New Relic, Inc.
Q2 2016 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Good afternoon. My name is Dan and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic's Second Quarter Fiscal 2016 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 will now turn the call over to Director of Strategic Finance and Investor Relations, Mr. Jon Parker.

[Jon Parker:]

Thank you. Good afternoon and welcome to New Relic's second quarter fiscal year 2016 earnings conference call. Today's call is to provide you with information regarding our second quarter fiscal 2016 performance in addition to our financial outlook for our third fiscal quarter and full fiscal year 2016. 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. Reconciliations 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 comments and responses to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or our quarterly results. Please be advised that the 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, periodic SEC reports, a webcast replay of today's call, or, to learn more about New Relic. With that, let turn the call over to Lew.

[Lew Cirne:]

Thanks very much, Jon. That was riveting. Good afternoon to everyone joining us today to review New Relic's second quarter fiscal 2016 financial results. I'm delighted to be joined today, and ongoing, by our recently promoted, President, Hilarie Koplow-McAdams, who will provide some color on key wins in the quarter. Then, she will turn it over to Mark to review our financials and guidance in detail. But, first, I want to share a few recent highlights. We saw continued momentum in our second fiscal quarter, which we believe stems from companies increasingly recognizing the need for cloud-based software analytics to help them drive amazing customer experiences and business success. Today, almost every company is a software company. From startups to established leaders, organizations are increasingly turning to new digital initiatives to better connect with their customers and deliver stronger business outcomes. We believe our momentum is evidenced by the breadth of impressive brands with whom we have transacted in the quarter. Spanning the enterprise market down to small and mid-size businesses. And, ultimately, our financial results which exceeded both the top and bottom lines of our previous guidance. For the quarter, we generated revenue of $42.9 million up 69% year-over-year, while at the same time delivering continued operating margin improvements. We've often said that we are all-in with a commitment to deliver our Software Analytics Cloud in a SaaS delivery model. We believe our multi-tenant SaaS model is a huge competitive differentiator and delivers strategic advantages to our customers, including dramatically lower TCO, quicker time to value, a faster pace of innovation, and perhaps most importantly, a real-time big data analytics cloud that can scale on demand. We have seen this message resonate with customers who understand the power of our Software Analytics Cloud and how difficult it would be to see these benefits on premises. We are seeing how quickly the market is moving in this direction. As companies of all sizes, industries, and geographies, are increasingly moving multiple applications to the cloud. In fact, an IDC report earlier this year stated their view that 91% of net new software this year would be built for cloud delivery. Ultimately, we believe our ability to monitor applications with an integrated, elegant, cloud-based platform, whether they are in the cloud or at scale behind their firewall is a significant strategic advantage. And, we see strong evidence of this in our ability to continually innovate at a rapid clip and add more value to our customer's subscription on an ongoing basis. This has always been part of our DNA as a product-first company. As an example of this, on last quarter's earnings call, I discussed our newly offered Docker functionality. While this quarter, '’m excited to mention, how just a few weeks back, at Amazon Web Search's re

[Hilarie Koplow-McAdams:]

Thanks, Lew. I think we're all excited about FutureStack next week and I look forward to discussing our go-to-market strategy in more depth at Analyst Day. But, for now, we'll focus on some of the customer highlights from the quarter. As Lew said, we were really pleased with our continued momentum in Q2. We had some great wins spanning companies of all sizes, geographies, and industries. And, really saw our software analytics vision resonate in the market. In the past year, I've spent a lot of time traveling to speak with senior leaders, and it's clear to me that we're in the midst of a massive digital transformation. We believe companies have never been as reliant on their software to drive their businesses as they are today. As a result, we've seen an incredibly diverse range of customers embrace our message and look to partner with us to help them make them successful both near-term and long-term. As such, we're seeing a growing number of strategic wins characterized by multi-year commitments, and increasingly, across our complete New Relic software analytics cloud. In Q2, ahead of the upcoming holiday season, we saw particular strength in retail and e-commerce, with wins at companies like Gamestop and Petco, among many other well-known brands. We also had fantastic wins with Salesforce and the Miami-Dade County Public School District, the nation's fourth largest school district. We believe these wins are examples of the strong demand we are seeing across large organizations. In addition to those enterprise brands I just mentioned, let me share some highlights from our small and mid-size business. As our software analytics cloud has broadened, we've seen SMBs find growing ways to leverage our platform. This quarter, we actually closed the largest SMB deal in New Relic's history with a leading Internet brand. We also closed business with other great organizations like Change.org, Fast Company, Mewsoft, Spokeo, and Surfline. And, I thought it might be valuable to share a couple of examples from this past quarter of how diverse companies are leveraging our platform. The first company is Major League Baseball Advanced Media or as commonly referred to MLBAM. If you're not aware, and I suspect you are, MLBAM has evolved into a full-service solutions provider distributing content through all forms of interactive media. I think this is a remarkable story. As the company was established as a tech startup back in 2001 and began by building and providing technology services for the league and its 30 teams. It had a small handful of employees tasked with building websites and e-commerce to distribute official merchandise and tickets. Since that time, MLBAM has emerged into one of the most talented and reliable names in the streaming video technology and become a household name in go-to choice for delivering media from organizations like HBO, World Wrestling Entertainment, and the NHL. We first partnered with MLBAM in early 2014 and have seen our relationship steadily evolve over the past 18 months, including a meaningful APM uptick this past quarter. MLBAM relies on New Relic's software analytics cloud to ensure that they have a deep understanding of their software's performance in the delivery of their streaming video and other digital services. An extensive AWS user, MLBAM uses New Relic to enable smooth scaling in AWS as they attract new customers. More specifically, in the company's move towards an engineering model, in which all teams collaborate around the same runtime metrics for system health, alerts, uptime, and application monitoring, New Relic's single pane of glass capability is critical in allowing the teams to work closely and effectively in monitoring their applications, so they can quickly identify and fix potential problems. We look forward to continuing our partnership with this leading-edge organization going forward. In fact, MLBAM's CTO, Joe Inzerillo, will be speaking at FutureStack and I would encourage you to try to attend his session. Another story I want to share is that of MercardoLibre. MercardoLibre is the largest e-commerce platform and marketplace in Latin America selling more than 30 million items in its second quarter. MercardoLibre is actually one of our earliest customers going back to 2011. And, over the last few years, has continued to standardize on New Relic, leveraging our APM offering across every development and production system. In addition to leveraging our APM solution, MercardoLibre has relied on our server solution, our mobile offering, and our plug-ins. And, two quarters ago we saw MercardoLibre start using our browser product. And, in this last quarter, they started leveraging our synthetics monitoring solution. MercardoLibre is now relying on our browser and synthetics offering to help them accurately monitor and report on the user experience to their business leaders. By monitoring their full environment, in real and simulated environments, MercardoLibre is leveraging New Relic’s software analytics platform to help paint a complete picture of the user flow and application speed which they directly correlate to conversions and less help line impact. The last vignette I want to share is about TrueCar. TrueCar is a leading modern car buying service whose mission is to transform the car buying experience for consumers through its network of more than 10,000 trusted certified dealers. TrueCar has built an extensive set of technology services over the last 10 years and as the complexity of their environment has grown their ability to accurately view its performance and capacity became extremely challenging. That's where New Relic came in. After a thorough evaluation, TrueCar joined us as a new customer this past quarter purchasing our complete software analytics cloud to help enable its development teams to self-serve all of their performance monitoring needs and proactively pinpoint performance bottlenecks, responding to issues more quickly. They are also leveraging New Relic's insights to get a real-time view into how customers and dealers are interacting with their site, and as a result, are able to continually optimize it to ensure engagement. We look forward to seeing their innovative mission evolve in the future. I think all three of these examples demonstrate the breadth and power of our platform and I would encourage you to talk to our many customers that will be showcased next week at FutureStack. Our customers are the best advocates and marketing that we have. And, so many are doing incredibly creative things with our technology as they look to play often and capitalize on the data flowing through their software. So, with that, let me turn the call over to Mark.

[Mark Sachleben:]

Thanks, Hilarie. Turning to the financials. For our second fiscal quarter, revenue was $42.9 million, up 69% year over year, and up 13% sequentially. As with the prior quarter, this growth continued to be driven by momentum across all of our go-to-market segments and products, and importantly, our success signing larger deals with enterprise accounts. Our annualized revenue per average paid business account, continued to march higher, and now sits near $13,600, an acceleration to 36% growth year-over-year, and up 8% sequentially. We ended the second fiscal quarter with 12,840 total paid business accounts. Of these, the total number of customers paying us more than $5,000 per year has reached 5,285, up approximately 42% year over year, and an increase of 410 customers from last quarter's figure of 4,875. This addition is just shy of our largest increase ever for this sub-segment. This continued trend is in line with our strategy to focus on a greater proportion of our investments in mid-market and enterprise, in addition to focusing on the highest value segment at the low-end of the market. For the quarter, we experienced a dollar base net expansion rate of 121% lower than past, the past several quarters, but in line with longer-term historical trends. Also, this level represented an improvement from 115% in the same quarter a year ago. We continued to see success internationally in the quarter, as our non-U.S. revenue grew to $14.1 million, up 66% year-over-year, and non-U.S. revenue accounted for 33% 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 press release issued earlier today. Gross margin for the quarter was 81%, unchanged, versus last year and last quarter. As we have stated in prior calls, we expect our gross margin to continue to moderate in the near term and should come down towards 80% for the full fiscal year. With regard to operating expenses, we continued to invest in our go-to-market teams across all segments of the business. Our sales and marketing costs were $27 million compared to $18 million for the year-ago period, and $26.7 million in the prior quarter. With our new CMO coming on board, we did decide to push out some investments from the second to the third fiscal quarter, resulting in a lower level of marketing spending than expected. However, as our guidance indicates, and I will discuss shortly, we expect to make up that spend this quarter. R&D expenses were $9 million in the quarter compared to $5.1 million in the year-ago period, and $7.7 million last quarter. New Relic is a product-driven company and we are committed to continued innovation for Software Analytics platform to be able to address the opportunity in front of us. G&A costs were $7 million in the quarter, up from $3.8 million in the year-ago period, and $6.5 million last quarter. The year-over-year growth is primarily a function of increased expenses associated with being a publicly traded company, along with increased headcount. Overall, our expense in the quarter produced an operating loss of $8.4 million compared to a loss of $6.4 million for Q2 of last year, and $10.1 million for Q1. This resulted in a negative operating margin of 20% in the quarter, an improvement from the negative 25% a year ago, and negative 27% in the prior quarter. In addition to improved operating leverage, this was also driven by a shift in marketing spend, as previously mentioned, and by a more backend-loaded hiring quarter than expected. Our net loss per share for Q2 was $0.17 based upon a weighted average share count of $48.2 million. This compares to a net loss per share of $0.15 based upon a pro forma weighted-average share count of $40.7 million in Q2 of last year, a share count that assumes the conversion of preferred stock outstanding prior to our IPO. Turning to our balance sheet, we ended our second quarter with $189 million of cash, cash equivalents, and short-term investments down from $195 million at the end of our first quarter. Elsewhere on the balance sheet, our total deferred revenue grew to $45.4 million, up 190% year-over-year. This growth continues to be a function of both our traction in the enterprise, where we more often drive annual billing terms, and also the mid-market, where we have migrated some of our customers from monthly to quarterly or annual invoicing. This quarter, we also saw a benefit to deferred revenue from two large customers, both of whom renewed under multi-year agreements, and requested we invoice their total commitment fees upfront. We do not generally push for these billing terms or provide any additional incentives to do such, but these were cases that suited the customer's own procurement needs. Overall, we continue to expect growth in our deferred revenue to meaningfully outpace revenue growth for the foreseeable future. However, as discussed previously, due to the varying durations of our contracts and billing terms, we do not consider deferred revenue to be a reliable indicator of our underlying business momentum, and accordingly, we do not currently view it as a key metric. Before turning to guidance, I want to briefly discuss today's announced acquisition of Opsmatic. The transaction closed last month and for fiscal year '16, we expect it to have no impact on our revenue. However, we do expect a roughly $1 million impact on our non-GAAP operating expenses in the back half of this fiscal year which we have factored into our revised guidance. Now, let me turn to our outlook for the third quarter of fiscal 2016, and for the year as a whole. We are initiating our outlook as follows. For the third fiscal quarter ending December 31, we expect revenue to range from $45 million to $46 million for growth of 55% to 58% year-over-year. We expect a non-GAAP operating loss of $14 million to $15 million. This would lead to non-GAAP net loss per share in the range of $0.29 to $0.31 based upon a weighted average share count of $48.9 million. Our third quarter guidance includes the expected impact of the Opsmatic acquisition, our FutureStack User Conference, and the shift in timing of some marketing investments as mentioned earlier. For the full fiscal year 2016, we now expect revenue to range from $174 million to $176 million or growth of 58% to 59% year-over-year. This is up from our previous guidance of $168 million to $171 million for the full year. We expect a non-GAAP operating loss of $44 million to $46 million, which is an improvement compared to our previous guidance for a loss of $44.5 million to $47.5 million. This would lead to a non-GAAP net loss per share in the range of $0.90 to $0.94 based upon a weighted average share count of $48.9 million. This is an improvement compared to our previous guidance for a loss of $0.91 to $0.97. And, with that, we are happy to turn it over to your questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Sterling Auty with JPMorgan. Your line is now open.

[Sterling Auty:]

Yes, thanks, hi, guys. Wanted to start with the growth in the annualized subscription revenue per paid business account, which, that's a mouthful. How much was that influenced by the two large multi-year renewals? And may be use some additional color about the continued traction you're having? As it seems like deal sizes and penetration in larger customers continues to do pretty well.

[Mark Sachleben:]

Sure, Sterling, this is Mark. And, those two deals did not have an outside impact on that number. Any large deal we do, obviously, has an impact and helps drive it up. But those two were not any more significant than the number of transactions we did in the quarter. We were very pleased with the growth we're seeing there and it continues driven by a number of things. We're seeing accounts, really, in all segments of the market, right, from our SMB right through to our enterprise, grow and expand their uses of our core products. We're also having good success in expanding the different products and at getting multiple products, multi-product deals into accounts. And then, we're seeing the transaction mix tilt more toward the enterprise. And those are generally larger deals and those are pushing the account spend up as well. And so, the combination of those factors is driving this higher.

[Sterling Auty:]

Okay. And, you mentioned, some, I think, backend loaded hiring. I didn't quite catch, in what areas was the hiring, kind of, pushed back? And, may be, more specifically, how are you trending in terms of the continued ramp in hiring of quota-carrying salespeople for both SMB and enterprise?

[Mark Sachleben:]

So, the hiring, the rep hiring, so address that portion first. We're seeing continued ability to continue to meet or exceed our plans across all segments of our rep hiring. So, we're very pleased with how that's going. The backend loaded nature behind, was more in the other function of the Company. And, I'm not sure if it was the nice weather in San Francisco, what, that had people take the summer off? Or, what was going on? But we just saw more hires come on in the September timeframe than we had been expecting. Or, being expecting a little bit more evenly through July and August.

[Operator:]

And your next question comes from the line of Michael Turits with Raymond James. Your line is now open.

[Michael Turits:]

Hello, guys. May be, a different metric tacked on some of the questions Sterling was adding about the move to larger deals. But, from the deferred revenue side. You had strong growth in deferred revenue. And, for the first time you broke out about $3 million in long-term deferred. So, again, how much was the impact on deferred? And then, may be, as a follow-up of those two large deals? And then, may be you could talk to us about the trend towards -- oh, it looks like longer duration, if you can quantify that in any way?

[Mark Sachleben:]

Yes, so the two deals that we mentioned were broken out as not -- I think they're broken out on our statements as long-term deferred. So, you can see the magnitude of those two individual transactions. The remaining deferred has been similar to other quarters where it’s been driven by the combination of the move to the enterprise and those customers more likely to pay annual upfront. And, then, in addition, we continue to see a migration of our existing SMB base more toward longer billing terms. So, month -- historically, we were monthly. We guide monthly to quarterly to annually, et cetera. And so, we're seeing that's pushing our deferred up as well. But, when you look at our customer base still we have the majority; more than half our customers are still paying on a monthly basis. So, we still see some room there and we expect that our growth in deferred will continue to outpace our revenue growth. And, that's why we're cautioned against using that as a metric for future revenue growth.

[Michael Turits:]

And then, if I get a second question in a completely different direction here, the Opsmatic acquisition. How does that work in terms of dovetailing with your existing server monitoring product in terms of the two types of techniques that you're using, obviously, as an APM company, than, mostly focused on analyzing code? So, how does the -- how does Opsmatic put it, in general, from a technical point of view? And, specifically, with your server product?

[Lew Cirne:]

Sure, that's a great question. And, this is Lew. And, in fact, that was the exact question. The answer to that question is what excited me about this deal. Because, I believe the way Opsmatic watches servers is entirely different and complementary to how we do it and how most of the rest of industry does it. What's interesting that happens on servers on large cloud environments is more of what is changing? What is the state of the server? And, that may be a challenge to measure when you're measuring a dozen or so servers in an on premise environment. But, the typical cloud deployment could be hundreds or thousands of virtual servers. And, Opsmatic uniquely is able to track the state and change of a large fleet of servers running in production. When we combine that with the data that we collect on the health of the server itself, in particular, with our recent AWS functionality, to see very, very clearly into what's going on in AWS environment. We think, like, we think we've got a unique and incredibly valuable and relevant view into the infrastructure. And, it's, of course, that infrastructure that’s essential to running healthy software. So, the way I view it strategically is, look, there are three key constituents that need to succeed together in order to make digital work. There's the development team, there's the operations team, and then, there's the digital business leader, who really is responsible for the success of the project as a whole. And, all three of them should be using the New Relic software analytics platform. And so, when it comes to the ops team, I think they're really going to like what they see when we come out with a product that comes out of the integration of Opsmatic into the New Relic platform.

[Operator:]

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

[Sanjit Singh:]

Thank you for taking my questions and nice quarter, guys. I had a quick question on the net expansion rate. You -- the past couple of quarters you guys have been clear on that that 130% that we've been seeing for the past couple of quarters. That might be difficult to sustain. But, in terms of it coming down this quarter, and, may be, thinking about in future quarters. Does it, sort of, level off at these levels? And, was there any sort of pause ahead of some new product releases from your customer base that might have caused that to come down this quarter?

[Lew Cirne:]

I think it's going to continue to be volatile, as you mentioned. We did I think the fact that it was so consistent for three quarters was probably more of an anomaly than anything. We -- it'll continue to bounce around. But, we had an improvement over last year, the same quarter, was 115%, went up to 121%. And so, we’re pleased by that. And, I think what we would advise is that we expect to continue to jump around going forward. We think it's healthy. We're continued to see accounts expand. And, but, I would, I guess, I would say that it's going to continue to be somewhat volatile.

[Sanjit Singh:]

Great. And then, just to, sort of, toggle back on the total paid account performance this quarter. It has been slowing over the last couple of quarters. But, I assume that's a reflection of the traction you're getting in enterprise. Any color there on, sort of, the, sort of, 3% sequential growth we saw in total paid accounts? Is that just a reflection of the more resource allocation towards the mid-market enterprise?

[Mark Sachleben:]

Yes, that's right. As we've talked about, we are sharpening our focus in the investment that we make on the accounts that have a greater propensity to expand and have a higher lifetime value. And, we've mentioned on the call, that we had 400, an increase of 410 accounts of accounts that pay us more than 5K. And, that grew over 40% year on year. I think it was our second best, or, close to the best quarter we've ever had. And so, those are the accounts that really are going to provide the growth for our future. So, we're very pleased with the results we’ve seen there. The accounts that pay us less than 5K, the number is going to jump around pretty significantly from quarter-to-quarter. And, that’s okay. That will continue to happen. What we really focus on is the larger accounts and we're seeing good growth there.

[Sanjit Singh:]

Great. Thank you.

[Hilarie Koplow-McAdams:]

And, Greg, this is Hilarie, just to add a little color to that. I really want to reaffirm what Mark said. About 18 months ago, we drove a strategy to investment market and in the enterprise to drive our growth. As you can see from the numbers, customers are committing very strategically to us. And, we think that's the best use of our resources. We certainly feel that the whole market is addressable. But, we're really excited about the growth that we're seeing in the upper market.

[Operator:]

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

[Greg McDowell:]

Great. Thank you very much. Hi, everybody. One for you, Hilarie and welcome to the wonderful world of Wall Street earnings calls. But, I was hoping you could expand a little bit on, may be, some of your priorities for the sales force in the back half of the year? And, in particular, sort of, the sales motion, the sales productivity, may be, any commentary on segmentation of the sales force as you attack larger and larger accounts. That's my first question.

[Hilarie Koplow-McAdams:]

Sure. I'm happy to provide some color there and then go deep on that. So, I think as I've explained, historically, we have two major segments. We have small, medium business customers, and they're really interesting. They're many of them are born digital. They are cloud first. And ultimately, what they love about New Relic is that we provide them unprecedented visibility into what's going on inside their digital experiences and there's just a wider array of digital experiences that they're all bringing to the market. And, I think I highlighted that, in that, in some of the deals that we discussed earlier in the call. We then have enterprise customers and that’s really been the investment surge. And, what we saw was, the large companies, in fact, some of the largest companies in the world, coming to us and realizing that digital is very much a part of their future. And, you hear this. You hear it from Jeff Immelt. You hear it from John Chambers. You hear from the CEOs. That some of what, historically, has been very traditional, companies declare that the world is going digital and New Relic is very much a partner in that. So, when we look at our go-to-market investments, we look very carefully at which segments are growing from a digital perspective. Where is this, a driver? How do we attach ourselves to strategic transformational projects? And then, ultimately, land on a standardization decision with that account. And, that's part of what you’re seeing underneath the numbers, where we have these big large commitments to New Relic over the course of several years, those are really company's saying, we're with you, we're partnering with you for the short and the long. How we go-to-market, specifically, is we really believe that we've designed a product that proves itself. So, we very much have a land and expand strategy. We want the customer to use our offering. We know from their feedback, and you can see this from the passionate following that we have, that within minutes they often see value and they get unprecedented visibility to what's going on within a digital experience. And, from there, we move to a standardization decision. And, ultimately, we want to cover the full update with our platform which, as you’re hearing, increasingly on every call, we’re broadening. Either through the development of our products, in weave genius, or the acquisition of solutions like Opsmatic. And, Lew, I'll hand it you to add a little more.

[Lew Cirne:]

What more can I say? I mean, do even want me on these calls? How amazing is Hilarie, I just got to say it. But, no, she nailed it.

[Greg McDowell:]

Thank you. And, one quick follow-up. Lew, since you guys became public; we've increasingly talked about New Relic as a multi-product company. And, as I think about some of the things coming out, EC2 monitoring, Opsmatic, it feels like we're going from five to seven SKUs. And, at some point here, we're going to be over 10 SKUs, or products that you guys can sell. So I guess my question is how -- do we come to a point where you feel like you have enough to sell? Or just the rate at which new products are going to come out. Is that going to slow? Or are we just going to keep saying the price lists expand here?

[Lew Cirne:]

Well, you'll have to forgive me, because probably the correct financial answer is we stop building when there's enough to sell. But, culturally, there's never enough to build that we feel like can really help our customers succeed in their digital initiatives. I should be spending more time today preparing for this call. But I was spending all my time looking at demos because we’re building a lot of great stuff. And, I'm excited about that and I think our customers love the -- we are never done innovating. And, now, we have to think hard about, like a frictionless experience. So if we got too many SKUs for the customer to understand which one they need, we may reevaluate how many products we actually have. And there's nothing we're prepared to announce today or nothing specifically on my mind. But that's different from whether we're going to keep building great stuff that deliver great value. I mean, that's at the core of our strategy, is never make assumptions that the great software we built last quarter or last year is sufficient to grow the business going forward. Keep pushing forward.

[Operator:]

Your next question comes from Ittai Kidron with Oppenheimer. Your line is now open.

[Ittai Kidron:]

Thanks. So, good quarter. Hilarie, I wanted to dig into the expand part of the land and expand. I do believe that Mark mentioned what percent of revenue was other products, not APM. And, I think last quarter, it was just cross the 10% mark. But, there was no mention of that now. May be, you can give us a little bit more color on traction or, lack thereof that you're seeing with mobile browser? And then, more importantly, insights? We haven't heard anything on the call, frankly, on attraction of those products. Would love to get some color from you.

[Hilarie Koplow-McAdams:]

Sure we're really happy with our expansion rates across the product platform and actually in some of the stories that I shared about MLBAM and MercardoLibre and TrueCar. Actually, those are all multi-product deals. I think, TrueCar in their case, they bought the entire platform. So as part of our expansion, most customers recognize the APM question first and foremost and that's why they come to us to provide an answer. But in the course of those discussions we quickly broaden out to what are the adjacent questions that they're asking themselves. Particularly, as you look at where architectures are shifting. So when we think about our customer base, most of them are in a hybrid architecture now. They have a cloud component. They have a non-cloud component. They have a lot of services that they're calling in and they really lack visibility across the full estate, as we like to reference it. And so New Relic uniquely provides visibility and each of our products plays a different role in that. So from an expansion perspective there are two types of expansion that we see. One is just a very broad footprint around application performance and server monitoring. But, then more often than not, we see customers adopt two, three, four, and five products so that they can get broad visibility across these architectures. And, I think, I guess the piece that I'd really like to highlight is the rate of change that our customers are experiencing in their architectures and how this really puts them in the position of needing a solution like New Relic to give them visibility.

[Ittai Kidron:]

Okay. And then Mark, regarding the gross margins, did I get that right that you talked about 80% for the whole year? And if so, does that mean that that fourth quarter gross margin is below 80 then? Is that -- did I get that right?

[Mark Sachleben:]

We have been talking about this for a number of quarters that in the long-term, we expect our gross margin to be drifting downward but hovering in the 80% range. I think we've exceeded expectations the last couple of quarters. But we continue to invest to there. And so, I think over the longer-term, we do expect it to get to down to 80%.

[Ittai Kidron:]

Okay. And then lastly, on the large deals. I mean very good nice growth there in the number of customers over 5,000. But can you tell us how broad is the range of deal sizes there? Are you is it still that most of them are still sub-30,000? Or you're starting to see a very good grouping above that figure?

[Lew Cirne:]

We are thrilled with the growth across pretty much the entire spectrum of deal sizes. We have segments for six-digit deals, high-six-digit deals, and then deals below a 100K. And, in general, the higher the segment, the higher the growth rate in number of deals or number of customers. So while we're sharing specifics on above 5,000 we're pleased with the growth rate at higher thresholds as well.

[Operator:]

Your next question comes from the line of Brent Thill with UBS. Your line is now open.

[Brent Thill:]

Good afternoon. A question for Hilarie on your move upstream in the enterprise. I'm curious, when you look at some of the SI or other third-party partners that can help leverage the brand. Are you seeing that -- those relationships open up? Or, is it too early? Can you just give us a sense of your strategy? And, how they may be helpful in building out the enterprise ecosystem?

[Hilarie Koplow-McAdams:]

Yes, I think, long term, Brent, thanks for the question. I think long-term SIs will play an important role. We've a lot of partners out there that are helping us. One that I'd love to comment on is Amazon. We were just at re

[Brent Thill:]

Okay. Great. And, a question for -- a follow-up for Mark and Lew, just, I know we don't to dwell on this paid business account addition. But, you've looked back at Q2 last year. You were up over 800 new accounts in this quarter, 400. And, we certainly understand the move up enterprise; you're getting more revenue there. But, I guess the question I get from investors is, when you we look at, kind of, the mass market, you would assume that mass market would grow and enterprise would grow. So, I guess, just, why are you seeing such a sharp deceleration there? And, a part of it may be intentional, but a little more clarification would be helpful.

[Hilarie Koplow-McAdams:]

Sure. It's an entirely an issue of focus and we certainly don't want to take our eye off the ball completely on the low-end of our customer base. But many of these are at companies or projects that are far more ephemeral than you would see in a larger, more established company. So our lowest growth segment in fact, it shrunk a little bit this quarter was 120 employees. And that's not something you want to see ongoing. It's we want to see growth in all of our segments. But if there's a segment that I want if there's one segment that I'd like to see shrink if I have to pick one it would be that segment right. So but, the low-end is so important to us a) for the business relationship because we can't profitably serve that market. But we can more profitably serve mid-market and enterprise and that's why we're focusing there. But that segment’s also important to us because these people often migrate to other positions in other companies and they recommend New Relic when they go there. In fact that's how a lot of our largest opportunities come. Is people moving from one company to another and having a great experience with New Relic. So, it's we are paying attention to all these numbers, but we're very happy with the trend right. We're adding the right kind of customers, and as you know, we need to be very thoughtful with how we allocate our time and capital and we think we're allocating it the right way.

[Mark Sachleben:]

And I guess I would just add onto that, Brent that if you think about our pricing. A customer that's paying us less than 5K a year has probably one or two hosts that they're monitoring. And so, these are generally small individuals, a couple of people in the company type customers. That, as Lew said, we value them. But they come and go. They’re project based. And, we pay attention to them. But what we really want is when ultimately they get bigger; they and they have larger environments that's where we'd like them to really be committed.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Derrick Wood with Susquehanna International Group. Your line is now open.

[Derrick Wood:]

Thanks. I guess, to follow-up on the, kind of, increasing mix up in the enterprise. I mean, as we look at the next 12 months, anything to flag in terms of expecting more seasonality? Longer sales cycles? And then, I'd be curious if you could share that the, kind of, where we are in the build out phase? May be, percentage of reps in the enterprise that are productive? Some metrics there, that'd be helpful. Thanks.

[Lew Cirne:]

Sure. I think, over time, as we migrate more toward the enterprise, deal cycles will inevitably take grow a bit. And, they'll be a bit more variability in the business. And, obviously, the SMB business is much smoother relative to the -- to what could be a lumpy enterprise business. We're not really forecasting too much of that into our plans right now. I think that the growth in the business is outweighing the potential seasonality effects. So, we're not looking at many seasonality impacts going forward. In terms of the rep headcount, we are very pleased with our ability to hire. Where, as I mentioned, we're at, or above, plans in throughout our segments of our sales organization. But, we are not disclosing explicit rep headcount, current numbers, or target numbers.

[Derrick Wood:]

Okay. And on the Opsmatic acquisition. Obviously, you're going to be more aggressively targeting the IT Ops group. I know it's early, but as you productize this technology and go after a different buyer, should we expect any notable changes in the sales structure? Or, is this going to be more of a product that gets put into the bag of things to sell for the existing account rep?

[Lew Cirne:]

One of the cool things about our operating is we already see an enormously high deployment rate of our existing server monitoring product, as is in our customer base, in particular, with larger deployments. So, while I won't get too specific, I -- you can imagine a future version of that server monitoring agent that integrates Opsmatic and New Relic technologies. So that, basically, if we see similar attach rates what we've had in the past with our server wandering agent deployment, then our customer interface job is, look at this amazing product you already have in production, would you like to buy it? And, that’s a wonderful conversation to have compared to selling a concept without the customer seeing the value. So, I don't know. It was part of our rationale when we did the deal, we do value the importance of the ops team and want to be more and more relevant to them. One way to describe, we described it is, when we go to a customer, the dev team there cheers. New Relic is here. And, we want the ops team to cheer too. And, I think they will when see what we do with Opsmatic.

[Derrick Wood:]

Lew, do you have any metric in terms of percentage of accounts? Or, may be, a percentage of the large accounts that are already using your server monitoring tool?

[Lew Cirne:]

I'm such a huge fan of insights, that I'm one insights query away from the precise number and, Mark would kill me if I did that. So, no, I don't.

[Operator:]

Your next question comes from the line of John Rizzuto with SunTrust Robinson Humphrey. Your line is now open.

[John Rizzuto:]

Hi. Thank you. A question, kind of, the opposite of what you were talking about earlier and how we could see how this is progressing for you, or, any insights you can give. The opposite of these smaller companies, smaller deployments, project base, is really, toward were you become the enterprise standard. The development tool of choice deployed strategically through ongoing initiatives. And, as you started penetrating, it's only over the last couple of years higher and higher up the enterprise foodchain. And, as they start going more directly to cloud-based apps. What are you seeing there? Where is the progress there? And, how are you focusing on that?

[Lew Cirne:]

We're very pleased with the progress because we're past the point where are wondering whether we’re able to do it. We have done it enough times with enough companies that we know we're capable to sell at that level. That our product is very, very capable to deliver value as the customer expects as a strategic standard. That's why you're seeing these multi-year commitments. Which invariably, come after a customer's had time with our products on a departmental level and has concluded this is the right product for us to standardize on? And so, like, we talked about a large multi-year deal last quarter. In the previous core call, we talked about how News Corp standardized globally on us. And, if you look at our upcoming FutureStack speaker list, not all of these are yet the enterprise standard, but, these are all, like the type of companies that want to come and speak at our conference. And, they do that because they see the potential of New Relic. So, we've got U.S. Foods, Capital One, Time, News Corp, Healthcare.gov, and Target, all coming to speak at FutureStack. And then, we've the leaders of, like, the next generation of innovation, like Slack and Airbnb. So, I believe in our capability to deliver on this. But this does not happen overnight and that's why I'm so thrilled that we have Hilarie as the leader to drive through that over the course of the future.

[Operator:]

And, there are no further questions at this time. I'll now turn the call back over to Mr. Jon Parker.

[Jon Parker:]

Great. Thanks, operator, and thanks everyone for dialing in. We really look forward to seeing many of you at FutureStack next week and our first Analyst Day that we'll be holding Thursday afternoon. So, hope to see many of you there and, until then, have a good day.

[Operator:]

This concludes today's conference call and you may now disconnect.