Application performance management software company New Relic (NYSE:NEWR) reported strong growth in the Q1 FY2022 earnings announcement, with revenue up 11% year on year to $180.4 million. New Relic made a GAAP loss of $74 million, down on its loss of $30.1 million, in the same quarter last year.
New Relic (NEWR) Q1 FY2022 Highlights:
- Revenue: $180.4 million vs analyst estimates of $173.1 million (4.25% beat)
- EPS (non-GAAP): -$0.25 vs analyst estimates of -$0.38
- Revenue guidance for Q2 2022 is $182 million at the midpoint, above analyst estimates of $175.2 million
- The company lifted revenue guidance for the full year, from $710 million to $732.5 million at the midpoint, a 3.16% increase
- Free cash flow of $4.78 million, down 78% from previous quarter
- Net Revenue Retention Rate: 111%, up from 99% previous quarter
- Gross Margin (GAAP): 67.1%, in line with previous quarter
Founded in 2008, 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.
New Relic is an anagram for the name of its founder, CEO Lew Cirne, a software developer who had 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).
As you can see below, New Relic's revenue growth has been solid over the last year, growing from quarterly revenue of $162.5 million, to $180.4 million.
This quarter, New Relic's quarterly revenue was once again up 11% year on year. We can see that the company increased revenue by $7.81 million quarter on quarter. That's a solid improvement on the $6.32 million increase in Q4 2021, so shareholders should appreciate the re-acceleration of growth.
Analysts covering the company are expecting the revenues to grow 5.77% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
Large Customers Growth
You can see below that at the end of the quarter New Relic reported 964 enterprise customers paying more than $100,000 annually, a decrease of 84 on last quarter. We have no doubt shareholders would like to see the company regain its sales momentum. New Relic changed the methodology how they account for customers which had an impact on these numbers.
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'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 111% in Q1. That means even if they didn't win any new customers, New Relic would have grown its revenue 11% year on year. Significantly up from the last quarter, this 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. New Relic changed the methodology how they calculate net dollar retention rate which had an impact on these numbers.
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, licences, technical support and other necessary running expenses was at 67.1% in Q1.
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 Q1 Results
With market capitalisation of $4.44 billion New Relic is among smaller companies, but its more than $817.1 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We were very impressed by the strong improvements in New Relic’s revenue retention rate. And we were also glad to see the acceleration in new contract wins. On the other hand, it was unfortunate to see that the revenue growth was still quite weak. Overall, we think this was a decent quarter. The company is down -0.96% on the results and currently trades at $67.5 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 mediocre, and analysts expect growth rates to deteriorate from there. And while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately gross margins aren't as good as other tech businesses we look at.
New Relic's price to sales ratio based on the next twelve months is 6.0, 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.