New Relic, Inc.
Q4 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good afternoon. My name is Jacqline, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic Fourth Quarter and 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, you may begin your conference.

[Jonathan Parker:]

Thank you. Good afternoon, and welcome to New Relic's fourth quarter and full 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.

[Lew Cirne:]

Thanks, Jon. We finished an outstanding fiscal year '18 with Q4 financial results above the high-end of our guidance range. I'm very pleased to report revenue of $98.4 million and non-GAAP operating income of $4.8 million for the quarter. For the full fiscal year revenue was $355.1 million, up 35% and our non-GAAP operating loss narrowed to $1.5 million. These results were fueled by continued go-to-market success which we believe stems from our relentless focus on helping customers move faster with confidence. We ended the year with our enterprise business representing a record 54% of ARR, and brought our total number of enterprise business accounts to more than 2,100. At the same time, our SMB business had another record quarter for new ARR. Overall, across all segments we saw a record number of six and seven-figure transactions which results in more than 40 paid business accounts now paying at least $1 million annually, greater than 78% increase from last year. We believe that we are only at the beginning of a seismic shift in how the companies build and deliver software which we expect will result in long-term tailwinds for our business. Industry research firm, IBC, predicted that by 2021 at least 50% of all global GDP will be digitized. Think about that for a second; digital transformation is driving companies to be more productive and efficient with how they build and operate modern software, particularly customer facing applications. For more and more companies, the digital customer experience is the primary brand experience which is why it is critical to have insights into the health of their digital business. In addition, the demand that's becoming a software driven business are putting significant pressure on developing an operations team to move quickly and to pull new products and features to customers more frequently. This pressure combined with the accelerating pace of technology change has led organizations to rapidly adopt modern software development technologies and practices, including DevOps, microservices, server-less computing, containers and of course, cloud computing. But introducing frequent changes to mission critical software in highly complex environments can create tremendous risk of interruptions and even outages to company's customer-facing apps. New Relic's modern technology teams visibility into the real-time performance of their software, infrastructure and customer experience which helps empower them to succeed with their digital initiatives. We allow companies to instrument every aspect of their modern architecture, so they can deliver an incredible digital experience to each and every customer. Today our advanced customers don't view New Relic as an APM tool, instead they trust New Relic as a strategic platform for managing the success of their modern digital initiative. According to a commissioned study conducted by four-star consulting, a typical enterprise has approximately 12 monitoring tools but many of these are single purpose tools that fail to deliver on a unified deal of one entire digital environment. We believe that we are redefining the market category as a platform for customer facing projects and that our true competition continues to be non-consumption. In March, Gartner estimated that only 5% of application workflows were monitored by APM; a figure that we expect to quadruple by 2021, which means we have significant runway to help every enterprise instrument their entire environment. We continue to see a fragmented under-served and expanding multi-billion dollar market opportunity for the New Relic platform. We started fiscal '18 with a goal to win the cloud heading out a vision to be the day factor standard for monitoring the performance of application workloads running into cloud, as well as the underlying cloud infrastructure itself. From talking to CIOs across the globe, it is clear that nearly every company today has a cloud strategy, whether it is public, private or hybrid; and we believe New Relic is uniquely positioned to help companies accelerate their adoption of the cloud, as well as optimize the cloud workflows. In Q4 we secured deals with organizations like Blue Cross Blue Shield, Expedia, Porsche AG and SAP Concur to help them accelerate their adoption of the cloud. Our peer [indiscernible] delivers a natural advantage over on-premise solutions that can't scale from modern cloud and hybrid environments. We also delivered more than a dozen new integrations for New Relic infrastructure with major cloud vendors making it easier for our customers to see all of their performance data in one integrated platform. Many companies today are embracing cloud strategies across multiple cloud vendors using the right cloud for the right workload. We can act as an independent third-party, an honest broker single platform to integrate all of their performance data coming from across cloud, as well as their on-premise workloads. We've talked about the importance of our partners to help bring our message to companies undergoing significant transformation. As part of this, we've recently kicked-off a world tour in parallel with Amazon Web Services Summit designed for each customers and prospects in more than 17 cities around the globe. In addition, at IBM's State Conference in March, CEO, Ginni Rometty, announced our new partnership whereby IBM will resell New Relic platform to it's global customer base and internally leverage our platform for many of it's critical workloads. New Relic is proud to help IBM's global customers accelerate their adoption of IBM's cloud just as we do for all the major cloud for vendors customers. On the product front, our engineering organization has continued to innovate at an incredible pace. Customers are responding to our new offerings in the market allowing us to deliver 40% of ARR from non-APM products in Q4. In particular, I want to call out both, New Relic Infrastructure which completed it's first full year in the market, and New Relic Insights, our analytics platform; each delivered more than 10% of new ARR for the full fiscal year. These products were critical in helping us deliver a net expansion rate of 141% in the fourth quarter. And overall, non-APM products now account for 28% of our total ARR. This result has showcased how our customers are continuing to expand their investments in New Relic. It also reflects early success with some of our recent go-to-market investments which aims to accelerate the rate at which our customers expand and standardize on our platform. More broadly, we delivered several new features across the platform in fiscal '18 including New Relic applied intelligence which uses machine learning to help customers identify patterns, trends and errors, and delivers both predictive analytics and prospective advice for quick error resolution. And New Relic Health Map, which provides a high density view of all your applications and the underlying infrastructure in a single pane of glass, so our customers can quickly pinpoint resolve problems and see the relationship between their application and their infrastructure. That's the power of our cloud delivery, enabling us to regularly strengthen our overall platform for our customers. In fiscal 2019, we planned a double down on our winning the cloud strategy and maintain our focus on becoming the dominant device platform that company views to monitor, manage and operate their digital systems. To accomplish this, we expect to accelerate our pace of R&D investment in fiscal '19 to help capture a significant opportunity we see in the market. Our increased R&D efforts are centered on a single goal to make it a no-brainer for our customers to put New Relic everywhere in every modern application environment. We see our current product requisite [ph] giving us ample runway for us achieving our $1 billion runway target exiting fiscal 2022. We also see a much greater long-term opportunity. In our view, every company needs to instrument [ph] their entire environment in order to be able to compete in the digital economy and we will continue to broaden our platform to provide deep visibility for them as they look to transform their businesses. Today, customers struggle to make sense of their performance by a collection of tactical tools. We see customers demonstrating a strong need for a unified platform, a single pane of glass, from a strategic partner like New Relic. We are early on our journey here but we are already seeing early signs of our success with our non-APM product adoption. We believe that a new category is emerging and we aim to become a dominant platform of choice. Finally, I want to call attention to our two promotions in the go-to-market organization designed to drive our continued growth and customer success. Our EVP of Global Sales, Erica Schultz, has recently been promoted to Chief Revenue Officer, and is now responsible for our entire go-to-market strategy and organization. In addition, our Senior Vice President of Technical Sales, Services & Support, Roger Scott, was also promoted to EVP and our first-ever Chief Customer Officer. As part of this move, we're expanding the role of our technical sales organization with the aim of delivering more value to our customers faster. I want to congratulate both, Erica and Roger, who are committed to our customers success. In closing, I want to thank my entire team and every Relic for delivering an outstanding fiscal '18, it was a banner [ph] year for our Company focused on helping solve our customers biggest problem and capping off our first decade in existence. I look forward to seeing you at our Analyst and Investor Day on June 4 in San Francisco. Now, over to Mark who will update you on the numbers.

[Mark Sachleben:]

Thanks, Lou. As a preliminary matter, I wanted to remind you that in Q1 2019 we adopted Accounting Standards Codification 606 using the modified retrospective method. During my portion of the call, the financial results for the fourth quarter and full fiscal year 2018 are presented under the pre-606 revenue recognition standard. However, our financial guidance for Q1 '19 and the full fiscal year 2019 has been issued according to the new 606 standard. With that said, our fourth quarter revenue was $98.4 million, up 34% year-over-year. As has been customary on past end of your calls, I'll provide some additional color today around how we ended the year. Overall, we ended the quarter with more than 17,000 total paid business accounts with a number paying more than $100,000 in annual recurring revenue, rising past $700; up 74% from last quarter, our strongest ever quarterly increase. The growth of this figure comes from a combination of new logos plus customers within our installed base expanded their spend underscored by 60% year-over-year increase in six-figure transaction in Q4 as Lou referenced earlier. Our enterprise business, defined as paid business accounts, if more than 1,000 employees ended the year at approximately 54% of annualized recurring revenue up from around 46% at the end of fiscal year 2017. Our dollar based net expansion rate in the quarter was 141%, up from 133% in the year ago period and the highest figure we reported as a public company. Given the expansion of our ARR installed base over the past year, we're particularly pleased with this metric but as we've mentioned before, we do expect to moderate and fluctuate overtime. Turning to our geographic split; U.S. and non-U.S. revenue each grew 34% year-over-year in the quarter with non-U.S. revenue representing 32% of revenue in the quarter. Before moving to profit and loss items, I would like to point out that unless otherwise specified, all the expense and profitable metrics I'll be discussing going forward are non-GAAP results. A full reconciliation between historical GAAP and non-GAAP results can be found in our earnings release issued today and available on our Investor Relations website. Our gross margin came as stronger than expected for the quarter at 85%, up from 83% in the year ago period. We expect gross margins to be moderate and low in fiscal '19 due to catchup in CapEx, it's still among the best-in-class at around 83%. With regard to operating expenses, sales and marketing costs were $49.8 million compared to $42 million in the same quarter last year. R&D expenses were $16.2 million compared to $13.3 million in the same quarter last year. G&A expenses were $12.5 million, up from $11.1 million in the same quarter last year. Overall, our expenses in the quarter produced non-GAAP operating income of $4.8 million or 5% revenue compared to an operating loss of $5.8 million or negative 8% of revenue in the same quarter last year. Overall, net income per diluted share was $0.09 compared to a net loss per basic share of $0.11 in the same quarter last year. Quickly running through our financials for the year; revenue was $355.1 million, up 35% over last year. Gross margin was 84%, up from 82% in fiscal 2017. Operating loss was $1.5 million or nearly breakeven as a percent of revenue compared to a loss of $25.4 million or negative 10% revenue in fiscal '17. Net income for fully diluted share was essentially breakeven compared to a net loss per share of $0.49 in fiscal '17. Turning to our balance sheet; we ended the year with approximately $248 million of cash, cash equivalents and short-term investments, up from approximately $233 million last quarter. Elsewhere in the balance sheet, our total deferred revenue ended the quarter at $190 million, up 51% year-over-year and 41% quarter-over-quarter compared to our guidance for mid-20% increase. As of last Q4, there are number of moving pieces that accounted for about half of the favorability relative to our expectations representing $10 million tailwind. This benefit was due to combination of few renewals that pulled forward from Q1, as well as several customers converting for monthly or quarterly to annual invoicing durations. The latter helped contribute to our installed base in the year with an 8.1 month average invoice duration, up from 7.2 months a year ago. Looking ahead to Q1, we expect deferred revenue to be down mid-to-high single digits percentage-wise from Q4. And really due to the early renewals and billing activity previously discussed which overall act as roughly $6 million headwind to a Q1 deferred revenue. For the remainder of fiscal 2019, we expect deferred revenue to generally follow the similar seasonal pattern that it did throughout fiscal 2018 including a slight sequential decline in Q2 and a moderate increase in Q3 before a more substantial uptick in Q4. For the full fiscal year, we expect calculated billings which we define as revenue plus the change in quarterly deferred revenue of at least $525 million. Turning to cash flow; we generated cash from operations of $12 million. Free cash flow defined as cash from operations minus purchase of capital expenditures minus capitalized software was also positive at roughly $6 million. As we look into fiscal 2019, we expect cash from operations between $70 million and $80 million; and physical capital expenditures of $35 million to $40 million reflecting some delayed spending data spending from fiscal year 2018, as well as numerous office expansions. For the year, we also expect capitalized software to be at similar levels to last year. Overall, we expect to generate between $30 million and $40 million of free cash flow for fiscal 2019 with seasonal pattern similar to those in fiscal '18 including Q1 representing the seasonally strongest period for free cash flow generation given our significant billing activity in Q4. Now I will turn to our outlook for the first fiscal quarter 2019 and the fiscal year as a whole which are calculated based on ASC606 standards which we are adopting on a modified retrospective basis beginning this first fiscal quarter of 2019. As a reminder, we believe the revenue impact of the new standard will be immaterial while the expense benefit will be more pronounced as previously discussed. For the first fiscal quarter ending June 30, we expect revenue to range from $104.5 million to $106.5 million reflecting growth of 30% to 32% year-over-year. We expect non-GAAP operating income of $5.5 million to $6.5 million. This will lead to non-GAAP net income per diluted share in the range of $0.10 to $0.12 based upon a weighted average fully diluted share count of 59.3 million for the quarter. Our Q1 guidance incorporates a roughly $1 million expense benefit primarily due to the three year amortization period for commission expenses under ASC606. Previously all commissions were expensed in the period in which they were incurred. For the full fiscal year 2019, we expect revenue to range from $452 million to $458 million, a growth of 27% to 29% year-over-year. We expect non-GAAP operating income of $15 million to $20 million, this will lead to non-GAAP net income per diluted share in the range of $0.29 to $0.37 based upon a weighted average share count of $60.2 million. I'd note that we currently expect Q2 to represent the low point of profitability for the year given significant hiring activity we're expecting in Q1 along with annual mere adjustments which this fiscal year moved to Q2 having previously occurred in Q1. Both fiscal year 2019 guidance includes roughly $10 million benefit due to the deferral of certain expenses under ASC606, primarily sales commissions. And with that, I'll turn the back to John.

[Jonathan Parker:]

Thanks, Mark. Before we start the Q&A, just wanted to highlight that we'll be having Analyst and Investor Day on Monday, June 4, here in San Francisco. If you do not receive a stay of the day [ph] and are interested in attending, please email us at [e-mail]. Additionally, just wanted to quickly let you know that we're responding to your questions today from two different offices due to a family health situation, so please bear with us in case during the lag between responding to your questions. With that, I'll turn it over to the operator to provide the queueing instructions.

[Operator:]

[Operator Instructions] Your first question comes from Michael Turrits [ph] from Raymond James. Your line is open.

[Unidentified Analyst:]

I was just hoping if you could just walk us through where you're investing in both, in R&D and the go-to-market given that margin especially is decelerating in fiscal '19? And then, furthermore, are you still sales capacity constraint in your ability to grow the business?

[Lew Cirne:]

On R&D side, the philosophy behind this -- if you recall about a year ago in the earnings call I talked about how I was going to increase my time in the field spending more direct time with our customers over the course of fiscal '18 and that was terrific and along the way I learned a lot about what the customers love about our products and some opportunities that are still better. And that's feeding what if our R&D investment for this year. The strong portion is, our customers love our products and want to make it even easier to consume it even more and deploy it even more broadly. As I mentioned in the prepared statements, Gartner says that only 5% of applications worth [indiscernible] have APM; and so we want to dramatically move the needle on that number. We believe we have already moved the needle on that number for the industry, tied to New Relic, it was a specialist tool used by small number of companies for small number of applications but we want to lead through ourselves and do even more, not only with APM but our entire platform. And so that's going to drive our R&D strategy, we're very excited about the progress we're making but it's a little too early to give you more details of that right now. On the go-to-market side, we're very pleased with how that's been growing. We've seen excellent growth and particularly on the enterprise side but also on the commercial side of our business; and we see the opportunity to increase our growth with more capacity and at the same time we're pleased with the efficiency gains we're seeing and productivity gains we're seeing as well. So we're going to continue to invest in that, we feel like we're certainly not constraint by market opportunity or by our products competitiveness, and we're thinking not only how do we sustain growth in the short-term but also set ourselves up for sustained growth over the long-term.

[Unidentified Analyst:]

Can you just give us an update on the infrastructure product on the overall competitive environment there? And who your closest competitors are right now?

[Lew Cirne:]

Sure. So very happy with the infrastructure product for to be delivered 10% of net new ARR in it's first year in the market, just a one year old product, that's terrific, it shows not only the strength of the product but also it backs up our belief in our statement that the market is really thirsty for single platform to integrate infrastructure visibility with application and customer experience visibility. So we love our win rate, we see a variety of competitors depending on the nature of the environment and it's a pretty long list but where we win is when customers want -- particularly, when they are running in a modern or tough environment and especially when they want to see it all in one place. We believe, and I believe the market believes that really the most important starting point is the application and of course, that's our strength and our hallmark is application visibility. And so our competitors tend to be infrastructure centric and struggle to deliver a satisfactory application level visibility product.

[Operator:]

Your next question comes from Rob Oliver from Baird. Your line is open.

[Unidentified Analyst:]

This is Matt [ph] for Rob today. Lew, the paid business accounts accelerated a bit to more than -- the paid accounts is over 100,000, accelerated to more than 700,000 this quarter but it still feels like early days just given that less than 5% of the 17,000 total data accounts that you have. What are the main things that need to happen to drive those greater than 100,000 accounts? Is it multi-product or wider adoption of APM or what do you think will drive that going forward?

[Lew Cirne:]

We believe many of them are already in the customer base, it's amazing to me that even though our enterprise business is 54% of ARR today, that's a relatively new development. Erica, our Chief Revenue Officer, joined to build the enterprise from scratch just four years ago. And so our average spend in the enterprise base is 100,000 and as you can imagine, that's not a bellcurve, that looks more like a long tail, so we've got a lot of enterprise customers in the base today that are just starting out in their New Relic journey; and if you look at our dollar rate expansion rate, last quarter being particularly strong. That's really driven by particularly enterprise segment by adopting more New Relic products as they've had success with it. So we think we've got the right machine in place, the right recipe in place to acquire customers, maybe not at the 100,000 level but as we demonstrate success with them, they grow rapidly to about 100,000 and beyond base and on the high end we see a really nice subject also in our $1 million plus customers segment.

[Unidentified Analyst:]

And just one more follow-up; you've spent more time in the field over the last year, what were the biggest learning's you had and maybe what changes do you think -- the biggest changes that come out of that more year spent in the field?

[Lew Cirne:]

First of all, there is nothing as energizing as visiting customers who rely on your products to do excellent and challenging work every day and I saw incredibly capable highly overworked and busy people trying to achieving incredibly aggressive goals for their company, it's not easy to run these complex systems and they rely on New Relic's data to make sure they deliver a flawless customer experience but they want more from us; they want us to be a no-brainer to put absolutely everywhere. And so, as I say, we're the best on achieving ubiquity within a customer and one of the ways to look at that is how many people use our products whereas our competitors' products might be used by 5 or 10 people in a company, we might be used by hundreds or in some cases thousands of people within the company. So by making our product even easier to use, even easier to deploy, even more cost effectively to run but that happened excess truly ubiquities solution for our customers and that makes us a strategic partner to them.

[Operator:]

Your next question comes from [indiscernible]. Your line is open.

[Unidentified Analyst:]

My question surrounds New Relic infrastructure; to what extent has infrastructure acted as a lending when you're in town? And if it has, what type of initial deal sizes are you seeing there, particularly in the enterprise?

[Lew Cirne:]

I would say that we are seeing some cases where New Relic infrastructure is a land product. It's certainly much more common for New Relic APM to be the land product, we've been doing it for longer time and it's often is a product that's adopted earlier in the life cycle because our APM product can be used before an application goes live to identify problems while it's under development. But still, there are some times when we do see people land with infrastructure or more and more often, they land with both products or three products as our platform value proposition continue to resonate. As for deal sizes, I'd like Mark to answer that one. I think he'll be clear on the numbers there.

[Mark Sachleben:]

Sure. That depends a little bit on the segment we're talking about. In the SMB, those deal sizes tend to be relatively small. Price point in our product land itself to getting in at a pretty low monthly spend. For the enterprise, they tend to be a little bit larger, but as Lew said, primarily we're getting in with APM or APM is included. More and more often, enterprises are adopting infrastructure and APM to start because they realized how valuable that is in helping them run their business. I think that's the trend we're seeing. I think longer term, we'll see where we go. We've talked in the past about having infrastructure being more of a leading product, but I think we're still not quite there yet.

[Unidentified Analyst:]

Thanks. That's helpful. And then if I could just a quick follow-up for Mark. Is there any reason to think that durations can now move past the 8.1 months right now? I seem to remember, I think 8-9 months was where you might have thought it would stable out.

[Mark Sachleben:]

I think you could see that the curve is slowing. We're like from 3.6 months to 6 months, then 6 months to 7.2 months, 7.2 months to 8 months. We're asymptotically heading towards some number that's probably in the 8-9 months range. I think as our business mix continues to shift, it could go a bit more. The general enterprises are paying us annually. We still have that phenomena and SMB commercial tend to pay us more monthly. As that mix shifts, we could head a little bit higher, but I don't think too much greater than the current 8.1 months.

[Unidentified Analyst:]

Great, thanks.

[Operator:]

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

[Nick Altman:]

Yes. Hey, guys. This is Nick Aldman on for Derrick. Thanks for taking our questions. Just going back to the strength on the infrastructure tool. Can you give us an idea of what kind of tax rates you're seeing there? And then I guess, are there any notable trends you're seeing in terms of what types of companies are driving the most demand for the infrastructure tool?

[Lew Cirne:]

Sure. I don't think we're disclosing our tax rates for any of our products today, but we may take that as a follow-up potentially for Analyst Day. But the types of companies that are adapting it, particularly companies and/or I would say mindset or key mindset is those who are adapting modern environments, typically cloud computing, containerization technologies in highly dynamic environments where the infrastructure is constantly moving. And because of that, it's very hard for more traditional tools to not only wash that infrastructure, but even more importantly, show the relationship between the application and the dynamic infrastructure that one's int. The thing is that we're seeing more and more enterprises and every vertical has teams and projects that are running in these environments. We believe it's going to drive the bulk of the growth in our market segment, these types of technology environments, which is why we're focusing our R&D efforts at being the best at managing and monitoring these modern technology environments. That I think gives us an opportunity to differentiate, again, because we start from the application point of view, which is without question was complex part of the problem and it's where all the logic is and where all the business value is, and then we roll in the application or the infrastructure and the customer experience data alongside all in one place so that our customers can really see the whole picture.

[Nick Altman:]

Got it. Okay, that's helpful. And then can you guys just talk about how growth is trending in the SMB market and then what sort of investments you guys are making there to sustain that growth?

[Lew Cirne:]

I'll let Mark take that.

[Mark Sachleben:]

Sure. We've announced couple of real strong quarters in that segment, so we're pleased with the way that is growing. It continues to be profitable for us. It has been for quite a while now. I think that's performing well. What we've done there is we try to focus a bit more on the high end of the SMB market, the commercial market we call them, that 100 to 1,000 segment and devote a little bit more investment to that segment, which I think in certain ways behaves like an enterprise in terms of how they buy and buying characteristics. So you can get good-sized transactions in that area. So that helped drive the growth of our SMB business overall. We continue to be expanding that business in terms of our investment, so it certainly is very healthy for us. But that said, the real growth we expect going forward is being driven by the enterprise.

[Nick Altman:]

Got it. Thank you.

[Operator:]

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

[Josh Baron:]

Hi. This is Josh Baron for Sanjit. Thanks for the question. You briefly mentioned server list computing in your prepared remarks. I was just hoping if you could expand on your longer term view of how server-less should impact the need for distributed monitoring and as a follow up, how would pricing models change when compute is on a triggered event basis. Thank you.

[Lew Cirne:]

Oh, I love getting to technical. Thank you Josh. This is great. We are seeing an uptake in adaption of server-less compute technology. We think it's very rare and we don't think it's going to be the case for -- the bulk of market should be 100% server-less in an application architecture. But it's going to be an important portion of how significant the functionality work in digital applications. So it's an important visibility point that we're going to invest more on. And it does beg the question, given there is no server to monitor and historically it won't be started out -- we price per server, 'how do you charge for this'? All I can say is we're having conversations with customers. Internally we're hard at work on figuring out the right way to do it. Our goal with pricing is always to be simple, fair, easy to understand and easy again, a friction-less way for customers to want to adapt more, want to be larger customers, and so we're going to approach our server-less visibility with that mindset as we evolve our pricing. We're always running experiments on our pricing by the way with customers and as we learned more, we make adjustments along the way, that I think play a part in why we're growing the way we are. But the net of it is I think server-less is important because again, another reason why you need one platform to see it all including your server-less activity.

[Operator:]

Your next question comes from Jennifer Low [ph] from UBS. Your line is open.

[Fatima Meneses:]

Lew, maybe a question for you; just turnaround this notion of the increasing dynamic of computing environment. You talked a lot in your prepared remarks about increasing the ubiquity of the New Relic platform; I'm wondering what levers do you feel you have to be able to increase that ubiquity? Is it pricing, is it better go-to-market, is it more partner and channel distribution?

[Lew Cirne:]

It's a combination of all of those. It's always ease of use. I take a few New Relic customers who are one of the most uniform things customers will say that they love about New Relic is that it's the easiest used product in the market and yet that's never good enough for us. So we take pride in the fact that we have customers with thousands of active users where our competitors might have 10 active users than in other part of the same customer. And that speaks too, do people use and want to use our products; we believe that more time people spend in New Relic products, more value they get out of it, the easier it is to drive larger deal sizes and more ubiquitous deployments. So we think of this in a way kind of similar to -- with a similar mindset to a great consumer oriented technology company where of course they have set the customer experience. And then that delivers revenue downstream in the consumer case through -- obviously, through advertising but in our case it's -- we just want people using New Relic products continually and that will drive more ubiquitous deployments overtime.

[Fatima Meneses:]

And maybe a follow-up for Mark. Mark, you mentioned the IBM relationship that you struck up from a retail standpoint; I'm wondering if you can sort of qualitatively talk to economics there and how you've incorporated upside from that into your guidance? And maybe why the growth should decelerate in the back half of the year as implied by the guidance? Thank you.

[Mark Sachleben:]

So we're excited about the IBM relationship, I think they bring us -- they have relationship with companies nationally, and companies that may not be as aggressive in becoming sort of modern environments, and -- so I think they could provide an attractive source for us to get involved with companies like that. We -- in terms of the impact on our guidance for this year, no customer is greater than a couple of percent of our total revenue base, we've got a very broad array of customers and so we don't look at any individual relationship as being core to due having a material impact on guidance for the year. In terms of either the second part of that question, we're seeing more seasonality as we saw this past year. We continue to see more seasonality as the enterprise becomes larger and larger portion of business towards our strong Q3 and then particularly strong Q4, billings number is obviously -- we want to set ourselves up for success for the year in terms of the guidance we're giving out and that later on billings numbers obviously -- those have an impact on our Q4 billings next year have an impact on the following years revenue, so we're trying to make sure we plan appropriately and as I said set ourselves up for success for the full year.

[Operator:]

Your next question comes from [indiscernible]. Your line is open.

[Unidentified Analyst:]

I wanted to maybe ping you on your journey to grow your average spend and become a standard across your enterprise customers. Any thoughts on how your go-to-market will evolve over say the next -- I don't know, let's say 18 to 24 months? And how it will change over that time to -- as you grow your spend and accelerate that sort of metric?

[Lew Cirne:]

I feel like in order to understand that really, we had a deep analysis of our customers and recognized that our most advanced customers who spend the most with us, they tend to grow faster than the average customer. And so first of all, it's recognizing where our customers are in their digital journey and then knowing which of them to invest more in from a services perspective, from a customer's perspective. This is why our promotion of Roger Scott to Chief Customer Officer is so important; he now has the entire services organization that has 362 [ph] with customers success. And so we're going to disproportionately invest in the most highest potential customers to accelerate their growth pad, and that funds our ability to continue to do that with an even larger group of customers in future quarters and years.

[Operator:]

Your next question comes from Keith Bachman from Bank of Montreal. Mr. Bachman, if you are on mute, please unmute, your line is open.

[Lew Cirne:]

You can go to the next question, operator.

[Operator:]

Certainly. [Operator Instructions] Your next question comes from Jesse Hulsing from Goldman Sachs. Your line is open.

[Unidentified Analyst:]

This is Kevin [ph] on for Jesse. Lew, regarding newer products like infrastructure and insights, are you seeing adoption skew more towards either the enterprise or SMB and are you seeing any changes in the competitive environment in the SMB space?

[Lew Cirne:]

As far as adoption, we're seeing nice adoption across the spectrum SMB and enterprise. We're seeing -- as you would expect larger deal sizes in the enterprise, larger land, larger expense but we're doing well in pretty much all the segments. No substantial change in the competitive mix in the SMB or commercial segment, and so we feel comfortable with how we're doing there and how to win deals against the various competitors in that space. I mean, I think the same could be said for our enterprise competitors too.

[Operator:]

Your next question comes from Keith Bachman from Bank of Montreal. Your line is open.

[Keith Bachman:]

I wanted to ask a couple of questions. Number one is, the billings number was exceptionally strong this quarter, even over a robust last quarter, so there was an acceleration of billings and yet if you look at the guidance for the year, you actually are projecting the deceleration and -- I'm just wondering was there -- is there -- you didn't call us out on one of the previous duration issue so we should we aware that might cause a deceleration revenue? It just doesn't seem to jibe with the revenue outlook that you've given for the year; if you could speak to that? And then I have a follow-up. Thank you.

[Mark Sachleben:]

We did talk in March 3 about $10 million tailwind that came from both, early renewals and duration increases. So that is something that helped us out obviously in Q4 but then had an impact on next year. So that's certainly one of the factors that's playing in there.

[Keith Bachman:]

Last year you had an $8 million tailwind, is that right, in Q4 as well as I recall from some similar circumstances and yet you were able to deliver 35% revenue growth this year. So it's just -- perhaps there is just an element of conservatism and also some of the underlying messages as well.

[Mark Sachleben:]

I think we certainly want to make sure that we -- as I said, set ourselves up for success. We feel like that the business is getting more seasonal and so more enterprise coming to Q3/Q4 and we want to make sure that we can deliver on what we talked about.

[Keith Bachman:]

My follow-up question is, philosophical --let's say for argument sake, you end up doing just a round number of 30% revenue growth for this coming fiscal year. Given the mix activities you're growing your enterprise, as well as generating more revenue per customer, should investors be thinking about durable growth, let's call it at roughly 30% for the next couple of years in your journey to $1 billion? This philosophically, how should we be thinking about kind of the journey to that $1 billion?

[Mark Sachleben:]

We've put our $1 billion target for the end of fiscal 2022, so March of 2022 and that's what we've put that out there. We feel like we do have great opportunity ahead of us to continue to grow at a nice healthy clip. And a lot of that's going to be driven by the enterprise, by the things we were talking about expanding and the customers we have now. Even us getting new customers but the average spend we expect to continue to go up in our existing folks and I think we saw some great metrics around that this past year. And so -- we're not updating our $1 billion targets at this point but we think there is durable growth heading to that target. We'll have some more updates on this at our Analyst Day in June.

[Operator:]

There are no further questions. I'll turn the call back over to the presenters.

[Lew Cirne:]

Thank you very much everyone and look forward to seeing you in a couple of weeks in San Francisco. Thank you.

[Operator:]

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