Circling Back to NEWR

Investment Analysis Clubs Saul’s Investing Discussions
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First of all, I would like to thank everyone on this board for all the input that helped drive my
portfolio to some impressive -for me - gains for 2018. Overall, I did better than some - worse than others - which; seems about par for the course.

Secondly, one of my somewhat ironclad - but pending entirely on circumstances - primary
resolutions for 2019 is to try to give back - contribute in some meaningful way - to the rich
investing discussions that occur here. Some of the resources I use for investing are fairly
typical:

Motley Fool Rule Breakers
IBD
Bert Hochfeld
Saul and Saul’s Board
Tinker’s Board
Kooba The Stock Dog

Others not so typical very much. For example, I use a guy on Seeking Alpha, Gary Alexander, as
a sort of contra indicator and the group think of TipRanks to generate interest on my part
for additional research on individual companies.

Anyway, I have been looking over some companies for 2019 that appear primed for, if not greatness,
then certainly elongated goodness. Which brings me to New Relic. As part of the routine here it is considered good form to outline what a company does. So for the record:

New Relic (NEWR)

NEWR provides software as a service for companies to monitor both software and infrastructure
performance by users.

That really doesn’t tell you very much and I have no clue as to what New Relic does - but, it seems to do whatever it does very well. However, Bert Hochfeld likes the company and I initiated
a small ‘Test Flight’ position at one point but sold a bit later to raise capital. Since that time NEWR sank with the rest of the tech stocks and now has the following data points:

Current Price: $80.88
52 WK Range: $56.01/114.78
Market Cap: $4.6B
P/S: 11.14
EV/Sales: 10.1
The Stock is 29.5% Below its 52 WK High

Growth in general has been rock steady with the last four (4) quarterly reports featuring
revenue growth of: 35.7%; 35.1%; 34.8% and 33.5%, respectively. Just a quick glance gives
slightly accelerating revenue growth and during their last Conf Call the company Raised
Guidance. (I capitalized Raised Guidance because I really like Raised Guidance). The stock
popped about 14% after the report and since has given it all back and then some. The last
earnings announcement can be found here:

https://seekingalpha.com/news/3406029-new-relic-beats-0_08-b…

https://seekingalpha.com/article/4219145-new-relic-newr-ceo-…

Highlights of the Conf Call Included:

  • Beat on EPS by 8 Cents
  • Beat on Revenue W 35.7 Y/Y growth
  • Increased Accounts Paying $100K or more by 34%
  • Dollar based Net Expansion Rate of 124%
  • Gross Margins of 85%
  • Deferred Revenue Increased 55% Y/Y
  • Raised Guidance

Negatives I could see included:

  • Total paid accounts were about flat at over 17,000. (RED FLAG!)
  • Gary Alexander wrote and article on SA praising the company performance (Potential Kiss of Death
    Red Flag)
  • On the NPI board I believe that NEWR was brought up and I think it was Tinker that noted that
    he noted that NEWR went down just like every tech stock - but had not recovered as fast as some
    others. Tinker please correct me if I am wrong.

Ok all that to ask this question:

I note that Saul was in NEWR for a bit but sold out: Bear has a currently 9.5% position in the
company. Since I am thinking of reinitiating a small position going forward I would like
to know if Saul has any additional thoughts on the company; and, why Bear has such strong confidence in it

Finally, it appears to me that NEWR probably won’t dominate the world but it has the potential
to provide good returns from here.

Differing opinions requested.

Champico

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I note that Saul was in NEWR for a bit but sold out: Bear has a currently 9.5% position in the company. Since I am thinking of reinitiating a small position going forward I would like to know if Saul has any additional thoughts on the company; and, why Bear has such strong confidence in it

Thanks Champico for your contribution. Nice to have you on the board.

I also pay absolutely no attention to Gary Alexander.

Here’s what I wrote on New Relic in my December summary: …continuing to trim New Relic and finally sold out of it for cash as it continued to not rebound off its lows and I didn’t know why not, which made me very uncomfortable! I’t also growing considerably slower than my other SaaS companies. I just used it for cash to buy other, faster growing companies that I had more confidence in.

Saul

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On the NPI board I believe that NEWR was brought up and I think it was Tinker that noted that
he noted that NEWR went down just like every tech stock - but had not recovered as fast as some
others. Tinker please correct me if I am wrong.

I don’t recall this, but it is quite possible. I went to review it, and of the SaaS companies New Relic has certainly underperformed during the downturn. It should be noted that Nutanix and Pure, as examples, have performed worse - but those are not SaaS companies (albeit, Nutanix is starting a transformation to being both a subscription and a SaaS company) and thus not the comparables I would look at.

As such, this underperformance alone is reason to weed NEWR out from other SaaS type companies. But as you bring up Total paid accounts were about flat at over 17,000. (RED FLAG!) I know what NEWR does, but I have not really found it worth digging further into. But flat paid accounts like this is truly a red flag in a world where cloud products are disruptive and taking over the world.

There was some talk re: New Relic that its revenue growth was expected to re-accelerate again but I never learned the reason why this was suppose to happen. If anyone knows, please let us know.

Otherwise NEWR has sub-par stock performance relative to its peers, has sub-par revenue growth (we are spoiled, but mid 30s is sub-par presently), from what you state very sub-par paying customer numbers, and thus to want to invest in NEWR one has to figure out why these things are and if there is some not straight-forward reason that is too tangential for the market not to have already figured out, that will change. Otherwise, why - move on. Many great companies out there.

Others will state that unlike many SaaS New Relic is profitable, and it also has a discounted price to revenue. The former is great, the latter I have found is often a counter-indicator as we have discussed in great detail on NPI. “Cheap” keep getting cheaper. However, one cannot say that New Relic is “textbook” cheap. Thus it is not textbook cheap (that is actually a positive).

Is there some reason NEWR’s revenues are expected to re-accelerate?

Tinker

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Saul
Tinker

Thanks for taking the time to reply.

Please note that I am not trying to sell or defend NEWR. What I am trying to do is find
potential inclusions in my portfolio that take into account Duma’s research that shows
that companies with high P/S levels may not be the best performers going forward - for at
least a little while.

For reference, I am currently invested in just 6 major positions: AYX, TWLO, ZS, ABMD,
MDB and TTD. Combined they represent 91% of the portfolio. Not quite Tinkeresque but close
enough for me. So…if DUMA is correct it makes sense to me to trim lightly and add 3-5
additional minor positions in fast growing companies that could add some pop to the port
on at least a short term basis. Or something like that. Sort of adding some Maury Wills type
singles hitters/base stealers to the heavy hitters swinging for the fences. Or - as I like to
call them - to justify the port churn - Test flight positions.

From my perspective, NEWR doesn’t have to reaccelerate its performance to add value to the port. It just has to continue to meander along with its 30+% growth to accomplish my objective. Having said that - if you solicit advice from the very best - and get it - then you could be a fool for not considering and following said advice. Sigh…investing is hard.

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Please look in more depth into the reason why paying customer growth appears to have nearly stalled.  We have seen two companies with similar issues (Cloudera and Pivotal), that many were high on (Pivotal at the IPO for me) that have had difficulty growing their customer numbers and this has materially been a reason why their stock prices dramatically declined and remain in the heap.

If this customer growth thing really is not a problem, New Relic is a fine company.  I am just speaking relatively in regard vs alternatives.  I would never tell you not to invest in New Relic.  Now Zuo...albeit a writer from the [Street.com](http://Street.com) picked Zuo as his number one pick for 2019.  Who knows.  But for 2018 that is the one stock that I definitively said NO!  Things can change however.

So dig deeper.  Is there any issue with long-term growth?  Remember, like with Apple’s management, like with Talend’s management, even like with Nvidia’s management (I do not believe Huang did not have a much better idea how bad the channel was - come on, $700 million miss!), do not take management’s excuses on face value.  Dig in and find out if they are on the level.

As you state, “red flag”.  If you can resolve this red flag, then it is worth a deeper look.  For me, there are multiple investment opportunities that may not have the same red flag one needs to dig into.  But Duma is a great source.  I am not sure he has dug into New Relic however.  Just not my cup of tea given the things I stated in the prior post.  Does not mean it won’t make for a great risk/reward from your perspective.

Tinker
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From my iPad…iPad’s are not the same as MacBooks. Don’t let anyone tell you different. Lots of quirks. So copying and pasting for better formatting:

Please look in more depth into the reason why paying customer growth appears to have nearly stalled. We have seen two companies with similar issues (Cloudera and Pivotal), that many were high on (Pivotal at the IPO for me) that have had difficulty growing their customer numbers and this has materially been a reason why their stock prices dramatically declined and remain in the heap.

If this customer growth thing really is not a problem, New Relic is a fine company. I am just speaking relatively in regard vs alternatives. I would never tell you not to invest in New Relic. Now Zuo…albeit a writer from the Street.com picked Zuo as his number one pick for 2019. Who knows. But for 2018 that is the one stock that I definitively said NO! Things can change however.

So dig deeper. Is there any issue with long-term growth? Remember, like with Apple’s management, like with Talend’s management, even like with Nvidia’s management (I do not believe Huang did not have a much better idea how bad the channel was - come on, $700 million miss!), do not take management’s excuses on face value. Dig in and find out if they are on the level.

As you state, “red flag”. If you can resolve this red flag, then it is worth a deeper look. For me, there are multiple investment opportunities that may not have the same red flag one needs to dig into. But Duma is a great source. I am not sure he has dug into New Relic however. Just not my cup of tea given the things I stated in the prior post. Does not mean it won’t make for a great risk/reward from your perspective.

Tinker

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I have nothing new to add that I haven’t already said. It’s a slower revenue grower than many here, but if 35% isn’t enough for us these days, we’re really spoiled. That said, if you’re choosing between 35% and 60% it’s pretty clear you should take the latter.

However, NEWR’s EPS will grow much faster. Can’t say that for most of our others at present.

Bear

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Things I like about NEWR:

  1. NEWR stated on slide 4 of it’s earnings slide deck, that the % of application workflows monitored by APM (their market) is expected to grow from 5% in 2017 to 20% in 2021. a fourfold increase in 4 years is about 40% growth. (TAM looks to be big and expanding)

  2. NEWR has been growing revenue between 33-37% for 6 quarters in a row, so if they hold market share they have the potential to start accelerating revenue growth.

  3. operating margins have been improving by 10% each year for 5 years.

  4. FCF margin has been improving by about 6% each year.

  5. Net expansion rate, which averages about 125 with some seasonality, has improved over the comparable quarter for 5 quarters in a row. (product customers love)

  6. gross margins of 85% (pricing power)

What I don’t like or need to learn more about

  1. not sure of their competitive position. Read that Elastic might be a competitor.

  2. if their customer count has stalled that is a big red flag. I can’t find where total customer’s is mentioned, only customers above $100K which is growing

  3. with an net expansion rate of 125 and overall growth of about 35%, 2/3 of their growth is coming from current customers and 1/3 from new customers. What happens when existing customers level off? Do they have enough new customers to maintain revenue growth?

Jim (long NEWR)

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Here is a link to the Gartner Magic Quadrant for Application Perfomance Monitoring.

https://www.gartner.com/doc/reprints?id=1-4TLC58J&ct=180…

NEWR is in the leading quadrant.

Shows what Gartner thinks are the strengths and cautions of NEWR and its competitors.

Jim

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Gardner peer insights reviews for the APM vendors.

NEWR is the leader in reviews and overall rating.

https://www.gartner.com/reviews/market/apm

Jim

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Hi Jim

For the comment on total customers being flat look on pg 3 of conf call transcript paragraph 9.

best,
champion

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New Relic has a negative Net Promoter Score of -4, which is not good. It means people who bought it are not likely to recommend it to a friend or colleague. By comparison, MongoDB has a NPS of +84.

https://customer.guru/net-promoter-score/new-relic-inc

That being said, I used New Relic quite heavily in my previous company, and liked it a lot. It gave early warning signs of performance issues on our Web app, and helped us troubleshoot the root cause. We could then take action to avoid an outage, which means it saved us serious money and helped improve our customers’ experience.

I’m curious as to why their NPS score is so low.

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From my perspective, NEWR doesn’t have to reaccelerate its performance to add value to the port. It just has to continue to meander along with its 30+% growth to accomplish my objective. Having said that - if you solicit advice from the very best - and get it - then you could be a fool for not considering and following said advice. Sigh…investing is hard.

PAYC and HUBS are examples of 30%+ growers that did quite well in 2018.

Rob

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