New Relic CEO declares turnaround complete as Q2 numbers beat Wall Street expectations

Profile picture for user slauchlan By Stuart Lauchlan November 9, 2021
Summary:
New Relic's year of transition has seen some bumps in the road, but CEO Bill Staples argues that the corner has been turned.

New Relic
(New Relic CEO Bill Staples)

The completion of our turnaround and the beginning of a new chapter of growth.

That was the confident assessment from New Relic CEO Bill Staples as the firm turned in Q2 numbers yesterday showing a quarterly loss of $53.8 million and revenue of $195.7 million, up 18% year-on-year and topping Wall Street expectations.

Staples, who stepped up as CEO earlier this year following his role as the architect of the company’s transition to a new consumption-based operating model, said the numbers were indicative of ongoing progress:

We made the bold move one year ago this quarter to disrupt the observability market and it's great to see the strategy beginning to show its strength in our financial results.

It’s taken a year of transition to get to this point, he said:

We faced a series of quarterly reports where we saw increased competition and declining revenue growth…We set out with a bold new vision to better capture value for our customers and compete in the market. We consolidated our underlying data platform and integrated all of our product experiences. We streamlined and simplified our packaging and pricing and shifted our business model from subscription to consumption.

For four quarters now, we've been innovating new platform experiences, shifting our go-to-market motion from driving contractual commitments to true value realization, and diligently migrating customer contracts onto our new consumption pricing model.

All of that has led the firm to the point where today Staples believes he can declare:

The strategy is sound. The business model is working. Customers are consuming the value at increasing rates. And from here on out, it's about focusing on refining and continuing to execute with ever greater efficiency the strategy that we put in place.

Delivering on priorities

He reiterated the five strategic priorities for the firm, beginning with revenue which he classed as demonstrating “our ability to create value that customers are willing to pay for in a competitive market”. He said of the year-on-year growth:

The primary driver for this was twofold, customers consuming in excess of their commitments as well as higher retention rates.

Priority 2 is to complete the migration of the company to the new business model, he went on:

Our goal is to migrate more than 80% of the business by the end of this fiscal year. Seventy-six percent  of committed revenues are now on the new model. That's a five-point improvement from last quarter.

The third priority involves growing customer headcount. This quarter has seen positive developments on this front, said Staples:

During our turnaround, we focused on migrating our customers to the new business model and ensuring that we were retaining their business. Some of our smaller customers moved to our free pricing tier. This led to the decline and then plateau of our total paid customer counts over the last several quarters. This quarter, our total paid customer count is growing again with over 14,300 customers now paying for services from New Relic. 

He cited some key logo wins to back up his point:

A great example of this is one of our biggest ever new logo wins in Europe, a U.K.-based fintech company with a total contract value of $3.5 million. This account started as a small proof of concept with a primary competitor already in the account, but we ultimately ended up displacing them entirely when the customer determined that we were able to better solve their problems with our all-in-one platform. The contract was fulfilled through our AWS marketplace, further demonstrating the strength of that alliance.

We're also seeing customer win backs from competitors. For example, one customer who transitioned away from New Relic in 2020 recently returned to our platform. As the customer's business grew, they began to experience sizeable technical gaps and surprise bills from the competition, a reoccurring theme. One of our partners spotted this opportunity to better address the customers' needs and ended up reintroducing them to New Relic One and completely displaced the competitor in the account.

Priority 4 is “to methodically deliver platform innovation and greater value to our customers” while number 5 is “to improve our internal execution, efficiency, and cost”. On the last point, Staples highlighted his push to accelerate a shift to public cloud outside of the US. This increases costs in the short term, he warned, but will lead to “ more opportunity, lower churn, and better customer experience medium to long term.”

In addition, he said, data growth is strong:

Data is our major driver of cost and continues to put pressure on our gross margins, especially while we're straddling both on-premise data centers and public cloud. But data will attract more users where our profit margins are higher. Pulling forward these investments impact margins over the near term, but we believe investing in these opportunities today will provide meaningful operational benefits and attractive returns over the medium to long term.

Overall, while wary of “unexpected setbacks and challenges” yet to come, Staples argued:

I believe the bold decisions we made the last four quarters and our tenacious execution against them, show New Relic has what it takes to be a market leader…With adversity, comes strength. And with the challenges of the past year behind us, I'm more confident than ever in our ability to solve our customers' hardest problems and reach our full potential as a company. 

My take

A corner turned? It certainly looks promising. The shift that New Relic has been executing has had a price tag on it in terms of its impact on the past few quarterly reports, but that was always to be expected. The firm has commendably kept its nerve and continued to work towards its stated plan. Attention now turns to the next phase of growth. 2022 will be an interesting year for New Relic’s ambitions.