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New Relic (NYSE:NEWR) Delivers Strong Q2 Numbers, Stock Jumps 11%


Full Report / November 08, 2021
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Application performance management software company New Relic (NYSE:NEWR) reported strong growth in the Q2 FY2022 earnings announcement, with revenue up 17.8% year on year to $195.6 million. Guidance for next quarter's revenue was surprisingly good, being $200 million at the midpoint, 9.15% above what analysts were expecting. New Relic made a GAAP loss of $48 million, improving on its loss of $47.9 million, in the same quarter last year.

New Relic (NEWR) Q2 FY2022 Highlights:

  • Revenue: $195.6 million vs analyst estimates of $182.2 million (7.4% beat)
  • EPS (non-GAAP): -$0.10 vs analyst estimates of -$0.13
  • Revenue guidance for Q3 2022 is $200 million at the midpoint, above analyst estimates of $183.2 million
  • The company lifted revenue guidance for the full year, from $732.5 million to $780 million at the midpoint, a 6.48% increase
  • Free cash flow was negative $40.7 million, down from positive free cash flow of $4.78 million in previous quarter
  • Net Revenue Retention Rate: 112%, in line with previous quarter
  • Customers: 1,011 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 67.1%, down from 72.7% same quarter last year

With the name being an anagram of its founder, Lew Cirne, New Relic (NYSE:NEWR) makes a monitoring software that collects, scores, and analyses performance data about a client's IT stack.

The software provides companies with a shared real-time dashboard where the information about their software stacks is visualised, including software applications and the infrastructure they run on. It can be integrated with other services like Pager Duty (NYSE:PD) and Slack (NYSE:WORK) to alert employees if the performance score drops and needs attention. On top of that, New Relic allows clients to solve problems faster by providing automatic insights into the root cause of every problem.

Lew Cirne previously built another company in the same space called Wily Technology, and sold it in 2006. New Relic gained early traction with its focus on the Ruby on Rails developer community, winning many high-profile evangelists.

The demand for application performance monitoring software has been increasing as businesses undergo digital transformation.

Like many software companies, New Relic has a product-led sales process that allows any developer to use their product for free (with limitations), and offers free trials for larger customers. That's important, since it faces a number of competitors in the performance monitoring space, such as Datadog (NASDAQ:DDOG) and Dynatrace (NYSE:DT).

Sales Growth

As you can see below, New Relic's revenue growth has been slower over the last year, growing from quarterly revenue of $166 million, to $195.6 million.

New Relic Total Revenue

This quarter, New Relic's quarterly revenue was once again up 17.8% year on year. We can see that the company increased revenue by $15.2 million quarter on quarter. That's a solid improvement on the $7.81 million increase in Q1 2022, so shareholders should appreciate the re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 7.13% over the next twelve months, although estimates are likely to change post earnings.

Large Customers Growth

You can see below that at the end of the quarter New Relic reported 1,011 enterprise customers paying more than $100,000 annually, an increase of 47 on last quarter. That is a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has had good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

New Relic customers paying more than $100,000 annually

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

New Relic Net Revenue Retention Rate

New Relic's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 112% in Q2. That means even if they didn't win any new customers, New Relic would have grown its revenue 12% year on year. Trending up over the last year, this is a good retention rate and a proof that New Relic's customers are satisfied with their software and are getting more value from it over time. That is good to see.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. New Relic's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 67.1% in Q2.

New Relic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from New Relic's Q2 Results

With a market capitalization of $5.65 billion New Relic is among smaller companies, but its more than $231.9 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We were impressed by the very optimistic revenue guidance New Relic provided for the next quarter. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 11% on the results and currently trades at $101 per share.

Is Now The Time?

New Relic may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of New Relic we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its customers spend noticeably more each year, which is great to see, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.

New Relic's price to sales ratio based on the next twelve months is 7.6x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

The Wall St analysts covering the company had a one year price target of $78.7 per share right before these results, implying that they didn't see much short-term potential in the New Relic.

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