Metric sales

The problem with the Alteryx retention metric

For any software business, retaining and growing customers is a valuable way to drive growth. Existing customers are a great source of new income at a low cost in terms of sales and marketing. The measure of the success of these efforts can be tracked in a metric called the dollar-based net expansion rate (DBNER). But investors should know that not all companies measure it the same way.

After checking the fine print in Alteryx‘s (NYSE: AYX) earnings review, Motley Fool contributor Brian Stoffel explains the problem with this company’s computation of data analysis on an episode of Fool Live that was recorded on February 11.

Brian Stoffel: Yeah. Next is the dollar-based net expansion rate. The best way to think about this is if your dollar-based net expansion rate is 100%, that means you’re essentially keeping all of your customers. In fact you know what? Do you want to go to the next slide and we’ll come back to it? What is the dollar-based net growth rate that your cohort of clients depends on, I’ll start off by saying year 1. Like December 31, how much annual revenue do we get from all of our clients? Then at the end of year 2, we go back and see how much annual revenue we collect from those same customers. The key is that we don’t include any new customers. Because what it does is dig a little under the hood and it says, “Okay, out of the people we had on December 31st of last year, how much income do we get from this group?” This includes people who leave and then those who add more.

If it’s $ 5,000 and you have a data scientist using that tool in your business, if you crank it up to three, then all of a sudden that’s a lot more revenue than Alteryx is getting. Now here’s the funny thing, and Brian circled that, is that the way they do it here is they calculate their net rate of expansion based on the dollar, and what they do is they take what it was at the end of each quarter, but then they average over the last four quarters.

If it was 130 percent in the first trimester, 125 percent at the end of the second trimester, 120 percent at the end of the third trimester and it was 115 percent at the end of the fourth trimester. What I want to know as an investor is I want to know it was 115% at the end of Q4, that’s what I’m interested in. But what they’ll post is that it was about 120 to 123 percent, because they’re averaging.

Let’s go back to that precedent now. If you look at them, overall, for a SaaS or Software as a Service business, that’s pretty good. If you can have a net dollar expansion rate of over 120%, that’s okay. The point is if you can see between Q2 and Q3 it fell 2% and then down Brian wrote in what we had this quarter, which was 122%. It has fallen 2% each quarter since the third quarter of 2019.

Brian Withers: You wonder why they haven’t shown the update on the slide for this quarter. [laughs]

Brian Stoffel: Yeah. Well, and what’s also interesting is that if it drops 2%, what we can infer from that is that regardless of the rate of net expansion in dollars for the fourth quarter of 2020 , it was about eight percentage points lower than it was in the fourth quarter of 2019. I could get into the math of it all. But basically, at the end of the day, we know that 2020’s Q1, Q2, and Q3, they’re all the same. They were included in the calculation for the last quarter and this quarter. The only difference is that we end the fourth quarter of 2019 and add the fourth quarter of 2020. If it goes down two percentage points and you multiply that over four quarters, that means it’s eight percentage points lower. . We’ve seen it drop about eight percentage points from the previous quarter for quite some time.

Again, this is not in the realm of “Oh my God, crisis.” But in general, I don’t like this level of opacity. I like the clarity. I like that people are really open about what is going on in the company.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.