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Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic Third Quarter Fiscal 2018 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Jon Parker, VP, Strategic Finance and Investor Relations, you may begin your conference.
Thank you. Good afternoon, and welcome to New Relic's third quarter fiscal year 2018 earnings conference call. Joining me today are New Relic's Founder and CEO, Lew Cirne and Chief Financial Officer, 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 projection and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to our earnings release issued today, as well as the risks described in our most recent Form 10-Q filed with the SEC, particularly in the section titled Risk Factors.
Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. But note that these measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. At times, we may offer incremental metrics to provide greater insight into our business or results. This additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics.
I encourage you to visit the Investor Relations section of New Relic's website to access our earnings release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's conference call or to learn more about New Relic.
And with that, let me turn the call over to Lew.
Thanks, Jon, and good afternoon to everyone joining today's call to review New Relic's third fiscal quarter 2018 financial results.
We delivered revenue of nearly $92 million in Q3, which was up 35% year-over-year and exceeded our guidance range. In addition, we achieved non-GAAP operating profitability a quarter ahead of our expectations.
Almost three years ago, we held our first earnings call and spoke about how our IPO was a major milestone for New Relic, which is one of many important steps in our growth and evolution. I see this quarter's results in a similar way and I'm proud of our team for the commitment it has taken to achieve non-GAAP operating profitability while simultaneously driving strong topline results.
Looking forward, we expect to maintain non-GAAP profitable growth, but believe that we are only in the early stages of a huge market opportunity and we plan to continue to heavily invest in ahead of what we see as a multibillion-dollar opportunity.
Overall, we continue to be pleased with our execution in the field and across our product lines. Continued traction of our platform with new and existing customers, drove solid growth in the number of 100K ARR paid accounts, which ended Q3 at over 600.
As is typical for us in past few years in the second half, we've seen strong expansion activity within our install base. We delivered a net expansion rate of 125% matching the prior year's rate, even as our business scales. Overall, we see these figures as continued support of the success of our land and expand strategy.
Our results in the quarter continue to be driven by more strategic enterprise adoption. Customers and prospects, I meet around the globe, routinely tell me they are under immense pressure to increase their pace of innovation and their mix of mind tools fail to provide a complete picture of their digital business.
We're seeing these companies increasingly embrace New Relic for the complete visibility we can provide into their increasingly complex environments. This visibility reduces their risk and delivers the confidence necessary for them to increase their speed of innovation.
At the same time, while our SMB business has gone through an evolution over the past 18 months, it remains an important part of our strategy to achieve ubiquity in the market. We are pleased to say it had a record quarter for new ARR.
Our installed base now includes more than 50% of the Fortune 100 and in Q3 alone, we signed new deals with over a quarter of the largest 20 on that list. More broadly, we engaged in new or expanded relationships across a remarkably diverse set of industries, with companies including Barrick Gold Corp, the largest gold mining company in the world; McCormick, the 125-year-old spice company and Reckitt Benckiser, one of Europe's largest consumer goods companies and Caribou Coffee, adding to the dominance of our coffee business.
We believe that virtually every company in every industry has a need for a solution like ours, which is why we're so excited about our long-term opportunity.
Looking to our products, we continue to see broad adoption of our full suite of offerings in the quarter. We delivered another record quarter for New Relic infrastructure, which represented over 10% of new ARR for the quarter.
Complementary to our flagship New Relic APM product, infrastructure delivers data from the underlying servers where they are on host or in the cloud. Customers who use APM and infrastructure together get a comprehensive view of the health of their servers and host as well as the applications and services they depend on.
Our customers continually tell us that they want to see infrastructure health and performance in the same painted glass as their application performance, which is why they select New Relic. We see these markets rapidly converging, which gives us confidence that our platform strategy is working.
We introduced New Relic Infrastructure just over a year ago and it is already one of our highest attaching products. We believe this market opportunity is as big as APM and that infrastructure can over time be a new landing point in some accounts.
We also saw continued demand for New Relic Insights, which came in at 10% of new ARR. These two products combined with New Relic mobile, New Relic browser and New Relic synthetics, drove our new non-APM ARR to be near to last quarter's record levels.
A great example from the quarter was a land deal with one of the world's largest airlines. They are leveraging New Relic mobile to dramatically improve the customer experience on their mobile app. Every week, millions of people use this app to book flights, check flight status, change seats and so much more.
Before New Relic, the android version was crashing 40% of the time. Thanks to New Relic, they’ve identified and implemented multiple fixes and they are now down to nearly zero app crashes. This means their precious development resources are now spend adding new features instead of fixing bugs.
This example is indicative of what we're seeing with companies across every industry. Digital is the new front door to their business and companies are quickly recognizing how delivering a strong customer experience can drive customer loyalty and ultimately the businesses bottom line.
It is apparent that software will continue to play an increasingly strategic role in every industry and as the amount of software in the world increases, so does the market opportunity for New Relic. With the increasing complexity in modern software architectures, one of the hardest things to do is to understand what's actually happening when something goes wrong and if you can't accurately diagnose the problem, you can't fix it.
New Relic enables you to break down all of that complexities so that you can pinpoint and solve problems quickly and minimize any negative impact on your customer or your business. Through deep instrumentation and applied intelligence, we give companies the confidence needed to deliver better software faster.
One of the biggest drivers of our business is the adoption of public cloud technologies. Nearly every forward-thinking company today views the public cloud as a strategic weapon in their digital arsenal and there in a race to move existing workloads off of expensive data centers and into the cloud because they can save considerable amount of money and resources by re-factoring their applications running in their cloud.
By getting visibility into the performance of their applications as well as the underlying infrastructure, New Relic helps organize organizations accelerate their migration to the cloud and we help them optimize the workboats once they're in the cloud.
In addition, we also see ourselves delivering highly differentiated value with New Relic applied intelligence. As the only 100% cloud multitenant offering that covers the breadth of our space, our platform uniquely collects billions of events every minute and is able to provide actionable intelligence to our customers in real time.
We are increasingly hearing powerful stories from our customers about how they are using this technology and we are continuing to invest in new used cases for this offering.
You heard us talk about our strategy to win the cloud, which focuses on aligning closely with the leading cloud providers. We are creating a broad set of integrations to make it easy for our customers to get access to data. At a SaaS service, we believe we have a natural advantage to become the enterprise standard for monitoring cloud applications and infrastructure.
In Q3, we deepened our relationship with Amazon Web Services, announcing that we now have integration with 31 of AWS' leading services and technologies. We are also a diamond level sponsor at AWS Reinvent, Amazon's Annual User Conference. It was our biggest ever commitment to the show and we were met with over 2,000 developers, operations professionals and business leaders.
We see companies who use New Relic with AWS achieving more success adopting the cloud than companies who don't use New Relic. In fact, we're thrilled that many companies have partnered with us to accelerate their cloud adoption.
These companies include 21st Century Fox, Vantec, Blackboard, Dunkin' Donuts, MorningStar, Scripps Networks, West Corporation, Zipcar and many, many more, from media to education, to retail and financial services, modern companies across every industry are making cloud core to the digital strategy and they're partnering with New Relic to make it successful.
Before I turn the call over to Mark, I want to take a moment to reflect back on our non-GAAP profitability. I'm particularly proud of our entire team and Mark in particular, for reaching this milestone and we are far from finished. I cannot wait for all that succumb for our platform and for our customers in the coming calendar year.
And now, I'll turn it over to Mark to run through some additional numbers.
Thanks Lou. I do have to say after nearly 20 years working together, it's great to hit this important milestone and I look forward to reporting continued non-GAAP profitability in the future.
Now turning to the financials, revenue was $91.8 million for the third quarter, up 35% year-over-year. Total paid business accounts were over 16,600 and the number paying more than 100,000 in annual recurring revenue rose to 629 up 32% compared to a year ago.
The growth of this figure represents both new logos and customers expanding beyond that threshold. Our annualized revenue per average paid business account exceeded 22,500.
While we have moved away from commentary around the total number of paid business accounts, we did want to address the relatively stronger increase we experienced this past quarter. As we previously announced, we end of life our free New Relic server offering in Q3, which is one of our highest attaching products for self-served customers.
We saw a relatively meaningful number of server users move over to New Relic infrastructure, which is still the void in the market. This provided what we believe to be somewhat of a one-time lift to total paid business accounts and applied some relative pressure to our annualized revenue per average paid business account given these are generally lower ASP accounts.
At the end of Q3, our enterprise business was approximately 52% of annualized recurring revenue, up from around 44% in the same period last year. Our dollar-based net expense rate in the third quarter was 125% matching the year ago rate. This is especially encouraging due to the growth in our installed base ARR over the past year.
Turning to our geographic split, US revenue of $63 million for the quarter was up 37% year-over-year, while non-U.S. revenue for the quarter grew to $28.9 million up 31% year-over-year. Non-U.S. revenue represented 31% of revenue in the quarter.
Before moving to profit and loss items, I'd like to point out that unless otherwise specified, all the expense and profitability metrics I will be discussing going forward are non-GAAP. A full reconciliation between historical GAAP and non-GAAP metrics can be found in our earnings release issued today and available on our Investor Relations website.
Our gross margin was a record 84% up from 83% in the year ago period. I have to commend our site operations team for doing remarkable job managing our infrastructure as we scale and the continued strong results here are a combination of both efficiency gains and renegotiate agreements with our cloud infrastructure providers as well as some CapEx that has pushed into fiscal '19.
While our Q4 gross margin will likely remain between 83% and 84%, as we look into fiscal '19, we do expect to catch up in some of our CapEx spending that will bring our gross margin back down towards 82%.
With regard to operating expenses, sales and marketing costs were $47.4 million compared to $39.9 million in the same quarter last year. R&D expenses were $15.1 million compared to $11.9 million in the same quarter last year. G&A costs were $12.1 million compared to $9.5 million in the same quarter last year.
As Lew stated earlier, on a non-GAAP basis, we achieved record operating results and profitability with operating income of $2.7 million or 3% of revenue compared to an operating loss of $4.9 million or negative 7% of revenue in the same quarter last year.
From an expense perspective, our spent profile in the third quarter came in much lower than expected due to several factors, including stronger cloud infrastructure savings due to renegotiated agreements.
Hiring activity was slower than expected due to the holidays although I'd note we started January with a record class of new hires and expect a very strong hiring quarter in Q4. Also, a greater portion of R&D cost in the quarter were deemed capitalizable. In particular, this is tied to some of the work we're doing around our previously announced European availability zone.
Finally, the external consulting work associated with a major system implementation we've previously spoken about, finished our lower than expected final cost. Overall, our net income per diluted share was $0.05 compared to a net loss per basic share of $0.09 in the same quarter last year.
Turning to our balance sheet, we ended the third quarter with approximately $233 million of cash, cash equivalents and short-term investments, up from last quarter's $227 million total. Elsewhere in the balance sheet, our total deferred revenue ended the quarter at $135 million up 46% year-over-year.
As we look into Q4, we anticipate deferred revenue to increase in the mid-20% range sequentially over Q3. As you look at the year-over-year comparisons for Q4, please recall the $8 million benefit we experienced last Q4 from a combination of early renewals and annual invoice conversions that drove particularly outsized growth in deferred revenue for that period.
Turning to cash flow, cash from operations was $7.5 million. Free cash flow defined as cash from operations minus capital expenditures and capitalized software was $2.7 million. For all of fiscal '18 we continue to expect cash from operations to be between $35 million and $40 million.
However, we now expect physical capital expenditures to be at the low-end of our unchanged $25 million to $28 million range. We are also now assuming capitalized software of approximately $4 million for the full year.
Combined, we now expect free cash flow to be between $5 million and $10 million up from our prior expectation for between $3 million and $8 million for fiscal '18.
Now I will turn to our outlook for the fourth quarter of fiscal 2018 and for the full year. For the fourth fiscal quarter ending March 31, we expect revenue to range from $95 million to $96.5 million reflecting growth of 31% year-over-year at the midpoint of our guidance.
We expect non-GAAP operating income of $2 million to $3 million. This will lead to non-GAAP net income per diluted share in the range of $0.04 to $0.05 assuming 58.6 million fully diluted shares. For the full fiscal year 2018, we now expect revenue to range from $351.6 million to $353.1 million reflecting growth of 34% year-over-year at the midpoint and an increase from our prior guidance of between $346.5 million to $349.5 million.
We expect a non-GAAP operating loss of $3.3 million to $4.3 million, representing an improvement from our prior guidance of between $13 million to $14 million. This will lead to non-GAAP net loss per share in the range of $0.04 to $0.06, an improvement from prior guidance of between $0.21 to $0.22 assuming 55.3 million basic and diluted shares.
Before we turn the call over for Q&A, let me briefly address ASC606. As we have previously disclosed, we intend to use the modified retrospective option when we adopt this accounting standard beginning in the first quarter of fiscal 2019. We continue to believe the impact of fiscal 2019 revenue will be immaterial, but likely result in margin improvement around two to three percentage points due to the capitalization of sales commissions.
We'll provide full fiscal '19 guidance and any impacts to our long-term operating model due to the new standard on our next earnings call. However, I did want to quickly make note that given both the significant operating margin outperformance against our initial expectations this year, along with our outlook around the market opportunity, we do expect only limited margin expansion next year on a pre-ASC606 basis.
Given the prior commentary around the benefits of 606 however, we do currently expect that the combination of these two factors will likely result in post ASC606 non-GAAP operating margins in the low to mid-single-digit range for fiscal '19. This would represent roughly a three to five percentage point increase compared to this year's guidance, which is on a pre-ASC606 basis.
And with that, we're happy to turn it over to your questions.
[Operator instructions] Your first question comes from the line of Rob Oliver from Baird. Your line is open.
Hey guys. Thank you very much for taking my question. I'll try to make it a two-parter. First for Lew. Lew you mentioned that rapid convergence that you're seeing among some of the products and I know you've talked often about the single pane of glass.
Is that a pull you're seeing from your customers when it comes to that convergence on APM and infrastructure and how if at all is that helping you send off perhaps some point competitors on the infrastructure side and then I have a very quick follow-up for Mark, thank you?
Sure Rob. Great question. It is a pull and what's driving is a few things. Customers have wanted a single place to go to see everything that's going on in their production environment for decades, but it's not really been a vital reality until software as a service came along because previously this was delivered by companies rolling up acquisitions and trying to integrate on premise software and it never really delivered on the vision for customers.
So, the demand has always been there, but now the technology capabilities of software as a service make it possible.
The second part of what's driving this trend is the fact that people are so rapidly migrating to the cloud, it's bringing to the forefront decision-making on their strategic tooling, but they're reevaluating who are they going to make substantial bets on for production visibility in light of this new era where everything is moving to the cloud and those conversations are increasingly going our way.
So, we're excited about those trends and it's why we're going to increasingly focus on delivering on that single painted glass vision.
Great. Thanks Lew. And Mark I know you just mentioned that you guys were a little light on hiring in Q4. It sounds like you're off to a great start in Q1 and nothing to be concerned about. But was there anything there relative to the sales force the maybe would have implications for a slightly longer ramp time or anything like that. Thank you guys very much.
Sure. No, no. There's nothing unusual about it. Some of it was we're just getting more disciplined about rather than starting and hiring people in mid-December. It's better off to start them -- better off for everyone to start at the beginning of the year.
So we mentioned, we had a great group start in early January and we continue to be able to hire sales reps. So, we feel like we have good capacity and hiring across the Board and we'll continue -- going to continue to do that as we ramp up into the next year.
Thanks again guys.
Your next question comes from the line of Michael Turits from Raymond James. Your line is open.
Good afternoon. This is Eric [Keyton] in for Michael. Congrats on a profitable quarter guys and then Lew could you give us an update on your infrastructure product and kind of what kind of penetration within enterprise you're seeing?
And then a follow-up to that would be what's the used case that usually drives to win the win rate and what you're currently displacing?
Yeah sure. Happy to answer those questions. So, as we mentioned in the prepared remarks, infrastructure was North of 10% of new business in the quarter. So, it's a very strong product growing very rapidly and it's only been about a little over a year since we launched the product.
The type of companies that we're doing with on the enterprise, it's often again linked to a company getting strategic with cloud adoption and there is a few used cases that they find our infrastructure product compelling for.
One is, they want to right-size their cloud investment. They're making big bets on running applications to the cloud. They want to know they're properly using those resources and being efficient with that. And also, when it comes to troubleshooting, often the problems and application problem that could be a slow customer experience for an outage and being able to see the application health and in the same place as the infrastructure health is of vital importance to them.
So, what's driving our win rate is the fact that we've got the industry-leading APM product and our customers don't want to go to a separate product to look at infrastructure health. They want to see it all in one place and that's where a platform story is resonating.
Okay. Great. And a quick follow-up if I may for Mark. Could just kind of tell us where you're seeing in terms of duration in billings?
We talked about historically a couple of years ago we migrated and as we stick more the enterprise, the durations have been increasing. That increases the slowing down and the big bulk of that shift has occurred. So, we're generally seeing durations comparable to what they've been over the last couple quarters.
Okay. Great. Thank you.
The next question comes from the line of Ittai Kidron from Oppenheimer. Your line is open.
Thanks. It's Ittai and congrats again on a good quarter. Lew I am not going to bust your chops on the products you don't like, but I do want to dig -- I do want to dig in going to your comment of the single pan of glasses. I guess one could also think that the network is important to know what's in the network to get a single pan of glass.
So how far do you think that vision needs to be extended in the future whether it be through the network, would it be all the way to the end user, would it be into log. How do I think about the reach that New Relic will deliver to its customers within a year or two? Give me some clues.
Sure. I can't give you too explicit clues. We've talked about these very questions and others and to deliver on that vision. I will tell you our strategy is to focus on modern cloud environments. Our analysis shows that for our market the segment that is growing and the fact that is in modern application architectures running in the cloud environment.
So, if for example you look at what it takes to show network health in that environment, it's entirely different for an on-premise network environment where you might be fiscal year running on premise and behind the firewall. That's not a very fast-growing segment.
So, when we think about our product strategy, we want to optimize the end-to-end view for the customer experience, the application health, the infrastructure and everything else that's related to it for that modern environment. That's where we have that strong win rate and where we have the biggest opportunity.
One specific skews or point of visibility we might add to round out that picture, we're not prepared to answer or speak to right now, but for building along that strategy.
That's great. And maybe as you think about the progress you've had so far with the infrastructure; can you give me some color on the profile of those customers?
Are those companies that are by nature more cloud borne by definition? Is it -- do any of them implement this against on premise resources? How do you think about the profile of the first buyer?
Certainly. We're seeing good adoption of our infrastructure product across both enterprise and SMB new companies as well as very enterprises that have been around for decades or longer. We in particular are more advanced and larger infrastructure. The point is cover both on premise and cloud because they want to be able to see all their infrastructure both traditional and cloud all in one place just like they want to see other applications all in one place and we do a great job of that.
The reason why they're coming to us often is because competitive products tend to look at infrastructure in more static way and they don't do very well in the cloud environment. So, what opens the conversation is often how well we work in a cloud environment but then they want to see all in New Relic infrastructure and we do that great.
Got it. Very good. All right, congrats guys. Good luck.
And your next question comes from the line of Derrick Wood from Cowen. Your line is open.
Thank you. This is Jim Fitzgerald filling in for Derrick. My first question is just on the Amazon partnership. So that's been live for a little while now and you mentioned in November you announced the expanded partnership now connecting to 31 services.
So, to what degree do you see this as something that can give you greater channel leverage and ultimately more enterprise growth over time?
What we see is a huge and strategic partnership and opportunity for us because customers -- New Relic customers adopt cloud infrastructure as a service not a cloud services provided by Amazon and other companies. They adopt them at a faster rate than people who are not New Relic customers.
So that's why we're a good partner for companies like Amazon Web Services. Prospect for a customer is using New Relic. They're going to be more confident to more aggressively move to the cloud and that just turns into more business for them as well. So that's why it's a win-win.
We feel like because virtually every enterprise is making strategic bet to decommission and in some cases entirely get out of their hosting business and go entirely to the cloud over period of say five years or so. It's forcing them to rethink their tooling not in a tactical way but in a strategic way and that's where our platform story is really resonating because we're SaaS delivered, we're a 100% SaaS delivery.
We're the perfect solution to contemplate if you want to go strategic with the cloud. It works in virtually every vertical and again it helps our cloud partners too.
So, we feel like our customers want an honest broker that helps them successfully adopt a multi-cloud strategy and that's why we see such a great opportunity as an independent in the space.
Okay. Great. And then can you talk about any new developments you're seeing in your partner program where you've seen several notable partners increasing their partner status over the last several months, I think I've followed CTE, maybe a few others. Is there any new developments there that you can speak of?
What you see in these types of partnerships as they tend to be experts in helping enterprises be successful in migrating workloads to the cloud or re-architecting for their cloud, you saw often thought leaders that enterprises turn to, to help them be successful in adopting the cloud as part of their IT strategy.
And their off -- and so they're the type of company that as domain experts their recommendation carries a lot of weight and their expertise in culminated tooling is important. So that's why we partner close to with them because in working with them, they can recommend our product and help the customers to be successful not only with our software, but in their cloud journey.
Great. Thank you.
Your next question comes from the line of Jennifer Swanson from UBS.
No. This is Fatima on for Jen. Thank you for taking my question. Maybe to start with you Lew, just to drill into some of your prepared remarks around listing a very strong customer acquisition quarter within the Fortune 100. I believe you said you signed about 25% of the 50% you now have in this quarter alone.
I am wondering if you can speak to what the complexion of those deals was like with the sales cycle was like and hand-to-hand combat that was involved in winning those customers and a follow-up for Mark if I may?
Sure, I just want to clarify that. So, the deals we did last quarter, some of those were new customer add-ons, but many of them were also expansion deals with these Fortune 100 companies. So, there's good news in both of those right where we're capturing new logos because of the reasons I've been talking about.
These enterprises want to rethink their tooling as they move to the cloud and this like New Relic and then after this like New Relic they increase their investment in New Relic.
The key takeaway is reiterating the strength of our enterprise business, how well it's growing, how pervasive we are in the Fortune 100 and how many of them do business with us quarter-to-quarter is all I think encouraging news.
That's very helpful. And Mark, a question for you. I noticed sales and marketing expense this quarter was flattish quarter-on-quarter. Anything to read into that because relative to historical trends it's certainly not matching with historical trends. I just wanted to understand if there is anything to read into that and that's it for me? Thank you.
Sure. No. The one big difference this year was our annual or big FutureStack event was in Q2 last year or this year and was in Q3 last year. So basically that moved out of quarter. So that had a skew on the year-over-year comparison.
And your next question comes from the line of Sterling Auty from JPMorgan. Your line is open.
Hi guys. This is actually Ugam Kamat on for Sterling Auty. Thanks for taking my question. Just wanted to understand about the enterprise penetration that you are getting and the solid traction that you have within the Fortune 100 customer.
Just to clarify on the market adoption, are most of these deals greenfield in terms of like you are the only vendor coming in who are educating them and then getting the deals? Or Brownfield where you are replacing legacy incumbents?
Typically, the opportunities that come into our Greenfield in that while they may have similar tools for legacy workloads are on other different projects, We are brought in for a strategic new digital initiative where they may have nothing in place at all because it's launching and for the first-time new products are launching continually or occasionally they may be just satisfied with another tool and then they bring us in.
But it's more the Greenfield opportunity than the latter and then as they have success with us, their project can grow and so we can grow our business with that customer just as that project growth and usage and therefore their New Relic investment grows with that.
And then ultimately though they may consider standardizing on New Relic at which point there may be some replacement about their tools and one of the things that customers like about us is how our single unified platform can help rationalize what historically may have been a collection of many tools from many vendors.
Got it. That is helpful. And secondly on your hiring plan, you said that you're hiring aggressively especially at the start of the year. Just wanted to understand where those hires are coming from? Is it more towards R&D to build products or sales and marketing?
And just to expand on that, how long does it take for your new sales reps to actually ramp up on your solution? Because you have a number of SKUs and the functionality. So just wanted to understand the normal ramping process. That's it for me.
So, we are hiring across the Board both in R&D, in sales and we tend to hire little bit more aggressively beginning of the year and that will be true this year as well, but it's across the Board.
In terms of the ramping up of our sales team, obviously spend a lot of time training and refining those processes and it varies by rep, but for our enterprise rep it can take up to a year to get them ramped whereas our SMB reps generally ramp a little bit quicker than that.
Thank you. And congrats on a great quarter.
Thanks.
Your next question comes from the line of Nate Cunningham from Guggenheim. Your line is open.
Hi guys. Lew as you've expanded your presence in the enterprise, can you comment on any changes in the mix of new versus existing workload that New Relic is being brought into monitor?
We typically get brought in -- our entry point is often with the new monitoring workload, and there's recovery is obviously our products is a great fit for it, but also the mindset of the people building those sorts of things, their expectations for quality of tooling, ease-of-use, SaaS delivery.
We're the perfect fit for that mindset and then we will then after we land that account their peers may be working on older workloads and dissatisfied or when they see our stuff they're amazed that how much better life can be of use New Relic. So that's how our expansion opportunity where there may be some replacement going on for those traditional workloads if they have a tool in place.
Okay. Thank you.
Your next question comes from the line of Jack Andrews from Needham. Your line is open.
Thanks. Good afternoon. Thanks for taking my question. Lew I was wondering, it seems like there's a number of companies in this market that are increasing talking about using artificial intelligence to automatically detect and remediate issues particularly in cloud environments and this is something that you've been talking about for quite some time with project Seymour initially.
So can you help us really understand what is called a table sticks now in this environment in terms of using artificial intelligence to automate things and where does the true differentiation really factor in? Is it better data quality? Is it better algorithms? How do we think about the product set and what's happening in this market?
Yeah. You have to start with the customer problems and what can AI and other related technologies do to help solve those customer problems that are. So, because the environments our customers are monitoring are so complex, there is so much going on, it's impossible for a human to fully understand everything that's going on in that environment purely by just looking at charts of data which is how it's historically been done.
So, AI really helps surface the needle in the haystack automatically and so in essence, that's what, what we called the project Seymour know it's radar. That's in essence what it does really well. It's scan all the data we collect across all of our products and then surfaces in a feed to users, like a social media feed, but it'll say here's what we think is of interest to your environment.
And then the user, if they like it, if they click on it, if they provide feedback, that gives us signal to improve the quality of that customer's feed and perhaps other customer's feeds. So that's the idea. That's our first step.
We think that artificial intelligence is not just a feature though. It ought to be baked into how we think about our products going forward. Where is the point of differentiation? I feel like there is a few.
First off, how much data are you collecting? What's the type of data you're collecting? And then, can that data be used to, can you continually improve your models and your algorithms based on that data and the single you're getting from your customers?
So, the customers that are going to struggle to succeed in this sort of customers that are not pure software as a service company or sorry, the vendors that -- our competitors. So, the competitors that might have one foot, one foot in service-as-a-service, but the other foot in on-premise, they're going to struggle to really do a great job with this problem because it's a kind of thing where these models need to improve continually and need to be tweaked continually and that's where we're seeing possibility of your updating on-premise software once every two-year cycle.
So, we think it's a combination of how much data we collect and we collected enormous amount of data. I think the last time I checked, we're collecting like five million events per second of performance data, infrastructure data, customer experience data, all into our cloud and then we're processing it all in real-time and we feel like that's a point of leverage that if we do really well, I don't think we're quite there yet. But if we do really well, it could become a true network effect in a very strong mode.
Sure thanks. And I appreciate your perspective on that. Just as a quick follow-up can you touch on the significance of holding your last FutureStack event in Sydney? Have you seen any type of impact on the pipeline in the Asia-Pacific region as a result of holding it there?
We decided this year to take FutureStack global and bring it to our customers. And so, we had Berlin in June that was a terrific event for us. We had London, we had New York and then our fourth one of the year was in Sydney. I very much enjoyed going there and seeing the customer activity traction particularly the traction in pipeline we're seeing in financial services companies in Australia was encouraging to me as they get serious with cloud and digital and customer experience telcos etcetera.
So yeah, I'm excited about the pipeline there and we've always done well in Australia, even since the earliest days I remember 10 years ago, we launched our first product and when the first deals to come across the wire self-service was in Australia in eCommerce company.
So, we've always had a group of New Relic fans in Australia and now we're investing with people locally to develop that opportunity with full potential.
Great. Thanks for taking my questions.
Your next question comes from the line of Sanjit Singh from Morgan Stanley. Your line is open.
Thank you for taking the questions. I've several questions, but I'll focus in just a couple. Maybe you can start with what's going on with micro services and a lot of the vendors in the space, of you look at Mesosphere, Docker, a lot of standardization on Cooper 90s and I guess my question to you Lew is as the application platform vendors start to standardize on Cooper 90s' container-based platform, what do you see as sort of the potential impact in terms of APM adoption if it's -- if it's more standardized? Does that obviate the need for us something like a New Relic APM or is that actually a tailwind?
It just means you can't succeed with these architectures without APM. Now not necessarily old-school firsthand APM, but more like the APM that New Relic has and we're going to do even more innovation in the space to service these complex microservice environment where an application isn't just one monolith.
An application could be a combination of your web user interface, plus your mobile app, plus a bunch of interconnected services on the backend. And so, so many potential points of failure and being able to follow a transaction across all of those tears to ensure that it works flawlessly, do that at massive scale and then make it very easy for our customers to diagnose and fix problems on their own.
Prior to New Relic, diagnosing application performance problem is like this with kind of our black art that only a couple of people knew how to use and knew how to use the tools and diagnose these problems and so your ability to improve the health performance of your systems was really limited to a small number of experts.
In comes New Relic to make this kind of problem-solving much easier because and believe me, there's a lot of work involved in making this kind of software easy to use, but that's why when whereas some of our competitors might have 10 or 20 active users using their products, we have customers with literally thousands of active users that are all making sure that their little piece of an interconnected system is working together to deliver an integrated great customer experience.
So, all those trends are great for us and they're going to put more pressure on companies that are not innovating fast enough, which I think are like a lot of the incumbents in the space where they're going to become less and less relevant.
Great. I appreciate the color. And then on the margins, definitely a milestone reached here this quarter was breakeven. I think when you guys IPO'd, you were on a negative 40% operating margin and to reach breakeven in four years is quite…
We were positive 3%.
That's right. So, I am not giving you enough credit, but yeah definitely a great milestone there and I know as we look into next year there is definitely going to be a little more investment. So, as we think about the longer-term model, fiscal year '22, wanted to get your updated thoughts on hitting that $1 billion annualized revenue run rate there and what it would take for you to get there?
Do you have the product portfolio already in place or is it going to be more organic R&D and maybe some M&A to get there, thanks?
Yeah and I am sure, Mark will have a lot of commentary to provide, but on the product portfolio, there's two parts to that. We're going to continue to deliver new products, it's just who we are. If we identify an opportunity to innovate and serve a customer need and broaden the appeal of our offering we're going to do.
That having been said, those products we don't expect -- we're not modeling dependency on future products to have a significant impact on our path to a billionaire or it's really more like what do we do after that, that where those new products will kick in.
And so, we think the bulk of our business is going to be coming from growing particularly in our enterprise segment, a lot is going to come from growing the size of how much business we do with our top customers and we're so underpenetrated in our existing customers with our existing products that that is -- that's all we need we think to reach the $ billion milestone. But that's not all we're going to have when we get there.
Got it. Thank you very much Lew.
And your next question comes from line of Keith Bachman from Bank of Montreal. Your line is open.
Hi. Thank you very much for taking the question. I had two questions and I'll ask them separately. You talked about the network effect, which does seem like an incredibly interesting opportunity for New Relic.
But I wanted to dig down a little bit deeper and try to understand why you think your competitors will have -- won't have a network effect or at a minimal have less of the network effect recognizing that portions of their business are on premise and in the cloud. But why do you think you'll have such a substantial lead with the network effect?
And this is all -- it's early days. So, we think it as the potential, but here's why we think we would have the opportunity to create a substantial competitive advantage with the network effect. It's our ubiquity. It's the type of data we collect.
How many customers we have deployed and then how many applications are sending data about that application health from those customers. As I say, we're inserting five million events every second of performance data from the applications, from the customer help, customer experience from the infrastructure health. We don't think there's a competitor out there that's collecting nearly that much data.
So, if you look at a great network effect company like Google, they’ve created search because most people search on Google and it drives this beautiful flywheel that we think we can do with AI on the data we collect.
Got it. Okay. Makes sense. The second question is I wanted to push back a little bit on the margins. You talked about mid-single digits, you just agreed it did have an operating profit this quarter. So, want to acknowledge that.
So, if I compare that with let's say it's mid-single digits in Q4 against a 22 target of call it 10% as the midpoint in the operating model. It seems very conservative to suggest that over the next couple years your margins would only go up by 500 basis points on the top -- on the back of the topline growth that you're generating. I'm just unclear about why you wouldn't get more leverage out of the model?
We feel like there's a big opportunity ahead of us. We want to continue to invest to achieve that opportunity and really a $1 billion is not the endgame. We want to be growing at a good pace at $1 billion. So, we want to continue to invest and take advantage of it.
We've shown great margin improvement over the last three years as we just referenced, but it's a balance between growth and increasing margins and we want to continue to walk that line, but we feel like we've got such a great opportunity ahead of us, we want to make sure we continue to invest to take advantage of it.
Okay. That's it for me. Thanks very much.
Your next question comes from the line of Jesse Hulsing from Goldman Sachs. Your line is open.
Yeah. Thank you. Lew, I think in your prepared remarks you alluded to it sound like six or seven deals within the Fortune 20. I'm wondering how many of those or I guess in general on the deal that you're doing in the Fortune 100 over the last couple quarters are related to larger scale cloud migration initiatives.
Are those the types of -- types of conversations that you're getting pulled into and in the case that you are, how do the deal sizes compare in those types of projects versus your typical enterprise project?
I would say cloud projects are the typical enterprise projects that are going on today in general. So, for newly funded projects and so yeah, most of our deals we -- cloud is a part of the story. One of the used cases we have is the strategic imperative to move as much as they can to the cloud over the course of a number of years and we're going to help accelerate and de-risk that move.
And that's one example like a fortune deal we might do and that's more of a centralized deal. Another deal might be project-base where it's an important digital project and the customer experience is really important. It might be having customer experience problems and we're brought in to help them with that project and end their project almost always as running on a public cloud because it's a new and it's a strategic project for the need to move quickly and compete on a moving faster with confidence.
So, in either place, cloud plays a part of it and then we just feel like we're seeing the market move to us in a way that we had hoped and predicted some years ago and so we will continue to compete quite effectively for that on-premise business that where that multi-cloud or hybrid cloud is in business, that all market opportunity available to us.
But we feel like when it's running in a public cloud environment that's kind of homefield advantage for us.
Got you. And your largest or one of your largest competitors was acquired about a year ago. I'm wondering if you've seen any changes in the competitive landscape over the last -- over the last couple quarters. Would you say that the market is getting more or less competitive and I guess looking forward, how do you think your positioning is consolidate share within the monitoring market, thanks.
Sure. Great question. Yeah, it's still a competitive market. It's still the same folks that we've seen in the past. I'd say our friends at Cisco, we still see them, if feels a little bit less focused. It feels like there's -- there may be a lot of other things going on and/or the typical thing you might see after an acquisition of the struggle to stay really focused, but there's still out there.
What we like about -- what we're seeing the competitive environment is how the customers are validating our thesis that these markets are converging. APM is not just an isolated market. Now it's part of a whole production visibility in the modern digital environment and that includes APM, but it also includes infrastructure monitoring, synthetic monitoring, customer experience monitoring and it include analytics.
And so that's why customers are asking for and where I think we differentiate really well is having that ball in integrated cloud.
Thanks Lew.
There are no further questions. This concludes today's conference call. You may now disconnect.