Here are the cloud stocks that do the best job of expanding business with existing clients

Published Fri, Jul 2 202110:23 AM EDT

It's one thing to recognize a company for growing by adding lots of new clients. It's another thing, and arguably smarter, to give credit for extracting more revenue out of the customers you already had. That's the purpose of a figure touted by many cloud software companies that's known as the net revenue retention rate, or NRR. It's sometimes also known as dollar-based net expansion rate or net dollar retention rate — NER or NDR. Definitions vary by company, but generally speaking, executives calculate the percentage by taking the amount of revenue received in a recent period of time from the customers they had one year ago and then dividing that amount by the revenue from those same customers in the year-ago period. This figure is expressed as a percentage, and 100% implies that revenue from a company's existing customers stayed flat. The measurement reflects instances of customers signing up for more products and expanding deployments, as well as the loss of existing customers, and it leaves out impact from adding new customers. The concept is not new. Companies have talked about their ability to increase the amount of revenue they derive from a given group of customers since at least 2010. Learning-management software maker Cornerstone OnDemand and marketing software company Responsys both touted their retention rates that year in paperwork for their initial public offerings. However, the notion of measuring growth within a set customer base has become more helpful as an instrument for analyzing companies that deliver their services from the cloud. That's because cloud technologies became more popular after the coronavirus pandemic caused companies to close their offices and limit access to data centers. 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 even as the pandemic recedes, these companies also report higher revenue retention rates. Even so, not all cloud companies announce retention rates. Salesforce , a pioneer in providing web-based software, is not in the habit of disclosing those figures. But the idea is gaining acceptance, even in some places that investors might not expect. Pure Storage , which makes flash storage hardware for corporate data centers, told analysts in 2019 that it had a 140% retention rate, based on average contract value. Pure talked about the metric because subscriptions to keep hardware and software up to date are becoming more important. "Now 35% of our business is subscription revenue, and it's growing faster than our company as a whole," CEO Charlie Giancarlo said in an interview in June. Some of the strongest retention rates can be found at companies that are new to public markets. Snowflake warned investors in its latest earnings statement that "we expect our net revenue retention rate to decrease over time as customers that 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 use cases rather than new use cases." Today certain venture capitalists train their portfolio companies to pay attention to retention rates. Dharmesh Thakker, a general partner at Battery Ventures, said that after he gets involved with a start-up, the top priority at the first board meeting is to find out the retention rate and ask about ways to improve it. He said it's more profitable to gain new revenue from existing customers than new customers because there are acquisition costs are lower. "There's no way you can drive 50% growth once you hit $300 million in revenue unless [net dollar retention] is above 140%. There's just no way," he said. "Without NDR, you're going to be stuck in the $3 billion to $10 billion bucket." Marqeta , a financial-services company with fast-growing customers such as DoorDash and Instacart, said when it filed to go public in May that it had a 200% retention rate. "This is pretty insane," one start-up CEO wrote on Twitter. The statistic from Marqeta does put many other companies to shame. Here's are the best and worst performers from a retention perspective in Bessemer Venture Partners' Nasdaq Emerging Cloud Index, which follows public companies that offer cloud software and services: Top 3 Snowflake : 168% . "We find that people are often puzzled, like, 'How does that work, where does that come from?'" CEO Frank Slootman said at the data analytics software company's recent investor day. Customers broaden their consumption by running multiple clusters to keep performance high as more people submit data queries, they run workloads more often, and they request larger workloads, Slootman said. The company expects retention to remain above 160% through the rest of its fiscal year, which ends in January 2022. Ncino : 155%. That's up from 147% when the company filed to go public last year. "The only way you get there is by cross-selling, okay?" CEO Pierre Naudé said on an earnings call in March. The North Carolina-based company sells "Bank Operating System" software with a slew of capabilities. The retention rate rose as the company helped banks process hundreds of thousands of U.S. Paycheck Protection Program loans. Zoom : Above 130% . Zoom became a household name in the pandemic 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 more products. Last month Zoom said diaper and toilet paper company Kimberly-Clark, which had already been using the Zoom Meetings and Video Webinar products, added 25,000 licenses for the Zoom Phone cloud phone service, while auto-parts company Denso expanded their use of Zoom Meetings and Video Webinar to 47,000 employees. Bottom 3 Dropbox : A percentage in the low 90s. CEO Drew Houston said in May that the cloud file syncing and sharing software company has been making investments that executives expect to raise retention rates. The company recently introduced a freemium version of its password-syncing tool for free users and made it easier for them to upgrade for higher file-transferring limits, Houston said. Dropbox is also focused on boosting retention rates by expanding the size of deployments within teams, finance chief Tim Regan said in February. Paylocity : Above 92%. The company sells human-resources and payroll software to medium-sized companies with 20 to 1,000 employees. That can make the retention rates less flattering. As a rule, large enterprises have more money to spend than small and medium-sized businesses, and Covid raised the risk of certain clients going out of business. Paylocity CEO Steve Beauchamp told analysts in May that "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 12 months ago." Proofpoint : 90%. The security software company's retention rate in the fourth quarter was up from "just below 90%" in the prior quarter, Paul Auvil, its chief financial officer, said in February. But the virus continued to impact the company, with customers renewing with fewer users in industries where the pandemic brought layoffs and furloughs, Auvil said. In April Thoma Bravo announced its intent to buy Proofpoint for $12.3 billion. WATCH: Marqeta CEO Jason Gardner on going public, the fintech sector and more