Shares of the observability company New Relic Inc. fell in after-hours trading today after it delivered fiscal fourth-quarter earnings results that missed expectations and followed up with weak guidance.

The San Francisco-based company reported a loss before certain costs such as stock compensation of 24 cents per share, amounting to a net loss of $55.5 million in the quarter. New Relic’s revenue for the period rose 19% from a year ago, to $205.8 million. The results were mixed, with Wall Street modeling a smaller loss of 21 cents per share on slightly lower revenue of $204.9 million.

For fiscal 2022, New Relic reported that its loss had widened to $250.4 million, with revenue coming to $785.5 million. The stock tanked, losing almost 9% of its value in after-hours trading having stayed flat earlier in the day.

New Relic is a leading player in the so-called observability market. It sells tools for enterprises to monitor their applications and DevOps environments. It’s popular with developers because it allows them to identify problems with their apps easily and find a way to fix them.

In a statement, New Relic Chief Executive Bill Staples (pictured) said the year just gone was a success, with the company delivering revenue that was well in excess of the $710 million it guided for one year ago. “This was a transformative year for New Relic and I’m very proud of all the hard work our people put in to get here,” he said.

The company had implemented a new business model as part of its transition to the cloud, reducing its product prices while doing so. The idea was to sacrifice some near-term profit in order to secure customers on longer subscriptions.

The plan may be working, as New Relic saw its number of active accounts rise to 14,800 by the end of the quarter, up from 14,100 in the same period one year ago. Meanwhile, its active accounts that deliver at least $100,000 in annual revenue rose to 1,099, up from 945 such accounts a year earlier. New Relic’s net revenue retention rate, which is a metric that measures how much revenue the company squeezes from its existing customer base, rose seven percentage points to 119%.

Analyst Holger Mueller of Constellation Research Inc. said today’s numbers show that the transition to subscription pricing remains a big challenge for New Relic, which not only increased its losses, but also has fewer active customers than it did seven quarters ago, despite the slight growth it is seeing. He worried that because the bulk of the company’s revenue comes from larger customers, the need to add more of them is a serious challenge in the way of its long-term growth plans.

“The good news is New Relic added 200 active customer accounts in the quarter, so it’s growing them slowly,” Mueller said. “Especially encouraging is that the number of customers who spend more than $100,000 a year is up by 35 from a year ago. These customers make up 82% of its total revenue, so it is making progress of sorts.”

Unfortunately for New Relic, though, it’s also bleeding cash. And that’s unlikely to change any time soon. For the first quarter, New Relic is forecasting a loss of between 35 and 38 cents per share on revenue of $212 million to $214 million.

Wall Street was looking for a much smaller loss of eight cents per share on revenue of $211.3 million.

The full-year picture doesn’t get much better, with New Relic forecasting a loss of 31 to 37 cents per share on revenue of $920 million to $930 million. That contrasts wildly with Wall Street’s expectation of a penny-per-share profit on sales of $913.9 million.

Mueller said that even this lower-than-expected guidance will be difficult to meet given New Relic’s poor cost management over the last year. He noted that its total costs were up more than $100 million compared to the year prior. However, New Relic only managed to grow its revenue by $118 million in the same period.

“New Relic’s problem is that its cost of revenue is up $75 million. One year ago, New Relic spent 27 cents for each dollar in revenue, but last year it was up to 32 cents for each dollar in revenue, an increase of more than 20%,” Mueller said. “Given this performance and the almost identical cost guidance for the next quarter and full year, its fiscal 2023 guidance is rather a bold prediction to make. Never say never, but the management is putting itself under serious pressure to make this full year into a massive turnaround for the company. The next quarter will tell us if it’s likely to get there.”

Photo: New Relic/YouTube