A New Chapter for New Relic

Yesterday marked a significant day for Bill Staples, the newly designated CEO of New Relic, with his tenure officially beginning on July 1st. Having dedicated over two decades to the technology sector, he has now been entrusted with leading a company. This represents a substantial achievement, yet the true challenges are only just beginning.

Transition and Long-Term Vision

Lew Cirne, the founder and current CEO of New Relic, is transitioning to the position of executive chairman. Over the past few years, Cirne has focused on a comprehensive overhaul of the company’s platform and a shift in its revenue strategy, all geared towards achieving sustained, long-term growth.

Cirne's Perspective on the Transformation

“The re-platforming of our data layer and user interface, coupled with the move to a consumption-based business model, wasn’t undertaken to simply maintain a $1 billion valuation for New Relic,” Cirne explained to TechCrunch following yesterday’s announcement. “Our aim is to build a multibillion-dollar company, and we are prepared to sacrifice some immediate gains and endure short-term difficulties to secure our future success.”

Market Position and Competitive Landscape

New Relic currently holds a leading position within the application performance monitoring (APM) market. Gartner’s assessment places the company in third place, following Dynatrace and Cisco AppDynamics, but preceding DataDog. While not definitive, the Magic Quadrant provides valuable insight into the relative standing of companies within this sector.

Understanding Application Performance Monitoring

New Relic operates within the application performance monitoring (APM) space. APM solutions empower organizations to monitor the operational health of their applications. This proactive approach allows for the prevention of issues or, at the very least, a faster diagnosis when problems arise.

In today’s fast-paced digital environment, where user patience is limited, APM is a crucial component of a positive customer experience. Poor application performance directly impacts customer satisfaction and can quickly drive users to competitor services.

Financial Outlook and Future Challenges

Alongside the CEO announcement, New Relic released its latest earnings report. TechCrunch analyzed the company’s financial data to assess the obstacles Bill Staples may encounter as he assumes leadership. The analysis reveals a company actively working to align its product roadmap and business model with future demands, though this may not immediately translate into the rapid growth expected by public investors.

Key Takeaways from the Financial Report

• The company is investing heavily in its platform and business model.
• Short-term growth may be moderate as a result of these investments.
• Long-term success is the primary focus of the current strategy.

New Relic is positioning itself for sustained growth, even if it requires navigating some immediate financial headwinds.

Short-Term Challenges, Future Potential

Investing in a company’s long-range product development and business strategy can present challenges for immediate market acceptance. However, these strategic initiatives often yield substantial returns over time, as demonstrated by Adobe’s successful transition from traditional license sales to a subscription-based revenue model.

Several other companies are currently undergoing similar transformations, frequently experiencing temporary setbacks in growth as established revenue streams are replaced with new sources.

Therefore, when evaluating New Relic’s recent performance and projections, our focus is on identifying indicators of future success rather than immediate gains.

Recent Performance Overview

New Relic reported a quarter exceeding initial expectations. Both the company’s net income and adjusted earnings per share surpassed analyst forecasts.

Total revenue reached $173 million, exceeding market predictions by approximately $6 million.

Despite these positive results, the company’s stock experienced only a modest increase of 5%, remaining significantly below its 52-week high.

Guidance and Market Reaction

This limited stock response is attributed to the company’s forward-looking guidance. New Relic anticipates revenue growth of 6% to 7% in the current quarter compared to the same period last year.

For the full fiscal year 2022, ending at the close of calendar Q1 2022, the company projects overall growth of around 6%.

These growth rates represent a considerable deceleration from the 11% growth achieved in the previous quarter (fiscal Q4 2021).

Furthermore, New Relic’s projected fiscal year revenue, estimated between $709 million and $711 million, is only slightly above the market consensus of $709.7 million, according to Yahoo Finance.

Navigating Transformation

A slowdown in revenue growth is a common consequence for companies undergoing significant strategic shifts. We anticipated this outcome, recognizing that prioritizing long-term investments often results in less impressive short-term financial results.

However, it’s crucial to identify additional metrics that may offer a more encouraging outlook. Let's examine these further.

Analyzing New Relic's Future Performance

A review of New Relic’s recent investor communication provides valuable insight into the company’s product and pricing strategy evolution. Essentially, New Relic shifted from traditional licensing to a consumption-based model with its New Relic One platform last year.

The company states, “While transformations present challenges, having completed the majority of the necessary work, we are now positioned with a highly competitive offering and a sales strategy designed to drive revenue growth in the latter half of fiscal year 2022.”

Is there preliminary evidence suggesting a positive shift in product performance, even if the anticipated revenue acceleration hasn't yet materialized in their financial projections? To some extent, yes. New Relic reports enhancements in usage metrics for the updated New Relic Explorer.

Furthermore, the recently launched Guided Install feature seems to be successfully increasing the volume of data types ingested by their customer base.

For a business operating on a consumption pricing model, increased product engagement is a crucial indicator of success. While we are limited to the metrics New Relic has chosen to disclose, these initial findings are encouraging.

It’s worth remembering Satya Nadella’s observation that revenue often follows usage; this principle is particularly relevant with consumption-based pricing. Therefore, for New Relic, tracking usage statistics may be the most telling measure of growth over the coming quarters.

Hopefully, the company will continue to share more detailed usage data in future reports.

Key Takeaways

• New Relic transitioned to a consumption-based pricing model.
• Early data suggests improved product usage.
• Usage metrics are now a leading indicator of future revenue.

The company’s success will likely hinge on its ability to drive continued engagement with its platform.

The Shift in Business Model and its Implications

New Relic expresses optimism regarding its transition to a consumption-based pricing structure, anticipating that streamlining its Sales and Marketing operations during fiscal year 2022 will lead to consistent improvements in customer acquisition costs. A reduction in CAC is a positive indicator. The company further emphasized that this new sales approach allows its team to prioritize rapid product adoption by customers, potentially leading to increased revenue over time, rather than prolonged upfront negotiations.

This framing is particularly valuable given the company’s recently reported net retention figures, which were somewhat subdued.

To facilitate this shift, New Relic is implementing internal changes. Notably, the company has adjusted its sales compensation model, with representatives now being rewarded based on actual product consumption – the extent to which customers utilize the service. This represents a beneficial long-term strategy, mirroring a similar move by Microsoft, which began incentivizing its sales force based on Azure cloud compute usage rather than simply sales volume.

When questioned by TechCrunch about the timeline for these product changes to translate into revenue growth, New Relic reiterated its expectation of accelerated growth in the second half of fiscal year 2022. This response followed earlier statements that lacked clear support from the company’s financial data.

TechCrunch’s conversations with numerous public company CEOs reveal a trend towards conservative guidance. This stems from a desire to exceed expectations, coupled with a heightened level of corporate caution, particularly in the current business climate. New Relic anticipates that its accelerated revenue growth in the latter half of the year will result in a single-digit growth rate, which is lower than its projected growth for the first quarter of the fiscal year.

This suggests either a significantly challenging second fiscal quarter is anticipated, or a discrepancy between the company’s verbal statements and its numerical projections. To reconcile its expectations of acceleration with its full-year guidance, New Relic would likely need to experience a period of slower growth in the second quarter. However, it is unlikely that the company is genuinely forecasting such a slowdown.

Consequently, Staples will assume the role of CEO facing certain financial hurdles. He conveyed to TechCrunch that his prior experience managing substantial Profit and Loss statements at Microsoft and Adobe has adequately prepared him for this challenge. His expertise will be crucial as he navigates New Relic through the uncertainties ahead.