clouds fan. So in Q3, we were we had lately.

Better gross margin than we had anticipated.

There are some some prereq work that we needed to do to to continue to accelerate the move to the cloud.

That's that hold up some of that migration now as we get into Q4, we'll be we'll be spending to kind of catch up what we didn't spend in Q3 as well as the increase from Q4. So so you know that.

I'll put pressure on our gross margin in Q4.

As we go forward.

You know migraine the cloud we've got this double bubble, where we're paying for the cloud spend as well as our internal data centers, there's not much not you know.

Look out of couple of months and there's not much that's gonna be happening there. Unfortunately, we're still paying for them.

And as we talked about when we first announced this last spring the.

The you know the the gross margins.

I think next year of probably going to be comparable to the second half of this year.

And then as we get into fiscal 'twenty three.

Towards the second half of that year they'll start to improve.

And the thought of the closer to where we were of.

The cloud migration is completed at the end of the old data center spend is.

Please the rolled off.

Okay. Thank you.

Yeah.

The next question comes from Rishi July of C. D. A Davidson. Please go ahead.

Hey, guys. Thanks for taking my questions and I appreciate all the detail in the shareholder letter I wanted to ask first starting on NR or.

Can you maybe walk us through a few of the puts and takes you don't I guess, a does that capture of churn to the extent that there are six figure customers, who in the span of a year do churn off of either completely offer downgrade to the point that they're no longer in the 100 K bucket Mark I believe you had said you plan on disclosing this metric.

For for all customers not just hundred Kay customers and in the future of just wanted to make sure I understood that correctly.

Yeah.

And maybe wanted to understand if we look at the historical.

And that when do we see this the end of our metric for free even though the six figure customers declined about 20 points in the span of six seven quarters. So maybe walk us through that and then I've got a follow up.

Sure and just the one one clarification.

We expect to use <unk> four.

I don't think it will be all our customers with more likely our customers over 25, K or some threshold as we go forward just because of the low end there is so much.

So much back and forth and they're pretty transient in the pay as you go segment thing. So so just what.

More to come on that one as we get into the next next year.

But.

You know that that number does reflect customers who were paying.

If they came in and out in the last.

The 12 months.

They would not be in there. So if you know its six months ago. They are big customer came in and then the month ago. They they left that would not be in that number but if they were a customer in.

In the in the prior excuse me 12 months and they dropped.

That would be captured in that number.

So.

That number is a is more of a historic looking at historical and new back backward looking number and you know if.

It tends to follow.

The overall revenue performance.

But I think it's oh, it breaks it down a little bit better. So we you know we recognize it's been declining I think as we go forward.

That will follow our overall revenue true.

Friends, where it's likely to be a little depressed for the next couple of quarters, and then start to turn up as we get into the the back half of fiscal 'twenty, two and beyond and once we've made once we've completed the transition where we have the vast majority of our customers from the consumption model. I think then it starts to give a real accurate.

<unk> of what's going on and then it would be reflective of okay, what's what's going on with with overall consumption.

Great that's helpful.

The on the the consumption versus subscription I'm sure of.

The overwhelming majority of the business today is subscription what what what's kind of the ideal mix of business Youre looking at getting 100% of customers on.

Consumption be it with some level of commitment upfront and what what's the general timeline for how long you would expect that to take it's not a matter of four quarters, where it would go from being a vast majority subscription of the vast majority of consumption longer than that of anything there would be helpful as well. Thanks.

Sure we would like to get.

We feel like we will have more than half our business on consumption by the end of this fiscal year. So by the end of March.

That's a target of ours.

And in and then as renewals are coming up we would you know our goal is to get every new all on a consumption model.

And so yeah.

There are certain reasons you can't do that.

But but by and large I think we're gonna be them do that so you go through the renewal cycles. We have some multi year deals that are it takes some time, but you fast forward a year from March by then.

More than two thirds of more than three quarters of our business should be on it should be on consumption.

You've always kind of you've got some site licenses at the high end of some other things that will prevent us from getting 100%, but we our goal is to get as much as possible in terms of commitment levels I think what's come across probably already very clearly is we're not concerned with the upfront commitment level, what we would like rather than us going to come.

<unk> and.

And asking for that we want our customers coming to us and saying you know I want to commit more because I'll get a better deal.

I'm, so confident that I'm going to be using a lot more of new relic I should get a better deal.

And that's a better position to be and it's customer driven and then when we visit when you know when we're having a negotiated with the rest of its look how much money I'm going to save you.

And so I you know I fully expect that a fair amount of our business will be committed.

Going forward, but the difference is I'd like to have it being customer driven commitment as opposed to our internal.

Our internal battling back and forth.

Pushing the customer to make commitments.

All right great. That's helpful. Thank you.

The next question is from Robert and the Jack <unk> Raymond James. Please go ahead.

Great. Thanks, it's good to see.

The your data ingest increase quarter over quarter can you just help us understand what's driving the uplift in data ingest specifically is it more tracing and increased application monitoring coverage or customers adjusting more metrics of logs and that's driving the bulk of the increase.

I would like bill to take that one.

You bet. Thanks Robert.

Yeah, it's actually really the exciting to see the growth in data ingest this quarter of the product team released several new capabilities that unlock more of the ingest and increase the issues of the platform.

Including our partnership with kind of fluids and the pay.

Philadelphia, the new relic connector for Kafka allows customers to ingest kaka topics at the new relic, one without running a single line of code, we announced the partnership with Tencent to provide network insights of.

Snowflake integration just logging Jesper large land the run time of logs integration improvements to synthetics that allow proactive monitoring of non http connections realtime job of profiling and dozens and dozens of other improvements.

The product is the team is really focused on accelerating that data and user growth.

So really it's across the board, we see growth in dimensional metrics all of a lot of expansion in logs.

And across the board and 70% growth in the first three quarters of this fiscal year, we're really proud of.

Great and just one more question from me if I can and it's a question of all of the rock with Jennifer but you mentioned that existing customers, who renewed on the new model of this quarter showed no AOR uplift instead of <unk> can you share what the uplift was in terms of total spend if we annualize the increase in Q3 spend or is it just too early.

To do that at this point.

It's too early to do that what what we're saying is there a R. R.

The total amount they commit it was flat so if it had been 100 million an IRR they committed to spend of $100 million now what will that spend be over the next 12 months.

You know that it's too early to tell there, but that's what we're very focused on is is aligning the whole company of driving that consumption. So.

We fully expect it to be more than 100, and just how much more is is up to us to.

To drive and for the customer to get see the value and really expand their consumption.

Great. Thanks, a lot.

The next question is from the types of John of Oppenheimer. Please go ahead.

Thanks, and thanks again for the liver are a lot of the until there will have to digest that later, but mark I just wanted to go again into the trying to make sure I understand the timeline for you to get real good clarity whether this is working well now of just talks about the second half.

Of the of our fiscal 'twenty, two but in reality at the end of the fiscal 'twenty. Two you still are going to have I'm, the 30 or 40% of revenue of that hasnt converted the consumption.

And you won't even know the expansion patterns of all of the customers that are what will expand in this in the next two to three quarters. So it's really the second quarter of second half of fiscal 'twenty or 'twenty through all of the first half of fiscal 'twenty three.

The late calendar year next year, right, where you're really going to have better insights winter.

Whether the consumption is working where did the expansion of the consumption is working as you would think it should.

Yeah.

I think the obviously the longer the longer the time, the better visibility we will have.

But if you you know there's there's this couple of quarter delay.

Between the when you at the time of commitment and the time when you can get a lot of that revenue increase and so if you think about.

A portion of our business.

Giving that increase in the in the Q3 another portion of the Q4 I think that the amount of bad debt impact grows each quarter and so when will it be fully realized I think it won't be fully realized for youre right.

Probably second until we have the vast majority of year three quarters. After we have the vast majority of our customer base moved over that's when you'll really see the true the.

The true model kick in and the true.

True performance, but before then you'll see I.

I think we will see the characteristics start to start to impact it and the current start to shape of upward when you talk about how much of how much we're seeing and when can we get data. We've got a cohort of customers that signed up in September of last year.

Yeah. This is oh developed of smaller cohort, but we've got you know it's in the meaningful and the in the many hundreds of customers that were in that that signed up in September. We now have four months of data around what there.

Pattern has been and we've got this concept of of running the cold you know of running hot we're in I'll call. It goldilocks when the middle of you know are they are they on target to do you use less of their commitment are they on path to hit their commitment or are they running hot or the impact of exceed their commitment obviously.

We expect over time, the vast majority of customers to run hot and exceed their commitment.

When we look at the.

Their behavior in that cohort of September customers. When we look at their October November behavior.

And then we look at their January behavior.

The the ones that were running very cold of running cool the runs their own Kool are now running new.

Control of everyone's of Brian neutral.

Of running running warm et cetera, they're they're moving up the app that of that stack. If you will and so we're seeing that type of behavior and when you get to next September.

At that point have a 12 month period, well, we'll see I mean, what did they come in.

What was their consumption pattern and how they do relative to commitments. So we're going to get good data.

Yeah.

In the next few quarters and in the meantime, we get all of these interim data points that we see to see how we're doing so and we can adjust depending how things are going in and make modifications along the way. So we'll get some indications along the way, but you're right.

I look forward of the day.

Couple of years from now where our entire customer base. All of this we've worked through all of these and and we have great data about about how our customers consume them.

But before then I think we'll we'll still have enough to to really are to the.

Understand our business got it I guess I'm trying to tie of what you said now to lose.

Points that he mentioned that the focus is on the customer.

And you know crews of reduce all friction and do whatever it is that the customer needs to try buying growth if I remember that was the commentary.

I'm trying to think of can you give us some color as to when do you think you're going to be more firm on your demands from the customer and what I mean by that it sounds like you're letting the blow through their capacity commitments and we've necessarily going right away to the taxing dam.

At what point do you say all right. The quote unquote enough is enough and you know at this point most of the left you'll have to pay do sort of most of the right you have to pay that because I was just wondering whether over the next 12 months, if you're going to assume a very lax.

Attitude towards customer behavior.

Again, the true upside here of the long term expansion of Oh, Oh Oh.

All of bandwidth and your platform, it's going to take time toward out to show in dollars.

Yes.

Okay.

I'll take that one.

So in this new model when our customers see.

Their consumption they automatically go into an auto billing situations. So that there is no firm conversation of acquired as part of their agreement with us. So if they exceed their annual consumption of months six months seven day.

They received an invoice and we recognize that revenue so.

And this is why we loved that it's customer friendly and I think the customer will observe how long of a sales growth.

And then the me, saying, Hey, you really expand it is growing but I'm seeing more value now is a good time to reach out to new relic and asked if we commit more today, but we get better unit economics.

And so we just think assets are more healthy relationships and having our all of our in our model today and I think this is generally a model. The model is broadening our space of having the rep case, the customer to try to force them to work on the vendor's timeframe.

This is the natural win win we're gonna obsess on delivering the value of the customer growth of consumption and that's one of them at some point turning to come from some of the overage now it's important to note that the that overage is not punitive right. It's not like when you go over the life.

Heavy fee that makes them feel regretful in the relationship or is not having Overcommit Inc.

So the relationship and that is different from what.

Others have done in this market.

So I hope that helps you better understand the situation there is no need for a nasty conversation or a difficult conversation.

Got it maybe Lew on the you know you talked about the two large customers that decided to start with the lower commitment.

Can you tell me how common that behavior was with all of her thousand dollar customers or even smaller customer who was that something that was common or rare.

I'm gonna of Mark answer that one.

I you know I think it is specific or customer specific.

Click and situation specific but we have I think most customers are willing.

Willing to come in at the level of their current spend of.

You know.

In normal course, that's an easy budget process like Oh, we were sending out this year last year, let's spend that again. So that's if you look at the mode, that's probably it.

But if you look at the main it's.

I mean, the mean was quiet I guess, when we gave that number but you have you have some customers who had just a little concerned budgets are tight and they say you know, it's it's easier to to spend a little bit commit a little bit less and all look good because I've saved some money now at the end of 12 months did they actually save money Navy Navy.

Our goal is to say the hope hopefully we've convinced them of the value and they've seen the value of the end up spending more.

But that's up to them.

So it's.

It's it's hard to say, but I and I think we see that we see that behavior throughout the stack of customers. It's not only of large ones. We do have some small customers. We have small sums customers, who said I'm gonna make zero commitment I'm going to go to a 100% pay as you go.

And the economics of the unit economics are much worse right.

For the cover of good, but they're they're more comfortable doing that.

Very good good luck guys. Thanks.

Yeah.

The next question comes from Ken Lewis Capital markets. Please go ahead.

Thank you. So obviously, there's a lot of focus on this new pricing model.

And the the impact of Onvia on the models that we all have to maintain and track your transition but the.

The change was done to attract new customers and more successfully ramp with existing customers. So can you just talk about any change you made in your.

Go to market plans to market this new pricing model to the right customers and also to the right people at the target customers in the funds. Just you know are you targeting the individual developers and department or are you also at the same time targeting the C level people, who couldn't see I O with this new pricing model.

And I'm curious on what the plan is in the.

The near term of at least <unk>.

And you know what are you learning out there all of your market if the new pricing model.

Bill I'd like you to speak.

The sleep.

Yeah.

The short answer is we're targeting both of them from our existing customer base.

As renewals come up we are focused on converting them to the new consumption and.

This new pricing model and in consumption.

Mark and we've talked about that's going.

Going well so far.

We're also targeting individual developers and new customers.

And that starts with our new perpetual free tier that we introduced last July.

This is a really generous offer because.

Because we believe the.

The.

Power of observe ability should be available to every developer.

And it's a generous free tier gets 100 gigabytes of and just kind of full stack user for free and we are of your reported last quarter, we've seen incredible engagement with that free offer.

We said last quarter kind of ex the number of customers who previously were in that.

1000, 2000 dollar spend are now engaging in that free tier.

This quarter as well we saw that.

Continued demand for the free tier offer and increase conversion to that pay as you go model by the small individual.

Individual developer and small business customers in fact, we just passed our 1000th newly converted pay as you go customer just the this week. So we're excited by that emerging opportunity to acquire new customers and really build developer mind share around our platform.

So in the renewal situations of.

It's a new.

The changes in structure of changes in the deal are you able to bring in the C level executives to kind of introduce exactly what you guys are doing and try to get maybe a bigger.

While the share of other projects that are ongoing or are being planned.

They're just kind of try to understand exactly what the initial responses from those customers.

When you're renewing with existing customers and whether or not you were able to communicate this new pricing model effectively to the cause of.

Two of the C level people.

Yeah, Yeah yeah.

Alright.

As you can imagine as the the spend level of increases.

So does the seniority of the people, we engage with and we've kind of two of history of working.

At the senior levels to drive strategic relationships in fact zone.

If you look at some of the results from the quarter, including deferred revenue you can see we did quite well from large deals that drove some of those numbers.

I'd say that what they like about this new model.

He is first of all of the predictability of the spend the.

Tool consolidation value proposition.

Some of that they have a single place from all of the telemetry data and its cost effective to have all of our telemetry data in one place.

The standardizing on the one per user products full seconds of the ability of that combines the capabilities of the many many products often from many vendors. So it's a great story that resonates with ctr, but what we like about the model. We're embracing it we can grow our way there naturally and so that.

So that we can enter into the account.

Relatively low spend growing kind of grown actually with them and then at the appropriate time half of that executive conversation.

Which is far easier when the have the when you're just coming in directly into the top of without that the street in context.

Great so low.

Do you expect the ramp in perhaps the professional services head count too.

To help your customers ramped any increase of usage.

We are organizing.

Organizing around them.

The chief customer officer of organization, whose primary responsibility is to drive growth and consumption of the platform and our customer base.

And so one of the things I'm I'm I continue to say internally.

The real account management and cross selling happens the day after the customer any of our commitment of happens that's true.

So we're going to have a dedicated organization that assesses all of that and so the line is the one.

Third between what is called pre sales of impulse sales. Its just continue of customer education to help them understand the value of consuming more adding mortgages out of the more data.

Okay, great. Thank you so much.

The next question is from Michael threats of Keybanc capital markets. Please go ahead, hey, guys.

One from Mark on flu for the.

The two large customers that are reducing their commitment of how much visibility do you have into why in the past.

When this happens.

Included in this sense of the Assembly I think over committed in terms of how much the just thought they'd use of their product.

So what do we really know about why theyre, reducing here.

Every one of these we are we talked about having having a that the her in Q3, we are expecting that take care of in Q4 everyone's a little bit unique.

But it you know.

Generally it comes down to I think a more of a not just.

Uncertainty around their budgeting process or internal.

The internal budgeting issues that they have as opposed to anything else and it's just it's it's a lot easier to do get smaller numbers committed upfront.

And you know if they're if they're asked to reduce the budget to do that and then you end up you know when you say either I'll do something of I'll go back for forgiveness later on.

Because they never really budgets free up or somewhere along the line. So I think I think that's a big part of it is just the perception.

Depending on what goals they have around how they procure and things I think that's the big part of it and then and then just the the notion that people feel like Wow, I'm going to get more efficient and they wanted to get more efficient and they think you know what we're gonna be able to be more efficient with this and and I think some people.

Go into the year thinking that's the case.

And sometimes it is if we're doing our job well really making sure they understand the value selling the new use cases, making sure they understand all of the capabilities of our platform.

We're confident that what theyre going to increase their consumption and they're going to realize you know I Wanna get efficiencies by by using more of new relic and I'll get efficiencies across other parts of the organization because I'm using more of new relic.

Not that they're going to ultimately you consume less new relic did you quantify for us the dollar impact of those two reductions.

Yeah, we said lots of low eight figures.

Okay, and then for Lew.

Something that's not about pricing or contracts.

Sure.

Some of your competitors have broadened into areas include.

Including the.

For the lesson of development cycle.

Workflow security you've got the who's got a lot of of your plate right now but.

Are you thinking that you'll be rolling out those kinds of answers some types of ancillary services and expanding the offering more of you really focus on being a very pure play observe ability of company right now.

I'm going to let bill speak to that because he's been doing a lot of the internal communications of our three year strategy. We're very excited about it but the when you find the answer that question.

You bet, Yeah Ah I.

I get asked that question all the time as you can imagine and if there's one thing I've learned after 25 years in this business. If you chase competitors tail lights you net.

Ever win where.

We're really focused on executing our strategy because we believe it holds more value for customers and investors over.

Over the long haul and we believe we are in the early days of observed ability.

We're focused on.

On the empowering every engineer on the planet with data driven engineering practices that help them plan build deploy and operate their systems faster.

And with higher quality of service.

We have the world's most powerful telemetry data platform, that's capable of ingesting petabytes of data with incredible economics, providing blazing for performance in the analytics and intelligence services. The correlating action data with very low low upfront investment.

We have of single user experience that spans everything from infra to APM synthetics the logs.

And we deliberate with a radically simple pricing model, it's easy to understand plan for and manage and gives customers the flexibility to commit only what they want and pay for only what they use.

That's the strategy and the benefits of our technology of the approach. We're confident are going to become clearer every quarter ahead.

So we're really focused on driving innovation that.

It helps our customers grow their usage, that's expressed through more data in the platform and more engagement by more users over time.

Thanks Bill.

Yeah.

The next question is from the Rethinking that JMP Securities. Please go ahead.

Hi, Thanks for taking the question. So we appreciate the disclosure.

Of the data ingest growth and the Investor letter.

In regards to the margin pressure stemming from the AWS data center transition is there a certain point of inflection where that would begin to be offset by improved unit economics kind of similar to the data overages with your own customer base as Lew alluded to earlier.

So the the biggest factor weighing on our gross margin is the is the migration fact that we're double paying right now as we migrate.

See the cloud, we're paying for that full cloud spend.

We basically have.

Data center and the cloud that we're paying for and we Havent data center or the number of them around the <unk>.

Country that we're paying for and so the biggest positive impact on the or on our gross margins will be once we roll off the the expenses associated with those.

The retiring internal data centers in.

In terms of the overall economics, you know there are lot of things, we can do to improve it.

Improve the processing cost of all of our data and our data cost and we continue to do those.

Right now we're focused on cash.

Enhancing the customer experience and more focused on getting data in there and then you know the specific so if it comes to spending a dollar to attract more data or <unk> or <unk>.

Optimize our our our data center.

Probably err on the side of attracting more data right now, but you know over the over the next couple of years, we're going to continue to to improve that and and and do those efficiency improvements.

We look at it over the long term.

We ingest the massive amount of data now two years five years now.

And we're gonna laugh at how much we're doing now of course, it's gonna be such a big number and at that point, we want to make sure that the the unit economics at that point are better they are than they are today and so we're confident we can get there but in the in the near term we're going to we're getting the best where we think is most appropriate and thats true.

Ooh that's to grow grow the overall data we get in.

That's helpful. Much appreciate it.

The next question is from Sterling Auty of Jpmorgan. Please go ahead.

Yeah. Thanks, Hi, guys. One one just real quick question. If you look at the pace of migration to the new pricing platform. How would you characterize that pace relative to what you were thinking even a quarter ago is that on track faster or slower.

Mark when you think of them yeah yeah.

I think it's I think we started a little slower.

Look back at the September where we just introduced it and last quarter.

And I think we're getting we're accelerating so that work by the end of this quarter will be about on track and then I feel good about our ability to to even exceed perhaps you know our initial impressions of the you know and we're getting better at selling it.

The customers are now understanding it and so I think that's helping.

And you know were even seen cases, where people have signed.

Multiyear deals and initially we had thought you know what we're gonna have to wait for three years, because they just signed the three year deal.

And when do we start talking of the customer.

We're realizing wow.

Potentially potentially change out that that deal is better for both parties to get on a different arrangement and perhaps you know we'll be able to migrate that customer over before three years. So I would say it started a little slower of or pretty much on track now and you know longer term.

Where we will be able to exceed the initial thoughts.

Got it thank you.

This concludes our question and answer the question I would like to turn the conference Mark over there. It is for any for any closing remarks.

Well, we thank you all for participating in this quarters call. We will look forward to seeing many of you in the upcoming conferences and reconvene. The next quarter. Thank you all.

The conference is now concluded.

Today's presentation you may now disconnect.