Q2 2022 New Relic Inc Earnings Call
Good day and welcome to the new relic second quarter fiscal year 2022 earnings conference call all participants will be in a listen only mode.
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After today's presentation there'll be an opportunity to ask questions.
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Please note. This event is being recorded I would now like to turn the conference over to Peter Goldmacher, Vice President Investor Relations. Please go ahead.
Yeah.
Hi, everyone and thanks for joining our Q2 fiscal 'twenty two earnings call. We published a letter on our Investor Relations website about an hour ago and hope everyone had a chance to read our letter together with today's earnings press release.
Today's 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 in our most recent 10-K and upcoming 10-Q to be filed with the SEC.
Also during this call we will discuss certain non-GAAP financial measures, we have reconciled those to the most directly comparable GAAP financial measures in our earnings release.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
Finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available here in a few hours and with that I'd like to turn the call over to Bill.
Thank you Peter and welcome to the call everyone.
This quarter marks the completion of our turnaround and the beginning of a new chapter of growth at new relic.
We made the bold move one year ago this quarter to disrupt the observe ability market and it's great to see this strategy beginning to show its strength in our financial results.
Mark's going to walk us through the detailed numbers in just a minute, but I'd like to first walk you through our progress against each of the five priorities I laid out for our company in the last earnings call.
Our top priority is to return our revenue growth to market growth rates as a consumption business. This demonstrates our ability to create value that customers are willing to pay for in a competitive market.
We are pleased to report revenues of $196 million for the quarter.
18% year over year growth up from 11% last quarter, and 14% a year ago and the highest year over year growth rate, we've reported in six quarters.
The primary driver for this was twofold customers consuming in excess of their commitments as well as higher retention rates.
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 the business by the end of this fiscal year.
76% of committed revenues are now on the new model, that's a five point improvement from last quarter.
Our third priority is to grow the number of paying customers.
During our turnaround we focused on migrating our customers to the new business model and ensuring that we were attaining their business.
Some of our smaller customers moved to our free pricing tier this led to the decline and then plateau of our total paid customer accounts over the last several quarters.
This quarter, our total paid customer count is growing again with over 14300 customers now paying for services from new relic. The primary way. We're driving this growth is through 100% self service product led growth funnel, starting with the new relic one free tier.
Since introducing that offer one year ago thousands of developers have signed up for new relic, one and nearly 5000 have entered credit cards, an increase of more than 1500 since we reported last quarter.
These customers provide an excellent qualified customer funnel for our direct sales teams and partners to nurture to higher levels of growth.
We also landed a healthy number of new logos driven by our sales teams' efforts this quarter, including greenfield opportunities as well as several competitive takeouts against the major vendors.
A great example of this is one of our biggest ever new logo wins in Europe, a U K based Fintech company with a total contract value of $3 $5 billion.
This account started as a small proof of concept with our primary competitor already in the account, but we ultimately ended up displacing them entirely when the customer determined that we were able to better solve their problems with our all in one platform.
The contract was fulfilled through our AWS marketplace further demonstrating the strength of that alliance.
We're also seeing customer win backs from competitors for example, one customer who transitioned away from new relic in 'twenty 'twenty recently returned to our platform.
As the customer's business grew they began to experience sizable technical gaps and surprise bills from the competition a reoccurring theme.
One of our partner spotted this opportunity to better address the customers needs and ended up of reintroducing them to new relic, one and completely displace the competitor in the account.
Our fourth priority is to methodically deliver platform innovation and greater value to our customers. This quarter was another hallmark of innovation from our product organization.
In addition to the.
The small and sometimes not so small improvements across the platform. We made two major new services for purchase available this quarter Pixie and network monitoring.
Well, it's still early days, we're seeing healthy adoption of these new workloads.
Last month, we also introduced new relic I O short for instant observer ability.
I always another product led growth initiatives. It offers a dramatically simplified approach to observe ability with a large and growing catalog of readymade telemetry sources, dashboards and alerts to help new and existing customers realize value in minutes.
In late October we also announced new relic coat stream an industry first innovation that we believe increases our ability to reach more developers and expands the observed ability tan.
Code stream empowers developers to instrument their applications collaborate with fellow engineers and debug production issues directly from inside their development environment of choice.
As part of this release, we announced a strategic partnership with Microsoft to reach millions of engineers through direct product integration now available in V. S code visual studio Azure Dev ops, Microsoft teams and Github.
Other popular developer tools.
Coinciding with the code stream lunch and to assist in monetizing this new cohort of users along with other capabilities of the platform, we announced a new core user type a lower priced offer specifically crafted for code focus developers, who have not yet embraced observe ability or are only occasionally pulled into.
Code related incidents and therefore don't have a paid user license.
This new user type will be available for purchase later this month and we anticipate will begin to be a source of a new paid users in Q4.
The core user serves as an on ramp to observe ability and will lead to more full platform users over time.
Our fifth and final priority is to improve our internal execution efficiency and cost.
We realize that while we showed strong progress this quarter in order to reach our full potential and achieve competitive growth rates all areas of the business need to move faster with less friction more alignment and greater efficiency.
The mental to all of that is great people.
We made recruiting retaining and developing our talented employees a top focus this past quarter.
We were able to dramatically lower attrition rates and we achieved our strongest hiring quarter in three years.
Our sales organization is beginning to really hit its stride more of a sales team achieve their quotas in Q2 than the past six quarters.
Our internal engagement survey shows employee morale across the board is improving and we remain focused on fostering a strong internal culture on.
On the financial efficiency front GAAP gross margins were 67% and non-GAAP gross margin remained at 69% for a few reasons.
I encourage the team to accelerate our move to public cloud in international regions. So we can better serve customers outside the U S.
This increased cost short term.
We believe will lead to more opportunity lower churn and better customer experience medium to long term.
Second data growth continues to be strong data is our major driver of cost and continues to put pressure on our gross margins, especially while we're straddling both on premise data centers and public cloud.
But they they will attract more users where our profit margins are higher.
Forward these investments impacts margins over the near term, but we believe investing in these opportunities today, we will provide meaningful operational benefits and attractive returns over the medium to long term.
For more details on our business. Please refer to the Investor letter, we published on the website.
Today is exciting inflection point for new relic and yet the most exciting part for me is the road ahead.
I believe we're still in the early days of a observer ability and we're playing the long game.
The long term success of any business is not be early moves made by so many.
But the strategic moves made by the few and in this regard I believe that bold decisions. We made the last four quarters.
And our tenacious execution against them show, New relic has what it takes to be a market leader.
We anticipate it'll be more unexpected setbacks and challenges along the way such as the way of any business.
But we'll have tackled them the same way we did the last four quarters by living our company values being authentic and true to who we are and boldly and with passion and a sense of connection work to serve customers and investors to whom we are accountable.
Only new relic is taking a developer first approach to observe ability.
It's in our DNA and it has been since the founding of our company.
There are 27 million professional developers and many millions sorry, I T operators and other professionals, who don't practice observe ability today.
And to whom we are bringing a powerful data driven approach to engineering. So they can stop relying on opinions and alignment meetings to prioritize plan and execute.
Only new relic is taking a data centric approach to observe ability.
Other than monetize after App only new relic allows engineering teams to ingest all types and all sources of telemetry for just 25 central gigabyte.
We then connect those datasets and the engineering teams that surround them with a full view of their systems and the dependencies between them.
Only new relic has shifted to a true platform consumption business model that allows enterprises to eliminate blind spots and standardized on new relic one across their engineering organization with a simplified user and data pricing model. So they only pay for what they use.
<unk>.
For these reasons I believe that road ahead is going to be even more thrilling. The journey, we took to get here.
I am so grateful for employees for their dedication to new relic throughout the turnaround.
For living our core values and giving their all despite a global pandemic despite fierce competition.
The great resignation.
With adversity comes strength and with the challenges of the past year behind us I'm more confident than ever in our ability to solve our customers' hardest problems and reach our full potential as a company.
With that over to you Mark.
Thanks, Bill and good afternoon, and good evening to everyone on the call.
I'd like to briefly recap our financial results and then spend some time discussing some important elements of our financial model.
For second quarter of fiscal year 'twenty, two we reported revenue of $196 million ahead of the guidance, we set in the first quarter for between 181 and $183 million.
GAAP loss from operations was $47 million and non-GAAP loss from operations was $6 $4 million ahead of the guidance, we provided for a loss of between 13 and $15 million.
GAAP EPS was a loss of 84 cents and non-GAAP EPS was a loss of 10 cents ahead of our guidance for a loss of between 11 and 15 cents.
This top line beat was driven primarily by customers consuming in excess of their commitments as well as by stronger retention rates.
Pleased with our results this quarter and excited to have returned to year over year top line growth acceleration a quarter ahead of the timeline, we previously discussed.
As Bill mentioned, our number one priority continues to be to get back to market revenue growth rates in the intermediate term and Q2 was another positive step along that path we.
We are providing third quarter revenue guidance of between $198 million to $202 million and a non-GAAP operating loss of between $10 million to $12 million.
We are also increasing full year revenue guidance from a range of between $730 million to $735 million to a range of between $778 million to $782 million, an increase of $47 $5 million at the midpoint of the range.
With regard to our non-GAAP operating loss, we are now guiding to a full year loss of between $35 million to $39 million an.
An improvement from our previous guidance of a loss of between $53 million to $55 million.
This increase in topline guidance is driven by three current trends that we have seen in the business, including.
First we are seeing increases in consumption above commitments from our customers.
Second.
We are seeing healthy renewal patterns from customers that had been on the consumption model for a year.
And finally customer retention has improved from both a unit and a revenue perspective.
We continue to see positive signs that our product investments and strategy focused on customer success are paying off.
There are a few other things that we'd like to highlight for this quarter.
As we have said there are two main reasons, we have exceeded our guidance. The primary reason is that consumption in excess of commitment has been stronger than our models estimated and this shows up in our revenue as variable consideration. The purpose of variable consideration is to ensure that revenue recognition reasonably approximates revenue from customers.
That are consuming in excess of their commitments.
Order to avoid any large spikes in revenue at the end of a commitment period, because it is difficult to forecast consumption, especially at the beginning of a commitment armour.
Our model is set to take a more conservative approach towards forecasting consumption for the purposes of variable consideration at the beginning of a contract.
Able to create a truer more accurate estimate of consumption over the term of the commitment how does it get more and more data points to build a consumption forecast.
This means that revenue recognized as a function of variable consideration tends to be conservative at the beginning of them come in theory and grow over the duration of the commitment period.
Assuming the consumption in excess of commitment remains consistent or grows over time.
So far most of our accounts with variable consideration have been consuming at a steady to slightly increasing rate as.
As we move forward and get a larger historical dataset, we will continue to refine our models and work toward developing more and more accurate forecasts.
The second important contributing factor to our top line results is improved churn.
Overall churn in the quarter was once again down sequentially and year over year as new old rates continue to improve.
The factors driving this improvement were better products better contracts and better customer service.
We expect to continue to drive down churn and improve renewal rates, but it will take a while for this to get reflected in Iran, and Iraq is a backwards looking metric.
Also it's worth noting that we had a nice sequential increase in active customer accounts greater than $100000. This quarter.
And our percentage of revenue from active customer accounts over 100, K ticked above 80% for the first time.
I also want to take a moment to discuss the difference between commitments and consumption.
Both of which are important factors in driving our topline growth.
When we talk about customers increasing their commitments, we mean, the overall contract renewal commitment of a cohort of customers in aggregate net of churn.
We saw an uptick in commitment to enter one renewals in Q2.
Consumption.
What a customer actually consumes during the course of a commitment period typically a year for us and in aggregate. We are seeing consumption tracked ahead of commitments.
That was the case in Q2.
And we're seeing stronger performance in the Q3, and Q4 cohorts largely due to better product and more familiarity and comfort with the model both internally and externally.
In particular, the amount of time and energy our go to market teams are spending with customers to make sure they're engaged and successful with their platform continues to increase and that translates to more value.
As Bill mentioned non-GAAP gross margin was flat at 69% driven primarily by acceleration of our move to the public cloud in EMEA and a P. J.
Also we've been focused on driving data growth and we're seeing results across our customer base.
These factors have moderated our expectations for gross margins in the short term and.
And we now expect relatively flat non-GAAP gross margin in Q3, improving to the low seventy's range in Q4.
Modest change from the previous guidance for low to mid Seventy's range in Q4.
However, we remain confident in our ability to continue to improve gross margin as we complete our worldwide moved to the cloud and drive towards our goal of high 70%, 80% gross margins in the intermediate term.
In terms of our operating margin as Bill stated.
Objective, we are focused on improving efficiency across the organization.
That said, we continue to prioritize topline growth over near term bottom line results.
This may impact near term costs and expenses, but we believe will have long term benefits.
Finally, we wanted to remind everyone that the move to a consumption model changes the dynamics of deferred revenue in our P. O and those metrics are less useful in understanding the momentum of the business. We provided more details around these dynamics in the investor letter.
And now we'd like to turn it over to your questions. Operator. Please go ahead and open it up thank you.
Yeah.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on you touched on.
If you are using a speakerphone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Kingsley Crane with Baghdad. Please go ahead.
Hi, Thank you. So why is today specifically the end of the turnaround and then looking ahead, what now stands in the way of you getting back to market growth.
Hey, Kingsley. Thank you for that question and I know you follow this pretty closely so you know allowed us but to kind of wrap it in a nutshell. We felt it was really important to mark the one year anniversary.
Of the turnaround that we planned and initiated last Q2 as you know at that time, we faced a series of.
Quarter reports, where we saw increased competition and declining revenue growth and we set out with a bold new vision to better capture value for our customers and compete in the market.
We consolidated our underlying data platform and integrated all of our product experiences, we streamlined and simplified our pet packaging and pricing and shifted our business model from subscription to consumption.
For four quarters now we've been innovating new platform experiences shifting our go to market motion from driving contractual commitments to true value realization and diligently migrating customer contracts onto our new consumption pricing model we.
We've been sharing our progress along the way and you all have been patiently waiting results in our financials.
With those operational changes complete and our year over year revenue growth accelerating to rates beyond what we demonstrated even when we announced the business model changes a year ago. We feel now is the time to mark the completion of that turnaround plan and the beginning of a new chapter of growth for me Rob.
Okay.
In terms of the second part of your question.
As we look ahead, it's really about the execution and increased efficiency of execution against our strategy. The strategy is down the business model is working and customers are consuming the value at increasing rates and from here on out.
It's about focusing on refining and continuing to execute with ever greater efficiencies. That's the strategy that we put in place.
That's really well said bill and it should be gratifying for you and the team I have just one quick follow up you've mentioned neurology, Iowa potential to lower the barriers to entry for the product code stream can introduce the pouch new jobs. You also have the new updated seat based pricing model. When you look at all of these three initiatives how much more white space.
Abuser growth do you think you've unlocked.
Oh.
Great question again gameplay I think it's incredible you know if you think about the observed ability market today.
Say a million engineers practice observe ability across all of the major vendors.
As we know from IDC and other market studies.
97 million professional developers in the world and many millions more are working in it and operations and all of them can benefit from a more data driven approach to engineering what code stream does is it really unlocks greater access to observe ability.
Data and insights.
Fostering an open ecosystem, where any community, whether it's open source or a commercial vendor or a customer or a partner of ours can contribute through open source readymade observe ability quick starts.
And with a few clicks allow data to flow into our platform and for customers to get insights and start to action.
You don't have to be a professional observe ability expert in order to get value from new relic, one anymore. I believe that opens up a greater access to observe ability to both developers and operators and then code stream. As you said is a really exciting new innovation because it completely changes the game of observable.
<unk> today is their ability is very reactive it's very operationally heavy and focused on incident response.
And what code stream has done is taken that same production telemetry data set that we've been talking about all year long and collecting at scale on behalf of our customers and opens up new use cases to developers who today don't even get involved in operations or maybe they only get pulled in occasionally but it takes that data and puts it.
Into their flow into the developer tools, they do use everyday to write code in fixed bugs.
And so it opens up.
The platform to potentially millions a greater millions more developers over the mid to long term.
Super interesting thanks again.
Thank you.
The next question comes from Rob Oliver with Baird. Please go ahead.
Great. Good evening guys. Thanks for taking my question Bill I have one for you and then I had a follow up for Mark So a bit of a follow up cute Kingsley's question you guys have made some considerable.
Improvements and enhancements to the product it was a great buzz at future stack around Pixie and I think it's checks supporting you guys.
That's really been an enhancement in terms of containers on the on the on the on the platform I, probably too early to talk about revenue associated with it but can you talk about what's a you know pixie network monitoring and and now coach Dream.
What was the what that's doing in terms of the conversations that you're having.
With some of these accounts and how much of a needle mover. It is in discussions both with new customers and about a converging converting to the new model and then I had a follow up thanks.
Yeah. Thanks for highlighting the innovation, it's so exciting to see the product organization really moving the needle in terms of differentiated value for our customers.
You mentioned pixie, great, but the future stack, when we announced the integration with new relic, one and open sourcing that we also had a great moment here at coupon just a few weeks ago.
With some major updates and roadmap announcements there and we were really pleased to see the number of Github stars, which is the number of developers who expressed interest in the open source project itself actually continue to just skyrocketed actually exceeds now many.
Many popular open source project in the same space from new relic as well as major competitors.
In the customer conversations as well early interest and adoption is very healthy and the sales team is fully enabled and has great sales play around the value proposition the pixies, though.
We're excited to see that starting to.
Get unlocked same thing with network performance monitoring and the partnership with <unk>.
We've got.
<unk> got joint customer list being worked in.
Go to market. There that is early stages, but also appears to be strong and code stream you just launched.
Not very many days ago. So it's very early but the buzz has been really exciting the partnership with Microsoft a big highlight and there are millions and millions of developers who use Microsoft tools is one of the most popular developer platforms in the world and so we're grateful for their partnership and reaching new audiences for us.
And also with our own customers, who happen to use Microsoft tools.
A great opportunity for them I'll note as well that could stream products.
While it takes advantage of the Microsoft platform integrates with V. S code visual studio get hub. Microsoft teams. It also does support non Microsoft platforms as well so Intel a J another very popular development environment slack you're.
All of those platforms also already supported out of the box. We're excited to take advantage of those flywheels as well.
Got it very helpful color. Thanks, Bill appreciate it and Mark just one for you you you guys nice move in terms of percentage of our of customers that have converted.
You're now up to seven.
76%.
Hum on the consumption model I think you guys had or you had traditionally said like maybe 80 would be the ceiling and should we now.
Potentially think of that not being a ceiling given the success you guys are having converting customers at a meaningful pace. Thanks guys.
Sure.
What we've said is we target 80% for the end of March the end of this year.
We're obviously well on our path toward that.
<unk> and the they're the ones who aren't there generally are in multiyear agreements that aren't coming up for renewal to until such point as after next March.
I don't think 80% is the ceiling I think we will get beyond that over time and at some point, we'd love to have our entire business there, but it will just take time given that these contracts have to run their course and oftentimes. These are multiyear multimillion dollar contracts that'll it'll take a little bit more time, but we certainly would love to get.
And we do expect to get over 80 in.
As we go forward beyond next March.
Okay. Thanks for that clarification I appreciate it thanks guys.
Yeah.
The next question comes from Jack Andrews with Needham. Please go ahead.
Well good afternoon, and congratulations on the results I wanted to see if I could ask one product in one financial question. If I may so on the on the product side I was just to follow up on the last question regarding Pixie I was wondering if you could just frame for us.
How important is the E V. P. S capability that you have and are there. Other use cases that you can sort of apply pixies some technology too.
Yeah. Thank you for that question ETF is a very low level insertion point.
That we use to capture.
System signals.
From the Linux operating system in our case with Pixie and it allows us with the pixie platform to easily capture that and turn it into telemetry data that developers can consume we initially started the pixie platform to center around the standard met.
Tricks and events and log.
Information that today customers would have to spend time deploying agents and <unk>.
Custom instrumentation boring, we unlock that automatically for them with pixie. So they don't have to do that upfront work.
But it's also an extensible platform. So customers can go in and using very simple lightweight scripting capture any any data actually flying through the network or through the kernel of the operating system.
So excuse to capture and also evaluate that locally on the kubernetes environment or send it back to our cloud.
For our retention advanced correlation and visualization.
So really.
The the.
It unlocks.
Warmus potential across many use cases, not just traditional application or infrastructure monitoring, but potentially security network.
Advanced <unk>.
Developer profiling application profiling and so forth.
So it's a it's a very powerful platform and when we we anticipate we'll be able to expand value on overtime.
I appreciate that color and just as a follow up question.
Is there a way to frame what type of net expansion rate you're seeing.
Upon renewal for the the.
The commitments that the customers are committing to now.
Yeah. So.
I think we have to separate talk about two things one is commitments and one is consumption and you know we didn't know how to cohort that's come through the Q2 cohort has been on the on the program for one year and then we look at commitments commitments or what the what a customer committed to a year ago and in aggregate and what.
That same set of customers committed to at the end of the first year, we see that commitments have gone up so you know increasing commitments over over the over the on the renewal period.
And when we look out in the forecast for Q3 and Q4, we see that type of behavior.
Continuing.
And the other one is the other thing thats driving consumption and consumption is how much a customer actually consumed during the one year period and as we've said consumption is running ahead of commitments and that happened in Q2, when we look at Q3 and Q4, we see that kind of behavior, continuing where they are.
Continue to consume at a rate that exceeds their overall commitment and so those are the two things that are driving overall top line growth and and those trends are what's driven us to you know to put out the Q3 and Q4 forecast that we've done.
Yeah.
Got it thanks very much.
Our next question comes from Sanjeev Singh with Morgan Stanley. Please go ahead.
Thank you for taking my question and congrats on the really strong results this quarter when I look at the sequential dollar growth in Q2 I.
I might be off but it looks like the biggest.
Sequential dollar increase in multiple years.
Which is very impressive and last quarter Q1 was up $8 million. This quarter is up $16 million. So in the spirit of the.
A previous question I guess, one this would be for Mark what do we think about that sequential dollar increase of 16 million how.
How much would you say came from you know lower churn being a driver relative to Q1, how much sort of came from expansion and then how much sort of came from net new sort of chemicals coming onto the platform any way to frame out you know across those three buckets.
So the the continue.
Continue improve churn is certainly having an impact.
We've mentioned that now for a couple of quarters and I think you know.
We're doing good job there, we still have room to go and so I think we'll we're our goal is to continue to improve that going forward. So that's had an impact I think the larger impact is the a.
The consumption ahead of commitment for our customers. The third piece was I think new new customers. He said.
That has an impact also but they.
But our customers that come on board tend to be coming on board at a at a pretty low level of spend so even when we get good numbers of customers. The dollar total dollar amounts added is pretty modest and then once they've spent the first dollar every dollar they spend thereafter is an expansion dollar.
So the new tends to be pretty modest, but the big driver is the fact that customers are consuming.
Ahead of demand and I guess, the other factor in there I want to point out is you know.
Variable consideration I would I would point to our Investor letter, where we are we have a a description of Arab integration and how that's how that's done.
And what we've done there and I would take a look at that.
Variable consideration in broad terms is the way, we align ray but revenue recognition with how our customer consumes and you know.
By design, we took a very cautious approach early on our models are getting better and better as we as we get more data and we're able to have more accurate more better predictive models.
And so I think that is that's also having an impact in how we recognize revenue.
That's super encouraging to hear Mark and then just one follow up also more more more data driven as you look at the Q2 cohort allowed the dimensions of paid user growth and data ingest growth also paid data.
Painted it in just growth how did that how did those type of growth in those two metrics compare to the to the Q1 cohort or some of the recent cohorts I mean any color there would be helpful.
So the Q2 cohort as the first cohort that has anniversaried right. That's the September cohort was the first one that was in that.
It's been through a full year and so we've got that that dataset.
And when we look at that data set versus what Q3 and Q4 are doing for example.
We're seeing in terms of overall consumption levels I think Q3, and Q4 are running slightly ahead of Q2.
Now remember Q2, the the the initial cohort was up to start. It back then we were still emphasizing commitments and that our comp plans at our field emphasizing commitments more so so that cohort was up 15%.
The subsequent cohorts are up a little less when they renewed onto the onto our new model. So I think you have to you have to really think about that but but overall, we're seeing stronger.
Results.
As we go through these cohorts and I think that's driven by our product is good.
Bedroom better obviously, but it's also more familiarity with the model both on the part of our customers as well as our go to market organization.
It was a big change obviously, when we introduced last August or July August and then we changed our comp plan in April that was another big move and we're still relatively new with this we've been doing it for a couple of quarters and I think we're learning what we've learned a lot and we're getting good at it but I still think we have.
What we can learn and things we can improve.
Really appreciate all the color Mike Thank you very much.
The next question comes from Eric stuff bigger with JMP Securities. Please go ahead.
Yeah. Thanks for taking the question congrats on a good quarter.
Kind of consistent with some of the other questions.
How can we think of the contribution from the.
Commitment versus the the.
The overage.
Where where are you trying to.
Where were you referring customers or how are you recommending customers approach their commitment levels.
So art our primary goal is consumption our comp plan is driven by consumption not commitment.
You know in the old way old model when it was subscription base looking at commitments, we're no longer doing that where we're at.
Our sales compensation plan is all around how much a customer consumes over the life of their contract. So that is the primary driver for us.
Sure. We obviously a bigger commitment is better than the smaller commitment, but that's not the real motivating force. The morning weighting factor for us is to get people too.
Send us more data.
And we feel like that is it is a leading indicator to more and more people are getting value out of that data. So we'll users will come continue to migrate to the platform. So we'll be able to grow user growth as well, but really most of what we do is driven around driving more data and more users at the end of the day. That's that's all.
Customers get value.
And and Thats, what we want to do is make sure. They they continue to get value and continue to increase their consumption.
So is that to suggest the majority of revenue is coming from the consumption side.
Theres a mix, it's a mixed and if you look at each each cohort it might be there.
Mice might be adjusted one way or the other as you look at the monthly go worse, it's too early for us to really draw I said with a broad generalizations. We've had one put one quarterly cohort come through was relatively modest number of customers in the hundreds.
We've got now thousands in this model that will continue to learn from them as we go through and as they start to hit their anniversary dates.
Yeah.
Okay, then real quick on the net retention rate.
Your net retention rate for sub 25000 dollar accounts is higher than it is for the greater than 25000 can you explain what with the base or why why that dynamic is.
I think I think the big reason there is.
Small numbers of small base, you've got you've got customers that are paying us a couple of thousand dollars and all of a sudden they go up to 20000 or are you you can see the number of 25 pain above customer you have is growing nicely. We've got some paying over 100 that that adds up in a hurry when the base is real small versus our.
The other basis, just a bus.
Much tougher to get a bit of a big percentage change off a high base.
Okay that makes sense. Thank you.
Yeah.
Yeah.
Your next question comes from Michael <unk> from Keybanc capital. Please go ahead.
Hey.
Congrats on a corner built really big picture question, obviously, you've done amazing job on execution now you've got a strong.
Strong double digit growth rates well show some perhaps.
The focus shifts to product strategy.
Even more so so at this point.
How would you really differentiate what you're doing strategically from some of the other strong players that are out there and I know you've talked about developers, but there are other there are other monitoring our observed ability companies, but also have developer focused product. So how do you really differentiate from what.
Some of the leading well known players are doing in the field.
Yeah, Thanks, Michael and.
It's a great question.
I would start by reminding everyone. If you think about this space its largely been driven by.
They all vendors, including new relic prior to the.
The new strategy, we laid out last year.
To be focused on collecting telemetry in helping developers react to incidents in production.
So.
There's a variety of ways to do that but every company in this space is focusing on that incident response process.
When you step back, though and you think about where engineers spend their time and what they're motivated by.
It's all around innovation around creating value for their business and customers.
And a lot of their time is spent on planning.
Planning that.
Building that innovation, validating with customers and testing and testing it and then deploying it into production.
And we have this fundamental belief that the production telemetry, we collect today to help customers are engineers troubleshoot can be used in those other phases of our lifecycle to help them to be more proactive to help them to build better software prioritize the right investments create better customer.
Spirit.
And not only is that going to help accelerate innovation prevent outages to begin with.
Create more customer value, but it also is very beneficial to new relic and our investors right because.
Today, when you think about just the use cases that are reactive in nature. It's a very small subset of the total engineering population.
When you think about all engineers it could be.
Many many times greater Tam than the current observe ability taps and so that big picture view for US is like how can we unlock that telemetry data.
Cross the software lifecycle, that's the fundamental premise by which we.
We took the shift to the user and data pricing model last year and it's.
Also the strategic impetus behind new innovations like I owe to unlock more data for more use cases as well as code stream of new use case for developers and developer tooling.
And youre going to see more of that overtime.
And then and then Mark for you.
What are the things that was in the in the Investor letter was that you've increased the take rate of.
Pay as you go but the percentage of paying customers there.
Decrease that had increased the conversion efficiency and how can we really measure the current pricing model.
Sure.
You're paying per user is actually increasing users and expanding user adoption within the enterprise how can we measure that.
Well.
For us one of the key things is it's just getting them using the platform.
And so we will invest and we mentioned we've driven some investments to push those those numbers and we want to get more people just using the platform and a lot of people think that's just new new organizations and that's not necessary. The case this could be additional people within an organization.
Just trying it just hearing about us really get the word out and get them to understand the power of the platform and so we want to make it as easy as possible to do that.
We have confidence that that we will be able to once they once they are using it there.
They'll get value and they will continue they will grow and ultimately if they're not paid at the 100 gig lam or add people and become paying customers.
And then we've seen a lot of evidence at once they get to the paying stage then they continue to grow from there and ultimately become a much larger and more significant accounts. So you know our goal I would say our primary goal is to get people into the in the funnel and using deployed in using the product.
And then we look at all of those conversion rates.
And we do all sorts of things to try and improve them, but at the end of the day for US, it's primarily about getting people to start using the platform because we do have confidence and we've seen a lot of evidence that once they start using it they will.
Go on to paid and become larger and larger customers.
Thanks for taking the questions and congrats on a big turnaround.
The next question comes from Yun Kim with loop capital markets. Please go ahead.
Thank you congrats on a good quarter Dale and Mark can you talk about the success you've had in adding new want undertake plus customers in the quarter I think you what's your best performance in a while.
Can you talk about whether these new 100, K plus customers are relatively new customers, who joined him over the past 12 months or so because they were attracted to the new pricing model or are they just simply existing older customers who are now committed to the platform and then also should we expect to see a 100, K plus plus customer account.
<unk> continued to move higher at these new faster rate of your enterprise sales capacity continues to ramp.
Yes, Thank you I'll take that.
And I'd first start with.
Short answer to your question are these relatively new customers or from the existing base I think the answer is definitely.
Definitely yes it is.
I'll start with maybe some of the numbers on the self service side that we find exciting.
Highlighted in the Investor letter.
Since we introduced that free tier and then add your credit card and moved to pay go model last year. We now have 5000 customers in that model and increased from 3500 last quarter sort of an additional 1500.
This quarter alone.
And we noted as well an increase from 69 customers to 100 at nine this quarter spending more than 25 K.
And an increase from four to six spending more than 100 K. So those customers are a great example of new Hunter Kay customers that came up through that free tier.
Pedro model.
Within the last year and are now spending in excess of $100000.
On the.
The remainder a large number of them are from our existing base customers, who may have been using the platform for a while and now with the consumption model.
And the full platform access they get for it are expanding at a greater rate and spending and now in excess of 100000, and I would expect us to be able to continue to grow that pool.
Across the more than 14000 customers that we now have.
Consuming services from new relic one.
Okay, Great and then I have a question for Mark.
It seems like a variable consideration metrics seems to be the hot topic today, So I'll ask another one.
Can you at least qualitatively address how much of your revenue is driven by this consumption in excess of commitment and has that mix been changing meaningfully quarter over quarter.
Sure well.
It certainly has been changing quarter over quarter since a year ago that number would have been zero.
If you if you're able to go back to Q.
Q2 of last year last September quarter, we had just gotten onto the model. So the variable consideration would have been zero, we had no customers really consuming in excess of their commitment.
Early on he can get into the first couple of quarters. We by design, we took a cautious approach to how we recognized Bravo consideration.
And so it was.
Pretty modest levels, and then you get into Q3 and Q4, we get better data sets, we get better models and it started to tick up and then when you get into the September quarter, you've got a balance things out right. Your revenue has to equal your overall consumption that these customers actually took so that's where you you.
Actually everything's got gotta be equal so it has been increasing.
I think that's it.
A lot of it is attributable to the fact that we started at zero.
We expect that to continue to grow over time, I would say not as quickly necessarily as it has over the past year, because again, it's kind of a larger numbers. It is.
<unk> get as big a percentage increase but.
But we do expect customers to continue to consume more than they commit and certainly are.
Our guidance and things have we've given our and are indicative of that.
Okay, great. Thank you so much.
Yeah.
The next question comes from Derrick Wood with Cowen. Please go ahead.
Great, Thanks, and I'll Echo my congratulations.
Mark all a double click on this variable consideration soccer again.
It just sounds like there's some moving parts on the mechanics of Rev Rec.
And in the past you've given us some sort of.
Percentages in like Q1 to Q3 Q4.
And in consumption, but maybe you could do that with Rev, rec, and and and and prepare.
Help us think.
What that kind of has looked like in year, one of our contract and how you see that shifting now that you get more data and better predictability and all of that.
In Europe too.
How the mix could shift there that the shape of the Rev. Rec curve could shift in Europe too.
So Jerry I think this is triple clicking just wanted to double click on it.
Yeah. So so we as I mentioned, we started out.
Appropriately cautious in it and and.
In a perfect world you'd be able to do this completely literally linearly obviously, we don't live in a perfect World. We don't have a perfect crystal ball. So our assumptions are changing every month every quarter as we get more and more data and also remember customer behavior is changing some folks who are our overconsuming.
They have a drop a lot of the folks who are consuming at a low level all of a sudden start to ramp up and we've got to make an assessment of is that a is that that ramp up going to be sustained or is that just a one time event and we've got to make these.
We've got to put together a forecast with the best available information.
As we get as we get better and better at this and we get a greater historical dataset will have more a larger larger history that we can draw on that says you know this kind of behavior typically results in this sort of behavior over the rest of the contract period, and so we will be able to continue to improve.
Fine.
Those models.
It's.
I think over the course of this year, we've certainly gotten better at it.
And so I would say when you look at.
The percentage of of.
Is it skewed towards Q4.
Although the fourth quarter of the contract in in our September cohort that was probably a little bit larger than we expect it to be in subsequent quarters.
But but.
And we'll just continue to prove that over time.
Understood that's helpful and maybe one bill for you.
You guys put out a blog talking about price differences between AWS.
AWS and did a dog or a couple of ones you compared to talked about being disruptive, but the consumption based pricing model.
Called out some competitive displacements on this call with you.
Cost me and one of the reasons, so I guess my.
Question is how prevalent.
Point is pricing in the market and how much opportunity do you see out there in and displacing other vendors.
Yeah, I regularly hear from customers about the price points and the pricing.
Pricing structure of observed ability, it's what drove us to tackle that as one of the first parts of our turnaround plan last year to structure the pricing differently. It's not necessarily a cost question is more of a value question for the dollar you are spending are you getting as much out of it.
As you would like them.
Regularly price does come up in competitive conversations and when you look at new relic versus a competitor the customer nothing that doesn't necessarily spend less or save money by going with new relic, but they feel they get much more value because the way we've priced it with very low day.
<unk> lets them instrument more of their system and understand more what's going on everyone's operating we blind spots today because of the cockpit.
The cost structure.
And then the user component gives them the enterprise much more predictability because.
Head Count's engineering head count doesn't spike or have seasonal variability as much as maybe your infrastructure does so that combination user and data pricing a lot of customers find advantageous because it lets them instrument more and have more predictability.
Great. Thank you.
The next question comes from Rishi jewelry up with D. A Davidson. Please go ahead.
Hey, guys.
Recently, I went with RBC now no longer D. A davidson. Thanks, so much for taking my question.
Just two quick ones for me first I wanted to drill down on gross margins can you give us an update for what the outlook on timing for completing the migration looks like.
Investor letter you talk about maybe the 80% gross margin target being pushed out by more than two years.
But the mix of data for its customers stays at the level. It is can you explain to US why that's the case and why would the data side the lower gross margin and then I've got a follow up thank you.
Sure. So as you know we've been we've been.
Getting out of our data our data centers in Chicago moving to the cloud that's been happening we started that a couple of years ago.
That was we talked about that.
Yeah.
Kind of running its course being largely complete by the end of fiscal 'twenty three.
In addition, what we've been doing is is opening up and moving to the cloud in internationally. So in the Asia Pacific region and in EMEA and so that was something we had planned over a longer time horizon.
But we pulled forward a bit given our results and as Bill mentioned earlier.
Earlier.
The quicker we can do that the better for our customers a better offer a business long term. So we would take a little bit of a short term hit on gross margin and make those investments to get the benefit over the long longer term in terms of.
The profit margin of each of our of our of users versus data, we intentionally priced our data at very low price and a low profit margin.
Because we want to make it a no brainer for our customers to send us all their telemetry data and so we felt like going in with a number that is a little bit eye-popping people I think sort of think well how can you really do it for this this cheap we want to make it really easy for them to say, yes sure. It's cheaper for you to take it then for me to store it and handle it in so.
So we wanted to do that specifically to get that data and make sure that we get as much.
We make that decision for the customer as possible.
And on the other hand, our users are much more profitable.
And that's what ultimately drives the profit at the bottom line profit of the business is getting those users and over time, we think that mix will get back towards the two thirds one third.
We mentioned right now in this past quarter. It was closer to 60 40 users' data and if it stays that way for a while we're fine with that because again, we feel like there is long term value and getting that data.
Alright.
Helpful. And then I just wanted to go maybe to another competition question and I. Appreciate the color you gave us on customer win box, which I think is really great to hear just overall, if we think about your competitive win rates.
How has that been trending over the past year I've, just gone down about the pricing and product transitions.
Yeah.
It's definitely growing stronger each quarter the product transformation over the last year I guess, the best evidence of that is the strength of that free tier and pay as you go model you know when there's zero between the customer and the value other than the product.
Product has to stand on its own customers have to be able to get value and be willing to put in that credit card and the numbers are there speaks for itself and I'd also translates to very large customer accounts, where you know some.
Some of our multimillion dollar contracts those engineers are now benefiting from the integration of the platform. The simplification we've done the removal of friction.
And it is helping us not only retain customers as we've talked about lower churn rates, but attract and win competitive deals I think.
It's obviously, a very competitive market out there, but the moves we've made both from a pricing and product perspective, but even more recently from a go to market motion perspective shifting.
The incentives for our field to be really focused on customer value.
And winning the loyalty and trust of our customers all work together to win new accounts and keep them happy customers for the long term.
Alright, great. Thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Bill Staples for any closing remarks.
Yeah.
Thank you operator, and thank you all for joining the call today and for your questions. Obviously, a very exciting quarter for new relic. We thank you again for your patience as we worked through our <unk>.
Turnaround plan and completed at this quarter, we're looking forward to reporting on our success in future quarters and growing the business I'm excited too.
Meet you as we continue to get out on the road and.
Yeah.
Meet with our customers and investors throughout the quarter. Thanks again for your interest in new relic have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now.