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spk06: all about revenue. And then that's why we talked about net revenue retention. And, you know, internally, we look at all sorts of metrics, as you can imagine. For us, it's really about accounts, users, and data, primarily users and data. That's what drives our top line. But internally, as a company, we are all aligned around growing data and growing users and so that's what we're very focused on in terms of the externally focused metrics it's really about revenue and um and the net revenue tension so that's what that's what we encourage folks to to to look at um and we think is is going to be really the most telling indicator of our business and um as we've we've talked about in the letter you know we're facing a headwind at this point um as we make this transition But we're looking at the back half of the year, and we're confident that revenue growth will start to reaccelerate in the back half of the year.
spk02: And if I could just follow up on that last point. Given that, as you say, that there's still a transition as it relates to revenue growth over the next couple of quarters, Wouldn't it make more sense to share some of those internal data around paid users, data consumption, just for investors to see those trend lines, to see sort of the progress in terms of executing on the business model transition, understanding that revenue growth in the near term is going to continue to be under pressure?
spk06: Yeah, so we've given some of that data in the investor letter talking about data growth. And we talked about the data growth year over year and how that has been expanding. And I think it went from roughly 70% year over year to 80% in the low 80s over the last 12 months. And so we have given indications of how that data is growing. We also are looking and we've given some information around the low end of our business, the self-service portion of our business, and some of the growth characteristics of that business which we think are very, very interesting and good data points for folks to take a look at. We obviously want to be – we're still in this process. We haven't had customers complete a full 12 months. in the annual pool of funds in consumption billing yet. So, you know, we've got to be a little cautious with what we give out because we know how those things tend to get extrapolated things. But we have given a fair amount of information in the letter about how that's going.
spk03: Got it. I appreciate it, Mark, and congrats to Bill on the UBC URL.
spk08: Our next question comes from Kingsley Crane from Barenburg. Please go ahead with your question. Kingsley Crane Thank you. I also want to extend congrats to Bill and to Lou for what you've built in New Relic and for now leading the company in a new capacity. Two questions. One is on some of the comments you've made in the letter about spend contribution from users and data. You said you've seen 65% users, 35% data. you've also said that you expect this to return to 70-30, but it also may go to 60-40, and it may affect gross margins. So just some clarification on where you see this trending and how it might affect gross margins would be helpful.
spk06: Sure. So it's roughly two-thirds, one-third. You know, I think it depends a little bit on how, you know, On the customer mix, larger customers tend to be a little bit skewed more heavily toward data than users. And the lower end, they can be more skewed a little bit toward users than data. We put two-thirds, one-third out there. In our longer-term models, we're looking at 70-30 as being the likely case. On the other hand, we want to let folks know, to the extent we're very successful in attracting even more data than we've assumed, then that could push that closer to 60-40. In that case, it would have a modest impact on gross margins, but we think that would be more than worth it, given the increased data would inevitably drive the top line higher.
spk08: okay that's that's fair thank you and then second would be in the letter you call out that you anniversary the model transition in the back half of this fiscal year and you expect a re-acceleration in growth your guidance implies six to seven percent growth in q1 and six percent in fiscal year so how should we think about the uh transitional headwinds as we progress through this year so
spk06: We continue to face headwinds as we're getting through the next two quarters. We've got Q1, then Q2. Remember, we introduced this new program last August. So at that point, we'll have our first cohort of customers. That just is anniversary. And so at that point, we'll have a full year behind us. And then as we look out at consumption and we look out at the trends we're seeing, we're confident that revenue will accelerate in the back half, starting in the second half of the year, Q3, and then into Q4. Okay. That's great.
spk08: Thank you again. Our next question comes from Rob Oliver from Baird. Please go ahead with your question. Great. Thank you, guys, and apologize for any background noise here. Phil, congratulations to you, and Lou, best wishes to you, and it's been fun working with you over the years. My question is on the state of the sales force right now. I mean, you guys asked your enterprise sales force to completely change the way they sell, and I'm just curious now, particularly now, coming into the new year about the state of the sales force, how they've responded to the change in the pricing model, how they're executing on that so far, and if we've seen all the changes that we, you know, if all the changes that have been needed in the sales force have all been made. Yeah, thanks for that question. This is Bill here. I'll take that one. We spend the first month of our fiscal year, so the month of April in a lot of sales enablement training, onboarding to the new compensation model for them. Spent a lot of time talking through the shift to consumption, the value that holds for customers, and the best ways to engage customers to help them solve their business problems. Universally, the feedback that I heard out of that sales training and enablement was very positive. I think, you know, it really changes the nature of the relationship that our sales relationship managers get to have with the customer, shifting away from these more combative, you know, negotiation-type conversations to really how can we solve your business problem? How can we put New Relic to work for you? and then unlocking that value with the customer, which drives consumption now fully aligned with their compensation model. So it's really a win for the customer, a win for our sales team, I've seen a lot of enthusiasm and engagement by the sales organization on the new model. So, yeah, I think we're off to a great start. The first month, six weeks of the quarter are looking good and looking forward to seeing the progress throughout the year. As Mark said, completing that transition from 60% of our customers in the model at the end of Q4 to well over 80% by the end of the fiscal year.
spk02: Great. Thanks, guys. I'll hold it right there. Appreciate it, Bill. Thanks again.
spk08: Congrats again. Our next question comes from Robert Magic from Raymond James. Please go ahead with your question. Great thanks and congrats to Bill and Lou. It looks like your ingestion volumes were generally flattish from November to February as I eyeballed the chart, but then picked up in March. And I know in the letter you talked about seeing some green shoots around engagement. Is the pick up in March an example of that? And should we expect a smoother ramp up from here on? The data volumes, I think they did level off around the holiday season and November, December, uh and into january with a little slower of a upstart that's pretty typical seasonal pattern that we see a lot of the ramp up to the holiday season uh in the observability workload happens before black friday you know anticipation of those spikes in volume so um there is a seasonal leveling off during the holidays and we have a bit of a slow ramp up i think um we chalk it up to uh you know covet and some of the um uh in variation there i think though we um you know we have seen enough tick in in data and indefinitely in engagement um since then the investor letter goes into some great detail in terms of the innovation in q4 as well as the impact that's had on user engagement uh increasing uh the number of users and the frequency with which they engage so That hypothesis that we had that increased data would lead to increased users is showing up now, and we're excited to see both of those grow, although there will be occasional seasonal variations. And can you go into more detail on the renewal churn you're seeing? Does it have to do with hesitation around the new consumption model, or is it indicative of a more competitive environment?
spk06: You gave us a few examples in the letter, but if you can elaborate more broadly on what you're hearing from customers, that would be helpful. A large part of that is the fact that we are now no longer focused on commitments. And so our focus is getting folks onto the new model. And so it's collaborative. We want them to commit to whatever level of spend they're comfortable with. And then once they do that, that's when the work starts. Okay, let's get them consuming, let's get them consuming more. And so I think that is, that's been, you know, that's been, when you look at the old metrics of ARR, that's been a headwind to ARR because we're no longer focused on that. We've been talking about that now for a couple quarters. And as we get into this year, we're, you know, the comp plans, everything's aligned around that. So I think I think the biggest issue has been us changing our strategy, now being more aligned with the customers and being comfortable with whatever level of commitment they want to commit to. So I think that's been a big change. I think customers like that. I think it's better for overall efficiency and getting deals done, and we've seen that accelerate the rate at which we can convert customers. It's fewer calories. Less energy is taken now to convert a customer to the new model now that we've gotten away from worrying about the level of commitment. We also have some customers who are not comfortable committing to large numbers even though they know and they've told us that they're going to spend a lot more than they're committing to. There's no penalty for that. We don't charge higher rates because they went over their commitment or something like that. So we have some large customers who have just said, I'm going to keep spending, I'm going to grow my spend, but you know what, I want to commit to a much lower level. We're comfortable with that. The critical thing for us would be to watch that consumption like a hawk and make sure that it is continuing as expected. But those are some of the dynamics that are going on that make that overall commitment level less of an indicator of how things are really going. Appreciate the call, Zach.
spk04: And our next question comes from George Awanek from Oppenheimer. Please go ahead with your question.
spk05: All right. Thank you for taking my question. And congratulations, Bill. And thank you for your perspective over the years. So looking at the sales comments that you made, can you give us a sense of maybe the type of person you're hiring right now? Are you hiring a more technical person to focus on the customer success part of the equation at this point?
spk08: Yeah, definitely the importance of having our technical sales field involved in those conversations on an ongoing basis is more important than ever, and so we're hiring there, as well as relationship managers that have a history of nurturing ongoing and supportive relationships with customers versus sometimes you see the pattern of more aggressive kind of negotiation-type sales managers We've, you know, with the consumption model really, really pivoted to focusing on long-term relationships and value realization. And so the vendors that are more indicative of that model are the ones that we're recruiting from. And also, as you know, a shift to more technical sellers as well as our solution consultants.
spk05: And so following up on that, just from a self service perspective, can you maybe give us some color on how you're shifting your marketing dollars, how you're leaning on ecosystem partners to, you know, accelerate the engagement process of those accounts and users?
spk08: You bet. Yeah, as you noted likely in the investor letter, our new self-service business is rapidly expanding. That's a great indication of the strength of the product and the value that customers are finding there as they transition from our free tier into a paid model. We are increasingly, with the confidence we're getting there, increasingly shifting some dollars, more dollars into marketing and top of funnel than we have in the past. But I wouldn't say that it's being driven out of pure marketing spend. It's really been much more driven on the brand and the word of mouth as customers, as the mindshare grows around the New Relic One platform. On the overall signs around self-serve business, I think, as you may have noted, our total paying accounts for the first quarter and quite a few quarters leveled out, and we see that largely driven by the growth in the self-serve business and The strength there we believe will continue and reverse the trend of declining paid customers in the future quarters. Thank you.
spk02: Our next question comes from Young Kim from Loop Capital Markets. Please go ahead with your question.
spk00: Thank you. First, congrats on Bill on the promotion. So I think you guys are already at least two quarters into the new pricing model. For those customers who have changed over to the new pricing model, how long does it take on average before they reach the revenue run rate that was somewhat same or similar to the old model?
spk08: Yeah, it's a good question, and it obviously varies by customer, but we have been studying over the last two and a half quarters that we've been in that model for the customers who've adopted. And what we're seeing is it takes about a month or so for them to right-size their consumption, you know, based on users and data, the new pricing meters. And then once that right-sizing is done the first month, usage begins to steadily grow. And as we've noted before, starting with data, ingesting more data because of the low cost per gigabyte that we offer, and then that attracting more users. And now we're seeing both data and users grow healthy for the customers that have been in the model for several months.
spk06: Yeah, the only thing I would add to that comment is – You know, it's interesting. We have two data sets, multiple data sets, but one where customers are converting over from the historical model that was subscription-based, host-based pricing, primarily APM-driven, that were migrating to a platform, to a consumption model. And then we have another cohort of customers that is brand new to the New Relic. They came on with the New Relic platform as their only knowledge of New Relic and the consumption model as their core platform. pricing mechanism, and the behavior of the two customers is quite different. The customers that convert over, in their minds, they have a value prop, a legacy spend level, so they'll be in some ways influenced by what they used to be doing, what they used to be spending, and we'll see some behavior modifications where it looks like they're trying to do some gymnastics to fit in that spend or do some things because they've got that historic perspective. New customers, on the other hand, tend to come in and embrace the platform and start to grow data and users right from the get-go. And I think those growth rates are what we think will be more indicative of the future once we've got everyone migrated over and people, again, get out of that historic perspective of, you know, a host-based and an APM-only and a siloed-type view of the product.
spk00: Okay, great. That was very helpful. One of the main goals of the new pricing model is to encourage use of more of your products customers adopt New Relic as their enterprise standard. Are you seeing that trend materialize with those customers who have adopted the new pricing model? You know, previously maybe they were only doing APM and maybe a couple of modules, but are you seeing them – I know it's only been two and a half quarters, but are you starting to see any pilot projects that kind of is leveraging some of the other newer products that they previously did not use?
spk08: Absolutely, yes. The number of data types and the breadth of adoption we are seeing expand. I think we've shared some of that data, again, in the investor letter and the one previous to this quarter as well, but very healthy adoption across the platform for customers that move to the new model. I'll note we also launched major improvements to our logging system product last month after Q4 ended, and the growth in logging in particular as an expansion in new products in the platform has been phenomenal. So definitely seeing breadth of platform adoption for customers who move to the new consumption model.
spk00: Okay, that's good to hear. I got one quick question for Mark. Can you remind us what the billing frequency is under the new model? Is it monthly, quarterly, annually?
spk06: Primarily, it is annual upfront.
spk00: Okay. For the new pricing model, right, the consumption-based?
spk06: Yeah, for the consumption. And then, obviously, once they hit their commit, then it gets to monthly overages. But when they make a commitment, the vast majority of our customers are annual upfront.
spk00: Okay.
spk06: And then a pay-go business, the low end is monthly.
spk00: Okay, great. Okay, thank you so much.
spk03: Our next question comes from Michael Turretts from CPAC.
spk04: Please go ahead with your question. Hey, guys. Lou, of course, congratulations to you on everything you've accomplished.
spk08: One for Mark, one for Bill. So for Mark, if there is what's called an accounting or model headwind to revenue growth, it makes that not representative right now.
spk04: First of all, do I understand that it's the difference between consumption as we go versus what we're a higher level of commits? and therefore a tough comp at this point with that anniversary?
spk08: And can you normalize for that in some way to let us know, at least based on current trends, where we might emerge once the anniversary of that from a growth perspective?
spk06: Well, in the old world, we would have gotten an upfront commitment at the time of renewal. We would have gotten, say, a 15% or 20% uptick in committed spend. And so on March 31, someone does that, and then we start recognizing that subscription on April 1 at the higher level. In the new world, they migrate over at that existing spend, and so on April 1, there's no difference. from March 31, right? April revenue is the same as March revenue. It's only when consumption increases and gets to the point where that consumption looks like it's going to be higher than their historical commitment where we start to recognize incremental revenue. So that tends to be pushed out a little bit. And I would say it's pushed out a couple quarters on average. It depends on a lot of things, but I would say that's kind of a decent proxy. And so you do have this, you know, a time of commitment instead of getting the initial immediate bump, you do have a delay. And now on the flip side, you know, historically a lot of our customers would have been overconsuming before the end of their contract period was up. And they would just get away effectively with overconsuming until the renewal period. You know, at this point, we'll actually capture some of that in the period in which they're consuming because the revenue will be more closely tied to their actual consumption. So initially, there is that headwind, but then we catch up in the back half of the year.
spk08: And do you feel like you can take a shot at normalizing to see where we emerge in terms of growth past the anniversary?
spk06: You know, we're looking at all sorts of numbers and trends around that. We've given out guidance, you know, our revenue guidance for the year. Certainly our long-term goals that we've talked about is to get back to market rate growth. And so, you know, we want to be able to do that. But, you know, it's hard to – it's kind of apples and oranges trying to compare the two, you know, over the next, you know, next one or two, you know, couple quarters.
spk04: I've got a Bill question.
spk08: The Bill question is, You know, you've pursued a – I wonder how things are going competitively in the sense that you've pursued maybe a more focused and defined monitoring or observability strategy around, you know, you've expanded into logging, metrics, traces, et cetera. But some of your competitors have gotten broader than that, looking at areas like workflows, security, or are part of larger organizations like ServiceNow is going to be in observability. Splunk is broader. So how do you feel like you're doing competing against what looks like a field that is approaching things from a broader strategic perspective? I wouldn't characterize it as a broader strategic perspective. I feel really good about our competitive position, honestly. The bulk of our opportunity is greenfield, although when we do come up against competitors, we're seeing some phenomenal wins again against some of the leading vendors. And our strategy is just fundamentally different. While they may be expanding into, say, security, as you've mentioned, um we're increasingly moving other directions and the the product roadmap as lou noted this quarter in q4 was phenomenal i'm really excited by where we're going to take observability and fy 22 and the roadmap ahead you're going to see continued innovation and differentiation from new relic one not chasing tail lights of competitors and some of the things that they've already chosen to do but really chart our own course which we think is most valuable for customers.
spk03: Thanks, Bill.
spk02: Our next question comes from Eric from JMP Securities. Please go ahead with your question.
spk07: Yeah, thanks for taking the question, and congratulations, Lou. First off, on the consumption model, what is the sales compensation like? Is it just a regular renewal that the salesperson gets on the commitment and then they get paid on the consumption piece on a monthly basis? Or how does that look? And then secondly, can you update us where you are in terms of the transition off of AWS?
spk06: Sure. So on the sales compensation, we pay on – it is 100% on consumption. So it is users and data, and that's the dollar run rate, basically, of the consumption of their customers. So every month you have a patch, and you look at what the consumption of your patch is on the first of the month. You look at what your consumption is on your patch on the last day of the month, and the change, the increase, is how you get paid. You work down quota by getting that consumption to increase, and you get monthly compensation on that. So that's the sales compensation. On the migration to AWS in the cloud, that is going well. As we note in the letter, the gross margin in Q4 – was impacted by some spend that had shifted from Q3, as well as we had a reclass of some expenses from R&D expense to our COGS line. But that is going well. We expect gross margins to take a dip in Q1, and I would say likely Q1 will likely be where we where we're into the 60s, a little bit lower gross margin, and then we expect them to start climbing to get back to the low 70s for the year. And we do expect gross margins to climb up into the 80s as we continue this migration through the end, back to the 80% rate, I should say, as we continue migration into fiscal 23. In fiscal 22, we expect about a $40 million hit to our cause and bottom line because of the double bubble, if you will, the migration expenses, the fact that we're carrying still the legacy costs, the scope costs associated with our internal data center, as well as driving our business to the cloud. So that's a substantial headwind in the year. Very good. Thank you.
spk02: Our next question comes from Sterling Audi from JP Morgan. Could you go ahead with your question?
spk08: Yeah, thanks, guys. First, Bill, congratulations. Lou, not only congratulations, but thank you for all the years of innovation that certainly has benefited all of us. So thanks again. On to the business, I'm curious with the new pricing model, can you give us a sense of the type of industry and the type of users that you're seeing the greatest traction with? So in other words, is there a particular kind of trend that you're seeing in the type of companies and the type of users that are attracted to the new model? On industry, I don't... I think it's cross-industry. I don't see much trend in terms of where we're more successful than others. In terms of the type of user, type of engineer, New Relic historically has been very attractive for developers and those who adopt our ATM solution that requires often involvement with deploying our agents with the code. But increasingly as well, we're seeing, given our stronger product offering with logging and infra and other solutions, more breadth adoption across IT, so enterprise and operators embracing New Relic One as a platform. So broadening into SRE and more of the operator space as well.
spk04: If I could add one detail, it is a little bit of a trend, though. We call to it in the letter. Our pay-as-you-go business, is remarkably strong and why i think that matters is that is pure product and it tends to be ahead of where larger enterprises go because smaller companies can be more nimble so the fact that we see such a rapid growth in the in the number of page you go customers exceeding our expectations and the fact that uh the growth the number of page you go customers that go above 25k with no direct sales involvement That's a testimony to the amazing product that really built and transformed in the last year and a bit, just driving business growth. And our hope is that that also shows up broadly across the whole business in a similar way over the long term. Got it.
spk08: And then as a follow-up, I wonder if we could revisit the user versus data mix contribution. I guess I wasn't clear. Where do you think that settles out over the long term and why?
spk06: So I guess I would say rough numbers, two-thirds, one-thirds. And that is... You know, we want to drive that. Obviously, the higher the user count for us, the better as a percentage given gross margins. That's a much higher gross margin on our user base than on the data. You know, so it does depend on our customer mix. We think overall our customer mix is going to be, I would say, if anything, shifting more toward smaller and medium-sized customers as opposed to the large enterprises. We'll get plenty of those. But if you look at where we are when we're at $2 billion, if you will, that mix I think is such that we'll be probably a little bit more skewed toward the higher user count and lower as a percentage of the total. You know, we do push data, and so if we're really successful in pushing data, then, you know, we could see that number drift below or above a third, and it could go as high as 40%. And, again, that would be great in our minds because we think that would be a leading indicator to then getting more users later on. So I think, you know, roughly speaking, I would say think two-thirds, one-third as a decent estimate.
spk02: Understood. Thank you. Our next question comes from Jack Andrews from Needham.
spk04: Please go ahead with your question.
spk02: Thanks for taking my question, and I'll echo my congratulations to Bill and Lou. I want to ask a question on the partner side of things.
spk08: Could you just talk about how your channel of MSPs and systems integrators have absorbed this consumption-based change, and are they fully educated on the change, or what is kind of the feedback that you're getting from that group? Yeah. Our MSPs uh is has been lagging i think where um our you know sales team has been the shift to consumption the new pricing model packs them as well and the the self-service tools that are needed to support them have not been fully available um and so i'd say it's been lagging but it's an important area of investment for us that we're prioritizing for this fiscal year and expect to help us to accelerate growth in the coming quarters ahead.
spk02: Okay, thanks. And then just I want to ask a higher-level question, which is just how do you think about elasticity of demand in this market when you're weighing, I guess, price versus users and data?
spk08: Do you think that you've found the sweet spot here, or do you think there's maybe opportunities to perhaps further optimize what you can potentially capture in terms of data and market share? That's a good question. We've been asking ourselves that lately and doing some studies with external vendors around price elasticity now that we've been in market for coming up on the anniversary in July. We think it's a good time, given we pioneered this model, kind of introduced and set the price to check in and getting some really valuable data and we'll be making any necessary pricing changes as a result of that. I think it's a bit too early to share the specifics on what might change, but it's definitely something we're looking at and wanting to be able to maximize our revenue share as a result of the attractive pricing model that we've introduced.
spk03: Thanks for the call. Ladies and gentlemen, once again, if you would like to ask a question, please press star and then one.
spk08: To withdraw your question, you may press star and two. Our next question comes from Derek Wood from Talon & Company.
spk03: Please go ahead with your question.
spk08: Oh, thanks, and congrats, Lou and Bill, and good luck on the next chapters. Maybe first, Bill, can you give us a little more color on the go-to-market restructuring that you guys announced and kind of more specifically what you've done. And one of the points in the press release was that you believe productivity levels are higher in a consumption model. So could you just flesh that out in terms of why you think that's the case? Yeah. Thanks for asking the question. Yeah, as we noted with restructuring, our – As you probably know, our sales and marketing spend has been much higher than our peers historically, and we feel like this change really sets us up to be both more competitive but also really aligned with the strategy and focusing our sellers on driving consumption versus those upfront commits. I think the traction that we're seeing also in that self-service space, think of that as not just validation of the product and a very highly efficient adoption model, but also a really highly efficient customer acquisition model. channel where those customers come in, they're getting value, they want to increase their spend, as we noted in the investor letter. We're seeing a number of customers going beyond $25,000, even $100,000 in spend, and those become highly qualified and engaged customers that our sales team then engages and expands. And so the efficiency really comes by reducing and focusing that go-to-market motion on consumption and coupled together with that product-led growth or self-service model really is the complementary benefits that we're seeing play out there. And I think this sets us up well for FY22, as I mentioned earlier, to begin again to grow paid accounts overall. We're going to see that expand, we believe, and also continue in the back half of the year, as Mark noted, to see accelerating revenue growth as well. Yeah, okay, that makes sense. And one for Mark, the 100K account number was down sequentially for the first time I heard. It sounds like most of that's due to the shift off of subscription contracts. But can you tell us how churn has trended during this model transition over the last couple of quarters? And I think you may have mentioned a couple losses in the quarter, but if you could give a little more color there, thanks.
spk06: Yeah, sure. So, you know, when we talk about churn, historically we've talked about churn and thought about churn as, Churn is any time someone goes from a certain level of spend to a reduced level of spend. And that's what we've talked, and that was churn, right? That was a downgrade. In our new modeling, we want to just be careful about how we're talking about things. churn is if a customer goes to zero and they turn out of our business that obviously is really bad we want to prevent that and and do everything we can to prevent that and i think a lot of the go-to-market restructuring work we're doing is is aimed at that making sure people are engaged if they're engaged they won't turn out they'll keep using um and and and uh you know so so when we look back what we're seeing is some customers are reducing their spend Sometimes that's a bad thing. Sometimes it's a fine thing, right? They are going to continue to consume. It's all around consumption. So I think we just want to be thoughtful about how we use all these terms. But when we look back at the trends we've been seeing, One of the big reasons we went to this model last summer was that we felt like we had too many customers who were stuck on APM only as New Relic customers, and we knew that wasn't a long-term win for us or for the customer. And we had too many customers who moved. too many times where we felt like the customer really wasn't getting enough out of our solution. And we felt that was a big change we had to make to drive different results. And that resulted in the platform introduction, New Relic went into production last August, which the product obviously changed dramatically, but also our go-to-market motion where we're changing and we're driving, we're compensating our reps on consumption. Now the reps have an incentive to be engaged with customers on a monthly if not weekly or daily basis. They want to be making sure that customers are doing that. So we've made all these changes to try and address what we felt like was a churn number that was above where we wanted it to be. As we get into this year, we're confident that that is having good results, that we're getting more engaged with our customers, that customers are adopting more of the platform, and that we'll be able to improve, you know, improve the number of customers who leave New Relic and, you know, our overall downgrades and turn numbers. We're confident we'll be able to improve those as we go through this year. Great. Thanks for the color.
spk08: And our next question comes from Keith Bachman from Bank of Montreal. Please go ahead with your question. Hi. Thank you very much. Mark, I wanted to see if you could offer any color on, given the platform that you have today and the new pricing model, how do you see the dynamics of growth driven by new logos versus existing customers?
spk06: Sure. Our business is going to be primarily driven in the short term by expansion of existing business and consumption increases from existing customers. No doubt about that. Those customers, that base can grow modestly, and it dwarfs the net new that we get for new customers. A new customer for us is someone we define as someone who comes in and goes from not paying us to paying us. And the vast majority of those customers come in at the pay-go, at the self-serve, pay-as-you-go threshold where they are a free-tier customer. They migrate to paying. And you can see in the – we talked about it. You've seen the information around how they grow. They get to a 25K or so threshold in annual spend, and then maybe they become a sales opportunity, and then we grow them from there. So the first couple dollars are new, and the next, you know, hopefully millions that we get from that customer are all expansion. So The vast majority of it is expansion. On the other hand, what we are very focused on is the number of new customers we get in. And that's what we really think. When we think about our new business, we look at the metric there is how many new customers we're getting in. And the secondary metric is how much, you know, in committed spend and consumption are we getting in from those new customers. So hopefully that addresses it.
spk08: yeah and so that's where i wanted to follow up on is you know the majority of your new dollars are still going to come from existing customers you've only had two quarters so i really as it may be a bit premature but how do you see your growth driven by the consumption model associated with your new customers previously we use the term net expansion but you don't want to use that but you know any any kind of conjecture or guidelines you might be able to provide about given the new consumption model how you think growth is going to trend with your existing customer base?
spk06: Well, we're keeping, as you can imagine, a very close eye on these numbers. We look at all sorts of different cohorts of customers that have transitioned. How are they growing? New customers, how are they growing? And, you know, what we speculated were seeing to be the case, where after this initial period, you know, customers tend to increase data consumption first, and our data price is very attractive, and I think customers recognize that. And so they say, you know what, it's pretty cheap. I'm going to put some data in there. And so the data growth starts, and that's what we see early, and then that drives the user growth you know, a couple months down the line. And then, you know, I think that, you know, what we're hoping for and expecting is that's somewhat of a virtuous cycle. You know, new users come on and they bring in more data. And so, you know, we've seen early indications of these trends happening, and we're pleased with the numbers we see, but, you know, we want to get a little more time under our belt before we start talking too broadly about them or, you know, take them to the bank. Yeah, understood.
spk08: Understood. Okay, I'm going to try to sneak one more in. Just on the channel, a question was asked previously. Mine's a little bit broader, but how do you get mindshare, you think, with channel partners? And what I mean by that, how do you make sure that the channel is making at least comparable money working with with New Relic based on the new consumption model. I just wanted to know what your tactics are to try to make sure you train channel mindshare as you're going through this multi-phase transition. Yeah, when we think about channel partners, obviously the opportunity in it for them has to be equally compelling as it is for our customers. And so we've been working through the arrangement in how they are able to both price and sell the consumption model as well as benefit from it. And then also working on a product roadmap that can support that from a self-service experience perspective so that they can onboard customers and support the customer as well. I think the opportunities there, especially we're seeing in the EMEA and APJ markets, the need for that partner channel, the demand for the partner channel as a sales funnel is increasingly clear. And as I mentioned earlier, we're going to be investing there in FY22 to expand that channel and support those partners. Okay. All right. Well, best of luck to all. Many thanks.
spk06: Okay. So I just want to – I know we're about out of time for questions, and before I hand it over to Lou, I just want to say a couple other comments about things that have come up. And one is on our – outlook for the year. I mentioned the $40 million double bubble spend we have hitting gross margin. We also have a change to our commission accounting. And if you remember, 606, a couple of years ago, we all went from expensing commissions to advertising them. In our case, it was generally over three years. and the bulk of commission were amortized. Now that we are moving to a consumption-based model and a sales commission plan that's based on consumption, we are actually going back to expensing commissions in the year in which they're earned, the period in which they're earned. And so that's going to be in the $35-ish million of a hit to our sales and marketing expense line this year. That is not a cash item. But you'll see that in numbers and still want folks to be able to model that out accurately. And then the only other thing in common I would like to make is around visibility. I've heard a number of comments from folks over the last couple quarters about visibility and whether or not how visibility changes with the move to the consumption model. And visibility, I would look at it as being just about as good for a consumption company as it is for a subscription company. The reality is we're looking at our customers and how they're consuming on a daily basis now. And in the old model, you did have a commitment for one year, but then that year, they could upgrade, they could downgrade, and a lot of times you didn't necessarily have good visibility of what was going to happen there. Whereas we're in a consumption model, we're paying much closer attention to this, and these trends generally don't really change dramatically from one period or one day to the next, one week to the next. You can look at historical trends and actually gain quite a bit of confidence in terms of outlook going forward. And so we're a unique period right now. We're in the midst of a transition. So I would say that does have an impact. The near-term visibility, I think, for the corridor is very good. And it will get better over the course of the year for the longer term as we get through the transition. There is some, as we said a couple times, we want to wait until we get to the one-year period and we see the anniversary and see behaviors at the end of the contracts and at the anniversary dates before we get too far ahead of ourselves. But I just want to point that out because I know that's been a question on people's minds, and it is something that we feel like over time, you know, the consumption model will continue to afford us very good visibility into the revenue outlook. With that, I will hand it over to Lou.
spk04: Okay, thank you very much, and thanks to everybody for your questions of call, and in particular, I'm personally touched by the kind words that were shared by most of you. Just as a founder, every founder, you know, they dream for their company to have success. When I started New Relic nearly 14 years ago, I know I just exceeded my highest hopes to get to where we are today, and yet... Like any other founder, your real hope is that your company outlasts you and that at the right time, when there is a time for next leader, that that person is you know, matches and aligns with core values. And that's so true in the case of Bill. So I'm thrilled that Bill is moving into this role. I'm also personally excited to code again every day and focus on innovation. I think the New Orleans One platform is an innovator's dream, and so there's more to be done there, and I hope to contribute in that way as well as being the best helper and advisor and confidant Bill could have as CEO. So I truly believe we're just getting started and that, you know, all of the hard work we've done in the last year is now ready and well set to bear fruit, especially with such strong leadership from Bill starting on July 1st. So thank you all for your time today and for your interest in New Relic, and we are excited to continue on our noble mission.
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