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Why This Metric Could Be Less Important for Cloudflare Going Forward

By Brian Stoffel and Brian Withers - Feb 22, 2021 at 5:00PM

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These three letters will tell you if the company is still healthy.

Cloudflare (NET -5.17%) is a company on a mission. That mission: "to help build a better Internet." It does that by offering a full suite of solutions that help companies get information to their users as quickly as possible. In the age of digital connectedness, seconds matter!

With software-as-a-service (SaaS) businesses, one of the most popular metrics to measure a company's strength is dollar-based net retention. This metric takes the amount of revenue a company gets from customers in year one and compares it with how much the same cohort brings in during year two. By filtering out the effect of new customers, you get a better idea of how well a SaaS company holds onto and deepens relationships with existing customers.

But sometimes, it doesn't tell the whole story. In this segment of Motley Fool Live, recorded on Feb. 12, Fool contributors Brian Stoffel and Brian Withers discuss why remaining performance obligations -- or RPO -- are a better indicator of company health.

Brian Stoffel: One thing I want to add to that, Brian, because -- first of all, thank you. That was a great summary -- is that that dollar-based net retention or dollar-based net expansion, whichever one it is, it's going to start to matter less and less as compared to RPO, because of what you said, they're signing on lots of big customers.

Here's the thing: Dollar-based net retention takes all the customers in year one and compares how much they spend to the same customers in year two. So you're filtering out all the new customers, which is good because it lets you know, well, are you able to grow once you have a relationship with a customer?

But here's the thing. If you've got all those products, and before someone who was signing up for just one and then adding more as time went on, that would show up in your dollar-base net retention. But if I come to you, Brian, and you're Cloudflare, and I say, "I want the whole board. I want to everything for my whole company." Well, then there's less room to grow. But that's not a bad problem to have. It won't show up in dollar-based net retention, but it will show up in that remaining performance obligation because it just says, "I don't care how much the pie grows from year one to year two, if you're ordering the biggest pie we have, that's great. Come on onboard."

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