New Relic, Inc.
Q4 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

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

[Jonathan Parker:]

Thank you. Good afternoon, and welcome to New Relic's fourth quarter and full year fiscal year 2017 earnings conference call. Joining me today are New Relic's founder and CEO, Lew Cirne; and our Chief Financial Officer, Mark Sachleben. Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to our earnings press release issued today as well as the risks described in our most recent Form 10-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 onetime in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at ir.newrelic.com to access our earnings release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about New Relic. With that, let me turn the call over to Lew.

[Lewis Cirne:]

Thanks, Jon, and good afternoon to everyone joining today to review New Relic's fourth quarter and full year fiscal 2017 fiscal results. Reflecting on fiscal 2017, it was an incredible year. We continued to deliver new innovations across our platform at what we believe is an industry-leading rate. In addition, we saw major traction with our enterprise customers around the globe and are the clear leader for our cloud-based digital intelligence. Our strong performance included full-year revenue growth of 45% and a 13 percentage point improvement in our non-GAAP operating margin, both well ahead of our goals entering the year. We exited the year with great momentum. I'm going to jump right into some of the highlights. During the fourth quarter, we closed a record number of both six and seven figure deals, including the largest in New Relic's history, an upsell to an existing customer resulting in a three year $24 million total contract value relationship. We also achieved many other records, including our first million dollar ARR customer for New Relic Insights alone and several sizable wins for New Relic Infrastructure. These both combined to our highest ever percentage of new business coming outside of our core APM product. Our enterprise business delivered a fantastic performance for the quarter and the year, spanning geographies as well as industry verticals. For instance, our new million dollar customers this quarter came from the U.S., UK, Canada, Israel and South Asia, reinforcing our view that New Relic is increasingly being seen globally as a strategic partner for advancing the success of key digital initiatives. Overall, we ended the year with more than 30 seven figure ARR customers, up nearly 100% from last year and more than 500 six figure ARR customers, up from over 350 a year ago. In businesses across the globe, we are seeing the pace of new software development and transformative digital initiatives continue with ferocity, acting as a key tailwind for our growth. We see this happening as enterprises accelerate their efforts to move away from legacy on-premise infrastructure and adopt cloud-based platforms. Companies are increasingly understanding that their cloud strategy needs to include much deeper visibility into performance of these mission-critical applications, which ultimately drive their top-line results. These dynamics continue to drive my enthusiasm for New Relic's future. We are targeting another strong growth performance in fiscal 2018, supporting our longer-term goal of $1 billion revenue run rate by the end of fiscal '22. Like I've done in past calls, let me take a moment to review how we performed against our key annual objectives before talking about our goals for fiscal '18. First, we believe that New Relic is quickly becoming the enterprise standard for digital intelligence. Second, our goal of ubiquity in the market is continuing to be more evident. And third, we continue to put innovation at the forefront of everything we do. As I just outlined, our enterprise momentum is very strong. In fact, we believe our enterprise business continues to grow faster than any of our direct competitors. Digital transformation is a critical strategic priority for enterprises, who in order to drive top-line growth need to deliver new digital experiences for their customers. These initiatives are being watched at the boardroom level. This means that IT teams need deep visibility into the performance of their applications and underlying infrastructure, and New Relic is dedicated to helping our customers see their digital businesses more clearly. We see synergies between New Relic's digital intelligence platform, which was built and born in the cloud, and these enterprise initiatives as uniquely aligned. Enterprises increasingly understand that traditional monitoring solutions were never designed to monitor, measure and analyze their future digital business initiatives. As a result, we think enterprises have to invest in the next-generation cloud-based digital intelligence platform as they look to deliver new innovative solutions and improve the existing services they offer customers. As it relates to our second goal, we believe our success throughout fiscal '17 underscores the strategic importance of our focus on ubiquity and driving adoption across multiple roles in our customers' organizations. An example of how ubiquity drives larger, more strategic deals can be seen by the record deal I spoke of earlier. This record enterprise deal was with a diversified Fortune 100 company already using New Relic across dozens of business units and which has engaged us in 100 transactions over the past six years. Our presence here is both broad and deep, and their continued commitment would not have been possible without the support of their nearly 1,500 users, who rely on New Relic each month. Working together, we determined that our presence and their need align in a way where we could demonstrate that there was additional value to be had by forging a more strategic partnership. Equally important, it was a deal that made sense for both of us. This organization is embracing the cloud, with around 1,500 developers, IT ops personnel and business leaders working together using New Relic to drive the success of their digital business initiatives. In fact, this company is using our platform in 45 countries. Even more notable, while this deal included our full platform, there is still meaningful potential for them to broaden their usage, and we expect them or one of our other enterprise customers to become our first $10 million ARR relationship in the not too distant future. While ubiquity is clearly important for driving our enterprise strategy, it remains an imperative across the overall business as breadth of adoption can help stimulate more strategic dialogues in all segments. In fact, during the quarter, we had our first mid-market customer cross through the million dollar ARR threshold, an international company using five of our products. Overall, during the fourth quarter, we had impressive wins in verticals like retail with BabyCenter, Buffalo Wild Wings, Room and Board and Under Armour. We also saw great wins in financial services vertical with Allianz and Barclays as well as technology with Adobe, Citrix and LinkedIn. As companies are launching digital businesses or adopting the public cloud as a core component of their digital transformation initiatives, they are more and more often turning to New Relic. The third key focus area for us in fiscal '17 was continuing to extend our innovation advantage. I want to tip my hat to the entire product organization for a breakthrough year in what we delivered to our customers. This included releasing new products, like New Relic Infrastructure, and significant platform advancements around learning, dashboards, crash reporting and support for both single-page applications and the Go programming language. Finally, we launched customer-friendly improvements like cloud pricing and availability in the Amazon Web Services marketplace. As we look ahead to fiscal '18, one particular area of excitement is Project Seymour. Seymour leverages unique machine learning algorithms to surface targeted and actionable information to users depending on their role and interests. We're getting great feedback in limited beta and are on track for a release later this year. These innovations speak to the breadth and value of our digital intelligence platform and our goal of ultimately delivering over half of our business outside of APM. Our progress against this goal is supported by our non-APM solutions contributing a record percentage of new business in the quarter, over 35% in fact. New Relic Insights once again represented around 10% of new business and was highlighted by a record deal with a Fortune 10 company, who is now spending 7 figures just on New Relic Insights alone. They are using Insights in part to monitor a highly strategic product launch, obtaining visibility into all aspects of the initiatives, from the user experience to the business results. As part of this deal, the company is also leveraging other products across our digital intelligence platform, including mobile, browser and infrastructure. Overall, we were encouraged by the performance of New Relic Infrastructure in its first full quarter in the market. This awesome new product was included in 4 of our top 10 deals and represented just shy of 10% of new business in the quarter. We're going to continue to invest aggressively in this offering throughout fiscal '18, both in terms of product and go-to-market. We expect New Relic Infrastructure to meaningfully add to our addressable market over the coming years as it solves a real problem for our customers, who need to monitor their dynamic infrastructure as well as their applications. As they continue to move to the cloud, customers need to see how their applications are performing, and we feel New Relic Infrastructure delivers the premier solution. Overall, as we look towards fiscal '18, we expect to continue to deliver on this winning strategy, and there is one new goal I want to highlight for you today. In fiscal '18, New Relic's number one priority is to dominate the cloud. It's never been more clear to us that to succeed long-term in the digital intelligence market, one has to win in the cloud. We think we are past the tipping point, as underscored by CIOs at large global banks recently making headlines for pushing cloud-first initiatives. In our view, competitors focused on the on-premise segment of our market, where the market used to be, will ultimately be left behind as the cloud becomes the dominant computing platform in the coming years. While we've always enjoyed overwhelming win rates in the cloud, we want these to be even more dominant going forward. From a product perspective, we will be doubling down on developing best-of-class native integrations across our entire platform with all of the major cloud providers. Let me be clear. Today, we monitor both on-premise and cloud-based workloads for many of our customers, and we will continue to monitor both to support our customers. But as the cloud market continues to expand, our goal for New Relic is to be the obvious choice for measuring, monitoring and analyzing every cloud-based digital application. To support this, we will be working closer than ever with our partners and influencers, letting them play a key role in being our ambassadors. This includes the key cloud providers, consultants and ecosystem ISVs. Last quarter, we spoke a bit about our new go-to-market motion with Amazon Web Services. During the fourth quarter, we announced a strategic alliance and new integration with Splunk to provide enterprises with a view into both application performance and infrastructure health with seamless sharing of data across Splunk and New Relic platforms. We will continue to look for ways going forward to integrate New Relic with other key technologies beyond AWS and Splunk, including other infrastructure services like storage and database as well as key SaaS services. We believe that if we can dominate the cloud, we will be extremely well positioned for market leading growth over the long-term. Before I wrap up, I also want to make a few brief comments around the recently announced management changes. As we announced last month, Hilarie Koplow-McAdams will be retiring in June, and I've wanted to truly thank her for her role in transforming our go-to-market organization over the past three plus years. She did an amazing job for New Relic and helped to put in place the foundation to drive the strong results that we are sharing today. Personally, I will continue to oversee day-to-day operations and increase my involvement with our go-to-market organization. Our Chief Marketing Officer, Robson Grieve; and Head of Technical Sales, Service and Support, Roger Scott, now report directly to me, along with Erica Schultz, who is expanding upon her role running enterprise sales to lead both enterprise and the SMB sales organizations. Jim Gochee, our Chief Product Officer; and Kristy Friedrichs, our Chief People Officer, will continue to report to me along with Mark. I am confident that this team's experienced enterprise leaders will continue to drive our success in fiscal '18. In closing, we continue to be the cloud leader in the market and make significant progress against our strategic growth initiatives. We very much remain on track to achieve our longer-term objectives, and I've never been more enthusiastic about New Relic's future. With that, I'll turn it over to Mark.

[Mark Sachleben:]

Thanks, Lew. Turning to the financials, our fourth quarter revenue was $73.3 million, up 40% year-over-year, 8% sequentially and ahead of our original guidance and preliminary expectations announced in early April. Overall, we ended the quarter with more than 15,000 total paid business accounts, 6,485 of which pay more than $5,000 per year. Our annualized revenue per average paid business account reached approximately $19,500, up 24% year-over-year and 5% sequentially. As I've done for our past end-of-year calls, I'll provide some additional color today around how we ended the year. We ended Q4 with 517 paid business accounts paying over 100,000 per year, up over 40% from a year ago. We also finished the year with more than 30 paid business accounts paying over $1 million per year, more than double last year. Our enterprise business, defined as paid business accounts with more than 1,000 employees, ended the year at approximately 46% of annualized recurring revenue, up from around 40% at the end of fiscal year '16, while we ended with over 1,700 enterprise paid business accounts. As we expect our enterprise business to reach over half of our ARR by the end of fiscal '18, we have decided to start providing certain metrics that we believe better reflect our enterprise strategy. Most notably, each quarter, we will now provide a number of paid business accounts paying over $100,000 per year in addition to the percentage of ARR coming from enterprise. We have provided the historical trends for these metrics as part of our investor presentation on the website. Going forward, we will no longer report the over $5,000 per year metric, which is much less relevant; given our enterprise focus. Similarly, while we will continue to report a total paid business account metric for each quarter, we will be rounding down the figure as there has been increasing noise that can appear from quarter-to-quarter that we believe diminishes the value of a specific figure. For instance, in Q4, as a result of the large deal that Lew referenced, we consolidated several dozen smaller accounts into one large enterprise-wide account. Our dollar based net expansion rate in the quarter was 133%, up from 125% last quarter. We continue to expect to see a similar seasonal pattern in fiscal '18 as we saw this past year. Turning to our geographic split, U.S. revenue of $49.9 million for the quarter was up 41% year-over-year, while non-U. S. revenue for the quarter grew to $23.4 million, up 37% year-over-year. Non-U.S. revenue represented 32% of revenue in the quarter. Before moving to profit and loss items, I would like to point out that unless otherwise specified, all of the expense and profitability metrics I will be discussing going forward are non-GAAP results. A full reconciliation between historical GAAP and non-GAAP results can be found in our earnings release issued today and available on our website. Our gross margin was 83%, up from 81% in the year-ago period and in line with last quarter. As we look ahead, we expect to sustain best-in-class gross margins around 82% in fiscal '18. With regard to operating expenses, sales and marketing costs were $42 million compared to $39.9 million last quarter and $33.8 million in the same quarter last year. Last quarter, we spoke about accelerating certain go-to-market investments and in fact in Q4, we had our strongest hiring quarter of the year; a pace which we expect to continue in Q1. R&D expenses were $13.3 million compared to $11.9 million last quarter and $12.5 million in the same quarter last year. The sequential increase was largely due to numerous personnel related costs resetting as we enter the new calendar year. G&A costs were $11.1 million compared to $9.5 million last quarter and $8.3 million in the same quarter last year due to a similar increase in personnel related costs as we entered 2017 as well as the beginning of a major internal systems upgrade, which we expect to impact G&A expenses through most of fiscal '18. Overall, our expense in the quarter produced an operating loss of $5.8 million compared to $4.9 million last quarter, but down meaningfully from $12 million for the same quarter last year. This resulted in a negative operating margin of 8% in the quarter compared to negative 7% last quarter and negative 23% in the same quarter last year or roughly a 15% point year-over-year improvement for the second consecutive quarter. Our net loss per share was $0.11 compared to $0.09 last quarter and $0.24 in the same quarter last year. Quickly running through our financials for the year, revenue was $263 million, up 45% over last year. Gross margins were 82.5%, up from 81% in fiscal '16. Operating margin was a loss of 10% versus a loss of 23%, and our net loss per share was $0.49 compared to a net loss per share of $0.85 in fiscal '16. Turning to our balance sheet, we ended the year with approximately $206 million of cash, cash equivalents and short-term investments, up from approximately $196 million last quarter. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $126 million, up 69% year-over-year and 36% 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 well as the overall velocity of our land and expand model, which in certain instances can result in our renewal base moving around from prior years. Let me pause here to discuss the impact of several of these on our Q4 results. We do not intend to regularly comment on specific factors impacting deferred revenue, but given the impacts in Q4 and potential subsequent effects on Q1, we wanted to provide some additional transparency. First, we saw an approximately $4 million benefit from a couple of renewals that we previously expected to close in April but closed and were billed as part of the upsells in March. Additionally, we saw a benefit of approximately $4 million from converting several customers to annual invoicing. Overall, our installed base ended the year with a 7.2 month average invoice duration. Looking ahead to Q1, we expect deferred revenue to be flat from Q4 primarily due to the early renewals and billing activity previously discussed, which overall act as about a $6 million headwind to our Q1 deferred revenue. For the remainder of the year, we expect deferred revenue to generally follow a similar seasonal pattern that it did throughout fiscal '17, with the exception of Q4 '18, which we'd expect to show more muted sequential growth versus fiscal '17, given the unique factors that we benefit from this past Q4. Turning to cash flow, we generated positive cash from operations for the sixth consecutive quarter, a record of nearly $10 million. Free cash flow, defined as cash from operations minus purchase of capital expenditures minus capitalized software was also positive at roughly $4 million. As we look into fiscal '18, we expect cash from operations to be between $35 million and $45 million and physical capital expenditures to be $26 million to $30 million, reflecting some delayed spending from fiscal '17. For the year, we also expect capitalized software to be at similar levels to last year. Overall, we expect to generate between $1 million and $10 million of free cash flow for fiscal '18. Now I will turn to our outlook for the first quarter of fiscal 2018 and the fiscal year as a whole, some of which we previously announced in early April. We are initiating our outlook as follows

[Operator:]

[Operator Instructions] Our first question comes from Michael Turits from Raymond James.

[Michael Turits:]

Hey guys. A quick question for you, Mark; there's a lot of puts and takes, obviously, around the deferred revenue issue. I know it's one of your favorites. But I just wanted to see if some of the bigger picture trends regarding deal sizes, renewals, et cetera, that had contributed to some back-end loading to billings in '17 will be the same types of patterns we'll see in '18?

[Mark Sachleben:]

Thanks, Michael. Yes, it's always a pleasure having the first question be about billings, right?

[Michael Turits:]

I know. I'm just trying to suck up. I wanted to get on your good side.

[Mark Sachleben:]

Hopefully, we'll get the one out of the way, right? We were pleased with the billings numbers and the deferred numbers, and we do expect to see continued seasonality as we've seen this year. At the end of the day, we're becoming more and more of an enterprise company, and those deals tend to cluster around the December, the calendar year-end, and the March, our fiscal year-end dates. And so we're seeing more new deals and more renewals and things cluster around those dates. So I think we'll see similar patterns going forward as we saw emerge this year.

[Michael Turits:]

Okay. And then for my non-billings question, talk a little bit if you would Lew, about the competitive landscape, especially obviously with AppD over at Cisco, how things have or haven't changed now, and how you feel like you're doing?

[Lewis Cirne:]

Sure, Michael. I'd say there's not a dramatic change. We've been happy with our win rate all along. I'd say it has improved even more in recent months, particularly if the customer is running in a cloud environment. And so what we're thinking about as we think about the competitive landscape is we want to think of if the application is in a public cloud environment, we want to think of that as home turf, where that's where we want a dominant win rate. And then we'll take a good win rate with the applications running on-premise too, but we want to continue to dominate in the cloud. And we believe with AppDynamics being now part of Cisco, we have an opportunity to even lengthen that lead based on their historical focus of being more geared towards the data center and on-premise workloads and from a networking point of view culturally. So we're very happy with our competitive position in the market. We expect it to remain competitive because it's an attractive space to be in. But we believe if we continue to dominate in the cloud, we'll have wonderful business for the long term.

[Michael Turits:]

Great, thanks, Lew, thanks Mark.

[Operator:]

Our next question comes from Ben McFadden from Pacific Crest Securities.

[Benjamin J. McFadden:]

Hey, guys. Thanks for taking my questions. Lew, I wanted to start with this large deal that was announced a month ago that you talked about in the call. I think you said 1,500 users in 45 countries, if I'm right. But I'm just curious if you could expand maybe even further around the footprint of this deal, as to what degree as far as apps deployed are you potentially touching within this organization? And what percentage may be on-premise versus public cloud? And kind of how do you get this deal to potentially continue to grow from here? Any more color on that would be great.

[Lewis Cirne:]

Sure. So we're thrilled about the deal and we're thrilled about how it came about in that clearly we proved our value proposition time and time again over the course of years. And it just came to a point where the customer recognized that every quarter, they were kind of signing up for another substantial increase in their New Relic investment and the time was right to discuss a much larger commitment, where they can just be comfortable rolling out much more broadly. And so while they signed up for the entire platform and there are -- that means every one of our product is in this deal, I would say in this particular case, it's skewed a bit more to APM in its distribution. And so therefore, while we see upside in many dimensions within this account in the future as they continue to grow, a particular portion -- a particularly large amount of upside will be in outside of APM. And when we look at the trends of how our non-APM business is doing across the whole company, we think that that's very attractive to us. The workloads are a combination of on-premise and in-cloud, but they are completely strategically bought into the cloud, which is why I believe they made it clear -- it was clear in their mind they wanted to be strategic with New Relic, because it lined up with where they are going strategically as well. And so our ability to work well on-premise but to be incredibly differentiated in the cloud environment was a big part of why they felt comfortable being strategic with us.

[Benjamin J. McFadden:]

Great, and then, Mark I just wanted to ask another question on seasonality without touching the deferred revenue question. Just in general, as we think about -- I think last year -- in the past year, you talked about the first two quarters being maybe stronger for new customer acquisition and then expanding as you go into the back half of the year. As we think about sort of these enterprise customers, are we still seeing some -- a large portion land within the first two quarters? Or has the model shifted so much that it's revolving significantly more around the back half of the year?

[Mark Sachleben:]

We are seeing, in terms of overall business, we're seeing more strength in the back half of the year. And that is driven by the enterprise, the additional enterprise emphasis of the company and also the strength. And as we've mentioned, the enterprise will be more than half our business by the end of this year, so that's having a larger overall impact. In terms of the number of customers though, if you look at the historical numbers for us, we tend to -- we've been adding roughly between 30 and 50 customers a quarter in the over 100k range. And that's something that tends to skew actually a little bit larger toward the second half of the year. So in the net, in terms of seasonal pattern, we think that is likely to be the case. I think the thing you have to remember is when we add new customers, the land and expand model is such that our new customers can be added -- a lot of times, they're added at relatively small amounts. And so in the first half of the year, we could add customers and they could be a 50k or a 60k, maybe a 100k customer and then expanding late in the year. The latter half of the year, we'll still be adding a lot of new customers. But I think, the overall impact in terms of the results for the quarter are more skewed toward the expansion deals because the expansion business tends to be stronger in the second half of the year.

[Benjamin J. McFadden:]

Thank you.

[Operator:]

Our next question comes from Greg McDowell with JMP.

[Gregory McDowell:]

Great, thank you very much. I think one of the most interesting components or information you shared on the call so far is just the cross-sell. And so I'd like to ask about that. Infrastructure is one product that has not been in the marketplace very long, and yet, you've mentioned it was in 4 of the top 10 deals. And I was just wondering if you could expand a little bit on some of the dynamics of including infrastructure and some of those large deals. And were those greenfield opportunities? Were those replacement opportunities of an existing infrastructure provider? And then I have one follow-up.

[Lewis Cirne:]

Sure. So I guess the way to look at it is from the customer's perspective. Our customers generally feel it's imperative to be successful with digital, and they're using the cloud typically to be successful with a new digital initiative. And our vision resonates with them. Our vision is to be successful with digital, you need visibility in the customer experience that could be the mobile application or the web, on the front end of the web browser. You also need visibility in the application. And the third leg of the stool is visibility into the infrastructure underneath that application, especially if it's dynamic infrastructure in the cloud. And they all should be in one unified platform, easy to use, SaaS delivered, so that you can see the impact of infrastructure health and configuration and how that impacts the application in the customer experience. That vision is resonating with our customers. And so sometimes, they may have an infrastructure monitoring product, there are open source tools out there they may have used, and this may be the first time for that project subscribing to a commercial offering. Sometimes, we are replacing other offerings that are focused on the infrastructure layer. It's a bit of a mixture of both at the moment, but what's driving it all is this unified view across customer experience, application infrastructure on one easy to use platform. So we're going to continue to focus on that strategy. It's a winning strategy, particularly when you look at customers running workloads in the cloud.

[Gregory McDowell:]

Thank you. And then one quick follow-up on Project Seymour, certainly, one team effort so far in this software earnings season has been machine learning and artificial intelligence. It feels like it's brought up on every earnings call. So I was just hoping you could help maybe run through the key value proposition of Seymour and maybe talk about -- I know we're still in limited beta here, but what are some of the key milestones you guys need to hit this year before it goes GA?

[Lewis Cirne:]

Great question. And for us, again, I'm going to put it back to the customer and what they're trying to achieve and what their challenges are. Our customers aren't coming to us asking, what can you do with AI? Our customers are saying, my environment is incredibly complex; there is so much going on, so many micro services all trying to work in concert to deliver a great customer experience; so many possible points of failure. From the customer experience to the application to the infrastructure, new Relic can you help put into intelligence or code or algorithms -- can you help automate the work of what humans have manually been doing in the past? Which is analyzing all this data and looking for problems, or trying to identify the root cause of problem or identifying just interesting stuff in that data that's worthy of attention before they are problems. So that has been a very human effort of just staring at data and trying to figure out what's interesting and actionable, and then routing it to the right person, who would actually have an interest and a role to play on based on whatever that insight is in the data. That's the foundation of what we're doing with Seymour. And so we're using some buzzword friendly technology like machine learning. We're using other just straightforward algorithms that encode the best practices that we've discovered in application management over the hundreds of engineer years that we have in place in this domain. And the results is our customers are using our products more and they're finding it to be more of a daily habit. So the vision of Seymour is to drive more usage of our product. Because as we talked about in that $24 million deal, it's not a surprise or a coincidence that we have so many active users within that customer using our products on a regular basis. So we believe if we've got more people using our product more often, it'll turn into healthier customer relationships. And so to answer your question of like what do I pay attention to in order for it to be ready for prime time, well, this is going to be continual effort for us, but we're going to be a lot of attention to stickiness and active usage for Seymour.

[Gregory McDowell:]

Great, thanks Lew, thanks Mark.

[Operator:]

Your next question comes from Sterling Auty from JPMorgan.

[Sterling Auty:]

Yes, thanks. Hi guys. I want to follow-up first on the land and expand item. When you look at the expand part of the deals, how much of the expand is coming from just follow-on APM? And how much of it is from taking on new products? And does that differ by the size of the customer?

[Lewis Cirne:]

Sterling, thanks. The -- it really varies, we grow our customers. We get in, we get a toe-hold in the account and they continue to grow in several ways. One is the application growth, the environment growth, and we'll sell more APM. The other -- and then another vector is we do go into APM only accounts. More and more accounts are coming in with multi-products to start, but we do have accounts that still start with APM, and they'll add additional products. And then, the third vector is moving to whole new environments. It might be a new application in that same group or another division within the organization. Any of those vectors can be an expansion opportunity. In terms of the size of the company, I think all three of those can work in small and larger companies. Obviously, the expansion of new applications and new divisions, that's much more relevant in the enterprise. But we see that still even in our smaller companies as well.

[Sterling Auty:]

And then one follow-up question. The success that you've seen over the last several quarters, has anything changed in terms of the top of funnel dynamics versus the close rates when you look at the go-to-market motion?

[Lewis Cirne:]

We studied those in depth as you can imagine. And we see -- we're seeing fairly consistent patterns emerge and trends. I don't think anything has changed dramatically. We test things. We try things fairly routinely. And it's interesting because you can run programs that really expand the top of the funnel. And then you'll see your conversion rates somewhere down the line maybe deteriorate. And so you can convince yourself that metric is great. But at the end of the day, it's what you're putting in and what you're getting out. And that's really what we focus on, and I think that's what we have to focus on long term to make sure we're improving the efficiency of the business.

[Sterling Auty:]

Thanks, guys.

[Operator:]

Your next question comes from Sanjit Singh from Morgan Stanley.

[Sanjit Singh:]

Thank you for taking the questions and congrats to the team on a strong fiscal year '17. Lew, I wanted to touch base on the security proposition that New Relic can potentially play. I think when I talk to your customers more and more, the performance management APM embedded within an overall security architecture, is the conversation that I'm having a lot. And I noticed the relationship you signed with Splunk. So I just wanted to revisit your thoughts on how New Relic fits into kind of these next generation security architectures? And what's your vision there?

[Lewis Cirne:]

Sure. It's a great question. And just as a reminder to you and the other listeners, what's interesting about our value proposition for security is that the web application typically is now the new point of attack into a business from the outside because by definition, the web application is kind of exposing something to the outside world, and therefore, it could be a point of vulnerability. And therefore, our unique visibility inside the application and what's going on and if it's changing is valuable telemetry to help security teams detect potential threats and attacks. One of the interesting things we are doing in Seymour is generating some alerts and cards that will notify when we see suspicious security events inside your applications. So we're dipping our toe in that space at the moment. And certainly, we and many of our customers use New Relic Insights for security use cases. However, we recognize that this is -- the security market takes a lot of focus in order to do really well. And so we are not yet quite ready at the point to develop -- to devote the considerable sales and marketing resources required to really make it an area of priority and focus from a go-to-market perspective. So we're learning from our customers exactly how they use our product for security use cases. And we'll continue to learn and have that in consideration as we think about our offering, how we may more directly address the security use cases in the future. And the last thing I'd say is we are thrilled about our Splunk partnership. We think it's good for us because it's good for our customers. A lot of our customers are Splunk customers and they rely on our digital intelligence platform as well as they rely on Splunk. And they want to see more data sharing between our platforms. We're happy to do that because it helps them be more successful. And when our customers are successful, they'll do a bit more business with us.

[Sanjit Singh:]

Great, and then one follow-up, just in terms of some of the changes in terms of go-to-market. Outside of the promotion of Erica, anything from a sales force perspective that's going to be different this year versus last year; anything major in terms of territory realignment, quotas, those types of things?

[Lewis Cirne:]

The short answer is no, nothing like large or significant. First of all, I would say since we made the announcement at the very beginning of April, shortly thereafter we had our annual sales kickoff. And the overwhelming consistent feedback was it was our best sales kickoff ever and the level of excitement and enthusiasm and passion and confidence is at an all-time high in the field. My hat's off to Erica for leading that incredibly well and her team. Erica did a great job in building out her lieutenants last year. And so our regional leaders underneath Erica have been in place for about a year now. We feel like that team is in great shape and is stable and so we don't anticipate large changes. That having been said, we're a growing business. We're always sort of asking what can we do better, so we may make minor adjustments here or there. But that's always been the case for our business historically, and we expect that will be the way we do business for the foreseeable future.

[Sanjit Singh:]

Understood, thank you.

[Operator:]

Our next question comes from Rob Oliver from Baird.

[Robert Oliver:]

Great, thank you guys. Mark, I think I heard you mention that the largest deal was a consolidation of a bunch of smaller deals that have existed within an account? And maybe, Lew to your point, you talk about the opportunity to bring that unified vision. As you look at enterprise pipeline now, how many deals look like that? In other words, clearly you guys have tremendous mindshare with the DevOps community. So how much of the pipeline looks like a bunch of smaller deals within an account, where you have the opportunity to come in and unify those?

[Lewis Cirne:]

Great question. And I think, one of the reasons why I'm so excited about New Relic's future and prospects. So we have now 30 customers spending $1 million a year or more with us, and that's nearly double in just 1 year, right? Where did they come from? Well, they were the $100,000 to $1 million class of last year and years prior. So that category -- we now have over 500 six figure customers, over 500 of them. And that's up 40% year-over-year. That's our farm team for the million dollar plus. And $1 million customers, they're the stable of customers that will -- some of them will ultimately be $10 million a year customers, and that's my challenge to the field is who's going to bring in the $10 million New Relic customer? And I hope it's this year. So it's this wonderful graduation steps that our customers go through. And let me remind you, the average spend across our customer base is only $19,500. Now the good news is that's up from $9,000 at the day of our IPO, which is what 2.5 years ago. So it's more than doubled. And of course, that's reflective on us going up market. But we're fine with bringing on a customer at a relatively low spend level because the product -- if we continue to deliver a product that customers love to use and value, then they'll increase their spend with us and ultimately, it turns into these wonderful relationships of long-term subscribers at substantial investment levels.

[Robert Oliver:]

Great, thanks Lew. Thanks, guys.

[Operator:]

Your next question comes from Jesse Hulsing from Goldman Sachs.

[Kevin Kumar:]

Hi. This is Kevin Kumar on for Jesse. Regarding Project Seymour, how many customers are testing the product currently? And when do you think they could be a material contributor to the model?

[Lewis Cirne:]

So we're not at a point yet where we can describe customer counts, except for to say, like, I love the growth that I'm seeing in usage across the beta customers, and that's the key point. How you think about Seymour in the model is not a separate product on its own, but rather a vehicle by which we drive more user engagement, more stickiness and substantially more competitive advantage. Our competitors are on-premise. We don't believe it's possible to do something like this on-premise single tenant. So it's going to be a simple do you have something like Seymour or don't you? And we think the answer will be only New Relic has something like Seymour in our broader competitive space. And so the way you think about how it will affect our business will be in win rates, in usage and hopefully more and more of these customer relationships that look like the substantial deal we talked about during in the call and more of those $100,000 and $1 million customer relationships.

[Kevin Kumar:]

Great, thank you.

[Operator:]

Our next question comes from Ittai Kidron from Oppenheimer.

[Ittai Kidron:]

Thanks. Lew maybe you can talk about your two of your least popular children, mobile and browser, and how do you think about them?

[Lewis Cirne:]

Whoever says they don't love all their children equally? I love Mobile and Browser.

[Ittai Kidron:]

You don't mention them at all.

[Lewis Cirne:]

I don't -- look, it's like when one of your children graduates from college, that's who gets the attention that day. So we had a great quarter for Insights. We had a great quarter for Infrastructure. Mobile and Browser are like, it starts the customer experience, right? So the whole point of digital is delivering a great customer experience. Every customer interaction must be measured. And we measure every mobile page load, every browser action. Every time you buy a coffee on Dunkin' Donuts, we measure the health, the speed of that transaction and if there's a crash, we can go all the way down to the cause of that crash, including all the steps prior to that crash. That's must have data because the customer experience and the digital customer experience is the brand experience. So yes, these are super important products for us. We believe they are, perhaps among our most differentiated products. They're where our more direct competitors in the APM space really have the furthest to go in being competitive in that space. And they're often why, especially if you've got a customer facing property why people select New Relic.

[Ittai Kidron:]

Got it. And then Mark, for you excluding those two -- the timing of this, I guess, $8 million billings that just kind of came without you expecting them to come in the quarter, I mean, without that your billings growth would have been up 42%, correct me if I'm wrong on a year-over-year basis, the high on the year, which makes sense seasonally. I guess the question is though you look at the rest of the quarter as we think to fiscal '18, do you have a view on the year and what would you do expect billings growth to be in '18? Is it low 30s on average for the year? Is that the kind of the right bogey to think about?

[Mark Sachleben:]

Well, I can confirm the math you did on the first calculation. And if you take out that $8 million, that is accurate. In terms of billings going forward, we're not guiding directly to billings. We've given some indication of deferred for the next quarter. We've also talked about our operating income for the year, our guidance for the end of the year, our cash flow targets. And when you combine -- I think we've given enough information to sort of have a sense for what the year might look like. We talked about how deferred will be seasonally similar to what it was last year with the exception of Q4 because this Q4 had those unusual items. So I think, we've given enough to triangulate to get a sense for it, but we are not providing explicit guidance in terms of billings growth or deferred for the year.

[Ittai Kidron:]

Okay. And maybe I guess, lastly on productivity, how do you feel about the productivity of sales force right now; the progression there? And how do you think, regarding the milestones you've put for the sales force for fiscal '18, I assumed there's an escalation out there. I mean, what's your initial kind of view into that? How good do you feel about your ability to get those productivity levels up?

[Mark Sachleben:]

Yes, we feel good about the productivity that we're seeing, that we've seen and we continue to see you. We're a growth company, and so we continue to hire aggressively, particularly enterprise. We are hiring across the SMB as well, but we're investing more aggressively in the enterprise. And so we still have at any given point in time, we have a fair amount of our sales team that is ramping and is relatively new. And so we continue to face the challenge and address the challenge of hiring good people, enabling them and making sure they ramp to the point where they get to be successful, fully ramped reps. And we're doing that at an aggressive pace. But in terms of the overall productivity, we like what we continue to see.

[Ittai Kidron:]

Very good. Good luck guys.

[Operator:]

Our next question comes from Derrick Wood from Cowen & Company.

[Rakesh Kumar:]

Hi, guys. This is Rakesh Kumar sitting in for Derrick. I was hoping to get more color on the AWS partnership that started last month and on the joint development and go-to-market initiatives. How is that trending? And what are some of your initial findings?

[Lewis Cirne:]

Well, it's still early with that particular portion of this partnership, but we're very encouraged by it. What we really are encouraged by is how Amazon and we at New Relic jointly see the customer journey to the cloud, and how we believe both companies see how we can help each other. How do we help Amazon? Well, Amazon benefits when customer workloads in the cloud move to the cloud faster and grow. And what are the obstacles to moving workload to the cloud? Often, it's uncertainty about how the application will behave in a cloud environment or not quite enough confidence to really go full scale into the cloud environment because it is different from on-premise. We give our customers confidence that they can deploy the cloud. We can compare the application's behavior in an on-premise environment to the cloud environment, show how often it behaves much more predictably and better and more cost effectively because you can right size the environment to the workload. And that results in more customer confidence to move to Amazon or to other cloud providers. And let me be clear, we are partnering with all the major cloud providers because our value proposition is similar in each of those cases. So that's how we help the cloud provider partners because the customer really does want an objective third party to give them that confidence. It gives them so much more confidence if it's New Relic objectively measuring the health of the application in both environments rather than a tool maybe provided by the cloud provider that could claim that everything is fine. That's always going to be a little harder for the customer, really, to get fully confident with. And that's why we're so important as an independent partner to serve in that role. So there's more we are looking at doing with all of our cloud partners, and the details aren't yet ready to release, but stay tuned. But because we're seeing this joint success, it's certainly a tailwind for our business and we think it's helping Amazon and our other partners accelerate their business as well.

[Rakesh Kumar:]

Got it. If I could ask a follow-up as well. You closed a large deal with the Insights product and it now accounts for almost 10% of your new business. I was hoping to understand at what point in the APM journey does customer start to look at the Insights product? And if there is a dedicated sales motion for Insights?

[Lewis Cirne:]

There is not a dedicated sales motion for Insights. And this particular use case was a wonderful one. It's not necessarily how all of our Insights deals work, but it is a wonderful story because in this particular case, it was a CEO visible, critical digital initiative, something they've been -- the CEO has been on record talking about in the press about how it is important for their business, and how excited they were about this project. And so we not only engage with the development and the operation teams and talk about what we usually talk about

[Rakesh Kumar:]

Thanks.

[Operator:]

Your last question comes from Fatima Boolani of UBS.

[Fatima Boolani:]

Good afternoon, thank you for taking the questions. Lew, I wanted to follow-up on a comment you made. It's very clear that New Relic is going to be doubling down even further on the enterprise side of the house. And I'm curious as you get closer to the go-to-market operation and sales motions, what your perspective is around offering ELAs or sort of all you can eat buffet options to really incent the adoption of the product portfolio that's expanded quite nicely in the last several years? And a quick follow-up for Mark, if I may.

[Lewis Cirne:]

Sure, great. Great question, and I'd like the -- we don't necessarily think specifically in terms of ELAs. My last company, Wily did that. We like them to be more of a natural outcome of lots and lots of usage because in the case like the $8 million ARR or $24 million TCB deal we talked about as I mentioned, there were 100 transactions we did with this company, every one of them at a higher unit price along the way. So we were doing just fine, doing one deal a quarter or multiple deals per quarter as we grew with them. And so it made sense was a natural time for a win-win. My worry about being an ELA-driven business is it often leads to an imbalance in the customer relationship, where we're trying to drive the bus too hard and the customer is not ready for it. It can turn into shelfware or it can turn into just a unit price that we don't think is right for us in the long term. So I'd rather kind of get there when we're ready and the customer is ready, driven by us demonstrating success in the customer environment. And that's how we're going to think about our customer relationship in the future. But it's great to demonstrate that we can get to this new level of spend with the large enterprise and show that the value proposition we have is strategic.

[Fatima Boolani:]

That's very helpful. And Mark, a quick question for you on gross margin. It continued to be pretty resilient and trending towards the high end and even maybe above your longer-term targets. And I would have presumed as you kind of march up market or for larger customers, who presumably have more complex instantiation requirements and more complex general environments, I'm wondering if you can help us understand kind of the puts and takes into the gross margin line. And that's it for me.

[Mark Sachleben:]

Okay, sure. We are incredibly proud of our gross margins. And you're absolutely right, the complexity of dealing with the enterprise organizations has certainly increased. And you would normally think that with the pressure in your gross margin, I think, it's a testament to the engineering team that we've done and our ability to really be efficient in serving that, if you think about it, the amount of data we collect today per customer is much greater than it was a couple of years ago. Looking forward, it's going to be much greater than it is now. And the challenge is going to be to continue to keep being efficient. When you look at what's historically gone on, you have a couple of things happening. One is things like our credit card cost, which is a decent component of our cost of sales. As more and more customers move to -- or more of our business moves to the enterprise, we end up with more and more invoicing and lower percentage of credit card costs. Our capitalized software has been fairly flat over time in the last few years. And so as a percentage of revenue it's been going down. So when you look at the amortization hit to the gross margin that's been declining as a percent as well. So there have been a couple of things like that that have been helping us. So we've been -- while we're thrilled with where it is we have been guiding to get closer -- to drift downward toward our long-term targets of the 78% to 82%.

[Fatima Boolani:]

Thank you for the detail.

[Operator:]

That is all the time we have for questions. Thank you for joining. This concludes today's conference call. You may now disconnect.