GitLab Inc. (GTLB) Earnings Call Transcript & Summary

All right. Thank you to everyone for joining us. I'm Mike Cikos the lead analyst here covering GitLab. With me, I'm pleased to say that we have the CFO, Brian Robins. Thank you for joining us.

Thank you for having us.

And in the front, we also have Kelsey as well. But we'll be going through some prepared questions on my side. Again, this tends to be the best when we are actually getting inbounds from you guys just make it interactive. You guys might have questions that are way more smarter than mine. So please feel free to just launch them.

I think just to level set because I know we're a little bit removed, numbers are a little foggy, but coming off the October quarter, which feels like a lifetime ago, can you just give us a quick refresher on the numbers and how it played out?

Yes, absolutely. Before I jump in, I just want to thank everyone for being here today and your interest in GitLab. I know everyone has busy schedules. And so it's great to see a lot of familiar faces. And so super happy with how we did in Q3. We had a great quarter. We executed really well across every vector within the company. We repeated 31% year-over-year revenue growth. We did that while maintaining best-in-class non-GAAP gross margins of 91%. We also continue to get great operating leverage in the business. And so one of the things that Sid and I have been really vocal about is, number 1 objective within the company is to grow, but we'll do that responsibly. And so we added 1,000 basis points of operating margin improvement. Ultimate continues to do well. It's 48% ARR, greater than 50% of total bookings. And so overall, it was just a really, really strong quarter. We talked about a number of new logos and AI. So happy how we're coming along with AI as well. And so it was the best quarter in PubSec in the company history which was great to see that our product is really resonating in the PubSec market. So happy with execution and happy with how the team did.

Excellent, excellent. And then one of the things that we've gotten of that, that goal specifically, I think at some point, Sid had mentioned something about consumption pricing. And I just wanted to see if we could flesh that out while we have them.

Thank you for the question. This is probably the one question we got most after the call was, are you considering a change in pricing? And if so, when? And so I appreciate you bringing that up. And to clarify, there's no changing in the pricing model that was specifically related to workflow which is in conception right now. We said we get a private beta out by wintertime. And so when we have to do a workflow and that comes out, there may be a consumption component to it but there's no contemplated pricing changes right now with the model.

Excellent. Okay. If I just think broader market at the time, we're in the new year, would love to get a sense, how are customer conversations shaking out from a budget or a demand perspective? What are you guys hearing currently?

Yes, absolutely. So we because we do a number of different conferences, some are broadcasted, some aren't. We've made a policy not to do sort of mid-quarter updates on customer demand. But I will do a refresher for those who did not hear the conference call, we said that the environment remains cautious. I think that's why a lot of companies are reporting, software companies specifically reporting. However, with that said, it's very stable. And so the last 3 quarters has been what we anticipated and so it's cautious. There's not -- sales cycles aren't getting elongated, but it's really -- it's been stable out there.

And this last quarter, again, strongest quarter for the company in its history as it relates to PubSec. Has there been historically like any change in demand from federal when we go through these changes in administration now that we know that we have a Trump administration? Or was PubSec maybe even too small to really be talking about 4 or even 8 years back at this point.

When we talk about PubSec, it's roughly about 12% of the business, so it makes up a meaningful size of the business. There's no changes in -- there was new sales related to the upcoming administration that actually drove PubSec. It was just great execution by the team. There are some exciting things. There's a new DOGE committee, I think it is, D-O-G-E. And hopefully, with sort of the savings within the government, that's really what the GitLab platform does. It takes out all the point solutions, puts it in a single source of system of record, if you will, and the payback period is really quick. And so we hope that there will be many more opportunities within the PubSec market.

Got it. And I mean the platform is obviously meaningfully expanded. You guys now have Dedicated, you have Duo Pro, you have Duo Enterprise. When we come back to the strength of PubSec this most recent quarter, again, is it fair to think that part of that is based on having something like Dedicated -- I'm sorry, yes, the Dedicated offering as well as the Duo offering or is this just more consistent execution and maybe that's to come still?

I would say it's more consistent execution than as it relates to Dedicated. Some of our -- if you look at our top 10 customers, some of our largest customers are 3-letter agencies. And so it's really the benefit they're getting by having one platform and a single pane of glass that can do the entire software development life cycle that the government is using.

Excellent. From a -- I guess if I think about where we are in the world, it seems to be like it's in the easier -- it just -- it's an easier way to cross-sell or upsell your existing customer base today versus going out and acquiring new logos. Can you talk about what GitLab is doing on the new logo front? Is there a potential to actually accelerate it from where we sit today? If there is that potential, what would be a driver for that?

As a CFO, I always think there's room for acceleration and so -- and so the answer to that would be, yes. We have set a very simple commission structure for the sales team. And so when the sales team goes in and talks to customers, it's a very consultative sales approach. They're trying to understand what the customer needs are, what they're trying to solve, how they can help them. And so they aren't going in and saying, "I want to sell you Ultimate, that's our SaaS product." And so we don't set our commissions by Ultimate versus Premium. We don't set them by net expansion versus first order. We allow the team to go in and basically sell whatever thing they can sell to the customer. It can be Ultimate versus Premium. It can be Duo Enterprise, it can be Duo Pro. And one of the things I think is awesome about the GitLab model is once we land a customer, they tend to expand with us for many, many years and don't leave. So we have a gross retention rate in the mid-90s. And if you look at cohorts from 10 years ago, they're expanding at roughly the same rate as cohorts from 2 years ago. And so I can't think of many other businesses with a single product or a couple of products where you can actually continue to expand 10 years with the same customer.

Can you talk about that dynamic for a second. Like why -- I would think you see the value expand and then maybe by the fourth or fifth go around, you just roll it out to these. Like I guess, based on your comments, the customers are much more phased as far as how that rollout takes place then?

Yes. So most of our customers buy from a bottoms up. And so it's a division department, they'll buy it, they'll use GitLab. Typically, we land with the developer and then it will go to another division department, another developer, then another developer then we'll change personas to operations and then eventually will change to security. And so when we land with a customer, we're landing more and more on Ultimate but we typically would land on Premium and then we would sell a number of seats. And then when we would have a tier upgrade, then they would have to buy Ultimate, so that was another way to get more wallet share. And so we see customers continue to expand. We have Agile planning now. So people are adding new seats or Agile planning. The AI SKUs are out there. So people are buying those and so there's just the ability to continue to expand with these customers because we land relatively small.

Excellent. Okay. And on that point, as far as these new customers, are they -- are new logos landing larger? I would think they are just because of how much traction you're seeing with Ultimate, but just to sound check it?

Absolutely. We're -- we are a enterprise company between enterprise and PubSec, and we classify enterprises over 2,000 employees, which is sort of a higher bar than some companies. That comprises over 70% of our total business. But we are -- we really early in sort of new people adopting a platform, as you start to go up the curve, we're starting to see larger lands as a -- as we go into the customer base.

And from that perspective, is that driven by -- again, I know you're not necessarily incentivizing the sales work to go one way or another. But hey, larger organizations have deeper pockets, which might be stickier spend in this kind of environment? Or is it maybe a function of the maturity of the offering? Like what are the drivers for that move-up market or landing larger today versus where we were couple of years ago?

Yes. I think us and our next closest competitor are really a small percentage of the overall market. It's a $40 billion TAM and growing. And so I think the when you had a lot of first movers, you're buying for just really small segments of your company and now people are buying from more division departments. We are a bottoms-up sort of land-and-expand motion, but we do, do some top-down sales. One company that we talked about, UBS, their CIO made a press release, UBS and GitLab years back and talked about how they're actually implementing -- they implemented like 9,000 licenses in 9 months and then they're up to like 18,000 licenses in about 15 months. And so they've really taken a bunch of point solutions out, saved a lot of money, increase cycle times and so forth. Actually, several quarters ago talked about it on our earnings call, on how implementing this platform really save them a lot of money and help them with their software development.

If -- so great on UBS and the expansion there. If you have seen that kind of success, is there a thought that maybe you can build out a stronger top-down selling motion to kind of supplement what you guys have? Or is that already in the works under the hood like?

Well, we do both, right? When we go in, obviously, reps up quotas and they want to sell as much as they can as quickly as they can. But typically, it's a bottoms-up adoption. And that -- when you do a wall-to-wall implementation, it's a much longer procurement process. And so when you're buying for a division department, if you look at the number of users that we say we have and the number of users at Microsoft says they have, it's like 3 to 4x a number of knowledge workers in the world. And so everybody has a free GitLab account, and everybody has a GitHub account. And so most people are familiar with GitLab already. And so when someone is buying it for a division department, they were a GitLab users and maybe they switch companies and are buying it for that division apartment. And then once we get into sort of spreads throughout the organization.

Okay. And we spoke about the $40 billion TAM already, the fact that there's 2 platforms out there that are leading. It's you and GitHub. My question is, why haven't we seen consolidation faster in this market. There are so many point solutions out there. We're talking about these very quick paybacks and productivity gains. If someone says, "Hey, we're good. Well, we'll take a pass on GitLab." What's the pushback on that?

When you -- let me answer the question around consolidation, then I'll talk about some of the reasons why people don't adopt. And so from a consolidation play within sort of the vertical, we've done some M&A but all of our revenue has been organic, and so we haven't acquired revenue. We have a single code base for our SaaS product, and our -- same code base for SaaS as it is for self-manage and if we actually go out and acquire a big company, we actually deprecate the code and rewrite it in our platform. And so -- but it wouldn't make sense to go out and pay a lot of money to acquire all these customers and say, "Hey, we're deprecating the code. We're no longer giving you that product, but you get the full platform." And so that's why there hasn't been a lot of company consolidation. We've actually built most of it. We will get a buy versus build to get to market quicker, but we've built most of the platform, most of the feature functionality that we had. When you're selling the product, if you're selling the product, our biggest competitor is not Microsoft, our biggest competitor, is DIY DevOps. And so it's the divisions of people that are actually with the bubble gum and bale wiring and putting together that. All those solutions with all the interfaces and so forth. And so when you're going in they're actually selling that product, you're trying to sell to the people whose job is to do all those integrations and manage it. If you have a platform, you don't need those departments to do that. And so a lot of people -- we don't clean -- our secret sauce is the fact that we have the entire software development life cycle in a single platform. It's a system of record, you can shift security left, but we don't claim to be best of breed in every single phase of the software development life cycle. But it's good enough to allow people to actually be able to work on everything at the same time to create software better, faster, cheaper, more secure. And that really is the secret ingredient, if you will, to the platform.

Excellent. And I know that you guys put a big focus on security compliance, putting that checkpoint thing in place throughout the process, right? I think on the most recent quarter, you're talking about the launch of advanced SaaS is now GA as well. And that was always the big pull for Ultimate. It feels like you guys are continuing to use packaging as a lever to help that up market adoption, right? We talked about like, Dedicated, you have to be an Ultimate customer; Duo, you have to be an Ultimate customer. Is that the philosophy we should think about as driving like, it's carried not stick necessarily?

You're getting into sort of a pricing and packaging question. And so when we price our products, we really look at 3 things. We look at what the benefit we're bringing to our users. What the cost to deliver is and then what's the competition out in the marketplace. And a lot of the things that you talked about, Duo Enterprise and Duo Pro, are per seat. And if you go Duo Enterprise, you have to be an Ultimate because of all the advanced security and compliance and so forth. Dedicated, you have to be on Ultimate as well because it takes a certain amount of money to set up a single-tenant SaaS, a private network. And so really, it's the number of licenses, it's the amount that they're spending with you is helped drive that Dedicated, but it's hard to put that just on Premium and say, "Hey, you can have Premium, in these things just because the Premium price point is much lower than Dedicated." I'm sorry, than Ultimate.

And with Premium, obviously, lower price tag, customers more economically sensitive. What is it you guys are seeing on that front from a new logo perspective versus internal plan experimentation, again, just given the economic sensitivity of those customers?

Yes. So since we don't have a commission for Premium versus Ultimate, we actually tell the reps go out and sell what you can sell when we report the numbers of the quarter, most of this is outputs, not something that we're actively managing to. And so we actually have seen Ultimate do really well since we managed to a total bookings number within a quarter or as big as we can, if you sell more Ultimate, by default you'll less Premium. And so Premium has been doing well within the enterprises where we've seen some weakness in Premium is really related to the price increase. And so we've seen some price sensitivity in the lower end of the market, lower and the mid-market in SMB. And so we've been running some promotions around that to see how price sensitive they are. And one of the things that we did is if you had fewer than a certain number of employees, you should buy a certain amount of premium licenses, and we saw trial sign-ups increased by 20%. And we saw conversions increase by 20% when we did that. And so we're still playing with that, we may actually come out with something specifically for SMB in the low end and mid market or we may continue to run some promotions.

Excellent. And for Duo Pro and Duo Enterprise, how has the go-to-market playbook built for those solutions? Does it require a little bit more of a sales specialist or sales overlay? Is a sales engineer getting pulled in to help architect that? Like how is that introduced to the customer in the sales process?

Yes. It's the same rep. And so there's not multiple -- there's not like an overlay force that's going out and selling Duo. And so we've actually worked on the enablement materials, we've trained the field. And so the same rep is used in Duo is a way to get into new accounts and also to go revisit the existing accounts. And so it's another tool in the tool bag, if you will. Just, "Hey, Mike, we have Duo Enterprise now. Would you like to try it and see what it would impact. Here are some of the customer testimonials that we have." And so it's the same rep. One of the things that we mentioned, I believe it was like 2 calls ago is, we've had to shift some of the go-to-market materials over the last couple of years and it went from being a very technical sale to a payback financial sale. Now it's a combination of both with AI in it. And so we've changed a little how we've done that. And so now on the technical side for some of these larger enterprises, we have what we call field CTOs. And so this is sort of like a very senior assay with the field CTO title. So when they go into our enterprise customers, they help talk about migration, benefit, the technical solution and so forth. And that's really helped out.

Excellent. And for Duo, you guys have spoken about some big customer wins there, Emirates, F5. Can you talk about, I guess, the adoption trends when that is discussed with the customer, is that typically at renewal? Or is that again, that's another opportunity for me to go to that customer and engage them even before they're up for renewal?

Yes. Any time our reps are going out and talking to -- 5 quarters ago, and I think I got my quarters right, about 5 quarters ago, as we prep for earnings, I'll go to our CRO and CMO and I'll say, like what new trends are you seeing out in the marketplace? No one mentioned anything about generative AI. 4 quarters ago, it was almost in every single sales conversation. And so -- and so if it doesn't come up, our reps are actually bringing it up proactively and getting people to try it. And so if you look at over the last 4 quarters, it's been super interesting. So this was the first time where I think media really led the hype cycle. Investors were trying to catch up and companies weren't even allowing it within their enterprises because there's IP concerns, there's security concerns. There's a number of different concerns. Some of those have been solved. And so then like 2 quarters ago, you would see people buy it, but they would buy just a small set of licenses, 10, 15, 20 licenses, they would test it in sort of sandbox environment, they would see what the impact was, but it was still not allowed from a policy perspective in a lot of companies. One of the things I talked about on the earnings call was when I looked at Duo and this was sort of a point of clarification I want to bring up as well. When I looked at Duo, the deals that we sold that had Duo involved in them, Duo was greater than 25% of the total ARR for those deals. And so what we're seeing now is people are buying them to match the number of licenses that they have, but they're actually rolling them out sort of in slower batches, if you will. And so it's good to see that we're seeing more adoption. We talked about that it's exceeded our internal expectations, and we -- the logos that you mentioned are great logos. And we're starting to see some bigger lanes with bigger enterprise customers that are trying out Duo Enterprise. I also think it's really important to mention Duo Enterprise is very different than Duo Pro and also Copilot. And so Duo Enterprise is basically injecting AI throughout the entire software development life cycle. So a lot of the -- a lot of what you hear about there with generative AI is just meant for coding and it's code assistance, and that's really what Copilot does. And we put out a DevSecOps report and coding only makes up about 20% of the total process and actually plan, manage, deploy, write, test, secure. And so it's a very small part of the whole process.

When Duo was introduced, so greater than 25% uplift, right? But when that's introduced. Do you tend to see sales cycles elongate just because there are potentially more constituents or now it's a larger price tag than it would have been otherwise? Like how does that play out?