Application performance management software company New Relic (NYSE:NEWR) reported results in line with analyst expectations in Q4 FY2023 quarter, with revenue up 17.9% year on year to $242.5 million. However, guidance for the next quarter was less impressive, coming in at $239 million at the midpoint, being 4.87% below analyst estimates. New Relic made a GAAP loss of $52.5 million, improving on its loss of $56.4 million, in the same quarter last year.
New Relic (NEWR) Q4 FY2023 Highlights:
- Revenue: $242.5 million vs analyst estimates of $241.1 million (small beat)
- EPS (non-GAAP): $0.42 vs analyst estimates of $0.22 ($0.20 beat)
- Revenue guidance for Q1 2024 is $239 million at the midpoint, below analyst estimates of $251.2 million
- Management's revenue guidance for upcoming financial year 2024 is $1.03 billion at the midpoint, missing analyst estimates by 4.29% and predicting 10.7% growth (vs 17.9% in FY2023)
- Free cash flow of $68 million, up from negative free cash flow of $29.5 million in previous quarter
- Gross Margin (GAAP): 76.7%, up from 68.9% 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).
Sales Growth
As you can see below, New Relic's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $172.7 million in Q4 FY2021, to $242.5 million.
This quarter, New Relic's quarterly revenue was once again up 17.9% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.73 million in Q4, compared to $12.9 million in Q3 2023. 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 10.4% year on year to $239 million, slowing down from the 19.9% 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 $1.03 billion at the midpoint, growing 10.7% compared to 17.8% increase in FY2023.
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 76.7% in Q4.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like New Relic to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed 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 $68 million in Q4, up 54.2% year on year.
New Relic has generated $33.8 million in free cash flow over the last twelve months, a decent 3.65% of revenues. This FCF margin is a result of New Relic asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from New Relic's Q4 Results
With a market capitalization of $5.75 billion New Relic is among smaller companies, but its more than $879.8 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 enjoyed seeing New Relic’s improve their gross margin materially this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that New Relic's revenue guidance for the full year missed analysts' expectations and the revenue guidance for next year indicates quite a significant slowdown in growth. While non-GAAP operating margin guidance was better, the market seems focused on the revenue guidance miss vs. expectations. Overall, this quarter's results could have been better. The company is down 7.62% on the results and currently trades at $76.25 per share.
Is Now The Time?
New Relic may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although New Relic is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there.
The market is certainly expecting long term growth from New Relic given its price to sales ratio based on the next twelve months is 5.3x. In the end, beauty is in the eye of the beholder. While New Relic wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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