New Relic’s transformation to a consumption model continued to pay dividends in its most recent quarter. Second quarter fiscal 23 revenue was $226.9 million, up 16% from $195.7 million one year ago, while net loss was $43.5 million, down from $48.07 million last year. Other stats of note:
- Active customer accounts are up from 14,300 last year to 15,300 this year.
- Active customer accounts contributing more than $100,000 ARR are up from 1,011 to 1,171.
For CEO Bill Staples, it’s affirmation that the firm is on the right track and in the right place:
There are an estimated 25 million engineers in the world across more than 25 distinct functions. Today, the vast majority of those engineers either don't have access to data about the performance and health of their systems, or the data they have is tied up in legacy monitoring tools.
We see observability as still a relatively new and emerging practice that will grow over the coming decade and we have been transforming our software and business model to win in the long run.
While competitors still sell an array of specialty tools at disparate rates, propagating the customer challenges of the past decade, only New Relic provides an all-in-one platform that is built and sold as a unified experience and cloud-scale data platform for every engineer.
Pointing to the increase in paying customers, Staples claimed the rate of acquisition was “industry-leading”, even if not always apparent:
Our progress here is masked by a long tail of small APM-only legacy customers, who signed up years ago and continue to pay us small amounts each month, but whose spend is not increasing and whose churn partially offsets our new customer growth.
This fast-growing cohort of customers, are new to the platform and embracing full stack observability practices at a rapid rate. It includes companies of all sizes from individual developers in the exploration phase to start-ups getting off the ground as well as large Fortune 2000 companies with engineering teams seeking to modernize their engineering practice.
The spend in this customer cohort ranges from a small initial monthly amount to five-figure annual or multiyear contracts. In fact the team was able to nurture several customers away from leading competitors and into six-figure contracts.
He cited the example of Tibber to back up his point:
Our consumption-based pricing model was the driving force behind our recent deal with Tibber, a fast-growing company in Europe using digital technology to make electricity consumption smarter. They evaluated one of our close competitors but found that a host-based pricing structure of competitors limits agility.
With New Relic, they get better economies of scale as their cloud infrastructure grows and predictable pricing as they expand their engineering team. They also appreciated how New Relic provides the opportunity to ingest telemetry data from any source and works well with modern micro-service architectures on the cloud, which makes correlating data from infrastructure hardware mobile apps and web apps much easier
Another big win in Q2 was UK grocery chain Tesco, which signed up to a seven-figure, three year strategic deal. Staples explained:
They had been using competitors but once again found that a host-based pricing model limited their ability to achieve full stack observability, as they moved to a cloud-native micro-services-oriented architecture. We're helping them standardize observability best practices, increase the reliability of their systems and identify business-impacting use cases.
Q2 saw customers overall increase their Consumption Run Rate (CRR) in aggregate by net $50 million, he added:
One of our large streaming media customers increased their CRR from $4.6 million to $5.9 million during the quarter. A telecom went from $5.7 million to $7.9 million; a beverage company increased from $3.1 million to $4.0 million; and an online retailer moved from $8.8 million to $10.8 million in just one quarter.
The strength of CRR growth this quarter demonstrates the excellent product market fit and power of the consumption business model. However, with CRR growth continuing to outpace customer commitments, we also see a continuation of the trend of customers who manage consumption down to budget, especially in the final quarter among many of our accounts.
Early renewals are also on the rise, said Staples, noting that the firm was able to pull forward $18 million in early renewals for customers ready to renew ahead of schedule. Why? Staples pointed to one (unnamed) user to illustrate the benefits:
A global online game and entertainment company increased their commitment from a mid-six-figure annual pool of funds to a three-year high-seven-figure savings plan agreement. The pandemic accelerated their digital transformation and growth in online social gaming.
Looking for more efficiency, the company replaced four separate commercial and open-source competitors to standardize on New Relic as their observability platform, increasing the productivity of their engineering teams and improving their costs. New Relic is now partnering with them in their cloud transformation journey to be 100% cloud native by the end of this year.
Overall, there’s ongoing momentum in moving large, multiyear, legacy customers over to the new consumption-based platform, Staples stated:
For example, this quarter an online travel company transitioned from our legacy business, where they had a $1 million annual spend, to a new platform agreement for three years and more than eight-figure commitments. They selected us over competitors as they were looking for a developer-first observability platform to consolidate all their tools get deep cloud cost visibility and support a robust site reliability engineering organization managing their Kubernetes environment.
Today the macro clouds appear to be getting darker, but our mentality remains the same. Nearly every business leader I speak with today is looking hard at their budget and is looking for efficiency. We believe that this environment will ultimately serve to highlight the customers that we have superior alignment and value proposition of our consumption model versus competitors' pricing models.
Definite evidence of progress in an economic climate that favors New Relic’s pitch.