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Edited Transcript of NEWR earnings conference call or presentation 5-Nov-19 10:00pm GMT

Q2 2020 New Relic Inc Earnings Call

San Francisco Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of New Relic Inc earnings conference call or presentation Tuesday, November 5, 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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* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* 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

* Mohit Gogia

Barclays Bank PLC, Research Division - Research 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 - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to New Relic's Second Quarter Fiscal 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand over the conference to your speaker today, Tony Righetti with Investor Relations. Thank you. Please go ahead.

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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 Second Quarter Fiscal Year 2020 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. 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 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, which we believe provide an additional tool for investors to use in evaluating ongoing operating results and trends. However, these measures cannot 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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Thank you, Tony, and good afternoon to everyone joining today's call. Since our beginning, New Relic's ambition has driven us to instrument the digital world and establish the standards by which all software and its impact can be measured and improved. While the first half of the year was challenging, I am pleased with the perseverance and steadfast focus demonstrated by our company over this period.

This was evident in September at our FutureStack user conference where we released advanced platform capabilities: New Relic Logs, New Relic Traces and New Relic Metrics. We also added programmability to the New Relic One platform, which gives our customers and partners the ability to build entirely new applications on top of the New Relic One platform, enabling them to integrate business data and create seamless workflows on our platform to drive realtime actionable insights.

We see programmability as a platform-defining capability and a litmus test of the observability platform. In other words, it's not a platform unless application development is supported. Unlike dashboard-only solutions, our platform enables software to be built and shared, combining observability and business metrics to deliver unique digital customer experiences. Connecting technical, customer experience and business data in visualizations tailored to the unique business needs and integrating our customers' workflows has nearly limitless use cases, which we see as a competitive advantage for our company.

With our recent enhancements, the New Relic One observability platform became open, enabling our customers to bring in agent-based and open telemetry data; connected, allowing our customers to see relationships between their systems; and programmable, empowering our customers and partners to build entirely new applications on top of New Relic to drive their digital business.

Since our product organization moved to the General Manager model, our innovation throughput has exceeded my expectations, and I was proud to open our FutureStack user event by announcing a record number of new innovations and SKUs. These new products delivered on New Relic One raised our paid product count to 10 and highlight the merits of converging our development focus around this common, powerful platform.

We believe we have executed well on our strategic imperatives outlined during our last earnings call -- extensibility and programmability -- and we are acutely focused on driving better results from our go-to-market organization in the second half. The initial phase of establishing regional go-to-market hierarchies is complete, and we expect to be in a position to better leverage our scale, significant installed base and the entire observability platform going forward.

We then strengthened our leadership team on October 1 by welcoming Mike Christenson to an operating role at New Relic as President and COO. Mike is a seasoned executive with deep familiarity not only with our space but our company, has the knowhow and experience required to drive us beyond $1 billion in annual revenue. He also adds capacity to our team, which affords me the bandwidth to allocate the majority of my time to driving strategic product initiatives.

With these changes in place, plus the expansion of our observability platform, I'm increasingly confident in our ability to execute in the second half. In fact, we're experiencing early signs of success with accounts that participated in beta versions of our newest platform capabilities.

In one particular case, our team was able to expand a mid-6-figure account in the social technology sector to a multimillion-dollar customer. The incumbent environment involved a typical sprawl of competitors, homegrown metrics, logging built on the Elasticsearch stack and an open-source visualization tool.

The value proposition of standardizing on New Relic was driven by the power of New Relic One. The customer created 2 applications through our programmability capabilities, recognized by superior scalability and then deployed our Log, Metric and Trace offerings while in beta. I believe deals of this caliber are scalable due to the organizational enhancements we made this year along with the broader field enablement that accompanies the general availability of our new offerings.

As we shift our focus to the second half, our key initiatives are enabling the field to sell the open, connected and programmable platform to further penetrate our significant installed base; productivity of our Customer Solutions Group; and further differentiating our observability platform by expanding the library of programmable template offerings to foster development, adding context to New Relic Logs and moving the New Relic AI product to GA status.

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

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

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Thanks, Lew. Now turning to the financials. Revenue was $145.8 million for the second quarter, up 27% year-over-year and above the high end of our guidance range. We ended Q2 with 906 Paid Business Accounts with ARR over $100,000, up 15% 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 Q2 was 112% compared to 124% from the year ago period. The decrease was in line with our expectations and driven by a lower amount of up-sell activity this quarter relative to our total installed base. At the end of Q2, enterprise business was approximately 62% of ARR, up from around 56% as of the same period last year. In terms of geographic split, U.S. revenue was $99.3 million for the quarter, up 27% year-over-year, while non-U. S. revenue for the quarter grew to $46.6 million, also up 27% year-over-year.

For Q2, our non-GAAP gross margin was 84%. Non-GAAP operating income was $11.2 million or 8% of revenue compared to $9.7 million or 8% of revenue in the same quarter last year. This result was above our guidance due to a number of conservative expense assumptions, an FX benefit and lower personnel expenses. Although we had a strong hiring quarter with over 150 net new hires, the start dates of our new hires were generally back-end loaded. Overall, our non-GAAP net income attributable to New Relic per diluted share was $0.24 compared to $0.20 in the same quarter last year.

Turning to cash flow. Cash from operations was $9 million. Free cash flow, defined as cash from operations minus capital expenditures and capitalized software development cost, was negative $8 million.

Turning to our balance sheet. We ended the second quarter with approximately $772 million of cash, cash equivalents and short-term investments, up from last quarter's $769 million total. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $233 million, up 22% year-over-year but down 9% sequentially.

This result was below our initial range of a sequential decline in the low to mid-single digits. When calibrated to the full year revenue outlook update provided on September 16, we were near the bottom of that range. Some of the factors that impacted Q2 deferred revenue include aggressive model assumptions, which have since been refined; as well as slightly lower sales attainment and an in-quarter invoicing change from a million-dollar account.

Now I will turn to our outlook for the third quarter and full fiscal year 2020. For the third quarter ending December 31, we expect revenue to be in the range of $148 million to $150 million. We expect non-GAAP operating income of $3 million to $4 million. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.12 to $0.13. We expect deferred revenue to increase on a percentage basis in the low single digits sequentially as we work to build market awareness and increase sales productivity.

For the full fiscal year 2020, we expect revenue to range from $588 million to $593 million. We expect non-GAAP operating income of $21 million to $25 million. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.60 to $0.67.

Before moving to Q&A, I'd like to provide the following to assist with modeling the remainder of the year and revenue beyond fiscal '20. Regarding this fiscal year, we're maintaining gross margin outlook and update the following items: Cash from operations we expect to be between $90 million and $100 million, which is down from $100 million to $110 million. Free cash flow we expect to be between $30 million and $35 million, which is down from $40 million to $50 million. And capital expenditures we expect to be between $55 million and $60 million, which is up from $50 million to $55 million.

Looking beyond this year, we're refining our $1 billion objective from a run-rate basis attached to Q4 of fiscal '22 to a full year $1 billion revenue total in fiscal '23. At our upcoming Analyst and Investor Day on December 12, we'll provide a fiscal '23 target operating model calibrated to $1 billion of annual revenue.

In summary, we saw improved overall performance in Q2 and are working to accelerate growth. We anticipate continued improvements through the second half and into fiscal '21 as we enable the field in order to broaden the adoption of our platform.

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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I guess this is a question for both of you guys. I'm just kind of trying to tie, Lew, what you said about trying to focus on the productivity of the Customer Solutions Group guys, a bunch of new product coming out, and then, Mark, your comment about slightly lower sales attainment in the quarter. How do you feel at this point about the training of the sales force? How capable are they in pushing the new products? And maybe you can also talk about how even the process is, the learning process, what kind of improvement productivity-wise would you expect over the next 2, 3 quarters?

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

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Great questions, Ittai. I'll take the first part of it, let Mark provide some color. We introduced an awful lot of innovations and capabilities of FutureStack. And as I said in the prepared remarks, I'm very pleased with the execution the product work has delivered. And so we're very focused on enablement, and there is an awful lot of new capability to enable our field on. And that's going on pretty well, but it's not an instant transfer of knowledge and understanding to take that out to the market. And so it's a top priority for us to enable well. And while we enable with so many -- with the breadth of our platform, the sophistication of our platform, I think there is an opportunity to do it intelligently, which ought to result in more efficiencies in our CSG organization.

So I'd say it's a top area of focus. We're early on it. We're very pleased with how our customers are responding to the innovations. It's definitely resonating with what the market is looking for, and they see differentiation in it. And now we absolutely need to focus on being efficient and taking it to market through a well-enabled go-to-market team.

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

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Got it. And then just as a follow-up, I know Mike is on the job officially only a month, I guess, at this point. But he's been there for quite some time. Any first impressions on what changes he's been implementing? Or how's he thinking about doing things a little bit differently internally than they have been up until now?

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

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Mike has ramped up very rapidly because, as you mentioned, he's actually been involved with the company for nearly 10 years now, over 9 years. So -- but even that having been said, he has spent an awful lot of time -- I think he's visited about 6 New Relic offices in literally around the world, including our Asia and European offices as well as North America. And he's quickly getting to speed. And we're -- he's going to go into some depth as to his initial impressions and thoughts as to how we think about growing our business at our Analyst Day coming up. But I'm really pleased with the energy he's bringing in, the idea he's bringing in. I'm very excited about how this partnership is developing.

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Operator [6]

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Your next question comes from Sanjit Singh with Morgan Stanley.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [7]

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Lew, I had a question for you going into the second half, which -- you've released a lot of products this quarter. But going into your big expansion quarters where your larger customers are, I want to get a sense from the perspective of the customer about how they think about renewing their New Relic contracts and hopefully expanding them. Is it a function of them sort of looking at the product road map and saying, oh these guys released a bunch of cool interesting stuff. We look like we're future-proofed. Or do you really guys have to sell them on the sort of capabilities, the programmability stuff that you've announced this quarter today? I was trying to get a sense of how much the lift is in terms of executing the second half on the renewal base?

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

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It's a great question, Sanjit. I'd say it varies a bit depending on what we're talking about that we released. For example, with Logs, that's an established market, and it's more about demand capture, I think, than anything else in that we're pleasantly pleased with how eager our customers are to talk to us and to evaluate and use our logging product. They love how fast it is. They love how easy it is to use and administer hassle-free really compared to an on-premise or an offering where you have to think about indexing. And of course, they love that it's integrated with our APM, which is, we believe, best-in-class.

So that's the nature of a product where customers are eager to talk about expanding their New Relic relationship with that at the table. But something like programmability, which is literally new. Nobody's done anything like this in our category. That takes time for our customers to understand, discover, think about the use cases and adopt. We're very pleased with the customers that have done that. We're seeing signs of stickiness and engagement particularly in moments of truth like launch days or game days or important moments. They're turning to programmability to really make sure that there are moments of truth. They understand exactly what they need to see in their business.

But that's going to take longer, I think, for -- to fully develop in terms of being broadly adopted and broadly understood, and that's fine. That's really a strategic -- that we're thinking about that, that bears out over a longer period of time. So as we look out across all of things that we deliver, we can sort of plot each of those things on that spectrum. But there's no doubt in my mind that, with what we have now, we've got an energized sales force and an energized customer base that are thrilled about what we've been delivering. So now it's time to really execute.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [9]

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Got it. And maybe just one quick follow-up on sort of the same topic. As we sort of come up on the midpoint of the current quarter, you talked about some early proof points. I guess my question is to what extent is the macro environment a factor or hindrance in terms of your outlook going into Q3 and Q4? And ultimately, what you want to execute upon? Was there any squeamishness in terms of the demand environment from a macro environment perspective that you saw on this quarter that's continuing into the current quarter?

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

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No. None really to speak of. The overriding forces are that these massive tailwinds around cloud, around the movement to the digital economy to DevOps, these are all things that work in our favor that we think are outsized compared to what potential macro issues may or may not exist. So we're not seeing that as a major factor today or in the quarter, either.

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Operator [11]

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Your next question comes 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 [12]

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Lew or for Mark. Lew, can we drill down a little bit on infrastructures side? I mean this is a product that was launched a long time ago, but you made a lot of changes this year, including, I think, moving to more visualization, dashboarding, extensibility, openness to third parties, et cetera. So how far along in that process are you? And how much uptick are you getting? And I would add, you also talked about expanding the sales force to handle that as well.

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

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We're really pleased with the progress we made in infrastructure on the product side, in particular, New Relic Metrics really address a key requirement the market was asking from us to have a more complete infrastructure offering. It allows any customer that's using Prometheus, which is an increasingly popular technology for monitoring virtually anything in the infrastructure environment to directly send that into New Relic One that we could natively handle. And so that's the key capability that really ups our game.

So we think we effectively have closed the competitive gaps that we have with other companies on infrastructure. And we're starting to see nice signs of some wins in the infrastructure space, heads up with other companies that have a more of an infrastructure history. So -- but we recognize that we got to keep the focus on it. We have a rich history in APM, and so we're continuing to invest in enabling our field to do big infrastructure deals.

And really, it's about platform deals. So now that we have logging and infrastructure with those gaps closed and APM together all in one platform, and that platform having significant differentiation, particularly with programmability, we think of this as winning on the platform, and that includes large infrastructure deployments.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [14]

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Then Mark, can you give us more detail on the shortfall relative to deferred revenue? You called out a number of factors which would be great to clarify a bit: aggressive model assumptions, lower sales attainment and then it sounds like an invoicing change. And on the latter, is that part of a general trend towards shorter invoicing that may be going below 1 year?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [15]

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Sure. So yes, we did call out those factors. The lower sales attainment relative to forecast, that was a $3 million to $4 million shortfall, so that obviously had an impact. We did have some aggressive modeling assumptions around renewals, coterms and duration. In fact, duration has been going up pretty steadily over the last number of years. This quarter, it impact declines slightly, and so that had an impact.

And then on the invoicing, we are seeing more pushback in terms of renewals, customers wanting to pay, willingness to pay year upfront. I think you go back a few years ago, customers routinely paid 3 years upfront. Then they went to 1 year. We are seeing pushback on that. We had a customer that -- multimillion-dollar customer that just would not pay annual upfront anymore, and so that also had an impact. And we are not willing to give financial incentives to make up that shortfall since we do expect them to pay over time.

And interesting about the macro question, as I totally agree with Lew's response about that, on the other hand, there may be some manifestations of that in terms of larger companies and their willingness to prepay full year and multiple, multiple years upfront.

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Operator [16]

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Your next question comes from Jack Andrews with Needham & Company.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [17]

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Lew, I was wondering when you think about greenfield opportunities in this market and you're approaching potential new customers with the value proposition of New Relic One, who's the buyer now? Who are you approaching within these organizations that could make the decision to potentially standardize on your platform?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [18]

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It does vary by deal size. And I would mention that it was an improved quarter on a number of $100,000 customers. So let's take the segment where it's the $100,000-and-up customer and deal approver. They tend to be like a VP of Engineering and/or VP of Ops. And more often than not, they're in the digital business side, right? So they're involved with digital projects that may or may not be tightly aligned with IT. And they -- so they've got some level of autonomy, but they certainly have a high level of connection point between the development team and the SRE team. And often, developers carry a pager, for example.

So that's why having a connection to those roles is important, and our products are well aligned for building bridges between the development team and the operations team. And so they align often under a VP of Engineering, who may report to a CTO. And so the CTO gets involved when the deal gets more to like $500,000 and up. And then when we get to the $1 million and up, then we start to talk about IT standard and cross-divisional sorts of relationships. And that's where we do build a relationship with the IT team who wants to standardize on New Relic and make it their platform of choice either for APM or for the whole product suite. And that's where we get involved with the central IT function.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [19]

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Appreciate the color. If I could ask a follow-up question to Mark. I was just wondering is there any impact that we should be thinking about to your margin structure just with the simultaneous running of both New Relic One and your existing platform currently?

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

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In terms of gross margin profile?

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Yes.

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

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We don't see a meaningful difference in those 2. And so we've given the guidance for that year. And we're comfortable that we can be just as efficient with New Relic One as previously.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [23]

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And I think that it's important to clarify is that New Relic One really is a new user interface onto the exact-same data that we've been collecting with our previous generation user interfaces, so it's a way to unify all the data collected into the New Relic Cloud in a simplified, unified user interface. And so that's why there's almost negligible impact on our hosting costs or anything like that. It's not like our new database is storing new types of data. It's in fact a way to simplify what customers are already sending into the New Relic cloud.

And one of the nice things to know about that is that's why New Relic One is such an easy on-ramp for our customers. They don't need to install anything new or to adopt any new SKUs to get New Relic One. It's just a new and improved view on what -- the data they've already been sending us.

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Operator [24]

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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 [25]

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First, I just had -- I guess this would be a clarification question but following up on Michael Turits' line of questioning. When I look at the prepared remarks around deferred revenue, there's a comment that says, "When calibrated to the full year revenue outlook provided in September, we were near the bottom of that range." And I'm assuming that range was the prior guidance for deferred revenue, which you came in lower than. So can you just sort of clarify that? And then how -- given that the full year revenue guidance didn't move but you are at the lower end on deferred in Q2, how do we sort of reconcile those things and get comfort that you have that visibility still into that full year revenue target?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [26]

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Yes. So when we took our revenue guide down in September, obviously, that had -- that was based on our outlook for Q2 and Q3 and Q4, primarily for Q2 and Q3 since that business has an impact on revenue to -- in this year, whereas Q4, does not much. And so obviously, as that revenue came down, our deferred expectations were lowered. And in terms of the -- where we stand going forward, we've given the guide for this current quarter.

And I think if you look at the implied billings growth numbers -- if you look at the latest 12-month implied billings numbers, I think you'll see growth in the low 20s, I believe it is. And then if you look at our billings numbers, project out our deferred for Q3 and you look at that billings -- imputed billings number, you're looking at kind of high single digits, a slight acceleration in that regard. And so when we look at all these numbers together and we look at -- project our revenue for the second half of the year, we do feel like we have good visibility into that.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [27]

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Okay. Great. And then just one more from me. On the last earnings call you talked about the net dollar retention being up quarter-over-quarter but still down year-over-year. You didn't sort of provide a similar comment on this call. As we think about the back half of the year, how should we think about -- I mean, given all of the impressive products that are coming out now, and now you're in market with a lot of these, should we assume that, that starts to return to more of a normalized rate over the next couple of quarters? Or should it still be depressed as we think through the back half?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [28]

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It will be -- we're very excited about the products. I think we're seeing good early indications of success there. Those are going to take time to really penetrate and filter into the numbers. And so I think, while they'll help certainly the back half of the year, I think the real impact of those new products will be in fiscal '21.

From a dollar-based expansion rate, generally speaking, the back half of the year from a new ARR standpoint tends to be strong for us. We have the Q3, which is the calendar year-end and then our Q4 in March. On the other hand, our renewal base tends to be very large in Q3 and Q4. And so just with a constant renewal rate, you've got a higher level of churn in those 2 quarters, and so you've got somewhat competing metrics in terms of driving that number.

Our view is that we do feel like our dollar-based expansion rate should tend to improve over the course of the year. So in the back half of the year, we are looking for improvement in the second half, but we're not giving any firm guidance on that.

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Operator [29]

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Your next question comes from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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I apologize if you covered this. I'm bouncing between calls. But specifically to the new solutions that you've introduced into the market over the last couple of months, what's been kind of the initial feedback that you've got? And what are the next milestones that we should be looking for in the New Relic One rollout?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [31]

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Sterling, I'm happy to talk about product as many times anyone would like. So I'd say the market response to solutions is enthusiastic. At our FutureStack conference, for example, I talked to our top 15-or-so customers in North America. And literally 100% viewed programmability as strategic to them. And it's the first time we've ever gotten all 15 of our customers to agree on something when we've asked for feedback. You can imagine some of the largest companies in the world, they're demanding but that they help us execute better, so that was great, just an example.

But I'd say the market is responding well to our logging offering. They see as differentiated, and they love that it's all in the same place as our world-class APM offering and our amazing infrastructure product. So that's resonating well. And then as I look towards the future of the year, there was a lot of interest in New Relic AI, which we announced as in beta but has yet to go GA and, specifically, the capability of New Relic AI to reduce alert noise by 80%.

So our customers, when things go wrong in production, they don't get one alert, they might get a dozen. And that's very confusing to our customers. And in the worst case, they start to ignore alerts if they get too noisy. And so New Relic AI offers a compelling value proposition to them that they're eager to adopt. And feedback is positive from the costumers in the beta. So we've got more software to deliver during this fiscal year, and we're excited to see that come to market, too.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

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Makes sense. And one follow-up. Did you guys disclose the non-APM part of the business in the quarter?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [33]

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We didn't specifically call that out, Sterling. The numbers were in the mid-30s, and -- for overall, and Insights and Infrastructure continue to be the 2 leading non-APM products coming in, in the high teens. One of the things we're finding is that more and more consumers are embracing the platform. And from our standpoint, that's great that it provides a lot more value to the customer. That's how they get the most value from our products is by adopting the entire platform. And so when they do adopt the whole platform, it gets to be an allocation question of an internal allocation how we want to -- what we want to put toward the -- toward other products.

And so from our standpoint, we look at things like usage, deployment, data ingest, things like that, to get some sense of how the products are doing in those accounts. But the actual percentage of non-APM starts to become less and less meaningful, I would say, in terms of the overall -- how our overall business is doing. But what we are seeing is things like attach rates, customers who have multiple products and customers who have the entire product suite and the whole platform continued to increase.

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Operator [34]

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Your next question comes from Mohit Gogia with Barclays.

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Mohit Gogia, Barclays Bank PLC, Research Division - Research Analyst [35]

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Solid progress this quarter. I wanted to dig into the retention rate. I know you have answered that question before, but -- so obviously, some progress versus Q1. But if we look at new business, so you mentioned that, in second half, you expect retention rates to sort of like show a trajectory of improvement -- further improvement. But I'm wondering if you can comment on new business. How -- outside of the up-sells, how is the new business this quarter? And what gives you confidence that you can sort of like sustain that momentum at least on new business side in the second half? And then I have a follow-up question.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [36]

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Sure. With regard to new business, candidly, what we've done over the last 2 years strategically is focus much of our growth efforts on a small number of our largest customers or customers who have the largest potential. You've seen that in the reflection of the number of customers that spend more than $1 million with us. That's grown at a steady clip, particularly over the last 2 years.

And one of the things that we feel like we need to adjust in that model is to focus more on new business, specifically $100,000 customers. So now we have 900 customers who spend $100,000 with us. And that's a healthy and growing number, but we want to really increase that number. We feel like if you're a $100,000 New Relic subscriber, that's a meaningful relationship. Virtually all of them use at least 3 of our products, so they tend to be stickier. They tend to grow faster. And so rather than focus on the relatively small number of customers that might go from $1 million to $1.5 million in a given period of time, let's focus on developing a much larger cohort of customers that spend at least $100,000 with New Relic.

And many of them are in the customer base today spending less than $100,000, but we also need to focus on landing $100,000 customers, too, and you're going to see that as an area of focus, particularly with Mike onboard, he's been talking with the team and with me about it, and we all agree that's an exciting new way for us to think about the business going forward.

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Mohit Gogia, Barclays Bank PLC, Research Division - Research Analyst [37]

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Understood. And my follow-up question was on the EMEA business this quarter. So you mentioned that you had a new EMEA sales leader that started -- who started in Q1. Just wondering if you can update us on the progress there. What you are seeing initially? Any macro issues you want to sort of like highlight because we've been obviously hearing from other vendors about the whole macro situation out of EMEA?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [38]

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Yes. So in EMEA, yes, we had a new leader start in Q1. I think he's very quickly moved to establish his team -- his leadership team and is, I would say, making good progress in the blocking and tackling of building that business. And this Q2 is always a difficult quarter in EMEA, and it was still pretty early for him. But I think what we see is him doing the right things, and he's got a good team in place now, and he is driving the team to do the -- what you'd expect with good sales execution, building pipeline, really focusing the group on the message that they take to market. And so I think he's making good progress, but obviously, it takes time for those things to really establish and then show up in the numbers.

In terms of the overall macro market in EMEA, I think it's similar to last quarter where we hear a lot about -- externally, we hear a lot about it. From our customers, I would say we don't hear that much about it. And when you look at the projects we're working on, the new digital initiatives, the move to the digital economy, projects like those tend to get funding. And I think that's -- our view is that those will be the last to be cut versus some of the other places that folks may look to cut spending in the event of a downturn or slight downturn.

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Operator [39]

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Your next question comes from Chris Merwin with Goldman Sachs.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [40]

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I just wanted to ask about containers. Maybe can you just talk a bit about how you're investing in your capabilities there to monitor workloads running on containers? And to the extent that you're seeing a further shift in the customer base towards containers, how, if at all, is it that impacting the competitive dynamics for you all?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [41]

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We've -- our customers have been using containers for several years now. We do incredibly well in containerized environments. And in fact, we actually strengthened our capability in containers at FutureStack by one of the many things we launched on the New Relic One platform that any customer can install for free. It's an improved container explorer and visualizer that allows them to look at the health of an unlimited number of containers at massive scale and correlate that with application health and, of course, correlate it with the health of the underlying host that the container's running on. So that continues to improve, and we feel good about -- we feel great about how the migration of containers just increases the need to associate the application's health with the infrastructure that it's running on.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [42]

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Great. And then, yes, as it relates to hiring, can you talk a bit about where most of these new hires will sit, whether that's in R&D or sales and marketing? And given some of the convergence going on, how do you think about the right level of investment in R&D in the business going forward?

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [43]

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Yes. So we had a terrific quarter from a hiring standpoint. And I think it was a record quarter with over 150 net new. And they're across the company. Obviously, we focus a lot on R&D and then the go-to-market org. And we've seen that we can attract great talent and continue to do that. And we expect to continue to invest there. And looking forward, we plan to continue to hire aggressively. And that will be across the board, but specifically, I think -- you've always got to get sales capacity ahead of future years.

And on the R&D side, we want to make sure we continue to get great talent there. Overall, we've bumped up our R&D spending this year as a percentage of revenue. And I think we're -- looking out, I think we've seen great returns on that. I think we should continue to see opportunities to invest there. And so, if anything, I think we'll be more likely to be bumping up our R&D spending than anything else.

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Operator [44]

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Your next question comes from Rob Oliver with Baird.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Lew, one for you. You mentioned in your prepared remarks the social software company that had moved from 6 figure to multiple 7 figures and had done New Relic One -- had used New Relic One. Was curious if you could provide a little bit more color on that progression from kind of initial use of some of the New Relic One features in beta up to the paid conversion, what that time line felt like for you; and then what that means in terms of how you look at some of your other large customers, how long it might take to begin to monetize that. And I just had a quick follow-up as well.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [46]

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Sure, Rob. I'd love to give more color. So this particular customer, we had a great conversation with them over the course of Q2 in the summer about them standardizing on our platform. They recognized they -- that the sprawl of lots of different tools was working counter to their goal to deliver great customer experience and to move faster. And they're an innovative company, and they understood the power of being able to develop their own capabilities on New Relic One so that there was really no exception case that would prevent them from seeing everything they needed to see in one platform. And that was a big thing that attracted them to with. And so they adopted programmability. They adopted our Metrics capability, our OpenTracing capability. And then they started adopting logs, and they're aggressively using our logs.

My favorite part about it is a different part of this company that was less familiar with New Relic during the course of that discussion, they were informed that New Relic One was the new standard, and 2 weeks before a major launch -- a major launch, they moved from a combination of open-source technologies onto the New Relic platform, and they developed the custom view they wanted to. Going from no familiarity with our platform to building their own software on top our platform in the final 2 weeks before making a major launch. And the usage of that custom software they built themselves was the highest of anything that we saw on New Relic One programmability because it was specific to their business.

They knew what they needed to see. It was an important moment. They were launching an important piece of software, and it was worthwhile for them to spend a little bit of time programming on New Relic One to show exactly what they did. The launch was huge success, and it was a huge -- for their business, another huge success for us and our reputation within that company. So I do want to tell that story not only on this call but, more importantly, to the rest of our sales team so they understand that, when customers understand the power of our platform, they build strategic relationships, and that's what drives the growth of our business.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Great. That's really helpful. And then I'd just -- my one follow-up was just for clarification. There's been a lot of good questions and color on the sales force and the progress that Mike's been making so far. But I just wanted to clarify one thing. In your prepared remarks, Lew, you said the initial phase of establishing the regional sales force, and I just wanted to understand, is that second phase just something more than getting familiar with the products and getting them in people's hands and bags? Or is there something else about the actual regional adjustment to the sales force that still has to happen? And if so, what is that?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [48]

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No, no. We don't anticipate any like regional changes or adjustment to the model, how we're organized or anything like that. We've completed that move to regional integrated sales forces. That was the right decision. It's more now where we are in the process of fully enabling our sellers to convey the value proposition of these new products we've delivered and, more importantly, the value proposition of the entire platform because the market certainly wants this. They don't want to jump from an APM product to a different log product. They want to see logs in context, which is why we're having some many customers come to us to try our logging product. And they want the infrastructure capabilities also in the same place, and they love that we're delivering that -- particularly with adding New Relic Metrics to the mix. So it's really about enabling our sales force to tell the story and take to market the capabilities that we've built.

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Operator [49]

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

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD & Senior Software Analyst [50]

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Lew, I wanted to drill down into the motions around upgrades of New Relic One. I know you guys have said you're letting customers upgrade at their own speed, but it seems like you're kind of running 2 tracks in terms of getting customers to adopt your innovation. One is upgrading the core onto the new platform and one for the new product adoption. So I know it's early, but you seeing any kind of trend in behavior whether customers want to adopt the new products first and then do the core upgrade or vice versa or at the same time? Any color there would be helpful.

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [51]

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So just as a reminder, I wouldn't call it an upgrade to New Relic One because that implies you're installing new software or you're taking some new action on. You're simply using an alternative higher-level view that New Relic One provides into the very same telemetry we're collecting into our existing products. And the one -- and we've improved our dashboarding capability, in particular, so that's where there's like a direct overlap of functionality between what we have in New Relic One and what we have in New Relic Insights.

And so for the customers that are using New Relic One for dashboards, they're engaging longer. They're logging in more often. We're seeing great signs of adoption. And so now, we're fully confident with where New Relic One is and what the feedback we're seeing from our customers, and the metrics we're seeing that we're ready to turn it on as the default homepage of what you see when you log in to New Relic. And historically, that default homepage has been our APM product. So that ought to happen. We expect that to happen sometime within the next 90 days. And so when that happens, we will expect increased usage of that.

Coupled with that, of course, other reasons to go to New Relic One beyond it being the default homepage is, of course, the capabilities only available in New Relic One. That includes logs. That includes our Kubernetes cluster explorer. It includes global search and our Metrics -- being able to visualize the metrics we collect with New Relic Metrics. So those are reasons for people to come to New Relic One because they can only get it there. And that is also part of why we see the increased organic usage. But now it's time to just turn it on and make it something that people see when they log in, and that ought to drive even more usage and standardization around it.

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Operator [52]

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Your next question comes from Gary Powell (sic) [Gray Powell] with Deutsche Bank.

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Gray Wilson Powell, Deutsche Bank AG, Research Division - Research Analyst [53]

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Maybe a couple if I can. I know this might sound kind of obvious, but I guess we've been talking about changes in the competitive environment that occurred over the last 6 to 12 months, and it really kind of showed up on the last earnings call. Have you seen any meaningful changes this past quarter? And then how do you feel on the visibility you have today on that dynamic relative to earlier this year?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [54]

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I would say that the competitive dynamic environment is largely unchanged since last quarter when we talked about it. However, with what we released in September, so towards the end of the quarter and too late to have an impact on the numbers that we've talked about today, but we believe that -- and what we're seeing from the customer feedback is that our competitive position is much, much stronger, and we feel like we've effectively closed the competitive gaps that we've had with some of the competitors, particularly on infrastructure and dashboarding and now with programmability. And actually, with some of the capabilities in our logging products, we've created new gaps of our own that put us ahead of our competitors in some meaningful ways.

So we feel better about our -- the competitive position today than we did 90 days ago thanks to the hard work of the product teams. But as I've mentioned, we now have to focus on enabling the field so that our customers understand the capabilities and can make the right choice in standardizing on New Relic One.

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Operator [55]

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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 [56]

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I had 2 questions if I could. The first is for Mark. Mark, I know you guys are uncomfortable with billings and even guidance, but this is probably the most important metrics for investors. So if you think about Q4, you've already provided guidance for Q3, which is December, but Q4 for the March quarter. In the last 2 years, you've grown 47% and 40%, sequentially. Is there any kind of metric that you want to provide to get investors thinking about calibrating their models associated with Q4 in particular? I assume you would suggest that sequential growth exhibited in the last 2 years would be meaningfully under what you've done in FY '18 and '19 but at least want to provide you with a forum to at least give some directional comments to help investors calibrate. And then I want to come back to Lew if I could.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [57]

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Yes. I think at this point, we're not really ready to give additional guidance to the Q4 numbers. Q4, as any software, Q4 tends to be a strong quarter. We expect that to be no different for us this year. I think we'll provide more guidance in December at our Analyst Day. We'll talk a little bit more about that. But at this point, I think we're going to hold off. We did give the guidance in terms of revenue target for fiscal '23, $1 billion in revenue in fiscal '23. So I think to the extent you want something beyond sort of near term, that's the milepost we put out.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [58]

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Okay. Well, let me come back to Lew in that regard because, Lew, you've talked a little bit about a few things, but I want to come back and try to at least get some feedback on how long. So for instance, if I look at what you've guided for Q3 and I'm guessing for Q4 as well, your billings are actually going to be down pretty meaningfully year-over-year. And New Relic is, thereby, meaningfully underperforming the

(technical difficulty)

introduced or late to the market. Your competitive positioning has been impaired as a consequence. And so how long do you think this journey is that you're asking investors to stick around till you get to, just to pick a number, kind mid-teens kind of billings growth rate? Because, frankly, that's the more important metric than the revenue growth rate. How long is this journey? Is this 1 year? Is this 2 years?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [59]

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We're not prepared to speak to a specific time frame. I will tell you that we make -- the decisions we make at this company are entirely from a lens of long term what's in the best interest of the company and our shareholders, and as you know, I am the largest one, so I care deeply about this. And we always like to see great progress sooner rather than later, and we're focused -- and we're moving focused with urgency but always with the favor of the long term over the short term.

I'll give an example of that. We could have been in the market a year ago, perhaps, if we rushed on logging, and the best way to rush on logging would be to buy a company, probably based on Elasticsearch, and go out with a me-too product that would have had inferior performance, inferior usability. We took longer to deliver logging on top of NRDB, and the feedback we're hearing from our customers is the differentiation is compelling. Now I would have liked to have executed better to deliver logging on top of our core data technology sooner, and that's something that we talked about last quarter. I'm very pleased with the improvement in execution we've done. But that doesn't change the fact that we have a mindset of delivering the best capabilities and doing it right so that we have the most sustainable competitive advantage.

Programmability is an example of a capability that we believe will deliver sustainable competitive advantage. And so that has required us to be a little patient and for investors to show some patience, too, and we understand that. But I feel like we're through the worst of it on this. We've now delivered on those capabilities, and you're seeing us talk about New Relic AI coming, too. So we are now in the market with these products. We're encouraged by what customers are saying, and I can't give you more specifics on what quarter, when does it hit a certain number, but we feel good about what we delivered.

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Operator [60]

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

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [61]

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First, just wanted to ask about kind of the revised outlook. Mark, I appreciate you talking about the new kind of long-term model. And not to get too ahead of the Analyst Day next month, but I mean, look, if I just look at the numbers based on guidance right now, we're looking at a CAGR of somewhere in the 19% range over the next 3 years versus, effectively, the 16% revenue growth that you're guiding to in Q4. Maybe just help us understand what it is that's giving you confidence in this implied acceleration to cross more than $1 billion in revenue in FY '23? And I've got a quick follow-up.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [62]

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Yes. I think the changes we're making, we've got -- as we've talked a lot about on this call, the new products releases that we've done, the continued product innovations that are coming out in the road map, we feel like that not only has allowed us to catch up but, in some ways, leapfrog our competitors. We've got now Mike in place who's working hard driving us forward. And we're working on the go-to-market. That's the next phase, right? We first have to introduce the products. The next phase is to enable the sales organization, get them focused, give them the proper messaging and get out there and start to drive the deals.

And when we look at the growth rate of the market and we look at what we expect to do and want to do, we feel confident that we can hit those objectives. Certainly, we put that target out there of $1 billion. I think if I look at it objectively and say how fast is the market growing, I think our aspirations are certainly to do more than that. But what we're committing to is the $1 billion in '23.

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Operator [63]

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Your next question comes from Steve Koenig with Wedbush.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [64]

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One quick one for Mark and one product question for Lew. Mark, can you just give us any sort of granularity on where the sales shortfall occurred in Q2 relative to the variance with your assumptions?

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

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It was a combination of expansion and new. And it was fairly broad across the geos. No one region or new expansions stood out.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [66]

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Okay. And was there anything systematic you think behind that, that you -- kind of you pointed to like wanting to change certain aspects of your assumptions? And then I do have a quick product one for Lew. I promise that's my last.

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Mark Sachleben, New Relic, Inc. - CFO & Corporate Secretary [67]

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Nothing that I would point to. Again, a lot of little things and improvements that we want to make that we think we can make and have made in some cases.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [68]

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Got it. Okay, great. And then, Lew, question about -- kind of similar to Derrick's question. I want to ask about the New Relic Infrastructure product versus what you're now providing with Metrics and the Kubernetes explorer. Is there any overlap here that could -- that needs -- that sales needs to learn how to sell these things together or where you need to tweak to go to market? Or are the products all pretty much completely complementary? How does that work together?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [69]

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They align well, and they attach well. So I think it's fine, and there's not a heavy lift or a new skill set required in order to enable a field to have the infrastructure reach its full potential.

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Operator [70]

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Your next question comes from Erik Suppiger with JMP Securities.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [71]

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You had mentioned earlier that you were seeing more of the standardized telemetry adoption. Can you talk a little bit about any trends that you're seeing on that front?

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [72]

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Certainly. So people are adopting Prometheus. People are using Kubernetes. The OpenTelemetry initiative for tracing are all things that customers are asking about. Now what we hear, particularly enterprise, is that they're going to have some of all of that, and then they're also going to want agent-based technology because, for example, with OpenTracing, that's an API that you need to call in order to get the visibility you want.

And enterprises may want to do that in some of their applications, but they have thousands of applications that they want to manage with one platform. And so they want agents for most of their stuff, quite frankly, and we're the best at providing the broadest set of agents to see inside software. But they want to complement that with technologies like OpenTracing, which historically meant they would select a different platform for seeing the OpenTracing stuff. And now they don't need to choose. They can put it all in one place in New Relic One.

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Operator [73]

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

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Lewis Cirne, New Relic, Inc. - Founder, CEO & Director [74]

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Great. Well, I want to thank you all for listening. And more importantly, I want to thank the now 2,000 Relics around the world. You're all working very hard. There's much more to do, but I'm very pleased with the innovations that the company's delivered, and now it's time to take them to our customers and help them be successful. We now have the only observability platform because it's not a platform unless you can build software on it, and we're the only one of its nature. And that -- our customers care about that. And so we're training our people to take this to the world, and we're excited about its potential.

And for those of you investors and analysts, we look forward to seeing you at our Analyst and Investor Day on December 12 in New York. So thank you.

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Operator [75]

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