First post here. Apology in advance if my misunderstanding of a comment WSM made in his quarterly update and the NRR definition on MNDY’s site ends up making all that I’m about to share useless as I spent a good bit of time trying to put this all together. And apologies for the poor formatting in advance!
When reading through WSM’s summary yesterday: https://discussion.fool.com/wsm8217s-year-end-portfolio-dec-2022…
he made about monday.com’s net revenue retention rate that really caught my eye. He said, “And bear in mind that they define NRR as a 4 quarter moving average which likely means the current quarter’s NRR for 10+employees is above the 130%.” Now perhaps this is the case for all of our companies and maybe I’ve always misinterpreted it. But assuming it’s not, I think it’s prudent we take WSM’s statement that “which LIKELY means the current quarter’s NRR for 10+ employees is above the 130%” and dissect the numbers a bit more. What I mean is that I think we can arrive at much closer numbers to what the actual quarters NRR is (as it seems other companies normally report it) and not this rolling average nonsense (which allows the bright clever board members here to gain info that the rest of the market might miss).
First note that in the 21Q2 and 21Q3 reports that the retention rates came in “over 125%” and “over 130%.” So for the sake of being maximally conservative, Im going to assume they came in at 125.0001%, and 130.0000001%, and just round them both down.
Now, based on how monday claims they calculate NRR, it seems to me we can arrive at the following system of equations that calculate the actually quarterly NRR for each quarter:
Let a,b,…,f,g = 20q1,20q2,…,21Q2,21,Q3. Then,
1/4 (a + b + c + d) = 119
1/4 (b + c + d + e) = 121
1/4 (c + d + e + f) = 125
1/4 (d + e + f + g) = 130
(Now converting the system of equations to variables easier to read):
1/4 ((20q1) + (20q2) + (20q3) + (20q4)) = 119
1/4 ((20q2) + (20q3) + (20q4) + (21Q1)) = 121
1/4 ((20q3) + (20q4) + (21Q1) + (21Q2)) = 125
1/4 ((20q4) + (21Q1) + (21Q2) + (21Q3)) = 130
Solving this system of equations (google wolfram alpha system of equations solver and use variables a through g for the each quarter if you’d like to help be a number checker for me :), we find that
EQUATION 1: (21Q1) = (20q1) + 8,
EQUATION 2: (21Q1) = -(20q2)-(20q3)-(20q4) + 484,
EQUATION 3: (21Q2) = (20q2) + 16,
EQUATION 4: (21Q3) = (20q3) + 20
So what can we gather from this?
Well, from equation 1 we see that the true NRR of 21Q1 was 8 percent higher than it was in 20q1.
From equation 2 we find that the average rates for 20q2, 20q3, 20q4, and 21Q1 is 121.
So we can start here and throw in some test values to see some possible true quarterly retention rates for the last two quarters. Since the first equation informs us that Q121 is 8% higher than q120 was, we get a tighter window of possible values to plug in for the other quarters (I’m also going to assume each quarters rate improved sequentially, but even if this assumption is off as it will be in the final test numbers I provide, the final numbers we will arrive at should still be pretty accurate).
Possible NRR numbers example one:
Since the average of 20q2, 20q3, 20q4, and Q121 is 121, suppose the true percentages for those specific quarters were 117, 119, 123, and 125, respectively.
21Q1 = 125, and 20q1 = 117 = 20q2 (from equation 1)
21Q2 = (20q2) + 16 = 133 (from equation 3)
21Q3 = (20q3) + 20 = 139 (from equation 4)
*note that in this example both 20q1 and 20q2 would have come in at the same rate. Given their rate of product development I would assume this probably is not the case.
Possible NRR numbers example two:
Suppose 20q2, 20q3, 20q4, and 21Q1 = 118,120,122,and 124 respectively.
21Q1 = 124, and 20q1 = 116 (from equation 1)
21Q2 = 118 + 16 = 134 (from equation 3)
21Q3 = 120 + 20 = 140 (from equation 4)
Possible NRR numbers example three:
Perhaps in the ‘worst case’ for our last 2 quarters retention rates (and these numbers would seem pretty bumpy if they are indeed true, so I think this case is the least likely), suppose 20q2, 20q3, 20q4, and 21Q1 = 115,117,125,and 127 respectively (be mindful, if these were the real numbers, then 20q1 would have been 119 which would have meant a dip for two quarters which again seems extremely unlikely or maybe even numerically impossible given our other numbers.
This would imply,
21Q1 = 127, and 20q1 = 119 (from equation 1)
21Q2 = 115 + 16 = 131 (from equation 3)
21Q3 = 117 + 20 = 137 (from equation 4)
And please remember, don’t look at the numbers in any of these examples these numbers and mistakenly think, "they cant be correct because 21Q2 reported at +125% but these numbers suggest they came in at over 130, because the percentages they are reporting are the rolling 4 quarter averages and not the current quarters actual number itself. Mixing that up will undoubtedly lead to confusion and I would like to avoid that!
So after reviewing these numbers and WSM’s super helpful side comment that was very very valuable, It looks like MNDY’s NRR has actually been accelerating quite well compared to last year (it took four quarters to get the rate up 8% between 20q1 and 21Q1), and then only took 1 more quarter to boost it again by 8%, and most recently, a 4% jump.
Hope this is helpful. Please remember that I certainly could have made human error in my calculations, and could have also made an error copying and pasting things around. And if it turns out that this is how all of our companies are reporting NRR and Ive just been misunderstanding it all this time then please let me know! And remember, even though some of these numbers involve hypothetical numbers, the range of the hypothetical numbers is so tight that they cant possibly be that far off of the true numbers for the most conservative case (re-read my assumptions about the "over 125% and over 130%s monday reported)! As each new quarter’s numbers come in we will be able to get a better idea of the exact values for the most recent quarters, which should hopefully help us pick up on acceleration and deceleration faster than the rest of the market!