Cloud software makers are seeing a sliding hold on revenue as customers ease up

In 2020 as a data analytics software provider Snowflake went public, one of the key statistics it touted to investors was net income retention.

Snowflake’s NRR at the time was 158%, meaning that its existing customer base from a year earlier had increased its total spend by 58%. The measure reflects customer demand for more products and services and is beloved by Wall Street because it means added revenue without much additional cost.

However, in the quarter that ended in January of this year, Snowflake’s NRR fell to 131%, a number that is still high by industry standards but shows a slowdown in new spending. It’s a trend emerging in the cloud software industry as former high-growth businesses grapple with a more conservative approach from the companies, governments and other entities they serve, whether the buyers are finance, marketing or IT departments.

“The average net retention of the software universe has been steadily declining over the past few quarters,” wrote Jamin Ball, a partner at tech-focused investment firm Altimeter Capital, in post on social media site X in Friday. “Greater churn pressure (as companies seek to reduce point solutions in favor of platforms) and more difficult upsells have reduced net retention,” Ball added.

Across the industry, the average net retention rate fell to 111% in the fourth quarter, as the number declined slightly each period, Ball’s data showed. According to the four-year chart he published, the NRR peaked at 121% in the first quarter of 2022, which was just after tech stocks hit a record and began a sharp decline.

The contraction continued even as interest rates stabilized, the economy showed signs of strength and the Nasdaq erased all of its losses since 2022 to hit new highs.

Twiliowhich sells cloud-based communications software, reported an NRR of 102% in February, with only 5% annual revenue growth. Go back to the fourth quarter of 2020 and the company’s NRR was 139%.

Almost all of Twilio’s revenue comes from its division, which contains technology for sending text messages and emails.

“We’re seeing a slight churn in this business, but compared to historical levels before 2023, just more contraction and more muted expansion,” Aidan Viggiano, Twilio’s chief financial officer, said during the company’s earnings call in February .

At Snowflake, Chief Financial Officer Mike Scarpelli told investors last month that NRR will at some point converge on its revenue growth rate, which slowed to 36% last fiscal year from 69% in fiscal 2023 and 106% the year previously.

The topic didn’t generate much discussion on Snowflake’s earnings call, as analysts were focused on the announcement that Sridhar Ramaswamy was replacing CEO Frank Slootman, a veteran Silicon Valley executive who led Snowflake through its 2020 IPO. the largest ever for a US software company.

Representatives for Twilio and Snowflake declined to comment.

The story is similar at scalingwhich has marked its net retention rate in the enterprise slip to 101% up 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 is different from the approach taken by competitors Google and Microsoftwhich typically force companies to pay for new AI capabilities.

“Because customers are also trying to reduce costs, that’s why we don’t charge customers for these features,” Zoom CEO Eric Yuan said during his company’s earnings call last month.

Zoom did not respond to CNBC’s request for comment.

Even Amazon Chief executive Andy Jassy said “cost optimization” was having an effect on the business. Amazon Web Services does not disclose NRR, but the division reported annual revenue growth in the fourth quarter of 13%, down from 20% a year earlier. Jassi said he sees the market starting to show signs of re-accelerating.

“I think the lion’s share of cost optimization has happened,” Jassi said. “It’s not that there won’t be more or that we don’t see more. But it’s just weakened very significantly.”

An AWS spokesperson told CNBC in a statement that “customers renew on larger commitments for longer periods.”

ZoomInfo, which sells access to data that companies can use to drive sales, reported a dramatic drop in NRR to 87% at the end of 2023 from 116% two years earlier. This means existing customers spend less year over year.

DigitalOcean, which competes with AWS, Microsoft and Google in providing cloud computing and storage services, also saw its NRR drop below 100% last year. After reaching 112% in the fourth quarter of 2022, the rate dropped to 107% in early 2023 and then fell to 96% in the third and fourth quarter.

Paddy Srinivasan, who was appointed CEO of DigitalOcean in January, told CNBC in an interview in February that developers are shutting down compute instances they are not currently using.

Like AWS, Srinivasan said DigitalOcean is “starting to see stabilization.”

Representatives for ZoomInfo and DigitalOcean did not respond to CNBC’s requests for comment.