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Edited Transcript of NEWR earnings conference call or presentation 6-Feb-19 10:00pm GMT

Q3 2019 New Relic Inc Earnings Call

San Francisco Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of New Relic Inc earnings conference call or presentation Wednesday, February 6, 2019 at 10:00:00pm 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

* Ittai Kidron

Oppenheimer & Co. Inc., Research Division - MD

* James Derrick Wood

Cowen and Company, LLC, Research Division - MD & Senior Software Analyst

* Jennifer Alexandra Swanson Lowe

UBS Investment Bank, Research Division - Analyst

* Jon Philip Andrews

Needham & Company, LLC, Research Division - Senior Analyst

* Keith Frances Bachman

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Michael Turits

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

* Rishi Nitya Jaluria

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

* Robert Cooney Oliver

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* 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 - SVP of Equity Research

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Presentation

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Operator [1]

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

New Relic's Investor Relations, Tony Righetti, you may begin your conference.

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

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Thank you. Good afternoon, and welcome to New Relic's Third Quarter 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. 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.

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 one-time 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 Third Quarter Fiscal 2019 Financial Results.

I'd like to start by announcing that New Relic has acquired SignifAI to address a significant, widespread problem that we see our customers struggle with on a daily basis. Later, I will provide more detail on this fantastic company and why I'm so excited at the prospect of bringing their exciting technology to our customers and to the broader market.

But first, let's talk about our third quarter. Results exceeded our guidance on both the top and bottom lines with revenue of $124 million and non-GAAP operating income of $7.8 million. It was 1 year ago this quarter that we reported our first quarter of non-GAAP profitability, which I am very pleased to see that we have sustained. At the same time, we've invested to enhance our platform and scale the business to an annual revenue run rate of nearly $500 million. While we've made great progress towards our $1 billion revenue run rate target, I feel we are just getting started.

Our sights are set on being the dominant DevOps platform for monitoring, managing and operating digital systems for what is a large, fast-growing, multibillion-dollar market that sits at the crossroads of what we view as the most impactful and important technology trends of the last 10 years: cloud computing, digital transformation and DevOps.

We see a tremendous underserved opportunity in large, midmarket and enterprise accounts, particularly with those that have not standardized on a single platform, to manage the performance of their critical digital initiatives. Across every industry, nearly every company is being challenged by digital transformations today. DevOps teams are under pressure to deliver high-quality, highly available digital experiences to their customers, and we exist to serve the DevOps teams that value technology as a growth driver. I call this playing offense with software, using software to grow revenue, increase productivity and enhance brand value.

Tracking the business impact of live, running software from the customer experience through the application and to the underlying infrastructure is critical to gauging success in sustaining any business' competitive advantage with their software. New Relic uniquely offers an integrated platform to manage digital performance. We enable DevOps teams to systematically operationalize the data that drives their business and then they can use that information to reduce risk, react quickly when risk issues arise and accelerate their development process and decision-making.

One New Relic customer playing offense with software is Canada's largest corporation, Manulife. As a global insurance and financial services provider with millions of customers in Canada, the United States and Asia, individuals and organizations around the world look to Manulife for help with their most important financial decisions. This company is undergoing a digital transformation as they invest in strengthening direct relationships with their customers through digital channels. But as software becomes increasingly critical to the success of their global business, Manulife has found that they were spending too much time managing multiple on-premise monitoring solutions. They needed a single, highly integrated, high velocity DevOps platform to succeed. That's why Manulife standardized on New Relic globally, to make it as easy as possible to build, deploy and operate their mission-critical applications using our cloud native DevOps platform. We're empowering Manulife teams with real-time data that they need to innovate at scale.

Our most successful customers leverage modern technologies such as micro services, serverless computing, Kubernetes, containers, cloud computing. All of these are in service of providing their DevOps teams with more autonomy and to empower them to scale their infrastructure and deliver their products to customers more rapidly so that they can deliver flawless customer experiences.

The product development team at New Relic leverages these technologies in a similar fashion, which helps drive our product road map and understand our customers' problems. A key benefit to the modern vision that we have is it aligns to our target market and therefore positions us as a strategic platform partner rather than a feature provider. Recently, we have added depth to our platform to help customers tackle the complexity of modern software, such as our Kubernetes cluster explorer, an APM support for Amazon Web Services, Lambda, which is their serverless offering.

Turning to the SignifAI acquisition that I mentioned at the beginning of my comments. In fiscal '20, we plan to expand our platform offering by offering the technology from the innovative team at SignifAI. This team has been focused on solving a very important problem for all software engineering and DevOps teams. These teams frequently have fragmented monitoring tools and when something goes wrong in production, they receive multiple alerts from each of these tools. Our customers often call it an alert storm. You can imagine how overwhelming this is, especially for complex environments.

What results is what our customers call alert fatigue. Enterprises are inundated with alerts, so they know that something's wrong, but they don't exactly know where to look to solve the problem. What I love about SignifAI is that their technology sits above these monitoring tools, ingests the alert data and then applies intelligence to it, telling you where to look to solve the problem. We believe this AI technology aligns nicely with our current platform and the New Relic alerts offerings and is complementary with alerting provider partners such as PagerDuty. This technology complements our existing platform and helps drive land-and-expand opportunities that are much larger than a single product category.

Driving expansions at a deliberate pace underpins our strategy. In fact, we achieved a paid business account milestone in Q3 with an expansion deal that led to our first $10 million ARR account. While we try to be the standard for all of our customers, we see this particular transaction as evidence that we are just getting started with the value that we can provide our customers and to the market as a whole.

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.

Now turning to the financials. Revenue was $124 million for the third quarter, up 35% year-over-year. We ended Q3 with 816 paid business accounts with ARR over $100,000 per year, up 30% compared 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 Q3 was 122% compared with 125% from the year-ago period. We drove larger upsells in absolute dollars during the quarter, but the installed base is much larger than the comparable period, which had a moderating effect on this metric. At the end of Q3, enterprise business was approximately 56% of ARR, up from around 52% as of the same period last year. Non-APM bookings during the quarter exceeded 40% of new ARR, with contributions from New Relic Insights of over 10% and New Relic Infrastructure at just below 10%. Our total paid business accounts remained over 17,000 and has been relatively flat during fiscal '19. This is primarily due to our emphasis on the upmarket opportunities with greater expansion potential.

Turning to our geographic split. U.S. revenue of $84.7 million for the quarter was up 35% year-over-year, while non-U. S. revenue for the quarter grew to $39.3 million, up 36% year-over-year. Non-U. S. revenue represented 32% of revenue in the quarter.

Non-GAAP gross margin was 85%. For the full fiscal year, we now expect non-GAAP gross margin to be 85%. We continue to hire aggressively during the quarter and added 108 employees across the organization as we pursue the significant market opportunity for the New Relic platform. Each quarter of fiscal '19 has been robust, and we plan to continue the hiring trend in Q4, which we expect to be a record.

Non-GAAP operating income was $7.8 million or 6% of revenue compared to $2.7 million or 3% of revenue in the same quarter last year. The outperformance to our third quarter expectations was primarily the result of revenue upside. Overall, our non-GAAP net income attributable to New Relic per diluted share was $0.19 compared to $0.05 in the same quarter last year.

Turning to our balance sheet. We ended the third quarter with approximately $722 million of cash, cash equivalents and short-term investments, down from last quarter's $731 million total. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $207 million, up 53% year-over-year and 8% quarter-over-quarter. As we look into Q4, we anticipate deferred revenue to increase in the low 20%s on a percentage basis from Q3.

Please note that as discussed on our call last May, deferred revenue in Q4 of fiscal '18 included a benefit of approximately $10 million from early renewals and annual invoice conversions.

Turning to cash flow. Cash from operations was $8.7 million. Free cash flow, defined as cash from operations minus capital expenditures and capitalized software, was a $7.5 million outflow. For all of fiscal '19, we continue to expect cash from operations to be between $70 million and $80 million and free cash flow to be between $30 million and $40 million.

Now I will turn to our outlook for the fourth quarter and full year fiscal 2019. For the fourth fiscal quarter ending March 31, we expect revenue to range from $126.5 million to $128.5 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 diluted share in the range of $0.04 to $0.06. For the full fiscal year 2019, we now expect revenue to range from $473.6 million to $475.6 million, an increase from our prior guidance of between $466.5 million to $469.5 million. We expect non-GAAP operating income of $26.7 million to $27.7 million, an improvement from our prior guidance of between $22 million to $24 million. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.58 to $0.60, an improvement from prior guidance of between $0.42 to $0.48.

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) Our first question comes from Rob Oliver from Baird.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Lew, one for you to start, and I have a very quick follow-up for Mark. I wanted to just dive in a little bit on the 8-figure ARR account, your first one. If you could talk a little bit about some of the different products that, that customer has taken beyond APM. And I know you mentioned as a full platform provider, and maybe talk a little bit about some of the use cases that have percolated there. And then I have a quick follow-up.

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

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Sure. So as you can imagine, this is a long-standing customer. I think we've done well over 100 individual transactions with this customer over the course of our relationship. They have all of the products in our platform and have had for some time. And I'd say one thing that was a nice catalyst to accelerate their investment was our introduction of an EDP structure. And what that is, it allowed the customer to add some flexibility on how they allocate it across the products. They knew they wanted to consume more, but it was taking a fair bit of effort to estimate precisely how much APM they would want, precisely how much Insights they would want. And same for Mobile and Browser and Synthetics. So they knew they wanted to grow all of them, and so we gave them the flexibility to do that, and that gave them comfort in stepping up to the $10 million level per year. And we intend for this to be a fruitful partnership, and we believe that there is more growth ahead in that particular account. And it's emblematic of what we hope to do with many other customers like this one.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Great. And then Mark, you -- I know you've talked in the past, you mentioned the hires, and you've talked a little bit about adding some more hires on the technical side. And I'm just wondering to what extent you're on track there and how that might play into landing a larger ARR deal like this and some of the incremental enterprise deals.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [5]

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Sure. So we are -- as we mentioned, we had a strong quarter, hiring-wise. We expect another strong quarter this quarter. And of course, we're hiring new capacity, new reps. But I have talked now for quite a while about our emphasis on hiring technical sales, people to go into the account, presales, post sales, the technical services folks that can help grow the accounts. And so we are continuing -- going to continue to invest there. And we're seeing -- what we're seeing is the more people we put on an account, the higher the expansion rates. When you look at our customer base and you segment it, that -- our 7-figure accounts are the ones that have the highest dollar-based net expansion rate, and I think that's driven by, in large part, by the fact that we've got people working with those accounts. And what we want to do is continue to invest in that area so that we can have more presence in the accounts that pass $100k to $1 million or even potentially below $100k. And we think that is an area that we're going to continue to invest in.

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Operator [6]

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Your next question comes from Sterling Auty from JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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So Lew, I'm kind of curious. Software, or I should say, digital transformations is such a popular project now across so many different industries. Where in the process of these digital transformations is New Relic actually getting brought in? Are you getting brought in earlier and earlier? And what does that look like? So in other words, why?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [8]

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Sure. So we are being brought in fairly early, in particular for companies or individuals who have had success with us previously and recognize the impact we can have on driving a more successful digital transformation. And how do we do that? Well, in order to be successful with digital, you must be continually using data to understand what's the customer experience, what is the performance, what is the health of the system, and how do I feel comfortable continually making changes to that production software in order to continually make it great.

Digital projects don't succeed if you can only update them once a quarter. And so in order to introduce that level of change, you must be watching it with precision, second by second. And so we're often -- more mature shops that have some understanding of best practices like DevOps, understand that they need to be thinking about real-time visibility, well diversified, and they all can bring us into these projects well before launch date. And then so we watch the successful launch, and then we continually inform our customers on how to make it better.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Got it. And then Mark, one follow-up for you. The expansion rate, the 122%, you gave some caveats there in terms of the year-over-year comparison given the base. How should we think about that metric moving forward? What's a comfortable level for that metric for you to continue to deliver the growth expectations?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [10]

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So if you look at the way we calculate that metric, just to remind everyone, we do that on a quarterly basis, and then we annualize it, which is a bit more granular than most peers do. So on a peer apples-to-apples basis, you'd look at the trailing 12 months, and when you look at that, it's been in the 127% range, I believe, and now it's down -- in around 126% following this quarter. Obviously, with the larger and larger base, it's tough to maintain that number. That number's going to moderate over time. But we feel comfortable with it -- with where it is and with the pace at which it's moving right now.

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Operator [11]

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Your next question comes from Ittai Kidron from Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [12]

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Congrats, guys. Great quarter and great acquisition. I guess I'm trying to understand the grammar. Am I to understand the deal is closed already, right? Just to clarify.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [13]

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Yes, it is closed.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [14]

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Okay, good. Well then, Lew, why don't you talk about the differentiation of SignifAI relative to BigPanda or Moogsoft? And also, does this create some conflicts coming out -- I mean, SignifAI had to maintain a lot of integrations with third-party APM tools like yours. Why would they want to still integrate, for SignifAI? How would that work?

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

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Great questions, and I'm glad you have some familiarity with the broader space. We did survey the space and concluded SignifAI had, by far, the best technology, particularly their AI capabilities so that with the minimum amount of configuration or 0 configuration, their artificial intelligence can correlate alerts the best.

Now I should set some context for those less familiar with this space. What SignifAI does is they take as input alerts or alarms coming from any monitoring product. And imagine, it's kind of analogous to your phone when a notification goes ring and bing and if it happens over and over and over again, it will drive you nuts, right? And so that's what our customers are dealing with today. When something goes wrong in production, it won't be just one alert they receive. They might receive 10, 20, 30 alerts. And they don't know how to make sense of it all. It's too much. And SignifAI is the best at correlating these alerts into one cohesive, logical outcome that is actionable.

And you do raise a good point that, that includes alerts from any monitoring products, including on-premise APM products or other products that some of our unfortunate customers might be struggling with today. And so we believe by offering something that allows them to consume alerts from all sorts of tools, that will just get -- buy more goodwill from the customer or engage our customer in a new way, and they'll value that, and over time, they'll consume our platform more rapidly.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [16]

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Yes, but maybe you can fine-tune the competitive differentiation. Like technology wise, what's different? And again, how do you -- do you see conflicts? Do you see all these integration partners willing to maintain those integrations and -- or abandon them? How do I think about that?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [17]

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No, we don't. I mean, basically, it's customer driven. So our analysis of SignifAI shows that their AI capabilities with 0 config show the least amount of effort and friction to get the most value and signal to noise from those alerts, okay? So it's the most mature AI technology we've seen when you look -- show real alert data at their system. And any monitoring product can throw off alerts. And by definition, those alerts can go to any destination, including SignifAI. So we don't see a conflict in technical integrations that they have.

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Operator [18]

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Your next question comes from Sanjit Singh from Morgan Stanley.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [19]

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I wanted to talk a little bit about sort of -- customers sort of consolidating capabilities with New Relic. So if a hypothetical customer is using New Relic for APM, event intelligence with another vendor, and maybe say infrastructure monitoring with another vendor, I was wondering if you can put a -- to sort of directly address what the benefit is to the customer by consolidating those capabilities on the New Relic platform.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [20]

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Sure. It's a great question, and I was talking -- I think one of the customers I met with late in Q3 had a perfect articulation of it. When there is a production issue, seconds matter. If you're having an outage, heaven forbid, or a really slow performance problem, every moment you spend on fixing that problem has enormous impact. And when you're in that heat of battle of trying to triage a problem, there's an enormous cost in switching tools. That cost is loss of concentration and context. So if you have to say, leave New Relic APM, which might show you that the application is having a problem, but you want to understand if that problem is infrastructure-related, if you leave APM to go to another infrastructure product, you need to reset the whole context. What was the point of time that I was looking at? What were the set of infrastructure hosts that were running, that were related to this application? And when you reset all of that, you're losing your concentration. You're restarting the problem-solving mindset and workflow. And that has real hard dollar cost to our customers.

And then, of course, there's the other, even more tangible dollar cost of just managing multiple vendors and multiple contracts and multiple offers and multiple sales cycles. And so there's the obvious cost-benefit on the tools consolidation argument. But the real -- the most value comes from the capability to resolve problems faster because it's all in one place.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [21]

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That makes a lot of sense. And maybe for my follow-up, Lew, as we sort of -- as we go into Q4, could you give us a sense of how the profile of users of New Relic has changed or expanded in terms of the types of users actually using the various products? How does that look today versus, let's say, maybe last year or 2 years ago? Has that pool of users started to expand? Anything you can do to describe that, that would be super helpful.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [22]

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So it's been an evolution, not a dramatic change. But I characterize our end users as, first of all, we've always been a tool that developers love because developers often get -- their primary job is to write and build software. But often, they get pulled into situations where they need to detect and resolve problems that are related to the code that they built. And they love how easy it is for New Relic to provide them the information to fix problems faster so they can go back to building software, right? So developers have always been champions of ours, and they're often thought leaders in tool selection and platform selection. But then, of course, you've got the operations people and more recently, DevOps professionals, who really want to bring a mindset of automation and engineering to running production in a more efficient way so that if you double the size of your application environment, you certainly don't want to have to double the headcount associated with running it. And so those folks also are big users of our software and big believers in the power of the New Relic platform.

I'd say the new kind of persona that we're starting to see more of is as we go into these large accounts, for example, these multimillion dollar customers, there are centralized centers of excellence whose job it is to empower teams of developers to be more productive and effective and adopt the DevOps culture within the company. So these are internal thought leaders in centers of excellence that provide New Relic and some other tools as a standard suite that enables these software teams to move faster. And they have their own requirements that we are keenly aware of and focused on which is a little different. They're not doing the troubleshooting, but they make sure that teams are able to troubleshoot themselves.

What that third constituency loves and values about us, that they see as highly differentiated, is ease-of-use. So what I often hear is that for competitive tools, particularly APM tools, it's almost like you need a Ph. D. in that tool to use it. And so if you're trying to federate responsibility for these tools throughout a large organization, it's too hard to do because the tools are too hard to use, and that impacts our ability to move faster. So they love New Relic for its ease-of-use and TCO, of course.

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Operator [23]

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Your next question comes from Jennifer Lowe from UBS.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [24]

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Maybe just the first question. So on SignifAI -- or AI, SignifAI, just from what's available out there, it looks like it's still a pretty young company. But from sort of the discussion today, it really sounds like there's some exciting capabilities there that would have pretty direct value for your customers. So as we think about what the rollout and what sort of the time line would be to actually have a product in market, what's the maturity of the technology today versus some of your very large customers out there? Is it sort of at that scale yet? Or should we expect this to be sort of a more gradual product rollout as you take the time to invest in the business and build it up to more of an enterprise scale?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [25]

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I mean, I love how you phrase that question because you're thinking about it the way we like to think about it. There's no doubt in my mind they uniquely address a problem that's very pervasive across our customer base, and so we believe that when the SKU is ready for market, it has the potential to attach very well, to allow for more value. And so we're excited to add this as our seventh SKU when it's ready. It's early days, so it's hard to predict exactly what quarter it will be ready to take out to our entire customer base. But we expect it will be sometime in fiscal '20 that we'll be ready to do that, and we, of course, want to make sure it's ready, ready for prime time when we do.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [26]

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Great. And then just one for Mark. Looking at the enterprise ARR mix, and obviously, that moves around quite a bit. But it sounds like you've been investing a lot in the sales motion there, certainly some great uptake. But that metric is maybe -- it looks like it was flat quarter-over-quarter and sort of flattish year-to-date. So could you just sort of give me a little color there on why that enterprise ARR mix number hasn't been growing faster, just given some of the commentary around the success you're seeing in the enterprise?

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

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Sure. Well, I mean, obviously, as that number gets to be a greater percentage of the business, it's harder to have it to increase at the pace at which -- a couple of years ago, when it's 25%, it was a lot easier to have that number go up. But no, we continue to see strength in the enterprise, and that is -- it's been growing nicely. But what we're also seeing is strength in the commercial, in the high end of the commercial market. These customers that are maybe not quite 1,000 employees yet, so they technically fit into the commercial space, but they are fast growing, they are -- have similar demands and requirements as the enterprise customers. And I think our commercial team is -- has been more focused on addressing that segment of the market, and we're seeing some good success in that segment of the market. So it's -- I think it's enterprises doing well, but we're also seeing some strength, some strength over the last couple of quarters, I would say, in the high end of the commercial market as well.

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Operator [28]

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Your next question comes from Michael Turits from 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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I'd just like to -- so it seems as if there are a number of different players that are expanding their silos, if you will. And there's more of an attempt to sell APM plus logs, plus infrastructure and even in some cases, network. So how are you seeing that play out competitively? Do you find that actually is the way customers want to buy? And are you competing in deals where people are looking for those multiple silos?

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

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Great question, Michael. So we're certainly seeing a lot of noise around it. There is, I think -- and in part because like, we've done very well, we think, and we're growing quite well, as you can see. And so that's going to attract all sorts of people to talk about our space at a minimum. We -- when the rubber meets the road, we feel like -- and the customers that we talk to like our approach, which is we are an application-centric, cloud-hosted platform that covers the application, the end user experience and the infrastructure all in one place. Okay. Now there are other broad platforms that collect a lot of data. I kind of think of them as a bag of metrics, where like anything that can throw off a metric, they'll collect. But it doesn't -- because it lacks that application-centricity, that thinking of the application as the center of the project where the business logic lies, it's really hard to put appropriate context to all those metrics, and it makes them hard to use on large-scale environments with lots of people. And so that's why there's plenty of room for our differentiation. But we do recognize because our APM business is so strong and because it's recognized as an important category, that there will be many companies talking about this space. But what we see in the market is, in particular, our APM product, is very strong, and there's plenty of room for differentiation, and it's not an easy technology to replicate.

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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 just I got another technology/product follow-up. Containers and if I could just throw it in the bucket, maybe serverless as well. You launched a lot of that capability last summer and then also made an acquisition in that area. There are some startups out there that are focusing specifically on those types of new architectures. How do you feel that level of competition is playing out? And are you winning in those spaces? Or do you feel like you still have more product development to go?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [32]

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Well, I think in that space, what we just talked about in the prepared remarks about our Kubernetes Explorer is a great example of market-leading capabilities that no one else can provide, that shows into the most modern of environments, Kubernetes environments, rapidly being adopted by enterprises and small businesses alike. And we've got this beautiful user interface that's easy to visualize and easy to understand how this complex cloud environment is working. And of course, we showed it in context with the application, the end user experience and the rest of the infrastructure. So we feel like we're innovating as well as we ever have in areas like this and that customers love it. There are always going to be point players trying to make an entry in an area of expertise. But when I talk to enterprise customers, they've got too many tools. In fact, a recent Gartner study shows that large enterprises typically have more than 30 monitoring tools. None of them like that. They want to consolidate it in one platform, as I spoke to earlier, sort of the reason why -- reasons why they want this all in one place. And so we believe that that's the way that the market is going to shake out, certainly on an aggregate spending level, and that we're excited to remain an innovative leader in modern environments.

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Operator [33]

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Your next question comes from Jack Andrews from Needham.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [34]

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Lew, I was wondering if you could talk about what your view is regarding the state of core mission-critical workloads specifically moving to the cloud. Where are we in this journey for those types of workloads overall? And I'm just wondering if there's any different parameters or requirements involved in competing for monitoring these types of mission-critical workloads, either from a sales process perspective or from technical requirements that perhaps might be different from your experience with other cloud-based applications.

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

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It's a great question. The good news is, like, we've been monitoring workloads that have been definitive of our customers businesses since the early phase of the company. So let's take, for example, one of our earliest customers, Airbnb. When they joined us, we were both tiny companies. I think they had maybe 25 employees when they first signed up for a New Relic environment. But now like, if you think about a mission-critical workload running in the cloud, that's pretty darn mission-critical, right? And that company has a market cap that's in the neighborhood or larger than most of the other major hotel providers. So it's hard not to consider that workload mission-critical. But you can also look at enterprise customers too as they move more legacy applications to the cloud.

I'd say one of the key things that they love about our platform is our APM product is so strong. We've got so many customers on it. So it's bulletproof. It's well proven in many environments. And then when they want to, for mission-critical workloads, go that extra level of customization that's so specific to their application, Insights really shines. And you saw Mark mentioned, we had another very strong quarter for Insights. We see that Insights consumption highly correlates to customers with really serious applications and application requirements, and it's where our differentiation strengthens, and it's often where our customers really grow their investment in New Relic post first transaction.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [36]

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Great. Appreciate your perspective. As a quick follow-up, could I just ask, is there any update in terms of early indications of how your efforts are going in Japan?

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

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It's very early. We're very excited about it. I'm looking forward to going to Japan next month to -- for the first New Relic FutureStack, Tokyo. So we're super excited about the opportunity. It's a great market, great market opportunity for us. We're so thrilled. We already have customers there, so we're being pulled into the market. But it's too early to give any quantitative data around it.

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Operator [38]

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Your next question comes from Rishi Jaluria from D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [39]

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Let me start out on the SignifAI acquisition. Is there some potential to take, if their ML technology is unique on this end, to kind of take some of what they've built out on the SignifAI product and maybe use that to bolster what we have on Insights or any other parts of the business as opposed to what SignifAI is doing as a standalone product, and then I've got a follow-up for Mark.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [40]

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The only reason for my pause is I'm wondering how much I should share at this point in time. We see a lot of potential synergy with what they have today and what they -- what that team and these brilliant AI experts in Sunnyvale and in Tel Aviv have the capability to do when they have access to the -- where are we at now, 12 million events per second, I think, coming into NRDB. So we collect an enormous amount of data off applications infrastructure. Every time a mobile application for one of our customers, if someone presses the buy button inside that application, that's an event that comes into our database that's right for AI analysis to answer all sorts of questions.

I'm just seeing some data here. We're collecting 2.3 billion events metrics per minute into our cloud, and we believe that, that has the potential to solve all sorts of problems when we apply more AI to the data.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [41]

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Okay, got it. That's helpful. And Mark, on the topic of deferred revenue and billings, and I know we've got endless amounts of caveats on this metric. But can you just help us understand your deferred revenue guidance for next quarter? Because low 20s sequential increase in total DR tells us that billings is going to decel the 12% or even if we control for the $10 million early in 4Q last year, that's still 20% from 35% this quarter. So without getting too -- placing undue emphasis on the metric, maybe just help us understand some of the puts and takes on that metric and what sort of moving parts might be baked into it.

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

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I appreciate you giving all the caveats in advance. I don't have to do that about billings and deferred in our business. But we're coming off a strong Q4 last year, and we look at the year-over-year growth in billings. Last year, I think if you control for the $10 million that we talked about in the call in last May, that was sort of one-time in nature. I think the growth last year was 43% or so. And then if you look at our guide now, and we're looking at 40% roughly year-over-year growth in deferred, and we feel like that is -- that's an indication of the strength of our business, and we do feel good about it. As we look out into Q4, we've got good pipelines. And I think based on the guidance we've given, it gives some confidence in that.

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Operator [43]

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Your next question comes from Derrick Wood from Cowen and Company.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD & Senior Software Analyst [44]

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Mark, just to stay on the -- go back to the enterprise metric. Another one that's been a little bit volatile is the number of new $100k accounts. That was -- it's normally a little bit seasonally stronger in December and March, that was down. Any color -- it was down sequentially this quarter. Any color as to why that would have been or what's the -- you talked about more emphasis maybe on upper commercial, drop something that's maybe contributing to some noise in that number. Any color would be helpful.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [45]

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Sure. So the -- I think we talked a little bit about where we're devoting the technical -- the investment we're making in technical resources is obviously where you would imagine, it goes to a higher-end accounts first. And what -- we had a good quarter in terms of large deals. I think what we saw was a lot of the large deals were in accounts that were already paying us more than $100k. So they didn't cross that threshold and add to that number. But obviously, we talked about the first $10 million customer. I think that's an indication of the strength we're having with our larger accounts. And so I think that number is volatile. It goes -- it's going to bounce around a bit. And so I think we happen to see this past quarter strength in this -- in large deals, but they happen to be in our larger accounts. And I think some of the investments we're making -- the continued investment we're making in the technical services and sales team is to make sure that we can drive that penetration and that coverage down to the lower accounts, not only keep it for the very largest of our accounts.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD & Senior Software Analyst [46]

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Got it. All right. That makes a lot of sense. And I'm just curious, obviously, you guys have been kind of marching upmarket, building more of a direct sales force. And I feel like I haven't heard a whole lot of color of domestic efforts versus international efforts. I noticed in your press release, you talk about opening a new Germany office and a France office. So maybe if you can give us some color as to where you are with your international efforts. What the demand environment looks out there with respect to the -- on the enterprise side?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [47]

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Sure. So we have been investing internationally, and we feel like that is a very -- a good market for us going forward. We've talked about $1 billion. When you look at $1 billion, our expected breakout is meaningfully more than the 32% that we see today coming from international markets. So I think that we do expect that to grow faster than the domestic market. Those investments have been -- they were delayed relative to the North American investments. What we try and do is invest here domestically, learn and then take those learnings overseas. Many of them do translate. Obviously, you've got to tweak it for different places. But you saw us open the German data center. We've opened -- we announced and opened an office in France. We've got the Japan investment. So I think we are making investments there. It will take time for those to pay off, but we see a good opportunity, and we're going to continue to invest fairly aggressively internationally.

That said, we have been deliberate, purposely deliberate in terms of how many countries we officially open. So like set up an office, have people on the ground, et cetera. Just because we feel like that that's a prudent way to go, is still being relatively focused as we're in international markets.

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Operator [48]

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Your next question comes from Keith Bachman from BMO.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [49]

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I'd like to ask 2 questions if I could. The first is on the competitive landscape. I wanted to follow on a question that was asked earlier, but really focus on infrastructure. And that's an important driver to get to your 10 -- $1 billion target, excuse me. And I just wanted to hear a little bit about how the dynamics are going there, particularly Datadog seems to have a strong position there, and it's not that you're not doing -- you're doing obviously very well in APM. But you need, I think, both APM and the infrastructure piece to work towards that $1 billion metric. So if you could just talk a little bit about your expansion into the infrastructure growth trajectory that you're experiencing now, and then I have a follow-up.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [50]

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Sure. So our infrastructure product is attaching very well. I'm universally seeing customer desire to get APM and infrastructure in one place. They like that. They like New Relic's application-centric approach to it for reasons that I discussed earlier. So our infrastructure product is doing very well, growing very nicely. It meaningfully contributes every quarter. And we expect it to continue to grow very well, adding things like our Kubernetes Explorer for example. That's the kind of thing that nobody else has that our customers really value.

And so yes, this is important. And we believe that it's -- well, that it's more straightforward for an application-centric company to add infrastructure than vice versa. For example, a host exposes 4 to 6 important metrics, CPU, disk, I/O, network. An application is this living thing that you need to watch tens of thousands of metrics and data points in real time. So it's a much harder problem to solve the application problem than to monitor a host or monitor the other things, cloud services, that you want to see in one place. And so that's why we believe that an infrastructure company is going to have an uphill battle doing the kind of job they need to do to really deliver the application visibility that customers want. Whereas our infrastructure product is delivering on the requirements to the market, which is why it's growing so nicely.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [51]

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Okay, okay. Let me ask my second question. I also want to return to the DR. Even if we normalize for last year, the sequential growth is meaningfully different from, say, the March quarter of '17 or the March quarter of '18. And I'm still confused on why even if we normalize for the extra $10 million or $11 million, why there's such a meaningful deceleration particularly if we look sequentially, which tends to normalize for the year-over-year. Is there just a lower pipeline or -- it seems like there should be more of an explanation.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [52]

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I talked about that a little bit. We feel good about our pipeline. I think we've given the guidance for -- the revenue guidance this quarter. And we feel good about it. Those numbers are -- as the base gets bigger and bigger, those numbers are going to be, like everything, those numbers get -- drift downward. So I don't think there is anything unusual or no more insights I can give other than we feel like we have a good pipeline, and we feel good about our business as we head into our Q4.

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Operator [53]

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Your next question comes from Erik Suppiger from JMP.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [54]

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On the SignifAI, one, can you give us any metrics, maybe about headcount or just how far along they were with product development? And then on the integrations you talked about or the press release, so they had 60 integrations. Can you give us a sense for what portion of the market that represents? Is that something that's going to expand significantly? Or how well of it -- how significant of an ecosystem has this already developed?

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

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Good questions. I'd say we're not going to disclose a ton of detail as there will be some supplemental information we are publishing that speaks to how we -- the economic value of the transaction, et cetera. So I encourage you to look at those materials that we have published or are about to publish shortly. And as regards to, like the number of integrations, et cetera, we believe that it's reached critical mass in terms of consuming alerts from the right type of products that our customers use to monitor production. And let me remind you. Those customers would love to reduce the number of tools they have. And over time, they will. But they've got this problem today. So we can go into any customer, including customers that might have competitive products and say, "Send your New Relic alerts and other alerts only to this one place to take those 300 notifications down to 1 actionable event that makes sense." And that's a value prop that our customers are eager to adopt.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [56]

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Can you comment in terms of types of additional partners that you would like to expand the integrations with?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [57]

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I think it's a pretty complete set. Whatever -- if there's anything missing from our customers, we haven't heard anything yet. But we're always -- and it's a straightforward integration. Anything that alerts, if it alerts, it kicks out an e-mail or it kicks out a notification. That's something that can easily integrate into SignifAI.

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Operator [58]

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Your next question comes from Steve Koenig from Wedbush Securities.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - SVP of Equity Research [59]

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It's kind of a multipart question here, and then I have a quick follow-up. So our data suggests that New Relic has a big lead in cloud application projects in the largest companies. And competitors, clearly, the legacy players and other players are trying to catch up. How does New Relic maintain the lead there? And is the shift to cloud such that, that, by itself, can propel New Relic to be the overall market leader? And/or how important is it that New Relic does more on-prem projects as well? So kind of that -- thoughts on that market dynamic is what I'm interested in.

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

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That's great. Well, it's great that what you're seeing is what we also see and believe. We think of the cloud as home-field advantage, right? So we want -- if there's a workload running in the cloud, we want to be the natural selection. Now we'll win small [wagings] too. If the workload is running on-premise, we'll take down some of those opportunities because we're certainly capable of doing a great job monitoring them. But what we want to always be the best at is monitoring workloads running in the cloud because that's most certainly the future.

I was just at one of the largest brands and companies in the world, and I asked them how they were doing in their cloud journey, expecting them to be in early days because of the size and magnitude of this company. They said, no, we are all done. We're out of data centers completely. And so it just -- that's the future for so many industries, that doesn't happen -- and now let's be clear, if you're multi-cloud, if you're hybrid cloud, you still want one place to go to for visibility. But if cloud is at all important, New Relic is the natural solution. And then we'll cover your on-prem stuff, too.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - SVP of Equity Research [61]

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Okay, great. If I may, I just have a quick follow-up, which is maybe a little color on how you're engaging with SIs, and particularly major SIs, and any color on untapped opportunity with them.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [62]

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I'd say it's still early days, in part because our product is so easy to use and install. Unlike traditional large enterprise applications, particularly big on-premise software applications of the '90s and early 2000s, that could drive a huge SI engagement, that could be lots of consultants for many months. I'm always delighted when I go into a customer prospect and say, how is your evaluation going? They say, well, I wanted to put it in on one application, it was so easy, I put it in on 10. So as customers get more sophisticated with our platform, there may be opportunities to go deeper that do require a more consolidated engagement model that goes beyond our capacity to service. So that might be something that happens in the future. But right now, our ease-of-use and adoption means that it's not necessarily a natural fit for big systems integrator projects.

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Operator [63]

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Your next question comes from Gray Powell from Deutsche Bank.

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Gray Wilson Powell, Deutsche Bank AG, Research Division - Research Analyst [64]

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I know it's getting late in the call, so I'll keep it quick. So it sounds like demand for Insights has really improved over the last few quarters. Just given that that's one of the more mature products, what do you think is driving the recent interest?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [65]

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It's the kind of product that -- it reminds me of APM in 2004. People weren't quite sure what to make of it because there was nothing like APM. As background, I founded a company called Wiley that created the first APM product before there was a category called APM. And in the early days, 2002, 2003, people were trying to figure out what it was. And then after some experience with it, they realized they couldn't live without it. And so that's been happening with Insights. We just kind of have a history of creating products and categories. And Insights is a product that there's nothing like it. It gives you real-time visibility onto everything flowing through your software, to answer questions you didn't even anticipate you're going to have, and you didn't imagine were answerable in real-time. And it's kind of one of those things that sounds a bit abstract, but to customers who have Insights and use it and understand it, they recognize they can't live life without it.

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Operator [66]

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There are no further questions at this time. I'll turn the call back over to management.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [67]

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Well, hey, I want to thank you all for joining the call, for your great questions. I want to thank the 1,600-plus Relics for the amazing work you're doing and welcome team SignifAI to New Relic. I've never been more excited about this great company, this opportunity, and it's just a pleasure to work with our amazing customers and help them all be successful with digital. Thanks, and we'll look forward to speaking to you again in the May call.

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Operator [68]

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