APM vendor New Relic has Q1 growth spurt as enterprise push continues

Digital application performance monitoring vendor New Relic beat Wall St expectations when it reported Q1 results this week and revised up its growth forecasts for the rest of the year. CEO Lew Cirne attributed the growth spurt to a particular focus on building large enterprise accounts:

We're most focused at the moment on the largest enterprises in the world, particularly those enterprises that are most aggressively adopting cloud, DevOps and digital.

Q1 revenue was up 35% year-over-year to $108.2 million, with operating income coming in at $8.7 million on a non-GAAP basis, while on a GAAP basis, the loss narrowed to $(3.6) million. Both revenue and income were above financial analyst projections and the company's own guidance range.

The company lifted its revenue guidance for the financial year by around 1% to a range of $457.5-462.5 million. It also reported an enlarged cash pot of $721 million, up almost $0.5 billion following completion of a convertible debt offering during the quarter, combined with the effect of strong positive cash flow from operations. It is expanding internationally, with plans in place to open a European data center, and a new joint venture for the Japanese market.

New Relic continues its push to consolidate its presence in the enterprise market, which it defines as organizations with more than 1,000 employees. This segment now accounts for 55% of the company's annual recurring revenue (ARR). That growth reflects not only a net increase in the number of customers in this segment but also New Relic's success in selling additional tools alongside its core APM offering. The combined effect of existing customers adding seats, extra tools, and upgrading their subscription — less any downgrades — is a 118% uplift in the dollar value of those subscriptions compared to a year prior, says the company.

A single pane of glass for DevOps

Most notable among these secondary tools is the vendor's infrastructure monitoring product, which just 18 months after its introduction has already become the most frequently bought add-on. Cirne says this "reflects the pent-up demand for the unification of application and infrastructure performance data in a single pane of glass." This is allied to the spread of DevOps, where engineering teams are jointly responsible for both development and operation of their software, he explains:

The big change really that we're seeing, and particularly on companies that are adopting DevOps, is that the silo between building your software and operating your software is breaking down. So, as companies move from big monolithic architectures and teams to smaller teams that have responsibility for their service and their piece of the broader application, then those teams have responsibility not only for building the application but making sure the application delivers high availability.

That's why you see this explosion in the number of people using our type of software. It's because developers — primarily they're writing code but they're also — if there's a problem in production, they need to quickly be able to resolve it, so they can go back to writing code.

Now in traditional IT operations organizations, there was a central operations team that tried to keep applications running. When you have that organizational structure, the only way they manage risk was they said 'no' to production change. That's why previous generation tools aren't fit for where the world is moving and why there is need to move faster. In order to move faster, you need developers to be more rapidly introducing change to production and that means pushing out responsibility for the health of the system to those people. And that's why we're so relevant to that community.

Land and expand into enterprise

In tandem with its push upmarket, New Relic is putting less resource into acquiring and retaining smaller customers. Churn among these smaller accounts meant that the total of paying business accounts remained static at around 17,000. Instead, the company is focusing on a 'land and expand' strategy of penetrating midmarket and large enterprise accounts and gradually increasing those companies' spend over time. Thus the number of these paying accounts spending more than $100,000 a year with New Relic reached 748 as of June 2018, up from 555 a year prior, a 35% increase.

Cirne says that New Relic's ease of use compared to earlier generations of APM products — such as Wily Technology, which he previously founded — is an important factor in growing its enterprise footprint:

I love the idea of democratizing this category and that's one of the strengths of our products, how easy it is to use. From a business perspective we see the greatest growth opportunity on the high end of the market. And so customer count may be the wrong way to think about success although we always love it when more people use our products.

The sad history of this category before New Relic was that most APM customers had two or three specialists that knew how to use these hard-to-use arcane tools — one of them I created in a prior life. With New Relic we wanted to make it as easy to use that hundreds or in some cases thousands of people use our product within these enterprises. So I like to think in terms not only of number of companies using our product but number of people using our product and that's an important way we think about changing our category.

Instrumenting microservices architectures

Cirne also spoke about New Relic's distributed tracing offering, based on the vendor-neutral OpenTracing framework, and which has just entered general availability. Its ability to highlight dependencies in interconnected microservices environments may well lead to increased takeup of New Relic, he believes:

Distributed tracing we're very excited about, because as companies move to more and more micro-service architecture, they want to see the health of an action like say, for example, somebody logging in. That might touch 10, 20, 30 services all running in concert and production.

Distributed tracing allows you to see the relationship as that transaction runs through all 30 of those services. And what's cool about it is, if you're only instrumenting a third of those services, then you've got a visibility gap that distributed tracing will stop short of — until you install New Relic on those other services. So we believe it has the potential to perhaps provide more incentive for our customers to instrument more of their environment as it becomes more interconnected. And that will certainly drive growth for our business.

My take

In his remarks, Cirne also pointed to a Gartner forecast of massive expansion in demand for APM services over the next few years. There's no doubt that an increased emphasis on rapid innovation and real-time feedback, coupled with a continuing switch to cloud-based, digital application infrastructures, is certain to drive take up of monitoring products like New Relic. But the landscape is becoming more and more complex too, with many businesses embracing a mix of containers and serverless across a hybrid on-premise and public cloud landscape. There's a lot to keep pace with.

The decision to increase New Relic's cash reserves at this time therefore looks like a wise move. It gives the company more scope to invest in growth as needed, while allowing it to contemplate acquisitions to bolster its technology base if necessary. The market opportunity is huge and the big challenge for New Relic is simply keeping pace with that potential.