Q4 2022 New Relic Inc Earnings Call
Good afternoon. Thank you for attending the new relic for Q FY 2022 earnings call. My name is to me and I will be your moderator for today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad.
I'd now like to pass the conference over to our host Peter Goldmacher, Vice President of Investor Relations.
Hi, everyone and thanks for joining our Q4 fiscal 'twenty two earnings call.
Published a letter on our Investor Relations Web site in about an hour ago and hope everyone had a chance to read our letter was 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.
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-Q and upcoming 10-K to be filed with the SEC.
Also during this call we will discuss certain non-GAAP financial measures, we have reconciled those to the most directly comparable GAAP financial measures in our earnings release.
These non-GAAP measures are not intended to be a substitute for our GAAP results and finally this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available there in a few hours and with that I'd like to turn it over to bill.
Thanks, Peter and welcome to the call everyone.
So it is in a stronger position now than it was a year ago, when I was announced as CEO successor, let.
Let me share with you five key accomplishments about slide 22.
First we accelerated our total revenue growth rate from 11% in FY 'twenty, 1% to 18% in FY 'twenty, two but adding almost $120 million to the top line this year.
Underneath this our net revenue retention rate or in our our crew for each of the reported cohorts and on an aggregate basis.
This was driven by strong market acceptance of our products and our new pricing model and importantly, we were able to achieve this growth, while keeping sales and marketing spend essentially flat excluding the amortized Commission expense, we discussed in detail last quarter.
Second we migrated 87% of our business to the new consumption business model.
Speed and boldness at this cannot be overstated.
I can't think of another company our size, but has successfully transitioned from a legacy business model to a new business model so quickly cusp.
Customers see the new relic model as a clear differentiator, helping them maximize the value of their budgets by avoiding the shelf, where an overage penalties associated with many of our competitors.
Have you been migration largely complete complete.
Houses can be single minded and growing the construction business going forward.
Managing both our legacy and new businesses simultaneously.
Third our total paid customer base is growing again after many quarters of declines.
Increases the pool of customers, we can nurture to higher levels of value to both in product and sales assisted efforts.
Fourth we're exiting the year with non-GAAP gross margins in the low seventies after four straight quarters of non-GAAP gross margins in the sixties. Another early indicator of the progress we expect to see towards healthier margins in the quarters to come.
Fifth and finally, our platform has never been stronger.
Our data centric approach to observe ability allows us to release waves of new innovation in FY 'twenty, two which further differentiated us from competitors and lay the foundation for increased adoption across our nearly 15000 customers going forward.
We not only extended our lead with APM by introducing new capabilities like errors in Boston code stream, but we also revamped our major platform capabilities like logs and infrastructure monitoring while extending our differentiation with brand new capabilities like explore pixie and N P M.
Historically customers came to new relic, primarily for APM, but our all in one platform approach is broadening the appeal of our offering.
Almost 26% of our customers use all four of our top capabilities APM infrastructure logs and browser.
And that number moves to almost 50% of our largest consumption customers.
Michigan increase from one year ago.
Well, that's why 22 was a transformative year. There is a lot of work remaining I've had the opportunity to talk with many investors over the past few quarters, since becoming CEO and I've been listening to your questions and concerns.
I've identified four priorities for FY 'twenty three.
Our top priority remains the same as FY 'twenty two.
The return of our revenue growth to market growth rate, which we've stated as 25% in the intermediate term.
We learned a lot about the unique aspects of a consumption model this year and exited the year with a better understanding of the seasonality and how customers consumption can fluctuate for a variety of reasons.
We factored that into our plans for FY 'twenty three in an effort to provide greater visibility into the business.
Give you a better sense of how our business performed in FY 'twenty two we have supplemented the discussion about revenue.
Our investor letter.
We used a metric called consumption run rate, where C. R. R, which is a more real time view of actual platform usage.
We report our monthly cir for the past 13 months in the Investor letter and you can see steady growth in consumption throughout FY 'twenty two.
Vacation of increasing platform usage in business help.
With the exception of the seasonal dip we reported last earnings call, which Mark will expand on in just a moment.
Following the debt we've seen a steady rebound in consumption run rate with a strong March and April .
While FY 'twenty three is only our second year in the model and their first with the majority of the business in it.
We believe this will be a helpful baseline for understanding architectural growth looking forward.
Our second priority is to continue to improve our non-GAAP gross margins and return to non-GAAP profitability exiting the year.
For FY 'twenty, three if you'd like to exit the year with non-GAAP gross margins in the mid seventies.
The three main things that will drive this result, our topline growth.
Offering customers, a broader menu of functionality and price points and fully exiting our data centers by the end of FY 'twenty three.
We also intend to improve operating margins and are targeting to exit the year with modest profitability on a non-GAAP basis.
Our third priority is to accelerate account growth.
In addition to the investments in product led growth we are investing in internal sales people and partnered by the efforts to accelerate conversion of our free tier funnel into paying customers.
<unk> will build on the demonstrated successes we had in FY 'twenty two.
Our fourth priority is to help customers realize the full value of our platform.
Customers get the most value and the greatest economic benefit when they make new relic the standard for observe ability across their enterprise.
And that's why 'twenty two we landed many of our key innovations and the primary focus for FY 'twenty three is to drive breadth and depth of adoption across our customer base for the dozens of capabilities already in place beyond D. P M such as infrastructure Pixie logs network Coldstream and more.
Our product and go to market teams are both focused on helping customers onramp and benefit from our all in one platform model, which will accelerate our growth.
In closing FY 'twenty two has been a pivotal year for new relic, we've come so far and achieved so much this past year and I'm, even more excited by the road ahead.
We're hosting our annual future stack conference next week in Las Vegas, and have a number of exciting announcements. This year. In addition to the analyst day on May 18th.
In light of the CFO transition underway, we will forego updates regarding the company's long term business model, but we will provide updates on our vision and strategy, including product roadmap and go to market approaches and we will take your questions regarding FY 'twenty three priorities and targets.
We entered the fiscal year strong and with momentum, making new relic a source of truth for every engineer to make decisions every day using data not opinions at every stage of the software lifecycle.
Before handing it off to Mark I want to take a moment to thank him for the contributions he has made can be relevant.
Mark was employee number three at new relic and served with incredible 14 years as new relic CFO .
Mark will lead to new relics IPO in 2014, and it's been a terrific partner to me throughout our business transformation.
We wish him all the best on his future endeavors.
We have an active search underway for our new CFO and I appreciate that Mark will stay until the transition is complete.
With that I'll hand, it over to you Mark.
Thanks, Bill and good afternoon, and good evening to everyone on the call.
I'd like to briefly recap our fourth quarter financial results discuss some metrics, we are sharing about the business and provide some additional commentary on fiscal 'twenty three.
First the fourth quarter recap.
For Q4, we reported revenue of $206 million.
At the high end of our guidance.
Representing year over year growth of 19%.
Q4 revenue was lighter than we hoped but we exited the quarter with a much better understanding of how to improve going forward.
I'll provide a bit more color on that in a moment.
As we shared on the Investor letter March came back nicely in April was stronger than March.
These are limited data points, we are encouraged by what we're seeing.
non-GAAP loss from operations was $16 million below the low end of our guidance, we provided for a loss of between 12 and $14 million.
While our non-GAAP gross margins were 71% and in line with the expectations we set in February .
Our non-GAAP loss from operations was impacted primarily by our ongoing investments in our business to drive growth.
non-GAAP EPS was a loss of 24 cents below the low end of our guidance for a loss of between 19 and 22 cents.
I'd like to spend a few minutes walking you through the metric that bill mentioned consumption run rate or <unk> for short.
<unk> is the annualized dollar value of our consumption business based on usage.
By showing how consumption is changing in real time.
<unk> is a good indicator of engagement and health of the customer base as a result of the way consumptions converted into revenue.
It's not an exact indicator or predictor of revenue.
In fact over shorter periods of time, such as individual quarters change in CR and revenue may differ somewhat however over longer periods of time, we believe CLR and revenue will closely align.
We are sharing seer or in the investor letter for the full year fiscal 'twenty two as a tool to provide investors with more visibility into our consumption revenue growth as we move to a consumption model over the full fiscal year.
Although approximately 85% of our aggregate some commitments driving consumption is key to our success.
Let's see our as a backdrop I'd like to spend a minute going through the dynamics of Q4.
Following the success, we have had over the past year in transitioning our customers. We now are a consumption business.
As we and other consumption based companies have reported consumption slowed down starting mid December due to reduced holiday period usage.
And it took longer than we expected to recover.
Means that revenue in the December quarter finished on a soft note and business for the March quarter got off to a slow start with our first VR reduction January and only modest growth in February .
There were two major seasonal patterns at play here.
First the reduced usage due to the holiday period and second we also observed that those customers who were consuming far in excess of their commitments slowed their growth in the final months of their contract as a means to limit excess.
Given Q4 is our largest renewal quarter by far.
This had a dampening effect on revenue.
We understand these seasonal patterns far better now and are identifying ways to mitigate them in future quarters, which will help us provide greater predictability for the business.
March consumption growth returned to expected levels in April was even stronger.
Our business transition has been rapid and we continue to learn and get better we enter fiscal 'twenty three with an improved understanding the dynamics of our consumption business.
Finally, a reminder, that our revenue growth is driven by consumption where platform usage.
Proximately, 85% of which is backed by commitments where customers lock in budget to pay for their consumption, providing us good predictability the.
The revenue from consumption over commitments is more challenging to forecast.
However, as the monthly CR data shows margin in April are on a good trajectory.
Now I'd like to share our first quarter in fiscal 'twenty three guidance for.
For the first quarter of fiscal 2023, we expect revenue between 212 in $214 million, representing a year over year growth of between 18 and 19% respectively.
We expect a non-GAAP loss from operations of between 23 and $25 million.
And we expect a non-GAAP net loss attributable to new relic per diluted share of between 35 and 38 cents.
For the full year fiscal 'twenty, three we expect revenue between 920 and $930 million representing year over year growth of between 17 and 18% respectively.
We expect non-GAAP loss from operations between 20 and $25 million.
non-GAAP net loss attributable to new relic per diluted share between <unk> 31, and 37 cents.
We expect to be modestly profitable on a non-GAAP basis exiting fiscal 'twenty three.
Lastly, before we go on to Q&A as you may have seen in the press release I announced my retirement from new relic. This afternoon.
It has been an honor and a privilege to lead such a dynamic and visionary organization I am so proud to have played a role in helping you really grow and deliver on its mission of helping millions of developers and engineers build better software.
And from 2014 years is now time for me to retire from new relic.
I remain committed to ensuring a smooth transition and will continue to lead the company until there's an appropriate successor is identified who help execute against strategic roadmap we've laid out.
I want to thank all of you for your continued support of new relic and I look forward to the continued success of the business.
And with that operator, please open up the line for Q&A.
Absolutely we will now begin the question and answer session.
Like to ask a question. Please press star followed by one telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question. Please press star one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking a question, we'll pause here briefly ask questions.
I registered.
The first question comes from Rob Oliver with Baird.
Your line is now open.
Great. Thank you. Good afternoon, guys. Appreciate you taking my questions Bill I had one for you and then Mark had a follow up for you as well so bill I wanted to ask first on the.
Go to market side, obviously over the past year, you guys have made a ton of changes around the sales force and the go to market you mentioned in your letter in your prepared remarks that the focus for 'twenty three was really to get sales focused on kind of the whole platform, but as you kick off the physical here. Just when you were here was wondering if you could talk a little bit about.
Go to market any changes or any update there and then I had a quick follow up thanks.
Hey, Thank you, Rob a really timely question.
It was just a few weeks ago I actually had a chance to bring the entire go to market organization together for our sales kick off.
This is really the first time that team had been together in over two years since the pandemic began and it was my first chance to actually be with them since I joined just a month before the pandemic.
Started and everything got locked down.
The energy.
All week was really contagious as they had exited FY 'twenty two with a ton of momentum.
It was especially striking for me and the leadership team given the way we started the year. If you remember announcing a restructuring of go to market and then the significant compensation model change, where we moved from commissions being based on commitment to 100% consumption base.
And throughout the year. The go to market team has really been over performing expectation as a whole and the sales kick off event was really a celebration of that jump start to the new year.
They shared some pretty incredible stories.
Over the course of the week, maybe a few anecdotes I'd share here for example in gaming we had a large seven figure customer upgrade to become our second largest globally.
<unk> set a new record for a multi year commit and a sizeable eight figure level in.
In financial services, when customer doubled their investment with an eight figure upsell over multiple years to new relic.
Yes on average 50 terabytes a day.
In travel we saw one customer in Q4 moving up from 150.
Dollar commitment to more than 10 X that.
This quarter now over seven figures.
And in technology, one of our customers increase their annual commitment, 50% moving into the eight figure spend each year for the next three years.
We've also been talking about this new customer acquisition channel with three tier that we launched when we.
We.
<unk> launched the platform.
In mid 2020, and how it's been a great channel for getting new customers into the platform at a free spend level and fun to watch them, graduating to more significant levels of spend.
Well this last year, we saw that happen with the customer coming in in the free tier. This is a global cloud native banking platform headquartered in London.
They signed up for the free tier got engaged by one of our SDE ours and this is a head to head battle with a leading competitor for new relic was chosen for a multi year million dollar commitment all starting out with an engineer coming into us through that brief here. So the go to market organization.
<unk> is really.
Tom to their energize going into this fiscal year, such a night and day difference from where we started the last fiscal year and I think.
That's going to bode well for us and growing the business this coming fiscal year.
Great Okay.
Really appreciate all the color Phil.
Super Helpful. And then Mark will first of all congratulations on your retirement and Trillium.
It's really been a pleasure working with you over the years and I'm going to Miss having you round. So all the best.
And then.
I did just wanted to ask around the so unless I missed it which is a possibility in the letter you guys did not address the additional.
Expenses in 'twenty three.
Just wondering if you could provide any more color around those expenses their use.
And thought process behind them. Thanks, guys.
Sure. Thanks, Rob appreciate it it's been a pleasure working with you as well.
The fiscal 'twenty three guide as you can see you know we're looking at a loss in Q1, and then roughly breakeven for the rest of the year and over the last three months what we've seen is they are.
We're seeing some things tick up that we don't expect to tick down, notably wages and salaries, there's definitely some some pressure in that regard no inflationary pressures.
And travelling E T.
G&A expense, they're starting to kick in and it'll take some time to absorb those into our into our budget and we don't expect those to tick down.
But on the other hand, there are some expenses in Q1 that are unique to the quarter. We've got our future stack conference. We had our kick off beginning here our annual kick off the first time, we've had these in person events and so I think they've been great are the kickoff was terrific future stack going forward too great in person.
But those two events are going to add about $10 million or close to $10 million and expense in Q1, which would not be repeated and so overall we think.
We're basically looking at breakeven for the last three quarters of the year AR and then leading to guide we mentioned for the full year loss between $20 million to $25 million. However, I would remind you that and everyone that we have the double bubble Commission expense fiscal 'twenty three is the last year.
With that that expense is about $23 million in fiscal 'twenty, three and so that will be as an expense. That's a noncash expense all hit us this year and will go to zero in fiscal 'twenty four.
Great. Thanks again guys.
Thank you.
Next question comes from.
Sanjeev Singh with Morgan Stanley .
Please proceed.
Thank you for taking the questions and satisfy you go Mark really appreciate working with you for.
Last several years now.
Also thank you for the consumption.
Because that's a revenue run rate metrics I think definitely that would be.
Useful to understanding where it used to just going over time I wanted to understand a little bit about the behavior of the cohorts that we saw.
In December heading into the March quarter, and particularly I'm trying to understand.
The dynamic where customers that have been consuming excess of spend.
Dampening dampening or limiting their usage.
Just give us a sense of like some of the factors that are driving that and why is that going to be a dampening effect in your revenue because I would assume that their consumption used to just sort of baked into their run rate and so when they were neither would I would assume that it's sort of baked into the usage number. So you can just walk through the dynamics on on some of these cohort behaviors as they come.
It up at the end of the contract and the impact on revenue. It really appreciate that thank you.
Yeah.
You bet. Thank you Sanjay.
As we've described before we break customer's consumption into several cohorts everything from running very cold, meaning under their commitment level significantly burning very hot are consuming.
Are in excess of their commitment.
And.
We monitor.
Monitor customers' usage in our go to market organization.
Rallies around those customers to try to help them ensure they understand where their consumption is trending as well as making sure that they're getting value from the platform.
What was interesting in Q4 that we saw it.
That final cohort the ones consuming far in excess of their commitments.
So think 130 to maybe 200% of their commitment range.
Slowed their growth in the final month or two of their contract and.
That's probably driven out of a number of factors. They obviously want to limit excess and go into their new conduct in cycle.
Being as efficient as possible.
It's also coincided with the end of the fiscal year and the beginning of a new calendar.
Calendar year.
And also could you know.
Potentially give them.
Greater negotiation leverage so.
D of factors there are slowing their growth they still ended their contract or in excess of commitment on the whole. So this has not been.
Significantly dialing down it's more moderating consumption when they were already in far in excess of the commitment.
And that's a behavior that we've now seen a clear trend around in Q4.
Something we feel like we need to better mitigate going forward.
What are the learnings from that for example is that we need to be better at helping and supporting our customers and getting budget, where their consumption throughout the fiscal year. So that they don't end up in that place where at the very end of the contract they.
They may not have you know.
Budget.
Secured underlying all of that consumption.
And making sure that they recognize the value they're getting from our platform throughout the year. So that's.
Those conversations on renewal are based and an ongoing conversation around value.
There are some of the changes we're making in FY 'twenty three both early renewals as well.
Customer value plans that underlie the consumption throughout the fiscal year.
Yeah.
Super helpful. Don.
You're saying some of those dynamics as we entered this fiscal year I think some of the things that you said at recent conferences and.
On the last earnings call is that either.
Sales team is really going to be.
No free up to really drive more usage of customers do that sort of a helping hand to drive them more usage can you talk about some of the initiatives that you have in place to drive that increased usage and then the second part of that question kind of goes to the comment that Mark made is that what would be the impact on our revenue.
So if the if your sales team the success successful this year and getting customers to use more either more data or where users.
That necessarily translate into upside into to your guidance and sort of the magnitude of the upside to your it guys I'm trying to understand this bridge between usage and ultimately all to ultimately revenue and how that how that's looking going into this next fiscal year.
Yeah. Good question. So on the first part of your question around how we help customers this fiscal year differently or in addition to last year.
A pretty significant shift last year was all about migrating the business from the legacy model into the new consumption model and as I've noted before at the very intensive effort to help customers understand.
Our full capabilities and value of the platform, the new pricing model and how consumption, whereas it was new for our sales team. It was new for our customers. It was a learning experience throughout the year and I'm. So proud of the progress we made so many companies struggle with that transition between legacy business, a new business for multiple years, we were able to effect.
As we migrate.
87% of the business.
And just about six quarters.
It's now happening is now the majority of the business is in the consumption model.
Orienting our go to market organization around value realization.
Sort of two parts to the go to market motion first part is around.
<unk> creation or helping customers identify the areas, where our platform can save them money in terms of hard cost savings through for example tool consolidation or increased productivity increased business performance their own top line revenue or customer satisfaction reliability those kinds of things.
So we have a part of our go to market organization that focuses on the value identification creation opportunity and then increasingly we're investing in our technical solutions part of or customer adoption part of our go to market organization, it's all around value.
<unk> realization.
What this team does is once the IDE.
Opportunities identified they held jointly document a consumption plan.
Jointly with the customer helps them realize their own business metrics through consumption of new relic.
That ties their consumption with their spend with their own internal metrics.
Or how they want to see the value recognized whether that's hard cost savings on their side improved SLA is improved customer experience better topline revenue or whatever the case may be.
And so.
That's a significant new motion investment for us and the customer adoption side, we're investing increasing resources are shifting go to market budget towards that area to support the consumption pattern of our customers.
The second part of your question.
That is now how we recognize and report revenue each quarter is now the 87% of the businesses as a model. It is based on that consumption pattern. So when customers increase the amount of data that are sending us or the number of users that directly translates to.
See our our that metric that we're sharing in investment letter and then through our revenue recognition.
Place to topline revenue that we report for the quarter.
Sorry, I would just add to that as I've mentioned.
Earlier remark in.
In the short term here on revenue changes could could differ somewhat and I think if you look back historically, if you parse.
I'm sure folks are really doing is looking at quarterly growth in Cri, and then trying to equate that to revenue and you'll see that there is some variability there and.
I think that was a function of the migration to the model and in large part, but in short term periods youre going to get that over a 12 month period and I really encourage people to take a longer term view. When you look over 12 months those two metrics I think will be very closely aligned and.
And when.
When we look at the when we look at the patterns of the underlying trends the secondary metrics. That's what gives us the confidence as we look forward.
But really it's ultimately.
C. R. R will be should be driving our growth and see our own revenue over multiyear periods views should be very closely aligned.
Understood. Thank you Bill I appreciate the thoughts.
Sure.
Okay.
Thank you the.
The next question comes from.
Adam Tindle with Raymond James Your line is open.
Yeah.
Hi, Thank you Bill I just wanted to start on priority to the return our non-GAAP gross margins to mid Seventy's and modest non-GAAP profitability exiting fiscal 'twenty, three just curious and sorry, I'm managing multiple calls here, but why target mid seventies.
I'm, just thinking you don't necessarily control data versus seats in the mix of that you know is there things that you can do to influence and achieve that target and secondly, you know how how we can think about how variable opex is in case that mix it does skew.
What would that cause any issues in achieving that non-GAAP profitability metric. Thank you.
Yeah.
Yeah. Thanks, Adam Good question.
As you noted we're targeting mid Seventy's for FY 'twenty three that's not the end points, we would like to get back to the high <unk> low 80 over a longer term, but mid seventies feels like a prudent target for this fiscal year given a couple of factors.
One of the drivers for improving gross margins as I noted, we do plan to exit our data centers.
By the end of this fiscal year.
That has been a double bubble effectively that we've carried the last two years will be exiting on time as planned.
It will improve margins, we're also though more importantly really.
Getting into a stronger pattern.
Engineering excellence around Cogs.
As we build out and scale our services we have.
Noted before that a lot of the cost pressure that we've seen is driven by the strong data growth, which is a very low margin.
Business for us.
50% year over year plus data growth.
And reporting has put pressure on that those services also we plan to drive improvements and efficiency around will get us to that mid 70, Mark and then those will continue.
Into FY 'twenty four to get us back to the high Seventy's.
Low eighty's.
Yeah.
Addressing the following up on that on that.
Of the savings that we expect to driving gross margin, we think roughly a third of that is going to be coming from the migration.
The data centers and the remainder being the efficiency and optimization improvements that bill mentioned on the on the expense side. We showed good improvements in go to market efficiency in fiscal 'twenty. Two we expect to continue those going forward into fiscal 'twenty three.
And so I think we do have a good plan in place that will allow us to achieve our goal.
I mentioned earlier that you know.
Wages and compensation expenses are certainly certainly picking up and I don't know if they see any any change in that area, but what we do overall.
Feel like we're making good improvement with what we're doing both in how we structure. The go to Marvin radiation as well as all the product led growth initiatives, we're doing where we're getting much better and much more efficient at not only bringing customers on and you see through our paygo business, but also nurturing and growing those customers to higher and higher levels.
No. That's helpful. Maybe just as a follow up though on the infrastructure product.
Maybe you could speak of the competitive differentiation in that product I think investors have a perception that data dog has kind of run away with that space. So you know how how you compete from the product standpoint, and secondly on go to market.
You know a lot of that success is in partnering with the hyperscale or at least that's the perception spin up a new cloud instance, on AWS and Azure and you're buying an infrastructure at the time of that.
Is that an opportunity for you. So you know competitive differentiation on product and to go to market with that infrastructure product. Thank you.
Yeah.
You mentioned the infrastructure products and the differentiation there.
To be clear one of the differentiations with new relic versus say a data dog is our platform approach.
Competitors like data, Doug you purchase for the vertical is application specialized applications like infrastructure monitoring or log or ATM separately as distinct products and those each have distinct prices they have distinct user experiences and often.
<unk> data stores underneath them with new relic.
The pivot.
Made a few years ago.
Is to really optimize for that all in one platform experienced and it starts at the data layer.
We've consolidated all telemetry types and all preliminary sources into one massive hyperscale platform with incredible economics.
We now charge effective June 1st 30 per gigabyte for.
And that that price effectively translates to a significant.
Cost advantage for our customers.
Per incremental.
Host or application.
So differentiation there comes in a few forms first in that all in one platform approach thats much simpler to plan for the budget for and for engineers to use and then second caster economic advantages in scale as you add more more hosts or more applications.
And.
The benefit from the cost economics of our Hyperscale platform.
In terms of go to market around that increasingly with FY 'twenty three as I mentioned, we're going to be driving more platform adoption across capabilities as I shared in my opening remarks, and as we document in the Investor letter we've seen significant.
Improvement in platform adoption, even in FY 'twenty two despite the fact that migration was the focus.
We saw customers move from 15% to 25% across all customers using our top four capabilities that include APM infrastructure logs and our browser product.
And that number goes even higher when you look at customers, who commit and spend more than $25000 a year with us up to 50% of those use those top core product. So.
That's a I think an advantage for us and our go to market motion that we want to really focus on that will drive increased value as our customers use more of the platform and increase consumption and revenue growth for the company.
Thank you.
Thank you.
The next question comes from Richie Deloria with RBC. Please proceed.
Oh wonderful. Thanks, Thanks, so much for taking my questions.
And to hear firsthand.
I guess I'm, just trying to decouple a couple of things. So if we look at the <unk> you had a really strong quarter.
In Q4, especially for the sub 25, K customers right, whether it's a trailing 12 month, so that would imply Q4 was even stronger than that.
First of all as you put out would represent.
I know, it's not an exact proxy, but if we look at revenue in the quarter from sub 100, K customers, we actually saw that decline sequentially.
Can you maybe speak a little bit to what's going on there is there.
Maybe strengthen the sub 25 K and on the 25 cable 100 kids makes about 100, K is doing well, but maybe walk us through the moving pieces. There and then I have a follow up.
We appreciate them.
I'm just trying to follow the year your comment about revenue declining in the under the under 100 I guess, what gave you that impression.
Do the math on on 100, Kay customers as a percentage of revenue and multiply it by total revenue in the quarter right. It was 81% in Q3, 82% in Q4 and I look at the total revenue for Q3 Q4, right that that has me and I know, there's rounding but at the very best it's flat right with with 100.
6% and our our.
That's where I'm trying to get at.
Yeah.
Again, sorry.
I'm ready.
Ready to retire I guess.
I'm missing something but I think we are seeing good growth in our over 100, K segment and I'm trying to undertake segment. So there could be some rounding in there.
The numbers, we're talking about one four to $1 six or something.
Perhaps that has had some sort of.
Impact.
Impact but.
But nowhere I think work.
We feel like we're doing good job driving customers up from the 25 K opt into the you know the next site. That's over 25 segment than that from that 25, K over 100 to the over 100 segment and we're seeing good growth.
Through the stack so.
I apologize, maybe we can follow up with that and and get to the bottom of that yes.
Yes, and just to quickly.
I mean, the only thing I would tell you is we're certainly seeing strong growth on the low end.
And.
You can see that in the paygo numbers, but but on the other hand.
We're not seeing declines in any any of that or any of our segments.
Yes, maybe okay, okay great.
Sorry, Yeah go ahead.
Yes.
<unk> is a backward looking metric to compare how customers.
Ben.
This quarter compared to a year ago and to clarify the numbers the less than 25 K cohort.
In Q3 was 127% in Q4 reporting $1 36.
Sizable increase as you said and as Mark clarified good growth really strong growth on the smaller customers with a greater than 25 K.
Cohort, we went from $1 15 in Q3 to $1 17 and in aggregate across all customers total $1 16 to $1 19 in Q4, so all customer cohorts.
As we look back compared to one year ago, increasing in our.
Okay got it got it thanks, and I'll make sure to follow up offline just to make sure I'm understanding it.
Second follow up I, just for my own understanding.
You're at through this consumption transition, mostly you said, 87% of revenues coming from are those on the new consumption model.
What are maybe struggling not understand is.
Given that Youre basically a vast majority consumption company at this time why are there still such wild swings in deferred revenue, especially in Q4, I mean, we saw it increase.
$90 million plus sequentially from Q3 to Q4, I know you have pre committed but my understanding was you still billing them in arrears. So I'm I'm I'm, just not understanding why deferred revenue moving maybe if you can just help clarify that would be really helpful. Thank you.
No just to clarify we most of our customers.
Permit for one year and most of our customers continue to pass upfront for that commitment.
What we bill in arrears are a paygo business, which as you know.
Lots of customer relatively small dollars and then overage so consumption in excess of commit we will build in arrears, but.
The up the commitment that folks make it we still almost always get that upfront and Q3, our December quarter and March as are our big quarters marched our biggest and so these are the times, where were 10 youre going to be getting the big the renewals and the big increases in deferred and then that has a subsequent impact.
On cash flow in Q4 and Q1.
Okay got it.
Yeah.
Can you also you also reiterate that.
As we mentioned the letter 80, 85% of our revenue is driven by these commitments that we that were paper upfront and then that consumption overcommit and the paygo that rest of that business is paid in arrears.
Okay. That's really helpful. Thanks, Thanks, a lot and Marc by the way, let me Echo My colleagues, it's been wonderful working with you since since IPO and wishing you all the best in retirement. Thank you.
Thank you.
Thank you.
The next question comes from Erik <unk> with JMP Securities. Please proceed.
Yeah.
Yeah. Thanks for taking the question and congratulations Mark.
First off on on customer Count I am just curious as you shift your focus from.
Away from just migrating customers over to newer sales is that going to drive or accelerate the growth in new customers.
Okay.
We are doing things in FY 'twenty three to grow new customers. In addition to the free tier.
Funnel that we've been talking about all year in FY 'twenty, two which continues to perform really well and we continue to make both.
<unk> improvements as well as sales improvements in terms of converting those free tier customers to paid customers. We are investing to increase internal sales as well as partner program to drive new customer growth and those are the programs around which.
Given us confidence to me.
That priority around accelerating new customer acquisition in FY 'twenty three.
What kind of metrics.
The metrics, we track for that you give customer count you had to be had about 700 customers added I think over the course of a fiscal 'twenty two.
Might we see that accelerate in a significant manner any any comments in terms of what kind of acceleration we might see.
Yeah.
Yes, we haven't expressed a specific target, but we do expect the growth rate to accelerate I'd also point you asked that.
We sure separately from the total paid customer count also the Paygo cut.
Customer growth that we experienced in FY 'twenty two.
Is the primary source of new customers coming into the platform.
We will continue to share that and that is where you will also see accelerating growth.
Okay.
And then it looks as though your Opex is going to really step up as we get into Q1, and then it is more or less levels off at that at that point for the remainder of fiscal 'twenty. Three let me know if that's not correct, but from your guidance that's what it looks like from my perspective is.
Is that to suggest that the hiring is going to slow as you get into the latter part of 'twenty three or how should we think of a impact from a head count perspective.
We are we are.
Looking to really frontload hiring, but the biggest impact there are the onetime events that we've had between future stack and our our company kickoff and personal first time references earlier that was upwards of $10 million in spend in Q1 that won't be repeated in subsequent quarters.
Okay very good thank you.
Thanks, Eric.
Thank you.
Our next question comes from Mike <unk> with Needham <unk> Company. Your line is open.
Hey, guys. Thanks for taking the question here I guess, the first really comes back to the changes in consumption that we saw in.
In the most recent quarter and how customers were depressing, where dampening their usage and I'm coming at it from two different ways in and they both competing with each other I'm trying to figure out, which one is right or if I'm mischaracterizing, but the first one if I'm dampening my usage is probably because let's say I work for X Y Z company.
He is the VP right and I need to I'm looking to make my number for the year right. That's in full support.
Me dampening usage to make sure that the company does well and I get my bonus. So the first question is how do you fend that off and then the second question is if I'm thinking about the massive market trends, we hear about absorbability being this mission critical tool.
Just struggling to understand how an organization is depressing.
The provisioning of new users or the the holding back of New project starts in this environment, where digital transformation remains top of mind for all of these companies can you help me square those two items away.
Yeah.
So I think youre right.
If youre a budget holder.
And youre coming into a renewal cycle and you realize.
Maybe you've heard it all along but you are kind of trying to square up the new budget asks for the new fiscal year with what your current run rate is.
That's a pretty motivating function to say Wow are there any efficiencies that can drive on the spend.
So to make the delta not quite as large.
And.
Your question was how can we help customers mitigate that well I think the realization for us is when.
When we let that gap grow so significant and again the cohort we're talking about our customers who spent who are consuming.
Far in excess of their commitment to 130% to 200% of their commitment where we need to do a better job of is helping them make sure. They understand the value, they're getting from that consumption as well as help them secure the budget throughout the fiscal year throughout the contract cycle.
And.
Because consumption one of the beautiful things about the consumption businesses.
It's organically grows throughout the year as the customer identifies ways to use the platform to get more value that's not often a top down only decision.
Bright engineers will discover new projects.
New optimizations that can drive if they can instrument and get more data maybe the product gets shared virally within the organization as more engineers discover its value and start consuming and then at some point the budget holder needs to come to terms with that increased consumption. So we can help them by informing them keeping them up to date.
And helping them secure the budget throughout the contract cycle, rather than wait for the renewal period.
And to square the second part of your question around digital transformation is definitely a top global priority is driving.
A lot of the growth that we see.
How can they possibly afford to scale back even a little bit I would say there is always efficiencies to be had.
Even with our simple user and data pricing model.
When we talk about these customers.
Oftentimes there.
Six seven figure.
<unk> spend over the course of the.
Of the contract cycle and when we talk about slowing their growth.
Again, we're talking about.
Being more efficient about which users are accessing the platform. It's engineers, who have rotated out of the company and we've seen a lot of resignations and people changing companies cleaning up those.
Those user lists.
As an example is the way that people make sure that their spend is being super efficient or.
Looking at all of the sources of telemetry that they're gathering and saying do we really need to capture all of these are there projects maybe that are more in a maintenance state were steady.
Steady state and we can.
Ramped down the consumption or put it towards new projects, just coming up that maybe youre not at scale.
Those are kind of examples that a VP of engineering.
Be looking at as ways to manage that run rate going into their new contract.
Thanks for that I really do appreciate it and then I guess my my follow up in the Investor letter. There. There's talk about you guys introducing a higher priced option for data ingestion and I think even on the call you guys had alluded to.
30 per gig effective June one this.
This is the first time since we've gone through this migration that you guys are now talking about a different pricing mechanism on the data ingest. So can you help extinct through what's causing the change in that messaging and strategy and the follow up on the gross margins. If we don't return to what's been a normal normalized two thirds one third.
Ratio for user to data.
How should we think about that normalizing longer term I think that the thesis has been that users over time will follow the data and I'm. Just curious do you guys have evidence of that showing up yet our users growing and following the amount of data that they'd been bringing into the new relic platform.
Yeah, great questions.
You noted.
Those are the two announcements we made a few weeks ago regarding data and data prices.
The strategy going in you have exactly correct we.
Believe that data is the.
The first sort of.
Leading indicator of growth within an account.
It's the original source of.
The insights that we can bring our customers is now capturing the data we can help them make more data driven approach and so we intentionally priced our data offering when we launched the platform two years ago to be extremely cost advantageous for every incremental host or application.
We wanted to price it effectively cost plus and thats been very successful for us we've seen data growth rates, 50% above year over year as customers have expanded the amount of telemetry that they send us to get those insights.
We are you know.
Have reassessed, how we look at those costs of course, our costs have been going up over the last few years and we've increased the value considerably without changing price for a few years, So we announced the new standard.
The data price is 30 per gigabyte.
And continues to give customers all of the benefits and value that we have been sharing with them over the past few years.
And we don't see that relatively modest price change really inhibiting our goal to capture as much of our customers' telemetry as possible.
Don't anticipate significant pushback on that price increase.
We are though introducing.
Our new data plus offering which has even more benefit to our customers and is based on some of their feedback and the features and value that they've been asking for.
Including increased retention rates.
Including higher query limits.
Some of our customers, who send us petabytes of telemetry and want to be able to.
In real time query that cigna.
Significant.
Date ranges and across multiple engineers.
Need additional quarry performance capacity and we can allow that with the data plus offering.
As well as.
New data sets and new capabilities that we're bringing to the platform will be on top of the data plus offering. So there is a higher priced.
Offering there'll be entering the market June 1st as well that will be selling into customers to give them even more value.
As to your question around whether that mix will change I think.
That is still to be determined base.
Based on acceptance of that data plus SKU, we could very well see.
The mix shift towards more data.
Contribution to revenue versus users.
But we will see how the acceptance of that new data plus SKU works out.
Great. Thank you very much guys.
Thank you.
The next question comes from Michael <unk> with Keybanc.
Please proceed.
Hey, guys. Thanks, Mark of course, congratulations best of luck Greg.
Two questions around consumption.
First.
You cited a bunch of seasonal factors and behavioral factors I know, it's tough but are you able to parse how much of it was from that versus macro or other factors.
First question the concern in other words, the consumption say shortfall.
And second this cohort.
The cohorts the March cohort.
We know that the prior two cohorts that were new to the pool of funds.
Probably you could back into growing overall their consumption.
<unk> year over year.
That's about where we ended up with a march cohort as well.
I guess the first question.
Macro.
We don't see we have not seen a macro impact on demand on the topline topline demand.
It seems like we're hearing more and more of our customers, becoming more cost cost conscious and to the extent that happens going forward. I think we are fairly well positioned given we're in a space that yes as earlier mentioned variability people really want it and I think our cost model allows.
People predictability and a very value driven offering so.
I think that yeah.
Well that will set us up well going forward.
In terms of the overall percentages.
Various cohorts, we haven't we haven't given explicit numbers around the various various cohorts.
And I guess I'd, probably want to stay away from doing that and look more at our customer base as a whole given we're in a consumption business.
The customer base and consumption should increase throughout the term of an agreement and it's not really I mean, if we think about renewal dates and what are they doing about renewal dates and things like that there are some there are some impacts that we have to.
Talking about Bill mentioned, we've got to make sure. We are on top of and we are ready for and we can can work to prevent but I think overall in a consumption business.
Where you are in the contract should not impact your your your.
Growth rate and so I wouldn't encourage you to just look really at the at the customer base as a whole in the numbers as a whole year over year growth rates things like that much more so than in any individual cohorts.
Yeah from a from a growth standpoint, that's the way we look at it and we look at our business will take growth in Q1 from customers that are going to renew in June and just as much as we can take it from customers that renew in December .
Thanks, Mark and again good luck.
Thanks.
Thank you.
This concludes the question answer session I will now pass the conference back over to the management team for closing remarks.
Alright, Thank you everyone for joining and for your questions.
And thank you Mark, especially as he announced his retirement today, we really appreciate 14 years of service and the ongoing support through the transition.
One final reminder, we do have future stack next week in Vegas. It will also be streaming the analyst day for those who want to join but we invite everyone to attend in person we can be a great event.
Customers, New partners and talk with us about the future of the business. Thank you everyone again and have a great day.
Goodbye.
This concludes the new relic for acute FY 2022 earnings call. Thank you for your participation you may now disconnect your lines.