Couchbase, Inc. (BASE) Earnings Call Transcript & Summary

Good morning. I'm Sanjit Singh, I'm part of the Morgan Stanley software research team. We are super excited to host Couchbase CFO, Greg Henry. Thank you so much, Greg, for joining the Spark Conference.

Yes. Thanks to Morgan Stanley for having us and for obviously leading our IPO.

Yes. And so Couchbase just completed its IPO. You're pretty successful. And before we get into the conversation on all things Couchbase and the opportunities, for important research disclosures, please go to www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley salesperson.

With all that out of the way, let's talk about Couchbase. My favorite end market in software, we would talk about this on the software team, is a database market. It's really big and not only is it really big, it's growing pretty fast, double digits. And I guess the context there is when you have a market that big, there's a lot of players, including all of the major public cloud providers. So with that as context, maybe give us a sense of what was the thesis on why Couchbase was founded. And what is it that it does better than some of the other players out there in database land?

Yes. So some history on Couchbase. I mean Couchbase was formed back in 2011. And it's when 2 companies came together. Kevin Efrusy, who's our lead partner from Accel who is the early investor, also was an investor with Facebook, obviously, and he saw what they were doing with data there. And he thought it would be really powerful to have a key value cash and a JSON document store database come together. He saw the sort of the future with having that multimodal capability. And so he basically incubated CouchOne from a CouchDB open source and then Membase from a Memcached open source project, and that's the formation of Couchbase. And it was always built to be a high-performing, highly scalable, enterprise-grade offering. And that's where he and the company feels will ultimately win the day and have really the largest profit pool in the database space.

That's great context. And you talked about being multimodal, which for guys not familiar with databases is the ability to handle multiple different things in terms of different applications and different use cases, all within a single database solution, the database engine. And so that's kind of the angle that Couchbase has taken. Can you talk a little bit about the customer base? Who are they? Is there any particular type of focus in terms of the types of apps you're building? And how do you think about the penetration rate and your opportunity within these customers?

Yes. So if I left everybody with one thing today, it's we are the modern database for enterprise applications. So we have been focused on serving the needs of the largest enterprises around the world and really supporting their Tier 0, Tier 1 applications, mission-critical applications that run their business where if Couchbase would go down, they couldn't book revenue effectively. And so that's where we've really been focused. We launched Couchbase Cloud, which I'm sure we'll talk about, gave us the ability to go a little bit further down market and become a little bit more developer-relevant, but we've been really focused on that sort of high end of the market, and we have a very nice customer base, but it's a highly concentrated, paying high ARR per customer. And I think we're really one of the highest in the industry.

Yes, it's certainly evident. I think it's nicely over 500 customers a day doing some pretty important stuff. A lot of the apps that you're standing behind are the customer-facing, revenue-generating apps. The next question is really around -- the short version of the question is really about how big is your TAM? But in the context of the conversation, having covered the database for the market, I think the question that I get is a little more granular in the sense of what are the apps that are being built today fundamentally? How that might be different from the past? And which databases are the right answer for which type of applications given all the different stuff that's being built? So maybe address the TAM question, but if you can sort of give us a sense of which types of apps are Couchbase the right answer for. And how much of the market do you think it potentially represents?

Yes. So IDC would say that our total addressable market for the database-- market will be $62 billion by 2024. So massive market. And we're still in the very early innings of really what's a generational shift because there really hasn't been much in terms of new database technologies really until the last 5 to 10 years. So it's still very, very early innings. Look, we're building applications that allow our customers get closer to their customers. So really focused on interactive-type data. So for example, at United Airlines, we have probably 20 to 25 applications running on Couchbase app. But the ones they're really focused on, customer engagement, right? So within the United app, it's things like where the plane coming from? Where is the next plane coming from? Ordering a wheelchair if you need one. Knowing the -- where your baggage is at all times, is it on the plane? Is it at the baggage claim? All that interactive information, that's really where we're focused on. And so that's what we think is a huge part of the TAM as people look to move away from transactional activity and get more closer to interactive activity and get better insights from their customer base.

Yes. That's just a great way to frame it. And I think it's -- you don't have to pull out the calculators, I understand that these more interactive apps are increasing as a percentage of what's getting built fundamentally.

That's where all the greenfield application activity is coming from. There will be the relational offload that will happen over time, but that's really the predominant new greenfield activity.

I want to touch on the relational opportunity as we get further in the conversation. But let's talk a little bit about growth, the pandemic, some of those trend lines that we've seen over the last 18 months. So the pandemic obviously has altered a lot of market dynamics in pretty unpredictable ways. For Couchbase, how does the pandemic impact the business in those early months? And what has been the trend lines as we gotten to -- got through the first half of 2021?

Yes. So for us, the COVID impact actually happened a little later than others. And it was just simply based on the renewal timing of our customer base. So we had about 15% of our ARR that was materially impacted, if you think about travel, entertainment in-person retail. And the renewals of those customers didn't really come up for the second half of last year. 80% of that cohort was in the second half of last year, 54% of it alone was in Q4. So we started seeing that impact later in the year. And on the road show, we sort of bifurcated that cohort versus the other part of the business. The other part of the business has been healthy, remaining around at 30% growth rate. This actual COVID cohort was actually growing closer to 40% before it got impacted. So it was actually a tailwind to the business. And it got to the point where it was basically flat to slightly down at this point this year because we've had cruise lines and airlines that just haven't been generating revenue, so they haven't been able to continue to expand. They've renewed healthy. We actually had our best renewal rate last year, they just couldn't expand. But we're getting to the point now where we're cycling back out of that. Like I said, it happened late last year. So Q4 is when we're going to start seeing things go the other direction. And we're already in meaningful conversation with these exact customers. Some of the cruise lines, for example, we've been enabling them to continue to do work without having to pay us for it, and we'll be able to monetize it this year. We're in the discussions right now, and that will be a growing part of the business going forward again.

Yes, that was going to be my follow-up question is like when does this 15% of the business that was growing 40% prepandemic and was flat to down. So we should think of Q4 as kind of the next sort of touch point for those customers to sort of get back to growing order capacity.

Correct.

And how do you think that sort of -- would that sort of start in Q4 and start to play out more materially in calendar '22? How do you feel those -- with that cohort, how much pent-up demand is in that cohort?

Yes. So I think we start going from flat to slightly down to start going positive. And I think it will take us -- just like it took us 12 months to sort of bottom out with that group, I think it's going to take us 12 months to get through that cycle again before we get back to hopefully being -- that being a tailwind for the business as a whole. But we're already in meaningful conversations and there is opportunity as early as even Q3 here, but we think, for sure, starting in Q4. Again, we're having discussions with cruise -- a couple of the cruise lines right now, and they're really getting ready to get back to continue to develop and build off Couchbase and create some technology that's going to help them get closer to their customers as that whole industry returns to normal.

That's pretty encouraging to see because it can be a pretty nice swing factor as you guys look to get back to that sustainable 20%, 25% growth. I think you guys were growing almost 30% ARR.

A year ago right now, we were growing 30% pre-COVID and then we're -- I'm sure we'll talk about this. We're excited about our managed offering that's coming that will also, we believe, be a nice tailwind for the business.

Maybe one more tactical question just coming off of your first quarter earnings is that, on the positive side, you signed your largest deal ever and landed a number of other sort of large deals. In terms of the timing of that, there was a little bit of the implementation of those deals. It looks like half got delayed, which impacted your rev rec and your billings. Can you walk us through some of those details? How should we think about this? And anything you'd like to call out in terms of those dynamics that you saw in your last quarter?

Yes. So we had 3 large deals last quarter. One was a new logo with a government agency in Asia Pacific. They were just prudent in terms of when they put their start date into the contract because, quite honestly, a lot of customers, they missed their production start dates. And so this customer is being prudent, so they put it at the end of the year. We had also 2 other existing large customers that expanded materially, one of which was, like we mentioned, the largest deal in company history. That will make that our second $5 million ARR customer at the end of the contract, but they also renewed at the same time. But the renewal for those is actually in the future, right, into early next year. And so what happens is when we book those, we -- their bookings, they go into RPO, they'll go into ARR because our ARR calculation does go out 12 months, but we can't start billing or rev rec-ing those deals until we get to those start dates in the future. So they're in the backlog, and they're going to get billed and rev rec-ed in the future, but there is a timing thing. We called it out this quarter and that's why we wanted to point to RPO as well because these kind of deals are always around. In fact, we have other deals of this nature happening right now. You just don't know when they're going to close, right? I mean it could be this quarter, it could be next, it could be Q1. So you just don't know the timing of some of these big deals. And we just wanted to call it out because these deals were larger and earlier than we typically experience. So that's why we called that out specifically.

Yes. Particularly thinking through some of these newer metrics in software, RPO versus some of the traditional metrics, revenue and billings, and trying to bridge those 3 is a pretty popular topic these days, and it's helpful to get that color. When we think about -- let's talk a little bit more about some of the product initiatives and some of the kind of secular drivers for growth for Couchbase. So Couchbase 7 got released this year. And it sounds like a pretty consequential release, particularly around the theme of relational migration. You guys announced a number of new features and new data structures. In terms of that relational migration opportunity, which frankly the industry has been talking about for quite some time, but it's sort of been a tough nut to crack. What's the prospect on that being an incremental driver for growth over the next 1 to 3 years?

Yes, we think it's huge. Again this is this generational disruption I talked about. That there's been this -- the majority of the database market sits on a relational technology today of some sort and is waiting to sort of get unlocked. That's why I was alluding to a lot of the business we're doing today has been greenfield, new applications to date, but we're -- we've been slowly, over the years, building towards this tipping point of when these applications on relational databases effectively no longer do what they need to do from a customer perspective. So a few things we've done. In Server 7, as you mentioned, we brought scopes and collections, which is a technology effectively to allow the mapping of a relational database to a nonrelational database to give sort of the road map of offloading. In the version before 6.5, we brought asset compliance in that transactional activity, right, which was really the essence of what the relational database did. So we're trying to effectively replicate all the feature functionality that you have in a relational database into our platform. And the thing we've done even a longer further ago, which we think is going to be a huge help going forward, is our query language is proprietary. And it's built where a query is off the NoSQL environment in Couchbase, but it uses the SQL language. So pretty much everybody in the world who speak SQL can come in, and there's a low barrier to entry. So we think just with that, the low barrier to entry, the asset, transactional compliance and now the mapping is just going to ease the way of us being able to offload that relational activity over the next -- I think it's even probably beyond 1 to 3 years, probably 5 to 10 years.

Yes. There's a long tail there, certainly. And that SQL point is a good point. I think that we sized this in an earlier report, I think, from last year that we -- there's around 12 million developers that know SQL. And so to give them something they already know, it certainly reduces the friction to adoption. Can you talk a little bit about the playbook behind the relational migration strategy? Like how do you go to market behind this? How do you get customers' comfort for doing it? Because my sense is that customers have been buying this as a project, but they're trying to do the cost benefit, whether this is going to make sense to do or not. And so how are you sort of -- how is the team sort of, from a go-to-market perspective, trying to get customers over the hurdle and start to kick off some of these projects?

Yes. So the first way we do is have a discussion about what the capabilities they'll be able to get from using Couchbase and using this NoSQL environment that they don't have today. We secondly talk about the TCO, right? So first of all, Couchbase is less expensive from a software perspective than the relational technologies. And we have a scale-out architecture so that you're not scaling the infrastructure at the same rate you are with database software spend. So there's multiple TCO angles. That said, we do believe that there are workloads that are fundamentally going to remain on relational databases for a long, long time, maybe forever. So it's really going in and saying, "Look, we're not trying to rip and replace all your relational. That's not what we're going after. We're going after the workloads and the use cases where you'll get true benefits, not only cost benefits, but performance, scalability and getting insights and data, right?" We have data technologies for -- we have real-time runtime analytics, for example. So we have customers that want to get these type of analytics. You cannot do that from a relational database. And so as an example, we've had -- we brought on Domino's, the pizza company, as a customer because they wanted the real-time analytics so that when certain events change in the world, like the example they gave us is when a sporting event, like a football game, goes into overtime or a hockey game goes into over time, that's their point to jump on their customers to send them promotions to actually encourage them to order. And without that real-time, runtime analytics, and knowing that the game is in overtime and all that, they can't do that. And so those technologies just don't exist on relational, and that's an example of a customer willing to migrate and build off of Couchbase to get closer to their customers to sort of -- to increase their revenue base.

I think, Keith and I were talking to some customers a couple of months ago. And I mean their point was we have a lot of stuff that was built on relational because relational is the only game in town, right? And so I mean tapping to your point is that there's some stuff where relational is absolutely the right answer and there's a bunch of stuff that was built on relational because that was the option, right?

If I can just bring the United example back in. So all those applications we're building on United, the one example I often use as an example here is the ticketing system, right? So United is probably a relational database, a legacy. It's been heavily invested. It does its job. And quite honestly, you and I really don't care if we get our ticket from a relational or a nonrelational system. So why would you change that? But all the interactive things about the baggage and the experience at the airport, that's really important to us these days.

Yes. Getting to a site that you got an upgrade or all that stuff.

Flight is delayed, do you want to change? You could push a button. I can change your flight for you. It's the experience.

The interactive experience nature of it. So let's talk about cloud because I think that's definitely going to be a growing part, a growing focus in terms of investors in the Couchbase story. So when you think about what Gartner says, I think they said 75% of database deployments will be in the cloud in just a couple of years. Can you walk us through like the timing? Couchbase Cloud, this first iteration that was launched in 2020, why did it take until 2020 to release a cloud offering? And then you're obviously going to -- we're heading down the path of a managed service offering, and we'll touch on that. But maybe just talk about like the path to get here.

Yes. So we were very focused on the largest enterprises. And so at that time -- first of all, Couchbase has always been built cloud-native, cloud-agnostic. So even though we've got this offering called Couchbase Cloud, the Couchbase Server that's sold today that's customer-managed is over 50% deployed in the public cloud. So all of it -- a lot -- the majority of it is in the cloud today. And you'll see next week, we have Couchbase Connect, our annual user customer conference, and there'll be a rebranding around this because there is a little confusion where people think that Couchbase Cloud is the first cloud technology we have, which is not the case. But basically, this has been a product-led company from its beginning, and the product was so good, not to be over -- but it sold itself. And back in about 2017, really early 2018, we realized we didn't have the right go-to-market wrapper, the enterprise go-to-market wrapper. And so we focused for the next year building that enterprise go-to-market around that because we felt that if we didn't have that, that we would be susceptible to some of these other database companies that you've seen that really have sputtered, if you will. And so that was where our focus was. And after we got through that, it could really sell what we had sort of on the truck, then we moved into cloud. So that's part of the reason why the timing plus the large enterprises that we were dealing with really weren't ready to be in a position where they could see where I want to go to a fully hosted offering and I'm going to give up the infrastructure and I'm going to give up the database. It's happening now, and that's why we've come to market with, as you mentioned, the first iteration, which is our in-VPC version of Couchbase Cloud.

Right. And so we got Couchbase Connect, which is your user conference coming up next week. And if you could sort of just give us a preview on moving to a managed cloud offering and why you're so excited about it. What sort of -- what can we expect, at least initially, in terms of a managed service offering?

Yes. So we have today -- Couchbase Cloud is a managed service offering, but it's an in-VPC. What that means is we actually manage the database that the customer still manages and owns the infrastructures. They open up in their virtual private client. They'll open it up and we'll go provision, deploy and take care of all the database activity. What we're going to announce next week is the fully hosted version of that. So it's the full, "we will own the infrastructure, we will own the database." The best analogy is, obviously, it's very much like Mongo Atlas. And so we have all flavors of whether the customer wants to manage it or not from a database perspective, whether they want to manage it or not from the infrastructure. And the reason why we went to this sort of middle model is a lot of our enterprises that we deal with, financial institutions like Morgan Stanley, they're not going to give us the infrastructure, right? They're going to continue to maintain and own the infrastructure, but they don't want to have the database management. So for the enterprise, that's really important. What the hosted version does is it unlocks the rest of the market for us and particularly with developers. It's going to make it much easier. We're going to have a free tier-hosted version of Couchbase Cloud, where you can come in and basically click a button and you're up and running. Today, that would be a -- you'd have to download our community version. You'd have to go put it on some of your infrastructure, wherever that is, and begin using it. And so from a developer perspective, they want the "one click, I want to go and run" and we're going to enable that. So it's going to allow us to come further down market. We're not trying to get -- we're not necessarily trying to replicate and have 30,000 customers paying us $15,000 a year, but it does allow us to go further down market and get closer to the developer. And we'll have -- for the first time, we'll have a really good understanding of who's using it, what they're doing with it. And so if we see 10 developers at Morgan Stanley playing with our free tier, okay, sales team go in and talk to Morgan Stanley. They're clearly doing something on Couchbase, and they might want to evolve that thinking. So top-of-funnel insights, all of that.

Great. I want to take a moment to see if there's any questions from the audience. You can just come up to the microphone to ask your question.

There's a whole slew of NoSQL databases out there and available to developers, which ones do you compete with most directly?

So the one -- when we talk about it, the ones we see most often in competitive situations is Mongo from a pure-play perspective, and then Amazon and Microsoft from a cloud-vendor perspective. And that's not to say we don't see others. These are the 3 we see most predominantly in the marketplace today and who we compete with.

Makes sense. Any other questions from the audience? If not, I have plenty more to go. So let's stick on what's coming back in terms of a fully managed SaaS offering, fully hosted SaaS offering. In terms of this, I guess, early stage, Stage 1 or Phase 1 of this offering, who do you expect to be the early adopters? Is it going to be kind of the existing enterprise base expanding? Are they going to be migrating? Is it about net new customers? Is it that developer community? Who do you think is going to be the first to sort of say, "This is what I've been waiting for. It's finally here." And that they're going to sign up with relatively quickly.

Yes. I mean I think we can see, quite honestly, all 3 of those groups being really interested, right? The developers are going to finally get the opportunity to have the easiest way to use and leverage Couchbase than they ever had. We've already been in market with Couchbase Cloud, it's just not the hosted offering, but we have customers existing today that are talking about migrating over because -- I was on a call with a customer the other day and was talking about Couchbase Cloud, and they basically said, "Yes. We're not in the business of managing databases. That's not what we do. I've got to keep a fleet of database administrators. I got to pay their increases every year. There's turnover. That's not what I want to do." And then I also think it's going to open up just, from a go-to-market perspective, we've been selling to the enterprises. We've been a direct sales motion, this sort of heavier, more expensive sell-to model. And this is just going to create the self-serve, buy-from model, and it's going to give us greater sales efficiency, we think greater new logo acquisition. And the example, I mean, I've been giving what I've been meeting investors this week is, "Look, we're in market with the in-VPC. We had a customer this year that bought early in the year a 6-figure deal, 40-day sales cycle as compared to a 9- to 12-month typical sales cycle." They bought 2x subsequently about the same level of purchase. The 2 subsequent buys were literally frictionless, right, no involvement from Couchbase. So this is exactly the type of opportunity. I mean, we've seen with others with whether it's MongoDB Atlas, whether it's Snowflake. These consumption models, they tend to buy and buy more frequently and more often. And so we'll get that motion. And then lastly I would add is that today, when we sell Couchbase and it's customer-managed, I might sell you 100 nodes that's Couchbase, but we really don't have telemetry to know for -- if you're using 100 or using 120 or 150. And so with Couchbase Cloud, that all goes away. You cannot overuse without paying for it. And we sort of "catch" some of our customers that are overdeploying, and we have to go try to recapture some of that value. But some of that value that's leaked from being an open-source model is now no longer going to be available to the customer base. And so as we migrate over time, not only will we grow between the customer-managed to the Couchbase-managed, but there will no longer be the sort of free usage that's going on out there in the market.

That's a really interesting point. Help us about the developer community because you hit on multiple points in this conversation already and seems like it's going to be a focus for the company. What's the strategy and how much investment will it take to better penetrate the developer community? They're known for being experimental, trying different things. They like new technologies, sometimes they're fickle. Developing that tight relationship with the community. Vendors that have done it have seen some really good rewards. And there's a lot of people that have been not successful. So the essence of the question is like how much investment will it take to really form a solid relationship with these groups of users?

Yes. Look, we -- so let me start with -- we think there's 3 key personas in a database-buying environment. The sort of the C-suite, CIO, CTO, whatever, then there's the enterprise architect and then there's a developer. And they're all -- all of them are important. We've been more focused on the top 2 and really the enterprise architect because for where we've been going for mission-critical, high scalable, high-performing applications, they are decision makers and they hold the budget, right? And so if you think about like Amadeus, we run their booking engine off of Couchbase, it's not a developer making that decision. That said, developers, as you point out, are influencers in this. And you want to have mindshare with the developer. So the things we've been doing beyond just having this hosted free-tier coming, which we think is going to be huge, is we hired -- about 2 years ago, we hired a marketing leader from Neo4j who had built the community there. So we have a marketing developer-focused team. We actually just hired a guy who had been running the community at Docker as well to join the team. So those 2 from a marketing perspective. We hired a customer of ours probably earlier this year and put him inside of our core engineering team to bring the developer mindset to the engineering -- the core engineering development platform, and he's building a team around that. And then lastly, from a go-to-market, we brought in a guy from Microsoft, who have been helping them grow their Azure business over the last -- he'd been there for 20 years. He's our now cloud sales overlay, and so he's all focused on cloud. And we've taken the whole inside team and put it under him to run. Now it may not seem developer-focused, but that's where we're going to look at sort of, again, going the downmarket area, and that's where we will run into more developers on that. So we're trying to come at it from a marketing perspective and engineering perspective and a go-to-market perspective and sales perspective.

And bringing that developer mindset and that developer DNA into the organization is a really interesting angle. And so as you think about these -- this multifaceted approach that you're going with, how -- what sort of the time line do you think it will take to start showing material traction with this developer initiatives more broadly?

Look, I think we hope to see that traction kick in over the next 12 months. And again, I think the biggest driver of that will be this free tier-hosted version where developers can get in there and use it. And I think developers have been hearing about Couchbase. I just don't think that they've had the opportunity to engage with Couchbase in the same way because we haven't made it as easy as others have in terms of allowing them to use and play with the tool. We've had -- so when we brought this engineering leader in to join the teams focused on developer, the first thing they did is they put a developer playground out on couchbase.com. And it's meant to sort of simulate what you're going to get from a free tier-hosted version. We've seen a lot of activity around that. So we just think that's going to be a driver. We should start seeing some really healthy pick up here in the next 12 months from a developer perspective.

That's great. I'm going to ask a CFO question.

Okay. Yes. Sure.

It's been all product questions. I'm talking to the Chief Product Officer versus the CFO.

I do have to remind people, I'm a CPA and I don't have an engineering degree.

Exactly. You handled them very well. So I mean, the classic question as you think about the balance between growth and margins, particularly in the database market, which I think is like a little structurally different in terms of an investment profile if you have ambitions in the market and then some of the other end markets and software. With that said, do you think is there like a revenue threshold or a time line to get to operating profitability? And how -- what's the philosophy between that balance between growth and profitability?

Yes. So we haven't -- let me step back. The reason why we love this market so much is if you look at Oracle as a predominant database player, they have something like 35% operating margins, and they've been able to sustain that for years and years. And that's why we love the database space because it's sticky and, long term, profitable. That said, we haven't really given guidance on like timing of profitability. I think the plan is start heading towards that. But if we still see the market growing and being healthy, we're going to invest into that. And we obviously look at Mongo, who's a few years ahead of us in terms of size and scale, and even to date at $700 million $800 million run rate, they're still not profitable. There's a reason because it is a generational shift in database spend and there's going to be a handful of players that are going to ultimately succeed in this market. And so investing into it is important. We come from a position of strength from a gross margin perspective. So last quarter, we ended with 88% gross margins. So we're going to be willing to trade off some of that gross margin, especially to get some of the growth, and we'll see that come through with Couchbase Cloud because it will be dilutive, but we also believe it's going to be a growth driver for us for really a number of years.

So great. I think it's a perfect place to stop. Thank you so much for your time, Greg.

Awesome. Thanks again.

Thank you.

Appreciate it.