Couchbase, Inc. (NASDAQ:BASE) Q4 2023 Earnings Call Transcript

Couchbase, Inc. (NASDAQ:BASE) Q4 2023 Earnings Call Transcript March 7, 2023

Operator: Greetings. Welcome to the Couchbase Fourth Quarter and Full Year Fiscal 2023 Earnings Conference Call. . I will now turn the conference over to your host, Edward Parker. You may begin.

Edward Parker: Good afternoon, and welcome to Couchbase’s Fourth Quarter 2023 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase’s Chair 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 and 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 at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to these risks discussed in today’s press release and our most recent annual report on Form 10-K or 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.

Matthew Cain: Thank you, Edward, and good afternoon, everyone. On today’s call, Greg and I will provide details on our fourth quarter results as well as our first quarter and full year fiscal 2024 guidance. I’ll start off with a few highlights of our Q4 financial results. Couchbase delivered another strong quarter, beating our guidance across all metrics. We delivered these results in spite of continued macroeconomic headwinds, anchored by growing momentum with Capella, excellent retention metrics and ongoing large deal activity. Furthermore, our pipeline continues to see healthy growth. I’m especially pleased with the substantial progress we made operationally during the quarter, headlined by better-than-expected non-GAAP operating margin performance.

This is a direct result of our focus across the company on driving improvement in efficiency, efforts that will serve us well in fiscal 2024 and beyond. Total annual recurring revenue, or ARR, was $163.7 million, up 23% year-over-year and up 24% in constant currency. Revenue in Q4 was $41.6 million, up 19% year-over-year. Our non-GAAP gross margin remains best-in-class at 86.3%. Non-GAAP operating loss was $9.9 million, 15 percentage points above the midpoint of our implied operating margin guidance range. We’ll cover more on this in a minute, but we will continue to complement our strong topline momentum with an increasing focus on driving more efficient growth and operating leverage in our model. We exited the quarter with 675 customers, an increase of 17 from Q3, the majority of which were Capella deals.

Before Greg provides more details on Q4, I want to highlight our accomplishments from the past year and reiterate our priorities for fiscal 2024. Looking back at fiscal 2023, I’m extremely proud that we accomplished all that we laid out to do at the beginning of the year. I attribute this success to 3 things: our expanded and differentiated product portfolio, our enhanced and more efficient go-to-market initiatives and key additions to our world-class team. These achievements have put us in an excellent position heading into fiscal 2024 to build on our momentum and importantly, meaningfully accelerate the pace of leverage in our model. Let me briefly recap these achievements. First, we made rapid progress with Capella, our fully managed cloud database platform.

Recall that we launched Capella on Google Cloud during the summer, which includes our unique app services. Next, we introduced a new developer experience for Capella in the fall and then announced Capella on Azure this past January, completing availability on all 3 major cloud platforms. And thanks to the investments we made, we saw meaningful new Capella logo additions and migrations across a broad range of industries over the year. This was complemented by a growing pipeline of exciting Capella opportunities across both new and existing customers. Second, we made significant progress with our go-to-market efficiency. We transformed how we go to market across buy from and sell to motions both in terms of efficacy and efficiency. Importantly, our partner and alliance ecosystem continues to deepen.

During the year, we saw strong bookings growth sourced and influenced by partners including ISVs, cloud service providers and system integrators. I am particularly excited about our broadened multiyear strategic collaboration agreement with AWS that we announced at Reinvent in November. This has already begun to accelerate and streamline customer migrations to Capella on AWS. On the buy from side, we continue to invest in growing our mind share with developers through community building and developer relations. We grew the number of evangelists in the market, increased our developer events and enhanced our online community presence. All of this, combined with product enhancements we made for developers will be an important accelerator for our business.

And third, we evolved our world-class team and culture by adding new leadership across multiple parts of the organization, including sales, engineering and more. Our culture remains a sustainable competitive advantage as we attract, develop and retain the highly skilled talent necessary to execute on our growth strategies. Refocused roles and responsibilities have accelerated our product development and delivery, allowed us to move at a faster pace and drive higher operational rigor and enhance go-to-market efficiency. In summary, the strategic product, go-to-market and team investments we made in fiscal 2023 are yielding incremental offerings and capabilities that we believe bolsters our ability to deliver sustained growth while also doing so in an increasingly efficient way.

We’ve always operated under a disciplined approach to our expenses. However, the implementation of increased operational rigor in recent weeks reflects an extra step to complement our growth with improved leverage in 2024. Now turning to wins from the quarter. We are pleased that in Q4, a majority of our net new logos were Capella. We added customers from a broad range of industries, including technology, e-commerce, gaming, insurance, health care, travel and more. Some exciting wins included a premier global gaming and entertainment company, a publicly-traded global IT company and a fast-growing mobile health care company. The Capella new logo use cases from the quarter reinforced what we started to see with Capella new logos at the beginning of the year.

Customers selecting Capella for best-in-class performance, speed, flexibility, scalability and improved TCO. In addition to new logos, we continue to see an acceleration of Capella migrations from existing customers. One such migration came from a clothing company that owns several major international brands. This long-time customer has leveraged Couchbase to build digital showrooms for a smooth, immersive experience that works flawlessly regardless of Internet connectivity. They made the decision to move from on-prem to Capella because of the flexibility, performance and improved TCO that our managed service provided. Another notable Capella migration in the quarter was a 7-figure deal from a leading cloud-based enterprise communication platform provider.

This customer initially selected Capella when looking to support large-scale real-time communication for managing sessions and recording SMS messages. After seeing initial success with Capella’s performance, they have moved their entire Couchbase estate to Capella. Their developer team is experiencing even greater reduction in database management, and they have reduced TCO, all while Capella has supported their rapid application growth. And our server and mobile offerings continue to generate both new logos and large expansions for us. In the quarter, we saw momentum across a broad range of industries, including telco, retail, media and entertainment, technology and travel. Customers continue to leverage our platform for a wide range of use cases and to power many of their most important business applications.

They also continue to take advantage of our differentiated architecture and multimodal capabilities by consolidating vendors to realize cost efficiencies and lower TCO. Now turning to some thoughts on the near-term environment. Given the large opportunity ahead of us, we plan to keep innovating and investing while also placing increased rigor on our expense discipline and focusing on what we can control. Like many of our technology peers, we’re seeing the impact of macroeconomic headwinds affecting broader IT spending and these trends intensified in the quarter. For example, some customers and prospects are taking longer to make their buying decisions, are requiring extra layers of approval or are electing to buy in smaller increments. That said, demand indicators remain strong, and we continue to see healthy pipeline growth.

Modern databases are nothing short of a requirement for successful digital transformation, which remains a strategic priority across the global enterprises and organizations we serve. Relational systems are too expensive and ill-suited for the task, and we believe that other emerging NoSQL solutions lack sufficient performance and scale to accommodate the incessant growth in data volume and variety that is at the core of application modernization. Couchbase’s ability to deliver in a fast, flexible, familiar and affordable way continues to resonate across our market. Of note, the increased interest in the economic value of our platform and the unique value proposition of Capella are serving as a powerful validation of one of our core differentiators, especially against this more challenging macro backdrop.

As we look to fiscal 2024, we remain extremely mindful of all these dynamics. This focus has carefully informed how we are looking at the near-term outlook, both in terms of driving continued growth and leverage. I am confident that we are well positioned to weather any downturn as a result of these strategic initiatives that are just starting to bear their fruit, coupled with the operational improvements we’ve implemented. These include a greatly expanded product portfolio, particularly with Capella, a meaningfully expanded partner ecosystem and transformational changes in terms of how we go to market. This will serve us well as we continue to seize the massive opportunity to drive a generational rethink of the database market. In closing, I want to reiterate our priorities.

First, delivering topline growth; second, increasing the mix of Capella across all metrics; third, driving further sales and marketing efficiency; and fourth, accelerating the pace of leverage in our model. I have high expectations for fiscal 2024, and our management team is committed to delivering improvements across all of these areas. 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. With that, I’ll hand the call over to Greg to walk you through our results in more detail. Greg?

Gregory Henry: Thanks, Matt, and thanks, everyone, for joining us. We had another strong quarter as we beat guidance across all key metrics against a more challenging macro environment and despite experiencing increased levels of deal scrutiny, we continue to see strong business momentum, robust renewal rates and overall healthy demand for our solutions while our efforts to reduce costs and improve efficiency resulted in a meaningful outperformance of our operating loss guidance. We are pleased with our execution in the quarter. I’ll now walk you through our fourth quarter and full year fiscal 2023 financial results in more detail. Total annual recurring revenue, or ARR, was $163.7 million at the end of the fiscal year, representing 23% growth year-over-year or 24% growth year-over-year on a constant currency basis.

Revenue for the fourth quarter was $41.6 million, an increase of 19% year-over-year and $154.8 million for the full year, an increase of 25% year-over-year. In addition to strong subscription revenue growth this quarter, revenue benefited from continued strength in professional services, which we remind you is nonrecurring and does not appear in our ARR number nor customer count. Subscription revenue for the fourth quarter was $38.1 million, an increase of 16% year-over-year and $142.9 million for the full year, an increase of 23% year-over-year. Professional services revenue for the fourth quarter was $3.5 million, an increase of 53% year-over-year and $11.9 million for the full year, an increase of 64% year-over-year. We do not anticipate the same degree of strength in professional services in fiscal 2024 and expect contribution as a percentage of revenue to be slightly below recent levels.

We exited the year with 675 customers, an increase of 17 net new customers from the third quarter. Our ARR per customer performance in the fourth quarter was $242,000, up from $231,000 in the third quarter and indicative of growing wallet share we have with large customers. In fact, the number of customers spending over $1 million in ARR grew 46% in fiscal 2023. 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 continues to exceed 115%. 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 Q4, our gross margin remained best-in-class at 86.3%. This compares to a gross margin of 88.7% a year ago and 88.0% last quarter. Our gross margin for the full fiscal year was 87.6%, slightly lower than our fiscal year 2022 of 88.4% due to an increased mix of Capella as well as professional services. 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. Our sales and marketing expenses for Q4 were $26.7 million or 64% of revenue compared to $22.2 million or 63% of revenue a year ago. For the full fiscal year, our sales and marketing expenses were $101.3 million or 65% of revenue compared to $85.4 million or 69% of revenue in the prior fiscal year.

Research and development expenses for Q4 were $12.9 million or 31% of revenue compared to $12.3 million or 35% of revenue a year ago. For the full fiscal year, our research and development expenses were $49.7 million or 32% of revenue compared to $48.3 million or 39% of revenue in the prior fiscal year. During the past year, we continued to thoughtfully invest in our as-a-service offering as well as in additional features to bolster our platform offering. General and administrative expenses for Q4 were $6.3 million or 15% of total revenue compared to $5.7 million or 16% of revenue a year ago. For the full fiscal year, our general and administrative expenses were $25.9 million or 17% of revenue compared to $21.0 million or 17% of revenue in the prior fiscal year.

Non-GAAP operating loss for Q4 was $9.9 million or a negative 24% operating margin compared to an operating loss of $9.1 million or a negative 26% operating margin a year ago. Operating loss for the full fiscal year was $41.3 million or a negative 27% operating margin compared to an operating loss of $45.5 million or a negative 37% operating margin in the prior fiscal year. During the fourth quarter, in addition to ongoing efforts to improve operational efficiency that Matt talked about, we identified additional opportunities for cost optimization and took proactive measures to improve our margin profile and accelerate our path to profitability. This included optimizing our head count by approximately 5%, largely from rigorous performance management and role eliminations.

Incremental to this natural leverage embedded in our model, we anticipate that these actions will result in approximately $4 million of net savings in fiscal 2024. We will monitor market conditions and selectively manage our headcount to align with our strategic initiatives while improving operating margins. Non-GAAP net loss attributable to common stockholders for Q4 was $8 million or negative $0.18 per share. For the full fiscal year, net loss was $40.5 million or negative $0.90 per share. Turning to the balance sheet and cash flow statement. We ended Q4 with $168 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 $165.9 million at the end of Q4, an increase of 3% year-over-year.

We expect to recognize approximately 71% or $117.2 million of total RPO revenue over the fiscal year 2024, which represents 19% year-over-year growth. We note that our total RPO performance has been impacted by year-over-year contraction in billings terms as some customers are electing shorter-term contracts to the macro uncertainty and because our sales plans no longer incentivize multiyear contracts as aggressively. Operating cash flow for Q4 was negative $10.2 million and for the full year, it was negative $41.2 million. Free cash flow for Q4 was negative $11.8 million or a negative 28% free cash flow margin. Free cash flow for the full year was negative $46.8 million or negative 30% free cash flow margin. We are pleased with the material improvement we have made in our free cash flow profile and remain committed to driving further improvement.

Now I will provide guidance for Q1 and the full year fiscal 2024. As Matt discussed, we continue to see solid momentum across our industry in support of broad-based digital transformation initiatives and our pipeline remains strong. Furthermore, we anticipate that incremental growth drivers, including our expanded product capabilities, enhanced partner ecosystem and improved go-to-market motion will continue to contribute to our momentum in fiscal 2024. These factors, in addition to excellent renewal rates gives us cautious optimism that we can sustain and build upon the momentum we’ve achieved since going public. That said, we are mindful of the macro headwinds impacting IT spending and are monitoring the environment and the impact on our business closely, including bookings, pipeline and pipeline conversion, retention and expansion rates, deal sizes, sales cycles, logo acquisition and sales productivity.

As such, our outlook prudently embeds an elevated degree of conservatism across all of these forward-looking metrics to account for this uncertainty. In addition, we have taken additional steps to put us in a position to quickly respond and make changes to our operating model should the need arise. Additionally, I’d like to remind everyone that as opposed to the annual credit portion of our Capella business, the on-demand portion is not currently counted ARR, and as such, we’re factoring this emerging dynamic in our outlook. Lastly, I want to highlight a change in how we plan and forecast for Capella revenue recognition. Historically, we assumed consumption to be approximate straight line, but now assume a true consumption pattern and customer usage to ramp over the contract period, especially for new logos and enterprise customers who migrate to Capella.

While the impact is not material to revenue in Q1 fiscal 2024, we do expect a negative impact to the full year revenue of approximately $2 million, representing an approximately 1% year-over-year impact to growth relative to our prior recognition method. With these factors in mind, for the first quarter of fiscal 2024, we expect total revenue in the range of $39.5 million to $40.1 million or a year-over-year growth of 14% at the midpoint. We anticipate ARR in the range of $169.2 million to $172.2 million, which represents 22% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $14.9 million to negative $14.1 million. For the full year of fiscal 2024, we expect total revenue in the range of $171.7 million to $174.7 million or a year-over-year growth of 12% at the midpoint or 13% before the revenue recognition change.

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 the new or migrated Capella customers. We, therefore, continue to view ARR as a better indicator than revenue of the strength of our business. We expect ARR in the range of $190 million to $194 million or 17% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $44 million to negative $40 million. With that, Matt and I are happy to take your questions. Operator?

Q&A Session

Operator: . And our first question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow: Congrats on another solid quarter. Matt, first question for you, and then I have a follow-up for Greg. Matt, if you think about the current environment, you talked about the headwinds, longer than the — longer decision-making cycles, et cetera, but you still seem to be performing pretty well. Can you talk a little bit about the action you have taken in terms of sales approach or accounts you want to land, et cetera, to kind of enable you to kind of come up with these really solid Q4 numbers, but also with a very solid ARR guidance for the next year?

Matthew Cain: Raimo, as we think about how we perform against the environment, we’re being very maniacal to separate the things that we can control from the things that we can’t. And I think throughout the call, we’ll probably talk about that more. As we indicated in the prepared remarks, there were some things outside of our control that intensified in the quarter. Longer sales cycles, elevated decision-making criteria, focus on economic value, some customers taking a little bit longer to move something into production. And we take great pride in the fact that as we shift over to the things that we can control, operational rigor, really understanding our sales cycle, showing up as true partners to our end customers, really articulating the value of Couchbase and consolidating multiple solutions into one, providing a solution with great total cost of ownership, particularly with Capella, executing on initiatives with our partnerships that have really opened up with our expanded go-to-market with the Capella offering, we feel great about our ability to overcome some of those intensified environments, and really deliver solid results across the business.

We’ve spent a lot of time talking about Couchbase as a story of acceleration. And a lot of that emphasis has been on top line, how do we grow the company faster, how do we increase the mix of Capella. On top of all those things, this quarter, we’re particularly proud with what we’ve done to accelerate the leverage in the business and spending more time and attention on the operational side. So from the standpoint of being in today’s environment, we talk a lot about deal with the world the way it is, not the way we want it to be and understanding that there are economic forces outside of our control, really leaning in and making sure that we are totally focused on what we can control across product, go-to-market and our teams. And that collective effort and that focus and the dedication of team Couchbase really allowed us to put up a great result and set us up for a great fiscal year ahead.

Raimo Lenschow: Okay. Perfect. And then one for Greg. The — well done on the improved leverage. Can you just remind us how you think about the path to breakeven profitability and the drivers that will get you there?

Gregory Henry: Yes. Thanks again, Raimo, for your comments. Yes, look, we’ve seen obviously improved results in the quarter and for the year in terms of leverage. As we talked about in our prepared remarks, we are continuing to be very focused on that. Things around things like Rule of 40 is really coming into focus where we’ve increased by 10 points in the prior year, and we’ll be very mindful of that going forward. As Matt stated, a couple of things that we’re really focused on is growing but growing with greater efficiency and greater leverage. And so you saw some of the actions we took we talked about in the fourth quarter. We’ve put other actions in place that haven’t even sort of beared fruit yet in terms of cost management.

And along with continuing to be a growth company, we think that we’re going to continue to see future leverage as well as moving towards that path to profitability and breakeven. We haven’t put a time frame on that yet, Raimo, but we are committed to getting there.

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

Howard Ma: Great. I have one for Matt and one for Greg. First for Matt. So as you progress towards a more frictionless buying experience, can you comment on — if most of new Capella customers on AWS, are they buying directly from the marketplace? Or is there usually a Couchbase sales rep involved? And then with respect to Azure and GCP, I understand that general availability now, which is great. When will Capella be available for direct purchase on those marketplaces? And I guess, just more broadly, how significant do you think availability on the hyperscaler marketplaces will be to expanding Capella’s customer base?

Matthew Cain: Howard, appreciate the question. As we think about our efforts on overall efficiency on go-to-market, we’ve spent a lot of time talking about our highly instrumented direct sales model and complementing that with what we refer to as a buy from model. How do we engage developers early in their consideration and buying cycle and create a great experience for them as they’re evaluating technologies and understanding the value of Couchbase. We believe that with the Capella offering, we’re going to dramatically increase that buy from experience and our innovation road map on integrating with developer tools and creating an even more frictionless experience and new UIs, all of these factor into that complementary motion that we can then instrument against our direct sales engagement.

If we go back 1 year ago, we were only in market with server on AWS. And this year, we’ve rounded out the portfolio on Capella. We’re now in market with all 3 hyperscalers on both server and mobile. So to answer that question, we think there is tremendous upside in the portfolio that our sellers and our partners are now bringing to market. Anytime we have Capella as part of our offering, our ability to dramatically increase the engagement with our partners is a very real factor for us. And you saw with AWS, we announced the strategic collaboration partnership, which was a big milestone for us. We anticipate reaching similar levels with Google and Azure now that we are in market with those solutions. As it pertains to actually getting new logos over the line, the great thing is we’re benefiting from ways in which customers want to consume the technology.

They want to buy it through cloud marketplaces, that’s open to them. If they want to engage with us in more traditional ways, we can do it that way. And one of the things that we were very proud of in Q4 is actually a majority of our net new logos came from Capella this time around, and we benefited from that mix of both partner leverage and our go-to-market team’s ability to continue to evangelize Capella and what it can do for them. Solving their development needs, but doing it a more efficient and lower total cost of ownership ways. So I’d put that in squarely in the bucket of what we can control and the intersection of how we innovate and improve our go-to-market. And as far as what we’re working on, again, big, big upside there, and we do think that will be transformational for the company as we go forward.

Howard Ma: Okay. Great. That’s really helpful color. And then if I could squeeze one in for Greg. Can you just help us better understand the discrepancy between total ARR guidance for — is for 16% to 19% growth and total revenue guidance for 11% to 13% growth. I understand that there’s — you discussed the Capella revenue recognition change, that’s about a percentage point. But it’s still a good — back that out, still like a 4% to 5% delta or a percentage point delta. Is that primarily due to an increase in committed self-managed contracts that — so that you include that in ARR, if you don’t recognize it as revenue until later on, like is that still the primary difference? I hope that makes sense.

Gregory Henry: Yes, it’s — yes, Howard, thanks. Good to have you on the call, of course. And yes, it makes sense. And I’d say there’s 2 drivers from that sort of delta between the growth in the ARR and the revenue. The first, as you mentioned, is Capella. As we get more Capella and now especially with that updated revenue recognition model, where we’re doing it as consumed. And particularly as you have migrations and new logos, those things take a little bit of time to ramp from a consumption perspective. That will create some delta in terms of the revenue growth versus the ARR growth. And the second thing I would add is that services, obviously, as we talked about services is not part of ARR, it is part of revenue. Last year, we had an outperformance in services.

I mean our services grew 64% last year ahead of what we had expected, and we’re not expecting it to grow anywhere near that. In fact, it will probably be a slight negative growth this year. And so that’s what — those 2 things combined are really what’s creating the sort of dislocation, if you will, between the growth rate you’re seeing on ARR and revenue.

Operator: Our next question comes from the line of Kash Rangan with Goldman Sachs.

Kasthuri Rangan: In the quarter, talk about the cash… what are the things that…

Gregory Henry: Sorry, Kash. Sorry to interrupt. We can’t hear you very well.

Kasthuri Rangan: Is this better?

Gregory Henry: A little better.

Kasthuri Rangan: Right. I would . So curious to get your thoughts on the initiatives that Couchbase’s Capella customers ramped up as quickly as possible. And since the product has been out of the market for actually several quarters now. What are the trends you’re seeing with respect to consumption. And what are the kind of projects that people are using Capella for that are very distinct from the central use case? In other words, we’ve gotten a good handle on the consumption trends and what might cause those things to accelerate, what might dampen those trends, that sort of thing.

Matthew Cain: Kash, you were a little hard to hear. I think I’ve picked up most of it. And I’ll sort of restate what I heard and answer the question, if I miss anything, please feel free to come back. I think generally noting that we’ve been in market with Capella and understanding that there’s big upside there, what are we seeing in terms of adoption from Capella and furthermore consumption and are there any patterns emerging? So what I would say generally speaking is Capella is dominating our customer conversations, both new logos and migrations. And we mentioned some use cases in the quarter at a very high level for both new logos and migrations, which I’ll touch on in a second. Generally speaking, I will tell you that when we get somebody into the Capella offering, whether it be a new logo or an existing customer, we are seeing the pace of growth and consumption being ahead of what we would see in our traditional model.

And that’s aligned to what we would have expected in light of the fact that we really work on ease of operational efficiency and opening up use cases and being able to directly engage a developer, leveraging things like telemetry to understand where customers may be having challenges and then being able to offer them subsequent advice or even services to accelerate in any of those things or overcome any barriers. As it pertains to use cases, I think we’re excited that we’re seeing it leverage across a vast variety of verticals and use cases. In Q4 alone, on Capella, we talked about a gaming company. That application was for internal bug reporting for their development process, enabling their developers to be that much more agile on responding to product feedback.

That’s very different from one of our migrations, which was a large online marketplace in Europe where the application running in Capella is managing a $30 million item product catalog across many retailers. And so Couchbase is a broad-based platform that services highly interactive applications and that pertains to telco and finance and professional services and edge use cases. And we are seeing it play out in the market that the offering and the consumption model of Capella offers additional benefits that Couchbase hasn’t had in the product arsenal until we’ve been out to market with it. We’ve had extremely high expectations for the impact that that’s going to have to our business. And we’re seeing that play out in the results and in the pipeline on a go-forward basis.

So consistent with what we’ve been talking about, we’re seeing that and remain very bullish on what this has in store for us as we go forward.

Operator: And our next question comes from the line of Rob Oliver with Baird.

Robert Oliver: Matt, on partners, obviously, you’re excited about partners. Deal sizes are getting bigger. You’re talking about a more efficient go-to-market. Can you give us a flavor of I guess, first, how partners, if at all, are influencing deals today? And then down the road, what might constitute success either from, say, a percentage of deals touched or how we might think about sort of the evolution of partners driving your business? And then I had a follow-up for Greg.

Matthew Cain: Yes, Rob, I appreciate the question. Look, partners are a foundational element of our strategy, and it’s not just one partner type. As I think about the impact, obviously, we are very excited about our expanded partnerships with the CSPs. And we think the pace of leverage there is only going to increase as we have more Capella end market. At the same time, we have great success with ISVs, and we also have investments and partnerships with GSIs in addition to resellers in particular geographies. You’d be hard-pressed, Rob, to find a customer where a partner hasn’t been engaged with us in some way. And as we analyze the analytics of deal flow and pipeline, we often talk about partner influence or partner sourced.

And you can see some variation by quarter or by geography on those various channels. But we are encouraging our go-to-market teams to think about partners in every one of their deals, and are very excited about some of the joint go-to-market activities that we have with the likes of AWS for converting large customers, moving workloads into Capella, getting at net new workloads in existing customers, and quite frankly, are really impressed with their desire to go after net new logos for the cloud providers and Couchbase. And there’s some really creative things that we can do in terms of account mapping, leveraging our CE installed base with their coverage to convert people to Capella, which is a new logo for both providers. And so Greg may be able to pile on some of the particular metrics from Q4.

But as I think about it, it’s pervasive across the business and gives us an opportunity to touch our customers and future customers in a way that just expands our leverage exponentially.

Gregory Henry: Yes. And Rob, I’d just add to Matt’s point, I mean we typically see 1/3 upwards of 2/3 of our deal activity in a quarter, partner source or partner influence. So as Matt said, it is a big and meaningful part of our business.

Robert Oliver: Okay. That’s really helpful, guys. And then, Greg, just a follow-up for you. And I know you guys had talked about potentially being able to kind of reach that materiality threshold on Capella perhaps this fiscal year and nice conversion traction and now a majority of new customer adds. So is it still fair to assume that we might see that broken out later this year?

Gregory Henry: Yes. Thanks for that, Rob. Yes. Look, as Matt said, we are pleased with Capella and the traction. You saw the customer impact it’s having along with other things. And I think that’s a fair statement. We haven’t made any commitment, but I think it’s fair to think that at some point this year, we would begin sharing more details and information around the Capella business.

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

Matthew Hedberg: Congrats on the year. In your prepared remarks, you talked about some — maybe some macro headwinds intensifying as the quarter played on. I guess, Greg, could you talk about maybe thoughts around the guidance for fiscal ’24? Did you embed sort of additional levels of conservatism like extended deal cycles or any sort of pipeline conversion rates?

Matthew Cain: Matt, this is Matt. In light of the importance of the question, I thought I’d start off and then turn it over to Greg. As we mentioned, we did see some dynamics intensified, and as we thought about the year ahead, we wanted to come at it with an assumption that those dynamics persist, if not get worse. With that assumption in mind, we took a look across the business and actually had an elevated level of conservatism across things like pipeline generation, conversion, retention and expansion rates, sales cycles, deal size, logo acquisition because those things — that macro dynamic is outside of our control. If you were to run that out, that would imply that we would not see an improvement in sales productivity, that close rates don’t improve, that we don’t have a material impact from Capella migrations, that we don’t have a material increase in new logo additions with Capella and CE migrations and even a deterioration to net retention rates.

Now to be very clear, the patterns that we’re seeing in our business are not aligned with the effects of that assumption. And so we wanted to be very mindful of the macroeconomic environment, noting that we don’t control it. We don’t know how long it’s going to persist. And then again, focus on what we can control and ensure that we’re going to do everything possible to weather those dynamics and focus on what we can.

Gregory Henry: Yes. I’d just add, Matt, just again, we carefully and possibly apply the sort of risk adjustment behind our guidance. But as Matt said, our guidance is not indicative of what I think our current performance is on our growth potential. We’re very committed to continue this pattern of growth that we’ve I think, demonstrated since in reacceleration we’ve demonstrated since becoming a public company and particularly in delivering more efficiency and profitability. Matt and I and the business have been through some of these challenges, not specific this one, but other ones and we feel like we’re reasonably experienced risk managers and have applied all that into the guidance and how we’re running the business.

Matthew Hedberg: Great. Great color. And then actually, Greg, that dovetails me my second question on sort of balancing growth and profitability. Obviously, with the success of Capella coming out of your IPO, we talked about a lot of go-to-market investments to drive broader adoption. As you look to fiscal ’24, are there incremental things that you think are going to be a top priority sort of the best dollar spent on go-to-market that can drive continued success of Capella?

Gregory Henry: Yes, Matt, great question. Like look, again, we’ve hopefully seen some of that as our sales and marketing efficiency improved this year. And we are certainly building a plan for us to improve next year. As you know, we made a change. Huw joined us as the new CRO middle of last year, and he’s really been spending not only the first 6 months running the business but also getting things in place to continue to create more efficiency and set up for better success in the future. He’s creating new models within the sales organization. As Matt talked about in his prepared remarks, we’re hiring what we think are better leaders. And so the combination of a number of those things we believe will allow us to have the growth potential we believe is there, but also create the efficiency we think, is also available for us.

Matthew Cain: Matt, from my chair, it’s great for me to think about that we are taking the field this fiscal year with the best team that Couchbase has ever had. And it’s not just on the direct sales side to see the level of collaboration and focus across our sales teams. Matt and his business development team, what John is doing on the marketing side and the synergy that’s coming together across those on the critical few priorities that are going to give us the best return. And it’s not just those leaders. It’s the talent that, as Greg alluded to, that we’re bringing in underneath them. So I’d say it’s a level of focus, it’s the level of collaboration, the understanding on where the leverage points are, quite frankly, the willingness to lean into areas that may not be a competitive strength for us, where we know we can do better.

And so I think there’s a lot that you all may not see that we certainly have confidence in seeds for good things to come based on all the hard work on operational initiatives that I think there’s clear alignment on across the company.

Operator: Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

Rudy Kessinger: Certainly understanding you’ve got a lot of conservatism on the guidance sounds like on the top line. I’m curious to what extent that’s been conservatism you’re applying to get the operating loss outlook. I think some might look at this and say, over the last 2 years, you guys have added roughly $50 million in revenue. You’re still guiding roughly the same operating loss on a dollar basis as you had 2 years ago. Why aren’t you showing more leverage yet?

Gregory Henry: Yes. Rudy, yes, thanks for the question. Again, I go back to is if we look at how we performed for fiscal ’23 and particularly as we got later in the year, I think you saw some of that efficiency and leverage fall through to the bottom line. We feel very good about what we delivered last year. And like I mentioned earlier, as we think about Rule of 40 and making progress there, we feel great about having added 10 points last year to that. As we go forward, yes, again, we talked about the prudence that we’ve added into our guidance. And I would say it’s both on the top line and the bottom line. We are expecting to see more efficiency, better free cash flow position. So there certainly is some of that risk adjustment to the bottom line as well.

Obviously, if the top line materializes, we believe that that will mostly fall through as we progress through the year. So I think it’s a combination of, again, us executing for what we can control, generating growth, having that fall through as well as providing more efficiency and seeing the sort of the multiplier effect at the bottom line.

Rudy Kessinger: Okay. And then on Capella, I know you said was the majority of new customers were Capella customers in Q4. I imagine those are obviously smaller deals relative to some of the other customers you signed. But how should we think about it in terms of net new ARR, just what percentage of that in the quarter came from Capella? Is it still too early to break any of that out?

Gregory Henry: Yes, Rudy. Good question. Yes, we haven’t broken any of that Capella specifics out. I would say that your talk points about them being smaller deals, yes, we’ve said that in the past, that is the case. I would also say that we’re also very focused as we think about with the field teams and with customers is we want people to do smaller-sized deals because that typically is the quicker and easier way in and getting customers up and running and using Capella. So we believe if we can get them going and get them started, that will lead to great things in the future. So I would continue to expect to see generally smaller deal sizes. We’ve talked about the ARR per customer, and that could moderate over time as we see more Capella come in with smaller deal sizes.

But we do think that’s the way to greater Capella adoption, which should fuel our growth and even the net retention rate over time. So that’s how we see it. As I mentioned, to Rob’s question previously, we believe at some point this year, we will break out the Capella metrics, and we’ll start sharing some of that information you’re looking for.

Operator: Our next question comes from the line of Sanjit Singh with Morgan Stanley.

Unidentified Analyst: Great. This is for Sanjit. I want to ask 1 question on sort of the theme of consolidation. On the last earnings call, you spoke quite a bit about how customers are coming to you to sort of consolidate 2 or 3 other NoSQL cloud databases to Capella. And I want to ask how that theme is sort of impacting the current quarter or Q4. And then how big of a theme will that be in fiscal year ’24. And maybe particularly looking at fiscal year ’24, if you’re parsing out, how much of that consolidation is sort of a cost argument versus a product argument? What are sort of the levers that you can maybe pull to sort of keep that theme of consolidation going?

Matthew Cain: Appreciate the question. Look, I think this is pretty fundamental to our value proposition and quite frankly, has been a big part of the mindset that we’ve had in developing our architecture from the very outset of the company. We’ve put a decade of innovation into ensuring that our modern cloud database can support multiple modalities, that it can run from cloud to edge. You’d be hard pressed to find a company that was talking about real-time analytics on top of an operational database earlier than Couchbase was and we sort of predicted that today’s applications would require these characteristics. I think part of the success that you’ve seen in Couchbase with large enterprise customers is that we’ve been helping them understand how they can put more and more applications, relational offload, things like that, replatforming applications net new inside of a single platform, there can be a cash adjacent database, can support things like full tech search, eventing and have connectors into other adjacencies.

That paradigm has never been more important. And when we overlay that with the ease of consumption of Capella, I think this is critically important in how companies are choosing databases and picking strategic vendors for them for a go-forward basis. Obviously, when there’s economic pressure, companies are going to be even more focused on how can I be more productive with less resources and/or extract costs. Each company is different. Different industries are going through different things. So whether it’s about more productivity or less cost, I think we can equally get at both of those. And never has been — has there been more focus on that part of the conversation and that part of our value proposition than there is now. So I think we saw that in Q4.

I think we expect to see that as we go forward. And as we continue to innovate and expand the types of applications that we can support for developers with Capella, we think that’s going to layer on the amount of upside in the business with this element and this dynamic that we think is going to persist for a long time.

Unidentified Analyst: Excellent. And if I can squeeze in sort of a quick second question. On new contract terms, have you broken out what the mix is within your existing customer base? And then how long do you expect the shift in contract terms to continue? Is there any way you can sort of put guidelines around that to help us understand at which point RPO can become a more meaningful forward metric again?

Gregory Henry: Yes, good question. We haven’t broken that out on the contract terms. I talked about just generically in the past about sort of our weighted average terms. So we haven’t broken that out specifically. We did mention that the terms are a bit shorter. They’re not outside the historical norms, but they’re on the low side given what’s going on in the macro. And as we said in our guidance, we expect that to — we’ve assumed the macro stays the same or gets worse and the implication of that would be that the contract terms would stay the same or potentially get a little shorter. But that’s sort of the best view we have right now. And again, we’ll continue to kind of update you as we get more information, but that’s what we’ve assumed right now.

Operator: And our next question comes from the line of Robert Galvin with Stifel.

Robert Galvin: This is Rob Galvin on for Brad Reback. I was wondering if you could talk on the Capella on demand trends that you saw during the quarter? I know Q2 was a big quarter. Q3 was lighter. And I’m just wondering what Q4 trends are like?

Gregory Henry: Yes. Thanks, Rob. Appreciate it. I appreciate the question, too. Look, the Capella on demand continues to — just like the rest of the Capella business continues to be performing well. There’s a lot of people that are, again, willing to come in and want to try and just not make that commitment. And we see that across the marketplaces as well as with us directly. And so we continue to see that. We talked about earlier in the year, it was not a Capella deal, but we do see this on-demand marketplace activity leading to regular contracting and longer-term deals. So we’re excited that we’re seeing customers using the on-demand opportunity to sort of get used to and get into Capella. So we feel good about where that is trending along with the rest of the Capella business.

Operator: And we have reached the end of the question-and-answer session. I’ll now turn the call over to Matt Cain for closing remarks.

Matthew Cain: Thanks, operator. To recap, we had a strong quarter and a strong year. We remain excited about our opportunity with Capella due to some very big trends in our favor, like digital transformation, acceleration of the cloud and innovation at the edge. We are cognizant of the macro environment and are sharply focused on execution during times like this, while also building what we believe will be a very exciting future. Thank you all for joining us, and I look forward to speaking with you next quarter.

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.