Q2 2023 New Relic Inc Earnings Call
<unk> afternoon. My name is Bailey and I will be your conference operator today at this time I would like to welcome everybody to the new relic second quarter fiscal year 2023 earnings conference call all lines have been muted.
To prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
Would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw this question. Please press star followed by two thank you.
It is now my pleasure to introduce your host English <unk> senior Vice President of Investor Relations and corporate finance. Thank you you may begin.
Good afternoon, and welcome to our second quarter of fiscal year 2023 earnings call on the call with me are Bill Staples, Our Chief Executive Officer, and David Berger, Our Chief Financial Officer.
On our Investor Relations website, you can find the earnings press release, and then Mr summary, slide deck, which is intended to supplement our prepared remarks. During today's call. In addition, an audio replay of this call will be available on our website IR dot new relic dot com and a few hours.
During today's call, we will make forward looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today.
Actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-Q and our upcoming second quarter 10-Q to be filed with the SEC.
Also during this call we will discuss certain non-GAAP financial measures, we have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results and with that I'd like to turn it over to bill.
Thank you and Joe I am pleased to report another solid quarter with revenue of $226 9 million, a $10 4 million sequential increase over last quarter.
Our non-GAAP operating profit was $6 9 million, a $24 million improvement over last quarter.
Importantly, this also represents our first profitable quarter in two years.
Last quarter, we told you that we recognize the importance of driving both growth and profitability.
And then we would pursue cost discipline, while continuing to invest in our future.
Today's earnings report is the first installment on that commitment.
Credibly proud of the new relic organization for embracing this mentality, which we believe positions us best to deliver a compelling value proposition to customers, while creating sustainable value for shareholders.
Dave will share more about our financial performance in just a minute as well as our updated guidance. However, before I hand, it over to him I'd like to remind everyone what makes new relic differentiated and unique.
Our product and our go to market strategy.
In 2008, new relic invented cloud APM for application engineers.
Today, we are a source of truth for all engineers to make decisions with data across their entire software stack and across the software lifecycle.
There are an estimated 25 million engineers in the world across more than 25 distinct functions.
Today, the vast majority of those engineers, either don't have access to data about the performance and health of their system.
Or the data they have is tied up in legacy monitoring tools.
We see a variability as still a relatively new and emerging practice that will grow over the coming decade.
We have been transforming our software and business model to win in the long run while.
While competitors still selling an array of specialty tools that disparate rates propagating the customer challenges of the past decade, only new relic provides an all in one platform that is built and sold as a unified experience and cloud scale data platform for every engineer.
Let's take a look at how our strategy is playing out and some recent highlights.
Let's focus on customer acquisition, unlike competitors, who land new customers with a sales led approach only new relic offers a unique perpetual free tier that offers every engineer an opportunity to learn and master observe ability no credit card required or fear of blocking.
Since launching our free to air and pay as you go model two years ago, we've been working to steadily increase the efficiency of this experience and nurture customer value to paid levels in.
In the second quarter, we added over 800 net new paid platform customers using the high volume low cost product led growth model.
At this rate new relic is now, adding new paint platform customers at industry leading levels.
Our progress here is masked by a long tail of small APM only legacy customers, who signed up years ago and continue to pay us small amounts each month.
But who spend is not increasing and whose churn partially offsets our new customer growth.
This fast growing cohort of customers are new to the platform and embracing full stack of durability practices at a rapid rate. It includes companies of all sizes from individual developers in the exploration phase to startups getting off the ground as well as large fortune 2000 companies with engineering teams seeking to modernize their.
Nearing practice.
The spend in this customer cohort ranges from a small initial monthly amount to five figure annual or multi year contracts.
In fact, the team was able to nurture several customers away from leading competitors and into six figure contracts.
I can tell you about one of them timber.
Our consumption based pricing model was the driving force behind our recent deal with timber a fast growing company in Europe , using digital technology to make electricity consumption smarter.
They evaluated one of our close competitors, but found that our host based pricing structure of competitors limits agility.
With new relic, they get better economies of scale as their cloud infrastructure grows and predictable pricing as they expand their engineering team.
They also appreciate how new relic provides the opportunity to ingest telemetry data from any source and works well with modern micro services architectures on the cloud, which makes correlating data from infrastructure hardware mobile apps and web apps much easier.
Next let's turn our focus to our sales led approach customers graduate to ourselves led motion when they expand consumption beyond $50000 annually and wish to make a contractual commitment to get better rates and receive additional technical services and support.
Our sales led motion this quarter were strong the sales team is focused on three key priorities.
Number one nurturing value realization with our customers against our committed spend through increasing platform adoption and usage.
Two helping customers align their contract commitments with their increasing usage and number three opportunistically landing new large enterprise customers.
Let's talk through examples of each of those three priorities.
First I'll look at consumption.
This quarter, we saw customers increase their consumption run rate in aggregate by net $50 million a record one quarter increase and driven by increase in both users and data.
A few examples of some of the biggest increases one of our large streaming media customers increased their CR from four six to $5 9 million during the quarter.
A telecom went from five 7% to $7 9 million a beverage company increased from three 1% to $4 <unk> million.
And an online retailer moved from eight eight to $10 8 million in just one quarter.
The strength of <unk> growth this quarter demonstrates the excellent product market fit and power of the consumption business model.
With <unk>, our growth continuing to outpace customer commitments. We also see a continuation of the trend of customers, who manage consumption down to budget, especially in the final quarter among many of our accounts.
I've highlighted this in the last few earnings calls and the gap between <unk> and commitments increased this quarter. Despite strong performance in contract renewals.
Q3, and Q4 represent our opportunity to help the majority of our customers who are up for renewal to plan and secured budgets to support their ongoing consumption needs.
Second lets look at a few examples of how we're helping our customers aligned commitments to support the increase in consumption.
Our customers are looking for ways to navigate through shifting economic social and technological change by consolidating tool spend from other vendors and standardizing their observe ability with new relic.
Our sales team increased our in quarter committed renewal base incrementally by three times compared to the quarter. Prior as we scaled the early renewal pilot that I talked about last quarter.
I am pleased that we were able to pull forward nearly $18 million in early renewals for customers, who are ready to renew ahead of schedule.
Let's look at how we're doing that.
A global online gaming Entertainment company increase their commitment from a mid six figure annual pool of funds to a three year high seven figure savings plan agreement.
The pandemic accelerated their digital transformation and growth in online social gaming.
Looking for more efficiency the company replaced four separate commercial and open source competitors to standardize on new relic as their absorbability platform, increasing the productivity of their engineering team and improving their costs.
New relic is now partnering with them in their cloud transformation journey to be 100% cloud native by the end of this year.
We continue to have success in moving large multiyear legacy customers over to the new platform for.
For example, this quarter in online travel company transitions from our legacy business, where they had a $1 million annual spend to a new platform agreement for three years and more than eight figure commitments.
They selected us over competitors as they were looking for a developer first observe ability platform to consolidate all their tools get deep cloud cost visibility.
And support our robust site reliability engineering organization managing their kubernetes environment.
And finally, our sales team continues to Opportunistically land, some very nice new logos this year.
For example, we recently landed a large high seven figure three year strategic agreement with a grocery retailer in the U K Tesco.
They had been using competitors, but once again found that our host based pricing model limited their ability to achieve full stack observe ability as they moved to a cloud native micro services oriented architecture.
We're helping them standardize observe ability best practices increase the reliability of their systems and identify business impacting use cases.
Our product organization contributed significantly to the ongoing efficiency improvements in gross margin and in parallel launched many small and large capability improvements to support increased value and consumption by our customers.
The number of customers using our top four capabilities APM infrastructure logs and browser grew again this quarter from 31% to 34%.
As customers adopt more of the platform their consumption generally increases as does our revenue.
The more of the platform our customers adopt the more value they get.
We also announced several key partnerships this quarter with AWS atlassian as well as strategic partnerships with multiple security vendors as part of our marquee innovation vulnerability management.
The public preview launched just a few weeks ago has already garnered record interest from our customers with several thousand engaged users and we're on track to begin general availability early in the new year.
We also completed a technology tuck in acquisition of <unk> cyber security for approximately $20 million in the quarter to extend this offering further.
In closing, we feel well positioned as a strategic partner to our customers, helping them navigate through economic social and technological change.
Our all in one platform is optimized to help them standardize their observed ability practice on new relic and thereby save money and increase productivity of their engineering teams.
Before I pass to Dave I'd like to address what we are seeing in the business climate and how we're responding.
Last quarter I told you that we had not yet seen a meaningful impact from the macroeconomic climate.
In an uncertain world, we would control what we can control.
Today, the macro clouds appear to be getting darker.
But our mentality remains the same.
Nearly every business leader I speak with today is looking hard at their budget and is looking for efficiency.
We believe that this environment will ultimately serve to highlight the customers that.
But we have superior alignment and value proposition of our consumption model versus competitors pricing models.
That said like our competitors, we are not immune to the macroeconomic conditions in the near term and we see these headwinds in our conversations with customers.
For this reason we are being prudent in our guidance, particularly given increased adverse FX impact consumption patterns and last year's seasonal variation.
Dave will share more detail on our financial performance and outlook in just a minute.
However, the macro conditions unfold, new relics response will be simple and in keeping with the strategy we have communicated to you.
First we will work tirelessly to help our customers succeed and drive superior value and efficiencies from new relic.
In an uncertain time, we are well positioned to serve as a strategic partner to help our customers as they undertake cloud migrations and digital transformation initiatives. We believe will remain investment priorities regardless of climate.
Second we will maintain a rigorous focus on cost discipline to drive profitability for our own business.
Doing so will enable us to grow our margins regardless of the business climate.
We're also providing fuel for investment in our future.
We are committed to continue to invest in innovation and our long term strategy. So we can deliver increasing value to customers with fair and transparent consumption pricing throughout this uncertain period.
With expanding leadership and new talent Onboarding I feel even more confident in our ability to execute and raise the standard of our performance.
We have turned an important financial corner with our first quarter with non-GAAP profit since the beginning of the transition.
And are committed to continued profitable growth.
We are humbled by the opportunity before us and hungry to continue striving toward our full potential.
Dave with that over to you.
Thank you Bill.
Our financial results for the second quarter reflect our team's focus and execution.
We exceeded the top end of the guidance for revenue and non-GAAP operating profit.
Our revenue was $226 9 million up.
Up 5% or $10 4 million on a sequential quarterly basis.
And an increase of 16% from a year ago.
non-GAAP operating income was $6 9 million a significant improvement over last year, when we incurred a loss of $6 4 million in the second quarter.
non-GAAP earnings per share was <unk> 13 on a share count of $68 2 million shares.
We are focused on delivering profitable growth and we achieved this milestone ahead of schedule.
I am pleased with the progress we made adjusting our cost structure during the quarter. We remained focused on delivering substantial levels of revenue growth and profitability in the future.
Turning to our growth during the quarter, we added more than 800 net new platform customers through our product led growth engine.
These customers come from diverse industries, and geographies, including Fortune 2000 companies and the public sector.
This is a key ingredient for setting up the foundation for growth in future quarters.
It is important to note are net new customer growth from <unk> is partially offset by the churn of legacy customers, who only use our old APM product.
This headwind naturally will diminish over time, which is why we are so excited for the companys future prospects.
non-GAAP gross margin increased another one two percentage points over our first quarter to 73, 7%. We are on track to exit the year with a non-GAAP gross margin of 75% or higher based on the execution of our key initiatives.
We remain confident we can expand our gross margin over time, even while investing in our multi cloud strategy.
During the quarter, we completed a restructuring the onetime cost was $7 $2 million and less than the range of eight 3% to $9 3 million. We have provided we expect this restructuring will save us approximately $6 million per quarter going forward.
Building on this theme, we continue to improve our sales and marketing efficiency.
As we look to next year, we expect to improve the magic number or Tac by 20% or more as the prior sales model Commission expense continues to add and our efficient product led growth sales motion continues to deliver results.
And finally in G&A, we also have been focused on reducing cost.
We will be reducing our real estate footprint through sub leasing and then allowing leases to expire in.
In line with our shift to the hybrid work model I expect each quarter, we will make progress in this area.
Shifting to the balance sheet, we ended the quarter with $833 million in cash cash equivalents and investments.
We have a convertible note that is coming due on may one 2023. It is our intent to repay this with our cash we are not currently interested in pursuing additional financing at this time that would dilute our shareholders.
Before moving on to our guidance I would like to share a few thoughts.
The business executed well in Q2, we're pleased with our progress on our strategic initiatives, including the rate of new customers customer base expansions and the level of consumption of.
Our revenue has increased sequentially by over $10 million in each of the last two quarters. However, like every business, we are not immune to the macro environment.
We are adjusting our full year outlook by 1% at the midpoint. It is driven by three factors.
First and foremost the impact of FX has been steadily growing each quarter and we expect the impact in Q3 will be more significant than in Q2.
On a full year basis, it may represent a headwind of $5 million to $7 million.
Second we also see customers being more budget sensitive.
And third we are also mindful of seasonal consumption patterns in particular over the holidays.
With that let's move on to the guidance.
For the third quarter of fiscal year 2023, we expect revenue between 230 and $235 million we.
non-GAAP income from operations between nine and $11 million and non-GAAP earnings per diluted share between 14% and 17.
For the full year fiscal 2023, we are adjusting our guidance range. We now expect revenue between 912 and $920 million at the same time, we are raising non-GAAP income from operations to a range of $8 million to $12 million and non-GAAP earnings per diluted share to a range of 16 to 20.
Two.
To conclude I am pleased with the performance we delivered in the second quarter and our focus on executing our plan equally an energized by our strategy and we're very focused on delivering long term profitable growth.
With that let's open up the call for questions operator.
Thank you.
Maybe I would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to turn that question. Please press star followed by two.
Again to ask a question. Please press star followed by one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question for today comes from the line of Kingsley Crane from Canaccord. Please go ahead. Your line is now open.
Alright, Thank you for taking my questions.
One certain belt, so thinking back to the new relic one platform release.
Really attractive data ingestion pricing idea was that customers could gain more value put more data into one platform you mentioned that Tesco in consort lens. We appreciate that I'm curious now that some time has passed.
Where do you feel you are in terms of customers standardizing on new relic versus continuing to be one option in the broader ecosystem.
Thanks, Kimberly great question as always.
I think when we launched our strategy little over two years ago, we had the sense that one of the most important customer problems to solve this.
This problem of tool proliferation.
And we really wanted to be a source of truth for engineers, not just application engineers, but those who manage the infrastructure of the company.
Either on Prem or in the cloud as well as network engineers and mobile engineers the full.
And very disciplined of engineering.
We set up our go to market strategy to follow suit to price on all data types and all data sources. So it would be easy to access data through our data platform at very low cost.
And then also easy to add engineers, regardless of specialty so they can all collaborate on top of that data.
In hindsight.
I'm really glad we made that move, especially given the current macro climate where companies around the globe looking for efficiency they've got the tool proliferation problems still and we now can and positioning our platform is the best all in one place to standardize on new relic, we can help offset hard comps they have.
Other vendors, we can also increase the productivity of their engineering team.
Bringing everyone into one place so it's easier to get the data you need to resolve the customer incident and keep the business up and running healthy. So I feel like we've made really good progress we understand the value proposition, we're getting much stronger and better at telling that value proposition and now that theres, a forcing function with customers.
Looking at their spend given the macro climate, we're seeing increasing success at that standardization and I shared a few of those examples earlier in the script.
Okay. Thank you Bill Thats really helpful. And then a quick one for Dave just to clarify I believe you mentioned on the call but.
<unk> at 119% and year over year revenue growth.
16%.
Is this due to the legacy customer churn.
It is certainly weighs on the on the math when you actually look at the business.
Okay, well congrats on a solid quarter. Thanks again.
Hey, thanks, so much.
Thank you.
Our next question today comes from the line of Sanjay Singh from Morgan Stanley . Please go ahead. Your line is now open.
Thank you for taking the questions and congrats on the underlying customer momentum.
David I had a couple of questions on guidance.
Hum.
On a couple of different factors.
Is there any way to think about.
So.
The reduction in the second half guide in terms of the impact of FX.
And <unk> I think below sort of the dynamics of consumption run rates.
Exceeding commitments that being a factor macro and then I remember last year, we went into.
Some seasonality with customers any way to think about how those various.
Factors sort of play into the second half guide.
So let's start with FX, because that's one that we can quantify and I think overall.
Sure.
We see it at the low end at $5 million in at the high end, it's about $7 million. So if you were to think about it on a quarterly basis in the second half Youre kind of looking at a couple a couple of million Bucks at least per quarter could be up to maybe $2 5 million per quarter.
So.
<unk>.
Just for FX for us with.
With a growing a subsidiary.
And Japan has continued to step up each quarter and again it will just be more pronounced in the second half.
So that's certainly one component of it none of the Eagle I think you called out that that second component, which I alluded to in our remarks, a secondary factor that we're looking at is some of those elements around seasonal consumption and what we would highlight as seasonal consumption combined with a a macro environment, that's clearly a little bit different than what we saw last year and so that's a bit of an extrapolation on an unknown.
Factor, but that actually featured into the math as well.
Okay got it and so the bill sort of a similar question to essentially around.
The opportunity to consolidate spend is there any sense of.
Within the new relic customer base.
On average how many different tools they are using and to the extent, there's a category of competitors that you feel like they're most prime too.
Displace or at least consolidate that spend would that be kind of the open source community. The commercial tooling community some of the legacy APM vendors.
What's sort of the opportunity around the consolidation effort.
Yeah.
Yeah, good question well.
First say the majority of consumption increases we see in users and data are really driven by.
The Greenfield opportunity out there most engineers don't yet have access to this data and don't practice observer ability and most applications and infrastructure are not yet fully observable.
And so as businesses embrace this practice and.
Rely on our data and platform to run and operate their business.
Actually drives consumption.
To your question, though about opportunities through to a consolidation there isn't a customer that I talked to of any considerable size that doesn't have literally a dozen or more tools and it is a combination of both commercial and open source systems that they're using today and they realize the pain of that both.
From a productivity perspective, as engineers are swiveling between different tools and systems or looking at different disparate datasets.
Or.
Also from a cost perspective, <unk> got contracts with multiple vendors and they can't rationalize the expanding span across multiple vendors.
Really great opportunity for us to go and help them make their environment more observable as they.
Grow their digital presence, but also help them save money.
<unk>.
Increase the productivity of their engineers.
It makes total sense. Thank you bill.
Okay.
Thank you.
The next question today comes from the line of Fred Lee from Credit Suisse. Please go ahead. Your line is now open.
This is Tim on for Fred Thank you so much for taking the questions.
First could you give us more color as to what youre seeing in overall consumption trends.
To date, and especially heading into the end of the year here.
Any incremental color there would be helpful.
Yes, we mentioned.
In Q2, we had a record 50 million consumption run rate increase so from start to finish the quarter at Cri metrics increased $50 million to give you a little bit more color on that.
Measure just the increases those who ended the quarter with a higher rate of consumption.
We actually they actually added a $100 million.
And consumption run rate.
And then if you look at those who decreased their consumption from start to finish of the quarter. They offset that 100 by about 50.
In decreasing consumption run rate that gives you a sense of.
Both the power of this consumption business model.
And how fast consumption can grow but also it gives you a sense for some of the headwinds around consumption.
Decrease in consumption comes about from in a number of factors first our customers do have some seasonality in their own business as they do product launches or large scale events of course their consumption run rate's going to spike to support those events and then naturally comes down as we get these paths.
Theres also.
Just standard business and talent cycles as engineers leave an organization.
The.
As user based consumption goes away as they hire it comes on same thing with apps and infrastructure applications or infrastructure get deep revisions or deprecated that telemetry data goes away as new one gets spun out it increases so there's that factor that drives the ebb and flow of Av.
Consumption finally, the one that we're really focused on is the consumption run rate versus the commitments that customers make.
The vast majority of our revenue is covered with commitments, but as I've shared previously the consumption run rate far exceeds those commitments and it's actually continuing to increase.
Trying to help our customers align their budgets through commitments to backup that consumption, but as the gap grows it sets up the environment the opportunity for customers towards the end of their contract in particular to manage the consumption down to avoid any excess overages.
And then that drags on our revenue in that final quarter of the contract and so.
Q3, and Q4 that is a huge focus for us continues to be a focus for us we had good success I mentioned last quarter, bringing.
Bringing our net new $18 million of revenue.
Into the quarter through those early renewals.
We are striving to beat that in Q3, and Q4 with the number of customers who have already reached the end of their commitment even though the contract does not expire and help them do it early renewal to shore up that consumption growth with committed spend.
And we will continue to focus on that as we right size the consumption run rate with the commitment we believe will unlock more steady predictable growth and consumption going forward.
Okay.
As a follow up.
Mark joining the organization of <unk> could.
Could you help us understand whether we should be thinking about any changes to the product line growth organization or to self led organization.
And just the general go to market structure.
Yes. Good question you hopefully all saw that we announced we hired Mark dogs as our Chief revenue Officer.
Really excited to have mark on the team who joins us from <unk>.
AWS and prior to that Dell and Microsoft.
He has been an executive sales and.
Technical sales leader.
For some world class companies and multibillion dollar businesses.
Yes.
Is.
A great addition to new relic and what I've done is taken this opportunity to bring together all of the constituents within the company that serve.
Our sales led business. This ranges from our obviously our sales team, but also our customer success or customer support our technical services teams and enablement all under Mark.
So that he has the mandate to help with that balance between <unk> and ACR that I. Just described we've got the technical services teams that are driving consumption hand in hand, with our customers and you've got the sales organization and focusing on helping customers secured budget with commitments and contracts and so I'm, putting all of that under one.
Leader, we not only get the benefit of scale and experience, but we have all the resources and he needs to help the company.
For our customers and continuing their consumption growth.
So I'm really excited to have him on board and I think it will only help us as an organization to simplify and focus our go to market motion to continue to accelerate the business.
Thank you.
Thank you.
Our next question today comes from the line of Mike <unk> from Needham <unk> Co. Please go ahead. Your line is now open.
Hey, guys. Thanks for taking the questions here I did want to just circle up on some of the guidance questions that we're having and really just to get a little bit more color if I could but.
When we look at the full year guidance reduction that we're talking about maybe you can parse that with the commentary that you guys have had as far as the $18 million that we renewed early into Q is there a thought that that early renewal that we're seeing in <unk> kind of create a little bit more of a headwind.
When we think about Q4 and then the other part around the guide is a question that I have.
Is it the <unk>.
<unk> operating profit is now down from where we were previously.
Just given some of the cost discipline that you guys are talking to just curious.
While we would be seeing a downtick for Q4 profitability.
That's great great questions. Mike. Thank you very much in terms of the early renewals what I the way I think about it as contracts enable consumption. So by securing an extra 18 million of incremental contractual growth. It alleviates one of those pressures that bill highlighted around people throttling our module.
Moderating their consumption as they may be in the final two or three months. So for US I think it is the element of it just allows them to keep that breadth of monitoring and observe ability and as they continue to expand it. It just allows them to do it at the level of depth and completeness I'd like to do it across their entire engineering team. So from my standpoint, it's almost kind of enables you.
To continue prosecuting the opportunity and enabling consumption in a frictionless way.
Does that help me on that point.
It does it does.
And then the commentary on the four key profit, yes got it.
Yes, great question, but in terms of guidance, maybe I didn't do a good job on messaging I think what we were trying to highlight is felt very good about the $6 9 million of non-GAAP operating profit.
I think we implied that we won.
Went ahead and we came in a little bit high on Q3 offering a guide of 911 I think consensus was just below that.
At the midpoint and then for the full year, we nudged it up a little bit at the midpoint.
In line with that outlook. So I'd say, we are increasingly optimistic around our ability to drive profitable growth and that's what we're trying to communicate through the outlook.
That's great. Thank you for clearing that up and if I could just a heck on.
Maybe one more if I could but I guess now that you're in the seat here, David and congratulations I know this is your first quarter in the in the CFO role on an earnings call for new relic, but can.
Can you help us think about what changes if any.
Have been implemented to the way new relic.
Goes about with its philosophy for guidance and I know it hasnt come up yet but to the extent. It's possible can you guys also start talking about what the.
Price increases that took place early in the new data tier.
Has that shown up in any way in the business model or is that still coming.
Coming down the pipe.
Okay great.
In terms of guidance I think I guess, what I'd observe.
That on the last call is a bit of a by standard but I think.
Maybe you had observed in maybe a couple of others that the second half had a at an implied acceleration in it what I really call out in this guidance is from midpoint to top end of the range for Q3 and Q4. It implies a sequential step up of about $6 million to $8 million. So I think what you'll find is that it has a very consistent lens through it.
As you look at the outlook.
Yes, I'd say the other element that maybe highlight in this guidance as well, particularly on profitability is.
Earlier I highlighted in our six nine it started to factor in some of the onetime costs associated with reducing our real estate and by that I mean, what I'm, specifically highlighting as we close down offices, sometimes we need to write off some of the lease hold improvements. So noncash charges. So we can all have left ourselves a little bit of room to work knowing that leases will roll off.
Different points in time, as we find opportunities to sublet. So I'd say in terms of profitability again, I think we feel like we have multiple levers and multiple opportunities to increase but again, knowing that will be shrinking real estate footprint.
Even ourselves a little bit of room to work knowing that that can impact profitability with some noncash charges.
Does that help at least in terms of guidance methodology and some of the things that were kind of on our minds.
It definitely does it definitely both Thanksgiving and then the other question that I had asked as well was around.
The increased pricing to the core data as well as the.
New data here that you guys had rolled out I believe it was in June .
Yes.
It's a great question and I think right now our standard observe ability as at 30 <unk>.
Customers, if they would like to go up to data plus that is 51.
What we also offer customers is the opportunity to say.
They would only like to have standard, but they'd like to have some of these enhanced features they're able to buy them on a one off basis as well and so I would say structurally what we're seeing and what I think youll see in the data over time is that price and mix.
Continue to climb overtime as people adopt more and more of the platform, but we're pleased with how people adopt standard we're pleased with the momentum that we have on data plus.
As well as people choosing.
Premium features such as fed ramp a hip or a high performance squares.
And just a reminder, I think we've shared on previous calls for the majority of customers that price increase doesn't happen until their contract comes up for renewal. The majority of our renewals happened in this quarter Q3 and Q4.
And.
We have had good success in Q2 and Q1 once we introduce the price increase very good acceptance from customers on the standard data price increase and very good success in Q2, as well getting more and more customers into data plus so that's definitely happening good adoption and uptake.
It feathers into the revenue throughout the coming year, and especially Q3 and Q4 as we go about the majority of our renewals.
Well, so I'll leave it there. Thank you guys appreciate it.
Thanks, so much.
Thank you.
The next question today comes from the line of Michael <unk> from Keybanc. Please go ahead. Your line is now open.
Hey, guys good evening.
I would like to see the raise in the EBIT dollar guide for the year.
Just one on that.
Just wanted to really clarify on the consumption come back to clarify on the consumption pattern, so $50 million incremental run rate consumption.
So just to be clear on it and you said, it's a record but is that.
Are we increasing that consumption growth rate overall.
It was the past couple of quarters.
And if you're bringing down the guide for the rest of the year.
Anticipating that.
Does that growth rate because uptown stays flat.
Yes. Good question first maybe a reminder, on what consumption resumes.
What we do is every day, we measure the annualized value of the business.
So we take that data consumption present value annualized that and measure that throughout the quarter every single day.
What I was describing is from.
We can mute lines there it sounds like somebody is on mute.
If you take day, one of the quarter and compare it today.
Last day of the quarter, we see a $50 million.
Net increase.
And that is the most significant increase in <unk> that we've seen in the business.
We began measuring that about six quarters ago or so.
We.
We're excited by that I did mention the offsetting.
Decreases in consumption as I walk through that a minute ago.
And the causes for that as we look forward into Q3 and Q4.
Every day brings different consumption patterns throughout the quarter and this is measure as a real time measure of the consumption value. We expect it to continue as we go into Q3 and Q4 to.
To continue to increase.
As Dave mentioned, we are keeping an eye given the imbalance between the consumption run rate and the commitments that puts pressure on the increase in consumption with many customers over 130%.
Their commitment already.
We also are keeping an eye on them.
Macro and the impact that's having us.
As executives look closely our budgets to ensure that they don't incur any unplanned expenses.
For those reasons.
Felt it was prudent to.
To look at the guide, but we do expect consumption run rate to continue to increase in Q3 and Q4.
Okay. So did increase so I guess does the growth rate.
Questioning.
<unk>.
Okay.
Michael are you asking about the sequential growth rate of consumption.
Year over year growth rate.
Yes.
Oh the Europe .
Year over year growth rate continue to increase.
<unk> will likely increase.
Yeah.
I'll tell you what Martin Michael Let me if you have another question for Bill, but let me see if I can take a look and see if I have it at that.
At my fingertips.
Yeah.
No I think yes, if you could let us know that that'd be great and then.
We could talk about it afterwards, but.
Also just to clarify on FX you guys too.
I thought you build mostly in dollars. So does that FX impact of a demand issue relative to the strong dollar or is there some questions I guess.
I thought it was most of the dollars.
We are mostly dollars.
We set up our footprint in Japan, Michael we set that up in yen and that just happens to be one of those subsidiaries thats done very well.
And.
What we're seeing what we're seeing out of there is just again accelerating pressure, hence the outlook I just wanted to telegraph the compression that we're seeing.
Okay, sorry, I missed that.
Right.
So that's different.
Okay.
Michael anything else.
No no.
Yes.
Back on that that close rate question that.
It's fine.
Take care of later I appreciate it.
Okay.
Yes.
Thank you.
The next question today comes from the line of Derrick Wood from Cowen and co. Please go ahead. Your line is now open.
Hey, guys. Thanks for taking my question Bill Atlassian indicated they're seeing a slowdown in developer hiring really across all geos and customer cohorts.
As well as his last three to paid motions are you guys seeing that same kind of dynamic.
I guess, if you are right what are you thinking about offsetting that I mean, you could look for new use cases look for targeting new personas.
Just curious if there is any any playbooks to counter some of those macro headwinds.
Yeah, Great question, I did listen to that Atlassian call.
Interesting trends that we're seeing no actually first I would say I mentioned on the call. The success, we're having with that product led growth motion.
Around new customer acquisition, and then customers coming in and signing up for the free tier and then graduating to pay go.
800, new paid customers coming into the platform this quarter.
It is.
Very strong and exciting to see them come into the platform and expand quickly.
So no headwinds, we're seeing on that front on the user front and center.
Important to understand how our user base consumption model differs from Atlassian.
<unk>.
Very different situations, where they have a very low priced developer seat model that is fairly ubiquitous within engineering teams and heavily.
Guess influenced by engineering head count and.
Various other factors with new relic is almost the opposite of that we have a very low penetration in terms of users as I said earlier.
Very few engineers actually practice of durability and Thats our opportunity to grow its also in mission critical workload.
I think it's Gardner.
Says that the average cost of downtime is like $5000 plus per minute.
I think they estimate 98% of organizations say that a single hour of downtime costs of $100000.
81% of 760 minutes of downtime costs $300000 in a full third of companies.
Port that one hour of downtime comps, 1% to $5 million.
Contrast that with the new relic users seed price of starting at $99 per month.
And you can kind of see the.
See the forest for the trees there.
Roy on new relic is incredible they are paying $100 starting price for a user to be able to troubleshoot for an entire month and incident that might happen to cost the business millions of dollars.
So the headwinds there in terms of user growth.
We're not seeing and don't expect to see we actually saw very good growth in both users and data this quarter.
And believe that will continue.
Great that's helpful color and Dave one for you on the P&L, we saw a pretty sizable drop in sales and marketing sequentially I know that <unk>.
Last quarter, you had conference expenses.
But even accounting for that decent drop and I'm sure some of Thats.
Due to the cost restructure efforts, but could you just give us a sense for where <unk> been able to take additional costs out and then I know that you had a change in commission expense structure last year has that changed at all this year.
Let me I'll address the last part and then I'll get to the first part in terms of the commission structure, we have about $34 million last year of extra commission related to the legacy model. This year, we have about $22 million. So I would say naturally we end up with about $11 million tailwind in that area, but we're still at the sales and marketing the way I think about it.
Overburden by $22 million, so youll continue to see that ebb and work its way out of the P&L, which is certainly one driver I guess the other driver I would say is that.
Last year at this time, our product led motion.
It is.
About 5% of total revenue and now it's almost 10% and Thats a very high very high efficient from a magic number from a cash perspective are higher and just a very efficient motion as we get that product led motion aligned with our sales motion and the.
And traditional account reps I think derik youre going to find that we're going to be able to continue driving down our overall cost of sale.
So that's one of Michael ratings continuing upon them.
Yeah, Yeah got it thank you.
Super Thank you.
Thank you.
The next question today comes from the line of Noah <unk> from Jpmorgan. Please go ahead. Your line is now open.
Hey, guys congrats on the quarter and taking our questions. This is no answer John .
Just two quick questions, maybe going back to the just the consumption trends is there any way to maybe elaborate that on what.
And what that was on a monthly basis or maybe the growth linearity through October this quarter and then.
Referring to maybe some of the cost saving initiatives you outlined earlier.
Is there anything that really think about as it.
Sort of look into the next fiscal year, and where you think maybe other costs can be reduced.
I'll take the consumption linearity question, maybe Dave you can opine.
Opine on costs.
Consumption linearity, we saw strong consumption growth increases all three months of the quarter in Q2.
<unk>.
The second and third months were stronger than the first.
This quarter in October .
First months of consumption. This quarter was a little bit ahead of last quarter.
Last quarter's first month that is so.
We're not sharing the month to month values on that you can see more information in the investor letter around.
Some of our key metrics, but.
Hopefully that gives you a sense for.
How it's trending.
In terms of cost against I break it out into three areas. We are continuing I think as I should suggested in my prepared remarks building on our multi cloud strategy and what we find as we build out the multi cloud strategy as gross margins continue decline, where we we just naturally are finding cost savings both from shutting down the leg.
<unk> centers.
But also just how we are engineering our products. So I think we continue to be enthused I think we highlighted that we would finish at gross margin of 75% or higher that's not in a kind.
Kind of a milestone that has an ending point, but it's just a checkpoint and a broader journey. So youll see core continued to come down you'll continue to see sales and marketing efficiencies and then certainly as I alluded to on real estate, we have an opportunity in G&A to continue optimizing that.
So you can imagine that we'll press on Boston and drive up margins.
Yes, all of that at all.
Thank you so much yes, thank you goodbye.
Thank you.
The next question today comes from the line of Rishi <unk> from RBC. Please go ahead. Your line is now open.
Wonderful thanks, so much for taking my questions.
Nice to see underlying strength in the business.
Two questions from me first I wanted to start by asking about churn just in terms of them in light of the macro headwind. What are you seeing in terms of churn from your existing customers and I'll I'll I'll add a wrinkle to that not just those that are fully unplugging, but maybe those who are actually reducing their spend with <unk>.
And then I've got a quick follow up.
A couple.
Lenses on churn I think at the Investor day back in May we shared our dollar churn numbers and if you remember we had reached a low point of.
Around 6% in the final quarter.
We mentioned in Q1, the churn would have been another low record.
But for a few deals that slipped out of the quarter and closed.
In the first week of the new quarter.
In Q2, we actually did achieve a new record low of 4%.
So we are proud of that <unk>.
Success and continue to.
Work on helping our customers too.
And the platform and realize the value of that thereafter.
In terms of.
Customer churn customer count churn I mentioned earlier, we have 800, new paid platform customers that came into the into the into the business.
Last quarter, but around 500, or so of our legacy APM very small customers that put a credit card on file and continue to allow us to charge it but that are churning out offsetting that customer count growth.
Overall, we feel good about that trend.
Because the new customers coming into the platform are obviously adopting the full platform and growing much faster and as we look forward when that churn rolls off to.
So very exciting future ahead.
Does that answer your question.
That I'll say, thank you for that really helpful. And then just kind of a really quick one.
<unk> been throughout this call having conversations around consumption trends over consumption et cetera. It seems like <unk> is going to be a very very important metric and I know you give us some sort of directional color and theres some stuff around in the slide deck, but why not just outright disclosed that number I think that it feels like that would help cut through a lot of the noise.
Especially in this environment. Thanks.
Yes, it's a great question region I think as we prepare to give an analyst update and share our long term model I think we will end up using <unk> I think there's probably still a question in my mind is to do it do we use it on a smooth basis, because as bill highlighted it's almost kind of like a balance sheet measure, it's kind of a point in time and it moves a little bit and so.
We're still thinking through whether it's.
On a rolling one week as a rolling 30 day, but almost in line with.
I would say perfecting every metric we want to spend a little bit more time thinking through the best way to present that metric. So that it is useful to you as possible knowing that it is a representation of users and data and platform adoption.
But definitely.
Appreciate it thank you.
Give you a good measure.
Awesome. Thank you I really appreciate it.
Thank you for your question.
The next question today comes from the line of Keith Bachman from BMO. Please go ahead. Your line is now open.
Good evening, good afternoon, and thank you I'll ask my two questions concurrently just in the interest of time, we're at the back part of the our the first one is related to the consumption versus contract and in our recent.
<unk> you mentioned some of the customers are at 70% of their pay for capacity and yet some are 130 and youre trying to bring those back into.
Closer cemetery around 100% so to speak.
How do you get customers there it sounds like some of the work you're doing is on new relic side, where youre trying to change go to market a little bit, but how you condition.
Your customer base.
To try to bring these two more in balance and how long do you think it takes because this has caused a little bit historically, it's cut a little bit of variability in your model, but I think the models maturing quite a bit. So that's question one and the second is I was hoping you could give me the.
The new customer adds was actually quite impressive I thought and given the macro is there may be a little bit more color you could add on.
If you did a histogram, what's kind of a frequent wind case in other words why are you winning these customers.
What's the what's the size of customer or whats the land size or any kind of metrics you could give us around.
Of that 800, new customer lands many thanks.
Yes, Thanks Keith.
<unk> to your question around balancing CR and commitment.
I think one important piece of context to remember his.
We just eclipsed the first year of migrating the majority of our customers into the platform and so and first year commitment with a hard commitment for for our customers to make they didn't understand the full value of the platform because they had never used it it was a brand new pricing model.
You may have used ATM before but now we're offering them access to this all in one platform for one price very hard to make a budgetary commitment. We've tried our best to guide them. Many many customers ended up.
I think their expectations exceeded and they consumed way more than they thought they would.
With that first year commitment and that's what created some of the headwinds that we're seeing now where many many customers are 130% or more of their original first year platform commitment you are right that now we are maturing they have a full year.
In the platform, we have a full year of executing.
And now most importantly, we've got the right tools to help them.
Incentivize them to increase their commitment for growth.
Put them into a contract structure that allows for both top ups, where they can add more budget anytime we didn't have that in the first year and also increased.
Dynamic.
We also have the ability to early renew them. Once again, we didn't have that in the contract structure in the first year and then third we also offer the ability with our savings plan to make up basically.
Low risk or no risk commitment because you can now we offer the ability to roll forward any phones for an additional year. If you end up not consuming your full commitment.
All of those now available through our sellers makes it much easier for customers to make commitments to rightsize those commitments with their consumption patterns.
None of that we had last year so.
I think thats going to help us quite a bit of course, we do have to go through the renewal cycle with the customers before we get the chance to do that right sizing. If you will and as I mentioned in Q3, and Q4 are the biggest renewal quarters for us.
Things like two thirds of the business or so is getting.
<unk> contracted in the next in this quarter and next and so that will help US go a long way to getting those more in balance.
To your final question around customer adds.
<unk>.
Yes, we see the strength of new relic APM as a capability.
And as the brand continues to.
Give us a lot of great tailwind.
We're known as a company that was developer one cloud first the developers can trust and of course.
As.
As is often the case in developer circled word of mouth marketing means a lot is why we invested in the free tier as a product led growth motion because.
Ultimately, even if a developer doesn't own the budgeted their mind share matters a lot we want to win their trust and win their mind share and a lot of our new platform customers coming to us are coming to us first for that APM brand and reputation we have but then also discovering with the way that we've evolved the <unk>.
Platform over time, how quick and easy it is to instrument not just their application, but also their infrastructure and get their logs and theyre all three and just a few minutes and they get full visibility of their stack.
That's a really powerful value proposition that no other competitor really offers and they can do it for free no credit card required and then that leads them to say, hey, I want to add my teammates I want to add more data and they put in their credit card and the way we go.
The size of these customers does range quite a bit as I mentioned, some I'll start out with free some add their credit card and paying a few hundred dollars a month.
Each quarter, we see the cohort of customers that come in their consumption expands quite dramatically over the first four to five quarters.
And and some customers come in for even a month or two and realize they want to contract. So they can get even better rates than the retail and so as I mentioned in timber came in through this free tier funnel and we got them under contract.
And they are paying six figure contract annual spend with new relic. So.
It varies widely.
It's a very strong high efficient high volume motion, but now we're focusing on helping move those customers into contracted consumption and into our sales led model, where they can get even more support from new relic.
And their consumption.
Alright, perfect. Many thanks.
Thank you.
The last question for today's call comes from the line of <unk> Kim from Loop capital markets. Please go ahead. Your line is now open.
Alright, great just wanted to quickly follow up on the question regarding the gap between the commitment.
Sure.
It looks like you had a success with the early renewal program you introduced the quarter obviously.
Acuity the gap and serves as a proxy for your future business. So what is your expectation regarding the early renewal program in the second half given this gap.
That's out there and then also even without early renewal should regular renewal cycle drive incremental uptick in commitment, reflecting at least some of that expanding gap. Thanks.
Yes.
For the.
For the question I think.
We do think that the cycle in Q3, and Q4 would be helpful. What was interesting is even with the net ACR expansion of $18 million.
GAAP actually went up about 1% it was about 115% I think we finished the quarter at 116%. So I think almost in line with the question earlier. The reason we focus on commitments and expansion is actually just to continue what customers are doing whether it's in tool consolidation or continuing to support their cloud strategy or digital transformation that they.
We have plenty of contract to work with so ironically, even with the success of last quarter, we kind of what the gap actually went up a percentage point and so we'll just continue to maintain focus on expanding contract supporting our customers and giving them plenty plenty to work with as they execute on a cloud initiative digital transformation or whatever.
Priority they may have.
Great real quick on contract length.
Especially on the early renewals.
Does that we knew at a one year anniversary one year link or does it kind of renew at the end of the original contract.
Great Great question, we're traditionally a one year shop in terms of annual contracts, we've been shifting to multi year contracts in order to support multiple multi year strategy and.
And Thats something that Youll youll continue to see play out.
<unk> through <unk> and other measures.
But so much in the early days.
We're in the early days of phasing and three year contracts.
Thanks, so much for the question. Thank you so much.
Thank you.
That concludes today's question answer session. So I'd like to pass the conference over to Bill Staples for closing remarks. Please go ahead.
Hey, and thank you all for joining today's call and we really appreciate your questions and interest in new relic Q2 was a solid quarter.
Really a new chapter for the company as we resume profitable growth.
I'll Express my gratitude to our customers to relics around the world, who work tirelessly to serve them.
And all of you I'm really excited by the opportunity ahead and I believe the transformation, we've undergone both in product and business model is really set us up to help customers better manage through these uncertain times and bring greater predictability and efficiency to their absorbability spend and to success.
Italy further their own digital business.
Look forward to seeing many of you on the road again, this quarter and or wherever the opportunity arises. Thanks again for your interest in new relic and for all of your support until next time.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Okay.