New Relic Analysis

New Relic – An Intelligent Fly on Cloud Wall?

New Relic is a Cloud platform helping enterprises design, monitor and provide intelligence on applications (on-premises, mobile, cloud, browser) and infrastructure. With 17,000+ customers and ~250 $ million 2017 revenue, and ~350 $ million revenue for 2018, and strong digital transformation tailwind, can New Relic scale to even greater heights? Can New Relic be the next Salesforce of Monitoring Platforms built on Cloud?

Product offering and Growth Strategy

New Relic is an Intelligent Fly on the Cloud Wall. The Fly knows what to monitor, how subtly to monitor with minimal intrusion, and how best to provide an actionable intelligence.

New Relic was launched in 2008 to serve application performance monitoring (APM) market but adapted to a changing landscape by introducing other products – Mobile, Browser, Insights, Synthetics, and Infrastructure. These newer products target three main areas of Digital Transformation 1) Cloud adoption 2) Digital Customer Experience 3) DevOps

Some applications / use cases of its platforms:

• AWS and Azure cloud migrations
• Usatoday.com content rollouts
•  Healthcare.gov functioning
•  Consumer experience on mobile apps

A few elements of product and revenue growth strategy:

• All-Cloud based monitoring.
• Breadth and depth of monitoring (various technologies and various levels of stack)
• Leverage Digital transformation industry trend
• Penetrate enterprise business customer segment (~2,100 vs potential ~30,000) even further, and increase annual customer spend through multi line products

Enterprise Utility

The best illustration of enterprise utility within the New Relic suite is provided by the New Relic Browser and New Relic Mobile applications. Both of them significantly aid in better and faster digitalization.

• Fast deployments vs monolithic releases. Consumers have short attention spans and have variety of choices these days. So, New Relic helps to understand and address consumer engagement bottlenecks faster.
• Consumers are continuously leaving their preferences and behavior footprint through digital interactions. So, New Relic helps in uncovering “white space” or New Business opportunities

In general, New Relic is providing intelligence on prioritizing in multiple areas like bug fixing and consumer engagement so that enterprises can achieve better resource allocation.

Competition

New Relic’s competition differs by the product suite offered. There are several players in performance monitoring space. While some are niche players in a fragmented market, there are some key well-established competitors that one should be aware of. Dynatrace, CA(APM) and Cisco (AppDynamics) have wider offerings. Dynatrace is privately owned and is the market leader (by revenue) and targets larger enterprises. Cisco and CA offerings have the usual pitfalls of larger more generalist enterprises – not being nimble enough, unclear roadmaps, and selling strategy which lacks focus due to coupled sales (with enterprise sales teams). New Relic also faces competition from Google, and Amazon for its New Relic Insights product.

New Relic’s competitive advantage

• Cloud emphasis from beginning.
  • No on-site product.
  • Focused execution.
  • Intelligence gained from studying enterprises usage can be leveraged to boost Faster and Better product innovation
• Breadth and depth of monitoring (various technologies and various levels of stack)
• High performance:
  • New Relic’s cloud platform collects 1.5 Billion metrics and events per minute across its 16,000+ customers (on-premises, and cloud).
  • Non-intrusive while providing breadth and depth of monitoring – a key requirement for not slowing down business operations

Management pedigree

Lew Cirne – Founder and Current CEO. Highly passionate and energetic similar to Marc Benioff of Salesforce. Lew is a Techie but is also a great Sales advocate of the products and company. His passion comes across in his interviews. I don’t anticipate anyone else doing a better job than him for now. There may come a point when a different and non-tech CEO may be required to steer company into a different trajectory with a different business strategy.

Key Financial Highlights

Earnings ($mil):

	2016	2017	2018	2022E
Revenue	181	263	355	3X (assumptions in customer profile section)
Gross profit	144	213	292
Operating Income	(67)	(61)	(46)
Net income	(67)	(61)	(45)
EPS	(1.39)	(1.18)	(0.83)

Balance Sheet ($mil):

		2017	2018
Cash & cash equivalents		83	132
Additional Paid-in capital		447	521
Shareholder equity		186	215
Total liabilities and equity		352	443

 

Cash Flows ($mil):

	2016	2017	2018
Operating	4	18	35
Investing	(58)	(18)	(23)
Financing	14	21	32
Free cash flow	(14)	(6)	9

Customer profiles:

	2015	2016	2017	2018	2022E
# of paid Enterprise customers	1,200	1,600	1,600	2,100	3,000
Average Annual Enterprise Spend	$45,000	$60,000	$80,000	$100,000	$250,000
# of customers with revenue (100k – 1 mil)		350	500	700
# of customers with ARR revenue (> 1 mil)		15	25	40
# of paid Business (SMB) customers	12,000	13,000	15,000	17,000	20,000
Average Annual Business (SMB) Spend	$9,000	$11,000	$12,000	$13,000	$16,000

Valuation Mktcap / Sales:

	Mktcap (June 8 2018)	Sales (FY 2018)	Sales (FY 2018 A/E)	Mktcap / Sales (FY 2018)	Mktcap / FY 2022E Sales
Zscaler	3920	185	E	21.2
Veeva	11740	685	A	17.1
New Relic	6020	355	A	17.0	5.7
Service Now	33070	2400	E	13.8
Okta	5810	260	A	22.3
Workday	27720	2140	A	13.0
Dropbox	12380	1400	E	8.8
Salesforce	99940	10480	A	9.5
Box	3730	506	A	7.4

Risks of investment

• Short to Medium term:
  • Biggest risk is Execution. Technology changes fast. New Relic has to integrate and certify for Monitoring with newer and newer technologies at breakneck speed.
  • Competition is another risk. New Relic will have to compete hard against Dynatrace (greater footprint with larger customers) to penetrate larger companies.
• Long term:
  • Some new company and new technology could make New Relic irrelevant in the next business cycle akin to the effect of internet, and cloud on once dominant companies