Application performance management software company New Relic (NYSE:NEWR) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 19.1% year on year to $205.7 million. However, guidance for the next quarter was less impressive, coming in at $213 million at the midpoint, being 0.24% below analyst estimates. New Relic made a GAAP loss of $56.3 million, improving on its loss of $58.8 million, in the same quarter last year.
New Relic (NEWR) Q4 FY2022 Highlights:
- Revenue: $205.7 million vs analyst estimates of $205.1 million (small beat)
- EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.20
- Revenue guidance for Q1 2023 is $213 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for upcoming financial year 2023 is $925 million at the midpoint, missing analyst estimates by 0.27% and predicting 17.7% growth (vs 17.6% in FY2022)
- Free cash flow of $44 million, up from negative free cash flow of $22.9 million in previous quarter
- Net Revenue Retention Rate: 119%, up from 116% previous quarter
- Customers: 1,099 customers paying more than $100,000 annually
- Gross Margin (GAAP): 68.9%, up from 66.9% 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.
Software is eating the world, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical, and ever more complex. To solve the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the issues in real time.
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 mediocre over the last year, growing from quarterly revenue of $172.6 million, to $205.7 million.
This quarter, New Relic's quarterly revenue was once again up 19.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.16 million in Q4, compared to $7.89 million in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates New Relic is expecting revenue to grow 18% year on year to $213 million, improving on the 11% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $925 million at the midpoint, growing 17.7% compared to 17.6% increase in FY2022.
Large Customers Growth
You can see below that at the end of the quarter New Relic reported 1,099 enterprise customers paying more than $100,000 annually, an increase of 35 on last quarter. That is a bit less contract wins than we saw in the last quarter but quite a bit still above what we have typically seen over the last year, suggesting sales momentum is coming off slightly after a stronger quarter.
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 119% in Q4. That means even if they didn't win any new customers, New Relic would have grown its revenue 19% 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.
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 68.9% in Q4.
That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. New Relic's free cash flow came in at $44 million in Q4, up 102% year on year.
New Relic has burned through $14.8 million in cash over the last twelve months, resulting in a negative 1.88% free cash flow margin. This below average FCF margin is a result of New Relic's need to invest in the business to continue penetrating its market.
Key Takeaways from New Relic's Q4 Results
With a market capitalization of $3.14 billion New Relic is among smaller companies, but its more than $268.6 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 enjoyed seeing New Relic’s improve their gross margin materially this quarter. And we were also glad that the revenue guidance for the next year looks positive. On the other hand, it was unfortunate to see the slowdown in new contract wins and the revenue guidance for the full year missed expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $47.79 per share.
Is Now The Time?
When considering New Relic, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 believe that rate will remain roughly steady. 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 3.4x, 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, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.