New Relic, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Feb 2017

[Operator:]

Good afternoon. My name is Mariana and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Relic Third Quarter Fiscal 2017 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. I would now like to turn the call over to Jon Parker, Senior Director Strategic Finance and Investor Relations, you may begin your conference.

[Jon Parker:]

Thank you. Good afternoon and welcome to New Relic’s third quarter fiscal year 2017 earnings conference call. Today’s call is to provide you with information regarding our third quarter fiscal 2017 performance, in addition to our financial outlook for the fourth quarter and full fiscal year 2017. Joining me today are New Relic’s Founder and CEO, Lew Cirne; our President, Hilarie Koplow-McAdams; 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 the press release we 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. Reconciliation between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release issued today, a copy of which can be found on our website. At times in our prepared remarks or in responses to your questions, we may offer additional incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that 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 our Investor Relations website at ir.newrelic.com to access our earnings press 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. With that, let me turn the call over to Lew.

[Lew Cirne:]

Thanks very much, Jon. Good afternoon to everyone joining us today. We are pleased to have delivered excellent financial results for the third fiscal quarter, exceeding our guidance with revenues of $68.1 million and growing 43% year-over-year, while delivering more than 15 percentage points of margin expansion. The outperformance is spearheaded by our enterprise business, which is growing faster than any of our direct competitors. This strength is driven by two secular trends. First, we see the enterprise imperative to drive new digital based initiatives; and second, we see the shift of applications from on-premise to the cloud. Together, these trends drive substantial demand for insight into performance of these mission critical initiatives. We believe recent activity in the market, validates and significantly underscores the opportunity in front us. It also underscores the criticality of companies having full visibility into performance of their business as they undergo digital transformations. The combination of these factors is fueling our strong performance and our positive outlook, as we’re once again increasing our top line expectations for fiscal 2017, and believe we remain on track to deliver our goal of $1 billion revenue run rate ending fiscal 2022. We’re also pleased to report that we expect to deliver well more than 10 percentage points of year-over-year improvement in each of our GAAP and non-GAAP operating margins that we guided towards the year ago. We believe this continues to demonstrate the operating leverage inherent in our pure cloud-based model. In the near-term, given substantial market opportunity, our strong multiyear growth outlook and outperformance against our operating model this year, we do plan to increase the pace of investment in the business for the next few quarters but while still delivering on non-GAAP operating income by next March. Like I’ve done in past calls, let me take a moment to review our progress against our key annual objectives. First and foremost, we believe New Relic is on the path becoming the enterprise standard for digital intelligence. Second, our goal of ubiquity in the market continues to be more evident. And third, we see our innovation leadership position extending. I’ll start with continued momentum we’re seeing with the enterprise customers, which clearly represents our biggest opportunity as well as the one that has quickly become the largest contributor to new business. We see every enterprise becoming a software business and placing digital transformation as one of their top strategic priorities. As enterprise companies launch new initiatives to drive their businesses, often including the cloud and mobile, we see it is natural that they would prefer a digital intelligence platform that was born in the cloud. In our view, traditional solutions were never designed to monitor, measure and analyze the digital business initiatives that are the future; rather, they were built for the use cases of the past. In addition, we see growing demand from customers to move from on-premise solutions to cloud-based digital intelligence platforms. We believe the demand stems from the desire to benefit from the much-faster pace of innovation and greater scalability inherent in the cloud solution, as well as the avoidance of costs often associated with deploying, updating and supporting on-premise products. In the third quarter, we also continued to make great progress in establishing the ubiquity of our platform. We believe our cloud-based platform enables us to address the needs of enterprises in all sectors across the world. We allow these companies to get live and see actionable information in minutes without the need for costly professional service crutches. This helps drive accounts to where they see hundreds and in some cases thousands of people interacting with New Relic every month. Going forward, we expect a key part of this will be Project Seymour which we announced at FutureStack. Seymour uses unique machine learning algorithms to service targeted and actionable information to users depending on their role and interest. We believe only New Relic can deliver this kind of value as on-premise vendors don’t have the breadth or the quantity of application, infrastructure and business data needed to make this technology relevant to their customers. I wanted to finish my prepared remarks discussing the progress against our roadmap, which has been a major factor in New Relic’s momentum in both the broader markets and in particular in the enterprise. We see the success of our efforts as evidenced by the fact that in the third quarter our non-APM solutions contributed to over 30% of new business for the first time in New Relic’s history. We expect that figure to continue to grow in the years ahead. Encouragingly, two non-APM products contributed roughly 10% each, speaking to the breadth of our platform’s value proposition. One of these was Insights which had a record quarter and continues to both, directly and indirectly be a driver of differentiation in the market. For example, we’ve seen a Fortune 10 CEO turn to New Relic Insights to see the success of a major digital initiative launch and literally seek his digital customer activity in real time. Another highlight of last quarter was our FutureStack User Conference. It was a marquee event for us this past quarter during which we launched New Relic Infrastructure which provides unique real time intelligence at the infrastructure layer. We were excited with the initial uptake in just a few short weeks and have very-broad ambitions for this remarkable new product, as we start looking forward to fiscal 2018. As part of New Relic Infrastructure, we introduced native visibility into more than a dozen AWS services pulling in key metrics, events and configuration data that can correlate against all the other valuable data our customers can provide using our platform, services like EC2, S3 and Lambda. We expect to significantly broaden our integrations across cloud platforms over the next 12 months. As enterprises continue to adopt public cloud, we unequivocally believe that New Relic is extremely well-positioned to benefit, and that shift to vendors like Amazon Web Services represents one of the strongest tailwinds to our growth. Due to the strength of our belief in this and our incredibly strong relationship with Amazon, starting in April, we’ll be launching joint go-to-market activities with Amazon, initially focusing on DevOps practices for teams working in the cloud. The campaign will include jointly published marketing assets, solution architecture descriptions and joint customer targeting through digital marketing events and telesales resources. Overall, we see our customers wanting a platform neutral solution to monitor the health and performance of their infrastructure and applications running their digital business initiatives. Additionally, over the long-term, we believe enterprises will continue to leverage multiple clouds and thereby require a platform that supports all cloud environments. In our view, New Relic is uniquely positioned to meet this need with a comprehensive, highly scalable digital intelligence platform that was born in the cloud but that can monitor both cloud-based and on-premise applications and infrastructure. In closing, we continue to be a leader in the market and make significant progress against our strategic growth initiatives. We believe we very much remain on track to achieve our long-term objectives, and I’ve never been more enthusiastic about New Relic’s future. With that, I’ll turn it over to Hilarie.

[Hilarie Koplow-McAdams:]

Thanks, Lew. Our third quarter results, I believe, further reinforce that we are now seeing all companies use software to accelerate their business objectives. As part of this movement, companies are increasingly moving to the cloud and moving from on-premise solutions to superior cloud-based offerings. New Relic is increasingly being recognized as a strategic partner to enterprise customers as this long-term secular trend plays out. Over the course of this fiscal year, we’ve spoken about the fact that we start the year generally more focused on winning new logos that have the great potential to expand over time. We have a powerful land and expand model, and a track record of proving our value with customers, expanding their usage and delivering new value-added products to our customers to drive even greater levels of expansion over time. We continue to believe that we have just scratched the surface in many of our customer relationships. During the third quarter, 9 of our top 10 deals came from expansion deals, as we would largely expect moving into the second half of the year. What is also very encouraging is the way our customers continue to expand with New Relic. Among these top expansion customers in the quarter, each came back to New Relic for additional APM solutions, but equally important, they were adopting multiple components of our overall digital intelligence platform include Insights Browser, Synthetics, Mobile, and our most recent addition, Infrastructure. Many of these were meaningful commitments across our platform, which is why non-APM products made their biggest contribution as a percentage of our new sales, increasing to over 30% of our sales for the first time. This shows that our significant market share gains in the enterprise, combined with greater adoption of our expanding platform are key contributors of our rapid growth. It’s also worth pointing out that several of those top expansion deals I referenced were already seven-figure customers of New Relic, prior to their expansion deal during the quarter. In each case, the additional purchase led to the customers committing to multimillion dollar spend with New Relic on an annual basis. As I indicated a moment ago, even with our largest customers, we believe that we continue to have enormous opportunities to expand over time as we continue to deliver value and expand our platform. Our team has made great strides in the enterprise, which is on its trajectory to become half of our revenue within the next fiscal year, as we are seeing a strong flow of new enterprise logos, larger deal sizes, and longer commitments from our customers. For example, we added a record number of 100K ARR customers in the quarter. The larger dollar and longer term commitments being made to New Relic are evidence of our success in the market, as well as the fact that New Relic is being viewed as an increasingly strategic partner, which is very encouraging for the long-term. Our investments in the business are creating more opportunities, our product innovation is adding to our opportunity set, and our expanding customer base along with their migration to the cloud, is creating an ideal backdrop for New Relic to drive growth. While we’re clearly focused on continuing to penetrate the enterprise market, we remain dedicated to profitably growing our SMB business. In fact, we signed our largest ever SMB deal in the quarter, showing our ability to drive meaningful monetization even with smaller companies, which we see as a reflection of the importance of digital business initiative as well as New Relic’s value proposition. Many newer and emerging businesses can become very prolific consumers of digital assets. In fact, they very often start their business with or based on a cloud asset. Our view is that we will continue to see further growth and a strong future ahead for the SMB business as they expand. More broadly, we saw impressive wins this past quarter in traditional verticals like media with Cox Enterprises, Gannett and Viacom; in technology with Rakuten and Red Hat; in the food and beverage sector, were Dunkin’ Brands, McDonald’s and Domino’s Pizza and other great names like Six Flags and Royal Dutch Shell. We also continue to see growing demand from other industries that have historically been slower to adopt cloud-based solutions. For instance, the financial services vertical where we did business for BNP Paribas, Capital One, Nationwide and Morningstar. As companies are launching digital businesses or adopting the public cloud as a core component of their digital transformation initiatives, they’re more and more often turning to New Relic. As we finished our fiscal year, we’re really excited about the changes we’re seeing our customers embark upon and look forward to helping make them successful in fiscal 2018 and beyond. With that I’ll turn it over to Mark.

[Mark Sachleben:]

Thanks, Hilarie. Turning to the financials, third quarter revenue was $68.1 million, up 43% year-over-year and up 7% sequentially. We ended the quarter with 14,915 total paid business accounts; of these, the total number of customers paying us more than $5,000 per year, reached 6,349. Our annualized revenue per average paid business account continued to grow, reaching proximally $18,500, up 26% year-over-year and 4% sequentially, while dollar-based net expansion rate the quarter was 125%, up from 116% last quarter. As we discussed in prior quarters, we’ve been starting to see more meaningful seasonality in the past, as our enterprise business becomes a greater proportion of the installed base, and our enterprise business is weighted towards the back half of the year of our fiscal year. Turning to our geographic split, U.S. revenue of $46.1 million for the quarter was up 44% year-over-year, while non-U.S. revenue for the quarter grew to $22 million, up 40% 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 non-GAAP results can be found in our earnings press release issued today and available on our website. Our gross margin was 83%, up from 81% in year ago period and in line with last quarter. We now expect our gross margin for fiscal 2017 to be approximately 82%. With regard to operating expenses, sales and marketing costs were $39.9 million compared to $36.8 million last quarter and $32.5 million in the same quarter last year. We continue to strategically invest across our go-to-market organization and in fact expect to start accelerating some of these investments in Q4, which I’ll talk more about shortly. However, we still expect to continue to drive meaningful operating leverage. R&D expenses were $11.9 million compared to $12.1 million in last quarter, and $10.2 million in the same quarter last year. The sequential decline was largely attributable to a modest uptick in capitalized software ahead of multiple product and feature releases at FutureStack. G&A costs were $9.5 million compared to $8.6 million last quarter and $6.9 million in the same quarter last year, primarily due to investments in headcount. Overall, our expenses in the quarter produced an operating loss of $4.9 million, unchanged from last quarter, but down meaningfully from $10.7 million in the same quarter last year. This resulted in a negative operating margin of 7% in the quarter compared to negative 8% last quarter and negative 22% in the same quarter last year or roughly 15% point improvement. Our net loss per share was $0.09, unchanged from last quarter and down from $0.22 per share in the same quarter last year. Turning to our balance sheet, we ended the third fiscal quarter with approximately $196 million of cash, cash equivalents and short-term investments, down slightly from approximately $197 million last quarter. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $92.9 million, up 60% year-over-year and 16% quarter-over-quarter. We still do not view deferred revenue as a reliable indicator of our underlying business trends due to the varying durations of our contracts and billing terms. As we look ahead to Q4, we expect deferred revenue to grow in the high teens sequentially versus Q3. While we don’t expect to regularly provide an outlook on deferred revenue, given some of the recent questions around this item and the wide range of forecast we’ve seen in some of the published models, we wanted to provide some perspective to help inform these estimates. Turning to cash flow, we generated positive cash from operations for the fifth consecutive quarter at nearly $6 million and expect to see similar levels in Q4. Free cash flow, defined as cash from operations minus purchase of capital expenditures minus capitalized software was a $4 million outflow primarily due to our office build out in San Francisco. As it relates to Q4, we expect to be roughly free cash flow breakeven as our physical CapEx levels start to moderate. For the year, we expect capital expenditures to be closer to $24 million, below our prior outlook of $32 million to $33 million as some of our build out can relate to CapEx that we previously expected this year will not occur until fiscal 2018. Although we’ve also realized some savings versus original plans. Please note this is separate from capitalized software, which we expect to continue to be near recent levels. Now, I’ll turn to our outlook for the fourth quarter of fiscal 2017 and the fiscal year as a whole before making a few preliminary comments around fiscal 2018. We are initiating our outlook as follows

[Operator:]

[Operator Instruction] Your first question comes from Ben McFadden with Pacific Crest Securities. Your line is open.

[Ben McFadden:]

I wanted to start with kind of the mix shift you saw in the quarter between SMB and enterprise, and how that might affected your billings duration or just overall large scale metrics in the quarter in fiscal Q3 relative to kind of what you saw the last two quarters?

[Lew Cirne:]

Thanks for question, Ben. This is Lew. I’ll talk qualitatively to it. We have been talking for some time about our efforts to build out the enterprise business. And I think it’s fair to say that that pivot is largely behind us. We feel successful in our execution against our enterprise strategy, and it’s showing in the number of 100K deals, which is a record number of enterprise 100K ARR deals this quarter. It’s showing in the types of names we’re bringing on board when you think of companies like Nationwide, Peterson, Royal Dutch Shell, McDonald’s, Morningstar, these are world-class enterprise names. And what’s driving all of their adoption of our solution is two secular trends, it’s the digital imperative in the enterprise, and it’s a secular move to adopt cloud computing. We think we are perfectly situated to help our customers on both of those journeys, like no other company in our competitive space. And that’s what’s driving our enterprise success. We love our SMB business; it’s a profitable business; it’s growing for us. So, when we look out into the future, we look at our path towards $1 billion revenue Company, we believe that the bulk that growth as well as the profitability behind our growth is also related to enterprise and we are thrilled with how that is moving as quickly as it is.

[Ben McFadden:]

Great. And then maybe switching to sort of the infrastructure products, you mentioned that you are pleased with the traction. But just wondering if you could provide any more color as far as how that changed your view on how quickly that could potentially be material to overall results or just any metrics you can maybe give around kind of how large those deals are getting early on?

[Lew Cirne:]

Look, we remain super excited about the infrastructure product; it broadens the footprint of what we do; it augments our APM and our other products, what they offer. And in particular to that, the data that infrastructure gathers is going to further differentiate our Seymour Project, which is an AI-based approach to making sense of all this data we gather. So, that’s going to be important data that feeds into Seymour as well. So for those reasons we think infrastructure has immense potential. But, it’s still very early days and far too early to give you a sense of how material it will be to revenues. As you know, we’re subscription business. So, early on, it’s building out those key wins; we’re thrilled with the types of customers they are bringing on and what they are telling us about the infrastructure product and how it is making their lives better with digital and with the move to the cloud. But, it’s going to take some time for it to build into a meaningful portion of revenues just as all of our historical products have. But it’s a key pillar in our growth strategy and we are excited about its potential.

[Operator:]

Your next question comes from Jesse Hulsing with Goldman Sachs. Your line is open.

[Jesse Hulsing:]

I wanted to touch on your plans for investment over the next year. What are you seeing in the market that’s encouraging you to invest or I guess ramp your investment more than you have been over the last couple of quarters? And will the bulk of this investment occur in your enterprise business or will you be continuing to invest in your SMB go-to-market as well?

[Lew Cirne:]

Great questions, Jesse. When I talk to our customers, I can see how much future opportunity is in front of us. Our average spend and we talked about the analyst day like the average enterprise customer has tripled their average spend with the Relic in little over two years since we’ve gone public. So that’s good news. But, there is so much more upside in that, still with average enterprise customers spend and when we disclosed that back in November of around 70,000 a year. And we have enough $1 million a year subscribers in all sorts of verticals and that we are confident that we can continue to grow that average enterprise customer spend. But it doesn’t come without investment. We need to continue to invest our relationships, we need to have more reps out in the field telling the New Relic story, understanding where our customers are and their journey towards cloud and their journey towards digital and helping them accelerate that with the New Relic digital intelligence platform. And so that’s an investment we feel like is going to return well on us. The other thing that excites me is the purity of our SaaS model I think is really showing itself this quarter with the margin improvement we have demonstrated at 15% year-over-year improvement in the operating model. And so that gives us confidence that well-managed, well-placed investments will deliver good results over time. We think that will pay back better over the long run of the enterprise and SMB but we love our SMB business as well. We have got great customers like Zendesk and like Shopify that literally signed on with New Relic when they were 10% companies, right or 30% companies. And so, we do want to serve the great companies of tomorrow; many of them are small companies today. But mark my words, the bulk of the investments, bulk of the opportunities building [ph] enterprise because we are so encouraged by what we are seeing and what’s going out in field today.

[Jesse Hulsing:]

And a quick follow-up on the investment question and maybe this is for Hilarie. As you add more products, infrastructure in particular but insights and others I’m sure down the road, do you plan to add more overlays, and I guess increase the relative complexity of your sales organization, if you haven’t done that already?

[Hilarie Koplow-McAdams:]

Yes. So, we don’t have any specialization or overlays in the organization heretofore. The infrastructure product is uniquely adjacent to our value prop around APM and the digital intelligence platform. So, our current thinking is that we might have a few technical specialists here and there to answer the long tail of questions but there is absolutely not a plan to create an overlay organization for any of the products. We think the value proposition holds together really beautifully.

[Operator:]

Your next question comes from Greg McDowell with JMP Securities. Your line is open.

[Greg McDowell:]

I wanted to ask you a question surrounding Cisco’s pending acquisition of AppDynamics. And I guess a two-part question, part one is, your reaction to the announcement and how you think it may or may not change the competitive dynamics in this space; and the second part of the question is around any changes to your operating plan in light of some of the competitive dynamics? It seems like there could be a temptation on your part to maybe accelerate some investments even further in light of some of these exogenous events. Thanks guys.

[Lew Cirne:]

Sure, Greg, happy to speak to it. Look, Cisco’s acquisition of AppDynamics serves as a great point of validation of the market. We believe we pioneered in that that serves a important role to all these enterprises that are moving to digital and moving to the cloud. So, we think this as a wonderful validation of our market opportunity. We feel stronger than ever about our competitive position. We feel that -- when you look not only where the market historically has been, we believe that candidly Cisco -- AppDynamics is a good fit for Cisco because the vast majority of their revenues is coming from on-premise hardware. And so, we believe the future is predominantly cloud. And when we look at our offering and when it competes both in cloud and digital and we feel like stronger than ever in our ability to compete in that sphere against a company like Cisco. So, we like how that lines up, and that does factor into how we think about the operating plan. And we think that there may be an opportunity for us to increase our rate of market share acquisition. And so, there may be a window of opportunity to continue to grow. And as we mentioned during the prepared remarks, our growth rate in the enterprise segment is the fastest of all of our direct competitors. And so, we’re going to continue to drive that leadership position. So, it’s like kind of excited us that we’ve got this opportunity that enterprises continually tell us they want an independent objective source of truth of what’s going on in their multi-cloud environment. And now, New Relic is truly, we believe the only game in town to provide that.

[Operator:]

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

[Michael Turits:]

Hey, guys. I’ve two questions, one is, given the guidance for high teens quarter over quarter growth in deferred in the fourth quarter, are you seeing the increase in duration that you expected for more large expand deals in the second half?

[Mark Sachleben:]

Hey, Michael; it’s Mark. So, in general, we are seeing the installed base duration continue to drift upward. And we expect that to continue to happen as more and more of our base becomes enterprise. We talked about sometime next year getting to 50-50 revenue wise. And so, I think that is going to continue to drive the installed base duration upward. We are not talking and disclosing individual duration, in-period [ph] durations for any given quarter, we just don’t want to go down that path. In any given quarter, the duration can change; we have things that come in and out; we have billings that might be done a couple days late, our renewals just to satisfy a customer, so that can have a big impact on deferred revenue. That’s why we continue to say that our billings and our differed revenue are not true indicators of the underlying strength of our business. All that said, we do expect the duration to continue to drift upward. Although, when you look back at big games we had in duration in Q3 and Q4 of last year, we don’t expect those types of games to be repeated. And we feel really good about our billings number and our deferred revenue for this quarter. We’ve guided to high-teens growth, so an acceleration of growth for Q4. And we are very pleased with that outlook, particularly given the real tough comp we had in last Q4.

[Michael Turits:]

I just wanted to follow up at some -- again, I apologize if missed this; I am jumping between calls. But, are you seeing -- what are you seeing in terms of the impact of your various pricing changes on ASPs, especially cloud pricing as well as essentials? Is it still continuing to have negative impact on ASPs or is that beginning to move up and is that also driving more revenue from an elasticity perspective?

[Mark Sachleben:]

Last quarter I think it was where we talked about shift in customers that migrated from our host-based pricing to our cloud-based pricing. We didn’t give specific metrics about that on this call. But, we continue to see similar patterns where customers are increasing their spend generally, when they migrate to a cloud-based pricing. And so that’s what we realize trying to focus on. What we want to do is we want to cover a larger portion of the state, and I think our cloud-based pricing option allows customers to do that. So, what we look at is what we’re getting per customer. And I think our cloud pricing initiative helps our ability to have that number go up. Overall, similar metrics. I think we’re seeing no other real changes in the dynamics of our pricing.

[Operator:]

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

[Derrick Wood:]

Great, thanks. I wanted to ask on Amazon, they had a new product they’ve released to market like last year. At the same time, it sounds like you guys have a new joint market, go-to-market initiative with that much. I don’t think I’ve seen that too often with other software companies. So, I guess two questions. First, what was the catalyst for them to do a joint go-to-market with you? And then, just I will be curious to hear what you think about their offering X-Ray in the market, and how it’s different than yours and why it’s not competitive?

[Lew Cirne:]

Sure, happy to talk to that Derrick. First of all Amazon did reach us, we had dialogue about what X-Ray was and how they believed and we believed the overlap was minimal, certainly different strategic objectives, and we quickly concluded that this wasn’t going to be a much of a direct competitive threat at all, nor was it intended by Amazon to be that, from what I can tell. I don’t want to speak from Amazon but that was our conclusion. And after more dialogue with them, that confirmed our viewpoint. So, our customers want a holistic view of the entire environment. The customer experience in the mold of browser; [ph] a comprehensive view of the application, not just a single data point, which is largely what X-Ray provides is a simple tracing capability for Amazon specific, whole hog Amazon specific deployments; and then, of course, the infrastructure, and putting that all into a real time analytics capability that New Relic uniquely provides. And then of course, the other trend we’re seeing is how -- many of our customers are mostly cloud. And so that’s another reason why our customers certainly are not mentioning X-Ray as a true competitive alternative when we talk to them. So, with that in mind, we believe Amazon views us as a trend for similar reasons we believe they’re friends. There’s the secular trend in migrating to the cloud but that our customers want to move faster than they can. And what holds up their move to the cloud, well, one of the questions is how will it perform; how efficient will it be; how reliable will my applications be in this relatively new environment called the cloud? And the way to answer that question is through New Relic. We can measure the health of an application in an on-premise environment, in a virtualized environment and in a bare metal environment or in any number of cloud environments. That gives our customers confidence to migrate faster. Faster migration to any cloud environment is a faster revenue ramp. So, it’s not just something -- what we’re seeing across the cloud ecosystem is not enough just to get a customer to commit to moving more close to the cloud, they get paid when workload moves to the cloud, and we accelerate that. And that’s why we feel like it’s in our joint interest to reach out to not only -- with Amazon to their customers, but also to other cloud providers and their joint customers. So, that’s the reason for the partnership and why it makes mutual sense to do that. It’s not at all that different from the Nationwide partnership, my previous company Wily Technology where the primary choice was the application server back in nearly 2000s and we’re an essential accelerant to the growth of the major application server providers as a partner. So, we see to be able to repeat there and that’s why we’re excited about the partnership.

[Derrick Wood:]

If I could sneak one more, software analytics, the Insight product at 10% of new business in the quarter, that’s a nice milestone. Is that helping you get into engaging more with line of business versus just the developer, curious to see how that’s gaining traction?

[Lew Cirne:]

Derrick, if you’re planning me a drink at a bar, I could share more detail. But, with attorney in the room, I better just -- I can’t share the customer name. But, CEO level, looking at the dashboards of Insights to see a major digital initiative that -- this is what Insights is enabling for our customers. And so, while it’s 10% -- with roughly 10% quarter on bookings, it’s certainly moved the needle on many of our competitive wins which was technically recognized as APM or other product revenue as well. So, it’s more than a 10% product in my mind. Because it changes the nature of conversation, what Fortune 10 CEO wants to look at like transaction traces on a dashboard? That’s not what they want to see; they want to see how many people are signing up; how is that versus planned; where’re they signing up; what’s the nature of that and other key business initiatives; so what features are sticking et cetera. And that’s what Insights helps our customers see along with of course are there errors and what is the nature of the errors and where are they happening and why are they happening? And these are related to business success, and that’s why we belong in same platform. So brand new innovations like Insights, and we believe there is nothing like Insights in the market, but it takes a while for the market to fully understand these brand new types of innovation. And so, we feel like we have gotten past that really, really early adopters to like a bit more mature part of the market that’s getting it, but there is still more room to run there, but it’s a fundamental part of the differentiation to competitive strategy.

[Operator:]

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

[Sanjit Singh:]

Hilarie, I wanted to see if you could talk about the enterprise sales motion, and if you can give us a little bit of detail on where you guys typically land within an enterprise, whether it’s digital market department or development group? And then how -- what other departments you reach over time? In addition to that, if there is any sort of sense you can give us on standardization deals, how long does it take to get to a standardization offering from what you guys have been seeing two years into the enterprise sales push?

[Hilarie Koplow-McAdams:]

Yes, great question, and a wonderful follow-on to how Lew just provided an answer about Insights because it’s very-related. So, starting with the entry point, there are really two points of entry. One is what we found apparent is a new digital initiative, it’s typically a modern stack. And I really want to emphasize this, it’s of a strategic nature to that company or organization. They are trying to engage digitally with somebody who is important to their top-line goals. And that’s a wonderful entry point for us. And what we try to do -- we often go through a proof of concept, we land that application, we use Insights as a way to really highlight, not just the performance management experience which is often what that of Dev Operations through the IT ops proof group is interested in, but also what I like to call the offering leaders, the person who cares about the success of this initiative wants to know about. And that’s what I thought Lew really nicely underscored in his last answer, how empowering it is to get that real time information about the customer experience and where they are in the app and what’s going on. And one thing that’s really important to understand is our customers think of these digital experiences as a funnels, funnels in which they are engaging the customer employment through an experience, and we give them digitally to what that funnel looks like and where they are in the funnel. The second place that we enter is in a migration to one of the many cloud platforms. And that goes back to what we said earlier, moving an application stack to the cloud has a lot of unknowns and there are new best practices. And one of the best practices is to be monitoring the performance of that application before doing and after, and giving this sort of unprecedented visibility across all the different types of compute that people are getting from these services and that’s where our Infrastructure product comes into play. So, those are the two places we enter. We usually start small; we really believe that this land and expand motion is the right way to win. And the rate at which people expand is a little bit of a function of the way they do business. We have seen customers expand very rapidly and then we have seen other customers be a little bit more incremental and it’s related to our fiscal year funding cycle or something like that. But what our commitment -- the commitment that we make consistently to all customers is that we will partner with them to see them through the success. So that’s really the play to us.

[Sanjit Singh:]

And I guess a follow-on to that. How should we think about your growth in terms of revenue prepaid account as we look into fiscal year 2018, given that we are going to cross the chasm in terms of enterprise becoming half of your business, you are seeing nice traction with Insights, you’re seeing nice traction with Mobile. What are the puts and takes on that revenue prepaid account year-over-year growth rate?

[Mark Sachleben:]

It’s really tail -- it’s somewhat bifurcated. When you look at the low-end SMB portion, and we gave these metrics back at our analyst day and in the presentation there, very modest increases in that. Those are folks of small environments that are trying it. But, when we look at our enterprise business, as we Lew mentioned, we have close to triple the average spend in the last couple of years, and we have got a lot of room to go. And so, we want to continue to drive that number up we think there is a lot of headroom for that number to continue to increase. And what keeps it down frankly is the fact that we keep adding new logos in our enterprise business as well. And so, it’s a balance between those two. But we feel like there is certainly lot of room for expansion in the average spend of the enterprise.

[Operator:]

Your next question comes from Jack Andrews with D.A. Davidson. Your line is open.

[Jack Andrews:]

As the business continues to shift more towards enterprise customers, can you help us drill down a bit on the potential changes in the seasonality of your business? I mean, the typical enterprise customer’s seasonal strength would be in your most recently completed December quarter but given that you are on a March fiscal year end, just wondering are there particular sales incentives that would make perhaps the March quarter even stronger just trying to understand which should be the overriding factor in the cadence of your business here?

[Mark Sachleben:]

In general, we have been talking about this all year, we are seeing more seasonality in our business. And really for us, it gets to the back half of our year. As you point out for enterprises, they are typically on a calendar year budget cycle; so that tends to be a larger quarter. On the other hand, you look at any enterprise software company, if their Q4 is May, somehow the May quarter turns out to be big. And I think that’s driven in large part by composition plans and things. And our enterprise sales folks are generally comp on an annual agreement. And when that happens, when they late plan out the year, they think about the first part of the year getting some good new land accounts, the second half of the year tends to be, alright, which ones am I going to farm up and grow up and get to the larger transactions, could be December quarter or if not, when the new budgets free up in January and into our year end March quarter. So, I think we expect to continue to see increased seasonality. But, for us, it’s tough to differentiate between those two. We look at it more between the first half and second half of the year and we feel like both quarters in the second half of our year should be where we show our strength.

[Jack Andrews:]

And then, just as a quick follow-up, you have mentioned that I think it was 9 of your top 10 deals were expansions from existing customers. I was just wondering, is there any particular commonality in these deals, either from particular product uptake that was key or either/or a particular consistent selling motion that there is common pattern in there similar?

[Hilarie Koplow-McAdams:]

Let me take that question. I am just looking at the list. I think the driver is probably where sort of where we were in our annual season of managing that customer and also where the customer was in their budget season. Generally as Mark said at the beginning of the year, the account executives go out and build up the value prop with their customers and then work through the evaluation process, the budget process. And you tend to see those expansions happen in the second half. So, I think it is more driven by us, our season and their season than any particular product trend.

[Operator:]

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

[Nate Cunningham:]

To follow up on cloud pricing, I think you previously said the customers were spending about 20% more on average. Lew, could you maybe clarify directionally which way that’s been trending?

[Lew Cirne:]

Here’s the way to look at. Cloud pricing is another vehicle by which our customers consume more products. In my mind, gross margin is important. Gross margin and average spend per account are the two kind of indicators that cloud pricing certainly is helping because both those numbers are looking better. So, what that means is our customers are spending more but it’s not costing us -- it’s actually costing us less to serve the customer base for a given dollar revenue than it was a year ago. And so, you can take from that implication that our cloud pricing is largely still driven by value but it’s easier to consume and easier to deploy more broadly because it’s more aligned with the environments that our customers are running software in. We believe it is a competitive advantage for us. And that competitive offerings that don’t as well align to the size and instance or what type of cloud it’s running on, that ends up in more friction in the buying process, which our customers don’t want. So, we think if it is a good thing and resonating well to the market, and I keep an eye on those metrics to make sure that we’re pricing well and delivering value to our customers.

[Nate Cunningham:]

Okay. And when you’re going to market with Infrastructure, I realize it’s early but could you give us a sense how often that’s a Greenfield sale versus a competitive situation?

[Hilarie Koplow-McAdams:]

Well, our focus right now with infrastructure is taking that functionality to our install base. It makes sense that we have customers who have standardized on our digital intelligence platform. We have 14,700 customers that are all candidates for infrastructure. That’s where we’re focusing our time right now over Greenfield. The beauty of infrastructure is, it is a great Greenfield opportunity, it’s a way to have somebody enter the franchise, and we’re working that motion as well. But, given where we are in the fiscal year, we’re kind of overweighed on the installed base.

[Operator:]

Your next question comes from Michael Turrin with UBS. Your line is open.

[Michael Turrin:]

Thanks for squeezing me and taking my questions. I wanted to talk a little about hiring plans and any shifts that might be occurring there. I know in the first half of the year, you were down on absolute basis, and you’ve been showing nice margin upside in tandem with that. I was wondering if you could provide an update on where you might be versus plan, closing the calendar year, entering your fiscal 4Q and any adjustments you might be making to that as you think about ramping up investments in the near-term.

[Mark Sachleben:]

Sure. So, we feel like we’re on track in terms of our hiring plan for this year. And in fact what we talked in the prepared remarks earlier was that we’re looking at accelerating some of the hiring for next year and pulling it forward into this current quarter. And then, when we look at the expense, and we gave some rough estimates in terms of operating results in the first couple of quarters, the next quarter, we are looking to do the bulk of our hiring in the first half of the year. I think for us what really is helpful is to get people on-board, especially on the sale side, get those account executives trained, enabled, get them out with customer and beginning to sell. And that sets us up well for the rest of fiscal 2018, as well as 2019 and beyond. And so, when we look at our hiring plans, we look to do the bulk of our hiring in the first half of our fiscal year. And in this case actually, we’re looking to bring some of the hires that we had projected to do in the April timeframe, and we’re looking to pull those forward into the current quarter.

[Michael Turrin:]

Thanks. That’s helpful color, Mark. We’ve talked a lot about the introduction of seasonality that happens in model as the shift to enterprise takes place. If you look at net adds over the past couple of years, we’ve talked about the first half being the bigger opportunity for land. Is there a reason why the third quarter tends to be the trough on that number on an absolute basis? Is there something that you could split out between the mix of SMB and enterprise that just provides additional granularity there or is that just a coincidence that that happened?

[Mark Sachleben:]

I think it’s as much coincidence as anything. The driver of the total account, the net add number is primarily at the low end of the market. That’s where there is much more variability and volatility. And we will take that business, that’s terrific business for us. But where we’re more and more focused is on the larger accounts, the enterprise names that come in. And we’re really after quality over quantity. So, the numbers of the high-end, as we mentioned, continue to be strong with a record number of 100K transactions that we closed. And when we look at the number of customers paying us more than 50K, more than 100K, more than 1 million, we shared some of those breakouts in our Analyst Day, November. When we look at those trends and those numbers, we continue to be very pleased.

[Operator:]

Your next question comes from Jason Velkavrh with Robert W. Baird. Your line is open.

[Jason Velkavrh:]

Thank you for taking my question. One thing that we have noticed when talking to enterprise APM users is just the proliferation of multiple APM tools within some larger enterprises. I was curious, is that a potential opportunity for expand for you, are you already capitalizing on the customers’ desire to standardize, and is that something you could be doing going forward, if not?

[Lew Cirne:]

We do see there is an opportunity to expand and it was driving the original founding idea of New Relic. My first company Wily was credited as creating the category of APM, and we acquired these wonderful accounts for this project, but then where we struggled was deploying it everywhere. It was cost effective or made sense for one or two really important projects but was too expensive to roll it out across everything. And most of the expense wasn’t in license, it was actually in all the on-premise hard work and rolling it out. So, the marginal and cost of rolling out APM in a new application, in new project was too high, but they still wanted the visibility. So, whole idea with New Relic was let’s take that marginal cost of monitoring more, down to near zero in terms of a product complexity or TCO perspective. And we’re delivering on that. We’re delivering on that far better than anyone else. Certainly, if you’re on-premise, how can you possibly make that claim? And so, yes, we believe that -- and one way to measure it is, it’s not only how many applications are you managing; how many people are using the software? And so, I have mentioned it before, but this depressing Gartner report that came out a year or two ago about how the typical APM deployment is only 3.5 active users. That’s a niche tool for a specialist. We want to turn this into a mainstream platform and we’re turning it into a mainstream platform where hundreds or thousands of people use our product to enable digital and cloud migration to be successful. And that’s how we become a standard in these enterprises. And we’ve talked in the past about stories about exactly how that’s become true. And we see it in the customer base today and we see a lot of opportunities looking forward. So, yes, there’s an opportunity there.

[Operator:]

There are no further questions at this time. This concludes today’s conference call. You may now disconnect.