Q1 2023 HashiCorp Inc Earnings Call
[music].
Ladies and gentlemen, and thank you for standing by and welcome to actually Corp's fiscal 2023 first quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded I would now like to turn.
The conference over to your Speaker today, Alex Kurtz head of Investor Relations. Thank you. Please go ahead.
Good afternoon, everyone and welcome to Hashi Corp's fiscal 2023 first quarter earnings call.
This afternoon, we will be discussing our financial results for the first quarter announced in our press release issued after the market close today.
With me are Hashi Corp, CEO , Dave Mccann at Sea.
So, Nevada will hinder and CTO and co founder Armani that guard.
At the close of the market today in conjunction with our earnings press release, we have published an earnings deck.
Contains additional financial information pertaining to our quarter.
We plan to do this each quarter before earnings call encourage you to review the DAC in advance of our calls.
Can access the decks.
On our Investor website at IR Dot <unk> Dot com.
Today's call will contain forward looking statements, which are made under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements, including statements concerning financial and business trends.
Our expected future business and financial performance and financial condition.
And our guidance for the second quarter of fiscal 2023.
And the full fiscal year 2023.
These statements maybe identified by words, such as expect anticipate it.
<unk> plan believe seek or will or similar statements.
These statements reflect our views as of today, only and should not be relied upon as representing our views at any subsequent date, we do not undertake any duty to update these statements.
We're looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
During the call. We will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
The financial measures presented on this call are prepared in accordance with GAAP unless otherwise noted.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished the SEC and is also available on our website at IR Dot Hatchi Corp Dot com.
With that let me turn the call over to Dave David.
Thank you, Alex and welcome everyone to our first quarter earnings call.
We're excited to share with you that Q1 was a solid quarter for <unk> Corp. As we exceeded our guidance with revenue of $100 9 million representing year over year growth of 51% along with a trailing four quarter average net dollar retention rate of 133%.
We're also pleased to announce that during Q1, we had our second customer reached $10 million in annual recurring revenue.
The most recent transaction by this global financial institution with a new commitment to console during the quarter, one of our largest console transactions ever.
We will discuss the strategic customer in a few months.
Also in Q1 current non-GAAP remaining performance obligations reached $305 2 million, representing 64% year over year growth.
And we added 49 customers with greater than or equal to $100000 in annual recurring revenue, reaching a total of 704.
Our <unk> cloud platform offerings reached $8 8 million revenue representing.
Representing 9% of subscription revenue in the quarter.
We're very pleased with the performance of HCP in Q1, and as we look out to the rest of the year are excited about adoption trends as we continue to rollout new features and capabilities.
I thought it would be helpful to briefly reiterate what we see is our unique approach to the marketplace as we help customers navigate this once in a decade architectural shifts that is recasting enterprise applications to the cloud.
As a reminder, we help enterprises with their transition to cloud and inevitably multi cloud by delivering a suite of products that provide a consistent cloud operating model.
As enterprises look to standardize their approach they need a system of record for each layer of the infrastructure stocks and that is what our portfolio provides.
Why do organizations to Sasha Corp, well first our products are designed with a cloud first and cloud agnostic approach using Infrastructure's code for provisioning identity as the basis of security and service and service name as the basis of networking.
Each of these represent the core paradigms of the cloud model.
Second our global footprint of practitioners using our open source tools and the free tier of our cloud offerings makes our products the de facto standards in the marketplace for cloud provisioning Infrastructure's code managing secrets in the cloud and increasingly for the still developing cloud service networking market.
We're convinced that for most companies the practitioner will decide how they approach cloud, which is why we focus on the practitioner experience above all else.
Finally, we've developed a rich ecosystem of technology integrations with partners around each of our products, which further accelerates adoption and standardization.
Our products are designed to enable third parties to easily integrate their services into bulk terraform confluent or other products and as we shared last quarter in our 10-K, we now stand at over 2050 providers in our tariff from ecosystem alone.
900 partners total as of the end of last year.
With over 3000 paying customers using our software today, we believe all three of these differentiators have created a significant barrier to entry around our offerings.
With that background, let's take a few minutes today to highlight important trends that we're seeing for our products and the broad demand for cloud and multi cloud adoption that is fueling our business.
Specifically I'd like to highlight the continued emergence of central platform teams within larger enterprises that we touched on briefly last quarter.
During the quarter, our field teams were able to travel more freely to meet with customers and Armani and I spent much of the quarter, having in person meetings with members of the global 2000.
And those meetings, we've been hearing the consistent theme around the emergence of a centralized cloud program offices or what they are often called platform teams within these accounts.
The technology that underpins the transition to cloud and the growth of multi cloud environments is fairly well known at this point what is less well understood is the importance of the teams that are managing this transformation.
As companies undertake cloud migrations or digital transformation CIO is off would find themselves in a difficult position of sifting through the disparate pieces of infrastructure and cloud resources at their various teams are deployed in the past usually with little or no coordination.
This has cost implications, but also efficiency applications siloed teams with siloed infrastructure and little stronger strategy that underlies it all.
And when developers want to develop and shipped a new product to serve customers. They often encountered constraints and delays from their ops security and networking teams, who would like to apply some level of governance.
<unk> sold to these various siloed teams to help them with their immediate cloud infrastructure issues for years, helping the provisioning security networking and application delivery.
However, we are now being brought in to help companies standardize their cloud infrastructure across teams.
Many instances in fact, those early adopters of our products are now being assigned to be the platform teams for their organizations as a whole.
The platform team is the group that consolidates from standardized as cloud infrastructure for an entire company.
It controls cloud infrastructure as a single cost center, great standard processes and establishes compliance protocols for applications and infrastructure.
With the central team in place companies can control costs and enforce consistent security policies.
Allowing developers to deploy applications with far less friction.
Our cloud operating model with an integrated stack of products, including Terraform bulk Cogs one others enables these platform teams to succeed.
We are seeing success in our larger deals each quarter being driven by these dynamics.
We also believe that part of the success. We are seeing a larger accounts is driven by our programmatic approach to selling what we call alere adopt land expand and extend and renew.
This motion happens initially in a single business group and its ultimately mimicked larger scale was platform teams are created to drive standardization across the organization.
We believe that this methodology, coupled with our product innovation can lead to durable long term growth.
We continue to see ourselves is uniquely positioned to enable the largest of enterprises and their decade long move to multi cloud across what six 500 group is estimated at $73 billion Tam through 2026.
We saw these concepts play out in Q1 and now like to turn your attention to notable first quarter transactions.
Like to highlight a few examples of strategic deals we completed the demonstrate our execution in the marketplace and show our adopt land expand extend renew motion.
Yeah.
First a land deal a global insurance and financial services organization landed as an enterprise vault user in Q1 after adopting both open source in 2019 for small departmental use case.
Volt combined with our residential solution architect services is enabling this customer to address audit findings and a global security mandate to address the management substantially sensitive credentials.
By centralizing the end to end process aligned to our jointly developed multi cloud architecture vault will address significant worldwide risk of exposure for this company, while providing cost efficiencies by automating the management and creation of globally secure credentials.
Next and expand deal with one of the largest global financial organizations in the world.
This customer expanded with tariff from enterprise to standardize its infrastructure provisioning approach to bring secure applications to market more quickly.
This will also enable them to reduce the operational costs of their estate by preventing the over provisioning of resources.
Sure from involved to replacing homegrown and self supported open source solutions, enabling the customers business groups to deploy new applications on multiple cloud platforms in a consistent manner.
And third and extend deal example, an energy company extended became a console customer during Q1 after recently, becoming a telephone customer.
Customer recognized of comfort was an agnostic platform that provides a consistent approach to service networking across multiple clouds.
The customer chose commvault, because it enabled us to accelerate the time to market for new applications, which are being migrated from private data centers to AWS.
As an added benefit console allows the customer to extend the life of their existing networking hardware via the console terraform sync capability.
And finally I'd like to spend a minute on how should corp, second $10 million or our customer that I mentioned earlier this.
This organization is also an example of a customer who started working with us around a single product and expanded and extended over time to include tariff on both console.
This global financial institutions began its journey using Packer one of our open source products in 2017.
It expanded the terraform and then volt enterprise after that.
As its cloud journey matured it faced heightened scrutiny and complexity across disparate networking control planes.
These challenges led the organization to add console enterprise this quarter coastal enterprise provides a cloud agnostic approach to service networking that allows the customer to link a variety of infrastructure platforms for private data center to cloud to the edge.
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All of this enables applications teams to embrace these new platforms without compromising security resiliency or agility.
We're proud to count companies like these as our customers and are deeply committed to continuing to earn their trust.
And with that let me turn the call over to the bone.
Thank you, Dave and thanks, again to everyone for joining us today.
Turning your attention to the top line financial results. We produced solid results in our first quarter of FY 2023, which exceeded the guidance from last quarter.
Our total revenue increased 51% year over year, and our trailing four quarter average net dollar retention rate reached 133%, which was over our 120% target range.
Looking at our geographic segments, 78% of our revenue came from the Americas, 16% from EMEA and 6% from the APAC regions.
The Americas region is the largest contributor to our revenue, but we are sequentially, increasing the percentage of revenue from the rest of the world.
As you know on average we have a high level of visibility into our revenue due to its recurring nature. This quarter, we saw more of our subscription revenue come in as recurring revenue approximately 96% of our subscription revenue was recurring.
Moving to the expense side Hershey Corp continues to prioritize resource allocation efficiency in the business.
Doing so allowed us to come in ahead of our non-GAAP gross margin non-GAAP operating income as well as our GAAP and non-GAAP net income plants.
We incurred a net loss of <unk> 43 per share on a GAAP basis, and <unk> 17 per share on a non-GAAP basis.
We track several key business metrics, which we believe help in understanding our business and financial performance in our journey to deliver durable growth.
Youll find a lot of our Kpis are detailed in the accompanying deck on our IR dot <unk> Dot com site I encourage you to review that in detail.
Focusing on one of the core business metrics, the greater or equal to 100, K customer cohort, we made solid progress during the first quarter, we continued to execute our adopt land expand and extend and renew model as highlighted in the customer activity in the quarter, which Dave just spoke about.
On a trailing 12 month basis, we add 181 of these customers and grew their revenue from the 124000 per customer to 141000 per customer in the quarter.
14% year over year increase.
Our HCP business continues to show strong momentum, we grew our HCP revenue by 255% year over year.
We launched several new HCP products and features this past quarter as we continue to invest in the platform.
We are excited about the adoption trends, we see with our cloud products.
Now I want to provide our guidance for the second quarter and the full year of FY 2023.
For the second quarter of FY 'twenty three we expect total revenue in the range of $101 million to $103 million.
We expect Q2 non-GAAP operating loss in the range of 59 million to $56 million.
We expect a non-GAAP net loss per share to be between <unk> 32.
And 30.
Based on a $184 3 million weighted average basic and fully diluted shares outstanding.
For the full fiscal year 2023, we expect total revenue in the range of $422 million and $432 million.
We expect FY 2023, non-GAAP operating loss in the range of $224 million and $216 million.
We expect non-GAAP net loss per share to be between $1 19.
And $1 15.
Based on a $184 9 million weighted average basic and diluted shares used in computing net non-GAAP net loss per share.
We are pleased with our Q1 results and with that Dave and I are happy to take any of your questions Alex.
Thanks, Nevada as a quick note during the quarter, we will be attending the bank of America Global Technology Conference and the William Blair Annual growth conference with that operator, let's go to our first question.
Okay.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Jason Ader with William Blair You May proceed.
Yes. Thank you Hey, guys did you bake any macro pressures into your guidance and then how resilient do you think your business might be if we do enter some type of a recession or downturn.
So Jason Thanks for the question. This is Dave I'll, Let me answer the first but in Alaska.
Nobody in arm on weigh in as well I think generally speaking what we saw what we have seen in Q1 is pretty consistent with prior quarters in terms of front end demand.
The pipeline built side, the middle that Nevada comment specifically on the guidance question, yes. Thanks, Jason So in Q1, we're seeing we're seeing some pretty solid demand signals that we're comfortable with our Q2 and FY 'twenty three guidance that we provided.
We're aware of global macro realities that are out there in the marketplace with rising inflation interest rates and the conflict in Europe . So as always we're taking a measured year measured view towards the back half of the year.
But that all that being said the fundamentals of the digital transformation and cloud adoption are very much intact and these are these are very long cycle markets right. So we're encouraged by the year.
Yes, maybe I'll just add anecdotally I've spent the last few weeks visiting customers across North America, Europe , and Asia Pacific regions.
I think what we've seen is it's a pretty consistent trend across customers regardless of region. They are continuing on their journey to cloud continuing on their journey to digital transformation I think almost.
Almost all of those customers see that as a long term secular transition for them.
Realizing there might be some.
And our macro factors along the way, but most of these customers are deeply committed to that journey.
And I think for many of them they've already made multi year commitments to their cloud partners as well.
Now I'll touch on maybe the second implicit question is around the durability part of.
Our product go to market around a very simple value proposition of cost reduction risk mitigation and time to market right think about tariff Orbis as an example, what core value propositions of terraform is allowing you to not over provisioned compute resources.
The cost savings that vault is allowing you to save cost and automation by rotating certificates around it could be a 10000 machine a state and a script rather than average people. So the value proposition is actually very clearly aligned to risk cost and time to market and I think a pretty fine tuned on that dosing. So so so net is I think that.
Actually plays really well despite the environment.
The second bit when you think about the role that our products play. Unlike say a database, which is tied to specific applications. Our products are more conducive to a utility once deployed right bolt underpins all of the applications in your state and so as a result of tends to you tend to see that in our <unk> numbers naturally so.
Both on kind of the new business side as well as the durability of our existing customer relationships are generally in a.
Selling spot.
Thank you.
Thanks, Jason next question.
Thank you. Our next question comes from Mark Murphy with Jpmorgan you May proceed.
Yes, Thank you very much Sir hey, good afternoon.
It feels like this is going to be a pretty amazing year for the cloud platform Youre going from one product to I think five or six youre extending some of those to Azure is it reasonable to think that that's going to propel the customer adds.
Pretty robustly or even.
Just maybe start to influence some incremental migrations.
From self managed to cloud if you could just help us maybe sketch that out and then I have a quick follow up yes, Hey, Mark It's Dave. So yes, I think I think your observation is correct. Like this is a very new effort for us is a net new audience that we're targeting.
In terms of its tends to be the longer tail of the customer base that are big users of the taxes sort of hear you tend to attract with that aspect of our offering is the host offering the second I'll just underscores just to your point out early this is I think we entered the year with really a couple of products running on HCP and to your point.
We have a few more to rollout in the short term you will see announcements to that and so I think we're pretty bullish on it.
But it is a net new business for us, it's really a net new channel. So yes, I think I think what youll see.
Reasonably as continued adoption as we aggregate people on the free tier of those platforms. They do convert to paid customers.
Slightly less friction so certainly it's compelling in that respect so I think we're optimistic.
I'd say, we were really looking at this as a net new thing we are not yet in a position where we are flipping existing customers to renew onto onto HCP. That's not emotionally began just to be clear. So it's really just net new.
Okay. Thanks.
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It will be different.
Yeah.
Yes, I'm, sorry, I didn't mean to interrupt. We then there are adequate follow up go ahead, okay. Yeah.
No.
Great to see the increase in guidance and the overall traction.
I'm I'm, just I'm trying to connect the dots on there is this tremendously large volume of customer at this.
This quarter, it's kind of an explosion.
It didn't translate maybe as much as the license revenue.
Or the arc.
Growth or is that just the kind of sequential revenue growth.
Just wondering should we interpret that as more it was more kind of smaller cloud customers. It'll scale later, maybe a little less of the <unk>.
Longer term kind of larger deals that drive some of the other metrics or.
How do we connect the dots on some of that.
Yeah. Thanks, Mark So I think to your first point and to your earlier comment about HCP very encouraged by that momentum and a strong customer net net customer additions that we're seeing there. So we're encouraged by that momentum that we're encouraged by the volume of customer additions we saw in Q1.
Specific to Q1 subscription revenue of one point to note is that this was a very high recurring revenue quarter, which is great because that gives us visibility into the fourth quarters that we're seeing so that's what you saw in Q1 high subscription recurring revenue business out there that that came in in Q1, which is obviously great for future quarter.
As to your point earlier on the <unk> side.
Saw high <unk> growth in the 50%, 50%, then CRB I'm, sorry high <unk> growth in the 50 plus percent, which is shows the volume of growth of sort of our contracts that are coming in in the quarter.
Thanks, Mark next question.
Thank you. Our next question comes from Italian Kimberly with Oppenheimer You May proceed.
Thanks, Hey, guys.
Just want to focus on HCP.
Perhaps you can talk about the customer adoption, there and one way is it different today than it was perhaps two or three quarters ago and I know you don't have that much of a track record there but.
Maybe you could talk about the changing patterns of customers on how they use this in the past you've talked about HCP as a way to go more lower end.
And open up the markets are more on the low end to mid tier are those really the customers that you see coming in or is it really still large customers that are just given their hybrid deployments are also considering and deploying.
HCP.
Yeah, Great question at a time I think.
As David mentioned, just sort of reiterating it is a it is sort of a blend of what we're seeing on one side. It is opening up a new channel for us. So it is a new audience and is that kind of long tailed that he mentioned. So these are customers that we would not have historically engage with with sort of our outside field motion that are now coming in obviously driving lower asps more of a transactional.
<unk>.
At the same time, we are seeing some of these larger enterprise organizations that are engaging with HCP up more of a departmental or project level, where great have a project that's being built in native cloud rather than trying to operate it themselves they are going directly through to HCP.
I think the <unk>.
By and large most of where we're seeing sort of the net new logos is the sort of long tail and.
And we expect to see more of those.
Kind of enterprise customers as they continue to gain comfort with the idea of that core infrastructure is going to be provided as a managed service and I think.
That is probably the biggest question Mark for US is just the comfort of those customers as they migrate to the notion of Hey, This is tier one critical infrastructure being provided as a managed service.
Very good and then maybe as a follow up Navarre on gross margins.
Good start for the year, you've talked about I think last last quarter of about 80% gross margin target for the year.
With the strong start that you have.
Would you care to revise that up perhaps.
Thanks.
Thanks, Nick.
Always making me revise up the.
So we're pleased with beating the gross margin plan.
Obviously three constituents to gross margin there is the self managed margin the cloud margin and the.
Professional services margin and the mix of that impacts the margin. So the good news that we're seeing as we beat our plan on cloud margins and its coming in ahead of.
What our expectations were so we're comfortable with where we're landing at the 80% Mark and over time, we should see as cloud takes a.
A bigger share.
We should we should land towards the long term targets all that being said we are at very high gross margin company and we're pleased with that.
Very good thanks, guys.
Next question.
Thank you. Our next question comes from Brad Sills with Bank of America Securities. You May proceed with your question.
Oh, great. Thanks, guys for taking my question I wanted to ask a question about how she corp cloud as well please.
Is there something about these customers that are opting for the cloud option that you think there is a different profile and trajectory of expand in other words do you think that those customer cohorts might have a higher propensity to add more over time, if theyre committing infrastructure to the cloud here with Hershey Corp is.
Is it a different different profile of customer.
Yes. Thanks. This is yeah. This is Dave I would say, yes. It is to a degree I think it's kind of it's kind of two categories. I think one is that sort of perhaps a longer tail customers who've indicated but number two is the departmental user inside of these larger organizations, which.
In some respects lack the expertise of running this stuff, even though they know they need it so they almost.
That enables us in a sense to be their platform team for them deprecation for those people that they're onboard maybe it really at the departmental level is the get up and running far faster. So yes, you can infer that I would expect those customers onboard and get to their expansion and extension to cross product fast.
Or and I think that's certainly the design principle of why we've created the Aqua cloud not as just a cloud version of one of our products, but rather as a single common chassis towards our products dropped. It allows us to then encourage that motion. So yes that has two audiences, yes I think.
I, certainly believe I'm optimistic that that at least.
Dodge adoption faster I would also maybe the last thing I think I think generally were surprised at the growing appetite for people to consume HCP.
And the larger customers I mean, I think the.
The operational reality of of infrastructure products.
It makes people slower to adopt but also once they start running them themselves realized how critical they are and so I think we're certainly optimistic and arm and in mice travel certainly last quarter. As you saw that express more often than I would've expected can you run the step for us and so.
So we need that market as it comes.
Super optimistic.
Thanks, Dave and then one more if I may please.
Our our acceleration here last several quarters.
Would you say that incremental expansion is coming from is it more on the expand side or more on the expense side as customers go from category to category or is it more just the expansion within whatever product they are running whether its terraform or Walter console.
Yes sure.
Short answer is it's both I will just sort of recall that serve our pricing model is aligned to as more applications go to cloud more and more usage of our products results. So for each part of our products. How is it that natural motion to it so what youre seeing is people's cloud of states grow we are in some sense a portion of that spend.
And certainly the fact that we can procure that through the marketplaces and most cloud providers makes that relatively frictionless and then number two there is the extend cross product opportunity I think as we've said before that there is just a maturity journey that people go on to sort of start with the terraform problem or the bolt problem and then they realize they have the other problem and they sort of naturally extending.
And that is just the journey. So it's almost inevitable that one customer becomes an extend customer.
And I think what Youre seeing is this cohorts CRO that just is what's happening so it's really both.
Thanks, Brad to hear thanks.
Next question.
Thank you. Our next question comes from Michael <unk> with Keybanc you May proceed.
Hey, guys nice quarter.
First as sort of an extension of the macro question.
But did you see as a result.
Macro inflation and recession fears et cetera, any change in people's attitude.
Towards cloud migration and two although clearly you wouldn't see it in your numbers for big deals Big deals.
Good any any change in their willingness to do larger projects.
I mean do you have a point of view on what appropriate.
Yes, no I think great question I think in general what we've seen is most of these large enterprises has embarked on their cloud journey several years ago, and I think they see it as a transition that's going to take them 510 years to really complete.
In many ways I think.
Look back on things like the Hypervisor transition and that was a decade long transition for a lot of those customers in.
Theres going to be a lot of macro bumps in a decade long period.
So I think that's kind of the attitude of the customers they realized that inevitably they have to do these transitions they have to sort of.
Innovate and drive the sort of transformation of their digital estate. So although our European customer is very aware of obviously ground conflict with their customers around the world.
Where the macro environment I don't think we've seen much impact to their plans around their adoption of cloud to a significant extent.
Okay and on the large deal size in other words people chunking up and tuned smaller projects again, obviously look youre big deal numbers are great and you signed another $10 million. So the numbers you wouldn't think so but anecdotally any reluctance.
It involved in larger and longer implementation time type of projects no honestly I think it's pretty consistent I think the constraint is more around.
Expertise in their particular region truthfully like that is as with any platform transition that occurs.
Theres a skills challenge around People's understanding of that new platform just like when we went from the mainframe world for client server World. It took some time for the skills in the marketplace to emerge I think.
That's the bigger constraint than anything else.
Okay, and then maybe the piece I would add here is just talking about the sort of second $10 million customer I think what's clear to our customers as they get to sort of a critical scale with us as they realize we will be a strategic partner to them, we're not a point vendor.
The one problem, we offer sort of a suite of solutions, we're going to solve multiple problems for them and so I think there's a natural comfort with the idea that you guys are going to be a generational partner to me as I'm going through this transition and they want to have a deep relationship and sort of plan over a multiyear horizon, because we impacted their strategy over a multiyear horizon.
I'm, just going to echo that point, because it because <unk> is exactly right that is what we hear over and over again, you think about the customer. It is generally a platform team inside of a larger organization.
And these kinds of environments their biases to consolidate their relationships not expand them. The fact that we have many products that address many of their problems from a single buying center single vendor is actually very compelling and that term strategic partner is the one that gets used over and over and over again like we are now.
Significant material proportion of the global 2000 in that seat and I think thats the basis of our growth opportunity from here.
Thanks, Mike next.
Next question.
Thank you. Our next question comes from Alex Zukin with Wolfe Research you May proceed.
Hey, guys. Thanks for taking the question so.
To kind of beat the dead horse on macro but.
Maybe.
A different way how should we think about the if you looked at your pipelines and you evaluated them any change in the length of the sales cycles the velocity.
Pipeline conversion or any elements there that make you have an added level of conservatism into the guidance and then I've got a quick follow up.
Yes, Alex Thanks for that looking in Q1, we're seeing consistent and solid pipeline and.
And we're comfortable with what we're looking at Q2 in terms of what the guidance number is for the back half.
Of macro so what we've taken as a wait and CFO attitude there on that on the on the guide. So at this point demand rebounds remains pretty strong and we're encouraged with how the year is looking.
Perfect and then I guess is there.
Yes.
Was there anything in terms of the duration.
That was either different or or nuanced this quarter I look at the total dollars added on total RPM.
And sequentially they were a little bit.
Lighter than maybe this time last year, but then current RPI was actually really strong and then.
The logical question, we're going to get us to bridge the.
If I look at current RP O change post Rev subscription revenue it looks like it's over 50% and then the guidance for Q4 I believe just implies.
Top line growth number again it starts with a two for subscription revenue. So just how do we bridge that gap.
Yes.
Good good observation Cogs.
The CRP number is a good proxy as to what the one year remaining.
Revenue could be not.
Not including the renewals. So that's the that's the number that you looked at look at it on an apples to apples basis for year over year, the duration did come down slightly and Thats, what youre seeing on the on the total RPM growth line.
As reflected in the total RPM growth, which is which is subject to duration also on the revenue line youre seeing more rate ability of revenue. So all those things are connected.
Understood.
Thanks, Alex next question.
Thank you. Our next question comes from Brad Reback with Stifel. You May proceed.
Great. Thanks, very much Nevada on the Opex guide for Q, a fairly significant step up after two quarters of basically flat just trying to figure out the degree of conservatism versus seasonal aspects that might be impacting thanks.
Yeah, Thanks, and maybe a step back to talk a little bit about the Opex philosophy here, which we touched on last call as well as the client is relatively consistent.
Have a very high net dollar retention rate high gross margin and a very solid balance sheet. So we made a decision to invest in the company and starting Q4 to show leverage in the business on an annual basis as we move forward beyond Q4.
So that's sort of the shape of the operating income line that youre seeing in the guidance now that being said in Q1 were very encouraged by delivering the top line performance with better than expected operating income and that's just part of our DNA of being a company. That's very focused on efficiency. So we're looking forward to delivering.
More and more of that in the future and sticking to our DNA of being an efficient company.
So if I just make Scott so, perhaps just a meta point on echo.
Current events point, we've been a very efficient company. Historically, if you look at our cash consumption relative to our scale today ultra light because of the design principle around efficiency, we have on top of that our highest gross margin business with strong and.
That being said we're constantly looking at.
Investment efficacy opportunities and you certainly saw that in Q1, but we also think there's an opportunity cost to not investing aggressively given the blue ocean around us in this market and buttressed balance sheet that we have to work with so that sort of underpins our philosophy hopefully it gives a sense.
That's great. Thanks, very much alright, thanks, Brad next question.
Thank you. Our next question comes from Derrick Wood with Cowen You May proceed.
Hi, This is carson on for Derik, Thanks for taking our questions here.
So security seems to be one of the strongest spinning priorities in software right. Now can you give us a sense on how vault is performing relative to the broader portfolio, what kind of trends youre seeing around initial deal sizes and expansion.
Yes, I'll make a comment as David.
The question I think honestly, it's very very consistent with what we've seen before our business remains relatively balanced across the.
The different aspects of our portfolio.
In terms of deal sizes again, very very consistent I think what you've seen from US is conservative pushed for higher velocity lands at a lower cost.
The instruction to our sales team.
Lets land the smaller transaction faster as opposed to one of the largest larger one and I think that holds true across our portfolio. So what you've seen is actually increasing the customer count and a slight drop in the ESP corresponding to that which is on purpose.
As you know when you talk about infrastructure people tend to say, okay hold on list price us across the entire state and that tends to slow things down to the more we can constrain that to a starting point to grow from that is what we try and do so net no real change in the dynamics across products or across deal sizes truthfully, but yes.
Security involved as the broker of identity across your machine the state.
Is one of those fundamental investments I think most companies are making.
The piece I would add to that is.
Just from a from sort of a tailwind perspective, certainly customers are cyber security is a very very top of mind and I think for us having a zero trust narrative in a story around our portfolio of products rather than just a vault clearly sort of our anchor play there, where we tend to sort of land and customers, but then being able to telecom telling story around.
Great how can we extend that to service networking and really does bring is zero trust approach network segmentation with console right and I think you saw that in our second $10 million customer where they are really looking at great. How do we embrace those zero trust primitives and really extend that beyond just identity with vault application security into the networking aspect and then looked.
Beyond into our portfolio with boundary as we think about extending that further into privilege access management I think that has been very compelling for our customers. Because we can present that kind of end to end zero Trust architecture, and certainly very top of mind for customers.
Got it thanks, Alright. Thank you next question.
Thank you. Our next question comes from James Fish with Piper Sandler You May proceed.
Hi, guys. Thanks for the questions one of the items, we've heard over the last few weeks.
Just the strategy around the freemium model.
How are you looking to better monetize some of our core offerings and in particular terraform does it makes sense longer term to put a limited timeframe for the free version or put it in a few versions behind the paid offering.
Go ahead.
Yeah, great. Thanks for the question I think we've had a very consistent approach to how we monetize our open source and it's premised around the idea around standardization of the whole market.
We invest genuinely in the success of our open source practitioners and really focus on how do we solve the technical problem for the individual users whether.
Whether that might be provisioning with terraform, whether that's secret management with all etsy.
Et cetera. So the open source is really meant to be unabated in that sense to really drive practitioner of bottom up adoption drive market standardization and I think youll see that with Terraform now, having 2000, plus integrations and then ultimately the commercialization is driven by a differentiated commercial product that solves the organizational challenges of using it.
These products at scale. So we're not trying to monetize those alone individual users. It's as you go from a single user to a team great that's where our entry level commercial products are focused and then as you move from a team. So maybe a broader department level. Our platform level is how do you move from collaboration at the lower end to really around multi tenancy governance.
Security policy operations at scale at the upper end and Thats really where we focus on it rather than trying to create sort of a second class experience around the open source.
Yeah.
Got it and just.
Circle back from the pipeline part that you mentioned as you were talking about the pipeline here being pretty consistent in terms of the front end of the pipeline. What are you seeing in terms of the lower part of the pipe and specifically on the large deals that could become plus $10 million contributor since it sounds like your focus more on the low hanging fruit the smaller customers at this.
Just as you kind of see some opex here.
No not at all I would say I would say I think.
We have a segment view of our about recover that cover the market and what is referred to previously was really the cloud offerings have a natural affinity for that lower end segment and Thats certainly has its own unit economics that we managed separately.
The influence on the on the on the rest of our business knows that is really unchanged.
What I was referring to is.
The pipeline building.
The other segments continues to be strong.
I think the guidance that <unk> shared is reflective of just an awareness of the macro.
Towards the end of the year, which will become more clear as we are close to it and thats really the visibility we have today, which is which is we see a lot of positive signs.
In the pipeline.
Alright, Thanks, James next question.
Thank you. Our next question comes from Sanjay <unk> with Morgan Stanley You May proceed.
Alright. Thank you for squeezing me in and congrats on the really touched on metrics this quarter.
On the pay side and on the total customer base.
Nice to see.
Dave I wanted to pick up on a comment that you made a question around.
Multiple sources or the multiple value propositions.
Hi.
I guess the spirit of my question with the ability to hone in on maybe the cost efficiency cost savings pcos back as part of the sales playbook.
The opportunity here to go into the customer base and say, we can dramatically lower hardware spend by consolidating firewalls or your.
What are your load balancers.
If you think about a one two combination of harmful.
As well as well as salt.
And a potentially tougher spend environment.
Is that a playbook that can be used to.
How effective.
But in the past getting crowded.
Thank you.
Yes. Thanks.
Yes.
No I think that my my Corp view is it.
There is heterogeneity heterogeneity to infrastructure and the apps that are running in your private data center being orchestrated by say, a firewall and load balancer gender.
Generally are going to stay there so our value proposition is really about providing that bridge to the new world for your new applications I think one of the real benefits actually I've talked about in the prepared remarks was the console terraform sync capability, which basically allows you to update the configuration of legacy networking gear as <unk>.
Part of your new application deployment. So I think the cost savings comes is it very very easy value proposition around extending the life of your existing investments for maybe the <unk>.
Three year view to the five year view.
Not having to replace that legacy year, because we are providing the bridge to the new world. So I think that's actually closer to how the conversation goes we don't generally go in and talk to you. So hey, Youre running firewalls are replace firewalls, because it would require you to rebuild the applications. It's more hey for your new applications, you probably don't need that firewall approach, let US help you provide a vehicle to bridge to keep.
Your old firewalls relevant and in so doing save the cost of having to upgrade those those newer.
Right.
Cost value proposition is really really strong honestly across all of our products in combination even stronger. What you described is certainly a play, but it's but it's probably not that one.
Understood understood and then sort of another product that topic I wanted to revisit again.
A question, which is around sort of monetization triggers and it's a topic that I think we get quite often.
With respect to care for them, but also with respect to <unk> I think you sort of mentioned in your strategic customer wins.
Handed.
A.
Following that customers started out in the open source in 2019 I was wondering if you can sort of any sort.
Meredith to draw between the customer landing with open source Youre, starting with open for US 253 years ago and ultimately.
I'll be cutting enterprise paying customer both on the bulk and the terraform side, what is sort of that journey that they're going through.
Help us understand.
These modifications have evolved over time.
I think so.
I'll start with about one first.
The idea of this one might be using volts ratio authenticate your identity for a particular application and open source is how it begins but it's sort of the minute the decade sort of established as a central shared service that has a tier zero application to your company, it's sort of an immediate trigger were right. It was okay that it was just running on one machine previously, but now you have to run it as a <unk>.
Sure service, there's redundancy the replication if that thing goes down it's like the power being turned off for all of the apps that speak to it and once that realization is made to hold on a second this is not just underpinning a single thing. This is actually a strategic tier zero application. It's a very simple conversion and that's what ends up happening there is sort of just natural maturation.
Through that organization.
It's very very consistent.
On terraform, it's a slightly different transition it is someone to <unk> point, our first priority was around market standardization to the greatest degree possible by making that ubiquitous and then we built terraform cloud just used that as an example to provide a broader workflow around people using tariff works provision there for sure.
Sure So where somebody may have initially adopted terraform, just as a provisioning tool on their on their lot.
<unk> when it gets establishes that tier zero application that is underpinning the entire organizations provisioning process now you need audit trails, and policy and governance and it's that notion of a single platform team ultimately needed to run something as a service for the organization, maybe it's an easier way to envision the value proposition because to be clear. These are tier zero application.
That no that cannot go down.
That sort of underpins the the overall value proposition of the commercial products alright.
Alright, Thanks Sanjay.
Alright next question please.
Thank you. Our next question comes from Paul <unk> with JMP Securities You May proceed.
Oh, great. Thank you hey, here's a different perspective on all of this stuff. So even armani is there a way in which a tighter capital market.
Tougher venture financing environment will help patchy.
Are you getting emails from interesting private companies are like you know we'd like to talk about selling you are you seeing less crazy pricing behavior from some.
Some competitors they are seeking to conserve cash or anything else like that.
Yes, I would say on the maybe two things separately I think it's still early it's short.
<unk> I think the private market has taken a while to react.
So I think we'll certainly be disciplined and aware of what's happening in the private markets.
But it's early number two in terms of the market dynamics in truth.
The competitive environment is not necessary there not a lot of smaller companies that we compete with truthfully I think it's generally more of the market standardization around open source and then the engagement commercially is much more common for us. So so that long term goal of driving standardization in order to provide an opportunity to be the partner of choice a commercially is really more of our <unk>.
Model, then competitively, but yes, if there are other startups trying to enter these markets. It certainly feels like it's gotten more difficult.
The one thing I would add is that certainly we felt a bit of a tailwind on our recruiting side.
Just cause I think organizations and people looking around to see that hey, how should we just went through the IPO we have.
<unk> balance sheet.
We definitely are in a different stage relative to some of these folks that maybe had stratospheric valuations that are on their way back down to Earth.
Great. Thank you alright.
Alright, Thanks Pat.
Next question please.
Thank you. Our next question comes on the theme of Bologna with Citi. You May proceed.
Hi, This is Joe on for <unk>. This one is just on console.
Are you able to share with us how budgetary and competitive dynamics evolving here, particularly as we see larger segment vendors become more vocal about the service mesh opportunity and then also related to that.
Given your recent announcement of the SVP for networking I was just wondering if you could update us on engineering product design, where that stands as well as the R&D roadmap and sales roadmap a quick follow up thank you.
Sure Yes, great question I think in general what we feel optimistic about is that I.
The market awareness and maturity around service mesh has evolved significantly right I think certainly 18 months 24 months ago.
Relatively limited awareness and I think now I think we're seeing that we're moving out of just the bleeding edge of early adopters into the early majority really starting to think about it and prioritize it as an infrastructure projects. So thats certainly encouraging for us as now we feel like there's sort of a broader market sort of aware and starting to go through.
That conversation.
From a R&D investment perspective, yes, we announced.
<unk> joined us as our new SVP running our networking group, we are very excited for him to join and lead that.
It's certainly an area, where we are very deeply invested.
With that let console as a service mesh.
Had some updates to our API gateway capability in the quarter as well and then obviously, our HCP console offerings as a managed service.
So sort of continuing to invest deeply across all of those fronts and I think again pointing to some of these customers that are now extending from terraform and ball only to bringing console and really speaks to I think our platform opportunity.
And really the chance to be a strategic vendor just one point I'll add because your question around the dynamics I think we have learned that before you can tackle the service mesh problems you have to have generally solve the provisioning and security problem right.
Alright, because until you move to the notion of service based identity.
Hard to move to service based orchestration just to double click on it a little bit so.
That sort of underscores Armani point as our focuses are building the trust of the platform teams with tariff one volt and then that in a sense. It makes us the incumbent for the service much opportunity because vault at that point is the identity broker.
Okay, Great and then just a quick follow up here on consumption models. So many of your software peers have been alluding to moderating usage or consumption patterns are you seeing a similar dynamics develop across certain customer cohorts in end markets or if not what is keeping your adoption or pricing model more intimate.
That's all for me thank you.
Yes, Thanks, why don't I take that quickly.
From a net from a results perspective, there really is no impact on consumption.
Our on our revenue, it's mostly entitlements subscription base. So over time Youll see youll see more of that but at this time were.
Most of the subscription revenue that has entitlement.
Okay, great. Thank you next question.
Thank you. Our next question comes from Katherine <unk> with Goldman Sachs. You May proceed.
Thank you very much congrats on the quarter I'm curious to get your perspective on two things one is the HCP are.
Are we at a point where the.
The services from Primetime inflections are there certain things from a product development perspective.
If you are looking to invest in that.
Enable HCP to really inflect, that's one and number two with respect to <unk>.
Cloud migrations.
Visa we expanding.
Enterprises are.
At what point do this harsh you get typically involved in is it at a fairly mature phase of the cloud migration process.
At the front end the reason to ask that question. This is due to the economic uncertainty people stop for a little bit off the cloud migration.
Does that in fact, Hershey at all or are you.
Getting involved at a later stage of the migration process that at the front end, even if things slow down a little bit.
From a provisioning networking security standpoint.
You'll get involved much farther along the way and maybe that could help you.
Not sure how exactly to think about.
I wanted to get your thoughts thank you.
Yes, great question Kash.
Yes, so maybe I'll take the first question.
In terms of sort of the the momentum on cloud I think we feel good that there is strong consistent delivery from an R&D perspective.
I think there is a lot more we can do that will continue to accelerate that again, if we look at the beginning of last year, we entered with effectively one cloud products, we exited last year with three on a single cloud provider.
We're now at five cloud products across to providers. So I think what youre going to continue to see from us and we have our upcoming user conference in the next three or four weeks here.
As youll see more momentum in terms of adding additional support for net new products Youll see additional cloud providers additional cloud regions and so I think each one of those continues to make that a little bit easier and expand the opportunity ahead of us. So I don't think theres going to be a particular inflection moment. So much is as we continue to deliver.
It will just continuously improve.
Then on your second question.
We think about the usage of our products in two phases, and which is step one is around our focus on practitioner adoption and open source where people very much begin their cloud programs. They use our products and open source because that's what the practitioners use and then the phase two is when they start to step back here hold on a second I need to systematize this domestic the platform.
<unk> creation, so that's the motion and the first one first instance, or using our open source products.
Where these numbers come from and then in the second phases, when they become our commercial customers and I think irrespective of where you are in your journey you are going to go through that those two processes. So I certainly am optimistic about the tail winds around secular cloud adoption.
Whether it's early stage just open source usage or later stage commercial usage one leads to the other.
So certainly the opportunity is.
Is it very durable one it's not a it's not a onetime thing for us.
Super Thank you very much I appreciate it.
Thanks Kash.
Thank you I would now like to turn the call back over to Mr. Dave Mckenna for any closing remarks I.
I just like to express my thanks for the participation for everyone here.
We appreciate you dialing in and for all the questions and look forward to speaking with everybody soon thank you.
Yeah.
Thank you ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
Thank you.
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