Dollar Based Net Expansion Rate (DBNER) is a critical metric to track for software stack companies. Companies with consistently high DBNER’s will grow revenues faster than their counterparts and experience significant stock price appreciation. DBNER also provides insight into a software stack company’s competitive moat and its pricing power.

For those who aren’t familiar, DBNER measures the percent increase in revenue from existing customers on a year over year basis. This is calculated by dividing total revenue for those customers in the past 12 months by the total revenue for those same customers in the prior 12 month period. New customers and lost customers are excluded. This rate is expressed as a percentage greater than 100%, assuming customer revenue is increasing over time.

Fastly (FSLY) provides a useful definition of this metric in their second quarter 2019 earnings press release (as well as having a nice DBNER that quarter of 132%):

Dollar-Based Net Expansion Rate (DBNER) measures the change in existing customers’ revenue from usage of our platform over a twelve month period, excluding the effect of new and churned customers.. We calculate DBNER by dividing the revenue for a given period from customers who remained customers as of the last day of the given period (the “current” period) by the revenue from the same customers for the same period measured one year prior (the “base” period). The revenue included in the current period excludes revenue from (i) customers that churned after the end of the base period and (ii) new customers that entered into a customer agreement after the end of the base period.

Fastly, 2Q 2019 Financial Results

Why is DBNER important? A high DBNER indicates the ability to expand sales within existing customer installations over time. It represents not only the “stickiness” of a solution, but its appeal to broader use cases or segments of the customer’s organization. Often, a software solution is initially sold into only one department or part of a customer’s infrastructure. As more confidence and experience is gained with the software stack offering, then its use is expanded. This is often referred to as a “land and expand” sales strategy.

Additionally, DBNER provides insight into a product’s competitive resilience and pricing power. If cheaper or easier competitive products existed, we would expect DBNER to decline below 100%. Granted, we still need to monitor customer churn, but I would expect customer spend to decrease first, in advance of finally churning out. Therefore, if a software stack company can maintain a high DBNER across multiple quarters, this would indicate favorable competitive position.

Revenue gained from expansion is separate from revenue gained by bringing on new customers. New customer revenue is driven by making new sales, which is more intensive. Expansion of usage by existing customers is much easier for the software stack company to facilitate, if they have to expend any effort at all. Their sales effort can be focused on landing new customers. Another benefit of having a high DBNER is that it provides a base of revenue growth that repeats and adds on top of whatever is achieved through new customer sales. The aggregate of the two (expansion sales and new sales) can make for high year over year revenue growth rates, which we like to see in software stack companies, as they rapidly expand into their TAM.

An example of how a software stack company can achieve a high DBNER can be seen in the performance of Twilio (TWLO). In its most recent quarter, Q3 2019, Twilio reported a DBNER of 132%. This was for its core business (separate from SendGrid email). Overall organic revenue growth in the same quarter was 47%, which means that a large portion of revenue growth was attributable to expansion of usage by existing customers. In Twilio’s case, this expansion takes the form of increased usage of their SMS and voice API’s. This increased usage is driven by either the company’s own business growth or the addition of new uses.

Another example of high DBNER is with Smarsheet (SMAR). Smartsheet sells cloud-based productivity software to companies. Examples are tools for project management, asset tracking, GDPR coverage, and many more specialize use cases (called Accelerators). In their case, revenue is generally tied to the number of software “seats” utilized by a customer. This represents an active user of one of their software offerings within the customer organization. In the most recent quarter, Smartsheet reported overall revenue growth of 53% year/year. Their DBNER was 134%. In Smartsheet’s case, revenue expansion is driven by an increase in customer user licenses for their software. Usually, this happens as a result of broader roll-out of software tools within an organization or use of more than one tool. You can see how a high DBNER (134%) almost automatically guarantees a high revenue growth rate (53%). In the prior quarter, DBNER and overall revenue growth rates were about the same.

As I mentioned, I like to see high rates of DBNER in software companies for investment. A DBNER over 120% is very good. A rate over 130% is outstanding. Select companies can even get over 140% for a quarter or two. Here are some sample DBNER’s for software companies that I have recommended or track closely for investment:

  • TWLO 132%
  • SMAR 134%
  • AYX 132%
  • MDB Over 120% Net ARR for past 8 quarters. MongoDB doesn’t report the actual value.

As I cover the performance of software stack companies, I will continue to reference this critical metric. As discussed, this rate can be one of the most important indicators of continued growth for software stack companies and a driver of increased stock performance over time.