New Relic converts 81% of customers to consumption model, but Wall Street has a downer on Q3 numbers

Stuart Lauchlan Profile picture for user slauchlan February 9, 2022 Audio mode
Summary:
New Relic's turned in strong revenue growth in Q3, but Wall Street's prickly mood towards tech stocks at present struck again.

New Relic
New Relic CEO Bill Staples

New Relic had a rough ride on Wall Street Tuesday on the back of its Q3 numbers, despite clear signs that the firm’s transition to a consumption-based operating model is gaining traction.

The observability firm reported a net loss of $53.5 million on revenue of $204 million, up 22% year-on-year and 18% on Q2. It was to that growth that CEO Bill Staples pointed:

This is the highest year-over-year growth rate New Relic has posted in two years and validation that we've moved past the turnaround and are making progress toward the approximate 25% market growth rate we shared as a priority at the beginning of the fiscal year. 

He added:

Our revenue growth is a reflection of our improving ability to nurture increased commitments and consumption, and both improved in the quarter. We increased the amount of committed revenue in the consumption model in Q3, exceeding our 80% target for the year a quarter earlier than planned. We now have the vast majority of the business in the consumption model.

Consumption increases 

In a letter to investors, the firm highlighted a significant Q3 expansion in the shape of automotive software provider CDK which signed a “multi-year, seven figure deal”. The letter noted:

CDK views observability as critical functionality to help it achieve its goals of owning the customer experience, driving business outcomes, increasing employee productivity/operational efficiency, and achieving operating leverage across multiple applications. By making a multi year investment in New Relic, CDK plans to consolidate multiple observability vendors onto the New Relic platform, and leverage New Relic’s vision to propagate observability throughout the business.

Such deals are indicative that New Relic’s competitive position is strengthening, said Staples:

They've been a customer for a while. When they saw the full value of our platform, they increased their commitment to us significantly…Their strategy is to partner with us to consolidate almost a dozen different tools from other vendors, as well as open source to standardize on the New Relic One platform.

That helps them achieve their goals of really owning the customer experience they want to deliver, driving their business outcomes, increasing their employee productivity and operational efficiency, and, together with us, drive their business forward. This is a great example of just one customer, but what we believe all customers ultimately want, which is a standard practice around the visibility and a platform that gives them all-in-one access to everything in their digital state.

Improved rates of consumption customers overall is encouraging, said Staples:

We're reaching the final stages of the migration of our business to the new model, and the challenges and variability associated with that conversion process are going away, leaving us with a more normalized growth rate that we can apply all of our R&D and sales and marketing capacity to increase and automatically capture revenue. FY '22 required much of our go-to-market organization to help customers understand and embrace the consumption model.

But now that that heavy lift is done, more capacity will be available to nurture value recognition through consumption. Our research and development team were heavily focused on launching new innovation across a large number of new initiatives this year, feeding the ground for future growth. While we will continue to innovate and introduce new products to market in FY '23, a greater portion of the team will be focusing on unlocking adoption and consumption growth against the many opportunities we already have underway.

 

As for the ‘long game’ of transition to the new model, this is entering a new phase for New Relic. Staples explained:

We're shifting from a business in transition where most of our go-to-market organization last year was focused on helping customers understand the new business model, migrate to it and embrace the full platform. And most of our product teams were focused on launching new initiatives, new innovation, feeding the market with new capabilities. 

Now the focus for Fiscal Year 2023 will be around “nurturing, consumption, helping customers realize the full value of the platform”, he said. As for Q4 of the current year, Staples is inevitably upbeat:

If we execute the Q4 plan according to updated guidance, we will have added about $75 million in revenue above our original guidance and taking the company from the 6% guide to over 17% year-over-year revenue growth. Not only that but we've inverted the steady decline of paying customers, and we're on the growth path.

My take

We have our sights really set on returning to that 25% year-over-year growth rate in the quarters ahead, and we'll continue to pursue it until we achieve it, which we said is in the intermediate term or within the next two years.I don't have a crystal ball for exactly when that will happen, but it will still be our No. 1 priority and we're striving toward it. 

Short-term thinking on the part of investors is hardly a new phenomenon and at the moment Wall Street is in a particularly prickly frame of mind when it comes to tech stocks as yesterday’s stock price slippage reminded us once again. The important thing for New Relic now is to keep on keeping on with the long term plan. As Staples noted, with 81% of the user base now tapping into the consumption model that puts the adoption rate already above the  previously stated full year target. Onwards!

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