Some of you may remember a little company I brought to the board last year, New Relic. Saul briefly owned it as well: http://discussion.fool.com/my-review-of-new-relic-newr-32786219…
On Tuesday (2/6), NEWR reported what I consider a fantastic quarter. I decided to buy back in, and I wanted to give a little info explaining why.
New Relic monitors web and mobile applications in real time, detecting issues before they become problems, and helping companies figure out where the pain points may be before it costs them sales, or even customers. Along with Cisco’s recent acquisition, AppDynamics, and a private company called Dynatrace, New Relic is one of the main leaders in the APM space (Application Performance Monitoring).
Paid Business Accounts Growth Accelerating
One of the main reasons I sold several months ago was because the new customer acquisition seemed to be slowing. Well, they really have kicked it back up these last couple quarters!
Mar17: 15,200 (less growth)
Jun17: 15,400 (a lot less growth…I sold)
Sep17: 15,900 (big uptick)
Dec17: 16,600 (woah)
As with Shopify Plus for SHOP, the large accounts are where the rubber meets the road for NEWR as well. They had 629 Enterprise Accounts this quarter (accounts spending over $100,000). These accounts make up a full 52% of annual recurring revenue. Let me say that again, 629 out of 16,600 accounts, make up more than half the revenue. We know what to look at now.
Now, they’re not growing the enterprise group exponentially. They add on average 39 members each quarter. This quarter it was 43. But slow and steady growth is just fine, because NEWR’s Dollar-Based Net Expansion Rate this quarter was 125%. Who do you think is spending more with them all the time? That’s right, the enterprise accounts.
If the trend continues, these 629 accounts (and those that reach enterprise level in the future) will eventually make up 55%, 60%, and maybe much more of the total revenue for NEWR. These are entrenched partnerships with switching costs galore, and as such, this is great for NEWR.
Revenue Growth Ticked Back Up
Here’s the history:
Revenue (in millions) Mar Jun Sep Dec 2016: 52 59 63 68 2017: 73 80 85 92 Revenue Growth Mar Jun Sep Dec 2016: 57% 54% 48% 42% 2017: 40% 37% 33% 35%
That’s not blistering compared to some, but the uptick makes me believe it will be steady around this level. That’s also a reasonable assumption due to the predominance of their enterprise accounts. But even more relevant than revenue growth is the leverage situation, so let’s talk about that.
Gross Profit Grew Nicely, OpEx Barely Grew, therefore Operating Loss Narrowed
Extremely nice uptick in gross profit: from 69M last quarter to 76.2M this quarter. That’s sequential growth!
OpEx? Sequentially it only grew from 83.8M to 84.1M! Almost no growth at all.
So obviously, this had a impressive effect on Operating Loss. Where they lost 15M in September, that loss was only 8M in December. Pretty obviously scaling.
Outlook for Next Quarter
Revenue between $95.0 million and $96.5 million, representing year-over-year growth of between 30% and 32%, respectively.
Non-GAAP income from operations of between $2.0 million and $3.0 million.
Non-GAAP net income per diluted share of between $0.04 and $0.05. This assumes 58.6 million weighted average diluted shares outstanding.
My conviction rating on New Relic is 8.5. I believe they have a solid niche carved out. They partner with Splunk, which lends some credibility to that assertion. Almost all revenue is recurring, gross margin is fantastic, they’ve shown they can grow without increasing spending, and seem to be well on the way to profitability.
As I said, I’m back into New Relic with a 4% position for now. I plan to keep it this time. I don’t expect it to take over the world, but I do think what they do is really cool: http://discussion.fool.com/thanks-ant-while-i-actually-think-new…
Their PS is currently 10.8 and their HPE30 (a metric I made up meaning hypothetical PE at a 30% margin) is 36. I consider them fairly valued here based on the likelihood that they continue growing.