Shares of New Relic (NYSE:NEWR) traded 27.6% lower at noon today, following a mixed third-quarter report. Management also provided disappointing earnings guidance for the fourth quarter, indicating that loftier financial goals will have to wait a while.
New Relic’s third-quarter revenues rose 22% year over year, landing at $204 million. Adjusted net losses came in at $0.18 per diluted share, compared to a loss of $0.14 per share in the year-ago period. Your average analyst was expecting a net loss of roughly $0.15 per share on sales near $200.5 million.
So that’s a mixed bag, but New Relic’s management also issued concerning fourth-quarter guidance targets. The analyst consensus was pointing to a net loss of just $0.02 per share on sales in the neighborhood of $204 million for the next quarter. The midpoints of the new guidance ranges point to deeper losses of approximately $0.21 per share and revenues of $205 million.
Today’s dip undermined the 40% gain that followed from New Relic’s impressive second-quarter report. The stock is still up 19% over 52 weeks, though share prices stand 38% below November’s all-time highs.
The company is in the process of implementing a different sales model, one whereby clients commit to a certain level of application monitoring activity with extra fees for going beyond the selected levels. More than 80% of the third quarter’s sales were collected under this model, and the ratio should only increase as contracts under the old billing system expire one by one.
New Relic is still aiming for year-over-year sales growth in the 25% range for the long haul, but the shifting contract model is pushing that long-term target a few quarters down the road.
“We have our sights really set on returning to that 25% year-over-year growth rate in the quarters ahead, and we’ll continue to pursue it until we achieve it, which we said is in the intermediate term or within the next two years,” Chief Product Officer Bill Staples said on the earnings call.
In the meantime, New Relic is putting its weight behind the top-line growth target, taking on dramatically higher costs of doing business as the monitoring platform grows. Some investors appear to be uncomfortable with the bottom-line pain that comes with this rapid-growth approach, which is why the stock is cratering today.
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