Q3 2022 Gitlab Inc Earnings Call

<unk> also enables our customers to manage and secure their entire Dev ops workflow across any hybrid and multi cloud environments.

This enables our customers to select the best cloud provider for their applications and it allows our customers to avoid vendor locking an over reliance on a single cloud vendor.

We believe this provides us with a competitive advantage to help empower our customers to embrace the full benefits of our multi cloud strategy.

In 2020, Gartner created a new market category for Dev ops tools called the value stream deliberately platforms.

Get loss position as the pioneer in the market of Dev ops platforms as evidenced by the fact that in October 2021, Gartner listed get lap as a representative vendor for their market guide for value stream delivery platforms for the second year in a row.

And get lab, we prioritize and are extremely effective and improving the platform.

We have a dual flywheel development strategy that Leverages, both our research and development group and our open core community.

By leveraging the power of each we create a cycle or more contributions will be two more features which leads to more users leading back to more contributions.

As an example of this innovation in the third quarter, we introduced over 100 new features.

A few of our top new features are get lot of operator.

Which enables customers to standardize their deployment and manage the full lifecycle of get lab on kubernetes based platforms, including Red hat open shift.

In addition, this feature Felicia Foundation for automating common tasks, which we believe ultimately reduces the total cost of ownership.

Another new feature is get Lance proprietary next generation static application security testing engine.

This new engine was built in house to enable customers to detect and eliminate security risks faster than before.

We also released improvements to the wiki experience with the new what you see is where to get markdown editorial.

This rapid increase in features into Dev ops platform enables customers to use get left for more tasks replace more point solutions and achieve a faster cycle time.

The Dev ops platform delivers positive business outcomes for a very wide range of customers.

From single users to tens of thousands of users from small organizations to fortune 500 companies.

Get lamps, the wider community spread across every geography and across a wide number of verticals, including the public sector.

Most people start using get lab with our industry, leading source control and testing functionality.

After they start using get lab customers often expand their usage in our platform realizing that they no longer need the accustomed tool chain with individual point solutions.

I'm proud to share that in the third quarter, we added 425 based customers.

Some of the new and expand logos includes Suzuki Motor Corporation, Smart sheet and Lockheed Martin.

Let me give you a few examples of expansion at other companies.

In Q3, we have many expansions with our public sector clients.

We continue to play a critical role for a government contractor supporting our military program the COO.

Contract or migrated 2000 users to a single integrated Dev ops environment.

Another key license expansion was with one of the largest logistics e-commerce and business services companies in the world.

They continue to expand enterprise modernization initiatives with get lap in Q3.

This expansion of get lap Dev ops platform reduced development cycle time from ideas to release and accelerated their data center consolidation efforts.

I'd like to highlight another expansion from a major telecommunications customer the customer added more development teams to get lap, which further simplifies their tool chain infrastructure.

The team was able to reduce their complete datacenter deploy process to under eight hours.

And because of that streamlines deployed and build process they enabled using get lab.

I believe that our platform solution that integrate security is the future.

In today's threat landscape, we need to secure 100% of your applications and 100% of the time, we believe that the only practical way to do that is to integrate security into the platform.

And get lives Davos platform does this.

In Q3, we also welcomed our newest board member so anybody spending as the Chief Information Officer, and Chief data Officer at Snowflake, and we're very pleased to welcome into to get lab Board of directors.

On November 10, we share that my co founder and creator of gift line Dmitry <unk> made the decision to leave his position as engineering fellow after completing his personal commitment of 10 years to get land.

I'm excited to continue to lead to get land and build on what we created I would like to thank dmitry for all of his contributions.

I will now turn the call over to Brian Robbins get Labs, Chief Financial Officer. Thank.

Thank you Sir and thank you again to everyone for joining us today I will quickly recap our third quarter financial results and key operating metrics and then conclude with our guidance before I dive into the quarter I will give a brief overview of our go to market strategy and our business model in today's innovative world. We believe that every company must become a <unk>.

If our company or they will be disrupted by a software company.

When it goes to market with a proven land and expand model to help organizations modernize their Dev ops.

Because customers often come to us seeking to address their most immediate needs and for the best developer experience, we have seen viral adoption and expansion of our platform. This is evidenced by our best in class dollar based net retention that has consistently been over 130%.

Our platform is offered with a free version and to pay subscription tiers premium announcements, which are price per user and based on the features available within those plans. The free version in both the peds subscription tiers are available as a size and self managed offering ultimately continues to be our fastest growing plan going.

Forward, we expect our SaaS offering which is recognized ratably to become a larger portion of our business art yourself managed offering has both ratable and upfront revenue recognition, including a license component, which is usually less than 10% of the contract value and is recognized upfront.

Post contract support which is usually about 90% of the contract value is recognized ratably over the contract period.

Our contract terms are typically annual deals with cash collected upfront historically, we've had some multiyear contracts where multiple years, where invoice upfront. However, we expect the vast majority of our multi year deals going forward will be invoiced annually.

Now, let me turn to the quarter.

Revenue of $66 8 million was up 58% from the prior year as of quarter end, we had over 4000 customers with <unk> of at least five <unk> up from over 3600, and over 2400 customers compared to the prior quarter and year respectively.

Current customers with greater than five <unk> represent approximately 95% of our <unk>.

We also measure the performance and growth of our largest customers, who we define as those spending more than a 100 K and are with us for the quarter. We had over 420 customers with <unk> of at least 100 K up from over 380 and over 240 customers compared to the prior quarter and year.

<unk>.

For both our five K and 100 gig customers I think it is important to note that we have already well exceeded the number of new customers. We've added to our platform compared to FY 2021 and over FY 2020. We think this is due to the increased market demand for Dev ops platforms and business imperative to become.

Better at Dev ops.

As many of you know, we do not believe calculate billings to be a good indicator of our business. This quarter was an excellent example of this as we saw strong revenue growth and even higher <unk> growth calculated billings year over year gross like both <unk> and revenue growth due to the prior period being impacted by a number of fab.

<unk>, most notably our history of large prepaid multi year deals non.

Non-GAAP gross margin was 89, 7% for the quarter, which compares to 88% in the immediate preceding quarter and 89, 2% for the third quarter last year.

As we move forward, we are estimating a moderate decline in this metric due to the rapid growth rate of our SaaS offerings year over year, which remains above 100%.

We saw improved operating leverage across the business this quarter non-GAAP operating loss of $23 9 million or 35, 7% of revenue compared to a loss of $22 3 million or 52, 9% of revenue in Q3 of the last fiscal year.

The main factors contributing to this were higher revenue and lower than expected team member growth during the quarter, we anticipate hiring to accelerate in the fourth quarter and into FY 2023 to support the growth in our business.

Operating cash used was $10 1 million in the quarter compared to $14 1 million use in the same quarter last year.

We performed well during the quarter and believe our business is set up for continued strength as Sid mentioned earlier, we believe we have a very substantial market opportunity is relatively underpenetrated and we're well positioned to capture an outsized portion of it.

Turning to guidance for the fourth quarter of FY 2022.

We expect total revenue of $69 5 million to $75 million, representing a growth rate of 51% to 53% year over year, we expect a non-GAAP operating loss of 33 million to $32 million.

And we expect a non-GAAP net loss per share of <unk> 26.

So 25, assuming a 144 million weighted average share is outstanding.

Let's turn to the full year FY 2022.

We now expect total revenue of $244 million to $245 million, representing a growth rate of 60% to 61% year over year, we expect a non-GAAP operating loss of $104 million to $103 million and we expect the non-GAAP net loss per share of $1 43 to $1 42 assumed.

<unk> 80 million weighted average shares outstanding.

With that we will now move to Q&A to ask a question. Please use the chat feature and pose your question directly to IR questions. Operator, we're ready for the first question.

Our first question should be coming from Kash Rangan.

Thank you very much congratulations on the first quarter as a public company.

Curious if you could give us an update on your perspective.

Post pandemic world that Florida ever happen.

As software development and release cycle.

Changes it would become faster or about the same and also if you could just give us a quick commentary on the competitive landscape.

Any interesting displacements that you did that put you on the strategic roadmap for large fortune private corporations. Thank you so much and congrats again.

Thanks Kash appreciate it we've continued to see strong demand for the dental platform and compare to a quarter ago. We saw that the labor market for developers security experts and operators got tighter. So we believe that with getting lab customers can get more done with the people they have and right now they are really struggling to hire more people.

For example at T mobile they increased their delivery frequency by Tenex due to get lumps of 10 times more frequent updates to their software and we believe we are still early and what we believe is a massive market with untapped potential.

Right and to comment on any competitive displacements or any changes to the competitive.

I know, where youre quite should take more share relative to the competition. Thank you so much.

Yes.

It's still the case that we're competing with DIY desktops. According to the latest Gartner numbers that came out in October ACD adoption of Def ups platforms being at 20% right now.

They see that growing to 60% by 2024.

Right now, it's all about customers, replacing their point solutions with our platform and convincing them that that is the way forward.

Yes. Thank you so much happy holidays.

Thanks, guys.

Next up we'll move to Sterling Auty.

Yeah. Thanks, Hi, guys. So you had mentioned the different pricing tiers that you've got.

I'm curious what you saw in terms of in the quarter, what any additional shifts that you might've seen towards that ultimate tiara and the impact on the business.

Thanks, Sterling ultimate continues to be our fastest growing tier at more than doubling year over year as.

As we continue to drive business outcomes. These customers, they're seeing the increased ROI and so we're really happy with with the growth in ultimate.

And then one follow up also on metrics when you look at to get over 70% growth in customers spending over 100000 with you can you give us a sense is that just those customers existing adding more developers is that a shift to ultimate is it brand new customers, what's kind of the mix or makeup of the growth in that in that.

<unk> for you.

So.

In the customers, we see the majority of it from existing customers adopting more users and then second is up here.

Got it thank you.

Thank you.

Next up we have a question from Rob Owens.

Great. Good afternoon, and thanks for taking my question I Love to Dovetail Sterling's question, a little bit and understand just how you are landing with customers are you landing larger at this point and are you landing broader with customers in terms of that use case and more of the platform proposition. Thanks.

Thanks, Rob.

We're continuing to see bigger land as well as more expansion.

On the land side, we are landing larger average new <unk> or new lands had a meaningful year over year increase and on the expand side, we're really happy with our expansion. Our net dollar retention continues to be in.

<unk> of 130%, which is best in class is driven more by its driven by new users as.

As well as the upturn Ultimate and then also we don't see many people leave and so we don't really have contraction or loss of customers.

And relative to that mix of Ultimate then are you landing more often with ultimate say than you were a year ago at this point.

Yes, we ultimate is continuing to grow faster and we're landing more of the ultimate and then we're also seeing up tier to ultimate.

Thank you much Bryan.

Thanks, Rob.

Next up we have a question from Joel Fishbein.

Hey, congrats on the quarter, gentlemen, and I just have a quick follow up to Rob's question.

Brian where are you in terms of sales productivity and also building out enterprise Salesforce that'd be helpful.

Yes, so we believe the productivity remains healthy and continues to get better. We currently anticipate continuing to build sales team in all market segments, and so were adding in enterprise and mid market and some in SP SMB as well and so we add add.

This quarter, we added a number of new salespeople and happy with their productivity.

Great. Thank you.

Moving on now to Koji Ikeda.

He said hey, Brian Congrats on a nice first quarter and your IPO.

I was wondering if you could tell us how your conversations may have changed or evolved over the past year with your customers and prospects.

And they were thinking with leading developers being able to choose their own desktop tools.

Maybe for speed or familiarity maybe versus taking a more standardization approach from the top down what typically is the catalyst that drives more of a top down standardization strategy.

Yes. Thanks for that question. So companies are seeing is that.

Integration efforts are growing they have more and more Dev ops tools and at the same time the number of protect projects that they have within the company is growing at the same time, so to get it thats, causing an exponential increase in the number of protect tools integrations and that effort is becoming unsustainable and thats why theyre going.

Towards the Dev ops platform think of it as.

As you get more electronics, you had a walkman you had a camera you had a flashlight as more and more electronics became available you were carrying more and more things with you. It wasn't sustainable no one's going to carry around a belt Whittle. These things you want an iPhone you want something that integrates all of that in a single device.

Got it thanks, and then maybe just one quick follow up for Brian I think in your prepared remarks, you mentioned something about lower than expected <unk> growth. Just just wanted to double click on that a little bit can you walk us through that comment was just because you were maybe a bit front loaded last year, maybe at the beginning of this year and this is a pause here or is there anything else, we should be aware of there.

Thank you.

Yes. Thanks for the question, we just wanted to point that out when Sydney Sydney. We're on the road, we talked about the number one objective was growth, but we'd do that responsibly. We added more team members this quarter than any of the last six quarters and so we did have a big quarter bedding Z members, but we added lesson anticipated NAND, so that fell to the bottom line.

We will look at reinvesting that back into the business when we can.

Got it thanks, Brian Thanks, guys I appreciate it.

Thank you.

Moving on now to a question I believe from Jeff Hickey.

Hi, guys. Thanks, I'm on for Karl.

The first question I have is how do you think about the broader opportunity.

Wes do you have over 30 million registered users there are numbers out there around the.

You made a number of professional developers, but the opportunity to have a much broader outside of maybe a more technical audience. So the first part would be how do you think about that moving forward as you move away from just use case is primarily focused on source code management.

Thanks, Jeff.

We think that the.

The broader opportunity is enormous.

You'd look at.

<unk> us today combined with Github, we think combined were less than 3%, it's a $40 billion Tam and we're just getting started so we're really early in the market every company has to become a software company or youre going to lose and we're helping software companies, where we're helping companies make software better faster more secure.

And the Rois that we're driving in the business outcomes are extremely positive. So we're really excited about the opportunity in front of us.

Got it and then one quick follow up would be on just the billings growth I think you guys were lapping a bit.

<unk> deal or something in Q3 last year could you elaborate more on that.

Billings metrics, we should really focus on going forward or do you expect it to be volatile.

Billings is a little choppy and so we tried to steer people away from billings when we were on the road.

In particular short term billings.

Little lower this quarter, but if you remove professional services and true ups and then the billing from one of the largest deals in company history last quarter. The growth rate is consistent from the last couple of quarters.

You see our 10-Q, our Apio grew 70% year over year, and our AR growth for three SKU exceeded that.

Got it thank you.

Matt Hedberg has our next question.

Hi, guys. Thanks for taking my questions.

I think Brian you mentioned SaaS is growing north of a 100% as it continues to increase in the mix does that open up new ways for you to leverage data.

To make the platform even more robust maybe it's even from a customer benchmarking perspective.

Yeah I'll take that question, if you don't mind, Matt It's a great question and it does it does open up new possibilities you mentioned benchmarking. Another thing is that we can train ml models that accelerates cycle time for example figure out who to assign something too and.

And also we can make more relevant suggestions to embrace new get lamps functionality.

And these.

Improvements don't just benefit our SaaS customers, we can frequently re Houston to also benefit our self managed customers.

That is super exciting considering the growth in that in that in that product.

And then my second question on the security side I think we're all aware of the <unk> op movements and sort of shift left.

Can you think about where you can take your security portfolio longer term, how do you think about that beyond sort of released and package today.

Yes, thanks for that.

We're really bullish on what we already have our secure state is the most complete offering in the market <unk> analysis secret detection code quality dynamic analysis API security first testing dependency scanning license compliance and vulnerability management we.

We anticipate that will be further expanding into protect states in that stage. We already offer basic versions of container scanning security orchestration contain a whole security in container network security.

Well done guys.

Thank you. Thank you.

And a question now from Derrick Wood.

Great. Thanks, and I'll Echo my Congrats first one for said I mean, given the trend of companies wanting to buy a dev ops platform.

How do you think about selling more bundles out of the gate like like crate and barrel by sold as an initial sale out of the gate is that something we could see more of or is it still going to be a motion of landing in one area and then expanding from there.

Yes, thanks for that question and what's important to know about our pricing model is at every tier includes every stage. So even in our free tier you get all the stages of getting that we charge for functionality on top of that is that functionality is aimed at an executive it will be in our ultimate tier.

If you look at how customers adopt it it is a gradual process, it's not possible to break down replace this dev ops processes. So courtyard customers due to really hard to change everything day. One if you look at the fourth tier city. We released together you find that customers to replace three point solutions in the first year.

And the second year in the third year, a linear pace of adoption. So customers can keep growing with get lab for a very very long time.

That is helpful.

And Brian.

Youre modeling pretty minimal b cell or a deceleration of growth in Q4. So I guess a couple questions. I mean, you alluded to the why there was a tough comp in Q3 does that does that more normalized in Q4 or is there anything else to think about it then I think you guys have.

The amount of government business can you remind us what gov.

Government seasonality is in Q3 and is there some seasonal downtick in Q4, just kind of flush out the second half seasonal motions.

Absolutely. Thanks for the question Derek from a pump perspective, <unk> is the biggest quarter for them and so.

Would be lighter for us in <unk> and then on the on the velocity of the de acceleration in growth.

Really the reference there was to the billings number as billings came in.

<unk> calculated total billings year over year and calculated current billings year over year growth was lower and so wanted to explain the normalization on that and then on the revenue growth, 58%. This quarter, we guided full year.

The implied growth rate of $60 to 61%.

Helpful got it thank you.

Alright, moving on to Michael tourists.

Hey, guys.

Brian everybody congratulations.

Brian a question for you.

Go to market and engage with customers.

How's it going, especially as you build out the enterprise sales force.

Terms of selling more top down as opposed to bottoms up to developers and are you starting to see that kind of standardization across the enterprise.

As you move up in terms of where you're selling.

Yeah, Thanks, Michael and I appreciate the comments on the quarter, we've been a.

Direct sales motion to the enterprise really since the company's inception, we just added some additional go to market motions over the last year, which are new but are very.

Very good.

The early results are very positive and Thats channel alliances partnerships and so forth and so.

No our normal sales motion sort of is for you.

Youll land relatively small and then expand within the client, but there are examples such as UBS, where we did a wall to wall implementation in less than a year.

And so we do land at the top sometimes as well.

And so we do both motions, but the the one where you land in a division department.

100 licenses at a time is probably the more normal motion for us.

Okay, and then if I could squeeze one in would you see it.

Many many customers and I think your core code.

Code repository STM NCI, but can you talk a little bit I know you talked about.

Sure.

A bit more about expansion into the CD and pipeline management side in that direction and how you've been.

The successful there.

Yeah. Thanks for the question Michael.

We do land with source code management and testing code and are testing code is now also appropriate land. So it's not just source control some customers use us exclusively for testing the code.

From there from those two land areas, we expand and secure package and release, so we secure replacing solutions like check marks like Synopsys like blackjack and package would be replacing things like gay probe artifacts in release, we commonly grips.

<unk> custom scripts that the customer made before better that are hard to maintain those are expansion points and we're investing there and especially secure has driven a lot of appearing to ultimate because it's really important for customers to test 100% of their projects, 100% of the time.

Alright, Thanks, guys. Thanks, Brian.

Thank you Michael.

And we'll take a question from Jason Ader.

Yes, hi, guys.

My question is on the accelerants to growth in 'twenty calendar 'twenty 'twenty to fiscal 'twenty three.

If you had to talk through the kind of different.

Accelerants, whether it's adding more sales head count more channel alliances or more product releases, how would you kind of.

Think about those three elements or maybe there are some other accelerants that I'm not thinking about.

Yes, thanks, Jason.

As I stated earlier, it's a $40 billion Tam.

Barely penetrated and so there's a lot of different areas.

One is we're going to continue to do more product investment and so the more investment we do on product the more differentiated in the driving the more positive business outcomes.

Secondly is will land new logos and so when we have new logo expansion.

Obviously, we get landed Tam and then we can expand them and also up tier them.

We're also investing in channel and alliances and then we're doing international expansion and so there is a number of different areas that I think give us opportunity to.

To continue to grow in this very enormous market.

And do you expect.

Average, new and our average new IRR, Brian should continue to trend higher.

It has it has done that historically I cant make a forward looking statement, but historically it has every quarter.

Okay. Thank you guys.

I appreciate it Jason.

And with that I'll turn things back over to sit for any additional or closing remarks.

Okay.

Yes. Thanks. Thanks, so much those were some some great questions.

I want to thank you very much for joining this call.

It's great to be able to announce our first earnings and I want to thank our investors the wider community around get lab contributing our team members, our users and our customers for a great quarter. Thank you very much.

Yeah.

Ladies and gentlemen, thanks again once more for joining us have a great day.