NEWR (2021 - Q4)

Good afternoon, everyone, and welcome to the New Relic Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in a listen only mode. [Operator instructions] After the today’s presentation there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded. At this time, I would like to turn the conference call over to Peter Goldmacher, Vice President, Investor Relations. Sir, please go ahead. Peter Go

Thank you, operator. Good afternoon, everyone. And thanks for joining our Q4 fiscal ‘21 earnings call. We published a letter on our Investor Relations website about an hour ago, and we hope everyone’s had a chance to read our letter together with today’s earnings press release. Because of the level of detail we provided across these two documents, today’s call will begin with Lew providing brief opening remarks, and then we’ll dive right into your questions. During this call, we will make forward-looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-Q to be filed with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. We’ve reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available there in a few hours. With that, I’d like to turn it over to Lew.

Thank you very much, Peter, and welcome everyone to the call. I think you would all agree there’s a lot of news to share today. And so, we want to leave lots of time to your questions. And I’m going to have a few comments at very end about the really exciting news about the transition of leadership and my moving on to the Executive Chairman role. But, I want to first lead off and talk a bit about the quarter and the fiscal year. As everyone knows, it was a very transitional year for us, where we made bold bets to do transformative things for our Company with an eye towards the long-term success and growth of the business. We have more conviction than ever than ever in that strategy, which really was the brainchild of Bill Staples. And we’re pleased with the progress we’re making towards that. We’re diligently focused on migrating as much of our customer base over to New Relic One model as possible. And as we see customers migrate over, we’re really pleased with how they consume against their commitment and how we believe that will result in a strength in the business going forward. It was a particularly good quarter for products. And we believe that core for all of this is a strong product that will drive usage and consumption, and therefore business growth. And now we’re thrilled that as of the start of fiscal year, we’ve aligned everybody in the Company, including compensation program, with the consumption model that we are fully committed to, which again, we think will bear fruit in the course of the fiscal ‘22. So, with that, we’ll hand it over to you, for your questions.

Operator, we’re ready for questions.

[Operator Instructions] And our first question today comes from Sanjit Singh from Morgan Stanley. Please go ahead with your question.

Thank you for taking the questions. And sad to see you go, Lew. But, I know you are leaving the Company in good hands in terms of the CEO. I know you are being Executive Chairman, but you’re leaving Company in good hands with Phil. So, it’s been great working with you and hope to continue the relationship going forward. My question is sort of really on kind of the path forward from here, and particularly as it relates to sort of metrics, because I think I understand the business model transition. So, two questions. Maybe earnings letter talks about 59% of the base being transitioned to the new model, when do we expect that to be fully transitioned? That’s number one. And then, second on metrics. It seems like we’re moving to net revenue retention, as you sort of say, a backward-looking metric. What is the metric that we should be focusing on? Is it something like RPO that gives us, and what forward-looking indicator of about how the pace of the transition and hopefully, underlying growth starts to improve over the next several quarters?

So, the investor letter talks a bit about the transition to the New Relic One pricing. We’re at about close to 60% as of the end of March, and we’re looking at being over 80% at the end of fiscal ‘22, so a year from March. So, at that point, we’ll be pretty well done other than we do have contracts that are multiyear agreements where those will time out, and as they expire over the next couple of years, they’ll transition to consumption billing. So, we’re very pleased with the fact that we’ve got more than half of our business now on the consumption model. And by the end of the year, we’ll be getting to effectively the whole business there. So, that’s good news. In terms of the metrics going forward, it’s really all about revenue. And then, that’s why we talked about net revenue retention. And internally, we look at all sorts of metrics, as you can imagine. For us, it’s really about accounts, users and data, primarily users and data. That’s what drives our top line. But internally, as a company, we are all aligned around growing data and growing users. And so, that’s what we’re very focused on. In terms of the externally-focused metrics, it’s really about revenue and the net revenue tension. So, that’s what we encourage folks to look at on. And we think it’s going to be really the most telling indicator of our business. And as we’ve talked about in the letter, we’re facing a headwind at this point as we make this transition. But, we’re looking at the back half of the year, and we’re confident that revenue will start to reaccelerate in the back half of the year.

And if I could just follow up on that last point. Given that as you say that there’s still a transition as it relates to revenue growth over the next couple of quarters, wouldn’t it make more sense to share some of those internal data around paid users, data consumption just for investors to see that -- this trend line to see how the -- sort of the progress in terms of executing on the business model position, understanding that revenue growth in the near term is going to continue to be under pressure?

Yes. So, we’ve given some of that data in the investor letter, talking about data growth. And we talked about -- we talk about the data growth year-over-year and how that has been expanding. And I think it was in the -- went from roughly 70% year-over-year to 80% in the low-80s over the last 12 months. And so, we have given indications of how that data is growing. We also are looking, and we’ve given some numeration around the low end of our business, the self service portion of our business and some of the growth characteristics of that business, which we think are very, very interesting and good data points for folks to take a look at. We obviously want to be -- we’re still in this process. We haven’t had customers complete a full 12 months in the Annual Pool of Funds in the consumption billing yet. So, we’ve got to be a little cautious with what we give out, because we know how those things tend to get extrapolated and things. But, we have given a fair amount of information in the letter about how that’s going.

Our next question comes from Kingsley Crane from Berenberg. Please go ahead with your question.

Thank you. I also want to extend congrats to Bill and to Lew for what you’ve built New Relic and for now leaving the Company in new capacity. Two questions. One is on the -- some of the comments you made in the letter about spend contribution from users and data. You’ve said you’ve seen 65% users, 35% data. You’ve also said that you expect this to return to 70-30, but it also may go to 60-40, and it may affect gross margins. So, just some clarification on where you see this trending and how it might affect gross margins would be helpful.

Sure. So, it’s roughly two-thirds, one-third. I think it depends a little bit on how -- on the customer mix. Larger customers tend to be a little bit skewed more toward -- more heavily toward data than users. And at the lower end, they can be more skewed a little bit toward data than -- I’m sorry, users than data. We put two-thirds, one-third out there. In our longer-term models, we’re looking at 70-30 as being the likely case. On the other hand, we want to let folks know, to the extent we’re very successful in attracting even more data than we’ve assumed, then that could push that closer to 60-40. In that case, it would have a modest impact on gross margins. But, we think that would be more than worth it, given the increased data would inevitably drive the top line higher.

Okay. That’s fair. Thank you. And then, second would be, in the letter you call out that you anniversary the model transition in the back half of this fiscal year and you expect a reacceleration in growth. Your guidance implies 6% to 7% growth in Q1 and 6% in fiscal year. So, how should we think about the transitional headwinds as we progress through this year?

So, we continue to face headwinds as we’re getting through the next two quarters. We’ve got Q1 and Q2. We introduced this new program last August. So, at that point, we’ll have our first cohort of customers that just is anniversarying. And so, at that point, we’ll have a full year book behind us. And then, as we look out at consumption -- we look out at the trends we’re seeing, we’re confident that revenue will accelerate in the back half, starting in the second half of the year, Q3 and then Q4.

Our next question comes from Rob Oliver from Baird. Please go ahead with your question.

Great. Thank you, guys. And I apologize for any background noise here. Bill, congratulations to you. And Lew congratulations to you, and it’s been fun working with you over the years. My question is on the state of the sales force right now. I mean, you guys asked your enterprise sales force to completely change the way they sell. And just curious now, particularly coming into the New Year about the state of the sales force. How they’ve responded to the change in the pricing model? How they’re executing on that so far? And if we’ve seen all the changes that we -- if all the changes that have been needed in the sales force have all been made?

Yes. Thanks for that question. This is Bill here. I’ll take that one. We spent the first month of our fiscal year, so the month of April, in a lot of sales enablement training, onboarding to the new compensation model for them, spent a lot of time talking through the shift to consumption, the value that holds for customers and the best ways to engage customers to help them solve their business problems. Universally, the feedback that I heard out of that sales training and enablement was very positive. I think, it really changes the nature of the relationship that our sales relationship managers get to have with the customer, shifting away from these more competitive, negotiation type conversation to really how can we solve your business problem? How can we put New Relic to work with you, and then, unlocking that value with the customer, which drives consumption now fully aligned with their compensation model. So, it’s really a win for the customer, a win for our sales team. And I’ve seen a lot of enthusiasm and engagement by the sales organization on the new model. So, yes, I think we were off to a great start, the first months, six weeks of the quarter are looking good, and looking forward to seeing the progress throughout the year. As Mark said, completing that transition from 60% of our customers in the model at the end of Q4 to well over 80% by the end of the fiscal year.

Our next question comes from Robert Majek from Raymond James. Please go ahead with your question.

Great. Thanks. And congrats to Bill and Lew. It looks like your injection volumes were generally flattish from November to February as I saw the chart, but then picked up in March. And I know in the letter, you talked about seeing some green shoots around engagement. Is the pickup in March an example of that? And should we expect a smoother ramp-up from here on?

The data volumes, I think they did level off around the holiday season and November, December and into January; it was a little slower of upstart. That’s pretty typical seasonal pattern that we see a lot of the ramp-up to the holiday season, and the observability work that happens before Black Friday, in anticipation of those spikes in volumes. So, there is some seasonal leveling off during the holidays. And we had a bit of a slow ramp-up. I think we chalk it up to COVID and some of the variation there. I think, though, we have seen an uptick in data and indefinitely in engagement. Since then, the investor letter goes into some great detail in terms of the innovation in Q4 as well as the impact that’s had on user engagement, increasing the number of users and the frequency with which to engage. So, that hypothesis that we had, that data with -- increased data would lead to increased users is showing up now. And we’re excited to see both of those grow, although there will be occasional seasonal variations like we have.

And can you go into more detail on the renewal churn you’re seeing? Does it have to do with hesitation around the new consumption model, or is it indicative of a more competitive environment? You gave us a few examples in the letter, but if you can elaborate more broadly on what you’re hearing from customers, that would be helpful.

Yes. A large part of that is the fact that we are now no longer focused on commitment. And so, our focus is getting folks on to the new model. And so, it’s collaborative -- if they’re -- we want them to commit to whatever level of spend they’re comfortable with. And then, once they do that, that’s when the work starts. Okay, let’s get them consuming, let’s get them consuming more. And so, I think that is -- that’s been -- when you look at the old metrics of ARR, that’s been a headwind to ARR because we’re no longer focused on that. We’ve been talking about that now for a couple of quarters. And as we get into this year, we’re -- the comp plan -- everything lined around that. So, I think the biggest issue has been us changing our strategy, now being more aligned with customers and being comfortable with whatever level of commitment they want to commit to. So, I think that’s been a big change. I think customers like that. I think it’s better for overall efficiency and getting deals done. And we’ve seen that accelerate the rate at which we can convert customers, right? It’s fewer calories. Less energy is taken now to convert a customer to the new model, now that we’ve gotten away from worrying about the level of commitment. We also have some customers who are just -- who are not comfortable committing to large numbers, even though they know and they told us that they’re going to spend a lot more and they’re committing to. There’s no penalty for that, right? We don’t charge higher rates because they went over their commitments like that. So, we have some large customers who have just said, I’m going to keep spending, I’m going to grow my spend, but you know what, I want to commit to a much lower level. We’re comfortable with that. The critical thing for us will be to watch that consumption like the hawk and make sure that it is continuing as expected. But, those are some of the dynamics that are going on that make that overall commitment level less of an indicator of how things are really going.

And our next question comes from George Iwanyc from Oppenheimer. Please go ahead with your question.

All right. Thank you for taking my question. And congratulations, Bill, and Lew, thank you for your perspective over the years. So, looking at the sales comments that you made, can you give us a sense of maybe the type of person you’re hiring right now? Are you hiring a more technical person to focus on the customer success part of the equation at this point?

Yes. Definitely, the importance of having our technical sales field involved in those conversations on an ongoing basis is more important than ever. And so, we’re hiring there. As well as relationship managers that have a history of nurturing ongoing supportive relationships with customers versus sometimes you see the pattern of more aggressive kind of negotiation type sales leadership with the consumption model really pivoted to focusing on long-term relationships and value realization. And so, those vendors that are more indicative of that model are the ones that we’re recruiting from and also, as you know, a shift to more technical sellers as well as our solution consultants.

So, following up on that, just from a self service perspective, can you maybe give us some color on how you’re shifting your marketing dollars? How you’re leaning on ecosystem partners to accelerate the engagement process of those accounts and users?

You bet. Yes. As you noted, likely in the investor letter, our new self service business is rapidly expanding. That’s a great indication of the strength of the product and the value that customers are finding there as they transition from our free tier into a paid model. We are increasingly -- with the confidence we’re getting there, increasingly shifting some dollars -- more dollars into marketing top of funnel than we have in the past, but I wouldn’t say that it’s being driven out of pure marketing spend. It’s really been much more driven on the brand and the word of mouth as customers, the mind share grows around the New Relic One platform. On the overall signs around Self Serve business, I think, as you may have noted, our total paying accounts for the first quarter in quite a few quarters leveled out, and we see that largely driven by the growth in the Self Serve business and strengthening, we believe will continue and reverse the trend of declining paid customers in the future quarters.

Our next question comes from Yun Kim from Loop Capital Markets. Please go ahead with your question.

First, congrats on -- Bill on the promotion. So, I think you guys are already at least two quarters into the new pricing model. For those customers who have changed over to the new pricing model, how long does it take on average before they reach the revenue run rate that was somewhat same or similar to the old model?

Yes. It’s a good question. And it obviously varies by customer. But, we have been studying over the last 2.5 quarters that we’ve been in that model for the customers who’ve adopted. And what we’re seeing is it takes about a month or so for them to rightsize their consumption based on users and data, the new pricing meters. And then, once that rightsizing is done, the first month usage begins to steadily grow. And as we’ve noted before, starting with data, ingesting more data because of the low cost per gigabyte that we offer, and then attracting more users. And now, we’re seeing both data and users grow healthy for the customers within in the model for several months.

Yes. The only thing I would add to that comment is, it’s interesting. We have two data -- multiple data sets, but one where customers are converting over from the historical model that was subscription-based, host-based pricing, primarily APM driven that we’re migrating to a platform to a consumption model. And then, we have another cohort of customers that is brand new to the New Relic. They came on with the New Relic platform as their only knowledge of New Relic and the consumption model as their core pricing mechanism. And the behavior of the two customers is quite different. The customers that convert over, in their minds, they have a value prop, a legacy spend level. So, they’ll be, in some ways, influenced by what they used to be doing, what they used to be spending, and we’ll see some behavior modifications where it looks like they’re trying to do some gymnastics to fit in that spend or do some things because they’ve got that historic perspective. New customers on the other hand tend to come in and embrace the platform and start to grow data and users right from the get-go. And those -- yes, I think, those growth rates are what we think will be more indicative of the future, once we’ve gotten everyone migrated over and people, again, get out of that historic perspective of a host-based and an APM-only and a siloed type view of the product.

Okay, great. That was very helpful. One of the main goals of the new pricing model is to encourage the use of more of your products and try to have the customers adopt New Relic or the enterprise standard. Are you seeing that trend materialize with those customers who have adopted the new pricing model? Previously, maybe they were only doing APM and maybe a couple of modules, but are you seeing them -- I know it’s only been 2.5 quarters, but are you starting to see at least pilot projects that kind of is leveraging some of the other new products that they previously did not use?

Absolutely, yes. The number of data types and the breadth of adoption we are seeing expand. I think we’ve shared some of that data again in the investor letter and the one previous to this quarter as well. But, very healthy adoption across the platform for customers that move to the new model, although we also launched major improvements to our logging product last month after Q4 ended, and the growth in logging in particular as an expansion in new products in new platform has been phenomenal. So definitely seeing breadth of platform adoption for customers who moved to the new consumption model.

Okay. That’s good to hear. I’ve got one quick question for Mark. Can you remind us what the billing frequency is under the new model? Is it monthly, quarterly, annually?

Primarily, it is annual upfront.

Okay. For the new pricing model, right, the consumption based?

Yes. Yes, for the consumption. And then, obviously, once they hit their commit, then it gets to monthly overages. But, when they make a commitment, most -- the vast majority of our customers are annual upfront. And then, the PAYGO business, the low end is monthly.

Our next question comes from Michael Turits from Keybanc. Please go ahead with your question.

Hey, guys. Lew, of course, congratulations to you on everything you’ve accomplished. One for Mark, one for Bill. So, for Mark, if there is a, let’s call it, an accounting or model headwind to revenue growth, makes that not representative right now. First of all, do I understand that it’s the difference between consumption as we go versus what were a higher level of commit and therefore a tough comp at this point, so we’ve got anniversary. And can you normalize for that in some way to let us know at least based on current trends, where what might emerge and we see anniversary that from a growth perspective?

Well, in the old world, we would have gotten an upfront commitment at the time of renewal, right? We would have gotten, say, a 15% or 20% uptick in committed spend. And so, on March 31 someone does that and then they -- we start -- recognize that subscription on April 1 at the higher level. In the new world, they migrate over at that existing spend. And so, on April 1, there’s no difference from March 31, right? April revenue is the same as March revenue. It’s only when consumption increases and gets to the point where that consumption looks like it’s going to be higher than their historical commitment where we start to recognize incremental revenue. So, that tends to be pushed out a little bit. And I would say, it’s pushed out a couple of quarters on average. It depends on a lot of things. But I would say that’s kind of a decent proxy. And so, you do have this -- a time of commitment instead of getting the initial immediate bump, you do have a delay. And now on the flip side, historically, a lot of our customers would have been overconsuming before the end of their contract period was up. And they would just get away effectively with overconsuming until the renewal period. At this point, we’ll actually capture some of that in the period in which they’re consuming, because it’ll be more closely -- revenue will be more closely tied to their actual consumption. So, initially, there is that headwind, but then we catch up in the back half of the year.

And can you -- do you feel if you can take a shot at normalizing to see where we emerge in terms of growth past the anniversary?

We’re looking at all sorts of numbers and trends around that. We’ve given out guidance, our revenue guidance for the year. Certainly, our long-term goal that we talked about is to get back to market rate growth. And so, we want to be able to do that. But, it’s hard to -- it’s kind of apples and oranges trying to compare the two over the next one or two -- couple of quarters.

If I could a, Bill, question, Bill question is, you’ve pursued a -- I wonder how things are going competitively in the sense that you pursued maybe more focused and defined monitoring and observability strategy around -- you’ve expanded into logging metrics, traces, et cetera. But some of your competitors have gotten broader than that. Looking there’s the workflows, security or are part of larger organizations like, the observability, Splunk [ph] is broader. So, how do you feel like you’re doing competing against what looks like a field that is approaching things from a broader strategic perspective?

I wouldn’t characterize it as a broader strategic perspective. I feel really good about our competitive position, honestly. The bulk of our opportunity is greenfield, although when we do come up against competitors, we’re seeing some phenomenal wins again against some of the leading vendors. And our strategies are fundamentally different. While they may be expanding into, say, security, as you’ve mentioned, we’re increasingly moving other directions. And the product roadmap, as Lew noted, this quarter in Q4 was phenomenal. I’m really excited by where we’re going to take observability in FY22 and the roadmap ahead. You’re going to see continued innovation and differentiation from New Relic One, not chasing taillights of competitors and some of the things that they’ve already chosen to do, but really charter our own course, which we think is most valuable for customers.

Our next question comes from Erik Suppiger from JMP Securities. Please go ahead with your question.

Yes. Thanks for taking the question. And congratulations, Lew. First off, on the consumption model. What is the sales compensation like? Is it just a regular renewal that the salesperson gets on the commitment, then they get paid on the consumption piece on a monthly basis, or how does that look? And then, secondly, can you update us where you are in terms of the transition off of AWS?

Sure. So, on the sales compensation, we pay on -- is 100% on consumption. So, it is users and data, and that’s the dollar run rate basically of the consumption of their customers. So, every month, you have a patch and you look at what the consumption of your patch is on the first of the month. You look at what your consumption is on your patch on the last day of the month. And the change, the increase is how you get paid. You work on out quota by getting that consumption to increase and you get monthly compensation on that. So, that’s the sales compensation. On the migration to AWS and the cloud that is going well. As we noted in the letter, the gross margin in Q4 was impacted by some spend that had shifted from Q3 as well as we had a reclass of some expenses from two -- from R&D expense to our COGS line. But, that is going well. We expect gross margins to take a dip in Q1. And I would say, likely Q1 will likely be the -- where we have the -- into the 60s, a little bit lower gross margin. And then, we expect them to start climbing to get back to the low-70s for the year. And we do expect gross margins to climb up into the 80s as we continue this migration through the end of -- back to the 80% range, I should say, as we continue the migration into fiscal ‘23. In fiscal ‘22, we expect about a $40 million hit to our COGS and bottom line because of the double bubble, if you will, the migration expenses, the fact that we’re carrying still the legacy cost, the cost associated with our internal data center, as well as driving our business to the cloud. So, that’s a substantial headwind in the year.

Our next question comes from Sterling Auty from JP Morgan. Please go ahead with your question.

First, Bill, congratulations. Lew, not only congratulations, but thank you for all the years of innovation that certainly has benefited all of us. So, thanks again. On to the business, I’m curious with the new pricing model, can you give us a sense of the type of industry and the type of users that you’re seeing the greatest traction with? So, in other words, is there a particular kind of trend that you’re seeing and the type of companies and the type of users that are attracted to the new model?

On the industry, I don’t -- I think it’s across industry. I don’t see much trend in terms of where we’re more successful than others. In terms of the type of user, type of engineer, New Relic historically has been very attractive for developers and those who adopt our APM solution that requires often involvement with deploying our agents with the code. But increasingly, as well, we’re seeing, given our stronger product offering with logging and infra and other solutions, more breadth adoption across IT, so enterprise and operators embracing New Relic One as a platform. So, broadening into SRE and more of the operators space as well.

If I could add one detail. It is a little bit of a trend, though, we called to it in the letter. Our pay-as-you-go business is remarkably strong. And why I think that matters is, that is pure product and it tends to be ahead of where larger enterprises go, because smaller companies can be more nimble. So, the fact where we see such a rapid growth in the number of pay-as-you-go customers exceeding our expectations and the fact that the growth in the numbers of pay-as-you-go customers that go above 25,000 with no direct sales involvement, that’s a testimony to the amazing product that really built and transformed in the last year and a bit, just driving business growth. And our hope is that that also shows up broadly across the whole business in a similar way over the long term.

Got it. And then, as a follow-up, I wonder if you could revisit the user versus data mix contribution. I guess, I wasn’t clear. Where do you think that settles out over the long term and why?

So, I guess, I would say rough numbers, two-thirds, one-third. And that is -- we want to drive that, obviously, the higher the user count for us, the better as a percentage, given gross margins, that’s a much higher gross margin on our user base than on the data. So, it does depend on our customer mix. We think, overall, our customer mix is going to be, I would say, if anything, shifting more toward smaller and medium-sized customers as opposed to the large enterprises. We’ll get plenty of those. But, if you look at where we are when we’re at $2 billion, if you will, it’s -- that mix, I think, is such that we’ll be probably a little bit more skewed toward the higher user count and lower -- as a percentage of the total. We do push data. And so, if we’re really successful in pushing data, then we could see that number drift below -- or above a third. And it could go as high as 40%. And again, that would be great in our minds, because we think that’d be a leading indicator to then getting more users later on, so. But, I think, roughly speaking, I would say think two-thirds, one-third as a decent estimate.

Our next question comes from Jack Andrews from Needham. Please go ahead with your question.

Thanks for taking my question. And I’ll echo my congratulations to Bill and Lew. I wanted to ask a question on the partner side of things. Could you just talk about how your channel of MSPs and systems integrators have absorbed this consumption-based change? And are they fully educated on the change, or what is kind of -- the feedback that you’re getting from that group?

Yes. Our MSPs have been lagging, I think, where our sales team has been, the shift to consumption of the new pricing model packs them as well. And the self service tools that are needed to support them have not been fully available. And so, I’d say, it’s been lagging. But, it’s an important area of investment for us that we’re prioritizing for this fiscal year and expect to help us to accelerate growth in the coming quarters ahead.

Okay. And then, just I want to ask a higher-level question, which is just, how do you think about elasticity of demand in this market when you’re weighing, I guess, price versus users and data. Do you think that you’ve found the sweet spot here, or do you think there’s maybe opportunities to perhaps further optimize what you can potentially capture in terms of data and market share?

Yes. It’s a good question. We’ve been asking ourselves out lately and doing some studies with external vendors around price elasticity, now that we’ve been in the market for coming up on the anniversary in July. We think it’s a good time given we pioneered this model, kind of introduced and set the price to check in and getting some really valuable data, and we’ll be making any necessary pricing changes as a result of that. I think, it’s a bit too early to share the specifics on what might change, but it’s definitely something we’re looking at and want to be able to maximize our revenue share, as a result of the attractive pricing model that we’ve introduced.

[Operator Instructions] Our next question comes from Derrick Wood from Cowen & Company. Please go ahead with your question.

Thanks. And congrats Lew and Bill, and good luck on the next chapters. Maybe first, Bill, can you give us a little more color on the go-to-market restructuring that you guys announced and kind of more specifically what you’ve done? And one of the points in the press release was that you believe productivity levels are higher in a consumption model. So, could you just flush that out in terms of why you think that’s the case?

Yes. Thanks for asking the question. Yes, as we noted with restructuring, our -- as you probably know, our sales and marketing spend has been much higher than our peers historically, and we feel like this change really sets us up to be both more competitive but also really aligned with the strategy and focusing our sellers on driving consumption versus those upfront commit. I think the traction that we’re seeing also in that self service space, think of that as not just validation of the product and a very highly efficient adoption model, but also really highly efficient customer acquisition channel where those customers come in are getting value. They want to increase their spend, as we noted in the investor letter, are seeing a number of customers going beyond $25,000, even $100,000 in spend and those become highly qualified and engaged customers that our sales team that engages and expands. And so, the efficiency really comes by reducing and focusing that go-to-market notion on consumption. And coupled together with that product-led growth our self service model really is the complementary benefits that we’re seeing play out there. So, I think this sets us up well for FY22. As I mentioned earlier, beginning again to grow paid accounts overall. We’re going to see that expand as we believe and also continue in the back half of the year, as Mark alluded, to see accelerating revenue growth as well.

Yes. Okay. That makes sense. Thanks. And one for Mark, the 100K account number was down sequentially for the first time. It sounds like most of that’s due to the shift off of subscription contracts. But any -- can you just tell us how churn has trended during this model transition over the last couple of quarters? And I think you may have mentioned a couple of losses in the quarter, but if you could give a little more color there.

Yes, sure. So, when we talk about churn, historically, we’ve talked about churn and thought about churn as churn is any time someone goes from a certain level of spend to a reduced level of spend. And that’s what we’ve talked -- and that was churn, right? It was a downgrade. In our new model, and we want to just be careful about how we’re talking about things, churn is if a customer goes to zero and they churn out of our business, that obviously is really bad. We want to prevent that and do everything we can to prevent that. And I think a lot of the go-to-market restructuring work we’re doing is aimed at that, making sure people are engaged, if they’re engaged, they won’t turn out, they’ll be using. And so, when we look back, what we’re seeing is some customers are reducing their spend. Sometimes that’s a bad thing. Sometimes it’s a fine thing, right? They are going to continue to consume. It’s all around consumption. So, I think we just want to be thoughtful about how we use all these terms. But, when we look back at the trends we’ve been seeing, one of the big reasons we went to this model last summer was that we felt like we had too many customers who were stuck on APM only as New Relic customers, and we knew that wasn’t a long-term win for us or for the customer. And we had too many customers who -- so many times where we felt like the customer really wasn’t getting enough out of our solution, and we felt that was a big change we had to make to drive different results. And that resulted in the platform introduction, New Relic One introduction last August, which the product obviously changed dramatically, but also our go-to-market motion where we’re changing and we’re driving, we’re compensating our reps on consumption. Now, reps have an incentive to be engaged with customers on a monthly, if not weekly or daily basis. They want to be making sure that customers are doing that. So, we’ve made all these changes to try and address what we felt like was a churn number that was above where we wanted it to be. And so, as we get into this year, we’re confident that that is having good results that we’re getting more engaged with our customers, that customers are adopting more of the platform and that we’ll be able to improve the number of customers who leave New Relic and our overall downgrades and churn numbers, we’re confident that we’ll be able to improve those as we go through this year.

And our next question comes from Keith Bachman from Bank of Montreal. Please go ahead with your question.

Hi. Thank you very much. Mark, I want to see if you could offer any color on -- given the platform that you have today and the new pricing model, how do you see the dynamics of growth driven by new logos versus existing customers?

Sure. So, our business is going to be primarily driven in the short term by expansion of existing business and consumption increases from existing customers. No doubt about that. Those customer -- that base can grow modestly and it dwarfs the net new that we get in as a -- for new customers. A new customer for us is someone who we define as someone who comes in and goes from not paying us to paying us. And the vast majority of those customers come in at the PAYGO at the Self Serve pay-as-you-go threshold where they are a free tier customer. They migrate to paying. And we can -- you can see in the -- we’ve talked about, you’ve seen the letter of information around how they grow, they get to the 25K or so threshold in annual spend. And then maybe they become a sales opportunity, and then we grow from there. So, the first couple of dollars are new and the next, hopefully, millions that we get from that customer are all expansion. So, the vast majority of it is expansion. On the other hand, what we are very focused on is the number of new customers we get in. And that’s what we really -- when you think about our new business, we look at the metric -- key metric there is how many new customers we’re getting in. And the secondary metric is how much committed spend and consumption are we getting in from those new customers. So, hopefully, that addresses it.

Yes. And so, that’s what I wanted to follow up on is, the majority of your new dollars are still going to come from existing customers. You’ve only had two quarters, so really it may be a bit premature. But, how do you see your growth driven by the consumption model associated with your new customers? Previously, we used the term net expansion, but you don’t want to use that. But any kind of conjecture or guidelines you might be able to provide about -- given the new consumption model, how you think growth is going to trend with your existing customer base?

Well, we’re keeping a, as you can imagine, a very close eye on these numbers. We look at all sorts of different cohorts of customers that have transitioned, how are they growing new customers, how are they growing? And what we speculated were seeing to be the case where after this initial period, customers tend to increase data consumption first. And our data price is very attractive. And I think customers -- customers recognize that. And so, they say, you know what, it’s pretty cheap. I’m going to put some data in there. And so, the data growth starts. And that’s what we see early. And then, that drives the user growth a couple of months down the line. And then, I think that’s what we’re hoping for and expecting is that’s somewhat of a virtuous cycle. New users come on and they bring in more data. And so, we’ve seen early indications of these trends happening. And we’re pleased with the numbers we see. But, we want to get a little more time under our belt before we start talking too broadly about them or take them to the bank.

Yes, understood, understood. Okay. I’m going to try to sneak one more in. Just on the channel. The question was asked previously. Mine is a little bit broader. But, how do you get mindshare you think with channel partners? And what I mean by that, how do you make sure that the channel is making at least comparable money working with New Relic based on the new consumption model? I just wondered what your tactics are to try to make sure you retain channel mindshare as you’re going through this multiphase transition.

Yes. When we think about channel partners, obviously, the opportunity in it for them has to be equally compelling as it is for our customers. And so, we’ve been working through the arrangement in how they are able to both price and sell the consumption model as well as benefit from it, and then, also working on a product road map that can support that from a self-service experience perspective, so that they can onboard customers and support the customer as well. I think the opportunity is there, especially we’re seeing in the EMEA and APJ markets the need for that partner channel -- demand for the partner channel as a sales level is increasingly clear. And as I’ve mentioned earlier, we’re going to be investing there in FY22 to expand that channel and support those partners.

Okay. All right. Well, best of luck to all. Many thanks.

Okay. So, I just want to -- I know we’re about out of time for questions, and before I hand it to Lew, I just want to say a couple of other comments about things that have come up. And one is on our outlook for the year. I mentioned the $40 million double bubble spend we have hitting gross margin. We also have a change to our commission accounting. And if you remember, 606 a couple of years ago, we all went from expensing commissions to amortizing them. In our case, it’s over generally three years and the bulk of commissions were amortized. Now that we are moving to a consumption-based model and a sales commission plan that’s based on consumption, we are actually going back to expensing commissions in the year in which they’re earned, the period in which they’re earned. And so, that’s going to be in the $35-ish million of a hit to our sales and marketing expense line this year. That is not a cash item, so. But, you’ll see that in the numbers and still want folks to be able to model that out accurately. And then, the only other thing, comment I would like to make is around visibility. And I’ve heard a number of comments from folks over the last couple of quarters about visibility and whether or not how visibility changes with the move to the consumption model. And visibility, I would look at it as being just about as good as for a consumption company as it is for a subscription company. The reality is we’re looking at our customers and how they’re consuming on a daily basis now. And in the old model, you did have a commitment for one year, but then that year, they could upgrade, they could downgrade. And a lot of times, you didn’t necessarily have good visibility to what was going to happen there, where as we’re in a consumption model, we’re paying much closer attention to this. And these trends generally don’t really change dramatically from one period or one data the next, one week the next. You can look at historical trends and actually gain quite a bit of confidence in terms of outlook going forward. And so, we’re in unique period right now. We’re in the midst of a transition. So, I would say that does have an impact. The near-term visibility, I think, for the quarter is very good. But, as we -- and it will get better over the course of the year for the longer term as we get through the transition. There is some -- as we said a couple of times, we want to wait until we get to the one-year period, we see the anniversary and see behaviors at the end of the contracts and at the anniversary date before we get too far ahead of ourselves. But, I just want to point that out because I know that’s been a question on people’s minds. And it is something that we feel like over time consumption model will continue to afford us very good visibility into the revenue outlook. With that, I will hand it over to Lew.

Okay. Thank you very much. And thanks to everybody for your questions on the call and in particular, I’m personally touched by the kind words that were shared by most of you. Just as a founder -- every founder, they dream for their company to have success. When I started New Relic nearly 14 years ago, I exceeded my highest hopes to get to where we are today. And yes, like any other company, you really help hope that your company outlast you. And at the right time, when there is a time for next leader that that person matches and aligns with core values. And that’s so true in the case of Bill. So, I’m thrilled that Bill is going to be in this role. I’m also personally excited to code again every day and focus on innovation. I think the New Relic One platform is an innovator’s dream. And so, there’s more to be done there, and I hope to contribute in that way as well as being the best helper and advisor and confidant Bill could have as CEO. So, I truly believe we’re just getting started, and that all of the hard work we’ve done in the last year is now ready and well set to bear fruit, especially with such strong leadership from Bill, starting on July 1st. So, thank you all for your time today and for your interest in New Relic. And we are excited to continue on our noble mission.

Ladies and gentlemen, that will conclude today’s conference. We do thank you for attending. You may now disconnect your lines.