The New York Stock Exchange welcomes Snowflake to begin the first day of winter on December 21, 2021. In honor of the occasion, Snowflake the Bear, joined by Chris Taylor, Vice President of Listings and Services at the New York Stock Exchange, rings the opening bell.
New York Stock Exchange
In 2020, as a supplier of data analysis software Snowflake It was hitting the public market, and one of the key stats it was touting to investors was net revenue retention.
Snowflake's NSR at the time was 158%, meaning its existing customer base increased its total spend from the previous year by 58%. This measure reflects demand from customers for more products and services and is beloved by Wall Street because it indicates additional revenue without significant additional cost.
However, in the quarter that ended in January this year, Snowflake's national net return rate fell to 131%, a number that is still high by industry standards but indicates a slowdown in new spending. It's a trend emerging across the cloud software industry, as formerly fast-growing companies take a more conservative approach than the companies, governments and other entities they serve, whether the buyers are finance, marketing or IT departments.
“Average net retention in the software world has declined steadily over the past few quarters,” Jamin Paul, a partner at technology-focused investment firm Altimeter Capital, wrote in a post on social media site X on Friday. “More pressure to change (as companies look to reduce point solutions in favor of platforms) and increased hard selling have led to lower net retention,” Paul added.
Industrywide, the average net retention rate fell to 111% in the fourth quarter, with the number falling slightly each period, Poole data shows. According to his four-year chart, the net return rate (NRR) peaked at 121% in the first quarter of 2022, after technology stocks hit a record high and began a sharp decline.
The reduction continued even as interest rates stabilized, the economy showed signs of strength and the Nasdaq erased all its losses from 2022 to reach new highs.
Twilio, which sells cloud-based communications software, reported an NRR of 102% in February, with revenue growth of just 5% year over year. Go back to Q4 2020 and the company's net return rate was 139%.
Nearly all of Twilio's revenue comes from its texting and email technology division.
“We are seeing lower decline in this business, but compared to historical levels before 2023, there is higher contraction and quieter expansion,” Aidan Viggiano, Twilio's chief financial officer, said on the company's February earnings call.
At Snowflake, CFO Mike Scarpelli told investors last month that NRR will at some point converge to its revenue growth rate, which slowed to 36% in the last fiscal year from 69% in fiscal 2023 and 106% the year before that.
The topic didn't get much discussion on Snowflake's earnings call, with analysts focusing on the announcement that Sridhar Ramaswamy would replace CEO Frank Slootman, the veteran Silicon Valley executive who led Snowflake through its 2020 initial public offering, the largest ever for the United States. Software company.
Representatives for Twilio and Snowflake declined to comment.
The story is similar in Zoom inwhich saw the net retention rate of organizations fall to 101% from more than 130% three years ago.
Zoom has chosen to add AI features to its premium video calling plans at no additional cost. This differs from the approach taken by competitors Google And Microsoftwhich generally forces companies to pay for new AI capabilities.
“Because customers are also trying to reduce cost, that's why we don't charge customers for these features,” Zoom CEO Eric Yuan said on his company's earnings call last month.
Zoom did not respond to CNBC's request for comment.
until Amazon CEO Andy Jassy said “cost optimization” is having an impact on the business. Amazon Web Services doesn't beat NRR, but the division reported fourth-quarter year-over-year revenue growth of 13%, down from 20% a year earlier. Jassy said he believes the market is beginning to show signs of accelerating.
“I think the lion's share of the cost improvement has occurred,” Jassy said. “It doesn't mean there won't be more or that we won't see more. But it's diminished very dramatically.”
“Customers are renewing larger commitments over longer periods,” an AWS spokesperson told CNBC in a statement.
“Additional selling pressure”
Zoom information, which sells access to data that companies can use to help boost sales, reported a significant drop in its net risk ratio to 87% at the end of 2023 from 116% two years ago. This means that existing customers spend less year on year.
Mid-sized companies, especially in technology, were the clients that felt the most heat in the fourth quarter, ZoomInfo CFO Cameron Hyzer told analysts on an earnings call last month. ZoomInfo ended the fourth quarter with 1,820 customers holding at least $100,000 in annual contract value on December 31, down from 1,869 customers at that level on September 30.
“We expect further downside selling pressure in the first quarter as we are still at the peak of negativity from last year and are working through a long series of multi-year contracts that have recently been dealt with in a very different operating environment,” Heiser said. He said management expects the retention rate to return to higher levels this year.
Digital Ocean, which competes with AWS, Microsoft and Google in providing cloud computing and storage services, also saw its NRR fall to less than 100% last year. After reaching 112% in the fourth quarter of 2022, the rate decreased to 107% at the beginning of 2023, then fell to 96% in the third and fourth quarters.
Paddy Srinivasan, who was named CEO of DigitalOcean in January, told CNBC in a February interview that developers are shutting down compute instances they are not currently using.
As with AWS, DigitalOcean is “starting to stabilize,” Srinivasan said.
Representatives for ZoomInfo and DigitalOcean did not respond to CNBC's requests for comment.
