New Relic, Inc. (NYSE:NEWR)
Q1 2017 Results Earnings Conference Call
August 02, 2016, 05:00 PM ET
Jon Parker – Senior Director of Strategic Finance & IR
Lew Cirne – Founder & Chief Executive Officer
Hilarie Koplow-McAdams – President
Mark Sachleben – Chief Financial Officer
Rob Owens – Pacific Crest Securities
Michael Turits – Raymond James
Sanjit Singh – Morgan Stanley
Greg McDowell – JMP Securities
Derrick Woods – Cohen & Company
Michael Turrin – UBS
Jesse Olson – Goldman Sachs
Steve Ashley – Robert W. Baird
George Iwanyc – Oppenheimer & Company
Good afternoon. My name is Christine and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Relic First Quarter Fiscal 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.
Jon Parker, Senior Director of Strategic Finance and Investor Relations, you may begin your conference.
Thank you. Good afternoon and welcome to New Relic's first quarter fiscal year 2017 earnings conference call. Today's call is to provide you with information regarding our first quarter fiscal 2017 performance, in addition to our financial outlook for the second quarter and full fiscal year 2017.
Joining me today are New Relic's Founder and CEO, Lew Cirne; our President, Hilarie Koplow-McAdams; and our Chief Financial Officer, Mark Sachleben.
Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Any statement that referred to expectations, projections or other characterizations of future events, including financial projections and future market conditions that are forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as the risks described in our most recent Form 10-Q filed with the SEC, particularly in the section titled Risk Factors.
Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use and evaluate ongoing operating results and trends. But note that these measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release issued today, a copy of which can be found on our website.
At times in our prepared comments or in responses your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at ir.newrelic.com to access our earnings press release issued today, a presentation that accompanies our earnings release, periodic SEC reports, a webcast replay of today's call, or to learn more about New Relic.
With that, let me turn the call over to Lew.
Thanks, Jon. Q1 was an encouraging start to the year. Revenue of $58.6 million was up 54% year-on-year led by our enterprise business which continued to grow at an impressive rate. We were also pleased to improve our GAAP and non-GAAP operating margins by roughly 900 and a 1000 basis points respectively, helping us drive both positive cash from operations and free cash flow in the quarter. In Q1 our team achieved an exciting new milestone closing our first ever seven figure enterprise land deal during the quarter.
Our model has never depended on million dollar initial transactions, but this deal mainly centered around the mobile experience of one of the world's largest brick and mortar retailers is highly validating. We think it is symbolic of how our reputation and value proposition are resonating in the market, in turn giving many of the worlds largest companies the confidence to partner with us to help them drive the success of their most critical digital initiatives. And this is important because companies of all sizes are going through a massive digital transformation.
Software has become their lifeblood. We enable developers, IT operations professionals and business leaders to collaborate in brand-new ways, leveraging the New Relic software analytics cloud to better understand and act to improve the customer experience. However, what's particularly exciting is that we are now seeing companies across almost all industries getting serious about leveraging the cloud for their success. Not just the early adopters.
In fact, in recent months, we've seen an increasing number of strategic Fortune 500 wins from industries that traditionally have been biased towards on premise. For instance, health care, financial services, and insurance and transportation. We think our differentiation is becoming more compelling as companies come to understand the limitations of the on premised or hosted solutions.
More companies are coming to us after sinking significant costs into false promises made by these type of companies only to find challenges in their ability to cost effectively scale. As the rapid migration to the cloud continues, we see ourselves as a prime beneficiary. In fact, we're thrilled to be recognized recently as the second largest systems management SaaS vendor in IDC's 2015 market share report. Moving up a spot from the prior year to be behind only Service Now, while being well ahead of any of our direct competitors.
As we have discussed on past calls, we believe that a key driver of our ubiquity across the market has always been our cloud only DNA enabling us to reach more companies than any other software analytics vendor relying on promise or hosted solutions. Additionally we recently released the New Relic Essentials SKU to help further extend its reach and we were pleased with the outcome in its first full quarter, strongly contributing to our second consecutive quarterly increase in net new paid business accounts.
New Relic Essentials helps customers more cost effectively expand their monitoring coverage. In turn broadening our market opportunity. And I'm excited that as a result of both the success with Essentials and some additional pilots we've run in the past year, next week at FutureStack, New York, we will be introducing a cloud pricing option to make it even easier to size New Relic APM for cloud environments.
This new packaging and pricing is supplemental to our existing host based pricing which will still be best for physical server environments. We see this continued evolution of our overall pricing strategy as a key driver in bringing the power of software analytics to a more expansive market. Now we talk a lot about ubiquity. Why? Because we're changing the game by driving hundreds and in some cases over a thousand users in single account to collaborate and interact with our platform.
This is critical because increasing the number of people connecting with New Relic generates an incredible feedback mechanism we believe will improve the value we deliver, helping our customers optimize their digital experiences. This is one of the most important sustainable competitive advantages we can deliver versus traditional on premises vendors who don't have a connection to their end user and we are incredibly focused on extending this lead.
In addition to cloud pricing, it has been a particularly exciting few months for our engineering organization. Just a couple weeks ago we announced two major enhancements to our platform capabilities. First the beta of advanced real user monitoring delivering enhanced visibility for Single Page Applications, or SPAs. SPAs are a rapidly growing type of web app featuring dynamically updated content which does not require a traditional page refresh, similar to Google Maps.
Secondly, we delivered the beta release for applications developed with the GoPro running language, a quickly growing modern framework representing our seventh supported language. With these advancements we are continuing to deliver meaningful innovation to our customers, extending the broadest set of language coverage for developers while also striving advanced monitoring and analytics from the application all the way to the end user.
Last and far from least I am thrilled to announce that our infrastructure monitoring product, which stems from last year's Opsmatic acquisition is ahead of schedule. We will be formally announcing the beta next week in New York, well ahead of our original end of year target. Furthermore we now expect this new SKU to be generally available in the market by calendar year end.
We're very excited about what we've been building and early feedback from our customers shows strong excitement and demand. Keep an eye out for this exciting new product announcement next week. As you can see it has been an incredibly busy first few months to fiscal 2017 and I'm excited about what's in store for the rest of the year.
With that, I'll turn it over to Hilarie.
Thanks, Lew. It was indeed a productive start to the year as we established many beach heads at accounts that we expect to grow into significant partnerships in coming quarters. As Lew alluded to it was particularly encouraging to see a more aggressive push to the cloud by companies that have been slower to innovate in the past. As a result, we feel increasingly confident about our ability to sell into any vertical.
With these opportunities we are building our reputation in the typical land and expand manner with smaller technical design wins and paid proofs of concept, looking to go expand our engagements more materially over time. The other trend that has gained momentum and that was a highlight of the first quarter was the interest in and adoption of our mobile APM offering, New Relic Mobile.
New Relic Mobile has been in the market for a few years and while we may have been a bit ahead of the time we prefer that approach as our DNA has always been about pioneering new markets. We're now starting to see that early investment really pay off as mobile applications are becoming the front door to company's digital businesses.
In Q1 New Relic Mobile registered its strongest new business quarter yet and was one of, if not the most important part of that seven figure land deal Lew mentioned earlier. We also had a great quarter in our international business despite some of the headlines being made overseas. We've been adding significant capacity throughout Europe and Australia over the past year and it's been encouraging to see those investments begin to pay dividends.
In fact our more nascent European enterprise business was up over 100% year-over-year in the quarter led by wins that some of the most well known brands over there. Overall, for the quarter we saw newer add on business with some fantastic enterprise companies and institutes, including Dane Capital, Chipolte, MIT, Schneider Electric, Symantech, Thompson Reuters and Willis Towers Watson. Within SMB we had deals with great organizations like Intercom, National Life Group, Quicken and the train line, among many others.
Like past calls we want to dig into a couple examples from this past quarter of how diverse companies are leveraging our platform. The first story I'd be remiss not to talk about was our first million dollar land deal. This global retailer has always been on the cutting edge of technology trends and over the past few years made a significant bet on mobile to drive new revenue streams and a better, more personal customer experience.
Ahead of the major new release of a mobile ordering and customer loyalty system, they were initially attracted to our industry leading mobile APM offering to help provide them with unparalleled visibility into how customers were engaging with their application in real-time, answering questions like was the application working, what were customers ordering, when were they ordering, data that could impact business decisions like how they staff their brick and mortar presence, what inventory they might need and how they can tailor individual promotional offers.
As the conversation evolved to how we can help them connect the mobile experience to the in-store experience they ended up deciding to standardize on our full platform to be able to connect the browser-based experience with their mobile applications and ultimately in-store. This was a great success story for us, adding to the stable of many other leading retailers we've previously spoken about who rely on New Relic to help them optimize their digital experiences.
I really like this second story revolving around Ancestry.com. Ancestry has millions of paying subscribers across its family history websites and a strong history of data analysis, having gone digital back in 1996 with their extensive and unique collection of billions of genealogical records. Given those billions of records, Ancestry required a scalable monitoring solution to make their data more actionable.
After evaluating both the cost and management of manual homegrown tools and other offerings Ancestry chose New Relic because they viewed us as providing unparalleled software analytics to monitor their system health, alerts uptime and application monitoring, ultimately resulting in millions of dollars of projected savings. Today New Relic is deployed across the full Ancestry.com stack and is critical to their transition from .NET to Java. We are thrilled to partner with Ancestry.com as they continue to innovate their evolving technology.
And finally I want to highlight our partner strategy. We continue to partner with leading public and private cloud providers to help companies ensure the success of their applications. Over the last few quarters, one of the companies we've been working more closely with is Pivotal, an enterprise software company whose cloud platform Pivotal Cloud Foundry is quickly becoming a standard for the world's largest enterprises.
We've been lucky to have Pivotal as both a customer and a partner for several years and this past quarter we expanded our relationship with them. We share a vision to help the world's leading companies transform into software-driven businesses and we're increasingly working with Pivotal in the field that many joint enterprise customers across a number of industries, including financial services, retail, consumer packaged goods and industrial. Companies who are currently or considering using New Relic to monitor their applications running on Pivotal Cloud Foundry.
With that I'll turn it over to Mark.
Thanks, Hilarie. I'll start today by reviewing the results of our first fiscal quarter before offering guidance for our second fiscal quarter and full year fiscal 2017. Turn to the financials, first quarter revenue was $58.6 million up 54% year-over-year and up 12% sequentially. We entered the quarter with 14,048 total paid business accounts. Up 530 from Q4. Of these the total number of customers paying us more than $5,000 per year reached 6,068.
Our annualized revenue per average paid business account continued to grow reaching approximately $17,000, up 36% year-over-year and 8% sequentially. The first full quarter of benefit from our New Relic Essential SKU was a key contributor to the second consecutive increase in our net new paid business accounts. However, we will likely see a deceleration in the growth rate of our annualized revenue per average paid business account over the next few quarters as both Essentials and our cloud pricing options start at lower prices.
It would stand to reason that these new options could account for a large portion of net new paid business accounts. As it relates to our new cloud pricing option for APM we have been encouraged by the pilots our team has run over the past year. We have seen a greater ability to bring in an incremental population of customers for whom our host based pricing does not work.
This incremental offering should also enable us to expand our footprint within existing customers to cover their fullest state and, in some case, it may better meet the needs of current customers who are concerned about their ability to cost effectively scale. We expect the addition of cloud pricing to be accretive to our overall business. Our dollar based net expansion rate in the quarter was 118%, down from Q4 as expected and within the historical ranges we've talked about previously.
As our enterprise business becomes a greater percentage of our installed base, we are starting to see a more meaningful seasonality than in the past as we are being brought into discussions for larger more strategic standardizations that tend to close later in budget cycles so later in our fiscal year. We expect the seasonality to be more apparent in our quarterly net expansion rate calculations due to our in quarter methodology which tends to create more volatility and how some of our peers report this metric.
Turning to our geographic split; US revenue of $39.8 million for the quarter was up 57% year-over-year while non-US revenue for the quarter grew to $18.8 million, up 47% year-over-year. Non-US revenue represented 32% of revenue in the quarter. Before moving to profit and loss items I would like to point out that unless otherwise specified all of the expense and profitability metrics I will be discussing going forward are non-GAAP results.
A full reconciliation between historical GAAP and non-GAAP results can be found in our earnings press release issued today and available on our website. Gross margin was 81%, unchanged versus last quarter, as well as the same quarter last year. We continue to expect it to be around 80% for fiscal 2017. With regard to operating expenses sales and marketing costs were $39.5 million compared to $33.8 million last quarter and $26.7 million in the same quarter last year we.
We continue to invest heavily across our go to market organization and we continue to see improved operating leverage. R&D expense were $13.3 million compared to $12.5 million last quarter and $7.7 million in the same quarter last year. We capitalized approximately $700,000 of software development costs compared to $1.3 million last quarter and $2.2 million in the same quarter last year. G&A costs were $8.3 million, unchanged from last quarter and compared to $6.5 million in the same quarter last year.
Overall our expense in the quarter produced an operating loss of $9.8 million compared to a loss of $12 million last quarter and $10.1 million for the same quarter last year. This resulted in a negative operating margin of 17% in the quarter, compared to negative 23% last quarter and negative 27% in the same quarter last year. Our net loss per share was $0.20, which compared to $0.24 last quarter and $0.21 in the same quarter last year.
Turning to our balance sheet, we ended the first fiscal quarter with $196 million in cash, cash equivalents and short-term investments, an increase of almost $5 million from the end of fiscal 2016. Elsewhere on the balance sheet our total deferred revenue grew to $82.2 million up 113% year-over-year. As discussed previously we continue to expect deferred revenue growth to outpace revenue growth in the near term.
However, we do not currently view it as a key metric or as a reliable indicator of underlying business trends due to the varying durations of our contracts and billing terms. In fact, last quarter we discussed how the growth in our overall invoice duration could begin to slow creating head winds relative to the tale winds we saw in fiscal 2016. This proved to be the case in Q1. As our average duration was unchanged from the six months we reported in Q4.
Looking ahead to Q2, while we do not give stock guidance around deferred revenue when assessing trends recall that last Q2 we had two unique situations that resulted in us invoicing just over $3 million in long-term deferred revenue which will likely distort the comparisons. As expected day sales outstanding adjusted for deferred revenue returned closer to historical levels in Q1 on strong collection activity. Although given our traction in the enterprise we do expect DSOs to increase over time.
Turning to cash flow we generated roughly $3 million of cash from operations in the quarter, our third consecutive quarter with positive cash from operations. Cash from operations benefited from the aforementioned stronger collections as well as the timing of certain payments. Free cash flow defined as cash from operations minus capital expenditures minus capitalized software was also positive in the quarter.
Looking ahead to Q2, we expect to return to negative cash from operations leaving us near break even for the first half of the fiscal year. Ahead of turning positive for the second half of the fiscal year. We still expect to generate positive cash from operations for the full year but negative free cash flow, unchanged from our prior guidance. CapEx will start to increase materially for this year's office build outs and data center investments and we continue to expect it to range from $32 million to $34 million for the full year.
Now I will turn to our outlook for the second quarter of fiscal 2017 and the fiscal year as a whole. We are initiating our outlook as follows for the second fiscal quarter ending September 30 we expect revenue to range from $61 million to 62 million for growth of 42% to 44% year-over-year. We expect a non-GAAP operating loss of $8.1 million to $9.1 million. This would lead to a non-GAAP net loss per share in the range of $0.16 to $0.18 based upon a weighted average share count of 51 million for the quarter.
For the full fiscal year 2017 we now expect revenue to range from $251 million to $255 million, for a growth of 38% to 41% year-over-year. We expect a non-GAAP operating loss of $31 million to $34 million. This would lead to a non-GAAP net loss per share in the range of $0.60 to $0.66 based upon of a weighted average share count of 51.7 million. We remain confident in our ability to achieve non-GAAP operating income break even and sustainably positive free cash flow by March of 2018.
With that we're happy to turn it over to your questions.
[Operator Instructions] Your first question comes from the line of Rob Owens from Pacific Crest Securities. Your line is open.
Great, thanks for taking my question. I want to drill down a little bit on the increasing number of Fortune 500 users. How those customers are being acquired, how broadly they're deploying up front. Just some color would be nice. Thank you.
Great question, Rob. This is Lew speaking. We're very pleased with the traction on what we're showing, particularly in the fortune customer base. And we've always started with a product that we felt would delight our customers and have an amazing first experience. And so we feel like if -- as soon as the customer deploys our product, it's super easy to try in a trial, then we have the advantage.
They're going to start using it and then we see this rapid transition where one or two people may start using the product but then they tell their colleagues about it and pretty soon it's dozens of people in some cases more than a hundred people. And that just builds momentum in the deal. And so we like entering in at a small level if that will accelerate the first deal and then relying on the strength of product for them to consume more over time.
Now as is evidenced in our prepared remarks we're happy to take a million dollar up front deal if that's what the customer needs to start out if it's a critical project like it was in the example of that customer. That's not the natural motion. So lead with a great product. Then follow with great execution in the field.
And as you mentioned these new verticals, health care, financial services, insurance, I think and transportation, are you competing with preexisting vendors of APM? Are you getting into different areas, given your cloud first focus?
We have a real structural advantage with our cloud DNA, particularly for digital projects and newer projects so that's often how we will enter into a new enterprise in particular in these verticals that are considered a little bit more traditional. And then slowly -- or shortly after they adopt us for a modern customer facing digital initiative they'll conclude that actually New Relic is great for workloads that might be behind the firewall or in a hosted environment and we can expand into a standardization decision.
So we like that motion because we've got such a strong advantage in the modern projects, especially if you're running on public cloud or if you have a mobile front end. And then that gets us into a place where we compete from a position of strength and then we let the product again naturally gravitate to other pockets of that customer.
Great. Thanks for the color.
Your next question comes from the line of Sterling Auty from JP Morgan. Your line is open.
Q –Unidentified Analyst
Hey, this is Ugam Gamodon [ph] on of Sterling Auty. So your dollar base net expansion rate was 118%. It was down from like 140% from the previous quarter. Could you give me a color about why this was so less? Or did you see any head wind in the enterprise business which drove the dollar based net expansion at a very high rate last quarter?
Yes, thanks. This is Mark. I'll take that one. We continue to see good expansion in our customer base and Q4 we talked about how that number was I think a little bit unusually large given the number of expansion deals that we had done in the quarter. And in Q1, early in the year we tend to focus more on land deals and then the field will build those accounts and work toward the end of our fiscal year where they can close a larger transaction.
And so, this is in line with what we've guided to historically. It's about the average of the last past couple Q1s we've had and for the Q1, for the first time in about four or five quarters, we saw an increase in the percentage of business that came in from new customers versus expansion of customers. So that goes in line with the way our -- particularly the enterprise team sells, which is to go after land customers early in the year and bill those accounts over the course of the year.
Q –Unidentified Analyst
Okay. Just to follow on, if you disclose the metric, how much of your MRR currently came from the enterprise business? Or the…
We do not break out the increase each quarter or the net increase in any given quarter about enterprise versus SMB. In the Q4 we talked about the -- that was the first quarter in which the contribution from our enterprise business exceeded that of our SMB business and at the time we mentioned that we felt that trend would continue. That trend did continue into Q1 so our enterprise business did contribute more than SMB but we don't break out the individual quarters.
Q –Unidentified Analyst
Okay. Thank you. And congratulations on a great quarter.
Your next question comes from the line of Michael Turtis from Raymond James. Your line is open.
Hey, it's Michael Turits. I was wondering if you could help clarify some of the underlying mechanics behind several cash flow items. First deferred revenue and billings as it relates to duration and then DSOs. So, first of all, why are we flattening out in terms of duration? And what impact will that have on -- how should we think about deferred revenue into next quarter and is this impact on billings we're seeing is that all anticipated in your cash flow guidance?
The billings duration, we talked about it -- that's been increasing over time as we are migrating more toward the enterprise. In Q4 we talked about we expected that to slow. It flattened out this quarter, and that's driven by a couple things. One I would point out is that when we do expansion deals, frequently our customers will do a follow-on transaction within the same year that they purchase and, in fact, we have a lot of our large customers which will do a deal each quarter. And when they come in for an expansion deal, it's very often they will want to co-term that payment or they'll co-term to their existing billing cycle.
So as we get into the year, they'll come in, they'll do an expansion deal and the invoice of that transaction will be relatively short and so that has an impact on the average -- the overall average for the Company. And so that was -- it was flat this year. I think in general over time it will migrate upward a bit, but I think the large gains that we saw the last couple quarters are probably -- they're probably -- will decelerate from those. So I'm trying to remember what the next question was.
I guess just in terms as we try to model it in terms of if you think about what -- I don't know what you're thinking duration will do into next quarter but what might it do and then should we think of deferred revenue as having its typical kind of team's sequential growth or what should deferred do next quarter sequentially?
I think if you look at our historical numbers, you can get a sense for what happens typically in a Q, in a September quarter versus a June quarter. And as I mentioned with the invoice cycle it's likely that next quarter we'll still be in a situation where customers are frequently co-terming deals and the duration of those invoices will be potentially less than 12 months, even though they're annual customers.
So, I think it's continued to be -- I would not expect large gains in that in the next quarter. But we have taken that into account in terms of the guidance we've given for operating cash flow positive in fiscal '17.
Okay. So in other words duration goes up but it's taking a bit of a pause right now and you should expect a seasonal deferred revenue sequential growth into next quarter is what I understand you're saying.
Your next question comes from the line of Ryan Hutchinson from Guggenheim Securities. Your line is open. Mr. Hutchinson, your line is open. Mr. Hutchinson if you're on mute, please unmute. Your next question comes from the line of Sanjeet Singh from Morgan Stanley. Your line is open.
Thank you. And congrats on that seven figure land deal. Very impressive. I actually wanted to revisit the SMB market and the enterprise market from a unit economic perspective. Now that you have essentials out in the market for a couple quarters now, how do you view that sort of -- I don't know, LTV to cash basis or just maybe the attractiveness of the SMB market now that you have more of a self service model? And then in terms of the success you're seeing on the enterprise market, how is your views changed on sort of the unit economics of the enterprise market as we stand today?
You know what when I founded the Company I really wanted us to have good fundamental economics in place so we've always been thoughtful about that. I think it's one of the reasons why we've had healthy gross margins all along and it's also been sort of built into how we even think about designing the product, right? So the easier it is to fall in love with the software the less human investment we have to do in convincing a prospect to become a customer, in convincing a customer to buy more and that all turns into really compelling unit economics in my mind.
We're happy with the fact we've got a growing and profitable SMB business. That's great. We've got a faster growing enterprise business that we think has more compelling long-term unit economics but that we're going to be investing in growth because we see so much runway in front of us in the enterprise business. So we don't go into details on the specifics of TAC and LTD but we like what we see and it's certainly a core part of our strategic decision-making.
Great. And then to sort of follow-up on the cloud side of the equation, you guys have been very vocal about your traction with in AWS environments. I wanted to see if you could provide some color on either Azure or some of the other cloud providers out there, what your traction with your relationships with the other cloud providers look like.
Well, it's without question a multi-cloud world and it's obvious that Amazon is the current leader in that space, but we're -- we do see increasing success for Microsoft with Azure and we do well -- very well in that environment and we're seeing customers talk more about Google as well. We feel that a multi-cloud world really benefits us strategically because we're the only truly cross-platform software analytics provider that can see into so many Asian languages, running in so many cloud environments, and of course we're fast delivered.
So that makes it the natural selection for an enterprise that wants to standardize. When I talk to fortune CEOs they're smart enough to know they want to have multiple cloud vendors do they are not beholden to a single vendor to provide their infrastructure and so they see us as a partner for them to be successful in migrating into a multi-cloud strategy. So that really benefits us as a tail wind.
Great. And, Mark, my last question, sort of a follow-up on Michael's question regarding the billings growth. So with invoice duration starting to normalize I was wondering if you could give us a sense of how billings growth varies by enterprise so the enterprise billing growth versus SMB billing growth, is there any sort of detail you can provide along those lines?
You know, qualitatively, as you can imagine, the duration of the billings for enterprises are generally longer than our SMB. We've been getting better and better at migrating our SMB customers to longer durations, but when they come up for renewal, et cetera, they feel comfortable with us and they'll commit to an annual contract and pay up front. But that's still -- there's still a segment of the market that is always going to pay -- very sensitive to cash and want to have short-term durations on their invoicing. But on the enterprise in general we're getting better and better at pushing those out to full one-year commitments.
Yeah, I guess -- I apologize. I probably didn't phrase the question right. I was more getting along the lines of if you're looking at billings growth just for the enterprise market, what do those growth rates look like versus the SMB?
Okay. I apologize for that. We are not breaking out our quarterly businesses by quarterly contribution. We did talk at the end of last quarter about enterprise being about -- growing to about 40% of our total revenue for the quarter. And we gave a couple growth rates last quarter. We're -- our SMB business continues to grow. We continue to be pleased with that. And as Lew mentioned, we're growing that in a profitable way. Our enterprise business, we're investing aggressively there. It continues to grow at a quicker rate but we're not breaking out the specific details of those two growth rates.
Got it. Fair enough. Congrats on a nice quarter.
Your next question comes from the line of Greg McDowell from JMP Securities. Your line is open.
Great. Thank you very much. I wanted to drill a little bit into the cloud pricing option versus the host-based pricing. Could you expand a little bit on what's driving the change and maybe why you think it will be accretive to the model and maybe how we'll see potential changes to the model because of this additional option, if any change? Thanks.
Well, first of all, there's a lot of excitement in the Company about our cloud pricing option. I'm personally very excited about it because we have seen for some time now customers who want to be larger customers, or prospects who want to be New Relic customers, where -- that are running into friction largely based on our host-based pricing, which is roughly how the rest of the industry prices as well or some price even older models.
And with the obvious change to the cloud where there's this incredible variance in terms of the type of hosts an application can run on from very small to very large, it felt like -- it added friction to our sales cycle for customers who wanted to understand how our pricing related to the value, given that they might be spending a different amount for one server versus another. And we addressed that one deal at a time by our reps basically working out a price that fit for their environment.
So we've effectively been manually doing cloud pricing one deal at a time for customers that were willing to engage in that conversation. But there were prospects that didn't even go into the conversation because they look at our website and they may conclude inaccurately that there wasn't a pricing model that worked for them.
So with the learning of doing that for the last several years, more than several years, we've now institutionalized it in the cloud pricing model that's much more transparent and it's easy to adopt and it's drop dead simple to put New Relic everywhere. Our vision is ubiquitous the point of our price across the entire estate and whatever we can do to reduce the friction for that broad adoption we will do and we think that will yield good benefits to us in the long run.
Yes, Greg. Just a follow up with what the impact will be. We think this will be accretive to the business. We think when customers are looking at a cloud environment like an Amazon or an Azure they're going to recognize with our cloud pricing option, and they really do have the option, that we have a really fair price point that fits their environment, tailor made for that environment and it takes out any kind of translation capability.
So we think what this will do is drive accretive business to us, either further adoption or de-mystification of what it costs to adopt and we think the reception has been very warm. We've of course piloting this for many months to understand what customer sentiment would be and it's all been positive so we're really excited.
That's helpful. Thank you. And one quick follow-up. It's great to hear about the traction with mobile and I guess broadly speaking in previous calls we've heard about some of the metrics around new MRR coming from non-APM products in the quarter and maybe qualitatively if you could just talk about whether that sort of new MRR came in line with historical numbers in terms of sort of the non-APM products and sort of the cash rates. Thanks.
We're really pleased where it's at and it's largely in line with the historical trends we've shared with you in the past. The way I think about is, in the cloud age, IT management begins with the application. You can't have an IT management story without world class APM. So of course that's a wonderful lead product. We think of it as the tip of the spear. But that's incredibly strategic territory.
Once we're inside the software we're in the lifeblood of the business, and that real-time dashboard is a perfect place to add surrounding metrics and telemetry to help have a complete view of their business and that's why we love seeing mobile succeed, which is a proxy for the front door, the new front door for enterprises today is the mobile application. We're very excited about announcing a new product next week in New York that's going to give us deeper visibility into the infrastructure, especially in cloud environments.
And so I feel like we're not done building out our platform and our employees are working incredibly hard at delivering on the software analytics vision and I want to thank all the New Relic employees who are working so hard on all these great products, not only building them but taking them to market. And I feel like we're just at the beginning of something that could be a platform that has a lasting impact for our customers.
I'm going to add a couple comments about mobile, Greg. Lew mentioned it's the new front door to the consumer brand. We've been kind of tickled with our success with our mobile offering as we've seen more and more consumer brands come to us with strategic applications that are allowing people to buy ahead, reserve ahead, take care of an eCommerce transaction, handle a banking transaction like we talked about with Cap One a couple quarters ago.
I won't say we're at a tipping point but I would say that we've been really impressed with the rate at which customers are taking up mobile platforms as tier one platforms for their brand experience and engagement with customers and the big difference in the role that we're playing is we're not just talking about the health of the mobile application. We're actually giving them real-time visibility to top-line drivers.
We can help them compare what are the stats, what are the consumption stats between New York and Chicago for a given fast food restaurant, and that is unprecedented and that's where we're playing a really unique role. So we hope that in future quarters we'll be able to report even more interesting use cases around mobile.
Great. Thank you.
Your next question comes from the line of Derrick Woods from Cohen and Company. Your line is open.
Q – Derrick Woods
Thanks. I wanted to go back on the cloud pricing. I would have thought that the lower unit price would be offset by higher volume of hosts if we're talking about a micro services environment, but it sounds like you're expecting some pressure on revenue per customer. Is that just because we -- they start smaller and the accretion will take place kind of longer down the road with scale or…
No. We expect average -- customer spend -- for a given customer to increase -- as your opening posit would suggest we expect people to deploy more New Relic into larger environments. Now, that having been said there are some people that don't pay New Relic at all that would like to pay New Relic. That we may welcome into the franchise on the very low end.
So that might impact the average spend in the short-term because we're just bringing in some new lower end customers that our host-based pricing just wouldn't work for them. But like, for a given existing enterprise customer, if they're deploying in the cloud, for example, we expect to deploy more New Relic with less friction bits of pricing that ought to turn into higher ASPs.
Q – Derrick Woods
Okay. That's helpful. That makes sense. And then Hilarie, since you just got through Q1 and you're still focusing on building out the direct sales efforts, any changes you'd highlight that you made to the sales structure at the beginning of the year that you think will help set up for greater productivity through the year?
We didn't make any material changes to the sales structure. We continued to invest in both our SMB business and our enterprise business, but the one thing that might be worth mentioning with the increased capacity that we're bringing into the Company, we have -- some of the territories are tailor made for more land or new logo acquisitions so we've focused the troops on new customer acquisition, knowing that we should see a near term expansion from those customers.
Other territories are more designed around the expansion work. Those are traditional larger install base customers where we still know that we have a broad estate to cover but really no substantial changes in strategy, just -- we just think we have a lot of market share out there to acquire so it's really about building out the coverage models in both of our businesses, SMB and enterprise, globally.
Q – Derrick Woods
Okay. And I just -- if I heard it right, that -- I mean, you guys had a good new customer account in Q1, very strong in Q4 last quarter. Those -- the repeat or the expand cycle can happen in a matter of three, six, nine months and so you expect these to move into expansion territory, towards the back half of the fiscal year?
Yes. I think that's what we tend to see. And we focus on getting the -- when the reps go out they look at their annual plan. They start the year. And the way they're thinking about their year and making their number is okay, I've got to go out and I've got to get some land deals, get some seeds out there, plant those, grow them through the year and then they come in as relatively modest paying customers early on and then they'll gear them up toward later in the year either the end of the business -- the budget cycle in December for their customers or at the end of our fiscal year March is when we tend to see the larger expansion deals take place.
Q – Derrick Woods
Okay. Thank you.
Your next comes from the line of Brent Thill from UBS. Your line is open.
Q – Michael Turrin
Hey, guys. This is Michael Turrin on for Brent. Most of my questions have been asked but I do have one for Mark. With respect to op margins. So Q1 number came in above our expectations but it looks like more of a modest increase in the full year guidance. Is that just conservatism or did some expenses move from Q1 into the rest of the year? I know last quarter you talked about plans for the majority of hiring to take place in the first half of the year. Are you still on pace to achieve that goal?
We still are on pace on hiring. We're generally on pace. I think when we look at the year, we're always balancing growth versus profitability. We've given the guidance for the full year. A thousand basis point improvement. We are committed to that. We are reaffirming that now. And we're -- we've given the guidance -- we've upped the guidance for the year in terms of revenue growth. So that's close to 40%. We think growing at 40% a year, improving our margin by a thousand basis points, those are great numbers and we're pleased with them so we're going to -- we're sticking toward those.
We still see a great opportunity ahead of us, though. We want to continue to invest and take advantage of that. So to the -- it's balancing the investment versus the growth. But we're committed to the thousand basis points and some of that additional savings we have in this quarter is going to improve margin. The rest is going toward investment.
Q – Michael Turrin
Okay. So it sounds like the hiring remains on track and then it looks like CapEx is going to sort of step up in the rest of the year?
Yes. That's right, our CapEx, some of that was delayed, some of the office buildout was just -- timing of contracts and payments, things like, that. Some of that slipped into Q2 so that's going to be a little more back end loaded but you heard the guidance that we confirmed on the earlier remarks.
Q – Michael Turrin
Perfect. Thank you.
Your next question comes from the line of Jesse Olson from Goldman Sachs. Your line is open.
Q – Jesse Olson
Hey, guys. Thanks for taking my question. I wanted to ask about your paid business accounts greater than 5,000 and I'm hoping that my math is right but it looks like the net ads were quite a bit lower than where they were trending last year for every quarter. And I'm wondering what would be driving that. Is it just a focus on even larger accounts within that segment? Is there something else that happened within the quarter? Is it seasonality? Could you help me with that? Thanks.
Yes, so, Jesse this is Hilarie. I'll take that question. We are actually really pleased with the number of new logos that we acquired in the quarter and we've shared that threshold in the past to help differentiate our monthly business from our annual business, but it's not -- it's one of many thresholds that we look at. We're very pleased with the quality of new logos that were acquired in Q1 so I probably wouldn't read too much into that number.
Underlying the bigger number, which I think was 500 odd new paid accounts is a lot of high-quality business with customers of all sizes, including a lot of traditional enterprise customers who might just start with one or two hosts to go through that motion that Lew described earlier in the call, where they prove us out, they organically adopt us and then they come back in a short period of time to make a larger commitment.
Q – Jesse Olson
Got you. Is it fair to say your that your business is becoming a little bit more top heavy, as far as new customers being added? And if that's fair or even if it's not fair, I guess, how are sales cycles trending versus your expectations? And I guess versus your prior experience?
Top heavy by definition is enterprise-oriented? Is that what you mean?
Q – Jesse Olson
Yes. I mean, I look at, you had 530 net ads for total accounts, you had 181 versus 375 a year ago for accounts greater than 5,000. It sounds like based on your commentary that the quality of the accounts within those buckets is increasing. I'm just wondering if -- are you seeing bigger and bigger customers within that 5,000K bucket -- or 5K bucket?
Yes, we're seeing bigger and bigger customers in all the buckets and we have not seen a discernible change in sales cycle. What we are seeing, which I mentioned in the prepared remarks, is many more traditional companies in the -- that you would characterize as enterprise companies coming to the table very interested in New Relic.
Sometimes driven by a cloud migration initiative. Other times driven by a modern application and digital initiative and then as Lew pointed out, coming back later. Our average customer spend is about $17,000. We feel like that's a really healthy number and we hope to see that improve as time goes on.
Q – Jesse Olson
Got you. And then a follow up for Lew, I mean, historically, the key driver for New Relic has been kind of these platform shifts, whether it's cloud or now it sounds like mobile is really starting to become a driver. I'm wondering if you're starting to make an effort or starting to get pulled back into classic enterprise application APM use cases, whether that's within existing customers that start with cloud and then expand the usage of New Relic or for new accounts?
Yes, we've absolutely seen that. And so we feel like the natural way that typically develops is we start in digital or cloud where we've got an incredibly strong, I'd almost say unfair natural advantage in those environments and then the customers use it on the digital side and they like it and then they show their poor friends on the IT side stuck with these antiquated tools. One of them I built back in 1998, I'm sorry to say.
And so now they've got this beautiful new product called New Relic that's cloud delivered, of course they want to expand at a (inaudible). Last quarter we talked about a couple of substantial deals that started on digital and it expanded to an entire IT standard. We think it's a wonderful, natural way to grow our business.
Q – Jesse Olson
Great. Thanks, Lew. Appreciate it.
Your next question comes from the line of Steve Ashley from Robert W. Baird. Your line is open.
Q – Steve Ashley
Thank you very much. I'd like to ask about the insights product. Still realize it's young but you've introduced kind of a seeding strategy there with Insights for everybody. Can you maybe just give us an update on how that may be looking here in the early days?
I mean, it's really exciting to me to see how people -- our customers are really getting excited about Insights and using it in very compelling use cases. We saw an example of a major retailer in the UK using Insights for security use cases, where they were detecting potential security threats on their web property. In fact our security team uses Insights for that as well. Now, we haven't developed a full security business strategy yet but it's wonderful to see that this product is so platform like that it can address use case that's go far beyond the core APM use case we're known for.
We have another customer that shows realtime business activity, in this case it's a travel company and they show like tickets booked in real time right next to application performance and as you might expect if the application has a performance problem fewer tickets are booked but they show exactly how much the impact of the performance is on the business in real time.
Of course that something that's far -- that's important not only to the people who have built the software or in the operations team, the actual digital business leader, and in some cases the CEO looks at the dashboard and that's what Insights has the potential to do, broaden the audience, broaden the use cases and become a platform.
Q – Steve Ashley
Perfect. Thank you.
Your next question comes from the line of George Iwanyc from Oppenheimer. Your line is open.
Thank you for taking my questions. Following up on the SMB questions, with essentials out there, have you seen any change to the churn rates that you have with this SMB install base?
No. We, we're pleased with the traction that essentials has been getting and our renewal rates have been fairly consistent over time. And the -- generally speaking, the more a customer pays, the more committed they are to New Relic, the higher renewal rates. And what we are seeing with essentials is that it allows customers to get in at a more affordable price point and we think that that allows them to actually use the product, perhaps even a little bit longer than they otherwise might do so.
Okay. And with the sales investment that you're doing this year, the new products are coming, whether it's on the server side, essential, the cloud pricing, what should we look at from a gross margin standpoint as we look to the end of this year and into the next?
We, long-term we've given guidance of, I believe, 78% to 82% has been long-term guidance. We've been hovering in the 80% to 81% range for the last number of quarters. And I think we expect to continue to be able to maintain very attractive gross margins in that range.
Okay. And just the last question, I don't -- unless I missed it, did you update the number on how many customers are buying multiple products at this point?
We did not update that this quarter. We provided data about that on our Q4 call in May.
Okay. So can you provide an update or is it kind of the 25%?
No. So we'll not be providing an update. I -- we only do that basically at year expend and then potentially midyear at analysts day that we may have in the fall.
Okay. Thank you very much.
Thank you, ladies and gentlemen. There are no further questions at this time. This concludes today's conference call. You may now disconnect.+
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