What happened

Following a mixed fiscal 2020 first-quarter earnings report, shares of New Relic (NYSE:NEWR), a software-as-a-service business that focuses on application performance management, dropped 28% as of 10 a.m. EDT on Wednesday.

So what

The headlines numbers for the period were actually pretty good:

  • Revenue grew 30% to $141 million, which exceeded the high end of management's guidance range. It was also above the $139.6 million that Wall Street was expecting.
  • Non-GAAP (adjusted) earnings per share grew 26% to $0.19. That was also above guidance and blew past the $0.09 that analysts were expecting.

However, a few of the company's key metrics were quite weak:

  • The dollar-based net expansion rate (DBNE), which measures existing customer spending from year to year, was just 109%. That was much lower than the 131% that was reported last quarter. It was also down 900 basis points from the year-ago period.
  • Deferred revenue dropped 6% sequentially to $255 million.
Business man with hand in front of data on screen

Image source: Getty Images.

On the conference call with analysts, CEO and founder Lew Cirne provided some commentary on the weak results:

[W]e did not execute well enough to meet quarterly sales and headcount targets. This resulted in a lower-than-expected deferred revenue balance and net dollar base expansion rate. We are not pleased with these results. But we do believe they are an anomaly, limited to the first half of the fiscal year and largely the consequence of our moving aggressively to complete go-to-market and product-related organizational transitions. At the same time, this was compounded by the release of a new product and user interface platform against the backdrop of a seasonally soft quarter. Longer-term, we anticipate the benefits of these initiatives which will align our operations to a common powerful platform, New Relic One.

Management's guidance for the upcoming quarter isn't sitting well with investors, either:

Metric Q2 2020 Guidance Range Implied Change 
at Midpoint 
(Year Over Year)
Revenue $143 million to $145 million 25%
Non-GAAP operating income $5 million to $6 million (43%)
Non-GAAP EPS $0.14 to $0.16 (25%)

Data source: New Relic. 

For perspective, Wall Street was expecting $145.9 million in revenue and $0.12 in non-GAAP EPS in the upcoming quarter.

Traders are mauling the stock in response to the mixed guidance and the admission of execution challenges. 

Looking forward

The good news for investors is that management reaffirmed its call for revenue to land between $600 million and $607 million for the full year, which implies growth of about 26% at the midpoint. The non-GAAP EPS guidance range was also increased by a penny to account for the lower-than-expected growth in headcount.

Management stressed that it expects to get the business back on track in the second half of fiscal 2020, and that the company remains well positioned for long-term success. What's more, CFO Mark Sachleben said that the weak Q1 DBNE number will be "the low point for the fiscal year."

Nonetheless, this quarter raises new questions about the company's ability to execute and the strength of its competitive position, so it's no surprise to see shares selling off hard today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.