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Good afternoon, and welcome to the New Relic First Quarter Fiscal Year 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Peter Goldmacher, Vice President of Investor Relations. Please go ahead.
Thanks Brandon. Good afternoon, everyone. And thanks for joining New Relic's Q1 fiscal 2021 earnings call. Joining us today are CEO, Lew Cirne; President and COO, Mike Christenson; CFO, Mark Sachleben; and Bill Staples, our Chief Product Officer.
We published a letter on our Investor Relations website about an hour ago and hope all of you had a chance to read the letter along with today's earnings press release. Because of the level of detail we provided across the two documents, today's call will begin with opening remarks from Lew, and then we'll just dive right into your questions.
During this call, we'll make forward-looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors and our most recent 10-K and upcoming 10-Q to be filed with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call, in its entirety, is being webcast from our Investor Relations website and an audio replay will be available there in a few hours.
And with that, I’d like to turn the call over to Lew.
Thank you very much, Peter. Thank you all for joining. I hope you all are staying safe and particularly, on the East Coast, I hope you're managing the weather as best you can. As you can see from our earnings release today, our Q1 performance exceeded our guidance, which reflected expectations around headwinds, including COVID-19 and a seasonally soft first quarter.
Although, we did exceed our guidance, we believe we can and should do better. And we aspire to grow faster. In fact, much of what I talk about during today's prepared remarks, provide our strategy to improve New Relic’s growth rate over the long-term and help the world deliver more perfect software.
When New Relic was founded back in 2008, we firmly believe that applications will become the center of daily living and thus, every business. We understood that application performance monitoring or APM gave developers the ability to see into the health and performance of these crucial applications, ensuring that their customers had a great experience every time they clicked, scrolled or swiped.
Data showed us a great application experiences, whether in the browser or increasingly on a mobile device, drove customer adoption, conversion and affinity, allowing some companies to pull away from competitors as customer expectations were reset higher and higher.
New Relic was at the forefront of this inflection point by delivering a comprehensive APM capabilities as well as a fully managed SaaS offering, New Relic established market leadership and revolutionize both the time to value for developers and scale, speed and performance by designing the product atop a massively scalable multitenant architecture, the very same architecture that has laid the foundation for our next chapter.
Since then, the way software gets delivered and operated has fundamentally changed, as traditional monolithic applications have been redesigned according to cloud-native microserviced architectures. In which the lifetime of some parts is measured in minutes, and the number of discrete components to be monitored have exploded into hundreds or even thousands per application. Added to this complexity is the emergence of DevOps and continuous delivery where software changes are now happening fast and frequently into hundreds and thousands a day in some organizations.
As applications have become more complex, the market has evolved into a variety of monitoring tool to address discrete problems, creating product categories around log management, infrastructure monitoring, APM, and other adjacent categories. Accordingly, vendors in these categories today overwhelm IT and development teams with an array of adjacent, overlapping and disconnected tools.
Each of these tools employs a different user interface and fundamental architecture and each promises visibility, proactive detection, and a mythical single pane of glass through which teams can allegedly see the entirety of their application infrastructure footprint. Meanwhile, the heretofore standard pricing system for APM and infrastructure based on hosts has become increasingly costly and difficult to predict in an age of distributed architectures. It also correlates very poorly to customer value.
Furthermore, when considering other tools related to beyond APM, teams have to estimate and budget according to a number of different and obscure pricing metrics such as page views, mobile users, data retention periods, resulting in a friction-filled provisioning process that often forces suboptimal usage in order to keep purchasing in line with budgets.
In short, current monitoring pricing models create a financial disincentive for teams to instrument all of their applications and infrastructure. Fundamentally undermining the holistic visibility, these teams strive to consider when these solutions were in the first place. Furthermore, customers who adopt these tools encounter surprise overage charges that may cause them de-instrument software or infrastructure to scale back costs further restricting the visibility provided by today's monitoring offerings.
To cope, customers install even more tools, open-source tools, alongside commercial tools, sometimes augmenting and sometimes overlapping functionality. Fragments of critical operational data gets trapped in siloed databases, creating acute bind spots that cripple the team's ability to deliver and operate software effectively. The average organization can end up with dozens of tools to monitor different parts of their stack, forcing engineers, to scramble and switch between these disconnected and often expensive tools to investigate issues while precious time passes in which end users are stuck and disgruntled.
We believe this model no longer works, engineers deserve better. End users deserve better. Customers deserve better. Traditional monitoring technique no longer – are no longer sufficient to provide visibility into modern systems. Complex punitive pricing from monitoring vendors flies in the face of the mission to deliver critical operational visibility. It's time for a new approach. One predicated on a connected, real view of the entirety of an organization's operational data in one central store.
This approach must be flexible enough to deliver answers to questions. One did not even know they needed to ask or even could ask of all their operational data. This approach must do more than just notify teams when an issue occurs but also illuminate what caused the issue and why. This approach must be petabyte scale with pricing that encourages teams to instrument all of their applications and infrastructure and collect all of their operational data into one central store in near real-time.
As the lines blur between infrastructure and applications, it's more critical than ever to be able to see across your entire software system and get traceability through your entire stack. New Relic to find this approach is observability. Observability describes how well your teams can understand the behavior of a complex digital system. If monitoring tells you when something is wrong, observability lets you ask why. Observability is predicated on upon your software and infrastructure being able to deliver the data, all of the data to provide an answer, supporting questions that lead to other questions that ultimately lead to the ultimate answer.
For a shift from traditional monitoring to observability to happen, our experience shows that customers require the following four things. One, a single source of truth for all your operational data, metrics, events, logs, and traces, not only coming from a vendor's agents but from any source of data; two, comprehensive visibility across the software stack in one unified user experience; three, AI and machine learning driven capabilities to detect anomalies and extract insights in real-time and at petabyte scale; and four, programmability so that customer and third-party developers can build applications and connectors to add functionality, creating an ecosystem of developers and partners.
Furthermore, observability requires pricing and technical enablement such that teams can readily instrument all of their applications and infrastructure, then collect that data. These are the design principles behind New Relic One. When we first announced New Relic One last year, we began a journey to reimagine what we offer our customers from the ground up, starting with the user experience and extending to how customers do business with us.
Simplicity is key to our strategy, across packaging, pricing, adoption and the user experience. Unlike other commercial monitoring tools or related open-source projects, we see New Relic as well positioned to offer the convenience of SaaS with industry best scale and performance at the data platform layer, extensibility, and full integration for open-source projects, to help engineers build and troubleshoot faster, which brings us to today.
July 2020 was perhaps the most important moment in New Relic’s 13-year history with the possible exception of our initial launch in June of 2008. In the last two weeks alone, we have made five major announcements. The first announcement was our commitment to open source release of all of our agents for APM, mobile, browser, infrastructure and all of our infrastructure integrations. Our second announcement was the dramatic simplification of the New Relic product portfolio, from 11 SKUs to just three powerful comprehensive products in one unified platform.
Three, we announced a new customer-friendly pricing model that we believe will define how companies will prefer to consume observability platforms going forward. Four, we announced the complete transition of all of our products, features and capabilities into New Relic One with 100% of our customers transitioned over to the New Relic One user interface. And five, we announced a new powerful perpetual free tier of the New Relic One observability platform that we believe effectively competes with solutions that could cost in the range of $10,000 per year.
New Relic One is how we deliver observability to the market in a way that is unique from any other commercial vendor or open-source stack. As I mentioned earlier, New Relic One now includes three and only three products. The first product is telemetry data platform. Telemetry data platform ingests, visualizes, alerts on all your metrics, events, logs and traces from any source that could include our agents or to conclude third-party sources of instrumentation or telemetry data. It does this at petabyte scale and pennies per gigabyte.
Our second product full stack observability correlates that data from the APM, logs, infrastructure monitoring, client side monitoring and distributed tracing all the way into a single integrated user interface and product, that is easy to analyze and troubleshoot your entire stack in one connected curated experience. Unlike anybody else in our space, we price this product per seat.
Our third product, applied intelligence, to texts, resolve incidents faster than with machine learning models trained using the entirety of a customer's operational data in the telemetry data platform. As is the case with other AI platforms, the more underlying data there is to work, the better the AI. I encourage you to read the investor letter we published today as well as our website to learn more about each of our three amazing products.
During Q1, we conducted many pilots, where we made proposals to a wide variety of customers and prospects using our new simplified model. Overwhelmingly, customers demonstrated a strong preference for our new pricing model. And this resulted in a higher level of willingness to spend and broader platform adoption with us than what would have been the case, where they to have stuck with our previous model. In one or two cases, customers who had been planning to leave New Relic for a competitive solution decided to do an about face and standardize on the New Relic platform, specifically because of this new model.
We've now trained and enabled our sales force to take our new packaging and pricing model to market, including our entire customer base. And while we are very excited about what this will do for our customers and our business, note that it will take time for the benefits of this new model to show up in our financial results.
I wanted to talk about just one more tenet of our strategy, which is our renewed commitment to developers and startups at a grassroots level. We will embrace these thought leaders and future decision makers by providing a robust free tier to encourage usage and adoption of our entire platform, as well as going all in to support key open source projects like Prometheus, Grafana and OpenTelemetry. Additionally, we are making our agents, integrations and SDKs available under an open-source license to increase the pace of innovation and quality in our products by engaging the broader developer community. It is with this community that New Relic was born – in which New Relic was born and first came to prominence, and it will be with this community that New Relic ascends to the next chapter of our company.
In summary, we are incredibly excited and proud of the product, packaging, pricing and strategy work we have just completed and announced. We have reimagined the New Relic One platform in order to return New Relic to the head of the pack in its fast-growing space, giving shape to the promise of deservability for team struggling with current monitoring offerings. Engineers building, delivering and operating complex highly distributed software have to do their jobs with data scattered across too many disparate tools and data stores. We believe those days are now over. Neither costs nor functional gaps needs stand in the way of organizations seeking to complete their observability mission any longer.
New Relic One provides the ability to collect, search, visualizing alert on all operational data via the telemetry data platform, at massive scale and speed, and that at data ingestion price point previously unimaginable in this market. Full stack observability delivers hyper-connected curated views of that data to speed insights and it's priced per user, which is customer-friendly compared to the array of Byzantine pricing meters that our competitors continue to use. The collection and analysis of all of our customer's data enables New Relic One to deliver AI and ML-driven value like anomaly detection and alert suppression via applied intelligence, making the day in day out work of engineers more efficient and of higher value. In short, with New Relic One we have now simplified what has become too complex. We believe our strategy is one that our competitors can neither copy nor beat.
So that concludes my prepared remarks. And before we jump into the questions from all of you, I would like to throw our first question to our new Chief Product Officer because this is one that we've already heard from an analyst. And so Bill, since we announced New Relic One a year ago, what specifically has changed? What's new today?
Thanks, Lew. You covered a great deal of it, but maybe I can add a few details. Having spent the past two decades at Microsoft and Adobe, I learned many things, but one in particular is key to building a successful business, focus the product strategy on creating customer value and great things will happen. And as our Chief Product Officer, I feel like that's my number one focus, to create value for customers.
The reimagined New Relic One platform that we announced last year has a very different value proposition than what we announced just this week. When I say value proposition, I mean the value exchange customers perceive by adopting the platform as experienced through a combination of innovation, packaging and pricing. And last week, as you mentioned, we made dramatic changes to all three. Let me take a moment just to describe in each in turn and why I believe this is an important milestone, not only for New Relic, but for our industry as a whole.
First on the innovation dimension, the product team has been accelerating execution towards this new platform vision and delivered some really compelling work in a short period of time. First, our customers have been telling us since the New Relic One launched last year, that while they love the new look and feel with New Relic One, they needed to see convergence of all our applications and capabilities into a single place, to simplify the user experience and easeful platform adoption. And as you said, we're excited to share that with the launch last week we have achieved that milestone. All New Relic capabilities are now available in New Relic One, and we have migrated 100% of our users to the New Relic One experience.
In addition, we took steps to simplify the first time user experience, build into the product documentation and support, and reduce complexity and adopting more of a platform with guided experiences. We also incorporated a direct in product feedback channel from users directly to our engineering team. And the engineering team has been swarming on customer feedback in preparation for launch with our preview customers, and since launch turning around fixes to bugs and making improvements at times in just hours. This is a massive achievement. And as you can imagine, integrating decade’s worth of IP and migrating hundreds of thousands of users is not for the faint of heart, but I'm happy to share it's gone very smoothly and with less than one-half of 1% of our users registering a complaint or opening a support ticket with us in the day since launch.
Another innovation that we're excited about is as a top contributor for the CloudFoundation’s OpenTelemetry project, we announced that we're embracing an open first approach to all of our instrumentation. We open sourced decades of IP with our own agents and integrations and begun embracing all of the most popular open source tools on the planet as data sources for the telemetry data platform. We’ve been excited to see the community respond not only with enthusiasm, but our first fully implemented poll request or code contribution from outside of New Relic came to us within just hours of the announcement and more in the last few days.
Another potent example of our embrace of open source is our announcement for support for Prometheus, one of those popular open source metrics solutions on the market, which is baked into Kubernetes and has enjoyed widespread adoption. Last week, we announced out of the box support for ingesting Prometheus metrics, with just a few clicks, solving customer problems with scale, retention and security concerns and opening up an all new channel of data that’s completely separate and independent from our own applications. This is just one example of how we’re opening up the platform to all kinds of data, including metrics, events, traces and logs from open source and other commercial systems.
Another powerful example of how we’re delivering a true platform approach is our support for Grafana. One of the most popular, open sourcing – open source dashboarding tools on the market. Customers can now choose to use our dashboarding tools or Grafana for all the data and telemetry data platform. Customers I’ve spoken with since this announcement have received this news with a lot of joy, Grafana is super popular for a lot of companies.
So second, on the value proposition is the packaging side. And here too, as you mentioned, we’ve made some dramatic changes. New Relic One like one last year was an application first business, which is the same approach as many of our competitors and sold our customers more than a dozen different applications, which collected, analyzed and help them troubleshoot their applications. Well, New Relic One today is a data first business. We believe observability is a big data problem.
And with last week’s release, we took one of the most impressive technical moats I’ve seen in my career, the NRDB technology that we’ve quietly nurtured for over a decade to support our own applications. And we promoted it to be a first class standalone platform for engineers to consume as a service. We believe telemetry data platform is the world’s only petabyte scale, multitenant store for all kinds of operational data. And we’re really proud to offer it as a platform service with incredible economics.
With built-in visualization, programmability and best-in-class support for dashboards, we’re removing all technical and economic barriers to instrument everything and provide a single source of truth for all operational data. We also heard from our customers that the complexity of our own tooling together with the array of open source and commercial tools they need to adopt to achieve full stack visibility is impinging on their efficiency of their engineering teams and driving up costs.
As the company who created the APM category. We’re going to be the ones who ended. We took APM off of our product list, along with all of our other independent products. And as you mentioned, we now offer only three products, the full stack observability product, being a combination of APM, infrastructure, logging and all the digital experience monitoring solutions that we’ve provided in the past, making it the easiest platform to standardize on across your engineering organization.
And last price. I’ve seen some speculation that we’re discounting price to help drive adoption of the platform. And I want to be absolutely clear. We are not discounting price. With our new packaging, we’ve aligned pricing with the way customers tell us they want to consume observability going forward.
We’re unlocking their ability to instrument everything, thanks to the pennies per gigabyte cost of the telemetry data platform and making observability costs more predictable with our per user pricing of full stack observability. We’re proud to be the first major player in this industry to offer full stack observability with a single per user price. We’ve tested this model, as you mentioned, and customers have given us tremendously positive feedback and a willingness in many cases to spend more on New Relic One, not less because it increases and unlocks more value. Thanks. I hope that answers the question.
Okay. Thank you, Bill. And we’ve gone quite a bit without taking some questions. So I think now is a good time to take our first question from an analyst. So Peter, why don’t you tell to our first question come from?
Operator?
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.
This is Philip Rigby on for Rishi Jaluria. Thanks for taking our questions. I have a couple around the announcement open sourcing your agents. So first, as the open source community and products start to build out, could that potentially free up some of your engineering talent on the agent side? And if so curious, where in your platform you’d be looking to shift those resources to if that plays out? And then just on the open source community, can you give us a color on what you’re doing or planning to do to build and maintain the community around open source projects? Thanks.
Sure. I’ll let Bill take those questions.
Yes, happy to. So first question around whether this will free up engineering resources. I do believe, the long list, we have more than 300 agents in immigrations to get data into the New Relic One platform. And that is a lot of code to maintain. And the pace of innovation in each of those areas, whether it’s languages or public cloud APIs, or open source systems is immense. And it is difficult and costly for us to keep up with the pace of that innovation. Our commitment to it remains the same. However, I do see the opportunity to innovate and create more value through an open source approach. And as I mentioned customers have been validating that already with their own poll request.
To the extent it does allow our engineers to move into other places of the platform to deliver increased innovation. I think where we would be able to apply more of that engineering capacity would be on the analysis and visualization front as well as our AI capabilities. Increasingly, we believe the future of instrumentation is open. That’s why we’re a top contributor or number three contributor to open telemetry. And the need for standardization on the instrumentation side is just a given. And so to the extent we can bet on and make open telemetry the first class instrumentation path for all applications that will allow us to then shift resources onto the things that make New Relic really unique, which is our incredible analytics capabilities and increasingly our AI layer.
To the question around embracing supporting the community, when we announced open source, we didn’t just throw the code over the wall and publish it on GitHub. We announced we are embracing an open standard and open approach for building the community and operating those projects. So for example, all of the issues will be tracked publicly in the community. We will publish roadmaps in the community. And as I mentioned, take poll requests, which we’ve already begun doing. So it’s a true open source model that we have engineers committed to full time to support in addition to the open telemetry project in the cloud foundation. I hope that answers your question.
Yes. That’s great. Thank you very much. And then it looked like dollar base net retention dipped a little bit in the quarter. Can you just give us some thoughts on how you’re thinking about that going forward?
Sure. Mark, you can take that one.
Sure, I can take that. So Q1 is a seasonally weak core of our expansion rate. And in Q1, we had several factors that impacted it. In terms of expansions, our non-U.S. business grew year-over-year, but North America underperformed. And this was due to a combination of issues around COVID-19 and a weak economy along with our own execution issues. As you can imagine, given the magnitude of our announcement last week, over the past four months, there's been a broad effort throughout the company working toward this launch.
We included a lot of tests in discussions with customers and prospects as Lew and Bill mentioned. And while this helped define our direction and provided more competence in the long-term success of that strategy, it did take away some of the focus of the team on Q1 results. In addition, we had a leadership transition during the quarter, and we're excited to have a new North America Head of Sales, who recently signed. I think we just sent that announcement out this afternoon. He'll be starting later this month and we're very excited about John Siebert coming over, who's worked with Mike in the past and great experience of both established companies and high growth organizations.
On the other side of the equation of customers reducing their spend. So in the quarter, that number was also – we had $5 million to $6 million of downgrades that were COVID or macro related. If we exclude those transactions, our renewal rate was up slightly year-over-year. But as we've said previously, we feel our new rates should be higher than they are. And we want to drive to higher numbers and we've been achieving. And when we look at the customer base, what are the dynamics we see with customers who adopt and use the full platform tend to expand their spend. Customers use one product, use the APM only are more likely to say flat or reduce their spend. So this is one of the many factors that drove our new pricing and packaging, making easy for our customers to consume the full platform. By removing this friction around deployment and usage, we're competent. Customers will see the value of New Relic One and expand their spend over time.
Now you talked about going forward. You can see from our guidance that we're looking at roughly flat ARR in this current core Q2, and that's driven by the fact that we are being incredibly generous with our – with the offering that we've just put out there. We have the free tier, so for low end customers, many of these who would have turned out over time, or they come and go. We're saying, what, you have free use of the entire New Relic platform.
And so we expect a fair amount of our low end customers to convert to free tier users. And we expect over the rest of fiscal 2021 to take $15 million to $20 million hit in ARR of customers that are going to migrating to our free tier. Much of that will happen. We believe in the near term, front end – front loaded. So we believe that'll have an impact on this quarter. And that will offset much of the increase in ARR we see.
The other thing, we've done is we've entitled our entire user base for the full platform. And we think that sets us up for great long-term success. We want people to adopt it, so they expand on it. But that's we think going to cause near term headwind to our results, but set ourselves up for success in the second half and accelerated growth as we get into next year.
Very helpful. Thank you.
Our next question comes from Sanjit Singh with Morgan Stanley. Please go ahead.
Thank you for taking the questions and congrats on the major product launch. I wanted to go back to the announcement and sort of make sure that I'm thinking about this, right? There's a lot of components here, but the one that sort of stood out to me is on the pricing and packaging side. And it seems like the focus here is just driving greater consumption of all the new innovations that you guys have put out in the last year, potentially, ahead of monetization. It sounds like Mark, that's sort of what you were alluding to.
So if you had an existing customer, for example, about that's spending a million dollars in ARR today as they migrate that – migrate to the new pricing and the new packaging platform, what's sort of the impact for that customer in the near term in sort of in year one. I assume it will expand even more vigorously over time, but as we go through this transition, how should we think about the impacts on the customer base?
I'll take a stab and then I'll have Mike kind of fall through. On how we designed the model, let's take a typical million dollar customer. There may be many versions of that. But many of them might be a million dollars almost entirely on APM. And in all likelihood they have not deployed APM everywhere they would like to, right? And that's because like all of our competitors, but we historically priced by the host on APM.
So now with this new model where the bulk of a typical New Relic bill will actually be per user, which is more predictable and better correlates with value. That customer will have more incentive to not only deploy more APM because the marginal cost to add more hosts is low at that per gigabyte pricing on the translated platform, but also very cost effective to add logs.
And there is no new product to buy, no new procurement cycle, so why not add logs? Why not add Synthetics? Why not add more data into the same place to get better correlation, better value, particularly if the economics are so attractive on the data side. And that's why Bill describes as a data-driven product strategy. So we believe there's no reason to expect that all of our customers will suddenly reduce their spend in the short term, some might, but many will increase their spend, but certainly, we expect that this model will incent our customers to standardize on one place as a single source of truth, all their telemetry data that'll drive more users, which will also create a flywheel effect.
Right. That makes tons of sense. And then I had a question for Michael to go back to the Analyst Day and sort of laid out the framework in terms of the timeline for acceleration. Obviously, the world has changed, right? And New Relic is changed whether with this major product movement. So what stays the same with that framework and what changes with that framework given not only COVID, but what you guys have announced over the last several weeks.
It's a great question. I think that the purpose of the framework was to basically break the frontend of our goal to get to a billion dollars of revenue into two segments of three quarters, where we would do a series of adjustments in the organization and with a lot of focus on the go-to-market organization. And we'd break it into two, three quarter pieces. So we've gone through all the details of what we adjusted in 3Q, 4Q and 1Q just recently. And now we're in the next three quarters segment.
Obviously, this change in the breadth and capabilities of our product portfolio is a huge help. And the transaction model will create a number of other opportunities to drive productivity in our sales force. So I would say that that second three of further refinement of our go-to-market motion, how we approach our customers, the transaction model, we can – I think we can stick to that timetable.
So that we go through the remainder of this quarter and then 3Q and 4Q, really proving out the value of this model and this positioning of the product and then go into FY2022 with some real momentum. So I think that, yes, obviously, there's more change than we had anticipated, but I believe it's still fits within that framework.
Understood. Thank you.
If I can just add to that, Mike, one note around that, given the compounding nature of ARR and the number of era headwinds given COVID, as well as the general – the generous product offering that we’re – what we’re doing today to be engaged developers. Yes. It’s no longer reasonable to expect us to achieve the $1 billion revenue goal in fiscal 2023, that we’d forecast that our Analyst Day in 2019. What we do – what we’re doing is we have, I would say we are taking a temporary disruption in the short-term to set ourselves up for accelerating growth in the back half and then particularly as we head into fiscal 2022 and 2023 on our path towards getting back towards market rate growth rates.
Understood. Thanks, Mark.
Our next question comes from Sterling Auty with JPMorgan, please go ahead.
Yes, thanks. Hi guys. So traditionally, observability, this space has been a best of breed approach, APM, logging infrastructure. And a lot of what we heard in this announcement is kind of driving a platform adoption across that. I guess the question is in order for you to succeed, do you have to have full platform adoption by your customers? Meaning it’s a little bit of all or nothing, or is there a way to still play nicely within the context of a customer might want to use Datadog for infrastructure and Splunk for logging?
We certainly can. So in that case, where let’s say a customer prefers best of breed and that that’ prefers some – quite a few of our customers, where we coexist with some of our competitors and we’re – as you might expect the standard for APM. But in those cases, even in some of our largest customers, many of them have withheld deployment of APM to everywhere they’d like to use it, because of the nature of our pricing model.
And so in that case, we believe that this new strategy we put together will increase broader adoption of our flagship product. And it’ll just reduce the friction involved in customers, trying our other products, logging, being very compelling, particularly at the price point that we’re talking about in Splunk’s data platform. But doing that in a way that isn’t an all or nothing kind of bad, it’s an easy experiment to run. And then we think over time, customers will include increasingly standardized in our platform, but that’s not the only way in which we can grow within a given a customer.
And then the one follow-up is, talk about reducing friction. I guess another way to look at it from a different angle is cheaper price. And if that’s the case, what does this new approach in terms of the new pricing paradigm due to your total addressable market and what does it due to the margin structure of the business moving forward?
I’ll let Mark take that one.
So, we feel like that it actually expands the market. As Lew mentioned, we’ve got a lot of customers, who are not instrumenting, not covering their full estate, because of the owner’s pricing, the complex cost structure and the unpredictability of monitoring, and collecting all this data. So, we feel like by making that easier, making that, cheaper for them on a per-unit basis allows them to achieve much better value and cover much more of their applications, much more of their digital business. And so we think it actually expands the overall market. And I think there have been a lot of examples of this historically, where as price goes down, the end goes up by a greater percentage and the overall market expands.
In terms of our margins the telemetry data platform that we’re offering that at a very attractive price to our customers. We can do that, because of our architecture that Lew has talked about and – but that margin is lower than our – than our full stack of their ability and other products. That said, we feel like as we continue to go through our migration to the cloud, overall, our gross margins will remain in the 80% range – 80% plus range over the long-term once we get through the cloud migration over the next couple years. And then from an offering standpoint, we feel like that we will – this will have – will have no negative impact on our long-term operating margins.
Okay. Thank you.
Our next question comes from Robert Majek with Raymond James. Please go ahead.
Thanks. Great to see the continued shift towards full stack observability under a single pane of glass that customers are looking for today. My question is, as we look out five years, where is the hockey puck going to next and the competitive monitoring world and what are you doing to stay out in front?
Well, we think we’ve done something that really does put us out, because people have been talking about convergence for quite some time. But they’re converging by – on their website, but certainly, not on their data architecture. We believe the convergence is not at the pane of glass. It’s actually at the data layer, right.
We’re the only company with a single database and a single query language that can respond to queries about logs, events, metrics, and traces. We’re the only company with one that does that at multitenant and because of our multicenter architecture, we can do that at petabyte scale. We can do that at remarkably fast, with no headaches of management. It’s truly designed to run in the cloud. There is no way that this could run on premise. It wasn’t designed to run on premise and that means that we can then offer it at very compelling economics.
I believe the market’s going to be trying to get there over the rest of market. We could really try and get there over the next five years, because it’s one thing to claim, you’ve got four products that cover the various components that you need to deliver observability. It’s another thing to say, all the data’s in one place, that’s what you need to drive best of class AI, and best of glass troubleshooting in a converged environment.
Just one follow-up for me. Can you just help us understand how an average customer’s deployment looks like in terms of how many monitoring silos, does a typical customer deploy today and what that number may look like in year or as you would encourage a shift to a full platform adoption?
Sure. There’s actually, if you look at the blog post that announced it, that’s undermining, there’s a graphic that in that graph, the blog post, that I’ve shown to about 15 CTOs over the last three months, every one of them viscerally reacted saying, this is the world I live in, and what that chart or picture shows is just a huge complex collection of a bunch of different sources of data going to a bunch of different databases and a lack of unity. We’ve seen customers spending over $20 million on observability tools alone, across many, many vendors. Customers routinely tell us they have 20, 30 plus tools all in and around the space of observing what’s going on production. None of them designed to work together, at least in a cohesive way, and certainly, not all in a single data platform.
So, there’s a lot of – and so not only did the CTOs, say, this is crazy, many of them were saying, and I am actively looking to unify all of this into a single source of truth. And before we made that presentation, they said, there’s nothing out there that can do this. So, I was actually thinking of building it myself, and now, they’re having conversations about moving that to the telemetry data platform.
Thanks.
Our next question comes from Jennifer Lowe with UBS. please go ahead.
Great. Thank you. I guess the first question is a quick one. So, where are you at this point in terms of rolling out the new pricing to the customer base? I know you mentioned the entire customer base with New Relic one, but have legacy customers all been put on the new pricing model, or is that something that will roll in over time?
Mike, you can go ahead and take that one.
When the customers were new, they will be put on the new pricing model. So, their current – whatever their current agreement is with New Relic that will continue until the renewal date or some other event that causes an early renewal.
Great. And then just going back to the earlier question that tended to ask about, if a customer has $1 million, what happens under the new model, and Lew, you gave the example of a hypothetical customer that was predominantly APM. but there’s a lot of different ways that customers can get to a certain deal size. One is expansive usage; other is upsell, which it sounds like some of those upsells will now be rolled into the packages. So, is the aspiration here that a customer that was $100,000 customer under the old model will be a $100,000 customer under the new model, just maybe looking a little different and around the edges and how they get there, or could you see meaningful variation in those contract sizes as customers roll over?
Mark, why don’t you go ahead and take that one?
So, our goal and our expectation is that that customer would become a larger customer, and that might happen at the time of renewal. So, as Mike said, we’ll go to the new pricing model at the time of renewal. They could say all become an annual pool of funds customer and spend $100,000 with you committed. And then they’ll start to use the platform, they’ll realize the ease and the simplicity of it. They’ll start to adopt it more and more, and they’ll burn through that pool quicker than expected, at which point, we get to – they get to the end of the pool instead of 12 months, they get to the end of the pool at nine months and we’re talking to them about an upsell.
On the other hand, what we’ve seen in a lot of the pilots we’ve run is that customers recognize that they’re getting a much broader set of capabilities, and they are willing to pay for that at the time that they convert to the new pricing. So, a 100,000 customer, perhaps they say, okay, I’m getting all this incredible value. It’s easier to manage. It’s more simple, I’d like it. I’ll go, I’ll bump up by 30%, 40% or some number. So, I think it’s a combination of both, but the important thing is that we believe over the longer-term, this is going to allow customers to experience the value and make it a much more efficient way on their end or on our end for them to increase their spend.
Great. Thank you.
Our next question comes from Jack Andrews with Needham and company. Please go ahead.
Good afternoon. Thanks for taking my question and congratulations on all the announcements. I wanted to ask on the go-to-market strategy, I think Lew, you mentioned that your sales force is fully trained and they’re focused on taking this to your customer base, but could you speak more broadly to how your – the strategy around broadening awareness of this new platform and how – and/or whether partners particularly some of the new technology partners may assist in your broader messaging here.
Mike, you want to speak to that?
Sure. We spent a lot of time over the last month training our sales force on how to help customers understand the impact of this model and how to explore opportunities to expand our relationship with our customers, as Lew indicated, and Mark indicated, one vector is obviously much broader adoption of application monitoring across their stake, but they can also dramatically expand their usage of infrastructure monitoring, log analytics, and all of the other capabilities of the platform.
So, there’s lots of ways to grow, and we trained our sales force to help identify those opportunities for customers to solve more problems, improve performance, and expand their usage of the platform. We do have a growing portion of our business that is in collaboration with partners, public cloud providers and other, what I’ll call distribution partners. So, we would expect that to grow over time, but it’s early days for us in that regard, but we’re very optimistic about what the potential could be.
Great. Thanks. And then just as a follow-up, could you touch a little bit more on the programmability aspect of things, or are you strictly focused on the open-source applications or is there kind of a broader vision of attracting other ISVs to potentially create apps on top of this new Relic platform?
So one – I think one of the things I love with this strategy is that it really further unlocks the potential of programmability, because the telemetry data platform with its economics is going to attract much more data, and they’re going to be more used cases and opportunity to do interesting applications on top of that data. I believe in general, it’s going to be much more like a force.com like platform, where the applications built on it, are going to be customer specific.
So that if there’s a particular use case for the data that are out-of-the-box experience or dashboards don’t cover very well enough, then that’s an easy thing to write software to do. And in general, it will be customer specific. So, I don’t anticipate many ISVs, building a business on top of our platform in the short-term, but that could develop over time as more and more customers start to do more interesting things on top of our telemetry data platform.
Great. Well, thanks for taking my questions.
Our next question comes from Yun Kim with Rosenblatt securities. Please go ahead.
Thank you. So, with the new pricing model and packaging, are you guys still focused on your current go-to-market and self-strategy around increasing monetization of your installed base, especially the ones below $100,000 to get them to move up to $100,000 plus? and then also does this new pricing model and go to market strategy kind of take away from your current capacity in terms of both marketing and sales or do target developers and DevOps groups then even start-ups?
I would say that, we would expect – we would continue, because we have such a large paying customer base. I would expect that for the near to midterm, the most of our new ARR, probably 80% to 90% of our new ARR will come from existing paying customers. We do it is very important for us to get new customers of all sizes and the free tier that we’re introducing here as part of this new model is designed to dramatically expand the potential users of new Relic. And we hope that all of them could eventually become paying customers. So, we – while I think the reality is in the near-term, as I said, it’ll be 80%, or even 90% of new ARR coming from existing. We do want to grow new logos and new users at all sizes.
Great. and then just the one question – another question for me, bill and Lew, one aspect of the platform that is unique to New Relic like versus many others in the space, is that you guys employ on multi-agent model versus a single-agent model. Now that you have consolidated your products into just three categories and whatnot is there any plan to change this multi-agent model while you guys currently have.
Bill? Do you want to take that one or I could go ahead, Bill.
Yes. So, I’d say there’s no plans right now to do that. We’re in this transition towards open telemetry as the preferred instrumentation approach for agents and we’ll provide an optimized package for that open telemetry system, as well as connectors and visualization for that in the New Relic One platform, but no plans to consolidate agents in that way.
Okay, great. Thank you so much.
Our next question comes from Derrick Wood with Cowen. Please. Go ahead.
Great, thanks. It’s Andrew on for Derrick. one from Mark, you have 10% to 15% of revenue from distressed verticals, did you see any change in that throughout the quarter? Any customers rebound there or – and how does this vary by region?
Not too much of a change, some are starting to recover, but I would say there still remains a great amount of uncertainty and their business prospects in general. And so, I think they're still being pretty cautious. I would say in EMEA and APAC regions probably, slightly ahead of where the U.S. is overall, but I still think there is a fair amount of caution out there in those verticals.
Great. And then for anyone who wants to take it, you have some big customers in the gaming vertical, that's seeing a good amount of health. How did you see that trend in the quarter and how sustainable do you see this in the back half of the year with back to school and potential reopening?
I guess what I would say as we have a number of customer profiles that have obviously benefited from the changes in the way we're living these days, but it tends – it's at the extremes. We have, as you’d identify 10% that are hard hit travel and hospitality and things like that. Across the broad profile of our customer base, it’s a difficult environment.
Great. Thanks.
Our next question comes from Keith Bachman with Bank of Montreal. Please go ahead.
Hi, many thanks. I wanted to ask two questions and I'll ask them concurrently. The first is on ARR, the second is on go-to-market. The first on ARR, it wasn't quite sure from the previous discussion, when you anticipated returning to call it 15% to 20% kind of ARR growth, is that in FY2022 that you get there? Or is there some rebound towards the end of this FY, call it December, March, if the benchmark is something like 15% to 20% growth.
And part B of the question is you've guided to basically 10% kind of ARR growth, I know there is a lot of changes going on, but the closest competitor that we have public information on is Dynatrace is growing, ARR by mid-30s call it per round numbers. And while you do have a lot of changes going on, I'm just surprised that the economy or the variance, if you will of those changes, is it SMB related or is there any kind of characterization even as you go through this process about why there's such a difference? And then I follow up if I could on go-to-market.
Okay. So if Mark wants to comment on anything on timeframe, I'm not going to comment on timeframe for – when we might expect to see certain changes in our growth rate. I would say we spent the better part of the last hour talking about what we are doing to grow faster. And while we've been focused on doing those things that is coming at the expense of more expedient short-term things that could have helped short-term growth. We think we've got a very competitive strategy that we think will put us in a position to be in a leadership position over the long-term. And so the short version of it is, we've done great strategic work and that's come at some short-term costs that we’re willing to take the trade off on.
Okay. Mark, any other comments from you before I ask my follow-up on go-to-market.
No. We're not going to put a timeframe on it, but we put the strategy in place, we feel good about it. And our goal is to reach – growth and get back to market rate growths, and as we get toward the end of this year and into fiscal 2022 and fiscal 2023.
Okay, great. Then my follow-up Lew, I'll put back to you is just go-to-market. And some of the things you're doing make a lot of sense. Previously at the Analyst Day the discussion was an intent to capture more of the higher end of the market, whether it’d be large midsize companies or enterprise organizations. And typically when you're trying to do more of an all encompassing, I think that that makes it tougher to go to enterprise because enterprise have been historically more best of breed.
And so I'm just wondering, does the new strategy where it is giving the opportunity for users to leverage the entire platform. How does that make you think about your opportunity set with the larger customers say than you're currently serving, or frankly to grow your larger set of customers is a better way of saying it.
Yes, I'd say, Mike spoke to this, the key new focus items since we talked – that we introduced about in our Investor Day with a 100K customers. So we do well, I think with $1 million plus customers, and that's still a healthy and growing segment. But what we really want to do is grow the number of 100K customers. And those are the 100K-plus customers obviously, and most of them will be medium and large businesses, we think this strategy absolutely is well suited to accelerate the growth of that number.
Okay. Well, good luck, gentlemen. Thank you very much.
Our next question comes from Mohit Gogia from Barclays. Please go ahead.
Hey guys. Thanks for taking my question. One question on product and the other question is on pricing. So on the product, I was wondering, so what changes have you made or maybe continue to make in order to better align the R&D organization along those three skews, right? So going from 11 different model lines to three different SKUs, like what are the changes you have made to sort of like make sure you can do that more efficiently? Thank you.
Bill?
Yes, actually, when we define the strategy we looked at the organization and realigned the product organization directly against those three product areas, as well as two other platform areas that kind of span all three products in terms of user experience, billing, account subsystems and so forth. So we have a really well aligned product organization against those three products – product SKUs.
Okay. And my second question is on the pricing and packaging. So I think it was only mentioned that it was around the – it will be around the time renewals when the new pricing built in for existing customers, right. So I was wondering in terms of just better recovering the salesforce to have some of the conversations around renewals and pricing changes kicking in to make sure that customers don't see like a big sort of like reduction in spend. Like, how are you equipping and stuffs like, what are some of the communication channels that will be used to make sure the customers can maintain their spend, at least in the near-term? That's all from my side guys. Thank you.
We don't see a scenario where all our customers have a meaningful reduction in spend. I mean, we think that expanding the capability – the access to the full capabilities of the platform, making it compelling to send us all your data, we think that everything we're doing here is to broaden access and adoption of the full set of capabilities. And that is not the kind of scenario where I would expect to see huge reductions in per customer spend. We're looking to grow per customer spend with this model.
Thanks guys.
This concludes our question-and-answer session, as well as today's conference. Thank you for attending today's presentation. You may now disconnect.