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spk04: Good afternoon. Thank you for attending the New Relic for QFY 2022 earnings call. My name is Tamia and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Peter Goldmacher, Vice President of Investor Relations.
spk03: Hi, everyone, and thanks for joining our Q4 fiscal 22 earnings call. We published a letter on our investor relations website about an hour ago and hope everyone 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 strategies, 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-Q and upcoming 10-K to be filed with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our investor relations website, and an audio replay will be available there in a few hours. And with that, I'd like to turn it over to Bill.
spk09: Thanks, Peter, and welcome to the call, everyone. New Relic is in a stronger position now than it was a year ago when I was announced as CEO's successor. Let me share with you five key accomplishments of FY22. First, we accelerated our total revenue growth rate from 11% in FY21 to 18% in FY22 by adding almost $120 million to the top line this year. Underneath this, our net revenue retention rate, or NRR, grew for each of the reported cohorts and on an aggregate basis. This was driven by strong market acceptance of our products and our new pricing model, and importantly, We were able to achieve this growth while keeping sales and marketing spend essentially flat, excluding the amortized commission expense we discussed in detail last quarter. Second, we migrated 87% of our business to the new consumption business model. The speed and boldness of this cannot be overstated. I can't think of another company our size that has successfully transitioned from a legacy business model to a new business model so quickly. Customers see the New Relic model as a clear differentiator, helping them maximize the value of their budget by avoiding the shelfware and overage penalties associated with many of our competitors. Having the migration largely complete allows us to be single-minded in growing the consumption business going forward versus managing both our legacy and new businesses simultaneously. Third, our total paid customer base is growing again, after many quarters of declines. This increases the pool of customers we can nurture to higher levels of value through both in-product and sales-assisted efforts. Fourth, we're exiting the year with non-GAAP growth margins in the low 70s after four straight quarters of non-GAAP growth margins in the 60s, another early indicator of the progress we expect to see towards healthier margins in the quarters to come. Fifth and finally, our platform has never been stronger our data-centric approach to observability allows us to release waves of new innovation in fy22 which further differentiated us from competitors and laid a foundation for increased adoption across our nearly 15 000 customers going forward we not only extended our lead with apm by introducing new capabilities like air's inbox and code stream but we also revamped major platform capabilities like logs and infrastructure monitoring while extending our differentiation with brand new capabilities like Explorer, Pixie, and NPM. Historically, customers came to New Relic primarily for APM, but our all-in-one platform approach is broadening the appeal of our offering. Almost 26% of our customers use all four of our top capabilities, APM, infrastructure, logs and browser, and that number moves to almost 50% of our largest consumption customers, a significant increase from one year ago. While FY22 was a transformative year, there is a lot of work remaining. I've had the opportunity to talk with many investors over the past few quarters since becoming CEO, and I've been listening to your questions and concerns. I've identified four priorities for FY23. Our top priority remains the same as FY22, to return our revenue growth to market growth rates, which we've stated as 25% in the intermediate term. We learned a lot about the unique aspects of a consumption model this year and exited the year with a better understanding of seasonality and how customers' consumption can fluctuate for a variety of reasons. We factored this into our plan for FY23 in an effort to provide greater visibility into the business. To give you a better sense of how our business performed in FY22, we have supplemented the discussion about revenue in our investor letter with a metric called consumption run rate, or CRR, which is a more real-time view of actual platform usage. We report our monthly CRR for the past 13 months in the investor letter And you can see steady growth in consumption throughout FY22, an indication of increasing platform usage and business help, with exception of the seasonal dip we reported last earnings call, which Mark will expand on in just a moment. Following the dip, we've seen a steady rebound in consumption run rate with a strong March and April. While FY23 is only our second year in the model and our first with a majority of the business in it, We believe this will be a helpful baseline for understanding our potential growth looking forward. Our second priority is to continue to improve our non-GAAP growth margins and return to non-GAAP profitability exiting the year. For FY23, we'd like to exit the year with non-GAAP growth margins in the mid-70s. The three main things that will drive this result are top-line growth, offering customers a broader menu of functionality and price points, and fully exiting our data centers by the end of FY23. We also intend to improve operating margins and are targeting to exit the year with modest profitability on a non-GAAP basis.
spk00: Our third priority is to accelerate account growth.
spk09: In addition to the investments in product-led growth, we are investing in internal sales, people and partner-led efforts to accelerate conversion of our free tier funnel into paying customers. These improvements will build on the demonstrated successes we had in FY22. Our fourth priority is to help customers realize the full value of our platform. Customers get the most value and the greatest economic benefit when they make New Relic the standard for observability across their enterprise. In FY22, we landed many marquee innovations, and the primary focus for FY23 is to drive breadth and depth of adoption across our customer base for the dozens of capabilities already in place beyond APM, such as infrastructure, Pixie, logs, network, code stream, and more. Our product and go-to-market teams are both focused on helping customers on-ramp and benefit from our all-in-one platform model, which will accelerate our growth. In closing, FY22 has been a pivotal year for New Relic. We've come so far and achieved so much this past year, and I'm even more excited by the road ahead. We're hosting our annual FutureStack conference next week in Las Vegas and have a number of exciting announcements to share, in addition to the Analyst Day on May 18th. In light of the CFO transition underway, we will forgo updates regarding the company's long-term business model, but we'll provide updates on our vision and strategy, including product roadmap and go-to-market approaches. And we'll take your questions regarding FY23 priorities and targets. We enter the fiscal year strong and with momentum, making New Relic a source of truth for every engineer to make decisions every day using data, not opinions, at every stage of the software lifecycle. Before handing it off to Mark, I want to take a moment to thank him for the contributions he has made to New Relic. Mark was employee number three at New Relic and served an incredible 14 years as New Relic's CFO. Mark led New Relic's IPO in 2014 and has been a terrific partner to me throughout our business transformation. We wish him all the best on his future endeavors. We have an active search underway for our new CFO and appreciate that Mark will stay until the transition is complete. With that, I'll hand it over to you, Mark.
spk11: Thanks, Bill, and good afternoon and good evening to everyone on the call. I'd like to briefly recap our fourth quarter financial results, discuss some metrics we are sharing about the business, and provides some additional commentary on fiscal 23. First, the fourth quarter recap. For Q4, we reported revenue of $206 million at the high end of our guidance, representing year-over-year growth of 19%. Q4 revenue was lighter than we hoped, but we exited the quarter with a much better understanding of how to improve going forward. I'll provide a bit more color on that in a moment, but as we share on the investor letter, March came back nicely, and April was stronger than March. While these are limited data points, we are encouraged by what we are seeing. Non-GAAP loss from operations was 16 million, below the low end of our guidance we provided for a loss of between 12 and 14 million. While our non-GAAP gross margins were 71% and in line with the expectations we set in February, our non-GAAP loss from operations was impacted primarily by our ongoing investments in our business to drive growth. Non-GAAP EPS was a loss of 24 cents, below the low end of our guidance for a loss of between 19 and 22 cents. I'd like to spend a few minutes walking you through the metric that Bill mentioned, consumption run rate, or CRR for short. CRR is the annualized dollar value of our consumption business based on usage. By showing how consumption is changing in real time, CRR is a good indicator of engagement and health of the customer base. As a result of the way consumption is converted into revenue, CRR is not an exact indicator or predictor of revenue. In fact, over shorter periods of time, such as individual quarters, change in CRR and revenue may differ somewhat. However, over longer periods of time, we believe CRR and revenue will closely align. We are sharing CRR in the investor letter for the full year fiscal 22 as a tool to provide investors with more visibility into our consumption revenue growth as we move to our consumption model over the full fiscal year. Although approximately 85% of our revenue is from commitments, driving consumption is key to our success. With CRR as a backdrop, I'd like to spend a minute going through the dynamics of Q4. Following the success we have had over the past year in transitioning our customers, we now are a consumption business. As we and other consumption-based companies have reported, consumption slowed down starting mid-December due to reduced holiday period usage, and it took longer than we expected to recover. This means that revenues of December quarter finished on a soft note, and business for the March quarter got off to a slow start, with our first CR reduction in January and only modest growth in February. There were two major seasonal patterns at play here. First, the reduced usage due to the holiday period, and second, we also observed that those customers who were consuming far in excess of their commitment slowed their growth in the final months of their contract as a means to limit excess. Given Q4 is our largest renewal quarter by far, this has a dampening effect on revenue. We understand these seasonal patterns far better now and are identifying ways to mitigate them in future quarters, which will help us provide greater predictability for the business. March consumption growth returned to expected levels, and April was even stronger. Our business transition has been rapid, and we continue to learn and get better. We end fiscal 23 with an improved understanding of the dynamics of our consumption business. Finally, a reminder that our revenue growth is driven by consumption or platform usage, approximately 85% of which is backed by commitments where customers lock in budget to pay for their consumption, providing us good predictability. The revenue from consumption over commitments is more challenging to forecast. However, as the monthly CRR data shows, March and April are on a good trajectory. Now I'd like to share our first quarter and fiscal 23 guidance. For the first quarter fiscal year 2023, we expect revenue between $212 and $214 million, representing year-over-year growth of between 18% and 19% respectively. We expect a non-GAAP loss from operations of between $23 and $25 million. And we expect a non-GAAP net loss attributable to New Relic for diluted share of between $0.35 and $0.38. For the full year fiscal 23, we expect revenue between $920 and $930 million, representing year-over-year growth of between 17% and 18% respectively. We expect a non-GAAP loss from operations between $20 and $25 million. and we expect non-GAAP net loss attributable to New Relic for diluted share between 31 and 37 cents. We expect to be modestly profitable on a non-GAAP basis exiting fiscal 23. Lastly, before we go on to Q&A, as you may have seen in the press release, I announced my retirement from New Relic this afternoon. It has been an honor and a privilege to lead such a dynamic and visionary organization. I'm so proud to have played a role in helping New Relic grow and deliver on its mission, of helping millions of developers and engineers build better software. After 14 years, it is now time for me to retire from New Relic. I remain committed to ensuring a smooth transition and will continually lead the company until an appropriate successor is identified who will help execute against the strategic roadmap we've laid out. I want to thank all of you for your continued support of New Relic and look forward to the continued success of the business. And with that, operator, please open up the line for Q&A.
spk04: Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on the telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. The first question comes from Rob Oliver with Baird. Your line is now open.
spk10: Great. Thank you. Good afternoon, guys. Appreciate you taking my questions. Bill, I had one for you, and then Mark had a follow-up for you as well. So, Bill, I wanted to ask first on the go-to-market side. Obviously, over the past year, you guys have made a ton of changes around the Salesforce and the go-to-market. You mentioned in your a letter in your prepared remarks that the focus for 23 was really to get sales focused on kind of the whole platform. But as you kick off the fiscal year here, I was wondering if you could talk a little bit about go-to-market, any changes or any update there, and then a quick follow-up. Thanks.
spk09: Hey, thank you, Rob. A really timely question. It was just a few weeks ago I actually had a chance to bring the entire go-to-market organization together for our sales kickoff. This is really the first time that team had been together in over two years since the pandemic began, and it was my first chance to actually be with them since I joined just a month before the pandemic started and everything got locked down. The energy all week was really contagious as they had exited FY22 with a ton of momentum. It was especially striking for me and the leadership team, given the way we started the year, If you remember announcing a restructuring of go-to-market and then the significant compensation model change, where we moved from commissions being based on commitment to 100% consumption base. And throughout the year, the go-to-market team has really been overperforming expectations as a whole. And the sales kickoff event was really a celebration of that and a jump start to the new year. They shared some pretty incredible stories Over the course of the week, maybe a few anecdotes I'd share here. For example, in gaming, we had a large seven-figure customer upgrade to become our second largest globally and set a new record for a multi-year commit at a sizable eight-figure level. In financial services, one customer doubled their investment with an eight-figure upsell over multiple years to New Relic. They're sending us, on average, 50 terabytes a day, In travel, we saw one customer in Q4 moving up from $150,000 commitment to more than 10x that this quarter, now over seven figures. And in technology, one of our customers increased their annual commitment 50%, moving into the eight-figure spend each year for the next three years. We've also been talking about this new customer acquisition channel, the three-tier that we launched when we launched the platform in mid 2020 and how it's been a great channel for getting new customers into the platform at a free spend level and fun to watch them graduating to more significant levels of spend. Well, this last year we saw that happen with a customer coming in, in the free tier. This is a global cloud native banking platform headquartered in London. They signed up for the free tier. got engaged by one of our SDRs. And this is a head-to-head battle with a leading competitor where a new relic was chosen for a multi-year million dollar commitment, all starting out with an engineer coming into us through that brief year. So the go-to-market organization is really pumped. They're energized going into this fiscal year. Such a night and day difference from where we started the last fiscal year. And I think That's going to bode well for us in growing the business this coming fiscal year.
spk10: Great. Okay. Really appreciate all the color, Bill. That's super helpful. And then, Mark, well, first of all, congratulations on your retirement. And it's really been a pleasure working with you over the years and going to miss having you around. So all the best. And then I did just want to ask around the, so unless I missed it, which is a possibility in the letter, you guys did not address the additional expenses in 23. So I was just wondering if you could provide any more color around those expenses, their use, and thought process behind them. Thanks, guys.
spk11: Sure. Thanks, Rob. Appreciate it. It's been a pleasure working with you as well. Robert Marlayson, The the fiscal 23 guide, as you can see. Robert Marlayson, You know we're looking at a loss in Q1 and then roughly break even for the rest of the year. Robert Marlayson, And over the last three months what we've seen is a some see some things take up that we don't expect to take down notably wages and salaries. Robert Marlayson, there's definitely some some pressure in that regard, you know inflationary pressures. And travel and T&E expense, they're starting to kick in, and it'll take some time to absorb those into our budget. And we don't expect those to take down. But on the other hand, there are some expenses in Q1 that are unique to the quarter. We've got our future stack conference. We had our kickoff, beginning of the year, our annual kickoff. It's the first time we've had these in-person events. TAB, Mark McIntyre, And so I think they've been great or the kickoff was terrific future staffing forward to a great in person event, but those two events are going to add about $10 million or close to $10 million in expense and Q1, which would not be repeated and so. TAB, Mark McIntyre, Overall, we think you know we're we're basically looking at you know break even the last three quarters of the year. TAB, Mark McIntyre, And then leading the guide we we mentioned for the full year of a loss between 20 to 25 million. TAB, Mark McIntyre, However, I would remind you that everyone that we have the double bubble Commission expense fiscal 23 is the last year will be hit with that that expenses about $23 million in fiscal 23 and so that will be as an expense that the non cash expense i'll hit us this year and we'll go to zero in fiscal 24. TAB, Mark McIntyre, Great thanks again guys.
spk04: Thank you. Next question comes from Sanjit Singh with Morgan Stanley. Please proceed.
spk01: Thank you for taking the questions, and sad to see you go, Mark. Really appreciate working with you for the last several years now. Also, thank you for the consumption revenue run rate metrics. I think that's definitely going to be useful in terms of understanding where usage is going over time. I wanted to understand a little bit about the behavior of the cohorts that we saw in December heading into the March quarter. And particularly, I'm trying to understand the dynamic where customers that have been consuming excess of spend, dampening or limiting their usage. Can you just give us a sense of some of the factors that are driving that? And why is that going to be a dampening effect in your revenue? Because I would assume that they're consumption usage is sort of baked into their run rate. And so when they were new, I would assume that it would sort of be baked into their usage number. So if you just walk through the dynamics on some of these cohort behaviors as they come up to the end of the contract and the impact on revenue, I'd really appreciate that. Thank you.
spk09: Thank you, Sanjit. As we've described before, we break customers' consumption into several cohorts, everything from running very cold, meaning under their commitment level significantly to burning very hot or consuming far in excess of their commitment. And, you know, we monitor customers' usage and our go-to-market organization rallies around those customers to try to help them ensure they understand where their consumption is trending as well as making sure that they're getting value from the platforms. What was interesting in Q4 that we saw is that final cohort, the ones consuming far in excess of their commitment, so think 130 to maybe 200% of their commitment range, slowed their growth in the final month or two of their contract. And that's probably driven out of a number of factors. They obviously want to limit excess and go into their new commitment cycle. being as efficient as possible. It's also, you know, coincided there with the end of the fiscal year and the beginning of a new calendar year, I mean. And also, you know, potentially gives them far greater negotiation leverage. So a variety of factors there slowing their growth. They still ended their contract far in excess of commitment on the whole. So this is not them you know, significantly dialing down and more moderating consumption when they were already in foreign access at the commitment. And that's a behavior that we've now, you know, seen a clear trend around in Q4 and something we feel like we need to better mitigate going forward. One of the learnings from that, for example, is that we need to be better at helping support our customers and getting budget for their consumption throughout the fiscal year so that they don't end up in that place where at the very end of the contract they may not have the budget secured underlying all of that consumption and making sure that they recognize the value they're getting from our platform throughout the year so that those conversations on renewal are based in an ongoing conversation around value. Those are some of the changes we're making in FY23, both early renewals as well as customer value plans that underlie the consumption throughout the fiscal year.
spk01: Yeah, I know that was super helpful, Bill, in terms of understanding some of those dynamics. As we enter this fiscal year, I think some of the things that you've said at recent conferences and in the last earnings call is that the sales team is really going to be free up to really drive more usage at customers and be that sort of helping hand to drive that more usage. Can you talk about some of the initiatives that you have in place to drive that increased usage? And the second part of that question kind of goes to the comment that Mark made, is that what would be the impact on revenue? So if your sales team is successful this year in getting customers to use either more data or more users, would that necessarily impact translate into upside into your guidance and sort of the magnitude of upside to your guidance? I'm trying to understand this bridge between usage and ultimately revenue and how that's looking going into this next fiscal year.
spk09: Yeah, good question. So on the first part of your question around how we help customers this fiscal year differently or in addition to last year, it's a pretty significant shift. Last year was all about migrating the business from the legacy model into the new consumption model. And as I've noted before, that's a very intensive effort to help customers understand the full capabilities and value of the platform, the new pricing model, and how consumption works. It was new for our sales team. It was new for our customers. It was a learning experience throughout the year. And I'm so proud of the progress we've made. So many companies struggle with that transition between legacy business and new business for multiple years, we were able to effectively migrate 87% of the business in just about six quarters. What's now happening is now that the majority of the business is in the consumption model, we're orienting our go-to-market organization around value realization. There's sort of two parts to the go-to-market motion. First part is around value creation or helping customers identify the areas where our platform can save them money in terms of hard cost savings through, for example, tool consolidation or increased productivity, increased business performance, their own top line revenue or customer satisfaction, reliability, those kinds of things. So we have a part of our go-to-market organization that focuses on those value identification creation opportunities. And then increasingly, we're investing in our technical solutions part or customer adoption part of our go-to-market organization. It's all around value realization. What this team does is once the opportunity is identified, they help jointly document a consumption plan that jointly with the customer helps them realize their own business metrics through consumption of New Relic. And that ties their consumption with their spend, with their own internal metrics for how they want to see the value recognized, whether that's hard cost savings on their side, improved SLAs, improved customer experience, better top line revenue, or whatever the case may be. And so that's a significant new motion investment for us on the customer adoption side. investing, increasing resources, shifting go-to-market budget towards that area to support the consumption pattern of our customers. And to the second part of your question, that is now how we recognize and report revenue each quarter is now that 87% of businesses is a model, it is based on that consumption pattern. So when customers increase the amount of data they're sending us or the number of users, that directly translates to CRR, that metric that we're sharing in the investment letter. And then through our revenue recognition, translates to top line revenue that we report for the quarter.
spk11: Yes, Sonny, I would just add to that. As I mentioned in the earlier remarks, in the short term, CRR and revenue changes could differ somewhat. And I think if you look back historically, if you parse I'm sure folks will be doing this, looking at quarterly growth and CRR and then trying to equate that to revenue. And you'll see that there's some variability there. And I think that was a function of the migration to the model in large part. But in short-term periods, you're going to get that. Over a 12-month period, and I really encourage people to take a longer-term view, when you look over 12 months, those two metrics, I think, will be very closely aligned. You know, when we look at the patterns, the underlying trends, the secondary metrics, that's what gives us the confidence as we look forward. But really, it's ultimately, you know, CRR should be driving our growth, and CRR and revenue over, you know, multi-care period views should be very closely aligned.
spk01: Understood.
spk00: Thank you, Bill and Mark. Appreciate the thoughts.
spk04: Thank you. The next question comes from Adam Tindall with Raymond James. Your line is open.
spk07: Hi, thank you. Bill, I just want to start on priority to the return non-GAAP gross margins to mid-70s and modest non-GAAP profitability exiting fiscal 23. Just curious, and sorry, I'm managing multiple calls here, but why target mid-70s? You know, I'm just thinking you don't necessarily control data versus seats in the mix of that. You know, is there things that you can do to influence and achieve that target? And secondly, you know, how we can think about how variable OPEX is in case that mix does skew? You know, would that cause any issues in achieving that non-gap profitability metric? Thank you.
spk09: Yeah, thanks, Adam. Good question. Yeah, as you noted, we're targeting mid-70s for FY23. That's not the end point we would like to get back to high 70s, low 80s. over a longer term. But mid-70s feels like a prudent target for this fiscal year, given a couple of factors. One of the drivers for our improving gross margins is, as I noted, we do plan to exit our data centers by the end of this fiscal year. That has been a double bubble, effectively, that we've carried the last two years. We'll be exiting on time as planned. That will improve margins. We're also, though, more importantly, really getting into a stronger pattern of engineering excellence around COGS as we build out and scale our services. We've noted before that a lot of the cost pressure that we've seen is driven by the strong data growth, which is a very low margin business for us, 50% year over year plus data growth that we've been reporting. has put pressure on that. Those services also we plan to drive improvements and efficiency around. We'll get us to that mid-70s mark, and then those will continue into FY24 to get us back to the high 70s, low 80s.
spk11: Yeah, and just addressing, following up on that Of the savings that we expect to drive in gross margin, we think roughly a third of that is going to be coming from the migration out of the data centers, and the remainder being the efficiency and optimization improvements that Bill mentioned. On the expense side, you know, we showed good improvements in go-to-market efficiency in fiscal 22. We expect to continue those going forward into fiscal 23. TAB, Mark McIntyre, You know, so I think we, we do have a good plan in place that will allow us to to achieve our goal, I mentioned earlier that you know. TAB, Mark McIntyre, wages and compensation expenses are certainly certainly taking up and you know don't necessarily see any any change in that area but, but we do overall you know feel like we're making good improvements. with what we're doing, both in how we structure the go-to-market organization, as well as all the product-led growth initiatives we're doing, where we're getting much better and much more efficient at not only bringing customers on, as you see through our pay-go business, but also nurturing and growing those customers to a higher and higher level.
spk07: That's helpful. Maybe just as a follow-up, Bill, on the infrastructure product, maybe you could speak of the competitive differentiation in that product. I think investors have a perception that Datadog has kind of run away with that space. So, you know, how you compete from the product standpoint. And secondly, on go-to-market, you know, a lot of that success is in partnering with the hyperscalers, at least that's a perception. You know, spin up a new cloud instance on AWS and Azure, and you're, you know, buying infrastructure at the time of that. You know, is that an opportunity for you? So, you know, competitive differentiation on product and to go-to-market with that infrastructure product. Thank you.
spk09: Yeah, you mentioned the infrastructure products and the differentiation there. To be clear, one of the differentiations with New Relic versus, say, a Datadog is our platform approach. You know, with competitors like Datadog, you purchase sort of verticalized applications, specialized applications like infrastructure monitoring or logs or ATM separately as distinct products. And those each have distinct prices, they have distinct user experiences, and often distinct data stores underneath them. With New Relic, the pivot we made a few years ago is to really optimize for that all-in-one platform experience. And it starts at the data layer where we've consolidated all telemetry types and all telemetry sources into one massive hyperscale platform with incredible economics that we now charge, effective June 1st, $0.30 per gigabyte for. And that price effectively translates to a significant cost advantage for our customers per incremental host or application. So the differentiation there comes in a few forms. in that all-in-one platform approach that's much simpler to plan for, to budget for, and for engineers to use. And then second, cost or economic advantages in scale as you add more hosts or more applications and benefit from the cost economics of our hyperscale platform. In terms of go-to-market around that, increasingly with FY23, as I mentioned, we're gonna be driving more platform adoption across capabilities. As I shared in my opening remarks, and as we document in the investor letter, we've seen significant improvement in platform adoption, even in FY22, despite the fact that migration was the focus. We saw customers move from 15% to 25% across all customers using our top four capabilities, that include APM, infrastructure, logs, and our browser products. And that number goes even higher when you look at customers who commit and spend more than $25,000 a year with us. Up to 50% of those use those top-core products. So that's, I think, an advantage for us and a go-to-market motion that we want to really focus on that will drive increased value as our customers use more of the platform and increase consumption and revenue growth for the company.
spk08: Thank you.
spk04: Thank you. The next question comes from Rishi Jaluria with RBC. Please proceed.
spk02: Oh, wonderful. Thanks so much for taking my questions. Two here. I guess I'm just trying to decouple a couple of things. So if we look at the NRR, you know, you had a really strong NRR quarter in Q4, especially for the sub 25K customers, right? And it's a trailing 12 month metric. So that would imply Q4 was even stronger than the percentage you put out would represent. But I know it's not an exact proxy, but if we look at revenue, in the quarter from sub-100K customers. We actually saw that decline sequentially. Can you maybe speak a little bit to what's going on there? Is there maybe strength in the sub-25K and the 25K to 100K is mixed and above 100K is doing well? Maybe walk us through the moving pieces there and then I'll have a follow-up.
spk11: Rishi, I'm just trying to follow the ear your comment about revenue declining in the under 100. I guess what gave you that impression?
spk02: If I just do the math on 100K customers as a percentage of revenue multiplied by total revenue in the quarter, right? You know, it's 81% in Q3, 82% in Q4. And I look at the total revenue for Q3, Q4, right? That has me. And I know there's rounding. But at the very best, it's flat, right, with 136% NRR. That's where I'm trying to get at.
spk11: Again, sorry. I'm ready to retire. I guess I'm missing something. But no, I think we are seeing good growth in our over 100K segment and 100K segment. So, you know, there could be some rounding in there. And if, you know, the numbers we're talking about, a 0.4 to a 0.6 or something, you know, perhaps that has some sort of, you know, impact. But, no, we're, you know, I think we're, we feel like we're doing a good job driving customers up from the 25K up into, you know, the next segment that's over 25 segments and then from that 25K to the over 100 segment. And we're seeing good growth, you know, you know, through the stack. So, you know, I apologize. Maybe we can follow up with that and get to the bottom of that.
spk09: Yeah, just to clarify.
spk11: The other thing I would say is we are certainly seeing strong growth on the low end. And, you know, you can see that in the PAYGO numbers. But on the other hand, you know, we're not seeing declines in any of our segments.
spk09: Yeah, the NRR metric is a backward-looking metric to compare how customers spend this quarter compared to a year ago. And to clarify the numbers, the less than 25K cohort in Q3 was 127%, in Q4 reporting 136. sizable increase, as you said, and as Mark clarified, good growth, really strong growth on the smaller customers. For the greater than 25K cohort, we went from 115 in Q3 to 117, and in aggregate across all customers, total 116 to 119 in Q4. So all customer cohorts, as we look back compared to one year ago, increasing in our arm.
spk02: okay got it got it uh thanks and i'll make sure to to follow up offline just just to make sure i'm understanding it uh second second follow-up i uh just for my own understanding uh you know you're you're you're through this uh consumption transition mostly you said you know 87 of of revenues coming from uh those on on the new consumption model um What I'm maybe struggling to understand is, you know, given that you're basically a vast majority consumption company at this time, why are there still such wild swings in deferred revenue, especially in Q4? I mean, we saw an increase, you know, 90 million plus sequentially from Q3 to Q4. I know you have pre-committed, but my understanding was you're still billing them in arrears. So I'm just not understanding why is deferred revenue moving. Maybe if you could just help clarify it, that would be really helpful. Thank you. Sure.
spk11: No, just to clarify that we, most of our customers commit for one year, and most of our customers continue to pay us up front for that commitment. What we bill in arrears, our PAYGO business, which is, you know, lots of customers, relatively small dollars, and then overage, so consumption in excess of commit, we will bill in arrears. But the commitment that folks make, we still almost always get that up front. And Q3, our December quarter, and March is our big quarter. March is our biggest. And so those are the times where we're tend to going to be, you know, getting the big, the renewals and the big increases in deferred. And then that has a subsequent impact on cash flow in Q4 and Q1. Okay, got it. That's . I can, can you also reiterate that in, As we mentioned in the letter, 85% of our revenue is driven by these commitments that were paid for up front. And then that consumption overcommit and the pay go, the rest of that business is paid in arrears.
spk02: Okay. That's really helpful. Thanks a lot. And Mark, by the way, let me echo my colleagues. It's been wonderful working with you since IPO and wishing you all the best in retirement. Thank you. Thank you.
spk04: Thank you. The next question comes from Eric Seppager with JMP Securities. Please proceed.
spk06: Yeah, thanks for taking the question and congratulations, Mark. First off, on customer count, I'm just curious, as you shift your focus away from just migrating customers over to newer sales, Is that going to drive or accelerate the growth in new customers?
spk09: We are doing things in FY23 to grow new customers in addition to the three-tier funnel that we've been talking about all year in FY22, which continues to perform really well. And we continue to make both product improvements as well as sales improvements in terms of converting those free to your customers, to paid customers, we are investing to increase internal sales as well as partner programs to drive new customer growth. And those are the programs around which give us confidence to make that priority around accelerating new customer acquisition at FY23. Well, kind of, um,
spk06: Metrics, might we track for that? You give customer count. You had about 700 customers added, I think, over the course of fiscal 22. Might we see that accelerate in a significant manner? Any comments in terms of what kind of acceleration we might see?
spk09: Yeah, we haven't expressed a specific target, but we do expect the growth rate to accelerate. I'd also point you at that we share separately from the total paid customer count also the pay-go customer growth that we experienced in FY22, which is the primary source of new customers coming into the platform. We'll continue to share that, and that is where we'll also see accelerating growth.
spk06: Okay. Then it looks as though your OpEx is going to really step up as we get into Q1, and then it more or less levels off at that point for the remainder of fiscal 23. Let me know if that's not correct, but from your guidance, that's what it looks like from my perspective. Is that to suggest that the hiring is going to slow as you get into the latter part of 23, or how should we think of the impact from a headcount perspective?
spk11: We are looking to really front-load hiring, but the biggest impact there are the one-time events that we've had between FutureStack and our company kickoff that was in person the first time. references earlier, that was upwards of $10 million in spend in Q1 that won't be repeated in subsequent quarters. Okay.
spk06: Very good. Thank you. Thanks, Eric.
spk04: Thank you. Our next question comes from Mike Sikos with Needham & Company. Your line is open.
spk08: Hey guys, thanks for taking the question here. I guess the first really comes back to the changes in consumption that we saw in the most recent quarter and how customers were depressing or dampening their usage. And I'm coming at it from two different ways and they're both competing with each other. I'm trying to figure out which one is right or if I'm mischaracterizing. But the first one, if I'm dampening my usage, it's probably because let's say I work for XYZ company as a VP. Right. And I need to, I'm looking to make my number for the year. Right. That's in full support, me dampening usage to, to make sure that the company does well and I get my bonus. So the first question is, is how do you fend that off? And then the second question is if I'm thinking about the massive market trends, we hear about observability being this mission critical tool. I'm just struggling to understand how an organization is depressing Um, the provisioning of new users or the holding back of new project starts in this environment where digital transformation remains top of mind for all these companies. Can you help me square those two items away?
spk00: Yeah.
spk09: Um, so you're, I think you're right. Um, you know, as if you're a budget holder and you're coming into a renewal cycle and you realize. or maybe you've heard it all along, but you're kind of trying to square up the new budget ask for the new fiscal year with what your current run rate is, that's a pretty motivating function to say, wow, are there any efficiencies I can drive on this spend to make the delta not quite as large? And your question was, how can we help customers mitigate that? Well, I think the realization for us is When we let that gap grow so significant, and again, the cohort we're talking about are customers who are consuming far in excess of their commitment, think 130 to 200% of their commitment. What we need to do a better job of is helping them make sure they understand the value they're getting from that consumption, as well as help them secure the budget throughout the fiscal year or throughout the contract cycle.
spk00: And
spk09: Because consumption, one of the beautiful things about a consumption business is it organically grows throughout the year as the customer identifies ways to use the platform to get more value. That's not often a top-down only decision. Engineers will discover new projects, new optimizations they can drive if they can instrument and get more data. Maybe the product gets shared virally within the organization as more engineers discover its value and start consuming. And then at some point, the budget holder needs to come to terms with that increased consumption. So we can help them by informing them, keeping them up to date, and helping them secure the budget throughout the contract cycle rather than wait for the renewal period. And to square the second part of your question around digital transformation is definitely a top-level priority and it's driving a lot of the growth that we see, how can they possibly afford, you know, to scale back even a little bit? I would say, you know, there's always efficiencies to be had, even with our simple user and data pricing model. When we talk about these customers, oftentimes they're, you know, high six, seven figure spend over the course of the contract cycle. And when we talk about slowing their growth, again, we're talking about, you know, being more efficient about which users are accessing the platform. If it's engineers who have rotated out of the company, we've seen a lot of resignations and people changing companies, cleaning up those, those user lists as an example, as a way that people make sure that their spend is, is, is being super efficient. Or, you know, looking at all of the sources of telemetry that they're gathering and saying, do we really need to capture all of these? Or are there projects maybe that are more in a maintenance state or a steady state and we can, you know, ramp down the consumption or put it towards new projects just coming up that maybe are not at scale? So those are kind of, you know, examples that a VP of engineering might be looking at as ways to manage that run rate going into their new contract.
spk08: Thanks for that. I really do appreciate it. And then I guess my, my followup, um, in the investor letter, uh, there there's talk about you guys introducing a higher priced option for data ingest. And I think even on the call, you guys had alluded to, uh, 30 cents per gig affected June 1st. This is the first time since we've gone through this migration that you guys are now talking about a different pricing mechanism on the data ingest. So can you help us think through what's causing the change in that messaging and strategy? Um, and the followup on the gross margins, if, if we don't return to what's been a normal normalized two thirds, one third ratio for user to data, how should we think about that? Normalizing longer term. I think the, the thesis has been that users over time will follow the data. And I'm just curious, do you guys have evidence of that showing up yet? Are our users growing and following the amount of data that they've been bringing into the new relic platform?
spk09: Yeah, great questions. You noted the sort of two announcements we made a few weeks ago regarding data and data prices. The strategy going in, you have exactly correct. We believe that data is the first sort of leading indicator of growth within an account. It's the original source of insights that we can bring our customers without capturing the data we can't help them make more data-driven approaches. And so we intentionally priced our data offering when we launched the platform two years ago to be extremely cost advantageous for every incremental host or application. We wanted to price it effectively cost plus. And that's been very successful for us. We've seen data growth rates 50% and above year over year. As customers have expanded, the amount of telemetry that they send us to get those insights. We, you know, have reassessed how we look at those costs. Of course, our costs have been going up over the last few years, and we've increased the value considerably without changing price for a few years. So we announced the new standard data price is 30 cents per gigabyte and continues to give customers all of the benefits and value that we have been sharing with them over the past few years. And we don't see that relatively modest price change really inhibiting our goal to capture as much of our customers' telemetry as possible. We don't anticipate significant pushback on that price increase. We are, though, introducing a new data plus offering. which has even more benefit to our customers. And it's based on some of their feedback and the features and value that they've been asking for, including increased retention rates, including higher query limits. Some of our customers who send us petabytes of telemetry and want to be able to, in real time, query that at significant date ranges and across multiple engineers need additional query performance capacity, and we can allow that with the DataPlus offering, as well as new data sets and new capabilities that we're bringing to the platform will be on top of the DataPlus offering. So there's a higher-priced offering that will be entering the market June 1st as well that we'll be selling into customers to give them even more value. As to your question around whether that mix will change, I think, That is still to be determined. Based on acceptance of that data plus skew, we could very well see the mix shift towards more data contribution to revenue versus users. But, you know, we'll see how the acceptance of that new data plus skew works out.
spk08: Great. Thank you very much, guys.
spk04: Thank you. The next question comes from Michael Turretts with KeyBank. Please proceed.
spk05: Hey, guys. Thanks. Mark, of course, congratulations. Best of luck. It's been great. Two questions around consumption. First, you cited a bunch of seasonal factors and behavioral factors. I know it's tough, but are you able to parse how much of it was from that? versus macro or other factors? That's my first question. In other words, the consumption is a shortfall. And second, this cohort, the cohort, the March cohort, you know, we know that the prior two cohorts that were new to the pool of funds, you know, were probably back into them growing, you know, overall their consumption mid to high teens year over year. Is that about where we ended up with the March cohort as well?
spk11: I guess the first question, you know, macro, we don't see, we have not seen a macro impact on demand, on top line demand. You know, it seems like we're hearing more and more about customers becoming more cost conscious. And to the extent that happens going forward, you know, I think we are fairly well positioned given we're in a space that, as earlier mentioned, observability, people really want it. And I think our cost model allows people predictability and a very value-driven offering. So I think that will set us up well going forward. In terms of the overall percentages of the various cohorts, we haven't given explicit numbers around the various cohorts. And I guess I probably want to stay away from doing that and look more at our customer base as a whole. Given we're in a consumption business, you know, the customer base and consumption should increase throughout the term of an agreement. And it's not really, I mean, if we think about renewal dates and what are they doing about renewal dates and things like that, there's some impacts that we have to, as we've talked about, Bill mentioned, we've got to make sure we are on top of, and we are ready for, and we can, uh, can work to prevent. But I think overall in a consumption of business, that where you are in the contract should not impact your, your, uh, your, your growth rate. And so I would encourage you to just look, you know, really at the, at the customer base as a whole and the numbers as a whole year over year growth rates, things like that much more so than any individual cohort. Yeah. From a, from a growth standpoint, that's the way we look at it. And, you know, we look at our business. We'll take growth in Q1 from customers that are, you know, going to renew in June just as much as we'll take it from customers that renew in December.
spk05: Thanks, Mark. And again, good luck.
spk11: Thanks.
spk04: Thank you. This concludes the question and answer session. I will now pass the conference back over to the management team for closing remarks.
spk09: All right, thank you, everyone, for joining and for your questions. And thank you, Mark, especially as he announced his retirement today. We really appreciate 14 years of service and the ongoing support through the transition. Just one final reminder, we do have FutureStack next week in Vegas. We'll also be streaming the analyst day for those who want to join, but we invite everyone to attend in person who can. It's going to be a great event. Meet customers, meet partners. and talk with us about the future of the business. Thank you, everyone, again. Have a great day.
spk04: Goodbye. This concludes the new Relic 4Q FY 2022 earnings call. Thank you for your participation. You may now disconnect your line.
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