New Relic’s transition to a consumption business model continues with some 87% of the customer base having made the move, leaving CEO Bill Staples - the prime architect of the shift - to declare:
The speed and boldness of this cannot be overstated. I can't think of another company our size, that has successfully transitioned from a legacy business model to a new business model so quickly.
Customers see the New Relic model as a clear differentiator, helping them maximize the value of their budgets by avoiding the shelfware and overage penalties associated with many of our competitors. Having the migration largely complete allows us to be single-minded in growing the consumption business going forward versus managing both our legacy and new businesses simultaneously.
Yesterday the firm reported Q4 revenue of $206 million, up from $173 million for the comparable period last year, with a net loss of $55.5 million. For the full year, revenue of $786 million was up 18% year-on-year, with a net loss of $229 million.
Pitching 2021 as “a transformative year”, Staples now sees four main priorities ahead, number one of which is to return revenue growth to market rates of around 25%. Supporting that ambition, there has been a lot of learning coming out of the shift to the new operating model, he said:
We learned a lot about the unique aspects of the consumption model this year and exited the year with a better understanding and seasonality and how customers' consumption can fluctuate for a variety of reasons.
One of the learnings is a fundamental one:
We need to be better at helping support our customers and getting budget for their consumption throughout the fiscal year, so they don't end up in that place where, at the very end of the contract, they may not have the budget secured, underlying all of that consumption and making sure that they recognize the value they're getting from our platform throughout the year.
One of the beautiful things about the consumption businesses is it organically grows throughout the year as the customer identifies ways to use the platform to get more value. That's not often a top-down-only decision. Engineers will discover new projects, new optimizations they can drive if they can instrument and get more data. Maybe the product gets shared virally within the organization as more engineers discover its value and start consuming. And then at some point the budget holder needs to come to terms with that increased consumption. So we can help them by informing them, keeping them up to date, and helping them secure the budget throughout the contract cycle rather than wait for the renewal period.
To boost transparency, the firm is now pointing to a metric called CRR - Consumption Run Rate - which Staples said provides a more real-time view of actual platform usage:
Following the dip [in Q3], we've seen a steady rebound in consumption run rate with a strong March and April. While FY '23 is only our second year in the model, and our first with the majority of the business in it we believe this will be helpful baseline for understanding our potential growth, looking forward.
Next up is a push to improve non-GAAP gross margins with a goal of non-GAAP profitability by the end of FY 23. More sales people are coming on board to support the third goal - accelerate account growth. Staples pointed to some recent customer use case successes:
In gaming, we had a large seven figure customer upgrade to become our second largest globally, and set a new record for a multi-year commit at a sizable eight figure level. In financial services one customer doubled their investment with an eight figure upsell over multiple years to New Relic. They're sending us on average 50 terabytes a day. In travel we saw one customer in Q4, moving up from $150,000 commitment to more than 10x that this quarter, now over 7 figures. And in technology, one of our customers increased their annual commitment 50% moving into the eight figure spend each year for the next three years.
Finally there will be an effort to help customers realize the value of the full New Relic platform. Staples explained:
Customers get the most value and the greatest economic benefit when they make New Relic the standard for observability across their enterprise. In FY '22, we landed many marquee innovations and the primary focus for FY '23 is to drive breadth and depth of adoption across our customer base for the dozens of capabilities already in place beyond APM, such as Infrastructure, Pixie, Logs, Network, CodeStream and more. Our product and go-to-market team are both focused on helping customers on ramp and benefit from our all-in-one platform model which will accelerate our growth.
Such a night and day difference from where we started the last fiscal year.
Staples is clearly upbeat about that 87% transition figure, as well he might be.
Expect to hear more about CRR at next week’s FutureStack event coming out of Las Vegas.