New Relic, Inc.

Good day and welcome to the new RELIC second quarter fiscal year 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Peter Goldmacher, Vice President, Investor Relations. Please go ahead.

Hi, everyone, and thanks for joining our Q2 fiscal 22 earnings call. We published a letter on our Investor Relations website about an hour ago and hope everyone's had a chance to read our letter together with today's earnings press release. Today's call will begin with prepared comments from Bill and Mark, and then we'll open up the line for your questions. During this call, we will make forward-looking statements, including about our business outlook and strategy, which we base on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and upcoming 10-Q to be filed with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. we have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our investor relations website, and an audio replay will be available there in a few hours. And with that, I'd like to turn the call over to Bill.

Thank you, Peter, and welcome to the call, everyone. This quarter marks the completion of our turnaround and the beginning of a new chapter of growth at New Relic. We made the bold move one year ago this quarter to disrupt the observability market, and it's great to see the strategy beginning to show its strength in our financial results. Mark's going to walk us through the detailed numbers in just a minute, but I'd like to first walk you through our progress against each of the five priorities I laid out for our company in the last earnings call. Our top priority is to return our revenue growth to market growth rates. As a consumption business, this demonstrates our ability to create value that customers are willing to pay for in a competitive market. We are pleased to report revenues of $196 million for the quarter, 18% year-over-year growth, up from 11% last quarter and 14% a year ago. and the highest year-over-year growth rate we've reported in six quarters. The primary driver for this was twofold, customers consuming in excess of their commitments as well as higher retention rates. Our second priority is to complete the migration of our business to the new business model. Our goal is to migrate more than 80% of the business by the end of this fiscal year. 76% of committed revenues are now on the new model. That's a five-point improvement from last quarter. Our third priority is to grow the number of paying customers. During our turnaround, we focused on migrating our customers to the new business model and ensuring that we were retaining their business. Some of our smaller customers moved to our free pricing tier. This led to the decline and then plateau of our total paid customer counts over the last several quarters. This quarter, our total paid customer count is growing again, with over 14,300 customers now paying for services from New Relic. The primary way we're driving this growth is through a 100% self-service, product-led growth funnel, starting with the New Relic One free tier. Since introducing that offer one year ago, thousands of developers have signed up for New Relic One, and nearly 5,000 have entered credit cards, an increase of more than 1,500 since it reported last quarter. These customers provide an excellent, qualified customer funnel for our direct sales teams and partners to nurture to higher levels of growth. We also landed a healthy number of new logos driven by our sales team's efforts this quarter, including greenfield opportunities, as well as several competitive takeouts against the major vendors. A great example of this is one of our biggest ever new logo wins in Europe, a UK-based fintech company with a total contract value of $3.5 million. This account started as a small proof of concept with a primary competitor already in the account, but we ultimately ended up displacing them entirely when the customer determined that we were able to better solve their problems with our all-in-one platform. The contract was fulfilled through our AWS marketplace, further demonstrating the strength of that alliance. We're also seeing customer win-backs from competitors. For example, one customer who transitioned away from New Relic in 2020 recently returned to our platform. As the customer's business grew, they began to experience sizable technical gaps and surprise bills from the competition, a reoccurring theme. One of our partners spotted this opportunity to better address the customer's needs and ended up reintroducing them to New Relic One and completely displaced the competitor in the account. Our fourth priority is to methodically deliver platform innovation and greater value to our customers. This quarter was another hallmark of innovation from our product organization. In addition to the thousands of small and sometimes not so small improvements across the platform, we made two major new services for purchase available this quarter, Pixie and Network Monitoring. While it's still early days, we're seeing healthy adoption of these new workloads. Last month, we also introduced New Relic I.O., short for Instant Observability. IO is another product-led growth initiative that offers a dramatically simplified approach to observability with a large and growing catalog of ready-made telemetry sources, dashboards, and alerts to help new and existing customers realize value in minutes. In late October, we also announced New Relic CodeStream, an industry-first innovation that we believe increases our ability to reach more developers and expands the observability TAM. CodeStream empowers developers to instrument their applications, collaborate with fellow engineers, and debug production issues directly from inside their development environment of choice. As part of this release, we announced a strategic partnership with Microsoft to reach millions of engineers through direct product integrations now available in VS Code, Visual Studio, Azure DevOps, Microsoft Teams, and GitHub, among other popular developer tools. Coinciding with the Code Stream launch and to assist in monetizing this new cohort of users, along with other capabilities of the platform, we announced a new core user type, a lower-priced offer specifically crafted for code-focused developers who have not yet embraced observability or are only occasionally pulled into code-related incidents and therefore don't have a paid user license. This new user type will be available for purchase later this month, and we anticipate will begin to be a source of new paid users in Q4. The core user serves as an on-ramp to observability and will lead to more full platform users over time. Our fifth and final priority is to improve our internal execution efficiency and cost. We realize that while we showed strong progress this quarter, in order to reach our full potential and achieve competitive growth rates, all areas of the business need to move faster with less friction, more alignment, and greater efficiency. Fundamental to all of that is great people. We made recruiting, retaining, and developing our talented employees a top focus this past quarter. We were able to dramatically lower attrition rates, and we achieved our strongest hiring quarter in three years. Our sales organization is beginning to really hit its stride. More of the sales team achieved their quarters in Q2 than the past six quarters. Our internal engagement survey shows employee morale across the board is improving, and we remain focused on fostering a strong internal culture. On the financial efficiency front, GAAP gross margins was 67%, and non-GAAP gross margin remained at 69% for a few reasons. First, I encouraged the team to accelerate our move to public cloud in international regions so we can better serve customers outside the U.S., This increased cost short term, but I believe will lead to more opportunity, lower churn, and better customer experience medium to long term. Second, data growth continues to be strong. Data is our major driver of cost and continues to put pressure on our gross margins, especially while we're straddling both on-premise data centers and public cloud. But data will attract more users where our profit margins are higher. Pulling forward these investments impacts margins over the near term, but we believe investing in these opportunities today will provide meaningful operational benefits and attractive returns over the medium to long term. For more details on our business, please refer to the investor letter we've published on the website. Today is an exciting inflection point for New Relic, and yet the most exciting part for me is the road ahead. I believe we're still in the early days of observability, and we're playing the long game. The long-term success of any business is not the early moves made by the many, but the strategic moves made by the few. And in this regard, I believe the bold decisions we made the last four quarters and our tenacious execution against them show New Relic has what it takes to be a market leader. We anticipate there will be more unexpected setbacks and challenges along the way, such as the way of any business. But we'll tackle them the same way we did the last four quarters, by living our company values, being authentic and true to who we are, and boldly and with passion and a sense of connection work to serve customers and investors to whom we're accountable. Only New Relic is taking a developer-first approach to observability. It's in our DNA, and it has been since the founding of our company. There are 27 million professional developers and many millions of SRE, IT operators, and other professionals who don't practice observability today, and to whom we are bringing a powerful message. data-driven approach to engineering so they can stop relying on opinions and alignment meetings to prioritize, plan, and execute. Only New Relic is taking a data-centric approach to observability. Other than monetize app after app, Only New Relic allows engineering teams to ingest all types and all sources of telemetry for just 25 cents a gigabyte. We then connect those data sets and the engineering teams that surround them with a full estate view of their systems and the dependencies between them. Only New Relic has shifted to a true platform consumption business model that allows enterprises to eliminate blind spots and standardize on New Relic One across their engineering organization with a simplified user and data pricing model so they only pay for what they use. For these reasons, I believe the road ahead is going to be even more thrilling than the journey we took to get here. I am so grateful for employees, for their dedication to New Relic throughout the turnaround, for living our core values and giving their all despite a global pandemic, despite fierce competition, despite the great resignation. With adversity comes strength, and with the challenges of the past year behind us, I'm more confident than ever in our ability to solve our customers' hardest problems and reach our full potential as a company.