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

Good. Perfect. Thanks for joining us. Welcome to our next session. We're staying on the database side. Greg, the -- let's maybe to get everyone back on the same page here. You reported results recently. Can you talk a little bit about the highlights from your perspective?

Yes, we thought it was a good quarter again. I think the highlights for us were we -- as we continue to make this transition to Capella, we hit 15% of our ARR. 1/3 of our customer base is now using Capella, and we did our single largest. It was a multimillion dollar customer on enterprise that we've migrated now or are migrating to Capella and got a really nice uplift. So some of that Capella momentum, along with the announcement around AI services was sort of the big thing for the quarter. So we felt good about it. And we know Q4 for us will be a big quarter, just how things lay out, and we got to go execute on that.

And what do you see in terms of -- and I apologize, but I'm asking a question like pretty much everyone. Like what are you seeing in terms of macro, postelection, et cetera? Like is there any change? Or how do we think about it?

Yes. We haven't particularly seen anything from either pre or post election change dramatically. So it was an election thing. I mean we still see some of the macro things, and we've talked about this, like we had a deal on the table with a customer that had a Q4 renewal. They came and said, "Hey, we want to do something early. We were all the way at the finish line, and they said, "Oh, we got to go all the way to the CEO, which no one seemed to know about. And if I sort of told you which company it is, it's a massive, massive company. And to think that -- it's -- for us, it's a very nice size deal, but to think that the CEO is approving it is challenging. Now we're getting that done now. But those are some of the macro things that still are out there with deal cycles and approvals are still popping up here and there.

Yes. yes. That's amazing, like a CEO like taking...

Founder, CEO of a global multibillion-dollar company.

I mean the deal size must be great. I'm looking forward to.

Again, it's good for us, but to think that, again, any CEO is having to approve that size deal is pretty amazing.

Yes. I mean talks to the discipline, I guess, as well. And you talked about the Q4 renewal opportunity there. Can you give us a little bit more detail? Because it sounds like -- is it that like how the pipeline shapes up? Is it renewal? Or like why are you so excited about that?

Yes, there's a couple of things. So Q4, as for most software companies is always the largest. And so the bigger deals and the bigger renewal pool for the year, sits there, and we've talked about this whole year that we had a sort of a disproportionate setup in the second half and particularly Q4 on that renewal pool. So we tend to upsell at the point of renewal. In fact, 3/4 of our upsell activity happens at the point of renewal, 1/4 of it happens sort of along the way. So that's a big point for us. And we have a bunch of big strategic deals sort of in the pipeline, some that have compelling events that have Q4 renewals, other ones that are in, quite honestly, in Q1 and even the future, but customers are coming to us saying we want to do something now as they go into next year and have budget certainty for next year and the following year. So that's a big dynamic. And then the other one we talked about is just based on some of the deals we did last Q4 and along the way this year, we have precontracted ARR that's sort of anomalous in a good way this quarter. And so we just want to make sure people understand that, that on top of that renewal -- large renewal pool is what's really giving us confidence in terms of being able to deliver a pretty sizable Q4.

What's the -- I'm listening to you, but I'm still a little understanding like what's -- how do we have to think about that precontracted?

Yes. So it's something that we always have. It's not -- it's just something we haven't really discussed and articulated previously because it hasn't been this significant. So we have it from time to time. And just to give an example before -- like Q1 and Q3 this year, we didn't have any, right? In Q2, we had a modest amount. So what it is, is when we do these large enterprise deals, whether it's with enterprises, whether it's on our enterprise, on-prem or Capella, we typically do multiyear deals, and we stagger growth into those deals. So as an example, we'll do a 3-year deal, year 1 will be $1 million, year 2 will be $2 million, year 3 will be $3 million. And our definition of ARR as we look at whatever is running at the end of the period plus 12 months forward. So if you do that 3-year deal, in this quarter, we'll pick up the $2 million of year 2. A year from now, we'll pick up the next $1 million from year 3. That's what we talk about that precontracted. There's no booking driving it. It's already contractually obligated, and it just sort of falls into ARR based on how the contract falls. So that's what we're talking about. And Raimo, you will recall, like last Q4, we talked about we did our single largest deal in company history. It was also a multiyear deal. So we're now getting into that next year of that contract among some others.

Yes, yes, yes. So it's basically in other vendors would call it like a phase deal because it gives the customer a chance to...

Ramp deal.

Ramp deal, same stuff...

Okay. And we try to build those because we know our customers are always going to grow over that period, right? They're going to either put new applications. The current applications are going to grow. So we try to size it correctly and get an agreement with the customer that there should be and will be growth in that period.

Yes. Okay. And there's another thing that kind of I keep asking every call -- on every of these firesides, and it's like a Q4 budget flush. Like -- and there's 2 questions to it. It's like, one, is that something that is like something that you guys are potentially exposed to? And then two, how do you think about it this year?

Yes. We don't -- I wouldn't say we experienced the budget flush per se. The dynamic we have is because most of our customers have a 12/31 year-end, and then we have 1/31, we have this 1-month window where they get budgets reopened for the next year. So it's not flushing the 2024 budget, it's actually getting access to 2025 and having certainty. That gives them ability to do deals in Q1 -- sorry, in January. And then the other dynamic is -- and again, all companies have this is you've got a number of sales folks who have either achieved or getting close to achieving quota, so they get into accelerators. So they are then incentivized to try to go find new business dollars, whether it's in quarter or maybe from the future quarter because that's going to be more valuable today than it will be tomorrow. And so there's always sort of a reach forward into the Q1 pool. So those are some of the dynamics we see more than a 2024 budget flush per se.

Yes, yes. And then shifting gear a little bit, like -- so Capella is in the market now for a few quarters. So...

For years.

Yes, yes, sorry. Many quarters. What's been your observation now in terms of like how that's playing out and how customer thinking has changed around that?

Yes. I mean at the beginning, it was -- they needed to see it sort of reference points and see it become a nice part of our business, and we've achieved that, right, with 15% of our ARR. So we have enough reference customers and people can see it. Really, a lot of it comes down to is, are they ready to make that migration and embrace the as-a-service managed service offering. The thing that we lead with a lot of times is TCO. I mean I don't think -- most customers don't understand until we come in and say, here's what you're paying for Couchbase or your software. Here's the infrastructure, and here's a proxy of the people resources going into it. And you stack that tower against the cost that's going to be going to Capella, it's usually a pretty compelling story. And so it really comes down to then is are they ready to do it? Are they ready to make the investment? And again, we're doing everything we can to make it easy. We do something called dual use rights where we let you stay on your licenses for a time to migrate over. You can very start small. So we're trying to make it as sort of as easy and seamless. But that -- it's the customer readiness.

And then the -- if I think about it, like you're the database, there's kind of usually an application kind of that sits on top of that, I would think. Like how does that work then? So the -- because you go -- the database into the cloud, but the application in a way needs to move as well because otherwise, you have an latency? Or how does it how does it work?

Yes. So today, our enterprise software and Capella sort of SIM ship. So it's the same software. And so if you're running the latest software and you're on one of the 3 clouds where we manage, the move is pretty -- I'll say easy. I'm sure there's people out there that say it's not easy, but relatively easy. It's when they're on an older version of Couchbase, then they have to upgrade before they can come over. And obviously, if they're running it on-prem on their servers, then it's a change from going on-prem into the cloud. So those ones become a little bit more challenging. But look, we've got people that know how to do this. We've been doing this for 3 years now. And look, we're even doing -- depending on size of deals, we're now offering free services to these customers to help the migration. So we -- Couchbase people go in and actually help the migration. So we're trying to, again, make it absolutely as seamless as we possibly can for the customer.

And then you mentioned at the very beginning that large customer that might move over there, and it's a nice opportunity for you to monetize that better. Can you speak to that? Is that -- is it like -- yes, you got like the software support kind of revenue? Now you have like more because you just kind of do more for them as simple as that? Or are they buying more? Do you see like up expansions as part of after the cloud?

Yes. So we typically see expansions because they are going to bring either more data or more applications in. So like I'll use this customer as an example, I'll use sort of fictitious numbers, though. So we said it was a multimillion dollar enterprise customer. So we'll start -- assume it's $2 million. What happened is when they did the deal this quarter, you'll now see $4 million hypothetically in the ARR, right? So they've doubled because they're going from enterprise to Capella. There's an uplift there. Then if you run out because they're going to do the migration over 8 quarters, if you run it out to what they're contracted is, the contract value at the end would suggest you'll get to $6 million as an example. And then if you take the last quarter of the commit credits that they've set up with us, if you annualize that, you would get to actually an $8 million figure. And again, I'm just giving you rough math of how you can -- you're automatically going from enterprise to Capella, you get a 1.5 to 2x. Then as they come on and bring more workloads, you can grow that triple and even in this case, we could get to a quadruple in 2 years.

And what are those new workloads? Because like I always thought like because you're an operational database, so there's an application that kind of feeds your operational database. A new workload seems almost like a new use case. Is that kind of -- or how do I think about...

Yes, they'll bring in other applications that they might not be -- that they could be running on, for example, on the community edition of Couchbase. They say, "Hey, we'll bring it in and you guys can manage it because now we're going to start getting rid of some of the resources. They could have other applications on competitive technology that they might bring in. So it could be any and all of that.

The -- like I was asking you about the experiences of having a cloud offering now. One of the things that cloud was supposed to do, and that's why I wanted to check with you, is that it makes it easier to operate with. Like Couchbase is a very powerful database. And one of the things -- the feedback in the past is like it's very powerful, but it kind of creates like its own challenges. Do you really see that the cloud makes it easier and so people are happier to work with it?

Yes. I think our view is even before Capella, our enterprise offering, we estimated and it's hard to get the exact number, but we estimated 3/4 of those who are using Couchbase were already running it in the cloud somewhere. And so for most, it's not a huge shift. But they were already taking advantage of the benefits of the cloud while self-managing Couchbase. This is now just moving it over and allowing us to manage it.

Yes, yes, yes. Okay. That's interesting. Yes. And then -- so shifting gears, like 2 more things actually on Capella. Well, it is very important. One of the things that, in theory, you could think is like you gain new customers more easily because adopting in the cloud is much more easily done because you're taking a lot of the heavy lifting away. Do you see that on -- like in theory, the answer is yes because I see it in the customer numbers. But do you see that? And is there anything that you can do to even drive that more?

Yes. So we absolutely see it. And I think the thing that we really see is that -- so we used to have what we call a 30-day free trial. This year earlier, we launched a perpetual free tier. So now people can use it. So just allowing people to use the technology and use it sort of now in perpetuity is what's really helping drive some of this. So even before Capella, yes, we had a community edition, but you had to go download it, find infrastructure. It was too cumbersome. Having -- I mean, I got a Capella account up and running in 90 seconds. So if I can do it, all these engineering developers can do it. So having the use and the ease of use, ease of access, that's the big thing. And then also being on marketplaces, being on demand, they can go -- have a much less friction interaction with Couchbase. That's what's starting to get us going more from a logo perspective. And we said there's going to be more logos, but they're going to be small dollars, we'll start small. That's the activity we're seeing. So all of those things are really helping us sort of get closer to people who wanted to try and use Couchbase, but really never could or wanted to.

And is there like -- I see the number -- I don't know if -- is the numbers that we see in terms of customer adds the full extent? Or is there kind of a number below people using the free tier, et cetera? Because the way I wanted to go with that is like, yes, I see more customers, but actually for the benefit it brings, I would almost have expected more.

Yes. So we brought in, as you recall, we brought in all the on-demand. So everybody who's paying for Couchbase today is in the customer count. What you don't see is the free tier usage and some of that activity. So that's building us pipeline, though, to acquire it. Even those who are doing it on demand, from marketplaces, it's just helping us get more insights into who's using it, what they're doing it -- what they're doing with it, and that gives us the ability to then actually use that to go after them and say, "Hey, we see you're doing this. We think you could be a great customer, let's talk to you about what you might want to make a commitment. So all of that is hugely helpful. Look, we still want to see greater pace of the new logo acquisition. But today, we're seeing something like 3/4 of the new logo acquisition is Capella. So that's telling us that that's...

It's starting to work...

That's what customers want, and it's starting to work.

And then the -- on that note, like the -- if you -- is there a difference between the 3 hyperscalers in terms of like where they are more supportive or where it's easier or like what?

We work with all of them, obviously. I mean, look, we launched on AWS first. So that -- and I think AWS just is a -- from just a pure infrastructure as more of the market. That's where we probably have a deeper penetration and deeper relationship, but we work with all of them equally. And we are agnostic, right? We want to go wherever the customer wants to go. . And I try to remind people that when you buy a credit of Couchbase Capella, it doesn't say AWS, Google, Azure, you can use it wherever you want, you can move things around. You can have workloads running on both. We're completely open or agnostic. But some of the partnerships are further along, but we look, we're working with all of them.

Yes, yes, yes. Okay. And then shifting gear a little bit, like Gen AI is like that big subject now. So I'm just -- how do I ask an intelligent question? Like if you think about it from a Europe perspective, and I had the team from Mongo on earlier today, one of the things that we haven't discussed enough was basically around database migrations getting easier? Is that something that you are interested as well that you can use Gen AI to kind of see like old legacy stuff and kind of to like think about like a database migration differently. Is that something that interests you? Or is it -- are you going more after new workloads?

No, it absolutely is. And even for Capella, we had built something at sort of a bit of a mapping that would help customers map from relational to nonrelational to make the move easier as we try to take some of those workloads from the relational players. But we think, obviously, with AI, with like our Capella IQ, where now there's a copilot, is helping people develop faster. So that just gives them additional abilities to use that in a different way than they could use the sort of self-managed Couchbase. But we think AI will be huge. We think it plays great for Couchbase. You even referenced it in terms of our performance and scalability. We believe that, that's going to be a huge requirement for the world and the AI applications. So we are very excited about what's coming. It is still coming, though, because these AI applications are still being built. You don't see very many in market today, but I think they are absolutely coming in the capabilities with our Calmer analytics, our Vector search and now some of these ARR services, which are in review are only going to help create some of that.

So if you think about that, how do you think about like the portfolio like, classic Couchbase, but then also Vectors part of that? Is that because you do have all the start-up funding around Vector database companies. But then you guys have vector extensions, but even Oracle has a Vector extension or how do you see that playing out in the market?

Yes. We've always said, even from a year or 2 ago when there was the sort of emergence of the Vector database companies that it was going to require, particularly for AI, a platform approach and have other capabilities in there besides just vectorization. We think that's important, but we don't think you can do it sort of completely, efficiently and effectively on a stand-alone basis, you need the platform and you need query and some of the other services that are going to be built in there to extend for vectoring.

Yes, yes, yes. And the -- if you think about it like the build out, like is there anything you guys can do to kind of go kind of closer towards the new AI workloads and new AI applications getting built out, like in terms of like ecosystem kind of marketing investments, et cetera. Like what are you doing there?

We're trying to work with all the players who are in the AI world. I won't throw a bunch of names out, but you'll know them. But yes, absolutely, we are trying to get closer to them and be sort of one of the de facto databases that will support those AI applications. But all of this is really -- I mean, if you just think about what we just announced where eventually you are able to take your data set, which today you have to vectorize the entire data set you have which quite honestly was a lot, and we were getting feedback that it was costly to do that. With our new AI services, you'll be able to create your own sort of LLM of a subset of data and then vectorize off that, which will be able to be much more effective and efficient for the customers. So those are some of the things that we're trying to do to sort of make it better and easier for customers to leverage that as they build out these AI tools.

And then we -- like how come -- like for us, it's easy because we're thinking like, oh, someone comes with the new AI thing and off you go, you don't own that next week. Like how difficult is it from your perspective, like in terms of like when you think about proper AI adoption and the benefits coming through for you, like how do you see that playing out?

Yes, I think it will be -- I think we'll start seeing some of it next year, so our fiscal '26, but it could even quite honestly, beyond that. And I always point to people today to say, like, look, just think about the applications that we have available to us today. Outside of LLM and chatbots, where are the AI applications? They're not really here yet. So they're in development and they're being worked through, but it's not anywhere near being ubiquitous, but we know it's coming. I mean, it's not even a question anymore.

Yes, yes, yes. Okay. And then the -- shifting gear the next last few minutes. You guys have been kind of very disciplined in terms of like thinking about, okay, I need to get to profitability. I need to go -- to go to breakeven. I guess it was a little bit of a theme of the entry as well in the downturn to do that. Can you talk a little bit about how your approach has changed? And it feels like a kind of rethinking analytic.

Oh, yes, starting a year or 2 years ago, we -- with everybody else because of what was going on in the market, we changed his mind shift and it's been incredibly healthy for us. We are absolutely doing more with less. We are being smarter about where we make investments. I think you can -- you all see -- if you see in the numbers, you can see it getting better. We still have to go. We understand that, but we've made some really good progress. And it's been super healthy for us to try to take that mindset. And it's not just a mine and Matt's level or the leadership team level, it is throughout the company now, right? We're being very thoughtful about travel, hiring, where we're putting people. We got a great team in Bangalore. We're trying to think about how do we expand that and get more leverage out of that. So all things sort of efficiency, if you will.

And then maybe talk me fruit as a little bit like because it's from our side because really a number of contrast, it's always kind of tough to understand a little bit like so how was the mindset before versus the mindset no?

Yes. I mean, look, the growth versus profitability has just shifted, right? And so quite honestly, it's been a healthy thing to force us and many others to think about it from a ship perspective. We are rule of 40 focused again, we know we're not there yet, but that's where our focus is. And we think that's going to make us a better company over the long term. So we've just embraced it quite frankly. You may have heard me say this, Raimo, but I always joke with people that the CFO, myself, drives a 2014 Nissan Ultima. And so just from a mindset perspective of how we run. Don't look at the CEO's car, of course. But yes, I mean, look, we're just -- that's the mindset we've embraced, and we're just driving it. And when we do all hands meetings, it comes up, we talk about it. I do CFO chats with the business. People ask me about Rule of 40 now. So you just feel that it's sort of taken hold.

And the -- if you think about it, like the counter question is then, obviously, like, yes, you get the margins gone, but the growth was kind of basically gone as well. Like how do you think about that dynamic in terms of like still being able to grow because that's what we ultimately want and kind of achieving that...

Yes, we feel pretty good about it. I mean, again, we talked about like this year, it's going to end up being from a renewal perspective. And as I referenced, that's when we tend to upsell and grow our customers, it's lower than our last fiscal -- last fiscal year, fiscal '24. Next year, at least as it stands today, that will not only be bigger than this year, but it's probably going to be bigger than fiscal '24. So we have a bigger pool to work from. We're further along with migration discussions. We've launched new AI capabilities and services. So that's where we feel good about the opportunity for us to still be a 20-plus percent grower. And look, this year, we -- in Q2, in particular, we took some more loss and down sell than we had expected a little bit of surprise, which was outside the norm. We hadn't experienced that for 3 years. And so if you sort of normalize for that, you can see a way where we could have been 20% growth this year. So we're mindful this hasn't cut at all costs and not invest for the future, but it's just trying to find that right balance of growth and profitability.

Yes. And then has your budgeting approach changed? Like we've learned that all like many years ago when Amy took over at Microsoft that it was like dynamic budgeting. So it wasn't like next year, you get 100 this year, you get -- next year, you get 110 and the next year you get 120. It kind of more -- much more dynamic. Is that kind of like where you changed your projectory?

Yes, a little bit. I think our approach has always been is we used to do something where we'd go along and things weren't working out, we'd have to go cut budgets, right? And it's just a painful process, and you don't want to do that routinely. It's just not a healthy thing. So it's more now that I'd say we sort of hold back some. And if we see things going as expected or better, we will give more and not have to do the take-back exercise just because it's a painful one. And it's really been a much better approach for us and it's worked out really nice for us this year.

Okay. Perfect. And then where are we on balance sheet strength, capital structure? Like how do you think about that from here?

Yes. We feel good about it. I think last quarter, we ended with $140 million on the balance sheet of cash investments. We've reiterated our plans to be free cash flow breakeven next year. So we are well capitalized to do what we need to do in the future, whether that's continue to invest for organic opportunities, inorganic opportunities. So we feel good about our position of where we are. And look, if the markets are open and we're in a good position, could we add to that at some point in the future? Possibly, but that's not necessary or top of mind for us right now.

Yes, yes, yes. I mean that's to see like it's a -- I don't know if sort like one of the speakers before, they just did a big convert and things like that, yes, yes, yes. so it looks like...

We went public in 2021. And if you would ask me at that point, by the end of '24, would you have done something else? Yes, I probably would have. But the markets and certain other things didn't line up to it. And so we don't need it. So it doesn't make sense. We're not going to do something that's not healthy for the company.

Yes. Okay. Perfect. And then you talked a little bit about M&A, like, but how do you think about that in terms of -- because you are like a proper database. Like how do you do M&A there like that kind of makes sense?

Yes. It's a good one. So we always said that it's going to be smaller. It's going to be either sort of pieces of technology or people that can help accelerate either Capella or AI. But we've already seen with Mongro and Deprecating Realm that it's really tough to take other technologies that have a underlying architecture that are different than yours and try to put them together unless you completely re-platform. And a lot of times, if that's the approach you're going to take, it's going to be really hard because it's probably not going to generate the type of synergies and efforts that you want, unless it's got 5 or 10 customers that you just say, okay, we're going to shut them down, move them over. It's hard. So the thought of smashing database companies together is difficult. That's why we would be focused on, again, smaller pieces of technology that we could embed acqui-hire type things, that's what we're making.

Yes. Because like we did -- as you said, we saw it at Mongo didn't work, yes, yes, yes.

It's just tough, right? I mean it's really, really tough when you have -- and there's been ideas of why don't Couchbase merge with another database company and get more scale? But you'll effectively end up running 2 different platforms and technologies. And so are there synergies from a G&A perspective and maybe -- but the technology, you're not going to get that synergy and you're never going to go replatform a scaled database company to Couchbase.

Yes, yes, yes. Okay. Perfect. But it sounds like exciting for next year.

We're looking forward to Q4 and next year. .

Yes, exactly. Greg. Thank you very much.

Thank you, Raimo. Appreciate it.

Thank you.