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

All right. Welcome to the afternoon session, day 4, the Morgan Stanley TMT Conference. We are pleased to have the management team from Couchbase, CEO, Matt Cain; and CFO, Greg Henry. Thank you, Matt and Greg for joining us once more at the TMT Conference.

Great to be here.

Awesome. Let's continue. Let's get to the disclosures, and we'll start off the conversation. For more important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. For any questions, please reach out to your Morgan Stanley sales representative.

Matt, maybe to start off the conversation, just picking up some of the themes on the earnings call, fiscal year '23 was a pretty successful year across both growth and product. ARR came in at sort of 24% constant currency. Can you give us a sense of what particular -- were there any sort of themes in terms of which market segments, customer verticals, help drive that growth. And to the extent you're seeing any particular market segments being more cautious, any sort of patterns in the data that you saw in Q4?

Well, first, Sanjit, we were excited about Q4 and the end of the fiscal year. I think throughout the year, we talked about Couchbase being a story of acceleration -- accelerating growth, and we are proud to talk about accelerating leverage in the business model. We believe we're still in the very early innings of a generational market transition and all things database, really driven by digital transformation and the use of modern applications to change the way we live our lives and how we work. And at Couchbase, we're very proud to participate in that. I think if I reflect one the fiscal year those themes really came true. I think people are looking for a database for mission-critical applications with scale and performance features from cloud to the edge and that really aligns very well with our value proposition, where we've worked so hard to architect. When I think about digital transformation, it's understanding the customer, bringing massive amounts of goods and services to a lot of different people doing that with real-time experiences and highly interactive applications. And that's really what we try to do and what we put into our platform. So there is no one single vertical where that applies. I mean everything from next-gen telco to healthcare to financial services to travel and entertainment, we have a platform that has applicability across those use cases because each one of those companies are striving to do that with their applications. Certainly, macro is a topic [ to Azure ], and we need to be to articulate the value proposition with strong total cost of ownership benefits and allow people to think about investing in Couchbase as a modern platform for the long term. So there's certainly dynamics that we need to be aware of. But by and large, we're believers in what we're building. It's aligned to digital transformation. We're proud to support our customers and again, reflect on a very productive year.

Yes. It's a great overview. And then, Greg, maybe for you. In terms of the outlook, you guided revenue 11% to 13% for next year, ARR growth in the range of 16% to 19%. Can you walk us through the assumptions that underpin that look because it does represent a deceleration versus the year you just completed.

Yes. Yes. Thanks, Sanjit. So we did -- that's where we guided to. I think the one theme or assumption we make is that the macro persists or, in fact, it's worse. And the impact or outcome of that would be things like lack of sales productivity, not having the Capella transitions from the installed base because we expect net retention rates flat to down. So those are the assumptions -- those are the impacts of that assumption, and that's what we've baked in, which was an elevated level of prudence versus what we had this year. And I'd say, if I think back a year ago, things actually worsened during the year. And so we just want to be in a position where we can at a minimum meet if not beat our guidance. So that's how we went to set it up. I will tell you that coming out of Q4, even though we saw macro impact, some of the things I stated that we're in the guidance that we're not seeing those today per se. And that's why I think if you look at our Q1 guidance, there's a little bit more confidence there. But we know that things deteriorated last year as the year progressed, and we just don't want to be in a position where if that happens that we're not able to deliver on the guidance.

Especially this -- particularly early start to the early stage of the year. That makes a ton of sense. One of the questions I've been getting over e-mail since the result is just the spread between ARR growth and total revenue growth. We've talked about some of these dynamics before, but maybe just sort of remind us of what's sort of driving that for next year?

Yes, there's a couple of things that are driving it that are even maybe different than they were in the prior year. So one is we had an outperformance on our services this year. We grew 64%. If you just looked at the trajectory versus coming off the last couple of years, it was just an outsized year. We had a nice backlog build and we had a nice demand for service delivery. So we overperformed there. That was a headwind last -- tailwind last year, it's going to become a headwind as we go into fiscal '24. We're not going to be able to repeat that. And so I would say that the services business will actually be down year-over-year, but in line with how we've been thinking about it over the multiyear period. So that's one. And then two, because obviously, services is in revenue, not an ARR. And then 2 is, as you think about as Capella comes online, we just talked about changing the way we do the rev rec, so that Capella will be on pure consumption basis. And if you think about new customers or migrating customers, the ramp of consumption is fairly delayed. Whereas if you sign a deal immediately. The way we do ARR, it goes into the ARR at the full level for the first year and then move to consumption a year later. So those are some of the reasons I think, [indiscernible] through getting that delta. We remind people that ARR for us is what we believe the better measure of the performance of the business and what's happening within the business in the more near term.

That makes lot of sense. Let's talk a bit before we get into -- I want to -- conversation with Matt around how Couchbase is going to win in a tougher budget environment. But on the op margin side, too, you showed some nice upside in Q4 and for the full year. And then when your outlook was also sort of better -- still unprofitable, but sort of give us through what's -- from an investment perspective, where are you sort of continuing to invest, double down? And what are the areas you're looking to pull back or get more efficient on?

Yes. So I appreciate that, and we do feel really good about how we close the year. And I think it was a continuation, but beginning of some real good efficiency and sort of moving towards profitability. And we have every intention in terms of continuing to be deliver more efficiency and move to profitability and free cash flow positivity, not in fiscal '24, but you'll see us continue to progress there. So look, we're still making investments in our go-to-market. I'll let Matt talk a little bit more about that. We've been very clear about making investments in Capella because we believe that's the growth engine of the future. There's clearly more technologies coming along the lines of serverless and other things that will absolutely be drivers for us as well. I think when we look across the business as we got into this macro environment, there are just areas where we have duplications or redundancies that we think we can get after. And we started to do that. We talked about a 5% optimization that we did in the end of the year. And we think there's a lot more. I mean we just have things -- like in my organization, I had 2 IT leaders, we didn't need 2 IT leaders, and we're consolidating down to one. And so across the organization, we're looking at that. We're looking at the software purchases we make, right, and the tools we use and are we really utilizing the full ability? And are there other areas where we also have software redundancies. So we're just looking literally across everything in the business. Matt, I don't know if you want to follow up on the...

Look, I think it's about balance and being precious with our resource allocation but also being mindful that this is a generational market opportunity. We still think we're in the very early innings of major disruption on all things databases, and we're sitting on the right side of that. A year ago, I brought in our current Head of Engineering Gopi and the transformation that he's driving in our engineering team and a cloud focus driving things with Capella, but taking advantage of our platform and the capabilities that enterprises depend on, we need to continue to innovate. Huw has been in the role now for several quarters. We're making great operational improvements in how we go to market across sales and marketing and business development, but we still want to grow. And so I think we're going to be very responsible on how we strike that balance. What gives me great confidence is we have the leadership team in place that have been able to strike these balances at previous points of their career. So how do we pursue our ambitions of growth and technology disruption, but not be afraid to find efficiencies as we do so. We're playing long ball here, and we see a massive opportunity, but we also want to do right by our investors and get to efficiency. So I think that's going to be a big narrative for us as we talked about in the call, but sort of on an inflection point of growth and efficiency this year.

Can you just speak to a little bit, just as a follow-up, to your plans for quota-carrying capacity next year. It's been a focus area for the last couple of years. Is that going to be a continued area investment going into next year?

Yes, we study that very hard. And it reminds me how much fun I had when I was the interim CRO for a year. But we have a lot of pride in our highly sophisticated, highly instrumented enterprise go-to-market model. We know exactly where we are at any given point on how many quota carriers, how many are ramped. We have a capacity plan that gets us to the upside of our forecast and then we can move that in any direction. I think a lot of companies think about capacity as in, do I have enough reps? Are they ramped or unramped? There's a lot of nuance in between. What is the level of enablement, how sophisticated are your systems and tools, what kind of operational rigor do you have in place to get the most out of reps? What kind of retention are you seeing? What is the state of your sales leadership and the effectiveness there? So not only do I think we are well covered in term of sales capacity, but I think those other things that make the engine more effective are better than they've ever been at Couchbase. You then layer on the efficiency of Capella and that being the offering that the market wants, that's additional uplift. So that's on our quota carriers. And where we've been particularly mindful is go-to-market expense nonquota carriers. So as we think about efficiencies, let's draw those down, enable the right set of resources to do a lot of work. But I'll tell you another thing that we're excited about alongside that sales capacity is our partner motion. And we think there's a ton of upside and additional reach that we're going to derive from the CSPs in addition to channels that have been strong for us like ISVs. So it's that entire system that we look at. Sales capacity is obviously critically important, but the amount of efficiency we're going to get out of each one of those, I think we're better poised than we ever have been.

Yes. Let's take a minute just to address the partner motion in relationship with the CSPs. Can you just sort of give us the status update across the Big 3, where do you stand, both from like the availability of the service, but then also on the go-to-market side, if you could just sort of walk through each of the major cloud providers and give us an update there, that would be helpful.

Yes. So one year ago today, we were in market with server on AWS. And so I think about our cloud portfolio as kind of 6 products server and mobile on the Big 3 clouds. We sort of summer time frame, we went from 1 to 4. So we brought in mobile on AWS and GCP on both an just recently, we announced that we are in market with Azure. I think the partnerships are going to follow the route to market on the offering. And so we've been working quite some time and at a higher level, quite frankly with AWS because we've been in market longer and we were so proud to announce the strategic collaboration agreement in the back half of the year. There's certainly benefit on the Ts and Cs of the agreement itself. But I think it's more indicative of what they see in Couchbase. They don't do this with very many partners. So the level of account planning and territory planning and understanding specific promotions and driving the enablement, we're just a little bit further ahead with AWS than we are the other 2. We fully intend and expect that we're going to do the same with GCP and Azure Microsoft as we go forward. But it starts with product, and we need to make sure that we have the offerings and market. The good news is we have pent-up demand and pipeline from a customer perspective on all of those clouds because if they're a Couchbase customer, we run in all those clouds today. We just haven't had it with Capella. And so I think we've been working on sort of the skeleton of the partnership with all of those and really expect that we can start to sprint now that we're in market.

Yes. That makes a lot of sense. I want to talk about Capella more in depth. Before I get there, across all my companies that I cover, like the strategy of almost everyone talks about is vendor consolidation, standardization, hugging your customer and taking more share of wallet. You guys have been talking about that prior to the downturn with things like relational offload and relational migrations. What sort of the playbook and what sort of momentum are you seeing on a standardization, consolidation strategy within the Couchbase customer base?

So glad you brought that up because I think that's part of the value proposition that we've been talking about at Couchbase that is more relevant now in the market than it ever has been. So if you go back to 2011, when we say the modern day Couchbase was created, it was actually a combination of 2 independent companies. One was an open source cache and one was a document-oriented database. And our founders back then believed in this concept that was core to our development called layer consolidation. How do I build a platform that can do more with less in support of an application. And over the decade of innovation, we've added capability like full tech search and operational analytics and relational offload and said, well, let's not only run that in the data center, let's extend it out to the edge with mobile capabilities. Let's do that all with SQL compatibility because we've taken a platform approach to our development. The reason we did that is because we fully believe that eventually, people are going to need platforms that they can depend on and do more with less. So we've been articulating that part of our company strategy for some time. Then we layer on Capella that makes that all easier to consume. And so that's very much part of the dialogue. I think when resources are plentiful, both dollars and people, there's less sort of constraint to drive that level of discipline and that level of thinking in enterprises. Well, if you fast forward today, find me a customer that isn't having that discussion. And there's so much focus right now on just spend dollars to acquire vendor solutions. There's not as much focus yet on the people to do the work. And I think there's going to be a shortage of developers to do all this innovation in a resource-constrained environment. Couchbase is thought through that. So you take our SQL compatibility, repurposing the labor force, align that with the platform capabilities we have, and we can sit in front of customers and say, I can help you with your objectives. I can help you build next-generation applications, and I can confidently tell you, we can do that with lower total cost of ownership. You then take our architecture in memory shared nothing scale-out, the more you run that in cloud, the more our differentiation materializes in cost performance benefits. And so if you look at the Capella price performance comparisons to Mongo and other solutions, you can see that value proposition coming to light. And I need less infrastructure to do the same amount with an application. Now as we think about our go-forward development with additional technologies that are going to make that even more efficient, this is a wave that we're going to ride for some time. So despite the intensifying of some of these macro dynamics, which could have short-term effects on demand, the big picture, drawing people to a value proposition of a platform with lower TCO plays right to our strengths and what we've been building for some time.

Matt, could you break this down for those listening in the audience, maybe a customer example out of Q4 that sort of highlights this kind of North Star vision of consolidation?

So we had a very large financial services company that came to our sales kickoff a couple of weeks ago. This is now a 7-figure subscription customer. They were under pressure, hey, how do we rationalize node counts and things like that. And we started talking to them about Capella. And we said, well, we've got services. We're going to help you rewrite the applications. We get them into Capella. We've grown that estate. Guy gets up on stage from our sellers and he says, I've now consolidated Mongo and Redis and I now run Couchbase with Capella, and he had a slide up with several hundreds of thousands of dollars that he saved this year alone. Now I've got all kinds of new use cases. I don't have to employ a large set of database administrators. I've got new use cases where we can just go innovate, we can get them into Capella. Oh, by the way, I have massive relational implementations that are costing you too much money, I'm looking at a path to move those into Capella. That is the value proposition in action, cashing, document database, next-generation use cases, mobile capabilities, all in the form factor of Capella, where we manage it on their behalf. And raw operational savings that are material that he's willing to talk about publicly.

Capella's, I think has been out for a little more than a year now. And in Q4, I think it was the first quarter where the majority of your new customer acquisitions came from the Capella side of the house. You also, I think, spoke to Couchbase customers migrating -- the migration activity to Capella is picking up. What are sort of the trend lines that you've seen from the start of the year, to the beginning of the year? And how does that -- how do you think Capella is going to play out in calendar year '23, fiscal year '24?

As I reflect on the year, I think the form factor of a Database-as-a-Service is the consumption model of choice for enterprises. And we've been admittedly catching up to that, right, bringing the consumption model. When I think about the year, I think it was a transformational one in how we think about cloud. I brought in -- Gopi's been running engineering. There's not an engineer at Couchbase now that's not thinking cloud first. And the pace of innovation is accelerating. We've got some great things coming. Our go-to-market teams now have Capella top of mind. And I could give you a list of our entire ARR base and tell you which customer is ready to go on Capella, which one is considering Capella and which one is net new workloads. When we study our pipeline creation, conversion, we look at things like trials and ease of use, and we marry that up with things like our new user interface. I mean there's a lot of pent-up momentum that points to the value proposition of Capella being realized. So we are extremely excited about it. We continue to lean in and learn everywhere we can, but I think it's the value proposition playing out exactly as we thought it would.

As we think about the sales motion and when I was working with you on the IPO, one of the themes was historically Couchbase targeting the enterprise architects, the kind that sort of designing distributed systems and then ultimately getting to that -- getting to developers. And I just wanted to get a sort of progress update on that motion in terms of targeting developers, building that community, if you will, and sort of building also as kind of like that product-led growth that we've seen -- like a lot of cloud companies have seen when they launch a managed service offering?

I think whenever I think about a database, I think about the applications that database has been architected to support, and we take great pride in the fact that we support mission-critical applications. If you think about a mission-critical application at Morgan Stanley or another big customer, you're going to have developers. They are the people writing the applications. They need to understand how it works. They need to understand query and all those things. At the same time, if I'm an enterprise and I'm deploying a mission-critical application that my business is dependent on, I'm going to have a central team make sure that I have resiliency programs in security -- by the way, if I'm going to spend millions and millions of dollars on this, I'm going to have C-level engagement and procurement to make sure I'm getting a good deal. So I think at Couchbase, we're cognizant of the fact for enterprise, there's going to be a multipersona sale. And one of the sort of maybe misunderstood things about Couchbase is, we've been only architect and not developer. If you go talk to any one of our customers around the world, you're going to find developers that love the product because of the elegance of design, the simplicity with SQL, the data resiliency, data movement, data orchestration technologies, what we have been unable to do developer-only or developer first. Because if you think about our buy from motion, we were a community-driven company, so I would have to go download community addition, bring my own infrastructure. It's just -- it's not clean. If I contrast that with an as-a-service solution where I can just get online and I start writing applications and you're running that for me, well, that's a completely different experience. And so I think we're going to take the value proposition of our product and marry that up with an experience that developers want. And that's how we're going to be able to drive mind share and the product-led growth component of the business that we haven't seen. So what we're doing is making sure we're orchestrating that expense with things like UI and embedded documentation, making sure that experience is great and then building the sort of buy from go-to-market motions, developer advocacy, developer relations and sort of thinking about articulating the value proposition, not just for the generic developer, but how I talk to a back-end developer is different than a front-end developer or a full stack developer versus a mobile developer. And so the sophistication of our understanding and the crafting of messaging with the consumption model, we're really pleased with the progress we're seeing, and that's only going to complement our direct touch model and the instrumentation between those is really, really powerful.

It's 2023, I can't not ask you the AI question, right? I mean so when we think about things like pilot for Microsoft and some of these generative AI models. It seems like directionally it's going to improve developer productivity. I was wondering what -- how you see that playing out in terms of the database layer and what are sort of the opportunities for Couchbase as developer productivity increases? And are there any sort of risks associated to the business from this movement?

We see it as a tailwind in 3 distinct ways: the first, if I take generative AI, we think there's a real opportunity to help migrate applications from non-Couchbase databases to Couchbase databases. One of the barriers that are introduced when people are evaluating that is I can see the value. I could potentially see how it's better TCO I don't know that I have the people to rewrite the application and go through the hard work. Well, we're actually evaluating, can we use some of these languages to do the work of rewriting the application stack knowing that the data model on a relational offload is well suited for that. So imagine if we can go to an enterprise and say, hey, we can take the hard work out, let's get you into Couchbase on your relational offload and now you have a platform that you can innovate on more powerfully for new applications. So that's area 1. Area 2 is how do we use AI in general to improve Capella-as-a-Service. Optimized for customers, start to understand can we take even more advantage of the underlying infrastructure in better, better ways, and we think that's going to be really compelling as we improve the value proposition of Capella. And the third, I would say, AI is dependent on massive amounts of data, structured and unstructured. And as a data company who's built one of the most sophisticated data repositories with data movement technology, we think that's going to be an opportunity for us as well, probably a little bit further out than the previous 2, but certainly material.

Because it's just like a next topic and then sort of an emerging debate in the category. Historically, if you look at database management, database market. It's been siloed into 2 groups: analytics, data warehousing; and then transactions, interactions, right? And there seems to be more of a movement to unify these worlds. This has been attempted before. It seems like we're trying to do that again. What's your take on the convergence between analytics and operational databases? And how does that -- and where does sort of Couchbase fit in that convergence?

We are pretty excited about this, and we've been excited about it for some time. If I look at the database market, depending on the market analysts, you've probably got a $60 billion TAM on the operational side, probably got a similar size TAM on the analytical side. What's emerging is this thing in between that I think is really interesting, real-time analytics. So how do I provide insight right now with things that are happening? I may not have the time to put it into an analytic system, but my operational solutions aren't built to provide insight, and I certainly don't want to slow down the performance of the application that are trying to run analytics against. If you go back, we were probably the first NoSQL solution that talked about analytics as one of the incremental services in our platform. And so we think there's real value in this niche right now of real-time analytics. And we think the fact that we manage the data and we've got these capabilities is going to allow us to address that problem and provide even more real-time analytics and rich applications while a person is engaging with that application. So we do not see a world where those 2 things completely combined. I think the capabilities are different. But I do think there's going to be a crossover in this area of real-time, and we've been working on that for some time in a JSON data format, which we think is going to be the one for the future. So a big part of how we've been thinking about things for some time, and I think the market is catching up to the capabilities we have in the platform.

Yes. Make makes total sense. We're running out of time, conversation's flying by. I wanted to go back to Greg to sort of frame out for us, what we think of a popular topic around stock-based compensation, share dilution, how are you managing -- how are you thinking about -- how is the company thinking about managing that going forward?

Yes, it's time my question. We just had the comp committee right before the Board and [indiscernible].

Stop off the presses. So...

Yes. So look, we're mindful of it. We understand that investors are also watching this closely. And so we've kind of set a mark with the Board about a sort of mid-single-digit burn rate. We're not -- we look at obviously stock-based comp as a percent of revenue, but we're really more focused on the shares out of the dilution. So the mid-single-digit burn rate is how we're thinking about it this year. And obviously, as we see the stock progress and continue to move, we think that would give us some benefit and move that lower. And we'll continue to watch that very closely. And hopefully, over time, we can move from the mid-single digits and bring it down, but that's the mark we set for this year.

Great. Any questions for the Couchbase management team?

Lastly, Akamai, Fly.iO, that space to maybe do something structurally, especially given how you guys are structured.

Let me just repeat the question. So the question is on edge computing, where you guys fit into the edge computing ecosystem?

I would be willing to bet you a beverage of your choice that you have multiple Couchbase databases inside the mobile device sitting in front of you. And so we fundamentally believe that applications need to go to the edge and the way that you need to have a database and the right form factor and manage things like asynchronous connection. We've been in market with that for some time. I think the CDN providers are extending the efficiency of the resources to do it in non-mobile connectivity. So you define edge as a small cloud, and we have future-proofed our architecture that we can take advantage of whatever compute and infrastructure is out there. So we think about fat pipes and skinny pipes and offline and online. But when we talk about distributed applications cloud to edge, we've prepared our platform for some time, and I think this is only going to provide a catalyst for additional growth.

[indiscernible]

So what I would say is we are on the evolutionary path of nonrelational technology. So we need a flexible data schema. We actually allowed the database to define the schema. And we do think we're right on that path. At the same time, we believe in SQL. And we are SQL compatible, and we think it's really powerful that you get a new engine, but you keep the steering wheel, gas pedal and brake pedal that you're used to running. And so I think that question really under -- your 2 questions really underpin some significant parts of our differentiation that's core to our platform.

With that, we're out of time. Matt, and Greg, I really appreciate you giving us the update on Couchbase. Thank you very much.