GitLab Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 5, 2023

There are 17 speakers on the call.

Operator

Thank you for joining us today for GitLab's Q1 of fiscal year 2024 financial results presentation. GitLab's Co Founder and CEO, Sid Sabrani and GitLab's Chief Financial Officer, Brian Robbins, will provide commentary on the quarter and fiscal year. Please note we will be opening up the call for panelists' questions. To ask a question, please use the chat feature and post your question directly to IR questions using the drop down menu. Before we begin, I'll cover the Safe Harbor statement.

Operator

During this conference call, We may make forward looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risk Associated with these forward looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10Q and our most recent annual report on Form for our 10 ks. Our forward looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward looking statements and we undertake no duty or obligation to update or revise any forward looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events.

Operator

We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with U. S. GAAP. These non GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings Press release, which along with these reconciliations and additional supplemental information, are available at ir.gitlab.com.

Operator

A replay of today's call will also be posted on ir.gitlab.com. I will now turn the call over to GitLab's Co Founder and Chief Executive Officer, Sid Sabrani?

Speaker 1

Thank you for joining us today. I want to start off by thanking so many of you for the well wishes I received regarding my health. I'm doing well. I remain committed as ever to GitLab's success. I'm pleased with how our business performed in the Q1 of FY 'twenty four.

Speaker 1

We exceeded our own guidance for both revenue growth and non GAAP profitability. We executed well towards our goal of making our customers successful on our AI powered DevSecOps platform. This quarter we generated revenue of $126,900,000 This represents growth of 45% year over year. Our dollar based net retention rate was 128%. Our Q1 results continued to demonstrate improving operating leverage in our business.

Speaker 1

Our non GAAP operating margin improved by almost 1700 basis points year over year, and we remain committed to growing in a responsible manner. I want to start this call with one of the most exciting technology developments of our time, AI and ML. AI represents a major shift for our industry. It fundamentally changes the way that software is developed and we believe it will accelerate our ability to help organizations make software faster. I'm excited about this new wave of technology innovation.

Speaker 1

We continue to focus on incorporating AI throughout our DevSecOps platform. We're innovating at a fast pace. In 1Q, we delivered 5 new AI features. And in the first half of May alone, we delivered 5 additional features. All of these are available to customers now.

Speaker 1

We continue to iterate on code suggestions. This feature allows developers to write code more efficiently by receiving code suggestions as they type. Code suggestions is available on gitlab to make it available and accessible to all developers everywhere. We also extended language support so that more developers can realize the benefits of AI on our platform. In 1Q, we increased language support from the initial six languages to now 13 languages.

Speaker 1

Code suggestions is uniquely built with privacy first as a critical foundation. Our customers' proprietary source code Never leaves GitLab's cloud infrastructure. This means that their source code stays secure. In addition, model output is not stored and not used AI is not only changing how software is developed, it's also amplifying the value of having a DevSecOps platform. DevSecOps is a category that we created and we're seeing it enter a mainstream adoption phase.

Speaker 1

We are seeing industry analysts recognizing this. I'm pleased to share that GitLab was recently recognized as the only leader in a Forrester Wave for integrated software delivery platforms 2023. We are excited to see the market mature and recognize the value of an integrated software delivery platform, A strategy that GitLab has followed from the start. This quarter we had many conversations with senior level customers, But one where the CTO from a top 5 European bank really stands out. At first, we focused on many of our differentiated features That only a DevSecOps platform can provide.

Speaker 1

For example, we talked about the benefits of value stream dashboards, Dura metrics and compliance on a single platform. When the conversation moved into AI, the CTO said something exciting. He said cogeneration is only one aspect of the development We only optimize cogeneration. Everything else downstream from the development team including QA, security and operations, breaks. Breaks because these other teams involved in software development can't keep up.

Speaker 1

This point incorporating AI Throughout the software development life cycle is at the core of our AI strategy. Today, our customers have the ability to use code suggestions For co creation, suggested reviewers for co review, explain this vulnerability for vulnerability remediation, value stream forecasting for predicting future team efficiency and much more. We're proud to have 10 AI features available to customers today, Almost 3 times more than the competition. Applying AI to a single data store for a full software development lifecycle We are hearing from customers that AI is motivating them to assess how they develop, secure and operate software through a new lens. Enterprise level companies who may not have been in the market until 2024, 2025, 2026 are reevaluating their strategies.

Speaker 1

On top of that, there's new personas entering the mix. As Chief Information Security Officers navigate this new AI powered world, they are working to empower their teams to benefit from AI and apply appropriate governance, security compliance and auditability. In all, we believe that AI will increase the total addressable market for several reasons. First, AI will make writing code easier, we believe will expand the audience of people such as junior and citizen developers who build software. 2nd, as these developers become more productive, We see software becoming less expensive to create.

Speaker 1

We believe this will fuel demand for even more software. More developers will be needed to meet this The third, we expect customers will increasingly turn to GitLab as they build machine learning models and AI into their applications. As we add ModelOps capabilities to our DevSecOps platform, this will invite data science teams as new personas And will allow these teams to work alongside their DevSec and Ops counterparts. We see mall ops as a big opportunity for GitLab. Expanding the addressable market will also create an opportunity to capture greater value.

Speaker 1

Later this year, we plan to introduce an AI add on focused on supporting development teams. This new add on will include Code Suggestions functionality. We anticipate this will be priced at $9 per user per month billed annually. This add on will be available later this year across all our tiers. All of this innovation accentuates a broader theme for our business.

Speaker 1

The differentiation between a dev and a devsecops platform. We believe that an AI powered platform focused solely on the developer persona is incomplete. It's missing essential security operations and enterprise functionality. Remember developers spend only a small fraction of their time developing code. The real promise of AI extends far beyond code creation and this is where GitLab has a structural advantage.

Speaker 1

We are the most comprehensive DevSecOps platform in the market. Features like code suggestions and remote development are important And today GitLab has more AI features geared towards developers than our competitors. However, that isn't enough. In order to achieve a 10 times faster cycle time on projects, enterprises need an end to end platform that works across the entire software development lifecycle. Let me describe some of GitLab's key security operations and enterprise differentiators.

Speaker 1

For security, only GitLab has dynamic application security testing, container scanning, API Security, Compliance Management and Security Policy Management. In operations, only GitLab has feature flags, Infrastructure as code, error tracking, service desk and incident management. And for enterprises, Only GitLab has portfolio management, OKR management, value stream management, Dora metrics and design management. Let me illustrate the value of a DevSecOps platform with one of our customers, Lockheed Martin. Lockheed Martin's customers Depend on them to help them overcome their most complex challenges and to stay ahead of emerging threats.

Speaker 1

Their customers need the most technologically advanced solutions. Lockheed Martin's engineering teams require speed and flexibility to meet the specific mission needs of each customers. We also require shared expertise and infrastructure to ensure affordability. Lockheed Martin has a history of using a wide variety of DevOps tools And needed to improve automation, standardize security practices and collaboration. They choose to go big with GitLab, Greatly reducing their tool chain and cutting complexity while reducing costs and workload.

Speaker 1

Lockheed Martin team has reported 80 times faster CI pipeline builds, 90% less time spent on system maintenance. They've retired thousands of Jenkins service. Lockheed Martin continues to grow with GitLab and is looking to migrate even more projects to their DevSecOps platform. One of their software strategy executives said by switching to GitLab and automating deployment, teams have moved from monthly or weekly deliveries to Daily or multiple daily deliveries. Lockheed is a great example of the power of a DevSecOps platform.

Speaker 1

And we see this in other use cases as well, Such as compliance. In the quarter, a large healthcare provider purchased GitLab Ultimate for our platform features. They needed to meet Specific compliance requirements from their auditors, they determine that GiltLab is the best way to achieve their objectives. Another customer we expanded business with in Q1 is NatWest Group, a relationship bank for the digital world. NetWest Group is focused on delivering sustainable growth and results of fostering a better simpler banking experience.

Speaker 1

Last year, NatWest Group chose GitLab Dedicated. They wanted to enable their engineers to use a common cloud engineering platform To deliver a better experience for customers and colleagues, 5 months into the program, we are pleased that NetWest has reported shorter onboarding times and productivity gains. This led to NatWest choosing GitLab Professional Services to accelerate their transformation by Supporting training, certifications and developer days. In summary, we're confident in the strong value proposition that GitLab provides to customers. GitLab is the most comprehensive AI powered DevSecOps enterprise platform.

Speaker 1

The significant return on investment, Quick payback period and well documented positive business outcomes are resonating globally. We're trusted by more than 50% of the Fortune 100 to secure and protect their most valuable assets. We also believe we're in the early stages of capturing an estimated $40,000,000,000 addressable market, a market that we've seen evolve from point solutions to a platform, From DIY DevOps to a DevSecOps platform and AI will speed up different aspects of software creation and development. This in turn creates the need for a more robust security, compliance and planning capabilities. In today's Era of rapid innovation, the power of a platform like GitLab to enable faster cycle times truly shines.

Speaker 1

I'll now turn it over to Brian Robbins, GitLab's Chief Financial Officer.

Speaker 2

Thank you, Sid, and thank you again for everyone joining us today. I'd like to spend a moment discussing the macro environment, the financial impact of our recently implemented premium pricing change and provide some insights The financial impact of our AI products. Then I will quickly recap our Q1 financial results and key operating metrics and conclude with our guidance. Let me first touch on some of the watch points I discussed on prior calls. We continue to see sales cycles remaining at 4Q levels due to more people involved in deal approvals.

Speaker 2

Contraction improved over 4Q, but is higher than prior quarters. Like 4Q, contraction is driven almost entirely by lower seat counts with minimal down tearing. I was pleased with the bookings predictability in 1Q. It was much better than 4Q. As we mentioned on the prior call, we raised the price of our premium SKU for the first time in 5 years.

Speaker 2

Over that timeframe, we added over 400 new features transitioned from a dev platform to a DevSecOps platform, we shared that we expect that the premium price increase have minimum impact in FY 2024 with greater impact in FY 2025 and beyond. The price increase which took effect on April 3rd is going as planned. We only had 1 month of renewals impacted by the price increase in the quarter. To date, customer churn is unchanged for the premium customers who renewed in April and our average ARR per customer increased in line with our expectations. Now on to the way we are thinking about the financials and the impact of our AI products.

Speaker 2

We continue to invest in people and infrastructure to support AI. While we have had some teams working on AI features, we recently shifted additional engineers from other teams to support the work on AI. As a result, this has not led to significant incremental expenses on engineering talent. Additionally, we have made investments in our cloud provider spend to support our AI and R and D efforts. In addition, we also continue to leverage partners to help drive our AI vision.

Speaker 2

This has included partnership announcements with Google Cloud and Oracle. The Google partnership allows us to use Google Cloud AI functionality to make our own AI offerings better by leveraging their toolset. The partnership with Oracle makes it easier for our customers to deploy their own AI and machine learning workloads using Oracle's cloud infrastructure. Both of these partnerships help create strategic differentiation for our customers in a financially responsible manner. Now turning to the quarter.

Speaker 2

Revenue of $126,900,000 this quarter represents an increase of 45% organically from the prior year. We ended 1Q with over 7,400 customers with ARR of at least $5,000 compared to over 7,000 customers in the 4th Quarter of FY 'twenty three and over 5,100 customers in the prior year. This represents a year over year growth rate of approximately 43%. Currently, customers with greater than 5,000 ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 in ARR with us.

Speaker 2

At the end of the Q1 of FY 'twenty four, we had 760 customers with ARR of at least $100,000 compared to 6.97 customers in 4Q of FY2023 and 5.45 customers in the Q1 of FY2023. This represents a year over year growth rate of approximately 39%. As many of you know, we do not believe calculated billings to be a good indicator of our business, Given that prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multiyear deals, This quarter total RPO grew 37% year over year to $460,000,000 and CRPO grew 44% to $324,000,000 for the same timeframe. We ended our Q1 with a dollar based net retention rate of 128%. As a reminder, this is a trailing 12 month metric that compares the expansion activity of customers over the last 12 months with the same cohort of customers during the prior 12 months period.

Speaker 2

The dollar based net retention of 128% was driven by lower seat expansion and contraction due to seats. The ultimate tier continues to be our fastest growing tier representing 42% of ARR for the Q1 of FY 'twenty four compared with 39% AR in the Q1 of FY 'twenty three. Non GAAP gross margins were 91% for the quarter, which is slightly improved from both the immediate preceding quarter for the Q1 of FY2023. SaaS represents over 25 percent of total AR and we've been able to maintain non GAAP gross margins despite the higher cost of delivery. This is another example of how we continue to drive efficiencies in the business.

Speaker 2

We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Non GAAP operating loss of $15,000,000 or Negative 12 percent of revenue compared to a loss of $24,800,000 or negative 28 percent of revenue in 1Q of last year. 1Q FY 'twenty four includes $5,600,000 of expenses related to our JV and majority owned subsidiary compared to $3,700,000 in 1Q FY2023. Operating cash use was $11,000,000 in the Q1 of FY2024 compared to $28,200,000 used in the same quarter of last year. Now let's turn to guidance.

Speaker 2

We are assuming the macroeconomic Headwinds and trends in the business we have seen over the last few quarters continue. There has been no change to our overall guidance philosophy. For the Q2 of FY 'twenty four, we expect total revenue of $129,000,000 to 130,000,000 Representing a growth rate of 28% to 29% year over year. We expect a non GAAP operating loss of $11,000,000 to 10,000,000 and we expect a non GAAP net loss per share of negative $0.03 to negative $0.02 assuming 153,000,000 weighted average shares outstanding. For the full year FY 'twenty four, we now expect total revenue of $541,000,000 to 543,000,000 representing growth rate of approximately 28% year over year.

Speaker 2

We expect non GAAP operating loss of $47,000,000 to 43,000,000 And we expect non GAAP net loss per share of negative $0.18 to negative $0.14 assuming 100 53,000,000 weighted average shares outstanding. On a percentage basis, our new annual FY 'twenty four guidance implies a non GAAP operating improvement of approximately 1200 basis points year over year at the midpoint of our guidance. Over longer term, we believe that a continued targeted focus on growth initiatives and scaling the business will yield further improvements in unit economics. The guidance has us on track to achieve cash flow breakeven for FY 'twenty five. For modeling purposes, we estimate that our fully diluted share count is 173,000,000.

Speaker 2

Separately, I'd like to provide an update on Jihu, our China joint venture. Our goal remains to deconsolidate Jihu. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for modeling purposes for FY 'twenty four, we now forecast approximately $29,000,000 of expenses related to GHUB compared with $19,000,000 in FY2023. These yahoo expenses represent approximately negative 5% of our total implied negative 8% Non GAAP operating loss for FY 'twenty four.

Speaker 2

Our number one priority as a management team is drive revenue growth, but we'll do that responsibly. There has been no philosophical change in how we run the business to maximize shareholder value over the long term. Before we take questions, I'd like to thank our customers for GitLab to help them achieve their business objectives. I also want to thank our team members, partners and the wider GitLab community for their contributions this quarter. With that, we'll now move to Q and A.

Speaker 2

We're ready for the first question.

Operator

Our first question comes from Rob with Piper Sandler.

Speaker 3

All right. I think I did that correctly after 3 years using Zoom. Good afternoon, guys.

Speaker 2

Hey, Rob.

Speaker 4

Good afternoon. Okay.

Speaker 3

I'm curious to hear an update on customer conversations. Obviously, a stronger than expected quarter, but we are seeing this Deceleration, I think, across all high growth tech companies. So, like both Gen AI and the macro, How should we think about pressure on net retention rates, customer acquisition that's coming from customers taking a more prudent approach in the current budgetary environment versus, I guess rethinking needs for dev headcount and reevaluating which dev tools to purchase, just given all the Gen AI innovations lately.

Speaker 1

Thanks, Rob. And before I answer that question, maybe an update on my health. I just completed my last round of Systemic Chemotherapy, so happy about that. Congratulations. Thanks.

Speaker 1

And also no sign of detectable disease, and I'm excited about GitLab's future and

Speaker 3

that's a

Speaker 1

big and my role as CEO and Chair. Yes, lots of things to unpack in your question. We see the macro trends continuing and that's putting pressure on seed count. That was the same last quarter and we anticipate that trend to continue. At the same time, we're super excited of what the macro is doing to the mindset of customers because they say, hey, now it's time to consolidate.

Speaker 1

And at the same time, we see that the analysts are seeing that, hey, this is consolidating as a market. So we believe that DevOps platform is going to be the way that people will consolidate. We have the most comprehensive DevSecOps platform, which is also great if you look at We're able to apply AI not just for code suggestions, but apply it across the entire spectrum. We have more than 10 features that we were able to ship and those ten features they drive value at every part along the stage. And as for how that influences the TAM which you alluded to, we think AI is going to make it easier for more people to enter the fray.

Speaker 1

So, we think it was a supply of more people using the product. At the same time, when you see that software development becomes easier, we believe there's going to be more demand for it. Software development used to be very expensive, AI makes it more affordable, there's going to be more demand. And more demand, again, means more people entering the fray. And last but certainly not least, it's an opportunity for us to manage not just the code that companies have but also their models.

Speaker 1

And that's what we do with our MLOps functionality. We already allow you to run experiments with GitLab. We want to extend to a full MLOps managed platform where we add the data engineers to the constituents that use GitLab.

Speaker 3

Great. And if I can sneak a quick one in for Brian, just regarding DBOs and the linearity of the quarter, Was that either large deals at the end or was it very back end weighted? And if I look at that receivable base and Assumed collections on it. It looks like you could turn the corner from a cash flow perspective relatively soon. So any commentary on turning free cash flow positive?

Speaker 3

Thanks.

Speaker 2

Yes. I'll touch on DSOs and I'll touch on free cash flow breakeven. And so from a DSO perspective, we were more weighted towards The end of the quarter. But the good news is that we our amount of bad debt over the last 3 years has not exceeded 1% And our age receivables has been very, very consistent. And so, some of our, European customers have requested net 45, net 60.

Speaker 2

And so, we've accommodated that just because of the, the macro and and the bad debt expense being so low. From a free cash flow breakeven perspective, We committed to be free cash flow breakeven in FY 2025. And we've also stated some of the actions that we've taken previously. We'll accelerate our path to profitability, but haven't given a specific timeline on it.

Speaker 3

All right. Thanks, guys.

Speaker 2

Thanks, Rob.

Speaker 1

Darcy, you're muted.

Operator

Up next, we have Joel with Truist.

Speaker 5

Thank you. And Sid, I'm sending prayers to you and congrats on making it through the treatment. Thank you. Brian, just a quick follow-up for you on Rob's question. Congrats on the margin improvement.

Speaker 5

I think that's you've done a really good job. Can you give us a little bit more color on some of the things that you're doing to continue to drive towards Cash flow breakeven while still investing in some of these new initiatives that you're doing, which obviously you've spent a lot of time talking about some of these AI Programs that are coming out. And then just as a follow-up to that is, have you like tested this $9 increase license increase To your customer base and whether or not that they'll, you know, there's not going to be any pushback there. Thank you.

Speaker 2

Yeah, Joel. Absolutely. Thanks for the question. You know, as Sid and I've always stated since we went public is the number one objective at GitLab is to grow, but we'll do that responsibly. And we've tried to demonstrate that Every quarter.

Speaker 2

And so nothing's changed in that front. Our non GAAP gross margin percentage went up to 91 Even though we continue to have really high SaaS growth and SaaS is greater than 25% of our overall revenue. And so we're continuing to look at All areas within the business where we can optimize, but we aren't doing that at the expense of growth because that's the number one objective at the company. I think we, you know, demonstrated that across all cost categories, and we'll continue to look at that quarter over quarter. On the $9 increase, You know, we we haven't tested that yet.

Speaker 2

You know, we, you know, from a from a guidance perspective, you know, most of the costs for that is in headcount and cloud costs, and that's included in the guidance that we gave. And so we don't expect any changes from a guidance perspective.

Speaker 5

Thank you.

Operator

Next, we have Sterling with MoffettNathanson.

Speaker 6

Thanks. Hi, guys. Sid, congratulations as well on the completion of the treatments. Hopefully, you got a chance to actually ring the bell. Brian, just to and Sid, just another follow-up question just on the pricing.

Speaker 6

So you touched upon it, but I want to make sure that I put a fine point here. Did it have any impact on win rates or length of deals where maybe customers were asking and negotiating a little bit harder because of the price increase Or anything in terms of size of initial lands that may have been impacted because of the price increase? And if not, Does that actually change when you think some of the benefits of the pricing increase will actually flow through the revenue line?

Speaker 2

Yeah. Thanks for that, Sterling. I guess for everyone on the call, let me just briefly touch on the price increase. You know, we haven't raised prices in 5 years. And over that time period, we added 400 new features to the platform.

Speaker 2

And so that was the genesis of the price increase. The guidance we gave last quarter and today include the price increase. You know, as you know, the price was effective in early April. And so, We really only had a short period of less than a month for that, but I am happy to say that, You know, the the renewal rates, and the churn in the land of new customers have been better than expected. And so we're happy with the results that we've seen in just that 1 month time period.

Speaker 6

Alright. Great. Thank you.

Operator

Our next question comes from Matt with RBC.

Speaker 7

Hey, guys. Great. Thanks for taking my questions and I'll offer my congrats, Sid. That's the best news of the call. Really good to hear you're doing well.

Speaker 7

I noticed Ultimate ticked up. I believe Brian you said it was 42%, which last year was kind of flattish Really the whole year. I was curious what was driving that? Is that sort of AI showing up some of those migrations? Is it more of the Or perhaps is it any of the price increase on premium that's maybe driving folks to Ultimate?

Speaker 2

Yeah. Thanks, Matt. When we talk about ultimate, you know, as we said before is, we don't set the sales compensation to basically compensate on ultimate versus premium. We want to try to take as much friction out of the process. For the consumer as well, we do Same on SaaS and self managed as well.

Speaker 2

And so, you know, Ultimate, the strength in Ultimate is really based on the underlying value that we're driving to our customers. The ROI on Ultimate, Forrester did a study was 427% over 3 years and payback was around 6 months. And so when when I looked at the quarter and looked at sort of premium and ultimate and sort of the breakout between contraction, churn, first order and expansion, Ultimate had churn was consistent with a bunch of prior quarters. Contraction was very consistent. Our growth was just as good as prior quarters, and we had a really strong first order quarter as well.

Speaker 2

And so Ultimate continues to do well. It's our fastest growing tier and we're happy with the results.

Speaker 7

That's fantastic. And then maybe just if I could follow-up with one Sid, one of the questions that we get from developer or from investors the most is, does Gen I put pressure on developer I think you talked about a little bit in your prepared remarks, but maybe could you put a finer point on sort of the question of P times And does the number of seats go down in the future? Or do you think it stays consistent or maybe even goes up?

Speaker 1

Yeah. We believe that generative AI will expand the market. So, First of all, you make the product easier. Like coding today is hard and AI makes it easier. So we expect these citizen developers, these junior developers To start coding, that code needs to be managed somewhere and that is in GitLab.

Speaker 1

Second thing is You make it when a developer can do more, you bring down the price and that should increase demand for development and software development 3rd, what you have is today is a DevSecOps platform but we've already articulated that we want to be a Models are harder to manage than code. They change over time and they have a lot of risks, security risks, discrimination risks, Risk that you're doing the wrong thing, risk that they're outdated. So it's a really interesting space to expand the product to. And for example, today, if you have an experiment in MLflow, you can link it to the experiment in GitLab. And in the future, we'll Plan to come out with a model registry in GitLab.

Speaker 1

So those are all reasons why we think the market will expand. One other way to look at it is you have generative AI, it produces more code. All that code also needs to be secured, also need to put in operations. So, if you don't have a good DevStackOps Platform, you create a bottleneck at the beginning. That bottleneck is sold for the DevSecOps platform.

Speaker 4

Thank you.

Operator

We will now hear from Koji with Bank of America.

Speaker 8

Hey guys, thanks for taking the questions. Maybe a question for Sid or Brian here. I wanted to ask you a question about how you plan on attacking the other 50% of the Fortune 500 or I'm sorry, the Fortune 100 that you don't have. Is it still a primary land and expand strategy or is it going to be more of a higher level sale for these customers? I was just kind of hoping you could dig into that a little bit more please.

Speaker 1

Yes, I think it's certainly that it is both the bottoms up sale, but also the top down sales. So we have A direct sales motion, but also a channel sales motion that's getting more important. Channel sales, think of our partners AWS and GCP, where we work with them to go to customers. And we're talking to CTOs, CISOs, CIOs and We help them see the picture. What we commonly do is a value stream analysis.

Speaker 1

We point out all the different tools they use Throughout the cycle and how that adds up in cycle time. And with GitLab, they can save on tooling costs, they can save On the cost of integrating that tooling, we can make their people more productive and they can go faster through that cycle and get initiatives out. So it's certainly Something we're going to market with and as you said, our goal is 100% of the Fortune 100.

Speaker 8

Got it. And maybe a follow-up here for Brian On kind of going back to free cash flow, this quarter free cash flow is higher than non GAAP operating income. And I recall there's some Cash flow mechanics around contract duration, that should be mostly out of the model by this point. So is that right with the cash flow mechanics and Does free cash flow trend higher than non GAAP operating income from here on an annual basis? Just, you know, could you just dig into that just a little bit more for me, please?

Speaker 2

Yeah, absolutely. You know, when we joined when I first joined the company, we were not incentivized in the Salesforce to do multi year deals because we had such a high gross retention rate. And so we really pushed for 1 year deals. And so that's why you saw billings and RPO is, go down and wouldn't grow at the same rate as CRPO or short term calculated billings. But we still continue to have prepaid multiyear deals within our existing book of business.

Speaker 2

And so as those contracts renew, you'll see some lumpiness in our billings and collections. And Q1 was one of those quarters.

Speaker 8

Got it. Thank you.

Speaker 2

Thank you.

Operator

Next, we have Michael with KeyBanc.

Speaker 9

Hey,

Speaker 2

Michael.

Speaker 9

Hey. Can you hear me? Sorry about that.

Speaker 2

We can. Go ahead.

Speaker 9

I mean, so can you talk, beginning to prime that competition has gone. Microsoft, obviously they have been very visible around CoViolet. You announced a lot of it. But how has the sort of day in and day out competition done? It's not like you said, Brian, the sales cycles have not extended, but Are people sizing you up against each other in a different way?

Speaker 9

How are they entering this discussion with upward and upward trajectory?

Speaker 2

Yeah, I think I got most of it, Michael. And I think I'll repeat the question was, You know, how has the sales cycle has changed with between us and Microsoft? And what what if you know had noticed a change, noticeable things within the quarter? And so one thing to note this quarter is on last earnings call, I talked about How the 1st month of the quarter was very different than the 2nd and third month of the quarter? This quarter is really predictable.

Speaker 2

And so I was happy with the predictability of the quarter. You know, week 3, we called the quarter and landed really close to that. The sales cycles in Q1 remained at 4th quarter levels, and so there wasn't a lot of change there. You know, as I talked about earlier, Ultimate You know, being greater than 50% of the bookings and continue to do well, I think that shows some of the differentiation between us and Microsoft. The hyperscalers as well had a great quarter as well.

Speaker 2

They grew 2 per over 200% year over year, from a bookings perspective. And also this quarter, we had lower discounting than the previous quarter. And so the trends with Microsoft Remained pretty consistent where, you know, we still don't see any competition in about 50% of the deals. We see them in very little deals, But there is more discussion around OpenAI, Chat GPT and CoPilot. All right, Darcy.

Speaker 2

We'll go into the next one.

Operator

Derek with Cowen is next.

Speaker 4

Great. Thanks and I said congrats on the news. I wanted to start in the press release you talked about An expanded partnership with Oracle and a new AIML offering, enabling customers to Speed up model training and inference. Can you give us a little more detail around those new partner initiatives? And then just from A broader perspective how you're thinking about the Gen AI related revenue opportunities and the quarters ahead?

Speaker 1

Yeah. Thanks for the question. So we're really excited about our partnership with Oracle Cloud. They have a great customer base. And what it means is that our customers now can now run AI and ML workloads on GPU enabled GitLab runners On the Oracle Cloud Infrastructure, and that's some great, powerful infrastructure.

Speaker 1

Additionally, we're available in Oracle's marketplace, Expanding our distribution. So our strategy with AI in mind is to partner closer with the hyperscalers. The toughest one is Microsoft. We try to partner there too. But with everyone else, we see a lot of momentum and that's AWS, GCP and Oracle, we want to get close to we want to enable our customers to run There are normal workloads, there are AI workloads there and where you can expect it to have more announcements going forward.

Speaker 4

Okay. Maybe a quick one for you, Brian. Appreciate getting more exact numbers on net revenue retention rates. Kind of looking forward and with respect to your guidance for the rest of the year, there's any kind of target ranges that you'd guide us towards or how we should be thinking about Trends around gross retention and expansion factors?

Speaker 2

Yes. We didn't give out the specifics of those metrics. You know, what I will say is this quarter, last quarter was more predictable. And so it makes it easier from a modeling perspective. And everything is factored into guidance, and so we didn't give specific metrics for those.

Speaker 4

Got it. Okay. Thank you.

Operator

Kash with Goldman Sachs.

Speaker 10

Okay, great. Thanks for taking my question. Sid, good to see that you're recovering very well and congratulations on the quarter. It looks like business stabilized for you guys. I had a question on the generative AI capabilities.

Speaker 10

At what point are we looking to is there any need for further differentiation of GitLab versus the competition? This auto code generation feature that has been made much of, right, is that a real sticking point in conversations? Do you think the Customer base really values and appreciates the broader set of AI capabilities that GitLab has to offer. So it looks like there's a bit of a Perception issue in the market that you don't have those kinds of features that the competition appears to have. If you can debunk that myth for us, that will be great.

Speaker 10

And then one for you, Brian, What does the month of May look like from a linearity standpoint? The net expansion rates that you Saw as improving in the March quarter. It does hold up in the month of May as well. Thank you so much.

Speaker 1

Thanks, guys. Like In AI, you have the code generation, but if you just produce a whole bunch more code and it's going to get log jammed Later down the pipeline, you also need to do more security fixes. You need to deploy more. So we're really fortunate that we have a single application, a single data store for the entire DevSecOps Cycle and we can apply to AI to all of that and that's led us to having 3 times as many publicly usable AI features as our competition. That is a big advantage as long as at the beginning that of course you also need the code suggestions.

Speaker 1

But having the whole rest, make sure that if you get more effective there, It works and you get a faster cycle time throughout and that's a really exciting development. And Brian,

Speaker 10

I had one for you. Yes, thank you.

Speaker 2

And just on the second part of the question, as you would expect, we track a number of metrics internally from top of the pipeline to bottom, conversion rates, pacing, expansion, churn, contraction, and so forth. And I'm happy quarter to date things are as expected. And so like I mentioned, last quarter was more predictable in Q4 and Quarter to date and we'll see how the quarter finishes out, but it's as expected on all those metrics that we track internally.

Speaker 10

Great. Good to see the quarter and the results. Thank you so much.

Speaker 2

Thanks, Kash.

Operator

Next is Carl with UBS.

Speaker 11

Thank you. Maybe, Brian, I'll point this to you. So, as all of us try to run back of the envelope math About what the $9 per seat monetization plan might mean for fiscal 'twenty five. Can you offer any guardrails as The things we should keep in mind, so maybe we're a little bit tight on what it could mean. And I guess maybe as two quick follow ups.

Speaker 11

Is there any reason to believe that it wouldn't be applicable to all of your paying users or does it feel like it would be relevant only for a subset? And then on top of that, do you think this could actually accelerate the conversion of the free user base to the paid user base such that the opportunity set Is beyond our estimate of what your paying user base looks like? Thank you.

Speaker 2

You know, lots in there to unpack. Yes. Just on FY 2025, we haven't given out guidance for next year yet. And so I really can't comment on that. And the $9 that, That Sid talked about in the script is baked into our guidance for this year.

Speaker 11

Okay. But Brian, does it could it accelerate a free to paid conversion? I'm not asking you for fiscal 'twenty five guidance, just kind of framework as we try to, to model out what it could mean. Any, anything you'd, you'd offer up as we take our best shot?

Speaker 2

Yeah. I think that, you know, all that we're doing is to make the developer, the security and operations personas more efficient And to allow them to make code better, faster, cheaper, more secure. And so I think anything that you do that enables that, Should help out on all the metrics that you track and model.

Speaker 11

Okay, great. Congrats on the quarter.

Speaker 2

Appreciate it, Carl.

Operator

We will now hear from Jason with William Blair.

Speaker 12

Yes. Hi, guys. Can you hear me okay?

Speaker 2

We can.

Speaker 9

All right. Great.

Speaker 12

I wanted to ask about whether you're exploring a consumption element to your pricing model And how that might work, especially on the cloud side?

Speaker 1

Thanks for that. We already have consumptive elements in our model. So, for example, for compute and for storage, you pay on a consumption basis. We're adding features to that consumption. For example, in GitLab 16 released on June 22nd, We released macOS runners.

Speaker 1

We released Linux runners. We had the Oracle partnership where we have more AI runners, GPU runners. So that is a small part of our revenue today, but we're releasing additional features. I think over time you see that the licensing is going to become more flexible. We have Cloud licensing today and that allows us to be more flexible in what you pay for.

Speaker 1

For example, the add on we are envisioning for AI, Right now, it's envisioned as something if you use it, you pay for it, otherwise not. We'll see what we end up releasing, but that's what we're thinking about. So I think you're right. The mindset of customers is going more consumption and we don't want to be Meeting the expectations there.

Speaker 9

Got you.

Speaker 12

All right. And then one quick follow-up just on that AI SKU. What is going to be included in that SKU beyond code suggestions?

Speaker 1

Right now we've only talked about code suggestions being part of it.

Speaker 12

Perfect. Thank you. Good to see you looking good, Sid.

Speaker 1

Thanks, Jason. Appreciate it.

Operator

Greg with Mizuho?

Speaker 2

Don't see him on. We can go to the next one.

Operator

Pindjalim with JPMorgan.

Speaker 13

Great. Thank you for taking the questions. Sid, good to see you doing well. Sid, maybe one on MLOps. Can you help us understand where are we in the maturity curve for GitLab with respect to MLOps?

Speaker 13

Is data ops kind of the gap at this point? Trying to understand with the current craze of kind of developing Gen AI application, Are you seeing new or existing customers kind of talking about using GitLab as part of their MLOps workflow when they're thinking about building this Gen AI apps? And then one follow-up, the $9 per user per month add on, is that basically an extension into Visual Code? Is there a difference between a SaaS user or a self managed user?

Speaker 1

Yes. Thanks for that. So to answer the last question first, that $9 will be the same $9 whether you're a SaaS user or a self managed user. You'll be able to use the code suggestion features in our web IDE as well as in the usual editors like Visual Studio Code. Regarding model ops, we're really, really early.

Speaker 1

So I don't want to oversell this. It's a vision of where we're going to Future of where we see the TAM expanding. Today, we have the functionality to link experiments in MLflow to GitLab. And the next Feature that will come out is a model registry. And when you have the model registry that's going to form the basis of new functionality we can do is then you have the model kind of Controlled in GitLab as well and you can start adding more functionality.

Speaker 1

We expect the MLOps functionality to come before the DataOps Functionality. The model learning looks a lot more like code in many ways than the data. So it's kind of the logical step is first models and then data. With data, It's we don't have functionality yet and that will come later. The thing to know is that we have the ambition.

Speaker 1

We have the ambition to go Beyond code, we have the ambition to manage your code, your models and your data because we think the application of the future is going to have all 3 And all 3 are gonna be governed. All 3 are gonna have security and compliance questions that you want your tool your DevSecOps Platform to figure out for you. And that's why we're doing this, not because it's Easy, but because it's super, super useful and because every application is going to have interactions between the 3, if you can bring all those constituents

Operator

Next is Mike with Needham.

Speaker 14

Hey, guys. You have Mike Cikos on the line here, and thanks for taking the question. First one for Sid, and Sid, great to hear on the help. That's tremendous news and appreciate you giving us all an update. Wanted to circle up on the AI add on that we've been talking about.

Speaker 14

And I know the Code Suggestions is the only one that we're talking to today that's going to be part of that add on. Can you help us think through, will GitLab be offering up AI features or certain products, however you want to phrase it, independent of that add on? Or are you going to have to adopt that AI add on Enable to reap the benefits of the AI technology investments that you guys are making today. And then I have one follow-up for Brian.

Speaker 1

Yes, it's a great question. Like will every AI piece of AI functionality be in that add on? And how does it work? Will there be additional add ons? Will it be part of Premium or ultimate, those are pricing and packaging questions.

Speaker 1

We're still looking into today's. I can't comment on that. It's a valid question though.

Speaker 14

Okay. Okay. And to Brian then, if I just look at Q1, obviously, the revenue was well ahead of The guidance and your expectations, can you help us think through what would better than expected during the quarter? And similarly, What is management embedding in its guidance if I look at the much more, I guess, modest sequential revenue growth that we're now looking for in 2Q?

Speaker 2

Yes. Thanks for the question, Mike. You know, I was happy with the predictability in the quarter that I stated earlier. When we talked about guidance on the last call, Because we had more variability in Q4, the range got higher. And so, we looked at the bottom end of the range and selected that.

Speaker 2

And so if you compare us 1Q to 4Q, sales cycles remained at 4Q levels. I did discuss How the hyperscalers' bookings were over 200% year over year. We also had lower discounting, and I touched on the strength of Ultimate in the quarter. And so, the guidance approach hasn't changed. When we look at the history of what we've done and we look at the assumptions that we have in the model.

Speaker 2

We have a very detailed bottoms up model to come up with guidance, and we use the same guidance approach given the macro conditions, And that's how we planned.

Speaker 14

I'll leave it there. Thank you, guys.

Speaker 4

Appreciate it.

Operator

Okay. Let's try Greg with Mizuho. He has reconnected.

Speaker 8

All right. Thank you very much. Glad the connection is holding. And Sid, very glad to hear the encouraging news regarding your health. I'd like to follow-up on ModelOps, and I know it's really early.

Speaker 8

I do think the native registry is an interesting enhancement. And just curious to get your expectation with regard to attracting data science teams To the platform going forward as that starts to ramp? And then I have a follow-up for Brian.

Speaker 1

Yes, because it's really early, we want Them to work together hand in hand. You see that many changes need both the change in the code and a change in the models And it's going to lead to different data being outputted. So these changes that today happen in Different platform, different tool chains and sometimes very manual. We expect that it's going to be more and more important to happen on the same level. You think about the financial industry, what you execute, what you have to prove to your auditors It's going to be based on procedural code plus a model you're running, plus that model you're changing based on data that you need to prove like What data did you use to train the model that was then called from your code?

Speaker 1

That's the questions we need to answer That our customers need to answer and we want to help them do that in a way that's friction free where it's not up to the developers to document it each Every time, but the platform just takes care of it and you only have to point out a transaction and you can immediately see how you did that. And that's Really hard to achieve today without a platform and that's what we're going for. As said, very, very early, but I hope a compelling ambition.

Speaker 8

All right. Very helpful. And then for Brian, in

Speaker 2

the Q4, you mentioned that your NRR decreased almost equally, I think, across Seats, tier upgrades and price yield, any change that makes in the, in the Q1? It's been relatively the same. And so Seats is about 50%, price increase is about 25%, and the last is 25%. So there really hasn't been Any change whatsoever.

Speaker 8

Terrific. Thank you.

Operator

Next is Nick with Scotiabank.

Speaker 15

Awesome. Thanks guys For taking the questions and Sid great to hear you're doing well. Just to follow-up on Matt's question On the ultimate mix ticking up, it sounds like some of the strength there was driven from business that was up For renewal, there's a smaller price point, delta between Premium and Ultimate and it also sounds like there was some strength there Just on net new customers landing at Ultimate. But I'm just curious, given there's more renewal businesses sort of we've progressed through 2Q in the second Should we expect the ultimate mix to continue to uptick here? Thanks.

Speaker 2

Yeah. Thanks for the question, Nick. You know, as as we said before, and I think it it it's worth saying again, you know, we don't compensate Solution for the customer and get them a quick time to value and a positive business outcome. And so Ultimate, you know, had strength in the quarter. You know, it's really driven by compliance, security and all the additional product features that Ultimate has.

Speaker 2

When when you go through and look at Ultimate and look at expansion, first orders and so forth, Ultimate performed well in a lot of the categories as expected. And so where we saw some pockets of weakness was really in premium, on expansion of our existing clients, As well as the contraction, churn was relatively low, but we still saw some contraction as well. And so, you know, like I said, Ultimate had a good quarter. There was some pockets of weakness and premium, I'll call them watch points that we continue to watch, Overall happy with what we delivered.

Speaker 15

Great. Thank you.

Operator

Our final question comes from Ryan with Barclays.

Speaker 16

Thanks, Chris. Sid, how are enterprises evaluating adopting AI for their code development today?

Speaker 1

So like

Speaker 16

what are some of the key items that they would grade you on? And would this happen via something like an RFP process? Or would this be something that they handle internally? Thanks.

Speaker 1

Thanks. I believe it's more organic today. They're trying different things. I think what is really important to a lot of customers is the privacy of their code. And what they're looking for is a provider Who can guarantee that, for example, the output of the models that they ask questions to isn't used for other models.

Speaker 1

So that's something that's top of mind for us as we build our features. Other than that, it also has to be Kind of accessible to everyone in the company. It has to work on the most popular editors. And we have a lot of revenue from self managed. So we want to make sure that over time functionality also is available to self managed customers where they can connect to the Internet to offer that functionality.

Speaker 16

So are you seeing a lot of questions from customers around securing the output of code from large language models?

Speaker 1

I think it's top of mind for customers is that the with some of the 3rd party services today, You don't get a guarantee that the output isn't used to train code suggestions from another organization. And that's certainly top of mind for them.

Speaker 16

Appreciate that. And one for Brian. Do you see any pull forward of demand or early contract negotiations from customers looking to take advantage of that $24 transition price The quarter?

Speaker 2

I'll answer this, but this is the last one, Ryan. We got to close out and get back on the callbacks. The, we did not allow early renewals. Your contract had to be up for renewal 2 weeks prior to expiration and so there was no pull forward in the quarter related to that.

Speaker 11

Great.

Speaker 16

Thanks, guys.

Operator

That concludes our 1Q FY 'twenty four earnings presentation. Thanks again once more for joining us. Have a great day.

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Earnings Conference Call
GitLab Q1 2024
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