New Relic's (NEWR) CEO Lew Cirne on Q3 2016 Results - Earnings Call Transcript

| About: New Relic (NEWR)

Call Start: 17:00

Call End: 18:00

New Relic, Inc. (NYSE:NEWR)

Q3 2016 Earnings Conference Call

February 4, 2016, 17:00 ET

Executives

Jonathan Parker - Director, Strategic Finance & IR

Lew Cirne - Founder & CEO

Hilarie Koplow-McAdams - President

Mark Sachleben - CFO

Analysts

Greg McDowell - JMP Securities

Sterling Auty - JPMorgan

Sanjeet Singh - Morgan Stanley

James Westman - Raymond James

Michael Turner - UBS

Jesse Olson - Goldman Sachs

Ittai Kidron - Oppenheimer

Scott Zeller - Needham & Company

Rakesh Kumar - Susquehanna Financial Group

Operator

Good afternoon. My name is Chris and I'll be your conference operator. At this time, I'd like to welcome everyone to the New Relic Third Quarter FY '16 Earnings Conference Call. [Operator Instructions]. Thank you. Jonathan Parker, Director of Strategic Finance and Investor Relations, you may begin your conference.

Jonathan Parker

Thank you. Good afternoon and welcome to New Relic's third quarter FY '16 earnings conference call. Today's call is to provide you with information regarding our third quarter FY '16 performance, in addition to our financial outlook for the full FY '16. Joining me today are New Relic's Founder and CEO, Lew Cirne; our President, Hilarie Koplow-McAdams; and our Chief Financial Officer, Mark Sachleben.

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

Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. But note 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 quarterly 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, periodic SEC reports, a webcast replay of today's call or to learn more about New Relic. And with that, let me turn the call over to Lew.

Lew Cirne

Thanks, Jon and good afternoon to everyone joining us today to review New Relic's third quarter FY '16 financial results. We delivered another fantastic quarter, exceeding our guidance, with revenue of $47.7 million, up 64% year over year. At the same time, we delivered better-than-expected operating margin improvement and achieved a significant milestone, generating positive cash from operations for the first time.

It's hard to believe that this call marks roughly the one-year anniversary of our first earnings call. Reflecting back, it has been an incredible 12 months of progress, underscored by significant accomplishments from everyone at New Relic. And I am more excited today about our opportunity than I was a year ago.

And why exactly is that? Well, a year ago, the New Relic Software Analytics Cloud was just in its promising infancy. In fact, Insights, Browser and Synthetics have been generally available for only about 12 months combined, while our enterprise field team was just getting off the starting block. 12 months later, we have seen companies of all sizes across almost every industry and region embrace and make long term commitments to our platforms. In fact, more than half of our quarterly revenue now comes from customers paying for more than one product.

Additionally, we continue to see success across the market, with a strong foothold in SMB and rapidly growing enterprise business. One example from the third quarter was an expanded partnership with GE to deploy New Relic globally across its critical systems. GE is a great example of how large enterprises are now moving aggressively to the cloud, as they intend to move a significant percentage of their workloads to cloud-based environments over the next few years.

Our vision for New Relic is to be the first, best place to look to understand your digital business. Whether you are a developer, in IT operations or a digital executive, we know that digital businesses are becoming more complex at the same time as they are becoming more important. So while APM software of the past may have just had a handful of users, we have customers who have hundreds of engaged users, who are each using New Relic in their roles.

We increasingly hear from our customers that the first thing they do in the morning is open up New Relic. Unlike the past, the entire team has a joint motive in the success of their software and has to understand the customer experience from both a complete view of their application and from their entire operating environment. Collectively, these teams are tasked with driving amazingly digital experiences to their customers, but each from a different angle.

We want to connect developers to builders of software, to users, to help them understand how real people are using their software. We hear consistently about developers creating breakthrough user experiences because of the data and insights we provide. We also want to make it possible for them to quickly fix something that is slow or broken, so that they can get back to what they really want to spend their time doing which is building something new. For busy operations teams, who are tasked with managing increasingly dynamic and complicated environments, we want to offer these often-behind-the-scenes heroes powerful yet easy-to-use tools that make sense of all the chaos and noise. And for executives, we want to deliver meaningful insights that make software and technology a real asset in their drive for growth.

We're seeing this vision resonate both in our financial results, as well as recognition around the industry. For instance, this past quarter, Gartner named us as a leader in its 2015 Magic Quadrant for Application Performance Monitoring Suites for the fourth consecutive year. We're thrilled to see our vision quickly garner growing industry mind share and believe we're uniquely delivering on our vision as the only 100% cloud-based multi-tenant solution in our space at scale. And as we continue to broaden our portfolio and expand our capabilities up-market, that scale element is so critical as we talk to companies that are looking to run substantial digital initiatives. To put our scale into perspective, in the last 90 days, our customers, leveraging the New Relic platform, have collected nearly 18 trillion events and have queried more than 12 quadrillion events.

As our customers are sending more and more of their event data into NRDB, the powerful database behind New Relic Insights and our entire product suite. They are leveraging NRDB in new and compelling ways. At the same time, our media response time for this database is only 9 milliseconds. In the old days, with on-premise solutions and batch processing, it might have taken hours or days to get an answer to an important question, along with requiring dedicated headcount and potentially millions of dollars for equipment. Today with NRDB, our customers are able to answer these questions in real-time.

This is where we expect New Relic's value proposition to grow deeper over time. As we believe the cost of our customers to be able to collect, store and analyze their data at-scale in real-time and on-premises is too prohibitive, compared to that at which we can deliver in the cloud for our customers. At FutureStack last November, we announced how we're now delivering real-time analytics embedded into every product we build at New Relic, not just Insights.

To help accelerate our customers' understanding of the power of our platform vision, we gave all paying customers eight days of event data, providing a taste of what could be accomplished with the power of our analytics. We have seen an incredible buzz generated by our announcement, as customers are recognizing an expanding number of use cases leveraging the data coming from their software.

We also saw particular excitement from our customers at FutureStack around our acquisition of Opsmatic which we believe deepens our positioning in the infrastructure management market. Successful software teams demand real-time visibility into every component of their technology stack, from the infrastructure all the way up to the user experience and increasingly recognize the value of a single place to look to develop and operate their digital initiatives which is why we think they are so excited about our potential with Opsmatic.

We have found that our customers recognize that the value of the New Relic platform is in solving incredibly complicated distributive problems. And as the lines between development, operations and business teams blur together, we're able to help create curated views for each of these constituents. The Opsmatic team is hard at work and we're aiming to have a public data available later this year.

All in all, it has been an incredible year as a public Company and we want to thank our employees, our customers and our investors for partnering with us in this journey. We're really excited about what this next year will bring as we continue to focus on what we do best -- build amazing products that our customers love to use. And with that, I'll turn it over to Hilarie to provide some additional color on key wins and the strength of our go-to-market strategy.

Hilarie Koplow-McAdams

Thanks, Lew. As Lew said, we were quite pleased with our performance in the third quarter. We continued to see excellent uptake on our broad Software Analytics Cloud, coupled with many encouraging data points in the quarter. We saw a record number of six-figure deals which were up over 100% from the same quarter last year. And again, our wins are expanding companies of all sizes across almost every geography and industry. We believe that digital transformation of business is well on its way and leading-edge companies are getting competitive advantages partnering with New Relic.

If you haven't had a chance to listen to the webcast from our Analyst Day at FutureStack, I would highly recommend it. I can't think of a better way to help give you a glimpse into the types of conversations I have with executives every day about how our Software Analytics platform is changing the way companies do business. In particular, when you hear the comments from the CTO of Aon and the CTO of Time, I think the message will be very clear. The quarter was particularly strong for installed base sales, as we saw a significant demand by customers to grow their existing New Relic footprints. This demand, combined with the focus of our sales team, led to a very strong net expansion rate during the quarter, albeit somewhat at the expense of a lower level of new customers.

Overall, we saw new or add-on business with some fantastic enterprise companies in the third quarter, including retail wins with leading outdoor gear brand REI, American Eagle Outfitters and Office Depot, to name a few. In media, we saw wins at iHeartMedia, NBC Universal, Fox Sports and France Televisions. While in the tech space, we closed transactions with Adobe and Citrix, among many other enterprise companies. Finally, as Lew mentioned earlier, we had a great win at GE.

In fact, this was our second Fortune 10 win of the quarter. If it wasn't clear already, with the great list of companies I've mentioned, these Fortune 10 wins further underscore the success we're having moving up-market. On the SMB side, for the third quarter in a row, we actually broke a record for our largest transaction to date which we see as underscoring our strategic importance to companies of all sizes. In addition to this deal, we conducted business with PBS -- the Public Broadcast Service -- Major League Soccer, the Royal Opera House and Zenefits, among others.

Like previous calls, we wanted to dig into a couple of examples from this past quarter of how diverse companies our leveraging our platform. Given all the Super Bowl activity in San Francisco this week, we're actually taking this call from Silicon Valley. But we expect one of our great long-standing customers to make a significant impact on this weekend's event. The first customer I would like to highlight is VenueNext. VenueNext is a technology platform company focused on transforming guest experiences at all kinds of venues -- venues from sports and concerts, to conferences, to theme parks and all with the goal of improving the businesses of those venues.

They have relied heavily on our flagship APM solution for the last two years to help them ensure their systems are up and running during peak periods. This past quarter, they made a long term bet on our Mobile solution which will be in full display as VenueNext prepares for its biggest event yet, Super Bowl 50 here at Levi's Stadium. A huge part of this year's Super Bowl stadium experience depends on the VenueNext application, from ticketing, parking, food orders and even game replays. And they will be leveraging New Relic in this and future mobile applications to help them ensure optimal performance. We're thrilled to help them deliver a fantastic experience at this weekend's big game.

The next interesting company customer story is Eastern Bank. While this almost 200-year-old institution may be the largest and oldest mutual bank in the entire country, Eastern Bank has long recognized the importance of the digital storefront in today's customer experience. When it came to rolling out a new banking system with both web and mobile applications, their priorities were to ensure a fast, smooth and secure transition. To do so, earlier last year, Eastern Bank turned to the complete New Relic Software Analytics Cloud and this past quarter significantly expanded its synthetics deployment, to ensure that any of its clients can access their most precious asset at any time, from anywhere.

The next customer story is certainly a fun one, as I'm sure many of you have had the unique experience of viewing the amazing artists of the Cirque du Soleil show. Cirque du Soleil joined the New Relic family this past quarter, leveraging our solutions to gain visibility into the performance of its Microsoft Azure-based ticketing app and to be able to benchmark its performance for users around the world. At the same time, they are leveraging New Relic Software Analytics to correlate web performance to business performance and gain clear, real-time visibility into how shows are selling in different geographies.

Lastly, I wanted to tell a great story about Netshoes Group, a large Latin American e-commerce sports retailer that serves a huge volume of customers each month, with more than 50 million people visiting its website monthly, while others visit it's 15 official stores across Latin America. Netshoes initially turned to New Relic to help keep its site up and running with our flagship APM product, but has since become one of our most passionate Insights customers.

They are relying on New Relic Insights and focus on customer experience by linking IT with marketing to provide up-to-the-minute results about what campaigns are generating the most sales, how products are performing regionally and ultimately, how their customers are shopping on the website. Insights has given Netshoes Group the potential to add value to the entire business chain by combining technological insights with real-time user behavior insight, while connecting online and offline customer experiences. I think these examples really showcase the power of our platform across a diverse set of use cases, as businesses of all kinds become software companies -- even 200 year-old banks.

Now, while we have had our sites firmly set on closing out a great year, we're here in the middle of our planning process for FY '17 and already expect several initiatives to be key focus areas. For instance, while we have been clear about our strategy of shifting investment dollars up-market, we do believe there is an opportunity to capture additional greenfield dollars at the lower end of the market, in a low-touch manner. And we have been examining options that we believe will appeal to a broad swath of companies.

In addition, during the quarter, you may have noticed we announced expanded efforts around the public sector. We have had great success with numerous agencies to support their digital initiatives, most notably Healthcare.gov. And we're now building out a dedicated team to more aggressively pursue the opportunity in partnering with key resellers in this space. We have also begun the process to become fully FedRAMP certified which we expect to unlock additional potential in the market. We think this will be one of many exciting opportunities for us going forward.

To summarize, we're very pleased to see the strategy we have put in place last year continuing to pay dividends, as evidenced by some of the customer wins I have mentioned and our overall financial result. Enterprises are increasingly depending upon us to help them optimize their mission-critical digital initiatives and we're really excited about the future. So with that, I'm going to turn it over to Mark.

Mark Sachleben

Thanks, Hilarie. I will start today by reviewing the results of our third fiscal quarter, before provided guidance for our fourth quarter and FY '16 and providing some preliminary views into our FY '17. Turning to the financials, for our third fiscal quarter, revenue was $47.7 million, up 64% year over year and up 11% sequentially. As has been the case in recent quarters, we're signing more large deals with enterprise accounts, as well as seeing strong cross-sell across our platform.

As such, our annualized revenue per average paid business account continued to grow, coming in the year at 14,700 -- a further acceleration to 38% year-over-year growth and up 8% sequentially. We view this as strong evidence that our decision to direct significant resources at the enterprise opportunity has been a sound one. We ended the third fiscal quarter with 13,126 total paid business accounts. Of these, the total number of customers paying us more than $5,000 per year reached 5,581, up approximately 35% year over year and an increase of nearly 300 customers from 5,285 at the end of the second quarter.

For the quarter, we experienced a dollar base net expansion rate of almost 129% -- towards the high end of historical levels, although down slightly from the year-ago period which benefited from the introduction of two new products -- Browser and Synthetics. While this is an excellent indicator of strong customer satisfaction and the power of our model and it continues a strong third quarter performance, we have started to put some new mechanisms in place to help drive a greater focus on new account acquisition, in order to maintain a healthy balance of new versus existing customer growth. We continued to see success internationally in the quarter, as our non-U.S. revenue grew to $15.7 million, up 59% year over year. Non-U.S. revenue represented 33% 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 expensive 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. Gross margin for the quarter was 81%, unchanged versus last year and last quarter. This is better than expected, especially given the top-line out-performance in the quarter, as well as the timing of certain hiring activity and infrastructure investments. We expect this to come down to 79% to 80% in Q4, but still within our long term range of 78% to 82%.

With regard to operating expenses, we continue to invest in our go-to-market teams across all segments of the business. Our sales and marketing costs were $32.5 million compared to $24 million for the year-ago period and $27 million in the second fiscal quarter of this year. Marketing spend on FutureStack was the biggest component of the sequential increase. R&D expenses were $10.2 million in the quarter compared to $5.7 million in the year-ago period and $9 million last quarter. New Relic is a product-driven Company and we're committed to continued innovation of our Software Analytics platform to be able to address the opportunity in front of us.

G&A costs were $6.9 million in the quarter, up from $5.6 million in the year-ago period, but down from $7 million last quarter. As we now anniversaried our first quarter as a public Company, we've started to see improving leverage from our investments. Overall, our expense in the quarter produced an operating loss of $10.7 million compared to a loss of $11.8 million for Q3 of last year and $8.4 million for Q2 of this year.

This resulted in a negative operating margin of 22% in the quarter, a substantial improvement from the negative 40% a year ago, but down from negative 20% in the second quarter, primarily due to the timing of FutureStack. Our net loss per share for Q3 was $0.22 based upon a weighted average share count of $49 million. This compares to a net loss per share of $0.28 based upon a pro forma weighted average share count of $42.3 million in Q3 of last year, a share count that assumes a conversion of preferred stock outstanding prior to our IPO.

Turning to our balance sheet, we ended the third fiscal quarter with $191 million of cash, cash equivalents and short term investments, up from $189 million at the end of the second fiscal quarter. I will discuss this in more depth shortly. Elsewhere on the balance sheet, our total deferred revenue grew to $58.1 million, up 147% year over year.

As has been the case in past quarters, this growth was driven by the predominantly annual billing terms of our enterprise customers and also some mid-market accounts changing from monthly to quarterly or even annual invoicing. As discussed previously, we continue to expect growth in our deferred revenue to outpace revenue growth for the foreseeable future. However, we do not currently view it as a key metric or a reliable indicator of our underlying business, due to the variant durations of our contracts and billing terms.

Turning to cash flow, I'm excited to report our first quarter of positive cash flow from operations. We generated nearly $7 million of cash from operations in the quarter, a substantial improvement from both the year-ago period and prior quarter. I would remind you for modeling purposes for our next year's fiscal 3Q, that we benefited this past quarter by approximately $3 million from collections associated with the long term portion of the two multi-year billings that we referenced last quarter.

Additionally in the quarter, we saw a few other tiny benefits, including final payments for several large FutureStack-related expenses ultimately paid in this current quarter. While we do not formally guide to cash flow, we do expect modestly negative cash from operations in the fourth quarter.

Now I will turn to our outlook for the fourth quarter of FY '16 and the remainder of the fiscal year as a whole. We're initiating our outlook as follows. For the fourth fiscal quarter ending March 31, we expect revenue to range from $49.8 million to $50.8 million, for a growth of 49% to 52% year over year. We expect a non-GAAP operating loss of $11.5 million to $12.5 million. This would lead to non-GAAP net loss per share in the range of $0.23 to $0.25, based upon a weighted average share count of 49.7 million.

This results in a FY '16 outlook of revenue ranging from $178.6 million to $179.6 million or a growth of 62% to 63% year over year. This is up from our previous outlook of $174 million to $176 million for the full year. We expect a non-GAAP operating loss of $40.8 million to $41.8 million, an improvement from our previous outlook, for a loss of $44 million to $46 million. This would lead to a non-GAAP net loss per share in the range of $0.83 to $0.85, based upon a weighted average share count of 48.9 million. This compares our previous outlook for a loss of $0.90 to $0.94.

Finally, I would like to make a few comments about FY '17. While we're still the middle of our planning process for next year, we wanted to provide some insight into the profitability-related guardrails through which we're building our FY '17 plan. We have consistently stated that we plan to improve our operating margin on a fairly steady basis. We've seen significant leverage in the business this year and currently expect the strong underlying economics of our business to be able to support 1000 basis points of further margin improvement next year, putting us on a path to achieve breakeven on a non-GAAP basis by the end of FY '18.

At the same time, we expect to front-load a good portion of our investments for FY '17, starting with some incremental hiring this quarter, as a result of the strong leverage we've seen in the business year-to-date, combined with the immense opportunity we see in front of us. As a result, we expect our first quarter non-GAAP operating loss to be the trough for the year and modestly larger than the current Q4, but with a fairly steep improvement throughout the remainder of FY '17. More near term, we expect to generate positive cash from operations for FY '17 as a whole, although there could be some deviations between quarters throughout the year.

Lastly, we're expecting to make some significant CapEx investments in FY '17 as we both build out new office space in San Francisco and Portland and also make meaningful investments in our data center infrastructure to keep pace with the growth of our customer base. As a result, we currently believe our FY '17 CapEx as a percentage of revenue will be similar to FY '15 levels, putting some downward pressure on our gross margins, although we will have more details on our next earnings call.

We'll have much more to say in May, but we wanted to provide a bit of a preview for how we're thinking about investing in the business, making meaningful progress from a leverage perspective and delivering positive cash from operations in FY '17. And with that, we're happy to turn it over to you for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question is from Greg McDowell with JMP Securities. Your line is open.

Greg McDowell

It is great to see the progress, especially on the cash flow line. I guess my first question has more to do with some of the commentary around new account acquisition and lower net new customers. Can you just maybe walk us through maybe why that number has been decelerating at the rate it has been? And maybe some of the plans for the new SMB account acquisition going forward? And sorry for the third part of the question, but if you could just maybe give us a sense of even the SMB exposure you guys have or at least remind us of the SMB exposure? Thanks.

Lew Cirne

Thanks, Greg, it's great to chat with you again. And we were really thrilled with the quarter as a whole. And I think the numbers, you'll agree, are very encouraging across the board. And as we mentioned, much of that -- what we're really pleased about in that growth is the success we're seeing in the enterprise. And that has been really the result of hard work we started shortly after Hilarie joined two years ago. Still, we were in the process of building it even as we went public. So I would say now, it's fair to say that the enterprise business is established. And we're happy with that, but of course, we're never fully done in growing that segment of our business.

As it relates to your question on SMB and net new accounts, it was great to add nearly 300 customers in the quarter and it's the quality of the customers we're adding that has, I think, substantially differed from a year or two ago. You can see that in our average customer spending 30% more on New Relic today than the average New Relic customer spent a year ago. And we've seen that average customer spend grow nicely and that is across all segments. It's not just -- that's of course the enterprise segments succeeding well, but it is also SMBs.

The SMBs we're attracting are, I think, the customers who want to have a relationship. That all having been said, there's no doubt we have an opportunity to do better. And we would like to continue to grow the customer count of the Company, but we're putting guardrails around that. Those guardrails are about the efficiency with which we acquire a customer and their lifetime value. And you can see the benefits of those guardrails showing up in the -- as an example, in the cash flow that you mentioned in your question.

So we're not going to just go purchase new customers just to support a numerical goal. We're going to grow the business in a healthy way and we're looking at ways to do that better. So we're excited about it and we think that there's plenty of opportunity for us to pursue.

Mark Sachleben

In terms of exposure you mentioned, in our Analyst Day presentation -- so these are numbers as of 9/30, we did give a chart. And just to remind you about that, our SMB accounts at that point accounted for 73% of our customers, but only 30% of our ARR. At the time, enterprise was 11% of customers and 35% of ARR and the mid-market made up the remaining 16% of customers and 28% of ARR.

Greg McDowell

I guess one quick follow-up on deferred revenue -- and maybe this is for you, Mark. But one comment you made that piqued my interest was just around some current monthly customers converting to annual billing. And I guess, obviously that helps your cash flow when you have such a big change in deferred. But how should we track or how should we judge how much of the net new deferred is coming from big customers like GE which is obviously a phenomenal expansion deal, versus current monthly customers converting into or changing their billing terms?

Mark Sachleben

We don't give an exact breakout, but the majority of that comes from our new business and I think the majority of that is from the new enterprise business which is predominantly annual upfront payment. I think we're getting better at signing on mid-market and even some SMB customers, for their initial deal to be annual upfront. I think we're a little more disciplined in that regard today.

And then at renewal time, we will migrate some of the SMB customers. But to be honest, the low-end, it is not worth it. The discount rate is too high, so it is not worth it to convert too many of those. Just roughly speaking, 60%-ish or so of our base still pays us monthly. And you can imagine that is the vast majority of SMB. And we expect that number to continue to trend downward. But at the same time, a lot of our base will pay us monthly going forward as well.

Operator

The next question is from Sterling Auty with JPMorgan. Your line is open.

Sterling Auty

Kind of curious, given that you guys see such a wide swath of what is happening out there on the macroeconomic side. When you look at the new customers that are coming in, especially these healthy customers with growing deal sizes, et cetera, any type of industries that are standing out or even -- you've got the expanding international side. Any commentary in terms of strength in the U.S. versus strength internationally would be great.

Hilarie Koplow-McAdams

This is Hilarie and I will give you an answer. We haven't seen any material trends that are that interesting from an industry or international U.S. perspective. You probably know we're in the relatively early days of our international expansion and we think we have a lot of opportunity there. But it's more or less the same, the places we play well and the customers that come to us are those who are going through the digital transformation. Five years ago, you could fully characterize that as business-to-consumer-oriented companies; now that is a much broader slaw office company, so the specific industry trends just don't follow as neatly.

Sterling Auty

And then I was interested in the comment about how you gave eight days of data storage so people could kind of get a flavor for all the things that are possible. I didn't quite catch what's been -- I know it hasn't been that long, but any early follow-on reads in terms of uptake or expansion sales on the back of that?

Lew Cirne

Yes and as a reminder, Insights has been a transformational product that really launched us beyond APM into the platform vision that we have been talking about for some time. And we felt like for those who had exposure to Insights and understood it, they adopted it. And so the strategy that we launched at our FutureStack conference in November was to give our customers that pay us for any New Relic product, give them eight days of data in Insights to get a better sense of what it can do. It is early days, but we're very encouraged by the results.

We saw 100% quarter-over quarter growth in our Insights sales, so that is wonderful. I should probably look left to my attorney to make sure that there's no projections made off of that particular quarter-over quarter trend. But Insights is a very strong product for us. But it's more about the platform that it represents and the fact that we're moving all of our products onto this database technology that really is at the core of what makes Insights special. And so we think this is crown jewel technology that not only will show its success in that product sale itself, but in customers adopting the whole platform, becoming multi-product customers at New Relic.

Operator

The next question is from Sanjit Singh with Morgan Stanley. Your line is open.

Sanjit Singh

I wanted to dig into anything interesting on the competitive environment. When you're making the move to the enterprise, are you encountering some of the legacy players or is it still sort of newer players in the APM space?

Lew Cirne

We don't see a significant change in competitive environments since what we talked about in prior calls and during our IPO road show. And that is, when you look across all the transactions we do in a given quarter, it is still roughly 90% of them we don't have a listed competitor for. But of course, as our enterprise business grows -- and the market we're in is a very attractive market -- we anticipate competition over the long term.

And we do see competition from time to time. But we continue to have very strong win rates against both incumbents and some newer players. And we're particularly strong in customer-facing applications that have an impact on the growth of the business. So when a customer wants to improve their customer experience by delivering great software performance and they want an easy-to-use platform, we have a very strong attachment and win rate.

Sanjit Singh

On the financial side, you guys were actually free cash flow positive this quarter. And I apologize if you already spoke to this earlier in your script, but I wanted to understand if there was any sort of one-time items that sort of reduced free cash flow this quarter? I understand your comments about the margin in the free cash flow trajectory going forward. I just wanted to see if, in this quarter, if there was anything there. And sort of related to that, the sales and marketing expense, you look on a year-over-year basis, that came down quite a bit. So I wanted to understand some of the growth rate dynamics on the sales and marketing side as well?

Mark Sachleben

Sure. In terms of the free cash flow-positive result, there were a couple extraordinary items. The was about $3 million of long term deferred, that we spoke about on a previous call, that had a very positive impact on the quarter's results. There were also some expenses related to FutureStack that translated into this current quarter and so that helped last quarter's result as well. If you look back over the prior couple quarters, we were hovering around $1 million to $2 million of a loss in operating cash flow.

This quarter, we were very positive. It put us positive for the first three quarters. What we're seeing is a nice, attractive trend of improvement and we expect to see that continue to go forward. And in fact, we have forecast -- or be have talked about being operating cash flow positive for FY '17. There's going to be some variability on the way, so any given quarter could be up or down a bit. And in fact, this quarter, we mentioned that we to expect to go to a modest loss. But I think overall, the trend is very attractive. We're seeing positive economies and scale from our sales and marketing operation.

We brought a new CMO in, Robson Grieve and we talked about him coming on, I think, a quarter or two ago. And we're taking a look at our spending and how we spend what we do, how we can be more efficient. And we're seeing some good results from that and I think that is helping our overall performance.

Operator

The next question is from Michael Turits with Raymond James. Your line is open.

James Westman

It's James Westman sitting in for Michael. Hilarie, could you just give us some more color around your initiatives when you were talking about FY '17, about going after the low end in a low-touch manner? Any additional color you can give us there?

Hilarie Koplow-McAdams

Yes. I think Lou and I will probably comment on this. What we see is a huge greenfield opportunity in the market. And the reason we feel it's so strong is that there are a lot of potential customers out there that have chosen non-consumption. They have applications that are important, but they haven't thought much about the monitoring value proposition and really how that drives customer experience. So we want to do some experimentation on the low end. We see this, we have a large -- or thousands of thousands of light users of our product which is essentially a premium offering. And we know that our flagship offering, Pro, is probably a big step up for them. We think there is something in the middle that really can hit the sweet spot. So we're going to be experimenting with that as we go forward in FY '17. I think from a big picture perspective, we know that we're only on 1% of all servers, so we think the big TAM out there is enormous for the Company. Lew, do you have a comment?

Lew Cirne

Yes, that is exactly how I think about it. The prior question about competition, while we don't want to ignore the companies that are in our space, I think our real competition are these poor unfortunate people that can't see into their software because they're not doing anything. So our competition is non-consumption, as Hillary says.

And I think a lot about ubiquity. And I feel like if we had a ubiquitous product that has the right packaging and the price point for the right various segments that we want to serve -- and that's pretty much every segment over a long term -- then we're going to build a really interesting and high-impact Company. So packaging and pricing falls into that, thinking about where people are running their workloads and where they will be running their workloads. Obviously, the move to the cloud is a big deal. And the strength of our position in cloud environments is something we're going to leverage. So that helps you, hopefully, think about how we're thinking about growing that way.

James Westman

That is, and then just a quick follow-up on the comments around the strong installed base sales. Hilarie, it seems like those came above your expectations. I just wanted to see if they were and if you had any color there? And then with the net new customers this quarter down versus the previous quarter, do you guys feel that it's just a move to quality or are you seeing something else maybe, like competition or just greater penetration in the market driving those lower net new adds?

Lew Cirne

I'll let Hilarie kind of fill in on the first part of the question. But the second one really is, look, our first goal is to build a quality Company with a quality finished model, where we're not going to just chase a number of customers. We want the right customers paying for the right product at the right price point, so we have great lifetime value. So efficiency of customer acquisition is something we really, I think, made good strides on. And you've seen that in many of the numbers we reported. But that having been said, as we run these experiments on packaging and pricing, I think there is an opportunity to really pursue a whole segment of customers that aren't using anything and that will impact those numbers over the long term.

Hilarie Koplow-McAdams

In terms of the expansion rate across the installed base this quarter, I wouldn't say I was surprised. It's seasonally -- it's customers' year-end. So seasonally, that's when you see a lot of expansion opportunities, where people spend their year-end budget expanding their positions. I think the thing that we're really delighted about, one of the attributes that we're seeing across our customers, is the rate at which they are acquiring not just our flagship APM product, but the add-on products. And you heard Lew talk about Insights which, we know when a customer uses Insights -- and we have talked about this on past calls -- that they have a very large engagement, number of people engaged in using New Relic.

And when we look at our largest customers and we look at our big market customers, the piece that really delights us is the number of people using New Relic. We see hundreds of people across these enterprises, sometimes north of 500, looking at New Relic on an active basis. If you look at -- we've talked about this in the past. Gardner had a study about the APM category and they said, historically, it was about three people in a company would look at APM statistics. We think this really proves out that we have a big position across companies of all sizes and that we're delivering on this concept of ubiquity across our platform. So in some ways, that's probably the surprise -- the rate at which we're seeing uptick across the user base within a given account.

Operator

The next question is from Brent Thill with UBS. Your line is open.

Michael Turner

This is Michael Turner on for Brent today. You've talked a lot about the importance of being a multi-product Company in the past and appreciate the color from Lew around Insights and quarter-on quarter growth there in the past. Given metrics around percent of revenue from non-APM or growth in multi-product customers, I was just wondering if you had any additional color or updates that you might be able to provide for us there as well?

Lew Cirne

You know, the color we're providing this quarter around is that more than half of our revenues come from multi-product customers. And so there are many ways to express that we're pleased with our transformation into a platform Company that offers multiple products to solve the whole problem for our customers. Our vision is to be the first, best place to look to understand your digital business. That is what New Relic wants to do for our customers. And depending on the specific environment you're in, that might require two, three, four, five products from New Relic. We're just going to deliver all the products you need to be the first, best place to look to understand your digital business. And it is resonating.

Michael Turner

You know, you touched on a lot in the last question, but you talked a lot about focus of reps on the right accounts and efficiency of customer acquisition being important to you. Just wondering if you have more commentary on sales rep productivity or any comments on metrics or trends you might be looking at there? And any additional color or feedback you could give is helpful there.

Mark Sachleben

We're pleased with the productivity we're seeing. We've had the enterprise team now for I guess about two years. And we continue to be seeing good ramps. And there's always room to improve, we want to do that, but the uptake and the ramp rep rates are great, the productivity is very good. And then across the SMB, a similar story. So I think we're continuing to build out the team and were doing it in a way that we believe makes sense and that is efficient and that will continue to be attractive growth at top line, but also be attractive on bottom line as well.

Lew Cirne

Michael, my comment on this is, I think the most effective way to drive sales and marketing productivity is through awesome products, right? So we can't take our eye off the ball on just making products that customers love and making them better every quarter, so that our sales and marketing teams have a relatively easier job of converting people who love what we offer, to buy more and tell their friends about it. So that's how we think about our Company. And Hillary certainly is super-important as the sales and marketing go-to-market lead of the Company, but I want her job to be just to take this awesome product people love to as many people as possible.

Operator

The next question is from Jesse Olson with Goldman Sachs. Your line is open.

Jesse Olson

Hilarie, you've talked about this a little bit, as far as introducing experimental pricing to go after the SMB base that hasn't been converting to the approach here. How do you balance the risk of cannibalization versus up-selling that cohort?

Hilarie Koplow-McAdams

The way we see it, the greatest risk is non-consumption, so I don't see this as a cannibalization risk. As I mentioned earlier, we have tens of thousands of customers on our light product that we think are great potential targets for a well-placed package at the right price point, to bring them into the franchise. I think the other piece of this -- it really goes back to this non-consumption question. There are so many organizations around the world of all sizes that are not consuming a solution like ours. As the market becomes savvier to the importance of the digital experience, I think this market will come to us. But we want to make it really easy for them. So I don't think we're concerned about that. I don't know, Lew, if you want to add any comment?

Lew Cirne

We certainly asked the question -- we want to design our packaging so that we have the right price for the right segment and we're not hearing a lot of pushback in general from the high end of our customer base about our pricing. We're a very high-value product there, at a very reasonable price. But what we have on our side is data, right? We see everything our customers do with our software, because we're the only pure play cloud Company in our space. So that data informs the decisions that we make, using products like New Relic Insights, that help us package the products in the right way, so we service the right segment at the right price point.

Jesse Olson

One question that I've been getting a lot lately is exposure to tech and who has exposure to tech and to startups. Can you give us a sense out of your paying accounts, out of your MRR or ARR, what percent is tied to tech, if you can?

Mark Sachleben

You know, we have a broad base of customers and I think one of the beautiful things Lew has mentioned about this model is that it is diversified and it can withstand the ups and downs. Tech is one of many sectors that comprise our total business. I don't think any individual segment is more than 15% or so, 15%, 20% of our business. And so I think that the tech exposure to us is modest in terms of the risk going forward.

Operator

The next question is from Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron

Hilarie, I wanted to dig into the productivity comment. Maybe you can separate the productivity between the SMB sales force and the enterprise. How many people or what's the percentage or at least qualitatively, how many of your sales people in each of those businesses is hitting quotas versus not hitting quotas?

Hilarie Koplow-McAdams

Well, we don't actually share that level of detail, but what I can tell you is, we're really satisfied with where we're. As you know if you've followed New Relic over the years, we've expanded our sales force, with a lot of focus on enterprise coverage and up-market, mid-market coverage. We've been able to attract really good people to the Company and we expect that they have a -- particularly in the enterprise, where it takes time to get through some of the technical toll gates that customers like to go through. We expect there to be a bit of a ramp for our new employees and we've been really satisfied with how they are making that ramp.

Ittai Kidron

Okay. And can you comment about turnover? Clearly it is very competitive all around you, especially in the city. How do you handle that? How you think about your turnover? How has it changed in the last, let's say, couple of quarters?

Hilarie Koplow-McAdams

We haven't seen a material change in regrettable or non-regrettable attrition. It has been very consistent. I think it goes back -- when we talk to our employees who are helping customers with the transformation that they're driving, they're really passionate about the kind of change process that they are driving with customers. So it's a very mission-driven sales rep and technical engineer that sits with that sales rep. And so they very much believe in the platform that we're delivering to customers. They recognize that our Software Analytics solution, Insights, is a huge differentiator, because we give customers real-time access to what's going on. So we just haven't seen any kind of change in attrition.

Ittai Kidron

Okay, very good. And lastly, Mark, a couple of questions for you.

Lew Cirne

And the flip side of the thing, on the flip side of attrition, of course, is attracting great talent. And the best sales reps I've ever recruited, what they focus on is just a product customers love. And we've got that and so that's a big part of why I think we attract great talent into the Company on the way in.

Ittai Kidron

Mark, a couple of questions. You know, you tried to give a little bit of framework for 2017. I just want to make sure I've got this right. You talked about the 1,000 basis points improvement in margin. That means fourth quarter 2017 over 2016? Am I getting that correctly?

Mark Sachleben

That's full-year 2017 over full-year 2016.

Ittai Kidron

So, okay, is the big part of your guidance right now for 2016, you have an applied operating loss margin of 23%, that means you're expecting a 13% loss in 2017? It just seems extremely aggressive.

Mark Sachleben

You know, we're comfortable with it. It's the first time we've given some forward guidance like that. But we see the operating efficiencies in the business and so that's what we're heading toward.

Operator

The next question is from Scott Zeller with Needham & Company. Your line is open.

Scott Zeller

Getting back to the two points earlier about the new revenue initiatives going down-market to low-touch and also the public sector, could you remind us when you may see that impact revenues?

Hilarie Koplow-McAdams

It's hard. This is Hilarie speaking. It's hard to know when we'll see that impact. Our early days in the public sector have been very successful. I think most of you are aware of the success that we had with Healthcare.gov and we're expanding our position across many of the federal agencies. We recently announced a relationship with TerraSoft, a federal re-seller. They are helping us get scale in that market. And we have initiated a lot of work to certify ourselves for the FedRAMP which is a certification level that is very important to federal agencies. So we're very hopeful about the future, but it is pretty hard to predict when we will see the payoff on that.

Operator

The next question is from Derrick Wood with Susquehanna. Your line is open.

Rakesh Kumar

This Rakesh Kumar sitting in for Derek, you guys saw a significant uptick in dollar net expansion rate this quarter. What are some of the factors driving that and how should we think about this metric going forward?

Mark Sachleben

I think that just speaks to the attractiveness of the platform and our expansion business is thriving. It also is helped by the fact that we have been moving up-market and we've been more penetrated in the enterprise. There's generally more room for expansion in the enterprise. We've had five products in the market now for several quarters. So we're getting better at penetrating the market and their sales team now has a couple quarters under their belt selling those. And so I think it just speaks to the great penetration and the willingness of customers to accept the platform.

Lew Cirne

What we've said in previous quarters and I think it's worth repeating, is that, this is a number that we expect to bounce around more than other metrics we disclose. It is a quarter-to quarter number, whereas some people report a similar looking metric, but it is kind of a blended average over trailing four quarters or something like that. So that's why it has had a pretty substantial change from the last quarter. But we have kind of guided 120 to 130 range in the past, right, Mark? Is that roughly --?

Mark Sachleben

Well, we don't guide to it. We have been bouncing around in that range, in the 120 to 130 range.

Rakesh Kumar

And if I could just squeeze one more. You announced more focus on the public sector. I was wondering if there are plans to focus on some other significant vertical that you are more interested in?

Hilarie Koplow-McAdams

We have vertical strategies that we have been employing already. I would say, if I were to identify what the big spear-heads are for next year, it is in our continued international expansion which I had talked about a little bit earlier. And public sector to aid these agencies which are often driving government-to-citizen application experiences and really want New Relic to help them understand how successful they are being at that. But those are the two that I would probably highlight.

Operator

There are no further questions at this time and this will conclude today's conference call. Ladies and gentlemen, you may now disconnect. Thank you.

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