New Relic's long term strategic thinking hits a short term 'bump in the road'

Profile picture for user slauchlan By Stuart Lauchlan August 7, 2019
Summary:
New Relic CEO Lew Cirne isn't happy with its latest quarterly numbers, but the long term plan remains on track.

Lew Cirne speaks at New Relic event

Softness in EMEA contributed to a bump in the road for New Relic which turned in quarterly numbers that led to CEO Lew Cirne admitting:

We are not pleased with these results.

He was however adamant that:

We do believe they are an anomaly limited to the first-half of the fiscal year and largely the consequence of our moving aggressively to complete go-to-market and product-related organizational transitions.

The firm turned in revenue of $141.0 million for fiscal 2020, compared to $108.2 million for the first quarter of fiscal 2019. GAAP loss from operations was $16.9 million, against $3.6 million for the comparable quarter last year.

Cirne pointed to two operational shifts during the quarter that are now complete:

One, we completed an operating model change in the product organization, which after a few quarters of transition resulted in a general manager structure consisting of five entrepreneurial-minded teams focused on core revenue-generating groups: application monitoring; client side; infrastructure; logging; and AIOps. We expect our innovation velocity and accountability to increase under this model and thereby further enabling us to address a larger share of a growing, multi-billion dollar market.

Two, the sales organization is now under a regional hierarchy with unique strategies shaped by local leaders. This has been an ongoing effort for approximately the past year and included establishing new offices and the expansion of our European Region, as well as bringing in new leadership to EMEA. Our international markets, EMEA and APAC, are key growth drivers for us and are expected to demonstrate the most significant improvements as a result of this initiative by the end of fiscal 2021.

(Andrew Lawson, former UK and Ireland General Manager at Salesforce, has taken over as EMEA EVP and General Manager for New Relic.)

New Relic One

Cirne also pointed to the release of New Relic One - “the foundation for the next decade” - as a factor in the slowdown for the quarter, albeit a necessary one:

We reimagined the user experience and developed a pan-enterprise, entity-centric, data model that makes visualizing up and downstream dependencies possible across a customer’s entire environment. The opportunity cost of this effort was a delay in revenue-generating product introductions, as well as fewer feature and integration releases over this period. This is having an adverse impact on the customer lands and expansions in the first-half, but we believe the investment in New Relic One was compulsory for durable growth over the long-term.

The logic underpinning our strategy with this platform originated from the early recognition that our user base would gradually adopt open source standards, micro-service architectures and containers. As it turns out, this trend, which we call observability and is an expansion of our current monitoring market, emerged at a faster rate than we initially projected with a different competitive landscape.

We believe New Relic One enhances our competitiveness broadly today with much of the future benefits being derived by users adhering to observability trends. Developers operating in this fashion prefer composable and configurable dashboarding, distributed tracing, metric and logging tools, in conjunction with the application instrumentation data that only New Relic can provide. To address the needs of this group, we plan to continue increasing both the extensibility and the programmability capabilities of our platform.

He added:

We also envision New Relic One’s programmability capabilities as being a differentiating feature whereby customers and partners create their own applications on top of New Relic One, and those applications drive digitally transformed businesses. As we expand New Relic One’s extensibility and programmability capabilities with additional products, we are advancing our ability to deliver a single platform for managing the performance of our customers’ digital businesses.

But it is important not to push the customer base forward at a forced pace, said Cirne:

We want them to adopt it at a pace that’s comfortable for them rather than to force it onto them on our timeframe. And so we’ve been thoughtful and how we introduce it in the market to make sure it works well with how our customers are approaching using our software.

He expanded:

We launched New Relic One in May…and that was the first release. And we did make it a release that any New Relic customer could use and discover on their own, but that we are not aggressively pushing out into the market due to just how big a release this was and how we wanted to make sure with a natural time for our customers to adopt and we want to observe how customers are using it.

We’re encouraged by what we’re seeing on customer usage, given that it’s been one where they’ve discovered it largely on their own. For example, our dashboarding capability, we see a 40% month-over-month uptick, or increase in engagement on that feature in the month of July.

My take

A bump in the road certainly, but the direction of travel remains sound. Introducing major new product upgrades is a balancing act of getting customers to adopt with some sense of urgency without piling on excessive pressure to move at the vendor’s pace rather than the user’s.

Short term hit vs long term thinking - it’s trade-off certainly and one where New Relic has made the right call. Cirne’s summary is a sound one:

From a macro-perspective, it’s all great in terms of our market opportunity and our position within the market. But in the last several quarters, while we made the, I believe, absolute right call, but it was a trade off call to focus on New Relic One, which was a long-term bet for the future. We did that the expense of doing smaller features, incremental features that could have further enhanced our capabilities in these micro-service environments.