Couchbase Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to Couchbase's 4th Quarter 2024 Earnings Call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase's Chair, President and CEO, Matt Cain and CFO, Greg Henry. Today's call will contain forward looking statements, which include statements concerning financial and business trends and strategies, market size, product capabilities, our expected future business and financial performance and financial condition, and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Operator

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

Speaker 1

Good afternoon, and welcome to Couchbase's Q4 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase's Chair, President and CEO, Matt Cain and CFO, Greg Henry. Today's call will contain forward looking statements, which include statements concerning financial and business trends and strategies, market size, product capabilities, our expected future business and financial performance and financial condition, and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date.

Speaker 1

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

Speaker 1

With that, let me turn the call over to Matt.

Speaker 2

Thank you, Edward, and thank you all for joining us on the call today. I'm delighted to report that we have delivered a strong Q4 with all our key financial metrics exceeding our outlook. Highlights include growing Capella mix, continued big deal activity, including a particularly robust quarter for renewals and expansions, strong new customer logos and overall excellent operational performance from all teams across the company. Total annual recurring revenue or ARR was $204,200,000 up 25% year over year. Revenue in Q4 was $50,100,000 up 20% year over year.

Speaker 2

Non GAAP operating loss in Q4 was 4 $100,000 representing a negative operating margin of 8.2%, 8.6 percentage points above the midpoint of our implied operating margin guidance range. We finished fiscal 2024 with strong momentum, capping off a historic year for Couchbase. We drove strong top line growth in a challenging macroeconomic environment, including accelerating our net new ARR growth. We achieved important milestones with Capella, which now represents 11% of our ARR and over 25% of our customer base. We worked tirelessly to improve our operational rigor and improve our efficiency across the entire company, which resulted in meaningful operating profit outperformance and substantial operating and free cash flow margin expansion.

Speaker 2

We enhanced and refined our go to market motion across marketing, sales and our partner ecosystems. Our product and engineering teams delivered multiple important enhancements and capabilities across our platform and did so at an accelerated pace. And we welcome many of you to our 1st Analyst Day as a public company just this last December in New York. I couldn't be more proud of the progress we made across all of our key strategic initiatives, deliver top line growth, increase the mix at Capella, drive sales and marketing efficiency and accelerate the pace of leverage in our model. Now let me discuss some highlights of the quarter and the year.

Speaker 2

I'll start by reviewing the many innovations we have announced over the past few months. These have contributed to the inflection point we are seeing with Capella and will be instrumental in unlocking future growth and leverage opportunities. From day 1, we've architected our platform to enable demanding applications to not only deliver premium performance, but also provide rich, hyper personalized, differentiated experiences for end users. Because of our differentiated architecture, our multipurpose platform converges operational and analytical capabilities and seamlessly integrates advanced services like indexing, eventing, full text search and more in a single solution. This approach is why Couchbase can uniquely power adaptive applications for customers.

Speaker 2

We've built a strong foundation with differentiation we can sustain. And now we've taken that foundation and have layered on new features and capabilities that we have recently announced that position us well for how adaptive applications are evolving with AI. First, we increased developer productivity by introducing the Capella IQ Copilot into our database as a service. IQ allows developers to interact with Capella using natural language conversation, making database interactions more intuitive, efficient and accessible for developers. They can go from an idea to code in just a few clicks.

Speaker 2

Next, we further extended our platform capabilities by announcing a columnar service for Capella, which converges operational and real time analytic workloads into a single platform. Customers can ingest data from anywhere into Capella in real time, reducing complexity and costs while increasing developer productivity. Initial feedback from the private preview has been exceptional and we are excited about what this key new service will unlock. Finally, as you may have seen last week, we announced Vector Search as a new feature in our platform optimized for running on-site across clouds and devices at the edge, including mobile and IoT. While Vector database point solutions aim to solve the challenges of processing and storing data for LLMs, having multiple standalone solutions adds complexity to the enterprise IT stack and slows application performance.

Speaker 2

Our multipurpose capabilities eliminate that friction and deliver a simplified and unified architecture to improve the accuracy of LLM results. We also make it easier and faster for developers to build applications by using a single SQL plus plus query, which incorporates the vector index, removing the need to use multiple indexes or products. And we're the 1st vendor to announce Vector Search at the edge, enabling organizations to run AI applications anywhere in connected or disconnected modes. I'm also pleased to announce that we are extending our AI partner ecosystem with LAMA index integrations, enabling a common API interface to converse with a broad library of LLMs, while providing developers with choices for LLMs. Taken together, we're embracing the opportunity to enable hyper personalized, high performing and adaptive applications powered by AI that deliver exceptional experiences to their end users.

Speaker 2

Customers are responding very positively to how our approach is aligned to their AI powered adaptive application journey. As you can see, we've achieved a lot in a short amount of time on both product innovation and customer uptake, and it's gratifying to see our efforts bearing fruit. As our Capella base continues to grow, we're seeing favorable consumption dynamics emerge as both existing and new customers realize our platform's unique performance and scale. We're seeing increased consumption across our customer base, which is indicative not only of the value we bring, but also gives us confidence in our ability to deliver sustainable growth. As such, we are committed to taking advantage of this recent inflection we've seen.

Speaker 2

We fully expect Capella to become an increasingly meaningful driver behind ARR and net retention as well as an important engine for new logo acquisition. And it will contribute to leverage across our entire business. Now I'd like to turn to customer wins. In Q4, we saw new Capella wins across many industries, including manufacturing, media, FinTech, technology, retail and telco. Array is a financial innovation platform that helps digital brands, financial institutions and FinTechs get compelling consumer products to market faster.

Speaker 2

Array's offerings helps its partners drive revenue, increase engagement and empower millions of consumers to achieve their financial goals. This quarter, Array selected Capella to support profile management for its privacy application because of the compelling value and impressive database performance. In Q4, a leading cloud communications provider expanded its investment in Capella to continue supporting its real time communications platform. This platform connects widely used applications to carriers worldwide, with all conversations being managed and recorded with our cloud database platform. This customer initially began migrating to Capella because of the scalability and benefits that a fully managed service provided to its developer team.

Speaker 2

They gain the ability to step away from database management and focus on developing core business applications. Another Capella expansion from the quarter came from a premier provider of life insurance in the Asia Pacific region. Couchbase powers Customer 360 data for this provider's many millions of customers. The customer decided to expand its investment in Capella on Google Cloud for cost optimization and to continue modernizing their architecture and database management in the cloud. Of note, this was our 1st multimillion dollar Capella migration.

Speaker 2

We also continue to see robust large deal activity with the strong foundation of our enterprise server. A new enterprise logo for us this quarter came from a multinational financial services company and one of Europe's leading banks, BBVA. They selected Couchbase to replace another NoSQL database at a worldwide level because of the price performance our platform offered and they will be using Couchbase to power profile management for its entire customer base. Finally, as I previously mentioned, we saw robust renewal and expansion activity in the quarter with some of our largest customers. This includes a Fortune 500 Shipping and Logistics company, which saw the largest expansion in our history and a major multinational technology company that provides software solutions for the global travel and tourism industry.

Speaker 2

Both customers rely on Couchbase for multiple applications and deployment modalities, and we're honored to continue their journey with them. As we look ahead towards fiscal 2025, we have a massive opportunity in front of us. Our foundation rests upon a carefully architected platform, purpose built to enable mission critical adaptive applications that are often being deployed at the edge in an increasingly AI powered world. I strongly believe that our foundational tenets of scale, performance and flexibility have never been more relevant as we continue to leverage our core innovations while adding new ones. These include our new real time analytic and vector search capabilities, both of which together have the potential to make a meaningful impact to our business.

Speaker 2

Our priorities going forward are to continue to drive sustained growth, capitalize on the inflection we're seeing across the business and accelerate the pace of leverage in our model. If I were to emphasize one of these priorities, it's the forthcoming leverage that I see building across all aspects of our business. This spans from how we innovate and deliver new capabilities and services to how we go to market, growing our outstanding customers, while also acquiring new ones to driving more efficiency in our P and L and model. Having held our annual kickoff last month, I can say confidently that we have a strong, motivated and highly aligned team in place to achieve our ambitions in fiscal 2025. At Couchbase, we're inspired by the generational opportunity that is in front of us and in being a trusted advisor for our customers, partners and the broader industry.

Speaker 2

It's an honor to be a strategic technology provider to so many organizations that are changing the way we interact through their modern applications. We have work to do and it won't be easy. But at Couchbase, we pride ourselves on attacking hard problems driven by customer outcomes. With that, I'll hand the call over to Greg to walk you through our results in more detail. Greg?

Speaker 3

Thanks, Matt, and thanks, everyone, for joining us. We finished fiscal 2024 with another strong quarter as we beat guidance across all key metrics. We are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment while driving very strong outperformance in our operating loss guidance. I'll now walk you through our Q4 and full year fiscal 2024 financial results in more detail. Total annual recurring revenue or ARR was $204,200,000 at the end of the 4th quarter, representing 25% growth year over year and 8% sequentially, driven by strong growth in Capella contribution as well as our core enterprise business.

Speaker 3

At the end of the quarter, Capella ARR was $21,800,000 representing 11% of our total ARR. Revenue for the Q4 was $50,100,000 an increase of 20% year over year and 9% sequentially and $180,000,000 for the full year, an increase of 16% year over year. Revenue growth benefited from growing consumption of Capella and strength in our Enterprise business, partially offset by declines in Professional Services. Subscription revenue for the Q4 was $48,100,000 an increase of 26% year over year and 9% sequentially $171,600,000 for the full year, an increase of 20% year over year. Professional services revenue for the Q4 was $2,000,000 a decline of 42% year over year and an increase of 12% sequentially and $8,500,000 for the full year, a decline of 29% year over year.

Speaker 3

As a reminder, this was consistent with our expectations following outsized strength in professional services in fiscal 2023. We expect professional services to normalize at current levels in fiscal 2025. Our ARR per customer performance in the 4th quarter was $273,000 up from $264,000 in the 3rd quarter, up 12% year over year and indicative of the growing wallet share we have with large customers. As a reminder, as our Capella mix continues to grow in contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar based net retention rate or NRR continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers.

Speaker 3

Our NRR has been steadily improving, thanks to Capella. We exited the year with 7 49 customers, an increase of 34 net new customers from the 3rd quarter. Capella once again represented the majority of new logos in the quarter, and we grew our Capella customer logo count by 41, over 25% from the 3rd quarter. We continue to be encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and retention metrics. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations and share count are on a non GAAP basis.

Speaker 3

In Q4, our gross margin was 90.4%, benefiting from sustained enterprise gross profit margin strength, lower services revenue mix, the completion of the amortization from some of our initial Capella investments and leverage as a result of our expanding Capella revenue base, offset by growing Capella mix, which carries lower gross margins. This compares to a gross margin of 86.3 percent a year ago and 89.5% last quarter. For the full fiscal year, our gross margin was 88.5 percent compared to 87.6 percent in fiscal 2023. As a reminder, as Capella mix increases, we expect gross margin will decline in fiscal 2025. Turning to expenses.

Speaker 3

We continue to invest to capture the generational opportunity we see in front of us, but are focused on driving leverage across our business. We are pleased with our execution on this front as our expense discipline and benefits from our cost savings initiatives resulted in us again outperforming our operating loss outlook. Our sales and marketing expenses for Q4 were 29,400,000 or 59 percent of revenue compared to $26,700,000 or 64% of revenue a year ago. For the full fiscal year, our sales and marketing expenses were $113,600,000 or 63 percent of revenue compared to $101,300,000 or 65 percent of revenue in the prior fiscal year. Research and development expenses for Q4 were $12,900,000 or 26 percent of revenue compared to $12,900,000 or 31 percent of revenue a year ago.

Speaker 3

For the full fiscal year, our research and development expenses were $50,500,000 or 28 percent of revenue compared to $49,700,000 or 32 percent of revenue in the prior fiscal year. General and administrative expenses for Q4 were $7,100,000 or 14% of total revenue compared to $6,300,000 or 15% of revenue a year ago. For the full fiscal year, our general and administrative expenses were $26,500,000 or 15% of revenue compared to $25,900,000 or 17 percent of revenue in the prior fiscal year. Operating loss for Q4 was 4 point 8% operating margin compared to an operating loss of $9,900,000 or a negative 24% operating margin a year ago. Operating loss for the full fiscal year was $31,300,000 or negative 17% operating margin compared to an operating loss of $41,300,000 or negative 27 percent operating margin in the prior fiscal year.

Speaker 3

Net loss attributable to common stockholders for Q4 was $2,900,000 or negative $0.06 per share. For the full fiscal year, net loss was $27,000,000 or negative $0.57 per share. Before I turn to the balance sheet and cash flow statement, I want to mention an impairment charge of $5,200,000 that we recognized in Q4. This impairment charge relates to a reprioritization of some R and D resources as we have focused our efforts on Capella, AI capabilities, services and related developments. This has been excluded from, but does not affect our non GAAP results for the quarter.

Speaker 3

Turning to the balance sheet and cash flow statement. We ended Q4 with $153,600,000 in cash, cash equivalents and short term investments. We remain well capitalized to execute against our long term growth strategy. Our remaining performance obligations or RPO totaled $241,800,000 at the end of Q4, an increase of 46% year over year, driven in part by the timing of robust renewal activity with some of our larger customers, several of which are on multiyear contracts driving higher average duration than we have seen in recent quarters. We expect to recognize approximately 61 percent or $147,600,000 of total RPO as revenue over the fiscal year 2025, which represents 26% year over year growth.

Speaker 3

As a reminder, we experienced fluctuations in our RPO balances due to a host of factors, including renewal time as well as changes in contract duration. Operating cash flow for Q4 was negative $6,500,000 for the full year was negative $26,900,000 Free cash flow for Q4 was negative $7,700,000 or negative 15.4 percent free cash flow margin. Free cash flow for the full year was negative $31,600,000 or negative 17.6 percent free cash flow margin. Now I will provide guidance for Q1 and the full year fiscal 2025. As Matt discussed, we enter fiscal 2025 with very strong momentum across our businesses and our pipeline remains strong.

Speaker 3

We achieved a critical milestone with Capella and expect it will continue to be an important driver behind all aspects of our business in fiscal 2025. Furthermore, we anticipate that our investment in our product capabilities, partner ecosystem and go to market motion will continue to complement our ARR momentum. While we continue to scrutinize our expenses we remain dedicated to increasing our efficiency, growing our free cash flow and operating margins and driving leverage across the business continued focus on increasing the Rule of 40 metric. We will continue to invest in our strategic priorities. As such, we expect to grow OpEx slightly faster in fiscal 2025 than in fiscal 2024.

Speaker 3

We remain committed to achieving positive free cash flow by fiscal 2026 and positive operating income by fiscal 2027, underpinned by 20% plus compound annual ARR growth, as I discussed last December at Analyst Day. Finally, we remain mindful of the macro headwinds and continue to carefully monitor their impact on our business. As such, our outlook maintains a consistent degree of conservatism to account for the uncertainty as well as lack of visibility into how the macro may impact consumption trends for our emerging as a service offering. With these factors in mind, for the Q1 of fiscal 2025, we expect total revenue in the range of 48,100,000 to $48,900,000 or year over year growth of 18% at the midpoint. We anticipate ARR in the range of $206,500,000 to $209,500,000 which represents 21% growth year over year at the midpoint.

Speaker 3

We expect a non GAAP operating loss in the range of negative $8,500,000 to negative $7,500,000 For the full year fiscal 2025, we expect total revenue in the range of $203,000,000 to $207,000,000 or year over year growth of 14% at the midpoint. As a reminder, we've historically seen variability with respect to the implementation timing of certain enterprise deals and new or migrated Capella customers, which impacts our revenue visibility. We expect this timing dynamic to influence the pace of revenue growth in fiscal 2025 with aforementioned large customer renewals continuing into the first half of fiscal twenty twenty five and causing our revenue seasonality to be slightly more weighted in the first half of the year relative to what we saw in fiscal 2024. As such, we'd expect fiscal Q3 revenue could be flattish from Q2. We therefore continue to view ARR as a better indicator than revenue of the strength of our business.

Speaker 3

We expect full year fiscal 2025 ARR the range of $235,500,000 to $240,500,000 or 17% growth at the midpoint. And finally, we expect a non GAAP operating loss in the range of negative $27,500,000 to negative $22,500,000 With that, Matt and I are happy to take your questions. Operator?

Operator

Thank you. We will now conduct our question and answer Our first question comes from Matt Hedberg with RBC Capital Markets. Please state your question.

Speaker 3

Great, guys. Thanks for taking my questions. Congrats on a really strong year. And it's really, really good to see the success with Capella and just general buying behavior improvement. I think it feels like it's a lot of hard work that's gone into that.

Speaker 3

So well done, guys. On the strong customer adds this quarter, and I guess, most specifically, Capella wins, can you talk about sort of both that partner motion as well as sort of the direct effort there? Because I know it's been a lot of work, not only on the product side, but on the go to market side. Maybe where are you seeing some of the most success on some of the go to market initiatives?

Speaker 2

Hey, Matt. How are you? Good to speak. Certainly appreciate the acknowledgment on the hard work. We do look at it as a historic year for the company.

Speaker 2

Look, we've been talking all year on the expectation that Capella is really going to help us on new logo acquisition. We saw great geographic balance in the quarter continue looking after new logos as well as migrations. But you're right to call out the partner contribution. We've been really focused for some time now on driving robust relationships at a global and local level with the likes of AWS and the other cloud providers. I'd say that was a highlight in the quarter.

Speaker 2

But it wasn't only AWS. We called out the largest Capella migration we've ever seen with GCP. So I think when you mentioned that this is a result of a lot of hard work, say there's a lot of diversification to the outcome. And we had high expectations and continue to do so on a lot of fronts with Capella in general and the success with the partnerships.

Speaker 3

Really, really good to hear that. It's great. And then maybe just as a follow-up, you mentioned

Speaker 2

in your prepared remarks, you talked about vector search. Can you

Speaker 3

talk about what you expect to see some customer use cases for that and maybe how you think that might impact monetization or growth rates from a customer perspective?

Speaker 2

Yes. Look, we're really excited to be on the forefront of what we think is maybe the largest market transition the world has seen and certainly the greatest catalyst to application innovation that we've seen for some time. You can appreciate that due to the nature of our sophisticated platform, we're fortunate to engage in a lot of future discussions with customers and it's coming across a wide variety of verticals. Couple of examples that I would point to that I like a lot. Recently we were talking to an e commerce provider and they're envisioning, well, how do I change the customer experience at the edge?

Speaker 2

An example could be, hey, I want a new pair of shoes that matches the outfit that I'm wearing, that's the color of the car parked outside, available within 15 miles with inventory in store today. That would be really hard to do without the addition of AI and combining that with platform capabilities that allow not just vector search, but understanding text and range based search and geospatial technology. And the fact that we've taken the comprehensive platform approach to Capella and Enterprise allows us to support those types of applications. Now a lot of people matter excited about the upside of AI and those hyper personalized adaptive applications that are going to be increasingly common in our life. But there's also the downside that enterprises are worried about.

Speaker 2

Another customer that we're actively talking about is in the logistics space. And they're looking about integrating chatbot technology to drive efficiency throughout

Speaker 3

their organization.

Speaker 2

And while we're working with them, they have a peer in an industry where the chatbot went wrong, started making disparaging remarks about company, negatively interfacing with customers. And so what that points to is the downside of ensuring that enterprise information is protected and that you avoid the downside of AI getting angry. And so we're engaged in POCs to prove that we can minimize the downside with our use of data and integrating multiple data sources, but also provide the upside of those unique experiences. So hopefully that gives you a sense of the types of engagements that we're having with our customers and really taking pride of being a future strategic platform that they can bet on for the necessity of multiple use cases that we bring together.

Speaker 3

Thanks a lot, Matt. Well done.

Operator

Thank you. And our next question comes from Jason Ader with William Blair. Please state your question.

Speaker 4

Yes. Thank you. Good afternoon, guys. Just wanted to try to square the guidance a bit with all the positive commentary and in particular the 25% ARR growth that you just reported for the quarter and for the year. It basically looks like based on the Q1 guidance, there need to be some deceleration as the year progressed in ARR growth.

Speaker 4

And just given all the good things that you have going on in the business, I'm just trying to reconcile that. And maybe there's something more specific going on. Maybe you had some large renewals or early renewals in FY 'twenty four that won't recur in FY 'twenty five. Can you just help us kind of square the guidance with all the positive commentary?

Speaker 3

Yes. Hey, Jason, it's Greg. Good to hear from you. Thanks for the question. Look, we're obviously very happy with how we performed in fiscal 'twenty four with ARR performance accelerating again yet another year and we remain committed to being to growing our top line 20 plus percent.

Speaker 3

Obviously, we're early days into fiscal 2025. We feel very good about how we've guided and as we've always stated, we're working to at a minimum meet it, if not beat it. And I think we've have established a good track record of that now. And so we just got to go out there, as Matt said, and it's going to be a lot of hard work. But we know what's in front of us and we feel good about it.

Speaker 3

And like I said, we're still committed to over this medium term period that we laid out over the Investor Day be a 20 plus percent grower and that's what we've been working for the last month and we'll continue to do for the rest of the year.

Speaker 4

Got you. So it's just we're just going to be conservative on the year given all of the macro uncertainty?

Speaker 3

I think we're going to continue to maintain the same level of conservatism that we had last year and

Speaker 5

with some

Speaker 3

of the macro and again as Capella continue to ramp over time. But again, we feel like we're in a good position and coming off a good year and we'll go work at it for the next 11 months to deliver at least what we've guided to, if not better.

Speaker 4

Got you. And then one quick follow-up for you, Greg, on the gross margin. Can you give us a sense of where gross margin where the gross margin outlook will be for FY 'twenty five and beyond? I know you have Capella, that's a lower gross margin offering. So can you just help us with the models there?

Speaker 3

Yes. It will certainly continue to tick down from where it is now. It will probably tick down quarter on quarter as we go throughout the year as Capella becomes more and more meaningful to the business. So that's how I would think about modeling that as you go through fiscal 'twenty five.

Speaker 4

Got you. Okay. Thanks, guys.

Speaker 6

Thanks, Jason.

Operator

Our next question comes from Rob Oliver with Baird. Please state your question.

Speaker 6

Great. Good evening. Thanks, Matt. Thanks, Greg. Two questions for me.

Speaker 6

The first is on ARR. I know you guys have said that ARR could moderate as you ramp Capella, but you're continuing to see really nice growth up 12% year over year. And I know from the Analyst Day and from some of our conversations, it does seem like some of the Capella transitions are actually producing larger ARR numbers. So we'd just be curious to know what sort of color you can provide and what you're seeing in that uplift on ARR as you move your customers to Capella? And then I had a quick follow-up.

Speaker 3

Yes. Hey, Rob, great to hear from you. Yes, look, we still feel great. I mean, we laid out obviously at the Investor Day how Capella was performing. We gave you the that for last Q3, the in quarter net retention rate was 167%.

Speaker 3

So when we bring those customers on, we continue to grow them very nicely. And we think we can maintain doing that. We talked about that we have continued progress in terms of Capella penetration of our ARR balance. We will continue to see that throughout the year. And we feel again very good about how Capella is performing both migrations and as Matt talked about the new logo piece of things.

Speaker 3

So I don't think we're going to see moderation from Capella. I think it's going to continue to be the tailwind and that's why we felt confident at the Investor Day to talk about having this medium term growth rate of 20 plus percent for the top line. Rob, let

Speaker 2

me tell you an exciting story from your recently speaking with the customer. They started off, they were a very small Couchbase customer and this is a company that you would know, big scale, big technology focus. At the beginning of this fiscal year, the one that we just finished, they were less than 20 ks. Over the course of the year, we proved our value proposition to them with Capella. They had multiple applications that they migrated into Couchbase Capella and we exited the year with them running north of 800 ks ARR.

Speaker 2

Now they would have said out of the gate, hey, we're interested in this and we hear what you're saying on the value proposition. But what the customer explicitly said that was running this is, I need to prove this out to me and my teams. These are mission critical applications that the company is running on and we need to be very diligent with how we prove this out, how we plan our workflows, how we plan our upgrade project. And that's indicative of conversations that we're having with a lot of customers on migrations. And as we've said before, we don't want to push customers before they're ready.

Speaker 2

We don't think that's smart. Reality is there's only so much that we would be successful with that. We want to be a trusted partner. So we think there's a lot many, many, many more of those to come. We can't predict when we're going to get those growth rates just like we wouldn't have predicted the scale of that one over the course of the year.

Speaker 2

So I think we're just we got to balance what we can control and what we can't. And I think you hear us talking about the potential because that's real and customers are telling us how valuable it is once they get in there. But there's some work to do based on the mission critical nature of a lot of these applications.

Speaker 6

That's super exciting. Okay. Yes. Thanks, Matt. Thanks, Greg.

Speaker 6

And then my quick follow-up is just Greg for you on Capella IQ and some of the costs associated with that. I appreciated earlier my previous question Jason was pushing you guys on potential conservatism on the top line and on ARR. And I guess how firm a handle do you guys have on the costs associated with Capella IQ? And just wanted to get a sense for how you sort of factored that into the cost outlook for the year? Thanks again, guys.

Speaker 3

Yes. Thanks, Rob. Yes, look, we have a I think we have a very good handle on the cost profile of Capella and can easily model that out. I think the more challenging piece, what Matt said, is just the pace of adoption and particularly the migrations that are going to drive the growth of Capella as we go here. So I feel very comfortable about how we are on managing the cost and understanding how that's going to play out over the course of the next year or even several years.

Speaker 3

It's really about the top line growth that's associated with it. So we feel very good about where that business is going and where we'll eventually get from a Capella margin perspective.

Speaker 6

Awesome. Appreciate it. Thanks again, guys.

Speaker 3

Thanks, Rob.

Operator

Our next question comes from Raimo Lenschow with Barclays. Please state your question.

Speaker 7

Hey, thank you and congrats from me as well. Matt, one for you, like as Capella becomes like a bigger part of the overall mix and obviously the momentum is clearly there for you. How do you think about your sales approach and how you sell, how you incentivize the sales force? I'm asking because a lot of your peers that have gone through the same transition at some point discovered like you probably need to kind of think about differently. So think more about consumption rather than just kind of putting like a proper project in place.

Speaker 7

Like is there anything on the horizon for you guys as we think about this year or next year? Thank you.

Speaker 2

Raimo, great question. We had our sales kickoff week 1 of this fiscal year and I was particularly excited about it and people are asking me why the excitement and obviously we wanted to share the good news on the fiscal year and celebrate a lot of great work by many people. What I was more excited about is the work that we've done to get in front of this year. And despite the fact that we delivered results that we were proud of knowing that we can do more and a lot of it is understanding underlying dynamics of Capellan consumption at a much higher level than we did a year ago because we have a lot of data that we can chew on. We're now able to look at our pipeline in an even more sophisticated way to understand, look, is this a customer that's building a net new application that needs to understand the capabilities and how to integrate SQL with natural language for developers?

Speaker 2

Or is this a use case where somebody is replatforming an application off a competitive solution and displacing an existing database for something like TCO and application rewrite is so much more important. As we peel those layers, we can be much more fine tune with our go to market approach and aligned to what prospects and customers are looking for. And so we've layered this approach in to everything we're doing on the go to market and that just goes above and beyond what we already had in place. Then we can follow-up with specific enablement to our teams to say, hey, if you're getting these types of questions, this is part of the value proposition that you need to point to or here's how to leverage a trial or professional services. All of that is with the lens of Capella and consumption.

Speaker 2

And then over the course of the year as we've executed on this inflection really building the instrumentation that we need to understand every aspect of how customers are consuming. Maybe they're tracking below what we might have thought, maybe they're running hot, being able to speak to them on a proactive basis to make sure that that's headed in the direction that we want it to be and we want them to be. So I'd say those are all different dynamics that the team is really leading into and we're excited to keep pushing forward.

Speaker 3

Yes. And Raimo, I'd just add one thing is even last year and it will continue this year, we have an element of consumption as part of the sales compensation plan. So it's not just about selling the project, but also getting consumption going as well.

Speaker 7

Yes. Okay, perfect. That makes sense. And then Greg, one for you, and it's more not so much for this year, but more conceptually. If you think about professional services, did you how do you kind of plan with that as a percent of the total?

Speaker 7

Or like how do you think about the growth there in the long run? Is there kind of like a base level that you need to do because some of the initial or early stage project early in the market kind of product releases, you kind of want to handle yourself to see the feedback quicker and the rest can go with partners? Like if I think about modeling professional services beyond this year as well, like how should we think about that? Thank you. Yes.

Speaker 3

Thanks, Raimo. Yes, I think modeling services going forward, at least for the next year or 2, I think, we obviously had a significant outperformance in fiscal 2023. I think we got to 2024 was more of a normal level. And I think that's the way you should think about it going forward. And as we've talked about over time, as more of our business goes to Capella, the services because there's embedded obviously services as part of Capella, the professional services component will probably moderate and flatten out over time.

Speaker 3

It won't continue to grow because that's really the majority of the services we're driving today are on the enterprise business versus Capella. So I think this year was a good year to sort of re level set and see sort of moderate growth from here

Operator

Guggenheim Securities. Please state your question.

Speaker 8

Thanks. And I want to add my congratulations to a solid finish to the year. For either Matt or Greg, can you help us think about the mix of total ARR between Capella and server exiting this year or enterprise exiting this year, so fiscal 'twenty five? What are the biggest pieces that would shift ARR mix to Capella? Is it more expansions of existing Capella customers or is it migrations for on prem?

Speaker 8

And how much are on prem renewals driving the mix shift? Thanks.

Speaker 3

Yes. Hey, Howard, thanks for that. This is Greg. Look, we as we noted, we finished the year at 11% of our ARR was Capella. I think I would go back to at the Investor Day, we said during that medium term 4 to 6 year horizon, we would be disappointed if we didn't get to at least a third of Capella mix, if not even a half of the business.

Speaker 3

So just sort of plotting the course of that timeframe because we're not guiding to the Capella mix in fiscal 2025. I would say though that the bigger drivers are, 1st, migrations of enterprise customers over, particularly the large some of the larger scale ones that will accelerate it. 2 would be expanding the existing Capella customer base, which Matt gave a great example of just recently. And then lastly, look, we've talked about that new logos, you're going to see the quantity tick up, but they're going to be at a lower starting point as we enter into the Capella journey. So that's probably the third one in terms of rank order, if you will.

Speaker 8

Okay. I appreciate you rank ordering that, Greg. And just a follow-up for you. What is you mentioned the longer average contract duration. What is driving that?

Speaker 8

Is it renewals or new logos? And do you expect that to be a persisting revenue tailwind this year or only in the first half?

Speaker 3

Yes. So Howard, in Q4, we did 2 renewals of our largest enterprise customers. One we talked about within the quarter, one was actually in Q1 they renewed early. And so those 2 went in and they were both multiyear deals. So we saw a higher than average duration this quarter because of those two deals in particular.

Speaker 3

But again, I think it's going to get back to where we normally see the duration. I think that was anomalous for those 2 specific deals and you obviously see it show up in RPO. And if you go back a couple of years, you saw a large RPO and then over time, those largest customers, they burn off their revenue until they get to this renewal point and then we put them back into the RPO and then the same thing is going to happen. So it's a it was a Q4 dynamic I would say, from a duration perspective.

Speaker 8

Okay. Very helpful. Thanks.

Speaker 3

Thank you.

Operator

Our next question comes from Stephen Schwartz with Wells Fargo. Please state your question.

Speaker 9

Hi. This is Stefan on for Andy Molinsky. Thanks for taking my question. I guess to start off on these large deals, I think you had mentioned there were some renewals coming up in Q1 as well. Was there anything that maybe pulled into Q4 that maybe had an impact beyond what you're expecting?

Speaker 3

Yes. We talked about this is Greg. We talked about last quarter that there was 2 large deals in particular like very large deals and one was due for renewal in the quarter and one was not and we weren't sure at the time whether that was going to close because it wasn't due in the quarter. They both did close. So as we just talked about the duration of the RPO pick those up.

Speaker 3

The one that was in quarter renewal obviously hit ARR and revenue. The one that was again just a little bit early into Q4, you'll see it in ARR, but it obviously started revenue because it has a Q1 revenue start date. So those were the only sort of dynamics that were at play with those couple of our deals.

Speaker 9

Got it. Okay. And then as a follow-up, as you think about capitalizing on this inflection in demand that you're seeing, how do you think about how that plays out in terms of investments in sales and marketing and R and D?

Speaker 2

Look, we certainly want to continue with the momentum and we're excited about it, but we're equally focused on the leverage side of the business on a go forward basis. And so when I think about momentum, leverage comes in multiple forms. The pace of innovation from our product team is better than it's ever been. And we haven't talked about up to this point on the call, our internal use of AI, but that's helping our development teams be that much more productive. The more insights we have on Capella, the more fine tune we can be with features that we're working on.

Speaker 2

And so I expect that we're going to get much more efficient as we execute through this inflection. Same is true on the go to market side. Having an additional level of telemetry and signaling from the product side, getting into complementing our enterprise motion with more product led growth, better fine tuning our spend based on the type of demands per my previous comment. And so a big part of how we're thinking about inflection is continuing to go fast and being smart about all things Capella, but then being really excited about a more leveraged future across all aspects of our business and that's before we benefit from the addition of AI into our platform as we take things to market. So a lot of our focus is again continued execution that we're proud of and the momentum we've established.

Speaker 2

How do we maintain that and get into levels of efficiency and leverage that we know are possible.

Speaker 9

Great. Thank you.

Operator

Our next question comes from Taz Kouiaghi with Wedbush Securities. Please state your question.

Speaker 10

Hey, guys. Thanks for taking my question. First of all, for Matt or Greg, on Victor, can you again explain how you monetize that feature? Is that part of the base product? Is it an add on?

Speaker 10

Do people pay for that separately on top of the core product?

Speaker 2

Yes, it will be Taz, it will be part of the platform. It's an extension of other features. And so they'll either license it or use Capella credits like they would other components of the platform.

Speaker 3

All right. Very helpful.

Speaker 10

Any sense of what kind of uplift the customer gets when he starts using that feature of the product?

Speaker 2

Look, it's too early for us to give you financial trends and patterns. I think it's a big part of the value proposition. And what we think about Couchbase is what are the application dynamics within our customer base and what are they trying to do with their innovation agendas? You'd be hard pressed to find any enterprise that isn't quickly trying to figure out how to get the most out of this exciting technology of AI. Well, when you think about highly adaptive applications in an AI powered world, that's going to really depend on a sophisticated data platform that brings together these features, but can also handle the scale and performance of massive data sets that include private information, public information, structured data, unstructured data at the cloud, at the edge.

Speaker 2

And so I think when we talk about one of the biggest market transitions and opportunities that the world has ever seen, it's hard to put a number on the opportunity. What we're focused on is meeting the needs of our customers that are building these adaptive applications. And if you were to step back and say, lay out the aspects of a data platform for the future world, you'd be hard pressed to find one that doesn't have that has a better start than what we have. And we truly believe that we've been built for this moment. So that's really our focus.

Speaker 2

We continue to press hard on meeting customer needs. Monetization is going to be exciting, but again, early days for us to give you specifics.

Speaker 10

Just one follow-up for Greg, very strong customer adds this quarter. Any comment on what that does to the average land sizes for new customers? Are you landing more smaller customers now because of Capella traction or the average yield cycle has really changed much?

Speaker 3

Hey, Taz. Yes, we're certainly as we've about with Capella, we're going to be landing more customers at a smaller land point and we are seeing that for sure. However, it doesn't mean that like in this quarter we talked about a couple of large enterprise deals as well and you see our ARR per customer continue to grow, although it should moderate over time with these Capella customers coming on. But yes, the land points will be smaller and we are perfectly fine with that because Matt gave the example before the customer starts at 10,000 or 20,000 within the year is at 800,000. So zero issue with landing small and growing from there.

Speaker 3

Very helpful.

Speaker 10

Thanks guys.

Speaker 3

Thanks Tejas.

Operator

Our next question comes from Rudy Kessinger with D. A. Davidson. Please state your question.

Speaker 5

Hi. This is Andres Miranda for Rudy. I just have a quick question for you guys. How is the consumption growth trending with Capela customers? If you could talk a little bit about that.

Speaker 5

And the consumption growth in Q4 so far in Q1 was is in line in Q1 with recent quarters or better, worse? Any extra color that you can give on so far?

Speaker 3

Yes. Hey, good afternoon. Yes, look, consumption continues to be good for Capella. We're very pleased at where we are with, again, not only bringing customers on, but getting them going and using. We talked about where there is a number of our customers that are continuing to not only use at the pace that they bought, but actually use beyond the pace that they bought, meaning consuming faster than they thought they would.

Speaker 3

So we still feel very good about those consumption trends. We talked a little bit about those at Investor Day and they continued through Q4. And look, as anything we would do, we look at the most recent trends for the last 3 to 6 months as the best predictor of what's going to happen in Q1 and we've leveraged that to model into our Q1 guidance. And just as a reminder, again, what we covered at Investor Day, if you look at the pace of growth of customers in Capella versus Enterprise, they grow about 2x faster going from 0 to 100 ks and 4x faster going from 100 ks to 500 ks. So we're seeing that continue.

Speaker 3

And again, I'll reference back the example that Matt shared before about a customer starting $10,000 or $20,000 and ending up a year later at 8 $100,000 So we remain very bullish on Capella and the consumption capabilities.

Speaker 5

Okay. Sounds good. And one last question, if I may. Next 12 months RPOs were up very strongly over Q3. How much was that driven by strong renewals versus new deals?

Speaker 5

And should the next 12 months RPOs begin to track more in line with ARR in fiscal year 2025?

Speaker 3

Yes. So I think you were asking about RPO and ARR. The RPO, that was the question. Obviously, again, we talked about those couple of large enterprise deals being large, not only large, but large multiyear deals. So we saw a very nice increase in our RPO.

Speaker 3

You'll see that continue obviously year over year early in the year, but then obviously these customers will start burning off their revenue and the RPO growth will moderate. And I'd just say if you look at RPO over the last couple of years, it's a good sort of pattern set of what we probably would expect to happen over the next couple of years.

Speaker 5

Okay. Sounds good. Thank you.

Speaker 3

Thank you.

Operator

Our next question comes from Param Singh with Oppenheimer and Company. Please state your question.

Speaker 11

Yes, hi. Thank you. Yes, this is Param Singh on for H. I. Kedron and thank you for taking my question.

Speaker 11

I know the revenue guidance have been beaten to death, but I just want to understand the impact from a higher mix of Capella. And as you look to fiscal 'twenty five, what are you embedding in your guide as an incremental headwind?

Speaker 3

Yes. Hey, thanks, Param. It's Greg. So a couple of things. Look, as you saw with our Q1 guide, we feel good about how Q1 is going to shape up from a revenue perspective in particular.

Speaker 3

Again, I'll go back to that large customer that we signed in Q4 with a start date in Q1, which will give us an outsized upfront license revenue from ASC 606, which is a bit anomalous. So if you think about revenue for the year, Q1 will be stronger than normal and then it will be sort of flattish for the next couple of quarters, just given the strength of that upfront license revenue. We don't necessarily see I know you referred to a headwind potentially with Capella revenue. We don't see that being a headwind. We see that being, if anything, a tailwind as we continue to move forward.

Speaker 3

So again, continued good strength with our enterprise customers and growth with Capella should help us, again get to that medium term outlook of being a 20% plus top line grower.

Speaker 11

Got it. Got it. Yes, I was thinking more in terms of revenue recognition, but I hear your point. So, if I think about Capella and columnar, the opportunity to provide an analytical database, what have you heard so far? What's the opportunity set in incremental workloads you can address with that?

Speaker 2

Yes. Great. I'm glad you brought that up. It was a really important release for the year. And as we think about, again, our world view that applications need to be highly personalized, highly interactive, available from the cloud to the edge, we think a fundamental attribute is being able to inject real time analytics while the application is being used by users.

Speaker 2

And so it's really about complementing the operational data store with real time analytics. What's important about our approach to columnar also is injecting multiple data sets whether that's from S3 or other competitive database solutions into the Couchbase engine so that that application is that much more sophisticated. So I think about the amount of data that's in the platform that the application can draw its sophistication from. That's really the power of that combination. You then extend Vector, which brings in AI intelligence to layer on top of that, this is the power of the Couchbase platform in action.

Speaker 11

Any commentary on early feedback from customers here?

Speaker 2

Yes. Look, I mean, we're in preview. I'd say it's exceeded our expectations. Specific commentary on the ease of rolling that out. You start to get into the complexity of things like ETL and moving data from one system to another.

Speaker 2

We can remove that complexity and converge all that capability into the Couchbase platform. Keep in mind, we're doing this with SQL plus plus and natural language. All of this is embedded in Capella IQ. So the capabilities that our developers have at their fingertips that they didn't have even 6 months ago, I think is being acknowledged in these previews and we expect that to continue as we move to GA.

Speaker 7

Thanks again for taking my

Speaker 11

questions and great quarter guys.

Speaker 7

Thank

Operator

you. There are no further questions at this time. I'll turn the floor back to Matt Cain for closing comments.

Speaker 2

Thanks, operator. And thanks to everyone for joining us today. We're thrilled with our performance and believe fiscal 2025 will be another historic year for Couchbase. We look forward to speaking with you all again soon. Thank you.

Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.

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Earnings Conference Call
Couchbase Q4 2024
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