GitLab Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 4, 2024

There are 15 speakers on the call.

Operator

Thank you for joining us today for GitLab's 4th quarter of fiscal year 2024 financial results presentation. GitLab's Co Founder and CEO, Sid Sibrandy and GitLab's Chief Financial Officer, Brian Robbins, will provide commentary on the quarter and the the fiscal year. Please note, we will be opening up the call for panelist 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 risks 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 10 Q and our most recent annual report on Form 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 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 Sabranbi.

Speaker 1

Thank you for joining us today. We had a strong 4th quarter with 33% revenue growth. We now have 96 customers with ARR over 1,000,000 up from 63 1 year ago and we continue to see that large enterprises like Barclays and Blue Halo are standardizing on GitLab. Speed, productivity and security are critical for our customers. With GitLab, customers see 7 times faster cycle times with 80% fewer code defects.

Speaker 1

Today, I'd like to discuss our progress this quarter in 3 key areas. First, there are security and compliance capabilities. From secure source code management and security scanning to GitLab Dedicated. Our platform helps customers establish more secure and compliant software development practices. 2nd is our AI offering, GitLab Duo, which integrates AI throughout the software development lifecycle.

Speaker 1

And third is our enterprise agile planning offering, which expands our platform to users outside of software engineering. Let's start with security and compliance. These are at the heart of our platform and set us apart from the competition. This quarter we released remote development workspaces into general availability. These workspaces are consistent reproducible environments that help developers get started faster.

Speaker 1

This also increases security because it limits the need to clone code to end user devices. Customers come to GitLab to replace security point solutions. With most point solutions, code isn't scanned at the time it's written. That causes friction for developers and increases the time required to find and fix vulnerabilities. T Mobile recently moved 25,000 projects into GitLab over just 2 months and increased their security scans to 100 of 1000 per month.

Speaker 1

Now that they are integrated into GitLab, T Mobile is looking forward to leveraging GitLab Duo to increase engineering efficiency even more. OXA, a global provider of autonomous vehicle software, upgraded to GitLab Ultimate in the quarter. The company wanted to modernize multiple developer and security tools, including version control, CICD and more. With GitLab Ultimate, Okta is now able to detect potential security issues earlier in the development process, which is a major game for Oxide, which works in a complex and safety first environment. Another example is CACI International, a national security company and a leader in agile software development.

Speaker 1

GitLab allows CACI to deliver more efficiently in an agile development environment and makes it easier to comply with emerging federal regulations. GitLab Dedicated is our single tenant SaaS solution for customers who need to comply with data isolation and residency requirements. I am excited to see adoption grow since we made it generally available last year. Organizations like Southwest Airlines are choosing GitLab Dedicated to get the best of both worlds. The security of a single tenant environment plus the benefits of a SaaS offering that's updated and backed up by GitLab.

Speaker 1

Onto AI, secure AI is a core part of our platform vision. We enable our customers to adopt AI responsibly. AI helps teams write more code faster. But more code isn't better if it's not secure and high quality. That's why GitLab Duo helps teams not only write code, but also understand code and fix vulnerabilities more effectively.

Speaker 1

Having the broadest DevSecOps platform allows us to add more AI features and deliver more value to our customers. In a recent OMDIA market radar report on AI assisted software development, GitLab Duo had the most currently available features any DevOps platform. Organizations like NatWest, Ultra Gas and Magic Leap have invested in GitLabDuo to help them drive efficiency while also ensuring robust security and company in Asia that was looking to boost productivity with AI powered features, not only in coding, but across the entire software development lifecycle. After testing code suggestions for 1 month and seeing positive results, in Q4, the company invested in thousands of GitLab Duo licenses to improve engineering productivity. After releasing GitLab Duo code suggestions into general availability last quarter, we recently released the beta of GitLab Duo Chat.

Speaker 1

GitLab Duo Pro now also includes organizational controls that help companies adopt AI responsibly and we are now selling GitLab Duo Pro for $19 per user per month. We recently launched the GitLab AI Transparency Center to enable our customers to confidently harness the potential of AI with GitLab. The AI transparency center documents how we built GitLab Duo Pro to accommodate the right model for the right use cases. It also demonstrates our commitment to transparency and protection of customer data and intellectual property. I'd now like to discuss our improvements in enterprise agile planning.

Speaker 1

We're hearing from more and more customers who want to rethink how they do planning. They want the planning in the same platform where the engineering work to deliver on the planning is happening. Early in Q4, we launched a new enterprise agile planning skew. Now customers can get even more value out of GitLab by bringing everyone into a single secure platform. For example, a leading 3 d modeling software company upgraded to GitLab Ultimate in Q4 and purchased additional enterprise agile planning seats so they can move their sales team out of Jira and on to GitLab.

Speaker 1

Finally, on the leadership side, we are excited to welcome Sabrina Farmer as Chief Technology Officer. Sabrina has 25 years of experience and joins us from Google, where she was directly responsible for the reliability and performance of Google's products and infrastructure. I look forward to the impact Sabrina will have across the company. In closing, we are well positioned to win in the estimated $40,000,000,000 market opportunity in front of us. I would like to thank all our customers, partners, team members, community members and investors for their support.

Speaker 1

And with that, I'll 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'll start with a brief recap of our full year and quarter results. In FY 2024, total revenue grew 37 percent to $580,000,000 Our growth continues to be driven by our land and expand motion. Our dollar based net retention was 130% in Q4. We delivered on breakeven free cash flow a year ahead of our commitment with free cash flow of $33,000,000 in FY 'twenty four.

Speaker 2

In addition, on a standalone basis, excluding the impact of Jihu, our JV and majority owned subsidiary, we recorded our 1st year of non GAAP operating profit. We are thrilled to have achieved these milestones. These are a testament to our philosophy for responsible growth. Our 4th quarter revenue grew 33% year over year and we delivered over 1900 basis points of non GAAP operating margin expansion. Looking back at the quarter, I want to share some of the areas we've been closely monitoring.

Speaker 2

These include customer buying behavior, contraction and ultimate performance. In comparing Q4 with Q3 of FY 'twenty four, we have seen improved buying behavior across all customer sizes. In particular, performance with our enterprise customers exceeded expectations. We had a record quarter for 100,000 ARR and 1,000,000 ARR customer net adds. While the spending environment remains cautious, we believe we are starting to see buying behavior normalize with accelerated adoption of our DevSecOps platform.

Speaker 2

Churn and contraction during Q4 also improved for the 4th consecutive quarter and is even better than levels we saw 6 quarters ago. And finally, we continue to see strong growth in Ultimate, our top tier. Ultimate represented over 50% of Q4 ARR bookings, driven by customer wins for security and compliance use cases. Now turning to the numbers for the quarter. Revenue of $164,000,000 this quarter represents an increase of 33% organically from Q4 of the prior year.

Speaker 2

We ended Q4 with over 8,600 customers with ARR of at least 5,000 compared to over 8,100 customers in the Q3 of FY 'twenty four. This compares to over 7,000 customers in Q4 of the prior year and a year over year growth rate of approximately 23%. Currently, customers with over $5,000 in ARR represents 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 $1,000,000 in ARR with us. At the end of the Q4 of FY 'twenty four, we had 9 55 customers with ARR of at least $100,000 compared to 874 customers in Q3 of FY 'twenty four.

Speaker 2

This compares to 6.97 customers in the Q4 of FY 'twenty three, a year over year growth rate of approximately 37%. At the end of FY 'twenty four, we had 96 customers with ARR of at least $1,000,000 compared to 63 at the end of the prior year, which represents a year over year growth rate of 52%. As many of you know, we don't 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 55% year over year to $674,000,000 CRPO grew 40% to $430,000,000 for the same timeframe. We ended our 4th quarter with a dollar based net retention rate of 130%.

Speaker 2

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 month period. Non GAAP gross margins were 92% for the quarter. SaaS represents over 25 percent of total revenue and grew 52% year over year. We have been able to maintain a best in class non GAAP gross margins despite the higher cost of SaaS delivery. This is another example 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. Q4 non GAAP operating profit was $13,200,000 or 8 percent of revenue compared to a loss of 13,800,000 dollars or negative 11% of revenue in the Q4 of last year. This includes an operating loss of $2,100,000 for Jihoo. On a standalone GitLab basis, Q4 non GAAP operating income was $15,300,000 or 9 percent of revenue. Cash from operating activities was $24,900,000 in the Q4 of FY 'twenty four compared to a $11,700,000 use of cash in operating activities in the same quarter of last year.

Speaker 2

Free cash flow was $24,500,000 in the Q4 of FY 'twenty four compared to negative $12,800,000 in the same quarter of last year. Free cash flow is defined as net cash from operating activities less cash used for property and equipment, excluding non recurring items. Turning to guidance, I'd like to make a couple of comments. First, we are entering our 3rd year as a public company. As I mentioned, we are seeing normalization in buying behavior as a result.

Speaker 2

I expect our guidance philosophy to be less conservative this year than in the 1st 2 years. We want to communicate the right expectations and are sharing guidance accounting for the current environment. 2nd, as a reminder, every year we evaluate our standalone selling price or SSP, which determines our upfront revenue recognition rate for license revenue. We have not finished our SSP analysis for the new year, so we've not factored any change to SSP in the FY 'twenty five guide. We will share an update at the next earnings call once we have the results of the SSP analysis.

Speaker 2

With that said, our guidance for Q1 of FY 2025. We expect total revenue of $165,000,000 to 1 160 6,000,000 representing a growth rate of 30% to 31% year over year. We expect a non GAAP operating loss of $13,000,000 $12,000,000 The loss includes an approximately $15,000,000 expense related to our in person company wide summit. As an all remote company, we're thrilled to bring team members together in the same location for the first time since 2019. And we expect non GAAP net loss per share of $0.05 to $0.04 assuming 158,000,000 weighted average basic shares outstanding.

Speaker 2

For the full year FY 2025, we expect total revenue of $725,000,000 to $731,000,000 representing a growth rate of approximately 26% year over year. We expect a non GAAP operating income of $5,000,000 to $10,000,000 and we expect non GAAP net income per share of $0.19 to $0.23 assuming $168,000,000 weighted average diluted shares outstanding. We believe that our continued focus on responsible growth will yield further improvements in our unit economics. We plan to be free cash flow positive again in FY 'twenty five, excluding a non recurring cash tax payments related to the bilateral advanced pricing agreement. There are a number of drivers we believe will fuel our business in FY 'twenty five, which we have included in our guidance.

Speaker 2

At our core, we see that continuing to deliver customer value with our DevSecOps platform aligns our success with our customer success. Additionally, in April last year, we raised the price of our premium tier for the first time in 5 years. Thus far, customer behavior has been in line with our expectations, and we expect to be $10,000,000 to $20,000,000 incremental revenue in FY 'twenty five. Another driver is GitLab Dedicated. GitLab Dedicated allows us to serve companies in highly regulated industries with complex security and compliance requirements.

Speaker 2

We continue to sign large enterprises on Dedicated. For example, a leading U. S. Airline expanded on Dedicated with a 7 figure deal during Q4. The final driver for FY 'twenty five is the monetization of our AI capabilities.

Speaker 2

GitLab Duo Pro is now in the market at $19 per user per month. 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 when this may potentially occur. Thus, for modeling purposes for FY 'twenty five, we forecast approximately $15,000,000 of expenses related to Jihoo compared with $18,000,000 in FY 'twenty four.

Speaker 2

In closing, I'm pleased with our business momentum driven by our market leading platform approach and commitment to capturing our large market opportunity. We hit major milestones for free cash flow and non GAAP operating income profit while growing the business. I'm proud of the consistent execution in FY 'twenty four. With that, we'll now move to Q and A. To ask a question, please use the chat feature and post your question directly to IR questions.

Speaker 2

We're ready for the first question.

Operator

Our first question comes from Rob at Piper Sandler.

Speaker 3

Great. Thanks for taking my question. I'll ask the kind of the broader economic outlook question right now, because Brian, you did indicate improved buying behavior, record deals above $100,000 above $1,000,000 We have seen some unevenness out there. There's still some layoffs happening in high-tech. And if I look at your open recs, it does appear you've somewhat accelerated hiring over the last couple of months.

Speaker 3

Maybe frame for us, is this your view that things have bottomed in the economy? And maybe provide high level thoughts around just planning for the upcoming fiscal year relative to sales capacity or other functional areas that you're putting these bodies into? Thanks.

Speaker 2

Yes, absolutely, Rob. Thanks for the question. We are seeing customer buying behavior normalize with particular strength in enterprise. This showed up in our numbers this quarter. A couple of examples I'll go through.

Speaker 2

One is we're seeing strong expansion within the existing customer base. With dollar based net retention, we had an uptick up to 130% from 128% last quarter. Churn and contraction also continues to improve. It's even better than rates that we saw 6 quarters ago. In terms of investment in the business, as we said, we're long term focused as a business, and we plan to continue to grow responsibly.

Speaker 2

The areas that we're adding new headcount within the company are sales capacity and key R and D roles. Thank you.

Operator

Next, we'll move on to Koji from Bank of America.

Speaker 4

Hey, guys. Thanks for taking the question. I wanted to ask a question on operating margin guidance. You finished the year here, the 4th quarter at 8% operating margin, guiding the full year next year at 1%. And then Brian, given your comment on maybe a little bit less conservative in the guidance for next year, can you maybe walk us through some of the upcoming levers to drive operating margin expansion from here?

Speaker 4

Thank you.

Speaker 2

Yes, absolutely, Koji. We mentioned in the prepared remarks, we're having our in person summit this year. That's in Q1. The estimated expense for that is $15,000,000 We haven't had an in person event at the company since 2019. And being all remote company, it's really important that we have that.

Speaker 2

Also in the guidance numbers, we have Jihu, which is roughly $15,000,000 as well. And so for the full year, we guided positive $5,000,000 to $10,000,000 and that includes the $15,000,000 for Jihu as well as the $15,000,000 for the in person event.

Operator

We'll now move to Kash at Goldman Sachs.

Speaker 5

Hi. Thank you very much. Great finish to the fiscal year sort of reversal from how we started out ending on a very strong note. So nice to see the net expansion rates metric rebound. I think you're one of the very first in software to see the rebound in net expansion rates.

Speaker 5

CRPO, RPO, all this looks good. Sid, with your I shouldn't say new head of sales, but you have a new head of go to market for this full fiscal year, what are the changes we should be expecting as a result of the introduction of new products, quotas, competitive win rates, new product contribution, pricing? There's so many things that are happening GitLab that are all quite positive, right? How should we rank order the impact of those things in your growth algorithm for this year? Thank you so much.

Speaker 1

Yes. Thanks, guys. We're super excited that Chris is doing so well. Him joining is evolution, not revolution. So he is completing the line.

Speaker 1

We continue to focus on the customers where we can have the most impact, which are typically the largest customers in regulated industries. And we're super excited about the things you mentioned, all the extra things that we now have that we can start selling. Duo Pro, we introduced, but also the planning features that allow customers to put their planning in the platform as well, the enterprise Agile Planning SKU and GitLab dedicated. I think all these extra offerings we can have are a great addition on top of Ultimate, which is more and more important to us and which resonates more and more in the market.

Speaker 5

So Brian, one for you and then I'll finish up. With all these levers that Sid is talking about, why is the guidance seemingly conservative? Or is it just that you're discounting these the effects of these new features and products? Because we just don't have enough data. Are you waiting for it to play out?

Speaker 5

How should we characterize the guidance? Thank you so much.

Speaker 2

Yes. Thanks, Kash. We do have a number of growth drivers for FY 'twenty five and beyond. I think you've named a number of them. It takes a while to build pipeline and close deals on new products.

Speaker 2

And so the total number of revenue that we have for next year for it to make a meaningful impact in a ratable business model is going to take a little while for that to come to fruition. And so we've put all the new products into the guidance. They're relatively new. And so didn't want to put a lot in right now. With the premium price increase, we're still saying that's roughly $10,000,000 to $20,000,000 of incremental revenue in FY 2025.

Speaker 2

And then we have dedicated enterprise agile planning and Duo Pro as well. So lots of new growth vectors for next year. It just take a little while for them to impact the top line.

Operator

We'll now move to Ryan at Barclays.

Speaker 4

Thanks for taking the question. One for Sid and one for Brian. Sid, and guys thanks for the continued partnership with Barclays. Look, just on the early indications of DuoCo, we'd love

Speaker 2

to hear how demand has trended there. And then how do

Speaker 4

you think about monetizing AI outside of DuoCo? Like are you seeing customers who are interested in AI also more interested in your security features or up tiering to ultimate? And then for Brian, just really quick, we'll have to hear what the incremental price increase contribution was for the Q4. Thanks.

Speaker 1

Yes. Thanks for that, Ryan. So Duo is resonating in the market and we were really pleased with the Omnia report that we had more AI features than any other platform. We could add value in more cases. And you talk about security and ultimate, we have the most comprehensive security offering of any DevOps platform that allows us to also release more AI features.

Speaker 1

And some of these features are not in Duo Pro, but they're part of Ultimate. So Ultimate now has more and more AI features. So AI is helping to drive Ultimate as well. Ultimate, number one reason why people buy that is because it helps them get more secure and every feature that is in Ultimate and that is now getting enhanced with AI, that AI we give to the customers of Ultima by default.

Speaker 4

Thanks. And then Brian, just real quick, if you can highlight the incremental price increase contribution to the 4th quarter? Thanks.

Speaker 2

We haven't broken out towards the Q4. We just said for next year, it will be roughly $10,000,000 to $20,000,000 in incremental revenue is what we included in our guidance.

Speaker 6

Okay. Thanks guys.

Speaker 2

Appreciate it.

Operator

Next we have Joel at Truist.

Speaker 7

Congrats on the great execution. Sid, just one for you on, are you seeing any increased conversions around AgilePlanning with the Atlassian server end of life approaching?

Speaker 1

Yes. For us, it's a new market. And Brian just talked about new markets. They start slowly and then they accelerate in the outer years. But we talked about a customer switching from Jira to GitLab again in the last quarter.

Speaker 1

So that's really exciting that we get to talk about that and we see an increasing pipeline. If customers are able to bring planning to the same platform, they don't have to create all these different connections between their planning tooling and their software creation tooling. With GitLab, it works by default. It's a better experience. There's less ceremony that they need to do.

Speaker 1

It is 1 interface 1 data source and that's appealing to customers. We're very excited about our enterprise agile planning SKU that we can sell along with the rest of GitLab.

Speaker 6

Thank you.

Operator

We'll now move to Pinduod at JPMorgan.

Speaker 8

Great. Hey, thank you very much for taking the question. Two part question for Brian. How much of the RPO growth of 55% is driven by price versus any elongation in contract land? Any way to kind of understand the components of that?

Speaker 8

And then on pricing, I know you're not giving up the Q4 number, but for the you have closed out FY 'twenty four now. Is it possible to understand again is the pricing benefit for the full year in dollar terms? Is it 1%, 2% of growth? And any help you can provide?

Speaker 2

Yes. On the let me start first with the RPO growth at 55%, CRPO growth was 40%. And so overall, we had a really strong quarter and happy with the performance in the quarter from a bookings perspective. As we previously stated, billings and RPO within a quarter are not good indicators of our core business momentum that they can fluctuate relative to revenue based on the timing invoices and the duration of the customer contracts. We did have a number of multiyear deals this quarter, which contributed to the RPO growth.

Speaker 2

On the pricing benefit, I've said $10,000,000 to $20,000,000 for next year. We haven't broken out what it is by quarter and don't plan to do that going forward.

Speaker 8

Thank you.

Speaker 2

Thank you.

Operator

We now have Nick at Scotiabank.

Speaker 9

Awesome. Thanks guys. You guys talked about how buyer behavior is normalizing, contractions improving. But kind of going off Finjalim's question around the premium price increase in that, the impact that's going to have to the model. If you look at NRR and you sort of backed out the price increase, would that still sort of be up

Speaker 1

on a sequential

Speaker 9

basis? Or is that kind of down excluding the price increase?

Speaker 2

Yes, I can happy to go through what is the buildup in the dollar based net retention rate. And so super happy that the dollar based net retention rate went up this quarter to 130%. We break it down between seats, price and tier. So 40% of that was related to seats, 40% was related to price and 20% was related to tier, not too dissimilar from last quarter. It's just a little bit different last quarter.

Speaker 2

Turning contraction also continues to improve. As I said earlier, it's even better than rates that we saw 6 quarters ago.

Speaker 5

Awesome. Thanks guys.

Speaker 2

Yes. Appreciate it.

Operator

We now have Greg at Mizuho.

Speaker 10

Okay. Thank you for taking the question. So obviously, it's incredibly early in your AI journey and this isn't very applicable to the Q4. But can you tell us how the uptake for GitLab Duo has been so far both in terms of the introductory price for the 1st couple of weeks and for the regular price that kicked in on Feb 1? Thank you.

Speaker 1

Yes, thanks. I think customers have been responding well to Duo. So they're mostly excited about the breadth of our Gen AI capabilities, including things like vulnerability summary, vulnerability resolution, root cost analysis. And an example is a major telco in Asia, they wanted to boost their AI workflow across their entire development lifecycle. And they saw positive results after testing code suggestions.

Speaker 1

And in Q4, they committed thousands to thousands of GitLab dual licenses to improve engineering productivity all the way through the process.

Speaker 11

Okay. Thank you.

Operator

Now we'll move to Shebly at FBN.

Speaker 6

Yes. Thank you very much. So I think in prior quarters you noted that sales cycles for the SMB mid market had been elongating. And this quarter you said enterprise did better than expected. So did SMB continue to be more challenged?

Speaker 6

Did the sales cycles improve? Just elaborate on what you're seeing in the SMB mid market segment?

Speaker 2

Thanks for that, Shebly. We're seeing customer buying behavior normalizing across the board. We didn't break out the sales cycles for SMB and mid market in particular. But as I said, the churn and contraction is best that we've seen in 6 quarters and sales cycles have normalized across the board.

Operator

Our next question comes from Carl at UBS.

Speaker 6

Okay, great. Thanks. Maybe for Brian. Brian, to your comment that you're electing to take a less conservative posture on the guidance, maybe a 2 parter. Why what's the logic there?

Speaker 6

Is it just that GitLab is now a big organization and across a a bigger scale and customer base, you've just got a little more precise visibility? Is that it? Or is it in reaction to the environment? And then I've got a quick follow-up on the same

Speaker 2

subject. Yes. Thanks for that, Carl. Going into our 3rd year as a public company and also seeing the normalization of buying behavior, we'll just be less conservative in the guidance that we're giving out.

Speaker 6

Okay. And then I guess the follow-up would be, did you make that change for the Q4 such that the beat you just put up in the January quarter might we can look as a kind of a start of this more conservative guidance posture or is it more going forward?

Speaker 2

No, it's more going forward. Very happy with the bookings this quarter. We had the largest bookings quarter in company history. There is many firsts within the quarter, largest hyperscaler contribution, largest first order, largest ultimate, and we had a greater number of $1,000,000 plus deals. There were some linearity in the quarter.

Speaker 2

Things came more back end in the quarter than expected.

Speaker 12

Okay, awesome. Thank you.

Operator

We'll now move to Matt at RBC.

Speaker 6

Hey, Greg. Thanks for taking my question. Congrats on the results. You mentioned a number of the drivers in the prepared remarks. One that I don't think you talked about was free to pay and I know there's been an increased focus on that.

Speaker 6

Any update on that sort of focus because it really does feel like that's a real long tail opportunity, but curious if there's anything to mention there?

Speaker 2

Yes. Thanks, Matt. We are getting a lot of free to pay conversion. However, the numbers are relatively low, so they don't come into the base customer count. And if you look at the overall sort of ARR that they're contributing, it's relatively small at this point.

Operator

We'll now move to Peter at Bernstein.

Speaker 6

Thank you and congratulations on another great quarter. Really looking forward to the momentum you're seeing. Maybe I build on an earlier question around Duo. Can you help us kind of understand how the attach rate initially is working? And as you look at customers and their use of the product, are you seeing that type of thing where it's getting into people's workflows and kind of the accelerating usage?

Speaker 6

Or is it still more kind of in experimental stages with customers? And then I guess maybe the adjunct to this is, if you look further forward, what do you think makes it sticky? In other words, like once people really get in there, is it going to be easy to switch away eventually? Or is there some reason why this thing like just really becomes like a tick in the system?

Speaker 1

Yes. To answer your last part of your question first, we're excited about the amount of AI features we can add to GitLab because we have the broadest platform. We can address the most use cases and us according to the OMBIA report kind of addressing more use cases than any other DevOps platform. That's why I think it's going to be more sticky rather than less sticky. The feedback so far has been positive.

Speaker 1

Customers like NatWest have invested in GitLab to help drive efficiency and at the same time ensuring robust security and code quality. Our customers have reported efficiency improvements upwards of 50%, still early in the AI journey and we expect further iterations as we expand Duo across the lifecycle.

Speaker 6

Thank you.

Operator

We'll now move to Gil at D. A. Davidson.

Speaker 7

Thank you. So stepping back a little bit in terms of margins, you're going to do $700,000,000 of revenue this year and you have 90% gross margins. At your scale, isn't there more margin upside at this scale? I think you may have gotten a little bit of a pass when you were growing more than 30%, but if we're guiding to close to 25%, 26% revenue growth, You gave a lot of margin expansion last year. Shouldn't there be more margin expansion this year?

Speaker 2

Yes, Gil, thanks for the question. Super happy with the operating leverage that we've been able to get in the model. This is our 2nd quarter of non GAAP operating income positive. If you look for the full year FY 'twenty four, we generated roughly about $33,000,000 of cash. And even with Jihu, for the full year, we're almost non GAAP operating income breakeven.

Speaker 2

And so there's 2 things I talked about in the prepared remarks that go into the guidance number that we gave for FY 2025. The first thing is our in person summit, which will be a $15,000,000 expense in Q1 that we didn't have last year. And then the second thing is we have Jihu that's still in our numbers, which is a non cash expense, which is roughly $15,000,000 as well. And so for the full year, dollars 5,000,000 to $10,000,000 is the guidance and there's $30,000,000 sort of in those numbers, one is non cash Jihoo and the other is the in person summit that will happen in Q1.

Speaker 7

Got it. Thank you.

Speaker 2

Yes. Thank you.

Speaker 12

We will

Operator

now move to Derek at Cowen.

Speaker 4

Great. Thanks. Hey, Brian, this is for you. I guess, just looking at these numbers, really impressive 40% CRPO growth that was acceleration from 34%. Last quarter, you had a 2 point uptick in net revenue retention rate at 130%.

Speaker 4

I guess in the context of this, it looks like your guidance of 25% to 26% revenue growth for fiscal 'twenty five would be conservative. So just two questions. Are there any drags in the model we should be aware of that may not be reflected in the backlog or the log or the trailing 12 month NRR numbers? And then, is it fair to say you think that growth tailwinds from pricing and from AI will be higher in fiscal 'twenty six versus fiscal 'twenty five?

Speaker 2

Yes. Thanks for that, Derek. As we stated earlier, billings and RPO is not a great indicator. They're directionally correct. Super happy with the quarter overall.

Speaker 2

The points that you made obviously are all true and valid. The revenue growth of 33% are guided 26% next year. That factors in the buying behavior and the normalization that we've seen in the market. We do have a ratable model. And then being a entering our 3rd year as a public company, that's when we're we set our guidance loss to be less conservative than the prior 2 years.

Speaker 2

And so I think the setup with the new products and the normalization of buying behavior as well as the metrics that we put up this quarter is a good setup for next year.

Speaker 4

And just on the follow on, with price tailwinds, would you comment on whether they would be bigger in fiscal 'twenty six versus fiscal 'twenty five?

Speaker 2

By the nature of the ratable model and then the step up that you get, I would anticipate 26 to be bigger than 25. Thank you. Yes. Thanks, Derek.

Operator

We'll now move to Alan at Wolfe Research.

Speaker 2

Hey, guys.

Speaker 4

I want to follow-up on the comments provided around normalizing trends. Looks like customers with over 5 1,000 in AAV are already accelerated and more than 23%. And while you pointed out strength in enterprise, can you just kind of give us the story in the quarter with respect to enterprise versus last Q4? Was there a higher volume of smaller deals or more big deals? And can you help us think about what a good year would be with respect to net customer?

Speaker 2

Adds? Yes. A couple of different points there that I'll talk about. One is the 427 that we had in base customers has pretty much been our run rate. As we indicated in the past, we try to make the selling as well as the buying as friction free as we can.

Speaker 2

And so we don't set a quota for ultimate versus premium, nor do we say you have to sell gitlab.com versus self manage. And so the amount of customers that come out within a given quarter is just sort of an output of how the quarter gets put together. I did mention very happy with the bookings this quarter. We had a number of first and first order expansion, ultimate hyperscaler contribution and really happy with the 100 ks customer adds as well as a greater than 1,000,000 customer adds, which was up 52% year over year. Thank you.

Speaker 2

Thank you.

Operator

We'll now move to Gray at BTIG.

Speaker 6

Great. Thanks for taking the question. So a follow-up question on

Speaker 4

the price increases that we have

Speaker 6

been talking about. You're implementing the price increases on GitLab Premium in 2 phases. The next one kicks in April. So just how should we think about the net benefit of this second phase versus the first phase? And specifically, is it safe to assume that the second phase has less churn and therefore

Speaker 4

a greater net benefit relative to

Speaker 6

what we've seen so far?

Speaker 2

Yes. Thanks for your question, Gray. Overall, we're pleased with the results of the price increase. The impact of the premium price increase exceeded our internal expectations. We went through and modeled that prior to doing the price increase.

Speaker 2

And for FY 2024, it came in above what we modeled internally. And so what we told you for FY 2025 was $10,000,000 to $20,000,000 of incremental contribution in revenue over FY 2024 and we've built in the benefit that you've alluded to, on the churn and sort of the 2nd tier and so forth of, what the assumptions are for that.

Speaker 6

Okay, understood. Thank you.

Speaker 2

Thank you.

Operator

We'll now move to Mike at NITA.

Speaker 13

Hey, thanks for getting me on here guys. Brian, I think first question for you, just with the guidance, a bit of a 2 quarter here, but I know you're talking about how there's less conservatism in the guide now. And I just want to make sure I'm clear, is that the first part, is that for both revenue and OpEx as far as the implied cost structure there or is it more just for the revenue? And then I guess the follow on to that, I know the company is like really beat the drum as far as profitable scale. And so even if I ex out the $15,000,000 of Summit, and I'm not going to back out Jehu just because it seems like a recurring cost until you, I guess, take it out as a consolidated statement, but there is still a massive uptick in the implied OpEx when I think about your guidance, and that's really what I'm trying to square on my side.

Speaker 2

Yes, thanks. You're correct. We have been very consistent since the IPO roadshow is our number one objective is to grow, but we'll do that responsibly. The less conservative, we've have beat the profitability pretty handedly every quarter. And so it's more directed at the top line than the bottom line.

Speaker 2

But we still want the number one thing is the company still to grow and we'll do that responsibly. And so you can expect that from us.

Speaker 13

Thanks for that. And then just a quick follow-up too. I know in the Q and A, I think you had called out from a linearity perspective, the quarter seemed to be a little bit more back half weighted. And so just curious, again, we're trying to get our arms around this guidance here. Was there any change in customer behavior or purchasing patterns as we moved into, we now have call it a month or 2 under our belt for the current quarter or were things relatively unchanged as far as the spending patterns you're seeing?

Speaker 2

Yes, thanks for that. We typically haven't commented sort of up into earnings. We comment sort of up into the quarter close. And we did see normalization across the entire across enterprise, mid market and SMB. And I've also mentioned that we saw a turn in contraction back to what we've seen 6 quarters ago.

Speaker 2

And so that obviously gave us some confidence to give the guidance that we gave. Thank you. Thank you.

Operator

We'll now move to Jason at William Blair.

Speaker 14

Yes. Thank you. Hey, guys. Nice to see you both. Brian, just trying to square, I guess, with everybody else that guidance with the less conservative posture comment, in particular, if NRR is trending up and is around 130%, doesn't this imply that NRR would have to decline from here for revenue growth to be in the mid-20s?

Speaker 2

There's a number of factors that go into our guidance. We build it from a bottoms up perspective. And I would just say that what we reported was actuals and what we're guiding to is guidance, right? So it's not comparing apples to apples.

Speaker 14

Okay. And then we'll squeeze 1 in for Sid, because Sid, you're just sitting there and nobody's asking any questions. It's not right. But really, I wanted to I know you've covered this, but can you just refresh us quickly on GitLab's key differentiators versus GitHub? I know there's a lot of questions always on GitLab versus GitHub.

Speaker 14

But just talk about where you are today on differentiation and where you expect to be going forward?

Speaker 1

Yes, thanks for that opportunity. So we're winning deals against GitHub because we have the most comprehensive platform. In security and compliance, only we have DAST, the dynamic scanning, the container scanning, the API security and the compliance management, the ability to prove that you've done all of that. For example, T Mobile moved 25,000 software projects to GitLab in 2 months and then they were able to start 100 of 1000 of security scans. In planning and management only we have enterprise agile planning, Value Stream Management, Dura Metrics.

Speaker 1

And because we are better able to address those use cases, we're also able to build AI features that build on that. For example, the ability to explain vulnerabilities and to have the AI suggest a fix. So we're really bullish in competing because we have the broadest platform and because that enables us to do more with AI.

Speaker 6

Thank you.

Operator

Next, we have Kingsley at Canaccord Genuity.

Speaker 6

Hi, thanks for taking the question. When we speak with customers, we hear that consumption associated with compute minutes has the potential to be a really meaningful part of the customer's total spend once they start adopting products like CICD. How often are compute and storage considerations factoring into a customer upselling into premium and ultimate? And how do you expect newer products like GitLab 0.0 or Enterprise Agile Planning to affect these needs?

Speaker 1

So GitLab does have consumption pricing for that. For us, it's not a material part of our revenue yet. We do allow people to bring their own runners, so to bring their own compute to bear for CI and CD. We expect a lot out of our new SKUs, but the impact is going to be seen over time. So for Duo, the AI features, for Planning, for Dedicated, the biggest impact is not going to be in the coming fiscal years, but in the outer years.

Speaker 1

Great. Thank you.

Operator

We'll now move to Yi Fu at Cantor Fitzgerald.

Speaker 11

Thank you for taking my question and congrats on a very strong finish. Questions for you guys, Sid or Brian. It's more of a back to basic question. I know Sid mentioned in the beginning of the call that consolidation is very healthy, right, At GitLab, I was wondering like can you discuss what are the legacy solutions you're consolidating and what inning are we in now and how much is left in the tank? And I have a quick follow-up for Brian as well.

Speaker 1

Yes. If you're looking for example at enterprise agile planning, by far the most popular incumbent is Jira from Atlassian and we're in the very early innings. We've only just started offering this and we're very encouraged by the progress, a leading CD modeling company upgraded to GitLab Ultimate in Q4 and they purchased additional enterprise agile planning seats so they could move their sales teams out of Jira and into GitLab, but it's early innings. Our market share there is just starting to ramp up and it will take some time. Thanks for the question.

Speaker 11

And then, Brian, quick follow-up is, other cloud native software companies, they guide based upon like what they see the last couple of quarters. I was wondering when you build your fiscal 'twenty five guidance, how did you do so? Did you look at your trends? How it was like last year, the last couple of quarters? Want to get your thoughts on that?

Speaker 11

And that's it from me.

Speaker 2

Yes. No, absolutely. Q4 of last year, there was a change in the quarter or 2 prior to that. And so we actually look just relatively short term opposed over 4 quarters. Since the buying behavior has more normalized and churn and contraction has been back to where it was 6 quarters ago, We'd looked over the entire year to develop our FY 2025 plan.

Speaker 2

Okay.

Speaker 11

Thank you for that, Frank.

Speaker 12

Thank you, Sid.

Speaker 2

Thank you.

Operator

Our final question comes from Adam at Raymond James.

Speaker 12

Okay. Saved the best for last. Good. I wanted to talk about the growth drivers monetizing AI and GitLab regulated, what you think that were bought up on the call. I think we tackled profitability with Brian to death here.

Speaker 12

So let's do growth. When you think about the AI piece, you've said in the past, 25% is spent on coding and 75% is spent on other tasks. I think a lot of attention gets paid to coding AI. So I'm just curious your observations and feedback, especially on that other tasks piece and how you built that or continue to build that into the product? And then on GitLab regulated, if you could just remind us of how to potentially size that and the timing for the impact of that?

Speaker 12

Thank you.

Speaker 1

Thanks, Yes. So you're exactly right. Developers spend 25% of their time coding and we're helping them with code suggestions. But there's also these other tasks we can help them with. 75% of their time is spelled elsewhere.

Speaker 1

And for example, GitLab helps you to review an issue. So if there's an issue like this is what you got to work on, GitLab will help you to summarize that issue. There might sometimes be hundreds of comments from stakeholders and it will help you kind of digest all of that. And for every developer, there's a security or operations person that we can make more effective as well. For example, GitLab allows you to not only kind of see what vulnerabilities you have, but the AI will help you explain what the impact is and how you could potentially remediate it.

Speaker 1

We're super excited that the OMDIA market rate of report shows that we have 38 out of the 43 areas where you could have AI features in the DevOps platform. We have them covered already. That's the best coverage of any vendor. And that's possible because we have the broadest platform to build that on.

Speaker 12

Get Lab Regulated was the other one, just sizing and timing?

Speaker 1

Ryan, you want to take that?

Speaker 2

I'm sorry, can you repeat the question?

Speaker 12

Get lab regulated as another key growth driver that you spoke about here on the call. I was just wondering if you could maybe talk about the sizing of that and the timing for that growth driver into the model?

Speaker 2

Yes. No, absolutely. We talked about a number of growth drivers for this year and new products that were launched. We didn't break out the contribution by driver. And we also noted that with the ratable revenue model and how much we got into in annual revenue for the year, that would take time for these to make a contribution to the top line.

Speaker 12

Got it. That's helpful. Thank you.

Speaker 2

Thank you.

Operator

That concludes our Q4 FY24 earnings presentation. Thanks again for joining us and have a great day.

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Earnings Conference Call
GitLab Q4 2024
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