Couchbase, Inc. (NASDAQ:BASE) Q3 2024 Earnings Call Transcript December 6, 2023
Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.18.
Operator: Greetings, and welcome to the Couchbase Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Edward Parker, Head of Investor Relations. Thank you, Mr. Parker. You may begin.
Edward Parker: Good afternoon, and welcome to Couchbase’s third quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase’s Chair, President and CEO, Matt Cain; and CFO, Greg Henry. Today’s call will contain forward-looking statements which include statements concerning financial and business trends and strategies, market size, our expected future business and financial performance and financial condition and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views as of 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. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release and our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases, which are available on our Investor Relations website.
With that let me turn the call over to Matt.
Matt Cain: Thank you, Edward, and good afternoon, everyone. On today’s call, Greg and I will provide details on our third quarter results, as well as our fourth quarter and full year fiscal 2024 guidance. I’ll start off with a few highlights of our Q3 financial results. I’m pleased to report that we had a very strong quarter, once again, outperforming our guidance across all key metrics. Highlights include growing Capella consumption, continued big deal activity, healthy new business and expansions, strong new customer logos and overall excellent operational performance from all teams across the Company. We continue to execute across our key priorities, deliver top-line growth, increase the mix of Capella, drive sales and marketing efficiency, and accelerate the pace of leverage in our model.
I believe our results this quarter demonstrate our increasing momentum across all of these fronts. Total annual recurring revenue or ARR was 188.7 million up 24% year-over-year, up 23% in constant currency and up 4% sequentially. Revenue in Q3 was $45.8 million, up 19% year-over-year and up 6% sequentially. Our non-GAAP gross margin remains best in class at 89.5%. Non GAAP operating loss was 5 million and non-GAAP operating margin was 11 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. I’d like to call out our momentum with Capella which continues to experience strong growth and is contributing more materially to our top line as well as net retention in fact more than a fifth of our customer base are now Capella customers.
Capella continues to be an especially important engine for new logo acquisition which contributed meaningfully to the 24 net new customers we added across the board in Q3 doubling quarter-over-quarter and more than we added in the first and second quarters of the year combined. As our Capella base continues to grow, we’re seeing favorable consumption dynamics emerge as both existing and new customers realize our platforms unique performance and scale, robust set of integrated services along with ease of use and rapid time to value. In Q3, we saw multiple instances of customers consuming ahead of their initial contracts and electing to buy more driving strong Capella consumption and contributing to our ARR and revenue outperformance. While we’re still in the early innings of our journey, it’s gratifying to see the investments we made in our cloud database bearing fruit as we expected they would.
I am confident as ever in our ability to sustain durable long term growth. Turning to innovation, we continue to invest in enhancements and capacities that further extend the value of Couchbase as a cloud database platform for modern applications. Recall that last quarter we talked about our four part vision for AI, drive developer productivity, optimize AI processing, enable AI powered apps anywhere, and do it all with a vibrant partner ecosystem. From inception our architecture has been built to enable the most demanding applications to not only perform but provide rich hyper personalized context aware experiences for our end users. We refer to these as real time adaptive applications. Combining operational and analytical capabilities, our multimodal platform seamlessly integrates advanced services like indexing, eventing, full text search, and more in a single solution.
Our platform is perfectly suited for the massive performance and scalability requirements that adaptive applications require. At AWS reinvent last week, we announced a new Capella columnar service on AWS which significantly enhances the ability to harness real time analytics to build adaptive applications. At the heart of this new service is the introduction of a columnar store and data integration capability directly into Capella which further converges operational and real time analytic workloads into a single platform. Capella columnar will also feature built in natural language processing with Capella IQ, the developer co pilot we announced last quarter. Capella columnar is a significant technical achievement that we believe brings substantial business value to our customers.
The gap between analytic and operational processing is a longstanding barrier to making it easier for development teams to include the required real time analytics into their adaptive applications. As a result, our customers can ingest data from anywhere into Capella in real time reducing complexity and cost all while increasing developer productivity. Importantly, this new capability is a perfect example of how we leverage our unique architecture to further capture new workloads. In this case real time adaptive applications in our singular cloud to edge platform. Now, I’d like to turn to customer wins. In Q3, we saw new Capella wins across many industries including high-tech, government, business services, and financial services. One new Capella customer from the quarter with an AI powered customer intelligence platform provider.
A top priority for this customer was eliminating maintenance costs and saving time with the managed service as its customer engagement application grows. Initially beginning on our community edition, this customer migrated to Capella this quarter because it delivered on all of the application requirements with the most compelling price performance. We also continue to see customers expanding with Capella. Yostar Games is one of the top publishers, developers, and investors of games in Asia Pacific. This customer initially selected Capella to deploy, manage and streamline its game database services. It has continued to invest in our database as a service because of Capella’s impressive price performance, stability, and superior database performance to support rapid customer growth as its game continues to scale.
Another Capella expansion from the quarter came from a leading global design and hospitality company. This customer leverages Couchbase to manage, organize, and analyze data for order management, fulfillment, and pricing for the thousands of products in its catalog. This customer originally selected Capella to reduce the maintenance and operational costs associated with the self managed database and made the strategic decision to expand its investment in Capella this quarter for additional operational benefits. Switching to new enterprise wins, we landed a Canadian subsidiary of an American multinational financial services corporation. This customer selected Couchbase to power a real time trading analytics application to analyze market trends enabling traders to make more informed decisions.
This customer selected Couchbase for its superior database performance and high availability. Another new enterprise customer this quarter was a communication services provider that offers a low cost, high quality mobile service for its customers. This customer needed a high availability database platform to support the mobile billing system for its more than 5 million mobile carrier service subscribers. This customer selected Couchbase because of database’s impressive scalability and suitability for cloud orchestrations while maintaining superior performance. Now, let me provide a few thoughts on the near-term demand environment. As we have discussed all year, the macro uncertainty continues to present headwinds for IT spending and we continue to see elongated deal cycles, extra layers of scrutiny and approval and customers electing to buy in smaller increments.
These trends again persisted throughout the quarter. That said, I’m very pleased with our execution against these headwinds. We continue to not only see a healthy pipeline of opportunities for our cloud database platform, but also strengthening consumption trends as we start to achieve scale with Capella. And Despite the challenging macro environment, organizations continue to invest in long-term digital transformation initiatives where we are increasingly playing a strategic role in enabling these journeys. While we would prefer a stronger demand backdrop, [Audio Gap] you’ve often heard me say that Couchbase has been built for this moment and I think that’s as true today as it has ever been. In closing, we are making progress on our initiatives, are committed to focusing on the areas we can control, and are nimble in navigating the ones we cannot.
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 invite investors and analysts on this call to join me and the rest of the Couchbase executive team at our first Analyst Day in New York City next Wednesday, December 13th. We’re excited to dive deeper into the foundation of our company, technology and strategy share details on Capella and how we are reimagining the database experience and demonstrate how we’re delivering on our commitment to drive efficiency across our business and financial model. Finally, as I always do, 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. With that, I will hand the call over to Greg to walk you through our results in more detail. Greg?
Greg Henry: 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 very strong outperformance in our operating loss guidance. I’ll now walk you through our third quarter in more detail before providing our guidance for the fourth quarter and full year. Total annual recurring revenue or ARR was $188.7 million at the end of the third quarter representing 24% growth year-over-year or 23% growth year-over-year on a constant currency basis and 4% sequentially.
Without the incremental currency headwind experienced in Q3, our ARR would have been approximately $1.4 million higher or $3.6 million above the midpoint of our guidance range. Revenue for the third quarter was $45.8 million, an increase of 19% year-over-year and 6% sequentially. Revenue growth benefited from stronger than expected consumption of Capella and strength in our enterprise business partially offset by declines in professional services. Subscription revenue for the third quarter was $44 million, an increase of 23% year-over-year and 7% sequentially. Professional services revenue for the third quarter was $1.8 million, a decline of 36% year-over-year and 17% sequentially consistent with our expectations following outsized strength in professional services fiscal 2023.
We continue to expect contribution as a percentage of revenue in fiscal 2024 to be below historical levels. Our ARR per customer performance in the third quarter was $264,000 up from $261,000 in the Q2 up 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. Our dollar based net retention rate or NRR continues to exceed 115% driven by strong renewal and up sell activity across our base of larger enterprise customers. Our NRR has been steadily improving thanks to Capella. We exited the quarter with 715 customers, an increase of 24 net new customers in the second 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 over 25% from the second quarter, up from over 20% from Q1 to Q2. We’re encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics against the more challenging spending environment. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations, and share count are on a non-GAAP basis. In Q3, our gross margin remained strong at 89.5% benefiting from sustained enterprise gross profit margin strength and the completion of the amortization from some of our initial Capella investments offset by growing Capella mix.
This compares to a gross margin of 88% a year ago and 87.2% 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. We are pleased with our execution on this front as our expense discipline and early benefits from our cost saving initiatives resulted in us again outperforming our operating loss outlook. Our sales and marketing expenses for Q3 were $27.1 million or 59% of revenue compared to $24.9 million or 65% of revenue a year ago. Research and development expenses for Q3 were $12.6 million or 27% of revenue compared to $12 million or 31% of revenue a year ago.
We continue to thoughtfully invest in our as a service offering as well as additional features to bolster our platform. General and administrative expenses for Q3 were $6.4 million or 14% of total revenue compared to $6.6 million or 17% of revenue a year ago. Non-GAAP operating loss for Q3 was $5 million or negative 11% operating margin, 11 percentage points higher than the midpoint of our guidance compared to an operating loss of $9.6 million or negative 25% operating margin a year ago. Non-GAAP net loss attributable to common stockholders for Q3 was $3.7 million or negative $0.08 per share. I’ll now turn to the balance sheet and cash flow statement. We ended Q3 with $156.6 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy.
Our remaining performance obligations or RPO totaled $164.4 million at the end of Q3, an increase of 3% year-over-year. We expect to recognize approximately 68% or $111.8 million of total RPO as revenue over the next 12 months, which represents 7% year-over-year growth. Operating cash flow for Q3 was negative $12.7 million and free cash flow was negative $13.8 million or negative 30% free cash flow margin. We are pleased with the progress we have made in our free cash profile and remain committed to driving further improvement. Now, I will provide guidance for Q4 and 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 product capabilities, partner ecosystem, and go-to-market motion will continue to complement our momentum.
That said, we remain mindful of the macro headwinds and continue to carefully monitor their impact on our business. As such, our outlook maintains a consistent degree of conservatism across all of these metrics to account for the uncertainty as well as lack of visibility into how the macro may impact consumption trends for our emerging as a service offering. For the fourth quarter of fiscal 2024, we expect total revenue in the range of $46.2 million to $46.8 million or year-over-year growth of 12% at the midpoint. We are raising fourth quarter ARR guidance last provided on our Q2 call and now anticipate ARR in the range of $198 million t7o $202 million, which represents 22% growth year-over-year at the midpoint. This compares to our prior outlook of $195.5 million to $199.5 million or 21% growth at the midpoint.
We note that due to foreign currency fluctuations, our guidance incorporates an incremental 1% year-over-year growth headwind since our Q2 call. We expect a non-GAAP operating loss in the range of negative $8.2 million to negative $7.4 million. Now turning to our revised full year guidance, we are raising our full year revenue guidance and now expect full year total revenue in the range of $176.2 million to $176.8 million or year-over-year growth of 14% at the midpoint. As a reminder, we continue to anticipate contribution from services revenue in fiscal 2024 to be below recent levels due to customers electing fewer services as a result of macro related budgetary pressures as well as a naturally lower services attach rate with Capella. Furthermore, we’ve historically seen variability with respect to the implementation timing of certain enterprise priced deals, which impacts our revenue visibility along with new or migrated Capella customers.
We therefore continue to view ARR as a better catered in revenue of the strength of our business. And finally, we are decreasing our operating loss outlook and now expect a non-GAAP operating loss in the range of negative $35.4 million to negative $34.6 million. With that, Matt and I are happy to take your questions. Operator?
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Q&A Session
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Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Rob Oliver with Baird. Please proceed with your question.
Rob Oliver: Matt, I had a couple for you on Capella and then Greg, I had one for you. So Matt, just first on Capella. When customers that are current Couchbase customers are considering a database as a service, does that go to competitive bid and it sounds like you guys are getting nice momentum winning those, but maybe talk about how that process happens and what you’ve seen in terms of kind of win rates with those customers that know you? And then you mentioned usage patterns, have risen nicely. And I’d just be curious to get some context there, like better than your expectations, is it more in line with like how we would expect the adoption curve, are there new use cases you’re seeing that have surprised you? So a couple of things there and then I had a follow-up for Greg.
Matt Cain: Sure. So let me take these one at a time. I think Rob as it pertains to existing customers. Oftentimes they have chosen Couchbase because of our platform capabilities. And what we’re able to with Capella is offer them additional value proposition, TCO, faster time to value, easier to expand use cases that is incremental to the value proposition we’ve already delivered. Very rarely if ever does that go into a competitive bid. It’s more finding the right time for them to migrate their entire estate, a subset of their estate or focus on new workloads moving into Capella, because of that value proposition. The competitive dynamic that we’re seeing is actually workloads that we don’t support where because Capella has traction, people are reevaluating decisions they’ve previously made on other database as a service vendors and saying, well, Couchbase now that you are mature with Capella, we’re going to open up decisions on workloads that you don’t have which is one of the dynamics that’s leading to our healthy expansion.
And so the migration path is one that’s very good for us. At the same time, we’re careful to not arbitrarily try to push customers beyond, what they want to do and maintain balances as we manage those relationships. When it comes to usage, we are in fact seeing very healthy usage across the board, both in our ability to land new customers with shorter sales cycles, the rate at which they expand both with those workloads and new use cases. It’s not really about additional types of use cases, just more that time to value relevance with the developer persona that drives to that consumption activity that again is really healthy and we’re going to spend a lot of time talking about what we’re seeing there.
Greg Henry: And Rob, if I could just add, that’s part of what drove some of the outperformance on the top-line this quarter particularly on revenue is that consumption dynamic Matt talked about.
Rob Oliver: And then Greg just one follow-up for you, just you’ve been very clear about the natural headwinds gross margin that comes from Capella, obviously sort of good problem to have here as Capella’s ramping nicely. As we look out and think about our model in FY ’25, are there levers do to offset that, not getting you not trying to get you to guide to a number here, but as we think about that gross margin. Are there levers do or things we should be thinking about that could be offsetting factors to that?
Greg Henry: Yes, I think just at the do total level, the more Capella we have, it’ll be diluted from a rate perspective. That said, as we get more mature and more scale of Capella, the margin rate will improve because there’s some level of effectively fixed costs in there. And then the other dynamic you see why we had a really strong margin performance this quarter is. We did have some internally developed software for Capella going back several years as we launched that the development that’s now off the books and it’s done. So that’s why you see a little bit more gross margin this quarter, but it will dilute over time. We just got to keep getting more volume and it’ll improve the Capella rate we’re seeing today.
Operator: Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.
Sanjit Singh: I guess, Matt, the other question I had on Capella is in terms of the workload that you guys are do starting to onboard onto Capella. Can you give us a sense of the nature of those types of workloads and how, as Capella addressing workloads that you may not have gotten before with Capella Enterprise?
Matt Cain: So, Sanjit, first of all, the pace of new logo acquisition is certainly going up and Capella is delivering on the value proposition that we expect that it would, which is lower barrier to entry into the Couchbase platform. As I know you know, the level of capabilities we have in our platform allows us to serve many, many different use cases, everything from customer 360 to field and inventory management across a very wide variety of verticals and use cases. So, the dynamic that we’re seeing with Capella is less about different types of use cases because quite frankly the breadth that we run today is quite extensive. It’s more the pace of acquiring. In some cases, geographies where we may not have as much of a direct presence built out, we’re benefiting from cloud partnerships and customers signing up.
