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Edited Transcript of NEWR earnings conference call or presentation 14-May-19 9:00pm GMT

Q4 2019 New Relic Inc Earnings Call

San Francisco May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of New Relic Inc earnings conference call or presentation Tuesday, May 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lewis Cirne

New Relic, Inc. - Founder, CEO & Director

* Mark Sachleben

New Relic, Inc. - CFO & Corporate Secretary

* Tony Righetti

New Relic, Inc. - Senior Manager of IR

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Conference Call Participants

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* Erik Loren Suppiger

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Gray Wilson Powell

Deutsche Bank AG, Research Division - Research Analyst

* Hannah Rudoff

D.A. Davidson & Co., Research Division - Research Analyst

* Ittai Kidron

Oppenheimer & Co. Inc., Research Division - MD

* Jennifer Alexandra Swanson Lowe

UBS Investment Bank, Research Division - Analyst

* Keith Frances Bachman

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Khanh Minh Ngo

Needham & Company, LLC, Research Division - Research Analyst

* Michael Turits

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst

* Nicholas William Altmann

Cowen and Company, LLC, Research Division - Associate

* Sanjit Kumar Singh

Morgan Stanley, Research Division - VP

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

* Steven Richard Koenig

Wedbush Securities Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. (Operator Instructions)

Tony Righetti, New Relic Investor Relations, you may begin the conference.

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Tony Righetti, New Relic, Inc. - Senior Manager of IR [2]

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Thank you, operator. Good afternoon, and welcome to New Relic's Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. Joining me today are New Relic's Founder and CEO, Lew Cirne; and CFO, Mark Sachleben.

Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. All information provided in this conference call is as of the date hereof and New Relic assumes no obligation and does not intend to update these forward-looking statements except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to our earnings release issued today as well as the risks described in our most recent Form 10-Q and subsequent filings with the SEC. Copies of these documents may be obtained by visiting New Relic’s Investor Relations website or the SEC’s website.

Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, but note that these measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today.

At times, we may offer incremental metrics to provide greater insight into our business or results. This additional detail may be onetime in nature and we may or may not provide an update in the future on these metrics.

I encourage you to visit the Investor Relations section of New Relic's website to access our earnings release issued today, supplemental materials that accompany our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about New Relic.

With that, let me turn the call over to Lew.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [3]

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Thanks, Tony, and good afternoon to everyone joining today's call to review New Relic's financial results.

In fiscal '19, we partnered with more enterprises than ever, and I am pleased to report annual revenue surpassed our initial guidance and that this upside largely flowed to the bottom line. Fourth quarter results contributed to strong performance as we exceeded our guidance ranges with revenue of $132.1 million and non-GAAP operating income of $3.8 million.

As we transition from one fiscal year to the next, I feel the timing is appropriate for discussing our vision and mission as a company. Our vision is a more perfect Internet, an Internet where every user interaction is subsecond every time, where there are no bugs, no crashes, no errors and zero downtime. This vision is aspirational by design and it means that our work is never done. Our mission is to instrument, measure and improve the internet to help our customers create more perfect software, experiences and businesses. Our goal is to establish the standards by which all software and its impact can be measured and improved.

Software is no longer just an expense to be managed. It is the fuel driving growth and topline results for companies across virtually every industry. We serve the leaders in this digital economy that are playing offense with software, by helping them build incredible customer experiences that accelerate their business results.

We are excited by our fiscal '19 achievements and the expanding, multibillion-dollar market for our platform and we see an opportunity to create enduring value by increasing our go-to-market capacity and accelerating our pace of innovation. The resources necessary to accomplish this can be serviced by non-GAAP profitable dollars, which have trended ahead of the intermediate term model that we

Introduced in 2016.

We began to pursue this opportunity in earnest during the second half of fiscal '19, which resulted in record hiring across our sales and marketing and research and development organizations. We believe that this is necessary to position us for durable growth once we reach our $1 billion revenue run rate milestone.

The increased rate of hiring in our product organization, accentuated by 2 acquisitions over the past 2 quarters, has essentially pulled forward our R&D operating model objective by nearly 2 years. This action is expected to have a favorable impact on the pace of product introductions. In fact, our fiscal '20 schedule includes the release of 3 new paid SKUs. The first will address serverless computing; the second, logging; and the third, AI-ops, a result of the SignifAI acquisition I announced in February. I look forward to providing updates on these anticipated products as they are rolled out throughout the fiscal year.

But first, I am very excited to announce the launch of a brand new offering called New Relic One, available to all of our Pro customers starting tomorrow. New Relic One is the industry's first entity-centric observability platform. It helps our customers quickly find, visualize and understand all of the data they need to deliver more perfect software.

With the explosion of microservices and adoption of DevOps practices, our customers' systems and organizations are becoming increasingly complex. Today, many of our customers leverage multiple point solutions, one tool for observing Kubernetes, another tool for servers and cloud hosts, another tool for applications, another tool for the network, and so on, but a cacophony of point solutions creates a fragmented view of their systems, which can make quickly finding and fixing problems nearly impossible.

It's not enough to merely gather and watch metrics. Our customers increasingly need to see the relationships and dependencies between all of the things that they measure. New Relic One treats all of the things you want to instrument as entities, allowing our customers to visualize complex environments and understand the dependencies at a granular level.

To date, we view most of the market and, in particular, our stand-alone monitoring tools, as metric focused, which means they don't realize that every metric has a source and a set of dependencies. No entity ever runs in isolation. And if it has problems, it's important for our customers to pinpoint the cause of that disruption across from all of the entities within their environment. New Relic One gives them a pan-enterprise, unified observability platform.

We view New Relic One as not only bringing entity-level visibility to the market, but also an enabling technology platform that will accelerate our pace of product development. This new unified platform will be the delivery vehicle for our latest innovations, including the 3 new SKUs that I referenced earlier.

New Relic One is designed to create greater value for our customers through the following features: a global search and discovery platform with universal tag filtering so that our customers can manage millions of entities across their estate; Service Maps that automatically visualize upstream and downstream dependencies of these entities, again, across the entire enterprise; enhanced dashboard capabilities; a unified, fast and intuitive user experience; and the one I'm most excited about is UI programmability.

In closing, I'd like to highlight the core strengths that underpin not only New Relic One, but our philosophy for creating sustainable competitive advantage.

First, we're application-centric. We believe the application tier is the most strategic layer for delivering business value in modern software stacks since the application is closest to the end user. It's also the hardest technology to observe and monitor in real time.

Second, we're highly curated. We offer a curated experience to our customers to give them guidance on what they're seeing. There's a lot of data out there. And while it’s flexible and nice to be able to take a metric and put it on a dashboard, we've seen that our customers far prefer us to recommend what they need to watch. And so we deliver this curated point of view on what they should be looking at and this is so critical when our customers are troubleshooting.

And third is our scale. We are the first monitoring company to offer a Software-as-a-Service native solution because we wanted everybody to use it, every company of every size. We focused on ease of use so that, within our customers, we have lots and lots of users.

With this framework in mind, I am very excited about our path forward in fiscal '20 and I'm confident in our ability to achieve our fiscal '22 objectives.

I'll now turn the call over to Mark to provide more color on the financials.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [4]

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Thanks, Lew. During today's call, fiscal year 2019 financial results are presented under ASC 606. A reconciliation table to prior year's results under ASC 605 is available in the earnings press release accompanying this call.

Please also note, we have standardized the timing of an audit process designed to capture classification changes within our installed base at the fiscal year end. The impact of this reclassification of our existing paid business accounts is reflected in these results.

Now turning to the financials. Revenue was $132.1 million for the fourth quarter, up 34% year-over-year. We ended Q4 with 858 paid business accounts with ARR over $100,000, up 22% to a year ago. This growth represents both new logos landed as well as installed base expansions derived from increased usage, expanded application coverage and the cross-sell of additional products. Our annualized dollar-based net expansion rate in Q4 was 131% compared with 141% from a year-ago period. At the end of Q4, enterprise business was approximately 61% of ARR, up from around 54% as of the same period last year. Non-APM bookings during the quarter were approximately 40% of new ARR with contributions from New Relic Insights of over 10% and New Relic Infrastructure slightly below 10%.

As is customary during our year-end report, I will provide updates for the following annual metrics. Enterprise paid business accounts surpassed 2,300, up from more than 2,100 a year ago. Average ARR from enterprise paid business accounts was greater than $140,000, up from more than $100,000. The number of accounts paying at least $1 million dollars per year increased to 72, up from 41 a year ago. The percent of ARR from non-APM increased to 34%, up from 28%. The installed base invoicing duration increased to 9 months, up from 8.1. And total paid business accounts declined modestly and ended the year at more than 16,900, which is down slightly from over 17,000 a year ago. The lower total is primarily due to our emphasis on the upmarket opportunities with greater expansion potential and, to a lesser extent, due to account consolidation within the enterprise business.

Turning to our geographic split. U.S. revenue was $90.2 million for the quarter, up 34% year-over-year, while non-U. S. revenue for the quarter grew to $41.9 million, up 34% year-over-year. For Q4, our non-GAAP gross margin was 85%.

We continued to hire aggressively during the quarter and finished the year with 1,774 employees. Sales and marketing and research and development headcounts increased by approximately 40% and 45%, respectively, from fiscal '18.

Non-GAAP operating income was $3.8 million or 3% of revenue compared to $4.8 million or 5% of revenue in the same quarter last year. The outperformance to our fourth quarter guidance was primarily the result of revenue upside.

Overall, our non-GAAP net income attributable to New Relic per diluted share was $0.13 compared to $0.09 in the same quarter last year.

Turning to cash flow. Cash from operations was $48.6 million. Free cash flow, defined as cash from operations minus capital expenditures and capitalized software development costs, was $33.7 million.

Now for the full fiscal year. Revenue was $479.2 million, up 35% year-over-year. Gross margin was 85%, up from 84%. Non-GAAP operating income was $30.0 million or 6% of revenue compared to an operating loss of $1.5 million or negative 1% margin a year ago. Non-GAAP net income attributable to New Relic per diluted share was $0.66 compared to breakeven. Operating cash flow was $115.5 million compared to $35.7 million. And free cash flow was $67 million compared to $9.4 million in fiscal '18.

Turning to our balance sheet. We ended the fourth quarter with approximately $745 million of cash, cash equivalents and short-term investments, up from last quarter's $722 million total. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $272 million, up 43% year-over-year and 31% sequentially.

Now, I will turn to our outlook for the first quarter and the full fiscal year 2020. For the first fiscal quarter ending June 30, we expect revenue to be in the range of $138 million to $140 million. We expect non-GAAP operating income of $0.5 million to $1.5 million. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.07 to $0.08.

For the full fiscal year 2020, we expect revenue to range from $600 million to $607 million. We expect non-GAAP operating income of $20 million to $25 million. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.54 to $0.62.

Before moving to Q&A, I would like to provide some details to assist with modeling fiscal '20. The lowest level of non-GAAP operating margin is expected to be in Q1 and peak in Q4. In Q1, we anticipate normal seasonality in deferred revenue with a decrease in the low single digits on a percentage basis from Q4.

And for all of fiscal '20, we expect the following: cash from operations to be between $115 million and $125 million and free cash flow to be between $55 million and $65 million. We expect capital expenditures to be between $50 million and $55 million. We expect headcount to increase at a moderately lower pace than fiscal '19. And we expect gross margin to be between 84% and 85%.

And with that, I would like to open the call for questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ittai Kidron with Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [2]

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Good results, guys. I guess a lot to unpack here. Lew, I'll start with you. Congratulations on the new product announcement. I hope -- as an outsider looking in, New Relic One just seems like a sophisticated AI-ops platform for me. So help me understand what does this deliver that AI-ops doesn't. I understand AI-ops will be a component in this, but where else -- how does it really take in? And also how much value will it deliver out of the box tomorrow? It sounded like the 3 other pieces you're introducing next year are going to be a part of this. So what's ready now versus a year from now?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [3]

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Great questions, Ittai. So I'd say AI-ops is part of what New Relic One will be delivering, but think of New Relic One as designed to be a single pan-enterprise view that allows our customers to see absolutely everything they need to observe in production across every type of entity. That spans from databases to microservices to Lambda functions to Kubernetes to cloud instances. And where other products have fallen short, and no product's ever been able to do that before, is do that in a unified way at a scale large enough where a single instance can see everything in that enterprise and see the relationships or dependencies between those entities. So it's not enough to see that a database is having trouble in production, it's also important to see that, that database might be impacting code running -- owned by a different team in a different part of the business in a different geography that might be using a different New Relic account. And New Relic One unifies that view across all of the New Relic accounts and across all of the different types of entities that we observe as well as designed to observe all sorts -- any kind of future entities that may throw off telemetry or instrumentation. So that's a big deal.

It's also a platform from which we will accelerate our delivery of new innovations going forward, including AI -- AI-ops with our acquisition of SignifAI, but also logging. And you could expect more innovations to come at a faster pace on the New Relic platform because we've designed it to be the basis of the next 10 years of innovation for New Relic.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [4]

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Got it. Just to clarify here. Is -- do I need to consume the whole portfolio of New Relic in order to use New Relic One or New Relic One will be an open system, open to third-party performance monitoring tools, able to pull from all the noise, the complete stand-alone? That -- if you could clarify that, that will be great.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [5]

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It is great. Let me clarify 2 things actually. One is our customers don't need to install anything new or add any -- any existing New Relic customer, if you happen to be a paying customer today, you're just going to get New Relic One and it's going to be this new higher level view that shows everything reporting into any of your New Relic products in a new integrated way. So they don't have to do anything new and all of their existing products will behave exactly as they have behaved.

It is also a core part of our strategy to be open by design, to integrate with Prometheus, to integrate with other open source technologies and tools, so that wherever your instrumentation data is coming from, there's a place for New Relic One. And you'll see us roll out more functionality around our open initiatives over the course of the year.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [6]

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Got it. And then lastly for you, Mark, on the expansion rate. I guess it's all -- every quarter now, it's down on a year-over-year basis. I mean, clearly, you're introducing new product -- new paid products, so hopefully that helps. But is there a level here where you think you kind of stabilize on a year-over-year basis? Or how do I get my hands around that going forward?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [7]

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It has been drifting downward. If you look at the last 4 quarters, it's been coming down. It's now in the mid-120s. And I think that's healthy. Obviously, as we -- as the base gets bigger, I think the law of large numbers comes into play. And inevitably, that's going to start to -- or continue to drift downward. But we don't see the trends to be different from what it's been historically where we expect it to be -- continue to be strong but also continue to moderate over time.

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Operator [8]

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Your next question comes from Gray Powell with Deutsche Bank.

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Gray Wilson Powell, Deutsche Bank AG, Research Division - Research Analyst [9]

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Great. Thanks for taking the questions. Can you help us -- could you help us through some of the moving parts on the operating income guidance? And just how much dilution is there from the SignifAI acquisition versus organic activities like investing in sales and marketing and then just -- and new product productions?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [10]

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Sure. Yes, thanks for the question. I'm glad you phrased it the way you did because it does take a few factors into account. First off, we made 2 acquisitions in the back half of last year. And in anticipation of New Relic One plus our logging initiative and other R&D initiatives, we saw a healthy pipeline all driven by customer demand. Our customers are asking us to do more for them, to help them consolidate their tools and see everything they need in one place. And so we felt it was definitely in the best interests of the company to invest in a variety of R&D initiatives, some organic and some through acquisition. And our historical R&D spending, I think, was in the 17% range and we feel like it's better to be a little north of that in the coming year.

And then what we've learned in the past is it's not enough just to deliver these amazing products. We also have to enable our sales force and be prepared to take them to market and help our customers understand them and take -- and get full value of them. And so we want to make sure our go-to-market is appropriately prepared and has the right investment to take these new initiatives to market.

So I'm very excited about all the opportunities we have beside us, but we're very disciplined on selecting these opportunities. There's many good ideas we had to say no to, but it means that the ones we've selected, that we're embarking on, we feel great about. And that's going to take some investment, but we're delighted that we've demonstrated control of our business.

Believe it or not, 5 years ago, we were a negative 44% operating margin business. And last year, we got all the way to a positive 6%. So it shows that we know how to control the business and be disciplined when we need to. And we feel like now is the right time to invest more in the future, and we feel like that will drive more sustainable growth.

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Gray Wilson Powell, Deutsche Bank AG, Research Division - Research Analyst [11]

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Got it. That makes a lot of sense. And then just how are you thinking about the opportunity with the SignifAI acquisition? Do you think that could have the same level of success as your infrastructure product? And just how quickly can you ramp up the sales mission?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [12]

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That's a great question. So we do think SignifAI has potential to be a big deal because our customers feel so much pain on what they call alert fatigue. So one of our customers literally has 50,000 alerts that fire a day in production. And they've hired a large number of people to do pretty menial work in trying to synthesize those 50,000 alerts into maybe a few thousand work items that really need attention and activity. And they're doing that by hand, by manually observing these things and trying to separate out the signal from the noise. So I think the business case for a product that can consolidate those 50,000 alerts into a few hundred meaningful pieces of action, that business case is very compelling.

And so when we're ready to announce it, I think it has potential to do very well in the market. But we'll ship it when it's ready, when it's part of the New Relic One platform and when we're confident that it can deliver great value for our customers, which are the most demanding digital operations in the world. And so we set a high bar for what we deliver for them, and we're excited about the progress we're seeing in delivering that, but we want to maximize its full potential, and so the ship date and when it contributes is less important than how great it will be when it comes out.

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Operator [13]

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Your next question comes from Jennifer Lowe with UBS.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [14]

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And I'd echo the congratulations on the broader product portfolio. It's pretty exciting to see. As you start to think about going to market with an expanded platform of solutions, how do you see that impacting both your competitive landscape and your partnership landscape just given that you're selling -- it's the same message, but it's a bigger message. Do you think it sort of potentially changes how you compete? And then, does it put you in competition with some players that might have been partners traditionally?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [15]

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Great question. So I do believe, as we grow our footprint and other companies evolve their strategies, there will be increasing -- some increasing overlap, but we always take it from a customer-centric view. So for example, take logging. Our customers are asking us to see logs in context when they're troubleshooting. In the APM's use case, they're having a production issue, seconds matter and they need to resolve the problem as rapidly as possible. And in that heat of battle, leaving New Relic to go to another tool to see logs costs them context which can cost them minutes of downtime. So we're obsessing on our logs delivering a great APM use case.

Does that mean there's some competitive overlapping with over -- other logging companies? Yes, but those logging companies pursue other use cases around security, perhaps around compliance, and those aren't areas of focus for us in the foreseeable future. So we still see the opportunity to partner and, in fact, deeper opportunities to partner, where, for example, New Relic One, I hinted at this on the -- in my prepared remarks, but it's going to enable us and our customers and our partners to build meaningful applications, not just static dashboards but meaningful applications, custom visualizations right inside New Relic that will deepen our potential to integrate with the leading software that our customers use. Because, if our customers want us to integrate with a partner, we'll follow their lead to deliver the best experience possible, and that will be more to help us grow our business than thinking about who's turf is whose.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [16]

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Great. And Mark, I just had a quick follow-up question for you, kind of following on Gray's question earlier. I think, in the past and with some of your peer companies, we've also seen some margin headwinds year-over-year from ASC 606. As we get a little further into the adoption cycle, we see some of the amortization and sales commissions come rolling in. Was that an impact? Because if I sort of -- and Street consensus always is a little bit tough to parse through, but it looked like the cash flow guide was pretty consistent with where The Street was, so it's the operating income guide that was a little bit lower relative to consensus. Is ASC 606 and sales expense, commission volume to amortization a factor there as well?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [17]

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It's not a significant factor. We had the bump up in margin a year ago or so -- this past year that we talked about and -- but going forward, we don't see any real meaningful impact from 606 on commissions.

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Operator [18]

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Your next question is from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [19]

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I apologize, I stepped on just a little bit late. I caught the comments around the incremental R&D investment, but how much of the operating margin guide is the incremental investment on the sales and marketing side?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [20]

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So we talked about, in the remarks, our medium-term guidance for our target for R&D is 20%. And as Lew mentioned, with the investment opportunities we have, we'd like to get to that point this year. Then, from a historical perspective, we've been expanding and improving efficiency in the sales and marketing line for the last 5-plus years at a pretty dramatic rate. This year, that's going to slow down quite a bit and just see very modest levels of improvement there. G&A, similarly, we expect pretty much flat or a slight improvement there as we continue to build out our ability to scale and internal systems and things to hit -- to be strong and be ready to get to $1 billion and beyond. And then from a gross margin line, we talked about guidance. That was just a slight moderation there from the -- just 0.5% or so. And so I think that breaks down the income statement for the '20 guide.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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Right. But just as a follow-up to that, just a comment in terms of the slowdown in the sales productivity or the exact words that you used, I guess my interpretation is that means that you're going to start to increase hiring. Is that the case? And where do you see those incremental heads being allocated geographically? And is it still, I would imagine, focused upmarket where you're seeing such good success?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [22]

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Sure, yes. So the hiring is across the board, but on the sales and marketing side, in particular, we've been, for the last number of quarters, investing pretty aggressively in our technical services organization. So these are the customer success folks, sales engineers, technical account managers, the roles that are all supporting our accounts and our reps. So we are expanding our rep capacity, but we're also more aggressively investing in our technical services capacity.

Today, I think I would say we've gotten to the point where maybe 40% of our ARR is covered at a rate at which we would like it to be covered in terms of either supporting customer success folks and things like that. We want to get that at least to over 50% so we can be serving our customers appropriately. It -- we are still focused on the higher end of the market. This is enterprises. And I think we've landed -- last year, we landed, as you can tell, from 2,100 to over 2,300. So we landed a couple hundred new enterprises. Between that and the high end of the commercial market, there are a lot of these new accounts that we want to continue to grow. And so the bulk of those hires will be focused more upmarket.

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Operator [23]

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Your next question is from Rishi Jaluria with D. A. Davidson.

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Hannah Rudoff, D.A. Davidson & Co., Research Division - Research Analyst [24]

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This is Hannah on for Rishi. First off, just a follow-up on the hiring in technical sales. I was wondering how you're measuring sales productivity and how long it would typically take these newer technical sales people to get up to speed and full productivity?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [25]

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So we look at productivity in a couple of ways. One is just the productivity of the individual reps, but then that's also factored into the size of the team. As you add more supporting folks to those sales reps, obviously, you would expect productivity to increase. And so we look at a number of metrics around that.

In terms of time to ramp, basically, it's roughly a year for both -- people ask us a lot about that on the quota-carrying folks. For technical salespeople, it's probably a little shorter than that depending on what role they're in, but it's also comparable to -- call it a year.

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Hannah Rudoff, D.A. Davidson & Co., Research Division - Research Analyst [26]

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Okay. Great. That's helpful. And then I saw you brought on Andrew Lawson as your new leader for EMEA. And I was wondering what his main initiatives are, what do you think?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [27]

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Sure. So we're very excited about Andy coming on board. He just -- I guess, we just announced a couple weeks or so ago. And he's really hit the ground running. And so he is charged with -- it's the first time we've had a real GM of EMEA. So he'll be overseeing both the enterprise and the commercial S&P business in EMEA, which is new for us. And we're really excited about him just building out -- continuing the success we've had there in the commercial, but also building out the enterprise organization. I feel like that's an area where, frankly, we've underperformed a little bit historically. And based on the investments we've made, we really would like to see some good results coming out of EMEA. I think Andy is very well-positioned given his background to come in and really do some good things there.

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Operator [28]

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Your next question is from Michael Turits with Raymond James.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [29]

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First, a couple for Lew. Lew, you talked about logging. People have asked about it on and off for a while, and you haven't really pulled the trigger on going to logging, so it seems important that you're doing that now. Why? And are you able to do it purely organically or many other companies have made acquisitions here.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [30]

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Great question, Michael. And it is related to why we're doing it now. We did make the decision to do logging organically. Because we've got a fundamental data platform that operates at a massive scale, NRDB -- I'm going to give you a live data right now. NRDB, at this very moment, is inserting 60 million time-stamped events every second. And our customers, when they query it, I often see them scanning over 30 billion time-stamped events per second, 30 billion per second at our cloud scale. It turns out that logged messages are just a different kind of time-stamped event, and it wouldn't make sense for us to go buy a logging company that has its own probably Elasticsearch-based data storage technology that then would have high overlap and low synergy with all of the other -- all of our other products which sit on this incredibly powerful proprietary technology that we own. So we decided to build logging on top of it.

Our early testing is showing an order of magnitude faster search speed than comparable solutions based on Elasticsearch. Now that's early testing, but it's encouraging. And so we're glad that we decided to build it organically because we've got an incredible core technology that no one else has that runs this level of scale. And it's not only going to deliver performance, but more importantly, it's going to deliver a natural integration so that -- this is the core technology that make Insights so magical, by the way, for our customers, and it's why Insights has been such a strong product.

So we're excited about our logging opportunity, but we recognize it's a first release and we're early in a market that is -- has many providers in it. And so we're going to be customer-led on, when our customers want to see logs in context, we're going to offer logging to them, and it's going to be a compelling logging solution.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [31]

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Thanks, Lew. And then, Mark, Jennifer's question, just a follow-up on that. And it's not from a 606 commissions issue. Why is it that you were able to guide cash from ops above The Street but you took a big hit on EBITDA? Is it because something wrong on the topline side, the billings are going to be strong? Why? Help.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [32]

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I can't speak for the models that are out there. This year, from a cash flow standpoint, this year, it was very strong obviously. We benefited by a number of things, including DSOs that improved that we're not assuming that kind of improvement. In fact, I think we'll probably see more of a reversion to where we were a year ago on DSOs if you look at our AR balances. We've had -- this year, we had a better than expected increase in duration, going up from 8.1 to 9 months. And we do feel like we're at the point where that duration benefit that we've been getting the couple of years is really going to start to level off. And so we don't think we'll be getting that same kind of improvement this year. So I think some of it is -- it's about where we expected to be a year ago, but this year, overachieved from a cash flow standpoint.

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Operator [33]

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Your next question is from Sanjit Singh with Morgan Stanley.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [34]

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I had a follow-up on Michael's question about a follow-up on Jen's question, which is, on the sort of new product initiatives, it sounds like it's going to be a big year for new product introduction, but as you guys rightly pointed out, that go-to-market is a key piece of the pie here. So when we look back at Infrastructure and Insights and some of the recent product launches you've had in the last couple of years, what have been some of the learnings from scaling those 2 product categories? Have those sort of met your expectations as you sort of look at Infrastructure at around 10% of ARR? What's your sort of take in terms of launching new services with the hindsight of Infrastructure and Mobile the last couple of years?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [35]

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That's a great question. And it's how I like to think about us as a company and as a learning organization, right? So we learn from our experiences. We are always trying to push the boundaries and try new things. Well, Mark isn't with how he does finance, but as an R&D org, we certainly are always trying do new things and learn from it.

And I'd say, there's a lot of things we did right when we introduced those new products, but there are things that we -- when we do it again, we're going to do differently. And it really is in enabling our field, recognizing exactly who is the buyer for these things and when is it -- when it's the exact same person who buys our product or are they closely -- working closely with another person who actually is the decision-maker, identifying that and tuning our go-to-market engine to take that into account and our processes to take that into account.

And then there's also just thinking through -- enterprise expectations are high, right? And so when we deliver a new product, we want to make sure it's ready. And I can recall one product initiative we announced before, 4.5 years ago or so. I think we could have taken another quarter to harden it before we brought it out, right?

So we're thinking about these things and making sure that -- building the software we're building is nontrivial. It's hard work. It's taking some really brilliant people doing some exceptional work, but that's part of it, right? Getting the message right, getting our field enabled, understanding how it relates to the other products and technologies they use, when to integrate or when to compete. Those are all important questions that we think through and answer before we feel like we're ready to proceed in the market with these products.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [36]

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Great. And if I -- just had another follow-up on sort of New Relic's competitive standing and positioning. So the context, I guess, over the last several years, Lew, is that you've sort of run the company by choosing sort of what not to do and what to focus on, and you guys have clearly focused on sort of the modern environment. And so as sort of DevOps and containers sort of cross the chasm here, how much of a lead do you have versus traditional APM on monitoring the players, in your perspective? And then how do you view the sort of upstart set of monitoring folks who are starting their businesses in a sort of container world? To what extent does that pose a competitive threat to the business?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [37]

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Great question. I think you can segregate out our competitive landscape quite well. It's how we do it, too. So we think our advantage on the more traditional legacy APM-centric vendors is substantial. We see very high win and retention rates whenever the customer is running in the cloud or a cloud-native or cloud-centric company. So we're super-strong there. I feel like that has to be a first-class priority when you think about APM in order to be competitive in there. And our competitors have a pretty deep history and -- of customers that are running behind a firewall with on-premise software and that's -- I think that makes it challenging for them to remain competitive in cloud environments. Whereas, we have, on many occasions, forgone pursuing business that we felt like it was out of alignment with where we wanted to lead in the market, which is in cloud and monitor.

Now, the separate category. Are these cloud-native companies who -- particularly, many of them are very strong in just gathering lots and lots of data from lots and lots of places, and we think of them as metric-centric companies. So anything that can be charted over time, they can gather it and present it. And that's -- a lot of people like that approach, but what you find when you get into really large deployments is you're awash in metrics and you're awash in data, but you don't have any context. So if a chart has a spike on it, and that chart might have a title, it might say database is slowing down, but without the context of what is that database, who are the services that depend on it, who are the services that depend on that, what are the customers that are using [org] services, without that context, you don't know how important that problem is, right, much less how to fix the problem.

And so that's where we differentiate from these kind of more recent competitors that don't have an application-centric point of view. They have a metric-centric point of view and they don't understand these entities and how they relate and interdepend on each other when they run in production. And that's why New Relic One is such a game-changer because we're running at a pan-enterprise level now where millions of entities, all that might have interdependencies, are now put together in context all in one place, and nobody else is delivering that. It's a game-changer.

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Operator [38]

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Your next question comes from Keith Bachman with Bank of Montreal.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [39]

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I'd like to ask 2 questions if I could. The first is, broadly speaking, at your analyst event, you had talked about reaching $1 billion revenue run rate in 4Q and non-APM would be roughly half of that, so round number is $500 million. And my question is, are you on track? And I wanted to just distill that down a little bit and include, if you could, some comments on Infrastructure. And within that non-APM, are you on track? And one of the reasons why I bring it up is you talk about net new in terms of signings, and it's usually below 10%. And I'm just wondering why we're not seeing an expansion rate associated with the non-APM, broadly speaking, but Infrastructure in particular. So if you could just talk a little bit about your current status relative to the target of, call it, $500 million in non-APM?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [40]

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Sure. So we -- I think we put 45 to 55 out there. I think we're trending toward the lower end of that target. We do feel like we are -- our non-APM products are getting great traction. They continue to do well. But we're probably, as I said, trending toward the low end of that range that we gave out there. That has to do with, partially, the success we've had -- continued success we've had in APM. Also, as we go forward, we'll be introducing -- this year, we talked about 3 new SKUs, and so they'll be contributing to non-APM and so it will help boost that number up over the next couple years. So I expect that continue to decline -- to climb.

But in terms of Infrastructure, we feel like that product continues to do well. We're getting better and better at selling it and bundling it into additional land deals, not only Infrastructure, but the whole platform, whereas it used to be most of our lands were APM-only. More and more frequently now, we're seeing lands come with multiple products and Infrastructure is often a component there. So I do feel like we are making good progress there. Are there things that we can do better? Sure. We're always looking to improve that, but we do feel like it's -- that's healthy.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [41]

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Okay. And I don't want to put words in your mouth, but I mean, it seems like to reach the $1 billion target, you're outperforming a little bit on APM side. And so the one -- and maybe underperforming a little bit on the non-APM and Infrastructure in particular. Is that a right way -- in other words, the $1 billion target is still the right number and mix may just be a little bit different. Is that a fair way to think about it?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [42]

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Yes, that's a way. The way we think about it is we want to grow our total revenue, our account spend from our customers, and we'll do that. If that ends up being 100% APM or whatever mix of products, that's terrific. We just -- we want to get accounts in. We want to get some increased spend and that's our primary objective. How the -- a secondary number that falls out of that is generally how much is each of the various products.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [43]

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Okay. My follow-up actually is on margins, just to come back to that subject. I think investors will be a little bit different -- disappointed, rather, in the margin guidance. You do have listed your FY '22 target still being 10% to 14%. So I wanted to come back to -- at the conclusion of this year, should investors expect, generally speaking, a linear progression, so to speak, to those FY '22 targets of 10% to 14%?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [44]

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I wouldn't -- we're not going to give explicit guidance on that, but I think it will be certainly trending up toward there and we still are comfortable with that guidance we've giving -- given. When you look at the hiring we did this past year, we hired almost 500 people. And so that's been terrific. This year, that hiring, in total numbers, is probably going to drop a bit. And obviously, in percentage terms, it's going to be declining. We want to make sure everyone gets up to speed and working. So overall, I think the -- when you look out toward the 2022 guidance, it's going to be not quite linear but relatively close to that.

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Operator [45]

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Your next question is from Steve Koenig with Wedbush.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [46]

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Congrats on the quarter. And just one question for Lew. It's maybe a little bit involved here. But on the product side, so the new capabilities in New Relic One like search and discovery and the dependencies and the Service Maps, can you just give us some color on -- it's maybe 2 related questions. One is why aren't these -- why shouldn't these be a part of your Insights product? Why a separate? Why not part of that SKU instead of being made available to everybody? And then secondly, and maybe this is related, if you could help me understand. These features like search and discovery and dependencies and Service Maps, to what extent are they useful stand-alone or more as an enabler of some of those other products, at least, that you'll be doing like logging or AI-ops or serverless?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [47]

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Right. So yes, a couple of things -- great question. A couple of things to establish. One is New Relic One is going to be offered for free to all existing New Relic customers. So it's kind of -- think of it as like the layer above. And one way to kind of help understand why it's different from any of the products we offer today is we've got many customers. Some of our customers -- we have one customer that spends $6 million a year on New Relic or more, and they've got hundreds of accounts, well more than 200 New Relic accounts. So they've got hundreds of accounts, all with different teams looking at their part of the estate. Those teams don't work in isolation. In fact, they're highly interdependent. And so what they are asking is can you tie together all of our stuff that we see in New Relic and make it so that I can seamlessly see across those accounts without having to switch accounts? Now, this is even a bigger problem if you're stuck with on-premise software because what people will do is they'll install an on-premise monitoring solution that has no awareness of another on-premise monitoring solution of the identical vendor. And you have to log in into a separate thing and there is no data sharing between it.

In our case, now with New Relic One, we are breaking down those silos and making it just a simple -- whatever you need to see and have the credentials to see, you can see in context. And so that's very different from the capabilities of Insights, which allow you to do analytics and build very powerful dashboards and we -- we're going to continue to invest in both of those capabilities, whereas New Relic One is more entity-centric, looking at all the things you want to observe and monitor in your environment. Of course, that's everything that New Relic monitors for you today, all the applications and microservices and cloud entities, but in the future, it will be anything that you want to monitor, including things that you might monitor with open source tools or alternative approaches.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [48]

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And one quick follow-up then, Lew, is then drilling into the search and discovery capability. I'm imagining that, that becomes particularly useful when you add logging. Or is that stand-alone value in its own right?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [49]

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It has stand-alone value in its own right. So for example, there might be a service called a log-in service, right? And that might be monitored by some team somewhere in your organization. You might have a universal log-in service. Well, in other tools, you have to figure out which product to log in, which account to select before you can find a log-in service. Now, with pan-enterprise search, we'll show you any dashboard that has log in its name, any service that has log in its name. It could be a database behind it that has log-in somewhere in its name. So think of it not only in searching log message, but searching the entities and organizing those entities across -- and there are millions of them. There are millions of them in the enterprise, right? Millions of server names. What if you could just type the name of any server running in the enterprise and it's instantly visible to you, and then you can see what are the applications running on that server. I mean, our IT professionals are going to just fall in love with the fact they've got one place to see everything.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [50]

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Sounds pretty bullish. Thank you very much.

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Operator [51]

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Your next question is from Derrick Wood with Cowen.

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Nicholas William Altmann, Cowen and Company, LLC, Research Division - Associate [52]

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This is actually Nick Altmann on for Derrick. Just with the new products you guys are introducing later this year, is it fair to say that you will be focusing on selling those more into the high end of the market? And then with those new products, do you guys anticipate any changes to the go-to-market strategy?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [53]

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I'd say that our products, by and large, align with our existing business mix today. I think it's fantastic that, now, 61% of ARR is enterprise. As a reminder, when we went public less than 5 years ago, we were at 25% enterprise. So by and large, I think our products will align with how the ARR lines up today. There may be some exceptions on a particular SKU, but that's a good rule of thumb.

And on the go-to-market, I think, yes, it's -- again, it's customer-led in terms of figuring out what customer segments are adopting Lambda, right? And this is a big deal, our Lambda offering. It's the first product to go into the inside of how that code that's running in a serverless environment like Lambda, first code to go inside it the way APM has done for traditional web applications and microservices. And so obviously, we're -- we've got a lot of customers, a substantial subsegment of our customers that are adopting Lambda. They're the ones we're going to pursue first from a go-to-market perspective.

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Nicholas William Altmann, Cowen and Company, LLC, Research Division - Associate [54]

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Got it. And then last quarter, you guys mentioned the average enterprise uses around 30 tools today and that's due for consolidation. And then today, you guys kind of mentioned that some of the newer offerings that are coming out later this year are products that your customers have been asking for, for quite some time. So I'm just wondering, is this kind of your guys effort to sort of kick-start that consolidation in the enterprise? Or how should we think about enterprise standardization? Is there some sort of catalyst that takes place? Or does it just kind of happen organically?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [55]

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No. That is how -- when you think of it, it's like we're trying to simplify our customers' lives by making it so you don't have to switch out of one tool to go to another tool when they are trying to understand the whole environment or in the heat of battle when they must troubleshoot an issue as rapidly as possible. So for example, if you're in the middle of troubleshooting and you've got it narrowed it down to a specific application or transaction or microservice and you want to see the logs from that, people don't want to leave that context to go find the logs. They want to see it in the same place. And so New Relic One is consolidating that in one place for that reason. And now -- but we recognize that -- and it starts with, automatically, anything that New Relic observes and monitors will just appear in New Relic One. So we're designing it as an open platform so that our customers and our partners can create new types of entities and applications so that more things -- more types of data and more types of entities can be sent into the New Relic One platform and more applications can be built to present that data, to solve more problems and to integrate with other complementary tools.

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Operator [56]

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Your next question is from Erik Suppiger with JMP Securities.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [57]

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Yes. On the New Relic One side, are the Service Maps new? And are they -- are there other products out there such as DynaTrace that have similar approaches?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [58]

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What's new about our Service Maps capability? There's a couple of things, but the biggie is, again, breaking down the silos between instances of New Relic or, in the case of DynaTrace, instances of DynaTrace. When you get -- when you're in a large company, it's not like there is one installation of DynaTrace for the entirety of a large bank. There may be dozens. And from a scale perspective, it's the only practical way to deploy it. And in the case of SaaS offerings, there are usually dozens of accounts within, say, a New Relic customer. And so, what our customers said was the transaction spans many microservices and entities that go across different accounts. So can you break down the visibility silos between those instances or accounts so that I can see the true end-to-end view? And while you're at it, can you just make everything universally searchable and organizable, right? So that's what's new about our capabilities in our mapping technology that we think is a really big deal because our customers are just going to get increasingly -- the world they're going to be working in is going to be increasingly fragmented.

And then, I guess, another capability is, once you've constructed a useful map, you want to do more with it than just look at that map. You want to see that map in context. So now we're also improving our dashboard capabilities so a customer can take that very sophisticated map, put it in a dashboard and put it next to other key performance metrics they want to see so that put -- merging the best of maps and dashboards into one technology is also something unique we're introducing with this that we think our customers will love.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [59]

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Very good. And then real quick, how quickly, given that the product is essentially free for existing customers, how quickly do you expect it to be adopted by your customer base?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [60]

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It's a great question. So we've been very thoughtful on how to introduce New Relic One because we believe that this is the foundation for the next 10 years. And yet, what we didn't want to do was introduce a dramatic change for our customers. They're doing mission-critical work there and so they need to have familiar user interfaces that they're used to, right? So we don't -- we could have decided to force it on them as a replacement for our existing products and that would have been a bad decision on our part. So what we're doing is we're offering it as a -- and we've designed the scope of New Relic One to offer it as a complementary view to the existing products they have. And so with that in mind, are we do -- are going to pay very close attention to the uptake, but we are not going to -- we're not going to try to force our customers into adopting this amazing technology on our time frame. So it's available for them to try. And the cool thing about it is, from a business perspective, the larger and more complex your environment, the more valuable New Relic One will be. And so our focus on initial rollouts will be with our top customers that have more than 100 accounts, more than 100 microservices or more than 100 users. And we've got a lot of those customers. So we're paying our closest attention to them to start.

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Operator [61]

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Your next question comes from Jack Andrews of Needham.

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Khanh Minh Ngo, Needham & Company, LLC, Research Division - Research Analyst [62]

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It's Khanh Ngo calling in for Jack today. You previously mentioned a long-term target for your enterprise accounts being 65% to 75%. It's just that there was a lot of strength in the high-end commercial accounts last quarter. So how should we think about the tailwind that you guys are seeing from the high-end commercial accounts? Should we think of this as a tailwind to long-term revenue?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [63]

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Yes. I think what we've seen is great success in these accounts that -- anywhere from 250 to 500 and up employees but below 1,000. And that is a great segment for us. A lot -- you get a lot of companies now with only several hundred people but have very complex environments that are doing large deployments in the cloud. And they're great customers. And so we want to continue to focus on those accounts. And as I mentioned, we're looking to land accounts that have high potential. And certainly, there are a lot of them in that segment. And now, what happens to those accounts over time, though, is they grow through it. So we could land an account that has 500 people today and they could continue to expand very nicely for us. A year -- a couple of years from now, we would reclassify them as an enterprise account so it will boost the number. So I think over the long-term, the high-end commercial accounts, I think, end up boosting the percentage of business that comes from the enterprise, but it's certainly an area of focus for us in terms of landing new accounts and servicing those high-growth companies.

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Khanh Minh Ngo, Needham & Company, LLC, Research Division - Research Analyst [64]

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Okay. Great. And how should we think about the maturity of the international markets in adopting APM versus the U.S.? For example, if you think about China, payments aren't made exclusively through like a mobile app. Is there a big APM opportunity and a significant TAM in China?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [65]

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We are not -- do not focus or not even considering the market in China in the foreseeable future. That said, we believe there is a great international opportunity in the rest of the world outside of China and outside of the U.S. I mentioned EMEA earlier. We've got our APAC team is going well between Sydney and then the joint venture we announced in Japan a couple of quarters ago. We're starting -- we've got some good accounts down in South America. So we feel like there's great opportunity for us to grow. It's early, but we think that it's a great -- the international market is going to be very strong for us going forward.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [66]

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One way to look at it is IDC says that by, I think it's 2022, 1/2 of the world's GDP will be digital, and that's just a stunning thought to me considering that it wasn't that long ago before there was an Internet. And so for half of the global economy to go digital in such a short period of time, that's just dramatic transformation. It means that virtually every vertical is either going to be on the winning side where they see software as strategic or they're going to be left behind. And so we're -- our mission is to help those companies that are playing offense with software deliver a more perfect Internet. And that's a global thing and that's why we're so excited about our opportunity.

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Operator [67]

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There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [68]

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Well, I want to thank everyone for coming on the call today. Obviously, a lot of very exciting announcements. And in particular, I want to thank every Relic, 1,800 of them now around the world, for the amazing work you've done. We've got a bold and noble mission. Our vision is to pursue a more perfect Internet, an Internet where there are no bugs, no crashes, no outages, no downtime. And while we may never fully get there, it means that we're always going to be busy. But today was a big milestone along that journey in the delivery of New Relic One, and so I'm just thankful for all the hard work that's gone into it, and I'm so excited about the year ahead. And thanks and we look forward to speaking to all of you again soon.

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Operator [69]

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This concludes today's conference call. You may now disconnect.