Q1 2020 Earnings Call
Good afternoon, My name is Rob and I will be your conference operator today.
At this time I would like to welcome everyone to the new relic first quarter fiscal 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you Mr., Tony Righetti Investor Relations you May begin your conference.
Thank you operator, good afternoon, and welcome to new relics first quarter fiscal year 2020 earnings conference call.
Joining me today are new relics, founder and CEO , Lew certainty and CFO Mark Sachleben.
Today's conference call contains forward looking statements.
Any statement that refers to expectations projections or other characterizations of future events.
Including financial projections and future market conditions is a forward looking statement.
Actual results may differ materially from those expressed in these forward looking statements.
All information provided in this conference call is as of the date hereof, New relic assumes no obligation and does not intend to update these forward looking statements except as required by law.
For more information about factors that may cause actual results to differ materially from forward looking statements. Please refer to our earnings release issued today as well as the risks described in our most recent Form 10-K and subsequent filings with the FCC.
Copies of these documents may be obtained by visiting the rocks Investor Relations web site or the Fccs website.
Our commentary today will include non-GAAP financial measures, we believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, but note that these measures may not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today.
At times, we may offer incremental metrics to provide greater insights into our business or results. These additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics.
I encourage you to visit the Investor relation relations section of new relics web site to access our earnings release issued today.
Supplemental materials that accompany our earnings release.
Periodic FCC reports a webcast replay of todays call well learn more about new relic with that let me turn the call over to Lou.
Thank you Tony.
The first quarter of fiscal 2020 close with year over year revenue growth of 30% driven largely by our continued focus on moving up market by leveraging our expertise in application code visibility and cross selling into our significant installed base.
While revenue was above our guidance for the quarter, we did not execute well enough to meet quarterly sales and head count targets.
This resulted in a lower than expected deferred revenue balance and net dollar based expansion rate. We're not pleased with these results.
But we do believe they are an anomaly limited to the first half of the fiscal year and largely the consequence of are moving aggressively to complete go to market and product related organizational transitions.
At the same time this was compounded by the release of a new product and user interface platform against the backdrop of a seasonally soft quarter.
Longer term, we anticipate the benefits of these initiatives, which are weiner operations to a common powerful platform new relic one.
The combination of nearly two years of engineering time, we view the new relic one platform as the foundation for the next decade of new relics innovation.
We re imagine the user experience and developed a pan enterprise entity centric data model that makes visualizing up to up and downstream dependencies possible across a customer's entire environment the opportunity cost of this effort, what's the delay in revenue generating product introductions as well as future fewer feature an integration releases over this period.
This is having an adverse impact on the customer Lance and expansions in the first half.
But we believe the investment in new relic, one was compulsory for durable growth over the long term.
The logic underpinning our strategy with this platform originated from the early recognition that our user base would gradually adopt open source standards microservices architectures and containers.
As it turns out this trend, which we call observe ability and is an expansion of our current monitoring market emerged at a faster rate than we initially projected with a different competitive landscape.
We believe new relic, one enhances our competitiveness broadly today with much of the future benefits being derived by users adhering to observe ability trends developers operating in this fashion prefer composable and configurable dashboard distributor tracing metric in logging tools in conjunction with the application instrumentation data that only new relic can provide.
To address the needs of the script, we plan to continue increasing both the extensibility and the program ability capabilities of our platform.
Expanding our access to third party telemetry to extensibility will augment our out of the box and instrumentation and act as a first step to giving our customers a single platform for observing their entire environment.
We released monitoring for eight only watch Lambda in May and expect to deliver logging in area ops products in the coming quarters.
All three of these products leverage our strategy, our ingesting telemetry from an increasing number of sources from new relic agents cloud providers and from open source technologies.
We also envision new relic ones programmability capabilities as being a differentiating feature white, whereby customers and partners create their own applications on top of new relic, one and those applications drive digitally transform businesses.
As we expand your ROIC once extensibility and program ability capabilities with additional products, we are advancing our ability to deliver a single platform for managing the performance of our customers' digital businesses.
On the operational side of the business, we accomplished two critical objectives during the first quarter.
One we completed an operating model change in the product organization, which after a few quarters of transition resulted in a general manager structure, consisting of five entrepreneurial minded teams focused on core revenue generating groups.
Application monitoring.
Client side infrastructure logging and a ops.
We expect our innovation velocity and accountability to increase under this model and thereby further enabling us to address a larger share of a growing multi billion dollar market.
To the sales organization is now under a regional hierarchy with unique strategies shaped by local leaders.
This has been an ongoing effort for approximately the past year and included establishing new offices and the expansion of our European region, as well as bringing in new leadership to EMEA.
Our international markets, EMEA and APAC, our key growth drivers for us in our expected to demonstrate the most significant improvements as a result of this initiative by the end of fiscal 2021.
We believe these operational initiatives combined with our investment in new relic, one well improve our potential for future growth. However, the training and enablement associated with the new platform released in conjunction with operational changes changes and record head count growth from the second half of fiscal 19 resulted in companywide dislocations that are expected to impact productivity throughout the first half the fiscal year.
We are maintaining our full year top and bottom line guidance ranges based on the stability, we expect in the second half of fiscal 20.
I'll now turn the call her to mark to provide more color on the financials.
Thanks Lou.
Before turning to the financials I'd like to offer the following additional color on sales in head count and team.
First the quarterly sales shortfall is primarily attributed to EMEA being significantly solved and partially to underperformance of the U.S.
The recent changes to the sales structure and in particular in EMEA are expected to improve both short and long term execution.
Second head count growth in Q1 was lower than expected across the company.
I'd like to note that the second quarter fiscal 2020 will be the first full quarter regional go to market operations and the GM product model.
Their respective leaders are moving quickly to build scalable processes and higher appropriately, which we anticipate will lead to head count building steadily throughout the year.
Now turning to the financials revenue was 141 million for the first quarter up 30% year over year.
We ended Q1 with 881 paid business accounts that they are over 100000 up 18% compared to a year ago.
This growth represents both new logos landed as wells installed base expansions derived from increased usage expanded application coverage and the cross selling additional products.
Our annualized dollar based net expansion rate in Q1 was 109% compared to 180% from a year ago period.
The decrease was driven by lower amount of upsell activity this quarter relative to our total installed base.
We believe Q1 will be the low point for the fiscal year.
And while we expect an improvement in Q2 compared with Q1, we anticipate a year over year decline in this metric in Q2 as well.
The end of Q1 enterprise business was approximately 62% of they are up around 55% as of the same period last year.
Non ATM bookings during the quarter were greater than 40% of new way or with the combined contribution from new relic insights, new relic infrastructure above 20% of new way or.
In terms of geographic split U.S. revenue was $96.6 million for the quarter up 30% year over year, while non us revenue for the quarter grew to 44.4 million also up 30% year over year.
For Q1, our non-GAAP gross margin was 85%.
non-GAAP operating income was 7.4 million or 5% of revenue compared to 8.7 million or 8% of revenue in the same quarter last year.
non-GAAP operating income was ahead of our expectations, primarily because of lower than expected headcount growth lower sales commissions and lower bonus payments.
Overall, our non-GAAP net income attributable to new relic per diluted share was 19 cents compared to 15 cents in the same quarter last year.
Turning to cash flow cash from operations was 36.5 million.
Free cash flow defined as cash from operations minus capital expenditures and capitalized software development costs was 18.9 million.
Turning to our balance sheet. We ended the first quarter with approximately 769 million of cash cash equivalents and short term investments.
Oh from last quarter 745 million tones.
Elsewhere on the balance sheet, our total deferred revenue ended the quarter at 255 million up 40% year over year, but down 6% sequentially.
This result was slightly below our expectations.
Now I will turn to our outlook for the second quarter and full fiscal year 2020.
For the second quarter ending September Thirtyth, we expect revenue to be in the range of 143 million to 145 million.
We expect non-GAAP operating income of five to 6 million.
This would lead to non-GAAP net income attributable to new relic per diluted share in the range of 14 to 16 cents.
We expect deferred revenue to decline on a percentage basis in the low to mid single digits sequentially.
Please note that Q2 19 results included an anomalous payment covering two years and totaling 16 million that equates to an 8 million deferred headwind in Q2 fiscal 2020.
For the full fiscal year 2020, we expect revenue to range from 600 to 607 million, which is unchanged from prior guidance. We expect non-GAAP operating income of 20 to 25 million also unchanged from our prior guidance.
This would lead to non-GAAP net income attributable to new relic per diluted share in the range of 55 to 63 cents.
Before moving to Q and eight I'd like to provide the following to assist with modeling the remainder of the year.
We are maintaining our 84, 85% gross margin outlook and updating the following cash items to reflect lower than expected first half deferred revenue.
Cash from operations, we expect to be between 101 hundred 10 million, which is down from 150 to 125 million.
And free cash flow, we expect to be between 40 and $50 million, which is down from 55 to 65 million.
Capital expenditure expectations remain between 50 and 55 million.
And with that.
I would like to open the call for questions. Operator. Please go ahead.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Sterling Auty from JP Morgan Your line is open.
Hi, guys. This is Matt on for Sterling. Thanks, Yes. Thanks, Hi, guys. We've heard from a number of companies plural say PTC and others about being behind schedule in terms of hiring are we getting to a point, where just the unemployment rate is actually making it more difficult to hire the candidates that you normally would expect to get.
I think for our company at our scale. That's you know that's not the number one factor.
It's really an issue of folks focus and discipline, which we need to apply more of them we have.
We started on that effort to really get serious about executing on our hiring plan. So I think this is more under our control.
Okay and then one follow up is you know with that net expansion rate given where you are with new relic one.
Why should we not read into this that instead of execution, it's actually a competitive issue that you need all these elements of new relic one in the market today and you're at a competitive disadvantage until they until they get out there.
Oh, we certainly have you know multiple factors that are contributing to that net expansion rate you did the sales distraction that we had in Q1 around moving to a geo model.
And the operational traction moving to a GM model on the product or.
Was a factor we had execution challenges broadly I'm, putting words in particular in Europe .
But yes, the third factor is that the competitive environment has evolved as as the market has become more dynamic and and so there's.
There's there's there's more for us to do more work involved in winning a deal today. There then there was a couple of years ago, but we still feel great about our long term competitive position, we take new relic one has unique capabilities.
And that the customer feedback on is very encouraging and yet we recognize this is this can help us as we're introducing a new user interface onto our customers, we want them to adopt it at a pace that's comfortable for them rather than to force it onto them on our timeframe and so we've been thoughtful on how we introduce it in the market to make sure. It works well with how our customers are approaching using our software. So that all adds up to we're managing this transition to the new platform I think.
With a lot of focus and with a lot of enthusiasm for where I will go but but you know in Q1, there was that attrition that transition that we went through and it had impact on our short term performance.
Got it thank you.
And your next question comes from the line of Jack Andrews from Needham Your line is open.
Well good afternoon, thanks for taking my question.
Wondering if you could just shed some more light on in terms of where you are I guess educating your customer base regarding the benefits of new relic one is this.
More of a self self discovery journey on their part or are there specific things that you're really doing to highlight the capabilities around this and specifically maybe around the program ability feature which you know it was a.
Very differentiated.
All right I'm glad you asked.
So so we launched new relic one in May.
Right around when we had our last earnings call and that was the first release and.
We did make it a release had any new relic or any any new relic customer could use and discover on their own but that we are not aggressively pushing out into the market due to.
Just how big or at least this was in how we wanted to make sure. It was a natural time for our customers to adopt and we want to observe how customers are using it we're encouraged by what we're seeing on customer usage given that.
It's been one where they've discovered it largely on their own.
For example, our dashboard and capability, we see a 40% month over month uptake or increasing engagement on that feature in the month of July . So we're encouraged by that and I remain incredibly excited about the program ability capabilities, which we plan to release.
In the near term, but we have not released yet to our customers. What we have done since launch new relic. One is enabled by our field technical field to build.
Applications onto top of new relic, one for our customers. So we are kind of the first people developing on top of the platform for our customers and the feedback is resoundingly positive, but obviously in order for this to work at scale this needs to expand beyond our own people developing application on new rock one to the community and Thats whats coming out shortly so we're heads down on getting that ready we're excited about its potential.
And.
We got to just focus on making that successful.
I appreciate that just as a follow up could you shed some additional light on what prompted the operating model change in the product organization into what looks like a five groups now.
Certainly so price prior to that change we've had a monolithic product organization. So one product leader responsible for all of our products.
And.
As the business has grown and we now have as many skews as we do we felt like especially with the introduction of new relic, one and having a common platform that can integrate all these products now was the right time to have entrepreneurial leaders fully accountable for the growth of their products and fully empowered to deliver the products that.
Well compete and win in their market segments and drive business growth.
And so we're already seeing the benefits of that model change for early in that but I'm very pleased with the change.
And.
And it's an area of focus for us because.
Weve highlighted the competitive environment is evolving and it's time for us to really be far more focused on delivering products that delight our customers.
Great. Thanks for taking my questions.
Your next question comes from a line of Rob Oliver from Baird. Your line is open.
Great. Thanks for taking my question.
Lew one for you and then I had a quick follow up for Mark.
Just I know you mentioned.
The evolution of the competitive environment and things like open source micro service architectures.
And moving to observe observe ability.
I know those are new for your users so what I'm trying to tease out here is.
Hi, just a buying decision moved away from your core user to somebody up the stack and is that the new relic, one move and can you talk a little bit about.
Your lands this quarter and.
If there were multiple product plans and any other evolution of the market. Thanks, and then I had a quick follow up here.
Sure.
So.
When we think about.
How the markets evolve and in particular towards extensibility, we feel like it factors into our product strategy and in three ways three pillars to our product strategy. The first is extensibility, we need to ingest more types of data into the new relic platform.
Examples of types of data could be open source data from open source projects or log data.
Or dimensional metric data so thats the extensibility part of our strategy. The second is intelligence being able to do more with with that data and be smarter with it in our AI ops capabilities that come out of our acquisition of signify our real key part of that part of the strategy and the third leg of the stool is program ability, which I have spoken to so as it relates to the market I'd say, we've always had a strength with the development the developer the development manager and the VP of engineering and the CTO all the way up that track.
What we are developing to complement that is a go to market focus on the operations professional and they tend to make decisions around the infrastructure.
We have a strong infrastructure product and it attaches very well, so our highest attaching product well over 30% of our customers have purchased it but the asps are relatively low and and we feel like that the best way to focus on growth JSP infrastructure product is to focus on the operations professional.
Who is appear often to element leader.
Great Thats helpful. Thanks, and then just one follow up Mark I know you've talked a little bit about some of the success you guys have had with parking some technical sales.
People at.
You know larger accounts and.
Just wondering how is the hiring shortfall in that technical sales area and in you and maybe to Sterling Auty. His question earlier is that just a harder person to higher.
Somebody that that is selling much broader.
Visibility platform then the NAPM thanks, guys.
Yes, so the higher shortfall I would say was was more across the board wasn't concentrated in one area. I think there are some issues that in the technical sales area, but I wouldn't say any more so than in other parts of the organization.
We are still we continue to see success and we continue to aggressively move to grow out our services capability and to do that with customers.
And those folks do take quite a while to ramp up so the team we have the.
We hired in the last year that we continue to hire getting ramped.
And so they are I think are seeing is it's it's taking more effort or time.
On our part park was technical team.
You get renewals and to get ourselves. So I think it's in their higher calorie, but we continue to see success. There and then present were deployed them.
We feel it.
Great success in those accounts.
Okay.
And your next question comes from the line of centered Singh from Morgan Stanley . Your line is open.
Hi, I. Thank you for taking the question I want to talk a little bit about guided and Mark I think there was a in your script you said that.
The second half doesn't assume an improvement in the overall business.
Given the product roadmap given some of the the challenges you saw you saw in Q1, what gives you the confidence that that.
This this will in fact improved in the second half as you as we think about the full year guidance.
Well as as Lew talked about the product road map, we feel like we are delivering what customers want.
We were we've got some of the organizational transitions behind US now so those are starting to take place that are starting to see the results of those and in EMEA as we talked about this can take a little bit longer.
But but with the GM model.
The the accountability that comes along with that change, we're starting to see positive improvements already.
And so we've given guidance that we feel comfortable with we feel confident with for the rest of the year.
We still feel good about our billion dollar revenue run rate target for the end of fiscal 2002, and so we feel like we're we're on a good.
We feel good with that there are going to be some bumps along the way as we've seen in the first half, but we do feel confident in our overall journey toward that milestone.
Got it and then maybe look a follow up.
I had a question on the state of.
How monitoring it conducted out there in the market is specifically is in your view the sort of agent based approach to application margin that evolving in it of itself. What do you think the implications are for new relic. If if were going from less of an agent based model to more of a distributor tracing approach any thoughts there.
Certainly well I think that there is no question that agents have a place in many circumstances may many environments, including distributor tracing use cases however.
Agents are a primary source of data, but can't be the only source of data.
That that our customers rely on in order to observe the entire environment.
So thats why when I spoke about our price strategy step one of our strategies extensibility and so we want to embrace data not only coming from our agents, which is highly valuable highly highly.
Differentiated and let's take for example, a large enterprise if they want to put visibility into as many applications as possible as quickly as possible. They have no choice, but to take an agent based approach they are not going to rewrite all their software.
Two two instrument it by hand, however, there will be pockets that want to instrument by hand or want to use other sources of telemetry to to observe the application, but they don't want to be going to different products and different tools to see that data the seat they want to see it all in one place that's why our extensibility strategy is so important and what I've got the team very focused on is delivering on our extensibility vision.
Within the next couple of quarters, and so you're going to see us make announcements on throughout the rest of this year and certainly in some in the near term.
And thats going to complement the other two pillars, which are.
Intelligence and program ability once all of that data is in our cloud and presented to our users our customers recognize and are demanding that go beyond simple static dashboards. They want to build applications that leverage this data and only new relic one is going to enable our customers to do that and so we're very excited about what that will do to give us a leapfrog opportunity that exists that that should really put some daylight on the differentiation.
Thats very helpful. If I could just sneak one quick follow up to that in terms of new relic, TB, which has sort of been the the architecture behind.
Behind the platform for several years has that changed and evolved commensurate with the new relic, while others are you storing and handling the data in a dramatically different way and that capability.
Available today.
Well.
What I see as we've evolved the capabilities of NR, DB, which is still running at a massive scale and we've had many customers come to us, saying they've used to us in complement with other monitoring products that may have specializations and other parts of the stack say infrastructure are logging and on big launch days, they've they've told us that only new relic could handle the load.
So we have what we believe to be the most scalable architecture for cone gathering this telemetry data at scale, how have we evolved it.
What we've been hard at work on is evolving the data collection technology to also work really well with logs and as I mentioned on our last earnings call. Our early research shows that is dramatically faster than than logging solutions built on open source technologies.
And most of our competitors, even if there are offering logging as a service are built on open source technologies that just don't perform well at scale on a multitenant environment compared to ours.
So weve also been hard work involving our technology to consume what's called dimensional metric data and Thats, what open source tools like promethium us use another kind of tools that modern many modern shops are using so.
That evolution is mostly complete.
We're tying up the loose ends on it and then with that we will have the capability to bring in all of that extra data along with the agent data that we've always been good at collecting.
Very helpful. Thank you.
Your next question comes from the line of Jennifer Lowe from your BS Your line is open.
Hi, Good afternoon. This exceptional now on for Jason. Thank you for taking our questions.
Let me start with you on some of the commentary you've shared with respect to EMEA and some of the execution softness there we're wondering if.
Perhaps there are some macro elements that could potentially have exacerbated that and how are you thinking about some of the higher level macro related dynamics as it relates to Brexit impacting the demand environment and sales cycles and purchasing patterns. There and then a follow up if I may.
Our primary focus has been on the execution challenges there.
At at our size and scale, we feel they're like Theres, good opportunity there and that.
That it's more internal issues than external macro issues for us we have a new leader start in the middle of the quarter He's come in and made some additional changes. So we think we've got those largely behind US now and we will take take time to rebuild the team, but I feel like it's generally more within our control than than macro issues.
Understood that's really helpful.
And then just with regards to product uptake you talked about insights and infrastructure combined being in excess of 20% of.
Non APN aer, our bookings and I'm wondering if you can give us some more specificity or granularity around the infrastructure offering because in the past I know you went live both talked about the blurring of the lines. If you will between infrastructure monitoring App monitoring so wanted to better understand sort of on what mechanisms you have in place to really drive that attach and penetration.
At a faster velocity and that's it from us Thank you.
Yes, sure. So so we have not.
We've not broken out anything beyond the over 20%.
I will say that insights is is the is more than half of that.
Well infrastructure continues to sell well.
That said I think we've got to be more aggressive with our infrastructure product. We're we've talked about it going more after the ops buyer really are a couple of things infrastructure as Lou mentioned is our highest attaching product with with.
With over over about a third of our customer base using that but this spend is is.
The average spend is was well below we think so we've got to do a couple of things. One is we have to expand the infrastructure sale to be beyond just the application environment, we want to cover the whole the state. So we've got to be better at that motion in that sales process.
The second thing is we've got to.
We've got to lead at some point, we want to have the capability to lead with infrastructure getting us into new accounts and so thats something that we will be working on.
As as we go forward. So we're very focused on the infrastructure product and making that b being a kind of a first class citizen in.
In new relic portfolio, so thats something that we will be spending a lot of time doing and with the GM model I think that really helps us.
We now have someone that the GM of that that.
The infrastructure product.
That person wakes up now every morning thinking about how many getting more infrastructure in our customers' hands, how my delay those customers more successfully and I think that accountability is going to really help.
That's very helpful. Thank you.
Your next question comes from the line of Derrick Wood from Cowen and company. Your line is open.
Thanks, guys.
Can you describe the.
Headcount target shortfall as a reason for maybe the the weaker results or perhaps a weaker Q2 guide.
Could you touch on how the the changes impacted sales head count retention and whether you are having to do more backfill and then you'd normally what coming out of Q1, and then maybe remind us what the typical time is to ramp to productivity for new reps.
Sure the.
Typically take a vendor that first typically we talk about a year ramping productivity from a sales rep standpoint, and I think that also extends to the technical sales folks that support the rep. Obviously that that unit is a critical component and developing both parts of that humans accrual component to be successful in the field.
In terms of sales rep attrition.
Thats actually was I think that that was was.
A strength of ours in the in the first half the first quarter.
We saw I would say lower than.
You would expect in a Q1 in terms of sales rep attrition. So I think thats been thats been going well.
On the other hand, we did hire a lot of reps throughout fiscal 19, and so we've got to make sure that they can they continue to stay and and ramp and that were successful in wrapping them.
Okay nice color there and.
Again, we talked about kind of the sales structural changes, but I'm curious how much impact are you seeing from the kind of the demand side maybe customers.
Taking longer to make additional purchases you had a major upgrade they may want to look to absorb this and look at the New road map I mean, do you think that as customers upgrade and these new products roll out we see this kind of pent up demand free up perhaps as we move into the second half.
You know I am.
It's a strong and healthy market.
And growing.
And with that growth and with the scale that we happen to be at that does attract more competitors.
And so that is impacting I think the number of calories and days involved in completing the equivalent sale say a couple of years ago.
And so that's how I'd characterize the impact of it.
So I wouldn't say necessarily say its market demand so much as.
The effort involved in in completing the sale.
Okay, all right. Thanks for taking my questions.
Your next question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.
Okay, great. Thanks very much.
I wanted to ask about the lot product I don't believe Thats been leadership, but correct me if I'm wrong, but just based on the feedback you've you've heard from customers are you finding that they want to log solution, that's really adjacent to some of the.
Vendors that they are already taking or is there something that would be more of a replacement and then I just had a quick follow up.
Oh, what's driving it from our customers is they are very interested in or logging product because they don't want to leave new relic when when they need log data to diagnose the problem. It's all about time to repair.
So if they have another log product that they purchased for solving production performance or availability problems and that may be an open source offering or maybe a commercial offering.
They see a real real value and see it on new relic, especially if those logs are in context. If for example, we can see.
The specific log messages that were submitted by an application when that specific application was having a problem that's often harder to do.
When you don't have the benefit of a application visibility like we have or sometimes even impossible to do.
So.
So thats why our customers are excited about it now by contrast.
There's some customers that use logging products to keep a years worth of data so that.
They might want to.
You know the handle some kind of security.
Use case or see if whether there was a vulnerability in the past or or compromise in the past.
That's not what we're aiming for the use case, we're not going after the security buyer et cetera. So we certainly expect to coexist with long solutions and many customers, but we want to deliver the most integrated fastest tying to detect and repair solution by integrating logs with with everything else, we have a new relic.
Okay, Great and then just on enterprise customer growth it looks like that slowed a little bit year on year was that just all related to some of the sales execution challenges you pointed out and if we do see recovery there will that be show up more in the form of new logos or expansion within the base.
I think that was that was attributable to the sales shortfall that we mentioned.
And no that going forward, we expect that number to the increase to generally slow over time as the base gets bigger.
As you know those are customers that that either come in as a franchise over 100, K. we're growth through that number.
But I think what we'll see going forward is we expect we expect that number to continue to increase at a declining.
A slightly slower rate.
And and the expansion rate.
We have a situation where a lot of our expansion comes from customers that are in over 100 K.
So I would differentiate the two those two numbers a little bit our expansion rate is driven primarily by growth in accounts that are already paying us 100 K.
And so I think thats, where we will see what drives the expansion rate versus the absolute number of over 100 K. know.
Payors.
Okay, great. Thank you.
Your next question comes from the line of Michael Turits from Raymond James Your line is open.
Hey, guys. Thanks for taking my question Lou.
Last quarter it seems the Sinclair the.
Not a piece of the business for a little bit below the long term targets in terms of the trajectory and you're making lots of moves to accelerate that but but it seemed like it was above targets long term.
Long term goals.
What what really I mean, obviously theres some execution, so what's really changed because it seems as if a PM is.
Slowed down too so what specifically has slowed I would assume mostly from a competitive perspective, and who are you seeing what kind of competitors Ray PM and is it really just now people want to buy it.
As a more solid product.
Well.
And you know just to speak a bit about our ATM product Gardner.
Poor insights is.
Is a mechanism by which customers actually vote for their favorite products and were rated number one with our ATM product. So it is strong and I feel like there's still a strong and growing market for it but that.
Kind of as I mentioned, a little earlier, we need our customers are asking us to do ATM and extensibility of ingesting more data beyond what ATM does automatically some parts of an enterprise just want to drop in an agent and see that visibility.
In an effortless way other parts the enterprise want more control over their instrumentation. They are willing to use manual instrumentation or.
Or or open source monitoring solutions.
To to help them with that and so what we're focused on delivering for our customers is a place to put all of that data. The data we automatically surface with our agents as well as data that may come from other sources.
And put that all into our cloud.
And I feel like that's that's what our customers are asking for and where the market is headed.
And that's very different from customers don't want agents in their applications because they do for many kinds of workloads very important, especially when you want to go strategic with.
Having a story for instrumentation visibility across the entire state you want to do that with the.
At least amount of cost and effort possible and so the way to do that as rapidly as possible as with an agent approach and then you complement it with something a little bit more manual when it makes sense to do that in those instances.
So that all makes sense to me I guess I was trying to get to.
Where.
If you drill down a little bit more.
On the competition.
Which competitors are you seeing what's your I mean.
Yeah, we see.
We see competitors for a few angles. There are open source solutions that our customers are deciding to install onsite and.
You know.
Invest the time involved in managing that on sort on premise stuff, we see infrastructure centric solutions that.
Have a historical strength in dash boarding and collecting data from lots of sources lots of.
And infrastructure.
We've.
For many years had this sort of same list of competitors in the EPM space.
You know I'd say, what's what's involved has been.
Some of these open source infrastructure centric vendors coming in as the markets clearly.
Much larger more interesting its attracted more types of competitors all kind of.
Responding to the customer demand to kind of see inside everything they need to see in real time to deliver great performance availability results.
And your next question comes from the line of Erik Suppiger from JMP. Your line is open.
Yes, thanks for taking my question.
First off can you can you give us the head count and what the hiring was in the quarter.
And then secondly.
Can you talk a little bit about the timing of how long the hiring has been an issue.
If it takes about a year for for people to reach productivity.
It's not clear to me why why this would cause such an impact.
It has just started this quarter.
So be sure to answer the first question the head count.
Was just under 1800 people.
As the as of the close of June Thirtyth.
That was an increase up.
Yes, roughly four years or so from our last Q was filed.
And so.
In terms of.
That hiring rate, that's something that we would certainly disappointed in as I mentioned it was across the board.
And how does that impact in quarter performance.
Well it's.
I think some of the some of the distractions and things.
Or that transitions, we went through organizationally had more of an impact in terms of the performance for the quarter I think the hiring shortfall was more geared toward the the.
Expense.
Feeds that we had when you talked about the.
The fact that our operating income was above what we had planned.
That was driven by lower than had lower than expected head count.
Okay. So the hiring hiring was not a factor in terms of the.
The the the.
Pipeline or the and the billings piece is that correct. That's correct. The heart. The hiring was it was not a big impact on the on the missing sales targets.
Okay all right. Thank you.
And your next question comes from the line of Steve Koenig from Wedbush Securities. Your line is open.
Terrific. Thank you very much.
So first one for you, though you laid out.
Yes, really compelling product.
And your road map for getting there or what you need to do.
So I am wondering.
To get where you want to be.
In terms of.
Executing to your plan.
And the numbers.
Does that does the new product vision really need the mature with those.
Being out and mature.
Get where you want to be on your financial targets or is it is it more in the near term a matter of educating your customers that their investment in HCM will be preserved.
And getting through the sales reorg that you've done.
Or do that products really the new products really need to get my answer for you to be back on track.
That's a great question I would say, we certainly need to deliver on these price and deliver.
Confidence these products are on track to.
To to meet our customers' needs and.
A lot of that we expect to happen out of the gate. For example, our infrastructure project is is very strong, but we have not put the appropriate level of go to market focus on fully leveraging the product we have there with the infrastructure and so our plays too.
Go from small departments within our existing accounts to full estate, that's largely the go to market effort.
That we recently kicked off in and with great focus and energy and scrutiny.
Other products like logging are going to be.
New to the market and and Thats why we focus in on the use case I described.
To an earlier question around troubleshooting, which is our strength and we think we're going to offer a lot there.
But I really think that the general manager model, we've moved to where these general managers are fully accountable not only to delivering great products that our customers.
Love and tell their friends about but also the business results that come from selling those products there they're punch their their their entrepreneurs that are accountable for delivering those results and that's that's a big change for us that I think is going to yield a lot of benefit.
And they're focused on exactly as questions like how how rapidly can I deliver the very best product that will drive business growth at new relic.
So that's helpful I guess.
If you were to.
Timeline.
The fee.
Incremental improvements to your results that will come about from.
Say the sales reorg product reorder.
Jordan Nice reorder.
Getting some of the new skews out like how do those things fall out in terms of a timeline like what what what benefits from which of those initiatives come first.
Well I'd say the.
Yes, we don't want to get too precise with with.
With with timelines, but I would say that.
In the coming quarter or two we need to deliver on extensibility right ingesting more data from logs from dimensional metrics from these other places. So that's that's work that we have to deliver in the next couple of quarters. When we do there is a backlog of customer demand that want to use that technology and that will influence their thinking when they think about standardization decisions, particularly enterprise customers that really want to understand the roadmap before they make.
A seven digit commitment so.
So those those are important milestones that were very focused on and they can have they could have a short term benefit.
Or shorter term benefit.
But but.
We eat given given the execution challenges we had in the quarter I don't want to set expectations too high on specific timeframe, rather just show that we are working with urgency to deliver these capabilities because our customers are asking for it and we believe it's going to really help our position in the market.
And your next question comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Hi, Thank you I'm going to go in a little bit different order given that last question.
You've taken down your cash flow targets for the year.
By call it $15 million and I'm going to assume that thats due to the de are moving lower but if you could confirm that.
And the follow the second part of that is if you. If in fact, you are lowering VR expectations.
Why not lower the revenue expectations commensurate with that even if it's more back end loaded.
The.
Confirm that thats largely driven by the.
The decline in D.R. that that guidance.
And I would say.
The shortfall in the first half of the year has a has a big impact on on revenue for the year as you know with the with a or are coming they are our model.
The second half of the year, we've talked about the guidance for Q2, and then you can internally sort of the results for the for the second half.
And those those numbers have less every quarter, the arrow has less and less of an impact on the revenue for the year.
And so I think the guidance Weve given we are we are comfortable with.
On on the revenue portion and.
And then you have you can do the math and the gymnastics around round the DVR to come up with your own.
You on the timing of when that IR is going to come in.
And your next question comes from the line of Gray Powell from Deutsche Bank. Your line is open.
Great. Thanks for taking thanks for taking the questions.
So.
I'm traveling today, hopefully I have the math right here, but I think billings guidance implies high teens normalized growth in Q2, just how should we think about that growth rate in the second half of the year, just just directionally same better or worse.
You know, we're we're we're not giving guidance beyond what we've given in terms of revenue for the year and the billings for the for Q or the D.R. for Q2.
Typically we are getting becoming more and more of an enterprise company.
I will say.
Our seasonality in the past has been such that the first half tends to be a little bit softer than the second half given to the enterprise buying cycle in December and then our Q4 in March.
We do expect those trends to continue but but.
At this point, we're not giving further color on the specifics in Q3 and Q4.
And your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.
Hey, guys. Thank you for taking my questions I think first let me just.
Start one comment that you made in the prepared remarks little was that the adoption of.
Microservices and the like has happened faster than you expected, which has been a little bit ahead Lynch just help me understand.
Why would greater adoption of something like kubernetes.
Be a headwind given that you have on actual kubernetes monitoring product.
Actual strategy around Microservices and arguably it's less competitive in this space and kind of the core ATM and then I've got a follow up.
Sure. So I think from a macro perspective, it's all.
Great in terms of our market opportunity and.
Our position within the market, but.
In the last several quarters well we made.
I I believe the absolute the right call, but it was a trade off call to focus on new relic, one which was a long term bet for the future.
We did that the expense of doing smaller features incremental features that could have.
Further enhanced our capabilities in these microsource environments, let's take for example.
In some micro service environments.
Customers want to complement our ATM agents with more manual instrumentation because of the nature of their application just isn't well suited to automatic instrumentation that our agents do and that happens a little more often and micro service environments, because because you've got many many different services many kinds of services and so automatic automatic instrumentations harder to do and we're the best at it but it's still may not be sufficient so.
So so in that case.
Being really good at flexible a consuming data from other places rather than just our agents is really important and that's why I've spoken to why we're so focused on extensibility in our platform to deliver on that now so let's say we had focused on that earlier.
At the expense of of of the kind of more foundational work, we did in strengthening our platform for the future. Then we would have had more capabilities that area and perhaps we would have captured more business in the short term.
However, I feel like when we look down the road.
We wouldn't have the same strategic position.
That would set us up for the maximum impact that we now have now that we've got new relic one in the market. So that's how we think about the trade off I think it is a good secular tailwind this move to micro services.
But but it did have some short term impact to the business. While we are focused on the long term.
And that is all the time, we have for questions I will turn the call back over to management for some closing remarks.
Well. Thank you all for joining the call I just wanted to share a couple of thoughts before we sign off when I founded new relic.
In 2008.
You know the founding idea was less deliver amazing software that end users love and tell their friends about and that will be the foundation upon which.
We we build a great company and so those those founding principles are still deep in my heart today.
I'm very excited about the opportunity we have in front of us and I feel like.
And I'm really proud of a lot of the work we have done.
It's great that when Gartner asks their p. rights peer insights customers.
Load who their favorite vendor is an application performance monitoring we have received the highest rating in the most number ratings the highest score the highest recommendation ratings. So we do good work really good work in what we do but as this market is evolving.
The call is upon us to up our game again, and Thats, an exciting challenge for us, but but what what really excites me about that challenge is how large this opportunity is and how relevant our strengths are.
In pursuing that opportunity so.
You know, we're not pleased with the results of the quarter, but I'm more excited today about new relic vision and roadmap than I ever have been and we were just getting started on our journey and so we thank you for your questions and we thank you for coming on the call and and we're excited to keep working on delivering.
Visibility for our customers and help them deliver great digital businesses.
This concludes today's conference call you may now disconnect.