Earnings Transcript for NEWR - Q1 Fiscal Year 2023

Operator: Good afternoon. Thank you for attending today's New Relic First Quarter Fiscal 2023 Financial Results Conference Call. My name is Francis, and I'll be your moderator today. All lines will be muted during the presentation portion of the call within opportunity for questions and answer at the end. [Operator Instructions] I would now like to pass the conference over to our host, Peter Goldmacher, Vice President of Investor Relations.

Peter Goldmacher: Hi, everyone, and thanks for joining our Q1 fiscal '23 earnings call. We published a presentation on our Investor Relations website about an hour ago and hope everyone has had a chance to review it together with today's earnings press release. Today's call will begin with prepared comments from Bill and Mark, and then we'll open up the line for your questions. . During this call, we will make forward-looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today. Actual results could differ materially due to a number of risks and uncertainties and, including the risk factors in our most recent 10-K and upcoming 10-Q to be filed with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available there in a few hours. And with that, I'd like to turn it over to Bill.

Bill Staples: Thank you, Peter, and good afternoon, everyone. Thanks for joining us for our Q1 FY '23 earnings call. I'd like to update you on how our first quarter of the fiscal year played out, including CRR trends, and what we're doing to accelerate the business before handing over to Mark for an update on the financials. As a reminder, we entered FY '23 with four key priorities

Mark Sachleben: Thanks, Bill, and good afternoon and good evening to everyone on the call. I'd like to cover 4 topics

Operator: [Operator Instructions] Our first question comes from Kingsley Crane with Canaccord. Please go ahead.

Kingsley Crane: So for Bill, there's a lot of debate right now between consumption models and subscription models. We think for investors, it could be helpful. If you were to go a year back, would you make the same decision now? And then if so, why is the consumption model the right choice for New Relic and for its customers?

Bill Staples: Kingsley, thanks for the question. I absolutely would make the same decision around business model. We feel like it's a great alignment of interest between our customers and our company. And we think it actually helps us in this macro environment we're in. As Mark described, we see this as a really vibrant end market. If you look at CIO surveys, they continue to highlight the importance of cloud adoption and digital transformation are the main drivers of our business. Customers really need to make sure that their digital assets are available and performing, and that's what we're excellent at. Our business model is created with really value-based pricing that puts the technology in the hands of more developers and engineers, more affordably than anyone else in the market. And while the majority of our opportunity is still greenfield, we also see the competitive replacements of point product providers as our more sophisticated customers start consolidating spend and standardizing on our platform. And finally, we believe the consumption model, as I said, is the best alignment between us and our customers because if we're not really great at helping our customers be successful, they won't continue to consume. So we're motivated to help them and they're motivated to bring more of their spend to us. So I would absolutely make the transition that we have, and we've seen the success in doubling our revenue growth rate as a result of it. And I think we're only getting started.

Kingsley Crane: Customer alignment makes a lot of sense. So for Mark, you had such a great run at New Relic. Certainly, a lot to be proud of. As we look forward, significant improvement in profitability is implied by the guide. Can you offer any specifics on the improvement to the cost structure? And then how these can be accomplished with an ongoing goal of revenue acceleration?

Mark Sachleben: When we look back at Q1, we beat our bottom line guide by quite a bit. And we expect to continue to do that through the rest of the year to the point where we will be profitable for the year. And those things -- those cost savings are coming in a number of areas. . Obviously, gross margin, we showed good improvement this past quarter. We expect that to continue, and we said we've guided to exiting the year in the mid-70s. So that gives us a continued improvement, lower OpEx due to hiring. We are continuing to hire. We continue to invest but I would say we're being more selective around our hiring and people. And so I think that hiring will be a little bit slower than we had thought probably 6 to 9 months ago in fiscal '23. And then when we look at sales and marketing, our yield is getting more efficient with our PLG spend and go-to-market. And so that -- overall, we do continue to expect go-to-market efficiencies to take hold throughout the rest of the year. So we feel like we can achieve these cost savings really by investing more in the places where we are seeing results, and we are getting good productivity and good efficiency. And then savings in some of the other areas, we're not getting as good a return. So we do feel like we can achieve these savings while still accelerate growth.

Operator: Our next question comes from Angie Ng with Morgan Stanley. Please proceed.

Angie Ng: I'm speaking for Sanjit Singh who is my analyst and one question for you guys is the pricing for data that took effect in June 1, how have customers responded to higher data and just pricing? And what contribution does the price increase have on the fiscal year '23 revenue guide?

Bill Staples: Thanks, Angie. Yes, as you noted, the price increase was effective June 1, so just the last month of the quarter. We did notify customers of that at the FutureStack conference in advance as well. As Mark noted, the price increase for most of our customer revenue only takes effect upon renewals. So for the Q1 renewals just that last month was captured. The -- it performed actually very nicely. In fact, the vast majority of our customers accepted the price increase at the $0.30 level for our standard data price change. We also introduced at the same time a Data Plus offering and saw healthy uptake from several customers on that in that last few weeks of the quarter as well. So while it's early days there, we're excited by that opportunity. In terms of how it impacts revenues, as we've noted before, it will be feathered in throughout the year as renewals take place. And so the majority of the impacts will be felt in the FY '24 time frame, but we'll see cumulative effects throughout the year.

Operator: Our next question comes from Derrick Wood with Cowen. Please proceed.

Unidentified Analyst: It's Andrew on for Derrick. Nice quarter. Mark, maybe just on the components you outlined in the full year rev guide, can you just help us understand the visibility you have into those and maybe rank order the biggest drivers of growth that you laid out there?

Mark Sachleben: Sure. So when I went through, I'll just read them or go through them in order in which I expressed them. I think the biggest one is the early renewal efforts that Bill mentioned. We're seeing an issue with budget and consumption, commitment and consumption. Where that gets too far out of line, there's inevitable pressure on consumption. And so these are our best customers that we want to make sure they have enough budget to go and continue to accelerate their consumption rates. So that's something that we're working on. Bill mentioned the pilot, gave some examples. We're seeing positive results from that. We're now rolling it out to the entire go-to-market org and to our customer base. And so we think over -- it's going to take time to get hold. But we think over the course of the next three quarters, that's going to be pretty meaningful in terms of the overall impact on our results. We expect account growth to continue to improve. We've been -- we added 300 or so this past quarter, and that's been growing. We expect that to continue to happen. We do expect continued adoption of more and more capabilities. That growth has been going on as we expect that to continue. And then the churn rates we expressed that we, of course, see an improvement in churn over the course of the next few quarters. In Q1, Bill mentioned that it was it was picked up. It was up to 6% from 5.3%. That was related to just a couple of renewals or handful renewals that slipped in July. They have now closed. Had they closed in the June quarter, our renewal would have been an improvement over Q4. So we feel good about our ability to continue to improve churn over the rest of the year. And then finally, just as mentioned in the last question, the data price increase which we have effectively rolled out, very modest. Virtually no impact in the Q1 numbers. We'll get a little bit in Q2. And then as more and more customers hit the renewals and we get through the rest of the year, that will have a greater impact over the course of the rest of fiscal '23.

Unidentified Analyst: And is there any follow-up to that? Is there any summer seasonality consumption factored into the guidance?

Mark Sachleben: No. We don't expect summer seasonality last year. When you look at our CRR, which we gave visibility to last quarter, we did not see any sort of slowdown. Our customer base is diverse enough where some go up, some are down and that generally continues. I think the only seasonal slowdown that we see is really at the end of the year, a modest one at the end of the year as overall kind of over the economy sort of shuts down a bit at the tail end of December.

Unidentified Analyst: And for Bill, maybe just talk about the user adoption you're seeing and the growth of data consumption has led to -- has that led to more users yet? And do you see that continuing throughout this year? Or maybe just shed some color on that.

Bill Staples: Yes. As we've talked about before, we believe pricing our data offering at a very low price makes it easier for our customers to cover more of their estate to expand with the platform at lower incremental costs and that increase in data leads to increase in users over time. That is a long-term strategy to be clear. So I expect it to play out over multiple years. As for this quarter, we actually did see very healthy user growth in the quarter. I think we mentioned in the Q4 call or Investor Day following that where we saw customers consumption exceeding commitments, they were managing spend down about 50-50 users and data. This quarter, where we saw that happening, it was a little more on the data, user growth continued and was actually fairly strong.

Operator: Our next question comes from Yun Kim with Loop Capital Markets. Please go ahead.

Yun Suk Kim: First, Bill, in the morning, one of your peers commented that there was some slowdown in certain areas where people who are being cost conscious. I think the company specifically indicated that log ingestion of the area of softness or they try to be cost conscious. Are you seeing any of that trend within your product portfolio at all?

Bill Staples: No, we don't see any trends specific to a particular platform capability or data type. We -- as we've stated earlier in the prepared remarks, we see the moderated usage really isolated to those customers whose consumption is -- consumption run rate is far in excess of their previous commitments. So that's where we're focused in terms of helping our customers shore up that consumption with additional budget. Otherwise, the impact of whatever macro situation is not specific to any particular product or platform capability.

Yun Suk Kim: And then just a hypothetical question. Obviously, you are proactively approaching customers whose consumption run rate is running hard. I think you mentioned 130% run rate. Are you introducing the price increase at that time? Or are you keeping the same price until the end of the contract?

Bill Staples: Yes. As we go up for early renewal, the price points and quantities are part of that discussion as well as the new contract date. So we are bringing the new price into that negotiation and helping customers understand the transition point.

Yun Suk Kim: And then, Bill -- I'm sorry, Mark, great working with you. It looks like you're finishing off your last quarter with a spectacular cash flow. Obviously, with a focus on early renewals, do you expect the quarterly cash flow seasonality to be more balanced throughout the year or do you experience some of the renewals kind of earlier in the year, whether than back-end loaded towards the second half?

Mark Sachleben: I think it's tough to say. It depends a bit on whether customers are paying for the entire renewal upfront or how they're managing that renewal. For some customers, it's easier to budget with renewal dates and the big cash outlay still being at their renewal time. So we are not looking at dramatically changed cash flow based on the early renewals. But I think that remains to be seen how that plays out.

Operator: Our next question comes from Michael Turits with KeyBanc Capital Markets. Please proceed.

Eric Heath: This is Eric Heath on for Michael. Bill, on -- for the customers that are consistently running hot, I mean, what is it you have to do with the time of renewal to get those commitment levels higher? Because if I recall correctly, I believe the customer isn't necessarily intended to kind of commit at a higher level because kind of the price per gig if they go over is the same. So it's not like a penalty for going over. So what is it you have to do to drive those renewals higher and be in excess of where they start and where they might actually get to by the end of the contract?

Bill Staples: Yes, good question. First thing to remember is with the consumption model, it's all underlaid with value. So the first thing we do is we go into our customers to help them understand their consumption and the value they're getting out of the ROI for the business. Most of our customers, we haven't agreed to -- of metrics that we're helping drive for them whether that's accelerated innovation, improved SLAs, progress on cloud migration, et cetera. . And so we help bring that value discussion to light, and we talk about their consumption rates. And then this quarter, in particular, we're unlocking some pretty exciting improvements to our buying programs. We've been able to take advantage of several of the features that other leading consumption companies like Snowflake, Mongo, Azure, AWS, have available for customers. For example, our new buying programs support the ability for customers to top off the contract with additional budget at any time to renew early as well as to roll over any unused commitments for an additional year at the end of the contract. That gives them a lot of security that by putting up budget, they're not at risk of shelfware because if they don't end up using it all in the contract period, they get one additional year to use it for consumption. We also have unlocked tiered pricing for our customers, both user and data pricing, which allows for them and us to reach a price point that incentivizes additional growth. So you can imagine, for example, they're currently paying a certain price for users and data. We secure that budget with them, but then unlock additional savings at volume, if they add more users and data beyond the current levels.

Eric Heath: And then just on the macro, I'm trying to square some of the comments. So you did note some slip deals and granted they closed in July. And we also have noticed some moderated consumption in May and June and talked about customers kind of throttling consumption. So could you just help us a [Indiscernible] macro phenomenon and kind of some isolated incidents?

Bill Staples: Sorry, the question -- you broke up there. You were asking about the macro and I didn't quite hear the question. Could you repeat it? .

Eric Heath: Yes. There is just -- I mean, the comments of the slip deals, the slowdown in the consumption in May and June and some customers kind of throttling consumption because they're running it out. So just kind of square those comments and why you're not necessarily seeing macro despite kind of these comments.

Bill Staples: Yes. In terms of customer support and consumption, we have a very good visibility into where that's happening. It is most dramatic in cases where the customer's consumption is far in excess of their commitment. For customers who are at a run rate below 130%, CRR growth is actually very healthy and they're continuing to accelerate their adoption of the platform. So in aggregate, you see those increases and decreases leading to slower CRR for the last two months of the quarter, although we ended at a higher mark than when we started the quarter. And then it reaccelerated again in July. In terms of the few deals that slipped out past the quarter. That occasionally happens as customers come under time pressure to get the contracts signed and the PO sent. But as Mark shared, those deals did land in the first few days of July. And have they come in a few days earlier, we would have actually achieved record churn. So we feel good about our ability to continue to decrease churn in the following quarters.

Operator: Our next question comes from Mike Cikos with Needham. Please proceed.

Mike Cikos: I did want to start out off the back of Eric's questions. With respect to the CRR trends that you guys have discussed. And if I had it right, so April was a strong quarter. You saw some moderation in May and June and then a recovery in July. And I just want to get a sense, can you help me understand the magnitude of those shifts on a month-by-month basis? Like if I'm looking at the strength that we're seeing in July now, is it at the levels that you guys were exhibiting in April? And then how much of a moderation was there in May or June when I'm trying to think about those consumption trends from your customers?

Mark Sachleben: Yes. So we -- it was -- it -- the July recovery was not to the level that we saw in April. But it was a nice bump up from the May, June numbers. These -- we don't want to get too fine with our analysis of $1 million or $2 here or there because things are variable. But we're being cautious with our guidance about what we expect for the next -- for the near term. I think given the environment, there is going to continue to be a focus on budgets. So we are expecting CRR to -- we're not expecting CRR to go up to the increase at the levels we saw in the March and April time frame.

Mike Cikos: That's great. And then I also just wanted to focus on the revenue guidance for a second. And kudos on the outperformance in Q1 coming in, call it, about $2.5 million north of the high end of your guidance. If I look at the maintained guidance for the year, could you help me understand what's behind that maintained guidance if macro is not impacting you? . And then the second thing is, it looks like you guys are baking in, I guess, stronger growth in the back half of the year versus what we're seeing in 2Q despite the year-over-year comparisons becoming more difficult as well. So any color there would be beneficial as far as we think -- our look on the remainder of the year.

Mark Sachleben: Yes, I think our toughest compare is this quarter given last year's Q2. But for Q2, for the near term, we talked about the dynamics of the consumption. And when consumption exceeds commit by the more than 130%, that's an issue for customers because that starts to put a greater focus on consumption. And we're seeing moderation at that point. So we're working on that. We talked about the pilots. We're getting there. But we think that's going to take time to really show up in the revenue numbers. And so we're thinking that is going to have a pretty modest impact or minimal impact in Q2 but will have an impact in Q3 and Q4. Also, we're not assuming any change in the macro environment in Q2, so we expect that to continue. So that leads us to our Q2 guide. For the year, I mentioned those other things earlier that we're seeing will continue to happen. And then just point out on the data price increase because of the way we're implementing it at renewal time, it's really -- we'll get the next big chunk of renewals that come in sort of in the September time frame. So that will be a pretty modest impact this quarter, but we'll get the Q, at least one renewal impact this quarter in revenue. But then in Q3, we'll get the first 6 months of renewals or the thereabouts will have an impact in Q3. And then Q4, it will be the December renewals have an impact. So that impact will help as well. The cumulative effect of that will be greater as we go throughout the year. So we do expect -- we expect increased or improved revenue performance over the course of the year, and we think there's good reason for that when we look out at these assumptions.

Mike Cikos: And just one more question, if I could. If I'm looking at the upgrade to guidance when thinking about that non-GAAP profitability and happy to see that guidance come out today. . But just working through the year, it does put your OpEx, depending on how we model the revenue and the gross margins, obviously, but in a relatively tight range versus where we're looking for 2Q to shake out currently. And I'm just curious, can you help us think about the cost structure here? Are you guys really -- should we be thinking about headcount? Is there the shelfing of projects? Is it negotiating with your vendors? Like where are the majority of these savings coming with the fact that you've now maintained your revenue guide for the full year, but are jumping up that profitability goal dramatically from where we were last quarter?

Bill Staples: Yes, we saw a significant bottom line interest, as we've noted in 1Q and continue to expect those throughout the year. In terms of the other cost savings, really across the board, all of our leaders are prioritizing and focusing on strategic projects that really help accelerate our growth and increase efficiency. In the first quarter, the majority of our cost savings were better gross margin. Like I said, we expect that to continue. Lower OpEx due to hiring. And our sales and marketing yields is continuing to get more and more efficient with our product-led growth go-to market, at least on the low end with new customer acquisition. So we expect those to continue, and we're looking across the board for how we can be more efficient and run a profitable company.

Operator: Our next question comes from Rishi Jaluria with RBC Capital Markets. Please go ahead.

Richard Poland: This is Richard Poland on for Rishi Jaluria. So I appreciate the commentary and color on the June 1 pricing change and just kind of around how the cadence of that should impact the revenue line. But just as a follow-up, did you see any impact in May in terms of customers looking to try and renew early ahead of that price change just in order to kind of lock in lower pricing for an extra year or any -- I guess, was there anything around that?

Mark Sachleben: We had a couple of customers bring that to us but it didn't -- it was not at all material. Folks see that and they say, oh, geez, can I get in under the wire and do something like that. Generally speaking, we would prefer that they got to their renewal and then renewed in ordinary course. But it was not a significant number at all. it is primarily the people that were kind of early June and missed it by a couple of days.

Richard Poland: And then just in terms of the net adds, it continues to sit in that 200 to 300 per quarter range. Is that kind of what we could expect as the new normal? And have you looked at just kind of in June, how customer adds tracked with the new pricing and just if there's any relationship there?

Bill Staples: Yes. We've been steadily adding new customers for the last four quarters. And again, those numbers are net of churn. We did not see any significant change in terms of new customer acquisition with the price change. If anything, we're getting more effective at helping bring customers into the platform and pay for the value.

Operator: [Operator Instructions] There are no questions waiting at this time, so I'll pass the conference back over to the management team for any further remarks.

Bill Staples: All right. Thank you, everyone, for your time today. We're pleased with the quarter results and look forward to connecting with you throughout the quarter, and see you next time.

Operator: That concludes the New Relic first quarter fiscal 2023 financial results conference call. Thank you for your participation. You may now disconnect your lines.