New Relic, Inc.

Good afternoon. Thank you for attending today's New Relic First Quarter Fiscal 2023 Financial Results Conference Call. My name is Frances and I'll be your moderator 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'd 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.

Hi, everyone, and thanks for joining our Q1 fiscal 23 earnings call. We published a presentation on our Investor Relations website about an hour ago. I hope everyone has had a chance to review it 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. 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 it over to Bill. Thank you, Peter.

And good afternoon, everyone. Thanks for joining us for our Q1 FY23 earnings call. I'd like to update you on how our first quarter of the fiscal year played out, including CRR trends, and what we're doing to accelerate the business before handing over to Mark for an update on the financials. As a reminder, we entered FY23 with four key priorities. First, return revenue to market growth rates. Second, improve our non-GAAP growth margins to the mid-70s and achieve modest non-GAAP profitability exiting FY23. Third, accelerate the number of new paying customers. And fourth, drive increased platform adoption across our customer base. Our first quarter of FY23 is off to a strong start against each of our top priorities. Q1 revenue is $216.5 million, representing 20% year-over-year growth and beating the high end of our guidance by $2.5 million. Our Q1 non-GAAP gross margin is 72.5%, a solid improvement versus Q4 at 71%. and more than four points higher than our Q3, which was 68.2%, and we plan to continue to make progress toward our target throughout the year. Our Q1 non-GAAP operating loss was 17.2 million, beating our guidance of 23 to 25 million loss. Additionally, we are revising our guidance today to reflect actions we are taking to improve our cost structure. We now expect to generate positive full-year FY23 non-GAAP operating profit of 5 to 10 million. We recognize the importance of driving profitability in our business, and we do not view cost discipline as a choice versus continued investment to accelerate our growth. We can and will pursue both. Additionally, while we have not yet seen meaningful impact from the macro environment in our business results, we recognize the uncertainty of the current economic climate and believe these steps advantage us regardless of what the future holds. We're confident we can achieve this from actions fully within our control. We've also begun delivering on our third priority of accelerated account growth. Total active customer accounts are up nearly 300 in Q1, net of churn, compared to a cumulative net increase of 700 accounts across the three fiscal quarters preceding it. I'm really pleased that we've added 1,000 paying customers to our base over the last year net of churn. As we shared at the analyst day in May, churn has been steadily declining since introducing the platform, and our Q1 churn number was 6%, a slight increase over Q4 as a result of a few deals that slipped into July and was in line with our internal forecast. Account growth acceleration is due to continued improvements in our product-led growth funnel and the new inside sales program. It's also encouraging to see that our number of active customer accounts with revenue greater than $100,000 grew by 38, double the number of additions we had in Q1 last year. So not only are we adding more paying customers, but they're graduating to higher levels of spend faster as well. Our fourth and final priority is to drive platform adoption across our customer base. We continue to see steady progress. Last quarter, we were able to spotlight many enterprise customer success stories at FutureStack, including McDonald's, Verizon, MercadoLibre, and Foot Locker, just to name a few, who joined me in the keynote and shared their enthusiasm for NewLX's all-in-one platform and how it's propelling their digital transformation and unlocking greater productivity for their engineering teams. We're grateful for the support from such world-class customers and partners. As we track success in driving platform adoption, there are two primary metrics to discuss. First, the percentage of customers utilizing multiple capabilities, and second, our consumption run rate, or CRR. On the first metric of capability usage, We saw increased platform adoption in Q1 as the number of customers using our top four capabilities, APM, infrastructure, logs, and browser, grew from 26% to 31% in the quarter. As customers adopt more of the platform, their consumption generally increases, as does our revenue. The more of the platform our customers adopt, the more value they get. The growth in platform adoption speaks to the strength of our product offerings beyond our traditional APM product and the attractiveness of our all-in-one platform model. Last quarter, we supplemented our discussion regarding consumption by introducing you to a new metric, consumption run rate, or CRR. As a reminder, CRR is a real-time, annualized measure of the business that takes into account buying program, price, and usage amount, on a per-customer basis, and something we expect to closely correlate with revenue over time. We track it daily. Monthly average CRR growth for April was strong, and while it also grew in May and June, it grew at a slower pace. Importantly, monthly average CRR growth reaccelerated from June to July. At a high level, CRR in the first quarter tells a positive story. However, underneath the surface, we think CRR tells a more complex story that also shows areas of strength in our model and places of opportunity that have emerged as we mature in our transition to a consumption business. For customers whose burn rate is below 130% of their commitment, we see healthy and predictable growth. However, when customers' run rate exceeds 130% of their commitment, Their consumption begins to materially differ from their budget spend, and they moderate consumption. This might seem counterintuitive, as these customers are our best evidence for product market fit and have garnered the most value from New Relic relative to their starting expectations. In fact, this group includes some of our largest and most passionate customers. Our opportunity as customers expand with New Relic is to support their increased consumption with budget on an ongoing basis. In Q1, we started taking action on this dynamic and partnering with a limited number of customers on early renewals. Let me share with you a few highlights from our initial pilot. Curry's PLC, a customer since 2016, renewed flat in December of 2021 at $73,000. This customer re-platformed their website to Salesforce Commerce Cloud, and New Relic was chosen as the strategic partner to monitor their new Salesforce-based front-end and back-end. In addition, they chose New Relic as their standard for observability, expanding their usage to cover their hybrid cloud environment, expanding legacy applications on IBM mainframes where they're moving off one of our competitors to major hyperscale environments in the public cloud. This customer now uses APM, logs, infrastructure, metrics, events, and traces, and had driven their consumption to $625,000 and agreed in Q1 to an early renewal of $921,000, more than 10x their commitment and a healthy uplift on their current burn rate. Another customer had originally agreed to $295,000, but had ramped consumption to $434,000. This customer decided to take advantage of our strategic agreement with AWS and renew early at $550,000 through the AWS marketplace, an uplift of 27% above their already high consumption rate. Last slide. Our last example demonstrates our ability to drive increased consumption and early renewal with multi-year contracts. This customer signed a three-year legacy deal in March of 2020 for $450,000 before we announced the platform offering in July. Given their recent agreement, which was a long-term agreement, they were initially reluctant to convert to the platform. but our sales and technical services teams demonstrated the advantages of the full platform and created a value plan in partnership with the customer. The plan includes projects that drive tool consolidation, improve alert quality, and training and enablement. Their consumption run rate peaked at $1 million, and they agreed to renew two quarters in advance at $794,000, an uplift of 76% over their prior contract. although under their peak run rate. We are now ready to scale this early renewal pilot across many more customers, and we've already begun executing a scaled-out campaign in Q2. In closing, let's step back for a minute and look at the big picture. Over the last year, we have accelerated revenue growth, nearly doubling the year-over-year growth rate in the last year. We've inverted the multi-year decline in paid customer accounts with consistent new paid customers for the last four quarters. We are growing the large accounts faster than before and net revenue retention has also re-accelerated from a low point of 110% just five quarters ago to now 120% this quarter. Product markets fit and consumption patterns are in fact so strong that many customers are consuming at an unexpectedly high rate relative to their original plan, something we're now ready to tackle with the right programs and incentives in place to help customers top off their contracts with additional budget or replace agreements with early renewals. We've also aligned our go-to-market team with additional incentives and negotiation levers to help customers unlock their budgets with early renewals. We're growing stronger inside the company as well, including progress on non-financial metrics. I had some of the very best recruiting conversations in my tenure at New Relic this quarter, with several editions of new executives onboarding from leading companies like Salesforce, AWS, Microsoft, and more. I was proud to see the results of our annual employee engagement survey, as our overall employee engagement jumped 17 points since last April. We're performing better and we're a much stronger company inside and out than just a year ago. No wonder we were recently recognized in Forbes Best Workplaces for Millennials. I'm so proud of the thousands of relics who work every day to make this possible. And finally, we're now committed to another financial milestone, a non-GAAP profitable business this year and a clear opportunity to accelerate revenue and non-GAAP profitability as we head into the next. Before I hand it over to Mark, I want to provide an update on the search for our next CFO. As you know, Mark announced his retirement last quarter, and we've been conducting a public search since that time. I'm pleased to announce that we have found New Relic's next CFO, and his name is Dave Barter. Dave laid the foundation of his career at world-class companies like GE and Microsoft, where he mastered the fundamentals of business and finance and established himself as a business leader. He has since led finance teams at multiple companies, including leading one company through a successful IPO. Dave has seen many of the challenges New Relic faces and brings fresh perspective, proven experience, and a focus on driving growth and profitability. This will be his third stint as a public CFO, and many I have spoken with who have worked around and under Dave speak highly of his integrity, the clarity and decisiveness he brings to organizations, and the accountability he holds himself and teams against. We are onboarding Dave now, and he will officially transition to the CFO role after the shareholder meeting on August 17th. Mark has generously offered to assist Dave for as long as needed to ensure a smooth transition. Given this will be Mark's last earnings call, I want to close my remarks with a heartfelt expression of gratitude to him for his many years of service to New Relic, our customers and shareholders, and wish him the best in his future endeavors. And with that, over to you, Mark.