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New Relic Is Investing in Its Future

Brian Feroldi, The Motley Fool

New Relic (NYSE: NEWR), a company that sells performance tracking and business intelligence software, reported its fiscal fourth-quarter 2019 and full-year results on Tuesday.

Management had previously warned investors that it was going on a hiring spree in an effort to level up its product offering and commercial team. Those investments helped drive top-line growth of 34% during the quarter, which was a faster rate than predicted. Management was also able to announce a full suite of new products that will be rolled out in the year ahead.

The outperformance on the top help helped the company's bottom line to hold up well even with the accelerated spending. However, investors should note that the company's non-GAAP year-over-year comparisons are a bit misleading at the moment because New Relic adopted a new accounting standard called ASC 606 in fiscal 2019. The numbers will become more useful in time once they can be compared on an apples-to-apples basis.

New Relic fiscal Q4 results: The raw numbers

Metric

Q4 2019

Q4 2018

Year-Over-Year Change

Revenue

$132 million 

$98.4 million

34%

Non-GAAP operating income

$3.8 million

$4.8 million

(21%)

Non-GAAP net income

$7.5 million

$5.4 million

39%

Non-GAAP EPS

$0.13

$0.09

44%

Data source: New Relic. GAAP = generally accepted accounting principles. Non-GAAP = adjusted. EPS = earnings per share.

Woman in server room with tablet in her hand

Image source: Getty Images.

What happened with New Relic this quarter?

  • Revenue of $132 million came in above the high end of management's forecast.
  • 858 customers now exceed $100,000 in annual revenue. This was a 22% jump when compared with last year.
  • The dollar-based net expansion rate remained strong at 131%. However, this figure was down 1,000 basis points when compared with the year-ago period.
  • Customer count declined sequentially to 16,900. CFO Mark Sachleben stated that the drop was owed to a focus on winning more business from its biggest customers.
  • International sales held steady at 32% of total revenue.
  • Free cash flow was $33.7 million.

Zooming out to the full fiscal year, here's a review of the company's key metrics:

  • Revenue grew 35% to $479 million.
  • Gross margin expanded 100 basis points to 85%.
  • Non-GAAP operating income was $30 million, compared with an operating loss of $1.5 million in fiscal 2018.
  • Non-GAAP net income was $0.66, compared with break-even last year.
  • Free cash flow was $67 million, compared with $9.4 million last year.
  • Cash balance at year-end was $745 million. 

What management had to say

New Relic's CEO and founder, Lew Cirne, stated that fiscal 2019 was "very productive" and that its focus on enterprise customers helped drive the financial outperformance.

Cirne also expressed his enthusiasm for a number of product launches that are planned for 2020. This includes the recent launch of a product called New Relic One: "We are kicking off FY20 with the launch of New Relic One, the industry's first entity-centric observability platform, designed to help our customers with complex environments find, visualize, and understand everything they need to create more perfect software. New Relic One is also our platform for delivering brand-new innovations to market -- and we expect to end the year with at least nine paid products."

Check out New Relics' latest earnings call transcript.

Looking forward

CFO Sachleben stated that the company will continue to spend lavishly on building out its product suite and commercial teams. Sachleben's guidance for the upcoming quarter suggests that the elevated spending growth will put pressure on the bottom line: 

Metric First-Quarter 2020 Guidance Range Implied Change
at Midpoint
(Year Over Year)
Revenue $138 million to $140 million 28%
Non-GAAP operating income $0.5 million to $1.5 million (88%)
Non-GAAP EPS $0.07 to $0.08 (50%)

Data source: New Relic.

Management's guidance for the full fiscal year 2020 tells a similar story:

  • Revenue is expected to land between $600 million and $607 million. This represents growth of about 26% at the midpoint.
  • Gross margin is expected to hold steady between 84% and 85%.
  • Non-GAAP operating income is expected to be in the range of $20 million to $25 million. This represents growth of negative 25% at the midpoint.
  • Non-GAAP EPS is expected to land between $0.54 and $0.62. This represents growth of negative 12% at the midpoint.
  • Free cash flow is expected to decline by about 10% to a range of $55 million and $65 million.

CEO Cirne ended his prepared remarks on the call with investors by stating that the investments that are being made in the business today will allow the company to reach a revenue run rate target of $1 billion by fiscal 2022.

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Brian Feroldi owns shares of New Relic. The Motley Fool recommends New Relic. The Motley Fool has a disclosure policy.