GitLab Inc. (GTLB) Earnings Call Transcript & Summary

[indiscernible] Barclays covering DevOps, cloud comms and martech. With me today from GitLab is their new CEO, Bill Staples; and CFO, Brian Robins. And for the folks on the webcast in the room, we won't be taking questions directly. So if you do have questions for the team, please e-mail me at [email protected]. We can get those questions in.

Bill, pretty whirlwind, I'm sure, over the past couple of weeks. Now congrats on the taking the new role. I guess, I'd love to start with like your thoughts on this GitLab opportunity and some of the reasons why you decided to move over to GitLab.

Yes. I've been asked that a lot lately. It's so good to be here. Thanks for having us and inviting me. I'm 5 days on the job. This is my fifth day. So when I look at GitLab, I see a really singular and unique company with so much opportunity. I'm a mission-driven person. I always have been. But at this stage in my career, I really want to be part of something that's going to have a profound impact on the world. And I reflect on the last decade of my life, and one thing that's changed the world in my lifetime is software, changed my personal life, changed my professional life. I'm sure it's changed all of your life with our devices and cloud and services, and all of that is built by engineers. And there's one thing I know it's software that helps engineers do their job. I've spent 30 years building developer tools and platforms, and GitLab is at the heart of all of that at the center of the developer SecOps life cycle, and a really unique company to be part of. So I couldn't be more excited to be part of that. Barclays is a customer, and I can say you guys help us...

We just do our jobs. So I appreciate that. Reviews have been good so far. That's just rolling out. It's always great to be on stage 5 days after. But look, I mean, just at a high level, I'd love to hear kind of any early thoughts on how you think your first few months will look like and maybe your strategy from the start?

Yes. Well, sort of 3 areas of focus for me, customers, team members and investors. And I've had a chance in the first 5 days to do a little bit of all of those, but I plan on doing a lot more of engagement across all 3 of those audiences. I'm in learning mode. I want to learn from all perspectives what the company is doing really well and we should continue to do and amplify and where we can improve. I think my goal with our interim CRO is, I go down the road and see up to 50 customers in the first 60 days I'm here, obviously, meeting with investors and analysts in the callbacks. Last week after earnings were another great opportunity for that. And then we just got done with an offsite with the executive team Monday and Tuesday, where we spent all day and evening, getting to know each other, talking about FY '26 planning, kind of bringing me up to speed. And we've also already had a couple of ask me any things with the entire company. So first 5 days have been very eventful. But all 3 of those audiences are in my mind, and that's what I plan to do in the first 60 days.

Excellent. And next year, this fireside, it will be like a hard mode for questions for us, but most of those are going to go to Brian today. But before them, I just love to hear like your past background has been in software. Anything that you think could correlate to the GitLab opportunity?

Yes. There's 3 things, I think, pretty obvious. First, like I said in the beginning, I know this user and our customer very, very well. Having built the developer platforms at Microsoft and Azure, I know our customer, our buyer, our users, same thing in Adobe, same thing at New Relic, just a wealth of experience with our customer. Second, I know how to build products in this space that have reached millions of users and adoption and generate billions of revenue for those companies that I've worked for. And third, I've been part of organizations that are at scale, that are 3, 4, 10, sometimes larger scale than GitLab. So from a people, from a process, from a business perspective, I know what great looks like and want to bring that knowledge and skill experience in to GitLab.

Excellent. And then as a sell-side analyst, I can sometimes pretend to be a lot of things, but one of them is not a New Relic expert. But I would just love to hear, we heard about you made some pricing changes in your past role, had some consumption pricing. Obviously, super early days. I'm not trying to break news here on the fireside. So you would like to, I'm always encouraging. But I guess, like let's just hear about your past experience with SaaS pricing and maybe like if you see any tweaks or anything early for GitLab?

Well, I'll cut to the chase and just say Sid did a great job on the earnings call saying he's not committing us to anything, and we're not announcing any pricing and I won't here either.

Fair enough.

I will say I do have a background in pricing going all the way back to Azure services, have been part of how we price and package, all the companies I have been part of. And so I'm sure that knowledge will come in handy. But We're early days with the workflow service where Sid mentioned that there's an opportunity. And we're going to do the right thing, build it, validate it with customers, test, understand willingness to pay and pick the best monetization vehicle. And we'll share when we get...

Yes. And that makes a lot of sense for use cases, especially, right? Like get people adding more value, adding their own workloads and then kind of -- we can figure out the pricing afterwards. Brian, this one might be for you. Just on the CRO search, been ongoing? Like any update there or how you guys are thinking about it?

So as Bill said, Ashley, as our interim CRO, has been doing a great job. She worked very closely with our prior CRO. And so it's a seamless transition between the 2. And I think the quarter that we just posted and the beat and raise is a testament to that. We've seen a lot of great candidates, but we want to get the best candidate. So we're in no rush to fill the role. The search is ongoing, and it's under Bill's leadership right now.

Excellent. And then just on -- I mean, I got the CFO right before the end of the year. I got to try. It's very least. Anything that we can get crunch you from a top line perspective on how to think about next year? Or like maybe what are some of the things that you're seeing in your business that can help investors as they're trying to figure out their model?

Yes, absolutely. As we -- so next quarter, we'll actually give our guidance for next year. No breaking news today. We could try. But there's a lot of growth drivers in the business that we're super excited about going into the year. As we entered this year, we primarily had Premium and Ultimate from a SKU perspective, and we've been talking a lot on the call about dedicated Pro and Enterprise and early adoption has been really positive. Customer productivity has been up to 50%. With that said, it's going to take a little while for that to make a material impact in the financials. We're also super excited about what we're seeing in Dedicated. That's our single-tenant SaaS platform that we host for customers, mostly highly regulating, higher complexity. And so happy with where we're at there and then we have the agile planning SKUs. So we have a lot more to sell into our customer base, take greater wallet share. But -- and then it's a big market. It's a $40 billion TAM, we're just shy of $1 billion. Our next largest competitor is us combined is still a small fraction of the market. And so landing new customers, expanding existing customers. hyperscaler partnerships. And so lots to be excited about. And next quarter, we'll be happy to update you on next year's guidance.

That's perfect. Just to stay with the third quarter, what happened. You talked about federal as a vertical that has performed really well for GitLab. I'm sure there's a lot of efficiency that you guys can help with across our government. But how do you -- how should investors think about like the TAM for that federal business? Or how do you think about like -- how that can be a bigger vertical for GitLab going forward?

Yes. With our self-hosted model, it fits well in the federal space and really happy one of our top 10 -- in our top 10, we have 2 three-letter agencies. And so when they deploy, they deploy really big. And I think it really goes to show the testament of the platform itself, how extensible it is, whether any vertical you're in and sort of the efficiencies that you get from that. And so I think the federal vertical we're going through a FedRAMP process right now, we've gotten early traction with some customers there as well. And so I think it's a -- especially with the new administration, what they call Dodge. But the Dodge committee that got us established. I think we're well positioned to actually help with that. And so excited to see what happens. And we had the best quarter in company history in the federal sector. September is their year-end. So to be expected in some case, but happy with what we're seeing there.

And look, I'm happy to plug my own research, but we published the developer hiring trends this morning, I can do every month. And you've seen some pretty strong year-over-year growth over the last few months. We track GitLab job postings as well. And your results track in line with that sentiment as well. I know that might not be a part of your guidance, but at least within your full customer base, are you seeing early signs of seat stabilization, like maybe larger customers doing better receipts like any commentary...

Yes. So thanks for the question. We're landing with this quarter, one of the things I called out last quarter as well as our enterprise customer base has been really strong. And so if you look at our customers over $100,000, they've grown 31% year-over-year. And we're landing larger as well. So the size of the deals is getting bigger as well. But with that said, we typically land smaller. We don't do mostly wall-to-wall lands. And so within a given quarter, a lot of our business is expansion within our existing client base, and we made land with the developer, then we go to operations, and we go to security, it's more seats plus an upgrade. . And so we have the existing business to continue to sell into, we call that our landed TAM. And then obviously, we can -- we're going after new logos every day.

So even with your largest customers then like because there's so few that are wall-to-wall, still seat opportunities for even them to continue to expand?

Absolutely.

Perfect. And just on pricing for this year, we previously talked about like $10 million to $20 million in total contribution for this year. Is that the right way to think about it for FY '25 or any updates there?

Yes. So for those who are new to GitLab, about 3 quarters ago, I think it was I looked at the consensus for this year, the models were way, way off. And so we dug into the models and said, where are we off at, and it was on the impact of the pricing increase. And so we gave a soft guidance for what the pricing increase would be relative to this year. We haven't updated that because the consensus has actually come in more in line. But what we have said externally is we're doing better than what we expected internally, and we're happy with what we're seeing there, really, on 2 fronts. One is, we're improving unit economics, obviously, with a higher price increase. And more importantly, when we actually did the price increase, if you're an existing client, we didn't allow you to renew early. So we were doing this to try to pull in a rush of bookings. You had actually it had to be up for renewal. You could only do a new contract reset 2 weeks before renewal. And so we announced at spring of last year where the first part of that was going from $19 to $24 per seat per month and then from $24 to $29. So we're about halfway through you'll continue to see the impact for many quarters to come, and we're happy with where we're currently landing with it.

And just with that dynamic, your average customer duration is like 15 months, right? So like you previously mentioned that next year, you should see a stronger price increase benefit than this year as those contract renewals come through. That's still kind of traffic that you're seeing?

Yes. It's really the way that we actually rolled it out and the ratable nature of the model. And so from $19 to $24, we're almost through all those contracts from an average basis of 15 months. We still have 3- and 5-year contracts as well. So we'll get the benefit from that when they come up. So you'll get everything that you recognized this year, the full nature of that next year from a ratable nature plus the $24 to $25 as well -- $24 to $29.

So that will be like a stronger pricing benefit next year. Bill, to tag you back in, as you kind of did your homework on GitLab and you talk to customers and suppliers and resellers and all that, was there anything that stuck out to you like a common theme or anything that you hold was interesting from those conversations?

Yes. I mean, GitLab is really a strategic asset for our customers. It's where their intellectual property is created, maintained and where their innovation happens. It's -- with the digital age, every business is in some way a digital business. And it's really exciting to be part of that. I'd say the productivity and ROI numbers that we share are just so impressive to me that customers adopt this, even they're moving from probably some homegrown stack. That's our primary competitor. Not only do they get rid of the maintenance and development of that, but they can move to a SaaS solution that's best in class, get enormous ROI and productivity benefits. They can then invest back into their own business. That theme came out, and it's like really is world-class.

And to Brian's point, I mean, you guys are midway through a two-legged price increase, and you saw like lows for churn in This most recent quarter. So it just shows your customers are getting more value of the platform. When it comes to the ultimate strength that you've seen, would you attribute this to like AI is still early days, so like more people wanting to adopt security? Or do they feel like they need to go to Ultimate anyway. So like they get those Ultimate AI features. Like how did you say where that strength is coming from?

I think it's coming from many different aspects, right? And so one of the things that surprised me, quite frankly, was the number of people adopting GitLab during the height of the pandemic when they're doing a massive amount of layoffs. And so one of the things is with a comprehensive DevSecOps platform and consolidating to a system of record and get rid of a number of point solutions, you can actually gain efficiency in several different ways. The first way is you eliminate point solutions. Secondly, you can minimize the teams that actually do the integrations. The third way is your developers are more productive. We've reported cycle times about 7x faster. And then fourth, if you have a revenue-generating app that out to market quicker. And so people are adopting a platform over point solutions for that. When they evaluate Ultimate versus Premium, they tend to like Ultimate more because they advance security features as well as the compliance everything that comes along with that. Ultimate is much more expensive than Premium, but I like to view it from a different way and say, at list price, $99 per month, $1,200 a year if our customers actually look how much they pay for all their other SaaS solutions. And for an engineer who -- a senior engineer typically has multiple years of experience, highly compensated to have a full software platform that enables them to be to make software better, faster, cheaper, more secure for $1,200 a year is a great deal. And so we're seeing more and more people land on Ultimate, Ultimate was greater than 50% of bookings in the last quarter and now comprises of 48% of our total ARR.

Yes, that's a good point. And like the developer that they're attaching to, right? Like that salary is going to be a lot higher than 1,200. Just when it comes to that Ultimate shift, like I'd think that's what you just described as a broader deployment and a larger decision than just beyond like we saw a price increase in Premiums, so let's move to Ultimate. Like do you think the Premium price increase had like a minimal impact on that Ultimate shift?

I think a little. If you go through the sales force notes, you'll actually see they're looking at Premium. Now they're going to Ultimate because Premium was 5x. There's a 5x difference, now it's a little over 3x. But really, I think it's a core platform going back to security and compliance. The ROI that Bill talked about is the payback period is less than 6 months with Ultimate and the ROI is over 480% in 3 years. And so we're seeing significant savings with our customers when they consolidate onto a platform just by increase in cycle times.

And just on like which also leads to better unit economics from your perspective, and you've seen improving margin growth, especially in the most recent quarter. It looks like some of that savings also you got much more leverage on the sales and marketing line for this quarter. Do you think you're comfortable with your sales capacity now? Or is that like -- is that in the right spot? Or like is that what the trend of like you guys seeing better Ultimate, seeing better revenue growth, so getting more leverage on that line.

Yes. So sales capacity and capacity model something near and dear to my heart. I've made my career out of spending most of the time with the CRO because if you have a good go-to-market model that's highly efficient, that's where you can create the most value for our company. When I got to the company, the E-to-R ratio for sales and marketing was well over 100%, and it's increased every quarter for the last 4 years. So part of it is just getting larger economies of scale. We've -- the leadership has been in there for some period of time now, landing larger with our customers. And 1 of the things from a capacity model perspective, you never want to get behind. And so every quarter we're actually evaluating what attainment was within the quarter. We know that it takes enterprise sales reps about 9 months to ramp. And so we'll bring those on throughout the year depending upon how we do, and we never want to get behind because it takes 18 to 24 to 30 months to actually catch back up on your capacity. So it's the leverage that we're getting in the business through the economies of scale, leadership, landing larger, less discounting, that's really having an impact on the overall operating margin. In Q3, as you talked about, we had 1,000 basis points year-over-year.

And we can expect that every quarter going forward, right? Like...

We did not say that. We are trying to be provocative.

Yes, I'm going to keep going. I mean, so you could say your margins are under reps because you have JiHu, right? And I know it's tough to put timing around like if you could consolidate or not. But maybe for investors like that are unfamiliar with dynamic, can you just talk about like what that looks like for GitLab and like how you guys are trying to consolidate JiHu today?

Consolidate...

The expenses for JiHu.

JiHu? Yes, absolutely. So for those who are newer to the story, so JiHu is our China joint venture. And when we started the joint venture, we wanted to actually be in China, but don't want to be distracted from the management and everything else. So we actually contributed the IP, and we had a venture Sequoia China that actually came in and put the money in. And due to our ownership structure, we actually have to put that in our consolidated results. And so for this year, there will be roughly about $14 million of JiHu expenses. There's a number of tests that you have to run through. We're just above 50% in equity ownership. And once we get below 50% and some other things, we will actually not consolidate that anymore. Back a couple of years ago after we went public, it was important to deconsolidate it because from a company perspective, we're losing a lot of money and JiHu was spending a lot more than $14 million per year. But 2 things have happened. One is JiHu's brought down their expenses considerably and then GitLab actually cross the threshold of being free cash flow generating. And so we're still trying to deconsolidate it. It's sort of a past fail thing on equity ownership until they raise more or we get diluted down, we'll continue to keep in our consolidated results.

Excellent. A question coming from the audience. You can look at the GitLab website, and you guys have been very open about some of the what you guys are working internally and you could see like kind of the product road map for like security features for Ultimate or some of the observability features. But the question from the investor broadly is, what's next in the product road map to increase the breadth of the platform?

Yes, I think if you look at the investments that we're making overall in the company, they really fall into 3 core categories. One is the DevSecOps platform. In our investor presentation, we have what we delivered from a platform perspective in 2019 versus where we're at in 2024 today. And we've really built out the security vertical, if you will. And so one of the things that a lot of our customers love is shift in security left. We've made some investments in observability. But more importantly, the feature functionality over the entire platform has grown. And I love numbers, being; a CFO, and that shows up in the net dollar retention rate of cohort from like 12 years ago. So cohorts for every year in the company's history are still expanding at about the same rate of the net dollar retention that we've actually published. And so that just talks about the benefit and the value and what customers are getting from us. So one is the core platform, and it's important to continue to innovate and differentiate and so forth. Number 2 is security. Security is on top of mind of all Board CEO, CSOs, CFOs, everybody within the company. And the fact that we can actually shift that security left to make it a system of record, whereas you're actually doing your program, you can get the vulnerability alerts, you can do the container scanning Daa, SaaS, [indiscernible] testing, all that upfront. That really instead of going back and forth, we were talking about earlier today, and Bill was saying like the CISO would come up with all the vulnerabilities and then create a flat file send it over here. It was 2 different systems and the accountability between the 2. It just creates a lot of friction and so forth. And so our investment in security, creating a very good security vertical that can shift left that comes inherently with the platform. is really great. And then the last area of investment is AI. And we've actually taken a fundamental different approach to AI than a lot of other folks. And so if you look at our AI features, we have Duo Pro, which is really meant for the developer and code assistance. Duo Enterprise is very different in a sense that we have 15 AI features that we bundled up in Duo Enterprise, and that's basically injecting AI throughout the entire software development life cycle. We did a DevSecOps report and in that report and going out and talking to hundreds of developers. On average, a developer spends only about 25% of their time coding, they spend the rest of their time managing, planning, deploying, QA and so forth. And so when you put all that other stuff in it, if you just have AI for the coding aspect, that's a small part of their overall workflow in their days activities. So by injecting it throughout the entire workflow, that's where we're seeing these productivity enhancements and the differentiating really pay off.

No, I completely agree. And I like -- that's a pretty crunchy comment around the like your existing customer cohorts are all growing around your retention rate. I mean, I guess, that goes back to what we talked about at the beginning, which is like your customer base really is in wall to wall GitLab largely. So they're still -- like even within your existing base, like a larger seat count opportunity from there. Just on Duo, since you brought it up, we can't go the whole time without talking about AI. I know there's a lot of excitement, and you gave some good stats on -- like how new customers adopt the Duo product. So can you just help us with like where Duo stands today? Any metrics around -- it's like utilization and then we'll go on to like how to think about it from here.

Absolutely. So I'd like to break this up into sort of 2 talk tracks. And so 1 from what we're seeing in early adoption and the customer feedback that we're getting and some of the new loans that we're landing and then from a financial standpoint, which I think you're getting at from a contribution standpoint. And so from a new customer standpoint, we've landed a number of great customers. Second quarter, I talked about AI did 3x where internal projection was. This quarter it was over our internal projection as well. We landed LATAM airways and Emirates and a number of other great clients this quarter. The change that I've seen with AI in general from a product perspective that we're selling is about 2 to 3 quarters ago when people would buy the AI product, they would buy 5, 10, 15, 20, 25 licenses and really try to test and understand what was happening. As a company, there's been a lot of AI talk, I guess, is the best way to say. And with that, there's been privacy issues, IP issues, code getting out there and so forth. And so it was really done more in a controlled test type fashion. When I ran the numbers this quarter, I was really curious of all the deals that included Duo, either Pro or Enterprise, how much of that was a percentage of the total ARR of those deals, summed up all the deals. And I was actually pretty surprised that Duo made up over 25% of the total ARR. And so what that tells me is that when you go back and look at the client, all the deals individually, what it tells me is that not only are they're buying for sort of if they buy Ultimate licenses, they're buying a Duo license, so they're buying more for the Enterprise. When I dug further into that and actually looked at deployment and active users and all that and actually went to the sales rep and talked to the sales rep, they're actually buying licenses for the -- most of the enterprise to match what they bought from a DevOps perspective. But they're actually rolling them mountain waves now. And so you're starting to see what I would say, more broader adoption at the enterprise than what you saw 2 or 3 quarters ago. So I found it very promising.

No, I mean, that's a great point. Like for instance, like if you're adopting a new workflow and going GitLab, you might be more willing to let's -- okay, let's start with AI features where existing customers might be setting your ways will start a little smaller. But at least on a like-for-like basis, that new customer has better ARPU because you're adding the Duo on top. Just from a monetization standpoint, on my side, if we like to get over our skis and feel all excited about these things, but what's kind of the best way to at least to help us initially framing like the Duo opportunity?

Yes. My personal belief and Bill's belief that the company's belief is like everybody should be on Ultimate and everybody should have AI because they can work on the things they want to work on. It enhances their productivity. It makes them more efficient and so forth. With that said, it's a penetration game, and we'll obviously get more penetration over time. The second part of the thread that I want to talk about is the contribution to the model. And we're roughly $800 million run rate company. We just reported 31% year-over-year revenue growth. And so when you're selling a new product that's starting off from scratch, there's an adoption curve. But for it to make a material impact to the financials, it's going to take time. It's a ratable model. It's going to take time. And so we're very excited about what we're seeing, the customer feedback, the Gartner Magic Quadrant that came out, the numbers that we see, but we're also measured and tempered on what we think is going to actually happen from a contribution of the model. And so what we're telling people is with all that excitement, don't expect material impact until really beyond FY '26.

And at least from my side, through your third quarter, you posted better-than-expected results. You've had a stronger beat in the past few quarters, RPO really held up. So I'm not picking on here, but I did save this question for the last, which is like -- no, but I mean like the 1 thing that you could bring up is like maybe the net new customer adds for your base customers is was a little smaller in the past quarters. I know you're more focused on bigger enterprise deployments now. But I guess, how should we think about that metric here?

Yes. So let me start off with some of the metrics for the quarter and why we're super happy with the quarter, 31% year-over-year revenue growth. We did that with non-GAAP gross margin of 91%. We continue to get great operating leverage on the operating margin, 1,000 basis point year-over-year improvement with 39% year-over-year cRPO growth. We don't compensate the sales force to say, hey, you have x of Ultimate, Y of Premium nor do we charge differently for a SaaS versus self-managed nor do we actually compensate them based on a number of new logos they bring in. So they get the same base commission rate for an expansion or a new client. And one of the things I talked about when we did the Premium price increase, it's going better than expected. But I've noted is some price sensitivity in SMB in the lower end of mid-market. And so when you look at base customers, that's an output to the quarter. It's not something that we're actually trying to drive internally to actually say, "Hey, we have a goal of x per quarter. " So it was lower. And part of the reason why it was lower this quarter was because Ultimate did so well. So it's a mix issue, Ultimate greater than 50% of the bookings 3x more than Premium. And so part of it was mix, but also it was part of the low end of the market that doesn't really have a material impact to the financials. So what we've done is we've done some promotional activity for SMB and low end and the mid-market. And so if you're a customer with 75 employees or less, you can buy up to 20 licenses at $19 per user per month. And what was really promising about that is we saw a 20% uptick in trial sign-ups and a 20% conversion in first orders higher than the year before based on that. So we're still playing around with pricing and packaging at the low end, nothing to announce today. We're still assessing that. But hopefully, we'll come out with something a little bit more permanent around that to address the low end of the market. That makes sense.

I appreciate that breakdown. Bill, having a trial was a good reason for me to get out of this conference last year. And you just started. So I'm sure the next time we'll talk, I'll much more follow on your end, but I want to say, looking forward to seeing what you guys are going to be doing GitLab the next few quarters. So thanks for the time, and investors if you have any questions, we can get with the GitLab team. But thanks again for being here.

Appreciate it.

Thank you