OKTA’s Trailing 12-Month Retention Rates have been falling. Is this something to worry about or is there a benign explanation?
FY
2019 Trailing 12-Month retention rate %
q2 118
q1 119
2018
Q4 120
Q3 120
Q2 121
Q1 121
2017
Q4 121
Q3 123
Q2 123
Q1 123
If you read the CC transcript, this is addressed by the CFO:
"Turning to retention. Our dollar-based net retention rate for the trailing 12-month period remained strong at 118% and represents and 1 point sequential decrease. The slight decrease is as expected and is impacted by the large initial deal sizes we’re achieving with large enterprise customers. As I mentioned last quarter, the net retention rate may fluctuate a bit from quarter to quarter. We expect it to remain very healthy as we continue to experience growth in initial deal sizes.
https://seekingalpha.com/article/4288556-okta-inc-okta-ceo-t…
The larger the initial lands are, the less “seats” can be sold going forward. RPO might be a better indicator:
Total RPO or backlog, which for us is contracted subscription revenue, both billed and unbilled that has not yet been recognized, was $914 million, representing a growth of 68%. As Todd mentioned, the exceptional growth in total RPO reflects the success we’ve been experiencing with large enterprise customers where the contracts tend to be much larger in total contract value and longer in length, up to five years in some cases. As we continue to see success with winning the world’s largest organizations, we expect the average contract size and term length to trend upwards over time.
Current RPO, which represents subscription revenue we expect to recognize over the next 12 months, also experienced strong growth of 52% to $461 million. As I mentioned last quarter, RPO should be viewed as an additional metric to gauge our performance in the quarter. The year-over-year growth in current RPO is a more meaningful metric when viewed along with subscription revenue and billings growth. Billings can sustain variability caused by changes in invoice duration and invoice timing, while RPO can reduce some of the variability seen in billings because it eliminates variances in these invoice dynamics. However, RPO can be influenced by factors such as contract duration and renewal cycles.
Best,
Matt
OKTA’s Trailing 12-Month Retention Rates have been falling. Is this something to worry about or is there a benign explanation?
Hi there, wnewyourktokyo,
First of all a “fall” from 123% to 118% (or 5%) over two-and-a-half years, is a very slow “falling” after all.
Secondly, larger initial deals means it’s hard to add the same percent growth the next year.
Best,
Saul
Hard to imagine such tiny changes as something to worry about … monitor, sure, but worry?
With customer count growth slowing, revenue growth slowing and net retention rate slowing it is not a recipe for continued strong growth.
Okta has been talking about a strong second half of the year due to new products. If these products are successful net retention rate should go back up.
Please name the metrics correctly.
Retention Rate =! dollar based net retention rate.
Everytime someone talks about retention rates, i have no clue which metric they are talking about.