New Relic’s business remodel will leave new CEO with work to do

For Bill Staples, the freshly appointed CEO at New Relic, who takes over on July 1, yesterday was a good day. After more than 20 years in the industry, he was given his own company to run. It’s quite an accomplishment, but now the hard work begins.

On the positive side of the equation, New Relic is one of the market leaders in the application performance monitoring space.

Lew Cirne, New Relic’s founder and CEO, who is stepping into the executive chairman role, spent the last several years rebuilding the company’s platform and changing its revenue model, aiming for what he hopes is long-term success.

“All the work we did in re-platforming our data tier and our user interface and the migration to consumption business model, that’s not so we can be a $1 billion New Relic — it’s so we can be a multibillion-dollar New Relic. And we are willing to forgo some short-term opportunity and take some short-term pain in order to set us up for long-term success,” Cirne told TechCrunch after yesterday’s announcement.

On the positive side of the equation, New Relic is one of the market leaders in the application performance monitoring space. Gartner has the company in third place behind Dynatrace and Cisco AppDynamics, and ahead of DataDog. While the Magic Quadrant might not be gospel, it does give you a sense of the relative market positions of each company in a given space.

New Relic competes in the application performance monitoring business, or APM for short. APM enables companies to keep tabs on the health of their applications. That allows them to cut off problems before they happen, or at least figure out why something is broken more quickly. In a world where users can grow frustrated quickly, APM is an important part of the customer experience infrastructure. If your application isn’t working well, customers won’t be happy with the experience and quickly find a rival service to use.

In addition to yesterday’s CEO announcement, New Relic reported earnings. TechCrunch decided to dig into the company’s financials to see just what challenges Staples may face as he moves into the corner office. The resulting picture is one that shows a company doing hard work for a more future-aligned product map and business model, albeit one that may not generate the sort of near-term growth that gives Staples ample breathing room with public investors.

Near-term growth, long-term hopes

Making long-term bets on a company’s product and business model future can be difficult for Wall Street to swallow in the near term. But such work can garner an incredibly lucrative result; Adobe is a good example of a company that went from license sales to subscription incomes. There are others in the midst of similar transitions, and they often take growth penalties as older revenues are recycled in favor of a new top line.

So when we observe New Relic’s recent result and guidance for the rest of the year, we’re more looking for future signs of life than quick gains.

Starting with the basics, New Relic had a better-than-anticipated quarter. An analysis showed the company’s profit and adjusted profit per share both beat expectations. And the company announced $173 million in total revenue, around $6 million more than the market expected.

So, did its shares rise? Yes, but just 5%, leaving them far under their 52-week high. Why such a modest bump after so strong a report? The company’s guidance, we reckon. Per New Relic, it expects its current quarter to bring 6% to 7% growth compared to the year-ago period. And it anticipates roughly 6% growth for its current fiscal year (its fiscal 2022, which will conclude at the end of calendar Q1 2022).

Both numbers are far smaller than the 11% it managed in its most recently completed quarter (the fourth of its fiscal 2021), and New Relic’s forecast of “between $709 million and $711 million” in current-year fiscal revenues is only marginally better than what the Street is expecting — $709.7 million, per Yahoo Finance estimates.

Revenue deceleration despite long-term bets? That’s the difficult place that companies in the midst of metamorphosis find themselves in. We expected this to some degree; making long-term bets in financial terms means that, well, the numbers won’t look great today — or even tomorrow. But are there other signals that we can index that might be more enticing? Let’s find out.

Playing future games

Digging into the New Relic investor letter, we can find a pretty good overview of New Relic’s product and pricing transition. The gist is that last year the company rejiggered its core New Relic One product and moved to a consumption model over licensing.

“Transformations are never easy, but with much of the heavy lifting behind us,” the company writes, “we enter the new year with a very competitive product, and a go-to-market motion that we are confident will enable us to reaccelerate revenue growth in the second half of fiscal year 2022.”

Are we seeing early indications of that sort of momentum in product terms, even if the revenue growth acceleration that the company mentioned in the above quote has yet to manifest in its forecast results? Somewhat. New Relic notes that a new version of New Relic Explorer, for example, has seen improvements to usage against a few metrics. And the company’s recent Guided Install feature appears to be boosting data type ingestion among its customers.

For a company that now leans on consumption pricing, seeing more user activity across products is what you’d hope to discover. Of course, we’re looking at the metrics that New Relic deigned to share, but all the same, they are somewhat hopeful.

Recall the Satya Nadella chestnut about revenue being a lagging indicator and usage a leading indicator; consumption-based pricing turns the general point into a hard reality. So for New Relic, perhaps the best growth metrics to parse for the next few quarters are simply usage numbers over anything else. Let’s hope the company shares more of that data over time.

The impact of the new biz model

New Relic is also bullish about its move to consumption pricing because it expects that its ability to “streamline [its] Sales and Marketing function for fiscal year 2022 [will] result in steady improvements in our customer acquisition costs.” Lower CAC is good. The company also stressed that with this new form of sales, “rather than wasting months negotiating an up-front deal,” its sales team has a focus on getting customers using its products more quickly, which can put them on a path to paying more over time.

For a company that just posted a slack dollar-based net retention number, that’s useful framing.

The company is implementing the changes needed to make that possibility a reality. In a move that must have been a shakeup internally, New Relic reports its sales reps “are compensated based on consumption, or, how much product the customer actually uses.” This is long-term good, frankly, and again matches a Microsoft move from a ways back when it started to pay its sales team on the amount of Azure cloud compute that was used, not merely sold.

TechCrunch asked the company when it anticipates its product changes will result in revenue growth, hoping for more clarity around its comments regarding the second half of this year. That’s because the company’s bullish comments didn’t seem to be backed up by its shared numerical comments. The company simply reiterated its perspective, telling TechCrunch that it “expect[s] to see accelerated revenue growth in the second half of fiscal year 2022.” Call it the coy perspective.

TechCrunch has spoken to a bunch of public-company CEOs in recent quarters about their guidance conservatism. It boils down to a desire to underpromise and overdeliver, mixed with what I think in the Elon era we can call an overabundance of corporate relations caution. Regardless, New Relic is telling people that its second-half revenue growth acceleration will yield a single-digit growth rate that is smaller than what it expects to post in the first quarter of its fiscal year.

Either it’s anticipating a truly rotten second fiscal quarter, or it’s saying one thing with words and another with numbers. By that, we mean that if it expects an acceleration in the latter half of the year, for its full fiscal-year guidance to square with its anticipation, it would have to suffer in the second quarter of its fiscal year for the math to work out. After all, if a company grows by 6% to 7% in the current quarter and 6% in the full fiscal year, with the back half of the 12-month period enjoying acceleration, there has to be a time in which growth slows. Not that we think that the company is really forecasting that.

Regardless, this all means that Staples will enter his tenure as CEO with some financial challenges ahead. As he told TechCrunch yesterday, he has had to deal with much larger P&Ls in his career when working in executive positions at Microsoft and Adobe, and he believes he is well prepared. He will need to draw on that experience as he guides New Relic through whatever lies ahead.