Q4 2023 GitLab Inc Earnings Call
Speaker 1: release, which along with these reconciliations and additional supplemental information are available at ir.giflab.com. A replay of today's webinar is available at ir.giflab.com.
Speaker 1: I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sbrandi.
Speaker 2: Thank you for joining us today.
Speaker 2: In the fourth quarter of FY23, we continue to demonstrate our ability to grow while significantly improving margins.
Speaker 2: We generated a revenue of $122.9 million during Q4 FY23. This represents a year-over-year growth of 58%.
Speaker 2: Our fourth quarter results also continue to exhibit improving operating leverage in our business. Our non-GAAP operating margin improved. There is no question that the past several months have represented a difficult time for many companies. Economic headwinds have resulted in budget reductions.
Speaker 2: companies are forced to figure out how to do more with less. They must continue to deliver customer value, but they need to innovate with fewer resources than before. Some of the watch points we cited during our third quarter fiscal year earnings presentation became more pronounced during the fourth quarter.
Speaker 2: Being a growth company offering a mission critical platform, we saw these impacts later than other software companies.
Speaker 2: The watch points that played out in the fourth quarter were longer deal cycle times, higher contraction of seats, lower expansion and historical trends. Based on this, we announced a 7% reduction in force on February 9th. We see significant opportunities ahead. We're confident in the strong value proposition that gets us to the point where we're going to be able to get to the point where we're going to be able to get to the point where
Speaker 2: that we created and we now have the most comprehensive offering with proven ROI. In this macro environment it is critical for companies to show the immediate return on software investments. Forster found that as a result of implementing GitLab
Speaker 2: a company generated a total return on investment of 427% over three years.
Speaker 2: Even more critical, they realized that payback on the investment in less than six months.
Speaker 2: This payback enables companies to reinvest in future innovation. Companies now need to simultaneously innovate and reduce costs. We believe this environment provides an ideal backdrop for GitLab to demonstrate significant value. We consolidate their many DevSecOps tools.
Speaker 2: which saves costs and leads to efficiency gains. They can reduce or eliminate the amount spent on toolchain integrations. Their engineers become more productive by reducing time to deploy applications. And they can accelerate revenue by deploying their software faster. Let me provide some customer stories in Q4.
Speaker 2: to demonstrate the value of GitLab's DevSecOps platform.
Speaker 2: Deutsche Telekom is the largest telecommunications provider in Europe .
Speaker 2: DevOps methodologies have become a cornerstone of their efforts to streamline software development, reduce manual tasks, break down silos, and increase productivity. Since adopting GitLab, Deutsche Telekom has reduced the time to release software from 18 months down to approximately 75 days.
Speaker 2: That's a seven times faster cycle time. And they've achieved this velocity while streamlining security practices and improving team collaboration. In Q4, they purchased over 1000 additional ultimate licenses. GitLab is also helping mass mutual subsidiary, Happen Technologies.
Speaker 2: a digital insurance leader. Using GitLab, they have cut costs, driven efficiency, and increased development velocity. They've doubled down on Kubernetes. In Q4, the team reported a 400% increase in development cycles, from roughly two cycles per week to two per day.
Speaker 2: and they have greatly increased the number of security pipelines run on each merge request, which helps to increase developer involvement in securing applications earlier in the development lifecycle.
Speaker 2: GitLab has also helped increase productivity by automating a number of processes, especially around branching.
Speaker 2: Finally, we're excited to see the results that Grammarly has achieved with GitLab. Grammarly powers effective communication for over 50,000 teams and for over 30 million people daily.
Speaker 2: Grammarly adopted GitLab in 2019 for source code management and continuous integration.
Speaker 2: Since then, they have steadily increased their GitLab adoption, with the number of users increasing more than four times.
Speaker 2: As an adoption group, so did Grammarly's interest in additional GitLab capabilities. Grammarly wanted to implement robust security scanning into the software development lifecycle, but managing numerous disparate tools became a challenge.
Speaker 2: Grammarly upgraded to GitLab Ultimate in 2021 so they could move from using GitLab for just SCM and CI to also use it for a number of advanced security capabilities all in a single application. These include static and dynamic security scanners, secret detection, and container scans.
Speaker 2: Grammarly added more ultimate licenses in Q4 and envisioned everyone at the organization using GitLab.
Speaker 2: All of these customers, Deutsche Telekom, MassMutual and Grammarly, thousands more are realizing the benefits of GitLab's core value proposition.
Speaker 2: software faster. Now let's turn to our product priorities.
Speaker 2: Our pace of innovation is widening to competitive mode.
Speaker 2: We are confident that we have the right product priorities to capture even more share in this expanding market.
Speaker 2: Our platform is differentiated in a number of ways.
Speaker 2: We deliver the most comprehensive DevSecOps platform as a single application. We are open core, ensuring we are on the leading edge of innovation by building with our global community of customers and users. Over 3000 new GitLab capabilities came from the wider community contributions in the last year alone. We have security native to the cloud.
Speaker 2: the needs of the most complicated compliance and security requirements across all sectors.
Speaker 2: Our current product priorities are all about building on this differentiation and strengthening GitLab's position as the most comprehensive DevSecOps platform. In AR number one.
Speaker 2: Continue integrating advanced security and compliance. This strengthens our ultimate offering and helps customers bring software supply chain security to the forefront of software development. Number two, deepen native integration of observability, analytics, and user feedback.
Speaker 2: This gives every stakeholder in the software development lifecycle the data and insight they need to unlock the value of their software investment. Third, expand to new use cases and audiences with artificial intelligence and machine learning. Here's an update on what we've accomplished since our last call.
Speaker 2: In Q4, we released GitLab Remote Development, eliminating the need to configure and maintain complex local environments.
Speaker 2: This newly released Web IDE enables everyone to contribute from any web browser while reducing the need for context switching.
Speaker 2: GitLab Remote Development also creates a more secure user experience by enabling organizations to implement a zero trust policy.
Speaker 2: that prevents source code and sensitive data from being stored locally across numerous devices. In addition, organizations can adhere to compliance requirements by ensuring developers are working with approved environments, libraries, and dependencies.
Speaker 2: Security and compliance continue to be the core reasons why enterprises choose GitLab over the competition. In Q4, we continued our pace of innovation in this area. We launched new capabilities, allowing security officers to enforce policy control, compliance frameworks, andix practices to improve Google's service capacity in the areas of health and safety.
Speaker 2: and license policies for multiple development projects more easily at the group level, rather than having to go project by project. We introduced browser-based dynamic application security testing, DAST, to authenticate, call, and scan web applications for vulnerabilities. The browser-based DAST significantly reduces the number of applications that are available to users. The browser-based DAST significantly reduces the number of applications that are available to users.
Speaker 2: testing time, and it has the advantage of more seamlessly fitting into the software development workflow.
Speaker 2: and we improve the accuracy of our dashed API analyzer.
Speaker 2: reducing false positives by an estimated 78%, making it easier for customers to hone in on true security threats. We see DAST as a competitive advantage for us in the DevSecOps platform space, and I'm glad to see us continue to innovate with these types of security scanners.
Speaker 2: These are just a few of the innovations we made in Q4 to make it easier to enforce security policies across the entire organization and enable companies to secure their software supply chain. reserved for it.
Speaker 2: We believe that these key additions to our security offering help our customers to build more secure software faster and more efficiently than with any other solution on the market. To bring analytics and feedback into our DevSecOps platform, last quarter we shipped GitLab Value Stream Dashboard.
Speaker 2: I'm really excited about this new capability. We have seen how it delivers tremendous values to our customers.
Speaker 2: This is only possible with a comprehensive DevSecOps platform built as a single application with a unified data store.
Speaker 2: ValueStream dashboard allows all stakeholders from executives to individual contributors
Speaker 2: to have visibility in the process and value delivery metrics associated with the software development lifecycle.
Speaker 2: Now companies can see where their roadblocks are and take steps to ship software faster. Our first iteration enables teams to continuously improve workflows by benchmarking key DevSecOps metrics.
Speaker 2: They can track and compare these metrics over time, helping teams identify and fix engineering inefficiencies and bottlenecks. One customer from a large financial services company was so excited about this new capability, he was able to use ValueStream dashboard to identify his best Java programmers and have them work on mission-critical projects.
Speaker 2: Another customer told me that this capability became a morale booster for all his engineers.
Speaker 2: They could now finally all rally around the same metrics to show what they were capable of doing.
Speaker 2: I believe ValueStream dashboard is a game changer for our customers. No other platform can give this level of visibility across every step of the software development lifecycle without needing to buy or maintain a third party tool. AI clearly represents a major technological wave. I fundamentally believe that AI will revolutionize DevSecOps platforms.
Speaker 2: However, AI isn't a department, it's not a standalone capability. It weaves through every function, every department, and every persona involved in developing security and operating software. We are pursuing AI as a fundamental and integrated part of the DevSecOps platform.
Speaker 2: First, we use AI to make GitLab's DevSecOps platform automate mundane tasks and reduce the cognitive load for our customers. We are creating AI-assisted capabilities for everyone in the software delivery workflow.
Speaker 2: These improve productivity and efficiency. Let me provide some examples. Suggested reviewers, which we launched last September , automatically suggest the best available reviewer for code change. This capability removes the guesswork by ensuring the right reviewer with the right contextual knowledge is reviewing code changes.
Speaker 2: so that customers can deploy software more efficiently.
Speaker 2: Our customers have told us that they absolutely love this new feature because it minimizes delays and leads to better reviews.
Speaker 2: They now have more confidence in the code they deploy. Already they have leveraged suggested reviewers tens of thousands of times to more efficiently and securely review code on our platform.
Speaker 2: GitLab code suggestions, which we launched this past February , increases developer speed and productivity by providing code suggestions in their integrated development environment. We plan to add new AI capabilities.
Speaker 2: throughout the DESECOPS lifecycle. For example, we are developing an intelligent code security solution to reduce the risk due to insecure coding practices.
Speaker 2: We anticipate that intelligent code security will automatically detect and remediate code quality and security vulnerabilities. Second, we make it easier for customers to incorporate AI into their applications faster. We are working on integrating this model of solution into the GitLab DevSecOps platform.
Speaker 2: to empower customers to build and integrate data science workloads and extend DevSecOps workflows to AI and machine learning workloads. In summary, AI is going to dramatically change the way teams work and the way organizations develop, secure and operate software. We believe we will be on the leading edge of it applying the same value of iteration
Speaker 2: with transition pricing for existing customers.
Speaker 2: This is our first price increase in more than five years. It reflects the evolution of GitLab from source control and CI to the most comprehensive DevSecOps platform.
Speaker 2: Since February 2018, GitLab Premium added over 400 new features, leading to improved cycle times, developer experience, and collaboration for our customers. We've also rolled out a significant step to accelerate our product-led growth motion. This month, we will begin applying user limits to the GitLab SaaS free tier.
Speaker 2: With this change, organizations on our free tier will be limited to five users. This gives them the opportunity to experience the value of a comprehensive DevSecOps platform while also driving them to convert to a pay tier if they use it with a larger team. We believe this change will drive an even greater adoption of our pay tiers.
Speaker 2: In summary, I'm confident in the opportunity ahead for GitLab. With the right product, for the right market at the right time. We have the most comprehensive DevSecOps platform. And now more than ever, companies will need to innovate faster and cut costs at the same time.
Speaker 2: On a personal note, I'd like to thank the Gillette E-group and the board for their support, as I'm currently going through some health challenges.
Speaker 2: I recently had surgery for spinal lesion and after much consultation with medical experts in the field, I decided to undergo radiation and chemotherapy last month for osteosarcoma.
Speaker 2: I've completed radiation and I currently have 13 weeks left of chemotherapy.
Speaker 2: My scope and responsibilities as GitLab's CEO and Chair remain unchanged. I'm looking forward to making a full recovery and I'm committed as ever to GitLab's success.
Speaker 2: I will now turn it over to Brian Robbins, GitLab's Chief Financial Officer.
Speaker 3: Thank you, Sid, and thank you again for everyone joining us today. I'd like to spend a moment discussing what we are seeing in the macro environment and will review the key characteristics of our business model. Then I will quickly recap our fourth quarter financial results and key operating metrics and conclude with our guidance. On our last earnings call, I cited some watch points that we encountered towards the end.
Speaker 3: in two ways. First, we saw that some of our customers experienced changes in their business, which led to either hiring slowdowns or a reduction in workforces. This impacted expansions primarily in our premium tier. It also led to an uptick in customer contractions and returns.
Speaker 3: Second, we encountered greater deal scrutiny at the end of the calendar year as companies re-evaluated their overall spending plans heading into the new year. We also saw more people involved in the approval process, which led to longer sales cycles. Looking forward, our fundamental proposition to our customers hasn't changed.
Speaker 3: In a world in which software defines the speed of innovation, GitLab enables companies to build and deploy software better, faster, cheaper, and in a more secure manner. We are the most comprehensive DevSecOps platform.
Speaker 3: Key aspects of our business model that enable our performance include the predictability of a subscription rather than a consumption model, a platform sale rather than a point solution, a diversified base of customers across industry verticals, customer sizes, and geographic regions.
Speaker 3: and a short implementation cycle with an established and well-documented ROI.
Speaker 3: Now, turn into the numbers. Revenue of $122.9 million this quarter represents an increase of 58% organically from the prior year. We ended 4Q with over 7,000 customers with ARR of at least $5,000 compared to over 6,400 customers in the third quarter of FY 2023.
Speaker 3: We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 in ARR with us. At the end of the fourth quarter of FY 2023, we had 697 customers with ARR of at least $100,000, compared to 638 customers in 3Q FY 2023 and 492 customers in the fourth quarter of FY 2023.
Speaker 3: represents a year-over-year growth rate of 62%. As many of you know, we do not believe calculated billings to be a good indicator of our business. Given that, the prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multi-year deals. This quarter, total RPO grew 39% year-over-year to 436% year-over-year.
Speaker 3: to the first three quarters of FY 2023. Next quarter we'll revert back to reporting this as a threshold metric using 130% or the actual number if below 130%. The ultimate tier continues to be our fastest growing tier representing 40% of ARR for the fourth quarter of FY 2023.
Speaker 3: were 90% for the quarter, which is slightly improved from both the immediately preceding quarter and the fourth quarter of FY 2022. As we move forward, we are estimating moderate reduction in this metric due to the rapid year-over-year growth rate of our SaaS offering.
Speaker 3: We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business.
Speaker 3: non-GAAP operating loss was $13.8 million or negative 11 percent of revenue, compared to a loss of $27.4 million or negative 35 percent of revenue in Q4 of last fiscal year. Q4 FY23 includes a $5.9 million of expenses related to our JV and majority owned subsidiary. Green cash used was 11 percent of revenue.
Speaker 3: revenue growth outlook assuming trends we saw on fourth quarter continued. Additionally in response to our near term revenue outlook we've made adjustments to our expenses. We believe these actions will lead to an accelerated path to profitability.
Speaker 3: For first quarter of FY 2024, we expect total revenue of $117 million to $118 million, representing a growth rate of 34 to 35% year over year. We expect a non-GAAP operating loss of $27 million to $26 million. And we expect a non-GAAP net loss such as $ Wee
Speaker 3: representing a growth rate of approximately 25% year over year. We expect a non-GAAP operating loss of $64 million to $59 million. And we expect a non-GAAP net loss per share of $0.29 to $0.24 assuming 153 million weighted average shares outstanding. On a percentage basis, our new annual FY 2024 guidance...
Speaker 3: I would like to provide an update on Jihoo, our China joint venture.
Speaker 3: Our goal remains to deconsolidate Jihoo, however, we cannot predict the likelihood of timing of when this may potentially occur. Thus, for modeling purposes for FY 2024, we forecast approximately 33 million of expenses related to Jihoo, compared with 19 million in FY 2023.
Speaker 3: These Jihoo expenses represent approximately 6% of our total implied 12% non-GAAP operating loss for FY 2024. As Sid and I have said over the last several quarters, our number one priority is growth, but we will do that responsibly.
Speaker 3: There has been no philosophical change in how we run the business to maximize shareholder value over the longer term. We continue to be focused on growth while driving improvements in the unit economics of our business. The overall fundamentals of our business have not changed. We believe we remain extremely well positioned to capture an outsized portion of an estimated
$40 billion market opportunity. With that, we will now move to Q&A. To ask a question, please use the chat feature and post your question directly to IR Questions. We are ready for the first question.
Our first question comes from Cash from Goldman Sachs.
Hi, thank you very much, and hope you feel recovered completely. Question for you, Brian . With respect to the outlook, you have these price increases contemplated in the model, and also a recurring revenue model you would have to have with the price increases.
some significant Down-taken net new error added to get to your numbers. I'm curious. What are you seeing in the early month of February and actually maybe even March that would justify this these kind of inputs.
And also secondly, if you can, your confidence that the price increases would stick. Have you done some early assessments and check-ins to see if customers would be willing to part with the value that they clearly see in the product from an ASP perspective? Thank you so much.
Yeah, absolutely. Thanks, Cash. Let me just sort of unpack what happened in the fourth quarter, and that sort of will go into the guidance. And so in the fourth quarter, up until earnings, like in November , the dollar-based net retention rate was greater than 145%. And as I stated in the prepared remarks, the dollar-based net retention rate was higher than the first quarter. So, in the fourth quarter, the dollar-based net retention rate was higher than the first quarter.
For first, second and third quarter, it was above 145% as well. There was really no meaningful changes in the sales cycle duration. However, we saw some of it increase in enterprise and mid market. We saw a slight increase, nothing really that material and SMB was holding it to historicals.ification.
The pacing for the quarter was okay. Nothing was off that dramatically. First order and ultimate we were happy with. And we had good pipeline coverage. Month two and three of fourth quarter acted differently than month one of fourth quarter. We saw a contraction increase. As you know it's the.
largest core that we have. And so, you know, it was impacted related to layoffs. Deal sizes got smaller. So typically when we'd go in and sell a deal, they buy a number of extra licenses for people in the enterprise, but they're buying just enough for what they needed at the time. We started to see pipeline getting pushed out.
And then our dollar based net retention decrease in months two and month three of the quarter. And it increased almost equally across seats, ultimate upgrades and price yield. It increased against all of them. And so we've had real no change in our guidance philosophy.
And so we took what we saw in fourth quarter and obviously, you know, the month leading into the call and put that into our guidance. As price increases, send your confidence that they will stick. And are they included in the guide as well. Thank you so much.
Yeah, no, thank you for that. So we did include price increase in the guidance. If you think about the price increase, it's for premium and so it doesn't take effect for existing customers until they come up for renewal. And so you have to actually roll that renewal when the contract actually comes up and then what that revenue impact will be.
we did sort of a stair set for existing customers. And then when you look at new customers, the majority of our bookings within a quarter is from our existing customers. So that's a smaller amount. So we did factor that in. And then prior to you'll implement the price increase, we went out and did a lot of market studies and so.
Just following up on that, you mentioned pipeline. Can you talk about what you saw in terms of the sales pipeline? Have you gone back and kind of re-scrubbed the pipeline? And what kind of coverage ratios did you assume in the new guide? Yeah, thanks Sterling. I mean, you could imagine the pipelines getting scrubbed on a very...
we believe we're in a big market. You know, it's a $40 billion estimated TAM, and we're in the very early innings of that. And so the pipe gen growth that we saw was more in previous quarters. Obviously with the macro, you need more coverage. And so we took that and factor that into our guidance based on what we saw in four.
expansion deals, typically we would see them buying a number of licenses in the future for projects to be projects to be started and or team members and we're seeing them buy basically what they need opposed to you know pre buying a lot of licenses and So we're continue to focus on pipe generation and driving a positive
you know, ROI discussion and business outcome for those customers. Understood. Thank you. Next we have Matt from RBC.
Great, thanks for taking my questions guys. You know, I guess maybe one for Sid here. You talked a little bit in your prior remarks about AI. I'm curious, what are the thoughts on generative AI and I guess specifically, you know, GitHub with copilots making a lot of noise out there? A little bit of thought around that.
Yeah, thanks for that. I think AI is a really big change. It will change software and it will change GitLab as a platform. The biggest impact is how fast people can use the platform. So our strategy for AI is more than just code suggestions. We think AI will change not just code, but it will change your...
which will soon be generally available. We have the code suggestions right now in closed beta, but we're working on many more AI-powered features.
Apart from that, we also want to empower our customers to add AI to their applications. So our model ops functionality already allows you to link your AI experiments to GitLab experiments. We'll be expanding this further so our customers can use AI to make the applications they make with GitLab even better. Got it. Can I ask a quick one for Brian then?
You know, with the with the pending price increase, does your Q1 guidance assume any sort of, you know, sort of like run or push on premium tier seats in anticipation of the price increase to push it off a year or just sort of thoughts on like how that might feather in? You know, we factored you as we look at guidance, we look at the pipeline conversion rates, the number of different.
question said thoughts and prayers out to you as well. And Brian , question for you, just on the drivers of profitability going forward. You know, you've made a lot of improvement on operating margin line. I know you've talked about the cuts, but he talked about any other levers that you have to pull in terms of
driving you to free cashflow positive. Appreciate it, thanks. Yeah, thanks, Joel. Appreciate the question. Yeah, I'm happy with what we did in our FY 2023. We increased our revenue incrementally by $172 million.
and we did that for $11 million less in operating loss. You know, if you normalize the incremental public company expenses and GHU expenses, we did that for $34 million less in operating loss. If you look at the guidance, we guided to a negative 12% operating margin for the entire year. That includes GHU, which is negative 6%. So,
GitLab minus Jihoo, we're guiding to negative 6% for the full year. And we're seeing improvements across everything, right? And so, you know, if you look at our cost of goods sold, even with SaaS revenue becoming a greater and greater portion, we've been able to maintain our
non-gap gross margins at a very, very high level. And then if you look at sales and marketing, R&D and G&A as a percentage of revenue, despite the increased public company expenses, with the growth of revenue, we're growing expenses, less than that to get the leverage in the model. And so
We'll continue to look at all areas to get greater efficiency in the business. But one of the key things we'll do is grow, but we'll do that responsibly. Great, thank you.
to look at all areas to get greater efficiency in the business. But, you know, one of the key things we'll do is grow, but we'll do that responsibly. Great, thank you. Thanks, Joel.
Our next question comes from Michael at KeyBank. Hi guys. Sid, of course, Pest and Health, you'd be well. Thanks, Mike. So for both Sid and Brian , we've talked a lot about some of the things that you've seen in the quarter, which are very similar to what other people have seen in terms of less expansion, sales cycles, et cetera. But I don't know, I'd love to hear your underlying information from them so let's see what we can do.
We'll just get it out now, Brian , if you could quantify for us how much you think the tailwind from price increase would be, this embedded nerve guide would be helpful.
Yeah, absolutely. Let me talk about, I'll take both of those, but one is just sort of overall in the macro, I can give you a couple of anecdotes that sort of happened. One, you talk about cloud optimization. From a hyperscaler perspective, we had the most logos brought to us by the hyperscalers.
and we know history shows once we land them, we can expand them over time. I would say generally in the enterprise.
we're seeing a couple of different things. One is I think, with the uncertainty in the macro, with a seat-based model, we felt that a little later than in consumption-based models and most companies have been tasked with trying to save money. And so where we would go into a typical large enterprise and where we would try to set up a large enterprise, we would go into a large enterprise where we would go into a large enterprise
And so it's just, you know, it's taken a little bit longer from a deal cycle perspective. And also those deals are a little smaller than they've been historically as well, because they're not pre-buying for future projects, they're buying for what they need at the time. On the next question about price increase baked into guidance,
I can walk you through the math, but if you have majority of our bookings are from our existing customers within a quarter. And so those have to actually come up for renewal before you get the impact. We have that transition pricing the first year for them. And then you basically, we're starting two months into the year. So you're only getting.
Next we have Koji from Bank of America.
Hey guys, thanks for taking the questions. Sid, from all of us at B of A, we're rooting for you. Maybe one question from me. Brian , can you remind us maybe how much of the business exposed to SMBs out there and really in the context of the recent developments in the financial industry?
If you look at the technology vertical overall, the technology vertical is less than 20% of our ARR. It's about 20% of our ARR. If you look at technology startup companies, which we identified with 200 or less employees, it's less than 5% of our ARR.
Enterprise continues to be roughly about 60% of ARR. We talked about PubSec being around 10 to 12%. And so the SMB is relatively small. It's around the 10, call it the 10% of our total ARR. If you look at verticals, we don't really have one vertical that makes up the majority of our ARR.
Okay great Brian just to carry on from that conversation did you see disproportionate weakness in the tech vertical that you just sized at 20% of ARR given that one of your comments was that you saw a contractions due to layoffs and given that the layoffs were
have been disproportionately tech vertical, I would assume that that's been a little bit of a weaker vertical for you. Is that the case? You know, it's a good question. I didn't get a chance to specifically go in and look vertical by vertical by vertical. I did go back and look at the net dollar retention rate. And, you know, I did find it interesting that if you look at the net dollar retention rate, the ratio of
change that we saw was the same between seats, upgrades, and price yield. And that was actually for all years back, seven years, except for one year where we had some anomalies, all acted relatively about the same. And so, you know, that, you know, it needed to dive further into that, but that led me to believe that it was more of a broader macro impact than a particular vertical impact. I think all companies today are, you know, sort of feeling
plus your guidance feels conservative but I want to throw that at you maybe to see our PO metric is a imperfect predictor and it's only capturing a portion of the next 12 month revenue growth and you're anticipating that new bookings are weaker do you mind unpacking the correlation between those two metrics yeah happy to do it we I mean we've we talked about historically how Billings and some of the metrics weren't directly correlated but transit
directionally correct. And so the CRPO growth for the quarter was 51%. And then we did guide to right about 25%. And so there's been no change in our guidance philosophy. And we try to factor everything that we see into that. And that's where we landed. Okay, got it. Thank you. Thanks. We have Paul from Piper Sandler. Rob.
the gross retention rate trend looks like and B what could cause that Q1 to be down. Thanks. Yeah absolutely Rob thanks thanks for the question. From a gross retention rate perspective you know it has declined a little but it's still up in the 90s you know sort of low to mid 90s from a gross retention rate perspective.
And so, I still believe that every company has to become a software company, and that the well-documented ROI and the payback period helps drive those renewals and those retention rates. And so, ultimately, I believe that that will be a lift to revenue over the long term.
And so, yeah. And thoughts around the Q1, what could create a negative sequential compare?
As we go through, we look at basically all different components, turn, contraction, times of closed deals and so forth. And so if obviously if you had more churn and contraction than you anticipated, you wouldn't be able to recognize that revenue. So there are some.
headwinds to revenue, that we, from a Q1 perspective as well, we're in the process of going through our SSP analysis. That's the annual analysis we have to do for 606. And so we factored all that based on what we do at the time into the guidance.
that we, from a Q1 perspective as well, we're in the process of going through our SSP analysis, that's the annual analysis we have to do for 606. And so we factored all that based on what we do at the time into the guidance. Great, thanks Brian .
Up next, we have Derek from Cohen. Great. Thanks. And, Sid, sending best wishes to you.
Well, I mean for Sid or Brian , but I just wanted to touch on the Restructuring or the realignment and some of the headcount cuts. Can you give us a sense of if you've made any changes on the go-to-market side and and I know you guys have been evolving from a bottom jump to more of a top-down model as you were.
you know, kind of selling more on a platform basis. Is that platform sale going to be a lot tougher in this environment and have you made any changes from a go-to-market perspective given that? Yeah, Derek, thanks for a question. Our land and expand sales model continues to be relatively the same. We're getting...
As we got ready to go public, we talked about the various things that we're doing to change our go-to-market motions. Primarily, we were a direct sales motion. We then added a channel program, an alliance program, the hyperscaler program, and so forth. As I mentioned earlier, within our hyperscalers, we had the most logos in a given quarter. With our hyperscalers, they continue to be a good distribution channel for us. They 1966 sold Office Pay which is the fruit of the company's
We're continuing to do that. One of the things that we started recently is doing value stream assessments to where we'll go into a potential client and tell them about, look at their stack and look at how much they're spending and look to see what GitLab can do to help them create faster software.
software faster and save money. And we typically go in at the exec level and sell that. So I think we're doing a good job there. If you look at the business outcomes and the ROI that we're driving for our customers, we continue to get positive feedback.
One ultimate customer, it was a global leader in financial services. We were able to save them $300,000 a year and just tool chain reduction and elimination of developer downtime. And so we're within that client, we replaced four security tools with GitLab and we increased their velocity by about 55% without sacrificing quality.
be pausing hiring, you're still going to be investing, still be investing in sales capacity, color there.
Yeah, absolutely. So when we looked at doing the reduction, obviously a very difficult decision to make. We looked at open headcount first and then looked at existing headcount. It was done across the company to basically align our cost model with our revenue projections to continue to drive operating leverage in the business.
you know, for the most part, based on the guidance, we have the capacity on board today to deliver, you know, what we committed to. And so we will continue to hire, but there'll be in, you know, very strategic areas of where we need to add, you know, need to add headcount at. And so there will be some in sales and marketing, some in R&D.
but at a much more measured pace.
but at a much more measured pace. Thank you.
We now hear from Ryan at Barclays. Hey guys, thanks for the question.
One for Brian , do you have a sense of how many customers have more than five free users on your free version? And have you seen increased instances of customers down-tiering from premium to free in the court?
Yeah, I don't, at my fingertips, I don't have the exact number of customers with five licenses or more. Typically, outside of when we did the starter deprecation, we did the start and end.
you know, we did see from the $4 product down to the free product, you know, we saw people go that way, but have not seen a lot of people go from premium to free. And that's due to the, you know, all the different functionality that you get with premium over free.
And just to follow up on the price increase, I know it's early and we'll have to see how it goes through, but do you think a more extensive premium tier could lead more users to reconsider ultimate and upgrading from there? Thanks. You know, I hope not. Based on the market research that we've done and the feedback that we've gotten from the customers....
are so positive that based on market research that we've done, we felt like that was a fair price for what we're delivering.
Appreciate it. Next we have Jason from William Blair.
Yeah, thank you. I guess, Brian , first one for you, with the 25% growth expectation for FY24, is it right to think that it embeds an NRR of around 120% for the year, and is that about where it was in months two and three of Q4?
Yeah, Q4. Yeah, so we basically took everything that happened in fourth quarter and what we saw at the beginning of first quarter and factored that into our guidance. In my prepared remarks, you know, I said that if it was over 130, we would continue to report it as a threshold. But if it dropped below 130, we'd actually report it as a threshold.
GitHub. I think what we have is a more comprehensive platform. So we do the entire DevSecOps cycle. We can replace more tools. In the end, what our customers need is to spend less time integrating tools, to have fewer people, to have a faster cycle time. So it's really about having a compelling value and having the most comprehensive platform. That's what we're selling.
That's what the results are showing. And of course, there's the price of the software, but if you earn it back in under six months, it's an amazing deal.
Okay, thanks. Be well. Thanks. Next, we have Mike from NEDA. Hey, thanks for taking the question, guys. I just wanted to circle up. I know that you guys aren't quantifying what the intended benefit to revenue is from the announced price increase for premium, but maybe for historical context. Can you help us think about...
what the deprecation of the starter package did as far as a contribution revenue. Again, just to help us kind of level setter or think through how this price increase will phase in over time.
Yeah, thanks, Mike. You know, on starter, you know, just to update everybody, we have slightly over a million dollars of ARR on starter. So we're almost completely through that transition. But the way that starter happened was about two thirds went up to premium.
and a third either went to free or churned. As you know, when we did the starter deprecation, we actually offered a slow increase price if you met certain requirements. And so the majority of our customers fell under that. And so it went from $4 to $6. And so two customers at $6 versus three at $4.
it was really the same revenue impact, and we didn't get much of a financial lift in year one from the starter deprecation. And then a follow-up if I could, but I know that you guys announced the layoff reductions and made a tough decision there. Is there a way we can think about what those anticipated savings are?
to the company and the construct of the, call it negative 12% operating margins you are calling out, or negative 6% if we exclude the $33 million in expense from Jihoo? Yeah, I guess the, you know, when we take the charge for that it would be roughly around $9 million.
call it negative 12% operating margins you were calling out or negative 6% if we exclude the $33 million in expense from GHU? Yeah, I guess when we take the charge for that, it would be roughly around $9 million, give or take.
I'm just a, thank you. Yep. Thanks. Mike.
We'll now hear from Nick at Scotiabank. Great, thanks. Just trying to understand some of the assumptions around the guidance.
Just going off of Rob's question, I think you guys said gross retention was sort of in the low to mid 90s. I guess when you look at the guide for this year, what does that sort of embed for gross retention? And then as a follow-up, historically, you guys have talked about how two-thirds of expansion really comes from sheet growth. And so can you maybe talk about...
what level of seat growth is embedded in that 26% guide? Yeah, so we obviously don't give all the details of the model, but I can go through a lot of the characteristics that we, or a lot of the things that we thought about in building out the guidance. So first let me talk about the net dollar retention rate. Seat growth is still the number one contributor to the net dollar retention rate.
followed by tier upgrades and then price yield. And so that hasn't changed that much. Seek growth, you know, two, three quarters ago was about two thirds. That's down to around 50% now. And then the other two make up the remaining 50%. And so as we went through guidance, you know, we looked at, you know.
in basically large, mid-market and SMB. We looked at pipeline, deal size, conversion rates. We looked at our contraction churn and basically built up the model from the bottoms up based on what we saw in fourth quarter and the beginning of first quarter.
Next, we have Pendulum from JP Morgan.
Oh, great. Hey, thank you so much and best wishes said for your health. Brian , maybe one question on the price increase again. Any way to understand, I know you saw about one third churn in the starter deprecation. Are you assuming somewhat similar kind of a chart level at this?
at this point for the premium price of upgrade here. How should we think about that starter deprecation plan because that is supposed to go from 6 to 9 to 15 to 19 right now. Would that 19 be basically 29, 15 going to 29 directly?
On the starter package, they did go from six to nine. What was the first question? Could you repeat that? The churn portion, one third, are you assuming something similar?
for a three-month price increase? We built out a model to say, you know, from new business, you know, will we have the same close rate? Will it take the same amount of time for the existing clients that we have the same thing? And so we did assume some kind of turn. It wasn't the same exact, but based on the market research that we went through.
we did assume some kind of turn. But it's not as high as 33 is what you're saying? We did give out a specific number on that. Yeah okay understood. One for Sid if I can. Sid what is your vision on kind of the monitor stage of
the infinity loop. You acquired ops trace. But we haven't heard much, I guess, on the observability side. How are you thinking about it? Yeah, we still believe there's a huge unmet need for observability. So observability fits in nicely with the rest of the loop.
And we've been working on distributed tracing, error tracking and product analytics. Those are all shipping in GitLab. What it allows our customers to do is to identify performance issues they have with the specific services, helping them improve the user experience. You can imagine the ability to automatically correlate errors to GitLab incidents.
to automatically monitor GitLab deployments. That is super important. So we are starting with the things that are very close to GitLab. GitLab already does incident management. GitLab already does deployments. We're focusing the observability there first and making
progress there because it adds a lot of value to close that loop with the customer. Got it. Thank you. Our final question comes from Shebly from FBN.
Yes, thank you very much. So are you considering raising prices on the ultimate tier as well?
All we announced was the price increase on premium. We have a pricing group. We look at pricing all the time. But the only decision that has been made is the pricing announcement that we made on premium. Okay, the other part for me is
In fiscal 25, it seems like there could be an exciting story for you, because more of the existing premium subs are going to be moving to $29. And I'm also wondering whether the $33 loss from Jihoo in 24, does it go away in 25? Any kind of thoughts? And so you're going to have a combination of $33 loss from Jihoo in 24, and $33 loss from $33 loss from $33 loss from $33 loss from $33 loss
of potentially better revenue growth and better margin expansion. But I just want to hear from you the opportunity you see for revenue acceleration in 25 and does that GHU 33 go away or does it go to a much smaller number? Yeah, let me just for those
fundraising around there. So it's we have a footnote in our accusing case around what we spend on that. So that's, it gets consolidated results, but it's the JB's cash, and it's their expenses. From a guidance perspective, we've been conservative in the sense that we don't include any revenue, and we include all the expenses.
you know, because it's a JV that we don't control. And so we've been working with our auditors to see if the facts and circumstances have changed to see if we could deconsolidate that. And we're in the process of going through that exercise. When it's deconsolidated, you would actually obviously see it all come out and we would account for it differently. And so from a revenue driver perspective, you know, it's been somewhat the same. We continue to sell new customers.
We're going to expand existing customers. We're going to go into new GEOs, where we currently aren't today, geographies. We're also, you know, we have the benefit of the price increase as well that will happen. And so there's a number of different revenue drivers to the company. And then also last call we announced Dedicated, which is a single tenant.
offering that we're rolling out right now. Thank you. That concludes our 4Q FY23 earnings presentation. Thanks again for joining us and have a great day.