Q1 2022 New Relic Inc Earnings Call
[music].
Good day and welcome to the new relic first quarter and fiscal year 2022 earnings Conference call.
All participants will be in listen only mode.
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Today's presentation and there'll be an opportunity to ask questions.
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To withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Peter Goldmacher V. P of Investor Relations. Please go ahead.
Hi, everyone and thanks for joining our Q1 fiscal 'twenty 2 earnings call. We published the letter on our Investor Relations website about an hour ago and hope you all and had a chance to read our letter together with today's earnings press release todays call will begin with prepared comments from Bill and Mark and then we'll open up the line for your questions.
During this call we will make forward looking statements, including about our business outlook and strategy, 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 and our most recent 10-K and upcoming 10-Q to be filed with the SEC.
Also during this call and we will discuss certain non-GAAP financial measures, we have reconciled those to the most directly comparable GAAP financial measures and our earnings and <unk>.
Non-GAAP measures are not intended to be and substitute for our GAAP results and.
Finally, this call and its entirety being webcast from our Investor Relations website, and an audio replay will be available there and a few hours and with that I'd like to turn it over to bill.
Thanks, Peter and.
Thanks to everyone for joining our Q1 FY 'twenty 2 earnings call. We had a strong start and the first quarter of our fiscal year, delivering just over $180 million revenue, beating the $1.72 to 174 million guidance, we provided last quarter and growing the business, 11% year over year.
Before we dive into the numbers and then answer your questions I wanted to take this opportunity My first earnings call and my new role as CEO.
Step back and paint and my view of the market our strategy and our priorities going forward.
A year ago last July 30th 2020, we introduced the new relic, 1 platform and consumption business model to the world.
It was a bold, but necessary move to serve our customers better and lay a new foundation of growth for the business.
As you know the past year and Covid has only accelerated the move to digital experiences.
Nearly every company and the world no matter the size or segment employs digital experiences to serve their customers partners and employees.
These digital experiences are built by highly skilled software developers and engineers and there simply are not enough of them to satisfy the demand.
The pressure on them to innovate faster is growing more intense and the complexity and toil and the software systems, they create and maintain continues to increase.
They spend a disproportionate amount of time planning Architected building fixing and deploying software only defined once it's in production and begins impacting customers, that's something somewhere when terribly wrong.
Observed ability vendors today use telemetry data to help production engineers Reactively monitor and troubleshoot systems that are unhealthy, but that's too late to reactive too much focus on symptoms and not enough and the root cause and prevention.
And help engineers spend more time doing what they really love, which is building cool stuff.
Our vision is much broader and we believe our potential much higher.
At new relic, we aspire to help millions of developers and engineers build more perfect software by making observe ability a daily data driven approach to engineering across the software lifecycle.
And to get there, we're obsessed with helping our customers master telemetry data to get past the watt and uncover the why.
There are 3 fundamental things about our vision and observe ability that are unique and whose impact on the business I believe will grow over time.
First.
New relic offers a purpose built all in 1 telemetry data platform.
Our customers are already ingesting petabytes of telemetry data from many sources, including our own agents open standards. A P is ore and ecosystem of hundreds of integrations, thereby eliminating data silos and unlocking insights across their entire digital and state.
Customers Trust, new relic with our telemetry data because we've taken a strong regulatory posture and security privacy and compliance with Sox 2 G. D. P. R fed ramp and as of last week. We're now the industry's first HIPAA compliant absorbability solution across all data types.
We use advanced data science techniques, employing AI and ml throughout the platform to help our customers sift through the data and more easily find signals from the noise, making AI ops more accessible than ever.
And we operate this telemetry platform and massive cloud scale actively ingesting storing and analyzing and real time, many petabytes of metrics and then logs and traces with blazing performance.
This is fundamentally a different approach than most of our competitors and is foundational to our strategy, allowing us to provide a secure single source of truth for telemetry data for even the largest of enterprise customers with incredible economics.
Second new relic provides developers and engineers with integrated and powerful analysis tools on top of this data the full platform experience and warm place and for 1 price.
[noise] competitors offer a bundle of skus, each with different user experiences and data stores and price points. All targeting those same production engineers focused on resolving incidence and they called that observe ability.
New relic is thinking much more broadly about the users and their ability considering not just the needs of I T operations site reliability engineers and cloud engineers, but taking a developer first approach and bringing the power of telemetry data into the flow of tools developers.
Already use every day ultimately, reaching the estimated 28 million professional developers who build the software to begin with.
Many of these potential users have yet to experience how observed ability can help them because they're focused on delighting customers through innovation and code not troubleshooting production environments.
Third new relic offers all of this value with a unique consumption based pricing model and there's more predictable affordable and scales with value.
Our platform, it's consumed and just 2 dimensions data ingest and user access.
First our unified telemetry data platform allows customers to ingest store and query that data for and unprecedented value and just 25 cents per gigabyte ingested.
Competitors prices can be several multiples higher than this for data, forcing engineering teams to sample what the instrument and order to contain costs, which only leads to more blind spots and incidents.
Second we have integrated all of our tools and provide full platform access for 1 price per user, giving buyers incredibly consistent predictable pricing that scales with usage and therefore value received instead of infrastructure.
This unique consumption model allows more users to observe more data and systems all in 1 place enhancing collaboration and increasing productivity across the engineering organization.
We are passionate and committed to this multi year vision and grateful for the ongoing focus and support of our relics investors and stockholders as we work towards this audacious yet achievable goal.
You may wonder with such an audacious long term vision, how are we prioritizing the work and how can you measure our progress quarter after quarter.
And as our new CEO I've identified 5 strategic priorities. The entire company is now aligned behind these objectives and we've identified measurable success criteria for each to help us all gauge our progress.
Each quarter I'll provide an update on how we're doing against each of these 5.
Our top priority is to return our revenue to market growth rates.
As a consumption business. This is the crowding metric, which measures our ability to innovate value that customers are willing to pay for and deliberate and and efficient manner.
And we measure our success with this priority through our quarterly revenue reports.
And we aim to show revenue increases and year over year growth and the quarters ahead.
We anticipate accelerating year over year revenue growth starting in Q3, we've updated our guidance to help you gauge our progress.
For 8 quarters revenue growth has decelerated, while we've re platform their products front end and back and pivoted towards the new platform pricing model and migrate existing customers contracts to the consumption model as a foundation for the vision I described earlier.
With that foundation laid and we are ready to bring that deceleration to and and and we're focused on scaling the business starting in Q1 and.
And I mentioned at the beginning of the call. We're pleased to report just over $180 million and revenue.
11% year over year growth compared to the first quarter of our last fiscal year and a significant increase over the $172 million to $174 million that we provided as guidance and our earnings press release last quarter.
Our second priority is to complete the migration of our business to the new business model.
Our goal is to migrate more than 80% of our committed revenue by the end of this fiscal year.
After 3 and a half quarters and market. We've already successfully migrated 71% of committed revenue as of the end of the fiscal quarter.
From 60% the prior quarter, another strong indication of our momentum.
This is a high priority because we aspire to create a growth engine for this business that will be disciplined systematic repeatable and scalable and by migrating the majority of our customers to our consumption model and they will automatically benefit from the innovation and full value of the platform, which we believe will lead to growth and their consumption and our Rev.
New will follow suit.
Our third priority is to grow the number of paying customers.
And every way in which we will deliver on this priority is through 100% self service product led growth funnel and starting with our new relic 1 free tier.
Since introducing the offer of 3 and a half quarters ago thousands of developers have signed up for new relic, 1 and more than 3300 Paygo accounts have entered credit cards through the end of the fiscal quarter and increase of more than 1300, since we reported last quarter.
This priority is important for 3 reasons first we see our self service funnel and strong validation of our product experience and product market fit.
Without a great product developers would simply not be willing to pay for the service.
Second.
And as we grow the number of paying customers, we expand the pool, we're able to nurture to higher and higher levels of service, including graduating them to sales led accounts.
And third the self service experience also signals experimentation and early adoption within ourselves and that accounts further helping us identify new opportunities to nurture expansion.
Our fourth priority is to methodically deliver platform innovation and value to customers.
We will showcase how we're achieving our unique vision each quarter through industry, leading innovation customer success analyst reports and rankings.
This quarter was another hallmark of innovation from our product and marketing organizations.
We held our annual future stack developer conference and enjoyed record attendance with many thousands more engineers and viewing the sessions on demand and following the conference.
And this quarter, we were able to introduce the pixie new relic, 1 integration, which unlocks what we believe is the world's best Cooper, New these observed ability and name.
<unk> and engineering teams to observe their environment and the services, they deliver and it and just a few minutes with zero friction.
Kubernetes is now mainstream and adoption is widespread so we see many engineers benefiting from this innovation.
It's truly a magical experience that we see rivaling the early days of new relic, which catapulted this company's success.
We also introduced the new relic errors in box and other first but enables engineering teams to triage and resolved errors across their entire stack rather than firefighting them during incidence.
Only new relic provides this kind of platform wide proactive aggregated arris experience included free for every full stack absorbability user.
We were also excited to announce our partnership with <unk> pulling network context, and to new relic, 1 and helping Dev ops teams and net ops teams collaborate more closely and the new relic 1 experience.
These on top of AI ops logging, new relic explore and many other platform innovations over the past few quarters are delivering incredible value for customers, which we believe will fuel increased platform consumption for quarters to come.
And that's just the start.
Our fifth and final priority is to improve our internal execution and costs.
And we realize that in order to reach our potential and achieve competitive growth rates all areas of the business, we will need to move faster with less friction more alignment and efficiency.
We our system of ties and are planning prioritization and execution rhythms across functions and better stitching together internal data across product marketing sales and finance. So we can run the business and real time and better serve our customers and their moments consuming the platform.
Every executive on my team has clear objectives and accountability with accelerating the overall company success as their overriding priority.
We're driving reduction to our Cogs and returning our gross margin to typical enterprise SaaS rates.
And we're already getting traction on many of these fronts as I shared a few weeks ago, we hired and neither Lynch, our new Chief data officer, and leader of our internal data systems and she's joining kristy friedrichs team, our new Chief operating officer responsible for system and <unk>, our internal execution across functions.
Manav Corona GM and product owner of our burgeoning self service business was also promoted to chief growth officer, bringing all aspects of that self service product experience together with a full marketing organization under his terrific leadership.
This is an incredibly exciting time to be at new relic.
I'm humbled to serve as CEO and grateful for all the contributions from relics around the world and especially for Lucerne, and our founder and chairman.
I've worked for some amazing companies and leaders, but there really is something special about new relic, a special group of people with the vision and skill to make a profound impact on the world through our technology.
And I'm honored to be part of this company and excited to help it grow.
With that I'll turn it over to Mark chocolate and our CFO to walk us through the full set of financial results for the quarter over to you Mark.
Thanks, Bill and good afternoon, and good evening to everyone on the call.
Like to briefly recap our financial results and then spend some time, helping everyone understand the most important moving parts of our financial model as we continue to transition to a consumption business.
For our first quarter of fiscal year 'twenty, 2 we reported revenue of $185 million ahead of our guidance, we set in Q4 for between $172 million to $174 million.
GAAP loss from operations was $73.9 million and non-GAAP loss from operations was $16.2 million ahead of the guidance, we provided for a loss of between $24 million to $26 million.
GAAP EPS was at a loss of $1.24 and non-GAAP EPS was a loss of 25.
Ahead of our guidance for a loss of between 37% and 40 cents.
This top line beat was driven by increased variable consideration revenue of customers consuming and excess of their contract.
And better than expected churn.
We are pleased with our results this quarter and we continue to expect to return to accelerating year over year top line growth in the second half of this fiscal year.
As Bill mentioned, our number 1 priority is to get back to market growth rates, which we estimate to be and about 25% and their intermediate term and <unk>.
1 was a positive step along that path.
We are initiating second quarter revenue guidance of between $181 million to $183 million and and non-GAAP operating loss of between $13 million to $15 million.
Also increasing full year revenue guidance from a range of between $790.711 million to a range of between $730 to $735 million, an increase of $22.5 million at the midpoint of the range.
For the full fiscal year, we are keeping our guidance for non-GAAP operating loss of between <unk> 53 and $55 million.
This increase and top line guidance is driven by the current trends, we're seeing and the business, including increases and consumption from customers and lower churn.
We believe our initial proof points that our product investments and strategy focused on customer success are paying off we expect our non-GAAP operating loss to improve throughout the year.
Since we introduced new relic, 1 and our new model last July we've been talking to you about the many ways in which we have been transforming our business both from an operational standpoint, as well as the impact on our financial model.
Operationally, we took another big step and our transformation and Q1 as you rolled out a new comp plan, 1 which better aligns the interest of the sales force with the interest of our customers and.
Our new comp plan sales reps are not paid anything upon signing the deal, but rather are paid as the customer consumes more new relic.
Our sales force has embraced the change and is excited about its potential.
We're seeing early results as there is now less of a focus on large upfront contractual commitments and more of a focus on making sure the customer understands the value of the platform and.
In terms of the impact of our transformation on the financial model I want to highlight a couple of things.
The first is a reminder, that we are no longer disclosing air or or any <unk> related metrics as those are subscription based metrics, whereas we're now consumption based company.
The second is that the move to a consumption model changes the dynamics of deferred revenue and our P. O and those metrics are less useful in understanding the momentum of the business as we continue our transition.
Specifically these changes stem from a number of factors, including.
First.
The aforementioned comp plan change means reps are driving consumption not commitments. This means no early contract renewals or true ups and less of a focus on large upgrades at renewal time or upon initial customer acquisition.
Second.
And we recognize variable consideration, we actually accelerate the draw down of deferred revenue.
Furthermore, incremental consumption in excess of commitment is billed in arrears and thus generally doesn't hit deferred revenue and finally some of our largest customers for 1 reason either are opting for lower upfront commissions in favor of a pay as you consume structure.
There are a few other things we'd like to highlight for the quarter.
As of the end of our first fiscal quarter, we have converted over 70% of our business to the new model and we are well on track to exceed our target of 80% on the new model by the end of the fiscal year.
And the majority of revenue that won't be on the new model entering fiscal 'twenty..3 is multiyear site licenses that arent renewing this year not hold outs as legacy renewals were very rare.
Churn and the quarter was down significantly sequentially and year over year. There are a number of factors that drove this result, including better products better contracts and better customer service we expect.
And to continue to drive down churn.
It takes a while for this to get reflected and enter.
There are given and are ours, a backwards looking metric.
I wanted to give you an update on our earliest conversions to the new model.
The first cohort August and September of last year of annual pool of funds renewals is small, but we believe they are on track to finish around the original commitment level.
Cohort signed onto the new epoch model at a 15% uptick to their prior commitments. So we were encouraged to see their consumption and track their commitment.
The December cohort, which is the largest cohort signed and calendar year 2020 is tracking well ahead of the September cohort at the same point and time.
We still feel good about our customers consuming and excess of their commitments.
The trend we see most consistently is that consumption shows modest acceleration through the year.
This gives us confidence that each monthly cohort should finish the year with consumption and excess of commitment.
Lastly, Cogs was flat sequentially slightly ahead of the expectations, we discussed with you all and the last earnings call.
This is driven by the revenue beat and progress and implementing efficiencies and our cloud infrastructure, which led to lower unit costs.
As Bill mentioned, 1 of our priorities is to run and efficient business and we continue to drive towards our goal of high 70% to 80% gross margins and the intermediate term.
With that I'll turn it over to the operator for questions.
Thank you.
And I'll begin the question and answer session, if you'd like to ask a question. Please press Star then 1 on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at anytime and your question has been addressed and you would like to withdraw your question. Please press Star then 2.
First question will come from Kansas and Crane with their and Baird. Please go ahead.
Hi, and thanks for taking my question. So we've talked often about the full stack vision. The benefits of this approach are becoming clearer with the industry's first fully HIPPA compliant solution. So would love to hear more about how this differs from existing solutions and the market and then what this means for our customers and the health care space.
Thank you Kimberly.
Great question as you mentioned, we announced HIPAA compliance last week.
And we've already actually signed our first be a 8 and the first week. So that was encouraging news as well that day.
To your question the difference between what we announced and what other competitors out there and really centers around the breadth of <unk>.
Data and data types that are covered.
By our HIPAA compliance.
And the architectural and therefore financial and security benefits of new relic.
Is this telemetry data platform.
As a service that we are and which unifies all telemetry types metrics events logs and traces into 1 single source of truth is operating and massive cloud scale and because it's 1.
And logical system, we're able to protect our customers' data and ensure that compliance across all data types.
Many of our competitors who offer.
HIPAA compliance and only do so or limited data type like a logging monitoring system.
And they're not able to offer the breath of compliance that we are because of the investments we've made and that telemetry data platform layer.
Thanks, that's really helpful and 1 follow up.
So on revenue.
You talked to already returning to market growth rates around 25% and that's a great goal. So how should we think about the growth algorithm to reach that figures do you think this is more of a 120% and our model with 5% from new customers, maybe it's 1 and 10% with 15% from new customers just any more clarity there.
Yeah. This is mark.
And we'll have to we'll have to see you know we expect.
New customers as defined by by Us.
It's the first dollar they come in and to spend and so the vast majority of our new customer dollars come in at the pay as you go level, meaning the volume pie, but the actual per customer spend is quite low.
So in any given quarter.
And if we're successful.
We will get a you know.
Big increases and the total number of customers the actual dollars that come in as new customer dollars and we expect to continue to be fairly low and so the vast majority of our growth as we go forward and even when we're at the you know at that.
And market levels.
And would be coming from existing customer expansion.
Right and because it makes perfect sense. Thank you.
And the next question will come from.
Sorry. The next question from Sanjiv Singh with Morgan Stanley. Please go ahead.
And thank you for taking the questions and congrats on the progress with the transition to new relic, 1 that 70% number is very impressive.
Although I really appreciate it and sort of walk down and the strategy and sort of the framework that we should be marking to market to over the next over the next several quarters. There's 1 element that I would like to get a better understanding of which is sort of the go to market and bracket secondly, part of this.
Part of this equation so prior to when you became CEO and it was a big focus on the move upmarket into the enterprise and the sort.
And it looked at 100, K customer adds and the mix of revenue from enterprise customers. Both a focus for many years as we seek to getting back to those market rates of growth what market segments. Do you think you're going to get most traction with initially and then as you try and get to that.
Growth rates over time, which market sectors do you think youll be more effectively able to expected consumption based model.
Okay.
Yes, I think mark started to address that with the last question and then.
You know historically, we did look at the 100 gig plus customers and our large existing customers as the place for expansion and that continues to be true even in the consumption model.
There is a large well as data and users there that we can continue to nurture to higher levels of value by.
Driving and platform adoption and increased consumption across the enterprise taking advantage of all of the innovation that we're delivering.
More data types and more users engaging on that data.
So we expect those medium and large enterprise customers to contribute to continued to contribute the majority of our revenue and revenue growth as I mentioned, though.
And 1 of the aspects of the new relic 1.
The strategy that I laid out that is new as of last year is this focus on self service and really building next generation cohort of customers that are looking for observe ability from the start.
And really starting in a self service model.
Not only validates our platform and the product market fit.
And because they wouldn't pay for and otherwise, but gives us a new cohort of users that we can continue to engage with both through the product experience and then once their spend levels reach a threshold.
With sales and engagement to help them standardize on and the entire platform by default.
And as we've shared and the Investor letter.
And we're having quite a bit of success for that I think we highlighted <unk> hundred new.
Paygo accounts this last quarter, we also highlighted.
Nearly double the number.
And the customers and the 25000 and above annual run rate over last quarter and 4 of those accounts that came in through the free tier are now spending more than $100000. So increasingly you know that part of the strategy will contribute not only to the number of pay.
And accounts that we are.
Our serving but increasingly over time the amount of revenue we're able to take.
You know to get from that segment.
And that answers required and trust.
Absolutely Bill.
And then as my follow up I wanted to return to from the comments on these early cohorts with the caveat that there's not.
They're early but with the I guess the August September cohort tracking to their commitment of about 15% higher spend if I remember correctly December I think it was more flattish and we think they're going to exceed their contracts and then.
From what you can tell in terms of their month to month consumption is it just a function of time do they have to hit month sixth or seventh of the contract is it a certain amount of data that they get into the pot from where that and <unk>.
Flywheel really starts to work in terms of accelerated consumption of any sort of early learnings early guesses on the behavior patterns and these are these early cohorts.
So yeah, sorry I E.
We spend a lot of time looking at those numbers and it's a little too early to give any make any definitive conclusions about that.
Well 1 of the things I would point out is when we look at new customers versus customers that have transitioned from a previous and APM typically and APM only top type type arrangement and a full platform and it moved over to the consumption model.
We do see significantly better growth rates in the and the new cohort versus the existing conversions.
Conversions and I think 1 of the things that's going on is there is a there's a legacy bias when a customer converts over right day. They come in they hear about a new pricing plan and the market is skeptical.
Just a software generals and software companies and in general and Unfortunately, and and so they have in their mind, a certain level of value and they'll try and manage around that that level of spend.
And I think it takes a while for them to realize well I used to be using all the APM and now I have this full broad platform.
Over time, they started to see those benefits and they realize Wow. This is worth more and.
And and we start to see.
In conjunction and exceed commitment level, but I think that takes a little bit of time versus in the brand new customers and come in and sign on directly to the Thomson consumption model, we see those numbers those that data and those user numbers grow.
Really regularly right from the start.
That makes a ton of sense, Mark and thank you for that sort of that color I appreciate it.
Okay.
Operator next question.
And the next question will come from and Rob Oliver with Baird. Please go ahead.
Great. Good evening. Thank you guys for taking my question Bill.
Do you have the vision that you've articulated is clearly clearly a product led growth vision and 1 that you know having spent time and future stock. This quarter I think you know with the extensive got a free user base you guys have really invested in really seems like you guys are are are really uniquely positioned to benefit from that just a couple of questions on that.
Uh huh.
Adobe is probably 1 of the original product line growth companies and so you have a ton of experience there, but what are some of the practical and nuts and bolts things that you want to see happen there that need to happen internally at new relic and order to create that sort of virtuous cycle and where you get feedback on what your customers are doing and you were able to integrate that and apply that to new use cases, and then I know.
Mark talked about you and respond to <unk> question. Some of the early cohorts and can you guys tell those cohorts using you know the whole new <unk>, new relic, 1 platform or are they just primarily kind of sticking to a P. M. For now thanks, guys I appreciate it.
Yeah.
Yeah. Thank you Rob Youre right.
And that growth is a really important part of our strategy.
Because as you said, it's a strong signal and validation of the product experience and product market fit.
It's.
Something that other companies have done successfully and we've studied and learn from and I have some experience with as well and the techniques that we're employing as we go about it is to really obsess about that self service experience.
And thinking about removing all of the friction from getting started with observe ability.
Building, the nurturing and training in the product for how to take advantage of the features and master the capabilities.
And it's the span of use cases, not just the things you might think of life and.
Adjusting your first data or analyzing.
The health of a particular system, but it include things like adding users and are reviewing your bill and adding your credit card every bit of friction that gets and the way of and engineer.
Getting value out of the products.
And as a source of friction that we wanted to remove and so the product team has.
It has increasingly spent a lot of energy and removing those friction points and I'd point out that that's valuable not only for growing new accounts, and you know and enabling customers to self service and adopt the platform is also extremely valuable to our large existing sales line accounts because though.
Same friction points annoying and get in their way of getting more value from the platform is and as Mark described the usage pattern and those large sales net accounts that maybe have uses for ATM.
Go through this phase of kind of right sizing and resetting their expectations and what they're getting from new relic and so removing the friction from engaging across the platform and getting all of the platform value.
Is beneficial for them as well and it's why we're taking such a strong.
Positioned on product led growth.
In terms of the usage patterns and yes, we are seeing.
Those new self service customers coming in and really with that expectation of adopting and observe ability platform from the start.
So they often directly start monitoring not just their applications as you would expect from a new relic customer with our world class APM, but theyre monitoring their infrastructure, they're ingesting logs and they're making use of new relic explore and the breadth of capabilities that we provide more.
Quickly and more broadly than that.
And the existing customer base that has to go through the migration that conversion and then the expansion.
And so their usage patterns as mark and Mark.
Our our are markedly different and their growth as a result of that is also different.
Hope that answers your question because that's really helpful. Thanks, a lot from all that color Bill I appreciate it.
Yeah.
Operator next question.
The next question will come from Michael <unk> with Keybanc capital. Please go ahead and hey.
Hey, guys very nice quarter and terms a lot of upturns here.
First Mark and wanted to start with you I just want to make sure we clearly.
Clearly identify exactly what drove the revenue upside and and acceleration in the quarter.
And they give me call net churn, but is it is it churn and then and it also an uptick in the and.
And Uh huh.
Legacy customers that were converting over and then also in <unk>.
Consumption relative to expectations, just want to make sure it's clear what drove that revenue up.
Upside.
Sure Michael.
And Michael D D.
The primary drivers more churn in.
Churn in terms of customers converting over and so we did a better job with with converting over customers than we had expected.
In fact.
And the metric that we have disclosed in the past around the conversion ratio and I think you might remember was 15%.
You too last year zero in Q3, and 4% and Q Q for.
That number was actually negative 4% in Q1.
And we feel that metrics declining and relevance to the point, where we're not going to give it beyond this quarter because we've migrated the majority of the customers over and I'll give you a little bit more color around that metric.
Although that number is negative and our overall conversion rates and Q1 were better than expected and buy.
That I mean, when we look at the total base of customers up for renewal at the beginning and at quarter.
And we compare that to how many we were able for new by the end of the quarter, we had a stronger than expected results.
Specifically customers may have churned out in previous quarters, instead migrated to new new consulting contracts and even though their commitment and may have decreased.
More of those customers remain and we can now focus on nurturing and growing them over the coming year. So that was that was 1.1 source of their revenue outside the other was driven by variable consideration, which as you know is is consumption in excess of commitment that we recognize.
And in the period and so.
That was that was 1 of the other other drivers back we had about a 5 times as many customers that we recognized travel inspiration for and Q1 versus Q4 and the overall numbers are still relatively modest but.
But when you look at that as a good sign in terms of.
Customers consuming their commitment.
And I guess I'll I'll actually go down and build a hit show the strategic question and another time and I've got something that I think are interesting, but mark do you have a timeframe for when we think that your new and our metric as well as our customers could start to increase.
So for the customer count.
We expect that to be increasing this year as bill mentioned, that's 1 of our key.
Key priorities and.
And.
And we look at that this quarter. It was relatively it was flat.
And we had a relatively high number of low and customers convert to the free tier.
And so that was offset by the new Paygo customers, we're anniversarying that that big Mike.
The migration to the free tier because the free tier was introduced last last August. So this this quarter, we'll have a fair number there and I imagine, but then I think the 3 decrease and as we continue to grow the paygo additions, we should start to see our our total account numbers.
Increased over the course of this and you count this fiscal year.
And in terms of the <unk> that is a.
I think that's a that's a trailing metric. So you know the reality is I think we'll start to see you'll see the revenue start to increase and start to excel reaccelerate in advance of the NR are ticking up.
Okay. Thanks, Mark Thanks, Paul.
Yeah.
Operator next question please.
And the next question will come from and Georgia, Iran income with Oppenheimer. Please go ahead.
Thank you for taking my question.
With.
And the new sales comp plan now in place and kind of focus on platform consumption.
And Mark can you give us a sense of.
And have you seen any attrition and are you able to bring and the type of people that you're comfortable with from a hiring perspective, right now and kind of where you are as far as staffing is concerned.
Sure Dee.
Attrition in Q1 for a for an enterprise sales software company is always always high.
Relative to the rest of the year, we're no different I think attrition throughout the industry throughout every industry actually is obviously a hot topic.
Right now.
But.
And and we did a lot of education.
Over the last couple of quarters.
Tail end of last year and Q4.
And then coming into Q1 and you know.
The trust US only goes so far but as we as we came into this quarter Q1 and.
And we did it yeah, I think and good job of educating the teams and letting them know how they could do very well.
And what was required.
And in General I would say it has been embraced.
And and people people I think I think we're starting to win over even the skeptics that were in the group.
From a from a few ones and a Q1.
I think.
Attainment was was strong and people are realizing wow. This can be this can be very attractive. So I think the internal team is is he is buying in and has bought in and you know I think where we're able to sell it to to new new folks and we've had we've had good success and.
<unk> and attracting the kind of talent that we want.
Maybe I'll just tag on to that a little bit of perspective, you know I had the opportunity with the CEO transition earlier in the quarter to really spend a lot of time with our go to market function as well as other functions and the company that I have and historically its been as much time with it and it was a great experience getting net.
And more relics and really understanding what's on their mind and what you know what they would expect from.
Me as CEO and from the company overall and I can say.
With the go to market organization.
A fantastic team that as Mark said really does seem to be and embracing the model and as you can imagine with the results we were able to share this quarter pretty excited as well with their own ability to attain quotas and drive consumption and and get the rewards of that in terms of attrition.
And that is I know and industry wide challenge as I've had the chance to also speak with other Ceos, who also facing a lot of attrition.
I think I read Microsoft and Linkedin published a study at 1 point, saying up to 40% of the workforce was considering changing jobs. This calendar year and no doubt. We've also seen our share of a record attrition, but the good news is.
It's only decelerated, it's only gone down and the last.
A couple of months and so we feel like we've taken the steps to really address that and make new relic Oh.
A great company to work for and we're going to continue to invest and our employees to make sure that their success and the company's success go hand in hand.
And I just want to follow on 1 comment about that Bill mentioned.
We've taken 1 of the steps we took was to look at compensation and starting July 1st.
And we did a compensation adjustment for just about every 1 and the company as a means of May help.
Helping helping them make sure that people are onboard and and engaged and and.
And fairly compensated and you may have noticed that we kept our guidance our operating income guidance for the year flat in spite of the big increase in the in the top line guidance and a big reason for that was the compensation adjustment that we did effective July 1st.
That's great. Thank you.
Operator next question please.
And the next question will come from Yun Kim with loop capital. Please go ahead.
Congrats on a solid quarter I think it goes I'm, not getting out and making a pretty good progress here.
I'm, just trying to understand and I noticed a consumption model, but just trying to understand the dynamics between the consumption and the seat count and mixing your model.
Motto.
Is it fair to say that it listened and near term the variability and your revenue or outside and your revenue will be more driven by consumption, where they're gone and where they're done and increasing the number of users and.
And just do you expect some seasonality around the consumption trends and the December quarter.
It is true we are consumption company and as such consumption for us is driven by more users and and or more data and.
And so that is what's driving our top line and that's what's driving growth.
In terms of seasonality, we don't really expect too much that.
The way, we recognize revenue with variable consideration and it tends to smooth out any of those any of those peak and over our customer base and many thousands of customers inevitably as summer semi jump up and a certain month or period and others are.
Flatter and so.
We don't expect a.
A lot of seasonality and our top line as we go forward.
Okay, Great and I, just want to make sure so and you'll contracts it doesn't specify a number of users or whatever I just simply based on the fact that day.
And if more users are using there'll be increasing consumption and that's how you guys are looking at it.
Yeah, so a customer.
And customer commits to a certain amount and spend.
And then they can draw that spend down through.
And data or through users, adding seats or.
Employing seat and.
It's incredibly attractive for customers because of the flexibility. We are we offer and I think that's something that perhaps isn't quite as well known.
Yes.
It means that you don't have to worry about what youre doing and 1 month or do you have seasonal fluctuations you just get a period of a pool of funds that you can use for the year and you can soon that you can consume that over that 12 month period and at the rate, which makes sense for your business and if you go over that number.
You just get charged at the at the same rate.
Not punitive or something and get charge excess teas and instead of that.
And so that's how you drive down either is either by ingesting data or or using seats.
Got it and then just stepping back can you talk about the progress you have made and and <unk>.
Regard to using your pricing model you just describe to attract new customers.
As you pointed out and it sounds like that and new customers are ramping up or expanding faster than the traditional customers you know.
And some of your.
Efforts to attract these new customers rather than.
Focusing on some of the older customers, who maybe are you know I'm always comparing to their full pricing whenever a day look at.
And any kind of expansion opportunity.
Yeah. The way I think about go to market. This is bill the way I think about go to market is really 3 approaches and now that we have at new relic Theres, our sales led approach, which for our top and most highest contracts and highest value contract customers we have dedicated.
And for us around that nurtures their relationship their consumption and adoption of the platform. We have a separate go to market motion around self service and that's really a product led and.
And.
And and that starts with the free tier.
And so zero commitment zero credit card required just begin using and as soon as you hit.
The thresholds on users or data.
You are then prompted to put and the credit card and and continue to consume freely and then the third is our partner led approach.
Our strategic partner.
Probably the biggest contributor to that revenue right now being AWS and partnership we have there along with.
Many other MSP is.
And resellers and.
So all 3 of those we invest in and with different parts of the company and and with different tactics and.
The majority of revenue obviously continues to come from our large sales sales leads our customer base.
But increasing and relevance in terms of the number of accounts being our self service go to market motion.
Gotcha I got 1 last question for Mark on when some of those customers with.
And your large renewals coming up do you expect them to kind of renew under a shorter term maybe 1 year annual contract lengths or do you expect them to kind of renew on a multiyear basis again.
I would expect most of them to go on a 1 year basis.
And if there are very large customers will do what's right from the customer and if that is multiyear is what they really require for their business, we would accommodate that but by and large.
Our customers and we find our customers of all sizes realize that the 1 year and new pool of funds is a very attractive pricing model for them. It gives them great flexibility.
And good combination of flexibility by price certainty and so I would expect most to go to that model.
Okay, great. Thank you so much.
Operator next question, please and then.
Next question will come from Derrick Wood with Cowen. Please go ahead.
Great. Thanks, This is actually Nick altmann on for Derek.
You guys had mentioned.
And that you've made some tweaks to how the sales forces and incentivize and compensated.
And with more compensation being derived from the consumption portion.
But historically speaking you guys have talked about and how youre investing pretty heavily and the customer success organization. So can you maybe give us an update there because.
And it seems like that would be pretty critical and sort of drive and that consumption Ts.
Yeah, just to clarify 100% of the new compensation model is derived from consumption. So.
R R.
<unk> pivot for our sales force going from 100% really derived from the upfront commitments and now have 100% driven from consumption and.
And.
It's a it's a strategic change because we believe that when we invest in our customer success and helping them realize the value of the platform, they're going to be willing to spend more over time consume more of the platform and spend more over time and.
And that.
That rolled out at the beginning of the first quarter and as Mark.
Already shared we believe is contributing to lower churn.
As well as the increased consumption and variable consideration revenue that railroads and report as part of our beating expectations in revenue this quarter.
Mark anything you'd add to that.
No I don't think science at the company.
Yes.
Got it and then just maybe a higher.
Go ahead.
Oh I was just going to ask it maybe a higher level question you know around a year ago, you guys talked about wanting to become.
Inner operate a little bit more with open source frameworks to help drive day consumption piece. So if you could just sort of given up and update there and just how that's gone that'd be a that'd be great.
Yeah, Great question. Thank you.
Yeah, we announced last year.
And we open sourced all of our existing proprietary agents that has gone very well and we've taken many contributions from the community from our customers.
And our partners through both new open source.
From previously proprietary and open source agents.
We've also committed to and put resources against open telemetry.
And industry standards that many vendors and.
And community members contribute to.
And we also now support and the platform is also open source and then many open source systems like Prometheus, which is a metric system is built into kubernetes.
Our gross on a you know and charting a.
Application that helps and then many operators often use to visualize their data we now natively support on the platform as well and increasingly we look for basically any telemetry data source, we treat as a first class contributor to our platform and connect to ensure that our.
Customers can ingest that data and really have 1 place as their authoritative source of truth for telemetry data. That's so important for engineers because whenever they have to.
And in the middle of and incident go between different tools and different data stores to try to reconcile the data, they're seeing and troubleshoot. It just adds time and adds friction.
And then in the middle of a crisis, that's not a good thing so customers love being able to connect all of those data types, whether it's from our own.
From our own agents or from open source systems and see it all in 1 place that's the core value proposition of our telemetry data platform and so far it's going really well, we're seeing a lot more data coming in through those open source channels.
And then we even expected.
And 1 of the contributors to the large data growth year over year that we've reported on.
Operator, maybe time for 1 last question. Please.
All right and the final question will come from Jack Andrews with Needham. Please go ahead.
And good afternoon, and thanks for taking my question and.
And the letter you talked about laying the groundwork for a broader ecosystem outside of AWS and could you just elaborate on who who do you think you could be moving the needle for you in terms of really gaining incremental distribution.
Yeah, when we think about that partner channel that I was talking about earlier is it go to market channel for US, we think broadly across the set of partners and that we have today as well as new partners and we want to nurture and grow and starting with cloud providers. We obviously have a <unk>.
Strategic partnership with AWS, but.
Increasingly our customers run and many clouds and want to see new relic available and partner with the other major cloud providers as well.
C msp's as and existing partner channel as well, but it works for us today, and we increasingly want to invest and tinder.
And to nurture more business going forward.
And and.
And we.
We get some business through other reseller channels and Isps through technology partnerships.
We have a team looking at that as well and so when I think about partners. It's.
That third leg of the stool that I expect will continue to contribute to new relic as growth in the quarters ahead.
Thanks very much.
Alright. Thank you so much for joining our call today.
I look forward to meeting many of you and the coming weeks and calls and at Investor conferences and the opportunity allows thank you for your interest and new relic and and.
You will see you again soon thanks.
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