Transitioning a company to a new business model is a long journey as various tech vendors have shown over the years. Doing so against a backdrop of a global pandemic is an added complication that no-one needs.
So as Bill Staples looks back on his first few months as CEO at New Relic, following his surprise appointment back in May, he can perhaps be satisfied with progress to date, while acknowledging there’s still a lot to do, saying:
A year ago…we introduced the New Relic One platform and consumption business model to the world. It was a bold, but necessary, move to serve our customers better and lay a new foundation of growth for the business. As you know, the past year of COVID has only accelerated the move to digital experiences. Nearly every company in the world, no matter the size or segment employs digital experiences to serve their customers, partners and employees.
Yesterday the observability platform firm turned revenue for Q1 2022 of $180.5 million, ahead of guidance, with net loss from operations of $73.9 million. As of the end of Q1, over 70% of the firm’s business had shifted to the new consumption pricing model, making the fiscal year end target of an 80% move look very achievable.
On the other hand, while the number of customer accounts worth more than $100,000 per annum - which make up around 79% of revenue - rose sequentially from Q4 to hit 964, total active accounts were flat for the same period at 14,100 and actually down on a year ago.
It’s all indicative of the realignment that occurs during operating model transitions. The trick for Staples now is to press ahead with the strategic objectives needed to build on success to date and complete the move.
The Big Five
With that in mind, the new CEO has identified 5 priorities which he says the entire company is aligned behind, with “measurable success criteria” for each which will be shared with the world to indicate progress.
The first priority is to get revenue growth back up to market rates. This has been impacted by the corporate overhaul and re-platforming work, admits Staples:
As a consumption business, this is the crowning metric which measures our ability to innovate value that customers are willing to pay for and deliver in an efficient manner. We measure our success with this priority through our quarterly revenue reports, and we aim to show revenue increases and year-over-year growth in the quarters ahead. We anticipate accelerating year-over-year revenue growth starting in Q3.
For eight quarters, revenue growth has decelerated while we've re-platformed our products front-end and back-end, pivoted towards the new platform pricing model, and migrated existing customers' contracts to the consumption model as a foundation for the vision. With that foundation laid, we are ready to bring that deceleration to an end, and we're focused on scaling the business, starting in Q1.
Next up is, of course, to finish the migration of the business to the new model:
Our goal is to migrate more than 80% of our committed revenue by the end of this fiscal year. After three-and-a -half quarters in market, we've already successfully migrated 71% of committed revenue as of the end of the fiscal quarter, up from 60% the prior quarter, another strong indication of our momentum.
This is a high priority because we aspire to create a growth engine for this business that will be disciplined, systematic, repeatable and scalable; and by migrating the majority of our customers to our consumption model, they will automatically benefit from the innovation and full value of the platform, which we believe will lead to growth of their consumption and our revenue will follow suit.
Adding to the number of paying customers is a priority for any vendor and for New Relic the mechanism to achieve this will be via a 100% self-service product-led growth funnel, starting with New Relic One free tier. Staples explains:
Since introducing the offer three-and-a-half quarters ago, thousands of developers have signed up for New Relic One, and more than 3,300 PAYG [Pay As You Go] accounts have [been generated via] credit cards through the end of the fiscal quarter, an increase of more than 1,300 since we reported last quarter.
Making an ongoing success of this priority is important for three reasons, he adds:
First, we see our self-service funnel as strong validation of our product experience and product market fit. Without a great product, developers would simply not be willing to pay for the service. Second, as we grow the number of paying customers, we expand the pool we're able to nurture to higher and higher levels of service, including graduating them to sales-led accounts. And third, the self-service experience also signals experimentation and early adoption within our sales-led accounts, further helping us identify new opportunities to nurture expansion.
The fourth priority is to “methodically deliver platform innovation and value to customers”, while the final item on the list is to improve internal execution and costs, he concludes:
We realized that in order to reach our potential and achieve competitive growth rates, all areas of the business will need to move faster with less friction, more alignment and efficiency. We are systematizing our planning, prioritization and execution rhythms across functions and better stitching together internal data across product, marketing, sales and finance so that we can run the business in real-time and better serve our customers in their moments consuming the platform.
As noted above, any transition on this scale is going to be long journey with a few bumps in the road. Look at the cloud strategic shifts and their progress at firms like Adobe, Oracle and SAP, to name but a few, to realize that change needs long-term commitment to a vision. Staples may be new to the CEO hot seat, but he was one of the main drivers behind New Relic’s new direction and as such his own commitment to the direction of travel can be taken for read. He’s now set out the priorities against which execution will be measured. Q1’s numbers were solid; the trick now will be to build out on the evident foundation that’s being put in place. Onwards!