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New Relic Inc  (NYSE:NEWR)
Q2 2019 Earnings Conference Call
Nov. 06, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Relic Second Quarter Fiscal 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Tony Righetti of Investor Relations, you may begin your conference.

Tony Righetti -- Investor Relations

Thank you, operator. Good afternoon and welcome to New Relic second quarter fiscal year 2019 earnings conference call. Joining me today are New Relic's Founder and CEO, Lew Cirne; and CFO, 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 our earnings release issued today, as well as the risks described in our most recent Form 10-Q and subsequent filings with the SEC.

Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, but note that these measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today.

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

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

Lewis Cirne -- Founder & Chief Executive Officer

Thanks, Tony, and good afternoon to everyone joining today's call to review New Relic's second quarter fiscal 2019 financial results. I'm pleased to report second quarter results that exceeded our guidance ranges, with revenue of $114.9 million, an increase of 36% from the prior year, and non-GAAP operating income of $9.7 million, an improvement of over 1,200 basis points year-over-year. These top and bottom line results along with another quarter of steady sequential growth in enterprise ARR and accounts paying more than $100,000 are outcomes of the investments we made to further penetrate enterprise and mid-market customer accounts around the world. Overall, we continue to build on our momentum from last quarter throughout Q2 as we maintain a relentless focus on becoming the dominant DevOps platform for monitoring, managing and operating digital systems.

Sales execution during the quarter was outstanding and underscored by record non-APM bookings, which totaled more than 40% of new ARR. Once again, New Relic Insights and New Relic Infrastructure led the contributions with at least 10% from each product. We feel this demonstrates the advantage of being an application-centric 100% multi-tenant software as a service platform. Let me explain.

Being application-centric places us at the most strategic layer of the digital stack, the closest to the customer experience. Visibility into this complex layer is paramount for our customers looking to drive top line growth for the digital investments. We do this better at scale than anyone in the market. Now it's really interesting today is that our target customers are rapidly adopting modern technologies at the infrastructure layer.

Micro services, server less computing, containers and cloud computing, all of these technologies and service of running their application code and it's critical that they have complete visibility, all the way from the mobile application or browser through the application running in the cloud and down to the underlying infrastructure. New Relic uniquely connects all of these data points into a single platform, in essence, our non-APM products work in concert with our APM product to provide a valuable holistic view of our customers' entire environment.

From a go-to-market perspective, we continue to believe our greatest opportunity lies in activating the segment of the market that is not currently using a monitoring platform which is as we covered on previous calls is majority of software in production today. Our investments in sales capacity are heavily skewed toward the activation and expansion of enterprises and driving ubiquity among developers, operations professionals, and business executives responsible for enterprise side digital transformations.

We believe the return on incremental investments made in our customer solutions team over the past year had more than favorable impact and is reflected in the highest Q2 dollar net expansion rate since fiscal 2013. When you're factoring the significant ARR our growth of our installed base during the same period, a 124% dollar net expansion rate at our scale is quite an achievement and it underscores how valuable our customers find our offering.

At a high level, our customer solutions teams have been having success by focusing on three common yet critical technology initiatives that every company encounters today. The first cloud adoption to enable teams to have more autonomy in scaling their infrastructure. Second, DevOps to offer teams greater agility to deliver great products to market. And third, delivering a flawless digital customer experience to build their digital brand and impact their bottom line.

By aligning our go-to market efforts with these foundational components to digital transformation, cloud, DevOps and digital customer experience, we are activating the non-consumption market by reaching new buyers. And because we're attaching ourselves to their most strategic growth initiatives, we are driving larger deals with broader product adoption, which is illustrated by the quarter end totals for enterprise ARR now at 56% of our business, as well as in accounts paying more than $100,000 per year, which grew at 34% year-over-year and now stands at 786 accounts.

One of our enterprise customers that is consistently modernizing to stay ahead of the media industry is USA Today Network, which is having their digital moment of truth tonight, election night. They join me on stage at our FutureStack event in San Francisco and we discuss how their team have prepared for peak traffic moments like tonight, in order to share second by second updates with their readers as election results come in.

Inside the USA Today Network war room, New Relic dashboards, help their team monitor the customers' experience on mobile, browser and video-on-demand. On election night and every day, USA Today network is deeply focused on the integration of technology and business performance metrics. They have turned the New Relic's a rich data to provide insight throughout their business, monitoring everything from modern technologies like Kubernetes, beginning visibility into their advertisers' performance on over 100 media properties. USA Today Network differentiates itself by delivering superior content and a modern digital experience and New Relic underpins the technology innovation at the core of this strategic effort.

In ongoing customer journeys such as this is a natural outcome of product fit, sales capacity and market demand alignment. In order to capture more of these opportunities, we have set an aggressive hiring plan for fiscal '19 and added a record 235 team members in the first half of this year. The bulk of these hires and those forecasted for the second half of the year are designated for areas that have shown the largest returns, namely customer solutions and sales reps, as well as key product development hires. We continue to work hard to bring in world-class talents throughout the organization.

In closing, we are excited about the continued prospects of growth for our platform. We see no end to the trend of software being used more and more often to improve business outcomes from driving revenue, to increasing productivity, to building brand value. Our multi-tenant SaaS model has the flexibility required to provide our customers with meaningful value to these continuously evolving modern digital applications. This drives an opportunity for us that is much larger than application performance management as we help our customers understand and connect data points from across their entire environment.

In this scenario, our application-centric strategy positions us favorably within the technology value chain to continue moving up market and capturing an outsized share of the growing multi-billion dollar market for monitoring, managing and operating digital systems.

I will now turn the call over to Mark to provide more color on the financials.

Mark Sachleben -- Chief Financial Officer

Thanks, Lew. During today's call, fiscal year 2019 financial results are presented under ASC 606. A reconciliation table to prior years results under ASC 605 is available in the earnings press release accompanying this call.

Now I'll turn to the financials. Revenue was $114.9 million for the second quarter, up 36% year-over-year. We ended Q2 with 786 paid business accounts, paying more than $100,000 per year, up 34% compared to a year ago. This growth represents both new accounts landed, as well as install base expansion derived from increased usage, expanded application coverage and the cross-sell of additional products.

Our dollar base net expansion rate in Q2 was 124%, which is a slight uptick from the year ago period, an encouraging result given increase in our installed base over the same period. At the end of Q2, enterprise business was approximately 56% of ARR, up from around 51% as of the same period last year.

Our total paid business accounts remained over 17,000, relatively flat again sequentially. This metric is expected to continue to fluctuate moderately in the near term as we focus resources toward opportunities upmarket within our installed base and optimized for economical growth at the low end of the market. That said, beginning in fiscal year '20, we will only provide fiscal year end updates to this metric.

Turning to our geographic split. US revenue of $78.3 million for the quarter was up 35% year-over-year, while non-US revenue for the quarter grew to $36.6 million, up 37% year-over-year. Non-US revenue represented 32% of revenue in the quarter.

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

Gross margin was 85%. For the full fiscal year, we expect gross margin to decline modestly to ramp 84%, driven by expanded capacity in our US data center and our new European region. With regard to operating expenses, sales and marketing costs were $54.9 million compared to $47.2 million in the same quarter last year. R&D expenses were $19.8 million compared to $14.8 million in the same quarter last year. G&A costs were $13.4 million compared to $11.8 million in the same quarter last year. Overall, we had another strong hiring quarter, and as we stated earlier, we expect hiring in Q3 and Q4 to be robust as well.

Operating income was $9.7 million or 8% of revenue, compared to an operating loss of $3.5 million or negative 4% of revenue in the same quarter last year. The outperformance to our second quarter expectations was primarily the result of revenue upside, non-linear start dates and new hires, and the larger portion of expenses being capitalized than anticipated. Overall, our net income attributable to New Relic per diluted share was $0.20 compared to a net loss per basic share of $0.06 in the same quarter last year.

Turning to our balance sheet. We ended the second quarter with approximately $731 million of cash, cash equivalents and short-term investments, up from last quarter's $721 million in total. Elsewhere on the balance sheet, our total deferred revenue ended the quarter at $191 million, up 55% year-over-year and 4% quarter-over-quarter, which compared favorably to our guidance range by approximately $14 million.

One contributing factor to our deferred revenue result was a two-year expansion deal with existing million dollar ARR paid business accounts, which included full payment upfront. This deal increased non-current deferred revenue by roughly $8 million. As we look into Q3, we anticipate deferred revenue to increase on a percentage basis in the mid-single digits from Q2.

Turning to cash flow. Cash from operations was $7.8 million. Free cash flow defined as cash from operations minus capital expenditures and capitalized software was a $600,000 outflow. For all of fiscal year '19, we continue to expect cash from operations to be between $70 million and $80 million, and free cash flow to be between $30 million and $40 million. We now expect fiscal CapEx to be $40 million to $45 million, up from earlier expectations of $35 million to $40 million, primarily due to office build outs later the consolidation of our San Francisco offices and additional data center capacity.

Now I will turn to our outlook for the third quarter and the full fiscal year 2019. For third fiscal quarter ending December 31st, we expect revenue to range from $118.5 million to $120.5 million. We expect non-GAAP operating income of $3.5 million to $4.5 million. This will lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.12 to $0.13. With the full fiscal year 2019, we now expect revenue to range from $466.5 million to $469.5 million, an increase from our prior guidance of between $457.5 million to $462.5 million.

We expect non-GAAP operating income of $22 million to $24 million, an improvement from our earlier guidance of between $18 million to $22 million. This will lead to non-GAAP net income attributable to New Relic per diluted share in the range of $0.42 to $0.48, an improvement from prior guidance of between $0.39 to $0.46, As our guides indicates, we expect headcount and CapEx investments to ramp up in the second half which result in full-year operating margins at the upper end of the expectations we signaled at the time for our Q3 fiscal '18 earnings call of low to mid-single digits.

And with that, I would like to open the call for questions. Operator, please go ahead.

Questions and Answers:

Operator

(Operator Instructions) And your first question comes from the line of Derrick Wood from Cowen and Company. Your line is open.

Derrick Wood -- Cowen and Company -- Analyst

Great, thanks. Nice job on the quarter. I wanted to ask on the net revenue retention rate that you've seen now five quarters of year-over-year improvement on that -- on that calculation, what are the drivers behind why this is getting better? Is it really just the mix of enterprise going up or is there something within the enterprise that is also trending higher, whether it's renewal rates or up-sells, et cetera, maybe give a little bit more color.

Lewis Cirne -- Founder & Chief Executive Officer

Great question, and I do think it's a multiple factors that are driving that the improvements that we're delighted to see. First is yes, the enterprise mix is now 56% of our run rate and of course as that increases, enterprises has much more demand and we're just such in the early innings of our enterprise journey within these customers that there is just much more upside in those accounts and so, that helps immensely.

And then, what we're also seeing as a secular trend in our market is a desire to standardize on a single platform to see everything. So our enterprise customers are frustrated with having to switch between multiple tools to have a comprehensive view of what's going in these digital environments, they want to standardize on a single platform and they love that our platform is application-centric is easy to use a software-as-a-service, it works well, and so that makes and give them more confidence to increase their spend and we think there's great opportunity in front of us.

We're delighted that our average customer spend was about $26,000 per year, $26,500 per year per account. That's wonderful news and that is up substantially again this quarter, but just think how much more room that has to run, that's still only lower 2,000 a month for customer and we believe we deliver much more value than that to our enterprise customers, our potential is. So there's a lot of room to run.

Derrick Wood -- Cowen and Company -- Analyst

Great. And I guess just a follow-up to that, I think that you guys have been focused on adding more technical people or SE's to support quota carrying reps and carry this -- how much that's impacting deal sizes or sales cycles or overall sales productivity, is it too early or you starting to see the impact of that?

Lewis Cirne -- Founder & Chief Executive Officer

Well, we are seeing enough to know that we are on the right track and again it relates to your -- the way we're answering that, because our customers want to standardize on a single platform to see the entire environment, the more completely they understand the breadth and depth of our platform, the more successful although we'll be doing that and more comfortable they will be stepping up the larger investments. And so that makes obviously makes life easier for our quota-carrying reps.

And so -- and that's been the thesis and what we're seeing so far is that thesis is bearing out into results and that doesn't mean that we're done with that work, there is more to do there, but our goal is to get our customers to completely understand the full potential of this incredibly sophisticated platform and when they do, they step up to investing substantial amounts in our platform, because we deliver substantial value.

Mark Sachleben -- Chief Financial Officer

Yeah, Derrick, this is Mark. I'll just jump in on that. Our best customers are our most educated and the ones that know us best, and we believe that and hiring those -- more and more of those technical folks is a great way to help educate our customers.

Derrick Wood -- Cowen and Company -- Analyst

Great. All right. Great job on the quarter. Thanks.

Operator

And your next question comes from the line of Sterling Auty from JP Morgan. Your line is open.

Ugam Kamat -- JP Morgan -- Analyst

Hey guys. This is actually Ugam Kamat on for Sterling. So I just wanted to dive deeper into the multi-year deal that you signed with a customer. As you penetrate enterprise and that becomes a larger portion of business, are you seeing more interest from the customers to lock in multi-year and should we consider this to be like a normal course of business going forward or is this just a one-time item?

Lewis Cirne -- Founder & Chief Executive Officer

We have more of a one-time item. I would say what we see is -- we see customers and you can see in our enterprise space, our customers are stepping up their expanding, but generally speaking, our customers still -- enterprise customers still pay us annually upfront and occasionally we'll take -- we'll get a deal as multi-year, but that's relatively rare and we don't necessarily push for that and I think that's not a direction the market's going generally.

Ugam Kamat -- JP Morgan -- Analyst

And as a follow-up, can you talk about the Japanese joint venture that you announced in your press release. Any impact to financials or any other go-to-market partnership that you have with them?

Lewis Cirne -- Founder & Chief Executive Officer

It's very early days as you know we just announced that relatively recently. So we think the impact in the short-term is going to be very modest, but we're very excited about that opportunity. We've got a great partner that we're in that joint venture with and we look at that market as being very attractive. We have a fair number of customers already in Japan, but we think in order to really penetrate the market, to really penetrate enterprises like we would like to do and like we think we can do, we felt it was best, we are best served going -- going at it with a partner and thus we set up that joint venture. So long term, we think they can -- we have great expectations for that venture, but the short-term impact, we think will be very modest.

Ugam Kamat -- JP Morgan -- Analyst

Okay. Thank you so much guys.

Operator

And your next question comes from the line of Jack Andrews from Needham & Company. Your line is open.

Jack Andrews -- Needham & Company -- Analyst

Good afternoon and thanks for taking my question. I was wondering if you could talk about how -- if there's an update in terms of how things are going with your IBM partnership and then maybe just what the potential implications could BTU given IBM's pending acquisition of Red Hat?

Lewis Cirne -- Founder & Chief Executive Officer

Sure, so we've been fortunate to partner with IBM for quite some time and that they are also a substantial customer of ours and I think that's one the reasons why the partnership is going so well. They have a deep appreciation of the breadth and depth of our platform, and what can do for them, because they -- some thousands of IBMers use our software to deliver on their digital projects. So the partnership is going well and we feel like they're are going to help us, in particular, reach certain enterprises that may be more difficult or expensive for us to reach on our own.

We think Red Hat -- the Red Hat acquisition, the interesting thing about that to me and I remember talking to Arvind a bit about this, about his vision of Switzerland of being like this independent or service provider that helps people on their journey to the cloud. And in a way, we service Switzerland in our particular space too in that. Our customers value the fact that an independent company is providing the visibility and monitoring they need as they run more and more workloads in multi-cloud environments.

They recognize that in order to be success with the cloud, they have to measure it and it makes supreme sense for the measurement to come from an independent party from the platform itself. If anything there's just to draw, a little bit of apparel view to that, we run great in Red Hat environments, many of our customers run their workloads on Red Hat. So we believe that there is just only more technical synergy as it's result of the combination of IBM and Red Hat.

Jack Andrews -- Needham & Company -- Analyst

Great, thanks. And then, can I also just ask -- what type of interest you're seeing in terms of the New Relic developer program you discussed at FutureStack, I mean, I'm just wondering if there's specifically an appetite for companies who maybe or not currently New Relic customers, but they do want to use the same APIs and tools that you're using to develop your own software whether this could essentially service another, I guess, lead generation mechanism for you.

Lewis Cirne -- Founder & Chief Executive Officer

Well, the way I think of the New Relic development platform is, it really came out as observing our customers and frankly ourselves even, but every customer I visit, particularly enterprise customers, staff small but small teams to build the internal tools to round out the complete visibility of what they need to see in the production environment, because particularly in enterprises, every enterprise customers something unique and how they report or what they do that also requires a bit of custom development.

We recognize that there is so much in our platform that could accelerate that custom development to help our customers provide that complete solution to see exactly what they need to see, measure exactly how they want to measure it, presented exactly how they want to present it to evolve from being a tool to being a solution.

And so we wanted to -- we begun our journey on making that -- making it possible for DevOps and internal developers at our customers to customize New Relic to become that full solution, rather than have to reinvent the entire wheel on how to collect and analyze in present performance data. So that's the vision developer platform, and while it's early days, it's resonating with our customers and we believe that -- it's laying the groundwork for something that we think will result in much healthier and stronger customer relationships, higher value that we're doing for our customers and ultimately better economics in the long run.

Jack Andrews -- Needham & Company -- Analyst

Great, and thanks for taking my questions.

Operator

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

Fatima Boolani -- UBS -- Analyst

Good afternoon. Thank you for taking the question. This is Fatima Boolani on behalf of Jen. Maybe a question for you Lew around the non-APM bookings contribution that continues to be very strong. And I want to better understand if there's specific incentives you're giving the sales organization in the form of quota retirement or additional kickers to really be able to sustain that level of non-APM level contribution. And then I have a follow-up as well, if I may.

Lewis Cirne -- Founder & Chief Executive Officer

Sure, no, we are not introducing any incentives or steps or anything of that nature to incent our customers or our sales reps to drive specific skews. This is a pull from the market, what we are -- what we are responding to is the market demand to go from a collection of tools to a unified platform. And so often customers first discover new relic because of our world-class and leading APM product, but then they recognize, hey, I would love to see other stuff in addition to the application performance and health. And so it's an easy conversation for our sales reps to have to explain from the breadth and depth of our platform and for them to.

They may start dipping their toe in the water with a product like Insights, but then they quickly see how powerful that product is, and they grow their investment in that product over time, the same can be said for our other products. So it's great, because it's organic and natural this in alignment with where the market demand is that's very helpful.

Fatima Boolani -- UBS -- Analyst

That's very helpful. And Mark, maybe a question for you on the deferred revenue. I appreciate you sort of walking us through the one-time nature of the outperformance on the long-term side. But if I think about the multi-quarter effort around user pruning, if you will, the SMB or lower level customer base. Can you help us think about sort of the go forward inputs into the complexion of deferred revenue, those types of lower economic customers that fade out of the model and you increasingly move up market and penetrate more and more into the enterprise? Thank you so much.

Mark Sachleben -- Chief Financial Officer

Sure. So mentioned the one-time $8 million benefit that we had this quarter on the multi-year. In general, you go back a few years ago and you've -- we had a significant SMB base that paid us monthly and that over the last few years, that's been changing, so that we have our enterprise business is much bigger now and even the high end of our SMB and commercial business, many of those customers have migrated to paying annually. So over that period of time, we've seen a drift upward in our -- for the first couple years is more than drift, but it's a climb upward, but we've seen the upward drift in our duration.

At this point, really starting, I think probably a year or so ago we mentioned that most of those impacts had run their course. At this point, we generally have -- we will see that -- we'll see durations increase but very slowly as our business mix shifts, but we don't see any real meaningful impact on deferred, because of the duration and the timing of the difference in the SMB versus enterprise customers. That said, there are every quarter, there are puts and takes about early renewals and -- or someone renewing next quarter or co-terms, things like that. We tend to -- that's when we tend to caution around using billings.

Our deferred revenue billings is too big an indicator of underlying the health of our business. It's getting better, but there's still a lot of puts and takes in that number. We tend to highlight the ones that are most meaningful each quarter, but we think we'll get better over time. But again, it's still -- there is still some oddities to it every quarter.

Fatima Boolani -- UBS -- Analyst

Very clear. I appreciate the color.

Operator

And your next question comes from the line of Gray Powell from Deutsche Bank. Your line is open.

Gray Powell -- Deutsche Bank -- Analyst

Okay. Thanks for letting me to ask question. So maybe just a couple again. Starting off -- in a high level, how do you feel about the pace of demand as calendar 2019 approaches. And then, do you see any changes in the macro environment or about cloud migrations or anything at all that could influence growth in either direction?

Lewis Cirne -- Founder & Chief Executive Officer

It feels as strong as it has been historically. The demand is there, the demand is rich, enterprises recognize that, in order to be relevant and to win in their various areas of business, they have to succeed with digital, it's not an option, and it's increasing their brand. And so that's driving immense demand for cloud computing. It's driving them to adopt DevOps and it's driving them to invest in digital customer experience. So those are the three themes that we attach ourselves to when we go to our customers and help them succeed in each of those. So that's largely unchanged and that is healthy, and we feel like we're certainly not constrained by market opportunity for the foreseeable future.

Gray Powell -- Deutsche Bank -- Analyst

Got it, OK. And then a major competitive question. So as an APM player, just moving into the infrastructure market, what you feel is your biggest advantage versus an infrastructure player that's moving into the APM space?

Lewis Cirne -- Founder & Chief Executive Officer

We believe that the whole purpose of infrastructure is to run applications. You don't buy a computer unless you want to run software on it, and we believe the hardest, most complex thing of the production environment is the software, especially if it's custom software. The thing that changes most often in the production environment is the software. In fact, as I just stated earlier, businesses are competing on how effectively they succeed on digital, in order to succeed on digital, you actually have to change software as rapidly as possible.

Like I talked about USA Today Network on election night, they spoke on stage a year ago about how on the election night two years ago, they were literally changing production in real-time as the election results reporting in, in order to respond to what they're seeing in real time. And that's what helped them deliver a flawless election night two years ago for their customer experience.

And so if you think about your change -- you are not changing your infrastructure at that rate, right. So infrastructure visibility is very important, but we believe the harder and more important problems to solve is the application. And so we've got a clear market leadership position in there. It's where the most business value is, it's where the most complexity is and then we've rounded out with the relatively easier problem to solve of watching all the various pieces of infrastructure that throw off some data.

And so, it's not to be too dismissive of the -- of the technical challenge of monitoring infrastructure. We're investing a lot in it, but we believe it's worth kind of working downhill from a -- whereas a company or a technology that is infrastructure-centric, moody application, they're going uphill.

Gray Powell -- Deutsche Bank -- Analyst

Got it. That's very helpful. Thank you very much.

Operator

And your next questions come from the line of Rishi Jaluria from DA Davidson. Your line is open.

Rishi Jaluria -- DA Davidson -- Analyst

Hey guys, thanks for taking my question. I guess, let me start, Lew, as you talk about your value with APM and infrastructure and all the different products as you expand it to -- you talked about how New Relic's value prop is kind of having everything all together on one common platform. Let me ask that log management, because that's kind of to me another area that's tangential to what you're doing, you're partnering now with the likes of Splunk and CMO and whatnot on that, but why not have a log management product of your own if that value prop kind of sticks out and having it on one platform versus partnering in? Then I've a follow-up for Mark.

Lewis Cirne -- Founder & Chief Executive Officer

Sure. So what we've done to date is prioritize our product roadmap on what we feel like has been the most important problems to solve for our customers that leverage our strengths and capabilities, and then partner in places where there are complementary sources of data that can further round out the visibility story. And of course logging -- log messages are a complementary source of data that we believe support the primary source which is what's going on in the applications. We believe we collect the primary data and then we augmented with some secondary data that come from log management solutions and we partner with many log companies. So that's where we stand today.

We're continually asking our customers where they'd like us to go next. We recognize there are many interesting adjacencies and it's just a little too early to say which adjacency will pursue next.

Rishi Jaluria -- DA Davidson -- Analyst

Okay, great, thanks. And Mark, more of a housekeeping question, but you saw a pretty big benefit from 606 this quarter, especially relative to last quarter, I think about 3% on the operating margin side. Just how should we thinking about what sort of benefit you're getting from 606 for the rest of the year until we head into FY '20 and this hopefully doesn't matter anymore then? Thanks.

Mark Sachleben -- Chief Financial Officer

I'm trying to think what we've said historically. I think we talked about coming to the year, we talked about it being couple of million dollars a quarter and I think that's probably be going to be fairly consistent throughout the end of the year. The big benefit for us is on the commissions. The fact that we now capitalize them and so sales commissions tend to be a little bit larger in the third and fourth quarters, particularly with the enterprise focus we have. We are at -- you know that those quarters tend to be relatively strong. So we'll have a slight uptick, I would say in the 606 benefits as we get into Q3 and Q4, but I don't think it's going to materially different than it's been in the first half of the year.

Rishi Jaluria -- DA Davidson -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from the line of Sanjit Singh from Morgan Stanley. Your line is open.

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. This is actually Keith Weiss sitting in for Sanjit. Given -- given Mark's warning not to look too closely at billings. When we look at current billings and adjust for like long term deferred, we still see your business doing extraordinarily well and if anything perhaps accelerating from sort of what we saw over the past couple of quarters. I wanted to ask two questions along that line. One, is there anything kind of turning on in the business. Anything that you guys could point to that that's materially getting better that could be leading to that acceleration or is at least sustaining really good growth at scale.

And then two, more broadly on the competitive environment. There was a lot of discussion over the past quarter, particularly around the IPO of Elastic about a more competitive environment out there for you guys in the overall APM space. But what are you seeing in reality? What's kind of like a view on the ground? Is the competitive environment really changing very much for you guys?

Lewis Cirne -- Founder & Chief Executive Officer

Well, the first question Keith, it's great to speak with you again is, we'd say what's really kind of cranking for us or it's showing a lot of strength that is turning into business results we're very proud of is, in particular, the enterprise capacity. You recall when we went public that was very early days that we had a small number of enterprise reps and we had to build an enterprise brand, an enterprise sales motion, the capability to support them and grow those accounts. And we're never done on that journey, but I think it's pretty clear, especially 56% of our business being enterprise. We've demonstrated our ability to execute well there and succeed there and that's working well for us.

And yeah, we're just so early into an enterprise opportunity. We see that there's plenty of growth in front of us if we continue to execute. Part of that is competing effectively. I think that the other thing that's really been a great tailwind for us is, we were very disciplined about our commitment not to have an on-premise offering. I can't tell you how many deals we've said no to five years ago, that would have said, if you can only build non-premise New Relic for me, then we'll bring you one and we felt like that would be short, you might give us some short-term benefit, but we will regret it over the long term.

We're glad we had that focus and that discipline to do that, because the market is now moved from a -- move to a place where they only consider on-premise offerings when they do RFPs, many of these enterprise customers, particularly if it's a modern workload running in a cloud environment. So that all works in our favor, particularly in the APM space.

And then, as we go forward, we think being application-centric matters a lot to our customers. We believe running at our scale is a big deal for our customers, our ability to support our customers. And their digital transformations is quite well differentiated from our competitors offerings. So there's plenty of reason for us to remain excited and confident in our competitive position and there is no deal we don't feel like we can win, particularly if it's running in a modern environment.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That's super helpful. Let me if I sneak one in for Mark and related to that enterprise motion, now becoming a much, much bigger part of your overall business. Can you give us an update or some additional color on how you guys are seeing sales productivity trending, any kind of sort of milestones you could give us on how that's been ramping up over the course of the year?

Mark Sachleben -- Chief Financial Officer

I think as Lew said, it's been -- it's been a great journey for us. We've learned a lot, we continue to learn a lot in terms of how best to hire, how best to ramp reps and what to look for as we bring on board, everything from making territories and to how we structure the teams. So I think those are things that we continue to learn, but those are things like we feel like we've gotten better at, and so as we've done that, we see productivity increasing, some of that comes from just duration of the sales team. Obviously, your first 10 reps you hire with a one-year average duration is pretty low. They are not that productive as you get to the point right now, we aren't growing that team pretty quickly, but percentage wise it's not nearly what it was in the early days. And so the duration starts to increase as you -- as long as you can retain folks and those durations lead to nice productivity gains.

So we've still got work to do here, but we're comfortable where -- with where we are. You can tell by the focus we've had over the last couple of quarters on investing in technical support, technical services and technical personnel to supplement the reps. We feel good about those kind of investments. So I think we're -- as we said, I think we feel good about what we've accomplished, I'll be the first to admit, we've got plenty to learn, still have a lot to do.

Keith Weiss -- Morgan Stanley -- Analyst

Thanks, Mark. Thank you very much guys and great quarter.

Operator

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

Steve Koenig -- Wedbush Securities -- Analyst

Hi, gentlemen. Thanks a lot for taking my question. So I was really intrigued by your comment Lew at this near the start of the call or you talked about aligning your go-to-market efforts with the customer needs around cloud adoption, DevOps and customer experience. And you said, thereby activating non-consumption market by reaching new buyers. So there is a lot, I sure there's a lot in that statement, can you maybe just unpack that a little bit for us, what kinds of buyers are not consuming that you're reaching more of now or any other aspects of what they're calling that non-consumer market right now?

Lewis Cirne -- Founder & Chief Executive Officer

Yeah, so let me clarify that a bit. I think primarily it's not necessarily new buyers and sort of different roles, it's more there are so many applications still today running production that do not have any APM products in place. And so the Gartner statement or something like was at 5% growing to 20%, they have application workloads it's up 5% today or was as of -- when they said that about six months ago and growing 20% over the next several years. So that's just such a massive opportunity in front of us just know, we believe we're a big part of driving that growth now you -- when we survey our customer advisory board, you know it's the vast majority of their production environment is deployed with APM, because we're democratizing the category. This isn't something that people should choose to put on some other applications, it just should be standard, just like every drivers should have car insurance right shouldn't just choose that car insurance for one of for 5% of the population.

And so the reason why we're democratizing the category is our products are easy to use and they are cost effective to deploy, and we figured out a way to do that in a profitable way with industry leading margins, right. So that's -- we're going to leverage those strengths to democratize the category and recognize that's a massive growth opportunity for us.

Steve Koenig -- Wedbush Securities -- Analyst

Thank you. And that suggest that your Customer Advisory Board is in the vanguard, I mean, the early adopters in this way, democratizing of the category. What are -- just my last follow-up question, what are the attributes of the early adopters that should give way to increasing mainstream adoption of the other APM and more specifically of SaaS type APM?

Lewis Cirne -- Founder & Chief Executive Officer

Well, these are the types of companies that were the earliest adopters of cloud technologies. These are the first company to recognize that the more effectively they compete on software, the more successful the whole business will be. These are the companies that bought into digital as a strategy that will drive the top line of the companies. The T-type of people that think of playing offense with technology. Technology is a top-line can enable top-line growth as opposed to just reduce the cost of operating in the back office. And so that mindset 5, 10 years ago with a bit of vanguard is becoming more mainstream and that's why so many companies are moving to the cloud now, but people have that mindset and tend to adopt New Relic -- adopted New Relic earlier and more completely adopt New Relic today.

Steve Koenig -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Michael Turits from Raymond James. Your line is open.

Robert Majek -- Raymond James -- Analyst

Hi, this is actually Robert Majek on for Michael today. As you go from 5% to 20% application workload penetration over time, how do you see pricing evolving, just so we can get a sense of the potential revenue growth from that?

Lewis Cirne -- Founder & Chief Executive Officer

You know I would say we are continually running experiments with pricing, a little experiments here and there to use that as a way to fully optimize our business. When we first launched our product, we offered a dramatically less expensive product and that opened up a much larger market opportunity that grew the oversize of the APM market. So if we believe -- if we have enough data to suggest that adjustments to our pricing, it can help to grow our top and bottom line substantially and really redefine the space to our favor, then we'll consider that.

But we'll always do that with a lot of experimentation and thought and certainly discipline around in anything that might impact our financial model. As it stands today, we are a value-based solution even though we've got attractive pricing, we always sell on the value, and the customers who adopt New Relic can understand and -- are serious with their digital operations, you know, they see the value and that's reflecting in the dollar and expansion rate.

Mark Sachleben -- Chief Financial Officer

Yeah, I guess I can just add on there that we want to make it easy for our customers to consume New Relic. And a couple years ago, we introduced now our cloud friendly pricing, we were the first to come out with something like that where we offered another way to buy. So that we've bought something was -- it was neutral to New Relic but just made it a lot easier for customers to deploying New Relic everywhere. And when we think about pricing, we think about really account spend and how we can optimize the dollars coming from an account. Our per -- I guess, if we look at our gross margins, they are very attractive. We want to maintain those, but we think over the long term, what we want to do is we want to see customer spend more because conversely that will be getting a lot more value out in New Relic and will become more important to them.

Robert Majek -- Raymond James -- Analyst

Thanks. And then maybe just one more for me. Can you just give us an update on what you're doing to expand internationally?

Mark Sachleben -- Chief Financial Officer

Sure. So we mentioned the joint venture in Japan that we just set up. Otherwise, we continue to expand in Europe, as well as Australia, APAC business headquartered in Australia continues to grow. Our strategy internationally tends to be relatively focused. I think we are -- I would say somewhat conservative in terms of entering new markets. We like to see a pretty good path to a market where we can deploy resources and deploy them effectively and efficiently before we really jump into a concrete -- and so with our customers all over the world.

But when it comes to really focusing on a country, we can look at what customers we have already in the base. We can look at that market, then we'll go after targeted countries where we'll put feet on the ground, including both sales and technical resource. And so we continue to do that primarily, in the near term, it will be primarily in Europe but we're investing. Overall, we're investing internationally. We expect that to be a good driver of our growth going forward.

Robert Majek -- Raymond James -- Analyst

Thanks a lot.

Operator

And your next question comes from the line of Erik Suppiger from JMP. Your line is open.

Erik Suppiger -- JMP -- Analyst

Yeah, thanks for taking the question. I want to come back to the sales expansion. How -- what kind of expansion percentage wise in sales force are you expecting over the course of fiscal '19 and what assumptions are you making in terms of the time required to reach full productivity for your new hires?

Lewis Cirne -- Founder & Chief Executive Officer

So we do not disclose the specific growth rates of the team or the size of the team, but obviously we've put a path to billion dollars out there. March 22, we want to be $1 billion run rate. And so you can imagine, we're growing our sales team fairly aggressively to help us get toward that target. And for our enterprise sales reps, we assume about a year to four quarters to productivity. For the commercial and SMB teams, it's a little bit quicker than that, but generally those are the guidelines.

Erik Suppiger -- JMP -- Analyst

Can you comment how your growth this year would compare -- in the sales organization would compare to the growth that you made last year?

Lewis Cirne -- Founder & Chief Executive Officer

Not getting into specifics, I mean, that gets to a question around productivity as you can imagine. If productivity stays the same, obviously your sales capacity has to grow basically the same rate as your top line. We're investing in sales resources, aggressively as well. So I don't want to get into many of the details there.

Erik Suppiger -- JMP -- Analyst

Very good. Thank you.

Operator

And your next question comes from the line of Keith Bachman from BMO Capital Markets. Your line is open.

Analyst -- -- Analyst

Thanks it's Cheung Patrick(ph)on for Keith Bachman. A question on international opportunities. You talked about Japan JV being very modest out, but when can you expect revenue from Germany to ramp in a meaningful way?

Lewis Cirne -- Founder & Chief Executive Officer

We just announced -- recently announced opening in availability zone in Germany, trying to those month or couple months ago I guess, pretty recent. So I think that certainly is a good publicity. I think if you know -- as well as it gets our name out there and so that could help. We do have feel on the ground. We've made investment in Germany, we continue to grow that investment and so we don't give a country breakout of our international business, but we certainly look at that market as being attractive. You can see, you look at the cloud spend there. It's a bit, obviously a big market. So we expect to continue invest there and anywhere we invest, obviously we'd like to see returns.

Cheung Patrick -- BMO Capital Markets -- Analyst

Great. And the follow-up on the competitive dynamics. Are you increasingly seeing Elastic in the competitive process or any change in the type of vendors that you're continuing. Thanks very much.

Lewis Cirne -- Founder & Chief Executive Officer

No, we're not seeing Elastic at all to be honest. It's a great search database. But it's just different enough from what we do and how we do out of the box, you know specifically tuned for performance availability, that's just a very different thing from how engaged in the market. And I would say in general, there's not been a substantial change in the competitive environment. Aside from what I just shared earlier in that, but the market trends toward favoring SaaS delivery, favoring ease of use and favoring a platform that can go beyond just the application to see the entire environment. Those are all things that we think the market is continuing to ask for that further tilts the market in our favor.

Cheung Patrick -- BMO Capital Markets -- Analyst

Thanks very much.

Operator

And there are no further questions at this time. I will turn the call back over to Lew for some closing remarks.

Lewis Cirne -- Founder & Chief Executive Officer

I just want to thank everyone for joining the call and my hats off to the 1,500 Relic's for the exceptional work they've done in delivering a great quarter for our customers and our shareholders, I mean, a great first half of the year. It's obviously an important night in this country and so we're delighted that on election night we're helping USA Today Network deliver great products (ph) experience for those who want to see what's going on in real-time with the elections, so that's great.

And we just encourage all of our customers and partners to come see us at the Amazon Conference, AWS event coming up later this month, where we can meet you face to face and talk about helping you succeed with digital cloud and DevOps. And thanks and have a great evening.

Operator

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

Duration: 57 minutes

Call participants:

Tony Righetti -- Investor Relations

Lewis Cirne -- Founder & Chief Executive Officer

Mark Sachleben -- Chief Financial Officer

Derrick Wood -- Cowen and Company -- Analyst

Ugam Kamat -- JP Morgan -- Analyst

Jack Andrews -- Needham & Company -- Analyst

Fatima Boolani -- UBS -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

Rishi Jaluria -- DA Davidson -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

Robert Majek -- Raymond James -- Analyst

Erik Suppiger -- JMP -- Analyst

Analyst -- -- Analyst

Cheung Patrick -- BMO Capital Markets -- Analyst

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