New Relic's Lew Cirne - observability platforms aren't optional if software matters to you (as the Iowa Democratic Caucus just found out...)

New Relic released its latest quarterly numbers yesterday as the fallout from the voting app failure in the Democratic Caucus in Iowa was unfolding. That story dovetailed nicely into CEO Lew Cirne making the case for what his firm stands for: 

In 2012, New Relic was the software that saved healthcare.gov. Moments like this just do bring it to the forefront - how important software is to the very fabric of how we exist as a society. And it's kind of like the ground we stand on, right? When software is working, you don't notice the ground you're standing on. But if there's a problem, all of a sudden it feels like quicksand.

So, the work that our customers do to keep software systems running, it's hard work. And there's so many ways in which these complicated applications can fail. That's why they need a single platform to bring it all in one place, and why they need to troubleshoot faster, all with context, with application context.

So we do believe that our observability platform, it's not optional. If your software matters, you need an observability platform. We believe we have the best one. That's why we're investing. That's why we're so excited about this opportunity. That's why I'm so excited about the team. And so yes, moments like yesterday, I wish they didn't happen, but that's why there's a need for an observability platform like New Relic.

That said, it was a case of decidedly mixed fortunes for New Relic yesterday as the firm turned in Q3 results that reported a  loss of $27.2 million on revenues of $153 million, up 23% year-on-year from a comparable figure of $124 million. Those were numbers that disappointed investors and put pressure on the share price post-announcement.

The better news was that the firm ended Q3 with 926 paid business accounts with ARR over $100,000, up 13% year-on-year. Cirne pointed to this growth in his remarks on the post-results conference call:

Today, over 45% of our 100k customers have four or more paid products, up from roughly 17% from the end of fiscal year ’17. In its first quarter in the market we secured nearly 100 deals for New Relic Logs.. Two of these deals were seven figures, which illustrates the power of observability all in one place as our customers want logged in context with the rest of their observability data. 

Case in point during the quarter - a large video conferencing company agreed to standardize on New Relic across APM infrastructure and logs. They were previously using three different tools, New Relic APM and two different competitive offerings for monitoring their infrastructure and their logs. They consolidated onto the New Relic One platform and now can see all of their application infrastructure and log data in context. So when there's an issue, they have one place to go to quickly pinpoint and find a resolution. What's more, they've seen significant cost savings and consolidating their tools into the New Relic One platform.

The 100 Logs wins overall were encouraging, he added:

What was actually really pleasant for us was seeing the uptake of Logs, a brand new product. I think it only had about 60 days in the quarter where it was available for sale. And to see two seven digit deals come in for Logs alone into the customer base was very encouraging, showing that we have a very competitive product and we expect it to do well in the market.

What's driving all of this is our customers do not want to switch between multiple tools when they're in the business of trying to keep these complex systems up and running. They want to see it all in one integrated place…The reason why they want it all in context is simple: they want to troubleshoot faster. They want the information in context to rapidly solve problems to get systems back and running as quickly as possible.

Those early wins have been attracted by the performance capabilities of Logs, he said:

The performance and scale of Logs blows our customers away, in particular compared to any other cloud hosted solution. So these customers were having trouble with their [solutions]. I think in both cases, they were open source logging solutions that were just unable to handle the load or it was too much work or effort [to] perform to their requirements. They just dropped us in and our ability to handle in excess of 10 terabytes a day with complete ease - and with no configuration or management involved - really amazed our customers.

Programmability matters

The New Relic One platform play is also throwing up some strong use cases, Cirne saidL:

The most popular applications I see are the ones that our customers are building for themselves. And that makes sense because it's making New Relic solve their specific problem in a way that no software vendor could do. It has to be programmable in order to do that….We have a company in Europe using New Relic One for an IoT use case. It actually is tracking the location of cars and helping them identify the right parking spot. So [it’s a] really cool IoT use case built on top of New Relic One, and helps our customers view us as a strategic platform, not just another tool.

The programmability aspect is something that appeals to large enterprise customers, he added:

Our customers are now thinking of it as in terms of a platform> They're not thinking it in terms of APM, particularly the strategic customers. Another way to think of it is, if you look in the early days of SaaS companies like Salesforce and other companies, they staffed their own teams to build their own observability and monitoring capabilities. Not because they wanted to be in that business, but because they had bespoke requirements that no vendor could provide off-the-shelf. They wanted the platform capabilities that we're providing now in New Relic One. So we think for these high end customers, particularly if we can nail the pricing and the solution presentation correctly, we're the only platform that can really deliver on the demands of the highest end customers, and it's because of the programmability.

All of that is positive stuff. Less so was a slight downwards dip in renewal rates during the quarter. That’s something that needs to be tackled, said CFO Mark Sachleben, who cited a case in point of a customer “rightsizing” their spend:

The overall number in the quarter was impacted by a couple of customers...reducing their spend and right sizing their spend with New Relic. In particular, we had one large customer - it’s a multi-million dollar customer - [that] signed up for a New Relic upgrade a year or so ago. At renewal time they reduced their spend and rightsized their environment. Not all projects and deployments go as expected. This is one case where that was the case, so they rightsized their investment in New Relic.

He added:

They continue to be a multi-million dollar customer and we expect them to be continued to increase their subscription rates going forward over the next couple of years.

So while this isn’t seen as a major pain point right now, it's something that needs to be factored in and headed off. It will come down to execution, suggested Sachleben:

Where we've got to do better job is [to] make sure that customers are deploying their software that they purchased. In these cases, the customers are purchasing this amount of software they expect to need over the next year and they're not deploying all that, so they get to the end of the year, and it'll be, you know, a reduction in spend for New Relic.

Rather than see that happen, we should be more proactive and 6 months ahead of time, if we see them not getting to a path where they're going to be fully deployed, we should be proactive and intervene there and help them with that deployment or find other opportunities within the organization to support those hosts. So rather than all of a sudden have a reduction in spend when the renewal time comes up, we stay flat or potentially have an upsell.

My take

There’s no doubt that New Relic had a bumpy ride on Wall Street over the past 24 hours, but all growth firms do at some points in their expansion as more short term investor instincts kick in at the first hint of disappointment. Long term, the firm remains well-positioned and addresses a market need that isn’t going to go away.