New Relic Inc (NEWR) 2017 Q3 法說會逐字稿

Good afternoon. My name is Mariana and I will be your conference operator today. At this time I would like to welcome everyone to the New Relic third quarter FY17 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Jon Parker, Senior Director, Strategic Finance and Investor Relations. You may begin your conference.

Thank you. Good afternoon and welcome to New Relic's third quarter FY17 earnings conference call. Today's call is to provide you with information regarding our third quarter FY17 performance in addition to our financial outlook for the fourth quarter and full FY17. 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 remarks or in responses to your questions, we may offer additional incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our investor relations website at ir.newrelic.com to access our earnings press release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's call, or to learn more about New Relic.

With that let me turn the call over to Lew.

Thanks very much, Jon. Good afternoon to everyone joining us today. We are pleased to deliver excellent financial results for the third fiscal quarter, exceeding our guidance with revenues of $68.1 million, and growing 43% year-over-year, while delivering more than 15 percentage points of margin expansion.

The outperformance is spearheaded by our enterprise business, which is growing faster than any of our direct competitors. This strength is driven by two secular trends. First, we see the enterprise imperative to drive new digital-based initiatives, and second, we see the shift of applications from on-premise to the cloud. Together, these trends drive substantial demand for insights into performance of these mission-critical initiatives.

We believe recent activity in the market validates and significantly underscores the opportunity in front of us. It also underscores the criticality of companies having full visibility into the performance of their business as they undergo digital transformation. The combination of these factors is fueling our strong performance and our positive outlook, as we are once again increasing our top line expectations for FY17, and believe we remain on track to deliver our goal of $1 billion revenue run rate ending FY22.

We are also pleased to report that we expect to deliver well more than 10 percentage points of year-over-year improvement in each of our GAAP and non-GAAP operating margins that we guided towards a year ago. We believe this continues to demonstrate the operating leverage inherent in our pure cloud-based model.

In the near term, given substantial market opportunity, our strong multiyear growth outlook, and outperformance against our operating model this year, we do plan to increase the pace of investment in the business for the next few quarters, but while still delivering on non-GAAP operating income by next March.

Like I've done in past calls, let me take a moment to review our progress against our key annual objectives. First and foremost, we believe New Relic is on the path to becoming the enterprise standard for digital intelligence. Second, our goal of ubiquity in the market continues to be more evident. And third, we see our innovation leadership position extending.

I'll start with continued momentum we are seeing with the enterprise customers, which clearly represents our biggest opportunity, as well as the one that has quickly become the largest contributor to new business. We see every enterprise becoming a software business, and placing digital transformation as one of their top strategic priorities. As enterprise companies launch new initiatives to drive their businesses, often including the cloud and mobile, we see it as natural that they would prefer a digital intelligence platform that was born in the cloud. In our view, traditional solutions were never designed to monitor, measure, and analyze the digital initiatives that are the future. Rather, they were built for the use cases of the past.

In addition, we see growing demand from customers to move from on-premise solutions to cloud-based digital intelligence platforms. We believe the demand stems from the desire to benefit from the much faster pace of innovation and greater scalability inherent in the cloud solution, as well as the avoidance of costs often associated with deploying, updating, and supporting on-premise products.

In the third quarter we also continued to make great progress in establishing the ubiquity of our platform. We believe our cloud-based platform enables us to address the needs of enterprises in all sectors across the world. We allow these companies to get [live] and see actionable information in minutes, without the need for costly professional service crutches. This has helped drive accounts to where they see hundreds, and in some cases thousands of people interacting with New Relic every month.

Going forward, we expect a key part of this will be Project Seymour, which we announced at FutureStack. Seymour uses unique machine learning algorithms to service targeted and actionable information to users depending on their role and interests. We believe only New Relic can deliver this kind of value, as on-premise vendors don't have the breadth or the quantity of application Infrastructure and business data needed to make this technology relevant to their customers.

I wanted to finish my prepared remarks discussing the progress against our roadmap, which has been a major factor in New Relic's momentum, in both the broader markets and in particular in the enterprise. We see the success of our efforts as evidenced by the fact that in the third quarter, our non-APM solutions contributed to over 30% of new business for the first time in New Relic's history. We expect that figure to continue to grow in the years ahead.

Encouragingly, two non-APM products contributed roughly 10% each, speaking to the breadth of our platform's value proposition. One of these was Insights, which had a record quarter, and continues to both directly and indirectly be a driver of differentiation in the market. For example, we have seen a Fortune 10 CEO turn to New Relic Insights to see the success of a major digital initiative launch, and literally see his digital customer activity in real time.

Another highlight of last quarter was our FutureStack user conference. It was a marquee event for us this past quarter, during which we launched New Relic Infrastructure, which provides unique real-time intelligence at the infrastructure layer. We were excited with the initial uptake in just a few short weeks, and have very broad ambitions for this remarkable new product as we start looking forward to FY18.

As part of New Relic Infrastructure, we introduced native visibility into more than a dozen AWS services, pulling in key metric event and key configuration data that can correlate against all the other valuable data our customers can collect using our platform. Services like EC2, S3, and Lambda. We expect to significantly broaden our integrations across cloud platforms over the next 12 months.

As enterprises continue to adopt public cloud, we unequivocally believe that New Relic is extremely well positioned to benefit, and that shift to vendors like Amazon web services represent one of the strongest tailwinds to our growth. Due to the strength of our belief in this, and our incredibly strong relationship with Amazon, starting in April we will be launching a joint go to market activity with Amazon, initially focusing on DevOps practices for teams working in the cloud. The campaign will include jointly published marketing assets, solution architecture descriptions, and joint customer targeting through digital marketing events and telesales resources.

Overall, we see our customers wanting a platform-neutral solution to monitor the health and performance of their infrastructure and applications running their digital business initiatives. Additionally, over the long term, we believe enterprises will continue to leverage multiple clouds and thereby require a platform that supports all cloud environments. In our view, New Relic is uniquely positioned to meet this need, with a comprehensive highly scalable digital intelligence platform that was born in the cloud, but that can monitor both cloud-based and on-premise applications and infrastructure.

In closing, we continue to be a leader in the market and make significant progress against our strategic growth initiatives. We believe we are very much remain on track to achieve our long-term objectives, and I've never been more enthusiastic about New Relic's future.

With that I'll turn it over to Hilarie.

Thanks, Lew. Our third quarter results I believe further reinforce that we are now seeing all companies use software to accelerate their business objectives. As part of this movement, companies are increasingly moving to the cloud, and moving from on-premise solutions to superior cloud-based offerings. New Relic is increasingly being recognized as the strategic partner to enterprise customers, as this long-term secular trend plays out.

Over the course of this fiscal year, we've spoken about the fact that we start the year generally more focused on winning new logos that have the great potential to expand over time. We have a powerful land and expand model, and a track record of proving our value with customers expanding their usage and delivering new, value-added products to our customers to drive even greater levels of expansion over time. We continue to believe that we have just scratched the surface in many of our customer relationships. During the third quarter, nine of our top 10 deals came from expansion deals, as we would largely expect moving into the second half the year.

What is also very encouraging is the way our customers continue to expand with New Relic. Among these top expansion customers in the quarter, each came back to New Relic for additional APM solutions. But equally important, they were adopting multiple components of our overall digital intelligence platform, including Insights, Browser, Synthetics, Mobile, and our most recent addition, Infrastructure. Many of these were meaningful commitments across our platform, which is why non-APM products made their biggest contribution as a percentage of our new sales, increasing to over 30% of our sales for the first time. This shows that our significant market share gains in the enterprise, combined with greater adoption of our expanding platform, are key contributors of our rapid growth.

It's also worth pointing out that several of those top expansion deals I referenced were already seven-figure customers of New Relic prior to their expansion deal during the quarter. In each case, the additional purchase led to the customer committing to multi-million-dollar spend with New Relic on an annual basis. As I indicated a moment ago, even with our largest customers, we believe that we continue to have enormous opportunities to expand over time, if we continue to deliver value and expand our platform.

Our team has made great strides in the enterprise, which is on a trajectory to become over half of our revenue within the next fiscal year, as we are seeing a strong flow of new enterprise logos, larger deal sizes, and longer commitments from our customers. For example, we added a record number of $100K ARR customers in the quarter. The larger dollar and longer-term commitments being made to New Relic are evidence of our success in the market, as well as the fact that New Relic is being viewed as an increasingly strategic partner, which is very encouraging for the long term. Our investments in the business are creating more opportunities, our product innovation is adding to our opportunity set, and our expanding customer base, along with their migration to the cloud, is creating an ideal backdrop for New Relic to drive growth.

While we are clearly focused on continuing to penetrate the enterprise market, we remain dedicated to profitably growing our SMB business. In fact we signed our largest ever SMB deal in the quarter, showing our ability to drive meaningful monetization, even with smaller companies, which we see as a reflection of the importance of digital business initiatives, as well as New Relic's value proposition. Many newer and emerging businesses can become very prolific consumers of digital assets. In fact, they very often start their business with or based on a cloud asset. Our view is that we will continue to see fertile growth and a strong future ahead for the SMB business as they expand.

More broadly, we saw impressive wins this past quarter in traditional verticals like media with Cox Enterprises, Gannett, and Viacom; in technology with Rakuten and RedHat; in the food and beverage sector with Dunkin' Brands, McDonald's, and Domino's Pizza; and other great names like Six Flags and Royal Dutch Shell. We also continued to see growing demand from other industries that have historically been slower to adopt cloud-based solutions. For instance, the financial services vertical where we did business with BNP Paribas, Capital One Nationwide, and Morningstar. As companies are launching digital businesses or adopting the public cloud as a core component of their digital transformation initiative, they are more and more often turning to New Relic.

As we finish our fiscal year, we're really excited about the changes we are seeing our customers embark upon, and look forward to helping make them successful in FY18 and beyond. With that I'll turn it over to Mark.

Thanks, Hilarie. Turning to the financials, third quarter revenue was $68.1 million, up 43% year-over-year, and up 7% sequentially. We ended the quarter with 14,915 total paid business accounts. Of these, the total number of customers paying us more than $5,000 per year reached 6,349. Our annualized revenue per average paid business account continued to grow, reaching approximately $18,500, up 26% year-over-year, and 4% sequentially, while dollar-based net expansion rate in the quarter was 125%, up from 116% last quarter.

As we discussed in prior quarters, we've been starting to see more meaningful seasonality in the past, as our enterprise business becomes a greater proportion of the installed base, and our enterprise business is weighted towards the back half of our fiscal year.

Turning to our geographic split, US revenue of $46.1 million for the quarter was up 44% year-over-year, while non-US revenue for the quarter grew to $22 million, up 40% year-over-year. Non-US 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 press release issued today and available on our website.

Our gross margin was 83%, up from 81% a year ago period, and in line with last quarter. We now expect our gross margin for FY17 to be approximately 82%. With regard to operating expenses, sales and marketing costs were $39.9 million, compared to $36.8 million last quarter, and $32.5 million in the same quarter last year.

We continue to strategically invest across our go to market organization. And, in fact, we expect to start accelerating some of these investments in Q4, which I'll talk more about shortly. However, we still expect to continue to drive meaningful operating leverage.

R&D expenses were $11.9 million, compared to $12.1 million in the last quarter, and $10.2 million in the same quarter last year. The sequential decline was largely attributable to a modest uptick in capitalized software, ahead of multiple product and feature releases at FutureStack. G&A costs were $9.5 million, compared to $8.6 million last quarter, and $6.9 million in the same quarter last year, primarily due to investments in headcount.

Overall, our expenses in the quarter produced an operating loss of $4.9 million, unchanged from last quarter, but down meaningfully from $10.7 million in the same last quarter last year. This resulted in a negative operating margin of 7% in the quarter, compared to negative 8% in the last quarter, and negative 22% in the same quarter last year, or a roughly 15% point improvement. Our net loss per share was $0.09, unchanged from last quarter, and down from $0.22 per share in the same quarter last year.

Turning to our balance sheet, we ended the third fiscal quarter with approximately $196 million cash, cash equivalents, and short-term investments, down slightly from approximately $197 million last quarter. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $92.9 million, up 60% year-over-year, and 16% quarter-over-quarter. We still do not view deferred revenue as a reliable indicator of underlying business trends, due to the varying durations of our contracts and billing terms.

As we look ahead to Q4, we expect deferred revenue to grow in the high teens sequentially versus Q3. While we don't expect to regularly provide an outlook on deferred revenue, given some of the recent questions around this item and the wide range of forecasting seen in some of the published models, we wanted to provide some perspective to help inform these estimates.

Turning to cash flow, we generated positive cash flow from operations for the fifth consecutive quarter at nearly $6 million, and expect to see similar levels in Q4. Free cash flow, defined as cash from operations minus capital expenditures minus capitalized software, was a $4 million outflow, primarily due to our office buildout in San Francisco. As it relates to Q4, we expect to be roughly free cash flow breakeven, as our physical CapEx level should start to moderate.

For the year, we expect capital expenditures to be closer to $24 million, a lower prior outlook for $30 million to $32 million, as some of our buildout related CapEx that we previously expected this year will not occur until FY18, although we have also realized some savings [versus] original plans. Please note that this is separate from capitalized software, which we expect to continue to be near recent levels.

Now I will turn to our outlook for the fourth quarter of FY17, and the fiscal year as a whole, before making a few preliminary comments around FY18. We are initiating our outlook as follows. For the fourth fiscal quarter ending March 31, we expect revenue to range from $70.3 million to $71.3 million, or growth of 34% to 36% year-over-year.

We expect a non-GAAP operating loss of $7.7 million to $8.7 million. This would lead to non-GAAP net loss per share in the range of $0.14 to $0.16, based upon a weighted average share count of 53 million for the quarter. As a result, for the full FY17, we now expect revenue to range from $260.4 million to $261.4 million, or growth of 44% year-over-year. We expect a non-GAAP operating loss of $27.4 million to $28.4 million. This would lead to a non-GAAP net loss per share in the range of $0.52 to $0.54, based upon a weighted average share count of 52.2 million.

While we are still working through our planning for FY18, we've been pleased with our demonstrated leverage throughout the year. A year ago we guided for a 10 percentage point improvement of our non-GAAP operating margin expansion this year, and we're now on track to deliver closer to 13 points.

Looking ahead, we are more confident than ever in the market opportunity in front of us, and expect to accelerate our go to market investments in Q4 to position us for FY18 and beyond. We expect this will result in a lower level of margin expansion from FY18 than the past few years, as well as operating losses in Q1 and Q2 of FY18 similar to the levels we are guiding for Q4. However, we are still reconfirming our goal to achieve non-GAAP operating income and sustainably positive free cash flow no later than March of 2018.

With that, we are happy to turn it over to your questions.

(Operator Instructions)

Ben McFadden, Pacific Crest Securities.

Hey guys, thanks for taking my questions. I wanted to start with the mix shift you saw in the quarter between SMB and enterprise, and just how that might have affected your billings duration, or overall large scale metrics in the quarter and fiscal Q3, relative to what you saw the last two quarters?

Thanks for the question, Ben. This is Lew. I'll talk qualitatively to it. We've been talking for some time about our efforts to build out the enterprise business, and I think it's fair to say that, that pivot is largely behind us. We feel successful in our execution against our enterprise strategy, and it's showing in -- there's a number of $100,000 deals which is a record number of enterprise $100,000 ARR deals this quarter.

It's showing in the types of names we're bringing on board, when you think of companies like Nationwide, Pearson, Royal Dutch Shell, McDonald's, Morningstar. These are world-class enterprise names, and what's driving all of their adoption of our solutions -- there's two secular trends, it's the digital imperative in the enterprise and it's a secular move to adopt cloud computing.

We think we're perfectly situated to help our customers on both of those journeys like no other company in our competitive space. And that's what's driving our enterprise success. We love our SMB business, it's a profitable business, it's growing for us, but when we look into the future, we look at our path [towards] $1 billion revenue company, and we believe that the bulk of that growth, as well as the profitability behind that growth, is also going to be (inaudible) enterprise, and we're thrilled with how that is moving as quickly as it is.

Great. And maybe just switching to the Infrastructure product. You mentioned that you're pleased with the traction, but just wondering if you could provide any more color as far as has it change your view on how quickly that could potentially be material to overall results? Or any metrics you can give around how large those deals are getting early on?

Look, we remain super excited about the Infrastructure product. It broadens the footprint of what we do. It augments our APM and our other products, what they offer. And in particular the data that Infrastructure gathers is going to further differentiate our Seymour Project, which is an AI-based approach to making sense of all this data we gather. So that's going to be important data that feeds into Seymour as well. So for those reasons, we think Infrastructure has immense potential.

But it's still very early days and far too early to give you a sense of how material it'll be to revenues. As you know, we're a subscription business, so early on it's building out those key wins. We're thrilled with the types of customers we're bringing on, and what they're telling us about the Infrastructure product and how it's making their lives better with digital and with the move to the cloud. But it's going to take some time for it to build into a meaningful portion of revenues, just as all of our historical products have. But it's a key pillar in our growth strategy, and we're exciting excited about its potential.

Great. Thank you very much.

Jesse Hulsing, Goldman Sachs.

Thank you, guys, for taking my question. I wanted to touch on your plans for investment over the next year. What are you seeing in the market that's encouraging you to invest, I guess ramp your investment more than you have been over the last couple quarters? And will the bulk of this investment occur in your enterprise business, or will you continue to invest in your SMB go to market as well?

Great questions, Jesse. When I talk to our customers, I can see how much future opportunity is in front of us. Our average spend that we talked about the analyst day, the average enterprise customer has tripled their average spend with New Relic in the little over two years since we've gone public. So that's good news.

But there's so much more upside in that. It's still at average enterprise customer spend, and when we disclosed that back in November of around $70,000 a year. And we have enough $1 million a year subscribers in all sorts of verticals, that we're confident that we can continue to grow that average enterprise customer spend.

But it doesn't come without investment. We need to continue to invest our relationships. We need to have more reps out in the field telling the New Relic story, understanding where our customers are in their journey towards cloud and their journey towards digital, and helping them accelerate that with a New Relic digital intelligence platform. And so that's an investment we feel like it's going to return well on us.

The other thing that's exciting to me is the purity of our SaaS model I think is really showing itself this quarter, with the margin improvement we've demonstrated at 15% year-over-year improvement in the operating model. And so that gives us confidence that well-managed, well-placed investments will deliver good results over time.

We think that will pay back better over the long run in the enterprise and SMB, but we love our SMB business as well. We've got great customers, like Zendesk and like Shopify, that literally signed on with New Relic when they were 10-person companies, right, or 30-person companies.

And so we do want to serve the great companies of tomorrow, and many of them are small companies today. But mark my words, the bulk of the investment, both the opportunity [to grow with] the enterprise because we're so encouraged by what we're seeing in what's going out in the field today.

A quick follow-up on the investment question, and maybe this is for Hilarie. As you add more products, Infrastructure in particular, but Insights and others down the road, do you plan to add more overlays and increase the relative complexity of your sales organization, if you haven't done that already?

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

Thank you, guys. Have a good one.

Greg McDowell, JMP Securities.

Thank you. Hi, Lew; hi, Hilarie; hi, Mark. I wanted to ask a question surrounding Cisco's pending acquisition of AppDynamics. I guess a two-part question. Part one is your reaction to the announcement, and how you think it may or may not change the competitive dynamics in the space?

And the second part of the question is around any changes to your operating plan, in light of some of the competitive dynamics? It seems like there could be a temptation on your part to accelerate some investments even further, in light of some of these exogenous events. Thanks, guys.

Sure, Greg, happy to speak to it. Cisco's acquisition of AppDynamics serves as a great point of validation of the market we believe we pioneered, and that serves an important role to all these enterprises that are moving to digital and moving to the cloud. So we think this is a wonderful validation of our market opportunity.

We feel stronger than ever about our competitive position. We feel that when you look not only where the market historically has been, and we believe that candidly Cisco -- AppDynamics is a good fit for Cisco, because the vast majority of their revenues is coming from on-premise hardware. We believe the future is predominantly cloud. And when we look at our offering, [when it] competes well through the cloud and digital, and we feel like stronger than ever in our ability to compete in that sphere against a company like Cisco. So we like how that lines up.

And that does factor into how we think about the operating plan, and we think that there may be an opportunity for us to increase our rate of market share acquisitions. And so there may be a window of opportunity to continue to grow, and as we mentioned during the prepared remarks, our growth rate in the enterprise segment is the fastest of all of our direct competitors. And so we're going to continue to drive that leadership position.

So it's all excited us that we've got this opportunity that enterprises continually tell us they want an independent objective source of truth of what's going on in the multi-cloud environment. And now New Relic is truly, we believe, the only game in town to provide that.

Thanks, Lew.

Michael Turits, Raymond James.

Hey guys, I have two questions. One is given the guidance for high-teens quarter-over-quarter growth in deferred and [into] fourth quarter, are you seeing the increase in the duration that you expected from more large expand deals in the second half?

Hey Michael, it's Mark. So in general we are seeing the installed base duration continue to drift upward. And we expect that to continue to happen as more and more of our base becomes enterprise. We talked about sometime next year getting to 50-50 revenue wise. And so I think that is going to continue to drive the installed base duration upward.

We are not talking, disclosing individual duration, in-period durations for any given quarter. We just don't want to go down that path. In any given quarter the duration can change. We have things that come in and out. We have billings that might be done a couple of days late on renewals just to satisfy a customer, so that can have a big impact on deferred revenue, and that's why we continue to say that our billings and our deferred revenue are not true indicators of the underlying strength of our business.

All that said, we do expect the duration to continue to drift upward. Although when you look back at the big gains we had in duration in Q3, Q4 of last year, we don't expect those type of gains to be repeated. We feel really good about our billings number and our deferred revenue for this quarter. We've guided to high-teens growth, so an acceleration of growth for Q4, and we're very pleased with that outlook, particularly given the real tough comp we had in last Q4.

A follow-up, again, I apologize if I missed it because I was jumping between calls, but what are you seeing in terms of the impact of your various pricing changes on ASPs, especially cloud pricing as well as essentials? Is it still continuing in the negative on ASPs, or is that beginning to move up, and is that also driving more revenue from an elasticity perspective?

Last quarter, I think it was, where we talked about the shift in customers that migrated from our host-based pricing to our cloud-based pricing. We didn't give specific metrics about that on this call. But we continue to see similar patterns where customers are increasing their spend generally when they migrate to our cloud-based pricing. And so that's what we are trying to focus on.

What we want to do is we want to cover a larger portion of the estate. And I think our cloud-based pricing option allows customers to do that. So what we look at is what we're getting per customer. And I think our cloud pricing initiative has helped our ability to have that number go up. Overall, similar metrics, I think we're seeing no other real changes in the dynamics of our pricing.

Okay. Great, Mark, thanks for the help, I appreciate it.

Derrick Wood, Cowen and Company.

Great, thanks. I wanted to ask on Amazon, they had a new product they released to market late last year. At the same time, it sounds like you guys have a new joint go-to-market initiative with them which -- I don't think I've seen that too often with other software companies.

So I guess two questions. First, what was the catalyst for them to do a joint go to market with you? And then would be curious to hear what you think about their offering X-Ray in the market and how it's different than yours and why it's not competitive?

Sure. Happy to talk to that, Derrick. First of all, Amazon did reach out to us, we had dialogue about what X-Ray was and how they believed and we believed that the overlap was minimal. Certainly different strategic objectives. And we quickly concluded that this wasn't going to be much of a direct competitive threat at all, nor was it intended by Amazon to be that. From what I can tell, I don't want to speak for Amazon, but that was our conclusion. And after more dialogue with them, that confirmed our viewpoint.

So our customers want a holistic view of the entire environment, the customer experience in the mobile device (inaudible) browser. A comprehensive view of the application, not just a single data point, which is largely what X-Ray provides is a simple tracing capability for Amazon-specific, wholly whole-hog Amazon-specific deployments. And then of course the infrastructure. And putting that all into a real-time analytic capability that New Relic uniquely provides. And then of course, the other trend we're seeing is how many of our customers are multi-cloud, and so that's another reason why our customers certainly are not mentioning X-Ray as a true competitive alternative when we talk to them.

So with that in mind, we believe Amazon views us as a friend, for a similar reason because we believe they're a friend. There's this secular trend to migrate to the cloud, but that our customers want to move faster than they can. And what holds up their move to cloud? Well one of the questions is, how will it perform? How efficient will it be? How reliable will my application be in this relatively new environment called the cloud?

And the way to answer that question is through New Relic, right? We can measure the health of an application in an on-premise environment, in a virtualized environment, in a bare metal environment, or in any number of cloud environments. That gives our customers confidence to migrate faster. Faster migration to any cloud environment is a faster revenue ramp.

So it's not just something -- what we're seeing across the cloud ecosystem is not enough just to get a customer to commit to moving workload to the cloud. They get paid when the workload moves to the cloud. And we accelerate that. And that's why we feel like it's in our joint interest to reach out to not only with Amazon to their customers, but also to other cloud providers and their joint customers.

So that's the reason for the partnership and why it makes mutual sense to do that. It's not at all that different from the nature of my partnership in my previous company, Wily Technology, where the platform of choice was the application server back in the early 2000s. We are an accelerant to the growth of the major application server providers as a partner. So we see [a bit of] a repeat there, and that's why we're excited about the partnership.

That's helpful perspective. If I could sneak one more. Software Analytics, the Insight product at 10% of new business in the quarter, that's a nice milestone. Is that helping you get into engage in more with line of business versus just the developer? Curious to see how that's gaining traction?

Derrick, if you were plying me with drinks at a bar, I could share more detail. But with attorney in the room, I can't share the customer name, but CEO-level looking at the dashboards of Insights to see a major digital initiative. This is what Insights is enabling for our customers. And so while it's 10% -- it's roughly a 10% quarter on bookings, it certainly moved the needle on many of our competitive wins, which was technically recognized as APM or other product revenue as well.

So it's more than a 10% product in my mind, because it changes the nature of the conversation. What Fortune 10 CEO wants to look at transaction traces on the dashboard? That's not what they want to see, they want to see how many people are signing up? How is that versus plan? Where are they signing up? What's the nature of that? And other key business initiatives. What features are sticking? Et cetera.

And so that's what Insights helps our customers see, along with, of course, are there errors, and what are the nature of the errors, and where are they happening, and why are they happening? These are related to business success, and that's why they belong in the same platform.

So brand-new innovations like Insights, and we believe there's nothing like Insights in market, but it takes a while for the market to fully understand these brand-new types of innovations. And so we feel like we've gone past the really, really early adopters to a bit more mature part of the market that's getting it, but there's still more room to run there. But it's a fundamental part of the differentiation competitive strategy.

Great. Thank you.

Sanjit Singh, Morgan Stanley.

Thanks for taking the questions and congrats on a nice quarter. Hilarie, I wondered if we could talk about the enterprise sales [motion], and if you'd give us a little bit of detail on where you guys typically land within an enterprise, whether it's the digital marketing department, or developer group? And then how -- what other departments you reach over time?

In addition to that, if there's any sort of sense you can give us on standardization deals? How long does it take to get to a standardization offering, from what you guys have been seeing two years into the enterprise sales push?

Yes, great question and a wonderful follow-on to how Lew just provided an answer about Insights because it's very related. So starting with the entry point, there are really two points of entry. One is, what we've found the pattern to be is a new digital initiative, it's typically a modern stack, and I really want to emphasize this. It's of a strategic nature to that company or organization. They're trying to engage digitally with somebody who's important to their top-line goals.

And that's a wonderful entry point for us. And what we try to do, we often go through a proof of concept. We land that application. We use Insights as a way to really highlight not just the performance management experience, which is often what the dev operations or the IT officer is interested in. But also what I like to call the offering leader, the person who cares about the success of this initiative wants to know about.

And that's what I thought Lew really nicely underscored in his last answer, how empowering it is to get that real-time information about the customer experience, and where they are in the app, and what's going on. One thing that's really important to understand is our customers think of these digital experiences as funnels, funnels in which they're engaging the customer and pulling them through an experience. And we give them visibility to what that funnel looks like and where they are in the funnel.

The second place that we enter is in a migration to one of the many cloud platforms. And that goes back to what we said earlier. Moving an application stack to the cloud has a lot of unknowns. And there are new best practices. And one of the best practices is to be monitoring the performance of that application before, during, and after, and giving this unprecedented visibility across all of the different types of compute that people are getting from these services. And that's where our Infrastructure product comes into play.

So those are the two places we enter. We usually start small. We really believe that this land-and-expand motion is the right way to win, and the rate at which people expand is a little bit of a function of the way they do business. We've seen customers expand very rapidly, and then we've seen other customers be a little bit more incremental and it's related to a fiscal-year funding cycle, or something like that. But what the commitment that we make consistently to all customers is that we'll partner with them to see then through to success. So that's really the playbook.

That's helpful. I guess a follow-on to that. How should we think about your growth in terms of revenue per paid account, as we look into FY18, given that we're going to cross the chasm in terms of enterprise becoming half of your business? You're seeing nice traction with Insights. You're seeing nice traction with Mobile. What are some of the puts and takes on that revenue per paid account year-over-year growth rate?

It's really somewhat bifurcated. When you look at the low end, the SMB portion, and we gave these metrics back at our analyst day in the presentation there, very modest increases in that. Those are folks with small environments that are trying it. But when we look at our enterprise business, as Lew mentioned, we have close to tripled the average spend in the last couple of years. And we've got a lot of room to go.

And so we want to continue to drive that number up. We think there's a lot of headroom for that number to continue to increase. And what keeps it down, frankly, is the fact that we keep adding new logos, in enterprise business as well. And so it's a balance between those two, but we feel like there's certainly a lot of room for expansion in the average spend of the enterprise.

Thank you. Congrats again.

Jack Andrews, D.A. Davidson.

Thanks for taking my question. As the business continues to shift more towards enterprise customers, can you help us drill down a bit on the potential changes in the seasonality of your business? The typical enterprise customer seasonal strength would be in your most recently completed December quarter, but given that you're on a March fiscal year end, just wondering are there particular sales incentives that would make the March quarter even stronger? Just trying to understand which would be the overriding factor in the cadence of your business here?

In general we've been talking about this all year, how we are seeing more seasonality in our business. Really for us it gets to the back half of our year. As you point out, for enterprises they are typically on a calendar-year budget cycle, so that tends to be a larger quarter. On the other hand, you look at any enterprise software company, if their Q4 is May, somehow the May quarter turns out to be big, I think that's driven in large part by compensation plans and things.

And our enterprise sales folks are generally comped on an annual agreement. And when that happens, when they plan out the year, they think about the first part of the year getting some new land accounts. The second half of the year tends to be, all right, which ones am I going to farm up and grow up and get to the larger transactions, could be December quarter, or if not when the new budgets free up in January and into our year-end March quarter.

So I think we expect to continue to see increased seasonality. But for us it's tough to differentiate between those two. We look at it more between the first half and second half of the year. And we feel like both quarters in the second half of our year should be where we show our strength.

Thanks, and then just as a quick follow-up, you've mentioned that I think it was 9 of your top 10 deals were expansions from existing customers. Was there any particular commonality in these deals, either from a particular product uptake that was key, or a particular consistent selling motion that there's a common pattern in that they are similar?

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

Thanks very much.

Nate Cunningham, Guggenheim.

Hey guys, to follow up on cloud pricing, I think you previously said that customers were spending about 20% more on average? Lew, could you clarify directionally which way that's been trending?

Here's the way to look at -- cloud pricing is another vehicle by which our customers consume more product. In my mind, growth margin is important. Growth margin and average spend per account are the two indicators that cloud pricing certainly is helping, because both of those numbers are looking better. So what that means is our customers are spending more, but it's actually costing us less to serve the customer base for a given dollar of revenue than it was a year ago.

And so you can take from that implication that our cloud pricing is largely still driven by value, but it's easier to consume and easier to deploy more broadly, because it's more aligned with the environments that our customers are running software in. We believe it is a competitive advantage for us, and that competitive offerings that don't as well align to the size and instance, or what type of cloud it's running on, that makes -- ends up in more friction in the buying process, which our customers don't want.

So we think of it as a good thing and resonating well with the market. And I'd keep an eye on those metrics, to make sure that we're pricing well and delivering value to our customers.

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

Well our focus right now with Infrastructure is taking that functionality to our installed base. It makes sense that we have customers who have standardized on our digital intelligence platform. We have 14,700 customers that are all candidates for Infrastructure. That's where we're focusing our time right now over greenfield.

The beauty of Infrastructure is it is a great greenfield opportunity. It's a way to have somebody enter the franchise, and we're working that motion as well, but given where we are in the fiscal year, we're overweight on the installed base.

Fair enough. Thank you.

Michael Turrin, UBS.

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

Sure. So we feel like we're on track in terms of our hiring plan for this year. And in fact what we talked about in the prepared remarks earlier was that we are looking at accelerating some of the hiring for next year and pulling it forward into this current quarter. And then when we look at the expense and we gave some rough estimates in terms of operating results in the first couple of quarters of next year, we are looking to do the bulk of our hiring in the first half of the year.

I think for us what really is helpful is to get people on board, especially in the sales side, get those account executives trained, enabled, get them out with customers, and beginning to sell. And that sets us up well for the rest of FY18 as well as 2019 and beyond. And so when we look at our hiring plans, we look to do the bulk of our hiring in the first half of our fiscal year. And in this case actually, we are looking to bring some of the hires that we had projected to do in the April time frame, we're looking to pull those forward into the current quarter.

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

I think it's as much coincidence as anything. The driver of the total account, the net add number is primarily at the low end of the market. That's where there's much more variability and volatility. And we'll take that business. That's terrific business for us.

But where we're more and more focused is on the larger accounts, the enterprise names that come in. And we're really after quality over quantity. And so the numbers at the high end, as we mentioned, continue to be strong, with a record number of $100,000 transactions that we close. And when we look at the number of customers paying us more than $50,000, more than $100,000, more than $1 million, we shared some of those breakouts in our analyst day in November. When we look at those trends and those numbers, we continue to be very pleased.

Excellent. Thanks a lot. Thanks, Mark.

Jason Velkavrh, Robert W. Baird.

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

We do see it as an opportunity to expand. It's what's driving the original founding idea of New Relic. My first company Wily was credited as creating the category of APM. And we acquired these wonderful accounts for these projects. But then where we struggled was deploying it everywhere. It was cost effective or it made sense for one or two really important projects, but it was too expensive to roll it out across everything. And most of that expense wasn't in license, it was actually in all of the on-premise hard work in rolling it out. So the marginal cost of enrolling out APM in a new application, a new project was too high. But they still wanted the visibility.

So the whole idea with New Relic was let's take that marginal cost of monitoring more down to near zero in terms of the product complexity or a TCO perspective. And we are delivering on that. We're delivering on that far better than anyone else, certainly if you're on premise how can you possibly make that claim? And so yes, we believe that -- and one way to measure it is not only how many applications are you managing, how many people are using your software, right? And so like I've mentioned this before but this depressing Gartner report that came a year or two ago about how the typical APM deployment's only three and a half active users. That's a niche tool for a specialist.

We want to turn this into a mainstream platform, and we are turning it into a mainstream platform where hundreds or thousands of people use our product to enable digital and cloud migration to be successful. And that's how we become a standard in these enterprises. We've talked in the past about stories about exactly how that's become true. And we see it in the customer base today, and we see a lot of opportunities looking forward. So yes, there's an opportunity there.

Great, thanks, that's all I have. Thanks for the question.

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