New Relic, Inc.
Q1 2018 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good afternoon. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic First 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]. Jonathan Parker, VP of Strategic Finance and Investor Relations, you may begin your conference.

[Jonathan Parker:]

Thank you. Good afternoon, and welcome to New Relic's first quarter fiscal year 2018 earnings conference call. Joining me today are New Relic's founder and CEO, Lew Cirne; and our 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 projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to our earnings press release issued today as well as the risks described in our most recent Form 10-K 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 onetime in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at ir.newrelic.com to access our earnings release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about New Relic. And with that, let me turn the call over to Lew.

[Lewis Cirne:]

Thanks, Jon, and good afternoon to everyone joining today to review New Relic's first quarter financial results. For the first quarter we delivered revenue of $80.1 million up 37% year-over-year and exceeding our guidance range. At the same time we improved our non-GAAP operating margin by 10 percentage points from the same quarter last year. We continue to demonstrate strong leverage in the business, which contributed to both record cash from operations and non-GAAP free cash flow generation. As we share on our last call, our primary goals entering this fiscal year are to extent our leadership in the cloud as well as capitalize on our platform expansion strategy. We aim to be the day facto of standard for monitoring, measuring and analyzing every enterprise digital initiative running in the cloud. As it relates to these goals, I spent much of Q1 on the road, meeting with dozens of customers and prospects. In June alone, I traveled across nearly 10 cities in three countries and I am really pleased to report that our vision is resonating with our customers. First and foremost digital transformation continues to be a top priority for companies looking to drive growth from new digital channels. To increase the velocity of their journey to digital, they are adopting dev-ops practices and increasingly running workloads on cloud platforms. These modern cloud first enterprises have very different requirements for monitoring than ever before. Digital is so strategic to their overall business that they now need to look at a single source of truth to understand their infrastructure health, application performance and our customer's experience. And we make it easy for them to deploy and use New Relic, in fact I recently met with an exec who during the initial stages of a pilot rolled us out to monitor just four applications and within a week they already had us deployed across 40 applications. I tell that story because it speaks to both how quickly our customers can deploy our technology and how they can immediately begin to see value from our products. The data we delivered was so powerful and compelling that they didn't want to stop with just four apps that's what magical about our products. And it speaks to the power we see within most of our customers to expand our partnership with them. When I hear stories like this, it's clear to me that we're just scratching the surface of our opportunity. We believe New Relic is uniquely positioned to help the world's most innovative and important companies ensure their digital initiative succeed. We give developers, operations professionals and digital business leaders real time insights into the performance of their infrastructure applications and customer experience. We call this digital intelligence. And New Relic's digital intelligence platform is the only dedicated multi-tenant SaaS platform purpose build to help companies see their business more clearly. We see this message continuing to resonate into marketplace especially with our enterprise customers. During Q1, we held our first two FutureStack events of the year in London and Berlin. My favorite presentation from our standing room only event in London was from Ryanair Europe's largest airline. In the view of its Infrastructure and Operations Manager --, Ryanair used to be an airline with a website, but now we thinks of the company as a website with an airline attached. That's how core digital is to Ryanair's overall business. And why they rely on New Relic as their single source of truth to monitor in real team the health of their vital online services, customer experience and business performance. I encourage you to take a look at the video link in our investor deck for some of the incredible New Relic dashboards that Ryanair uses to better see their business. At FutureStack Berlin I met with overwhelming applause when I announced our intention to open up a European data center in calendar 2018. That would be our first dedicated capacity outside of the U.S. enabling our customers to get the full power of New Relic's digital intelligence platform, while ensuring that their data remains local. This announcement reflects our commitment to the European market and our confidence we have in our market opportunity across EMEA. On the product front, our innovation engine continued full steam ahead in Q1 helping support our goal of being the dominant leader in monitoring both cloud applications and cloud infrastructure. In the past quarter we deepen the integrations between New Relic infrastructure and leading cloud platforms allowing our customers to directly pull in new key metrics. In just six months after making this product generally available to our customers, we have nearly doubled the number of integrations we offer. In the quarter we released new integrations into some of the most popular services from Amazon Web Services, including AWS Elastic Search and AWS Billing. As it relates to ladder, IT teams and their business partners can now see at a granular level the exact cost of running their applications and their infrastructure. Combined with New Relic alerts our customers can be proactively notified when their spend exceeds their defined thresholds. As we move forward, expect us to continue to release additional integrations including deeper visibility into cloud services from Amazon, Microsoft, Google, IBM and Pivotal. We continue to see our enterprise customers adopt multi-cloud strategies running different services and applications on multiple cloud infrastructure platforms, and we want to make it dead simple for our customers to use New Relic to monitor workloads in the cloud. We also delivered many new features across our platform including Health Map, which for the first time unifies application and infrastructure health metrics into one integrated dashboard. Finally, we also delivered increased intelligence into our platform by beginning the rollout of Project Seymour, which provides our customers with more accurate and actionable insights into their increasingly complex environment. Seymour leverages unique machine learning algorithms to surface targeted and actionable information to users depending on their role and their interests. We're getting very positive feedback on Seymour from our customers and given the billions of events coming into our multi-tenant cloud based architecture we are able to iterate on our algorithms at an incredible rate to deliver an even better more relevant experience for our customers. I'm really excited about these developments and I'm excited about getting Seymour into the hands in more and more of our users. Turning to our go-to-market performance, as we've discussed before, the first half of our year is typically symbolized by a greater focus on adding new high quality customers. Then as they quickly realize the power of our New Relic platform and the value we can add to a growing number of digital initiatives we expand our relationship with the upsell activity that increasingly happens in the second half of the year. Overall as Mark will discuss in his remarks we had an encouraging quarter for bringing in new enterprise logos. While new enterprise customer typically come in at low initial spend levels and require more calories to land, they are critical for helping drive the long-term growth of the business since the expand opportunities tend to be much larger. While this dynamic of smaller lands followed by larger expansions is contributing to greater seasonality in the business. Our overall pipeline and especially our enterprise pipeline is larger than it has ever been and we're optimistic about the conversion of larger upsell opportunities in the second half of the fiscal year just as we delivered in fiscal 2017. Our digital intelligence platform continues to resonate with enterprise customers. Among the new customers we landed in Q1 where organizations like Alaska Airlines, Pfizer, HSBC, Texas Instruments and Chelsea Football Club. In addition to these we also expanded our relationships with companies like Cox Enterprises, H&R Block, Levi's Strauss, News Corp, Scripps Networks and U.S. Foods. That's the power of our land and expand model as companies deploy more and more of our products. Across our non-APM products we saw a nice balance of add-on activity and continue to see overall adoption near record levels from Q4. We believe that New relic infrastructure is being well received in the market and it will continue to be one of our biggest investment areas. We are just starting to see what's possible in the market. Particularly as our customers see the value of bringing application and infrastructure held together in one platform. As you can see we are off to a good start for the year with great new enterprise customer additions, progress with new products in the marketplace along with continued product innovation and increased investments in the business. We believe the combination of these factors position us well to drive strong growth for the fiscal year, which is supported by our increased full year guidance that Mark will detail in a moment. With that I'll turn it over to Mark.

[Mark Sachleben:]

Thanks, Lew. Turning to the financials, revenue was $80.1 million for the first quarter, up 37% year-over-year and 9% sequentially. Total paid business accounts surpassed 15,400 and the number paying more than $100,000 in annual recurring revenue rose to 555, up nearly 40% compared to a year ago. The growth in this figure represents both the new logo activity that Lew referenced earlier as well as some customers expanding past that $100,000 per year threshold. Our annualized revenue per average paid business account exceeded $20,000, for the first time and the same figure for our enterprise customers, which we define as paid business accounts that's more than 1000 employees is about four times that level closer to $80,000 per year. As a reminder, we rounded total paid business accounts down to nearest 100 and are no longer providing a $5,000 ARR per paid account metric. Both are less relevant given our enterprise focus and our relief that over half of our annualized recurring revenue will come from the enterprise category in the next two quarters ahead of our prior expectations. At the end of Q1 our enterprise business was approximately 49% of annualized recurring revenue, up from around 43% in the same period last year. Please note that two points of sequential increase in the year were the result of a period reclassification based on updated company size data, more specifically approximately 200 accounts graduated from our mid-market business into enterprise. This dynamic underscores the strategy behind our continued investment in the mid-market space as these companies can grow over time and become larger future expansion opportunities. Our dollar based net expansion rate in the first quarter was 113% compared to 118% in the year ago period. As the mix of our business increasingly shift to enterprise we expect our net expansion rate metric will continue to become more seasonal with a slower start of the year and a stronger finish. We saw this type of acceleration on our expansion rate last fiscal year and believe we will realize a similar seasonal pattern in fiscal '18. Turning to our geographic split, U.S. revenue of $54.8 million for the quarter was up 38% year-over-year, while non-U.S. for the quarter grew to $25.3 million, up 35% year-over-year. Non-U.S. revenue represented 32% of revenue in the quarter. Before moving to profit and loss items, I would like to point out that unless otherwise specified all of the expense and profitability metrics I will be discussing going forward are non-GAAP results. A full reconciliation between historical GAAP and non-GAAP results can be found on our earnings release issue today and available on our Investor Relations website. Our gross margin was 83%, up from 81% in the year-ago period. We expect to sustain gross margins around 82% for the year, which we consider best in class among our appears. With regard to operating expenses, sales and marketing costs were $44.7 million compared to $35.9 million in the second quarter last year. Overall we continue to invest aggressively in distribution as we execute again plans to build $1 billion business. In fact in Q1, we had our strongest hiring quarter in several years. R&D expenses were $15.2 million compared to $13.3 million in the same quarter last quarter. The increase was largely due to a combination of strong hiring and lower software capitalization. G&A costs were $11.9 million compared to $8.3 million in the same quarter last year. The increase was partially a function of consulting cost related to an ongoing manor system implementation as well as continued hiring activity. Overall, our expenses in the quarter produced an operating loss of $5.4 million, strongly improve from a $9.8 million operating loss for the same quarter last year. This resulted in operating margin of negative 7% in the quarter compared to negative 17% in the same quarter last year, an improvement of approximately 10 percentage points. Overall, we expect our pace of hiring to moderate as we move through the year, which should help drive continued leverage as recent hires become more productive. Our net loss per share was $0.09 compared to $0.20 in the second quarter of last year. Turning to our balance sheet, we ended the first quarter with approximately $227 million of cash, cash equivalents and short-term investments, up from approximately $206 million last quarter. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $125.6 million, up 53% year-over-year and as expected relatively flat quarter-over-quarter. I would like to remind everyone of the approximate $6 million headwind we faced in Q1 due to early renewals, annual invoicing conversions and other billing factors that occur in Q4 and, which we called out on our last earnings call. We still do not view deferred revenue as a liable indicator of our underline business trends due to the varying durations of our contracts and billing terms as well as the overall velocity of our land and expand model, which in certain instances can result in renewal dates moving around from prior years. Last quarter, we noted our expectation that deferred revenue seasonality from Q1 to Q2 will be similar to the prior year. This expectation remains and we expect Q2 deferred revenue to decline modestly from Q1 for low single-digit percentage wise. For the second half of the year, we expect more meaningful sequential increases in Q3 and in particular Q4. However, as we also noted last quarter, we do not expect the percentage increases to be as large as those shown last year, which we mentioned at the time benefited from some onetime movements due to early renewals and annual invoice conversion. Turning to cash flow, we generated positive cash flow from operations for the seventh consecutive quarter, a record of $17.7 million. Free cash flow, defined as cash from operations minus capital expenditures and capitalized software was also a record at roughly $9.5 million. For all of fiscal '18, we continue to expect cash from operations to be between $35 million and $45 million and physical capital expenditures to be $26 million to $30 million. Overall, we expect free cash flow to continue to be between $1 million and $10 million for fiscal '18, reflecting a near-term return to negative free cash flow due to typical seasonality in our quarter-to-quarter cash collections. This is driven by the timing of the largest portion of renewals and new sales activity, which happens in the third and fourth quarter, leading to stronger cash collections in the first and fourth quarter. Now I will turn to our outlook for the second quarter of fiscal 2018 and the full year as a whole. For the second fiscal quarter, ending September 30, we expect revenue to range from $81.8 million to $83.3 million, reflecting growth of 30% year-over-year at the midpoint of our guidance. We expect a non-GAAP operating loss of $5 million to $6 million. This will lead to non-GAAP net loss per share in the range of $0.09 to $0.11 based upon a weighted average share count of 54.7 million for the quarter. For the full fiscal year of 2018, we now expect revenue to range from $344 million to $348 million, reflecting growth of 31%year-over-year at the midpoint and an increase from our prior guidance of between $342.5 million to $346.5 million. We expect a non-GAAP operating loss of $14 million to $17 million. This would lead to a non-GAAP net loss per share in the range of $0.23 to $0.28 upon a weighted average share count of 55.4 million. Overall, we continue to expect to achieve sustainable non-GAAP operating income and free cash flow by the end of this fiscal year. And with that, we're happy to turn over to your questions.

[Operator:]

[Operator Instructions] Your first question comes from Greg McDowell from JMP Securities. Your line is open.

[Gregory McDowell:]

Great, thank you good afternoon. I was wondering if you could first expand on the record new enterprise logo wins and maybe just give us a little more color on what were some of the drivers especially given that it's your Q1 and it's the very start of the fiscal year. And then I have one follow up thanks.

[Lewis Cirne:]

Sure Greg, this is Lew. Yes we're really pleased with the enterprise logo wins. It's been a theme over the last several quarters we've been talking about how our focus on the enterprise is really starting to pay bear fruit. As you know that the first part of the year is we put a lot of effort until making sure we got the right logos in the customer base. And then that can drive nice back half on expansion business. And so I think the dynamics that are driving those logos and our pace of acquisition of them is - are the themes we've talked about over the last several quarters they are moving to the cloud more rapidly, they are more convince they need to. And so they want to partner to derisk that move, it's a multi-cloud move. And so they like the fact that New Relic can independently measure applications running on premise or in the cloud. And then they were also making big strategic bids on digital as really an imperative. If they don't succeed in digital really there is a risk that businesses may lose relevance in the coming decades. So those are all tailwinds for our business and why we're adding these logos.

[Gregory McDowell:]

Great thanks Lu. And maybe one follow-up for now, I want to thread the needle a little bit on the greater seasonality in the business. And I guess first make sure I understood you correctly that it's reasonable to think that the net expansion rate will continue to increase throughout fiscal year '18. But I also want to ask about how we should think about customer adds throughout the rest of the year if you think Q1 represents trough levels for customer adds. And finally with respect to deferred and billings and I recognize you guys don't necessarily use that metric to drive your business. But the deferred revenue commentary you gave us does imply acceleration in billings in Q2. And I was just wondering if you view that Q1 billings rate as sort of trough billings growth rate for the fiscal year. Thanks.

[Mark Sachleben:]

Sure there is a lot there Greg, and I'll try and explore here. In terms of the net expansion rate, we - as Lew mentioned and we talked about in the past beginning in the year the first couple of quarters for us tend to be more driven by a focus on net new logos. And so we do expect to that overtime particularly for us in the Q3 and Q4 that's when the more strategic the larger transactions tend to take place. And so we do believe that will see a similar pattern to last year, we're not - we are giving guidance about the exact nature of that or what might be a trough. But in general what we're saying is that the first half of the year salaries net expansion rate will tend to be a little bit softer and will strengthen in Q3 and Q4. In terms of the billings calculations that you did, those are your map is accurate there. I do of course want to caution against easing billings as an indicator and deferred as an indicator of the underlying health of our business. But right now as we see as we get more and more into the enterprise that's what's driving our business we mentioned that 49% of our base is now enterprise we've said in the next couple of quarters that's going to exceed 50%. You look at our renewal base and our renewal base more and more is getting skewed and focused around our Q3 and particularly our Q4. And so that has an impact on the curve of billings for the year. And we saw this trend emerge last year and we expect that trend to continue where our billings and number would tend to be much stronger in the second half of the year.

[Gregory McDowell:]

Thank you.

[Operator:]

Your next question comes from Sterling Auty from JP Morgan. Your line is open.

[Ugam Kamat:]

Hi, guys this is Ugam Kamat on for Sterling Auty, thanks for taking my questions. You have already mentioned in the past and you try to say this quarter as well that you expect the first half to be new logo addition and try to expand with that same customers in the back half of the year. But if I look at your addition of paid business accounts it has been only 200 additions in this quarter a significant moderation from what we have seen in the past. So can you please comment on your analogy about having a higher land deals in the first half, but when I see the numbers I see only 200 additions a decline from the past?

[Lewis Cirne:]

Yes I think the key number to pay attention to is not the gross number of accounts as we talked about repeatedly the largest growth opportunity for us is the enterprise segment. So I think the best proxy to look at that for how we are doing on new logos and quality logos in that segment is the number of accounts that pay us more than $100,000 a year. And that number is up 39% year-on-year to 555 and we added more in Q1 than we did in Q4, which was also a strong quarter for that metric. So that's why we've decided to report on gross number of accounts and round that down to the nearest hundred. Because we do believe that if we just focus entirely on the number of logos rather than the type of customers that are capable of increasing the strategic spend levels than we could make a mistake and focus on the wrong type of customers. So we started right reporting on that number for that reason and we feel like the numbers that we were seeing in the last quarter were encouraging.

[Ugam Kamat:]

That's helpful. And secondly, to touch on the non-APM side of the business, are you seeing any deals in the pipeline that are solely being led by the non-APM products or is there always an APM component, which is being present within…

[Lewis Cirne:]

We have there have been some very exciting ones one with the a large - one of the large airlines in the country that was a non-APM deal that now we are looking to expand into APM we have also done that was actually synthetics product deal. And then we have also entered into a large financial services company with mobile first. So there are occasions where people start with a business problem that New Relic is well suited to solve that's not our core APM product it's not the common way we acquire account, but it's certainly increasingly - we are seeing at an increasing rate. And we do believe that our infrastructure products also has the capability to be a product that we could enter accounts with in the future.

[Ugam Kamat:]

Okay great, thank you so much.

[Operator:]

Your next question comes from Michael Turits from Raymond James. Your line is open.

[Michael Turits:]

Really dying to ask Mark a deferred revenue question but they have already taken some. So sorry Mark, not to say something.

[Mark Sachleben:]

I am happy to take another.

[Michael Turits:]

Okay. So Lew two questions for you, one is can you talk a little bit more about the infrastructure product and how that's doing and also I would like you to maybe talk a little bit about the AWS relationship, which is certainly there is some partnership and arguably some competition there?

[Lewis Cirne:]

Sure, the infrastructure product we are still very, very encouraged with it, it's still early but we are liking what we see we are starting to see more meaningful deal sizes in Q1 showing that. But as a step function for infrastructure the easy natural first step for infrastructure just put it on the servers where APM product runs, but as we have said in the past on our Analyst Day, that's just a fraction of a number of virtual or physical cloud servers that we could run our infrastructure product on. And so we are starting to see some of the very first customers that are deploying our infrastructure product more broadly beyond just the host that would run the application or what our APM product is on. That's encouraging, I mean that's important for us to really realize the full potential of our infrastructure product. So we have seen enough of that to know that it's possible and achievable, but we recognize that it's still early and we got to continue to focus on it. With regards to the partnership with Amazon I'd say it's still remarkably healthy. We had Morningstar on stage with New Relic's kind of cloud expert in residence Leaches and that was at an Amazon Web Services Chicago events. So we're on stage together talking about how we jointly help customers with the joining of the cloud where we're continuing to partner with them in the field and our product is getting stronger and stronger and working in an Amazon environment with the recent products announcements that we discussed in the prepared remarks. We have not seen any substantial competitive thread from any Amazon offering really. It's just a different segment of the market that might considered something offered by Amazon, but again when we think about our enterprise strategy we feel like what enterprise customers want they're on a multi-cloud strategy. They want complete platform and so we see this is entirely a partnership and not a competitive relationship.

[Michael Turits:]

Great. Lew, thanks very much. Congrats for the quarter.

[Operator:]

Our next question comes from Derrick Wood from Cowen & Company. Your line is open.

[Derrick Wood:]

Great. Thanks. I'm going to go back to the customer account won. And obviously you guys are shifting to enterprise, I guess we get that. But maybe you can give us an update on what the SMB strategy is? Clearly, I think the new customer generation is lower, but they are not big dollar numbers, but - and so maybe you're letting that deflate a little bit, but can you give us a sense for what the SMB strategy is going forward.

[Lewis Cirne:]

Sure. We love serving SMB market for a variety of ways. One it's a great way to have a sense of where - what SMBs are typically doing now. The mid-market may do in two years to three years. Then the enterprise will do a couple of years after that. So by understanding and serving that SMB segment, we have a window into the future. I remember in the early days New Relic, our SMB customers were the aggressive cloud adopters being formed our cloud strategy. And of course they were the early adopters of the containers and now that's starting to show off the enterprise. And some of them grow into as we said like we added 2 sequential percentage points to our enterprise business this quarter at our companies that used to be classified as SMB companies that are now over 1,000 employees and we consider enterprise employees. So some of those SMB customers grow into healthy enterprise partnerships. But as matures the business and as you see how we've improved our operating margin by 1,000 basis points this quarter we're really being thoughtful about where is the best ROI in our business. And so we want to be smart with how we approach the SMB segment and think about that as an opportunity to be ubiquitous, to have mind share to hopefully catch those SMBs that are potential to be large companies. But where we really want to invest our go-to-market - incremental go-to-market focus is really on those high potential customers that could grow to be multi-millionaire dollar in New Relic customers.

[Mark Sachleben:]

I guess I will just add Derrick this is Mark that business continues to grow for us and as we mentioned number of quarters ago it turned profitable. And so it continues to be profitable. And so we want to continue to grow that profitably and really focus on making that more and more efficient.

[Derrick Wood:]

Okay. That's helpful. And then another question and it may hit deferred and it may touch on expansion activity. But I'm just curious when you see more business shifting to cloud based workloads, from a DR perspective does that have any impact on invoicing terms or maybe a variance in usage patterns that could cause more volatility in deferred. And then conversely it would seem that people that are building applications in the cloud it's easier to spin up new workloads. You could see a greater cadence of expansion activity is that something that could happen on the cloud side as well?

[Lewis Cirne:]

In terms of the differed, we don't see meaningful difference whether it's something is on premise or in the cloud in terms of our invoicing and the deferred impact. Generally speaking as we said in the past, our enterprise customers are committing and - our customers committing to annual deals our enterprise customers are paying us 12 months upfront and our SMB tend to pay more monthly lines. So we don't really see any difference there. Certainly the way folks consume in the cloud is different than traditionally with on premise software. And we think that's where our cloud based pricing really helps that's unique as far as we know for our competitors where we offer the ability to purchase in a way that's more similar to have how they're used to consuming the cloud. That said, it's not on demand, they are making commitments to us, and they're committing to a base level of spend. The nice thing is we do multiple transactions often times with the customers over the course of a year. And so as their demand does go up over the course of that year, we'll take advantage of that. And their base level commitment spend will increase over the course of the year.

[Derrick Wood:]

Okay. And just on the rate of expansion. I mean it's still early for you guys in the cloud, but would you see any different motion or is it too early to tell?

[Lewis Cirne:]

I think it's little too early to tell. In terms of we see good expansion numbers in our accounts that are on premise we see good expansion numbers or accounts that are in the cloud. So I wouldn't want to classify either one of those two at this point as being meaningfully different.

[Derrick Wood:]

Okay. I'll get back in the queue. Thanks.

[Operator:]

Your next question comes from Ben McFadden from KeyBanc Capital. Your line is open.

[Unidentified Analyst:]

Hi this is Clark on for Ben. Lew you spoke about business need enterprise customers is coming to New Relic for maybe non-APM products based off a business need like mobile. I was wondering if we could get an update on how many new deals are greenfield versus with replace?

[Lewis Cirne:]

I think the vast majority of our opportunities in new logos are what we would consider greenfield in that they do not have an existing solution in place to instrument that specific application. Because customers or enterprises are continue developing software at a dazzling pace. And that's what's driving most of the market growth opportunities we don't think application development is going to slowdown for the foreseeable future it's only going to increase. And so every time a new application is built that's an opportunity for us or for our competitors. And so if that application is likely to run in the cloud if it's a modern application that's most new applications are. We've got a natural advantage in those situations. And then after that if a customer has a great experience with us as they usually do. Then they may say hey, I want to use New Relic in other parts of the business we like it's ease of use and total cost of ownership. At that point there may be a replacement opportunity for us, but they are already a customer and they know us. And so we can do that I think more efficiently than we would if we were going to go frontally into a brand new account.

[Unidentified Analyst:]

Great. And on the current pricing you had mentioned before sort of that you would do multiple transactions within the year. I was wondering if in general you can kind of say on average whether that's inflationary or deflationary or are you kind of - is that still a process and you haven't reach enough customers at steady state to know how their purchasing trajectory is panning out. Just…

[Lewis Cirne:]

Yes when Mark spoke about multiple transactions there almost invariably increases in their spend with us. So there is a slide we shared in analyst days in the past that shows our top 20 customers or something of that nature. And it shows how many of them would have an increase in spend with New Relic multiple quarters like three quarters out of four going back many years. And so that's the kind of pattern that we see with our healthiest customers is that as their applications grow as what they're put into more applications and then they add on new products like mobile and synthetics and insights that just turns into upsell transactions on a regular basis more often than not.

[Unidentified Analyst:]

Alright, thank you very much.

[Operator:]

Your next question comes from Jesse Helsing [ph] from Goldman Sachs. Your line is open.

[Unidentified Analyst:]

Hi [indiscernible] on for Jesse. Could you provide some color around customer retention trends where it is today? And overall I'd expect it improve with you add larger enterprise customers. So I'm curious about how retention has been trending. I mean the SMB side of the business whether that's stable or not?

[Mark Sachleben:]

Sure. So in general our overall retention has been going up. And that's I think primarily a function of the trend that we've seen toward more than enterprise focus and a larger enterprise base. Typically what we see is the more customer spends with us the more likely they are to renew and stay with us. And so, as we get more focused on the enterprise as that becomes a bigger portion of the business that overall trend will drift upward. In terms of the SMB, they're at the low end - those customers are fairly truancy and they come in and out and that's fine. They are very inexpensive to get it's efficient process. And then as a customer in the SMB gets larger, those renewal rates and those retention rates will continue to increase and then that continues right into the enterprise again the more enterprise spends, the more likely they are continuing to renew and to expand.

[Unidentified Analyst:]

Thank you.

[Operator:]

Your next question comes from Sanjit Singh from Morgan Stanley. Your line is open.

[Josh Baer:]

Hi, this is Josh Baer on for Sanjit. One more question coming back to the new infrastructure product and you talked about other integrations and partnerships and the early signs of encouragement there. I'm just wondering how has infrastructure traction been relative to expectations and how do you sort of frame that contribution or that opportunity near-term and longer term?

[Lewis Cirne:]

I'd say, we're pleased with the infrastructure and it's largely what we had hope for, and what we're see in the market recognizing that it's a new product. So, we're early but also our instinct productive right that this is such a perfect natural adjacency. Our customers want to see the infrastructure health in the same pan of glasses or application health. They want to see the impact of an infrastructure problem on an application and with the customer experience. So, that's resonating with our customers and it's turning into encouraging business momentum. So, I would say it feels on track. But we're still early in the journey, but what I'm excited about is we're starting to see these larger deals that as I say where infrastructure footprint goes beyond our traditional footprint at the application layer looking in to the servers that might host databases or other services that are not a fit for our core ATM product. So, that's when we see that we're really I think reaching a new level with our customers and becoming more of the single point of truth for the entire environment.

[Josh Baer:]

Thanks. If can sneak in one more, so you've been showing very strong operating leverage margins coming in well above expectations again this quarter. Does this outperformance impact your timeline for that sustainable profitability at the end of FY '18 or your longer term targets? Thanks.

[Lewis Cirne:]

No, we mentioned in the prepare remarks, we're still - we've guided towards sustainable profitability in Q4 of this year as well as sustainable free cash flow positive at that point and we're continuing with that guidance. We have not talked about our longer term profitability metrics beyond what we gave last Analysts Day, which talked about obviously a slowing we've been increasing our margins by about over 1,000 basis points a year. And Analysts Day last year we talked about 8% to 12% operating margins at the end of fiscal '22 when we have targeted $1 billion run rate. Operator, next question.

[Operator:]

The next question comes from Nate Cunningham from Guggenheim. Your line is open.

[Nate Cunningham:]

Hi guys. I'm sure you saw that Elastic recently made an acquisition in your space and I'm curious how mature is the ecosystem for open source performance monitoring and what degree of customer sophistication is needed to implement and maintain something like that?

[Lewis Cirne:]

Great question. There will always be segment of the market that thinks about open source but historically we've not seen and we have seen several open source projects in the past attempt at APM, but it's never been a real competitive threat for us historically. We got a lot of respect for Elastic Search they do great things in their space. But we think in particular for our mid-market and enterprise business and even for good a chunk of our SMB business. This is a pretty hard problem to solve with open source. It does require very high level of specification and what that really means is you're going to have to get your most precious assets your software developers to spend time wrestling with an APM system instead of spending time building business value. And so we believe that the fact I spoke to the market will be investing their development or resources on building the stuff their customers want and we'll free them up to do more of that because we've got easy to use, easy to deploy system that can run anywhere.

[Nate Cunningham:]

Got it. Thank you. Operator Your next question comes from George Iwanyc from Oppenheimer. Your line is open.

[George Iwanyc:]

Thank you for taking my question. So now with project Seymour in more customer hands at this point, can you give us little bit more color on the feedback you're getting in the type of used cases that they are deploying that with.

[Lewis Cirne:]

It's really exciting for me. I remained so fired up about Seymour's potential. Yet, as you can tell we're being pretty disciplined about how we roll it out and recognize this is a long journey we're on, but we're way ahead of anyone else because of the massive scale of data we collect and our capability for doing it all in the cloud. So what we're hearing early on is what some of the stuff that customers love most about is when Seymour will automatically surface the problem they didn't know they had and then it'll automatically diagnose the cause of the problem. So what we're doing is we're putting into software the smarts of not only detecting a problem, but saying here is the likely root cause of that problem. This is where - this is a game changer in comparison to how traditional performance monitoring tools present charts and then it's up to the human to kind of pour through all the data to find the root cause of the problem. Now I will caveat as I say we're early in that journey and so this is not something that we'll say we'll work for every conceivable type of problem, but the cool thing is because when they cloud because we're constantly innovating Seymour will get smarter and smarter over time. And so this is just something that on premise companies won't be able to do because they don't have the data, and they don't have the capability to continually iterate on that data and those algorithms. So those are the things that excite me about Seymour and just as it heads up we've more to announce about that over the course of the next couple of months. I encourage you to come to FutureStack New York it's September 13 and 14 and we'll more to announce about Seymour and the rest of the product line then.

[George Iwanyc:]

Also on the infrastructure side, can you give us a little bit more color on how the new Health Map is tying either more bundle purchases or is it pushing more ATM or more infrastructure?

[Lewis Cirne:]

I think what it's pushing is the New Relic platform. So just to educate the other listeners on the call what we introduce with Health Map is an elegant migration between the data we collect at the application layer and the data we collect at the infrastructure layer to combine it both integrated you with a Health Map. That shows the relationship between the application and the infrastructure in one integrated view that makes sense. So it's not enough just to have the data from all of these sources, the next step that we're continually thinking about is how do we deliver incredible leverage from having it all coming into one place and integrating in intuitive and innovative ways and that's what Health Map does. And that's where we get this real competitive advantage where our competitors that might have a certain piece of the pie, but not the whole environment. The customers can't reconcile those two things. And so Health Map is a great example of us delivering on the power of an integrated platform.

[George Iwanyc:]

Thank you.

[Operator:]

[Operator Instructions]. There are no further questions at this time. And this now concludes today's conference call. Thank you for joining us.