New Relic, Inc.

Good afternoon. My name is Hannah and I will be your conference operator today. At this time, I would like to welcome everyone to the new RELIC fourth quarter fiscal year 2023 earnings conference call. All lines have been placed on mute 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 your question, press star two. Thank you. It is now my pleasure to introduce to our host, Ingo Friedrichowitz, Senior Vice President of Investor Relations and Corporate Finance. Thank you. You may begin.

Good afternoon and welcome to our fourth quarter and 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.muralic.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 fiscal year 2023 Form 10-K on file with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all of the expense and profitability metrics discussed on today's call are non-GAAP results. 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 with our fourth quarter results in execution, ending our fiscal year 2023 on a strong note. 2022 tested nearly every company's agility and focus amidst economic uncertainty, inflation, and market volatility. Thousands of relics around the world, right to the occasion, and delivered consistent year-over-year revenue growth at the same 18% levels as prior year. We also made steady progress against our strategy to pioneer our category's first true consumption business model. In Q4, over 80% of our revenue came from our consumption business, growing at 55% year-over-year in total and over 30% year-over-year, excluding the benefit of migrations. This demonstrates just how competitive our new platform and business model is in the market today. The product team defined the year through innovation, delivering many market-leading launches, including DataPlus, our premium DataSkew, our major user experience upgrade, and vulnerability management, just to name a few. They also got a quick start to this fiscal year with a brand-new unified ATM, infra, and logs experience, and were first to market with an open AI monitoring solution and observability's first generative AI assistant, which is already defining the modern observability experience for the next decade. To be able to deliver that breadth of innovation while simultaneously driving an eight-point growth margin improvement over the course of the year is astounding and illustrates New Relic's world-class engineering. The whole company executed an impressive shift toward profitable growth, delivering durable double-digit operating income this quarter, ending the year at a new high watermark for the company with $26 million of operating income in Q4. Consistent year-over-year revenue growth, first-to-market innovation, increased margins and profitability, with so much distraction in the world today, there are not many companies who are closing the year on such a positive note. I'm very grateful for such terrific customers and all the hard work across the company, which made FY23 a terrific year. Let's now dive into how our go-to-market execution unfolded this quarter. We once again saw strong new logo growth in the fourth quarter. adding more than 800 net new paid platform customers, a rate which is significantly ahead of many other competitors in our category. As you know, New Relic's success in growing new paying customers is a result of our unique and efficient product-led growth motion, which starts with a perpetual free tier that allows customers to use the product and fall in love with it at their own pace, and then pay with a credit card as they begin to scale usage. We then naturally offer them additional discounts under contracts as they decide to commit annual or multi-year budgets to New Relic. Our free tier now reflects more than 41,000 active customers, and it includes engineers and teams and organizations of all sizes, including government, large enterprise, digital natives, and entrepreneurs in every segment and vertical. These free tier customers, together with our 16,000 paid customers, constitute a customer base of more than 57,000 actively engaged organizations, making New Relic the most ubiquitously adopted observability platform. Let me share a couple of examples of large new logo land where we drove head to headwinds versus leading competitors. First, we closed an agreement with a leading telecommunications provider to standardize on New Relic. This customer was using a host-based pricing model competitor, but experienced overages which constrained them from getting all the capabilities needed to achieve full-stack observability. Second, a leading Wall Street rating agency signed a six-figure savings plan with New Relic after their prior observability vendor was not able to achieve the customer's uptime and reliability targets, even after spending 5x more than originally planned. With New Relic, this customer now has access to more than 30 capabilities in one platform with better cost scaling to enable the agency to achieve their business goals. We are winning new customers through our growth engine and industry leading rates, as well as new strategic logos who are standardizing on New Relic. These wins also reflect the economic reality that expenses matter, and customers are increasingly focused on getting the best ROI for their observability investments, making New Relic a leading choice. Let's turn to our customer base. It's important to remember that we tend to land small through our efficient PLG sales motion and then expand in the ensuing quarters. As a result of this motion, the majority of our growth in any given quarter comes from our customer base. In the past few quarters, we've been focused on helping customers expand their contracts in situations where their consumption exceeds their contractual commitment. Equally, given economic pressures, we've been helping customers consolidate their tools and provide support to assist their cloud and digital transformation initiatives, as each continues to be a top CIO priority, even in the current environment. Let me share just a few examples of how our customers are expanding with us. First, a leading North American retail store chain almost doubled their annual commitment this quarter with New Relic. They have been a longtime customer and decided with this renewal to replace their log solution with New Relic logs as the retailer is rolling out additional instrumentation at their point of sales. Second, a global cloud-based communications leader has materially increased their already large commitment to an eight-figure multi-year commitment. A key driver for this expansion has been the customer's standardization on OpenTelemetry, which makes it easier for them to ingest more data from different systems. New Relic was a natural choice for them, given their commitment to OpenTelemetry standard and being a leading contributor in the category. Third, a leading financial services company, increased its commitment to New Relic by more than seven times. As this financial services company is going through a digital transformation of their front office, they needed to consolidate their various monitoring tools to gain comprehensive insights to ensure high uptime and reliability. New Relic's platform does exactly that. And fourth, a global business application provider more than doubled its commitment with New Relic upon shifting from a subscription contract to a consumption contract. This shift delivered more value to the customer by unlocking the entire all-in-one platform. While we're pleased with our customer base expansions, we are not immune to cloud optimization trends, which for us takes the form of user and data optimization. In the fourth quarter, beyond the expected seasonal pattern which we anticipated and guided toward this quarter, we saw optimization happening in two specific cohorts. First, while we have made steady progress at reducing the gap between consumption and commitment, we continue to see optimization most often occurring when customers are consuming far ahead of their commitment. Second, while we saw steady consumption growth across all spend cohorts, Optimization tends to be more pronounced this quarter with our largest spend customers where the largest budgets are set. For example, we were proud to be part of supporting one of the largest online entertainment companies who had a seasonal high over the holidays, reaching nearly 30 million in annualized consumption run rate, but then scaled down usage and drove optimization closer to 10 million annualized consumption during the quarter. They remain a healthy, happy customer of New Relic and appreciate their ability to scale usage on demand and pay only for what they use and avoid peak rate penalty billing, which is standard practice by our competitors. We work with our customers during such optimizations as we believe this deepens the partnership and allows us to grow faster as customers emerge from their optimization efforts. As seen in our strong RPO growth over the last several quarters, customers have opened up room to expand their consumption as their business is ready. We view the current climate as an excellent time to serve customers well and win increased market share. Next, I'd like to highlight some of the recent hallmark innovations on our all-in-one platform. We've strengthened our technical note in multiple areas. First, in generative AI, as I mentioned earlier, we were first to market with our announcement of New Electric Rock, the industry's first observability assistant, which will dramatically simplify users' access and ability to derive insights from telemetry data. We were also first to market in our category with MLOps and first to introduce support for monitoring OpenAI GPT. allowing customers to simultaneously track performance and cost metrics in real time. Second, our infrastructure capability has become even more competitive with deep integration to our market-leading APM capabilities so that engineers can truly achieve full-stack visibility at one-third the cost of competitors. This allows us to build on key wins with Capital One, Confluent, and others who moved off leading infrastructure-focused competitors. And third, we are reaching more developers with launching New Relic CodeStream for all core coding languages. CodeStream delivers insights into software performance in line with code inside leading developer tools like VS Code, Visual Studio, and IntelliJ, empowering more developers to quickly identify issues before they hit production and accelerate engineering velocity. We're excited to share more about our platform advantages and future innovation roadmap at Analyst Day this Thursday. Let's first shift to the road ahead. We're operating in a segment with persistent secular tailwinds. Digital transformation, cloud migration, as well as increased technical complexity, now including generative AI, which is driving an explosion of new applications that also need observability. In the short term, cloud optimizations remain a fact of life. But in the medium to long term, I'm confident observability will continue to grow in our consumption business model, which is rooted in customer success and the promise of paying only for what you use. We'll continue to strengthen, as Gartner already recognizes, becoming the leading customer preferred way of doing business. In FY23, we successfully grew our consumption business from 56% to 76% of total revenue and exited Q4 at more than 80%. We consider a customer part of our consumption business when they adopt not only our user and data pricing, but also sign up for one of our modern consumption buying programs with incremental usage billed automatically and revenue recognized on usage. We've been very successful with these migrations and now plan to accelerate our completion of the migration in the next four to six quarters. Completing the migration of our subscription base will have two benefits to the business. First, It unlocks growth potential with customers, as indicated in the example I provided earlier. Second, it also means that at the end of that shift, we only have one business model, consumption, which will cost less to operate and helps us focus and reduce complexity in the business. We're excited to share more about this plan and additional metrics to help you understand and model the consumption business going forward. We hope to see many of you in person at the event this Thursday and welcome everyone who can't join in person to tune into the live stream. Before turning it over to Dave, I would like to share a few thoughts on growth and our medium to long-term prospects. I'm incredibly excited about our business. Bookings and consumption growth in Q3 were quite strong. In Q4, we saw booking strength and many customers increased their consumption in line with prior quarters. We also saw increased optimization by large and hot customers who are naturally focused on efficiency and thereby offsetting otherwise healthy growth. Consumption growth came back in March, but the optimization trends limited the rebound through April. We are continuing to focus on what we control and be prudent as we enter the new fiscal year. We will continue to book deals with new and existing customers and close the gap between consumption and commitments. But as with other consumption businesses, we empower customers to decide the timing of their usage, and we must work hard every day to deliver value in order to recognize the revenue they committed to us over the lifetime of their annual or multi-year contracts. We also control our pace of innovation and our operational excellence and continue to raise the standards of excellence. We will simplify our business and lower costs by accelerating the exit of our legacy subscription contracts over the next four to six quarters. This is faster than we contemplated at the start of the calendar year. This is because we see the opportunity to end this year a meaningfully more efficient and profitable company poised for accelerating growth with a subscription business largely shed. We will continue to define our market with leading innovation. Generative AI is a tremendous opportunity for us to dramatically simplify observability and achieve our goal of making the practice ubiquitous for every engineer and team. Our continued investments in delivering a unique and fully integrated APM, and logs and infrastructure experience build on our simple all-in-one platform message. During these economic times, there's no better way for customers to achieve the efficiency efforts they seek while also increasing their top line and improving the productivity of their engineers. I believe our business was designed to perform in tough times. While we may not always see it immediately in our revenue, I believe we're well positioned to take market share and position our company for meaningful growth and profitability. Dave, with that, I'll turn it over to you.