NEWR (2020 - Q3)

Ladies and gentlemen, thank you for standing by and welcome to New Relic Third Quarter Fiscal Year 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand over the conference to your speaker today Greg McDowell Investor Relations. Thank you. Please go ahead, sir. Greg McD

Thank you, operator. Good afternoon and welcome to New Relic’s third quarter and fiscal year 2020 earnings conference call. Joining me today are New Relic's CEO and Founder Lew Cirne; CFO, Mark Sachleben; and COO and President, Mike Christenson. Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations or future events, including financial projections, financial guidance and future market conditions is a forward-looking statement. All information provided in this conference call is as of the date hereof and New Relic assumes no obligation and does not intend to update these forward-looking statements, except as required by law. For information about factors that may cause actual result 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, and subsequent filings with SEC. Copies of these documents may be obtained by visiting New Relic’s Investor Relations website, or the SEC's website. Our commentary today will include non-GAAP financial measures, which we believe provide an additional tool for investors to use in evaluating our operating results and trends. However, 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 financial 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 maybe one-time in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit the Investor Relations section of New Relic’s website to access our earnings release issued today, supplement materials that accompany 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.

Thank you. And good afternoon to everyone joining today's call. Joining Mark and me today is Mike Christenson, our new President and Chief Operating Officer, who started at the beginning of Q3. Many of you had a chance to meet Mike during our Investor Day in December in New York, where we laid out our growth strategy and vision for the future. For those of you who are unable to attend or haven't yet seen a recorded event, we encourage you to review our presentation on our Investor Relations website. New Relic exists to help our customers create more perfect software, digital customer experiences and businesses. As digital becomes the primary channel for how business is done, companies simply cannot afford that downtime or poor software experiences. It costs them in terms of loss productivity, loss brand attendee and loss revenue. Companies must be up and available 24/7. New Relic delivers full visibility across that environment, which helps companies precisely pinpoint where issues could arise, so they can quickly fix them before their customers are impacted. We serve the teams responsible for the performance of digital systems. When something goes wrong, they don't want to have to open up a collection of disparate tools to pinpoint the issue. During the system disruption they want a single platform to see all of the data in context with a unified and simplified user interface. Our customers demand a single platform that has three core characteristics. First, it must be open so they can bring in multiple data sources across their systems, their applications, their infrastructure, and now from their logs. They want a connected platform. They're upon a single scale with database in our case NRDB, so that they can quickly understand how all of their systems are connected. And finally, they need a platform that is programmable so they can customize their observability platform for their unique business needs. We have a long history of delivering curated experiences out of the box for our customers. However many of our customers have incredibly complex environments. And they need a customizable programmable platform, one that lets them build their own applications on top of their telemetry data in order to reach the gold standard of five 9's availability for their mission critical applications. Our platform scales incredibly well to help the most demanding companies deliver the most available and incredible customer experiences. And that's exactly what we deliver with New Relic One, our observability platform, which we launched in the end of Q2, featuring New Relic Logs, Serverless, Metrics, Traces and Programmability. Given the breadth and depth of these new platform features and capabilities, our primary job in Q3 was to train our sales team to sell the platform and educate our customers in the market at large about these exciting new capabilities we believe is unique and only in New Relic One. In Q3, we traveled the world and hosted global future stack events in London, Sydney and Melbourne, delivering a platform story. And while we're still early in our platform journey, we're seeing success with our customers. Today, over 45% of our 100k customers have four or more paid products, up from roughly 17% from the end of fiscal year '17. In its first quarter the market we secured nearly 100 deals for New Relic Logs, two of these deals were seven figures, which illustrates the power of observability all in one place as our customers want logged in context with the rest of their observability data. Case in point during the quarter, a large video conferencing company agreed to standardize on New Relic across APM infrastructure and logs. They were previously using three different tools, New Relic APM and two different competitive offerings for monitoring their infrastructure and their logs. They consolidated onto the New Relic One platform and now can see all of their application infrastructure and log data in context. So when there's an issue, they have one place to go to quickly pinpoint and find a resolution. What's more, they've seen significant cost savings and consolidating their tools into the New Relic One platform. Also we are making it easier for our customers to adopt the full platform of products. Through our New Relic Platform Pricing program, our customers commit to a certain level of spend, and they can spend that cross across whatever products they want. They get the predictability they need for spending combined with the flexibility they need to use the right product at the right time in the right environment. This December, we joined many of our customers at AWS re:Invent where we were sponsor and showcased our latest platform innovations can help them gain visibility into their workloads across clouds. We ensured the results study from Forrester Research, which reported that New Relic can reduce the cost of moving applications to cloud by 95% and help deploy applications into the cloud 90% faster. What's more Forrester interviewed four existing customers and partners and measured the potential ROI of 191% with a three month break even on investment. The value we can deliver to our customers adopting the cloud is tangible, which has led to a strong go to market partnership with AWS. Our customers tell us we have the most complete and useful platform for observing Kubernetes clusters and their workloads. We just had a big presence at Cube Con in San Diego last November, the industry event for Kubernetes with more than 10,000 attendees. As I demoed at Investor Day New Relic infrastructure brings together critical observability data metrics and defense logs and application traces all in context inside a single beautiful unified user interface. That's the value of our Kubernetes cluster explorer, and it delivers complete observability. Finally, we recently announced that Bill Staples will join as a Chief Product Officer on February 14. Bill comes from Adobe, where he led the engineering team behind Adobe Experience. Before that, he spent 17 years at Microsoft, working on the Azure Cloud Platform and many other initiatives around developer focused products. Bill knows how to build and scale world class cloud, engineering and product organizations and businesses. But above his resume and relevant experience, what's most important that Bill shares our core values and a passion for creating products that customers love to use. Reporting to me, he'll be directly responsible for leading a product engineering and design teams to execute on our strategic product roadmap. With the addition of Mike and Bill, we have grown the executive leadership team at New Relic and are excited about the future ahead. In summary, New Relic remains committed to growth and to our strategy laid out on Investor Day. We believe we have the most complete observability platform in the market and our customers are responding favorably. Now we're working hard to enable our go to market engine to bring these rich capabilities to our customers as a complete platform. And we continue to hire world class leadership and team members to advance our growth objectives. Our job in Q4 is to continue executing on our platform vision, including the upcoming launch of our enhanced AI ops capabilities. I'll now turn the call over to Mark to provide details on the numbers.

Thanks, Lew. Now turning to financials. Revenue was $153 million for the third quarter, up 23% year-over-year and above our guidance range of $148 million to $150 million. As a reminder, at our Investor Day in December, we shared with you that we're targeting to end this fiscal year with $635 million in ARR. Based on bookings results in Q3 we believe we are well positioned to hit our $635 million target. We ended Q3 with 926 paid business accounts with ARR over $100,000 up 13% compared to a year ago. This growth represents both new logos landed as well as installed base expansions derived from increased usage, expanded application coverage and the cross sale of additional products. Our annualized dollar base net expansion rate in Q3 was 109% compared to 122% from the year ago period. Looking at the trailing four quarter average our dollar base net expansion rate was 115%. At the end of Q3 enterprise business was approximately 62% of ARR up around 56% as of the same period last year. In terms of geographic split, U.S. revenue was $104 million for the quarter up 22% year-over-year, while non-U.S. revenue for the quarter grew to $49 million, up 26% year-over-year. For Q3, our non-GAAP gross margin was 84%. Non-GAAP operating income was $3 million or 2% of revenue compared to $8 million or 6% of revenue in the same quarter last year. This result was at the low-end of our guidance due to continued headcount growth. We had a strong hiring quarter with almost 100 net new hires, and it continued to add capacity in Q4. Overall or non-GAAP net income attributable to New Relic per diluted share was $0.09, compared to $0.19 in the same quarter last year. Turning to cash flow, cash used in operating activities was $14 million. Free cash flow, defined as cash used in operating activities minus capital expenditures and capitalized software development costs, was negative $33 million. On our balance sheet, we ended the third quarter with approximately $737 million of cash, cash equivalents and short-term investments, down from last quarter's $772 million total. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $237 million, up 15% year-over-year and up 2% sequentially. Now, I will turn to our outlook for the fourth quarter and full fiscal year 2020. For the fourth quarter ending March 31, 2020, we expect revenues to be in the range of $154 million to $156 million. We expect a non-GAAP operating loss of $2 million to a breakeven result. This would lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.02 to $0.06. As we look into Q4, we anticipate deferred revenue to increase in the low 30s on a percentage basis from Q3. For the fourth fiscal year 2020, we now expect revenue to range from $594 million to $596 million an increase from our prior guidance of between $588 million to $593 million. We expect non-GAAP operating income of $19 million to $21 million versus our prior guidance of between $21 million to $25 million. This will lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.54 to $0.59 compared to our prior guidance of between $0.60 and $0.67. Taking into account cash from operations for Q3. We now expect cash from operations to be between $67 million and $72 million for the full fiscal year, which is down from our previous guide of $90 million to $100 million. For free cash flow, we expect to be between $3 million and $8 million, which is down from $30 million to $35 million. As per capita expenditures, we expect total CapEx to remain within our previous guidance of $55 million to $60 million for the year. As a reminder, for the reasons we touched on at Investor Day and as we elaborate in our 10-Q, we'll begin reporting new metrics in fiscal '21. Beginning with the quarter ending March 31, 2020, we will be including quarterly ARR and percentage of ARR from paid business accounts with ARR over $100,000. As mentioned, we believe we are well positioned to hit the $635 million target for fiscal '20. And these metrics reflect the renewed commitment we discussed at Investor Day to invest for the future in order to drive accelerated ARR growth in fiscal '21 of at least 200 basis points year-over-year. We expect the improved ARR growth would then flow into improved operating cash flows on route to our long-term targets for fiscal '23 highlighted at Investor Day. With that, I would like to open the call for questions. Operator, please go ahead.

[Operator Instructions]. Your first question is from the line of Sanjit Singh from Morgan Stanley. Your line is open.

Hi, and thank you for taking the question. I guess, I wanted to start off on just the team's view on sort of the underlying demand environment. So we'll look to the metrics a nice speed on revenue, billing came in line. When I look at your supply billings guidance in terms of Mark, what you said for low-30 sequential deferred revenue growth. But also came in above, where we were expecting. I think the one metric that was a little bit surprising was the dollar based net expansion rate, which tick down versus this quarter. So in a way, if you could just Mark address the dollar based expansion rate this quarter, and then what the team's view on the underlying demand for New Relic in the December quarter. How would you sort of characterize that?

[Technical difficulty] Recording where some people were dropped off and so I genuinely apologize for that. The recording will be made available and the transcript was made available later today. So apologies for that. But getting to your question, Sanjeev. So, the dollar based net expense rate did tick down from 112 to 109 [ph] in the quarter. When you look at our over 100k that number is stronger that number is up the trailing 12 months for that's been about 123. But the overall number in the quarter was impacted by customers -- a couple customer, number of customers, reducing their spend and right sizing their spend with New Relic. In particular, we had one large customer, it’s a multimillion dollar customer. They signed up for a New Relic upgraded a year or so ago at renewal time they reduced their spend and right sized, their environment. Not all projects and deployments go as expected. This is one case where that was the case. And so they right sized, their investment New Relic. They continue to be a multimillion dollar customer. And we expect them to be continued to increase their subscription rates going forward over the next couple of years. We do expect our net expansion rate to improve to the best of the year in Q4. And, overall I would say that the demand environment is healthy. We continue to think that the market is very attractive and something that we want to continue to go after aggressively.

Thank you. And if I may one for follow up for Lew, you brought in a new Chief Product Officer and Bill Staples from Adobe. Can you talk a little bit about what is sort of mission statement going into next year is going to be? What's going to be in focus in terms of getting New Relic One to sort of the next phase and just your sort of overall plans for Bill going into next year?

Sure. So first of all, thrilled to have Bill joined the company. We conducted that search last quarter as an opportunity, some incredibly talented leaders. But Bill was quite clearly the right one for New Relic, a combination of not only his background and experience, but his particular domain expertise and experience in servicing some of the toughest people to please in software, which are the builders of software themselves. So, his role at Microsoft building the tools that help service developers make them more productive was valuable to us as well as the enterprise experience at Adobe at a very large scale. Bill's charter really is to build on what we have been doing today to continue to deliver and innovate and deliver the world's most powerful observability platform that will drive acceleration in our business growth. That's his charter. It's going to be a partnership with me. I love to think about where we take the company from an innovation perspective and Bill is going to be execution focused and making sure that the New Relic product organization is the best in our space and delivers the capabilities the market is asking for and delights our customers.

Thank you.

Your next question comes from the line of Sterling Auty [ph] from JPMorgan. Your line is open.

Hi, guys, this is Matt on for Sterling. Thanks for taking the question. Just trying to get a sense of the success that you guys are having with a non-APM product. I don't know if you guys mentioned previously on the call. But what have you guys seen in terms of percent of customers that are using infrastructure or other non-APM products?

We're seeing very good attach rates for infrastructure in particular. We're seeing a meaningful percentage of our customers adopting infrastructure and a good number of that subset standardizing on infrastructure across the enterprise. And what was actually really pleasant for us was seeing the uptake of Logs, a brand new product. I think it only had about 60 days in the quarter where it was available for sale. And to see two, seven digit deals come in for Logs alone into the customer base was very encouraging showing that we have a very competitive product and we expected to do well in the market. What's driving all of this is our customers do not want to switch between multiple tools when they're in the business of trying to keep these complex systems up and running. They want to see it all in one integrated place. And we firmly believe the best place to see it all in context is New Relic One. And the reason why they want it all in context is simple. They want to troubleshoot faster. They want the information in context to rapidly solve problems to get systems back and running as quickly as possible.

Great, great. Thanks for that color. And then just one quick follow up, gross margins have kind of been ticking down I assume from that build out of the New Relic One, but is there anything that -- anything else that we should kind of be aware of going forward in terms of what you're expecting on that front?

Our gross margins continue to be very high. I think the envy of a lot of a lot of our peer group. And in we're proud of that. If you look at the rate of growth of data that we collect over the last, I would say a decade probably that data has been increasing at a rate far higher than our revenue growth. And we continue to see that and expect that to be the case. That's a competitive advantage for us. The more data we collect, we think that's better for us. It's also better for our customers. And so we expect that to continue to be the case. Historically, our gross margins have come up since we went public over the last five years. And we haven't assumed that that's going to be the case going forward. If you look at our medium term, longer term models, we do expect some mild down drift in the gross margin over time.

Great, thanks, guys. Appreciate it.

Your next question comes from the line of Rob Oliver from Baird. Your line is open.

Hey guys, good afternoon. Apologies if I have a spotty connection. Lew, one for you. And then I know Mike's on the call so if he's available, I have follow up for Mike. But Lew, I wanted to just talk about -- ask about platform pricing. And whether that's contributing at all positively to some of the early success which you just called out on the Logs side. Pretty impressive 100 new deals in the quarter and two, seven figure deals. And then as a corollary to that, I was wondering as you start to see people take products beyond APM, does -- because they have the ability to switch between products. Do you find that usage is following their initial purchase intentions? In other words, are you seeing the usage rates in Infrastructure and Logs, which admittedly I know is early, kind of follow those initial purchase intentions?

So, great questions. First of all, yeah, the New Relic platform pricing the markets responding very well to that. And because our customers have very dynamic environments. First of all, they do want a consolidated, unified platform to see all of the telemetry data in one place connected together. And yet, it's very hard for a customer. It's a very dynamic environment to predict exactly how much APM exactly how much infrastructure or mobile or browser or logging they will need. So they like the predictability of a set stand rate any yet the flexibility to allocate between our various and great products. And so I think we're doing a pretty good job of focusing on usage and consumption rates. And yet this is one of the things I would like Bill Staples to really do an even better job with. At Microsoft and Adobe, he really brought great discipline into measuring everything about the user activity in order to drive our product decisions and our growth decisions with data and with focus. So I think that that's something we do and we're going to do better I think when Bill gets in place. So that our customers really, all they want is a platform to deliver faster mean time to repair and better uptime, better customer experience. So they don't think in terms of exactly how much APM that is or exactly how much infrastructure that is. And so long as we deliver the solution that really helps them address those business goals. Then we'll deliver a great business growth.

Great. Thanks, Lew. And then Mike, for you, I know you laid out a really detailed plan at the Analyst Day in December. And it's probably a little unfair to ask you to update that. But I guess what I would ask is, you said a lot of things should be in place to kind of hit the ground running on April 1. And just wanted to get a sense now that you've been -- you're not new to New Relic, but now that you're in an operational role there. How is that progressing so far? And then, on the hiring side, I know you had a long term plan to get from 300 to 600 sales reps, you guys are definitely being pretty aggressive on the hiring front right now and wondering if your fingerprints are at all on that. Thanks, guys.

Sure. So, we are -- as I described at the Investor and Analyst Day in December, we look at it as three quarters where we would be making adjustments three quarters the balance of FY21, where we might do some additional refinements. And then two four quarters for fiscal ‘22 and fiscal ‘23, where we expected to see really across all of those periods improvement. We are -- we feel good about where we are in that process. We are now January and February are important months to get FY21 planning behind us. So that we are not distracting our sales organization in the critical fourth quarter. So, we started this quarter, doing a lot of planning, trying to fill the pipeline with new potential sales reps. But that will taper off as we go through the rest of this month and our goal is to have that completed by the end of this month. So that we can focus 100% percent of everybody's attention on closing out a good year and then launching the New Year. So, we feel good about having filled the pipeline with some good people who can start early in FY21. We feel good about how that planning process has been going for FY21. And, now frankly, as we go through the rest of February, job number one is to make sure the team we have on the field today is successful, and does well in this quarter. We've got to make sure we're taking care of the people we already have. And we're very focused on clearing the deck so that they can accomplish what they need to accomplish at the end of 4Q.

Great, thanks, Mike. Thanks, guys.

Your next question comes from the line of Michael Turits from Raymond James. Your line is open.

Hey, good evening everybody and congrats on great top line performance especially seeing the billing, imply billings got get us billings consistent revenue growth. Question is on the margins and cash flow. Came in below this quarter and guide below. And the two questions. One is what drove that? I know you said the hiring was ahead of schedule. You had announced a pretty ambitious hiring program. So what changed? And why is the miss and the guide below on cash flow from ops higher than that on EBIT?

Sure, so Michael. We are in investment mode and I think we talked about that Investor Day. And so we feel like we have an opportunity ahead of us and we're going to invest to go after that opportunity. As we said at that day, we are prioritizing top line growth. And we want to see growth in an acceleration, in fact, in our ARR growth as we go into next year and we're going to be investing to do that. And so that is having an impact on our bottom line. Q3 was a very strong hiring quarter. Many of those folks were in place in early in the quarter. We've been fortunate that we've been able to retain a lot of our great talent. And so, that had an impact on the results in the quarter. Also that operating performance also had an impact on the cash flow for Q3. Additionally impacting the cash flow for Q3 was the deferred revenue came in a little bit lower than expected due to the down, drop in the in the net expansion rate. So that had an impact on the cash flow shortfall as well. And then finally, when you look at cash flow, there were some timing issues that came into play. In terms of CapEx we pulled the fair amount of CapEx forward from Q4 into Q3. And if you we did keep our guide CapEx for the year consistent in the $55 million to $60 million range, but we pulled a lot of that into Q3. When you look at our guidance for the year you can impute, we expect cash flow to rebound in Q4. And then we are confident in our ability for that to rebound or to increase next year as we head towards the targets we set out for our fiscal 2023.

Thanks Mark. And then Lew if you could as you put out, really great to see in person, not even a full quarter out wins on Logs, especially two large deals. Any more details you can give us on, especially the big deals you won there? Did you displace existing log vendors? Does it have a full displacement? Why did you win and how should we think about your prospects there?

So, yeah, it's early days. We are really encouraged. Our customers are telling us two things they love about New Relic Logs. The first is the logs they are in context. They use -- they rely on APM as like their strategic tool for understanding the most important thing with the health of the software, the application. The only reason why Infrastructure is consumed is to run software. So you start from software. And to go straight from there to the Logs and the Logs that matter in context of that software problem is vitally important. That's one. The second thing is the performance and scale of our Logs blows our customers away in particular compared to any other cloud hosted solution. So these customers were having trouble with their, I think in both cases, they were open source logging solutions that were just unable to handle the load or it was too much work or effort towards perform to their requirements. And they just dropped us in and our ability to handle in excess of 10 terabytes a day with complete ease. And with no configuration or management involved, really amazed our customers. And I think I'm going to belabor this a little bit longer. This is why we invested in our platform. Okay, NRDB has some -- I talked about it at the Investor Day, some really impressive qualities and it shines in the logging use case. And so we've invested a lot in New Relic One and in NRDB. And because of that investment, the logging team was I think about eight or 10 engineers total from start to finish about a nine month project to get that to market from zero. So think about that. After we have the platform ready, we're ready to able to have a really competitive product in the market in a short period of time and relatively small investment, because we have the platform. And so it's not just about Logs, it's about the power of the platform we've invested so much in.

Your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.

Hi, guys. This is Hannah on for Rishi. Thank you for taking my question. I'm following-up on one of the earlier questions, at your Investor Day you talked a lot about one of your goals being enabling the sales force to sell the full platform. Wondering if you could provide some color on how this is going or what you've achieved and what's left to span on that?

Sure, it's Mike. To refresh everyone's memory, we announced most of these new capabilities including the New Relic One platform in September and early October at our future stack. We immediately rolled out intensive training for our worldwide sales organization. The products came quickly. There was a lot of new things. And we felt that we wanted to front end all of the training so that people could keep customer capable in 3Q and 4Q. So we feel pretty good about that. We are making great progress with that platform messaging. And the comfort that the CEO has in communicating that message. And then they're also clearly as Lew just described with Logs, demonstrating the ability to sell what we call the three on ramps to that platform APM Infrastructure and Logs. So, it's a lot to ask for people to develop the skills to sell the platform and develop the skills to sell the three on ramps. But we felt like we simplified it enough that they could be effective in 3Q and 4Q and executing on that vision.

Great. That’s very helpful. And what are you guys getting on the open source past year [technical difficulty] talk about what you're seeing in customer building their own app [ph]?

We're seeing really interesting use cases. So, customers in particular, I think the most popular open source application we've seen is the one that helps our customers identify their opportunity reduce their cloud spend, somewhere in some cases by millions of dollars. Where they've over provisioned the cloud capacity for a given workload and New Relic One is identifying greater opportunities to save without sacrificing performance. So, that in particular is doing well and other ones are also showing up. But when I look at the data, the most popular applications I see are the ones that our customers are building for themselves. And that makes sense because it's making New Relic solve their specific problem in a way that no software vendor could do. Right? It has to be programmable in order to do that. I'll give you one example. We have a company in Europe, using New Relic One for an IoT use case. It actually is tracking the location of cars and helping them identify the right parking spot. So really cool IoT use case built on top of New Relic One, and helps our customers view us as a strategic platform, not just another tool.

Great, thanks, guys.

Your next question comes from the line of Ittai Kidron from Oppenheimer. Your line is open.

Thank you. Hey, guys. Lew, maybe we can start with you on the on the competitive front. Now that the platform has been out for a few months now. How do you look at win rates? Is there any change on that front to help us understand what you're seeing from a competitive standpoint? What has changed?

It's pretty early still we've had less than one quarter with these new capabilities and offerings in the market. So, I'd say the landscape is largely unchanged and the dynamic has not changed a lot. But what I'd say customers are resonating with, again is what they love about New Relic is the fact that the platform is truly all in one place. We didn't do this through acquisition. We built our logging on the same core database technology that all the rest of telemetry is. And what that means is our customers can troubleshoot faster because all the data is in the right context. And so we feel like we've got now a really differentiated competitive story. It starts writing application centric by having context and with programmability. And now with our logging, there's differentiation I’ve already talked about. So we like our ability to compete the market. But I would say that overall is the same set of players with not a lot of change.

Very good. And as a follow up for Mike from the hiring front, clearly an impressive quarter there. I guess my question is what was that the target or it just so happens that you had a lot of talent available and decided to pick that up? And as you think also into fiscal '21 then will it be your intention to try and front load hiring? Help me understand the linearity of this from a planning and execution standpoint?

Sure. That's a great question. Now that number that Mark gave you was for the whole company that wasn't just for sales. But we did have a good quarter. Part of our part of our challenge now at this time of year is we don't want to take people out of selling mode to do interviews. So we try to get as much done in November, now in January, a little bit in February, but I expected to tail off significantly in March. What we're really focused on now is with our talent acquisition team, filling that pipeline of prospects that have been qualified and had an initial interview, so that we can front load as much FY21, sales capacity hiring as we possibly can. If we can get those people in early, it gives us the spring and summer to train them, and then they'll be ready as we roll into 3Q and 4Q. So we're trying as hard as we can to, to pull that in into the right windows, and we'll see how it goes.

All right, good luck guys.

Your next question comes from the line of Jennifer Lowe with UBS. Your line is open.

Great. Thank you. I wanted to go back quickly to the deferred revenue guidance. And it was certainly great to see that look a little bit more like what we would normally expect in a Q4. But given that you're coming off of a Q2 and Q3 or deferred did come in a little bit later than you would expect at the outset. Can you just talk to us about what gives you the conviction that we get back to more of a normal seasonal trend? What's your visibility, what's your assumption in terms of sales execution, getting back to where we see it historically? If you could just give us a little more on that, that'd be really helpful.

Sure, so now, we were pleased to see that. For us internally, we look at things like pipeline look at capacity. And what our various forecasts are for the various regions. We've got a lot of history to go on in terms of conversion rates and things like that. We're looking at the uptake that we're seeing and the excitement we're seeing around the new products and the platform story, as our field gets more and more comfortable with that sales process. We put that together and come up with a forecast that we that we feel comfortable with.

Great. And maybe just one more for me. Looking at the net dollar retention, you mentioned earlier, there's one particular large customer that had reduced their planned usage. And those things happen. Do you have a sense of whether that retention rate would have looked like ex that one customer or in terms of the upsell piece of that did that improve from what we saw in Q2, any more color on that?

We don't have the explicit detail around that one customer's impact. I will say, as I mentioned, the renewal rate did tick downwards slightly in the quarter. And so that's something that, we want to make sure to improve. And at our Investor Day, Mike talked about, some of the initiatives we're working on and one of them was around renewal yield. And, so we've been in the process of really being more clear in the roles and the go-to-market organization around new ARR and renewals and expansions. And who's responsible for what? I think in the past, it's, those lines have been arguably too blurry. And so we've been really identifying the more crystal about whose roles are and whose job it is to do those various pieces. And so as we that, we would like to see that renewal rate, come back up. The other factor is one of the issues or the issue driving that renewal rate was customers rightsizing their spend. And what we've got to do better job is get be -- make sure that customers are deploying their software that they purchased. And these cases, the customers are purchasing this amount of software they expect to need over the next year. And they're not deploying all that, so they get to the end of the year. And it'll be you know, a reduction spend for New Relic. Rather than see that happen. We should be more proactive and 6 months in ahead of time, if we say them not getting to a path where they're going to be fully deployed. We should be proactive and intervene there and help them with that deployment or find other opportunities within organization to support those hosts. So rather than all of a sudden have a reduction span when the real time comes up, we stay flat or potentially have an up sell.

Great. Thank you.

Your next question comes from the line of Derrick Wood from Cowen and Company. Your line is open.

Thanks, guys. First one for you, Mike. What are the initiatives you laid out at the Analyst Day was to focus on generating more 100k account deals. Didn't seem like there was much strength there in the December quarter, but it's obviously very early and you do have a multi-pronged plan ahead. So if you give us a sense in terms of when you think that could be realistic and see more net new 100k deals is that next fiscal year? Any more color there would be helpful.

Well, whenever you remember, we talked about 3 big metrics on Investor Day. New ARR 100k customers and improved renewal yields. The first thing you do when you communicate that message to the organization is you've got to make sure everybody's aligned around those objectives. And when you first announce them or first communicate that message, you're limiting the amount of organizational change you can affect to make that happen. So as we rolled through November, December last year it was all about management, attention, planning. How do we achieve those goals? How do we make sure everybody's focused on executing against those goals? It's more of a management practice if you will to try and get people to move those numbers. As we roll into this quarter. We can make some other changes, adjustments to coverage plans. We can make some compensation adjustments. We can, there's more we can do as each quarter passes by actually making changes in the way we do business on a day to day basis. So I feel far better in this quarter than I did last quarter in our ability to generate new 100k customers. I'm actually -- this will be a really important quarter for that metric. As we go into next fiscal year, I expect to see a significant improvement over what we've done this year. But I'm hopeful that this quarter we will be able to show material progress on that front and then carry that momentum into FY '21.

Great, thanks for the color. And I guess, maybe for Lew, on the 100 log deals that certainly seemed pretty impressive. Can you give us -- is there some pent up demand from beta customers and then should we expect that to bounce around or do you think that we're kind of off to the races with accelerating adoption curve over the next several quarters?

Let's see. I wouldn't want to use the term off to the rates right now. I'm excited about the potential. Let's show it in the numbers. But I was pleasantly surprised with quite frankly given how crowded the logging market is. How rapidly -- how eager the market was to look at our product and forego other solutions. That's what's really encouraging to me. As we've got a competitive product in that -- they really do value logs in application context. And they value that in they don't want to be managing these really hard to manage high volume data collection servers. And but when they move to the cloud, they find that most of the other cloud offerings, they have scalability challenges or management challenges. So I'm very excited about our logging capability. But Mark wouldn't allow me to say off to the races in any earnings call, I think.

That makes sense. Thanks for the color. Thanks, guys.

Your next question comes from the line of Jack Andrews from Needham. Your line is open.

Hello, good afternoon. Thanks for taking my question. I was wonder if we could drill down a little bit more on the programmability aspect of things. I know it's early, but are you seeing any sort of differences in behavior from customers that are actively developing applications? Do you foresee them to be expanding faster, or just other sort of interesting characteristics that you've observed from those who are really actively taking advantage of this new feature?

One of those seven digit logging deals that we did last quarter came out of a customer who also built I think four applications on New Relic One. So the correlation is high. What is -- the theme behind all of it is, we want a platform that people can bet their digital business on to make sure that they're -- they deliver more perfect software. And it's a combination of the openness of getting all the data of the New Relic platform, not just the data of customer agents; the connectedness of showing the relationship between the Application, the Infrastructure and the Logs, and the end user experience; and finally, programmability to say there is no use case that you can't pursue in New Relic as it relates to observability and delivering the visibility presented the right way to help you to deliver more perfect software.

Right. So just to put a fine point on it. It sounds like you think the programmability will lead customers to perhaps consume products like infrastructure and logs rather than just merely strengthening the value proposition of APM? Is that the right way to think about it?

Yeah. Our customers are now thinking of it as in terms of a platform, they're not thinking it in terms of APM I think that particularly the strategic customers. And another way to think of it is, if you look in the early days of SaaS companies like Salesforce and other companies, they staff their own team to build their own observability and monitoring capabilities. Not because they want to be in that business, but because they had the spoke requirements, that no vendor could provide off the shelf. They wanted the platform capabilities that we're providing now in New Relic One. And so we think for these high end customers, particularly if we can nail the pricing and the solution presentation correctly, we're the only platform that can really deliver on the demands of the highest end customers, and it's because of the programmability.

Got it. Appreciate the color. Thanks.

Your next question comes from the line of Keith Bachman from BMO. Your line is open.

Many thanks team. I want to start with my first question and come back to Michael's question he asked previously. But I'm going to ask it in a different dimensions. But in terms of for FY20 you're lowering your operating income at the midpoint by $3 million. And yet at the midpoint, you're lowering cash flow guidance by 27 [ph]. And yet DR growth was in line with quarterly expectations and frankly seems pretty healthy for Q4 and CapEx is the same. So it's quite a, I would say weak cash flow guidance. And I want to try to ask it a different way. Mark, could you speak to, how investors at least directly should be thinking about the next fiscal year in terms of both margins and free cash flow? In other words, is this the bottom that investors should be thinking about? And if we look year-over-year, should the next fiscal year which would be FY21 should operating margins and free cash flow improve over what you expect to report this juncture? Because otherwise, it just looks like profitless growth. And then I have a follow-on question.

Sure. So, as we've talked about, we are in investment mode. And we are prioritizing now. And as we go into next year, we will be prioritizing acceleration of ARR and revenue over profitability. And so we've talked about giving ARR metric at the end of this year, March 31, the $635 million number. We've talked about accelerating our growth by at least 200 basis points in our ARR for fiscal '21. Obviously, you can work that through into the revenue as revenue trails ARR. So we do expect to be investing. At the same time when we look out into fiscal '23, it's a billion dollar revenue target. We want to maximize our ability to hit that, not only hit that number, but hit that number and really surge through it. And so to do that, we're going to be investing in the near term. Same time, we are comfortable with the margin profile that we've put out for fiscal '23 that we laid out Investor Day. In terms of cash flow, we do feel like cash flow will be increasing in fiscal '21 on the path toward, again, that would be our linear path, but we are comfortable with the cash flow profile that we laid out in Investor Day as well.

Okay, so….

It's Mike, I just want to add one thing to that. We're selling a sophisticated observability platform with a broad set of capabilities, including programability in a subscription model. And we don't think about that in any scenario as profit less growth. We look at the long-term value of that growing subscription stream on that platform as an incredibly valuable asset,

Okay. I understand the platform context. But Mark, it sounds like free cash flow improved, but not willing to say whether operating margins will be up down or neutral with what we expect to happen at the end of this year.

As I said, we’ll give more guidance around that in our May call that planned for next year. But I would reiterate that we are looking at accelerating our top line and that is our priority and that is the clear objective to grow revenue and ARR over profitability. We have shown over the last few years we went from negative 50 [ph] to positive and we've been positive over last few years. I think we've shown we have discipline, the model does work. And so now we want to make sure we invest to take advantage of the opportunity and to grow the top line.

Okay. Well my follow-up sort of such a long winded question is just on the net retention rate. Just to be clear, has the attrition rate within that changed at all? And when you talked about improving into Q4, is there any mentioned dimensions rather, that you could give around that? I assume it'll be up sequentially. But can it be in the teens do you think or any color around that? Thank you. And that's it for me.

We expect it to be the best quarter of the year, which implies that it's above 112. And so that number is impacted by two things, right, the amount of expansion business we do, and the amount of downgrades or churn that we have. Q4 is our highest renewal period. So, like most companies, Q4, we do a lot of business here, right. So we've got by far and away the largest number of renewals this quarter. So if we have the same renewal rate, it still means the absolute dollars of churn we will have in Q4 higher than the other quarter. We expect that that's not unusual. We also expect a large number expansion in the business to more than offset that. So, we are we are looking at that being in the teens in this quarter.

Great. Many thanks.

Your next question comes from the line of Mohit Gogia with Barclays. Your line is open.

Thanks, guys, for taking my question. Mark, I just wanted to dig into the new ARR and the new logo [ph] performance this quarter. So great to see you guys conforming the $635 million guide for ARR for fiscal ‘20. But wondering how the new ARR performed and new logo performance was this quarter, given that he also discussed the renewal yield are dropping a bit this quarter? And I have a question for you afterwards.

Yes, so we're not yet breaking that out. We'll start that with the March quarter. But you can take it as a good sign that we've confirmed the $635 million. In terms of numbers, we did report the number of 100k customers. And, while we're pleased with that grew, and we obviously have objectives that are much greater than that and Mike talked about that and answered that question earlier. So, it's something we certainly are focused on and want to see and have lofty ambitions for how many 100k customers we will be adding going forward.

Understood. What I was trying to -- maybe I should have phrased that question a bit differently. What I was trying to get at is, obviously you will start to disclose the ARR numbers and next fiscal year, but is it fair to say just based on that you reiterated your fiscal '20 guide that the new ARR performance this quarter came better than expectations, given that the renewal yield, which is another component of ARR tick down?

Well, I think we're not, saying individual components of the ARR. We're not disclosing those at this point. We feel good about the quarter. And I think you can see from the guidance, we that we feel good about continuing to see improvement as we head into Q4.

Understood. Lew a follow up question. So, at the Analyst Day you mentioned that sometime in early 2020, you will start to sort of like have a New Relic One as the default UI before landing page for all customers. Just wondering if you can give us some more color there? Are you still planning to do that? Is there any more concrete timeline as to when that's going to be rolled out? Any more color will be helpful. That's it from my end guys. Thank you.

Yes, great. So, I've done a review of that. We are that it's on track that happens this quarter. We still want to give our customers the choice. If they really prefer the old landing page, then they can make that selection. But we want the default experience to be New Relic One, it's certainly far superior and yet, we respect that in our enterprise customers may have specific requirements that want to give them some choice in going back to the old UI. As a reminder, our customers need to -- don't need to install anything new, or do anything different to get the benefits of New Relic One. It's simply a new and far improved user interface on the very same data and the very same telemetry that they've been gathering in our products and into our platform to date. So this is a very easy product for them to adopt. And we're on track and into some extent as head of track on migrating other capabilities natively into New Relic One. So, by the week and month there are even more and more reasons to just standardize on all your experience New Relic One. And so I'm pleased with how that's going. After Bill gets up to speed I think that'll continue to show even more strength.

Your next question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.

Thank you for taking my question. I just wanted to go back to the Logs deals that you mentioned earlier in particular the two, I think $1 million plus Logs deals. In terms of how you want for those deals, specifically, because I imagine those customers probably had more complex like hybrid environments like were you displacing anyone in particular there were complimentary products, what they already had installed? Just curious, how we should think about this Logs product and its potential attraction in the enterprise? Thanks.

Sure. So as you know, it's a -- there's a lot of players in the logging market and some of them are more cloud centric, more open source centric, or more proprietary or traditional enterprise. In both of these cases, these were customers that had very high volumes of logs that were struggling to, or spending too much time and energy, managing their open source logging tools to keep up with that volume. And then they also were -- wanted to see those logs in context. So to get more value of the log data we're collecting. And so we think that's a good chunk of the market right there. We've got a lot of customers who love our APM product and want to see Logs and context, particularly for the troubleshooting in meantime to repair use case, right. So this is all about troubleshooting faster with the log data in context. And so, for that use case, there's a number of other log players that we might displace in order to deliver that capability for our customers.

Great. That’s it for me. Thank you very much.

Your next question comes from the line of Steve Koenig from Wedbush Securities. Your line is open.

Great, thanks, guys. One quick question and one quick follow-up. Mark for you. Are you -- did your view of year-end deferred revenue and full year dollar based net expansion change and/or are you being more cautious in these assumptions in your cash flow guide?

We’ve been through three quarters now instead of two quarters, so we've got better visibility, less uncertainty as we get closer to the time period. So I think at this point, we're always more informed than we were three months ago. But, from that standpoint, I would say, it's likely to be a better estimate. But the methodology with which we went about it, is comparable.

And so, the methodology is comparable is your -- have your expectations come in a little bit, just due to the Q3 retention?

We factored the historical performance in of Q3, of Q2. We look at a lot of factors as we assess that. We're getting better at looking out in the quarter. So beginning of the quarter, we know what renewals are coming in that work or do that quarter. We're getting a better sense of which ones are looking to expand, which ones are looking to renew which ones we may have to work on. And we're not done with that. We should be doing that six months in advance, not three months. But, I think we are getting better at that. And so I think going forward, we're hoping to have a better sense of renewal rates as we enter the quarter.

Okay, great. Thanks, Mark. And for you, Lew, on the hundred Logs deals, maybe as you look across them and try to generalize a little bit, to what extent are you seeing standardization, does it relate to the cloud infrastructure versus kind of incremental or auxiliary block solution being added and also kind of Greenfield versus replacement? What's the mix there and maybe some color and the size of the accounts?

Early days let's not read too much into those two seven digit deals. It's great to show that we can do those. But it's too early to claim that we've figured out how to be a standard an enterprise standard for Logs. The market is obviously very large, in that segment. We're seeing a lot of smaller companies adopting our Logs who love our platform. And again, just love logs in context. And yet, we're also seeing, I'm delighted with some of the logos that are also using our logs, particularly when they are using New Relic in a cloud environment. So they're already moving to the cloud with an application. They're already adopting Kubernetes. That's another trend that we're doing very well in, right. So if you're running in Kubernetes, and you want to see your logs in context, in your application in a Kubernetes logs context, that's a great -- we've got the best platform for that environment we believe. And so, I think that that is a very standard motion that virtually every enterprise is going through. And so, we're seeing traction in that segment as well. So it applies pretty broadly. But it's not yet at a point where we can say, we're winning standardization deals, nor do we need to do substantial business with our logging product.

Your next question comes from the line of Rustam Kanga from JMP Securities. Your line is open.

Great, thank you. This is Russ on for Erik Suppiger. Just taking more of a macro angle. This might be a bit of a stretch, but would you say that the [indiscernible] failure would be beneficial for the broader APM markets, in particular in terms of just raising awareness?

Within 2012 when we, New Relic was the software that saved healthcare.gov. In moments like this, just do bring it to the forefront. How important software is to the very fabric of how we exist as a society. And it's kind of like the ground we stand on, right? And when software is working, you don't notice the ground you're standing on. But if there's a problem, and all of a sudden it feels like quicksand. And so, the work that our customers do to keep software systems running, it's hard work. And there's so many ways in which these complicated applications can fail. That's why they need a single platform to bring it all in one place, and why they need to troubleshoot faster, all with context with application context. So we do believe that our observability platform, that's -- it's not optional, if your software matters, you need an observability platform. We believe we have the best one. That's why we're investing. That's why we're so excited about this opportunity. That's why I'm so excited about the team. And so yes, moments like yesterday, we -- I wish they didn't happen. But that's why there's a need for an observability platform like New Relic.

Great. Thanks so much.

I would now like to turn the call over to CEO, Lew Cirne for closing comments.

Thank you very much. Not the first time my last name has been mispronounced. But thank you very much in particular for those who had any problems with the phone quality, we apologize for that. Follow up with our IR team if there's any content you missed, and we'll be able to provide you with the content that we presented today. And we appreciate you spending time with us and we're very excited about our opportunity ahead. Thank you all.

That concludes today's conference call. You may now disconnect.