Breaking Down New Relic, Inc. (NEWR) Financial Health: Key Insights for Investors

Understanding New Relic, Inc. (NEWR) Revenue Streams

Understanding New Relic, Inc.’s Revenue Streams

The revenue for the three months ended September 30, 2023, was $242.8 million, compared to $226.9 million for the same period in 2022, representing a year-over-year growth of 7%. For the six months ended September 30, 2023, revenue was $485.4 million, up from $443.4 million in 2022, indicating a growth rate of 9%.

Revenue Breakdown by Category

Revenue by Geographic Areas

Contribution of Different Business Segments

For the six months ended September 30, 2023, consumption revenue accounted for approximately 90% of total revenue, with 61% derived from data ingest fees and 39% from provisioned users. In contrast, subscription revenue has seen a significant decline, decreasing by 61% year-over-year.

Significant Changes in Revenue Streams

There has been a notable shift in revenue streams from subscription-based models to a consumption-based model. This transition is reflected in the significant decrease in subscription revenue and the corresponding increase in consumption revenue, which grew by 36% for the six months ended September 30, 2023.

The following table summarizes the year-over-year growth in revenue by segment:

Overall, the company’s shift to a consumption-based revenue model aligns with current industry trends and customer preferences, indicating a strategic pivot to enhance customer engagement and revenue predictability.

A Deep Dive into New Relic, Inc. (NEWR) Profitability

Profitability Metrics

Gross profit for the three months ended September 30, 2023, was $190.0 million, compared to $162.1 million for the same period in 2022, representing a gross margin of 78% for both periods. For the six months ended September 30, 2023, gross profit was $378.2 million, versus $314.7 million in 2022, maintaining a gross margin of 78%.

The operating profit for the three months ended September 30, 2023, reflected a loss from operations of $(20.5) million, an improvement from a loss of $(45.3) million in the same quarter of 2022. For the six months ended September 30, 2023, the loss from operations was $(53.5) million, compared to $(100.9) million for the same period in 2022.

Net profit margins for the three months ended September 30, 2023, were (7)%, improving from (20)% year-over-year. For the six months ended September 30, 2023, the net profit margin was (11)%, compared to (23)% for the same six months in 2022.

Trends in Profitability Over Time

Over the past year, the company has shown a consistent improvement in gross profit margins, moving from 71% in Q2 2022 to 78% in Q2 2023. This trend indicates better cost management and operational efficiency as the company transitions to a consumption-based revenue model.

Operating expenses, while still significant, have decreased as a percentage of revenue, from 91% in Q2 2022 to 87% in Q2 2023. The reduction in losses from operations demonstrates improved operational efficiency and strategic focus on growth areas.

Comparison of Profitability Ratios with Industry Averages

As of September 30, 2023, the company's gross margin of 78% is significantly above the industry average of approximately 65% for similar software-as-a-service (SaaS) firms. This suggests a competitive advantage in managing direct costs associated with revenue generation.

In terms of net profit margins, the company’s margin of (7)% contrasts with the industry average of 10% for profitable SaaS companies, indicating room for improvement in net profitability.

Analysis of Operational Efficiency

Operational efficiency has improved notably, with total operating expenses declining from 94% of revenue in Q2 2022 to 87% in Q2 2023. The company has effectively managed its costs, particularly in sales and marketing, where expenses dropped from 42% to 35% as a percentage of revenue.

The table below summarizes key profitability metrics for the company over recent periods:

The shift to a consumption-based model is expected to further enhance operational efficiency and profitability metrics as the company continues to optimize its cost structure and capital allocation strategies.

Debt vs. Equity: How New Relic, Inc. (NEWR) Finances Its Growth

Debt vs. Equity: How New Relic, Inc. Finances Its Growth

Overview of Debt Levels

As of September 30, 2023, the company reported total debt of $134.7 million, comprising short-term debt of $98.7 million and long-term debt of $36 million.

Debt-to-Equity Ratio

The debt-to-equity ratio stands at 0.35, calculated by dividing total liabilities of $473.4 million by total stockholders’ equity of $387.4 million. This ratio is below the industry average of approximately 0.5, indicating a conservative approach to leveraging debt for growth.

Recent Debt Issuances and Credit Ratings

The company repaid its 0.50% convertible senior notes that matured on May 1, 2023, amounting to $500.25 million. Currently, the company maintains a credit rating of B+ from S&P, reflecting moderate credit risk.

Balancing Debt Financing and Equity Funding

The company has primarily financed its operations through equity financing, with total stockholders’ equity amounting to $387.4 million as of September 30, 2023. Recent equity activities include the issuance of common stock for stock options and employee stock purchase plans, contributing to an increase in additional paid-in capital to $1.42 billion.

This structured approach to managing debt and equity allows the company to maintain operational flexibility while pursuing growth initiatives. The balance achieved between debt financing and equity funding supports its long-term strategic objectives.

Assessing New Relic, Inc. (NEWR) Liquidity

Assessing New Relic, Inc.'s Liquidity

Current Ratio: As of September 30, 2023, the current ratio was approximately 2.1, calculated from current assets of $325.5 million and current liabilities of $155.2 million.

Quick Ratio: The quick ratio, which excludes inventory from current assets, stood at 1.9, indicating a robust liquidity position.

Working Capital Trends

Working capital as of September 30, 2023, is reported at $170.3 million, reflecting a significant increase from $140.0 million in the previous year. This trend indicates improved liquidity and operational efficiency.

Cash Flow Statements Overview

Cash Flow from Operating Activities: For the six months ended September 30, 2023, cash provided by operating activities was $46.2 million, compared to $5.6 million for the same period in 2022.

Cash Flow from Investing Activities: Cash used in investing activities was $7.4 million for the six months ended September 30, 2023, down from $2.4 million in the prior year.

Cash Flow from Financing Activities: Financing activities resulted in cash used of $484.0 million for the six months ended September 30, 2023, primarily due to the repayment of convertible senior notes.

Potential Liquidity Concerns or Strengths

Despite the strong current and quick ratios, the significant cash outflow from financing activities raises potential liquidity concerns. The repayment of $500.25 million in convertible senior notes in May 2023 has impacted cash reserves, leading to a net decrease in cash, cash equivalents, and restricted cash of $323.8 million for the six months ended September 30, 2023.

However, the strong performance in cash flow from operating activities suggests a solid operational foundation, potentially mitigating liquidity concerns in the near term.

As of September 30, 2023, the company reported cash and cash equivalents of $170.5 million, which should be sufficient to meet short-term obligations.

Is New Relic, Inc. (NEWR) Overvalued or Undervalued?

Valuation Analysis

In evaluating whether the company is overvalued or undervalued, we will examine key financial ratios including the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

Price-to-Earnings (P/E) Ratio

As of the latest financial reports, the company reported a net loss of $23.8 million for the three months ended September 30, 2023, resulting in a diluted net loss per share of $0.34. With a stock price of approximately $25.00, the P/E ratio cannot be calculated as the company is currently not profitable.

Price-to-Book (P/B) Ratio

The book value per share is calculated as total equity divided by shares outstanding. As of September 30, 2023, the total stockholders' equity was $387.4 million with 71.3 million shares outstanding, yielding a book value per share of approximately $5.43. Therefore, the P/B ratio is:

P/B Ratio = Stock Price / Book Value per Share = $25.00 / $5.43 ≈ 4.6

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The enterprise value (EV) can be calculated as market capitalization plus total debt minus cash. Assuming a total debt of $0 and cash reserves of approximately $113.9 million, with a market cap of $1.8 billion, the EV is:

EV = Market Cap + Total Debt - Cash = $1.8 billion + $0 - $113.9 million = $1.6861 billion

For the trailing twelve months (TTM), EBITDA is calculated from the latest reports showing an operating loss of $53.5 million for the six months ended September 30, 2023, and additional adjustments yielding a TTM EBITDA of approximately $45.2 million. Thus, the EV/EBITDA ratio is:

EV/EBITDA = $1.6861 billion / $45.2 million ≈ 37.3

Stock Price Trends

Over the past 12 months, the stock price has fluctuated between a low of $21.00 and a high of $40.00. Currently, the stock is trading at approximately $25.00, reflecting a decline of about 37.5% from its peak.

Dividend Yield and Payout Ratios

The company does not currently pay a dividend, and thus the dividend yield is 0%. The payout ratio is also 0% as there are no earnings being distributed to shareholders.

Analyst Consensus

According to the latest analyst ratings, the consensus recommendation is a Hold with a target price averaging around $30.00. This reflects a potential upside of approximately 20% from the current trading price.

Key Risks Facing New Relic, Inc. (NEWR)

Key Risks Facing New Relic, Inc.

New Relic, Inc. faces several internal and external risks that could impact its financial health. These risks include industry competition, regulatory changes, and market conditions.

Industry Competition

The software analytics industry is highly competitive, with numerous players vying for market share. As of September 30, 2023, New Relic had 16,000 active customer accounts, with 1,255 accounts generating over $100,000 in revenue, reflecting a 7% increase year-over-year. However, increased competition could pressure pricing and margins.

Regulatory Changes

Changes in regulations, particularly related to data privacy and security, could pose significant risks. The company needs to adapt to various international regulations as it expands its international operations, which constituted 18% of revenue from EMEA, 12% from APAC, and 8% from other regions for the three months ended September 30, 2023.

Market Conditions

Economic downturns can adversely affect customer spending on software solutions. For the six months ended September 30, 2023, the company reported a net loss of $61.2 million, compared to a net loss of $97.0 million for the same period in 2022. This continued financial strain highlights the vulnerability to changing market conditions.

Operational Risks

New Relic's operational risks include reliance on its consumption-based business model, which accounted for 61% of revenues from data ingest and 39% from provisioned users in the six months ended September 30, 2023. The transition from subscription to consumption models may lead to fluctuations in revenue recognition and cash flow.

Financial Risks

As of September 30, 2023, New Relic's accumulated deficit was $1,024.7 million, reflecting ongoing net losses since inception. The company has incurred substantial restructuring costs of $23.2 million for the six months ended September 30, 2023, indicating significant financial pressures.

Strategic Risks

Strategically, New Relic's restructuring efforts to align resources with a consumption business model may not yield the desired outcomes. The company incurred restructuring costs of $1.5 million for the three months ended September 30, 2023, as part of its realignment efforts. If these initiatives fail to improve efficiency and profitability, it could hinder future growth prospects.

Mitigation Strategies

To address these risks, New Relic aims to enhance its international footprint through commercial partnerships, which may help mitigate customer acquisition costs. Additionally, the company is investing in targeted areas of growth and expects to leverage existing customer relationships to increase revenue from larger accounts.

Future Growth Prospects for New Relic, Inc. (NEWR)

Future Growth Prospects for New Relic, Inc.

Analysis of Key Growth Drivers

New Relic has identified several key growth drivers that are expected to enhance its market position and revenue streams:

• Product Innovations: The company is transitioning to a consumption-based pricing model, which aligns customer costs with their usage and value derived from the platform. For the six months ended September 30, 2023, consumption revenue increased by 36% year-over-year to $437.3 million, while subscription revenue decreased by 61% to $48.1 million.
• Market Expansions: International revenues accounted for 38% of total revenue for the three months ended September 30, 2023, with EMEA contributing 18%, APAC 12%, and other regions 8%.
• Acquisitions: The company completed a business acquisition valued at $20.6 million, enhancing its technological capabilities.

Future Revenue Growth Projections and Earnings Estimates

For the fiscal year ending March 2024, analysts project revenue growth of approximately 10-15%, driven by increased customer consumption and market penetration. The company reported revenue of $485.4 million for the six months ended September 30, 2023, representing a 9% increase from the previous year. Earnings per share (EPS) estimates for fiscal 2024 are projected to improve, with a forecasted net loss per share of $0.87.

Strategic Initiatives or Partnerships

New Relic is focusing on strategic partnerships to enhance its international presence and customer acquisition:

• Commercial Partnerships: The company plans to leverage commercial partnerships to accelerate international market penetration, aiming to reduce customer acquisition costs.
• Joint Ventures: The establishment of New Relic K.K. in Japan demonstrates the company's commitment to expanding its footprint in Asia.

Competitive Advantages

New Relic's competitive advantages position it favorably for growth:

• High Gross Margins: The company reported a gross margin of 78% for the three months ended September 30, 2023, up from 71% in the prior year.
• Strong Customer Base: The number of active customer accounts increased to 16,000, with accounts generating over $100,000 in revenue rising to 1,255, reflecting a 7% increase.
• Net Revenue Retention Rate: The company's net revenue retention rate was reported at 114%, indicating strong growth among existing customers.