Q4 2021 New Relic Inc Earnings Call
Good afternoon, everyone and welcome to the new relic fourth quarter and fiscal year 2021 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Peter Goldmacher, Vice President of Investor Relations. Sir. Please go ahead.
Thank you operator, good afternoon, everyone and thanks for joining our Q4 fiscal 'twenty one earnings call. We published a letter on our Investor Relations website about an hour ago, and we hope everyone's had a chance to read our letter together with today's earnings press release because of the level of detail. We provided across these two documents today's call will.
Begin with Lew providing brief opening remarks, and then we'll dive right into your questions.
During this call we will make forward looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today, our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-Q.
To be filed with the SEC also during this call we will discuss certain non-GAAP financial measures. We've reconciled those for 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.
Finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available there in a few hours.
I'd like to turn it over to Lou.
Thank you very much Peter and welcome everyone to the call I think you would all agree there's a lot of news to share today and so we wanted to have lots of time for your questions.
And I'm going to have a few comments at very end about the really exciting new start the transition of leadership and my moving on to the executive Chairman role.
I want at first lead off and talk a bit about the quarter and the fiscal year as everyone knows it was a very transitional year for us where we made a bold bets to two new transformative things for a company with an eye towards the long term success and growth of the business.
We have more conviction than ever than ever in that strategy on which really was the brainchild of bill staples.
And we're pleased with the progress we're making towards that.
And where we are diligently focused on migrating as much of that customer base over to the new relic, one model as possible and as we see customers migrate over we're really pleased with how they consume them against their commitment and how we believe that will result in a strength in the business going forward.
It was a particularly good quarter for product and we believe that our core to all of this is a strong product that will drive usage or consumption and then and therefore business growth and now we're thrilled that as of the start of fiscal year, we've aligned everybody in the company, including compensation programs with a consumption model that.
We are fully committed to which again, we think will bear fruit.
And in that order.
For the course of a fiscal 'twenty two so.
With that we'll hand, it open a hand it over to you for your question.
Yeah.
Okay.
Operator, we're ready for what it is but.
Ladies and gentlemen at this time, if you would like to ask a question. Please press star and then one using a touchtone telephone with debt.
Your question you May press Star and two.
You are using a speaker phone would you ask you. Please pickup your handset before pressing the eastern shore the best sound quality.
That in mind. It is star and then wanted to join the question for you.
Yeah.
And our first question today comes from from good thing from Morgan Stanley. Please go ahead with your question.
Thank you for taking the questions and I'm sad to see you go but I know you are.
Leaving the company in good hands in terms of the fee.
For comparison.
He has worked with Phil so.
It's been great working with you and hope to continue that relationship going forward. My question is sort of really on kind of the path forward from here.
Particularly as it relates to sort of metric because that I think I understand the business model transition. So two questions in the earnings letter talks about 59 per cent of the base are being transitioned to the new model. When do we expect that to be fully transitioned that's number one and then second on metrics it.
It seems like we're moving to net revenue retention.
As you sort of say a backward looking at metrics what is the metrics that we should be focusing on is it something like RPM that gives us a more forward looking indicator at all about how the pace of this transition and hopefully underlying growth starts to improve over the next several quarters.
So.
Our investor letter talks a bit about the transition to to the new relic one pricing we're at about close to 60% as at the end of March and we're looking at being over 80% at the end of fiscal 'twenty two so a year from for Mark.
And you know at that point, we'll be we'll be pretty well done other than we do have contracts that are that are multiyear agreements, where those will will time out and as they expire over the next couple of years they'll transition to consumption billing.
No.
We're very pleased with the fact that we've got more than half of our business now on the consumption model and by the end of the year, we will be getting too.
Effectively the whole business, there so I share that.
That's good news in terms of the metrics going forward, it's really all about revenue.
And then that's why we talked about net revenue retention.
And internally, we look at all sorts of metrics as you can imagine for us it's really about accounts users and data primarily users and data that's what drives our top line, but internally as a company. We are all aligned around growing data and growing users and so that's what we're very focused.
Just on in terms of the externally focused metrics, it's really about revenue and and the net revenue tension. So that's what that's what we encourage folks to two two to look at and we think is going to be really the most telling indicator of our business and as we've talked about in the letter.
<unk>.
We're facing a headwind at this point as we make this transition, but but we're looking at it at the back half of the year and we're confident that our revenue real revenue growth will start to reaccelerate in the back half of the year.
And if I could just follow up on from that last point given that as you say that.
Theres still a transition as it relates to revenue growth over the next couple of quarters Wouldnt. It make more sense to share some of those internal data around paid users data consumption just for investors to see that the trend line to see how the sort of the the progress in terms of executing on debt.
This model transition.
Understanding that revenue growth for the near term is going to continue to continues to be under pressure.
Yeah. So so we have given we've given some of that data in the in the Investor Alert that's for letter talking about data growth and we talked about day to talk about the data growth year over year, and and how that has been been expanding and I think it was in line.
From roughly 70% year over year to 80% in the low eighties over the last 12 months and so we have given indications of how that that data is growing. We also are looking and we've given some information around the low end of our business. The self service portion of our business and some of the growth characteristics of that business.
We think our our.
Very very interesting and good data points for folks to take a look at.
We obviously wanted to want to be.
We're still in this process, we haven't had customers complete a full 12 months in the in the annual pool funds in consumption billing yet so we've got to be a little a little cautious with what we give out because we know how have those things tend to get extrapolating things are but we have given a fair amount of interim.
In the letter about about how that's going.
Got it I appreciate it mark it and Ah and Ah Congrats.
Congrats to bill on that getting C L.
Thank you.
Our next question comes from things like Crane from bearing Berg. Please go ahead with your question.
Thank you and also want to extend congrats to bill absolute for what you've built new Raleigh can for now leading the company into new capacity.
Two questions. One is on the some of the comments you've made it in the water about spend contribution from users and data.
Ted you've seen 65 per cent users 35 per cent data.
You've also said that you expect us to return to 70 30, but it also a new go to 60 40.
They affect gross margin. So just some clarification on where you see this trending and how it might affect gross margin would be helpful.
Sure. So so it's roughly two thirds one third.
I think it is.
It depends a little bit on how are you.
On the customer mix larger customers tend to be a little bit.
Skewed more toward more heavily towards data and users and the lower and they can they can be more skewed a little bit toward toward data. Then then I'm sorry, the users and data.
We put two thirds one thirds out there are you know in our.
Longer term models, we're looking at 70 30 as being being the likely case on the other hand, we want to let folks know to the extent, where we're very successful in attracting even more data than we've assumed.
Then that that could push that closer to 60 40 in that case. It would have a modest impact on gross margins, but we think that would be more than worth it given the increased data would inevitably drive for top line higher.
Okay. That's that's fair. Thank you and then second would be in the letter you called that you anniversary the model transition and the back half of this fiscal year and then you expect for Reacceleration in growth your guidance implies 6% to 7% growth from Q1 and 6% in fiscal year. So how should we think about the transitional.
Transitional headwinds as we progress through this year.
Yeah.
So.
We continue to face a headwind as we're getting through the next two quarters.
We've got Q1 than Q2 and remember we introduced this new program last August so at that point, we will have our first cohort of customers that just is anniversary and and and so at that point.
We'll have a full year for behind US and then as we look out at consumption. If we look out.
The trends, we're seeing we're confident that revenue will accelerate in the back half starting in the second half for the year Q3, and then into Q4.
Okay. That's good alright.
Alright, Thank you again congrats.
Okay.
Our next question comes from Rob Oliver from Baird. Please go ahead with your question.
Great. Thank you guys and apologize for any background noise here Bill congratulations to you and low.
Especially with the West best wishes to you and it's been fun working with you over the years. My question is on the state of the sales force right now I mean, you guys ask.
At your price sales force to completely change the way they sell and I'm, just curious now, particularly coming into the new year.
About the state of the sales force how they've responded to the change in the pricing model, how they're executing on that so far and if we've seen all of the changes that we.
If all the changes that have been needed in our sales force have all been made.
Yeah. Thanks for that question. This is bill here I'll take that one.
We.
Then the first months of our fiscal year so the.
The month of April.
And a lot of sales enablement training and.
You know onboarding to the new compensation model for them.
Spent a lot of time talking through the shift of consumption the value that holds for customers on the best ways to engage customers to help them solve their business problems.
And universally the feedback that I've heard out of that sales training and enablement was very positive.
Thank you.
It really changes the nature of the relationship that ourselves our relationship managers get to have with the customer shifting away from these more combative.
Negotiation type conversations to really how can we solve your business problem. How can we put new relic to work for you and then unlocking that value with the customer which drives consumption and now fully aligned with their compensation model. So it's really a win for the customer a win for our sales team.
I've I've seen a lot of enthusiasm and engagement by the sales organization on the new model.
So yes, I think we were off to a great start in the first.
Month, six weeks of the quarter or looking looking good and are looking forward to seeing the progress throughout the year as Mark said completing that transition from 60% of our customers and are in the model at the end of Q for them too.
Well over 80% by the end of the fiscal year.
Great. Thanks, Scott I'll hold it there I appreciate it bill Thanks, again and congrats again.
Yeah.
Our next question comes from Robert Magic from Raymond James. Please go ahead with your question.
Great. Thanks, and congrats to bill on low it looks like Youre ingestion volumes were generally flattish from November to February as I Eyeball to chart a day ticked up in March and I know in the letter you talked about seeing some green shoots around engagement is the pickup in March an example of that and should we expect a smoother ramp up from here on.
The data volumes.
Think they did level off around the holiday season in November December.
And into January it was a little slower of upstart that's pretty typical seasonal pattern that we see a lot of the ramp up to the holiday season.
The observed ability workload happens before Black Friday, you know in anticipation of those spikes in volume so.
There is a seasonal leveling off during the holidays, and we had a bit of a slow ramp up I think.
We chalk it up to COVID-19.
COVID-19 and some of the.
You know variation there I think though we you know we have seen an uptick in data and indefinitely and engagement.
Since then the Investor letter goes into some great detail in terms of the innovation in Q4 as well as the impact that's had on user engagement.
Increasing the number of users and the frequency with which to engage so.
That hypothesis that we have the data with Inc.
Increased data would lead to increased users.
It is is showing up now and we're excited to see both of those growth, although there will be occasional seasonal variations like you noted.
And can you go into more detail on the renewal churn you're seeing because it has to do with hesitation around the new consumption model or is it indicative of a more competitive environment. You gave us a few examples in the letter, but if you can elaborate more broadly and what youre hearing from customers that would be helpful.
Yeah, a large part of that is.
The fact that we are now.
No longer focused on commitments.
And so our focus is getting folks onto the new model and so it's collaborative if if if there you know that we want them to commit to whatever level of spend they are comfortable with.
And then once they do that that's when the work starts okay, let's get them consuming let's get the consuming more and so I think that is.
Ben that's been.
When you look at the old metrics of IRR, that's been a headwind to IRR, because we're no longer focused on that and we've been talking about that now for a couple of quarters and as we get into this year, where the comp plans are being aligned around that so so I think that the biggest issue has been us changing our strategy now being more aligned to the customers.
And being being comfortable with whatever low level of commitment that they want to commit to.
I think that's been that's been a big change I think customers like that.
I think it's better for for overall efficiency in getting deals done and we've seen that we've seen that accelerate the rate at which we can convert customers right. It's fewer calories less energy is taken now to convert a customer to the new model now that we've gotten away from worrying about the level of commitment. We also have some customers who are.
Who are not comfortable committing to large numbers, even though they know and they've told us that theyre going to spend a lot more and they're committing to.
There is no penalty for that right, we don't charge.
Higher rates because they went over there for something like that so we have some large customers who have just said.
To keep spending to grow my spend but you know what I want to commit to much lower levels.
We're comfortable that the cash.
Critical thing for us will be to watch that consumption like a hawk and make sure that it is continuing as expected.
But those are just some of the dynamics that are going on that make that debt overall commitment level less of an indicator of how things are really going.
I appreciate the color. Thanks.
And our next question comes from George <unk> from Oppenheimer. Please go ahead with your question.
Alright. Thank you for taking my question and congratulations Phil and thank you for the perspective over the years.
So looking at the sales comment that you made can you give us a sense of maybe the type of person you are hiring right now.
One of the more technical person to.
Focus on the task force, that's part of that equation at this point.
Yeah definitely.
Important so having our technical sales field involved in those conversations on an ongoing basis is more important than ever and so we're hiring there as well as relationship managers that have a history of nurturing ongoing supportive relationships with customers versus sometimes you see the pattern of more.
Aggressive kind of negotiation type sales.
Our leadership.
We've with the consumption model really.
Really pivoted to focusing on long term relationships and value realization and so.
The other vendors that are more indicative without model are the ones that are where we're.
We're recruiting from then and also as you know a shift to more technical sellers as well as our solution consultants.
So following up on that just.
From a self service perspective can you maybe give us some color on how you're shifting your marketing dollars, how you're leaning on our ecosystem partners to our you know.
Hello rate that debt.
Engagement process of those accounts from users.
You bet Yeah. As you noted are likely in the investor letter or a new self service business is rapidly expanding.
That's a great indication of the strength of the product and the value that customers are finding there as they transition from our free tier into a paid model.
We are increasingly with the confidence were getting their increasingly shifting some dollars more dollars into marketing and top of funnel than we have in the past but I.
But I wouldn't say that it's being driven out of pure marketing spend it's.
Really been much more driven on the brand and the word of mouth.
As customers that's the mind share grows around the new relic one platform.
On the.
Hum overall signs around self serve business I think.
You may have noted.
Total paying accounts for the first quarter in quite a few quarters leveled out and we see.
That largely driven by the growth in the self serve business.
The strength there.
We believe we will continue and reverse the trend of declining paid customers.
In the.
For future quarters.
Thank you.
Our next I think comes from Jonathan Kim from Loop capital markets. Please go ahead with your question.
First congrats on the promotion.
I think you guys are already at least two quarters into the new pricing model.
For those customers, who have changed over to the new pricing model, how long does it take on average before day of which the revenue run rate that was somewhat seamless similar to the old model.
Yes, it's a good question and it obviously varies by customer, but we have been studying it over the last two and a half quarters that we've been in that model for the customers who have adopted <unk>.
And what we're seeing is it takes about a month or so for them to rightsize their consumption.
Just on users and data the new the new pricing meters.
And then once that right sizing is done in the first month.
Usage begins to steadily grow and as we've noted before starting with data ingesting more data because of the low cost per gigabyte that we offer and then that attracting more users and and now were saying both data and users grow healthy for the customers other than the model for.
For several months.
Yes, the only thing I would I would add to that comment is.
It's interesting.
We have two data multiple datasets, but one where customers are converting over from the historical model that was subscription based host based pricing primarily APM driven.
And that we're migrating to a platform to consumption model and then we have another cohort of customers that is brand new two new to the new relic. They came on with the new relic platform as their only knowledge for new relic and the consumption model as their core pricing.
The mechanism and the behavior of the two customers is quite different.
Customers that convert over.
In their minds, they have a value prop.
Our legacy spend level.
There'll be there'll be there'll be in some ways influenced by what they used to be doing what they used to be spending and we'll see some we'll see some behavior.
Modifications, where it looks like they're trying to do some gymnastics to fit in that spend or do some things because they've got that historical perspective, new customers on the other hand tend to tend to come in and embrace the platform and start to grow data and users right from the GAAP.
And those I think those growth rates are what we think will be more indicative of the future ones.
Once we've gotten everyone migrated over and people again get out of that that historical perspective of a host based and in an APM APM only in a siloed type view of the product.
Okay, Great that's very helpful.
Yeah.
One of the main goals of the new pricing model is to encourage the use of more of your products I'm going to try to have the customers adopt new relic.
Enterprise standard.
Seeing that trend and materialize with those customers who have adopted the new pricing model.
Maybe they were only doing APM and maybe a couple of modules, but are you seeing them I know, it's only been two and a half quarters, but are you starting to see any pilot projects that kind of is.
Leveraging some of the other new products that they previously did not use.
Absolutely yes.
The number of data types.
And the breadth of adoption, we are seeing expand.
I think we've shared some of that data again in the Investor letter.
The one previous to this quarter as well but.
Very healthy adoption across the platform for customers that moved to the new model.
Although we also launched.
Major improvements to our logging.
Product last last month.
After Q4 ended and the growth and logging in particular as an expansion in new products.
The platform that's been for novel so.
Totally saying breadth of platform adoption for customers who.
New consumption model.
That's good to hear I got one quick question for Mark.
Can you remind us what the.
Linked frequency is under the new model is it monthly quarterly annually.
Primarily it is annual upfront.
Okay.
Okay.
For the for the new new pricing model right for consumption based yeah, yeah for the consumption and then obviously once they hit their committed then it then it gets to a monthly overages, but but when they make a commitment.
Most the vast majority of our customers our annual upfront.
Okay, and then the Paygo business the low end is monthly.
Okay, great. Okay. Thank you so much.
Our next question comes from Michael <unk> from Keybanc. Please go ahead with your question.
Hey, guys Lew of course, congratulations to you.
And I have everything you've accomplished a one for one for Mark one for one for Bill for.
So for Mark.
If there is a kind of let's call it an accounting or model headwind to revenue growth. It makes it not representative right now first of all do what do I do I understand it. It's the difference between consumption as we go versus what were a higher level of commits.
Therefore, a tough comp at this point, we've got anniversary and can you normalize for that in some way to let us know at least based on current trends, where we might emerge once we anniversary that from a growth perspective.
Well in the old World, we would have gotten an upfront commitment.
At the time of renewal right, we would've gotten say, a 15 or 20% uptick in committed spend.
And so on March 31, someone does that and then they are they do we start we start recognize that that subscription on April one at the at the higher level.
In the new world they migrate over at that existing spend.
And so on April one there is no difference from March 31, right April April revenue is the same as March revenue, it's only when consumption increases.
And gets to the point, where that consumption looks like it's going to be higher than their historical the commitment.
Where we start to recognize incremental revenue so that tends to be pushed out a little bit and I would say, it's pushed out a couple of quarters on average.
It depends on a lot of things, but I would say that's it.
It's kind of a decent proxy and so you do have this this at time of commitment instead of getting the initial immediate bump you do have the delay and now on the flip side here.
Historically, a lot of our customers would've been overconsuming.
Before the end of their contract period was up.
And they would just get away effective with overconsuming until the renewal period.
At this point, we'll actually capture some of that in the in the period in which they are consuming because it will be more closely revenue will be more closely tied to their actual consumption. So initially there is a there is that headwind, but then we catch up in the back half of the year.
And can you do you feel like you can take a shot at normalizing to see where we emerge pass in terms of growth past the.
Anniversary.
We're looking at all sorts of numbers and trends around that we've given our guidance our revenue guidance for the year are certainly our long term goals that we've talked about is to get back to market rate growth.
And so we want to be able to do that.
But but it's hard to it's kind of apples and oranges trying to compare the two.
Over the next one.
One or two couple of quarters.
If I go to a bill question the real question is.
You know you've you've pursued a I wonder how things are going competitively in the sense that you pursued maybe more focused and defined monitoring or absorbability strategy around if you've expanded into logging metrics.
Traces etcetera, but some of your competitors I've gotten broader than that looking there like workflows security or are part of larger organizations like surface now.
Variability Splunk has brought or so.
How do you feel like you're doing competing against what looks like a field that is approaching things from a more a broader strategic perspective.
I wouldn't characterize it as a broader strategic perspective, I feel really good about our competitive position honestly.
Bulk of our opportunity is greenfield.
Although when we do come up against competitors, we're seeing some phenomenal win wins again against a if for.
Some of the leading vendors.
And you know our strategy is just fundamentally different.
Well they may be expanding into say security as you've mentioned.
We are increasingly move.
Moving other directions in.
The product roadmap is Lew noted this quarter in Q4 was phenomenal I'm really excited by where we're gonna take observe ability in FY 'twenty two and the roadmap ahead.
Youre going to see.
Our continued innovation and differentiation from new relic one.
Not chasing tail lights of competitors and some other things that they have already chosen to do but really chart, our own course, which we think.
Is most valuable for customers.
Thanks Bill.
Yes.
Our next question comes from Eric <unk> from JMP Securities. Please go ahead with your question.
Yeah. Thanks for taking my question and congratulations Lew.
First off on the on the consumption model.
Is the sales compensation like is is it a just a regular renewal that the sales person gets on the on the commitment to them and then they get paid on the consumption piece.
On a monthly basis or how does that look.
And then secondly can you update us where you are in terms of the transition off of AWS.
Sure. So on the sales compensation, we pay on is 100% on consumption.
So it is users and data and and that's the dollar run rate basically of the consumption of their customers. So every month.
You have a patch and you look at what the consumption of your of your patches on the first for the months you Lew.
Look at what your consumption is on via a patch on the last day of the month and the change. The increase is is how you get paid you work down quota by by getting add consumption to increase and you get monthly monthly compensation on on that.
So that's the sales compensation on the migration to the AWS and the cloud that is going well.
As we noted in the letter.
Gross margin in Q4 was was impacted by some some spend that had shifted from Q3 as well as we had at a re class from some.
Some expenses from two from from R&D expense to them to our Cogs line.
But but that is going well, we expect gross margins to to take a dip in Q1, and I would say likely Q1 will likely be the.
Where are we where we have the where the into the six <unk> a little bit lower gross margin and then we expect them to start climbing to get back to the low <unk> for the year and.
And we do expect gross margins to climb up into the 80 is as we continue this migration through the end of back to 80 per cent range I should say as we continued migration into fiscal 'twenty three in fiscal 'twenty. Two we expect about a 40 million dollar hit to our Cogs and <unk>.
Line because of the double bubble if you will the migration expenses. The fact that work for carrying still the legacy cost historical costs associated with our internal data center as well as driving our business to the cloud. So that's a a substantial headwind in <unk>.
In the year.
Very good thank you.
Our next question comes from Sterling Auty from J P. Morgan. Please go ahead with your question.
Yeah. Thanks, guys first bill congratulations Luke not only congratulations but thank you for all the years of innovation that certainly a benefit a benefit it is all of us. So thanks again.
Onto the business I'm curious with the new pricing model can you give us a sense of the type of industry and the type of users that you're seeing the greatest.
Traction with.
So in other words is there a particular kind of trend that youre seeing in the type of companies and the type of users that are attracted to the new model.
On the industry I don't.
I think it's a cross industry I don't see much trend in terms of.
Where we are more successful than others in terms of the you know the type of user type of engineer a new relic historically has been very attractive for developers and those who adopt them.
Our APM solution that requires.
Often involvement with deploying our agents with the code.
But increasingly as well, we're saying given our.
Stronger product offering with logging in interest and other solutions.
More of a breath adoption across.
Enterprise and operators embracing new relic one.
As a platform so broadening into sorry in more of the operators space as well.
Could I ask one detailed there's a little bit of a trend, though we called to it in the letter.
Our pay as you go business is remarkably strong and why I think that matters is that is pure product and it tends to be ahead of where larger enterprise Cisco because smaller companies can be more nimble. So factor, we see such a rapid growth in the in the number of pay as you go.
Customers exceeding our expectations and the fact that the growth for the number of <unk> customers that go above 25, K with no direct sales involvement as a testimony to the amazing product that really built built and transformed in the last year and a bit.
Just just driving business growth and our hope is that debt.
That also shows up broadly across the whole business is simpler way over over the long term.
Got it and then as a follow up I Wonder if you revisit the user.
Versus data mix contribution I guess, it wasn't clear where do you think that settles out over the long term and why.
So I guess I would say.
Russell numbers two thirds one thirds.
And and debt that is.
We want to drive that.
Obviously, the higher the user accounts for us the better as a percentage given given gross margin that's a much higher gross margin on our user base and on the data.
So it does depend on our on our customer mix, we think overall, our customer mix is going to be.
I would say.
If anything shifting more toward the smaller and medium sized customers as opposed to the large enterprises will get plenty of those but if you look at where we are.
We're at $2 billion, if you will.
It's that mix I think as such that will be will be probably a little bit more skewer skewed towards the towards the higher user count and lower lower as a percentage of the of the total.
We do push data and so if we're if we're really successful in pushing data.
And then we could see that number drift below or above a third and it could go as high as 40%.
And again that would be that would be great in our in our minds, because we think that would be a leading indicator to then getting more users later on so but I think roughly speaking I would say think inc. Two thirds, one thirds as a as a decent estimate.
Understood. Thank you.
Our next question comes from Jack Andrews from Needham. Please go ahead with your question.
So good afternoon. Thanks for taking my question and I'll Echo My congratulations to Bill and Lew I wanted to ask a question on the partner side of things could you just.
Just talk about how your channel of MSP and systems integrators have absorbed this consumption based change and are they fully educated on the change or just what is kind of there the feedback that you're getting from that group.
Yeah.
Yeah.
Our MSP is.
Have been lagging I think where.
Our.
Sales team it has been.
The consumption of the new pricing model for them as well.
So self service tools that are needed to support them.
Uh huh.
Not been fully available.
And so I'd say, it's been lagging, but it's an important area of investment for us that we're prioritizing for this fiscal year and expect to help.
Help us to accelerate growth in the coming quarters ahead.
Okay. Thanks, and then just I want to ask a higher level question, which is just how do you think about elasticity of demand in this market when you're weighing I guess price versus users and data do you think that you've found the sweet spot here or do you think there's maybe opportunities to perhaps further optimize what you can.
Potentially capture in terms of you know data and market share.
Yeah.
Yes, it's a good question, we've been asking ourselves lately and doing some <unk>.
Studies with external.
Vendors around price elasticity now that we've been in market for.
Coming up.
On the anniversary in July we think it's a good time, given we pioneered this model kind of introduced and set the price.
Check in and getting getting some really valuable data in it.
We will be making any necessary pricing changes as a result of that I think it's a bit too early to share the specifics on.
What might change, but it's definitely something we're looking at them wanting to be able to maximize our hubs.
Revenue share as a result of the <unk>.
Tractor pricing model that we've introduced.
Thanks for the color.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star and then one.
To withdraw your question you May press Star and two.
Our next question comes from Derrick Wood from Cowen and company. Please go ahead with your question.
Oh, Thanks, and congrats Lew at Bell and good luck on the next chapters.
Maybe first bill could can you give us a little more color on the go to market restructuring that you guys announced in.
Got it more specifically, what you've done and what other points in the in the press release was that you believe productivity levels are higher and.
Sumption model. So could you just flush that out in terms of why you think that's the case.
Yeah.
Thanks for asking the question.
As we noted with the restructuring.
Our.
As you probably know our sales and marketing spend has been much higher than our peers historically.
We feel like.
This change really sets us up to be more.
More competitive, but also really aligned with the strategy and focusing our sellers on driving consumption versus those upfront commitments.
The.
Thanks.
Attraction that we're seeing also in that self service space think of that is not just validation of the product.
Very highly efficient adoption model, but also a really highly efficient.
Customer acquisition.
Channel, where those customers come in they are getting value they want to increase their spend as we noted in the investor letter for staying a number of customers going beyond 25000, even 100000 in spend and those become highly qualified and engaged customers that our sales team that engages and expands.
So the efficiency really comes in.
Bye.
Reducing and focusing that go to market motion on consumption.
Coupled together with that product led growth or self service model really.
It is.
Complementary benefits that we're seeing play out there so.
I think this sets us up well for FY 'twenty two as I mentioned earlier to begin again to grow paid accounts overall, we're going to see that expand.
We believe and also continue in the back half of the year as Mark noted to see accelerating revenue growth as well.
Yeah, Okay that makes sense, thanks, and one for Mark.
The 100 K account number was down sequentially for the first time I. It sounds like most of that's due to the shift of subscription contracts, but any can you.
Tell us how you how churn has trended during this model transition over the last couple of quarters.
And I think you may have mentioned a couple of losses in the quarter, but if you could give a little more color there. Thanks.
Yes, sure. So when we when we talk about churn historically, we've talked about churn and thought about churn as churn is any time someone goes from a certain level of spend to a reduced level of spend and that's what we've talked and that was churn right that was a it was a day.
Great.
In our new modeling we wanted to just be careful about how we're talking about things churn is if a customer goes to zero and they churn out of our business that obviously is really bad we want to prevent that and do everything we can to prevent that and I think a lot of the go to market restructuring work we're doing is.
Aimed at that and making sure people are engaged they're engaged they won't turn out that isn't.
And and and.
So so when we look back what were seeing is some customers are reducing their spend sometimes that's that's a bad thing and sometimes its a fine thing right. They they they are going to continue to consume it's all around consumption. So I think we just want to be thoughtful about how we use all these terms, but when we look back.
At the trends we've been seeing.
One of the Big reasons, we went to this model last summer was that we felt like we had too many customers who were who were.
Stuck on APM, only as new relic customers. When we knew that wasn't a long term win for for us or for the customer and we had we.
We had too many customers who.
Many times are we felt like the customer really wasn't getting enough out of our solution and we felt that was a big change we had to make to do to drive different results and that resulted in the platform introduction of new relic one reduction in last August which the product obviously changed dramatically, but also our go to market motion, where we are.
We're changing and we're driving for compensating our reps on consumption.
And our reps have an incentive to be engaged with customers on a monthly if not weekly or daily basis, they want to be making sure that customers are doing that so we've made all these changes to try and address what we felt like was a churn number that was above where we wanted it to be.
And so as we get into this year, we're confident that that is having good results that we're getting more engage with our customers that customers are adopting more of the platform and that will be able to improve.
Improved the number of customers, who leave new relic and and our overall downgrades are in turn numbers, we're confident that we'll be able to improve those as we go through this year.
Alright, thanks for the color.
And our next question comes from Keith Bachman from Bank of Montreal. Please go ahead with your question.
Hi, Thank you very much.
Mark I wanted to see if you could offer any color.
Given the platform that yesterday and the new pricing model, how do you see the dynamics of growth driven by new logos versus existing customers.
Sure so.
Our business is going to be primarily driven in the short term by by expansion of existing business and consumption increases from existing customers no doubt about that.
Those customer that base.
Can grow modestly in it dwarfs, the net new that we get in as a for.
For new customers and new customer for us as someone who we define as someone who comes in and goes from not paying us.
Two paying us and the vast majority of those customers come in at the Paygo at the self serve pay as you go thresholds, where they are free to your customer they migrate to paying.
And we can you can see and as we've talked about and you've seen a letter of information around how they grow they get to the 25 K or so.
Thresholds in annual spend and then maybe they become a sales opportunity and then we grow them from there, but so the first the first couple of dollars are new and the next hopefully millions that we get from that customer all expansion. So.
The vast majority of it is expansion.
On the other hand, what we are very focused on is the number of new customers, we get in and that's what we really when you think about our new business. We look at the metric the metric there is how many new customers, we're getting in and the secondary metric is how much how much when committed spend and consumption are we're getting in from those new customers.
<unk>.
So hopefully that addresses it.
And so that's why I wanted to follow up on as you know the majority of your new dollars are still going to come from existing customers. You've only had two quarters. So it really is it may be a bit premature, but how do you see your growth driven by the consumption model associated with your new customers previously we use the term net expansion, but you don't want to use that but.
Any any kind of conjecture guidelines you might be able to provide about a.
Given the new consumption model, how you think growth is going to trend with your existing customer base.
Well were you were keeping or as you can imagine.
Close eye on these numbers, we look at all sorts of different cohorts of customers that are transitioned how are they growing new customers how are they growing.
And.
What we what we what we speculated were seeing to be the case, where after this after this initial period customers tend to increase data consumption first.
And our data price is very attractive and I think customers right customers recognize that and so they say you know what it's pretty cheap I'm going to put some data in there.
So the data growth starts and that's what we see early and then that drives the user growth a couple of months down the line and then and then and then I think that what we're hoping for and expecting is that.
One of our virtuous cycle.
New users come on and they bring in more data and so we've seen early indications of these trends happening.
And we are pleased with the numbers, we see but we want to get a little more time under our belt before we start talking to you broadly about them or R. R.
<unk> taken them to the bank.
Understood understood, Okay, I'm going to try to sneak one more in just on the channel.
Question was asked previously mine's, a little bit broader but how do you get mind share you'd think with channel partners and what I mean by that.
How do you make sure that the channel's making at least comparable money working with with new relic based on the new consumption model I'm just wondering.
What your what your tactics are to try to make sure you retain channel mindshare as you're going through this multi phase transition.
Yeah, when we think about channel partners, obviously the opportunity in it for them has to be.
Equally compelling as it is for our customers and so we've been working through.
The arrangement.
How they are able to.
Both price and sell the consumption model as well as.
Benefit from it.
And then also working on our product roadmap that can support that from a self service experience perspective, so that they can onboard customers and support the customer as well.
I think the opportunity is there, especially we're seeing in.
The EMEA and a P J markets the need for that partner channel the demand for the partner channel as a.
Sales funnel is increasingly.
Increasingly clear and as I mentioned earlier, we're going to be investing there in FY 'twenty two to expand that channel.
Support those partners.
Okay, Alright, well best of luck to all many thanks.
Okay. So I just wanted I know, we're about out of time for questions, but before I hand to pollute just wanted to say a couple a couple of other comments about about about.
Things have come up and one is on.
On our.
Outlook for the year.
You mentioned the $40 million.
Double bubble spend we have on hitting gross margin. We also have a change to our commission accounting and if you remember 606, a couple of years ago. We all went from expensing commissions to two amortizing them in our cases generally over three years and the bulk of commission for amortized now that we are moving to.
A consumption based model and our sales Commission plan. That's based on consumption, we are actually going back to expensing commissions.
The year in which they're earned material, which they're earned.
And so that's going to be in the 35 ish million dollars of a hit.
Get to our ex <unk>.
Sales sales and marketing expense line. This year that is not a cash item.
So, but you will see that in the numbers I, just don't want folks to be able to model that out accurately and.
And then the only other thing I'd comment I would like to make is around visibility and I've heard a number of comments from folks over the last couple of quarters about visibility and whether or not.
Visibly changes with with the move to the consumption model.
And.
Visibility I would look at it as as being just about as good as.
For our consumption company as it is for a subscription company. The reality is we're looking at we're looking at our customers and how they are consuming on a daily basis now and in the old model you did have a commitment for one year, but then debt year vacate upgrade they get downgrade and a lot of times you didn't necessarily have good.
<unk> ability to what was going to happen there, whereas we're in a consumption model, we're paying much closer attention to this and these trends generally don't really change dramatically from one period or one data. The next one week to the next.
You can you can look at historical trends and actually gained quite a bit of confidence in terms of.
Outlook going forward.
And so we're a unique period right now we're in the midst of a transition. So I would say that that does have an impact the near term visibility I think for the quarter is very good.
But as we and it will get better over the course of the year for the longer term as we get through the transition. There is some as we said a couple of times, we want to wait till we get through the one year period, we see the anniversary and see behaviors at the end of their contracts and at the anniversary date.
Before we before we get too far ahead of ourselves, but I just want to point that out because I know that's been a question on People's minds and it is something that we feel like over time consumption model will continue to have for us very good visibility into into the revenue.
Our revenue outlook.
With that I will hand, it over to Lew.
Okay. Thank you very much and thanks to everybody for your questions for call and in particular line personally touched by the growth.
Kind of where income was shared by most.
Most of you.
Just as a founder.
Every pound or.
They dream for their company to have success when I started new rally nearly 14 years ago I had no.
It was just 16 my highest hopes to get to where we are today.
And yet.
Like any other foundry real hope is that your company out last few and that.
At the right time, when there is a time for next leader that that person is in a.
Matches and aligns with our core values.
And that's so true in the case of <unk>.
Sales so I'm thrilled that bill is moving into this role I'm also personally excited to code again every day.
And and focus on innovation I think the new relic one platform is an innovative stream and so theres more to be done there and I hope to contribute in that way as well as being the best helper and advisor and confidant Bill could have as CEO. So I truly believe we're just getting started.
And that.
All of the hard work we've done in the last year is now.
Ready and well start to bear fruit, especially with such strong leadership from.
From Belk, starting on July one so thank you all for.
For your time today and for each new relic and we are excited too.
Continue on our noble mission.
Yeah.
Ladies and gentlemen that will conclude today's conference. We do thank you for attending you may now disconnect your lines.
Okay.