Logo of jester cap with thought bubble.

Image source: The Motley Fool.

New Relic (NYSE:NEWR)
Q1 2021 Earnings Call
Aug 04, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the New Relic first-quarter fiscal-year 2021 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Peter Goldmacher, vice president of investor relations. Please go ahead.

Peter Goldmacher -- Vice President of Investor Relations

Thanks, Brandon. Good afternoon, everyone, and thanks for joining New Relic's Q1 fiscal '21 earnings call. Joining us today are CEO Lew Cirne; President and COO Mike Christenson; CFO Mark Sachleben; and Bill Staples, our chief product officer. We published a letter on our Investor Relations website about an hour ago and hope all of you had a chance to read the letter, along with today's earnings press release.

Because of the level of detail we provided across the two documents, today's call will begin with opening remarks from Lew, and then we'll just dive right into your questions. During this call, we'll 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-K and upcoming 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. And with that, I'd like to turn the call over to Lew.

Lew Cirne -- Chief Executive Officer

Thank you very much, Peter. Thank you all for joining. I hope you all are staying safe. And particularly on the East Coast, I hope you're managing the weather as best you can.

As you can see from our earnings release today, our Q1 performance exceeded our guidance, which reflected expectations around headwinds, including COVID-19 and a seasonally soft first quarter. Although we did exceed our guidance, we believe we can and should do better, and we aspire to grow faster. In fact, much of what I talk about during today's prepared remarks provide our strategy to improve New Relic's growth rate over the long term and help the world deliver more perfect software. When New Relic was founded back in 2008, we firmly believe that applications will become the center of daily living and thus, every business.

We understood that application performance monitoring or APM gave developers the ability to see into the health and performance of these crucial applications, ensuring that their customers have a great experience every time they clicked, scrolled, or swiped. Data showed us that great application experiences, whether in the browser or increasingly, on a mobile device, drove customer adoption, conversion, and affinity, allowing some companies to pull away from competitors as customer expectations were reset higher and higher. New Relic was at the forefront of this inflection point. By delivering comprehensive APM capabilities, as well as a fully managed SaaS offering, New Relic established market leadership and revolutionized both the time-to-value for developers and scale, speed, and performance by designing the product atop a massively scalable multi-tenant architecture, the very same architecture that has laid the foundation for our next chapter.

Since then, the way software gets delivered and operated has fundamentally changed as traditional monolithic applications have been redesigned according to cloud-native microservice architectures in which the lifetime of some parts is measured in minutes, and the number of discrete components to be monitored have exploded into hundreds or even thousands per application. Added to this complexity is the emergence of DevOps and continuous delivery, where software changes are now happening fast and frequently into hundreds and thousands a day in some organizations. As applications have become more complex, the market has evolved into a variety of monitoring tools to address discrete problems, creating product categories around log management, infrastructure monitoring, APM, and other adjacent categories. Accordingly, vendors in these categories today overwhelm IT and development teams with an array of adjacent, overlapping, and disconnected tools.

Each of these tools employs a different user interface and fundamental architecture, and each product promises visibility, proactive detection, and a mythical single pane of glass, through which teams can allegedly see the entirety of their application infrastructure footprint. Meanwhile, the heretofore standard pricing system for APM and infrastructure based on hosts has become increasingly costly and difficult to predict in an age of distributed architectures. It also correlates very poorly to customer value. Furthermore, when considering the other tools related beyond APM, tools that teams have to estimate and budget according to a number of different obscure pricing metrics such as page views, mobile users, data retention periods, resulting in a friction-filled provisioning process that often forces suboptimal usage in order to keep purchasing in line with budgets.

In short, current monitoring pricing models create a financial disincentive for teams to instrument all of their applications and infrastructure, fundamentally undermining the holistic visibility these teams strive to consider when these solutions were in the first place. Furthermore, customers who adopt these tools encounter surprise overage charges that may cause them to de-instrument software or infrastructure to scale back costs, further restricting the visibility provided by today's monitoring offerings. To cope, customers install even more tools, open-source tools alongside commercial tools, sometimes augmenting and sometimes overlapping functionality. Fragments of critical operational data gets trapped in siloed databases, creating acute blind spots that can cripple a team's ability to deliver and operate software effectively.

The average organization can end up with dozens of tools to monitor different parts of their stack, forcing engineers to scramble and switch between these disconnected and often expensive tools to investigate issues while precious time passes in which end users are stuck and disgruntled. We believe this model no longer works. Engineers deserve better. End users deserve better.

Customers deserve better. Traditional monitoring techniques are no longer sufficient to provide visibility into modern systems. Complex punitive pricing from monitoring vendors flies in the face of the mission to deliver critical operational visibility. It's time for a new approach, one predicated on a connected, real view of the entirety of an organization's operational data in one central store.

This approach must be flexible enough to deliver answers to questions one did not even know they needed to ask or even could ask of all their operational data. This approach must do more than just notify teams when an issue occurs, but also illuminate what caused the issue and why. This approach must be petabyte scale with pricing that encourages teams to instrument all of their applications and infrastructure and collect all of their operational data into one central store in near real time. As the lines blur between infrastructure and applications, it's more critical than ever to be able to see across your entire software system and get traceability through your entire stack.

New Relic defines this approach as observability. Observability describes how well your teams can understand the behavior of a complex digital system. If monitoring tells you when something is wrong, observability lets you ask why. Observability is predicated upon your software and infrastructure being able to deliver the data, all of the data, to provide an answer, supporting questions that lead to other questions that ultimately lead to the ultimate answer.

For a shift from traditional monitoring to observability to happen, our experience shows that customers require the following four things: one, a single source of truth for all your operational data, metrics, events, logs, and traces not only coming from a vendor's agents but from any source of data; two, comprehensive visibility across the software stack in one unified user experience; three, AI and machine-learning-driven capabilities to detect anomalies and extract insights in real time and at petabyte scale; and four, programmability so that customer and third-party developers can build applications and connectors to add functionality, creating an ecosystem of developers and partners. Furthermore, observability requires pricing and technical enablement such that teams can readily instrument all of their applications and infrastructure then collect that data. These are the design principles behind New Relic One. When we first announced New Relic One last year, we began a journey to reimagine what we offer our customers from the ground up, starting with the user experience and extending to how customers do business with us.

Simplicity is key to our strategy across packaging, pricing, adoption, and the user experience. Unlike other commercial monitoring tools or related open-source projects, we see New Relic as well-positioned to offer the convenience of SaaS with industry-best scale and performance at the data platform layer, extensibility, and full integration for open-source projects to help engineers build and troubleshoot faster, which brings us to today. July 2020 was, perhaps, the most important moment in New Relic's 13-year history, with a possible exception of our initial launch in June of 2008. In the last two weeks alone, we have made five major announcements.

The first announcement was our commitment to open-source release of all of our agents for APM, mobile, browser, infrastructure, and all of our infrastructure integrations. Our second announcement was the dramatic simplification of the New Relic product portfolio from 11 SKUs to just three powerful comprehensive products in one unified platform. Three, we announced a new customer-friendly pricing model that we believe will define how companies will prefer to consume observability platforms going forward. Four, we announced a complete transition of all of our products, features, and capabilities into New Relic One, with 100% of our customers transitioned over to the New Relic One user interface.

And five, we announced a new powerful perpetual free tier of the New Relic One Observability Platform that we believe effectively competes with solutions that could cost in the range of $10,000 per year. New Relic One is how we deliver observability to the market in a way that is unique from any other commercial vendor or open-source stack. As I mentioned earlier, New Relic One now includes three and only three products. The first product is Telemetry Data Platform.

Telemetry Data Platform ingests, visualizes, alerts on all your metrics, events, logs, and traces from any source. That could include our agents, or it could include third-party sources of instrumentation or telemetry data. It does it in petabyte scale and pennies per gigabyte. Our second product, Full Stack Observability, correlates that data from the APM, logs, infrastructure monitoring, client-side monitoring, and distributed tracing, all the way into a single integrated user interface and product that is easy to analyze and troubleshoot your entire stack in one connected curated experience.

Unlike anybody else in our space, we price this product per seat. Our third product, Applied Intelligence, detects, resolves incidents faster than with machine learning models trained using the entirety of a customer's operational data in the Telemetry Data Platform. As is the case with other AI platforms, the more underlying data there is to work, the better the AI. I encourage you to read the investor letter we published today, as well as our website to learn more about each of our three amazing products.

During Q1, we conducted many pilots where we made proposals to a wide variety of customers and prospects using our new simplified model. Overwhelmingly, customers demonstrated a strong preference for our new pricing model, and this resulted in a higher level of willingness to spend and broader platform adoption with us than what would have been the case were they to have stuck with our previous model. In one or two cases, customers who had been planning to leave New Relic for a competitive solution decided to do an about-face and standardize on the New Relic platform, specifically because of this new model. We have now trained and enabled our sales force to take our new packaging and pricing model to market including our entire customer base.

And while we are very excited about what this will do for our customers and our business, note that it will take time for the benefits of this new model to show up in our financial results. I wanted to talk about just one more tenet of our strategy, which is our renewed commitment to developers and start-ups at a grassroots level. We will embrace these thought leaders and future decision-makers by providing a robust free tier to encourage usage and adoption of our entire platform, as well as going all-in to support key open-source projects like Prometheus, Grafana, and OpenTelemetry. Additionally, we are making our agents, integrations, and SDKs available under an open-source license to increase the pace of innovation and quality in our products by engaging the broader developer community.

It is with this community that New Relic was born -- in which New Relic was born and first came to prominence, and it will be with this community that New Relic ascends to the next chapter of our company. In summary, we are incredibly excited and proud of the product, packaging, pricing, and strategy work we have just completed and announced. We have reimagined the New Relic One platform in order to return New Relic to the head of the pack in this fast-growing space, giving shape to the promise of observability for teams struggling with current monitoring offerings. Engineers building, delivering, and operating complex, highly distributed software have to do their jobs with data scattered across too many disparate tools and data stores.

We believe those days are now over. Neither cost nor functional gaps need to stand in the way of organizations seeking to complete their observability mission any longer. New Relic One provides the ability to collect, search, visualize and alert on all operational data via the Telemetry Data Platform at massive scale and speed, and at a data ingestion price point previously unimaginable in this market. Full-Stack Observability delivers hyperconnected, curated views of that data to speed insights and it's priced per user, which is customer-friendly compared to the array of Byzantine pricing meters that our competitors continue to use.

The collection and analysis of all of our customers' data enables New Relic One to deliver AI and ML-driven value like anomaly detection and alert suppression via applied intelligence, making the day in, day out work of engineers more efficient and of higher value. In short, with New Relic One, we've now simplified what has become too complex. We believe our strategy is one that our competitors can neither copy nor beat. So that concludes my prepared remarks.

And before we jump into questions from all of you, I would like to throw our first question to our new chief product officer because this is one that we've already heard from an analyst. And so, Bill, since we announced New Relic One a year ago, what specifically has changed? What's new today?

Bill Staples -- Chief Product Officer

Thanks, Lew. You covered a great deal of it, but maybe I can add a few details. Having spent the past two decades at Microsoft and Adobe, I learned many things. But one in particular is key to building a successful business, focus the product strategy on creating customer value, and great things will happen.

And as our chief product officer, I feel like that's my No. 1 focus: to create value for customers. The reimagined New Relic One platform that we announced last year has a very different value proposition than what we announced just this week. When I say value proposition, I mean the value exchange customers perceive by adopting the platform as experienced through a combination of innovation, packaging, and pricing.

And last week, as you mentioned, we made dramatic changes to all three. Let me take a moment just to describe each in turn and why I believe this is an important milestone not only for New Relic but for our industry as a whole. First, on the innovation dimension. The product team has been accelerating execution toward this new platform vision and delivered some really compelling work in a short period of time.

First, our customers have been telling us since the New Relic One launched last year, that while they love the new look and feel of New Relic One, they needed to see convergence of all our applications and capabilities into a single place to simplify the user experience and ease full platform adoption. And as you said, we're excited to share that with the launch last week, we have achieved that milestone. All New Relic capabilities are now available in New Relic One, and we have migrated 100% of our users to the New Relic One experience. In addition, we took steps to simplify the first-time user experience, build into the product documentation, and support and reduce complexity in adopting more of the platform with guided experiences.

We also incorporated a direct in-product feedback channel from users directly to our engineering team, and the engineering team's been swarming on customer feedback in preparation for launch with our preview customers. And since launch, turning around fixes to bugs and making improvements, at times, in just hours. This is a massive achievement. And as you can imagine, integrating decades' worth of IP and migrating hundreds of thousands of users is not for the faint of heart.

But I'm happy to share it's gone very smoothly and with less than 0.5% of our users registering a complaint or opening a support ticket with us in the day since launch. Another innovation that we're excited about is as a top contributor for the Cloud Foundation's OpenTelemetry project, we announced that we're embracing an open-first approach to all of our instrumentation. We open-sourced decades of IP with our own agents and integrations and have begun embracing all of the most popular open-source tools on the planet as data sources for the Telemetry Data Platform. We've been excited to see the community respond not only with enthusiasm, but our first fully implemented pull request or code contribution from outside New Relic came to us within just hours of the announcement and more in the last few days.

Another important example of our embrace of open-source is our announcement for support for Prometheus, one of the most popular open-source metric solutions on the market, which is baked into Kubernetes and has enjoyed widespread adoption. Last week, we announced out-of-box support for ingesting Prometheus metrics with just a few clicks, solving customer problems with scale, retention, and security concerns and opening up an all-new channel of data that's completely separate and independent from our own applications. This is just one example of how we're opening up the platform to all kinds of data, including metrics, events, traces, and logs from open-source and other commercial systems. Another powerful example of how we're delivering a true platform approach is our support for Grafana, one of the most popular open-source dashboarding tools on the market.

Customers can now choose to use our dashboarding tools or Grafana for all the data in Telemetry Data Platform. Customers I've spoken with since this announcement have received this news with a lot of joy. Grafana is super popular for a lot of companies. So second on the value proposition is the packaging side.

And here, too, as you mentioned, we've made some dramatic changes. New Relic One last year was an application-first business. We took the same approach as many of our competitors and sold our customers more than a dozen different applications, which collected, analyzed, and helped them troubleshoot their applications. While New Relic One today is a data-first business.

We believe observability is a big data problem. And with last week's release, we took one of the most impressive technical notes I've seen in my career, the NRDB technology that we've quietly nurtured for over a decade to support our own application, and we promoted it to be a first-class stand-alone platform for engineers to consume as a service. We believe Telemetry Data Platform is the world's only petabyte scale multi-tenant store for all kinds of operational data, and we're really proud to offer it as a platform service with incredible economics. We've built in visualization, programmability, and best-in-class support for dashboards.

We're removing all technical and economic barriers to instrument everything and provide a single source of truth for all operational data. We also heard from our customers that the complexity of our own tooling, together with the array of open-source and commercial tools they need to adopt to achieve full stack visibility, is impinging on their efficiency of their engineering teams and driving up costs. As the company who created the APM category, we're going to be the ones who end it. We took APM off of our product list, along with all of our other independent products.

And as Lew mentioned, we now offer only three products, the full stack observability product being a combination of APM, infrastructure, logging, and all the digital experience monitoring solutions that we've provided in the past, making it the easiest platform to standardize on across your engineering organization. And last, price. I've seen some speculation that we're discounting price to help drive adoption of the platform. And I want to be absolutely clear, we are not discounting price.

With our new packaging, we've aligned pricing with the way customers tell us they want to consume observability going forward. We're unlocking their ability to instrument everything, thanks to the pennies per-gigabyte cost of the Telemetry Data Platform and making observability costs more predictable with our per-user pricing of full stack observability. We're proud to be the first major player in this industry to offer full stack observability with a single per-user price. We've tested this model, as you mentioned, and customers have given us tremendously positive feedback and their willingness, in many cases, to spend more on New Relic One, not less, because it increases and unlocks more value.

Thanks. I hope that answers the question.

Lew Cirne -- Chief Executive Officer

OK. Thank you, Bill. And we've gone quite a bit without taking some questions, so I think now is a good time to take our first question from an analyst. So, Peter, why don't you tell us who our first question comes from?

Peter Goldmacher -- Vice President of Investor Relations

Operator?

Questions & Answers:


Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.

Philip Rigby -- D.A. Davidson -- Analyst

Hey, this is Philip Rigby on for Rishi Jaluria. I have a couple around the announcement on open-sourcing your agents. So first, as the open-source community and products start to build out, could that potentially free up some of your engineering talent on the agent side? And if so, curious where in your platform you'd be looking to shift those resources to if that plays out. And then just on the open-source community, can you give us any color on what you're doing or plan to do to build and maintain the community around open-source projects? Thanks.

Lew Cirne -- Chief Executive Officer

Sure. I'll let Bill take those questions.

Bill Staples -- Chief Product Officer

Yeah, happy to. So first question around whether this will free up engineering resources. I do believe the long list -- we have more than 300 agents and integrations to get data into the New Relic One platform, and that is a lot of code to maintain. The pace of innovation in each of those areas, whether it's languages or public cloud APIs or open-source systems is immense, and it is difficult and costly for us to keep up with the pace of that innovation.

Our commitment to it remains the same. However, I do see the opportunity to innovate and create more value through an open-source approach. And as I mentioned, customers have been validating that already with their own pull requests. To the extent it does allow our engineers to move into other places of the platform to deliver increased innovation, I think where we would be able to apply more of that engineering capacity would be on the analysis and visualization front as well as our AI capabilities.

Increasingly, we believe the future of instrumentation is open. That's why we're a top contributor, No. 3 contributor to OpenTelemetry. And the need for standardization on the instrumentation side is just a given.

And so to the extent we can bet on and make OpenTelemetry the first-class implementation path for all applications that will allow us to then shift resources onto the things that make New Relic really unique, which is our incredible analytics capabilities and increasingly, our AI layer. To the question around embracing supporting the community, when we announced open-source, we didn't just throw the code over the wall and publish them on GitHub. We announced we are embracing an open standard and open approach for building the community and operating those projects, so for example, all of the issues will be tracked publicly in the community. We will publish road maps in the community.

And as I mentioned, take pull requests, which we've already begun doing. So it's true open-source model that we have engineers committed to full time to support in addition to the OpenTelemetry project in the Cloud Foundation. I hope that answers your question.

Philip Rigby -- D.A. Davidson -- Analyst

Yeah. That's great. Thank you very much. And then it looked like dollar-based net retention dipped a little bit in the quarter.

Can you just give us some thoughts on how you're thinking about that going forward?

Lew Cirne -- Chief Executive Officer

Sure. Mark, you can take that one.

Mark Sachleben -- Chief Financial Officer

Sure, I can take that. So Q1 is a seasonally weak quarter for our expansion rate. And in Q1, we had several factors that impacted it. In terms of expansions, our non-U.S.

business grew year over year, but North America underperformed, and this was due to a combination of issues around COVID-19 and the weak economy, along with our own execution issues. As you can imagine, given the magnitude of our announcement last week, over the past four months, there's been a broad effort throughout the company working toward this launch. These include a lot of testing and discussions with customers and prospects, as Lew and Bill mentioned. And while this helped define a direction and provided more confidence on the long-term success of that strategy, it did take away some of the focus of the team on Q1 results.

In addition, we had a leadership transition during the quarter, and we're excited to have our new North America head of sales who recently signed -- I think we just sent that announcement out this afternoon, and he will be starting later this month. And we're very excited about John Siebert coming over, who has worked with Mike in the past and has great experience with both established companies and high-growth organizations. On the other side of the equation, customers are reducing their spend. So in the quarter, that number was also up.

We had $5 million to $6 million of downgrades that were COVID- or macro-related. If we excluded those transactions, our renewal rate was up slightly year over year. But as we've said previously, we feel our renewal rate should be higher than they are, and we want to drive to higher numbers than we've been achieving. And when we look at our customer base, what are the dynamics we see? Well, customers who adopt and use the full platform tend to expand their spend.

Customers who use one product, usually APM only, are more likely to stay flat or reduce their spend. So this is one of the many factors that drove our new pricing and packaging, making it easy for our customers to consume the full platform. By removing this friction around deployment and usage, we're confident customers will see the value of New Relic One and expand their spend over time. And now, you talked about going forward.

You can see from our guidance that we're looking at roughly flat ARR in this current quarter in Q2. And that's driven by the fact that we are being incredibly generous with the offering that we've just put out there. We have the free tier. So for low-end customers, many of these who would have churned out over time or they come and go, we're saying, "You know what, you have free use of the entire New Relic platform." And so we expect a fair amount of our low-end customers to convert to free tier users.

And we expect over the rest of fiscal '21 to take a $15 million to $20 million hit in ARR of customers that are going to -- migrating to our free tier. Much of that will happen, we believe, in the near term and front-loaded. So we believe that will have an impact on this quarter, and that will offset much of the increase in ARR we see. The other thing we've done is we've entitled our entire user base for the full platform.

And we think that sets us up for great long-term success. We want people to adopt it, so they expand on it. But that's, we think, going to cause a near-term headwind to our results, but set ourselves up for success in the second half and accelerated growth as we get into next year.

Philip Rigby -- D.A. Davidson -- Analyst

Very helpful. Thank you.

Operator

Our next question comes from Sanjit Singh with Morgan Stanley. Please go ahead.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions. Congrats on the major product launch. I wanted to go back to the announcement and sort of not sure if I'm thinking about this right. There's a lot of components here, but the one that sort of stands out to me is on the pricing and packaging side.

And it seems like the focus here is just driving greater consumption of all the new innovation that you guys have put out in the last year, potentially ahead of monetization, it sounds like, Mark, that's sort of what you're alluding to. So if you have an existing customer, for example, that's spending $1 million in ARR today, as they migrate to the new pricing and the new packaging platform, what's sort of the impact for that customer in the near term sort of in year 1? I assume that will expand even more vigorously over time, but as we go through this transition, how should we think about the impact on the customer base?

Mark Sachleben -- Chief Financial Officer

I'll take a stab, and then I'll have Mike kind of follow through. On how we design the model, let's take a typical $1 million customer, there may be many versions of that, but many of them might be $1 million almost entirely on APM. And in all likelihood, they have not deployed APM everywhere they would like to, right? And that's because like all of our competitors, we've historically priced by the host on APM. So now with this new model where the bulk of a typical New Relic bill will actually be per user, which is more predictable and better correlates with value, that customer will have more incentive to not only deploy more APM because the marginal cost to add more host is low at that per gigabyte pricing on the Telemetry Data Platform but also very cost-effective to add logs.

And there is no new product to buy, no new procurement cycle. So why not add logs? Why not add synthetics? Why not add more data into the same place to get better correlation, better value, particularly if the economics are so attractive on the data side? And that's why Bill describes it as a data-driven product strategy. So we believe there's no reason to expect that all of our customers will suddenly reduce their spend in the short term. Some might but many will increase their spend.

But certainly, we expect that this model will incent our customers to standardize on one place as a single source of truth for all the telemetry data that will drive more users, which will also create a flywheel effect.

Sanjit Singh -- Morgan Stanley -- Analyst

Great. That makes tons of sense. And then I have a question for Michael. If you go back to the analyst day, you sort of laid out the framework in terms of the timeline for acceleration.

Obviously, the world has changed, right? And new roles change with this major product movement. So what stays the same with that framework and what changes with that framework given not only COVID but what you guys have announced over the last couple of weeks?

Mike Christenson -- President and Chief Operating Officer

It's a great question. I think that the purpose of the framework was to basically break the front end of our goal to get to $1 billion of revenue into two segments of three quarters, where we would do a series of adjustments in the organization with a lot of focus on the go-to-market organization, and we'd break it into two three-quarter pieces. So we've gone through all the details of what we adjusted in 3Q, 4Q, and 1Q just recently. And now we're in the next three-quarter segment.

Obviously, this change in the breadth and capabilities of our product portfolio is a huge help. And the transaction model will create a number of other opportunities to drive productivity in our sales force. So I would say that that second three of further refinement of our go-to-market motion, how we approach our customers, the transaction model, I think we can stick to that timetable so that we go through the remainder of this quarter and then 3Q and 4Q really proving out the value of this model and this positioning of the product and then go into FY '22 with some real momentum. So I think that, yes, obviously, there's more change than we had anticipated, but I believe it still fits within that framework.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. Thank you.

Lew Cirne -- Chief Executive Officer

If I could just add to that, Mike. One note around that. Given the compounding nature of ARR and the number of ARR headwinds given COVID, as well as the generous product offering that we're doing today to reengage developers, it's no longer reasonable to expect us to achieve the $1 billion revenue goal in fiscal '23 that we'd forecast at our analyst day in 2019. What we were doing is we have -- I would say we are taking a temporary disruption in the short term to set ourselves up for accelerated growth in the back half and then particularly as we head into fiscal '22 and '23 on our path toward -- getting back toward market-rate growth rates.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. Thanks, Mark.

Operator

Our next question comes from Sterling Auty with J.P. Morgan. Please go ahead.

Sterling Auty -- J.P. Morgan -- Analyst

Yes, thanks. Hi, guys. So traditionally, observability, this space has been a best-of-breed approach, APM, logging, infrastructure. And a lot of what we heard in this announcement is kind of driving a platform adoption across it.

I guess the question is, in order for you to succeed, do you have to have full-platform adoption by your customers, meaning it's a little bit of all or nothing? Or is there a way to still play nicely within the context of the customer who might want to use Datadog for infrastructure and Splunk for logging?

Lew Cirne -- Chief Executive Officer

We certainly can. So in that case, where, let's say, a customer prefers best-of-breed, and that's true that quite a few of our customers where we coexist with some of our competitors. And we're, as you might expect, the standard for APM. But in those cases, even in some of our largest customers, many of them have withheld deployment of APM to everywhere they'd like to use it because of the nature of our pricing model.

And so in that case, we believe that this new strategy we put together will increase broader adoption of our flagship product, and it will just reduce the friction involved in customers trying our other products, logging being very compelling, particularly at the price point that we're talking about in Telemetry Data Platform. But doing that in a way that isn't an all-or-nothing kind of bet is an easy experiment to run. And then we think over time, customers will increasingly standardize our platform, but that's not the only way in which we can grow within a given customer.

Sterling Auty -- J.P. Morgan -- Analyst

And then the one follow-up is talk about reducing friction. I guess another way to look at it from a different angle is cheaper price. And if that's the case, what does this new approach in terms of the new pricing paradigm do to your total addressable market? And what does it do to the margin structure of the business moving forward?

Lew Cirne -- Chief Executive Officer

I'll let Mark take that one.

Mark Sachleben -- Chief Financial Officer

So we feel like that it actually expands the market. As Lew mentioned, we've got a lot of customers who are not instrumenting, not covering their full estate because of the onerous pricing, the complex cost structure, and the unpredictability of monitoring and collecting all this data. So we feel like by making that easier, making that cheaper for them on a per-unit basis allows them to achieve much better value and cover much more of their applications, much more of their digital business. And so we think it actually expands the overall market.

And I think there's a lot of examples of this historically where, as price goes down, the end goes up by a greater percentage, and the overall market expands. In terms of our margins, the Telemetry Data Platform that we're offering that at a very, very attractive price to our customers, we can do that because of our architecture that Lew has talked about. But that margin is lower than our full stack of their ability and our other products. That said, we feel like as we continue to go through our migration to cloud, overall, our gross margins will remain in the 80-plus percent range over the long term once we get through the cloud migration over the next couple of years.

And then from an offering standpoint, we feel like that this will have no negative impact on our long-term operating margins.

Sterling Auty -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

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

Robert Majek -- Raymond James -- Analyst

Thanks. Great to see the continued shift toward full stack observability under single pane glass that customers are looking for today. My question is, as we look out five years, where is the hockey puck going to next in the competitive monitoring world? And what are you doing to stay out in front?

Lew Cirne -- Chief Executive Officer

Well, we think we've done something that really does put us out because people have been talking about convergence for quite some time, but they're converging by -- on their website, but certainly not on their data architecture. We believe the convergence is not at the pane of glass. It's actually at the data layer, right? We're the only company with a single database and single query language that can respond to queries about logs, events, metrics, and traces. We're the only company with one that does that at multi-tenant.

And because of our multi-tenant architecture, we can do that at a petabyte scale, we can do that remarkably fast, with no headaches of management. It's truly designed to run in the cloud. There is no way that this could run on-premise. It wasn't designed around on-premise, and that means that we can offer it at very compelling economics.

I believe the market is going to be trying to get there over -- the rest of the market will try to get there over the next five years because it's one thing to claim you've got four products that cover the various components that you need to deliver observability. It's another thing to say all the data is in one place. That's what you need to drive best-of-class AI and best-of-class troubleshooting in a converged environment.

Robert Majek -- Raymond James -- Analyst

And just one follow-up for me. Can you just help us understand how an average customer's deployment looks like in terms of how many monitoring silos does the typical customer deploy today and what that number may look like in a year or as you encourage a shift to a full platform adoption?

Lew Cirne -- Chief Executive Officer

Sure. There's actually -- if you look at the blog post that announced -- that's under my name. There is a graphic that in that graph blog post that I have shown to about 15 CTOs over the last three months. Every one of them viscerally reacted saying, this is the world I live in.

And what that chart or picture shows is just a huge complex collection of a bunch of different sources of data going to a bunch of different databases and a lack of unity. We've seen customers spending over $20 million on observability tools alone across many, many vendors. Customers routinely tell us they have 20, 30-plus tools, all in and around the space of observing what's going on production and none of them designed to work together, at least in a cohesive way, and certainly not all in a single data platform. So there's a lot of -- and so not only did these CTOs say this is crazy, many of them are saying, and I am actively looking to unify all of this into a single source of truth.

And before we made the presentation, they said there was nothing out there that can do this, so I was actually thinking of building it myself, and now they're having conversations about moving that to the Telemetry Data Platform.

Robert Majek -- Raymond James -- Analyst

Thanks.

Operator

Our next question comes from Jennifer Lowe with UBS. Please go ahead.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you. I guess the first question is a quick one. So where are you at this point in terms of rolling out the new pricing to the customer base? I know you mentioned the entire customer base is now on New Relic One, but have legacy customers all been put on the new pricing model, or is that something that will roll in over time?

Lew Cirne -- Chief Executive Officer

Mike, you can go ahead and take that one.

Mike Christenson -- President and Chief Operating Officer

When the customers renew, they will be put on the new pricing model. So whatever their current agreement is with New Relic, that will continue until the renewal date or some other event that causes an early renewal.

Jennifer Lowe -- UBS -- Analyst

Great. And then just going back to the earlier question that Sanjit asked about if a customer's $1 million, what happens under the new model? And Lew, you gave the example of a hypothetical customer that was predominantly APM, but there's a lot of different ways that customers can get to a certain deal size. One is expansive usage. Other is upsell, which it sounds like some of those upsells will now be rolled into the packages.

So is the aspiration here that a customer that was $100,000 customer under the old model will be a $100,000 customer under the new model, just maybe looking a little different around the edges in how they get there? Or could you see meaningful variation in those contract sizes as customers roll over?

Lew Cirne -- Chief Executive Officer

Mark, why don't you go ahead and take that one?

Mark Sachleben -- Chief Financial Officer

So our goal and our expectation is that that customer would become a larger customer, and that might happen at the time of renewal. So as Mike said, we'll go to the new pricing model at the time of renewal. They could say, I'll become an annual pool-of-funds customer and spend $100,000 with you committed, and then they'll start to use the platform. They'll realize the ease and simplicity of it.

They'll start to adopt it more and more, and they'll burn through that pool quicker than expected, at which point they get to the end of the pool -- instead of a 12-month, they get the end-of-pool at nine months, and we're talking to them about an upsell. On the other hand, what we've seen in a lot of the pilots we've run is that customers recognize that they're getting a much broader set of capabilities, and they are willing to pay for that at the time that they convert to the new pricing. So $100,000 customers, perhaps they say, OK, I'm getting all this incredible value. It's easier to manage.

It's more simple. I like it. I'll bump up by 30%, 40%, or some number. So I think it's a combination of both.

But the important thing is that we believe, over the longer term, this is going to allow customers to experience the value and make it a much more efficient way on their end and our end for them to increase their spend.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you.

Operator

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

Jack Andrews -- Needham and Company -- Analyst

Good afternoon. Thanks for taking my question and congratulations on all the announcements. I want to ask on the go-to-market strategy. I think, Lew, you mentioned that your sales force is fully trained, and they're focused on taking this to your customer base.

But could you speak more broadly to the strategy around broadening awareness of this new platform and/or whether partners, particularly some of the new technology partners, may assist in your broader messaging here?

Lew Cirne -- Chief Executive Officer

Mike, do you want to speak to that?

Mike Christenson -- President and Chief Operating Officer

Sure. We spent a lot of time over the last month, training our sales force on how to help customers understand the impact of this model and how to explore opportunities to expand our relationship with our customers. As Lew indicated and Mark indicated, one vector is obviously much broader adoption of application monitoring across their estate, but they can also dramatically expand their usage of infrastructure monitoring, log analytics, and all of the other capabilities of the platform. So there's lots of ways to grow.

And we trained our sales force to help identify those opportunities for customers to solve more problems, improve performance, and expand their usage of the platform. We do have a growing portion of our business that is in collaboration with partners, public cloud providers, and other, what I'll call, distribution partners. So we would expect that to grow over time, but it's early days for us in that regard, but we're very optimistic about what the potential could be.

Jack Andrews -- Needham and Company -- Analyst

Great. Thanks. And then just as a follow-up, could you touch a little bit more on the programmability aspect of things? Are you strictly focused on the open-source applications? Or is there kind of a broader vision of attracting other ISVs to potentially create apps on top of this New Relic platform?

Lew Cirne -- Chief Executive Officer

So one of the things I love with this strategy is that it really further unlocks the potential of programmability because the Telemetry Data Platform, with its economics, is going to attract much more data. And there are going to be more use cases and opportunity to do interesting applications on top of that data. I believe, in general, it's going to look more like a force.com-like platform where the applications built on it are going to be customer-specific, so that if there's a particular use case for the data that our out-of-the-box experience or dashboards don't cover very well enough, and that's an easy thing to write software to do. And in general, it will be customer-specific.

So I don't anticipate many ISVs building a business on top of our platform in the short term, but that could develop over time as more and more customers start to do more interesting things on top of our Telemetry Data Platform.

Jack Andrews -- Needham and Company -- Analyst

Great. Well, thanks for taking my questions.

Operator

Our next question comes from Yun Kim with Rosenblatt Securities. Please go ahead.

Yun Kim -- Rosenblatt Securities -- Analyst

Thank you. So with the new pricing model and packaging, are you guys still focused on your current go-to-market and sales strategy around increasing monetization of your installed base, especially the ones below $100,000 to get them to move up to $100,000-plus? And then also, does this new pricing model and go-to-market strategy kind of take away from your current capacity in terms of both marketing and sales? Or do you target developers and DevOps groups and even start-ups?

Lew Cirne -- Chief Executive Officer

I would say that we would expect -- we would continue -- because we have such a large paying customer base, I would expect that for the near to midterm, most of our new ARR, probably 80% to 90% of our new ARR, will come from existing paying customers. It is very important for us to get new customers of all sizes and the free tier that we're introducing here as part of this new model is designed to dramatically expand the potential users of New Relic, and we hope that all of them could eventually become paying customers. So while I think the reality is in the near term, as I said, it will be 80% or even 90% of new ARR coming from existing, we do want to grow new logos and new users at all sizes.

Yun Kim -- Rosenblatt Securities -- Analyst

Great. And then just another question for me. Bill and Lew, one aspect of the platform that is unique to New Relic versus many others in the space is that you guys employ a multi-agent model versus a single-agent model. Now that you have consolidated your products into your three categories and whatnot, is there any plan to change this multi-agent model you guys currently have?

Lew Cirne -- Chief Executive Officer

Bill, do you want to take that one? Or I could...

Bill Staples -- Chief Product Officer

Go ahead, Lew.

Lew Cirne -- Chief Executive Officer

Yes. So I'd say there's no plans right now to do that. We're in this transition toward OpenTelemetry as the preferred instrumentation approach for agents, and we'll provide an optimized package for the OpenTelemetry system, as well as connectors and visualization for that in the New Relic One platform, but no plans to consolidate agents in that way.

Yun Kim -- Rosenblatt Securities -- Analyst

OK, great. Thank you so much.

Operator

Our next question comes from Derrick Wood with Cowen. Please go ahead.

Andrew Sherman -- Cowen and Company -- Analyst

Great. Thanks. This is Andrew on for Derrick. One for Mark.

You have 10% to 15% of revenue from distressed verticals. Do you see any change in that throughout the quarter? Any customers rebound there or -- and how does this vary by region?

Mark Sachleben -- Chief Financial Officer

Not too much of a change. Some are starting to recover, but I would say there still remains a great amount of uncertainty in their business prospects in general. And so I think they're still being pretty cautious. I would say in EMEA and APAC region is probably slightly -- slightly ahead of where the U.S.

is overall. But I still think there's a fair amount of caution out there in those verticals.

Andrew Sherman -- Cowen and Company -- Analyst

Great. And then for anyone who wants to take -- you have some big customers in the gaming vertical that's seeing a good amount of health. How did you see that trend in the quarter? And how sustainable do you see this in the back half of the year with back-to-school and potential reopening?

Lew Cirne -- Chief Executive Officer

I guess what I would say is we have a number of customer profiles that have obviously benefited from the changes in the way we're living these days, but it's at the extremes. We have, as you identified, 10% that are hard hit, travel and hospitality, and things like that. Across the broad profile of our customer base, it's a difficult environment.

Andrew Sherman -- Cowen and Company -- Analyst

Great. Thanks.

Operator

Our next question comes from Keith Bachman with Bank of Montreal. Please go ahead.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Many thanks. I wanted to ask two questions, and I'll ask them concurrently. The first is on ARR.

The second is on go-to-market. The first on ARR, wasn't quite sure from the previous discussion when you anticipated returning to, call it, 15% to 20% kind of ARR growth. Is that in FY '22 that you get there? Or is there some rebound toward the end of this FY, call it, December, March, if the benchmark is something like 15% to 20% growth? And part B, the question is -- you report -- you've guided to basically 10% kind of ARR growth. I know there's a lot of changes going on.

But the closest competitor that we have public information on is Dynatrace that's growing ARR by mid-30s, call it, for round numbers. And while you do have a lot of changes going on, I'm just surprised at the dichotomy or the variance, if you will, of those changes. Is it SMB-related? Or is there any kind of characterization even as you go through this process about why there's such a difference? And then I have a follow-up, if I could, on go-to-market.

Lew Cirne -- Chief Executive Officer

OK. So if Mark wants to comment on anything on time frame, I'm not going to comment on the time frame for when we might expect to see certain changes in our growth rate. I would say we do spent the better part of the last hour talking about what we are doing to grow faster. And while we've been focused on doing those things, that has come at the expense of more expedient short-term things that could have helped short-term growth.

We think we've got a very competitive strategy that we think will put us in a position to be in a leadership position over the long term. And so the short version of it is we've done great strategic work that's come at some short-term cost that we're willing to take a trade-off on.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Mark, any other comments from you before I ask my follow-up on the go-to-market?

Mark Sachleben -- Chief Financial Officer

No. I mean, we're not going to put a time frame on it, but we put the strategy in place. We feel good about it. And our goal is to reaccelerate growth and get back to market-rate growth and as we get toward the end of this year and into fiscal '22 and fiscal '23.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Great. And my follow-up, Lew, I'll put back to you is just go-to-market. And some of the things you're doing make a lot of sense.

Previously, at the analyst day, the discussion was an intent to capture more of the higher end of the market, whether it be large, midsize companies or enterprise organizations. And typically, when you're trying to do more of an all-encompassing, I think that makes it tougher to go to enterprise because enterprise has been historically more best-of-breed. And so I'm just wondering, does the new strategy where it is giving the opportunity for users to leverage the entire platform, how does that make you think about your opportunity set with the larger customers, say, than you're currently serving? Or frankly, to grow your larger set of customers is a better way of saying it.

Lew Cirne -- Chief Executive Officer

Yes. I'd say Mike spoke to this. The key new focus item since we talked is that -- that we introduced about in our investor day was $100,000 customers. So we do well, I think, with $1 million-plus customers.

That's still a healthy and growing segment. But what we really want to do is grow the number of $100,000 customers, and those are the $100,000-plus customers, obviously. And most of them will be even large businesses. We think this strategy absolutely is well suited to accelerate the growth of that number.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Well, good luck, gentlemen. Thank you very much.

Operator

Our next question comes from Mohit Gogia from Barclays. Please go ahead.

Mohit Gogia -- Barclays -- Analyst

Hey, guys. Thanks for taking my question. One question on product and the other question is on pricing. So on the product, I was wondering, so what changes have you made or maybe continue to make in order to better align the R&D organization along those three SKUs, where it's going from 11 different product lines to three different SKUs.

Like what are the changes you have made to sort of like make sure you can do that more efficiently? Thank you.

Lew Cirne -- Chief Executive Officer

Bill?

Bill Staples -- Chief Product Officer

Yes. Actually, when we define the strategy, we looked at the organization and realigned the product organization directly against those three product areas, as well as two other platform areas that kind of span all three products in terms of user experience, billing, account subsystems, and so forth. So we have a really well-aligned product organization against those three product SKUs.

Mohit Gogia -- Barclays -- Analyst

OK. And my second question is on the pricing and packaging. So I think it was earlier mentioned that it was around the -- it will be around the time of renewals, when the new pricing will fill in for existing customers, right? So I was wondering in terms of just better equipping the sales force to have some of the conversations around renewals and these pricing changes kicking in to make sure that customers don't see like a big sort of like reduction in spend. Like how are you equipping and sort of like what are some of the communication channels that will be used to make sure the customers can maintain their spend, at least in the near term? That's all for my side.

Thank you.

Lew Cirne -- Chief Executive Officer

We don't see a scenario where all our customers have a meaningful reduction in spend. And we think that expanding the capability -- the access to the full capabilities of the platform, making it compelling to send us all your data, we think that everything we're doing here is to broaden access and adoption of the full set of capabilities. And that is not the kind of scenario where I would expect to see huge reductions in per customer spend. We're looking to grow per-customer spend with this model.

Mohit Gogia -- Barclays -- Analyst

Thanks, guys.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Peter Goldmacher -- Vice President of Investor Relations

Lew Cirne -- Chief Executive Officer

Bill Staples -- Chief Product Officer

Philip Rigby -- D.A. Davidson -- Analyst

Mark Sachleben -- Chief Financial Officer

Sanjit Singh -- Morgan Stanley -- Analyst

Mike Christenson -- President and Chief Operating Officer

Sterling Auty -- J.P. Morgan -- Analyst

Robert Majek -- Raymond James -- Analyst

Jennifer Lowe -- UBS -- Analyst

Jack Andrews -- Needham and Company -- Analyst

Yun Kim -- Rosenblatt Securities -- Analyst

Andrew Sherman -- Cowen and Company -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Mohit Gogia -- Barclays -- Analyst

More NEWR analysis

All earnings call transcripts