New Relic FY2017 results confirm shift to enterprise

Profile picture for user pwainewright By Phil Wainewright May 11, 2017
APM vendor New Relic pleases the market with its FY17 results, confirming a shift to enterprise sales as its cloud-based product portfolio closes big deals

Lew Cirne speaks at New Relic event
Lew Cirne, New Relic

Cloud-based application performance management (APM) provider New Relic's stock touched new all-time highs yesterday in the wake of Q4 FY2017 results that came in above analyst expectations.

Revenue grew 45% compared to a year ago while the non-GAAP operating loss shrank to 13%. The company posted full year revenues of $264 million and expects to grow by up to a third this financial year to close to $345 million.

Most notable was the company's marked shift further into the enterprise market, which it expects to account for more than half its revenues in the new financial year. In the company's earnings call, CEO Lew Cirne made much of a 3-year, $24 million contract closed in the quarter, the largest of a record number of six- and seven-figure deals. The stock closed up around 5% on the day, although in the next day's trading it gave up some of those gains.

From six to seven figure deals

The company ended the year with more than 30 customers on contracts worth more than $1 million in annual recurring revenue (ARR), more than double the number a year previously, while more than 500 customers are on contracts in the $100k to $1 million range, up from 350 a year ago. Many of those contracts will follow the same path from six to seven figures as today's tally of thirty $1+ million customers, says Cirne, while others have potential to grow further:

Where did they come from? They were the $100k to $1 million class of last year and years prior. In that category, we now have over 500 six-figure customers — and that's up 40% year over year. That's our farm team for the million-dollar-plus.

Our million-dollar customers, they're the stable of customers that some of them will be ten million dollar customers. That's my challenge to the field, who's going to bring in a $10 million New Relic customer? And I hope it's this year.

The average annual contract value across the paying customer base is still a relatively low $19,500 — although that's already more than double the average at the time of New Relic's IPO two and a half years ago. But while the company will no longer report customer numbers at these lower contract values, it still sees them as an important contributor to its growth, says Cirne.

We're fine with bringing on a customer at a relatively low spend level because the product, if we continue to deliver product that customers love to use, and value, then they'll increase their spend with us and ultimately turn into these wonderful relationships of long-term subscribers at substantial investment levels.

Growing customer spend

With a range of offerings alongside its core APM tools, New Relic has a number of routes to growing spend within a customer, says Cirne. Growth in existing applications leading to more APM licenses is the simplest example. Cross-selling additional products into APM-only accounts is another. A third is where New Relic expands its reach into new applications or divisions within the same enterprise.

This can happen in any size of company, he says, although the third type of expansion is naturally more prevalent in larger enterprises. The three-year, $24 million deal with a Fortune 100 customer was the outcome of a hundred separate transactions over the past six years, he says, and now has 1,500 users using New Relic in 45 countries.

This organization is embracing the cloud with around 1,500 developers, IT ops personnel and business leaders working together using New Relic to drive the success of their digital business initiative.

There's still scope for further growth and upsell to this customer, he adds:

We expect them, or one of our other enterprise customers, to become our first $10 million ARR relationship in the not-too-distant future.

Competitive landscape

Asked about the competitive landscape in the wake of Cisco's acquisition earlier this year of close rival AppDynamics, Cirne was upbeat:

We've been happy with our win rate all along. It has improved in recent months, particularly if the customer's running in a cloud environment.
If the application is in the public cloud environment, we want to think of that as home turf. That's where we want a dominant win rate. And then we'll take a good win rate if the application's running on-premise too, but we want to continue to dominate in the cloud.

With AppDynamics now being part of Cisco, we have an opportunity to lengthen that lead, based on their historical focus of being more focused toward the datacenter and on-premise workloads, and from a networking point of view, culturally.

This is in line with New Relic's cloud-first strategy for the current financial year, as Cirne explains:

New Relic's number one priority is to dominate the cloud. It has never been more clear to us that to succeed long-term in the digital intelligence market, one has to win in the cloud. We think we are past the tipping point, as underscored by CIOs at large global banks [such as JP Morgan] recently making headlines for pushing cloud-first initiatives.

In our view, competitors focused on the on-premise segment of our market — where the market used to be — will ultimately be left behind as the cloud becomes the dominant computing platform in the coming years ...

Let me be clear. Today we monitor both on-premise and cloud-based workloads for many of our customers, and we will continue to monitor both to support our customers. But as the cloud market continues to expand, our goal for New Relic is to be the obvious choice for measuring, monitoring and analyzing every cloud-based digital application.

Analytics and dynamic infrastructure

Alongside that strategy, New Relic is pushing new products and functionality alongside its core APM products. These include the analytics tool Insights and the recently launched Infrastructure product for monitoring dynamic cloud and hybrid environments. This is a very pertinent offering, says Cirne:

Our customers feel that it's imperative to be successful with digital, and they're using the cloud, typically, to be successful with the new digital initiatives.

Our vision is, to be successful with digital, you need visibility in the customer experience, you also need visibility into the application, and the third leg of the stool is visibility into the infrastructure underneath that application — especially if it's dynamic infrastructure in the cloud.

They all should be in one unified platform, easy-to-use, SaaS-delivered, so that you can see the impact of infrastructure health and configuration and how that impacts the application and the customer experience. That vision's resonating with our customers.

What's driving it all is this unified view across customer experience, application, infrastructure, on one easy-to-use platform. We're going to continue to focus on that strategy. It's a winning strategy, particularly when you look at customers running workload in the cloud.

Its Project Seymour capability, which uses machine learning to help automate the process of identifying and alerting issues to appropriate users, will be a further differentiator when it enters general availability later this year, says Cirne.

Seymour is not a separate product on its own but rather a vehicle by which we drive more user engagement, more stickiness and substantially more competitive advantage. Our competitors are on-premise. We don't believe it's possible to do something like this on-premise, single-tenant.

How it will affect our business will be in usage, in win rates, and hopefully more and more of these customer relationships that look like the substantial deal we talked about during the call, and more of those 100k and million-dollar customer relationships.

Cirne also highlighted the first $1 million ARR customer for New Relic Insight, which closed in Q4. This was a project where the customer's CEO was publicly committed to the success of the project, which helped advance New Relic's proposition, says Cirne.

We engaged with the product management team and we asked them, 'What is business success for this?' They're talking in terms of new users and user stickiness and how many people get through the funnel from trial to paid, and the kinds of things that business people think about.

We said, 'What if we could do a real-time dashboard that could present that data along with performance data? The way we do that is through Insights.'

Well, that just transformed their view of New Relic. We're no longer just a tool for debugging code, we were their strategic dashboard. That's when it became something they actually demoed to the CEO of the company.

It shouldn't be a surprise that after you get that level of visibility you start to get seven-digit transactions just for Insights alone. So it's transforming how accounts think about New Relic.

My take

The transition to the enterprise market seems to be working well for New Relic and its cloud-first focus certainly chimes with the times. It's interesting to hear some of the user stories that throws up and how business metrics are becoming increasingly important as a part of its solution.