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New Relic (NYSE:NEWR) Q1 Sales Beat Estimates, Stock Jumps 13.4% on Announcement Company is Being Acquired


Full Report / July 31, 2023

Application performance management software company New Relic (NYSE:NEWR) reported Q1 FY2024 results beating Wall Street analysts' expectations, with revenue up 12.1% year on year to $242.6 million. New Relic made a GAAP loss of $33.3 million, improving from its loss of $56.3 million in the same quarter last year. Additionally, New Relic announced that it has entered into a definitive agreement to be acquired by Francisco Partners, a leading global investment firm that specializes in partnering with technology businesses, and TPG, a leading global alternative asset management firm, for $87.00 per share in cash. The all-cash transaction values New Relic at an equity valuation of approximately $6.5 billion.

New Relic (NEWR) Q1 FY2024 Highlights:

  • Revenue: $242.6 million vs analyst estimates of $239.4 million (1.33% beat)
  • EPS (non-GAAP): $0.43 vs analyst estimates of $0.31 (37.9% beat)
  • Free cash flow of $73.5 million, similar to the previous quarter
  • Gross Margin (GAAP): 77.6%, up from 70.5% in the 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 over the last two years, growing from $180.5 million in Q1 FY2022 to $242.6 million this quarter.

New Relic Total Revenue

This quarter, New Relic's quarterly revenue was once again up 12.1% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $136 thousand in Q1 compared to $2.73 million in Q4 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 11.1% over the next 12 months.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.6% in Q1.

New Relic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, New Relic's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. New Relic's free cash flow came in at $73.5 million in Q1, up 91.8% year on year.

New Relic Free Cash Flow

New Relic has generated $69 million in free cash flow over the last 12 months, a decent 6.77% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from New Relic's Q1 Results

With a market capitalization of $5.2 billion, New Relic is among smaller companies, but its $457 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was comforting to see that New Relic topped analysts' revenue and EPS expectations this quarter. We were also glad that its gross margin improved. Zooming out, we think this was a decent quarter, showing that the company is staying on target. 

New Relic announced that it will be acquired by Francisco Partners and TPG for $87.00 per share in cash. The all-cash transaction values New Relic at an equity valuation of approximately $6.5 billion. The purchase price is 26% premium to New Relic’s 30-day volume-weighted average closing price ending on July 28, 2023, and approximately a 30% premium to New Relic’s last-twelve-months volume-weighted average closing price ending on July 28, 2023. The transaction is expected to close in late 2023 or early 2024.

The stock is up 13.4% after reporting and currently trades at $83.96 per share.

Is Now The Time?

When considering an investment in New Relic, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of New Relic, we'll be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there.

Given its price to sales ratio based on the next 12 months is 5.5x, New Relic is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. 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.

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