GitLab Inc. (GTLB) Earnings Call Transcript & Summary

Thanks, everybody, for joining Day 3 of the UBS Tech Conference. Excited to have GitLab, Brian Robbins here, Jack in IR sitting in as well to rescue Brian, if I ask him questions he can't handle.

[indiscernible] obviously great Monday night [indiscernible]. Brian, just given that was a couple days ago, everybody has had a busy few days, maybe not everybody has been laser focused. Do you want to spend 1 or 2 minutes on what you thought were the key takes from the print that you're trying to convey to investors and if there has been any common thread in the questions you received. I'm going to ask them anyway. But if you want to address those as well. What were the 3 big highlights?

Yes. No, absolutely. So thanks for having us here, of course, I really appreciate it. And so we're really pleased with the quarter. Just to go over some of the highlights from the quarter, we reported 69% year-over-year revenue growth. And as we delivered $13 million of revenue, we did with maintaining our non-GAAP gross margin, we did 89% there. We're able to increase -- continue to get operating leverage in the model. And so we did $46 million of incremental revenue this quarter over this quarter last year, and we did that with less operating loss, and that includes Dhu and cancellation fees and a number of different things. And so we're happy with the continued leverage that we're seeing in the model. And so -- and then we added over 600 new base customers. And then one of the highlights for the quarter as well is everybody is talking about the macro and what the macro impact is having on various companies. We started to feel some of the macro impact. We are -- I feel like being a mission-critical platform, we're fairly resilient, but we started feeling a little bit more towards the end of the quarter as it became more pronounced. -- but we signed up our first for bookings, which is our new customers, new bookings for the quarter grew 75% year-over-year. So overall, we're really pretty so the quarter.

Good. We'll probe a little bit. Let's hit on the point you just made around what you called fairly resilient. So maybe you could unpack that. What is it about GitLab or broadly the DevOps space that in your judgment makes this a relative island of safety as some land lines are going off across broadly tech. What is it about the DevOp...

Relative Island and safety may be strong, but Yes. So every -- we believe every company today has to be a software company. If -- in the last week, we're in a one-on-one meeting there's like 8 people there. And I said who received at the Amazon package in the last week. And everybody raised their hand, except 3 people and I say, well, why didn't you get an Amazon package -- we live in Hong Kong they don't deliver there. We didn't you? Well, we're in seeded liver there either, but everyone that could get a pack, it's got a package. And so we do so much now through digital transformation, [indiscernible] phones, getting stuff delivered and all these applications have to be rewritten. And so the thought that every company I'm a software company, we enable companies to deliver that software better, faster, cheaper, more secure. And so that is what we're bringing. The fact that we actually deliver -- when we land a customer, we land with 50 to 100 licenses. So we're landing relatively small. So the ticket item is not that large. And so in the documented ROI in Ultimate Forrester did a study, if you get by Ultimate, which is our highest priced product, it's a 427% return over 3 years. You can eliminate 4 point solutions in the first year. And so we're seeing this literally across our customer base. And I think with the macro economy and the relative resilient, the reason why I mentioned first stores is that pushing people to a platform, companies do need to do more with less. People need to become more productive. We need more collaboration and our platform enables people to do that. So we're seeing that -- and that's why there's some resiliency in the marketplace.

Can you maybe just elaborate on where you're -- to the extent that macro is knocking on the door and impacting your results, Brian, where exactly is it showing up? And when you set your guidance for the fourth quarter and you gave the initial guidance for next year, if you could elaborate on what macro assumptions you're embedding in that guidance. Same as you [ thought ] through October, November, worse, that would be helpful.

Absolutely. One of the things that when I -- so as we kick off the earnings season, the first mean that we have is with our CRO and CMO. And we ask no data. We don't bring any data of the room. No prep, just off the top of your head, what are things that are seeing this quarter that you saw versus last quarter, new things have popped up. And one of the things that popped up was that there was a little bit more scrutiny on deal reviews. There's more sign-offs and more scrutiny.

We're seeing that everywhere.

Exactly. And as I thought about it, I was trying to think about it and say what is this analogous to because the world has changed so much in the last couple of years -- and if you think back and remember about the start of COVID, there was a steep decline in the stock market and every company did increase it, there's layoffs. There was like expenses that plant down dramatically. -- software companies had a really, really tough quarter. Then you had this V-shape in the recovery in the stock market and then quickly resume back to normal. I think today, I think about what's happened and funny enough, I thinking about this report came out last night, there's been 210,000 layoffs in technology this year and happened in the third quarter. And so most of these layoffs actually occurred in the third quarter. Just I think we're experiencing something similar today that we experienced back to when Covid start around companies are saying, "Hey, wait a second, just time out. We're going to cut down on expenses now. We're going to evaluate our spend. We aren't going to hire as many people. We may do layoffs. And so to me, that's where it feels like we're at. In the business, since we've cohorts 7 years ago, they are still expanding with us today. We have the well-documented ROI. We have all these use cases. I feel like we're in a really good position. And so that's some of the -- that's sort of like when we talk about it internally some of the feelings that we're seeing.

And when you're thinking about Brian, part to my question around 4Q next year, assuming these trends stay flat, drag them to the right... This is work to excess can answer your question.

Now so the great thing about GitLab is we have a very predictable business model. About 90% of our revenue is ratable. And we had 28 quarters of cohort data on the land and expand [indiscernible]. And so I have a high degree of predictability into my revenue next quarter, a little less in the following quarter and so forth. We also go through pipeline, we look at coverage ratios and win rates. And then we look at how our customers have expanded with us historically and how they contracted. We put all into sort of the various models and it gives us a degree of confidence because where the markets are today, we wanted to come out and say, sort of give some soft guidance for next year and say that we feel comfortable enough where the analyst consists was at earnings that we would grow north of 40%...

Brian, when I run some ingot on your 40% target it equates to $168 million of sequential revenue growth versus what you posted this year. So that's the same sequential revenue growth as you're putting up this year. So no change in the dollar added. That strikes me intuitively as Snowflake recently set their next year guide, and it requires greater sequential growth next year than this year versus flat. So what would your response be to that observation that it feels a state...

They were a newly public company. We've new teams in the guidance place, and we're happy that we're able to provide some guidance for next year. Great.

And then, Brian, let me press you on something from one of your arrival. So investors, even in your stock, you're well aware, you and Jack, a little spooked when Atlassian reported because they called out slower seat expansions as fewer software engineers get hired, they called out a slowdown in the free-to-paid conversion, which is a tailwind for you guys as well. So obviously, everybody post Atlassian was a little bit nervous that those factors would knock on the door for GitLab, get you not without some weakness that you've acknowledged, but generally powered through those earned pretty well. So how would you contrast your business model versus theirs in a way that might explain why you saw those issues less purely that you're at much smaller scale? Or is there a more fundamental difference in the model that you'd like to highlight?

Yes. So I've said last in a little, but their penetration in our market base is really, really high. Our penetration in our market place is really, really low. We estimate that our total addressable market is roughly $40 billion. We gave guidance for this year, slightly over $400 million. So we're a little more than 1% penetrated. And so it's really the difference when we land an account, we land small 50 to 100 licenses, UBS is a great example UBS deployed over 9,000 licenses in 9 months, and now you're over 18,000 licenses. And so you continue to deploy the product because of the benefit that you're seeing and you can remove all those point solutions. And so that's -- if there's no more hiring in our client base, being only 1% penetrated that's not 1% penetrated in each client, but landing small and having the ability to continue to expand is one of the great things about the business model. And we felt reservoir landed TAM, we can continue to sell in. And so we think that that's a big difference in the business model.

Got it. One of the other questions that I get from investors that, as you just pointed out, you gave some great bet on layoffs and how concentrated they are in the tech industry -- and this question isn't just around GitLab, -- it's around all kinds of growth software firms around exposure to tech in general exposure to pre-IPO startups that might be running in the funding shortfalls now. I don't know that you formally offered an exposure metric. But qualitatively, can you talk through your exposure to the tech sector in general on that pre-IPO cohort?

Yes, absolutely. I'll talk about the bigger tech factor. If you'd like me to I'll talk about the IPO cohort. And so as many of you know, we prepare for these -- we report late in the earnings cycle, and we prepared a lot, and that came up with a number of calls. So we actually pulled the data. And so we don't have concentration really in any vertical or any geo because we the same platform for basically all of our clients. There's no customization whatsoever. When you go and pull the sick codes for technology, we have about 20% of our customers are in a technology-related field. If you go further and look at IPO exposure, it was hard to say like who is in that, who's not that. So we actually said, within that 20%, how many companies have left to 200 employees as we view the most start up the is, if you will and that was less than fiber. And so fortunately enough, we don't have any exposure to small tech companies and the technology vertical as a whole, which includes really, really big companies as well as smaller companies is about 20%.

Okay. Good start. Thanks for covering that. Another subject that's, I think, interesting to a lot of your investors is the ultimate view. If we can talk about that. So running 39% of your ARR, similar to last quarter. So it does feel like the ultimate mix of ARR is flattening out a little bit. Why would that be? Why wouldn't that be continuing to grow? And it begs the question is there a macro impact there where maybe some of your customers are a little bit more prone in these kind of conditions land on the lower-priced SKU, which might give you an opportunity to upsell them down the road, but obviously has an impact on the numbers.

Absolutely. I appreciate the question. It's the first time I got this question. And so... I'm sure he's being cases. No. So when we went public, we gave a number of different metrics. Ultimate is a to ARR is one of the metrics that a lot of investors locked in on as well as analysts as well as new base customer adds. One of the things that we have done at a from a compensation design philosophy and also from a buying closes, we tried to remove the friction out of the sales process and remove the friction of the buy process. And so our sales compensation plans, we don't compensate differently for ultimate versus premium. We will compensate differently between self-managed and SaaS and nor do we compensate differently between new logos and expansion. And so the ultimate as a percent of ARR is an output at the end of the quarter based on all the great work that our sales team does during the quarter. And so the reason why we do that is we want to go in with a consultative sales approach, go talk to the clients, what their problems are that they're having, how we may be able to help and what goals that they want to achieve. And we'll talk to them about Get lab, what Gitlab will do, and then we'll say, you can actually do that on them or you can let us manage it for you. Well, great. Well, what's the price difference between the 2. If we said, well, SaaS is $29 for premium, it's $19 for self-managed we would have the finance people, the company would want to do the analysis of how much does it cost by the equipment, people manage the equipment and so forth, and we delay the process. And so we said, we're just going to keep the same price. We're going to take that out from the buy process. And we aren't going to compensate differently on the sell process either. And so we're really happy with ultimate adoption. As I mentioned earlier, the ultimate ROI, the new Forester report came out was really compelling. Our typical buyer's journey that we see is 50 to 100 licenses land on premium. They'll use it within the division department, we'll go to another division departments, still developers and with the developer, expand with the developer -- and then we'll change personas. Then we'll tell the operations people and then eventually we call those security people, and then eventually, there's an upgrade ultimate. And so we can achieve our numbers. We're selling 100% premium and 0% ultimate. And the sales team can actually hit those numbers, and their compensation won't change differently. And so I think it's important to note that it's an output, not an input. Ultimate still remains our fastest granter, -- and so the adoption there has been really wonderful.

Does that suggest, Brian, that when you set your guidance for next year does not assume a significant mix shift to Ultimate?

So we look at all of our historical patterns, and then we build that out, but we don't -- like when we do our monthly internal reporting, there's not anywhere in the company, there's not a target for Ultimate was next and here's what was delivered. And so we have to build it out from a from an expense standpoint and margin standpoint -- and so we build it out that way, but we actually don't measure ourselves against that is his base office.

And Brian, what are the features, the attributes that you get in that ultimate module versus premium? And what is GitLab doing to bolster the ROI, the value prop of that...

Yes. So we're constantly working on enhancing the platform in both ultimate and revenue free tier. And so there's a number of reasons why people moved Ultimate. One of the reasons there's a number of advanced security features that we have. And so if you buy Ultimate, you get a number of advanced security features, Ultimate is really meant for the executive levels and more broader within the company. And so you have portfolio management, value stream management, get way more compliance features with ultimate -- so there's a number of different things that you get with Ultimate that you don't get with premium. One of the -- is an interesting point. One of the questions I always get is, how can you justify a 5x increase in price for the next available tier. And if you look at how expensive software developers are and if you can give them a full stack end-to-end one cycle platform, that's ultimate at list is less than $1,200 a year. If you look at how much you spent for a sales rep to get them between sales and Marketo and... Ever cousin your point about this being a low set item. It really is. And I think the documented success in ROI is really the proof in the pudding.

Okay. One more on the -- this might be hard for you to answer, but a lot of investors won't disaggregate the revenue growth between call it, seat growth and ARPU growth -- in the same way, we unpack Microsoft office between those P and Q. It's hard to get at. You guys don't disclose that. I mean we've done our best and arrived at a view that it might be sort of 2/3 ARPU, 1/3 seat. Does that even pass a [indiscernible] test for you, Brian? Or can you help the group out at all on disaggregating that into the P&C...

What I will talk about is that on our dollar-based retention rate, that about half of it comes from seat expansion. -- about 1/3 of it, 30% comes from tier upgrades -- and then 20% comes from something that we call increased customer yield and increased customer yield is when we land a client, we may get a 15%, 20% discount or 10%, maybe no discount, but we're actually pushing for 1-year deals. And so we did push for longer-term deals and cash collection upfront. But since we had such a high growth retention rate, we did away with that. And so the number of multiyear collections we've done has dropped considerably. And when we redo them instead of giving them whatever discount it was, we give them less of a discount because the feature functionality that we put back in the platform.

Okay. That's helpful. Brian, let's switch subjects maybe to the margin line. When GitLab came public incredible growth, not so great margins. Since then, you've made steady improvement on that operating loss. And this past October print was a big improvement from even 1 quarter prior in July. Is there any -- when you insist sit down, are you changing given the environment, Brian, your philosophy around the growth margin trade-off and leaning a little bit more into [indiscernible] control at all? Or is this improvement planned and a function of the pretty strong revenue gain?

There's been no change in our investment philosophy. We have been crystal clear as a company. And fortunately, we have been is that the #1 objective is to grow, but we'll do that responsible -- and so as I think back -- I've just been in the company a little over 2 years. And if I think back, my tenure at the company, there's been really 3 discrete phases. Phase 1 was a private company couple hundred million dollars on the balance sheet, you could do anything that the Board would allow you to do. Phase 2 as a public company, newly public, right before the height of the market, nearly $1 billion on our balance sheet and everybody saying groan cost, revenue multiples through the roof. And then Phase 3 was where we're at today, still nearly $1 billion on the balance sheet, and everybody's tenet profitable, you've got to get profitable at any cost. And so we have not changed our investment philosophy at all. We've not changed our messaging at all. And we continue -- it's such a big market, and we're so early in the market that for the ability to continue to capture the market, we'll continue to invest. And so our investment is actually pretty programmatic. We have an internal goal. We have a very detailed capacity model. If we overachieve what we anticipate within a quarter from a sales perspective, we actually have to go add more capacity. It takes a number of months to ramp an enterprise sales rep. And so we build that up for the following year. And so the other thing you Gitlab that I'll just point out, which I think is a pretty incredible attribute of the business model as a CFO I have 2 key dials within the business. One is pipeline and we watch pipeline like you wouldn't believe from top to the bottom of the funnel. And depending upon how the pipeline is going, we can adjust headcount growth. And fortunately enough, we've been growing at very good growth rates. And so first quarter, we added over 200 new team members. Second quarter, we added over 200 team members. Third quarter, we added over 200 team members. And so if at any point, we see the pipeline coming down because some of the macro. All I need to do is adjust open headcount and both of those are really easy to do. And we watch indicators literally on a daily basis.

Is there a time frame to go from what in October was, I think, a $21 million non-GAAP operating loss to breakeven, Brian?

So we -- from a guidance perspective, 2 new things that we said on this earnings call that we haven't previously disclosed, one is given soft guidance growth for next year that we talked about. The other one is that we're targeting to be free cash flow breakeven in FY 2025. And so for the full year, if you add up all the quarters, it may be deposit negative, but we'll be positive for the year.

Got it. Related question to margins is just everybody asks on stock-based comp. As a percentage of it, I don't know if you look at it that way, but it definitely -- it came down this past quarter, 37% in July down to 31% of revs and up still high. What's the path to get that down and reduce share dilution?

Yes, there's been no change in our compensation philosophy either and how we issue stock. So we as a company issue RSUs, for every position, we have a set dollar amount that we issue. The stock-based comp has really been driven by all the new team members that we brought on and upstock price. And so we're fortunate as a company that we didn't issue stock at really, really high prices. And so to my knowledge, as I sit here today, I can tell you there won't be a special grant to sort of catch up or to normalize where people are at. It's totally a function of headcount that we bring on. The other part of the stock-based compensation is we did put an E in place. And so that just got kicked off and there's some dilution related to that. But those are really the indies consolidated results, there is some Ghosn there as well.

One last one from the print before we talk about some of the broader GitLab DevOps trends call it, Brian, but long-term DR ticked up a little bit. It created some questions as to whether maybe there was enough tick in perhaps some multiyear invoice deals that could have distorted the P&L in some way. mind commenting on that...

Average contract length went up just a hair, but there was really no... The... Got it. Some of our bigger deals, they don't want to sign your contract to a multiyear contract. I think as they're making a commitment to the digital transformation -- and so if we land a big deal within a quarter, you'll see the contract only tick up just a little...

Right. Those are the questions I had on the print. I'm going to ask Brian a few questions more broadly in the story. [Operator Instructions] But for any of you that want to go either deeper on the broader story or deeper on the print and ask a question, there is a QR code on that card in front of you. Scan it, ask a question, and I will pop up on the laptop in front of me, and we'll leave them in us at the end for audience questions for -- so more broadly on the story, on the product road map, Brian, where is the big emphasis these days? Where is your engineering team leaning in? And I think one question investors have is, there is likely a future gap to some of the super sticky tools like Jira that Atlassian has. What's GitLab's road map to come up with a Jira equivalent that could maybe start tipping away at the dominance they've got on that project management side.

Yes. Great question. Our investment in various stages has been somewhat consistent on where we land the developers are in great and verify. And so that's been a big investment focus as well as our secure stage. And so if you look in our latest investor press, you can find on our website, Gitlab by our website, we said where we were in 2019 from a platform when we're at today. And you can see all the advancements that we've made in our security offering. And so really happy with that. On sort of the Jira replacement, there is in our -- in the platform, the ability to have Bureau like functionality. Some of our larger clients are actually starting to migrate off a Jira and use GitLab for that functionality.

That's happening.

That is happening. And we'll continue to develop the functionality to try to reach parity aren't there today, but that is the goal.

Is the goal to reach parity because you'd be -- the investment would have to be pretty enormous -- or could you get away with 80% as good part of a super-integrated platform and still have a ton of success.

Yes. I think the value of GitLab is having an integrated platform -- and so if you were trying to be the best at every single stage... That's going to be... Very, very expensive. And so the value actually comes through the orchestration integration of a single interface.

To draw another analogy to Atlassian, their ambitions seem broader beyond serving the programmer, the DevOps community and they've stepped well beyond that -- just to be clear, as you inside the company strategy going forward, is that a path that you would consider? Or at least for now and the near term, stay laser-focused on the DevOps opportunity?

So we're laser-focused on DevSecOps. And so in DevSecOps, you got 3 different personas. You have the developer, the operations and security. And that is our -- that's where we're focused at.

Okay. Let's talk a little bit about Microsoft and GitHub. Certainly, when I do checks -- it seems like the 2 like are the up and comers taking share. Microsoft is a beast. They've got a legacy app development suite. They've got GitHub. What are you seeing in terms of the competitiveness vis-a-vis Microsoft? I know there's broad concern that when Microsoft really leans into a space, boy, it's tough to outrun them. It certainly seems from your growth rate, Brian, you're outrunning them. But I'd love to hear your prospectus.

Yes. I get asked this question a lot last -- over the last couple of quarters and when we first went public, but we went and pulled the competitive data. And it's a big market, both them and us combined are less than 5% of the total market. when we actually go through our quarterly data and as it seems that much, and about 15% of the deals, we see no competition whatsoever. And so these are companies that are creating software they have a DIY approach. They aren't to our knowledge, there's not an RFP or they are talking to other companies about a platform. And so there's less than 50% -- about 50% of the deals, there's no companies worth ever. Microsoft is the one that we compete against the most. If you look at our total deals in a quarter, we see Microsoft in less than 20% of the deals. In what's more interesting to me is our win rate with Microsoft in a deal or not in the deal is almost identical. And so the fact that we only see them in less than 20% of the deals talked about how big the market is. It's not a winner-take-all market. There will be multiple providers in the market because it's such a big market. And so we compete well in I'm happy with the progress, have with our growth rate, which given out a couple of different data points lately. They just said they reached $1 billion in ARR. We know how to GitHub was when they get acquired, and so you can sort of extrapolate what you think their growth rate is. And so I think we're doing really well, and we compete well. We've partnered with the hyperscalers. We're completely agnostic. We don't try to push business towards one or the other. We're open source for primarily close code and happy with the go-to-market motions now we're doing.

Are there 1 or 2 feature advantages you'd highlight that GitLab has over GitHub? I'm sure you'll you would argue it's the integration of that suite, but also GitHub is traditionally a source code repository. I don't know whether they've built out the rest of the fleet as aggressively as Mat has...

I mean I think it's the suite itself is the biggest, and then we're very heavy in security. And I don't know if they have as much security features as we have. So you look at our ultimate price versus their highest price here. They're much more different in costs.

What about on the go-to-market, Brian? What's new there? Obviously, a company growing in the 65%, 70% level needs to be scaling your enterprise sales capacity pretty aggressively. Where are you on that journey to build out a mature sales effort?

Yes, absolutely. The company, up until about 1.5 years, 2 years ago was primarily a direct sales motion -- and so from an enterprise sales motion, I think we have the muscle memory to do that. About 1.5 years ago, we introduced a number of new go-to-market motions. And so one is we started our hyperscaler relationships. The hyperscalers have been doing awesome. The number of deals this quarter over this quarter last year that came through the hyperscalers increased over 250%. And so a big, big pickup on a number of deals. We also put a channel program in place. We have also expanded in new geographies. And so we're constantly evolved in the way we go to market and our go-to-market message. But now we have multiple go-to-market motions. Most of them are still early in their development, but we're super pleased with how they're doing.

Brian, you've talked about how your friends with all the big cloud infrastructure providers it certainly seems from the press and even some of the commentary that there's a very tight relationship with Google. Can you elaborate on that, if that's true?

Yes. So every quarter, Google and AWS reason our behalf from an AWS perspective, you're an AWS customer, you have an EDP commitment, if you can get relief by your GitLab the marketplace correct. And so we're super happy with how both of those are progressing. We did announce our call, we did launch something called Cloud seed, which is an integration with Google. It basically allows developers to deploy their workflows on Google Cloud easier. So within GitLab, within the UI, you can self-publish the Google Cloud Services. And so there's things that -- and we can do that for other hyperscalers as well. But we did just announce that with Google.

Okay. Terrific. Any questions from the audience? I know none have arrived in laptop yet, but shout it out if you want to ask Brian, anything -- last chance this year... We covered everything... On fantastic print. What a great year for you guys to -- in this tough macro to be growing high 60s, one of the fastest growing, if not the fastest-growing software company in the next couple of quarters. Congrats on that amazing success. And you, Jack, have a fantastic holiday as well.

Thank you, [indiscernible], and thank you for everyone being here. Really appreciate it.

Great.