Couchbase, Inc. (NASDAQ:BASE) Q3 2024 Earnings Call Transcript

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

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.

We’re able to again shorten sales cycles, but then benefit from faster expansion. I think the ability to go directly to developers and move from trial to initial customer is something we’ve been talking about and we’re seeing that. And that’s not just net new customers, but that’s also new applications in existing accounts where we may be able to migrate into a line of business or a particular part of multinational that we weren’t able to get to begin with. So, overall really healthy, again, we’ve had very high expectations for Capella across all of these variables and we’re really starting to see that come to fruition.

Sanjit Singh: That’s really encouraging. I’m sure we’re going to hear more about that next week in the ORIX at the Investor Day. Just as a follow-up, as we go into Q4, and obviously Q4 is a big quarter for everyone in software and I’m sure that’s the case with Couchbase as well. Going into Q4, Greg, is there any way you can give us a sense of the size of the renewal base this year versus last year? How do you feel the sales team is in terms of being on top of those renewals given that the macro is still a little challenging out there?

Greg Henry: Hey, Sanjit, good question. Yes, Q4 is a big one for us. It’ll obviously be should be our biggest quarter ever. And the renewal pool is very healthy. It’s slightly larger than last year and I would just add that, you probably saw we had a little bit wider guidance range at times. There’s several of our largest customers have renewals coming up between Q4 and Q1. And depending on the timing of when they get done, obviously, the Q4 ones will happen now. The Q1s could happen in Q4, they could happen in Q1 depending on timing. But those will drive a significant amount of what that actually looks like. So, it’s a big quarter, there’s a couple of really big deals out there that are going to be really exciting to do and, that’s what’s going to drive Q4. So, we’re looking forward to it and as we said we’re looking forward to sharing more next week.

Matt Cain: Sanjit, if I could just pile on. We talked about the excellent operational performance in the quarter. That’s not just the efficiency and leverage that we demonstrated with the financial results, but it gets at some of the very things that you’re asking about. Never have I been more confident in the functions across the Company inclusive of our go-to-market teams. Really understanding where we are with deals, understanding how to position with the right economic value, managing pipeline, just driving linearity across the big core. So, there are big deal dynamics at the big quarter, but testament to the teams for the operational rigor they have in place and I think they are doing a great job and we’ll continue to deliver.

Operator: Our next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Ittai Kidron: Couple from me Greg, can you remind us on the RPO, why is that not a good indicator for your business? I mean it’s been flattish for three quarters in a row and Capella cannot have too much of an impact on it given that it’s a low-single-digit percent of your revenue still. So, help us understand, remind us again, the disconnect between RPO and revenue?

Greg Henry: Look, on the RPO, I would just tell you and it goes back to the comment I just made on Sanjit. We have several of our largest customers coming up for renewal and typically they do multiyear renewals. So if you think about at the renewal point, if it’s a multiyear deal, you’re putting all that into RPO. And by the time you get to the end of that, there’s not much left. And so, I think you’ll see an improvement in RPO coming out of Q4 because of some of those particularly large deals which is why you’re seeing some variability in the timing whereas obviously the revenue stays it grows, it stays relatively consistent over time. So, the revenue that full value of revenues running, but there’s some of these deals that are renewing in Q4, there’s only one quarter left of RPO in the backlog if you will.

Ittai Kidron: Are these multiyear deals, Greg?

Greg Henry: Yes. These large deals are typically multiyear deals, at least two if not three year deals.

Ittai Kidron: And then, on Capella, on gross margin I understand the comments there, but maybe can you specifically comment on Capella specifically, meaning, is the gross margin of Capella still below 50% or has it already who improved above that level?

Greg Henry: Yes, Ittai, we haven’t obviously talked about that and spoken about the gross margin. I can just tell you that it has steadily been improving and we saw a very healthy uptick this quarter in particular and it’s doing exactly what we thought in terms of the growth of the business and the margin rate and so it is improving. And like I said, we had that one time comparison adjustment. So, we feel good about where the margin rate is on Capella and where it’s going to ultimately land. And as I was mentioning, the more volume we get there, it will only continue to improve.

Ittai Kidron: And then last one for you, Matt, on Capella itself. In what way are the customers that are adopting it, especially the new ones that are joining the platform different in their profile, in their use cases compared to customers you’re bringing on with your on premise platform?

Matt Cain: Again, I think it’s less about the use case and more about the pace of adoption. We talked about, one of the new logos in the prepared remarks. We had another company that you know well multinational cyber security company chose us for price performance on an app that certifies all of the connectors to their platform and doing security health checks on behalf of their customers. That’s aligned with an application that we would have serviced before, but not until we had Capella did we break through with that price performance, usability, time to value. We had another new logo, Swarm engineer, AI/ML based supply chain optimization platform and they chose us because it literally freed up developer time and resources with the managed service against other solutions that they were evaluating.

Now if we were to go through the specific use cases in these verticals, we have comparisons and it’s not like we couldn’t get at that with Couchbase, but it’s the incremental value proposition and ease of use and all the things that we’ve built into Capella that are getting those deals over the line. And if I were to take you through migrations and new applications inside customers, it’s more of that value proposition coming to fruition. We have a very broad based platform and we continue to add to it with additional services. Customers have always valued that. We’re now marrying up the consumption, the way they want to consume the technology with all those capabilities which we believe are differentiated and industry leading in our single cloud edge platform.

So it’s that combination that’s providing the uplift, not necessarily an ability to get at new use cases because we work so hard to have those capabilities in place.

Operator: Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Matt Hedberg: Thanks, guys. Congrats from me as well. Matt, the accelerating net adds were great to see. I think you gave some statistics on first half or even Q2. Was there anything unique with this quarter’s adds? Anything pull in for instance? I know you just talked about a large renewal cohort, but I guess I’m wondering in Q4, but I guess I’m wondering on the new business. Could this be a new run rate for kind of quarterly net adds?

Matt Cain: Look, Matt, we’ve said quite transparently that this was an area that we need to improve in. And we’re certainly pleased with the results and I think it shows that the first half was an anomaly. We still have ways to go. I will tell you it was the highest gross adds that we’ve ever had as a company and it was driven by the highest gross adds of Capella. Now, we’ve expected that and it’s not just the Capella value proposition, it’s also operational rigor and the things that we’ve been focused on, on a go-to-market, expanding our partnerships. So, there’s a lot of what I like to say lines in the water to drive the proven there and there’s no bigger focus area that we have as a company. And I think this is much more indicative of what we can and will be delivering on a go forward basis.

Matt Hedberg: And maybe, Greg, this might be a topic of Analyst Day. But as we’re thinking about our models next year, you didn’t obviously guide us for fiscal ’25. Are there any guideposts that you give us on sort of growth or margins, in sort of, we’ve known your philosophy on sort of like trying to focus on growth but also expand margins as well. Then any sort of commentary that you provide us with tonight on how we should think about next year?

Greg Henry: Yes, hey, Matt, good to hear from you. Look, there’ll be a lot more obviously next week. We are not going to be giving specific fiscal ’25 guidance until we get to our Q4 earnings. So 90 days from now, but we will obviously provide some sort of long-term view of how we’re thinking about it. That said, we are extremely mindful of profitability, free cash flow, op income and we are working to create a more efficient model, get more leverage out of the model. And again, I think you saw some of that continue to come through this quarter and all year and we’re just committed to continue to improve our margin profile and move our way to profitability.

Operator: Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Jason Ader: Just wanted to ask first for you, Greg, Q1, I know you’re not giving specific guidance, but if I look at the last to Q1s, it was down a little bit sequentially from Q4 to Q1. So just remind us on the seasonality and any other kind of puts and takes as Q4 turns into Q1?

Greg Henry: Yes, I’ll give you some sort of how general is as I was alluding before, Q4 is typically our largest quarter of the year and Q1 is typically our smallest quarter of the year depending on the year of course. So I think the seasonality you’ve seen historically is reasonable to think about. But again, we’re not guiding yet. As I mentioned, we’ve got a couple large deals that could fall in Q4 or Q1, Which would change sort of that dynamic. So that’s why we’re not ready to sort of come out with guidance because we just really need to see how that’s going to play out timing wise. They’re going to happen. It’s just a matter of, when not if. But I think again seasonality wise, we’ve seen historically our Q4 to Q1 is typically it’s not nearly as big as the renewal pool, just not as robust.

Jason Ader: And then for you, Matt, you talked about the columnar analytics feature. I don’t know, it’s just a big deal. Every company introduces features and talks about how great they are, but how important is this? Maybe talk about some use cases where this might be used? Just try to get a greater sense on the importance of this new capability?

Matt Cain: We think it’s quite significant. And as we look into the future, we start in thinking about what are trying to solve with their application strategy. And every company around the world is trying to figure out how to use technology to improve their business and get closer to their customers. And in order to do that, you need to not only have all of the operational data at your disposal, but to make these applications truly real time and adaptive taking their capabilities to the next level is injecting data that you’re analyzing alongside the operational data store. And as much as people are focused on analytics in the world, the vast majority of enterprise data is not analyzed. And furthermore you have this significant gap, this latency gap that’s existed for 50 years in the wall that exists between operational and analytical data.

What we’ve done with this capability and our underlying architecture is enable a developer to develop these real time adaptive applications by combining not just the data that we manage on our data store, but ingesting data from S3, from other relational sources, sources like Mongo in a real time basis and then feed those insights directly into the application while it’s performing. There’s not eliminating ETL, reducing efficiency and with the underlying architecture to maintain the operational performance in SLA that modern databases require. So this is quite a big step for us. And when we think about the data layer for applications in an AI driven world obviously we’ve talked about vector being on the roadmap which will add to our architecture.

But we like to think about the density of the application that we are supporting in that data layer. Operational, analytical, and all of these capabilities coming together in a single platform is our advantage and we think that never have our core capabilities and the platform that we’ve developed with these scale and performance cloud to edge requirements ever been more relevant. And so we’re quite excited about that and getting quite frankly pretty phenomenal feedback from customers that understand the importance of this and aligning it to their overall digital transformation and application strategies.

Jason Ader: And can you give us some examples of use cases for the columnar analytics technology? Please proceed with your question.

Matt Cain: Yes. So, this is about like taking applications to the next level. So I mean I’ll give you a few generic ones. Let’s say you’ll find something on an e-commerce store and we all know you get a recommended product. But what if that recommendation was completely personalized to you? What if the product descriptions matched what was happening in your life? If you’re shopping in a home improvement store and it has the awareness that you’re doing a home remodel, well, now the product descriptions map the type of home remodel that you’re delivering and then can bring in the inventory that meets those needs at your local store. These are real time personalized occasions that are changing based on what’s happening in your world with you as a user.

Streaming services often recommend shows for us, but what if it’s aware of what’s happening in my connected home and recommends to pause something because the beer in my fridge is now the temperature that I like it and I’m not going to miss a particular portion of that game. Or I get an alert that another one of my favorite teams is starting that that level of adaptive application without slowing down the performance taking it to the next level. That’s what happens when you take all of these analytics and feed it into real time applications with access to information from every possible input, structured, unstructured et cetera.

Operator: Our next question comes from the line of Brad Reback with Stifel. Please proceed with your question.

Brad Reback: Matt, what if anything needs to change at Capella in order for it to be a true volume customer acquisition engine?

Matt Cain: I think we’re heading that direction. We’re excited to spend time next week. We’re going to talk a lot about this idea that Capella is at the inflection point. I think the product that we have, the usability, the integration of things like IQ is going to give us the opportunity to augment our highly sophisticated enterprise go-to-market motion and benefit from more product led growth. And I think we’re to the point now where we have the solution. We’re marrying that up with know, how we’re marketing, how we’re investing in go-to-market resources, how we’re thinking about partnerships. And so, I do think we’re at the point of that you know hockey stick where we’re going to start to see that inflection coming.

Operator: Our next question comes from the line of Taz Koujalgi with Wedbush Securities. Please proceed with your question.

Taz Koujalgi: I have a question on Capella first one. So you’re very positive on the new logo traction driven by Capella. Can you comment on the deal sizes or deal values of these Capella deals by comparing to enterprise new logo adds? Are these smaller? Are these at the same level of the enterprise new deals?

Greg Henry: Yes. Taz, it’s Greg. Thanks for the question. Yes, the new logos in Capella are certainly smaller than what we would see on the enterprise side of the business. But again, the time to value and again, we’re going to talk about this a lot next week is the growth rate on that is substantial compared to the enterprise business. So, they start smaller but they grow faster and that we always assume that would be the nature of the Capella model. Now that said, there are times where we get larger ones, but in general they’re smaller than the enterprise part of the business.

Matt Cain: And Taz, we actually want that when we’re building programs and incentives to get customers started. One of the friction points that we have in landing new logos with the enterprise business is trying to find the exact sizing that customers are going to commit to knowing that applications are dynamic and people are picking us because we’re a platform. You know with Capella, we can remove that friction entirely. Just get people going and then they can you know add credits or you know go with the pure consumption model. So we anticipate that and if anything, I would expect it continues to come down as we add more volume. That’s not to say that they’re expected value or potential of spend is any smaller. It’s just the efficiency of landing them and getting them going.

Taz Koujalgi: And then, follow-up to that, Matt, if you mentioned in the call that you’re seeing some customers this quarter, consume ahead of their commitments or credits. Anything that was done this quarter to, I guess, capitalize that? Do you think anything in the go-to-market to make, customers, I guess, consume faster or use their credit faster? The reason I’m asking is one of your peers who had earnings last night spoke about how they’re changing their go-to-market model, in certifying their salespeople to sell not on a commitment, basis, but more on a consumption basis to drive consumption faster so that people don’t just buy the credits and keep them unused. So anything that has changed on your go to market side to, I guess, make customers consume faster?

Matt Cain: Look, if I were to talk about operational capabilities that we’ve matured dramatically over the course of this fiscal year, certainly the last six quarters, it would be on managing consumption, providing incentives throughout our go-to-market engine everything from quota carrying salespeople, SE resources, professional services, customer success in aligning to customer needs and being very aware of consumption. Certainly, we want to be prepared if people in rare circumstances are consuming below where we need them and adjust that and help them with the deployments that they anticipated. Maybe surprising, but a big part of that is understanding where customers may be running hotter than we think they need to and getting ahead of that so we don’t end up with a customer relationship issue.

So, the level of operational investment we’ve put there in systems, tools, process and people, consumption can be complicated to manage, but I think we’re leaning into that complexity and feel pretty good about the operational rigor that we have in place to manage that as we go forward and the subsequent incentives, which for me we’re in the business of satisfying customers and we want to make sure that we’re helping them with their business strategies and making sure that Capella and Couchbase are a big part of that. Getting consumption right is certainly an important variable.

Taz Koujalgi: Just one follow-up if I may. I think last quarter when we look at the number of new logos added overall and number of new logos that for Capella, Capella had a higher new logo adds. I guess you were saying that I think, you got the benefit of migrations of workloads from enterprise to Capella, so that’s why the Capella number was higher. This quarter, I think the new logos and, Capella new logos are almost the same. Is it fair to assume that the migration activity from enterprise to Capella was a little lighter this quarter versus last quarter?

Matt Cain: No. I think something might be getting lost in the takeaway there. I mean, we mentioned we’re over a 5th of our customer base. Greg can talk about the quarter-over-quarter Capella growth, but again it was the majority of net logos. We saw a healthy number of migrations. I think all of that is up quarter-over-quarter. You have the specifics?

Greg Henry: Yes. I mean this quarter that the Capella customer count you know, grew by more than 25% whereas last quarter it grew by 20%. So we’re accelerating the pace of Capella customer adds. Both that’s inclusive of both migrations and new logos. So we feel very good about it.

Operator: Our next question comes from the line of Howard Ma with Guggenheim Securities. Please proceed with your question.

Howard Ma: Great quarter, guys. I guess just the dovetail off of Taz’s last question. When we think about the sales and market efficiency levers for Capella, where is the sales force in terms of efforts focused on migrations versus acquiring new deal logos? And that’s it for me. Thanks.

Matt Cain: Howard. Look, I think we’re appropriately balanced to do our jobs as salespeople here we need to be taking care of our existing customers, growing those accounts because of the platform that we bring. That’s existing applications, net new applications and then obsessing over adding new customers. You can appreciate that we have a fairly mature go-to-market model on any given rep may have a little more focus on an existing account. We have reps sort of almost entirely focused on new. But if we look at the collective army of field resources out there, there’s not a moment that goes by at the Company that we’re not obsessing over both. I think one of the things that’s fantastic about Capella is, we not only talk exclusively about new logos, but new applications and our ability to win new apps both in new logos and in existing accounts is better than it ever has been.

We spend a lot of time on our compensation and incentive plans to ensure that we have the appropriate balance. You know I spend a lot of time thinking about the operational focus and rigor across the board, but you know I think we need to achieve our medium- and long-term objectives we need to do both and I think we are striking that balance and if in any given region or territory or down to individual reps we’re off, we make those adjustments on pretty real time basis. So, again I’m pretty proud of the operational execution across the board and testament to our field leaders and in navigating this dynamic along with many others.

Operator: Thank you. There are no further questions at this time. And I’d like to turn the floor back over to Chairman and CEO, Matt Cain for closing comments.

Matt Cain: Thanks, operator, and thanks to everyone for joining us today. I’m sure you can tell we’re very pleased with how the business performing and are working hard to make fiscal 2024 our best year yet. I look forward to seeing many of you all next week in New York Hope to see you then. Thank you.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.