Q2 2023 HashiCorp Inc Earnings Call
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Thank you for standing by and welcome to ask me Corp's second quarter fiscal 2023 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
I would now like to hand, the call over to VP of Investor Relations and corporate development Alex Kurtz. Please go ahead.
Good afternoon, and welcome to <unk> fiscal 2023 second quarter earnings call. This afternoon, we will be discussing our financial results for the second quarter announced in our press release issued after the market closed today.
With me are Hashi Corp, CEO , Dave mechanic.
So the volume will be under.
And CEO cofounder Armand agar.
At the close of the market today and in conjunction with our earnings press release, we have published an earnings deck that kantar.
Additional financial information pertaining to our quarter.
Carriage you to review the decks in advance of our calls you can access the decks on our investor website at IR Dot <unk> Dot com.
Today's call will contain forward looking statements that are made under the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Forward looking statements, including statements concerning financial and business trends.
Our expected future business and financial performance and financial condition and.
And our guidance for the third quarter of fiscal 2023.
For fiscal year 2023.
These statements may be identified by words, such as expect anticipate.
Ken plan belief seek.
Or well 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.
And we do not undertake any duty Dr. <unk> statements.
Forward 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.
It is also available on our website at IR Dot assay Corp dotcom.
Finally, we'll be hosting a financial analyst day at our Hatchi comp Global user conference on October 5th in Los Angeles. We will also be live streaming event details will be available at IR Dot has equipped dot com.
With that let me turn the call over to Dave Dave.
Thank you Alex welcome everyone to our second quarter earnings call.
We are excited to share with you. The Q2 was a strong quarter for us as we exceeded our guidance with revenue of $113 9 million representing year over year growth of 52% along with the trailing four quarter average net dollar retention rate of 134%.
Current non-GAAP remaining performance obligations reached $498 4 million, representing 48% year over year growth and we added 30 customers with greater than or equal to $100000 in annual recurring revenue, reaching a total of 734.
Our harsh core cloud platform offerings reached $10 6 million in revenue representing nine 6% of subscription revenue in the quarter. We're very pleased with the performance of our onshore cloud managed offering in Q2 and as we look out to the remainder of the year are excited about adoption trends as we continued to rollout new features and new capabilities.
Before diving into more details about the second quarter I'd like to take a few minutes today to outline how we help enterprises transition to and operate in the cloud and inevitably multi cloud by delivering a suite of cloud infrastructure and security automation products that provide a consistent cloud operating model.
As enterprises look to standardize their approach to cloud they require a system of record for each layer of their infrastructure stack.
Our product portfolio provides that system of record across each of those layers.
And Thats why organizations <unk> Corp.
Our products are built with a cloud first or cloud agnostic approach and as multi cloud is becoming the standard our suite of products becomes even more valuable to our customers as they enable the adoption of a consistent operating model.
We recently released our second annual harsh Corp state of cloud strategy survey, which highlighted these observations.
First according to the survey multi cloud is now the standard way that most organizations build and operate their infrastructure and nearly all respondents are adopted multi cloud C thats, helping them to advance or achieve their business goals.
Second organizations are hyper focused on cloud security respondents said that the leading factor in determining the success of their cloud strategy is in fact security.
This reinforces the value of our foundational security offering Harsha Corp fault.
Third nearly all respondents said that they rely on a centralized cloud platform team.
As you've heard from us before we've seen this trend emerge over the last few years and believe it is becoming the norm for organizations finding success with their cloud adoption efforts.
I want to underscore the importance of these central cloud platform teams and the maturity level it signals with customers.
We see the typical journey of the cloud following a very predictable cost a team or a business group tasked with building something you decided to build an application on our cloud platform.
This is what the first phase of cloud adoption looks like for nearly every organization, it's what I'd call tactical.
It is at this stage that utilize the open source version of our products.
As these organizations shifted the next more mature phase of cloud adoption, we're seeing a centralized cloud platform team function emerge.
As these projects cliff rate operations security and networking teams realized that they must become prescriptive leading to the creation of a platform team to enable standardization and best practices to industrialize, our cloud operations.
It's the second phase of cloud, but sets up the basis for successful cloud adoption and this is when we see governance security collaboration and the high value enterprise capabilities to help the hospital commercial products, becoming a requirement and being managed by that platform team.
Importantly, this platform team represents a common buying center for our entire product portfolio.
I'd like to share an example of what the central cloud platform team looks like within one of our customers. We're a strategic partner to one of the largest global financial institutions in the World who is in the early stages of a mass migration from private data centers to one of the big public clouds.
This transition began about two years ago and their team realized early on that if they were to succeed they needed to establish a cloud platform team and fundamentally change how they approached infrastructure operations.
Their cloud platform team is tasked with delivering cloud throughout the organization.
They required a frictionless workflow to enable 15000 developers to safely provision infrastructure for over 275 apps that underpin their business.
To do this the cloud platform team selected Terraform enterprise because it offers the ability to manage both their policies and their actual infrastructure is code in a self service manner.
We're proud to partner with this financial institution, and just completed a major renewal and expansion with them for both terraform and vault.
Now I would like to turn your attention to notable second quarter transactions.
I want to highlight just a few examples of strategic deals that we completed during the quarter that demonstrate our execution in the marketplace and show our adopt land expand and extend and renew motion in action.
First a land deal and E Commerce company in Indonesia began using console open source in 2015 and has now standardized on the console platform with plans to scale to 20000 nodes there.
And one of the fastest growing technology companies in Indonesia, and require service discovery and service health solution that is able to scale and support the momentum of their expansion plans.
The high resiliency and availability afforded by console has enabled this company to scale operations to millions of users and at the same time, we're working with our products to reduce their operational spend by at least 10%.
Next and expand deal our banking as a service provider that was already using nomad cognizant volt.
During the quarter the company expanded with a three year contract that gives them a predictable migration model for moving console and vault Hodgkin cloud platform are harsh group managed cloud offering by the end of 2025.
This customer is in year two of the five year aggressive growth plan. So they plan to bring in new business units and scale the existing environments to build out new services for their growing customer base.
And third and extend deal with one of the largest global insurance providers in the world.
This customer initially landed with both enterprise and fiscal year 2022.
And extended to terraform cloud in the second quarter.
Terraform.
Underpinning technology as they embark on a full cloud migration of $50 million project, which consist of marketing over 1000 applications to AWS.
This customer previously had limited governing standards for the initiatives. They have now deployed on share from cloud to enforce policies and governance to support this migration.
We are proud to count companies like these as our customers and are deeply committed to continuing to earn their trust.
Finally, I'd like to briefly highlight several product updates that were introduced in the quarter in.
In June we hosted our Oshkosh Europe community conference featuring customer speakers, such a Swiss railway booking dot Com Deutsche Bank, Tom Tom and others.
The in person experience is sold out and we have thousands more practitioners joining us virtually.
We made multiple product announcements at the conference showing both our continued push towards building robust cloud versions of our products as well as our ongoing innovation focused on delivering high value for our customers.
First we announced the private beta of HCP boundary are secure remote access offering which we're incredibly excited about.
I am thrilled with the team's progress and the speed with which we delivered a high score manage offering a battery to customers and we're particularly encouraged by the high level of interest in a private data.
Second we announced and subsequently delivered HCP console on Microsoft Azure with this release, we now have cloud based offerings, a console or service networking product for both AWS and azure environments.
Third we introduced the drift detection capability for Terra from cloud, which continually checks the state of infrastructure looking for errors or drifts and configuration. This is a high impact feature that provides immediate value for care from enterprise customers.
Finally vault was evaluated.
<unk> with the federal information processing standard 140, <unk> II also known as <unk>. One for you guys to achieving fits one pointed asked you compliance and important milestone for our public sector customers.
Thank you all for joining us today I look forward to seeing many of you at our Investor day, taking place at our harsh KOF Global conference on October 5th in Los Angeles.
And with that let me turn the call over to Nevada.
Thank you, Dave and thanks, again to everyone for joining us today.
Turning your attention to the top line financial results. We produced strong results in our second quarter of FY 'twenty. Three we grew our total revenue by 52% year over year and our trailing four quarter average net dollar retention rate reached 134%, which is over 120% long term target rate.
Looking at our geographic segments, approximately 78% of our revenue came from the Americas, 15% from EMEA and 6% from the APAC regions. The.
The Americas region remains the largest contributor to our revenue we expect an increasing percentage of revenue from the rest of the world over the long term.
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.
As we have previously discussed after IPO.
Turned into an investment cycle, while we aggressively invested in the areas of customer success sales coverage and ongoing product innovation starting in Q4. This year as planned we moved from an investment cycle, two and operating leverage cycle with the goal of improving operating margin on an annual basis, while continuing to invest in.
The long term growth of our business.
With our continued focus on operating efficiency. We came in ahead of our expectations on EPS incurring a net loss of <unk> 40 per share on a GAAP basis, and <unk> 17 per share on a non-GAAP basis.
We tracked several key business metrics, which we believe help in understanding our business and financial performance and our journey to deliver durable growth.
We'll find a lot of our kpis detail in the accompanying investor deck published today on our IR Dot <unk> Dot com site.
Courage you to review this deck in detail.
Focusing on one of our core business metrics that greater or equal to 100, K customer cohort our progress continued during the second quarter on.
On a trailing 12 month basis, we added 176, 100, KL greater customers and grew their revenue per 100 care greater customers from 128000.
To 149000 per customer in the quarter, a 16% year over year increase.
The continued growth of these large customers. It's the foundation of our durable growth model, which remains on track.
Our HCP business continues to show positive momentum, we grew our HCP revenue by 183% year over year, we launched several new HCV products and features this past quarter, such as HEB boundary public beta in HCP console on Microsoft Azure.
Finally, before moving onto guidance I wanted to provide some context about how we are looking at the current macro environment.
While digital transformation and cloud transformation initiatives, our long cycle investments by our customers, we expect to see some macro headwinds in the upcoming quarters. We saw increased scrutiny on spend from several customers this quarter and we expect that to continue.
The continued scrutiny on spend may have some impact on the timing of when we can close our contracts.
While it is difficult to predict the impact of macro on our close rates. We have estimated an approximate 4 million to 6 million headwind impact to our revenue in FY 2023, which we have incorporated into our guidance.
Given the expected macro impacts we have moderated some of our forward investment spend levels in the business to focus more on the operating efficiency. This year, we will continue to increase or decrease spend accordingly, as we gain clarity.
Outside of macro I'd like to also remind everyone that our business is subject to enterprise buying patterns that resulting seasonality during our quarters. Historically Q3 has been a seasonally slower purchasing quarter by customers, particularly due to the summer months and we expect to see the same seasonality this quarter.
Despite some macro adjustments we are extremely encouraged by the overall market interest in our products.
Partnerships, we are forming with the largest institutions in the world and the progress we are seeing with our new ATP products.
Now, let's move on to our guidance.
For the third quarter of fiscal 2023, we expect total revenue in the range of $110 million to $112 million.
We expect Q3 non-GAAP operating loss in the range of 66 million to $63 million.
We expect non-GAAP net loss per share to be between 32 and.
<unk>.
Based on 187 4 million weighted average basic and fully diluted shares outstanding.
For the full fiscal year 2023, we expect total revenue in the range of $442 million and $448 million.
We expect FY 2023, and non-GAAP operating loss in the range of $198 million and $194 million.
We expect non-GAAP net loss per share to be between 97 and 95.
Based on $186 2 million weighted average basic and diluted shares used in computing non-GAAP net loss per share.
Finally, we will provide more detail on our outlook for the company's medium and longer term operating model at our upcoming analyst day in October , but I wanted to provide our initial view for non-GAAP operating margin for FY 'twenty four.
Driven by increased focus on spending efficiencies, we are targeting a range of 5% to 10 percentage points of improvement to non-GAAP operating margin for FY 'twenty four compared to our FY 'twenty three full year guidance level.
We're pleased with our Q2 results and with that David and I are having to take any of your questions.
Okay.
Thanks for the volume during the quarter, we will be attending the Citigroup Global Tech conference the.
The Goldman Sachs Global Tech Conference and.
And the Piper Sandler growth Frontiers conference with that operator, let's go to our first question.
As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question.
Our first question comes from the line of <unk> Kidron of Oppenheimer and company.
Your line is open.
Yeah, Hey, guys congrats great quarter in November thanks for the macro color on how you are incorporating that very helpful.
I have a question a follow up the question is.
And the net dollar retention rate.
Denise can move quite impressive.
Can you give us a little bit more of a breakdown of the drivers behind it how much of this is.
Footprint footprint increase of customers' upsell of new solutions.
And your vertical color our regional color, where this is taking more hold versus others that will be great.
Thanks, Ed Yes. This is Bob.
Q2 was a strong quarter in terms of the net dollar retention rate as I mentioned, 144% and 134% net dollar retention rate, which is a tick up from where we saw last quarter and was driven mainly by reaffirmation of 100, K customer group and our general customer growth rates and we're very pleased with the success we have.
With our customers, who are continuing to adopt our products expand into.
Band into the usage they have and also extend into the secondary products. So you break it down into basically the expand extend cycle. It's our pricing is based on usage the more customers use or move to cloud you'll get to see expansions and that's one big component of our net retention rate and also secondarily you'd see.
Customers moving onto their second or third product purchases, which also contributed so overall, it's I think it was both and we're very pleased with that number.
Comment.
This is Dave I also think it's worth noting just stepping back a little bit I talked a little bit a little bit about this notion of platform teams.
Note that we have a single buying center for for our product portfolio, which is very unique and certainly the design principle of what we've been trying to accomplish for quite some time. So it is both expansion of existing product and extension to next product, but I'll just underscore that that is the philosophy that we built as a company.
And I think what you're starting to see is really some of the benefits of that manifest in the map.
Okay, Great and then as a follow up on HCP.
Another good quarter, there, but when you look at the quarterly net adds there a decline from the first quarter you have added less this quarter than you did in the last.
Yes.
What can you tell me about the drivers there and did this performed to your expectations in the quarter and how do we think about.
The addition of other cloud partners.
Flexion point in this and I think it hasn't been growing slowly but.
We'd like to see more as they say.
Okay. Thanks, I'll jump in real quick before handing it over to Dave. So just a quick point are our customer our revenue is predominantly focused on the 100 K customer group, which represents about 88% of the total.
And that group has been very strong in the second quarter, we have been aiming to add 80 to 100 customers that we came in well ahead of that which was the basis of sort of a durable growth model, we have of continuing to expand and extend.
Into that customer I guess just to underscore.
Neurology for 80 to 100 customers per year with our guidance framework.
We had a 30 in the quarter.
I think what you are alluding to is sort of the specifics on our HCP offering when you look at the total customer count obviously some portion of that is predicated on new ads on our cloud offering and some of that is on the south Madison products.
I'm always pointing out predominantly our revenue is driven by the self managed products today I would say.
HCP as a new distribution channel for us as we've talked about it has affinity towards the longer tail of our customer base and I think certainly theres, probably some macro backdrop with smaller companies.
But you'll see reflected in that math, but that number is going to move around a bunch in terms of the customer count. So yes, I would attribute some of it to the longer tail SMB.
But overall Super Super encouraged by both the velocity of sign ups after the free tier of our cloud offerings as well as sort of growing enterprise interest.
Our cloud managed offering.
So settle out all the noise that makes it clear thanks.
Thanks for the time.
Next question.
Thank you. Our next question comes from the line of <unk> Singh of Morgan Stanley <unk>. Your line is open.
And thank you for putting up a quarter thats.
Less anxiety inducing.
Makes it easier on me and I really appreciate that.
Part of your question for Dave or Armando jump.
Jump Bob wanted to get a little insight around with protection, how did that feature capability, where did that idea generation come from and more broadly as we think about adding more value, particularly on your.
Pete.
Enterprise offerings.
Okay.
Is there a risk there or a set of features and capabilities that you guys can.
Kind of a rollout over the next several years to your <unk>.
To continue to add that value or the sort of the start.
It's going to get a sense of what could be preparing for farmer.
Feature monetization perspective.
Great. Yes. Thanks, Angie this is <unk> happy to take that one.
The way, we kind of think about it is ultimately going back to the open source model, it's about winning the practitioners first and sort of getting them to standardize around a workflow based on our products.
As Dave mentioned really the enterprise need is how do I build a system of record ultimately to help with my governance challenges my compliance challenges my security challenges on top of that practitioner oriented workflow and so that's what sort of manifest in our product strategy. So if we think about something like drift detection. It starts I think great we want.
Practitioner Terraform open source.
Using our terraform Clowder terraform enterprise in their free tier capacity, but then the enterprise capability is really about great on the day to challenge I really worry about <unk>.
Security issues or compliance issues introduced by drift right, where that might be caused by emmanuel reconfiguration or someone logging into the console or other changes taking place outside of terraform.
And so you start to see this almost split of our roadmap between what are the capabilities designed around the practitioners, which really won't workflow orientation that we want to drive standardization and on these higher value commercial features like drift detection, which is really about extending into that day too concerned of the platform team has around security or operations at scale.
Kind of a long story short, yes, it's part of the sort of longer track, where we think about investing across those two different parts. One is around workflow and winning the practitioner and then the second piece is around building those systems of record right and those are the capabilities that we're really focused on from a monetization perspective drift detection being a major new capability.
Upcoming conference in October yourselves, released new capabilities to build on top of that.
That's great perspective, and looking forward to it.
<unk> conference and remember that all of us.
Follow up question for you. Thank you for your framework.
$6 million.
The size of your business is actually.
That's quite encouraging because it's relatively minimal impact from a revenue perspective Im sure Theres, a theres, maybe a little bit higher or bookings impact in terms of four to 6 million can you sort of explain how.
Are you sort of got to that got to that framework, whether its assumptions are all different customer cohorts, whether it's different.
Conversion rates on the pipeline.
For clarity to unpack that $4 million to $6 million I appreciate it.
Sure Sanjay so this isn't about the way the way we can.
Q2 played out was it was a very strong quarter in terms of the actual performance and momentum. We saw what we did see was scrutiny from customers on spend and I think youre seeing that across the board for most customers.
Most people out there and we're doing the same so what we're expecting is more scrutiny in Q3, and Q4 and the impact of that is essentially the deals. We have we tend to get and but the timing of that is a little uncertainty that we've factored the elongation of close cycles into the back half of the year.
In the back half of the year impact essentially that $46 million that we provided to you.
The bookings given there were mostly ratable revenue company is higher than that but despite all that we think we're still going to have a very good year and that gave us cause us confidence to raise the outlook for the year in this guidance.
Yes, I'm very encourage again I really appreciate it thanks for the color.
Thanks Sanjay next question. Thank you. Our next question comes from the line of Alex Zukin of Wolfe Research Alex Zukin. Your line is open.
Hey, guys. Thanks for taking the question I guess if you.
If you think about the scrutiny you have a pretty.
Verse customer base, but is it possible that maybe just drill Ed as it were any of the macro are longer sales cycles were there any specific verticals that were incrementally stronger or incrementally weaker and then I've just got a.
And maybe for Dave are you starting to see that some customers are looking to deploy multi cloud or get more efficient as a result of incremental cost cutting initiatives and moves to get more efficient.
And an optimized and then I've got a quick call.
Yes, my comment on the.
What we're seeing from customers and I think the.
I just want to reframe exactly how.
As outlined in the opening remarks, how adoption happens and how that relates to our product portfolio. So.
Every cloud journey begins with some practitioner, saying I want to build something that nearing cloud and that is where the use of open source products.
Companies mature right they adopt our commercial products because now with the central team to one supply policy and governance everything else associated with diagnosis of cloud that cloud.
Cloud <unk> cloud <unk> was very very typical very very repeatable the value proposition of our products, whether it's single cloud or multi cloud is actually for the use of the platform team. So they can reduce the cost of what's getting provisions. They can reduce the risk of what's going to provision. They can accelerate the time to market without getting in People's way for those developers so actually.
Irrespective of whether its single cloud or multi cloud that value proposition is the basis of our commercial offerings and I just wanted to tease apart. Our open source products are designed for use by the practitioner or commercial partially reduced by the court.
Buyer, which is the platform owner so in that sense, so that secular trend towards cloud adoption continues unabated, if anything theres more heterogeneity than less over the course of time, we think that puts us in a really really positive position relative to the market obviously.
We are aware of the macro but our value proposition is very very very strong and I don't really see that having changed.
The question was around.
We're seeing some impact yes, Alex so I would say that the impact was relatively broad based but I would say more SMB Dan enterprise. So that's one area of higher focus absolutely on the SMB side secondarily geographically I would say it was a little bit more EMEA focus than that Americans' focus so the good news for us.
Is that being focused on 100 gig customers and predominantly Americas Theres a.
Ah moderated impact, which gave us confidence in the full year.
Perfect and then maybe just as a follow up with respect to some of the metrics if I look at.
<unk> versus <unk>, it looks like it slipped a little bit with RPI strength this quarter.
Maybe versus last and so RPM bookings look really strong and then from a duration perspective is there any changes that you're factoring in maybe less upfront revenues because customers want to do more one year deals over three year deals any of that kind of more complex map that we should factor into the.
Some of the forward.
Forward looking metrics.
Alright, Yes, I'd comment on Q2 first I'd say Q2 was was a normal quarter for us in terms of duration.
There was a reversion to the mean on the duration side and it ended up being roughly what we normally see with 90% plus ratably in the business.
In Q3, we take our normal view of how we look at it at a quarter forecast and there is a wide range of outcomes, we take a measured view around the middle of and our solid execution side and.
The timing of large deals are typically unpredictable larger long duration deals are unpredictable. So we'll take a more measured me with how that comes in but overall strong.
We feel confident about Q3 and the full year.
Yes.
Thanks, Alex.
Thank you. Our next question comes from Jason Ader of William Blair, Jason Ader. Your line is open.
My first question is how often are you guys in enterprise deals where the main competition is your own open source and how has that trended over time and then do you think theres more risk now given the environment.
That customers could choose.
Can opt for open source.
Yes, so just to reiterate the point I made earlier, thanks for the question, which is yes.
There is a.
There is a phase that we're jumping sources used and there is a phase which inevitably converts to a commercial problem domain.
So.
Our model as we are.
As stated from the beginning is around.
Building as large of a market is possible and proliferating our open source everywhere. So candidly, it's atypical for us to enter any company, who has not already using our open source technology because that is the basis of the model.
But that is.
And by the practitioner as the central platform team starts don't understand that now this product.
Products now with tier zero service, but it is supporting their entire organization. It is a different set of concerns completely which is how do I play policy and governance, Colorado as a shared service with zero downtime that dynamic is the base of our model open source for the users commercial for this core platform teams and that is really no difference David.
It has been.
Say anybody that is running our products division.
Service is benefiting from lower risk lower cost and faster time to value for all of those teams and I certainly wouldn't expect that to change in any environment. So net no change and in fact, given that dynamic of increasingly foundational usage of our tech.
I'd be surprised if there were any changed.
Great and then.
Matt.
On that topic of open source Armand can you give us an update on consoles are you guys feeling good about winning that category as well.
Yeah, great. Thanks for the question, Jason Yes, I think we feel pretty good about console generally I think this quarter, we continue to land net new.
Customers.
Now that we're expanding from existing usage, either terraform or hall, and so we're continuing to see that extend motion work for again going to Dave's point, it's about winning the trust of that central platform team typically with either terraform revolve first and then once we have that sort of position of trust is really extending into the console use case around additional challenges around.
Network governance, and moving towards Zero Trust posture, so continuing to feel good about console, there and optimistic about the traction as Dave mentioned, releasing that new products like HCP console on Azure, so continuing to bring the cloud service onto additional regions and additional clouds.
Which is expanding the surface area of customers we can address.
Yes, I'll just add on the plate because just as a reminder, we want.
The customers, we called out in the in the prepared remarks was in fact net new console land it's indicative.
Continue to add new cost for customers that are at a healthy clip I would as we've shared previously that market is still relatively immature in terms of its evolution.
Certainly it certainly anticipate that that will continue to be a meaningful part of our business.
Thanks Keith.
Thank you. Our next question comes from Mark Murphy of Jpmorgan, Mark Murphy Your line is open.
Dave or maybe Armand do you see mounting evidence in Q2 of <unk> products being used synergistically or in concert as a suite or seeing kind of connected multi product usage and are there any metrics or anecdotes.
You can share along those lines and then I have a quick follow up.
Yes, Thanks, Marc for the question, Yes, I think we're seeing this on a number of different dimensions, right I think particularly within the cloud portfolio right within HCP I think.
Core design has been that we want that to be common chassis. So as customers come in it seamless for them to expand from one product to multiple products. So I think there we're already seeing that impact and certainly it's been a big focus for us in terms of having a unified approach to identity and billing.
So the customers can start with product moved product B and do all of that kind of seamlessly within the platform. So already seen good examples of that actually in quarter.
Customer out of Asia Pacific region, signing up on cloud product with.
One initial product and then in quarter during an expansion to two additional products I think is a great example of that kind of emotion working.
Particularly well in cloud, where there's lower friction to it then within our self managed enterprise customer base continuing to see it I think thats reflected as Nolan mentioned.
In the in the MTR number as well and again it goes back to that extension motion, where it's really for US. The core motion is about winning the trust of our platform team landing with one product and then doing an expansion and extension play and I think you'll see that reflected in the MTR.
Okay, great to hear thank you for that Armani and then.
Im looking at the 6% sequential growth in support revenue.
The major revenue stream and that one has slowed a bit that had been trending 10% to 12% sequentially from the prior quarters. Just wondering what is the underlying driver.
On that piece of it is that reflecting some of the macro or the deal scrutiny.
Is that something that we could perhaps see stabilizer rebound a little bit in Q3 Q4.
Yes, thanks Mark.
In terms of the revenue lines, I'd say product and cloud are the main revenue lines of focus for us support as essentially being sold to accelerate expansions and extensions and we don't expect that to be a very large percentage of our total so its bouncing around the sub 5%.
Mark.
Essentially where were aiming for this quarter I'd say the support line didn't didn't show any any meaningful uptick or downtick. It was as expected and certainly within normal bounds. So I don't think that that that the.
The services I'm sorry, the services line was any was anomalous in any way.
Alright, Thank you Mark.
Thank you. Our next question comes from the line of Fatima <unk> of Citi.
<unk>. Please go ahead.
Thanks, so much for taking my questions.
Dave I'll start with you you kind of alluded to the observable changes or rather Nevada, the observable changes and some buying patterns in some budgetary decision, making around the edges, but.
But I want to go back to the example that you've shared in the prepared remarks with that Indonesian e-commerce customer, who immediately realized 10% reduction in their operating cost to do that either.
That's a public cloud using your product and so im curious why hasnt that necessarily counter acted or overcompensated.
For some of his budget scrutiny and then I have a follow up for development.
Yes, that's what I want thanks for the question.
Back to sort of this transition from private data center to cloud is underpinning all of this and those are.
Both.
Unavoidable transitions that are taking some period of time to play out but they're also deeply considered decisions by customers. So I think that that is that is just the reality of infrastructure. These are markets that are deeply considered and cost is one aspect of the decision criteria. So I would actually.
Refer to that.
Sort of indicative of just how serious these decisions are for people. These are decision.
Decisions that are difficult to undo and periods of caution those things sometimes come up with greater scrutiny that being said as you saw that reinforced in our and our outlook for the year, but also in our ability to raise the guide for the year, which sort of does indicate that there's a good balance between the risks in the positive.
Thank you and just.
Some additional color from you on the guidance and outlook into minute philosophy here that you fleshed out for us So maybe a two parter on this.
You've had sort of the experience of going through the Covid pandemic, where you did maybe fee.
Larry dynamics I'm curious if you can compare and contrast sort of again buying posture now and in this environment versus what you saw in Covid and then to your commentary on being.
Proactive around tight trading the hiring and expense envelope in response to the changing macro where exactly do you feel that you.
You can pull back a little bit without really sacrificing the momentum that youre seeking to execute on and Thats. It from me. Thank you.
Great. Yes, thanks spots about great questions in terms of cycles every cycle is different from each other.
The Covid cycle, certainly saw some some lengthening of deal cycles and.
I would also say that the foundational aspects of cloud transformation and digital transformation, where it's very much intact, then and it continues to be very much intact. Now so it's slightly different it's less uncertain I would say at this point in terms of how we sell.
That was a very uncertain point, where our enterprise field sales team had to adopt very different behaviors and this time around we don't have that additional headwinds so.
We feel that there is some scrutiny and spend but obviously, it's a different cycle and the impact we've talked about during prepared remarks, we're comfortable with and feel that it has been reflected in the full year and we're confident about the full year in terms of the spend you know we've always been an efficient <unk>.
In terms of resource allocation during the IPO, we made a conscious decision to spend ahead of plan for the first.
Three quarters as we go into this investment cycle and the fourth quarter and continues to be the fourth quarter at the end of that investment cycle. So we're going to move into a normal operating leverage cycle beyond that point. So all this is is saying that we're going to continue to focus on investing into the long term of the business and we're not.
Pulling back we're just investing less further ahead and we think that the.
Investments made in the first three quarters.
Adequate for this year and next year's performance.
Alright.
Thank you for taking my next question. Thank you. Our next question comes from the line of Jim Fish of Piper Sandler Jim Fish. Please go ahead.
Okay.
Any change to what customers are prioritizing in terms of the main product sets and I'll take the bait this quarter and even ask.
Is there a rough contribution of revenue change in the quarter between the main solutions I'm really just trying to understand if we're starting to shift more towards.
Console and nomad and boundary as opposed to terraform involved.
Yeah. Thanks, Sara I'll take those this is Dave King.
In general the powder remains consistent and it's been it's really much more to the market maturity honestly that anything else, which is the provisioning problem. The security problem or the first one has to be brought into sort of tariff tariff I'm involved continue to be where people.
Our landing.
I think that's for sure.
It depends on the on the account as to which one it tends to be.
That being said this note to a single buying center is how we view our opportunity and so certainly we view the adjacent products is natural.
Items, which will be adopted over the course of time.
The reality is it will be different depending on which company that is in terms of which one they're prioritized. We're certainly excited about boundary boundaries not currently generally available yet.
I would say mark more common is the expansion into your console as a third product.
Net market maturity remains about the same these things are taking a while to play out.
Less about us and more about just market maturity, but overall I think this idea of a kind of a single buying center and a common distribution channel is the essence of how we think about the opportunity and we do think that's the virtue of being a multi product company.
Got it thanks, Dave.
That's really helpful on the go to market side of things.
Has there been any kind of underlying development with either system integrators or even.
Obviously, we talked about the strength of Azure with console here.
But how that can kind of evolve your go to market process by working more with Hyperscale. Despite kind of this positioning around being able to help automate multi cloud.
Yes.
And then we'll have a point of view I'll start. This is Dave I think I really proposition has always been about the ability to accelerate cloud adoption and that has made us.
An excellent partner for the cloud provider 71 partner of the year from Azure, several times and Google as well et cetera. So overall our go to market motion is very much in concert with the cloud providers and then there is typically a system integrator opportunity to help with the skills gap that does exist that is the sort of the common elements I think.
We continue to get better at executing that together, we certainly have lots of support from the cloud providers and are slowly growing our partner Eisai ecosystem. As you know the skills gap is probably the biggest challenge of cloud computing irrespective of us and that is that is why that trifecta works on any major differences no I think <unk> captured it I think the only thing I'd add is by and large.
Our Si community is there to provide services that sort of accelerate the adoption and help customers realize the value of it.
It tends to be less of a traditional resell channel. So I think while we have a very large and extensive investment in the Si community I think by and large that's how we sort of focus is engaging directly with the customers and then bringing in our Si partners to help accelerate their adoption of the product.
Yeah.
Yes.
Thank you. Your next question. Our next question comes from Derrick Wood of Cowen.
Please go ahead.
Okay. Thanks, guys. Dave first question wanted to go back to the Central cloud platform team subject I mean, it seems like once companies get to this kind of strategic makeup of a centralized buying center, that's really where you start to see inflection not only on our core product but.
Driving extension into other products.
The formation of these kinds of teams are pretty early still so I'm, just curious what verticals stick out as being kind of early in its positioning forward thinking I mean, you called out a large financial services when you called out a large insurance win.
Ben served the vertical that's really starting to see this and any other ones that you'd flag.
Yes, generally it's those verticals that are good at software delivery historically.
It is what it is.
So that has been historically been plus services certainly there are telcos theres. Some health care that are good they're good at this but yes. It's early as a short version I think it actually underscores how early the cloud opportunity is in the global 2000, because this construct is how it is done successfully.
So yes financial services, yes, the big markets, we would expect generally those that are good at software development, but certainly we see it over time, but I think if you look at the virtualization as an example, the VA add Monroe became ubiquitous over time and I think there are some doesn't.
Analog here.
Got it thanks, Bob one for you I just wanted to drill down on the Q3 guide I think at midpoint.
It's got revenue down a few points sequentially.
The last couple of years you've seen.
Q3 up 9% sequentially is this just extra conservatism or is there something in the pipeline that makes you think it's more Q4 weighted or something in the model that we should be considering in terms of why were.
Going to see some kind of extra seasonality this Q3 versus versus past years.
Yes. Thanks for the question. So yeah Q2 was very strong and it was a very it was still a very rateable quarter with 90% plus rate ability, but as we move from Q2 to Q3, you have to refill the non ratable component. So when we think about the Q3 guide we look at the way, we normally do things, which is a solid execution quarter.
And large deals are inherently unpredictable so.
So we take a measured view on how those come in and we've factored in seasonality. So all of those to all those things considered or what what we're looking at for Q3.
That being said, we're very optimistic for the full year.
As I mentioned and Dave mentioned before guiding up the entire.
Here in the back half so regardless of the Q3 Q4 split I think we're very optimistic about how the year is going to turn out.
Alright, Thanks Derek.
Yes.
Next question. Thank you. Thanks. Our next question comes from Brad Sills of Bank of America.
Again, Thats, Brad Sills Bank of America branch, Sir Your line is open.
Okay.
And we can hear you Bryan go ahead.
Great sorry about that.
Wanted to ask a question about ASP.
One of the metrics that stands out to me is that cohort of greater than 100, K customer accelerating to 60% on asps.
A tougher comp so my question is.
If you could unpack that a little bit.
That acceleration due more to expansion versus the extension.
Customers expanding what they already have.
Or are they extending in these other categories like Volte console Packer. Thank you.
Yes got it.
Customer journey is an inherently predictable when you land then the next thing you do as you expand as usage increases and then extension happens to be sort of a day to concerns of terraform to vault Walter console. So on and so forth. So as you think about a cohort maturing it's more expansion in the beginning with extension coming later and then <unk>.
And on those extended products. So that's generally how you think about the journey of a customer within our product set.
The ASP growth is within our durable <unk>.
<unk> growth framework, which is continued expansions and extensions within those under U K customer cohort and we're very pleased with the reaffirmation that we're seeing from those customers continuing to buy your software.
Wonderful great to hear and then one more if I may. Please you talk about this concept of a centralized buying center what does it take for a customer to get to that point is it simply we now have a big enough multi cloud deployment, we need the standard console to manage provisioning security networking et cetera, with hockey and what can.
<unk> duty to move customers along to get to that point. Thank you.
Yes, it's a great question I think we've we've seen this play out a number of different times and so we are sort of jokingly call. It cloud won two out of three data and I think what we often see isn't that sort of initial adoption phase.
What happens is an organization maybe signs.
An agreement with one or more cloud providers and sort of opens up the floodgates to their internal development community.
So you have this very sort of tactical AD hoc approach to cloud adoption.
Inevitably what happens is 12 to 18 months later as those teams are all doing it in sort of an inconsistent way right. There isn't a centralized approach to driving common compliance common security common controls across it and so very quickly it becomes unmanageable and so either.
Either it triggers a cost concerned because you have overruns of spend or triggers security and compliance concerns because youre running into some of those issues.
So often times organizations, then realize that they actually need to have a stronger more consistent approach to how they do cloud and that's the catalyst for them to then create that central group right and so that tends to be the shift where they go from <unk>.
To <unk>.
I think the pattern tends to be most of the time you have organizations that run into the problem and then that is the catalyst for it.
Rare is the is the people who see it enforced site.
And so certainly we.
Trying to encourage customers, but sometimes you have to feel the pain first.
Alright.
Thanks, everyone.
Thanks, Brad.
Thank you. Our next question comes from Brad Reback Stifel, Brad Reback Your question. Please.
Okay. Thanks, very much no problem as.
As we think about the leverage commentary for next year is that going to be fairly split evenly between R&D and sales and marketing or will it trend one way or the other thanks.
Yeah, Thanks, Brad it'll be evenly split across the board in all three segments sales and marketing R&D and G&A. We've invested ahead in all three of those segments and the the leverage cycle will prove out nowadays.
Great. Thanks very much.
Sure.
Thank you. Our next question comes from Michael <unk> of Keybanc, Michael <unk>. Please go ahead.
And then on margins because now couple of times, but congrats on the five to 10 point increase for next year.
A question on the volume or Dave There was a lot of evidence of some slowing in cloud deployments.
Quarter.
From the Hyperscale is down to people who are migrating their own businesses to clouds did you see any of that impact at all.
That kind of action at all and so since typically people frequently adopt terraform in particular, when making that cloud migration did you not see it did you were able to just execute well against it.
<unk>.
Yes, David I would say in.
In general it's hard to see that sort of thing at the macro level I would attributed to strong demand and good execution from our sites candidly.
Our teams did a phenomenal job during the quarter.
I don't think we saw a very specific as it relates to.
You are describing.
And then our month.
If you could drill down a little bit more on comps on console great great to see that you had a major win in Indonesia.
Earmarked in prior quarter calls <unk> seen maturation earlier adoption of.
Of console. So what are the use cases, you mentioned surface mapping service discovery.
Are the use cases around service mesh and what if anything is driving the growth.
Yeah, Great question I think there's two effectively two primary use cases. The first one is I think as.
Organizations are adopting cloud there is and there is a greater mix of technologies that play right. They have some mix of Virtualized workloads, some mix of containerized workload increasingly we've seen more several as applications.
So the basic initial problem. They have is one of simply service discovery or enabling the workloads running on those different platforms to connect to one another right. So.
That tends to be the first kind of use cases that we lead with with console is really more of a discovery one solving. The fact that you have multi platform multi cloud workloads that they need to inter operate with one. Another then I think the day to concern really is around the security of that and so as organizations three invest in a zero trust posture and think about how do I protect.
Those are for applications talking to one another that's really at the service mesh use case.
So that's where we really see console comments, focusing on sort of enabling the security of those service to service communications.
Have a day to concern right versus service discovery, which is more of a day one enabling concern.
And then I think more on the sort of kind of day three cost optimization process optimization is our investment in network automation right. So how do I, then look at connecting console to terraform to actually automate how my network functions rather than have dramatic processes, where I'm filing tickets in humans have to intervene to update the network. So that tends to be the kind of core prop.
Possession is day, one enablement of multi cloud and multi platform day to security data III or cost and process optimization.
Okay. Thanks, Mike.
Thanks, everyone. Thanks, Dave.
Thank you again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question or.
Our next question comes from the line of Pat Wall Ravens of.
JMP Securities Pat.
Well Robin Xu your line is open.
Great. Thank you and let me add my congratulations.
I'm curious how the macro progressed through the quarter. So.
One Blake Big Cloud companies said that May and June were actually.
Quite strong.
<unk> was a step down in the problem and then.
When they reported prelate in August they said August hadn't gotten any better. So I'm just wondering what was your experience like in the quarter and how is August and so far I guess August is done how was honest.
Oh, Hey, Pat it's Noah here so the.
The buying cycle for us is very enterprise heavy so what that ends up.
That means is that it's a tail end weighted quarter for us in terms of how the contracts come in so you generally don't see it as much in the beginning of the quarter and you see it closer to the contract and so that's essentially how we saw the.
The increased scrutiny of spend starts manifesting towards the back half of the quarter end and that's generally at the timing of when you said all of that being said Q2, we managed to execute very well despite the increased scrutiny.
Yes.
And August what would you say I get that it's back end weighted but any different so far that I don't I don't see any difference in the August timeframe compared to the beginning of last quarter or towards the middle of last quarter. It is really no difference now know note that.
Vacation time into summer that impacts the third quarter and that's the seasonality comment I made and that's that's been pretty consistent in terms of how it's been from the previous years as well.
Great. Thank you.
Okay.
Thank you at this time I'd like to turn the call back over to Dave Mclennan for closing remarks, Sir Yes I.
I just want to express my thanks for the prescription from everybody here we.
I appreciate you dialing in and for the questions and look forward to speaking to everybody soon thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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