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

Welcome to our next session. It's nice to have the team from Couchbase in person. It's nice to be back in that kind of setting. You guys delivered really solid results this week. Maybe if you kind of get everyone on the same page, like can you just kind of go through some of the highlights from your perspective?

Well, I appreciate you starting off with that. I want to focus on sort of the qualitative operational progress. Maybe you hit a few highlights on the financials and then I'll pile on. Go ahead.

Yes. Look, so we delivered a really strong quarter. We beat across all key metrics. ARR, 28% constant-currency growth, really, really strong on the bottom line, delivering a $5 million beat and flowing that to our next quarter and full year raise. So we feel good that we've got good top line momentum and we're being prudent with our spend these days and getting leverage in the model and that's going to be some of our themes we're going to continue as we go into fiscal '24.

So super exciting results, Raimo. But as I'd reflect on the quarter, obviously, proud to have delivered those. But what really gets me excited is the progress we've made operationally. And we're an enterprise database that is quickly becoming the best enterprise cloud database. And so when I think about what's going to drive that transformation, how are we innovating with our Capella offering, driving innovation towards our managed service and at the same time, are we making progress on the go-to-market side to make the adjustments to -- you really make that a meaningful part of our business and there were a lot of highlights operationally that go along with the results. So we feel very good about the quarter on balance.

If you think and I wanted to go kind of to those kind of more product and product evolution and company evolution areas. Just one question for Greg before I go there. Talk a little bit about kind of guidance comments that you gave for Q4, then a little bit about next year as well. Like I know you're a fairly conservative guy. So it's kind of -- let's put it into context. But like talk a little bit about like how you're kind of setting the company up for the rest of the year?

Yes. So for the rest of the year, like I said, we flowed through most of the revenue beat and all of the op loss fee. We flowed that all through. So you'll see that come through on the guide. And again, we feel like we're set up well. Obviously, ARR, we reiterated our guidance on a constant-currency basis. The reason for that is with what's going on around the world today, we know that the first thing that we're going to see impact to is ARR, less on the revenue and the op loss side. So we want to just be a little bit more prudent on that as we set up for the rest of the year. So we still feel good about where we're at. And again, our view is we set up our guidance to, at a minimum, meet it, if not exceed it. And I think we've now 6 quarters under our belt as a public company, kind of seen the track record that we're building. If we think about for fiscal '24, although we didn't give a guidance and we would not normally have done it so at this time, we did sort of try to give some thematic views on how we're thinking about next year, which is 4 key areas, which is, 1 is continued top line growth, which we've seen this year, increased the Capella mix across all our metrics. We're seeing good demand on Capella, and that's going to continue to grow next year. Go-to-market or sales and marketing efficiency, again, we've seen good signs of that improving this year, and we're going to continue to drive that next year and then getting overall leverage in the model. And that's really the sort of the themes and focus. And it started now and we'll continue to see it go into next year.

And Matt, like the main focus, obviously, you're like -- at least from us, from an investor side, is and I'm sure for you as well as like on Capella. Talk a little bit about the evolution, like for Capella from like when the idea came out was like, look, the world is going to the cloud, I need a proper cloud product to where we are today?

Yes. So maybe a little bit of historical context before we get into that. I mean what excited me when I joined the company 5.5 years ago was the underlying architectural advantages that this company was built on. And so if you think about where we are in the world, developers want a multi-mobile database. They want to be able to write applications and language as they know. You need to have highly distributed, highly performing applications that can run in cloud out to the edge. I want to be able to do relational offload, I want to manage structured and unstructured information. And what I saw the potential of is let's build the best database platform for enterprises. And we've been very carefully and very strategically building out that platform to serve mission-critical applications in the enterprise. What's really powerful with Capella is we now say, not only do you have all those database capabilities, but we're going to allow you to just focus on writing applications and we're going to run that on your behalf. And so unlike some other solutions, we took the full power of Couchbase from cloud to the edge and we're now enabling enterprises to let us run that service with our Capella managed offering. And so when developers come in, we can give them the confidence that they not only get all those tools, but they have a solution that scales and performs better than anything else. And they're focused on writing applications to transform their business. We're handling the sizing, running the database. And so this opens an aperture of us to developers that need that way of consuming the technology both in net new customers, allows us to go down market, opens up use cases with existing customers, but never sort of losing the value proposition of that platform that's been so important for us over the duration of the company's history.

Yes. I mean it's funny, it's interesting, it's like the conversations we have with guys and the field is like, like Couchbase data were super powerful, very good solution, but slightly on the tough side to work with. Capella and kind of all the work you do in front-end should kind of solve better.

Yes. So I think whenever I think of an as-a-service, there's capabilities and consumption. And I think certain companies get really focused on ability to consume smooth AI, simple documentation, and that's really important. I'd say Couchbase has built the capability first. So let's solve the hardest problems first. How do you handle distributed applications? How are you moving large data volumes over different points of the network topology. We really focused on capability knowing full well that we could get the consumption. So how do I deploy a cluster really easily? How am I integrating into the developer ecosystem of tools. And on a relative basis, that hasn't been something that's been an area of strength but we quite consciously didn't give up on building out that capabilities too soon and now we're layering on the ease of consumption. What's really powerful for us though is we can go to developers and say, hey, not only is it now easy to use, but you don't have to worry about running out of scale like you would with other solutions because you have that performance and agility for mission-critical applications and the demands of those mission-critical applications only continue to go up, more data volume, higher expectations of end users and our personal and professional lives. And so that marrying up that best enterprise capability with leading consumption and ease of use, that value proposition we're really excited about.

Yes. Okay. Okay, makes sense. And then the -- what do you see in terms of like early signs of adoption like customer interest, et cetera?

Yes. Look, I think it's going to transform all aspects of our business. We say that it's dominating customer conversations. People, particularly in a resource-constrained environment, how am I doing more with less. I bet you'd be hard-pressed to find any company that's attending this that is giving up on digital transformation as part of their strategy. How are they using technology to get closer to their customers or make their operations more efficient. At the same time, they don't have as many people as they may have thought to go write those applications. So how do you provide a tool that can do all that. With Capella, we're engaging a new set of customers that says, wow, if you've got that and you can run it for me, I can get up and running and get productive and bet on a platform that it can have for some time, really powerful conversation. We're seeing that in top of funnel growth. We see faster sales cycles because people are just able to move through the consideration process that much faster. With large enterprises, we can talk to them about migrating. Is it net new applications that you want to deploy maybe in a different buying center where you've got different developers, maybe that application is more fit-for-purpose for our managed service. And then we have some customers are saying, look, I want to move the entire estate over to Capella and the fact that you have feature parity with the solution that customers would manage with Capella, again, that's that strategy playing out. So I think it's going to be absolutely material throughout the customer journey, awareness, consideration, preference, all the way through deployment and expansion.

And one of the other aspects of the cloud is because you manage it is like you had, so you can kind of -- often -- well, at least often you see scale it down and you may kind of offer like very, very easy entry points into the solution that you have like a more trial situation, trial and error and people can work with it without kind of overpaying, overcommitting. Is that something that is on the road map for you as well?

No question. We're having those conversations today and so first of all, we have a free trial and we can engage with customers up to some of our largest to say, look, here's what's happening with your environment. One of the signs to me that we are successfully executing on the transformation is that we're able to now go to customers and saying, you're actually over deployed. You're consuming faster than we think you want to. Let us help you right-size the service because now we're aligning to the best interest of the customer. So without question, that's been one of our design points. I think related to that is being able to feed on the telemetry that you have with an as-a-service offering. We're an open source company, which comes with it a lot of benefits. One of the challenges, we always -- we don't always know when people are using our technology, which features, where might they be getting stuck. With Capella, everything changes. I mean we can literally do analysis on a particular point of the UI, where are people getting stuck. Well, let's change that up or if somebody is in production and they're running into a particular issue, that's part of the value proposition of the service. So massive impact in how we build the product, how we engage customers, how customers view us as a strategic partner. All these are pretty transformational components.

We're trying to make it as easy as possible to get customers using Capella. So we've got these starter packs too that are certain bundles of credits and services to allow them to get up and running as fast as possible. We're doing things for existing customers and even our CE or free using customers, which is we call dual use rights where they can continue to use the self-managed nodes while they migrate over to the Capella consumption model. So we're just trying to make the on-ramp as easy as possible.

And how do you -- Greg, one more for you, like how do you price Capella? Like is that like a -- how do you price the consumption? Is it like certain clusters like compute and storage or related to just compute time? Like how do you kind of price this?

Yes, we have 2 models. We have an on-demand sort of pay-as-you-go, and we have an annual credit model. And then for the annual credit model, you buy a certain number of credits. You use those until they're gone, whatever time period. And basically, you're using it based on the infrastructure and compute that you're going through with your application. We obviously over time can moderate how -- the pace at which some of that is going. So we have a lot of controls, a lot of insights to make sure that our teams are monitoring, for example, like consumption, are you on the pro rata consumption line? Or are you ahead of it? Are you below it? If you're below it, how do we send people in to help you get going. If you're ahead of it, we want to alert you to make sure that you understand that you're running above a pro rata that you're going to have to buy sooner to make sure they're not over consuming. So we're using all that intelligence we can get from the new offering.

Yes. Okay. And then the -- what are you seeing at the moment out of your customer base in terms of like is Capella getting used as like all the new projects go there? Or do you see kind of conversations about migrations? And then on the migration side, are you kind of pushing for that yet? Or is that like a bit too early?

So I think sort of broad spectrum. We have existing customers that are saying, hey, I'm happy with my current estate. We've got an application that's stable. We'll continue to grow capacity, but we don't yet have a compelling event to ship that deployment model. However, I want to start with new applications and I want to run those on Capella. All the way to the other extreme, where they're saying I want to take my entire estate of customer managed Couchbase and move it into Capella. We're obviously advocating for Capella because of the value proposition and really focused on TCO. But I think what we're careful to do is not push 1 consumption model over the other. We try to align with customer incentives. And look, the reality is, if you look at the market of databases, the fastest-growing component is as-a-service cloud solutions. And so I think our objective is to align with customers that are ready to do it rather than try to artificially push migration. In fact, our definition with our go-to-market teams on migration is if a customer is 100% running their own Couchbase instance, any application, if they move a single application or have some Capella, we're considering that a migration. Again, it's part of the DNA of don't artificially try to drive the entire thing if they're not ready, get them using the solution. People love Couchbase when they use it. Capella is an easy way to show that value proposition, and that's how we're thinking about it.

And you touched on that already a little bit, and I want to go deeper. Like how do you think about the operational changes in terms of like now you have a cloud solution. Like how do you incentivize your sales force? How do you make sure like they sell Capella, but like if it's not right for the client, you then can't create friction because you want to -- like he was probably better served themselves or like how do you kind of solve that?

So I think more fundamentally, before we get into the field side, what we talk about at Couchbase is we're moving from a product company to a service company. So first and foremost, let's insert into our DNA that we are responsible for delivering a service and how we need to support customers, engage with them and the time horizon of deployments and spent, we just need to think about that differently. If you're a product company, when you're initially landing a customer, a lot of the stress is, well, let's make that initial land as big as possible. In a service environment, let's just get going with the small solution, we'll get that. So I think we've been very thoughtful with our field compensation plans to make sure that they're aligned on the potential of Capella and they're rewarded for, a Capella dollar is more lucrative to them than a non-Capella dollar. But if you think about the value proposition, we start with Couchbase and then it's as-a-service model. If a company is not ready for as-a-service, it's not like we're still selling Couchbase. And so I think our field teams are benefiting from the fact that you have feature parity between the 2 solutions. And they're actually pretty excited, right? Because now they have an as-a-service solution, which is the consumption model that most people want. So we've got them very incented to sell. It's aligned to the market and sort of the backstop, if those 2 -- if supply and demand aren't ready to meet there, the alternative is still really good.

And the -- I mean, it is still -- it's still a relatively young service for you like -- and what you see in terms of industry and industry adoption is that they kind of go like, okay, this looks really interesting, you try it out. Like where are we on the reference customer base and being able to kind of show like, okay, this guy is using it at scale, I don't know why you're holding on?

I mean we've got some significant deployments and those customers are more than willing to speak. So I don't think we have a shortage of that. Look, the pipeline of Capella is growing where we would have expected and wanted it to be and we had high expectations. So new opportunities are emerging. We've seen some deal cycles that are incredibly compressed. Greg mentioned our community addition set of deployments. We've seen customers that have now decided, hey, I was running the free version, managing them by myself, I want to move into Capella because of what's it. So I think we're going to have no shortage of reference customers that are willing to talk about Couchbase and the additional benefits from Capella.

Okay. Last question on Capella, Greg, like since it is so important and it will be important for investors because like if you come out as a cloud database, that's kind of there in the future is as well. Where are we on that disclosure in terms of numbers? Like I know at the moment it's going to be small, it's going to probably, all its subscriptions, it's not going to be overly lumpy, but it's still small. How do you think about disclosing kind of numbers there? And yes, maybe I'll leave it there.

Well, we obviously fully intend to disclose the Capella results. At a certain point, we've talked about waiting to look at what we believe is a material part of the business. just because in the early days, it can just be a little noisy as we get going. But when we do, we'll clearly come out with customer count, revenue, ARR, the metrics that clearly, the investors want to see and we know that's really important, and it's going to help us as we grow as a company, it's going to help the valuation of the company because people want to build, see and say, hey, look, this is how it's really doing. I can model it out now and see a trend pattern versus others who have done it before. So I would say that we got a question other day from an investor that said, hey, is there any chance that you don't disclose Capella metrics next year and essentially is -- no, I mean we'll get there next year. It's just a matter of when and every 90 days, we get closer. So it's absolutely coming.

And are you in the systems already like -- well, some of the times, you talked with people that are like, well, to me, it doesn't matter. It's a dollar of revenue. But like are you in the systems already set up to kind of be able to do that? Just do you need to get understands like the quarterly cadence, et cetera?

The systems to report?

Yes, to report, yes, yes.

We have it. We can see it. We have it. We know what the reporting is, and we watch that very, very closely as well. And so we have certain internal targets in terms of what percentage penetration we want to have into our ARR base and our customer base for Capella. So we're absolutely looking at that and driving the field to that as well.

Yes. Okay. Perfect. And then I think that's a Capella question actually, so I apologize. I like how are the hyperscalers like kind of working with you now? Like is it just like -- is it just, oh, there's another database that I can host or like how excited it will be about that?

Dramatic shift.

Great. That's nice, yes.

So Couchbase back to the core architecture is a cloud-native database. We've run in all the hyperscalers. You can move in, in-between active active, active passive. But until we've had the as-a-service offering, we haven't felt the energy that we're now experiencing dramatic shift in from AWS and the other providers. As a matter of fact, a couple of weeks ago, we announced a strategic collaboration agreement with AWS. And if you look at the other vendors that they've done that with, these are very large, very relevant infrastructure companies. I think that speaks to the way in which they're seeing Couchbase and how additive it can be to their solution set, which is driven by large enterprises. And so Capella is absolutely a game changer with respect to those relationships. We can't publicly disclose the exact terms, but it's joint go-to-market market development funds, commitments to technical integration, I mean, the level at which we're engaging down to an account level. And actually, AWS views us potentially is bringing net new logos to them, right? And so we're really excited about what that relationship is -- has in front of us. And Capella is the thing that's really taking that to the next level.

And on that note, like it's more a simple investor question because they will go like, oh, look, AWS has DynamoDB and then they had like DocumentDB. If you think about the AWS helping and working with you, telling you, is there kind of from their perspective, a much better understanding, like there are some use cases for DynamoDB. Like if you want to very easy one but Couchbase is so much more powerful. And so for most of the time, I kind of work with you guys.

Yes. I think there's an understanding. And I think the way -- I was talking to a sales leader at AWS. And he said, look, if you think about one of my reps in a territory, even if they're focused in the data management space, we have 40 different services in our portfolio, different databases, different modalities, analytics. He's like -- I mean, to try to get up to speed on 5 or 6 services, there are 40 services like that's pretty. So I think AWS has done a really good job as are the other cloud providers on aligning to what customers want. As soon as AWS as a whole understands the value proposition we can bring and we do that type of agreement, well, then their field teams are very incented to draw down EDP and other commitments and ISVs like Couchbase can really help them with that. And so I think the incentives are very aligned. It's our job to ensure that our product is competitively differentiated from Dynamo and we do that every single day, and we've got multi-cloud hybrid deployments, I mean there's a whole bunch of things that we do that make our value proposition different and we think better in a lot of cases. But I think from a commercial perspective, that business model is pretty well ironed out and it's a great collaboration. So we are not worried about the, hey, we engage with AWS, and they move us out to push Dynamo, their incentive structure and behavior that they've proven I think is well beyond that.

And I started our conversation with like talking a little bit about Q4 and end demand and stuff like that. How do you think this -- Capella allows you to kind of adopt much more easily, you can [indiscernible], et cetera. In this current environment, like how do you -- like what do you see out there? And like how do you kind of then position like Capella as well in that respect?

Well, I think current environment, so people are going to be more disciplined on spend, right, making sure that projects are truly strategic. I mean, if Greg and I are managing our own business, we're asking these very questions, which our customers are going to ask, right? So are we aligned to the most important strategic priorities? I think digital transformation is still at the top of people's list. They have to be building next-generation applications. Okay, well, now why Couchbase over other things. Well, we get into what our database can do. But one of the things that has been relevant for Couchbase for so long is our value proposition on TCO. We can do more things in our database than stacking up a couple of vendors combined. Well, if I can displace multiple database solutions and put Couchbase in and now I have an as-a-service offering, we're now enhancing the amount of TCO that we provide. And so I think with Capella, we're able to articulate that story, free up resources, more developer productivity, go back to one of the things that's key to our solution were a SQL interface database, well, now I've got a whole bunch of developers that I can free up, do the work that I need. So I mean we have so many attack points on doing more with less productivity, better TCO. I think that's really natural for us. And Capella only enhances if not accelerates that part of our value prop.

Okay. Makes sense.

That's why these trials and starter packs are so valuable because it's the easiest way even if you're trying to just step your way into it without making any kind of big commitment. It's just really important, which we didn't -- quite honestly, we didn't have before Capella.

Yes, yes. Yes. Perfect. Yes. Makes sense. Last couple of minutes, I want to talk on -- speak on margins a little bit. Greg, like so far this year, you've been outperforming on operating margins. Like can you talk a little bit about the drivers there?

Yes, I think -- well, again, I think we've been outperforming on the top line, which obviously helps. And then I think we've come into the year knowing that we're going to have to have some more cost discipline and efficiency, and we've been delivering that. We've also -- we talked about on the call, we had a benefit as everybody has from foreign exchange this year. And then we also started doing some software capitalization of Capella this year, we're required to do that. And so there's some benefit that we got through that. But really, it's been around thinking about the efficiency of the model and trying to build leverage. And that's why when we talk about fiscal '24, we want to continue that pattern and continue to demonstrate that.

It was interesting in the conversations I had earlier today, it came up quite often actually from CFOs, this whole notion of like cost of capital is higher, which basically means for any investments I'm doing, I need thinking about ROI slightly differently. Has that -- have you started changing kind of that notion already in terms of like, okay, where do I invest, how much do I invest in certain areas?

Absolutely. I mean we started earlier this year because we started seeing things happening and we want to make sure we were ahead of it. Look, we've never been a company that's gotten way out over our skis to in terms of hiring a bunch of headcount and trying way ahead of things. So we haven't had to make some sort of big dramatic pullback. And if you just look at our headcount since Matt and I have been there sort of been moving along nicely to try to grow the business, but not doing anything. So that's absolutely part of it, but we've also always had pretty good discipline. And Matt and I, obviously, through COVID and previously, we've got a couple of other what we call sort of storms, if you will, that we've had to navigate through. So we've had to do this before. So this is not something that's new and our background sort of when to being able to execute on this.

And if you -- I mean, if you think about it, the -- if you go into next year, there's a lot more talent available and that comes from kind of places where maybe historically they wouldn't have come to you. Like how do you think about that kind of using this time as well as a kind of turning point?

We think about it all the time. And I use a term often used in sports, wins above replacement. And any time we've got talent out there that can make Couchbase that much better, that's a good business decision for us. I think Couchbase has traditionally been a little bit in the middle. On the one hand, you have big, large tech cloud providers, Facebook, Apple, and you may say, well, wait a minute, how is that applicable to Couchbase. Well, the sophistication of our platform means that we need to have engineers that are as relevant there as they are at Couchbase. So those have been kind of safe havens. On the other extreme, you've got the start-up community, which has been a pretty good place to be. And we were sort of in the middle. The fact that both of those are being dislocated are relative attractiveness for people coming in has gone way up. And I think we can feel that in the people we're hiring. We're having conversations with talent that we realistically wouldn't have been able to have 12 or 18 months ago. So it's a big dynamic. We're going to be really prudent about where we make those bets and sort of balance the realities of the current environment, which we're going to continue to obsess over. But also keep in mind, this is a $60 billion market that's going to go through a generational in transformation and we've got an opportunity to be a leader.

Yes. I mean I see our time is up. So that was also a very good closing statement. Greg, thanks for joining us again.

All right. Thank you for having us.

Thank you. It's pretty excited to see. Thank you.

Thank you.