Q1 2024 Hashicorp Inc Earnings Call

Speaker 1: Against a challenging environment, I'm pleased with the solid Q1 results that the team delivered. However, macro challenges continue to impact our business, and I'd like to provide more color on what we're seeing in the market. During Q1, Arman and I spend much of our time speaking with customers. The key theme from these discussions, regardless of customer size, is the uncertainty that they are feeling about the economy and what it means for their own businesses. As we have mentioned in the last few earnings calls, we saw this budget uncertainty start in October of last year as higher interest rates began to impact our customers thinking about their FY23 budget cycles. This economic uncertainty is driving organizations to optimize their software spend. Procurement teams are scrutinizing many larger software purchases and stretching deal cycles. The deepening inspection of budgets is happening across all of our customer segments, but most noticeably in our largest customer deals. Despite these near-term challenges, we believe the long-term trend to cloud computing remains unabated.

Speaker 1: We continue to see demand for our products as customers continue to plan their cloud initiatives for the next several years. I would highlight the customer stories we have outlined in our earnings presentation on the IR site to give us confidence in our market opportunity and product fit. These customers include a large US-based financial services company, a back-of-office software platform, and a

Speaker 1: and the European Stock Exchange, all very diverse verticals and all very early in their cloud adoption journey.

Speaker 1: We are laser focused on building trust with these customers so that we can be a central partner as they continue to invest in their cloud initiatives.

Speaker 1: In addition, our focus on adding larger, new customers produced solid traction during Q1 as we added 26 net new Global 2000 logos, the largest number we've added in five quarters, and we continue to add a healthy number of greater than $100,000 ARR customers as well.

Speaker 1: These large customers are an important part of our future, and our model is built to grow our footprint with them as we become an increasingly critical piece of their infrastructure over time.

Speaker 1: So while we're seeing heavy budget scrutiny on our large expansion deals, these entry-level deals with large companies give us confidence about the long-term shift to cloud and our role as the enabler of that transition.

Speaker 1: We also continue to see strong and growing interest in boundary, which we introduced late last year.

Speaker 1: As a reminder, Boundary solves a key security challenge for organizations by using Identity Secure Remote User Access.

Speaker 1: As I noted earlier, Armon and I spent much of Q1 on the road with customers.

Speaker 1: In nearly every meeting, customers proactively inquire about Brownery, which is a great signal as to the longer term opportunity we see for the product.

Speaker 1: Next week, we will host Tashi Days, our European user conferences, where we will make a series of announcements that highlight ongoing product innovation, particularly around cloud security automation. I look forward to sharing more details during next quarter's call.

Speaker 1: Before handing it over to Navam, I want to provide more detail on the announcements made after the market closed today.

Speaker 1: First, we announced a reduction of our workforce by approximately 8%.

Speaker 1: I want to acknowledge that a lot of talented people who made meaningful contributions to Hosh Corp are leaving the company.

Speaker 1: This was not a decision we made lightly and is part of a necessary effort that Navam will describe to reduce our operating costs to reflect the current customer spending environment.

Speaker 1: Second, we are excited that Susan St. Ledger will be joining the company in July as President of our worldwide field organization.

Speaker 1: Susan is a master of scale and a deeply technical sales leader who understands how to make the most of complex product portfolios. Susan has been on our board since 2019, so she is already well acquainted with HashiCorp, our products, and our team. With Susan, we get the rare opportunity to work with an experienced leader who has done this multiple times. Susan is a master of scale and a deeply technical sales leader who understands how to make the most of complex products portfolios. Susan is a master of scale and a deeply technical sales leader who has done this multiple times.

Speaker 1: having most recently led the field organizations for Okta and Splunk, where she helped them each surpass a billion dollars in revenue.

Speaker 1: We have trust and confidence that her experience and leadership will serve our field and overall organization well through the current economic conditions as well as through our next phase of growth.

Speaker 1: I believe strongly in our opportunity given the long-term trend of cloud adoption and believe we are now better positioned to take advantage of that opportunity.

Speaker 1: And, in line with the guidance we provided last quarter, we continue to operate against an aggressive goal to achieve profitability next fiscal year and remain on track to meet this goal. Now, I'd like to turn it over to Navam, and I look forward to answering any questions.

Speaker 2: Thank you, Dave, and thanks again to everyone for joining us today.

Speaker 2: Our first quarter results showed solid progress in our fundamental customer adoption engine.

Speaker 2: Our process remains very consistent.

Speaker 2: Customers adopt our open source products throughout the organization.

Speaker 2: We land the organization as a commercial customer with a particular product. The customer expands its product usage and then extends into adjacent products.

Speaker 2: The success of this adoption engine drove our customer count to increase by 261 in Q1.

Speaker 2: and our 100k plus ARR customer count increased by 32.

Speaker 2: Our total custom account and 100k plus ARR custom account is currently 4,392 and 830 respectively.

Speaker 2: While the pattern of customer adoption remains consistent, as Dave mentioned, the economic headwinds we've noted in the past few quarters also continued into Q1.

Speaker 2: combined with our typical first quarter seasonality.

Speaker 2: we saw ongoing pressure on customer budgets, which caused slowdowns in customer behavior and elongation of sales cycles.

Speaker 2: The impacts were most acute among our larger contracts within our global customer sector.

Speaker 2: along with the large enterprise customer segment. In addition, one of our largest customers in the retail sector.

Speaker 2: adjusted for some excess capacity and reduced a portion of their spend with us.

Speaker 2: The impact to our quarterly growth and net retention rates due to this customer's spending adjustment was roughly 2%. Despite the adjustment, the customer continues to be very engaged with our team and remains one of our largest customers.

Speaker 2: We expect the current buying environment will create ongoing uncertainty in the pace of large customer expansions and extensions for the rest of the fiscal year.

Speaker 2: Accordingly, we have reflected these expectations in our full year guidance.

Speaker 2: We've also widened the range of potential revenue outcomes given the overall purchasing environment.

Speaker 2: While we have shown ongoing diligence in managing our expenses, we are operating in a very cautious customer spending environment. As a result, we took additional steps today to reduce our cost structure through a reduction in force of approximately 8% of our workforce. Before making any employee reductions, we are going to take a few minutes to reduce our cost structure.

Speaker 2: we took a number of other carefully considered actions, including reducing our program spend and eliminating open but unfilled jobs.

Speaker 2: It is difficult to transition out valued employees who have helped build HashiCorp.

Speaker 2: And this was a very hard decision for the company. However, we also believe it is necessary to have the right spending and investment profile to navigate the current economic environment.

Speaker 2: while also maintaining enough resources to deliver on our long-term plan.

Speaker 2: Following the reduction in force, which we expect to be materially complete by the end of Q2, we will begin to see the impact of these reductions in our free cash flow in Q3 of this year and beyond.

Speaker 2: We expect free cash flow margins of approximately negative 5% in FY24, followed by sustainably positive free cash flows on an annual basis the following year and beyond.

Speaker 2: Other than seasonally low second quarter cash flows, we are expecting all other quarters to have positive free cash flows.

Speaker 2: We are maintaining our target to reach non-GAAP EBIT profitability in the second half of FY 2025.

Speaker 2: With that, let's move on to our guidance.

Speaker 2: Our full guidance numbers can be found in our earnings presentations available in our ir.hashcorp.com website under financials quarterly results. I encourage you to read through the doc for full metric disclosure.

Speaker 2: shareholders, share-count disclosures, and gap-to-non-gap reconciliations. To summarize our guidance, for the second quarter of FY24, we expect total revenue in the range of $137 million to $139 million.

Speaker 2: and a non-GAAP operating loss in the range of $46 million to $43 million. For the full year 24, we expect total revenue in the range of $564 million and $570 million.

Speaker 2: and expect FY24 non-GAAP operating loss in the range of $113 million and $108 million.

Speaker 2: Thanks for your attention. Dave, Armond and I are available to take any of your questions. Alex? Thanks, Nivam. With that operator, let's go to our 1st question.

Speaker 3: Thank you. As a reminder, to ask a question at this time, you'll need to press star 11 on your telephone and wait for your name to be announced.

Speaker 3: To withdraw your question, please press star 1-1 again. Please limit yourself to one question. Please stand by while we pile our Q&A roster.

Speaker 3: Our first question comes from the line of Sterling with your line is open. Please go ahead. Hi, guys. I am curious with Susan St. Ledger coming in to head up sales, is there an early sense of the extent or magnitude of the changes that you want to make to the go to market

Speaker 1: growth in front of us. We had the unique opportunity to bring in a go-to-market leader who has done that now multiple times in multiple different companies. And so we're super excited about that opportunity. I think Canada Lee, that's the aspiration. It's about setting ourselves up to the next generation of scale that we certainly envision ourselves progressing through as a...

Speaker 1: Strong independent company and that's that's really what it's about and there's really nothing beyond that The vomit had had alluded to some program spend changes I think we're just reflecting some some program changes that we had made over the last quarter or so To try and use keep the cost line relative to the to the revenue line, but not related to Susan

Speaker 1: And that's really what it's about. There's really nothing beyond that. The vomit had alluded to some programs, Ben Changes, I think, which is reflecting some program changes that we had made over the last quarter or so to try and use to keep the cost relative to the revenue line, but not related to Susan. Mr. Ba arrowble,

Speaker 3: Thanks, Sterling. Next question. One moment. Our next question comes in a line of Derek Wood with TD Cowen. Your line is open. Please go ahead. Great, thanks. One question I'm getting from investors is if you're seeing customers move from commercial to open source given the budget pressures out there.

Speaker 3: Obviously, there's those dynamics in your end markets. Just was hoping to get a sense of if you're seeing any of that or kind of what's your view on the risk of those kind of term dynamics as you look going forward.

Speaker 1: Hey, Derek, I'll answer that one again. The short answer is no. The open source products solve a problem for an individual, the corporate commercial product solves a problem for an organization, so in a sense, they're fundamentally different products. And so, no, I think what we are seeing is very, very consistent what we've...

Speaker 1: with what we've been communicating over the last couple of earnings calls, which is as Armon and I both be traveling a ton, what we're seeing at the front end is very, very consistent in terms of interest in what we do, design when decisions being granted to us, no change to competitive environment. What we're really just seeing is increased scrutiny in the procurement process that is just difficult to predict as we've indicated over the last

Speaker 1: start to look at some of the numbers in our earnings report, you'll see we added 26 new global 2000 customers, 32 customers over 100,000 in ARR, and another quarter of strong NDE, which I think really just speaks to that consistent long-term trend and really no material change otherwise. Okay. Thank you. Thanks, Derek. Next question.

Speaker 4: One moment.

Speaker 4: Our next question comes from the line of Michael Turret with KeyBank. Your line is open. Please go ahead.

Speaker 5: Hey guys, I just want to try to get as much of a sense for what's changed as possible. You've held up extremely well during a period in which people have seen this type of scrutiny, deal cycles extending, etc. And in fact, to some extent, cloud optimization seems to have...

Speaker 5: benefited you in prior quarters. So is there anything that you feel like was an inflection point here that might have determined your outlook worsening for the year?

Speaker 2: Hey, Michael. Hey, it's here. Thanks for the question. So, in terms of what's changed, I think the main the main points to to talk about is what's what's not changed is the front end environment, which is. The pipeline activity, the pipeline creation activity still remains very strong.

Speaker 2: As Dave mentioned in the call, very healthy quarter in terms of the G2K ads, Net 100K ads, and total customer ads. So the activity of cloud transformation efforts, cloud efforts, all those things remain similar.

Speaker 2: What happened in the first quarter, and this is a little bit of first quarter seasonality as well, the first quarter in a very long year, in this new budget cycle, you saw a lot of headwinds, a lot of procurement pressures in the global segment and the enterprise segment related to very, very large deals or large deals.

Speaker 2: And that's reflected in the guidance range that we've given. So that's the material change we saw in the first quarter. But the main thing to remember with these large deals, and I'll give you an example of a first quarter deal that we were working on, and it was held up in procurement due to some procurement process issue.

Speaker 2: Ended up closing in the second quarter as a multi-year deal using several of our products. So these deals don't get lost for competitive pressures. They don't get lost because the cloud transformation effort is canceled. It just elongates and they happen when they move to it. They happen in different quarters.

Speaker 1: Maybe to add a little bit to Dave, let me add a kind of subjective commentary. As you see on the hyperscalers, there's a lot of scrutiny around anything related to the cloud narrative at the moment. You see in the hyperscaler results, and certainly that seemed to be more acute in the quarter based on what I saw externally than in previous quarters.

Speaker 1: We are fundamentally tied to the cloud transition, and that does cause things to get elongated as there's increased scrutiny on certainly the larger transactions associated with anything cloud related.

Speaker 1: fundamentally tied to the cloud transition and that does cause things to get elongated as there's increased scrutiny on certainly the larger transactions associated with anything cloud related. Thanks, David. And then classicaleend watch.

Speaker 6: Thanks, Michael. Next question?

Speaker 4: One moment please. Our next question comes from the line of it. Ty Kidron with Oppenheimer. Your line is open. Please go ahead. Your line is open.

Speaker 7: Thanks guys. I like to dig in into the retail customer that reduced portion of the spend. Just a few things around this. First of all, how big of a customer is it as percent of revenue to have a two point impact? It must be a quite significant customer. Can you give some color on why they reduced spend or just not using it or didn't see value there? And Navam, would it be fair to say that without this customer you're actually, if I'm doing the math right, actually

Speaker 1: around procurement and finance scrutiny. We, you know, they ended up right sizing that particular entitlement for that particular product for that particular application for their state, which is consistent with, you know, what other vendors have commented on. But in the sort of partnership, you know, that's something that we want to do with them. You know, I would just underscore that.

Speaker 1: They remain one of our largest customers. They are a multi-product customer. We are super engaged with them. And also, it's very clear that they're very early in their cloud estate. These are big companies that spend a lot of money on this category, but they're very early. So, net, it was an optimization that we certainly are partners in. I'll let Navam comment on that. Yeah, you know, it's a large customer relationship of ours. And I think I mentioned during the...

Speaker 2: prepared remarks was about a 2% impact to our growth in net retention rates. It's about a 1% revenue impact. In terms of the guidance, I think the guidance is reflective of the general, uh, you know, large deal movement that we're seeing in, in any given quarter rather than specific to this customer. So.

Speaker 2: This customer's impact was obviously reflected in the guidance as well, but it's more a relationship relation to. What's happening in the expand extend.

Speaker 2: Large contract side and the impacts of procurement and the CFO being part of that purchasing decision more and more this quarter in this new budget cycle.

Speaker 2: large contract side and the impacts of procurement and the CFO being part of that purchasing decision more and more this quarter in this new budget cycle. I appreciate it. Thanks.

Speaker 6: Next question, please.

Speaker 4: One moment.

Speaker 4: And our next question comes from the line of Jim Fish with Piper Sandler. Your line is open. Please go ahead. Thank you.

Speaker 1: Hey guys, thanks for the question. Just building off of Gita's question there, how much risk is there to other sort of large customers like this retail customer of reducing a portion of spend? You know, what kind of guarantees do you have that that doesn't happen, you know, next quarter or the quarter after? And Navam, does this mean we should kind of expect?

Speaker 1: this kind of what's called mid teens kind of net retention rate in the period to continue forward? Or should we get back to that greater than 120% kind of trailing 12 months long term target? Thanks.

Speaker 1: Hey, sure, thanks for the question. Yeah, just really quickly on, you know, I think we have a pretty good view of the overall customer state and I think our view is reflected in the guidance we have, more generally of the guidance framework that Navam shared.

Speaker 1: this is a, you know, retail is a very specific vertical for as you can imagine, so I don't, I think we forget about the remainder of the estate. Yeah, in terms of the net retention rates, you know, I point to there's a lot to be optimistic about after we get through this year's budget cycle not whole. You've still got, you've still got a lot of money to spend.

Speaker 2: Very healthy activity on the G2K, you've got very healthy activity on the 100Ks. These are all expansions and extensions that happen and also multi-product extensions that happen with our product portfolio and also the upcoming boundary product, which will impact our revenue going forward. So,

Speaker 2: No, I don't think that this is a new reality of what net retention rates would be. I think it's more a reflection of the purchasing environments along what's stopping sort of large contracts from proceeding to the finish line. Once these, once this budget cycle resets into the next one, I think we see the usual impacts of expansion, extension, and multi-product purchasing.

Speaker 2: So, our long-term targets of being above 120 percent, which is the target we've set, remain intact, and we're very optimistic about that long term.

Speaker 6: Thanks. Next question.

Speaker 6: Thanks. Next question. One moment.

Speaker 3: Our next question comes from the line of Alex Zukin with Wolf Research. Your line is open. Please go ahead. Hey, guys. Thanks for taking the question. I've got a multi-part first one and then just a clarification. So I guess if we think about...

Speaker 7: some of these larger contracts, these larger deals, these longer sales cycles, are you seeing like is this is the incremental scrutinization that's being put on these deals, is it anything to do, you mentioned Dave about kind of similar dynamics within the hyperscalers, is this customers pausing on cloud migrations, is this

Speaker 7: greater focus on cloud optimization before the next phase of the journey? What are you seeing in that dynamic that's causing that incremental friction? And then can you comment on what you've seen kind of in the month of May and June relative to

Speaker 1: how April and maybe March trended? You know, thanks Alex. It's super interesting because it's also consistent. Like if you think about the conversations that we've been having for the last seven months, they're the same conversations we're having now, which is, hey, we're going cloud. Those...

Speaker 1: Plans are unabated by the global 2000. They are not slowing down. You know, they are engaging with us to say yeah We've created a platform engineering function. You guys are the basis of how we do that It's just taking us time and some friction to align the organization Towards the consumption of that design when which is already in place. I had two conversations this week one with that

Speaker 1: massive utility, one with an insurance company, where that was exactly the conversation. What's happening is that those design wins are being done, given the front-end consistency of the pipeline that we're seeing. What's not happening to the same degree is those things flowing through procurement. In some instances, it's a question of the typical plan of buying slightly ahead of

Speaker 1: Demand which is what most companies do on the entitlement side. That's what's being stopped by finance departments specifically So you want to could stand to reason because we won those design wins that that will flow through over the course of time There's really no material change other than just literally like it's almost like if you're towing a boat behind you the boats a little further behind

Speaker 3: because that part needs to get through procurement, but it's going in this direction without question. Maybe Armand has a point of view. He traveled, I think, nine weeks last quarter. Yeah, I think maybe anecdotally just to echo what Dave said, I think what we're seeing pretty consistently is going into this fiscal year, most of these organizations sort of have locked their budgets and the top focus for them is really in optimization.

Speaker 8: consolidation of vendors, focusing on right-sizing their estates. And so I think we continue to see that translate to the procurement pressure that you're seeing, especially around the bigger deals. But that said, I think all these groups are still engaging with us on next product along, really thinking about great, how do we architect tools like Terraform and Vault into foundational layers of our platform.

Speaker 8: aperture for that. So I think it's it's accelerating a lot of those org transformations and it's also accelerating you know the need to have standardization around the tooling. So you know I think you know all that speaks well to the pipeline and I think that continues happening there. I also just add just to add to Armon's point it is also occurring to the general shift towards consolidation of vendors during this cycle which is certainly a net positive for us.

Speaker 1: as you're going through the design process, they are trying to rationalize in general their portfolio. As a multi-product vendor, it actually accrues very, very well to us on the design-win side and as long as we make them company successful, the right things will happen over the longer term.

Speaker 8: Perfect. And then what about just on the monthly cadence question? Yeah, I mean, I would suggest, I feel it's very similar to me. Yeah, I don't think there's been a marked change. And I think this really speaks to the fact that these budgets are generally set on an annual basis for organizations and I think that's reflected in our guide. I think it would be

Speaker 8: you know, for most organizations, unusual to reset their budget mid-year. Perfect. And then just maybe a clarification question on the appointment of Susan to that role. Is she replacing someone? Is this a new role? Is there, you know, kind of contemplated meaningful

Speaker 1: changes to the go-to-market organization through the year given she starts in July . Just any help that would be helpful. Yeah, you know obviously we're super excited about the opportunity to bring in Susan. Suffice to say it was never about her availability. It was always about her availability and not our lack of interest and having her play that role as someone who...

Speaker 1: is very uniquely positioned to do that. And I think as I mentioned, as we think about the next phase of scale, the billion dollar number is the one ahead of us and that's certainly where our energy is pointed. And we just think she's super well positioned to do that. And so we're bringing her in as president of World Wide Field Operations. We think this is the right time to introduce that role as we think about the next phase of growth. And that is more of a decision around a...

Speaker 4: We're ready for the next question. Our next question comes from the line of Gary Powell with BTIG. Your line is open. Please go ahead. The line is open.

Speaker 3: Okay, great. Thank you very much for taking the question. If you help me sort of dig into the revenue guidance more, I'd appreciate it. I think the full year guidance implies that you grow revenue around 11 or 12% in the second half of the year.

Speaker 8: Just how should we reconcile that against CRPO, which just grew 29 percent? And then how should we think about the potential for growth to reaccelerate at some point or maybe the timing of a reacceleration? I know that last one is going to be hard to call, but any caller would be really appreciated.

Speaker 2: Yeah, thanks, Greg. Again, good question on the CRPO side. So the CRPO is obviously reflective of the front half seasonality compared to the back half seasonality. Right? So when you think about it, as we sell to large enterprise contracts, they're tailored and weighted. So the back half is a much bigger impact to our revenue than the front half from a bookings perspective.

Speaker 2: So the CRPO, you know, growth rates will defer from the front half to the back half. So there is going to be a difference between the first quarter absolute number CRPO growth rate and what the full year revenue growth rate is, just from a timing perspective, because it implies what the bookings are for the year.

Speaker 2: for the back three quarters of the, or the back half of the year, right? So we've factored in basically continued headwinds in the global segment and the enterprise segment in how we think about the revenue guidance. Now I've also caveated, this is really early in the year, so we'll execute every quarter and we'll give you updates as we move along. We're very optimistic about the front end, especially given what we're seeing in terms of customer activity.

Speaker 2: environment we're seeing until that changes and every quarter will be an update.

Speaker 3: Got it. Okay, thank you very much. All right, thank you. Next question?

Speaker 4: One moment.

Speaker 4: One moment.

Speaker 4: Our next question comes from the line of Mark Murphy with JP Morgan. Your line is open. Please go ahead. Hello everyone.

Speaker 4: Our next question comes from line of Mark Murphy with JP Morgan. Your line is open. Please go ahead. Oh, thank you very much.

Speaker 9: So seeing the heaviest scrutiny coming from your actually your largest customers and then in the expansions is not what we would typically see. I think we'd you know we would assume those are the customers that they know you they trust you they you would they'd want to consume a larger footprint. Can you just double click on that and maybe?

Speaker 1: Hey, Mark. Today, let me just ask the first one. Just so I understand or just so I clarify. Yeah, I think the procurement friction we're seeing is a general commentary inside existing customers, as well as new. I think we saw a very strong NDE in the quarter, which I think is reflective of those large companies continue to purchase incremental pieces from us.

Speaker 1: But certainly the cycles for them are slower than maybe they were a year ago, just given the constraints in their own business. But that's more of a general commentary than anything. But overall, exactly what I would expect and consistent. Yeah, Mark on the, on the large customer side. Yes, it is 1 of our largest customers, the current be the 1 of our 3 10Million dollar customers.

Speaker 2: slipped below the $10 million line, they still remain engaged and large as I mentioned. So yes, the count is now two.

Speaker 6: Thank you. Thanks Mark. Next question. One moment.

Speaker 3: And our next question comes from the line of Nick Altman with Scotiabank. Your line is open. Please go ahead. Great. Thanks, guys. There were some good upside of margins in the quarter and with the 8 percent headcount reduction, I guess I'm a bit surprised why the margin guidance wasn't revised upward a bit more. So, I guess I'm a bit surprised. I guess I'm a bit surprised. I guess I'm a bit surprised.

Speaker 3: Is there anything else there we should be thinking about or considering? And then just to clarify, was the RIF factored into the prior margin guidance?

Speaker 2: Hey Nick, yeah, so just to clarify, the severance related to the RIF is factored into our current Q2, which impacts some of our margins.

Speaker 2: But overall, I think our EPS is guiding better than what we had previously factored in. Also note that it takes until the back half of the year after the first quarter of actuals and the second quarter severance to work its way through and really see the long-term impacts to your margins in the back half of the year. So that's what you need to know.

Speaker 2: seasonality, you should expect positive free cash flow for the rest of the year.

Speaker 6: Great, thanks. Next question? It's way too late.

Speaker 4: One moment.

Speaker 4: Our next question comes from the line of Miller Jump with Truist Securities. Your line is open. Please go ahead. Your line is open.

Speaker 8: Hey guys, thanks for taking the question. Maybe just one more to follow up on the headcount reduction. I was wondering, could you give any more color on which segments of the business you plan on reducing or that you have reduced headcount in and then maybe just are there any segments where you plan to continue hiring for the rest of the year? Thanks.

Speaker 1: I just want to underscore, this is a hugely difficult decision for us to make and the one we felt needed to be done. I just want to reflect back that we had gone through an investment cycle over the past four quarters very deliberately with an expectation of a certain demand environment to be in place.

Speaker 1: and clear that different demand environment did not materialize. You have to sell cycles extending just like for everybody else. But I want to make clear that because of that investment cycle, we feel that we're in a good position to deliver on the capacity required to deliver this year and next. So while certainly there were modifications across all sectors, we forget about the capacity that remains across all segments required to do.

Speaker 2: invested in the long term. And we were very careful in the large impacts when you think about the large organizations which are sales and R&D. We maintained our investments in where we felt we needed the capacity. And in several geos or in certain product areas where we thought the payback was a little longer term, we took the action of

Speaker 2: understanding what the criticality of that business is and trimming it down. So overall, we are still very well staffed from a sales and R&D perspective to both deliver the quarters and also deliver the product roadmap. And we feel that the headcount that we have or the employee base that we have this quarter.

Speaker 3: Our next question comes from the line of Kash Rangayan with Goldman Sachs. Your line is open. Please go ahead. Hey guys, I asked Chad GPT what questions have not been asked by Mark Murphy and Alex Yokin and it timed out so I have to do some thinking on my own here.

Speaker 1: In seriousness, when you look at the net expansion rate, is the pressure coming from existing customers expanding more or is it because of existing customers cutting down the scope of the deployment? We can just give some color. And also, is there a way to triangulate? Is that coming from Terraform or non-Terraform out of the house? That would be great. And also, Susan obviously has got a great track record. She was at Salesforce around marketing.

Speaker 1: This is Dave, I'll answer the first one. I think I got it and I'll try to get to the second. My observation is that it's largely around the net new expansion pace.

Speaker 1: It's the rebuy cycles just because of that procurement pressure that we're seeing. Once deployed, our products are in the runtime path of applications.

Speaker 1: and that makes them generally long relationships with their customers, notwithstanding small optimizations here and there. So generally speaking, the NDE is, notwithstanding the one thing that, the one customer that Navam referred to, is just sort of a slight slow down in the rebuy of next use case along, next product along.

Speaker 1: In terms of Susan, I think we're cognizant of phase shifts of a company and we think about the next phase ahead and it is an operationally different phase at a billion dollars in revenue and that's really where we think Susan can help us as opposed to anything specific about our product portfolio or type of go-to-market. There are very few people in the world.

Speaker 1: available to do that and she's at the very top of that list. So it's more generally a scaling question for us as a company, as you can see. Our customers are among the largest companies on the planet. We play a critical role for them. They're going cloud and that is not shifting and our relationships will be extremely long as a result and we wanna build the best possible companies to support them. Wonderful, thank you so much and all the best. Thank you, Cash. Next question. One moment.

Speaker 4: Our next session comes from the line of Patrick Wall-Ravens with JMP Securities. Your line is open. Please go ahead. You're close.

Speaker 3: Oh, great. Thank you. Hey, Armand, like at the beginning of the year, you were talking about how budget is aggregated across three layers of data. And you thought there was a lot more variability in absent data. How are you thinking about that division today? It's still a helpful way to think about the business.

Speaker 8: Hey Pat, Yammer, thanks for the question. I think that still is a useful way and I think what we see in all these accounts is, you know, at the infrastructure layer all these teams are still committed to cloud, they're still moving ahead. I think they're taking sort of a moment to, you know, pause a beat, look at hey, you know, over the last three, four years, you know, spending on cloud has been gangbusters. Where is there opportunity to optimize and consolidate?

Speaker 8: drive a little bit of efficiency in these estates. I think what we broadly see is a fairly large amount of waste in the cloud environments. But I think no one is really divesting from cloud as a strategy, right? So our view is it's like everyone's pausing, taking a beat to do that optimization, but really forging ahead on sort of a multi cloud strategy. You know, and I think in that sense we expect infrastructure, you know, we'll sort of take that pause and continue the growth as people move there. If anything, I think where we feel some optimism.

Speaker 8: is I think with a lot of customers who are now interested in leveraging some of the generative AI techniques, we actually think those will be drivers of net new cloud workload. And we're already seeing that. There's a very large financial group we've been working with who has dramatically pulled forward and accelerated their efforts to get onto Azure for exactly that purpose. So that's bringing net new workload, expanding them to multi-cloud, and they're using Terraform and Vault and Consul to underpin that multi-cloud journey. So I think in that sense, we feel like there's going to be this optimization that, you know...

Speaker 8: you know, we're seeing broadly across the market, that'll take a pause and then we'll continue to see workloads on cloud continue to grow, you know, at that infrastructure layer. All right, great, thank you. Navam, can I just as a follow-up, how confident are you in your new guidance? Hey Pat, so yeah, I think we're very confident about our new revenue guidance. It factors in.

Speaker 2: Large contract activity to occur as they will for the next 3 quarters, but as soon as the headwinds change, we should see return to normal. But. The full year is reflecting our, our, our confidence in, in what we can achieve next year. Of this year.

Speaker 2: Activity to occur as they will for the next 3 quarters, but as soon as the headwinds change, we should see return to normal. But. The full year is reflecting our, our, our confidence in, in what we can achieve next year. Of this year, thanks Pat. Yeah.

Speaker 4: Next question. One moment. And our next question comes from the line of Sanjit Singh with Morgan Stanley . Your line is open. Please go ahead.

Speaker 10: I had a question for Dave or Armon. I guess a jump ball. And it goes to the right sizing of the environment, Armon, that you mentioned in a previous question. In your conversations with your customers, when they talk about optimizing their environment, right sizing their environment, could you give us a sense of what that entails? Good.

Speaker 8: From the feedback that you've gotten, how long does a rightsizing initiative or project take from what you're hearing from your customer base? Hey, Sanjeev. Thanks for the question. You know, it's a really good question. I think the shape of it takes a few different forms. I think part of what we see is you have development testing environments that have been relatively unconstrained and some customers might be as much as 50% of their cloud spend. I think there's one side of this which is really looking through those dev test environments.

Speaker 8: A whole lot of it is orphaned resources, things that, you know, if developers set up an environment, left it running for three months, you know, you're paying the meter on that. So, I think there's a lot of that happening in DevTest where, you know, that takes a, you have to go through an inventory process, identify those workloads and shut them down. Then, I think on the other side, you have production environments.

Speaker 8: where you have kind of multiple forms of a voice take place. One is, hey, maybe this needs to run on five servers, so it's really running on 10. Okay, can we identify that and sort of shrink the footboard down to five? You have other cases where it's like, I'm running on a double extra large when really I should be on kind of a medium-sized capacity. So I think that also is a complex challenge of you have to inventory all the assets, really look through data and telemetry to understand where.

Speaker 8: responsible for driving that in a standardized way. And I think in fact this has been an accelerant of conversations for us around the value of standardizing on tools like Terraform and having a platform team. Because that central aperture gives me visibility of what workloads are dev test, what workloads are production, it allows me to kind of do that instrumentation on usage.

Speaker 1: For us, it's actually been a useful conversation driver on the importance of creating those standardized layers. I think for the teams and organizations that don't have that, it's a longer journey. They have to get their hands around the problem and there's multiple phases of identification, right sizing and change management. Yeah, if I could add just my subject comment, Sanjay, I think to me, there's two countervailing forces. One is, as Armin describes, we see it, obviously we're doing it ourselves. There's a lot of cleanup of those orphan environments that we're all paying for and overspend. And so that is driving consumption down. At the same time, the velocity of new things going to cloud is not slowing. So at the same time as that is coming down, you're

Speaker 10: So new workload growth hopefully outpaces or surpasses the impact from optimization. So that's encouraging. I have one follow-up for Navam, and it goes back to the previous question around your confidence in the guide. I hear you guys loud and clear in terms of the longer sales cycles and the procurement process.

Speaker 10: we do have a new sales leader in place. And so I wanted to understand in terms of the magnitude of change in terms of the blocking and tackling of sales, territory alignment, comp, how much change is being instituted in the sales organization at a time where we've had a risk and then also the environment's a little bit weaker.

Speaker 2: understand like the magnitude of those changes and whether that creates incremental execution risk this year. Yeah, thanks. Thanks Anjit. The short answer is no. We don't see incremental execution risk with the addition of Susan and in fact we were optimistic about her impacts to the company and how she could help us grow into this new stage.

Speaker 2: Just as a reminder, you know, when we took this very carefully considered, you know, workforce reduction, we didn't overly, you know, impair the capacity in our core regions where digital transformation is the most advanced or the most furthest along. Rather, we looked at where the GOs were that, you know, potentially were longer term investments and we right sized those a little bit. And those were the margin packs that we saw.

Speaker 2: on the workforce reduction plan. The existing sales leadership still is intact and they will, as a unit, report up to Susan. So the org still is very stable and we feel like there's no incremental risks with the change.

Speaker 3: No incremental risk with the change. Understood, I appreciate that context. Thank you. Thanks, Andre. Thank you, and I would like to turn the conference back over to Dave McJannet for any further remarks. I'd just like to express my thanks for the participation from everyone here, and we certainly appreciate you dialing in and for all the questions.

Speaker 4: I look forward to speaking to everybody soon. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded I would now like to turn the conference over to your first speaker today, Alex Kurtz VP of Investor Relations and corporate development. Thank you. Please go ahead.

Good afternoon, and welcome to <unk> Corp fiscal 2024 first quarter earnings call. This afternoon, we will be discussing our first quarter fiscal 2024 financial results announced in our press release issued after the market closed today.

With me are Hashi Corp, CEO, Dave Mclennan, CFO, Nevada, where Linda and CTO and co founder Armand <unk>.

In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information about our quarter.

We encourage you to review that presentation in advance of our call you can access it on our investor website at IR Dot <unk> Dot com.

Today's call will contain forward looking statements, which are made under the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

Forward looking statements include statements concerning financial and business trends.

Our expected future business and financial performance and financial condition.

And our guidance for the second quarter and full 2020 for fiscal year.

These statements may be identified by words, such as expect anticipate intend plan believe seek or will or similar statements.

These statements reflect our views as of today, only and should not be relied upon as representing our views at any subsequent date.

And we do not undertake any duty to update these 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.

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 and other metrics is included in our earnings press release, which has been furnished to the SEC.

So available on our website at IR Dot Hashi Corp Dot com.

With that let me turn the call over to Dave Dave.

Thank you Alex and welcome everyone to our first quarter earnings call for fiscal 2024.

We're pleased to report first quarter results that exceeded our top and bottom line guidance with revenue of $138 million representing year over year growth of 37% and solid improvements in our profitability with our first quarter of positive free cash flow as a public company.

Current non-GAAP remaining performance obligations reached $394 $6 million representing.

Representing 29% year over year growth.

Compared to last quarter, we added 32 customers with greater than or equal to $100000 of annual recurring revenue to reach a total of 830.

Our harsh called cloud platform offerings reached $16 $5 million in revenue, representing 12% of subscription revenue in the quarter.

We remain excited about adoption trends as we continue to roll out new features and new capabilities during FY 'twenty four.

Against the challenging environment I'm pleased with the solid Q1 results with the team delivered.

However, macro challenges continue to impact to our business and I'd like to provide more color on what we're seeing in the market.

During Q1, all monetized spend much of our time speaking with customers a key theme from these discussions regardless of customer size is the answer.

Certainty they are feeling about the economy and what it means for their own businesses.

As we've mentioned in the last few earnings calls we saw this budget uncertainty starting in October of last year as higher interest rates began to impact our customers thinking about the FY2023 budget cycles.

This economic uncertainty is driving organizations to optimize their software spend.

Procurement teams are scrutinizing, many larger software purchases and stretching deal cycles.

The deepening inspection of budgets is happening across all of our customer segments, but most noticeably in our largest customer deals.

Despite these near term challenges, we believe the long term trend to cloud computing remains unabated, we continue to see demand for our products as customers continue to plan their cloud initiatives for the next several years.

I would highlight the customer stories, we've outlined in our earnings presentation on the IR site to give us confidence in our market opportunity and product fit.

These customers include a large U S based financial services company.

Our back office software platform and a European stock exchange are very diverse verticals and all very early in their cloud adoption journey.

We are laser focused on building trust with these customers. So that we can be a central partner as they continue to invest in their cloud initiatives.

In addition, our focus on adding larger new customers produced solid traction during Q1 as we added 26 net new global 2000 logos. The largest number we've added in five quarters and we continue to add a healthy number of greater than $100000 <unk> customers as well.

These large customers are an important part of our future and our model is built to grow our footprint with them as we become an increasingly critical piece of their infrastructure over time.

So while we're seeing heavy budget scrutiny on our large expansion deals. These entry level deals with large companies give us confidence about the long term shift to cloud in our role as enabler of that transition.

We also continue to see strong and growing interest in boundary, which we introduced late last year.

As a reminder, a boundary solves a key security challenge for organizations are using identity secure remote user access.

As I noted earlier, our imminent I spent much of Q1 on the road with customers.

Nearly every meeting customers proactively inquire about <unk>, which is a great signal out to the longer term opportunity, we see for the product.

Next week, we will hold cash as our European user conferences, where we will make a series of announcements that highlight ongoing product innovation, particularly around cloud security automation I look forward to sharing more details during next quarter's call.

Before handing over to Nevada, I want to provide more detail on the announcements were made after the market closed today.

First we announced the reduction of our workforce by approximately 8%.

I want to acknowledge that a lot of talented people, who made meaningful contributions to harsh corporate leaving the company.

This was not a decision we made lightly and as part of the necessary efforts and Yvonne will described to reduce our operating costs to reflect the current customer spending environment.

Second we are excited that students St Ledger will be joining the company in July as president of our worldwide field organization.

Susan is a master of scale and a deeply technical sales leader, who understands how to make the most of complex product portfolios.

Susan has been on our board since 2019, so she is already well acquainted with harsher Corp, our products and our team.

With Susan we got the rare opportunity to work with an experienced leader who has done this multiple times, having most recently led the field organizations for often splunk, where should help them each surpassed $1 billion in revenue.

We have trust and confidence that her experience and leadership will serve our field and overall organization well through the current economic conditions as well as through our next phase of growth.

I believe strongly in our opportunity given the long term trend of cloud adoption and believe we are now better positioned to take advantage of that opportunity.

And in line with the guidance, we provided last quarter, we continue to operate against an aggressive goal to achieve profitability next fiscal year and remain on track to meet this goal.

Now I'd like to turn it over to Nevada.

I look forward to answer any questions.

Thank you, Dave and thanks, again to everyone for joining us today.

Our first quarter results showed solid progress in our fundamental customer adoption engine.

Our process remains very consistent.

Customers adopt our open source products throughout the organization.

We land the organization as a commercial customer with a particular product.

The customer expanded its product usage and then extends into adjacent products.

The success of this adoption engine drove our customer account increased by 261 in Q1.

And a 100 K plus a our customer account increased by 32.

Our total customer count and 100, K plus into our customer count is currently 4392 and 830, respectively.

While the pattern of customer adoption remains consistent as Dave mentioned, the economic headwinds. We have noted in the past few quarters also continued into Q1.

Combined with our typical first quarter seasonality.

We saw ongoing pressure on customer budgets, which caused slowdowns in customer behavior and elongation of sales cycles.

The impacts were most acute among our larger contracts within our global customer segment, along with the large enterprise customers, saying.

In addition, one of our largest customers in the retail sector adjusted for some excess capacity and reduced a portion of their spend with us.

The impact to our quarterly growth in net retention rates due to this customer spending adjustment was roughly two percentage points.

Despite the adjustment the customer continues to be very engaged with our team and remains one of our largest customers.

We expect the current buying environment will create ongoing uncertainty in the pace of large customer expansions and extensions for the rest of the fiscal year.

Accordingly, we have reflected these expectations and our full year guidance.

We have also widened the range of potential revenue outcomes, given the overall purchasing environment.

While we have shown ongoing diligence in managing our expenses, we are operating in a very cautious customer spending environment.

As a result, we took additional steps today to reduce our cost structure through a reduction in force of approximately 8% of our workforce.

Before making any employee reductions we took a number of other carefully considered actions, including reducing our program spend and eliminating open but unfilled jobs.

It is difficult to transition our valued employees, who have helped build hassey Corp.

And this was a very hard decision for the company.

However, we also believe it is necessary to have the right spending and investment profile to navigate the current economic environment.

While also maintaining enough resources to deliver on our long term plan.

Following the reduction in force, which we expect to be materially complete by the end of Q2, we will begin to see the impact of these reductions in our free cash flow in Q3 of this year and beyond.

We expect free cash flow margins of approximately negative 5% in FY 'twenty four followed by sustainably positive free cash flows on an annual basis, the following year and beyond.

Other than seasonally low second quarter cash flows were expecting all other quarters to have positive free cash flows.

We are maintaining our target to reach non-GAAP EBIT profitability in the second half of FY 2025.

With that let's move on to our guidance.

Our full guidance numbers can be found in our earnings presentation is available in our IR dot <unk> Dot com website.

And our financials quarterly results I encourage you to read through the Doc for full metric disclosures share count disclosures and GAAP to non-GAAP reconciliations.

To summarize our guidance for the second quarter of FY 'twenty four we expect total revenue in the range of 137 million to $139 million.

On a non-GAAP operating loss in the range of 46 million to $43 million.

For the full year 'twenty four we expect total revenue in the range of $564 million and $570 million and expect FY 'twenty non-GAAP operating loss in the range of $113 million and $108 million.

Thanks for your attention, Dave <unk> and I are available to take any of your questions Alex.

Thanks, Bob.

With that operator, let's go to our first question.

Thank you as a reminder to ask a question at this time Youll need to press star one on your telephone and wait for your name to be announced.

Your question. Please press Star one again, please limit yourself to one question. Please standby.

ILEC Q&A roster.

Our first question comes from the line of Sterling Auty with Moffett Nathan Your line is open. Please go ahead.

Yeah. Thanks, Hi, guys I'm curious with Susan St Leger coming in to head up sales is there an early sense of the extent or magnitude of the changes that you want to make to the go to market structure in terms of either approach or.

Either staffing et cetera, because you also mentioned some changing in program spend as well. Thank you.

Hey, Sterling. Thanks for the question, Yes, I think.

It's really about as we step back and think about this next phase of growth in front of us and we had the unique opportunity to bring in our go to market.

<unk>, who has done that now multiple times in multiple different companies and so we're super excited about that opportunity.

And I think candidly that's the aspiration, it's about setting ourselves up for the next generation of scale that we certainly envision ourselves progressing through as a strong independent company and that's that's really what it's about.

Really nothing beyond that.

Nevada had alluded to some program spend changes I think we're just reflecting some some program changes that we have made over the last quarter or so to try and keep it at the cost line relative to the to the revenue line, but not related to Susan.

Understood. Thank you.

Sterling next question.

Yeah.

One moment.

Our next question comes from the line of Derrick Wood with TD Cowen. Your line is open. Please go ahead.

Great. Thanks, one question I'm getting from investors is if you're.

Kind of Youre seeing customers move from commercial to open source given the budget pressures out there.

Obviously there is.

Those dynamics in your end markets, just was hoping to get a sense of if you're seeing any of that or kind of what's your view on the risk of those kind of churn dynamics as you look going forward.

Hey, Derrick I'll answer that one again.

The answer is no.

The deals and source products solve a problem for an individual or corporate commercial product solve a problem for an organization. So in a sense they are fundamentally different products.

And so so no I think what we are seeing is very very consistent.

What we've been communicating over the last couple of earnings calls, which is as Armani and I both would be traveling a ton what we're seeing at the front end is very very consistent.

In terms of interest in what we do design win decision has been granted to US no change to the competitive environment. What we are really just seeing is increased scrutiny in the procurement process that is difficult to predict as we've indicated over the last couple of calls and much like our other vendors in the market that is that is putting pressure on us but that is no different than really anybody.

Yes.

But I don't hear anybody doing is changing their plants.

The clip to cloud arena remains unabated and I think as you sort of start to look at some of the numbers in our in our earnings report Youll see we added 26, new global 2000 customers through to your customers over 100000, and another quarter of strong MDU, which I think really just speaks to that consistent long term trend and in real note really no material.

Change otherwise.

Okay. Thank you.

Eric next question.

One moment.

Our next question comes from the line of Michael <unk> with Keybanc. Your line is open. Please go ahead.

Hey, guys.

I just wanted to try to get as much of a sense for whats changed as possible.

<unk> held up extremely well during a period in which people have seen this type of scrutiny deal cycles, extending et cetera.

And in fact.

Just to some extent deal cloud optimization seems to have benefited you in prior quarters. So is there anything that you feel like was inflection point.

Might have determined your outlook worsening for the year.

Hey, Michael Hey, it's Nick <unk> here. Thanks for the question. So in terms of what's changed I think the main the main points to talk about is what's not changing the front end environment, which is there.

The pipeline activity the pipeline creation activities still remains very strong as Dave mentioned in the call.

Very healthy quarter in terms of the GTK adds net of 100, K ads and total customer adds so the activity of cloud transformation efforts cloud efforts all of those things remain similar.

What happened in the first quarter and this is a little bit of first quarter seasonality as well as the first quarter and a very long year.

In this new budget cycle, you saw a lot of headwinds a lot of procurement pressures in the globals in its segment and the enterprise segment related to very very large deals.

Large deals and Thats reflected in the guidance range that we've given so that's been a material change we saw in the first quarter.

But the main thing to remember with these large deals and I'll give you. An example of our first quarter deal that we were working on.

And it was held up in procurement due to some procurement process issue.

Ended up closing in the second quarter is a multiyear deal using several of our products. So these deals don't get loss for competitive pressures they don't get lost because the.

Cloud transformation effort is canceled it just elongate and they happen when they when they move to be happening different quarter, and maybe Dave Let me say either kind of subjective commentary.

I think as you see on the Hyperscale or is Theres just a lot of there's a lot of scrutiny around anything related to the cloud narrative at the moment and you see that in Hyperscale results and certainly that seemed to be more acute in the quarter based on what I saw externally than in previous quarters, we are fundamentally tied to the cloud transition and.

That does cause things to get elongated as there is increased scrutiny on certainly larger transactions associated with anything cloud related.

Thanks, David.

And then the phone.

Thanks, Thanks, Michael the next question.

Yes.

One moment please.

Our next question comes from the line of <unk> Kidron with Oppenheimer. Your line is open. Please go ahead.

Hi, Thanks, guys I would like to dig in into the retail customer that reduced portion of the spend.

Just a few things around this first of all how big of a customer is it as a percent of revenue to have a two point impact it must be quite significant.

Customer can you give some color on why the reduced spend or just not using it or didn't see value there.

Would it be fair to say that without this customer you are actually putting if I'm doing the math right actually guiding in line to consensus for next quarter is that the right way to think about the magnitude.

Hey, Dave Thanks for the question I'll, let <unk> answer the mass side of it I'll answer the more subjective side of it yes, I think as we showed it in the prepared remarks, there is a retail customer that have procured entitlements really for peak season.

It's probably a really good example of what's happening and across the board around procurement and finance scrutiny.

Yes.

They ended up right sizing that that particular entitlement for that particular product for that particular application for their state, which is consistent with what other vendors have commented on that in the sort of partnership.

That's something that we want to do with them I would just underscore that they remain one of our largest customers that they are in multi product customer. We are super engaged with them and also it's very clear that they are very early in their cloud as states. These are big companies spend a lot of money on this on this category, but they're very early so net it was an optimization that we serve.

We are partners in 11 of our comment on the math.

It's our largest customer relationship of ours and I think I mentioned during the prepared remarks. It was about a 2% impact to our gross and net retention rates. It's about a 1% revenue impact in terms of the guidance I think the guidance is reflective of the general.

Large deal movement that we're seeing in any given quarter rather than specific to this customer so.

This customer's impact was obviously reflected in the guidance as well, but it's more a relationship relation to what's happening in the expand extend.

Large contracts side and the impacts of procurement and the CFO of being part of.

That purchasing decision more and more this quarter and if new budget cycle.

Appreciate it thanks.

Thanks Ned.

Question. Please.

One moment.

And our next question comes from the line of Jim Fish with Piper Sandler. Your line is open. Please go ahead.

Hey, guys. Thanks for the question just building off of <unk> question there how.

How much risk is there to other sort of March customers like this retail customer of reducing a portion of spend.

What kind of guarantees do you have that that doesn't happen next quarter or the quarter after and Nevada does this mean, we should kind of expect this.

Let's call it mid teens kind of a net retention rate in the period.

Continue forward or should we get back to that greater than 120% kind of trailing 12 month long term target. Thanks.

Sure. Thanks for the question, Yes, just really quickly.

Got it.

We have a pretty good view of the overall customer's state and I think our view is reflected in the guidance we have.

And more generally of the guidance framework that <unk> shared.

And this is a.

Recent retail is a very specific.

Vertical for us as you can imagine and so I don't know.

Forget about the the remainder of this year.

Yes in terms of the net retention rates.

There is a lot to be optimistic about after we get through this next year's budget cycle and not hold right.

You've still got very healthy activity on the <unk>, you've got very healthy activity on the 100 case. These are all expansions and extensions that happened and also multi product expansion multi product extensions that happened with our product portfolio and also the upcoming boundary.

Product, which will impact our revenue going forward. So no I don't think that this is a new new reality of what net retention rates would be I think it's more a reflection of the purchasing environment, along with what's stopping sort of large contracts from preceding to the finish line. Once these once this budget cycle resets into the next one I think.

We see the usual impacts of expansion extension and multi product purchasing recovery. So our long term targets of being above 120%, which is the target we set.

Remain intact and were very optimistic about that long term.

Thanks next question.

One moment.

Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open. Please go ahead.

Hey, guys. Thanks for taking the question I have got a multipart first one and then just a clarification.

So I guess, if we think about some of these larger.

Contracts. These larger deals has longer sales cycles are you seeing.

The incremental scrutinize basin, that's being put on these deals is it anything to do you mentioned, Dave about kind of the similar dynamics within the Hyperscale or is this customer.

Zinc on cloud migrations is this a greater focus on cloud optimization before the next.

As of the journey like where what are you seeing in that dynamic that's causing that that incremental Brixton and then can you comment on what you've seen kind of in the month of May and June.

June relative to.

How April and May be marks trended.

Thanks, Alex.

Super interesting because it's also consistent like if you think about the conversations that we've been having for the last seven months Theyre. The same conversations we're having now which is hey, we're going cloud those plans are unabated by the global 2000, they're not slowing down they are engaging with us to say, yes, we've created a platform engineering function.

And you guys are the basis of how we do that it's just taking us time and some friction to align the organization towards the consumption of that design win which is already in place I had two conversations. This week one was the massive utility one with an insurance company, where that was exactly the conversation.

What's happening is that those design wins are being done given the front and consistency of the pipeline that we're seeing what's not happening to the same degree as those things flowing.

Through procurement and some in some instances. It's a question of the typical plan are buying slightly ahead of demand, which is what most companies do on the entitlement side, that's what's being stopped by finance Department, specifically, so you'd want it stands to reason because we won those design wins that will flow through over the course of time, there's really no material change other than just literally like.

It's almost like if you are calling a boat behind you the books a little further behind because.

That part is to get through procurement, but it is going in this direction without question, maybe Armand has a point of view. He travels I think 99 weeks last quarter right. Yes, Yes, I think maybe anecdotally just to echo what Dave said I think what we're seeing pretty consistently is going into this fiscal year. Most of these organizations are sort of locked their budgets.

The top focus for them is really an optimization and consolidation of vendors focusing on right sizing their states and so I think we continue to see that translate to the procurement pressure that youre seeing especially around the bigger deals.

That said I think all of these groups are still engaging with us on next product along really thinking about how do we architectural like terraform and evolve into a foundational layers of our platform. How do we start thinking about the other aspects of where we can help them on their automation journey and I think in many ways both accelerating the trend towards platform teams because I think these organizations are realizing if theyre really going.

Or get their hands around how do I do cloud efficiently at scale.

Really need to have a central aperture for that so I think it's accelerating a lot of those order transformation and it's also accelerating the need to have standardization around the tooling. So I think all of that speaks well to the pipeline and I think the activity is happening there.

Also just to add to almost point. It is also occurring to a general shift towards consolidation of vendors. During this cycle, which is certainly a net positive for us as youre going through the dominant process. There are trying to rationalize in general their portfolio as a multi product vendor it actually.

Crews very very well to us on the design win side and as long as we make them comfortable with those companies successful right things will happen over the longer term.

Perfect and then what about just on the monthly cadence question.

Yes.

Would suggest normally you covered I feel it's very similar to me Yeah, I don't think Theres been a marked change and I think this really speaks to the fact that these budgets are generally say on an annual basis for organizations and I think that's reflected in our guide I think it would be.

For most organizations are unusual to reset their budget mid year.

Perfect and then just maybe a clarification question on the appointment of Susan to that role is C.

Replacing someone is this a new role is there kind of contemplated meaning.

Meaningful.

Changes to the go to market organization.

Through through the year given she starts in July just any help there would be helpful. Jay Obviously, we're super excited.

About the opportunity to bring in Susan.

Suffice to say it was never about her availability. It was always about her availability or lack of interest in having a play that role of someone who is very uniquely positioned to do that and I think as we as I mentioned as we as we think about the next phase of scale.

The billion dollars numbers, but want to ahead of us and that's certainly where our energy is pointed and we just think she's super.

Well positioned to do that and so we're bringing on as president of worldwide. Peter outfield operations. We think this is the right time to introduce that role as we think about the next phase of growth and that is more of a decision around a rule requirement for us so beyond that no material changes obviously her scope will be completely determined once you get once you arrives full time in the next month.

But conceptually it's just the addition of a new role in the existing team will report enduring and obviously help should help us grow into the Mexico, John Alright. Thanks, Alex next question helpful. Okay got it.

We're ready for next question. Our next question comes from the line of Gary Powell with <unk>. Your line is open. Please go ahead.

Okay great.

Thank you very much for taking the question.

Can you just if you could help me sort of dig into the revenue guidance more on I appreciate it.

I think the full year guidance implies that you grow revenue around 11% or 12%.

In the second half of the year.

Just how should we reconcile that against <unk>, which just grew 29% and then how should we think about the potential for growth to reaccelerate at some point or maybe the timing of a reacceleration I know that last one is going to be hard to call but.

Any color would be really appreciate it.

Thanks, Greg Good question on the <unk> side. So the <unk> is obviously reflective of.

The front half seasonality compared to the back half seasonality right. So when you think about it.

And we felt it large enterprise contracts Theyre ceilidhean weighted so the back half has is a much bigger impact to our revenue than the front half from a bookings perspective, so the CRP.

Both rates will differ.

The front half to the back half so there is going to be.

A difference between the first quarter.

Absolute numbers, the RVO growth rate and what the full year.

Our revenue growth rate is just from a timing perspective, because it implies what the bookings are for that.

For the back three quarters of the or the back half of the year right. So we have factored in basically continued headwinds in the global segment and the enterprise segment and how we think about the revenue guidance also caveat that this is really early in the year. So we will execute every quarter and we will give you updates as we.

As we move along we're very optimistic about the front end, especially given what we're seeing in terms of customer activity and especially given what we're seeing from.

The field with <unk> and David go and visit our customers. So at some point, we're going to be out of this budget cycle and at that point I think we moved to normal purchasing cycles with our with our customer base and that's where we feel.

We'll be back to a normal growth rates, but as <unk> mentioned cm budgets are set once a year and we're reflecting sort of the current budget environment, we're seeing until that changes in every quarter will be an update.

Got it.

Okay. Thank you very much alright.

Alright. Thank you next question.

One moment.

Uh huh.

Our next question comes from the line of Mark Murphy with Jpmorgan. Your line is open. Please go ahead.

Yes.

Thank you very much so seeing the heaviest scrutiny coming from your actually your largest customers and then in the expansions is not what we would typically see I think we do.

I would assume those are the customers that they know you They trust you.

They did.

They'd want to consume a larger footprint can you just double click on that and maybe maybe explain.

Why we're seeing that.

The behavior kind of shake out that way and then.

As a follow up so what is the current number of $10 million our customers as of June is that would that number be sitting at two now.

Hey, Mark it's Dave Let me just ask the first one.

Just so I understand or destroy clarify, yes, I think the.

The procurement friction, we're seeing as a general commentary inside of existing customers as well as new.

So a very strong NDA in.

In the quarter, which is reflective of those larger companies continuing to purchase incremental pieces from us, but certainly the cycles for them.

Slower than maybe they were a year ago, just given the concerns in their own business, but that's that's more of a general commentary then than anything but.

<unk> exactly what I would expect them consistent.

Yes, Mark on the on the large customer side, yes. It is one of our largest customers to correct that one of our $310 million customers.

Slipped below the $10 million line, they still remain engaged and large as I mentioned so.

So yes the counties Matthew.

Thank you. Thanks, Mark next question one moment.

Okay.

And our next question comes from the line of Nick Altmann with Scotiabank. Your line is open. Please go ahead.

Great. Thanks, guys.

There is some good upside to margins in the quarter and with the 8% head count reduction I guess, a little bit surprised why the margin guidance wasn't a revised upward a bit more so is there anything else. There we should be thinking about or considering and then just to clarify was the risk factored into the prior margin guidance.

Yeah.

Hey, Nick Yeah, So just just to clarify the.

The severance related to the Rep is factored into our current Q2, which impact some of our margins.

But overall I think our EPS is guiding better than what we what we had previously factored in and also note that it takes until the back half of the year. After the first and second first quarter actuals in the second quarter severance to work its way through and really see that impacts the long term impacts to your margins in the back half of the year.

So thats, what youre seeing in terms of that the margins margin guidance, but that being said our EPS guidance has ticked up and we expect to be apart from the second quarter seasonality Youre always going to expect that our second quarter dip in free cash flow due to the first quarter.

<unk>.

Ah seasonality.

You should expect positive free cash flow for the rest of the year.

Great. Thanks, Nick next question.

One moment.

Our next question comes from the line of Mr. Jeff with your Securities. Your line is open. Please go ahead.

Hey, guys. Thanks for taking the question, maybe just one more to follow up on the head count reduction I was wondering could you give any more color on which segments of the business you plan on reducing or that you have reduced head count and then maybe just are there any segments, where you plan to continue hiring for the rest of the year. Thanks.

Okay.

The first part of question I'll, let Tom answer the second I just want to underscore that.

Usually a difficult decision for us to make an.

The one we felt we needed to be done I just want to reflect back that we had gone through an investment cycle over the past four quarters very deliberately.

With an expectation of certain demand environment to be in place and a clear that different demand environment did not materialize, obviously with sales cycles, extending just like everybody else.

But I want to make clear that because of that investment cycle, we feel that we're in a good position to deliver on the capacity required to deliver this year and next.

So while certainly there were modifications across all sectors.

We feel good about the cap capacity that remains across all segments required to Jordan to do both in R&D and in sales.

Yes, alright.

Echoing Dave this is a very difficult decision for us and not something we took lightly we took many steps to to impact spend before going down this path.

And ultimately we still are a growth company. So we want to make sure. We're investing in the long term and we were very careful in the large impacts when you think about the larger organizations, which are sales and R&D.

We maintained our investments in where we felt we needed the capacity and in several geos are in certain product areas, where we thought the payback was a little longer term we took the action.

Understanding what the what the criticality of that business is entering it down. So overall we are still.

Very well staffed from our sales and R&D perspective to both deliver the quarters and also deliver the product roadmap.

And we feel that that that the head count that we have or the employee base that we have this quarter.

Is sufficient for the year. So we don't feel like we are going to add unless.

The environment materially changes right.

Understood. Thanks for the color. Thank you next question one moment for our next question.

Yeah.

Our next question comes from the line of cash Randan with Goldman Sachs. Your line is open. Please go ahead.

Hey, guys ask Chad GPT, what questions have not been asked Mark Murphy.

And at a timed out so I have to do some thinking on my own.

No.

And seriousness when you look at our net expansion rate.

Is the pressure coming from.

From existing customers expanding.

More or is it because of existing customers cutting down the scope of the deployment. If you can just give some color and also is there a way to triangulate is that coming from tariffs.

Terraform or non to reform the house that'd be great.

So Susan Susan obviously, it's got a great track record shows that Salesforce marketing cloud here at <unk>.

<unk>.

President of worldwide operations I believe.

Something pretty close to that okta, very very different business and very different products.

<unk> Susan to accomplish for horseshoe.

With respect to that.

Do you think she brings in.

That is so critical for hockey at this stage okay. Thank you so much.

Sure Hey, Kash. Thanks. This is Dave I'll answer the first one I think.

Got it and I'll try to answer the second.

I think.

My observation is that it's largely around the net new expansion pace.

Re buy cycles, just because of that procurement pressure that we're seeing once deployed our products around the runtime positive applications.

And that makes them.

Generally long relationships with our customers notwithstanding small acquisitions here and there are sort of generally speaking the NDA is notwithstanding the one thing that the one customer that <unk> referred to as.

<unk> is just sort of a slight slowdown in the rebuy.

Next next use case, allowing next product along.

In terms of Susan I think there I think.

We're cognizant of phase shifts of the company and we think about the next phase ahead and it is an operationally different phase.

$1 in revenue and Thats really where we think she's going to help us as opposed to anything specific about product portfolio or type of go to market.

There are very few people in the world available to do that and she's very thoughtful about less so it's more generally at scale in question.

For us as a company as you can see.

Our customers are among large companies on the planet, we play a critical role for them, they're going cloud and that is not shifting in our relationships will be extremely long as a result, and we want to build the best possible companies to support them.

Okay.

Wonderful. Thank you so much and all the best.

Thank you Kash next question.

One moment.

Our next question comes from the line of Patrick <unk> with JMP Securities. Your line is open. Please go ahead.

Oh, great. Thank you.

Hey, Armand like at the beginning of the year you were talking about how budget is aggregated across three.

<unk> and data.

And you thought there was a lot more variability in apps and data.

How are you thinking about that that division today, there's still a helpful way to think about the business.

Hey, Pat yes. Thanks for the question I think that still is a useful way and I think what we see in all of these accounts.

At the infrastructure layer all of these teams are still committed to cloud. They are still moving ahead, I think theyre, taking sort of a moment to pause and look at hey over the last three or four years spending on cloud is going gangbusters, where is there opportunity to optimize and consolidate and drive a little bit of efficiency. In these states that I think what we broadly see a fairly large.

The amount of waste in the cloud environments.

But I think no one is really divesting from cloud to the strategy right. So our view is it's like everyone's pausing, taking a beat to do that optimization, but really forging ahead on sort of a multi cloud strategy.

I think in that sense, we expect infrastructure will sort of take that pause and continue the growth as people move there.

If anything I think we're we feel some optimism is I think with a lot of customers who are now interested in leveraging some of the degenerative AI techniques. We actually I think those will be drivers of net new cloud workloads and we're already seeing that there's a very large financial group, we've been working with who is dramatically pull forward and accelerated their efforts to get onto Azure offering.

Exactly that purpose, so that's bringing net new workload expanding them to multi cloud and they're using terraform involved in console to underpin that multi cloud journey. So I think in that sense, we feel like there's going to be this optimization.

We're seeing broadly across the market that will take a pause and we will continue to see workloads on cloud continued to grow.

That infrastructure layer.

Alright, great. Thank you and can I just as a follow up how confident are you in your new.

Do you have any guidance.

Hey, Pat So yes, I think we're very confident about our new revenue guidance. It factors in this elongated large contract cycle into into.

The rest of the year.

And as <unk> said, we are optimistic about not losing out due to competitive pressure or losing out due to cancellation of the cloud program. So we expect this this large contract activity to occur as they were also in the next three quarters, but as soon as the headwinds change we should see return to normal, but the full years, reflecting our.

Our our confidence in what we can achieve next year or this year.

Thanks Pat.

Next question.

<unk>.

One moment.

And our next question comes from the line of Sanjay Singh with Morgan Stanley. Your line is open. Please go ahead.

Thank you for squeezing me in I had a question for Dave or Amman, I guess, a jump ball and it goes to the right sizing of the environment I'm on that you mentioned in the previous question and your conversations with your customers. When you talk when they talk about optimizing your environment right sizing your environment could you give us a sense of what that is.

Tales and.

From the feedback that you've gotten how long does a right sizing initiatives or projects take from what Youre hearing from your customer base.

Hey, Sanjay Thanks for the question.

It's a really good question. So I think the shape of it takes a few different forms right I think part of it what we see is development testing environments that have been relatively unconstrained and some customers might be as much as 50% of their cloud spend.

So I think there is one side of this which is really looking through those Dev test environments and a whole lot of it is orphaned resources things that developers set up an environment left theyre running for three months.

They are paying the meter on that so I think theres a lot of that happening and Dev test where that takes us we have to go through an inventory process identify those workloads and shut them down.

And then I think on the other side you have in production environments, where you have kind of multiple forms of voice take place. One is hey, maybe that's neutral on five service that's really running on 10, Okay can we identify that and thats. Our shrink the flip are down to five you have other cases, where it's like I'm running on a double extra large when really I should be on a kind of a medium sized <unk>.

<unk>.

That also is a complex challenge of yet the inventory all the assets really look through data and telemetry to understand where am I over utilized where am I over deployed and then go through the change management to kind of rightsize some of that in terms of how long that takes I think theres, a fair amount of variability and frankly, it actually goes back to the maturity of their cloud program. The programs that were least mature.

They don't have a good handle on it the data is not readily available to them. They don't have a central team that was responsible for driving that in a standardized way and I think in fact this has been an accelerant of conversations for us around the value of standardizing on towards like Terraform and having a platform team.

Because that central aperture and gives me visibility on what workloads are Dev test what workloads are production. It allows me to kind of do that instrumentation usage. So for us it's actually been a useful conversation driver on the importance of creating those sort of standardized layers.

I think for the teams and organizations that don't have that it's a longer journey right. They have to sort of get their hands around the problem and theres multiple phases of identification right sizing and change management.

Yes, if I could add just my most other commerce sounds good I think to me, it's kind of it's kind of two countervailing forces. One is Armand described there as we see it.

Obviously, we're doing ourselves there's a lot of cleanup of those orphan environments. The wrong thing for an overspend and so that is driving consumption down at the same time.

The velocity of new thing, it's going to crowd is not slowing so so at the same time is that as coming down youre seeing an increase in the slope of the line of new things going cloud.

So in a sense that it's getting offset a little bit.

Ultimately terraform as a critical element of how people actually solve that problem by putting constraints from the provisioning process. The irony being you have to get through the procurement function to put that in place, but that is certainly what people are doing.

That's really helpful context, and then it seems to align broadly with the Hyperscale guys are talking about how that's manifesting in my environment, well and ultimately we get to a place where new workload growth hopefully outpaces or surpasses the impact from optimization. So thats encouraging I had one follow up for the volume and it goes back to.

The previous question around like your confidence in the guide I hear you guys loud and clear in terms of the.

Longer sales cycles in the procurement process, we do have a new sales leader in place and so I wanted to understand like in terms of the magnitude of change in terms of.

The blocking and tackling of sales territory alignment.

Comp how much change has been instituted in the sales organization.

At a time, where we've we've had a risk and then also the.

Environment is a little bit because I just wanted to understand like the magnitude of those changes and what does that create incremental execution risk this year.

Yeah. Thanks, Thanks, Sanjay the short answer is no. We don't we don't see incremental execution risk with the addition of Susan and in fact, we were optimistic about our impacts to the company and how she could help us grow into this new stage.

As a reminder, when we when we took this very carefully considered.

Workforce reduction, we didnt, we didnt overly in.

Impair the capacity in our core regions, where our digital transformation is the most advanced or the most furthest along.

Whether we looked at where the Geos where that.

Potentially where longer term investments and we rightsize those if erik a little bit that was where the large impacts that we saw on the workforce reduction plan. The existing sales leadership still is intact and they will as a unit report up to Susan So the Orange still is very stable and we feel like there is no.

Incremental risks with the with the teams.

Thanks, guys.

With the change.

Understood I appreciate the context thanks.

Thanks Sanjay.

You and I would like to turn the conference back over to Dave Mclennan for any further remarks.

I just would like to express my thanks for the participation from everyone here and we certainly appreciate your dialing in and for all the questions look forward to speaking to everybody soon thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.