It’s quite another to acknowledge an organization that expands by acquiring a substantial number of new customers. Extracting additional money from your existing clients is an alternative and maybe more intelligent way of doing business.
That is the goal of the net revenue retention rate, or NRR, which is promoted by many cloud software companies. It is also referred to as the dollar-based net expansion rate or the net dollar retention rate — NER or NDR.
Definitions vary by company, but in general, executives calculate the percentage by taking the amount of revenue received in a recent period of time from customers they had one year ago and dividing it by the revenue received from those same customers in the previous period.
This figure is expressed as a percentage, and a value of 100 percent indicates that revenue from a company’s existing customers remained constant. The measurement takes into account instances of customers signing up for more products and expanding deployments, as well as the loss of existing customers, but does not take into account the impact of adding new customers.
The idea is not novel. Since at least 2010, businesses have discussed their ability to increase the amount of revenue they derive from a specific group of customers. Cornerstone OnDemand, a maker of learning management software, and Responsys, a maker of marketing software, both boasted about their retention rates in the paperwork for their initial public offerings that year.
However, the concept of measuring growth within a specific customer base has become more useful as a tool for analyzing companies that provide cloud-based services. Because of the coronavirus pandemic, which caused companies to close their offices and limit access to data centers, cloud technologies became more popular.
Just as cloud companies such as Snowflake and Zoom continue to command high price-to-sales multiples based on revenue over the next 12 months, these companies also report higher revenue retention rates. Nonetheless, not all cloud service providers disclose retention rates. Salesforce, a pioneer in web-based software, is not in the habit of disclosing those numbers.
However, the concept is gaining traction, even in unexpected places for investors. Pure Storage, which manufactures flash storage hardware for corporate data centers, told analysts in 2019 that it had a 140% retention rate based on average contract value. Pure mentioned the metric because subscriptions for keeping hardware and software up to date are becoming increasingly important. “Now, subscription revenue accounts for 35% of our business, and it is growing faster than the rest of the company,” CEO Charlie Giancarlo said in a June interview.
Companies that are new to public markets have some of the highest retention rates. In its most recent earnings report, Snowflake warned investors that “we expect our net revenue retention rate to decrease over time as customers who have consumed our platform for an extended period of time become a larger portion of both our overall customer base and our product revenue that we use to calculate net revenue retention rate, and as their consumption growth primarily relates to existing customers.”
Certain venture capitalists now train their portfolio companies to focus on retention rates. Dharmesh Thakker, a general partner at Battery Ventures, stated that when he first gets involved with a start-up, the first board meeting is spent determining the retention rate and discussing ways to improve it. He claims that gaining new revenue from existing customers is more profitable than acquiring new customers because the acquisition costs are lower.
“There is no way you can achieve 50 percent growth once you reach $300 million in revenue unless [net dollar retention] is greater than 140 percent. “There is simply no way,” he stated. “Without NDR, you’ll be stuck in the $3 billion to $10 billion range.”
Marqeta, a financial-services company with fast-growing customers like DoorDash and Instacart, claimed a 200 percent retention rate when it filed to go public in May. “This is pretty insane,” one startup CEO tweeted. The Marqeta statistic puts many other companies to shame.
The following are the best and worst performers in terms of retention in Bessemer Venture Partners’ Nasdaq Emerging Cloud Index, which tracks public companies that provide cloud software and services:
168 percent for a snowflake. “We find that people are frequently perplexed, asking, ‘How does that work, where did that come from?’” CEO Frank Slootman stated this at a recent investor day for the data analytics software company. Customers broaden their consumption by running multiple clusters to maintain high performance as more people submit data queries, run workloads more frequently, and request larger workloads, according to Slootman. The company anticipates that retention will remain above 160 percent for the remainder of its fiscal year, which ends in January 2022.
Ncino has a score of 155 percent. This is up from 147 percent when the company filed for IPO last year. “The only way you’re going to get there is by cross-selling, okay?” On a March earnings call, CEO Pierre Naudé stated. The company, based in North Carolina, sells “Bank Operating System” software with a variety of features. The retention rate increased as the company assisted banks in processing hundreds of thousands of Paycheck Protection Program loans in the United States.
Zoom: greater than 130 percent. During the pandemic, Zoom became a household name as people used its video-calling software to stay in touch with classmates, colleagues, family members, and friends — but the company is also signing up customers for new products. Last month, Zoom announced that Kimberly-Clark, a diaper and toilet paper company that had previously used the Zoom Meetings and Video Webinar products, had added 25,000 licenses for the Zoom Phone cloud phone service, and that auto-parts company Denso had expanded their use of Zoom Meetings and Video Webinar to 47,000 employees.
Dropbox has a low-to-mid-90s percentage. In May, CEO Drew Houston stated that the cloud file syncing and sharing software company has been making investments that executives anticipate will increase retention rates. According to Houston, the company recently introduced a freemium version of its password-syncing tool for free users and made it easier for them to upgrade to higher file-transfer limits. Dropbox is also focusing on increasing retention rates by increasing the size of deployments within teams, according to finance chief Tim Regan in February.
Paylocity: greater than 92 percent. Human-resources and payroll software are sold to medium-sized businesses with 20 to 1,000 employees by the company. As a result, retention rates may be less flattering. Large enterprises, on average, have more money to spend than small and medium-sized businesses, and Covid increased the likelihood of certain clients going out of business. In May, Paylocity CEO Steve Beauchamp told analysts, “we’ve probably seen a little bit more momentum at the upper end of our target market and even beyond than maybe we had seen a year ago.”
90 percent of the time. According to Paul Auvil, the company’s chief financial officer, the retention rate in the fourth quarter increased from “just below 90 percent” in the previous quarter. However, the virus continued to have an impact on the company, with customers renewing with fewer users in industries where the pandemic caused layoffs and furloughs, according to Auvil. Thoma Bravo announced its intention to acquire Proofpoint for $12.3 billion in April.
“Google is the consensus long in Internet land right now,” Bernstein analyst Mark Shmulik wrote in a note published Friday.
Alphabet shares, according to Shmulik, are trading at a low price relative to earnings.
“Paying a market multiple for a high-teens growth business with a 30 percent operating margin and a moat stronger than Benin’s Walls? “Yes, please,” Shmulik replied.
The firm reiterated its outperform rating on the stock and maintained its $2,800 price target, implying a 31% increase from Thursday’s closing price.
According to Shmulik, Alphabet is poised to benefit as the return of travel boosts Google searches and ad revenues. Meanwhile, YouTube is bringing in ad dollars, and Android may gain market share as Facebook and Apple spar over privacy policies, he added.
Alphabet shares closed at $2,448.89 on Thursday, up nearly 40% in 2021.
Shmulik stated, “I still like Facebook, Amazon, and Snapchat.” “But right now, I just prefer Google a little more.