New Relic Inc (NEWR) 2018 Q1 法說會逐字稿

Good afternoon. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic First Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) Thank you.

Jonathan Parker, VP of Strategic Finance and Investor Relations, you may begin your conference.

Thank you. Good afternoon, and welcome to New Relic's First Quarter Fiscal Year 2018 Earnings Conference Call. Joining me today are New Relic's Founder and CEO, Lew Cirne; and our Chief Financial Officer, Mark Sachleben.

Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to our earnings release issued today as well as the risks described in our most recent Form 10-Q filed with the SEC, particularly in the section titled Risk Factors.

Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, but note that these measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. At times, we may offer incremental metrics to provide greater insight into our business or results. This additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at IR www.newrelic.com, to access our earnings release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about New Relic. And with that, let me turn the call over to Lew.

Thanks, Jon, and good afternoon to everyone joining us today to review New Relic's first quarter financial results.

For the first quarter, we delivered revenue of $80.1 million, up 37% year-over-year and exceeding our guidance range. At the same time, we improved our non-GAAP operating margin by 10 percentage points from the same quarter last year. We continue to demonstrate strong leverage in the business, which contributed to both record cash from operations and non-GAAP free cash flow generation.

As we shared on our last call, our primary goals entering this fiscal year are to extend our leadership in the cloud as well as capitalize on our platform expansion strategy. We aim to be the de facto standard for monitoring, measuring and analyzing every enterprise digital initiative running in the cloud.

As it relates to these goals, I spent much of Q1 on the road, meeting with dozens of customers and prospects. In June alone, I traveled across nearly 10 cities in 3 countries, and I'm really pleased to report that our vision is resonating with our customers.

First and foremost, digital transformation continues to be a top priority for companies looking to drive growth from new digital channels. To increase the velocity of their journey to digital, they are adopting DevOps practices and increasingly running workloads on cloud platforms. These modern cloud-first enterprises have very different requirements for monitoring than ever before. Digital is so strategic to their overall business that they now need to look at a single source of truth to understand their infrastructure health, application performance and their customers' experience.

And we make it easy for them to deploy and use New Relic. In fact, I recently met with an exec who, during the initial stages of a pilot, rolled us out to monitor just 4 applications. And within a week, they already had us deployed across 40 applications. I tell that story because it speaks to both how quickly our customers can deploy our technology and how they can immediately begin to see value from our products. The data we delivered was so powerful and compelling that they didn't want to stop with just 4 apps. That's what's magical about our products. And it speaks to the pull we see within most of our customers to expand our partnership with them. When I hear stories like this, it's clear to me that we're just scratching the surface of our opportunity.

We believe New Relic is uniquely positioned to help the world's most innovative and important companies ensure their digital initiatives succeed. We give developers, operations professionals and digital business leaders real-time insights into the performance of their infrastructure, applications and customer experience. We call this digital intelligence. And New Relic Digital Intelligence Platform is the only dedicated multi-tenant SaaS platform purpose-built to help companies see their business more clearly.

We see this message continuing to resonate in the marketplace, especially with our enterprise customers. During Q1, we held our first 2 FutureStack events of the year in London and Berlin. My favorite presentation from our standing-room-only event in London was from Ryanair, Europe's largest airline. In the view of its Infrastructure and Operations Manager, Declan Costello, Ryanair used to be an airline with a website. But now he thinks of the company as website with an airline attached. That's how core digital is to Ryanair's overall business and why they rely on New Relic as their single source of truth to monitor in real time the health of their vital online services, customer experience and business performance. I encourage you to take a look at the video link in our investor deck for some of the incredible New Relic dashboards that Ryanair uses to better see their business.

At FutureStack Berlin, I was met with overwhelming applause when I announced our intention to open up a European data center in calendar 2018. That would be our first dedicated capacity outside of the U.S., enabling our customers to get the full power of New Relic's digital intelligence platform while ensuring that their data remains local. This announcement reflects our commitment to the European market and our confidence we have in our market opportunity across EMEA.

On the product front, our innovation engine continued full steam ahead in Q1, helping support our goal of being the dominant leader in monitoring both cloud application and cloud infrastructure. In the past quarter, we deepened the integrations between New Relic Infrastructure and leading cloud platforms, allowing our customers to directly pull in new key metrics. In just 6 months after making this product generally available to our customers, we have nearly doubled the number of integrations we offer.

In the quarter, we released new integrations into some of the most popular services from Amazon Web Services, including AWS Elasticsearch and AWS Billing. As it relates to the latter, [ITTs] and their business partners can now see in a granular level the exact cost of running their applications and their infrastructure. Combined with New Relic alerts, our customers can be proactively notified when their spend exceeds their defined thresholds. As we move forward, expect us to continue to release additional integrations, including deeper visibility into cloud services from Amazon, Microsoft, Google, IBM and Pivotal.

We continue to see our enterprise customers adopt multi-cloud strategies, running different services and applications on multiple cloud infrastructure platforms. And we want to make it dead simple for our customers to use New Relic to monitor workloads in the cloud.

We also delivered many new features across our platform, including Health Map, which, for the first time, unifies application and infrastructure health metrics into one integrated dashboard. Finally, we also delivered increased intelligence into our platform by beginning the roll out of Project Seymour, which provides our customers with more accurate and actionable insights into their increasingly complex environments. Seymour leverages unique machine-learning algorithms to surface targeted and actionable information to users, depending on their role and their interests. We're getting very positive feedback on Seymour from our customers, and given the billions of events coming into multi-tenant cloud-based architecture, we are able to iterate on our algorithms at an incredible rate to deliver an even better, more relevant experience for our customers. I'm really excited about these developments, and I'm excited about getting Seymour into the hands in more and more of our users.

Turning to our go-to-market performance. As we've discussed before, the first half of our year is typically symbolized by a greater focus on adding new high-quality customers. Then, as they quickly realize the power of New Relic platform and the value we can add to a growing number of digital initiatives, we expand our relationship with the upsell activity that increasingly happens in the second half of the year.

Overall, as Mark will discuss in his remarks, we had an encouraging quarter for bringing in new enterprise logos. While new enterprise customers typically come in at low initial spend levels and require more [calories] to land, they are critical for helping drive the long-term growth of the business, since the expand opportunities tend to be much larger.

While this dynamic of smaller lands followed by larger expansions is contributing to greater seasonality in the business, our overall pipeline and especially our enterprise pipeline, is larger than it has ever been, and we're optimistic about the conversion of larger upsell opportunities in the second half of the fiscal year, just as we delivered in fiscal 2017.

Our digital intelligence platform continues to resonate with enterprise customers. Among the new customers we landed in Q1 were organizations like Alaska Airlines, Fiserv, HSBC, Texas Instruments and Chelsea Football Club. In addition to these, we also expanded our relationship with companies like Cox Enterprises, H&R Block, Levi Strauss, News Corp, Scripps Networks and US Foods. That's the power of our land and expand model as companies deploy more and more of our products.

Across our non-APM products, we saw a nice balance of add-on activity and continue to seek overall adoption near record levels from Q4.

We believe that New Relic Infrastructure is being well received in the market, and it will continue to be one of our biggest investment areas. We are just starting to see what's possible in the market, particularly as our customers see the value of bringing application and infrastructure health together in one platform.

As you can see, we're off to a good start for the year, with great new enterprise customer additions, progress with new products in the marketplace, along with continued product innovation and increased investments in the business. We believe the combination of these factors position us well to drive strong growth for the fiscal year, which is supported by our increased full year guidance that Mark will detail in a moment.

With that, I will turn it over to Mark.

Thanks, Lew. Turning to the financials. Revenue is $80.1 million for the first quarter, up 37% year-over-year and 9% sequentially. Total paid business accounts surpassed 15,400, and the number paying more than $100,000 in annual recurring revenue rose to 555, up nearly 40% compared to a year ago. The growth of this figure represents both the new logo activity that Lew referenced earlier as well as some customers expanding past that $100,000 per year threshold. Our annualized revenue per average paid business account exceeded $20,000 for the first time, and the same figure for our enterprise customers, which we define as paid business accounts with more than 1,000 employees, is about 4x that level, closer to $80,000 per year.

As a reminder, we've rounded total paid business accounts down to the nearest hundred and are no longer providing a $5,000 ARR per paid account metric. Both are less relevant given our enterprise focus and our belief that over half of our annualized recurring revenue will come from the enterprise category in the next 2 quarters, ahead of our prior expectations.

At the end of Q1, our enterprise business was approximately 49% of annualized recurring revenue, up from around 43% in the same period last year. Please note that 2 points of sequential increase in this figure were the result of a periodic reclassification based on updated company size data. More specifically, approximately 200 accounts graduated from our midmarket business into enterprise. This dynamic underscores the strategy behind our continued investment in the midmarket space, as these companies can grow over time and become larger future expansion opportunities.

Our dollar-based net expansion rate in the first quarter was 113% compared to 118% in the year-ago period. As the mix of our business increasingly shifts to enterprise, we expect our net expansion rate metric will continue to become more seasonal, with a slower start to the year and a stronger finish. We saw this type of acceleration in our net expansion rate last fiscal year and believe we will realize a similar seasonal pattern in fiscal '18.

Turning to our geographic split. U.S. revenue of $54.8 million for the quarter was up 38% year-over-year, while non-U. S. revenue grew to $25.3 million, up 35% year-over-year. Non-U. S. revenue represented 32% of revenue in the quarter.

Before moving to profit and loss items, I would like to point out that, unless otherwise specified, all of the expense and profitability metrics I will be discussing going forward are non-GAAP results. A full reconciliation between historical GAAP and non-GAAP results can be found in our earnings release issued today and available on our Investor Relations website.

Our gross margin was 83%, up from 81% in the year-ago period. We expect to sustain gross margins around 82% for the year, which we consider best-in-class among our peers. With regard to operating expenses, sales and marketing costs were $44.7 million compared to $35.9 million in the same quarter last year. Overall, we continue to invest aggressively in distribution as we execute against plans to build a billion-dollar business. In fact, in Q1, we had our strongest hiring quarter in several years.

R&D expenses were $15.2 million compared to $13.3 million in the same quarter last year. The increase was largely due to a combination of strong hiring and lower software capitalization. G&A costs were $11.9 million compared to $8.3 million in the same quarter last year. The increase was partially a function of consulting cost related to an ongoing major system implementation as well as continued hiring activity. Overall, our expenses in the quarter produced an operating loss of $5.4 million, strongly improved from a $9.8 million operating loss for the same quarter last year. This resulted in an operating margin of negative 7% in the quarter, compared to negative 17% in the same quarter last year, an improvement of approximately 10 percentage points.

Overall, we expect our pace of hiring to moderate as we move through the year, which should help drive continued leverage as recent hires become more productive. Our net loss per share was $0.09 compared to $0.20 in the same quarter last year.

Turning to our balance sheet. We ended the first quarter with approximately $227 million of cash, cash equivalents and short-term investments, up from approximately $206 million last quarter. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $125.6 million, up 53% year-over-year and, as expected, relatively flat quarter-over-quarter. I'd like to remind everyone of the approximate $6 million headwind we faced in Q1 due to early renewals, annual invoicing conversions and other billing factors that occurred in Q4 in which we called out on our last earnings call. We still do not view deferred revenue as a reliable indicator of our underlying business trends due to the varying durations of our contracts and billing terms as well as the overall velocity of our land and expand model, which, in certain instances, can result in renewal dates moving around from prior years.

Last quarter, we noted our expectation that deferred revenue seasonality from Q1 to Q2 would be similar to the prior year. This expectation remains, and we expect Q2 deferred revenue to decline modestly from Q1 or low single digits, percentage-wise. For the second half of the year, we expect more meaningful sequential increases in Q3 and, in particular, Q4. However, as we also noted the last quarter, we do not expect the percentage increases to be as large as those shown last year, which we mentioned at the time benefited from some onetime movements due to early renewals and annual invoice conversion.

Turning to cash flow. We generated positive cash flow from operations for the seventh consecutive quarter, a record of $17.7 million. Free cash flow defined as cash from operations minus capital expenditures and capitalized software, was also a record at roughly $9.5 million. For all of fiscal '18, we continued to expect cash from operations to be between $35 million and $45 million and physical capital expenditures to be $26 million to $30 million. Overall, we expect free cash flow to continue to be between $1 million and $10 million for fiscal '18, reflecting a near-term return to negative free cash flow due to typical seasonality in our quarter-over-quarter cash collections. This is driven by the timing of the largest portion of renewals and new sales activity, which happens in the third and fourth quarter, leading to stronger cash collections in the first and fourth quarters.

Now I will turn to our outlook for the second quarter of fiscal 2018 and for the full year as a whole.

For the second fiscal quarter ending September 30, we expect revenue to range from $81.8 million to $83.3 million, reflecting growth of 30% year-over-year at the midpoint of our guidance. We expect a non-GAAP operating loss of $5 million to $6 million. This would lead to a non-GAAP net loss per share in the range of $0.09 to $0.11, based upon a weighted average share count of $54.7 million for the quarter. For the full fiscal year 2018, we now expect revenue to range from $344 million to $348 million, reflecting growth of 31% year-over-year at the midpoint and an increase from our prior guidance of between $341.5 million to $346.5 million. We expect a non-GAAP operating loss of $14 million to $17 million. This would lead to a non-GAAP net loss per share in the range of $0.23 to $0.28 based upon a weighted average share count of 55.4 million. Overall, we continue to expect to achieve sustainable non-GAAP operating income and free cash flow by the end of this fiscal year. And with that, we're happy to turn it over to your questions.

(Operator Instructions) Your first question comes from Greg McDowell from JMP Securities.

I was wondering if you could first expand on the record new enterprise logo lands and maybe just give us a little more color on what were some of the drivers, especially given that it's your Q1 and it's the very start of the fiscal year. And then I have one follow-up.

Sure, Greg. This is Lew. Yes, we're really pleased with the enterprise logo lands. It's been a theme. Over the last several quarters, we've been talking about how our focus on the enterprise is really starting to bear fruit. As you know, the first part of the year is -- we put a lot of effort into making sure we've got the right logos in the customer base, and that can drive a nice back half on expansion business. And so I think the dynamics that are driving those logos and our paced acquisition of them is -- are the themes we've talked about over the last several quarters. It's -- they're moving to the cloud more rapidly than ever. They're more convinced they need to, and so they want a partner to derisk that move. It's a multi-cloud move. And so they like the fact that New Relic can independently measure applications running on-premise or in the cloud. And then they're also making big strategic bets on digital as, really, an imperative, right? If they don't succeed in digital, really, there's a risk their businesses may lose relevance in the coming decade. So those are all tailwinds for our business and why we're adding these logos.

Great, Lew. And maybe one follow-up for you, Mark. I want to thread the needle a little bit on the greater seasonality in the business and, I guess, first make sure I understood you correctly that it's reasonable to think that the net expansion rate will continue to increase throughout fiscal year '18. But I also wanted to ask about how should we think about customer adds throughout the rest of the year, if you think Q1 represents trough levels for customer adds. And finally, with respect to deferred and billings, and I recognize you guys don't necessarily use that metric to drive your business. But the deferred revenue commentary you gave us does imply an acceleration in billings in Q2. And I was just wondering if you view that Q1 billings rate as sort of a trough billings growth rate for the fiscal year.

Sure. There's a lot there, Greg. I'll try and get you in order here. The -- in terms of the net expansion rate, we -- as Lew mentioned and we've talked about in the past, the beginning of the year, the first couple of quarters for us tend to be more driven by a focus on net -- on new logos. And so we do expect that over time, particularly for us in Q3 and Q4, that's when the more strategic, the larger transactions tend to take place. And so we do believe that we'll see a similar pattern to last year. We're not giving guidance about the exact nature of that or what might be a trough. But in general, what we're saying is that the first half of the year, the dollar rates and that expansion rate will tend to be a little bit softer, and it will strengthen in Q3 and Q4. It in terms of the billing calculations that you did, those are -- your math is accurate there. I do, of course, want to caution against using billings as an indicator and deferred as an indicator of the underlying health of our business. But right now, as we see -- as we've gotten more and more into the enterprise, that's what's driving our business. We mentioned that 49% of our base is now enterprise. We've said in the next couple quarters, that's going to exceed 50%. You look at our renewal base, and our renewal base more and more is getting skewed and focused around our Q3 and, particularly, our Q4. And so that has an impact on the curve of billings for the year. And we saw this trend emerge last year, and we expect that trend to continue where our billings numbers will be -- tend to be much stronger in the second half of the year.

Your next question comes from Sterling Auty from JPMorgan.

This is Ugam Kamat on for Sterling Auty. You have already mentioned in the past and you tried to say this quarter as well that you expect the first half to be new logo addition and try to expand with that same customers in the back half of the year. But if I look at your addition of paid business accounts, it has been only 200 additions in this quarter, a significant moderation from what we have seen in the past. So can you please comment on your analogy about having a higher landings in the first half, but when I see the numbers, I see only 200 additions, a decline from the past.

Yes, I think the key number to pay attention to is not the gross number of accounts, as we've talked about repeatedly. The largest growth opportunity for us is the enterprise segment. And so I think the best proxy to look at that, for how we're doing on new logos and quality logos in that segment is the number of accounts that pay us more than $100,000 a year. And that number is up 39% year-on-year to 555. And we added more in Q1 than we did in Q4, which was also strong quarter for that metric. So that's why we decided to report on gross number of accounts and round that down to the nearest hundred, because we do believe that if you -- if we just focus entirely on the number of logos rather than the type of customers that are capable of increasing to strategic spend levels, then we could -- we could make a mistake and focus on the wrong types of customers. So we started reporting on that number for that reason, and we feel like the numbers that we've seen in last quarter were encouraging.

That's helpful. And secondly, to touch on the non-APM side of the business. Are you seeing any deals in the pipeline that are solely being led by the non-APM products? Or is there always an APM component which is (inaudible)?

We have. There have been some very exciting ones, one with a large -- one of the largest airlines in the country, that was a non-APM deal, that now we are looking to expand into APM. We've also done that with a -- we -- that was actually a Synthetics product deal. And then we've also entered into a large financial services company with mobile first. So there are occasions where people start with a business problem that New Relic is well suited to solve that's not our core APM product. It's not the common way we acquire an account, but it's certainly increasing -- we're seeing it at an increasing rate. And we do believe that our infrastructure product also has the capability to be a product that we could enter accounts with in the future.

Your next question comes from Michael Turits from Raymond James.

Well, I was really dying to ask Mark a deferred revenue question, but they've all been taken, so sorry, Mark. (inaudible)

I'm happy to take another.

So Lew, 2 questions for you, and one is, can you talk a little bit more about the infrastructure product and how that's doing? And also I would like you to maybe talk a little bit about the AWS relationship, which is -- certainly, there's some partnership but, arguably some competition there.

Sure. The infrastructure product -- we're still very, very encouraged with it. It's still early, but we're liking what we see. We're starting to see more meaningful deal sizes in Q1, showing that -- really, the step function for infrastructure, the easy natural first step for infrastructure is just put it on the servers where our APM product runs. But as we've said in the past at our Analyst Day, that's just a fraction of the number of virtual or physical or cloud service that we could run our infrastructure product on. And so we're starting to see some of the very first customers that are deploying our infrastructure product more broadly beyond just the hosts that would run the application or what our APM product is on. That's encouraging. And that's important for us to really realize the full potential of our infrastructure product. So we've seen enough of that to know that it's possible and achievable. But we recognize that it's still early, and we've got to continue to focus on it. With regards to the partnership with Amazon, I'd say it's still remarkably healthy. We had Morningstar on stage with New Relic's kind of cloud expert in residence, Lee Atchison, and that was at an Amazon Web Services Chicago event. So we're onstage together talking about how we jointly help customers with their journey to cloud. We're continuing to partner with them in the field, and our product is getting stronger and stronger and working in an Amazon environment, with the recent products announcements that we discussed in the prepared remarks. We have not seen any substantial competitive threat from any Amazon offering, really. It's just a different segment of the market that might consider something offered by Amazon. But again, when we think about our enterprise strategy, we feel like what enterprise customers want, they're on a multi-cloud strategy. They want a complete platform, and so we see this as entirely a partnership and not a competitive relationship.

Your next question comes from Derrick Wood from Cowen and Company.

I'm going to go back to the customer account one. And obviously, you guys are shifting to enterprise. And I guess we get that. But maybe you can give us an update on what the SMB strategy is. Clearly, I think the new customer generation is lower, but they're not big dollar numbers? And so maybe you're letting that deflate a little bit. But can you give us a sense for what the SMB strategy is, going forward?

Sure. We love serving the SMB market for a variety of ways. One, it's a great way to have a sense of where -- what SMBs are typically doing now, the midmarket may do in 2 to 3 years and then the enterprise will do a couple of years after that. So by understanding and serving that SMB segment, we have a window in the future. And I remember in the early days in New Relic, our SMB customers were the aggressive cloud adopters, and they informed our cloud strategy. And of course, they were the early adopters of the containers, and now that's starting to show up in the enterprise. And some of them grow into -- as we said, like we added 2 sequential percentage points to our enterprise business this quarter out of companies that used to be classified as SMB companies that are now over 1,000 employees and we consider enterprise employees. So some of those SMB customers grow into healthy enterprise partnerships. But as we mature as a business and as you see how we've improved our operating margin by 1,000 basis points this quarter, we're really being thoughtful about where is the best ROI in our business. And so we want to be smart with how we approach the SMB segment and think about that as an opportunity to be ubiquitous, to have mindshare, to hopefully catch those SMBs that have potential to be large companies. But where we really want to invest our go-to-market -- incremental go-to-market focus is really on those high-potential customers that could grow to be multimillion-dollar New Relic customers.

I guess I would just add, Derrick -- this is Mark, that, that business continues to grow for us, and as we mentioned, a number of quarters ago, it turned profitable. And so it continues to be profitable. And so we want to continue to grow that profitably and really focus on making that more and more efficient.

Okay. That's helpful. And then another question. And it may hit deferred, and it may touch on expansion activity. But I'm just curious, when you see more business shifting to cloud-based workloads, from a DR perspective, does that have any impact on invoicing terms? Or maybe a variance in usage patterns that could cause more volatility in deferred? And then conversely, it would seem that people that are building applications in the cloud, it's easier to spin up new workloads. You could see a greater cadence of expansion activity. Is that something that could happen on the cloud side as well?

In terms of the deferred, we don't see meaningful differences, whether it's something that's on-premise or on the cloud, in terms of our invoicing and the deferred impact. Generally speaking, as we said in the past, our enterprise customers are committing -- our customers committing to annual deals, our enterprise customers are paying us 12 months upfront, and our SMB customers tend to pay more along monthly lines. So we don't really see any difference there. Certainly, the way folks consume in the cloud is different than traditionally with on-premise software. And we think that's where our cloud-based pricing really helps. That's unique in as far as we know for our competitors, where we offer the ability to purchase in a way that's more similar to how they're used to consuming the cloud. That said, it's not on demand. They are making commitments to us. And so their commitment -- they're committing to a base level of spend. The nice thing is we do multiple transactions, oftentimes, with customers over the course of a year. And so as their demand does go up over the course of that year, we'll take advantage of that, and their base level commitment will spend -- will increase over the course of the year.

Okay. And just on the rate of expansion. The -- I mean, it's still early for you guys in the cloud. But would you see any different motion, or is it too early to tell?

I think it's a little too early to tell. We -- in terms of -- we see good expansion numbers in our accounts that are on-premise. We see good expansion numbers in our accounts that are in the cloud. So I wouldn't want to classify either one of those 2 at this point as being meaningfully different.

Your next question comes from Ben McFadden with KeyBanc Capital.

This is Clarke on for Ben. Lew, you spoke about business need of enterprise customers coming to New Relic for maybe non-APM products based off a business need like mobile. I was wondering if we could get an update on how many new deals are greenfield versus rip and replace.

Well, I think the vast majority are new -- our opportunities in new logos are what we would consider greenfield in that they do not have an existing solution in place to instrument that specific application, because customers -- enterprises are continually developing software at a dizzying pace. And that's what's driving most of the market growth opportunities. We don't think application development is going to slow down for the foreseeable future. It's only going to increase. So every time a new application is built, that's an opportunity for us or for our competitors. And so if that application's likely to run in the cloud, if it's a modern application, as most new applications are, we've got an natural advantage in those situations. And then after that, if the customer has a great experience with us, as they usually do, then they may say, "Hey, I want to use New Relic in other parts of business. We like its ease of use and total cost of ownership." At that point, there may be a replacement opportunity for us. But they're already a customer, and they know us, and so we can do that, I think, more efficiently than we would if we were going to go frontly into a brand new account.

Great. And on the cloud pricing, you had mentioned before sort of that they would do multiple transactions within the year. I was wondering if, in general, you can kind of stay on average whether that's inflationary or deflationary? Or are you kind of -- is that still a progress, and you haven't reached enough customers at steady-state to know how their purchasing trajectory is panning out? Just if you can comment on (inaudible)

Yes, when Mark spoke about multiple transactions in the year, they're almost invariably increases in their spend with us. So there's a slide we've shared in Analyst Days the past that shows our top 20 customers or something of that nature. And it shows how many of them would have an increase in spend with New Relic, multiple quarters, like 3 quarters out of 4 going back many years. And so that's the kind of pattern that we see with our healthiest customers is that as their applications grow, as they're put into more applications, and they add on new products like mobile and Synthetics and Insights, that just turns into upsell transactions on a regular basis, more often than not.

Your next question comes from Jesse Hulsing from Goldman Sachs.

It's (inaudible) on for Jesse. Could you provide some color around customer retention trends, where it is today. And overall, I would expect it to improve as you add these larger enterprise customers. But I'm curious about how retention has been trending on the SMB side of the business, whether that's been stable or not.

Sure. So in general, our overall retention has been going up. And that's, I think, primarily a function of the trend that we've seen toward more of an enterprise focus and a larger enterprise base. Typically, what we see is the more a customer spends with us, the more likely they are to renew and stay with us. And so as we get more focused on the enterprise, that becomes a bigger portion of the business. The overall trend will drift upward. In terms of the SMB, they're at the low end. Those customers are fairly transient. They come in and out, and that's fine. They're very inexpensive to get, where it's an efficient process. And then as a customer in the SMB gets larger, those renewal rates and those retention rates will continue to increase. And then that continues right into the enterprise, again, with -- the more an enterprise spends, the more likely they are to continue to renew and to expand.

Your next question comes from Sanjit Singh from Morgan Stanley.

This is Josh Baer on for Sanjit. One more question coming back to the new infrastructure product. And you talked about all the integrations and partnerships and the early signs of encouragement there. I'm just wondering how has infrastructure traction been relative to your expectations. And how do you sort of frame that contribution or that opportunity near term and longer term?

I'd say we're pleased with Infrastructure, and it's largely what we had hoped for and what we're seeing in the market, recognizing that it's a new product. So we're early, but also -- our instinct proved out to be right, that this is such a perfect natural adjacency. Our customers want to see the infrastructure health in the same pane of glass as their application health. And they want to see the impact of an infrastructure problem on an application and at the customer experience. So that's resonating with our customers and it's turning into encouraging business momentum. So I would say it feels on track. But we're still early in the journey, and -- but what I'm excited about is we're starting to see these larger deals, as I say, where the infrastructure footprint goes beyond our traditional footprint at the application layer, looking to -- into a service that might host databases or other services that are not a fit for our core APM product. So that's when we see that we're really, I think, reaching a new level with our customers and becoming more of the single point of truth for the entire environment.

And if I could sneak in one more. So you've been showing very strong operating leverage -- margins, coming in well above expectations again this quarter. Does this outperformance impact your timeline for that sustainable profitability at the end of FY '18 or your longer-term targets?

No. We mentioned in the prepared remarks, we're still -- we've guided towards sustainable profitability in Q4 of this year as well as sustainable free cash flow positive at that point. And we're continuing with that guidance. We have not talked about our longer-term profitability metrics beyond what we gave last Analyst Day, which talked about, obviously, a slowing -- we've been increasing our margins by about -- over 1,000 basis points a year. And we're -- in the Analyst Day last year, we talked about an 8% to 12% operating margin at the end of Fiscal 22 when we have targeted $1 billion run rate.

Your next question comes from Nate Cunningham from Guggenheim.

Lew, I'm sure you saw that Elastic recently made an acquisition in your space. And I'm curious, how mature is the ecosystem for open-source performance monitoring? And what degree of customer sophistication is needed to implement and maintain something like that?

Great question. There'll always be some segment of the market that thinks about open-source, but historically, we've not seen -- and we have seen several open-source projects in the past attempt at APM, but it's ever been a real competitive threat for us, historically. We've got a lot of respect for Elasticsearch. They do great things in their space. But we think for, in particular, for our mid-market and enterprise business, and even for a good chunk of our SMB business, this is a pretty hard problem to solve with open source. It does require a very high level of sophistication. And what that really means is you're going to have to get your most precious -- one of your most precious assets, your software developers, to spend time wrestling with an APM system instead of spending time building business value. And so we believe that, that spoke of the market will be investing their development resources on building the stuff their customers want. And we'll free them up to do more of that because we've got an easy-to-use, easy-to-deploy system that can run anywhere.

Your next question comes from George Iwanyc from Oppenheimer.

So now with Project Seymour and more customer [hands] at this point. Can you give us a little bit more color on the feedback you're getting and the type of use cases that they're deploying that with?

It's really exciting for me. I remain so fired up about Seymour's potential. Yet, as you can tell, we're being pretty disciplined about how we roll it out and recognize this is a long journey we're on. But we're way ahead of anyone else because of our -- the mass of scale of data we collect and our capability to do it all in the cloud. So what we are hearing early on is what -- some of the stuff that customers love most about it is when Seymour will automatically surface a problem they didn't know they had. And then it will automatically diagnose the cause of the problem. So what we're doing is we're putting into software the smarts of not only detecting a problem but saying, "Here's the likely root cause of that problem." This is where -- this is a game changer in comparison to how traditional performance monitoring tools present charts and then it's up to the human to kind of pour through all the data to find the root cause of the problem. Now, I will caveat, as I say, we're early in that journey. And so this is not something that we'll say will work for every conceivable type of problem. But the cool thing is, because we're in the cloud, because we're constantly innovating, Seymour will get smarter and smarter over time. And so this is just something that on-premise companies won't be able to do, because they don't have the data and they don't have the capability to continually iterate on that data and those algorithms. So those are the things that excite me about Seymour. And just as a heads up, we have more to announce about that over the course of the next couple of months. I encourage you to come to FutureStack New York. It's September 13th and 14th. And we'll have more to announce about Seymour and the rest of the product line then.

Also on the infrastructure side. Can you give us a little bit more color on how the new Health Map is tying either more bundle purchases or -- is it pushing more APM or more infrastructure?

Yes. Well, I think what it's pushing is the New Relic platform. So just to educate the other listeners on the call, what we introduce with Health Map is an elegant integration between the data we collect at the application layer and the data we collect at the infrastructure layer to combine it both in an integrative view with a health map that shows the relationship between the application and the infrastructure in one integrated view that makes sense. So it's not enough just to have data from all these sources. The next step that we're continually thinking about is how do we deliver incredible leverage from having it all coming into one place and integrating it in intuitive and innovative ways. And that's what our Health Map does. And that's where we get this real competitive advantage, where our competitors might have a certain piece of the pie but not the whole environment, the customers can't reconcile those 2 things, and so Health Map is a great example of us delivering on the power of an integrated platform.

(Operator Instructions) There are no further questions at this time. And this now concludes today's conference call. Thank you for joining us.