What happened

In response to fiscal third-quarter earnings that beat expectations and a boost in full-year guidance, New Relic (NEWR) saw its shares fall as much as 11% in early morning trading on Thursday. Shares have since recovered and were down about 3% as of 10:25 a.m. EST.

So what

New Relic, a software-as-a-service business focused on application performance management tools, posted these key numbers from the quarter:

  • Sales jumped 35% to $124 million. This figure exceeded the high end of management's guidance range and beat the $120.1 million in total revenue that Wall Street was expecting.
  • Adjusted net income jumped 286% to $11.2 million, or $0.19 per share. These figures were also well ahead of guidance and slammed past the consensus analyst estimate of $0.12.
Woman with tablet in server room

Image source: Getty Images.

Management expects the company's strong top-line growth to continue into the upcoming quarter. But expenses are also expected to rise substantially on overseas investments, accelerated hiring, and the closing of a recent acquisition. In response, here's the guidance being shared with Wall Street for the upcoming quarter: 

  • Revenue is expected to grow 28% to 31% to a range of $126.5 million to $128.5 million. For context, market-watchers were expecting $126 million in revenue.
  • Non-GAAP EPS is forecast to land between $0.04 and $0.06. While the midpoint of this range represents a 44% decline from the year-ago period, it is actually ahead of the $0.03 in EPS that traders were expecting.

And the upbeat quarterly results allowed management to boost its full-year fiscal 2019 guidance for the third time in a row. Here's a look at the updated numbers for the year:

  • Revenue is now expected to land between $473.6 million and $475.6 million, up from the prior range of $466.5 million to $469.5 million. This new range is also above the $469 million that analysts were predicting.
  • Non-GAAP operating income is expected to land between $26.7 million and $27.7 million. This is a big boost from its prior outlook of $22 million to $24 million.
  • Non-GAAP EPS is expected between $0.58 and $0.60 -- above management's prior range of $0.42 to $0.48 and nicely ahead of the $0.50 that Wall Street had modeled.

Given the forecast-topping results and strong guidance increase, why did shares fall after earnings were released? Here are a few guesses:

First, the company's customer count has held steady at over 17,000 for most of the fiscal year, according to the third-quarter earnings call. This number isn't moving much because management is focused on upselling existing customers and landing high-value new ones, instead of just growing the absolute number. It is possible that this is worrying some investors.

Second, the company's dollar-based net expansion rate dipped 200 basis points sequentially to 122%. This is an important metric for every software-as-a-service business, so the knee-jerk reaction to the sequential decline could have been negative.

Third, New Relic's stock is up 74% over the last year. It's possible that shares were simply due for a pullback no matter how good the news was.

And fourth, management's guidance suggests that its near-term spending growth rate is going to exceed revenue growth. That could be worrying some investors.

Regardless of any reasons for the shares' decline, it was an excellent report all around.

Check out the latest New Relic earnings call transcript.

Now what

New Relic's results clearly show that the company is having a lot of success at growing revenue and driving operating leverage. Long-term investors have every reason to be happy with this report and should do their best to ignore the day-to-day market gyrations.