Q2 2024 Couchbase Inc Earnings Call

Matt: It is not my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you Edward, you may begin. For discussion of the material risks and other important factors that could affect our actual results, please refer to the risk discussed in today's press release and our most recent annual report on form 10K or quarterly report on form 10Q followed the SEC. During the call, we will also discuss certain non-gap financial measures, which are not prepared in accordance with generally accepted accounting principles, the reconciliation of these non-gap financial measures, the most directly comparable gap financial measures, as well as how we define these metrics and other metrics that is included in our earnings press releases, which are available on our investor relations website.

Matt: With that, let me turn the call over to Matt. Thank you, Edward, and good afternoon, everyone. On today's call, Greg and I will provide details on our second quarter results, as well as our third quarter and full year fiscal 2024 guidance. I'll start off with a few highlights of our Q2 financial results. Touch base delivered a strong quarter, once again beating our guidance across all metrics. I am pleased with the team's execution against our strategy to deliver top line momentum while outperforming on profitability, all against a difficult economic environment.

Matt: Total annual recurring revenue, or ARR, was 180.7 million, up 24% year over year, up 23% in constant currency, and 5% sequentially. Revenue in Q2 was 43.1 million, up 8% year over year, and 5% sequentially. Our non-gap gross margin remains best in class at 87.2%. Non-gap operating loss was 9.2 million, and non-gap operating margin was 4 percentage points above the midpoint of our implied guidance range. This demonstrates our focus on increasing efficiency across our business and continued operating expense discipline.

Matt: As we cross the halfway point of the fiscal year, I'm especially proud of the progress for making on the four key priorities we laid out for fiscal 2024. Focus on top line growth, increase the mix of Capella, drive sales and marketing efficiency, and accelerate the pace of leverage in our model. While there is much more to do across all of these to reach our full potential, our momentum is building. We believe we are set up for a strong second half of the year and more importantly beyond.

Matt: We have many initiatives underway to continue our progress, but I want to touch specifically on the exciting opportunity we see with AI and how it will be a tailwind for all four of our key priorities. To begin, databases are the unsung heroes of AI because without data, there is no AI. The fact is, behind every application is a database. From day one, we have architected a cloud database platform that enables demanding applications to not only perform, but provide rich, personalized, differentiated experiences for end users.

Matt: Combining operational and analytical capabilities, our multimodal platform also seamlessly integrates advanced services like indexing, eventing, full tech search, and more in a single solution for developers. Our platform and unique architecture are perfectly suited for the massive performance and scalability requirements that AI applications require. We're investing in additional AI capabilities that will further extend the value of couch base as a cloud database platform for modern AI applications. Generative AI is the next great catalyst for modern applications.

Matt: Developers and customers are exploring ways to build AI-powered apps that can run anywhere with our platform. To cement our long-term position as a destination for AI applications, our AI strategy has the following four pillars. First, drive developer productivity and adoption. Second, optimize AI processing. Third, enable AI-powered apps anywhere, including at the edge. And fourth, build and foster a vibrant AI ecosystem. With that backdrop, I'm excited that last week we announced a private preview of Capella IQ, which adds generative AI capabilities to our Capella offering to greatly enhance developer productivity.

Matt: Developer productivity has never been more important given the pressure to rapidly innovate and deliver increasingly more complex workflows. This new capability in Capella will allow developers to use natural language prompts to quickly and easily generate queries in code, sample datasets, and unit tests. What used to take a developer hours to code takes minutes with Capella IQ, moving from spot to code in just a few clicks. I encourage you to visit our website and watch the demo video of Capella IQ to see just how profound of an impact the feature will have for developers.

Matt: Leavaging Generative AI to build and test applications more quickly and more easily in Capella leads to higher developer productivity and quality, with the ultimate result being faster and more efficient time to market. We expect this will drive increased Capella adoption and consumption. Our vision for Capella IQ is to be a co-pilot for developers that makes intelligent recommendations during the development process, and we will continue to build out and enhance this important new feature.

Matt: On the go-to-market side, we continue to focus on improving efficiency by driving ongoing operational improvements and investing in our partner ecosystem. AI is undoubtedly gaining momentum across our partner ecosystem, which is why last week we also announced our Couchbase AI Accelerate Partner Program. This program is designed to make it easier for customers to build AI applications with Capella and support integrations with the broader AI and data ecosystem. It reduces friction for customers who are building and deploying models for AI applications, and includes technical, enablement, and go-to-market opportunities for participating partners.

Matt: Additionally, we continue to deepen and expand our relationships with our strategic partners who are starting to see next-gen AI applications deployed on their clouds. At AWS, we're developing ongoing ways to reach and serve our customers through an increasing number of go-to-market activities around joint asset creation, developer engagement, and AWS summit around the world. And I'm happy to share that Couchbase is now a Google Cloud Premier partner. The aforementioned recent announcements illustrate how exciting the AI opportunity tailwind is and how it drives further progress against our four key priorities for the year.

Matt: While it is still early days, the potential for AI to drive significant transformation is enormous. That said, we continue to deliver additional important Capella innovations for customers at a rapid pace. Last week, we also announced several other new updates to Capella that further enhance the developer experience, increase efficiency, and make it easier to operate the cloud database platform. Our differentiated technology remains at the heart of who we are, and we will continue to work hard every day to rapidly bring market leading enhancements and capabilities to our offering.

Matt: Now, turning to customer wins, I am pleased with the breadth of activity across industries and our product portfolio that we saw this quarter. Starting with Capella, our managed service continues to gain momentum. Once again, Capella represented the majority of our new logos and was an important contributor to our strong net retention rate. In Q2, we saw new Capella wins across many industries, including financial services, academia, manufacturing, telco, high tech, and gaming.

Matt: We also continue to see existing customer migrations and expansions with Capella. During the quarter, leading global FinTech company MoneyGram, decided to expand its partnership with us and invest in Capella to offload database management and further improve PCO. Switching to Enterprise, we were excited to add several impressive new logos during the quarter, including a large banking group in Europe. This customer had to migrate away from Oracle because its legacy relational database was not delivering the desired performance.

Matt: This customer is using couch base for its derivatives clearing application and selected our platform for its superior performance and speed. I'm also pleased that we won an AI-powered application with Tondo Smart, a fast-growing technology company in Israel that delivers a connected devices platform for smart cities. Tondo's selected couch base to power its cloud-based smart city management platform, including AI for city sensor operational excellence use cases. This customer needed a cloud database platform that could deliver high performance, scalability, and mobile use cases.

Matt: Only couch base could deliver on these needs with the most compelling price performance. We also saw significant enterprise expansions with long-term customers, including a large Australian multinational banking company, one of the US's largest financial services companies, and a major consumer electronics retailer. Additionally, Tesco, a British multinational grocery retailer, and one of the world's largest retailers has signed a multi-year agreement. Trendy all is the leading multi-category e-commerce marketplace in Turkey, and one of the top e-commerce platforms in the world.

Matt: Recently, Trendy all significantly expanded its partnership with couch base to help support many of its most important applications, including its online shopping cart, delivery tracking, product catalog, coupons, claims, inventory management, pre-orders, and customer personalization. This was one of the biggest expansions in our history, and we are pleased to be such a valued partner for Trendy all's growing business. Now, let me provide a few thoughts from the near-term demand environment. As we discussed over the last two quarters, the macro uncertainty continues to present headwinds for IT spending, and we continue to see longer-deal cycles, extra layers of scrutiny and approval, and customers electing to buy in smaller increments.

Matt: These trends persisted through the end of the quarter, but I am very pleased with our execution against these headwinds. That said, we continue to see a healthy pipeline of deals and interests in our cloud database platform, driven by trends such as the rapid adoption of cloud, desire for greater cost efficiency, and IT modernization. And though it is early days, we believe AI will drive a transformational impact for businesses as customers reimagine existing applications and create net nuance.

Matt: AI requirements of extremely high performance and massive scale, coupled with the convergence of operational and analytical capabilities, are the foundational elements of how we are architected. These dynamics are creating additional tailwinds and opportunities for us as a company, while further leveraging the very strengths that make us who we are. You've often heard me say that Couchbase has been built for this moment and I think that's as true today as it ever has been.

Matt: In closing, we're making progress on our initiatives. We're committed to focusing on what we can control and we're nimble in navigating areas we cannot control. We remain dedicated to delivering against our key priorities for fiscal 2024. Focus on top line growth, increase the mix of Capella, drive further sales and marketing efficiency and accelerate the pace of leverage in our model. Before handing the call over to Greg, I want to emphasize one of our core values that I've repeated many times before. At Couchbase, we attack hard problems driven by customer outcomes.

Greg: With that, I'll hand the call over to Greg to walk you through our results in more detail. Greg. Thanks, Matt and thanks everyone for joining us. We had another strong quarter as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt mentioned, we are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment while driving healthy out performance in our operating loss guidance.

Greg: I'll now walk you through our second quarter in more detail before providing our guidance for the third quarter and four year. Total annual recurring revenue for ARR was $180.7 million at the end of the second quarter, representing 24% growth year over year or 23% growth year over year on a constant currency basis and 5% sequentially. Revenue for the second quarter was $43.1 million in increase of 8% year over year and 5% sequentially.

Greg: Recall that revenue in the year ago quarter benefited from strong subscription revenue growth as well as outperformance in our on-demand business and strength and professional services, both of which are non-returning. Subscription revenue for the second quarter with $41 million in increase of 11% year over year and 6% sequentially. Professional services revenue for the second quarter was $2.2 million, a decline of 20% year over year and 11% sequentially consistent with our expectations following outsized rank and professional services in fiscal 2023.

Greg: We continue to expect contribution as a percentage of revenue in fiscal 2024 to be below recent levels. Our ARR per customer performance in the second quarter was $261,000 up from $254,000 in the first quarter of 14% year over year and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters.

Greg: Our dollar-based net retention rate or NRR continues to exceed 115% driven by strong renewal and upsell activity across our base of larger enterprise customers. Our NRR has been steadily improving thanks to Capella and our in-quarter NRR was the highest in the last three years. We exited the quarter with 691 customers in increase of 12 net new customers from the first quarter. As Matt mentioned, Capella once again represented the majority of new logos in the quarter and we grew our Capella customer logo count by more than 20% from the first quarter, who are encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent air or our grill and our strong retention metrics against a more challenging spending environment.

Greg: In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operation, and share count on a non-gap basis. In Q2, our gross margin remains strong at 87.2%, this compares to a gross margin of 88.7% a year ago in 86.4% last quarter. As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses, we continue to invest to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth.

Greg: We are pleased with our execution on this front as our expense discipline and early benefits from our cost-saving initiatives resulted in us outperforming our operating loss outlook. Our sales and marketing expenses for Q2 are $28 million or 65% of revenue compared to $24.9 million or 63% of revenue a year ago. Research and development expenses for Q2 are $12.6 million or $29% of revenue compared to $12.2 million per 31% of revenue a year ago.

Greg: We continue to thoughtfully invest in our as-a-service offering as well as an additional features to bolster our platform. General administrative expenses for Q2 were $6.3 million or 15% of total revenue compared to $6.5 million or 16% of revenue a year ago. Non-gap operating loss for Q2 is $9.2 million or a negative 21% operating margin, 4% is points higher than the midpoint of our guidance compared to an operating loss of $8.4 million or a negative 21% operating margin a year ago.

Greg: Non-gap net loss attributable to common stockholders for Q2 with $8 million or negative 17 cents per share. Turning to the balance sheet and cash flow we ended Q2 with $155.8 million in cash, cash equivalents and short-term investments. We remain well capitalized against our long-term growth strategy. Our remaining performance obligations for RPO told the $170.6 million at the end of Q2 in increase of 2% year over year. We expect to recognize approximately 67% the $114.4 million total RPO as revenue over the next 12 months, which represents 11% year over year growth.

Greg: Operating cash flow for Q2 was negative $500,000 and free cash flow was negative $1.6 million or negative 4% free cash flow margin. We are pleased with the progress we have made in our free cash flow profile and remain committed to driving further improvement.

Greg: Now, I will provide guidance for Q3 in the full year of fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong. Furthermore, we anticipate that our investments and our product capabilities partner ecosystem and go-to-market motion will complement our momentum in fiscal 2024. That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention expansion rates, deal sizes, sales cycles, level acquisition and sales productivity.

Greg: As such, our outlook maintains a consistent degree of conservatism across all those metrics to account for the uncertainty, as well as lack of visibility into how the macro may impact consumption trends for emerging as a service offering. With these factors in mind, for the third quarter of fiscal 2024, we anticipate ARR in the range of 185 million to 188 million dollars, which represents 23% growth year-over-year at the midpoint. We expect total revenue in the range of 42.7 million to 43.3 million dollars, or year-over-year growth of 12% at the midpoint.

Greg: We expect a non-gap operating loss in the range of negative 9.9 million to negative 9.1 million dollars. For the full year of fiscal 2024, we are raising our ARR outlook and now expect ARR in the range of 195.5 million to $199.5 million for 21% growth at the midpoint. This compares to our prior outlook of $191.5 million to $195.5 million for 18% growth at the midpoint. We continue to expect total revenue in the range of 171.7 million to 174.7 million dollars, or year-over-year growth of 12% at the midpoint.

Greg: As a reminder, we've historically seen variability with respect to the implementation timing of certain enterprise deals, which impacts our revenue visibility along with new or migrated cappella customers. We therefore continue to view ARR as a better indicator than revenue of the strength of our business. While we anticipated that contribution from services revenue in fiscal 2024 would be below recent levels, we now expect this dynamic to be more pronounced as fiscal year due to customers electing fewer services as a result of macro related budgetary pressures as well as the naturally lower services attached rate with cappella. And finally, we are decreasing our operating loss outlook and now expect a non-gap operating loss in the range of negative 42.5 million to negative $38.5 million.

Unknown Executive: With that, Matt and I are happy to take your questions. Operator? Thank you.

Unknown Executive: We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participant using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. One moment, please, while we pull for questions. Thank you.

Matthew Hedberg: Our first question is from Matt Headburn with RBC Capital Markets. Please proceed with your question. Great, guys. Thanks for taking my questions. Congrats on the results here. Matt, I want to start with you. I think the way that you outlined kind of the four ways that you're thinking about, Gen AI was super helpful. And I think in your script, you mentioned you plan to monetize it with sort of increased cappella adoption and consumption.

Matthew Hedberg: But I'm wondering for some of the other products like cappella IQ, is there an additional monetization strategy with that? Matt, good to hear from you. Simple answer is that'll be part of the Capella offering and we expect to monetize it with additional consumption, more developer reach, better go to market efficiency. So we think there's a compelling impact to the business, but as far as the service itself is, we'll be part of, again, part of Capella.

Matt: Great, that makes a lot of sense. And then, you know, I know on the, on the, on the hyperscaler front, I know you've had a lot of progress with AWS, it was great to hear your comments on GCP this quarter. I'm just sort of wondering, you know, when you're seeing deals come in through partners like that, what does the profile of those customers look like? And how would you talk about sort of the pipeline for those hyperscaler type deals?

Matt: Matt, so we're excited about the ongoing momentum with AWS. Obviously, you know, the bar that we got over with GCP in their premier program, you know, the announcement with our AI, specific partner program and the benefits that are going there, investing in the ecosystem and, you know, thinking about our customers and developers and the total tools they want to use partnerships are going to continue to be a big part of our business.

Matt: Quite frankly, we're seeing success with partners across all deal types, you know, up to and including our very largest customers that are working on Capella migrations, you know, all the way to, you know, our five case starter packs and, you know, relatively new regions for us. You know, so we think a lot about not just partner source but partner influence. And you can appreciate that all of the, you know, partners that we work with have tremendous reach and credibility with customers and the extent to which we can, you know, build joint solutions and have strategic account plans and do territory planning with them, all of which we're seeing. You know, across the business, really beneficial to us and a big part of that go to market efficiency that we've been talking about for some time. Thanks a lot, Matt. Well done. Thank you.

Ittai Kidron: Our next question is from ETI Kidron with Oppenheimer. Please proceed with your question. Thank you. Greg, I wanted to ask you about revenue, ARR and CRPO. So looking at your revenue growth. I think it's the fifth quarter in a row where it's declining, decelerating from over 30% to 90, 10% on a year of your basis, your ARR, however, is holding quite firm at the 2324 range. And your CRPO is in the teens and the low teens. So help me reconcile the three.

Greg: How should I think about the evolution of these three key metrics going forward and why are they so far apart, I guess? Yeah, hey, Ty, good to hear from you. Yeah, well, first I'd point out just ARR obviously does not include services or any of our on demand business. Whereas revenue and RPO CRPO would pick all that up. So there is a little bit of sort of apples and oranges there. And again, just for the revenue perspective, particularly for this quarter, there was a couple of things are subscription business continued to do well services, as we talked about in our script has been more impacted because of the macro.

Greg: And so the demand is less. So we're seeing that. And obviously last year at this time, just from a year of your comparison, we sort of peaked from both a subscription revenue and services revenue. And that's not repeating. I think the subscription revenue software revenue has been reasonably reasonably constant. And we think we will continue to see an improvement on the subscription revenue as we go forward. On RPO and CRPO in particular, when we get towards some of the later stages of our contracts, whether they're one year or multi year, that's when they're sort of less in the in the performance remaining performance obligations.

Greg: So we have a couple of our largest customers that are up renewal between now and Q1. And we think that we will see start seeing an improvement on the RPO as well. Okay, and just to be clear, you said Kapela is not part of ARR? No, Kapela is part of ARR. What's not part of ARR is professional services, any on-demand business. And is it common to see Kapela on demand or it's mostly one-year contracts?

Greg: I'm sorry, could you repeat that? Kapela is it common to see consumption there on demand or is it mostly one-year contract? It's the largest majority of the Kapela business today, is their annual credit model, which would fall into ARR. Got it.

Matt: Okay, Matt, one for you on the competitive side of the equation, help me understand what you're seeing out there and what it's changing for you. You know, some of your competitors are doing very well in the marketplace. I'm just trying to think about where you see your place in the market and then on the competitive front. Anything from a win rate standpoint that would greatly appreciate it, thank you. Kitai, generally speaking, I'm pleased with how competitive we are.

Matt: If we think about the nature of applications that we serve, the demand for high performance and scalability and cloud-to-edge architectures, have never been more prevalent than they are today. I think what's exciting to us is the additional what I would call at-baths that we're getting with Kapela and moving down market and bringing the full power of the couch-based platform and all those benefits with the consumption model that is often preferred by customers, certainly a majority of them.

Matt: But when we get into competitive situations and we do proof of concepts and show the power of the platform and the integration of the services, the value proposition, the PCO dynamics that do more with less. I would say in some ways those value propositions have never been more relevant than they are now. And I think it increases the value that people see in our platform, both existing and new customers. I'm pleased with how we compete. We wake up every day with the appetite to do more and do better, but we're well positioned with dynamics like migration to cloud, modernization, and many other things that we've talked about before.

Unknown Executive: Great. Thank you.

Unknown Executive: This is Beyond for Sanjeet. I first have a higher level of questions from the AI strategy that you laid out. I mean, it really resonates. And the way that we are trying to sort of think about these impacts are mostly in two ways, right? The new workloads related to AI apps and then the migration, which in many cases gets accelerated through AI. When you're thinking about kind of those two opportunities, and I think you spent a lot of time talking about the first one of those two, where do you see kind of the bigger opportunities one or two years out?

Unknown Executive: And then what are you doing today to positions for both or maybe for the bigger ones more so than the other ones? Anything that you can kind of share around your strategy, both on the migration side, as well as kind of the new workload type that you already talked about.

Matt: Yeah, look, appreciate the question. I think if we step back and say, you know, why are we all so excited about AI, we think it's the, you know, the next great catalyst for applications, both existing and new. And we talk a lot about the demand for rich, personalized, customized applications that we use in our personal and professional lives, and the demands on the database to be able to bring all that data to life.

Matt: We combine operational and analytical capabilities, leverage services like indexing, eventing, and search in a single platform, that's never been more relevant. And if you think about the amount of data that's going to need to be processed to further bring light with even more personalization and customization for future applications, that lends itself very well to the couch base platform that was built for scale and performance from cloud to edge with, with PCO benefits.

Matt: We're spending a lot of time with large customers today on their future plans of AI and us being a platform that is strategic to them, you know, for their existing applications. At the same time, as we mentioned, you know, in the prepared remarks, we had a net new customer and emerging geography that is an AI company for smart cities that realize the couch base was the platform that they needed to process all their data.

Matt: And enable the application that they're building. So as we have always done, we take an architectural approach to the data layer and then upon a solid foundation, integrate services in a compelling way for both customers and developers. You combine all that with the, you know, compelling consumption model and we're really bringing a lot of capabilities together in a seamless way that quite frankly, other vendors just aren't architected to do certainly at the scale and performance.

Matt: And so I think we're going to be able to get at both migrations and new workloads, you know, as we look at the effect on our business because of the size of some of our existing customers. When we monetize a migration, that can be a little bit of a bigger contribution out of the gate. But we certainly spend a lot of time and attention on new logos. So, you know, we'll be able to track the trending of which one is a bigger impact over time, but you'd be hard pressed to find any customer that is thinking about a future data platform strategy that isn't inclusive of AI.

Unknown Executive: And we think an integrated platform is the winning strategy and we're excited about our path forward. Makes a lot of sense.

Greg: And then maybe just one quick follow up question, just on thinking about reconciling the customer numbers. I think it had 12 customers this quarter, which was a step up from last quarter, but still maybe compared to your commentary on pushing down market around kind of a new customer momentum, particularly around the power. Teams still a little bit low compared to some of the letters that you put out last one. Is there any way that you can help us think about sort of the new customer signings piece versus the customer churn piece?

Greg: Is that churn piece still kind of weighing down that met at number or any kind of more granularity you can share on that that will be super helpful. Yeah, happy to give some color there. So to your question, yes, we are still seeing a bit more churn on our smaller customers like we did last quarter, which are macro impacted. They do not have a big dollar impact. Our gross ads are performing well and in line with what we've seen historically.

Greg: And as we mentioned in the script, you know, Capella, the Capella logo count actually is up 20% quarter over quarter. So we're actually very pleased with how Capella is performing. We're still working through some of that, you know, smaller business churn.

Unknown Executive: But overall, we think that we're going to start seeing, you know, sort of more favorable impacts to the customer account as we move forward through the second half of the year. Great. That makes sense.

Unknown Executive: Thank you.

Raimo Lenschow: Our next question is from Raimo Lenschow with Barclays. Please proceed with your question. Perfect. Thank you. Can you speak a little bit to what you see in terms of pipeline and how pipeline is evolving? It looks like this quarter, you know, things continue to improve for you. But like if you think about like early stage pipeline, as you think about the back part of the year, what are you seeing there? And then I had one quick follow up.

Matt: Raimo, the simple answer is we feel really good about it. And hopefully you've come to appreciate the level of detail that we have and how we measure that everything from expansions in the back cap, how we expect those to grow migrations to Capella, you know, new logos and understand the dynamics that are different there. You know, early stage Capella progression in terms of, you know, trials and into active deals. And so I think as we look across the, you know, entirety of the pipeline, both in terms of size scale velocity, those metrics look really good and we feel confident about the demand of the product and quite frankly, the execution of the go to market team to continue to grow and nurture the pipeline for the back cap and beyond.

Matt: But overall, I think it's an exciting mix of opportunities and indicative of the optimism we have in the business as we go forward. So, you know, that's, you know, professional terms of freedom going to be a little bit of a headwind all the time.

Greg: Like, how do you think about managing that journey? Greg, thank you. Congrats for me as well. Yeah, thanks, Raimo. Look, we obviously think professional services is key to our business. We believe it actually generates more software sales long term for us. But right now, what we're seeing is customers when their budget constraint due to macro, they are opting to continue and grow on the software side, but a little bit less on the services side.

Greg: So services, as we talked about at the beginning of the year, would be slightly down versus last year, given we out perform last year. There's probably a little slightly bit more of a headwind than we expected. The second part of that is, as we get more and more into Capella, given that it's a service into itself that the customers are going to have a less smaller attach rate to the Capella business from a service perspective.

Greg: So I think both of those things are starting to play right now, but look, we still think services are important for customers and we'll continue to push them, but we're very pleased at how the software part of the business is outperforming when well services is, you know, slight offset to that. Yeah, very clear. Thank you very much, Comrade. Thanks, Raimo.

Rob Oliver: Thank you, our next question is from Rob Oliver with Beard. Please proceed with your question. Great.

Greg: Good afternoon, guys. Thanks for taking my question. I had to, Greg, I'll start with you since there was one earlier on customer count. So the 20% growth in Capella customers, you know, certainly sounds great. And then just from some of the other commentary you guys made, trying to triangulate, it feels like the contribution might be about half new logos and half existing customers on Capella. You know, is that, is that right?

Greg: And how should we think about that, you know, guy going forward, I know you guys have said Capella is going to be, you know, the single best source of new logos for you, but sort of in the common quarters, how should we think about that split? From a new logo perspective, Rob, is that yes. Yeah, like I'm thinking more Capella ads, it seems like, you know, because you guys said 20% growth of Capella customers, but based on your customers added in the commentary around that, some of them are new logos.

Greg: So I just wanted to get a sense of how that split is. Yeah, I think so a couple of things. One is we do expect that Capella will continue to be the majority of new logos as we go forward into the second half of the year and in the next year, that's just where we're seeing the most momentum. I would remind you that we do have customers that have both enterprise couch based enterprise and couch based Capella.

Greg: And so, you know, they're in a total customer count, we only count them as one. But obviously, when we give you the Capella customers, everybody who's got Capella, but some of them also have enterprise. So just when you're trying to sort of reconcile just to be, to be aware of that, but again, we expect there to be the majority of that being Capella, but we're still obviously as Matt was talking about the pipeline, we still have a good pipeline around enterprise, you know, business too.

Greg: So we still plan on, you know, driving new logo business there. In terms of this, you think about ARR and revenue. Clearly, the migrations will be the larger, you know, given our enterprise nature and large customers that will make up the bigger amount in the near term until the newer customers get ramped up.

Matt: Okay, helpful. Thanks. And then, you know, Matt, you've gotten a couple questions on AI and some of the macro are already. So I guess I'll ask about, you know, Capella consumption trends into a quarter, you know, kind of what you're seeing in terms of customer usage for those that adopt Capella any color there would be real helpful. Thanks, guys. Rob, we've said a couple times that we have really high expectations for Capella and we're pleased with the momentum in terms of consumption, I would say that's meeting, if not exceeding even our internal expectations, I think it's proving the value proposition of do more with less, getting people focused on application development while we run the database, I think they're realizing the benefits of, you know, the underlying couch based platform.

Matt: Faster with more efficiency, you know, we've talked about the, you know, it's driving the majority of net new logos. We're also seeing, you know, improvement on net retention rate driven by, you know, the success of Capella, you know, your comment on balancing migrations and new logos is really important to us. While we are certainly focused on and excited on new logos and the area that we will do better, we see some really healthy migrations on Capella.

Matt: In addition to the ones we provided, you know, one of the largest hospitality companies in the world that's been in existing customer bars aggressively pursuing next generation apps with Capella for the value proposition of scale and performance and cost effectiveness. And that's just, you know, one example. So we look at the pipeline and the planning that we're doing with, you know, existing customers while managing the pipeline of new, you know, we're looking at consumption dynamics in both cohorts, if you will. And my comment on exceeding expectations actually pertains to both, which is something, you know, adding to our excitement about Capella overall. Great, helpful caller. Thank you very much. Thanks, Rob. Thank you.

Jason Ader: Our next question is from Jason Ader with William Blair. Please proceed with your question. Yeah, thank you. Good afternoon guys. I just wanted to ask about the go to market side. I know we talked a lot about Capella here on this call, but are any specific initiatives on the go to market side that are helping you get in front of new enterprise customers, which still seems to be like, you know, a challenge for you guys to get in front of, to get the at-baths and to get in front of those, those, those prospects.

Jason Ader: Yeah, Jason, I would, I would say there's probably not a thing that we're doing on the go to market side that isn't focused on getting in front of new customers, everything from, you know, demand, announcing new capabilities, building our pipeline, establishing channel programs. Investing in geographies that are relatively new to us where we're seeing disproportionate demand and, you know, in faster return. I think, you know, one of the things that we're very mindful of is you need a compelling event for an application to be developed and for the applications that we serve.

Jason Ader: In a lot of cases, they're truly mission critical and there's there's a time element to, to that initial land. We've talked about shortening that quite a bit with, with Capella. But our teams are maniacally focused on new customer acquisition and managing the pipeline and, you know, there's not an hour that goes by a couch base that we're not, you know, thinking about how to get better there. So, as Greg mentioned, we expect that to improve.

Jason Ader: We're seeing the leading indicators that we would want and I think it's an area that I would say unquestionably we can and will do better as we go forward. And just following up on that, Matt, can you talk about any geographies? You mentioned sort of, you know, disproportionate success and certain geos anything that you can expand on there. Yeah. Hey, Jason. It's Greg. I'll add it. I mean, look, there's a couple regions in particular.

Jason Ader: So we actually broke out our sort of a mere region and we run into Europe and then to me, which is Turkey is real Middle East and Africa. And we see we're seeing very good activity there. We have a great leader there. And then the other one, which we've been investing in the last couple years is age of specific, which has also been doing very well. And as you can imagine, because we're newer there and newer technology, we're seeing a lot of capital activity and a lot of new local activity coming out of Asia Pacific. So those regions are really starting to, you know, become, you know, much more impactful to the business as we've invested there over the last few years. Thanks, guys. Good luck. Thanks, Jason.

Unknown Executive: Thank you.

Brad Reback: Our next question is from Brad Reback with Steve. Please proceed with your question. Oh, great. Thanks very much. Matt, any reason you wouldn't break Capella out next year? In what sense, Brad, like reporting wise? Yes. We expect to break that out when we're ready and are excited to be at the point we can do that.

Brad Reback: Okay, switching gears, thoughts around using M&A to gain scale? Thanks. Yeah, Brad. I mean, I think we pride ourselves at being agile with our strategy and we're always doing build by partner analysis. You know, it's something that would be an ongoing consideration for us and as we think particularly about M&A, there's benefits beyond scale, like in improving the platform in a particular area. So I'd say it's part of what we do, but I'm not prepared to make comments beyond that. Great. Thanks very much. Thanks, Brad.

Taz Koujalgi: Thank you. Our next question is from Taz Koujalgi with Wedbus Securities. Please proceed with your question.

Greg: Hey guys, actually no question. One for what's good for Greg? Greg, I don't know. You don't focus on buildings as much. Focus mostly on refugees and ARR, but look at the buildings. Number, the score is a little bit light. I think seasonally down sequentially, which is I believe never happened before. Do you have anything to call out there on the buildings metric? Any, any had been on the invoice integration front? No, not really.

Greg: I would say Taz. I mean, again, we've tried to say that buildings for us is a bit noisy. We don't focus on that too much. We think ARR is a better measure. And a lot of it has to do with the timing of some of the renewals because we're still, you know, the predominant part of our business is the enterprise business and the renewal timing or annual upfront when we get those buildings is when we do the renewal.

Greg: So no, I wouldn't read into anything about the buildings, durations are, you know, steady if not slightly improving from sort of the lows we saw in the, you know, in the sort of worse of the macro.

Matt: Okay, they just won't follow up for Matt. Matt, you've seen strong strength in Capella in the last few quarters. And on the go to market motion for Capella, is there a self-service element where people are signing up Capella without requiring a sales guy or a sales rep to get to them? If you just comment on any self service motion with Capella traction, which is a direct PLS selling Capella to their customers?

Matt: Yeah, Taz, it's certainly part of the Capella value proposition, what I would say complementing our, you know, more direct, highly instrumented go-to-market model, enabling developers to come to us in their evaluation, initial purchase, etc. So it's certainly something that we're actively building as a complement to the overall business. And, you know, one of the benefits that we see there is not just for new logos but expansion activity where people within our existing accounts can get at, you know, new applications faster.

Matt: So we're focusing a lot on what we call the developer experience and getting into product life growth, all of which is possible with, you know, the Capella offering. And we're excited about the instrumentation that we have in place and leading indicators of what that will do to the overall business.

Unknown Executive: Thank you.

Howard Ma: Our next question is from Howard Maugh with Guggenheim Securities. Please appreciate their question. Thank you. Greg, AR guidance assumes that you add about the same amount of net new AR in the second half of the year as the 17 million added in the first half. Can you remind us if new bookings is normally more backup weighted? And if so, are there any offsetting factors this year that would make it to have more equal?

Howard Ma: Yeah, hey Howard, appreciate the question. Look, obviously we feel good about the AR performance and even even the ARR guide and the outlook we have in a second half. To your question about the bookings, yes, there is slightly more weighted towards the bookings in the second half, particularly Q4 tends to be our largest bookings quarter. Again, this is this is the guidance which we feel good about and as we've stated before we, you know, set up guidance to hopefully at a minute and then we'll meet that if not beat it.

Matt: And again, we feel good about the momentum we have heading into the second half. Okay, great, thanks. And for Matt, do you think new GNI capabilities could accelerate your new customer acquisition engine, your term? For instance, do you have any evidence that the fellow customer prospects are placing more weight on capabilities such as coding co-pilots when choosing a database mansion system? Or is GNI more of a mechanism to drive expansion among existing customers?

Matt: Thank you. Howard, I think the simple question or simple answer to the question is yes. And we were excited to announce Capella IQ. You know, I would tell you that the early signups for private preview have exceeded my expectation, which I think is indicative of, you know, new customer activity. And if you think about the value proposition of Capella and just making it so much easier for developers, so much more efficient to get the full benefit of couch base, that's really important to us and quite frankly something that we think is going to add a lot to how people think about and then directly and quickly. So I think it's going to be an accelerant on both sides, new and migrations. Great, that's encouraging. Thank you. Thanks, Howard.

Rudy Kessinger: Thank you. Our next question is from Rudy Kissinger with DA Davidson. Please proceed with your question.

Greg: Thanks for taking my questions. I'm Capella. I know I speak for everybody in this call, regularly waiting for the metrics you can share. Could you at least comment maybe directly just how Capella is treated as a percentage of new bookings over the last several quarters and the increase you've seen. I know you said it's been the majority of customer signings, but how is it trending as a percentage of new bookings or total bookings, anything you can share.

Greg: Yeah, hey Rudy, it's Greg. Good to hear from you. Yeah, look again, it become Capella every quarter becomes a larger percentage of pretty much every metric, whether it's bookings revenue, ARR or customer account, it just continues to grow. So, which is what we expected. So, yeah, it just becomes a bigger, bigger component every quarter because it's growing faster than the rest of the business.

Greg: Okay, fair enough. And then on the ARR out performance in the quarter in the 4 million raised year, what's the primary driver there? It sounds like that is primarily consumption exceed exceeding expectations, but I know FX also flipped to a 1% tailwind in the quarter to that have any impact on the 4 million raised for the year. A little bit, not as much. I think it was two things. I think it's the Capella acceleration.

Greg: We talked about the net retention rate continuing to improve and it being the best in three years. So that was part of it from my Capella, but Matt also referred to some large enterprise deals. We closed in the quarter with some very material expansion. So, it's really, again, at the combination of both I see it is sort of just broad based performance in the quarter, quite honestly in terms of where we had set guidance. And the pipeline strong. So, you know, we're again excited for what we did here in the second quarter and the second half outlook.

Unknown Executive: Thank you. There are no further questions at this time.

Matt: I would like to hand the floor back over to management for any closing comments. Thanks operator. To recap, we had another strong quarter. We remain excited about our opportunity with Capella due to some very big trends in our favor. The rapid adoption of cloud, desire for greater cost efficiency, IT modernization, and of course AI. We are cognizant of the macro environment and are sharply focused on execution during times like this, while also building for what we believe will be a very exciting future.

Unknown Executive: Thank you all for joining us and we look forward to speaking with you next quarter. This concludes today's conference. You may disconnect your lines at this time.

Unknown Executive: Thank you for your part.