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New Relic (NEWR) Q4 2021 Earnings Call Transcript

By Motley Fool Transcribing - May 14, 2021 at 1:30PM

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NEWR earnings call for the period ending March 31, 2021.

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New Relic (NEWR -0.93%)
Q4 2021 Earnings Call
May 13, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, everyone, and welcome to the New Relic fourth-quarter and fiscal-year 2021 earnings conference call. [Operator instructions] We also note today's event is being recorded. At this time, I'd like to turn the conference call over to Peter Goldmacher, vice president of investor relations. Sir, please go ahead.

Peter Goldmacher -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone, and thanks for joining our Q4 fiscal '21 earnings call. We published a letter on our Investor Relations website about an hour ago, and we hope everyone's had a chance to read our letter, together with today's earnings press release. Because of the level of detail we provided across these two documents, today's call will begin with Lew providing brief opening remarks, and then we'll dive right into your questions.

During this call, we will make forward-looking statements, including about our business outlook and strategies, which we based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-Q to be filed with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. We've reconciled those to the most directly comparable GAAP financial measures in our earnings release.

These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety, is being webcast from our Investor Relations website, and an audio replay will be available during a few hours. With that, I'd like to turn it over to Lew.

Lew Cirne -- Founder and Chief Executive Officer

Thank you very much, Peter, and welcome, everyone, to the call. I think you would all agree there's a lot of news to share today, and so we want to leave lots of time for your questions. And I'm going to have a few comments at the very end about the really exciting news about the transition of leadership and my moving on to the Executive Chairman role. But I want to first lead off and talk a bit about the quarter and the fiscal year.

As everyone knows, it was a very transitional year for us where we made bold bets to do transformative things for our company with an eye for the long-term success and growth of the business. We have more conviction than ever in that strategy, which really was the brainchild of Bill Staples, and we're pleased with the progress we're making toward that. And we're diligently focused on migrating as much of the customer base over to the New Relic One model as possible. And as we see customers migrate over, we're really pleased with how they consume against their commitment and how we believe that will result in strength in the business going forward.

It was a particularly good quarter for product, and we believe that core to all of this is a strong product that will drive usage and consumption and therefore, business growth. And now we're thrilled that as of the start of fiscal year, we've aligned everybody in the company, including compensation programs with the consumption model that we are fully committed to, which again, we think will bear fruit in the -- over the course of fiscal '22. So with that, we'll hand it open -- hand it over to you for your questions.

Peter Goldmacher -- Vice President of Investor Relations

Operator, we're ready for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question today comes from Sanjit Singh from Morgan Stanley. Please go ahead with your question.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions, and sad to see you go, Lew, but I know you are leaving the company in good hands and turning to Bill. Although, I know you're going to be executive chairman, but you're leaving the company in good hands with Bill. And it's been great working with you and hope to continue the relationship going forward. My question is sort of really on kind of the path forward from here and particularly as it relates to sort of metrics because I think I understand the business model transition.

So two questions. And the earnings letter talks about 59% of the base being transitioned to the new model, when do we expect that to be fully transitioned? That's number one. And then second on metrics. It seems like we're moving to net revenue retention was at -- as you sort of say, a backward-looking metrics.

What is the metrics that we should be focusing on? Is it something like RPO that gives us -- and what forward-looking indicator about how the pace of the transition and hopefully, underlying growth starts to improve over the next several quarters?

Mark Sachleben -- Chief Financial Officer

So the investor letter talks a bit about the transition to the New Relic One pricing. We're at about close to 60% as of the end of March, and we're looking at being over 80% at the end of fiscal '22, so a year from March. So at that point, we'll be pretty well done other than we do have contracts that are multiyear agreements where those will time out. And as they expire over the next couple of years, they'll transition to consumption billing.

So for -- we're very pleased with the fact that we've got more than half of our business now on the consumption model. And by the end of the year, we'll be getting to effectively the whole business there. So that's good news. In terms of the metrics going forward, it's really all about revenue.

And then that's why we talked about net revenue retention. And internally, we look at all sorts of metrics, as you can imagine. For us, it's really about accounts, users and data, primarily users and data, that's what drives our top line. But internally as a company, we are all aligned around growing data and growing users.

And so that's what we're very focused on. In terms of the externally focused metrics, it's really about revenue and the net revenue tension. So that's what we encourage folks to look at, and we think it's going to be really the most telling indicator of our business. And as we've talked about in the letter, we're facing a headwind at this point as we make this transition.

But we're looking at the back half of the year, and we're confident that revenue will -- revenue growth will start to reaccelerate in the back half of the year.

Sanjit Singh -- Morgan Stanley -- Analyst

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

Mark Sachleben -- Chief Financial Officer

Yes. So we've given some of that data in the investor letter talking about data growth. And we talked about the -- we talk about the data growth year-over-year and how that has been expanding. And I think it was in the -- went from roughly 70% year over year to 80% in the low 80s over the last 12 months.

And so we have given indications of how that data is growing. We also are looking and we've given some information around the low end of our business, the self-service portion of our business and some of the growth characteristics of that business, which we think are very, very interesting and good data points for folks to take a look at. We obviously want to be -- we're still in this process. We haven't had customers complete a full 12 months in the annual pool of funds in consumption billing yet, so we've got to be a little cautious with what we give out because we know how those things tend to get extrapolated and things.

But we have given a fair amount of information in the letter about how that's going.

Sanjit Singh -- Morgan Stanley -- Analyst

Congrats to Bill on being CEO.

Bill Staples -- President and Chief Product Officer

Thank you.

Operator

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

Kingsley Crane -- Berenberg Bank -- Analyst

Thank you. I also want to extend congrats to Bill and to Lew for what you've built at New Relic and for now leading the company in new capacity. Two questions. One is on the -- some of the comments you've made in the letter about spend contribution from users and data.

You've said you've seen 65% users 35% data. You've also said that you expect this to return to 70-30, but it also may go to 60-40, and it may affect gross margins. So just some clarification on where you see this trending and how it might affect gross margins would be helpful.

Mark Sachleben -- Chief Financial Officer

Sure. So it's roughly two-thirds, one-third. I think it depends a little bit on how -- on the customer mix. Larger customers tend to be a little bit skewed more toward -- more heavily toward data than users.

And at the lower end, they can be more skewed a little bit toward data than -- I'm sorry, the users than data. We put two-thirds, one-third out there. In our longer-term models, we're looking at 70-30 as being the likely case. On the other hand, we want to let folks know, to the extent we're very successful in attracting even more data than we've assumed, then that could push that closer to 60-40.

In that case, it would have a modest impact on gross margins, but we think that would be more than worth it given the increased data would inevitably drive the top line higher.

Kingsley Crane -- Berenberg Bank -- Analyst

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

Mark Sachleben -- Chief Financial Officer

So we continue to face headwinds as we're getting through the next two quarters. We've got Q1 then Q2. Remember, we introduced this new program last August. So at that point, we'll have our first cohort of customers that just is anniversaried.

And so at that point, we'll have a full-year book behind us. And then as we look out at consumption, we look out at the trends we're seeing, we're confident that revenue will accelerate in the back half, starting in the second half of the year, Q3 and then into Q4.

Operator

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

Rob Oliver -- Baird -- Analyst

Great. Thank you, and I apologize for any background noise here. Bill, congratulations to you. And Lew, best wishes to you, and it's been fun working with you over the years.

My question is on the state of the sales force right now. I mean, you guys asked your enterprise sales force to completely change the way they sell. And just curious now, particularly coming into the new year about the state of the sales force, how they've responded to the change in the pricing model, how they're executing on that so far. And if we've seen all the changes that we -- that -- if all the changes that have been needed in the sales force have all been made.

Bill Staples -- President and Chief Product Officer

Yes. Thanks for that question. This is Bill here. I'll take that one.

We spent the first month of our fiscal year, so the month of April, in a lot of sales enablement training and onboarding to the new compensation model for them, spent a lot of time talking through the shift to consumption, the value that holds for customers and the best ways to engage customers to help them solve their business problems. Universally, the feedback that I heard out of that sales training enablement was very positive. I think it really changes the nature of the relationship that our sales relationship managers get to have with the customer, shifting away from the more combative negotiation-type conversation to, really, how can we solve your business problem? How can we put New Relic to work for you? And then unlocking that value with the customer, which drives consumption now fully aligned with their compensation model. So it's really a win for the customer, a win for our sales team.

And I've seen a lot of enthusiasm and engagement by the sales organization on the new model. So yes, I think we were off to a great start, the first month. Six weeks of the quarter are looking good and looking forward to seeing the progress throughout the year. As Mark said, completing that transition from 60% of our customers in the model at the end of Q4 to well over 80% by the end of the fiscal year.

Operator

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

Robert Majek -- Raymond James -- Analyst

Great. Thanks, and congrats to Bill and Lew. It looks like your injection volumes were generally flattish from November to February as I eyeball the chart but then picked up in March. And I know in the letter, you talked about seeing some green shoots around engagement.

Is the pickup in March an example of that? And should we expect a smoother ramp-up from here on?

Bill Staples -- President and Chief Product Officer

The data volumes, I think they did level off around the holiday season and November, December and into January was a little slower of an upstart. That's pretty typical seasonal pattern that we see a lot of the ramp-up to the holiday season in the observability workload happens before Black Friday, in anticipation of those spikes in volumes. So there is some seasonal leveling off during the holidays, and we had a bit of a slow ramp up, I think we chalk it up to COVID and some of the variation there. I think, though, we have seen an uptick in data and definitely in engagement.

Since then, the investor letter goes into some great detail in terms of the innovation in Q4, as well as the impact that's had on user engagement, increasing the number of users and the frequency with which they engage. So that hypothesis that we had that data would -- increased data would lead to increased users is showing up now, and we're excited to see both of those grow, although there will be occasional seasonal variations like we noted.

Robert Majek -- Raymond James -- Analyst

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

Mark Sachleben -- Chief Financial Officer

Yes. A large part of that is the fact that we are now no longer focused on commitment. And so our focus is getting folks on to the new model. And so it's collaborative if they're -- we want them to commit to whatever level of spend they're comfortable with.

And then once they do that, that's when the work starts. OK, let's get them consuming, let's get them consuming more. And so I think that is -- that's been -- when you look at the old metrics of ARR, that's been a headwind to ARR because we're no longer focused on that. We've been talking about that now for a couple of quarters.

And as we get into this year, we're -- the comp plan are being aligned around that. So I think the biggest issue has been us changing our strategy now being more aligned with the customers and being comfortable with whatever level of commitment they want to commit to. So I think that's been a big change. I think customers like that.

I think it's better for overall efficiency and getting deals done. And we've seen that accelerate the rate at which we can convert customers, right? It's fewer calories. Less energy is taken now to convert a customer to the new model now that we've gotten away from worrying about the level of commitment. We also have some customers who are just -- who are not comfortable committing to large numbers, even though they know and they've told us that they're going to spend a lot more than they're committing to.

There's no penalty for that, right? We don't charge higher rates because they went over their commitment or something like that. So we have some large customers who have just said, "I'm going to keep spending. I'm going to grow my spend. But you know what, I want to commit to a much lower level." We're comfortable with that.

The critical thing for us will be to watch that consumption like a hawk and make sure that it is continuing as expected, but those -- some of the dynamics that are running on that make that overall commitment level less of an indicator of how things are really going.

Operator

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

George Iwanyc -- Oppenheimer & Company -- Analyst

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

Bill Staples -- President and Chief Product Officer

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

And also, as you know, a shift to more technical sellers as well as our solution consultants.

George Iwanyc -- Oppenheimer & Company -- Analyst

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

Bill Staples -- President and Chief Product Officer

You bet. Yes. As you noted, likely in the investor letter, our new self-service business is rapidly expanding. That's a great indication of the strength of the product and the value that customers are finding there as they transition from our free tier into a paid model.

We are increasingly -- with the confidence we're getting there, increasingly shifting some dollars, more dollars into marketing and top of funnel than we have in the past, but I wouldn't say that it's being driven as pure marketing spend. It's really been much more driven on the brand and the word-of-mouth as customers, the mind share grows around the New Relic One platform. On the overall signs around self-serve business, I think, as you may have noted, our total paying accounts for the first quarter in quite a few quarters leveled out, and we see that largely driven by the growth in the self-serve business and strength there. And we believe we'll continue and reverse the trend of declining paid customers in the future quarters.

Operator

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

Yun Kim -- Loop Capital Markets -- Analyst

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

Bill Staples -- President and Chief Product Officer

Yes, it's a good question. And it obviously varies by customer, but we have been studying it over the last two-and-a-half quarters that we've been in that model for the customers who've adopted. And what we're seeing is it takes about a month or so for them to rightsize their consumption based on users and data, the new pricing meters. And then once that rightsizing is done, the first month usage begins to steadily grow.

And as we've noted before, starting with data, ingesting more data because of the low cost per gigabyte that we offer, and then that attracting more users. And now we're saying both data and users grow healthy for the customers that have been in the model for several months.

Mark Sachleben -- Chief Financial Officer

Yes. The only thing I would add to that comment is it's interesting. We -- that we have two data -- or multiple data sets, but one where customers are converting over from the historical model that was subscription-based, host-based pricing, primarily APM driven that we're migrating to a platform to a consumption model. And then we have another cohort of customers that is brand new to the New Relic.

They came on with the New Relic platform as their only knowledge of New Relic and the consumption model as their core pricing mechanism. And the behavior of the two customers is quite different. The customers that convert over, in their minds, they have a value prop, a legacy spend level. So they'll be, in some ways, influenced by what they used to be doing, what they used to be spending.

And we'll see some behavior modifications where it looks like they're trying to do some gymnastics to fit in that spend or do some things because they've got that historic perspective. New customers on the other hand, tend to come in and embrace the platform and start to grow data and users right from the get-go. And those -- yes, I think those growth rates are what we think will be more indicative of the future once we've gotten everyone migrated over and people, again, get out of that historic perspective of a host-based and an APM only in a silo type view of the product.

Yun Kim -- Loop Capital Markets -- Analyst

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

Bill Staples -- President and Chief Product Officer

Absolutely. Yes. And the number of data types and the breadth of adoption we are seeing expand. I think we've shared some of that data again in the investor letter and the one previous to this quarter as well that very healthy adoption across the platform for customers that move to the new model, although we also launched major improvements to our logging product last month after Q4 ended.

And the growth in logging in particular as an expansion in new products in the platform has been phenomenal. So definitely seeing breadth of platform adoption for customers who moved to the new consumption model.

Yun Kim -- Loop Capital Markets -- Analyst

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

Mark Sachleben -- Chief Financial Officer

Primarily, it is annual upfront.

Yun Kim -- Loop Capital Markets -- Analyst

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

Mark Sachleben -- Chief Financial Officer

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

Operator

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

Michael Turits -- KeyBanc Capital Markets -- Analyst

Hey, guys. Lew, of course, congratulations to you and everything you've accomplished. One for Mark, one for Bill. So for Mark, if there is a -- let's call it, an accounting or model headwind to revenue growth that makes that not representative right now, first of all, do I understand that it's the difference between consumption as we go versus what were a higher level of commits and therefore, a tough comp at this point, so we've got anniversary.

And can you normalize for that in some way to let us know at least based on current trends, where we might emerge and see anniversary that from a growth perspective?

Mark Sachleben -- Chief Financial Officer

Well, in the old world, we would have gotten an upfront commitment at the time of renewal, right? We would have gotten, say, a 15% or 20% uptick in committed spend. And so on March 31, someone does that, and then they -- we start -- recognize that subscription on April 1 at the higher level. In the new world, they migrate over at that existing spend. And so on April 1, there's no difference from March 31, right? April revenue is the same as March revenue.

It's only when consumption increases and gets to the point where that consumption looks like it's going to be higher than their historical -- the commitment where we start to recognize incremental revenue. So that tends to be pushed out a little bit. And I would say it's pushed out a couple of quarters on average. It depends on a lot of things.

But I would say that's kind of a decent proxy. And so you do have this -- a time of commitment instead of getting the initial immediate bump, you do have the -- a delay. And now on the flip side, historically, a lot of our customers would have been overconsuming before the end of their contract period was up. And they would just get away effectively overconsuming until the renewal period.

At this point, we'll actually capture some of that in the period in which they're consuming because it'll be more closely -- the revenue will be more closely tied to their actual consumption. So initially, there is that headwind, but then we catch up in the back half of the year.

Michael Turits -- KeyBanc Capital Markets -- Analyst

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

Mark Sachleben -- Chief Financial Officer

We're looking at all sorts of numbers and trends around that. We've given out guidance -- our revenue guidance for the year. Our -- certainly, our long-term goals that we talked about is to get back to market rate growth. And so we want to be able to do that.

But it's hard to -- it's kind of apples and oranges trying to compare the two over the next one or two couple of quarters.

Michael Turits -- KeyBanc Capital Markets -- Analyst

I've got a Bill question. The Bill question is you've pursued a -- I wonder how things are going competitively in the sense that you pursued maybe more focused and defined monitoring or observability strategy around -- you've expanded into logging metrics traces, etc. But some of your competitors have gotten broader than that, looking. There's like workflows, security or are part of larger organizations like ServiceNow as the observability.

Splunk is broader. So how do you feel like you're doing competing against what looks like a field that is approaching things from a broader strategic perspective?

Bill Staples -- President and Chief Product Officer

I wouldn't characterize it as a broader strategic perspective. I feel really good about our competitive position, honestly. The bulk of our opportunity is greenfield. Although, when we do come up against competitors, we're seeing some phenomenal wins, again, against some of the leading vendors.

And our strategies are fundamentally different. While they may be expanding into, say, security, as you've mentioned, we're increasingly moving other directions. And the product road map, as Lew noted this quarter, in Q4, was phenomenal. I'm really excited by where we're going to take observability in FY '22 in the road map ahead.

You're going to see continued innovation and differentiation from New Relic One. Not chasing taillights of competitors and some of the things that they've already chosen to do, but really tread our own course, which we think is most valuable for customers.

Operator

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

Erik Suppiger -- JMP Securities -- Analyst

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

Mark Sachleben -- Chief Financial Officer

Sure. So on the sales compensation, we pay on -- is 100% on consumption. So it is users and data and that's the dollar run rate basically of the consumption of their customers. So every month, you have a patch and you look at what the consumption of your patches on the first of the month.

You look at what your consumption is on your patch on the last day of the month. And the change, the increase is how you get paid. You work out a quota by getting that consumption to increase and you get monthly compensation on that. So that's the sales compensation.

On the migration to the -- to AWS and the cloud, that is going well. As we noted in the letter, the gross margin in Q4 was impacted by some spend that had shifted from Q3, as well as we had a reclass from -- of some expenses from two -- from R&D expense to our COGS line. But that is going well. We expect gross margins to take a dip in Q1.

And I would say likely -- Q1 will likely be the -- where we have the -- into the 60s, a little bit lower gross margin. And then we expect them to start climbing to get back to the low 70s for the year. And we do expect gross margins to climb up into the 80s as we continue this migration through the end of -- back to the 8% range, I should say, as we continue the migration into fiscal '23. In fiscal '22, we expect about a $40 million hit to our COGS and bottom line because of the double bubble, if you will, the migration expenses, the fact that we're carrying still the legacy cost, the cost associated with our internal data center, as well as driving our business to the cloud.

So that's a substantial headwind in the year.

Operator

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

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

First, Bill, congratulations. Lew, not only congratulations, but thank you for all the years of innovation that certainly has benefited us, all of us. So thanks again. On to the business, I'm curious with the new pricing model.

Can you give us a sense of the type of industry and the type of users that you're seeing the greatest traction with? So in other words, is there a particular kind of trend that you're seeing and the type of companies and the type of users that are attracted to the new model?

Bill Staples -- President and Chief Product Officer

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

So broadening into SRE and more of the operators space as well.

Lew Cirne -- Founder and Chief Executive Officer

If I could add one detail. It is a little bit of a trend, though, we called to it in the letter. Our pay-as-you-go business is remarkably strong. And why I think that matters is that is pure product and it tends to be ahead of where larger enterprises go because smaller companies can be more nimble.

So the fact where we see such a rapid growth in the number of pay-as-you-go customers exceeding our expectations and the fact that the growth in the number of pay-as-you-go customers that go above $25,000 with no direct sales involvement, that's a testimony to the amazing product that really built and transformed in the last year and a bit, just driving business growth. And our hope is that that also shows up broadly across the whole business in a similar way over the long term.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

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

Mark Sachleben -- Chief Financial Officer

So I guess I would say rough numbers two-thirds, one-third. And that is -- we want to drive that. Obviously, the higher the user count for us, the better as a percentage, given gross margins. That's a much higher gross margin on our user base than on the data.

So it does depend on our customer mix. We think, overall, our customer mix is going to be -- I would say, if anything shifting more toward smaller- and medium-sized customers as opposed to the large enterprises. We'll get plenty of those. But if you look at where we are when we're at $2 billion, if you will, it's -- that mix, I think, is such that we'll be probably a little bit more skewed toward the higher user count and lower as a percentage of the total.

We do push data. And so if we're really successful in pushing data, then we could see that number drift below or above one-third. And it could go as high as 40%. And again, that would be great in our minds because we think that would be a leading indicator to then getting more users later on.

So -- but I think roughly speaking, I would say, think two-thirds, one-third as a decent estimate.

Operator

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

Jack Andrews -- Needham & Company -- Analyst

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

Bill Staples -- President and Chief Product Officer

Yes. Our MSPs is -- have been lagging, I think, where our sales team has been. The shift to consumption of new pricing model back then as well. And the self-service tools that are needed to support them have not been fully available.

And so I'd say it's been lagging, but it's an important area of investment for us that we're prioritizing for this fiscal year and expect to help us to accelerate growth in the coming quarters ahead.

Jack Andrews -- Needham & Company -- Analyst

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

Bill Staples -- President and Chief Product Officer

Yes, it's a good question. We've been asking ourselves that lately and doing some studies with external vendors around price elasticity now that we've been in the market for -- coming up on the anniversary in July. We think it's a good time given we pioneered this model, we kind of introduced and set the price to check in and getting some really valuable data. And we'll be making any necessary pricing changes as a result of that.

I think it's a bit too early to share the specifics on what might change, but it's definitely something we're looking at and wanting to be able to maximize our revenue share as a result of the attractive pricing model that we've introduced.

Operator

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

Derrick Wood -- Cowen and Company -- Analyst

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

Bill Staples -- President and Chief Product Officer

Yes. Thanks for asking the question. Yes, as we noted with restructuring, our -- as you probably know, our sales and marketing spend has been much higher than our peers historically, and we feel like this change really sets us up to be both more competitive but also really aligned with the strategy and focusing our sellers on driving consumption versus those upfront commits. The -- I think the traction that we're seeing also in that self-service space, think of that as not just validation of the product and a very highly efficient adoption model, but also really highly efficient customer acquisition channel where those customers come in, are getting value.

They want to increase their spend. As we noted in the investor letter, we're seeing a number of customers going beyond $25,000, even $100,000 in spend and those become highly qualified and engaged customers to our sales team that engages and expands. And so the efficiency really comes by reducing and focusing that go-to-market notion on consumption. And coupled together with that product-led growth or self-service model really is the complementary benefits that we're seeing play out there.

So I think this sets us up well for FY '22. As I mentioned earlier, to begin again to grow paid accounts overall. We're going to see that expand as -- we believe, and also continue in the back half of the year, as Mark noted, to see accelerating revenue growth as well.

Derrick Wood -- Cowen and Company -- Analyst

Yes. OK. That makes sense. And actually one for Mark, the $100,000 account number was down sequentially for the first time.

I -- it sounds like most of that's due to the shift off of subscription contracts. But any -- can you just tell us how you -- how churn has trended during this model transition over the last couple of quarters? And I think you may have mentioned a couple of losses in the quarter, but if you could give a little more color there.

Mark Sachleben -- Chief Financial Officer

Yes. Sure. So when we talk about churn, historically, we've talked about churn and thought about churn as churn is any time someone goes from a certain level of spend to a reduced level of spend. And that's what we've talked -- and that was churn, right? It was a downgrade.

In our new model, I think we want to just be careful about how we're talking about things. Churn is if a customer goes to 0 and they churn out of our business, that obviously is really bad. We want to prevent that and do everything we can to prevent that. And I think a lot of the go-to-market restructuring work we're doing is aimed at that, making sure people are engaged.

If they're engaged, they won't churn out, they'll keep using. And so when we look back, what we're seeing is some customers are reducing their spend. Sometimes that's a bad thing. Sometimes it's a fine thing, right? They are going to continue to consume.

It's all around consumption. So I think we just want to be thoughtful about how we use all these terms. But when we look back at the trends we've been seeing, one of the big reasons we went to this model last summer was that we felt like we had too many customers who were stuck on APM only as New Relic customers, and we knew that wasn't a long-term win for us or for the customer. And we had too many customers who -- too many times where we felt like the customer really wasn't getting enough out of our solution, and we felt that was a big change we had to make to do -- to drive different results.

And that resulted in the platform introduction, New Relic One introduction last August, which the product obviously changed dramatically. But also our go-to-market motion where we're changing and we're driving, we're compensating our reps on consumption. Now the reps have an incentive to be engaged with customers on a monthly, if not weekly or daily basis. They want to be making sure that customers are doing that.

So we've made all these changes to try and address what we felt like was a churn number that was above where we wanted it to be. And so as we get into this year, we're confident that, that is having good results, that we're getting more engaged with our customers, that customers are adopting more of the platform and that we'll be able to improve the number of customers who leave New Relic and our overall downgrades or -- and churn numbers, we're confident that we'll be able to improve those as we go through this year.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

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

Mark Sachleben -- Chief Financial Officer

Sure. So our business is going to be primarily driven in the short term by expansion of existing business and consumption increases from existing customers. No doubt about that. The -- those customer -- that base can grow modestly and it dwarfs the net new that we get in as a -- for new customers.

A new customer for us is someone who -- we define as someone who comes in and goes from not paying us to paying us. And the vast majority of those customers come in at the pay-go, at the self-serve, pay-as-you-go threshold where they are a free-tier customer. They migrate to paying. And we can -- you can see in the -- we've talked about, is seen in the letter, information around how they grow.

They get to the $25,000 or so threshold in annual spend and then maybe they become a sales opportunity, and then we grow them there. But -- so the first couple of dollars are new and the next, hopefully, millions that we get from that customer are all expansion. So the vast majority of it is expansion. On the other hand, what we are very focused on is the number of new customers we get in.

And that's what we really -- when you think about our new business, we look at the metric in -- metric there is how many new customers we're getting in. And the secondary metric is how much in committed spend and consumption are we getting in from those new customers. So hopefully, that addresses it.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. And so that's where I wanted to follow up on is the majority of your new dollars are still going to come from existing customers. You've only had two quarters, so I really -- as it may be a bit premature. But how do you see your growth driven by the consumption model associated with your new customers? Previously, we used the term "net expansion," but you don't want to use that.

But any kind of conjecture or guidelines you might be able to provide about -- given the new consumption model, how you think growth is going to trend with your existing customer base?

Mark Sachleben -- Chief Financial Officer

Well, we're keeping a -- as you can imagine, a very close eye on these numbers. We look at all sorts of different cohorts of customers that have transitioned, how are they growing? New customers, how are they growing? And what we speculated we're seeing to be the case where after this initial period, customers tend to increase data consumption first. And our data price is very attractive. And I think customers recognize that.

And so they say, "You know what? It's pretty cheap. I'm going to put some data in there." And so the data growth starts. And that's what we see early, and then that drives the user growth a couple of months down the line. And then I think that -- what we're hoping for and expecting is that's somewhat of a virtuous cycle.

Users come on and they bring in more data. And so we've seen early indications of these trends happening, and we're pleased with the numbers we see. But we want to get a little more time on our belt before we start talking too broadly about them or are taken to the bank.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Understood. Understood. OK.

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

Bill Staples -- President and Chief Product Officer

Yes. When we think about channel partners, obviously, the opportunity in it for them has to be equally compelling as it is for our customers. And so we've been working through the arrangement in how they are able to both price and sell the consumption model, as well as benefit from it. And then also working on a product road map that can support that from a self-service experience perspective so that they can onboard customers and support the customer as well.

I think the opportunity is there, especially we're seeing in the EMEA and APJ markets, the need for that partner channel -- demand for the partner channel as a -- sales level is increasingly clear. And as I've mentioned earlier, we're going to be investing there in FY '22 to expand that channel and support those partners.

Mark Sachleben -- Chief Financial Officer

OK. So I just want to -- I know we're about out of time for questions, but -- and before I hand it over to Lew, I just want to say a couple other comments about things that have come up. And one is on our outlook for the year. I mentioned the $40 million double bubble spend we have on hitting gross margin.

We also have a change to our commission accounting. And if you remember 606, a couple of years ago, we all went from expensing commissions to amortizing them. In our case, it's generally over three years, and the bulk of commissions were amortized. Now that we are moving to a consumption-based model and a sales commission plan that's based on consumption, we are actually going back to expensing commissions in the year in which they're earned, the period in which they're earned.

And so that's going to be in the $35-ish million of a hit to our sales and marketing expense line this year. That is not a cash item. So -- but you'll see that in the numbers. And I still want folks to be able to model that out accurately.

And then the only other thing -- the comment I would like to make is around visibility. And I've heard a number of comments from folks over the last couple of quarters about visibility and whether or not -- how visibility changes with the move to the consumption model. And visibility, I would look at it as being just about as good as for a consumption company as it is for a subscription company. The reality is we're looking at our customers and how they're consuming on a daily basis now.

And in the old model, you did have a commitment for one year, but then that year, they could upgrade, they could downgrade. And a lot of times, you didn't necessarily have good visibility to what was going to happen there. Whereas we're in a consumption model, we're paying much closer attention to this. And these trends generally don't really change dramatically from one period or one data the next, one week to the next.

You can look at historical trends and actually gain quite a bit of confidence in terms of an outlook going forward. And so we're in a unique period right now, we're in the midst of a transition, so I would say that, that does have an impact. The near-term visibility, I think, for the quarter is very good. But as we -- and it will get better over the course of the year for the longer term as we get through the transition.

There is some -- as we said a couple of times, we want to wait until we get to the one-year period, we see the anniversary and see behaviors at the end of the contracts and at the anniversary days before we get too far ahead of ourselves. But I just want to point that out because I know that's been a question on people's minds. And it is something that we feel like, over time, consumption model will continue to afford us very good visibility into the revenue outlook. With that, I will hand it over to Lew.

Lew Cirne -- Founder and Chief Executive Officer

OK. Thank you very much, and thanks to everybody for your questions on the call and in particular, I'm personally touched by the kind words that were shared by most of you. Just as a founder, every founder, they dream for their company to have success. When I started New Relic nearly 14 years ago, I had no -- it just exceeded my highest hopes to get to where we are today.

And yet, like any other founder, your real hope is that your company outlasts you and that at the right time, when there is the time for a next leader, that, that person is -- matches and aligns with core values. And that's so true in the case of Bill. So I'm thrilled that Bill is moving in this role. I'm also personally excited to code again every day and focus on innovation.

I think the New Relic One platform is an innovator's dream, and so there's more to be done there. And I hope to contribute in that way as well in terms of being the best helper and advisor and confidant Bill could have as CEO. So I truly believe we're just getting started. And that all of the hard work we've done in the last year is now ready and well set to bear fruit, especially with such strong leadership from Bill starting on July 1.

So thank you all for your time today and for your interest in New Relic, and we are excited to continue on our noble mission.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Peter Goldmacher -- Vice President of Investor Relations

Lew Cirne -- Founder and Chief Executive Officer

Sanjit Singh -- Morgan Stanley -- Analyst

Mark Sachleben -- Chief Financial Officer

Bill Staples -- President and Chief Product Officer

Kingsley Crane -- Berenberg Bank -- Analyst

Rob Oliver -- Baird -- Analyst

Robert Majek -- Raymond James -- Analyst

George Iwanyc -- Oppenheimer & Company -- Analyst

Yun Kim -- Loop Capital Markets -- Analyst

Michael Turits -- KeyBanc Capital Markets -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Jack Andrews -- Needham & Company -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

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