New Relic, Inc.

Good afternoon. My name is Bailey and I'll be your conference operator today. At this time, I would like to welcome everybody to the New Relic second quarter fiscal year 2023 earnings conference call. All lines have been muted to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw this question, please press star followed by two. Thank you. It is now my pleasure to introduce your host, Ingo Friedrichowitz, Senior Vice President of Investor Relations and Corporate Finance. Thank you. You may begin.

Good afternoon and welcome to our second quarter fiscal year 2023 earnings call. On the call with me are Bill Staples, our Chief Executive Officer, and David Barter, our Chief Financial Officer. On our Investor Relations website, you can find the earnings press release and investor summary slide deck, which is intended to supplement our prepared remarks during today's call. In addition, an audio replay of this call will be available on our website, ir.newrelic.com, in a few hours. During today's call, we will make forward-looking statements, including about our business outlook and strategies, which we base our predictions and expectations on 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 10Q and our upcoming second quarter 10Q 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 with that, I'd like to turn it over to Bill.

Thank you, Ingo. I'm pleased to report another solid quarter with revenue at 226.9 million, a 10.4 million sequential increase over last quarter. Our non-GAAP operating profit was 6.9 million, a 24 million improvement over last quarter. Importantly, this also represents our first profitable quarter in two years. Last quarter, we told you that we recognize the importance of driving both growth and profitability. and that we would pursue cost discipline while continuing to invest in our future. Today's earnings report is the first installment on that commitment. I'm incredibly proud of the New Relic organization for embracing this mentality, which we believe positions us best to deliver compelling value proposition to customers while creating sustainable value for shareholders. Dave will share more about our financial performance in just a minute, as well as our updated guidance. However, before I hand it over to him, I'd like to remind everyone what makes New Relic differentiated and unique with our product and our go-to-market strategy. In 2008, New Relic invented Cloud APM for application engineers. Today, we're a source of truth for all engineers to make decisions with data across their entire software stack and across the software lifecycle. There are an estimated 25 million engineers in the world, across more than 25 distinct functions. Today, the vast majority of those engineers either don't have access to data about the performance and health of their systems, or the data they have is tied up in legacy monitoring tools. We see observability as still a relatively new and emerging practice that will grow over the coming decades, and we have been transforming our software and business model to win in the long run. While competitors still sell an array of specialty tools at disparate rates, propagating the customer challenges of the past decade, only New Relic provides an all-in-one platform that is built and sold as a unified experience and cloud-scale data platform for every engineer. Let's take a look at how our strategy is playing out and some recent highlights. First, let's focus on customer acquisition. Unlike competitors who land new customers with a sales-led approach, Only New Relic offers a unique, perpetual free tier that offers every engineer an opportunity to learn and master observability. No credit card required or fear of lock-in. Since launching our free tier and pay-as-you-go model two years ago, we've been working to steadily increase the efficiency of this experience and nurture customer value to paid levels. In the second quarter, we added over 800 net new paid platform customers using the high volume, low cost, product led growth model. At this rate, New Relic is now adding new paid platform customers at industry leading levels. Our progress here is masked by a long tail of small APM only legacy customers who signed up years ago and continue to pay us small amounts each month, but whose spend is not increasing and whose churn partially offsets our new customer growth. This fast growing cohort of customers are new to the platform and embracing full-stack observability practices at a rapid rate. It includes companies of all sizes, from individual developers in the exploration phase to startups getting off the ground, as well as large Fortune 2000 companies with engineering teams seeking to modernize their engineering practice. The spend in this customer cohort ranges from a small initial monthly amount to five-figure annual or multi-year contracts. In fact, the team was able to nurture several customers away from leading competitors and into six-figure contracts. Let me tell you about one of them, Tibber. Our consumption-based pricing model was the driving force behind our recent deal with Tibber, a fast-growing company in Europe using digital technology to make electricity consumption smarter. They evaluated one of our close competitors but found that a host-based pricing structure of competitors limits agility. With New Relic, they get better economies of scale as their cloud infrastructure grows and predictable pricing as they expand their engineering team. They also appreciated how New Relic provides the opportunity to ingest telemetry data from any source and works well with modern microservice architectures on the cloud, which makes correlating data from infrastructure, hardware, mobile apps, and web apps much easier. Next, let's turn our focus to our sales-led approach. Customers graduate to our sales-led motion when they expand consumption beyond $50,000 annually and wish to make a contractual commitment to get better rates and receive additional technical services and support. Our sales-led motions this quarter were strong. The sales team is focused on three key priorities. Number one, nurturing value realization with our customers against their committed spend through increasing platform adoption and usage. Number two, helping customers align their contract commitments with their increasing usage. And number three, opportunistically landing new large enterprise customers. Let's talk through examples of each of those three priorities. First, a look at consumption. This quarter, we saw customers increase their consumption run rate in aggregate by net $50 million. a record one-quarter increase, and driven by increase in both users and data. A few examples of some of the biggest increasers. One of our large streaming media customers increased their CRR from 4.6 to 5.9 million dollars during the quarter. A telecom went from 5.7 to 7.9 million. A beverage company increased from 3.1 to 4.0 million. and an online retailer moved from 8.8 to 10.8 million in just one quarter. The strength of CRR growth this quarter demonstrates the excellent product market fit and power of the consumption business model. However, with CRR growth continuing to outpace customer commitments, we also see a continuation of the trend of customers who manage consumption down to budget, especially in the final quarter, among many of our accounts. I've highlighted this in the last few earnings calls and the gap between CRR and commitments increased this quarter despite strong performance in contract renewals. Q3 and Q4 represent our opportunity to help the majority of our customers who are up for renewal to plan and secure budgets to support their ongoing consumption needs. Second, let's look at a few examples of how we're helping our customers align commitments to support increasing consumption. Our customers are looking for ways to navigate through shifting economic, social, and technological change by consolidating tool spend from other vendors and standardizing their observability with New Relic. Our sales team increased our in-quarter committed renewal base incrementally by three times compared to the quarter prior as we scaled the early renewal pilot that I talked about last quarter. I am pleased that we were able to pull forward nearly 18 million in early renewals for customers who were ready to renew ahead of schedule. Let's look at how we're doing that. A global online game and entertainment company increased their commitment from a mid-six-figure annual pool of funds to a three-year high seven-figure savings plan agreement. The pandemic accelerated their digital transformation and growth in online social gaming. Looking for more efficiency, the company replaced four separate commercial and open source competitors to standardize on New Relic as their observability platform, increasing the productivity of their engineering teams and improving their costs. New Relic is now partnering with them in their cloud transformation journey to be 100% cloud native by the end of this year. We continue to have success in moving large, multi-year legacy customers over to the new platform. For example, this quarter, an online travel company transitioned from our legacy business, where they had a $1 million annual spend, to a new platform agreement for three years and more than eight-figure commitment. They selected us over competitors as they were looking for a developer-first observability platform to consolidate all their tools, get deep cloud cost visibility, and support a robust site reliability engineering organization managing their Kubernetes environment. And finally, our sales team continues to opportunistically land some very nice new logos this year. For example, we recently landed a large, high seven-figure, three-year strategic agreement with a grocery retailer in the UK, Tesco. They had been using competitors, but once again found that a host-based pricing model limited their ability to achieve full-stack observability as they moved to a cloud-native microservices-oriented architecture. We're helping them standardize observability best practices, increase the reliability of their systems, and identify business-impacting use cases. Our product organization contributed significantly to the ongoing efficiency improvements in gross margin, and in parallel launched many small and large capability improvements to support increased value and consumption by our customers. The number of customers using our top four capabilities, APM, infrastructure, logs, and browser, grew again this quarter from 31 to 34%. 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. We also announced several key partnerships this quarter with AWS, Atlassian, as well as strategic partnerships with multiple security vendors as part of our marquee innovation, vulnerability management. The public preview launch just a few weeks ago has already garnered record interest from our customers. with several thousand engaged users, and we're on track to begin general availability early in the new year. We also completed a technology tuck-in acquisition of K2 cybersecurity for approximately $20 million in the quarter to extend this offering further. In closing, we feel well-positioned as a strategic partner to our customers, helping them navigate through economic, social, and technological change. Our all-in-one platform is optimized to help them standardize their observability practice on New Relic and thereby save money and increase productivity of their engineering teams. Before I pass to Dave, I'd like to address what we are seeing in the business climate and how we're responding. Last quarter, I told you that we had not yet seen a meaningful impact from the macroeconomic climate, but that in an uncertain world, we would control what we can control. Today, the macro clouds appear to be getting darker, but our mentality remains the same. Nearly every business leader I speak with today is looking hard at their budget and is looking for efficiency. We believe that this environment will ultimately serve to highlight the customers that we have superior alignment and value proposition of our consumption model versus competitors' pricing models. That said, Like our competitors, we are not immune to the macroeconomic conditions in the near term, and we see these headwinds in our conversations with customers. For this reason, we are being prudent in our guidance, particularly given increased adverse FX impact, consumption patterns, and last year's seasonal variation. Dave will share more detail on our financial performance and outlook in just a minute. However the macro conditions unfold, New Relic's response will be simple and in keeping with the strategy we have communicated to you. First, we will work tirelessly to help our customers succeed and derive superior value and efficiency from New Relic. In an uncertain time, we are well positioned to serve as a strategic partner to help our customers as they undertake cloud migrations and digital transformation, initiatives we believe will remain investment priorities regardless of climate. Second, we will maintain a rigorous focus on cost discipline to drive profitability for our own business. Doing so will enable us to grow our margins regardless of the business climate while also providing fuel for investment in our future. We're committed to continue to invest in innovation and our long-term strategy so we can deliver increasing value to customers with fair and transparent consumption pricing throughout this uncertain period. With expanding leadership and new talent onboarded, I feel even more confident in our ability to execute and raise the standard of our performance. We have turned an important financial corner with our first quarter with non-GAAP profit since the beginning of the transition and are committed to continued profitable growth. We are humbled by the opportunity before us and hungry to continue striving toward our full potential. Dave, with that, over to you.