Thread by @jaminball

A few weeks ago I shared a graphic looking at the change in YoY growth rates for SaaS businesses from Q2 to Q1. I thought another interesting analysis would be looking at the change in net new ARR added from Q2 to Q1. The data below shows the % change:

To calculate net new ARR in a given quarter I first take the quarterly subscription revenue (where disclosed) and multiply it by 4 to get an implied ARR metric. I do the same thing for the quarter prior. The difference between the 2 is the implied net new ARR added in a quarter

What's graphed is the % change in net new ARR added in Q2 vs Q1.

An example: Fastly added $48.3M net new ARR in Q2 and $15.8M of net new ARR in Q1. The number shown is the growth in net new ARR 205%. (shoutout to my Fastly bulls)

Normally it makes more sense to look at growth metrics YoY. But when I look at net new ARR I like to see the number increasing on an absolute basis every quarter (positive % graphed). Even at large scale I still like to see the absolute dollar increasing.

In theory companies are not reducing the size of their sales force, so if net new ARR declined on an absolute basis the same number of sales reps sold less business one quarter vs the previous quarter (not good, less efficient)

This is a large oversimplification, and there are other factors in play like expansion bookings. Public SaaS businesses don't disclose granular bookings metrics (new logo bookings vs expansion bookings, etc), so this implied net new ARR analysis is the best we can do

The companies with positive percentages added more net new ARR in Q2 vs Q1. The companies with negative percentages added less net new ARR in Q2 vs Q1. An important point to note is that companies with negative percentages are not declining

Companies can actually decelerate overall revenue growth YoY, but still accelerate net new ARR added (which is why I wanted to look at this analysis).

An example: Okta grew revenue 46% YoY in Q1 and 43% YoY in Q2. So their growth "decelerated."

However, in Q2 they added ~$68M of net new ARR, and in Q1 they added ~$61M of net new ARR.

So even while growth decelerated, net new ARR accelerated

One of the tricky aspects of SaaS businesses is that they recognize revenue ratably over the course of a contract. So looking at GAAP revenue change doesn't always tell the full picture when trying to draw short term conclusions

This is especially true if a large percentage of new business gets signed at the tail end of a quarter.

Unfortunately I don't think billings / bookings always tell the full story either since the length of contract is not factored into either

One thing to note - many SaaS businesses don't report subscription revenue separately, so they've been left off the analysis.

Similar to the YoY growth rate analysis I did, this analysis shows the clear Covid beneficiaries are Fastly, Zoom and Shopify.

However this analysis (which I think tells a more accurate picture) also highlights others as true winners as well

For reference here is the growth rate analysis I've referenced

And one final note - Datadog will be under pressure this quarter. They're one of my favorite SaaS companies, but the drop off in net new ARR in Q2 vs Q1 was significant, and a big reason the stock dropped. I'll be watching Q3 closely for them (still long term bullish)