NEWR Q4 Earnings and New Platform

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I guess I must be one of the few still hanging on to New Relic shares here.

Yesterday they announced Q4 earnings (their fiscal year ends on March 31st):

https://ir.newrelic.com/press-releases/Press-Release-Details…

Revenue still growing at 30%+, which pales in comparison to some of the companies we follow here, but is pretty typical based on NEWR’s last few quarters. Looks like it was a beat compared to the consensus on revenue and earnings (earnings were about double the consensus)

However shares are down a few percent today based on guidance, particularly for earnings, which was less than than expected.

At the same time, they announced their new platform New Relic One

https://ir.newrelic.com/press-releases/Press-Release-Details…

The in house press release gives more technical description, but this tech crunch article puts some more layman terms that I could understand around it:

https://techcrunch.com/2019/05/14/new-relic-takes-a-measured…

The new platform, called New Relic One, has been designed to replace the original platform, which was developed over the previous decade. The company says that by moving slowly to the new platform, customers will be able to take advantage of new features that it couldn’t have built on the old platform without having to learn a new a way of working.

Jim Gochee, chief product officer at New Relic, says that all of the existing tooling and functionality will eventually be ported over or reimagined on top of New Relic One. “What it is under the covers for us is a new technology stack and a new platform for our offering. We are still running our existing technology stack with our existing products. So we’re [essentially] running two platforms in two stacks in parallel, but all of the new stuff is going to be built on New Relic One over time,” he explained.

By redesigning the existing platform from scratch, New Relic created a new, modern, more extensible model that will allow it to plug in new functionality more easily over time, and eventually even allow customers to do the same thing. For now, it’s about changing what’s happening under the hood and providing a new user experience in a redesigned user interface.

So essentially everything is moving from their existing platform to the new “One” platform which goes live today, although it will be a gradual move so customers can continue to use the old platform for a while. I’m guessing this investment which, although live today, still sounds like it is having features built out over at least the next few quarters, is probably driving some of the earnings guidance miss.

I don’t know if the market was expecting this big rollout or not. I suppose if this is a big upgrade from what they’ve been selling for the past decade, it could potentially lead to a re-acceleration of revenue, but time will tell and we should be able to track its progress from quarter to quarter.

There really isn’t much news or chatter that I could find online about it, so I’m interested to see if Bert chimes in. Overall, I’m happy keeping my small position in NEWR. Once all of our April 30th companies report, I’ll reassess my overall allocations and consider whether I might want to add a little bit here or not, but I’m not in a rush to do so, especially since most of the other companies we follow will report over the next few weeks

-mekong

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You’re not the only one. I do regret not bailing out before earnings, though. I’d already tagged NEWR as my first next one to go because it’s languished for a year, but decided to chance a possible ER-related jump. No such luck. I’m still above water, but it does feel like this one is going to go nowhere relative to many other stocks, so the love is gone.

I’m thinking of rolling it into more of TTD or AYX, but the latter is already oversized due to its stellar growth. Maybe SQ since it’s also been punished a little of late.

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mekong22 –

I sold out of NEWR after last Q’s report, but was paying close attention to this one as it was on my watch list. My sell thesis at the time was:

“I had no problem with revenue growth holding at 35% last Q. My issue was slippage in all of the following areas:

* gross profit growth
* operating expenses
* operating expenses as a % of revenues
* operating margins
* free cash flow margin
* expansion rate
* their prior EPS momentum/growth

In addition:

* their overall customer count remained flat for the 2nd Q in a row (potential growth issue)
* they spent a decent amount of time on their call outlining a move upmarket, suggesting a little more work to generate business (potential operating leverage issue)

Considered individually none of those blips was big enough to scare me off. However, when I put them all together I decided NEWR might have some headwinds I didn’t see in other names I was tracking.”

So after taking a look at their release and listening to the call, how did they do in addressing my concerns? (Please note that there might be some ASC 606 vs 605 consideration in the exact comparisons, but I think the gist is right.)

As you noted, their major point of emphasis this quarter was the release of their new New Relic One plaform. Unless I’m reading it wrong, they view this as a revamp of their core product offering. According to the CEO, “we’ve designed it to be the basis of the next 10 years of innovation for New Relic.” So they’ve got quite a few things going on. There’s nothing wrong with that as all companies need to innovate especially in the tech sector. The question becomes whether we believe this innovation will lead to more business success down the road. Here’s how I’m thinking through it:


Revenues							%YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	$63.44	$68.10	$73.34	$263.48		2017	 	 	 	 	0
2018	$80.10	$84.69	$91.83	$98.45	$355.06		2018	#DIV/0!	33.5%	34.8%	34.2%	34.8%
2019	$108.22	$114.90	$124.01	$132.10	$479.23		2019	35.1%	35.7%	35.0%	34.2%	35.0%

Take: Holding steady and no issues here. I’m not crazy about the 29% guide for Q1 or 27% for FY20, but as we’ve seen before guides are made to be beaten.


Operating Expenses						%YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$64.99	$65.96	$69.41	$74.47	$274.83		2017	 	 	 	 	0
2018	$81.57	$83.83	$84.14	$89.60	$339.14		2018	25.5%	27.1%	21.2%	20.3%	23.4%
2019	$94.80	$101.98	$112.35	$125.80	$434.93		2019	16.2%	21.7%	33.5%	40.4%	28.2%



Operating Expenses % Revenues		
	Q1	Q2	Q3	Q4	YR
2017	 	104.0%	101.9%	101.5%	104.3%
2018	101.8%	99.0%	91.6%	91.0%	95.5%
2019	87.6%	88.8%	90.6%	95.2%	90.8%
2020	0.0%				0.0%

Take: Hmmm. Trending the wrong way the last couple of Q’s. They mentioned record hiring in both S&M and R&D as the main driver here. They stated on the call they believe this hiring and a couple acquisitions have pulled their R&D model forward about 2 years, so that’s a positive. However, there will also be some carrying costs as they will need to support both their old and new platforms while transitioning customers over. That could be a drag for a while. However, these increases are perfectly reasonable if they lead to avenues for future growth.

Are there any signs of that future growth? They obviously believe their new platform will be an avenue. I don’t have any reason to doubt them on that point. However, they’ve also referenced “upmarket opportunities with greater expansion potential” for a couple of quarters now. What’s that look like?

Pros:

  • 2300 Enterprise accounts vs 2100 last year (+9.5%). Not great growth, but it is an increasing base.
  • 61% of ARR from Enterprise accounts this quarter vs 54% last year. Good.
  • Average ARR from Enterprise accounts $140K vs $100K (+40%). Very good.

Cons:

  • Total paid accounts dropped to 16,900 vs 17,000 (-5.8% YoY). From flat to a decrease in 3 Q’s. That’s fewer small customers to hopefully convert into bigger customers.
  • Their expansion rate has declined from 141% to 131%. They are selling less to their existing customer base, although that’s not unusual if you’re getting bigger lands from Enterprise clients. This admittedly might not be a con, but I can’t consider it much more than a push at best.
  • And…

Customer Accounts >$100K					%YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	517	 		2017	 	 	 	 	0
2018	555	586	629	703	 		2018	 	 	 	36.0%	 
2019	748	786	816	858	 		2019	34.8%	34.1%	29.7%	22.0%
  • As we see above, growth in their lowest reported tier of upmarket customers appears to be declining rather holding or accelerating. Uh oh. We have other companies at similar run rates showing much better growth at the $100K level.

Take: I view the cons outweighing the pros here, at least in the short term. This doesn’t look like a company organically moving upstream to take advantage of bigger business already coming its way. It looks more like a company trying to monetize bigger clients because the easy money is drying up. They suggested on the call the time to ramp up new sales hires was roughly one year. I see more slog than smooth transition here.

Final Take:
As a prior holding for me and a company I was pretty familiar with, NEWR had a strong spot on my watch list. However, I can’t say this quarter impressed. A lot of companies organically release new products or features as a natural expansion of their business model. This smells more to me like a company who is reactively adjusting its business in an attempt to reignite growth. NEWR does have an advantage in that it is already profitable as it tries to make this adjustment. However, my assessment of this quarter suggests NEWR is likely to drift for a while until it finds its new footing. I’d be curious to hear if Bear sees things differently as he’s a little more adept with the numbers than I am and clearly knows New Relic better than just about anyone.

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I’d be curious to hear if Bear sees things differently as he’s a little more adept with the numbers than I am and clearly knows New Relic better than just about anyone.

Umm…I don’t know about that, Stock"novice." I was about to write up my thoughts, but I saw your post, and you literally nailed every point I was about to make.

  • I’m not impressed with “New Relic One.” Honestly it sounded like “we’re going to give this a cool name and roll it out as a new thing, but really it’s just our base product + several options that most people want anyway.” Maybe that’s not entirely right, but something like that.

  • I’m not happy with the expenses creeping up, as you mentioned. I thought the slowish growth would be fine here since they showed signs of increasing profitability. Now it looks more like they’re trying to buy growth.

  • I was hoping to see a slight tick up in growth rate, actually – especially with their recent acquisition. But we just saw signs of a continued gradual slow down in growth.

Nothing too crazy here. But nothing that makes me think they can grow fast enough or profitably enough to be a great investment. So I sold at $102 yesterday, after hours. It was a large position for me. I need to find something to do with the money.

Bear

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