What happened
Shares of enterprise-software company New Relic (NEWR) jumped on Wednesday after it reported financial results for the third quarter of its fiscal 2023. Adjusted profits came in much higher than Wall Street expected, and that's a leading reason New Relic stock was up 20% as of 11:40 a.m. ET.
So what
New Relic's management had guided for Q3 revenue of up to $235 million. However, the company generated $239.8 million in Q3 revenue, well ahead of guidance and Wall Street's expectations.
Even more impressive was New Relic's rapid improvements with profitability. The company's gross profit margin in Q3 was 74.4%, up dramatically from its 66.2% gross margin in the same quarter of last year and up from its 72% gross margin in the second quarter. CEO Bill Staples credited the improvements to the "engineering team's focus on cloud optimization and architectural improvements."
Gross-margin improvements allowed New Relic to reach profitability on an adjusted basis in Q3, with adjusted operating income of $18.7 million. And this surging profitability excited the market today.
Now what
According to management, New Relic gained over 800 net new paying customers in Q3. To me, this is the most important takeaway from the company's report. Right now, many enterprises are cutting back or pausing spending on enterprise software.
Moreover, New Relic has a free tier. Gaining that many paying customers in a time like this is an impressive feat.
That said, New Relic's management is only forecasting full-year revenue growth of 17.8% at best, which is slower than peers like Datadog and Dynatrace. Moreover, while New Relic is making progress on profitability, it still has a long ways to go, according to generally accepted accounting principles (GAAP). Through the first three quarters of its fiscal 2023, it saw an operating loss of $130 million.
Therefore, it was a good quarter of progress for New Relic. But the company needs to keep pushing forward if it's going to beat the market over the long term, in my opinion.
