New Relic entered its current fiscal year with some key priorities on show, including returning revenue growth to market rates, accelerating the number of new paying customers and driving increased platform adoption across the installed base.
So how’s that going? The observability company just posted Q1 revenues of $216.46 million for the quarter ended June 2022, up 20% on $180.48 million for the year-ago quarter, with an operating loss of $56 million.
In terms of growing customer adoption, the quarter ended with 15,100 active customer accounts, up 1,000 year-on-year. Some 1,137 of those are over $100,000, up 18% year-on-year and now accounting for 83% of total revenues. CEO Bill Staples said:
Total active customer accounts are up nearly 300 in Q1, net of churn, compared to a cumulative net increase of 700 accounts across the three fiscal quarters preceding it. I'm really pleased that we've added 1,000 paying customers to our base over the last year, net of churn…Account growth acceleration is due to continued improvements in our product-led growth funnel and the new inside sales program. It's also encouraging to see that our number of active customer accounts with revenue greater than $100,000 grew by 38, double the number of additions we had in Q1 last year. So not only are we adding more paying customers, but they're graduating to higher levels of spend faster as well.
As for increasing platform adoption, Staples said that “steady progress” is being made:
Last quarter, we were able to spotlight many enterprise customer success stories or future stack, including McDonald's, Verizon, Mercado Libre and Foot Locker, just to name a few, who joined me in the keynote and shared their enthusiasm for New Relic's All-in-One platform and how it's propelling their digital transformations and unlocking greater productivity for their engineering teams.
There are two primary metrics to bear in mind when assessing platform adoption, he added - the percentage of customers utilizing multiple capabilities and the Consumption Run Rate (CRR), the latter being defined as a “real-time annualized measure of the business that takes into account buying program, price and usage amount on a per customer basis”. Staples said:
On the first metric of capability usage, we saw increased platform adoption in Q1 as the number of customers using our top 4 capabilities, APM, infrastructure, logs and browser grew from 26% to 31% in the quarter. As customers adopt more of the platform, their consumption generally increases as does our revenue. The more of the platform our customers adopt, the more value they get. The growth in platform adoption speaks to the strength of our product offerings beyond our traditional APM product and the attractiveness of our all-in-one platform model.
As for the CRR, the monthly average in April was strong, although growth was slower in May and June, but accelerated again from June to July. Staples explained:
At a high level, CRR in the first quarter tells a positive story. However, underneath the surface, we think CRR tells a more complex story that also shows areas of strength in our model and places of opportunity that have emerged as we mature in our transition to a consumption business.
For customers whose run rate is below 130% of their commitment, we see healthy and predictable growth. However, when customers run rate exceeds 130% of their commitment, their consumption begins to materially differ from their budgeted spend and they moderate consumption. This might seem counterintuitive as these customers are our best evidence for product market fit and have garnered the most value from New Relic relative to their starting expectations.
In fact, this group includes some of our largest and most passionate customers. Our opportunity as customers expand with New Relic is to support their increased consumption with budget on an ongoing basis.
Staples pointed to the example of retailer Curry’s as an exemplar here:
This customer re-platformed their website to Salesforce Commerce Cloud, and New Relic was chosen as the strategic partner to monitor their new sales force base front end and back end.
In addition, they chose New Relic as their standard for observability, expanding their usage to cover their hybrid cloud environment, spanning legacy applications on IBM mainframes where they're moving off one of our competitors to major hyperscale environments in the public cloud. This customer now uses APM, logs, infrastructure, metrics, events and traces and had driven their consumption to $625,000 and agreed in Q1 to an early renewal of $921,000, more than 10 times their commitment and a healthy uplift on their current run rate.
The consumption model works for New Relic and its customers, insisted Staples, adding that he would make the same decision again to shift to that approach if he had to:
Customers really need to make sure that their digital assets are available and performing, and that's what we're excellent at. Our business model is created with really value-based pricing that puts the technology in the hands of more developers and engineers, more affordably than anyone else in the market. And while the majority of our opportunity is still greenfield, we also see the competitive replacements of point product providers as our more sophisticated customers start consolidating spend and standardizing on our platform.
And finally, we believe the consumption model is the best alignment between us and our customers because if we're not really great at helping our customers be successful, they won't continue to consume. So we're motivated to help them and they're motivated to bring more of their spend to us.
Overall, Staples is convinced that the firm is delivering on the strategic priorities it had previously identified:
Over the last year, we have accelerated revenue growth, nearly doubling the year-over-year growth rate in the last year. We've inverted the multi-year decline in paid customer accounts with consistent new paid customers for the last four quarters. We are growing the large accounts faster than before, and net revenue retention has also re-accelerated from a low point of 110% just 5 quarters ago to now 120% this quarter.
A good start to the new fiscal year and making good on some of those strategic priorities.