New Relic Inc (NEWR) 2018 Q2 法說會逐字稿

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

Jonathan Parker, you may begin your conference.

Thank you. Good afternoon, and welcome to New Relic's Second Quarter Fiscal Year 2018 Earnings Conference Call. Joining me today are New Relic's Founder and CEO, Lew Cirne; and 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 projection 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 an isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today.

At times, we may offer incremental metrics to provide greater insight into our business or results. This additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at ir.newrelic.com to access our earnings release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's conference call or to learn more about New Relic.

With that, let me turn the call over to Lew.

Thanks, John, and good afternoon to everyone joining today's call to review New Relic's Second Quarter of Fiscal 2018 Financial Results.

We delivered revenue of nearly $85 million in the second quarter, exceeding our guidance range. At the same time, we narrowed our non-GAAP operating loss to its lowest level since becoming a public company, and we continue to expect to reach non-GAAP profitability in Q4. With these numbers, I see New Relic continuing to chart a course towards $1 billion in revenue run rate by the end of fiscal 2022. Our confidence stems from the particularly strong growth we are seeing in our enterprise business. This focus area continued to grow over 50% year-on-year and surpassed more than 2,000 paid accounts in the quarter as we now count over 50% of the Fortune 100 as our customers.

Additionally, more than half of our annual recurring revenue now comes from enterprise, up from 43% a year ago. We reached this exciting milestone remarkably only 3 years after truly starting to build out an enterprise sales presence in the field. Overall, we drove a combination of encouraging land deals as well as larger expansions with existing customers. These deals spanned companies like Carnival Cruises, Cisco, Expedia, John Hancock, Nationwide, Morningstar, Scripps and other great companies. We also continue to see nice attach rates across our platform, and we're particularly encouraged with New Relic Insights and New Relic Infrastructure, which we see as 2 critical pillars of the $1 billion target.

I'll go into those in more detail shortly. But first, I want to take a macro look at what's driving the tremendous demand we're seeing, particularly from the enterprise.

I've been traveling around the world, and nearly every customer I connect with across every industry tells me the same thing: they have an imperative to go faster; they want to identify and fix issues faster; deliver value to their customers faster; and build high-performing DevOps teams faster. But speed alone introduces risk. New Relic helps our customers manage that risk and gives them confidence so they can accelerate the pace of innovation. New Relic is a catalyst for businesses to deliver better software faster.

How do we do that? Our cloud-based platform delivers 2 fundamental things: instrumentation and intelligence.

First, ubiquitous instrumentation. We help enterprises quickly measure a wide variety of key metrics across their environment. Every mobile tap, every page view, every piece of software and infrastructure must work in concert to deliver a flawless customer experience. We measure all of it.

Second, we deliver intelligence. Our applied intelligence technology uncovers real-time insights that enterprises can leverage to predict and fix performance problems, improve time to repair and better understand their digital customer. We bring these things together in a unified, easy-to-use Software-as-a-Service-based platform that ultimately provides technology teams the confidence to move faster.

We built our platform of products to be easy-to-use and to deliver immediate value to our customers, which is key to our expand growth strategy. When customers see the value delivered from any one of our products, they are likely to continue to invest more and more across other products from APM, Browser and Mobile to Synthetics, Insights and Infrastructure. This quarter, a record 40% of new ARR came from outside of APM, with 2 non-APM products each representing more than 10% for the first time. New Relic Infrastructure became generally available only 1 year ago and is still very early in its evolution, but it had its best quarter yet at over 10% of new ARR. And it remains our fastest-growing product.

This past quarter, we closed our first $1 million dollar ARR infrastructure deal, achieving this milestone in less than a year, faster than any other product in our history.

We had an amazing win at a large global coffee company that is likely one of your daily addictions. I know it's my wife's daily addiction. As part of this partnership, New Relic Infrastructure was selected to monitor the company's point-of-sale systems across North America. We began our journey with this company a little over a year ago by instrumenting their digital customer experience on their mobile ordering app. And last quarter, we expanded our relationship and are now instrumenting the point-of-sale machines that power their physical in-store customer experience. I'm so inspired by customer stories like this one because it highlights the incredible power of our platform and the breadth of important problems that our customers are solving with New Relic.

New Relic Insights had another record quarter and was our second non-APM product to deliver more than 10% of new business. New Relic Insights is our analytics product, which allows our customers to easily extract actionable information from the massive quantities of unstructured and structured data flowing through their apps and infrastructure. It allows our customers to quickly explore their data through a curated and ad hoc queries. I can't tell you the number of times I hear from customers how Insights is game-changing for their business and they can't imagine life without it.

This quarter, New Relic Insights along with New Relic Infrastructure were key to a substantial expansion of our relationship with 21st Century Fox. As you all know, the entertainment and media industry is in the middle of a transformation, and 21st Century Fox is a leader because they know that the fastest movers will win. A big part of their transformation strategy is via the public cloud, taking advantage of the cloud's scalability and instant accessibility to drive amazing digital customer experiences. And they have chosen New Relic Infrastructure to give them visibility into the performance of their applications and underlying cloud infrastructure, and New Relic Insights provides the ability for their CTO and hundreds of his employees to drill into their data to understand the real-time performance of their business. The future of 21st Century Fox is digital, and they're betting their digital strategy on New Relic.

But we're not just seeing this at 21st Century Fox. We're seeing this demand from many of our customers all over the world who are adopting public cloud technology. They are quickly recognizing the importance of putting New Relic everywhere to get a complete picture of their application and infrastructure performance.

And we're not done delivering more innovations to make our platform even more valuable for our customers. In September, many of you joined us in FutureStack in New York where we hosted many of our top partners, customers and prospects for 2 days of hands-on product training and powerful customer-led sessions. This was the first time we brought our flagship event to New York, home to many of our customers across many industries, especially media, financial services and technology. It was fantastic to connect with an amazing group of companies and truly get inspired to learn how our customers like Dunkin' Donuts, Gannett, GE, John Hancock and Nationwide are growing faster with confidence. And I love seeing that our attendees were a great mix of both frontline technologists and executives or, as we call it, hoodies and suits. What they all share is a desire to move faster with the help of New Relic.

On stage at New York, we announced New Relic Applied Intelligence. A new set of services embedded throughout our entire platform, which are intended to help customers use monitoring data to uncover and resolve problems faster. Among these services is New Relic Radar, which we first started talking about last year under the name Project Seymour. Radar leverages artificial intelligence and machine learning to help our customers see what's important across their complex environment. The product has been rolled out to many of our customers, and we've received tremendous feedback because it not only identifies potential issues, it also delivers intelligent recommendations for resolution.

Our approach to AI is that it should be built into our SaaS platform and across all of our products. We believe that this approach further differentiates New Relic's SaaS-based model apart from our on-premise competitors. In our view, only New Relic has the data and the scale to deliver true promise of applied intelligence to the market.

We also continued to execute against our strategy to dominate the cloud. We want to win every deal that involves instrumenting company's applications and infrastructure when they are running in the cloud environment. As the only pure play Software-as-a-Service vendor covering the full breadth of solutions in our space, this is our sweet spot where we believe we enjoy natural and structural competitive advantages. This is a key advantage that we don't believe our on-premise competitors can match. It's that power and promise of the cloud which we are uniquely positioned to provide.

To strengthen our leadership position even further, we announced more than 35 new product features at FutureStack. I'm so proud of our product organization for that accomplishment. In particular, our team is working hard to integrate New Relic Infrastructure with all of the leading cloud platforms, several of which, Amazon Web Services, Microsoft Azure and Google Cloud platform joined us on stage at FutureStack.

We notably deepened our relationship with Microsoft by announcing support for .NET Core 2.0, which was key for many of our enterprise customers. And we announced brand-new integrations between New Relic Infrastructure and 5 of Microsoft Azure's most popular services. We also announced deeper integrations across AWS because we continue to see our customers expand beyond just using one cloud platform. As customers continue to adopt multi-cloud strategies, New Relic is dedicated to helping them instrument their application and infrastructure across all of the major cloud environments.

To wrap up my comments. We're halfway through our fiscal year, and it's important to take stock of how we're doing against our strategic goals for the year. Our first goal was to dominate the cloud where we are seeing our lead widen, underpinned by deeper visibility into application and infrastructure performance across the key cloud providers. Second, was to deliver new innovations across our platform. And the aforementioned launch of New Relic Applied Intelligence and other recent products enhancements signal our solid execution on this front. These goals will continue to align our efforts and be core to the long-term financial success of New Relic.

Speaking of finance, let's have Mark take you through the numbers. Mark?

Thanks, Lew. Turning to the financials. Revenue was $84.7 million for the second quarter, up 33% year-over-year. Total paid business accounts were approximately 15,900, and the number paying more than $100,000 in annual recurring revenue rose to 586, up 37% compared to a year ago. The growth of this figure represents both new logos and customers expanding beyond that threshold. Our annualized revenue per average paid business account exceeded $21,500 for the first time.

At the end of Q2 our enterprise business was approximately 51% of annualized recurring revenue, up from around 43% in the same period last year. This key metric crossed through the 50% milestone 2 quarters ahead of our expectation entering the fiscal year.

Our dollar-based net expansion rate in the second quarter was 123% compared to 116% in the year ago period and marked our strongest Q2 result in over 5 years. While we have talked about this metric usually skewing higher towards the back half of the year, the combination of some larger expansions and improved gross churn helped drive a seasonally strong result. In fact, as we look at our retention rates, we are pleased that these have been trending upward from the mid-80% range and are now approaching the high-80% range. Having said that, as enterprise continues to grow beyond 50% of our base, we do expect that our net expansion rate metric will generally continue to be seasonal, with a lower rate in the first half and higher rate in the second half.

Turning to our geographic split. U.S. revenue of $58 million for the quarter was up 35% year-over-year, while non-U.S. revenue for the quarter grew to $26.7 million, up 30% year-over-year. Non-U.S. revenue represented 31% of revenue in the quarter.

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

Our gross margin of 83% was approximately flat from the year-ago period. We now expect to sustain gross margins around 83% for the year, up from our previous expectation for around 82%.

With regard to operating expenses, sales and marketing costs were $47.2 million compared to $36.8 million in the same quarter last year, primarily due to personnel-related expenses. Overall, we continue to invest aggressively in distribution as we execute against plans to build a billion dollar business, with an increasing focus on technical sales and supporting functions to help deepen our enterprise relationships.

R&D expenses were $14.8 million compared to $12.1 million in the same quarter last year. The increase was largely due to strong continued hiring activity. G&A costs were $11.8 million compared to $8.6 million in the same quarter last year. The increase was partially a function of continued consulting costs related to an ongoing major system implementation as well as continued hiring activity.

Overall, our expenses in the quarter produced an operating loss of $3.5 million, an improvement over the $4.9 million operating loss for the same quarter last year. This resulted in an operating margin of negative 4% in the quarter compared to negative 8% in the same quarter last year. Overall, we expect our pace of hiring to moderate in the back half of the year given the success of our hiring activities over the past 9 months. This should help drive continued leverage as recent hires become more productive.

Our net loss per share was $0.06 compared to $0.09 in the same quarter last year.

Turning to our balance sheet. We ended the second quarter with approximately $227 million of cash, cash equivalents and short-term investments, essentially unchanged from last quarter.

Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $123 million, up 53% year-over-year and, as expected, down slightly 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 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 to see more meaningful sequential increases in Q3 and, in particular, Q4, although to a lesser extent than in fiscal '17 given some onetime movements due to early renewals and annual invoice conversion. This expectation remains and we expect deferred revenue to increase in the high-single digits percentage-wise in Q3 compared to Q2.

Looking ahead to Q4, it's important to keep in mind the $8 million benefit we saw in the comparable period last year from early renewals and annual invoice conversion which drove roughly 10 percentage points of sequential increase.

Turning to cash flow. Cash from operations are negative $1.1 million. Free cash flow, defined as cash from operations minus capital expenditures and capitalized software, was an outflow of $8.8 million in the quarter. For all of fiscal '18, we now expect cash from operations to be between $35 million and $40 million, a narrowing of the range primarily reflecting payout of accrued vacation in Q3 ahead of a move to a new company vacation policy starting in January. However, we are also lowering our expectations for physical capital expenditures to $25 million to $28 million. Our assumptions for capitalized software remained unchanged at approximately $3 million. Overall, we now expect free cash flow to be between $3 million and $8 million compared to our prior expectation for between $1 million and $10 million for fiscal '18, unchanged at the midpoint of the range.

As it relates to Q3, we expect free cash flow to be slightly negative, ahead of stronger positive free cash flow in Q4.

Now I will turn to our outlook for the third quarter of fiscal 2018 and the full year as a whole. For the third fiscal quarter ending December 31, we expect revenue to range from $88.3 million to $89.8 million, reflecting growth of 31% year-over-year at the midpoint of our guidance. We expect a non-GAAP operating loss of $4 million to $5 million. This will lead to a non-GAAP net loss per share in the range of $0.07 to $0.09 based upon a weighted average share count of 55.3 million for the quarter.

For the full fiscal year 2018, we now expect revenue to range from $346.5 million to $349.5 million, reflecting growth of 32% year-over-year at the midpoint and an increase from our prior guidance of between $344 million and $348 million. We expect a non-GAAP operating loss of $13 million to $14 million, an improvement from our prior guidance of between $14 million and $17 million. This would lead to a non-GAAP net loss per share in the range of $0.21 to $0.22 based upon a weighted average share count of 55.4 million.

Overall, we continue to expect to achieve sustainable non-GAAP operating income by the end of this fiscal year.

And with that, we're happy to turn it over to your questions.

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

Nice to see the progress and achieving the milestone with the enterprise accounts. I wanted to -- it's been a year since your Analyst Day when you first laid out the billion dollar revenue run rate exiting 2022. I was just hoping you can talk a little bit about the scorecard one year later because as I look through the slide deck from a year ago, it certainly seems like, on enterprise especially, you're tracking ahead of expectations of what you laid out a year ago. So I was just hoping you can -- since you've brought up the billion dollar revenue run rate on this call, if you could just walk through some of those drivers and what's changed versus a year ago and what you need to do in the rest of this year and FY '19 to track towards that goal. That's my first question.

Thanks, Greg. This is Lew. I'll take the first half and let Mark chime in probably with a little bit more of his CFO's perspective. But from my mind, yes, the key drivers to our path to $1 billion in that time frame are enterprise and product portfolio diversity. And I'm very pleased with how we're progressing on both axes. Now that enterprise is more than half of our business, that's a major milestone. And you've been following us long enough to know that when we went public, I think it was around 25% of our business, somewhere in that range. So it's a pretty substantial change over a short period of time. And also, we've firmly, I think, established ourselves as a multiproduct company with the results we announced this quarter with 40% of new business coming from outside of our traditional APM products. So those are 2 essential elements to reaching that target. And of course, we'd like to not stop there, but look beyond it. And I'm -- I give us quite good grades on both. We've got a lot of execution to do and certainly, the bulk of our execution we're now in the back half of our year and so that's where we've got to focus on the strategy. But we like the strategy we have. I've been visiting a lot of customers around the world, and the consistent theme I'm hearing from them is, "I need to move faster, and New Relic gives me the confidence to move faster on all of my digital projects" and so we believe that in aligning with that business need, we have the opportunity to grow these accounts further.

Yes, Greg. This is Mark. I think I would agree with your commentary and Lew's that we are well on track toward that goal. We -- particularly enterprise, we continue to expand the number of accounts. And we're really focused on expanding the spend within those enterprise accounts, and so that's going quite well. On the other hand, the SMB business also continues to grow. It continues to be profitable for us. And so I think we're -- that business continues to track nicely as well. You combine that with the progress we've made in terms of efficiency gains and the path to our profitability, and I think we're doing quite well generally on these metrics toward $1 billion.

And Mark, one quick follow-up for you. I was especially curious about the gross churn commentary. So I was hoping you can thread the needle on -- is gross churn more of a function of the enterprise mix being greater now? Or are you doing something differently internally to enhance the stickiness of the customer base? Because certainly hearing churn is going down is music to everybody's years, so I was just wondering if you can expand on the dynamics behind that?

Sure. We're very pleased with that, there are -- both factors weigh in. Certainly, we are helped -- we've always said that our enterprise churn is -- our renewal rates are low 90s and the more someone pays, the more likely they are to renew, which is great. So the mix -- the business mix shift is certainly helping that. On the other hand, we are doing things across the customer base to expand -- to extend the stickiness of the product, customer success team's built out, renewals team, the investments we're making across the organization to help make sure customers renew, make sure customers get value from early on following their purchase. Things like that are helping customers get value earlier. And the earlier the more value they can get during their initial subscription, the more likely they are to renew.

Your next question comes from Sterling Auty from JPMorgan.

This is Ugam Kamat on for Sterling Auty. I wanted to touch upon the Radar solution that you launched in the last quarter. Is this a separate SKU that is being sold or is it bundled with other products? And as compared to pricing, how is it priced related to other solutions like APM or Insights or Infrastructure?

Great question. So when we launched Radar, we also announced that our product strategy is to bake applied intelligence into the entire New Relic platform. And so Radar is one of the things that shows off our unique and proprietary applied intelligence technology. We are not charging for it. Rather, we are making a strategic bet that customers will select New Relic and stick with New Relic and grow with New Relic because we've got applied intelligence baked into the entire product suite. We believe our on-premise competitors can't begin to compete along this axis because in order to do AI well, you need 2 things. You need an enormous amount of data and then you need to be able to iterate all the algorithms in the models on a continual basis. That's impossible with on-premise solutions. So we feel like, with Radar, with our applied intelligence strategy, we're going to increase our leadership position, increase renewal rates. And that's going to drive higher investment levels from our customers in our product suite.

And then the pricing? Okay, and you mentioned...

So the pricing, it's baked into the product so it's actually just a further differentiation, more value we're putting into the existing products.

And a follow-up is on the Infrastructure deals. You mentioned a strong quarter, more than 10% of the ARR coming from -- of the new business coming from Infrastructure. Are you seeing infrastructure deals that are being sold with APM products that are on the server or are you seeing the opportunity move beyond the host?

Our strategic deals, and we did more than just that one Infrastructure deal. Our deals, where we go beyond just the host that the application runs on to a much broader portion of the environment, in some cases, every piece of cloud infrastructure that runs and, in some customer cases, some on-premise infrastructure. It's all candidates for our Infrastructure product, and that's where we start to do these strategic deals. So customer may decide to start with us just running New Relic Infrastructure where they run APM. And then, they recognize they want to see it everywhere so they can have complete visibility in the environment, and that's where we do these larger deals. So I'm delighted to see them come to light last quarter.

Your next question comes from Michael Turits from Raymond James.

A question for you on the net adds. I'm not sure if you've run over this before or not. But can you parse that a little bit? I know you said that churn was improved. So how much of this was a gross add increase improvement and how much of it was from decreased churn. And if the gross adds picked up, what do you attribute that to?

Well, I guess that I would highlight the number that we focus on is the number over 100k, which was up nicely, up 37% year-over-year. And so -- and that's a combination of some accounts getting to over 100k who they may have been at $50,000 or $60,000, and they did an upgrade to get over 100k along with a number of new adds that come in and initially spend more than 100k. So that's the thing that we're really focused on. And in terms of the total mix, that number bounces around a lot, has in the past. And we've generally tried to downplay the focus on that. But that was a combination, I think. Overall, we expect it to continue to bounce around. This past quarter, it was a combination of both normal variances in companies that join, plus I think it is helped a bit by our improvement in the churn numbers.

Okay. And then just -- I want to revisit a -- the price -- the cloud pricing change that you made a while ago. Initially, you talked about seeing great demand elasticity there where you reduced pricing and got larger deals. So I just want to see if you could update us on if that has continued to be the trend?

Yes. We've not given out specific metrics around that, but we do continue to see that. And our initial thesis we continue to see playing out, which is that giving people the option of the traditional host-based pricing or the cloud pricing allows them some flexibility to take whichever method works best for them. And we are seeing coverage of the environment expand. So generally, customers who are -- it's easier for customers to cover more of their environment. That's better off for the customer, we think that's better off for us. The unit pricing can be lower in cloud pricing than host pricing but generally seeing that because of the greater environment coverage, the total spend is increased. And at the end of the day, that's what we're focused on, which is the account spend along with the value they get from the product. And those 2 metrics are better -- can be better under the cloud pricing.

Your next question comes from Jesse Hulsing from Goldman Sachs.

It's great to see the enterprise mix going 50% for the first time. I'm curious how we should think about the SMB business because if I just do very simple math and assume ARR mix, looks kind of like revenue in that business probably is growing in the teens now. Is there a sustainable growth profile for that business over the next couple of years? Can that be a teens grower? Do you expect it to continue to decelerate into the single digits?

We like both our enterprise and our SMB business. SMB is growing. It's been profitable for some time. We expect the profitability to continue. Our primary strategic goal for SMB is not to drive overall revenue growth for the company. It's rather ubiquity within that segment. We want lots of people using the product. We want it to help inform our product strategy because often SMBs are adopting technologies and practices that enterprises will adopt a few years down the road. So we like being present and ubiquitous as we can be in that segment but always with an eye towards that being a healthy and efficient business for us. So we expect to continue to grow, and we like where we're at in the SMB segment. But obviously, the enterprise segment is where we see the bulk of revenue growth coming from.

Got you. That's fair. And then, on the infrastructure product. A million dollar deal is pretty impressive just given how new the product is for you or how recently you released it. Is this a lumpier type of product where you expect to see bigger deals driving business there? Or is this a type of product where you feel like the entire installed base can adapt it in smaller bites?

It can be lumpy, but it's more of I think the maturity of our business and the reputation we're getting with our -- the enterprise customers been working with us for some time. We've earned their respect. We're becoming a more strategic vendor with them. And so they'll conduct an evaluation of Infrastructure and decide to roll it out everywhere. That's not a constraint to the product. We have a lot of customers or new customers that may dip their toe in the water with Infrastructure. So we don't feel like we need to do these huge deals that might take a little longer in order to get into an account with the product. But we're delighted to see that, when we need to, we can do these million dollar year -- remember, they're subscriptions and that we expect and -- that many of these customers will continue to grow after they do -- they reach that 7-digit level.

Your next question comes from Ittai Kidron from Oppenheimer.

I had a question. I hope I'm triangulating on the data right. Mark, won't you help me on this? Under the assumption that Infrastructure and Insights are a bit more enterprise-weighted than your core APM product, if each of them is 10% of ARR that means that APM is only 30% of ARR that's related to enterprise. I guess my question is, Lew, as we think 2, 3 years forward, which one of your products do you think is more critical to keep on driving your enterprise business?

So Mark, why don't you clarify the numbers?

I'm not sure I quite followed the numbers. But what I guess I want to say is in terms of the allocations and things can be very different and so in terms of financial allocation versus how important individual products are to any given account. What we look at is the whole platform. And the platform is what customers want, we realized. That's meeting their demand. There -- some customers may come in and Synthetics could get us in. Some customers could be Mobile. So -- and we've had customers where Mobile has gotten us the account. But at the end of the day, when we get full coverage, the Mobile allocation is actually relatively modest. And so I think it's important to look at a lot more than the numbers of what is allocated or attributed to any of the products. All of our products we consider important and critical, and our customers do to. What is selling is the platform.

Okay. When I look at the infrastructure product, clearly, you had very good strong demand. How do I think about when it's deployed? First of all, how frequent is it that it's deployed already in an existing APM customer versus not, number one? And number two, does it frequently get deployed side-by-side by -- next to other infrastructure monitoring solutions? Or you actually see it most of the time being as displacing third-party solutions?

So Infrastructure, last quarter was its third quarter in the market, so it's still early. And there are many New Relic customers -- since we have nearly 16,000 of them, many of them have not yet deployed infrastructure in their environment. So there's plenty of upside in growth opportunities just within the base itself, let alone in new customers we expect to attract over the years. When they do deploy New Relic Infrastructure, if it's a new project they have nothing in place, so it may start in an environment where there's no competitive product and they need visibility. They want it all in one platform. We think it only makes sense for all this stuff to be coming together in one platform. And then, as they look to expand their use and they see how strong the product infrastructure is, then they look to -- they consider replacing other legacy on-premise hard-to-use infrastructure monitoring products, and then they can -- and that's when we may actually replace other products, and the customer can save some money and get a better product experience in the process.

So when someone gets to spend $1 million, by definition, it implies they have taken something else out?

Well, a lot of what's driving that is their strategic moves to the cloud, so they are already moving away from the infrastructure that was in the data center. And while they are moving away from it, they are definitely moving away from the legacy tools that was there to watch that infrastructure. And so this is a company that wants to move to as much of the cloud as possible. So in that case there was -- I mean, it's implicit replacement but they were -- they didn't have anything watching that cloud infrastructure in place yet.

Your next question comes from Sanjit Singh from Morgan Stanley.

Definitely nice to see those renewal rates come up. Lew, I had a question for you. You and the team went through the bold process of reorganizing how your product engineering renovation operates. And it certainly seems like it's paying dividends here with Radar out Tracing is out as well. And I guess my question is, just looking at the products portfolio more holistically, infrastructure is gaining traction, APM continues to do well, you're getting traction outside of APM. How important is monitoring the network in terms of your overall product portfolio strategy? And then I have a follow-up.

So thank you for mentioning it. I want put a hat tip to our product award. We've got engineers, primarily in Portland. We've also got some great engineers in Barcelona and a few other cities around the world. But this team is on fire, Sanjit. I mean, they're doing incredible work. And I am also personally involved in a very exciting project that's too early to share with. But just know that the product org is cranking, and we're not done innovating, that's for sure. I don't -- it's a little too early to say where network fits in that. We start with our customer problems, particularly customers running in cloud environments, customers running modern technology. What do we need to do to help them move faster with confidence is the question we ask over and over again. And there's -- I feel like a kid in a candy store. There's so many opportunities for us to pursue, problems we can solve for our customers. And I believe we've got the right product org, the right product leadership and right product strategy to capture a really large opportunity in front of us beyond the existing products we have today.

I appreciate the color there. In terms of my follow-up, with customers adopting more of a multicloud strategy, I was wondering -- maybe this might be one for Mark, if you could -- I think historically, you guys have said that you monitor 50% -- the 50% of the application that you monitor are actually on-premise. And have you got any insight on whether that's changing or whether you have expected the change to go forward as customers evolve their cloud strategy?

So I think a while ago where we talked about more than 50% of our -- or I think well over 50% of our customers are in the cloud versus on-prem. And it was roughly 50-50 in terms of dollars, cloud versus on-prem. I think that was a number of years ago. We haven't given explicit guidance about that number currently. But what I would say is it's trending upward, that more than half is now coming from the cloud, and a lot of that is multi-cloud. I would expect that trend to continue. We continue to have -- there's a lot of great advantages anytime someone is in the cloud. On the other hand, customers want a single pane of glass. They want one solution that can handle their multiple cloud environment plus their existing on-prem stuff, and we do that and we do that very well. And so we'll continue to pursue those opportunities. But overall, I would say that the percentage that comes from the cloud will continue to generally drift upward.

And in terms of that rate of change, has it been generally like a stable sort of progression towards more cloud? Or have you seen any sort of inflection points or acceleration points over the last couple of quarters?

Well, I mean, there's 2 vectors to consider. One is obviously the industry is moving to the cloud at a striking rate that's obvious to, I'd say, most industry observers including you. But then there's this second trend of there's so many enterprises that are discovering New Relic on their cloud initiative and saying, "Hey, I want to run you back on-premise, too." So there's -- that's why we say generally, there could be a time where customers start -- has us in their entire cloud environment and wants to bring us on-prem. We're happy to take that business and help them in their entire environment. And that's a little harder to predict quarter-to-quarter, but there's those 2 vectors at play.

(Operator Instructions) Your next question comes from Derrick Wood from Cowen and Company.

This is [Jim Fitzgerald] sitting in for Derrick. On the Amazon partnership, I think it's been live now for about 6 months. Is there anything there that moves the needle from a go-to-market standpoint to help you sell into AWS environments? And then, I guess, on the flip side, have you seen any competitive change from the AWS X-Ray product?

So I think what really moves the needle on our Amazon partnership is recognition that New Relic customers consume more public cloud than non-New Relic customers. And if a company has an existing relationship with a cloud provider such as Amazon and then they become a New Relic customer, they consume their cloud resources faster because we help them move to the cloud faster with confidence. That is one of the major reasons why 21st Century Fox decided to go strategic with us was because they had a goal to get out of the data center business and move to the cloud as rapidly as possible. But they have to do that responsibly, and they have to manage the risk of doing that. And they were moving slower than they would have liked because they didn't have the visibility that we provided everywhere, right? So with New Relic in place, they are now migrating to the cloud faster. Amazon loves that, okay? Now as it relates to potentially competitive products, X-Ray does offer a little bit of overlap. It's one feature that has some overlap with what we do. I am not aware of a single deal that we have ever lost to X-Ray. We feel like it's just -- it doesn't have nearly enough overlap to be a competitive offering. And certainly, it doesn't work in a multi-cloud environment or when the customer wants to go beyond just tracing a transaction to monitoring the entire environment from a customer experience through all the services on Amazon's cloud or elsewhere and then the infrastructure underneath it, and that's what we uniquely provide.

Okay. And then, one more as I may. Last quarter you guys onboarded quite a bit of net new headcount. How are you seeing the new people ramp to productivity? And is that tracking to levels that you've seen historically?

It's been an area of focus to us, not only to get the right people, the talented people that fit our core values into the company, but then making them productive and effective in their roles. And I'd say we're pleased with the result we're making. We put a lot of investment into the engine that helps our people be productive. And we got a lot of products. They're all very sophisticated products. And we want our -- if you're a sales representative visiting our customer, we want those reps to be fully up to speed in our products. And we just launched 35 new features in New York in September. So it's an effort to keep them up to speed, but I think we do a good job of it. It important to sustain the growth that we want to maintain.

(Operator Instructions) Your next question comes from Jack Andrews from Needham.

I guess, given the backdrop that digital transformations are impacting all industries, could you just talk about the process by which you're mapping I guess your finite sales and marketing resources to the opportunity sets that are out there? I mean are you increasingly focusing on particular industries or geographies or maybe landing with a certain product? How are you thinking about this broadly speaking?

It's a great question and we do typically work -- do best in industries that are most -- going through the most digital transformation change at a given point in time. So it's no surprise that great media companies like 21st Century Fox, they are classic examples of companies that have to succeed with digital, right? And they're the type of companies that are moving to us. But more recently, we've seen digital impacting things like insurance companies. So that's why we have Nationwide as a customer we referenced in our release today. And what they're doing is they're trying to make claims processing a lot better for their customers and make it so that they can improve the customer experience and reduce the cost of processing claims. And so we do pay attention to verticals that are like competing most -- with the most focus in digital and pursue them. But the other way we think about it, and we talked a bit about this in our last call, I believe, is we've got this amazing growth opportunity within the base. Now that we have half of the Fortune 100 as customers, and we don't believe any of them are nearly at their full potential as New Relic customers. And so delivering as much value as we can and into the high potential customers so that they can become truly strategic customers where they realize the full value, that's where we see a bunch of growth going forward. And so we're going to try to be really good at focusing on our customer base.

And thank you for joining us today. This concludes today's conference call. You may now disconnect.