Couchbase Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Couchbase Third Quarter Fiscal 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Edward Parker, Head of Investor Relations. Thank you, Mr. Parker. You may begin.

Speaker 1

Good afternoon, and welcome to Couchbase's Q3 2024 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase's Chair, President and CEO, Matt Cain and CFO, Greg Henry. Today's call will contain forward looking statements, which include statements concerning financial and business trends and strategies, market Zai's product capabilities, our expected future business and financial performance and financial condition and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Speaker 1

Forward looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10 ks or quarterly report on Form 10 Q filed with the SEC. During the call, we will also discuss certain non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press releases, which are available on our Investor Relations website. With that, let me turn the call over to Matt.

Speaker 2

Thank you, Edward, and good afternoon, everyone. On today's call, Greg and I will provide details on our Q3 results as well as our Q4 and full year fiscal 2024 guidance. I'll start off with a few highlights of our Q3 financial results. I'm pleased to report that we had a very strong quarter, Once again, outperforming our guidance across all key metrics. Highlights include growing Capella consumption, Continued big deal activity, healthy new business and expansions, strong new customer logos and overall excellent operational performance from all teams across the company.

Speaker 2

We continue to execute across our key priorities, Deliver top line growth, increase the mix of Capella, drive sales and marketing efficiency and accelerate the pace of leverage in our model. I believe our results this quarter demonstrate our increasing momentum across all of these fronts. Total annual recurring revenue or ARR was $188,700,000 up 24% year over year, up 23% in constant currency and up 4% sequentially. Revenue in Q3 was $45,800,000 up 19% year over year and up 6% sequentially. Our non GAAP gross margin remains best in class at 89.5%.

Speaker 2

Non GAAP operating loss was $5,000,000 and non GAAP operating margin was 11 percentage points above the midpoint of our implied guidance range. This demonstrates our focus on increasing efficiency across our business and continued operating expense discipline. I'd like to call out our momentum with Capella, which continues to experience strong growth and is contributing more materially to our top line as well as net retention. In fact, more than a 5th of our customer base are now Capella customers. Capella continues to be an especially important engine for new logo acquisition, which contributed meaningfully to the 24 net new customers We added across the board in Q3, doubling quarter over quarter and more than we added in the 1st and second quarters of the year combined.

Speaker 2

As our Capella base continues to grow, we're seeing favorable consumption dynamics emerge as both existing and new customers realize unique performance and scale, robust set of integrated services along with ease of use and rapid time to value. In Q3, we saw multiple instances of customers consuming ahead of their initial contracts and electing to buy more, Driving strong Capella consumption and contributing to our ARR and revenue outperformance. While we're still in the early innings of our journey, It's gratifying to see the investments we made in our cloud database bearing fruit as we expected they would. I am confident as ever in our ability to sustain durable long term growth. Turning to innovation, we continue to invest in enhancements and capacities that further extend the value of Couchbase As a cloud database platform for modern applications, recall that last quarter we talked about our 4 part vision for AI, Drive developer productivity, optimize AI processing, enable AI powered apps anywhere and do it all with a vibrant partner ecosystem.

Speaker 2

From inception, our architecture has been built to enable the most demanding to not only perform, but provide rich hyper personalized context aware experiences for our end users. We refer to these as real time adaptive applications. Combining operational and analytical capabilities, Our multimodal platform seamlessly integrates advanced services like indexing, eventing, full text search and more in a single solution. Our platform is perfectly suited for the massive performance and scalability requirements that adaptive Applications require. At AWS re:Invent last week, we announced a new Capella columnar service on AWS, which significantly enhances the ability to harness real time analytics to build adaptive applications.

Speaker 2

At the heart of this new service is the introduction of a columnar store and data integration capability directly into Capella, which further converges operational and real time analytic workloads into a single platform. Capella Columnar will also feature built in natural language processing with Capella IQ, the developer co pilot we announced last quarter. Capella columnar is a significant technical achievement that we believe brings substantial business value to our customers. The gap between analytic and operational processing is a long standing barrier to making it easier for development teams to include acquired real time analytics into their adaptive applications. As a result, our customers can ingest data from anywhere into Capella in real time, reducing complexity and costs, all while increasing developer productivity.

Speaker 2

Importantly, this new capability is a perfect example of how we leverage our unique architecture to further capture new workloads. In this case, real time adaptive applications in our singular cloud to edge platform. Now I'd like to turn to customer wins. In Q3, we saw new Capella wins across many industries, including high-tech, government, Business Services and Financial Services. 1 new Capella customer from the quarter was an AI powered customer intelligence platform provider.

Speaker 2

A top priority for this customer was eliminating maintenance costs and saving time with the managed service as its customer engagement application grows. Initially beginning on our community addition, this customer migrated to Capella this quarter because it delivered on all of the application requirements with the most compelling price performance. We also continue to see customers expanding with Capella. Yostar Games is one of the top publishers, developers and investors of games in Asia Pacific. This customer initially selected Capella to deploy, Manage and streamline its game database services.

Speaker 2

It has continued to invest in our database as a service because of Capella's impressive price performance, stability and superior database performance to support rapid customer growth as its game continues to scale. Another Capella expansion from the quarter came from a leading global design and hospitality company. This customer leverages Couchbase to manage, organize and analyze data for order management, fulfillment and pricing for the thousands of products in its catalog. This customer originally selected Capella to reduce the maintenance and operational costs associated with the self managed database and made the strategic decision to expand its investment in Capella this quarter for additional operational benefits. Switching to new enterprise wins, we landed a Canadian subsidiary of an American Multinational Financial Services Corporation.

Speaker 2

This customer selected Couchbase to power a real time trading analytics application to analyze market trends, enabling traders to make more informed decisions. This customer selected Couchbase for its superior database performance and high availability. Another new enterprise customer this quarter was a communication services provider that offers a low cost, high quality mobile service for its customers. This customer needed a high availability database platform to support the mobile billing system for its more than 5,000,000 mobile carrier service subscribers. This customer selected Couchbase because of database's impressive Scalability and suitability for cloud orchestrations while maintaining superior performance.

Speaker 2

Now, let me provide a few thoughts on the near term demand environment. As we've discussed all year, the macro uncertainty continues to present Headwinds for IT spending and we continue to see elongated deal cycles, extra layers of scrutiny and approval and customers electing to buy in smaller increments. These trends again persisted throughout the quarter. That said, I'm very pleased with our execution against these headwinds. We continue to not only see a healthy pipeline of opportunities for our cloud database platform, but also strengthening consumption trends as we start to achieve scale with Capella.

Speaker 2

And despite the challenging macro environment, organizations continue to invest in long term digital transformation initiatives where we're increasingly playing a strategic role in enabling these journeys. While we would prefer a stronger demand backdrop, We're seeing a growing desire for lower TCO and faster time to value, both of which play to our strengths and are creating additional opportunities for us as a company. You've often heard me say that Couchbase has been built for this moment and I think that's as true today as it has ever been. In closing, we're making progress on our initiatives, are committed to focusing on the areas we can control and are nimble in navigating the ones we cannot. We remain dedicated to delivering against our key priorities for fiscal 2024.

Speaker 2

Focus on top line growth, increase the mix of Capella, drive further sales and marketing efficiency and accelerate the pace of leverage in our model. Before handing the call over to Greg, I want to invite investors and analysts on this call to join me and the rest of the Couchbase executive team At our first Analyst Day in New York City, next Wednesday, December 13th, we're excited to dive deeper into the foundation of our company, Technology and strategy, share details on Capella and how we're reimagining the database experience and demonstrate how we're delivering on our commitment to drive efficiency across our business and financial model. Finally, as I always do, I want to emphasize one of our core values that I've repeated many times before. At Couchbase, we attack hard problems driven by customer outcomes. With that, I'll hand the call over to Greg to walk you through our results in more detail.

Speaker 2

Greg? Thanks, Matt, and thanks everyone for joining us. We had another strong quarter as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt mentioned, we are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment while driving very strong outperformance in our operating loss guidance. I'll now walk you through our 3rd in more detail before providing our guidance for the Q4 and full year.

Speaker 2

Total annual recurring revenue or ARR was $188,700,000 At the end of the Q3, representing 24% growth year over year or 23% growth year over year on a constant currency basis and 4% sequentially. Without the incremental currency headwind experienced in Q3, our ARR would have been approximately $1,400,000 higher or $3,600,000 above the midpoint of our guidance range. Revenue for the Q3 was $45,800,000 An increase of 19% year over year and 6% sequentially. Revenue growth benefited from stronger than expected consumption of Capella And strength in our enterprise business, partially offset by declines in professional services. Subscription revenue for the Q3 was $44,000,000 An increase of 23% year over year and 7% sequentially.

Speaker 2

Professional services revenue for the Q3 was $1,800,000 A decline of 36% year over year and 17% sequentially, consistent with our expectations following outsized strength in professional services in fiscal 2023. We continue to expect contribution as a percentage of revenue in fiscal 2024 to be below historical levels. Our ARR per customer performance in the Q3 was $264,000 up from $261,000 in the 2nd quarter, up 14% year over year, and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, We expect ARR per customer growth could moderate or decline in future quarters. Our dollar based net retention rate or NRR continues to exceed 115 Driven by strong renewal and upsell activity across our base of larger enterprise customers, our NRR has been steadily improving, thanks to Capella.

Speaker 2

We exited the quarter with 7 15 customers, an increase of 24 net new customers in the 2nd quarter. As Matt mentioned, Capella once again The majority of new logos in the quarter and we grew our Capella customer logo count by over 25% from the 2nd quarter, up from over 20% from Q1 to Q2. We're encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics against the more challenging spending environment. In discussing the remainder of the income statement, Please note that unless otherwise stated, all references to our expenses, results of operations and share count are on a non GAAP basis. In Q3, our gross margin remained strong at 89.5%, benefiting from sustained enterprise gross profit margin strength And the completion of the amortization from some of our initial Capella investments, offset by growing Capella mix.

Speaker 2

This compares to a gross margin of 88% a year ago 87.2% last quarter. As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses, we continue to invest to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth. We are pleased with our execution on this front as our expense discipline and early benefits from our cost saving initiatives resulted in us again outperforming our operating loss Our sales and marketing expenses for Q3 were $27,100,000 or 59 percent of revenue compared to $24,900,000 or 60 percent of revenue a year ago. Research and development expenses for Q3 were $12,600,000 or 27 percent of revenue Compared to $12,000,000 or 31 percent of revenue a year ago, we continue to thoughtfully invest in our as a service offering as well as additional features to bolster our platform.

Speaker 2

General and administrative expenses for Q3 were $6,400,000 or 14% of total Compared to $6,600,000 or 17 percent of revenue a year ago, non GAAP operating loss for Q3 was $5,000,000 Or negative 11% operating margin, 11 percentage points higher than the midpoint of our guidance compared to an operating loss of $9,600,000 or negative 25% operating margin a year ago. Non GAAP net loss attributable to common stockholders for Q3 was $3,700,000 or negative $0.08 per share. I'll now turn to the balance sheet and cash flow statement. We ended Q3 with $156,600,000 in cash, Cash equivalents and short term investments. We remain well capitalized to execute against our long term growth strategy.

Speaker 2

Our remaining performance obligations or RPO totaled $164,400,000 at the end of Q3, an increase of 3% year over year. We expect to recognize approximately 68 percent or $111,800,000 of total RPO as revenue over the next 12 months, which represents 7% year over year growth. Operating cash flow for Q3 was negative $12,700,000 and free cash flow was negative $13,800,000 Or negative 30% free cash flow margin. We are pleased with the progress we have made in our free cash flow profile and remain committed to driving further improvement. Now, I will provide guidance for Q4 and the full year fiscal 2024.

Speaker 2

As Matt discussed, we continue to see solid momentum and our Pipeline remains strong. Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem and go to market motion will continue to complement our momentum. That said, we remain mindful of the macro headwinds and continue to carefully monitor their impact on our business. As such, our outlook maintains a consistent degree of conservatism across all of these metrics to account for the uncertainty as well as lack of visibility into how the macro may impact consumption trends for emerging as a service offering. For the Q4 of fiscal 2024, we expect total revenue in the range of $46,200,000 to $46,800,000 or year over year growth of 12% at the midpoint.

Speaker 2

We are raising 4th quarter ARR guidance last provided on our Q2 call and now anticipate ARR in the range of $198,000,000 to $202,000,000 which represents 22% growth year over year at the midpoint. This compares to our prior outlook of $195,500,000 to $199,500,000 or 21% growth at the midpoint. We note that due to foreign currency fluctuations, our guidance incorporates an incremental 1% year over year growth Headwind since our Q2 call. We expect a non GAAP operating loss in the range of negative $8,200,000 to negative $7,400,000 Now turning to our revised full year guidance. We are raising our full year revenue guidance and now expect full year total revenue in the range of $176,200,000 to $176,800,000 or year over year growth of 14% at the midpoint.

Speaker 2

As a reminder, we continue to anticipate contribution from services revenue in fiscal 2024 to be below recent levels due to customers electing fewer services as a result of macro related budgetary pressures as well as a naturally lower services attach rate with Capella. Furthermore, We've historically seen variability with respect to the implementation timing of certain enterprise deals, which impacts our revenue visibility along with new or migrated Capella customers. We therefore continue to view ARR as a better indicator than revenue of the strength of our business. And finally, We are decreasing our operating loss outlook and now expect a non GAAP operating loss in the range of negative $35,400,000 Negative $34,600,000 With that, Matt and I are happy to take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question Thank you. Our first question comes from the line of Rob Oliver with Baird. Please proceed with your question.

Speaker 3

Great. Good afternoon. Can you guys hear me okay? Sorry for spotty connection.

Speaker 2

Loud and clear, Rob. Hey, Rob.

Speaker 3

Okay. Great. Hey, Matt. Hey, Greg. Matt, I had a couple for you on Capella and then Greg, I had one for you.

Speaker 3

So Matt, just first on Capella, when customers that are current Couchbase customers are Considering a database as a service, is that does that go to competitive bid? And it sounds like you guys are Getting nice momentum winning those, but maybe talk about how that process happens and what you've seen in terms of kind of win rates With those customers that know you. And then you mentioned usage patterns have risen nicely. And I'd just be curious to get some context there like better than your expectations, is it more in line with like how we would expect the adoption curve? Are there new use cases you're seeing that have surprised you?

Speaker 3

So a couple of things there and then I had a follow-up for Greg.

Speaker 2

Sure. So let me take these one at a time. I think Rob as it pertains to existing customers, Oftentimes, they have chosen Couchbase because of our platform capabilities. And what we're able to do with PELOS offer them additional value proposition, ECO, faster time to value, easier to expand use Okay. So that is incremental to the value proposition we've already delivered.

Speaker 2

Very rarely, if ever, does that Going to a competitive bid, it's more finding the right time for them to migrate their entire estate, a Subset of their estate or focus on new workloads moving into Capella because of that value proposition. The competitive dynamic that we're seeing is actually workloads That we don't support where because Capella has traction, people are reevaluating decisions they've previously made on other database as a service Vendors and saying, well Couchbase, now that you are mature with Capella, we're going to open up decisions on workloads that you don't have, which is One of the dynamics that's leading to our healthy expansion. And so the migration path is one that's very good for us. At the same time, we're careful to not arbitrarily try to push customers beyond what they want to do and maintain balances as we manage those relationships. When it comes to usage, we are in fact seeing very healthy usage across the board, both in Our ability to land new customers with shorter sales cycles, the rate at which they expand both with those workloads and new use cases, It's not really about additional types of use cases, just more that time to value Relevance with the developer persona that drives to that consumption activity that again is really healthy and we're going to spend a lot I'm talking about what we're seeing there.

Speaker 2

Yes. And Rob, if I could just add, that's part of what drove some of the outperformance on the top line this quarter, particularly on revenue is That consumption dynamic Matt talked about.

Speaker 3

Great. Okay. Yes, that's helpful color. Really appreciate that Pat and Greg. Then Greg, just one follow-up for you.

Speaker 3

Just you've been very clear about the natural headwind to gross margin that comes from Capella. Obviously, sort of good problem to have here as Capella is Ramping nicely. As we look out and think about our model in FY 'twenty five, are there levers To offset that, not getting you not trying to get you to guide you a number here, but as we think about that gross margin, are there levers or things we should be thinking about that could be offsetting

Speaker 2

Yes, I think just at the total level, the more Capella we have, it'll Diluted from a rate perspective. That said, as we get more mature and more scale of Capella, the margin rate will improve because there's some level of And then the other dynamic you see why we had a really strong margin performance this quarter is, we did have some internally developed software for Capella going back several years as we launch that development that's now off the books and it's done. So that's why you see a little bit more Gross margin this quarter, but it will dilute over time. We just got to keep getting more volume and it'll improve the Capella rate we're seeing today.

Speaker 3

Great. Super helpful. Thanks guys. Appreciate it.

Speaker 2

Thanks, Rob.

Operator

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.

Speaker 4

Yes. Thank you for taking the question and really nice to see these results again this quarter, particularly on the ARR side. I guess, Matt, the only question I had on Capella is In terms of the workloads that you guys are starting to onboard onto Capella, can you give a sense of The nature of those types of workloads and how is Capella addressing workloads that you may not have gotten before with

Speaker 2

So Sanjeet, first of all, the pace of new logo acquisition And it's certainly going up and Capella is delivering on the value proposition that we expect that it would, which Lower barrier to entry into the Couchbase platform. As I know you know, The level of capabilities we have in our platform allows us to serve many, many different use cases, everything from Customer 360 to field and inventory management across a very wide variety of You know, verticals and use cases. And so the dynamic that we're seeing with Capella is less about Different types of use cases, because quite frankly, the breadth that we run today is quite extensive. It's more the pace of acquiring. In some cases, geographies where we may not have as much of a direct presence built out, we're benefiting from Cloud partnerships and customers signing up, we're able to, again shorten sales cycles, But then benefit from faster expansion.

Speaker 2

I think the ability to go directly to developers and move from File to initial customer, is something we've been talking about and we're seeing that. And that's not just net new customers, but that's So new applications in existing accounts where we may be able to Migrate into a line of business or a particular part of multinational that we weren't able to get to begin with. So Overall, really healthy. Again, we've had very high expectations for Capella across all of these variables and we're really starting to see that come to fruition.

Speaker 4

That's really encouraging. I'm sure we're going to hear more about that next week in the Orkaz at the Investor Day. Just as a follow-up, As we go into Q4 and obviously Q4 is a big quarter for everyone in software and I'm sure that's the case with Couchbase as well. Going into Q4, Greg, is there any way you can give us a sense of the size of the renewal base this year versus last year? And How do you feel the sales team is in terms of being on top of those renewals given that the macro is still a little challenging out there?

Speaker 2

Hey Sanjeet, good question. Yes, Q4 is a big one for us. It will obviously be should be our biggest quarter ever. And the renewal pool is very healthy. It's slightly larger than last year.

Speaker 2

And I would just add that, you probably saw we had a little bit wider guidance range this time. There's Several of our largest customers have renewals coming up between Q4 and Q1 and depending on the timing of when they get done. Obviously, the Q4 ones will happen now. The Q1s could happen in Q4, they could happen in Q1 depending on timing, but those will drive a significant amount of What that actually looks like. So it's a big quarter.

Speaker 2

There's a couple of really big deals out there that are going to be really exciting to do and That's what's going to drive Q4. So we're looking forward to it. And as we said, we're looking forward to sharing more next week. And Sanjeet, if I could just pile on. We talked about the excellent operational performance in the quarter.

Speaker 2

That's not just The efficiency and leverage that we demonstrated with the financial results, but it gets at some of the very things that you're asking about. Never have I been more confident in the functions across the company, inclusive of our go to market teams, Really understanding where we are with deals, understanding how to position with the right economic value, managing pipeline, just Driving linearity across the big quarter. So there are big deal dynamics at the big quarter, but Testament to the teams for the operational rigor they have in place. And, I think they are doing a great job and will continue to deliver.

Speaker 4

Great. I appreciate the thoughts, Matt. Thanks.

Operator

Thank you. Our next question comes from the line of Ittai Kidron with Oppenheimer, please proceed with your question.

Speaker 5

Thanks and nice work guys. Great quarter. Couple for me, Greg. Can you remind us on the RPO, why is that not a good indicator for your business? I mean, it's been flattish for 3 quarters in a row and Capella cannot have too much of an impact on it given that it's a low single digit percent of your revenue still.

Speaker 5

So Help us understand, remind us again the disconnect between RPO and revenue?

Speaker 2

Yes, it's a good question. And thanks, Ittai. Look, on the RPO, I would just tell you and it goes back to the comments I just made on Sanjeet. We have several of our largest customers Coming up for renewal, typically they do multiyear renewals. So if you think about at the renewal point, if it's a multiyear deal, you're putting all that into RPO.

Speaker 2

By the time you get to the end of that, it's there's not much left. And so I think you'll see an improvement in RPO coming out of Q4 Because of some of those particularly large deals, which is why you're seeing some variability in the timing, whereas obviously the revenue stays, It grows, it stays relatively consistent over time. So the revenue, that full value of revenue is running, but there's some of these deals that are renewing in Q4, There's only 1 quarter left of RPO in the backlog, if you will.

Speaker 5

Are these multiyear deals, Greg?

Speaker 2

Yes, yes. These large deals are typically multi year deals, at least 2, if not 3 year deals.

Speaker 5

Okay. And then on Capella, on gross margin, I understand the comments there. But maybe can you specifically comment on Capella Specifically, meaning, is the gross margin of Capella still below 50% or has it already improved above that level?

Speaker 2

Yes. Ittai, we haven't obviously talked about that and spoken about the gross margin. I can just tell you that it has steadily been improving And we saw a very healthy uptick this quarter in particular. And it's doing exactly what we thought in terms of the growth of the business And the margin rate, and so it is improving. And like I said, we had that one time comparison adjustment.

Speaker 2

So We feel good about where the margin rate is on Capella and where it's going to ultimately land. And as I was mentioning, the more volume we get there, it will only continue to improve.

Speaker 5

Okay, very good. And then last one for you, Matt, on Capella itself. In what way are the customers that are adopting it, Especially the new ones that are joining the platform different in their profile, in their use cases compared to customers You're bringing on with your on premise platform?

Speaker 2

Ittai, again, I think it's less about The use case and more about the pace of adoption, we talked about one of the new logos in the prepared remarks. We had another company that you know well, multinational cybersecurity company chose us for price performance On an app that certifies all of the connectors to their platform and doing security health checks on behalf of their That's aligned with an application that we would have serviced before, but not until we had Capella did we break through with that Price performance, usability, time to value. We had another new logo Swarm Engineering, AI ML based Supply chain optimization platform, and they chose us because it literally freed up developer time And resources with the managed service against other solutions that they were evaluating. Now if we were to go through the specific use cases in these verticals, we have Comparisons, it's not like we couldn't get at that with Couchbase, but it's the incremental value Proposition and ease of use and all the things that we've built into Capella that are getting those deals over the line. And if I were to take you through migrations And new applications inside customers, it's more of that value proposition coming to fruition.

Speaker 2

We have a very broad based platform and we Continue to add to it with additional services. Customers have always valued that. We're now marrying up the consumption, the way they want to consume the technology With all those capabilities, which we believe are differentiated and industry leading in our single cloud to edge platform. So it's that combination that's providing the uplift, not necessarily an ability to get at new use case Because we've worked so hard to have those capabilities in place.

Speaker 5

Appreciate it. Thank you so much. Good luck.

Speaker 2

Thank you, Todd.

Operator

Thank you. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Speaker 2

Great. Thanks, guys. Congrats from me as well. Matt, the accelerating net adds were great to see. I I think you gave some statistics on first half or even Q2.

Speaker 2

Was there anything unique with this quarter's adds, Anything pull in, for instance? I know you just talked about a large renewal cohort, but I guess I'm wondering in Q4, but I guess more on the new business. Could this be a new run rate for kind of quarterly net adds? Look, Matt, we've said quite transparently that this was an area that we need to improve in and we're certainly pleased with the results and I think it shows that the First half was an anomaly. We still have ways to go.

Speaker 2

I will tell you it was the highest Gross adds that we've ever had as a company, and it was driven by the highest gross adds of Capella. Now we've expected that and it's not just The Capella value proposition, it's also operational rigor and the things that we've been focused on, on a go to market, expanding our partnership. So there's a lot of what I like to say lines in the water to drive the improvement there and there's no bigger focus area that we have as a company. And I think this is much more indicative of what we can and will be delivering on a go forward basis. Got it.

Speaker 2

Thanks. And maybe, Greg, this might be a topic of Analyst Day, but as we're thinking about our models next year, you didn't obviously guide us for fiscal 25, are there any guideposts that you give us on sort of growth or margins? We've known your philosophy on sort of Sort of like trying to focus on growth, but also expand margins as well. But any sort of commentary that you provide us with tonight on how we should think about next year? Yes.

Speaker 2

Hey, Matt, good to hear from you. Look, there'll be a lot more obviously next week. We are not going to be giving specific fiscal 2025 Guidance until we get to our Q4 earnings, so 90 days from now, but we will obviously provide some sort of long term view of how we're thinking about it. That said, We are extremely mindful of profitability, free cash flow, op income and we are working to Create a more efficient model, get more leverage out of the model. And again, I think you saw some of that continue to come through this quarter and all year, and we're just committed to

Operator

Thank you. Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Speaker 6

Yes. Thank you. Good afternoon, guys. Just wanted to ask first for you, Greg, on Q1. I know you're not giving specific guidance, but if I look at the last 2 Q1s, it was down a little bit sequentially from Q4 to Q1.

Speaker 6

So just remind us on seasonality and any other kind of puts and takes as Q4 turns into Q1.

Speaker 2

Yes. Hey, Jason. Yes, I'll give you some sort of general is, as I was alluding before, Q4 is typically our Largest quarter of the year and Q1 is typically our smallest quarter of the year depending on the year of course. So I think the seasonality you've seen Historically is reasonable to think about, but again, we're not guiding yet. As I mentioned, we've got a couple of large deals that could fall in Q4 or Q1, Which would change sort of that dynamic.

Speaker 2

So that's why we're not ready to sort of come out with guidance because we just really need to see how that's going to play out timing wise. They're going to happen. It's just a matter of when not if. So, but I think again seasonality wise, you've seen historically our Q4 to Q1 It's typically it's not nearly as big as the renewal pool, just not as robust.

Speaker 6

Got you. Okay. And then for you, Matt, you talked about the columnar analytics Feature, I don't know, it's just like it's just a big deal. Every company introduces features and talks about how great they are, but How important is this? Maybe talk about some use cases where this might be used?

Speaker 6

Just try You'll get a greater sense on the importance of this new capability.

Speaker 2

Jason, appreciate the question. We think it's Quite significant. And as we look into the future, we start in thinking about what our customers are trying to solve with their And every company around the world is trying to figure out how to use technology to improve their business and get closer to their customers. And in order to do that, you need to not only have all of the operational data at your disposal, but to make these applications truly real time and Adaptive taking their capabilities to the next level is injecting data that you're analyzing alongside And as much as people are focused on analytics in the world, the vast majority of enterprise data It's not analyzed. And furthermore, you have this significant gap, this latency gap that's existed for 50 years And the wall that exists between operational and analytical data.

Speaker 2

What we've done with this capability and our underlying architecture is enable A developer to develop these real time adaptive applications by combining not just The data that we manage on our data store, but ingesting data from S3, from other Relational sources, sources like Mongo in a real time basis and then feed those insights directly into the application while it's performing. There's not another data platform that can do this natively across JSON, eliminating ETL, reducing efficiency And with the underlying architecture to maintain the operational performance in SLA that modern databases require. So this is quite a big step for us. And when we think about the data layer for Applications in an AI driven world, obviously, we've talked about Vector being on the roadmap, which will add to our architecture. But we like to think about the density of the application that we are supporting in that data layer, operational, analytical, And all of these capabilities coming together in a single platform is our advantage.

Speaker 2

And we think that never Have our core capabilities and the platform that we've developed with these scale and performance cloud to edge requirements ever been more relevant. And so we're quite excited about that and getting quite frankly pretty phenomenal feedback from customers That understand the importance of this and aligning it to their overall digital transformation and application strategies.

Speaker 6

And can you give us some examples of use cases for the columnar analytics technology?

Speaker 2

Yes. So I mean this is about like Taking applications to the next level. So I mean, I'll give you a few generic ones. Let's say you're Find something on an e commerce store and we all know you get a recommended product. But what if that recommendation was completely personalized to you?

Speaker 2

What if the product descriptions matched what was happening in your life? If you're shopping in a home improvement store and it Has the awareness that you're doing a home remodel, well now the product descriptions map the type of home remodel that you're delivering And then can bring in the inventory that meets those needs at your local store. These are real time personalized applications That are changing based on what's happening in your world with you as a user. Streaming services often recommend shows for us. But what if it's aware of what's happening in my connected home and recommends to Pause something because the beer in my fridge is now at a temperature that I like it and I'm not going to miss a particular portion of that game or I get an alert that Another one of my favorite teams is starting that level of adaptive application without slowing down the performance Taking it to the next level, that's what happens when you take all of these analytics and feed it into real time applications with access to information from every possible input, structured, unstructured, etcetera.

Speaker 6

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Brad Reback with Stifel. Please proceed with your question.

Speaker 2

Great. Thanks very much. Matt, what if anything needs to change at Capella in order For it to be a true volume customer acquisition engine. Right. I think we're heading that direction.

Speaker 2

We're excited to spend time next week. We're going to talk a lot about this idea that Capella is at the inflection point. I think the product that we have, the usability, the integration of things like IQ It's going to give us the opportunity to augment our highly sophisticated enterprise go to market motion and benefit from more Product led growth. And I think we're to the point now where we have the solution. We're marrying that up with How we're marketing, how we're investing in go to market resources, how we're thinking about partnerships.

Speaker 2

And so I do think we're at the point of that hockey stick where we're going to start to see that inflection coming. That's great. Thanks very much. Thanks, Brad.

Operator

Thank you. Our next question comes from the line of Tas Kuchalgi with Wedbush Securities. Please proceed with your question.

Speaker 7

Hey, guys. Thanks for taking my question. I have a question on Capella first one. So you were very positive on the new logo traction driven by Capella. Can you Comment on the deal sizes or deal values of these Capella deals that comparing to enterprise new logo ads?

Speaker 7

Are these smaller? Are these at the same level of the enterprise new deals?

Speaker 2

Yes. Hey, Taz, it's Greg. Thanks for the question. The new logos in Capella are certainly smaller than what we would see on the enterprise side of the business. But the again, the Time to value and again, we're going to talk about this a lot next week is the growth rate on that is substantial compared to the enterprise business.

Speaker 2

So They start smaller, but they grow faster and that we always assume that would be the nature of the Capella model. Now that said, There are times where we get larger ones, but in general, they're smaller than the enterprise part of the business. And Taz, we actually want that and we're Building programs and incentives to get customers started. One of the friction points that we have in landing new logos with the enterprise business is Trying to find the exact sizing that customers are going to commit to knowing that applications are dynamic and people are picking us because we're a platform. With Capella, we can remove that friction entirely, just get people going and then they can add credits or go with the pure consumption model.

Speaker 2

So We anticipate that and if anything, I would expect it continues to come down as we add more volume. That's not to say that their Expected value or potential of spend is any smaller. It's just the efficiency of landing them and getting them going.

Speaker 7

Yes, very helpful. And then a follow-up to that, Matt, you mentioned in the call that you're seeing some customers this quarter consume ahead of their, I guess, commitments or credits. Anything that was done this quarter to, I guess, catalyze that? Do you think anything in the go to market to make customers, I guess, Consume faster or use their credit faster. The reason I'm asking is one of your peers who had earnings last night spoke about how they're changing the go to model incentivizing their salespeople to sell not on a commitment basis, but more on a consumption basis to drive consumption faster so that people don't just buy the credits and keep them unused.

Speaker 7

So anything that has changed on your go to market side to, I guess, And to make customers consume faster.

Speaker 2

Yes. Look, if I were to talk about Operational capabilities that we've matured dramatically over the course of this fiscal year, certainly the last 6 quarters, it would be on managing consumption, providing incentives throughout our go to market engine, everything from QuotaCare and salespeople, SE Resources, Professional Services, Customer Success in aligning to Customer needs and being very aware of consumption. Certainly, we want to be prepared if people In rare circumstances are consuming below where we need them and adjust that and help them with the deployments that they anticipated, Maybe surprising, but a big part of that is understanding where customers may be running hotter than we think they need to and getting ahead of that, so we don't end up with a Customer relationship issue. So the level of operational investment we've put there in systems, tools, process and people, Consumption can be complicated to manage, but I think we're leaning into that complexity and feel pretty good about The operational rigor that we have in place to manage that as we go forward and the subsequent incentives, which for me, we're in the business of satisfying customers And we want to make sure that we're helping them with their business strategies and making sure that Capella and Couchbase are a big part of that.

Speaker 2

Getting consumption right is certainly an important variable.

Speaker 7

Yes. Just one follow-up, if I may. I think last quarter, when we look at the number of new logos added overall and the number of new logos added for Capella, Capella had a higher new logo adds. I guess you were saying that I think You got the benefit of migrations of workloads from enterprise to Capella, so that's why the Capella number was higher. This quarter, I think the new logos And Cabela new logos are almost the same.

Speaker 7

Is that is it fair to assume that the migration activity from enterprise to Capella, is there a little lighter this quarter? What's his last quarter?

Speaker 2

No, I think something might be getting lost in the takeaway there. I mean, we mentioned we're over a 5th of our customer base. Greg can talk about the quarter over quarter, Capella growth. But again, it was The majority of NetLogos, we saw a healthy number of migrations. I think all of that is up Quarter over quarter, you have the specific?

Speaker 2

Yes, I mean this quarter the Capella customer count grew by more than 20 5% whereas last quarter accrued by 20%. So we're accelerating the pace of Capella customer adds Both, both. That's inclusive of both migrations and new logos. So we feel very good about it. Very helpful, guys.

Speaker 2

Thank you. Thanks.

Operator

Thank you. Our next question comes from the line of Howard Ma with Guggenheim

Speaker 2

I guess just to dovetail off of Taz's last question. When we think about the sales and market efficiency levers for Capella, Where is the sales force in terms of efforts focused on migrations versus acquiring new deal logos? And that's it for me. Thanks. Howard, look, I think we're appropriately balanced to do our jobs as salespeople here.

Speaker 2

We need to be taking care of our existing customers, growing those accounts because of the platform that we bring, that's Existing applications, net new applications and then obsessing over adding new customers. You can appreciate that we have a fairly mature go to market model and any given rep may have a little more focus on an existing account. We have reps They're almost entirely focused on new. But if we look at the collective army Field resources out there, there's not a moment that goes by at the company that we're not obsessing over both. I think one of the things that's Fantastic about Capella is we not only talk exclusively about new logos, but new applications And our ability to win new apps, both in new logos and existing accounts is better than it ever has We spent a lot of time on our compensation and incentive plans to ensure that we have the appropriate balance.

Speaker 2

I spent a lot of time thinking about the operational focus and rigor across the board, but I think we need to achieve our medium and long term objectives. We need to do both. And I think we are striking that balance. And If in any given region or territory or down to individual reps, we're off, we make those adjustments on a Pretty real time basis. So, again, I'm pretty proud of the operational execution across the board and testament to our field leaders and Navigating this dynamic along with many others.

Speaker 2

Okay. Thanks, Matt.

Operator

Thank you. There are no further questions at this time. And I'd like to turn the floor back over The Chairman and CEO, Matt Cain for closing comments.

Speaker 2

Thanks, operator, and thanks to everyone for joining Today, I'm sure you can tell we're very pleased with how the business is performing and are working hard to make fiscal 2024 our best year yet. I look forward to seeing many of you all next week in New York and hope to see you then. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Couchbase Q3 2024
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