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New Relic (NYSE:NEWR) Posts Better-Than-Expected Sales In Q1 But Quarterly Guidance Underwhelms


Full Report / September 16, 2022
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Application performance management software company New Relic (NYSE:NEWR) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 19.9% year on year to $216.4 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $221.5 million, 1.39% below analyst estimates. New Relic made a GAAP loss of $56.2 million, improving on its loss of $74 million, in the same quarter last year.

New Relic (NEWR) Q1 FY2023 Highlights:

  • Revenue: $216.4 million vs analyst estimates of $213.1 million (1.55% beat)
  • EPS (non-GAAP): -$0.26 vs analyst estimates of -$0.36
  • Revenue guidance for Q2 2023 is $221.5 million at the midpoint, below analyst estimates of $224.6 million
  • The company reconfirmed revenue guidance for the full year, at $925 million at the midpoint
  • Free cash flow of $38.3 million, down 13% from previous quarter
  • Net Revenue Retention Rate: 120%, in line with previous quarter
  • Customers: 1,137 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 70.4%, up from 67.1% 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).

Sales Growth

As you can see below, New Relic's revenue growth has been solid over the last year, growing from quarterly revenue of $180.4 million, to $216.4 million.

New Relic Total Revenue

This quarter, New Relic's quarterly revenue was once again up 19.9% year on year. We can see that the company increased revenue by $10.7 million quarter on quarter. That's a solid improvement on the $2.16 million increase in Q4 2022, so shareholders should appreciate the acceleration of growth.

Guidance for the next quarter indicates New Relic is expecting revenue to grow 13.1% year on year to $221.5 million, slowing down from the 17.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 16.6% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter New Relic reported 1,137 enterprise customers paying more than $100,000 annually, an increase of 38 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.

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 120% in Q1. That means even if they didn't win any new customers, New Relic would have grown its revenue 20% 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 70.4% in Q1.

New Relic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

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 $38.3 million in Q1, up 700% year on year.

New Relic Free Cash Flow

New Relic has generated $18.7 million in free cash flow over the last twelve months, 2.27% of revenues. This FCF margin is a result of New Relic asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from New Relic's Q1 Results

With a market capitalization of $4.21 billion New Relic is among smaller companies, but its more than $867.3 million in cash and positive free cash flow over the last twelve months give us confidence that New Relic has the resources it needs to pursue a high growth business strategy.

It was good to see New Relic improve their gross margin this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for New Relic. The company currently trades at $60 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. Although New Relic is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower. And while its customers are increasing their spending quite quickly, suggesting that they love the product, unfortunately 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 4.2x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that New Relic doesn't trade at a completely unreasonable price point.

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