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Here's Why New Relic Stock Is Tumbling Today

By Brian Feroldi - Updated Feb 5, 2020 at 10:32AM

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Shares drop after the company releases mixed earnings results and guidance.

What happened

In response to the company's announcement of fiscal 2020 third-quarter results that missed the mark, shares of New Relic (NEWR 3.01%), a software maker that focuses on application performance management, dropped as much as 14% in early morning trading on Wednesday. Shares were down about 8% as of 10:53 a.m. EST today. 

So what

Here are the headline numbers from the quarter: 

  • Revenue jumped 23% to $153 million. That was ahead of management's guidance and beat the consensus estimate on Wall Street.
  • The number of customers who spend more than $100,000 with New Relic each year jumped to 926, up from 816 at the end of 2018. 
  • The dollar-based net expansion rate was 109%. That was much lower than the 122% in the year-ago period. 
  • The GAAP operating loss rose sharply to $24.2 million. But on an adjusted basis, operating income came in at $3.0 million. 
  • GAAP net loss was $0.46 per share.
  • Non-GAAP (adjusted) net income dropped by more than 50% to $0.09 per share. While the drop was expected, the $0.09 came in $0.03 below the $0.12 in adjusted profits that analysts were looking for.
  • The cash balance at quarter-end was $737 million. 
Arrow pointing up and down with question mark

Image source: Getty Images.

As for guidance, here's what New Relic expects in the upcoming quarter:

  • Revenue is forecast to grow by about 17% to between $154 million and $156 million. That range is right in line with Wall Street's estimate of $155 million.
  • The non-GAAP loss from operations is expected to range from breakeven to $2.0 million.
  • Non-GAAP net income per share is expected to land between $0.02 and $0.06. That's behind the $0.08 that analysts were projecting.

Guidance for the full fiscal year was adjusted, too:

  • Revenue is now forecast to grow by about 24% and land between $594 million and $596 million. That's up from management's prior outlook of $588 million to $593 million.
  • Non-GAAP income from operations is expected to land between $19 million and $21 million. That's much lower than the previous guidance range of $21 million to $25 million.
  • Non-GAAP net income is projected to land between $0.54 and $0.59 per share. That's also down from management's previous outlook of $0.60 to $0.67, and below the $0.64 that Wall Street was expecting.

Given the lower-than-hoped-for profitability, it's no surprise to see shares taking a step backward today.

Now what

The updated guidance shows that management is choosing to invest heavily in itself right now to drive top-line growth. That's a trade-off that investors should applaud as long as that growth translates into increased profitability down the road. 

New Relic remains out of favor with growth-focused tech investors right now, which makes sense given the slowing growth and declining profitability. Only time will tell if the company's recent strategy change and management shake-up will pay off. 

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