HashiCorp, Inc. (NASDAQ:HCP) Q1 2024 Earnings Call Transcript June 7, 2023

HashiCorp, Inc. misses on earnings expectations. Reported EPS is $-0.42 EPS, expectations were $-0.14.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the HashiCorp’s Fiscal 2024 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, VP of Investor Relations and Corporate Development. Thank you. Please go ahead.

Alex Kurtz: Good afternoon, and welcome to HashiCorp’s fiscal 2024 first quarter earnings call. This afternoon, we will be discussing our first quarter fiscal 2024 financial results announced in our press release issued after the market close today. With me are HashiCorp’s CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar. In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information about our quarter. We encourage you to review that presentation in advance of our call. You can access it on our investor website at ir.hashicorp.com. Today’s call will contain forward-looking statements which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition and our guidance for the second quarter and full 2024 fiscal year. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek or will or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles.

The financial measures presented on this call are prepared in accordance with GAAP, unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashicorp.com. With that, let me turn the call over to Dave. Dave?

Dave McJannet: Thank you, Alex, and welcome, everyone to our first quarter earnings call for fiscal 2024. We’re pleased to report first quarter results that exceeded our top and bottom line guidance with revenue of $138 million representing year-over-year growth of 37% and solid improvements in our profitability with our first quarter of positive free cash flow as a public company. Current non-GAAP remaining performance obligations reached $394.6 million, representing 29% year-over-year growth. And compared to last quarter, we added 32 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 830. Our HashiCorp Cloud Platform offerings reached $16.5 million in revenue, representing 12% of subscription revenue in the quarter.

We remain excited about adoption trends as we continue to roll out new features and new capabilities during FY’24. Against a challenging environment, I’m pleased with the solid Q1 results that the team delivered. However, macro challenges continue to impact our business and I’d like to provide more color on what we’re seeing in the market. During Q1, Armon and I spent much of our time speaking with customers. A key theme from these discussions, regardless of customer size, is the uncertainty that they are feeling about the economy and what it means for their own businesses. As we have mentioned in the last few earnings calls, we saw this budget uncertainty start in October of last year as higher interest rates began to impact our customers thinking about their FY’23 budget cycles.

This economic uncertainty is driving organizations to optimize their software spend. Procurement teams are scrutinizing many larger software purchases and stretching deal cycles. As deepening inspection of budgets is happening across all of our customer segments, but most notably in our largest customer deals. Despite these near-term challenges, we believe the long-term trend to cloud computing remains unabated. We continue to see demand for our products as customers continue to plan their cloud initiatives for the next several years. I would highlight the customer stories we have outlined in our earnings presentation on the IR site to give us confidence in our market opportunity and product fit. These customers include a large US based financial services company, a backup office software platform, and a European stock exchange of very diverse verticals and all very early in their cloud adoption journey.

We are laser focused on building trust with these customers so that we can be a central partner as they continue to invest in their cloud initiatives. In addition, our focus on adding larger new customers produce solid traction during Q1 as we added 26 net new global 2000 logos, the largest number we’ve added in five quarters, and we continue to add an healthy number of greater than $100,000 ARR customers as well. These large customers are an important part of our future and our model is built to grow our footprint with them as we become an increasingly critical piece of their infrastructure over time. So while we’re seeing heavy budget scrutiny on our large expansion deals, these entry level deals with large companies give us confidence about the long-term shift to cloud and our role as the enabler of that transition.

We also continue to see strong and growing interest in boundary, which we introduced late last year. As a reminder, boundary solves a key security challenge for organizations by using identity secure remote user access. As I noted earlier, Armon and I spent much of Q1 on the road with customers. In nearly every meeting, customers proactively inquire about Boundary, which is a great signal as to the longer term opportunity we see for the product. Next week we will host HashiDays, our European user conferences where we will make a series of announcements that highlight ongoing product innovation, particularly around cloud security automation. I look forward to sharing more details during next quarter’s call. Before handing it over to Navam, I want to provide more detail on the announcements we made after the market closed today.

First, we announced a reduction of our workforce by approximately 8%. I want to acknowledge that a lot of talented people who made meaningful contributions to HashiCorp are leaving the company. This is not a decision we made lightly and is part of a necessary effort that Navam will describe to reduce our operating costs to reflect the current customer spending environment. Second, we are excited that Susan St. Ledger will be joining the company in July as President of our worldwide field organization. Susan is a master of scale and a deeply technical sales leader who understands how to make the most of complex product portfolios. Susan has been on our board since 2019, so she’s already well acquainted with HashiCorp, our products and our team.

With Susan, we got the rare opportunity to work with an experienced leader who has done this multiple times, having most recently led the field organizations for Okta and Splunk, where she helped them each surpass $1 billion in revenue. We have trust and confidence that her experience and leadership will serve our field and overall organization well through the current economic conditions as well as through our next phase of growth. I believe strongly in our opportunity given the long-term trend of cloud adoption and believe we are now better positioned to take advantage of that opportunity. And in line with the guidance we provided last quarter, we continue to operate against an aggressive goal to achieve profitability next fiscal year and remain on track to meet this goal.

Now I’d like to turn it over to Navam and I look forward to answering any questions.

Navam Welihinda: Thank you, Dave, and thanks again to everyone for joining us today. Our first quarter results showed solid progress in our fundamental customer adoption engine. Our process remains very consistent. Customers adopt our open source products throughout the organization. We land the organization as a commercial customer with a particular product. The customer expands its product usage and then extends into adjacent products. The success of this adoption engine drove our customer account to increase by 261 in Q1 and our 100K plus ARR customer account to increase by 32. Our total customer count and 100K plus ARR customer count is currently 4,392 and 830 respectively. While the pattern of customer adoption remains consistent, as Dave mentioned, the economic headwinds we’ve noted in the past few quarters also continued into Q1.

Combined with our typical first quarter seasonality, we saw ongoing pressure on customer budgets, which caused slowdowns in customer behavior and elongation of sales cycles. The impacts were most acute among our larger contracts within our global customer segment, along with the large enterprise customer segment. In addition, one of our largest customers in the retail sector, adjusted for some excess capacity and reduced a portion of their spend with us. The impact to our quarterly gross and net retention rates due to this customer spending adjustment was roughly two percentage points. Despite the adjustment, the customer continues to be very engaged with our team and remains one of our largest customers. We expect the current buying environment will create ongoing uncertainty in the pace of large customer expansions and extensions for the rest of the fiscal year.

Accordingly, we have reflected these expectations in our full year guidance. We have also widened the range of our potential revenue outcomes given the overall purchasing environment. While we have shown ongoing diligence in managing our expenses, we are operating in a very cautious customer spending environment. As a result, we took additional steps today to reduce our cost structure through a reduction in force of approximately 8% of our workforce. Before making any employee reductions, we took a number of other carefully considered actions, including reducing our program spend and eliminating open, but unfilled jobs. It is difficult to transition out valued employees who have helped build HashiCorp and this was a very hard decision for the company.

However, we also believe it is necessary to have the right spending and investment profile to navigate the current economic environment, while also maintaining enough resources to deliver on our long-term plan. Following the reduction in force which we expect to be materially complete by the end of Q2, we will begin to see the impact of these reductions in our free cash flow in Q3 of this year and beyond. We expect free cash flow margins of approximately negative 5% in FY’24, followed by sustainably positive free cash flows on an annual basis the following year and beyond. Other than seasonally low second quarter cash flows, we’re expecting all other quarters to have positive free cash flows. We are maintaining our target to reach non-GAAP EBIT profitability in the second half of FY 2025.

With that, let’s move on to our guidance. Our full guidance numbers can be found in our earnings presentations available in our ir.hashicorp.com website under financials quarterly results. I encourage you to read through the doc for full metric disclosures, share count disclosures and GAAP to non-GAAP reconciliations. To summarize our guidance, for the second quarter of FY’24, we expect total revenue in the range of $137 million to $139 million and a non-GAAP operating loss in the range of $46 million to $43 million. For the full year ’24, we expect total revenue in the range of $564 million and $570 million and expect FY’24 non-GAAP operating loss in the range of $113 million and $108 million. Thanks for your attention. Dave, Armon and I are available to take any of your questions.

Alex?

Alex Kurtz: Thanks, Navam. With that operator, let’s go to our first question.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Sterling Auty with MoffettNathanson. Your line is open. Please go ahead.

Sterling Auty: Yeah, thanks. Hi, guys. I’m curious with Susan St. Ledger coming into head up sales. Is there an early sense of the extent or magnitude of the changes that you want to make to the go-to-market structure in terms of either approach or either staffing, et cetera? Because you also mentioned some changing in program spend as well. Thank you.

Dave McJannet: Hey, Sterling, thanks for the question. I think, it’s really about as we step back and think about this next phase of growth in front of us. We had the unique opportunity to bring in a go-to-market leader who has done that now multiple times in multiple different companies. And so we’re super excited about the opportunity, I think, candidly, that’s the aspiration. It’s about setting ourselves up for the next generation of scale that we certainly envision ourselves progressing through as a strong independent company and that’s really what it’s about. There’s really nothing beyond that. Navam had alluded to some program spend changes, I think, it was just reflecting some program changes that we had made over the last quarter or so to try and keep the cost relative to the revenue line, but not related to Susan.

Sterling Auty: Understood. Thank you

Alex Kurtz: Thanks, Sterling. Next question.

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

Derrick Wood: Great. Thanks. One question I’m getting from investors is if you’re kind of you’re seeing customers move from commercial to open source given the budget pressures out there, Obviously, there’s those dynamics in your end markets. Just I was hoping to get a sense of if you’re seeing any of that or kind of what’s your view on the risk of those kind of churn dynamics as you look going forward?

Dave McJannet: Hey, Derrick. It’s Dave. I’ll answer that one again. The short answer is no. The open source products solve a problem for an individual, the corporate commercial products solves the problem for an organization. So in a sense, they’re fundamentally different products. And so, no, I think what we are seeing is very, very consistent what we’ve been communicating over the last couple of earnings calls, which is as Armon and I both be traveling a ton, what we’re seeing at the front end is very, very consistent, in terms of interest in what we do, design when decisions being granted to us, no change to the competitive environment. . What we’re really just seeing is increased scrutiny in the procurement process that is just difficult to predict as we’ve indicated over the last couple of calls.

And much like other vendors in the market, that is putting pressure on us, but that is no different than really anybody else. What I don’t hear anybody doing is changing their plans. The crypto cloud remains unabated. And I think as you sort of start to look at some of the numbers in our earnings report, you’ll see we added 26 new Global 2000 customers, 32 customers over 100,000 in ARR and another quarter of strong NDE, which I think really just speaks to that consistent long-term trend and really no material change other way.

Derrick Wood: Okay. Thank you.

Alex Kurtz: Thanks, Derrick. Next question.

Operator: One moment. Our next question comes from the line of Michael Turits with KeyBanc. Your line is open. Please go ahead.

Michael Turits: Hey guys. I just want to try to get as much of a sense for what’s changed as possible. You’ve held up extremely well during a period in which people have seen this type of scrutiny deal cycles extending, et cetera. And in fact, to some extent, deal cloud optimization seems to have benefited you in prior quarters. So is there anything that you feel like was inflection point here that might have determined your outlook worsening for the year?

Navam Welihinda: Hey, Michael, it’s Navam here. Thanks for the question. So in terms of what’s changed, I think the main points to talk about is what’s not changed is the front-end environment, which is the pipeline activity, the pipeline creation activity still remains very strong. As Dave mentioned in the call, a very healthy quarter in terms of the G2K ads, net 100K ads and total customer ads. So the activity of cloud transformation efforts, cloud efforts, all those things remain similar. What’s happened in the first quarter, and this is a little bit of first quarter seasonality as well, the first quarter in a very long year. In this new budget cycle, you saw a lot of headwinds, a lot of procurement pressures in the global segment and the enterprise segment related to very, very large deals or large deals.

And that’s reflected in the guidance range that we’ve given. So that’s the material change we saw in the first quarter. But the main thing to remember with these large deals, and I’ll give you an example of first quarter deal that we were working on and it was held up in procurement due to some procurement process issue, ended up closing in the second quarter as a multiyear deal using several of our products. So these deals don’t get lost for competitive pressures. They don’t get lost because the cloud transformation effort is canceled, it just elongates and they happen when they move to — they happen in a different quarter.

Dave McJannet: Maybe just add. This is Dave. Let me just add to kind of a subjective commentary. I think as you see on the hyperscalers, there’s just a lot of — there’s a lot of scrutiny around anything related to the cloud narrative at the moment. And you see that in the hyperscaler results. And certainly, that seemed to be more acute in the quarter based on what I saw externally than in previous quarters. We are fundamentally tied to cloud transition. And that does cause things to get elongated as there’s increased scrutiny on certainly the larger transactions associated with anything cloud related.

Michael Turits: Thanks, Dave and Navam.

Alex Kurtz: Thanks, Michael. Next question.

Operator: One moment please. Our next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open. Please go ahead.

Ittai Kidron: Thanks, guys. I’d like to dig in into the retail customer that reduced portion of the spend. Just a few things around this. First of all, how big of a customer is it as a percent of revenue to have a two-point impact, it must be a quite significant customer, can you give some color on why the reduced spend or just not using it or didn’t see value there? And Navam, would it be fair to say that without this customer, you’re actually — if I’m doing the math right, actually guiding in line to consensus for next quarter? Is that the right way to think about the magnitude?

Dave McJannet: Hey, Ittai. It’s Dave. Thanks for the question. I’ll let Navam answer the math side of it. I’ll answer the sort of the more subjective side of it. Yes, I think, as we shared in the prepared remarks, there’s a retail customer that have procured entitlements really for peak season. It’s actually a really good example of what’s happening in across the board around procurement and finance scrutiny. They ended up rightsizing that particular entitlement for that particular product for that particular application for the state, which is consistent with what other vendors have commented on. But in the sort of partnership that’s something that we want to do with them. I would just underscore that they remain one of our largest customers.

They are a multiproduct customer. We are super engaged with them. And also, it’s very clear that they’re very early in their cloud estate. These are big companies spend a lot of money on this category, but they’re very early. So net, it was an optimization that we certainly are partners and I’ll let Navam comment on the math.

Navam Welihinda: Yes, it’s a large customer relationship of ours. And I think I mentioned during the prepared remarks, it was about 2% impact to our gross and net retention rates, about 1% revenue impact. In terms of the guidance, I think the guidance is reflective of the general large deal movement that we’re seeing in any given quarter, rather than specific to this customer. So this customer’s impact was obviously reflected in the guidance as well, but it’s more a relationship in relation to what’s happening in the extend large contract side and the impacts of procurement and the CFO being part of that purchasing decision more and more this quarter in this new budget cycle.

Ittai Kidron: Appreciate it. Thanks.

Alex Kurtz: Thanks, Ittai. Next question please.

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

James Fish: Hey, guys. Thanks for the question. Just building off the Ittai question there. How much risk is there to other sort of large customers like this retail customer of reducing a portion of spend? What kind of guarantees you have that, that doesn’t happen next quarter or the quarter after? And Navam, does this mean we should kind of expect this kind of let’s call it, mid-teens kind of net retention rate in the period to continue forward? Or should we get back to that greater than 120% kind of trailing 12-month long-term target? Thanks.

Dave McJannet: Yeah, sure. Thanks for the question. Yes, just really quickly on, I think we have a pretty good view of the overall customer state and I think our view is reflected in the guidance we have more generally of the guidance framework that Navam’s shared. And this is a — retail is a very specific vertical for, as you can imagine, so I don’t — I think we forget about the remainder of DC.

Navam Welihinda: Yes. In terms of the net retention rates, I’d point to there’s a lot to be optimistic about after we get through this year’s budget cycle, not hold right? You’ve still got very healthy activity on the G2K. You’ve got very healthy activity on the 100K. These are all expansions and extensions that happen and also multiproduct expansion — multiproduct extensions that happened with our product portfolio and also the upcoming Boundary product, which will impact our revenue going forward. So, no, I don’t think that this is a new reality of what net retention rates would be. I think it’s more a reflection of the purchasing environment along with stopping sort of large contracts from proceeding to the finish line. Once these — once this budget cycle resets into the next one, I think, we see the usual impacts of expansion extension and multiproduct purchase recovery.

So our long-term targets of being above 120%, which is the target we’ve set remain intact, and we’re very optimistic about that long-term.

Alex Kurtz: Thanks. Next question.

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

Alex Zukin: Hey, guys. Thanks for taking the question. I’ve got multipart first one and then just a clarification. So I guess if we think about some of these larger contracts, these larger deals, these longer sales cycles, are you seeing like is this — is the incremental scrutinization that’s being put on these deals, is it anything to do? You mentioned, Dave, about kind of similar dynamics within the hyperscalers. Is this customers pausing on cloud migration? Is this greater focus on cloud optimization before the next phase of the journey? Like what are you seeing in that dynamic that’s causing that incremental friction? And then can you comment on what you’ve seen kind of in the month of May and June relative to how April and maybe March trended?

Dave McJannet: Thanks, Alex. It’s super interesting because it’s also consistent. Like if you think about the conversations that we’ve been having for the last seven months, they’re the same conversations we’re having now, which is, hey, we’re going cloud. Those plans are unabated by the Global 2000. They are not slowing down. They are engaging with us to say, yes, we’ve created a platform engineering function. You guys are the basis of how we do that. It’s just taking us time and some friction to align the organization towards the consumption of that design win, which is already in place. I have two conversations this week, one with the massive utility, one with an insurance company where that was exactly the conversation what’s happening is that those design wins are being done given the front-end consistency of the pipeline that we’re seeing, what’s not happening to the same degree as those things flow through procurement in some instances, it’s a question of the typical plan of buying slightly ahead of demand, which is what most companies do on the entitlement side.

That’s what’s being stopped by finance department specifically. So you want to stands to reason because we won those design wins that, that will flow through over the course of time. There’s really no material change other than just literally like it’s almost like if you’re towing a boat behind you, the boat is a little further behind because that part needs to catch your procurement, but it’s going in this direction with that question. Maybe Armon has a point of view. He traveled I think nine weeks last quarter.

Armon Dadgar: Yes. I think maybe anecdotally, just to echo what Dave said. I think what we’re seeing pretty consistently is going into this fiscal year, most of these organizations are sort of have locked their budget and the top focus for them is really an optimization and consolidation of vendors focusing on rightsizing their estates. And so I think we continue to see that translate to the procurement pressure that you’re seeing, especially around the bigger deals. But that said, I think all these groups are still engaging with us on next product along really thinking about great. How do we architect tools like TerraForm and Vault into foundational layers of our platform. How do we start thinking about the other aspects of where we can help them on the automation journey.

And I think in many ways, it’s also accelerating the trend towards platform teams, right? Because I think these organizations are realizing if they’re really going to get their hands around how do I do cloud efficiently at scale, you really need to have a central aperture for that. So I think it’s exiting a lot of those order transformation and it’s also accelerating the need to have standardization around the tooling. So I think all that speaks well to the pipeline and I think the activity is happening there.

Dave McJannet: I’ll also just add, just to add to Armon’s point, it is also occurring to a general shift towards consolidation of vendors during this cycle, which is certainly a net positive for us. As they’re going through design win process, they are trying to rationalize in general, their portfolio as a multiproduct vendor, it actually it accrues very, very well to us on the design win side and as long as we make those companies successful the right things will happen over the longer term.

Alex Zukin: Perfect. And then what about just on the monthly cadence question?

Dave McJannet: I mean, I would suggest, normally, you know I feel it’s very similar to me.

Armon Dadgar: Yes. I don’t think there’s been a marked change. And I think this really speaks to the fact that these budgets are generally set on an annual basis for organizations. And I think that’s reflected in our guide. I think it would be for most organizations, unusual to reset their budget midyear.

Alex Zukin: Perfect. And just maybe a clarification question on the appointment of Susan to that role. Is she replacing someone? Is this a new role? Is there kind of contemplated meaningful changes to the go-to-market organization through the year, given the start in July? Just any help there would be helpful.

Dave McJannet : I’ll say we’re super excited about the opportunity to bring in Susan, suffice to say, it was never about her. It was always about her availability and not our lack of interest in having her play that role as someone who is very uniquely positioned to do that. And I think as we — as I mentioned, as we think about the next phase of scale, the $1 billion number is the one ahead of us and that’s certainly where our energy is pointed. And we think she’s super well positioned to do that. And so we’re bringing her as President of Worldwide for Field Operations. We think this is the right time to introduce that role as we think about the next phase of growth. And that is more of a decision around a role requirement for us.

So beyond that, no material changes obviously her scope will be completely determined once she arrives full time in the next month. But conceptually, it’s just the addition of a new role and the existing team will report it to her and obviously she’ll help us grow into the next phase and beyond.

Alex Kurtz: All right. Thanks, Alex. Next question. Got it. We’re ready for next question.

Operator: Our next question comes from the line of Gray Powell with BTIG. Your line is open. Please go ahead.

Gray Powell: Okay, great. Thank you very much for taking the question. Just if you can help me sort of dig into the revenue guidance more, I appreciate it. I think the full year guidance implies that you grow revenue around 11% or 12% in the second half of the year. Just how should we reconcile that against cRPO, which just grew 29%? And then how should we think about the potential for growth to reaccelerate at some point or maybe the timing of a reacceleration? I know that last one is going to be hard to call, but any color would be really appreciated.

Navam Welihinda: Yes. Thanks, Gray. Good question on the cRPO side. So the cRPO is obviously reflective of the front half seasonality compared to the back half seasonality, right? So when you think about it, as a — we sell large enterprise contracts, they’re tail-end weighted. So the back half has a — is a much bigger impact on our revenue than the front half from a bookings perspective. So the cRPO growth rates will differ from the front half to the back half. So there is going to be a difference between the first quarter absolute numbers, cRPO growth rate and what the full year revenue growth rate is just from a timing perspective because it implies what the bookings are for the back three quarters of — or the back half of the year, right?

So we’ve factored in basically continued headwinds in the global segment and the enterprise segment and how we think about the revenue guidance. Now I also caveated this is really early in the year. So we’ll execute every quarter, and we’ll give you updates as we move along. We’re very optimistic about the front-end, especially given what we’re seeing in terms of customer activity, especially given what we’re seeing from the field when Armon and Dave go and visit our customers. So at some point, we’re going to be out of this budget cycle. And at that point, I think we moved through normal purchasing cycles with our customer base, and that’s where we feel will be back to our normal growth rates. But as Armon mentioned, the budgets are set once a year, and we’re reflecting sort of the current budget environment, we’re seeing until that changes and every quarter will be an update.

Gray Powell: Got it. Okay. Thank you very much.

Alex Kurtz: All right. Thank you. Next question.

Operator: One moment. Our next question comes from the line of Mark Murphy with JPMorgan. Your line is open. Please go ahead.

Mark Murphy: Thank you very much. So seeing the heaviest scrutiny coming from your — actually your largest customers and then in the expansion is not what we would typically see. I think we would assume those are the customers that they know you, they trust you, they would — they’d want to consume a larger footprint. Can you just double-click on that and maybe explain why we’re seeing that the behavior kind of shake out that way? And then as a follow-up, so what is the current number of $10 million ARR customers as of June? Is that — would that number be sitting at two now?

Dave McJannet: Hey, Mark, it’s Dave. Let me answer the first one. Just so I understand or just so I clarify, yes, I think the procurement friction we’re seeing is a general commentary inside existing customers as well as new. I think we again saw a very strong NDE in the quarter, which I think is reflective of those larger companies continuing to purchase incremental pieces from us. But certainly, the cycles for them are slower than maybe they were a year ago, just given the constraints in their own business, but that’s more of a general commentary than anything. But overall, what — exactly what I would expect and consistent.

Navam Welihinda: Yes, Mark. On the large customer side, yes, it is one of our largest customers, the current, one of our three $10 million customers slipped below the $10 million line. They still remain engaged and large, as I mentioned. So, yes, the count is there too.

Mark Murphy: Thank you.

Alex Kurtz: Thanks, Mark. Next question.

Operator: One moment. And our next question comes from the line of Nick Altman with Scotiabank. Your line is open. Please go ahead.

Nick Altman: Great. Thanks, guys. There were some good upside of margins in the quarter and with the 8% head count reduction. I guess I’m a bit surprised why the margin guidance wasn’t revised upward a bit more. So is there anything else there we should be thinking about or considering? And then just to clarify was the risk factored into the prior margin guidance?

Navam Welihinda: Hey, Nick. Yes, so just to clarify, the severance related to the ripe is factored into our current Q2, which impacts some of our margins. But overall, I think our EPS is guiding better than what we had previously factored in. And also note that it takes until the back half of the year after the first and — first quarter actuals and the second quarter severance to work its way through and really see the impacts — the long-term impacts to your margins in the back half of the year. So that’s what we’re seeing in terms of the margin guidance. But that being said, our EPS guidance has ticked up and we expect to be — apart from the second quarter seasonality, you’re always going to expect a second quarter dip in free cash flow due to the first quarter ACV seasonality you should expect positive free cash flow for the rest of the year.

Alex Kurtz: Great. Thanks. Next question.

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

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

Dave McJannet: Actually, maybe as for the first part of the question, I’ll let Navam answer the second. I just want to underscore, this is a hugely difficult decision for us to make and the one we felt that needed to be done. I just want to reflect back that we had gone through an investment cycle over the past four quarters, very deliberately, with an expectation of a certain demand environment to be in place and clearly, that different demand environment did not materialize, obviously with sales cycles extending just like for everybody else. But I want to make clear that because of that investment cycle, we feel like we’re in a good position to deliver on the capacity required to deliver this year and next. So while certainly, there were modifications across all sectors. We feel good about the capacity that remains across all segments required to do what we need to do, both in R&D and in sales.

Navam Welihinda: Yes, right. Echoing Dave, this is a very difficult decision for us and not something we took lightly. We took many steps to impact spend before going down this path. And ultimately, we still are a growth company, so we want to make sure we’re invested in the long-term. And we were very careful in the large impacts when you think about the large organizations, which are sales and R&D. We maintained our investments in where we felt we needed the capacity. And in several geos or in certain products where we thought the payback was a little longer term. We took the action of understanding what the criticality of that business is and trimming it down. So overall, we are still very well staffed from a sales and R&D perspective to both deliver the quarters and also deliver the product road map.

And we feel that the headcount that we have or the employee base that we have this quarter is sufficient for the year. So we don’t feel like we’re going to add unless the environment materially changes.

Miller Jump: Understood. Thanks for the color.

Alex Kurtz: Thank you. Next question.

Operator: One moment for our next question. Our next question comes from the line of Kash Rangan with Goldman Sachs. Your line is open. Please go ahead.

Kash Rangan: Hey, guys. I asked ChatGPT, what questions have not been asked by Mark Murphy and Alex Zukin. And it timed out. So I have to just be thinking on my own here. In seriousness, when you look at the net expansion rate, is the pressure coming from existing customers expanding more? Or is it because of existing customers cutting down scope of the deployment? If you can just give some color? And also, is there a way to triangulate, is that coming from TerraForm or non-TerraForm out of the house, that would be great? And also, Susan, obviously, has got a great track, but she was at Salesforce had market in cloud, she at Splunk, President of Worldwide Operations and I believe something pretty close to that Okta, very, very different business, very different products. What do you want Susan to accomplish for Hashi with respect to the [Technical Difficulty] Do you think she brings in that is so critical for Hashi at this stage of the game? Thank you so much.

Dave McJannet: Hey, Kash. This is Dave. I’ll answer the first one. I think I got it, and I’ll try to get to the second. I think my observation is it’s largely around the net new expansion pace. It’s the rebuy cycle just because of that procurement pressure that we’re seeing. Once deployed, our products are on the runtime positive applications and that makes them generally long relationships with our customers, notwithstanding small acquisitions here and there. So generally speaking, the NDE is notwithstanding the one thing that the one customer that Navam referred to is just sort of a slight slowdown in the rebuy of next use case long next product along. In terms of Susan, I think we’re cognizant of phase shifts of a company, and we think about the next phase ahead, and it is an operationally different phase at $1 billion in revenue, and that’s really where we think is going to help us as a put to any specific about our product portfolio or type of go to market.

It’s — there are very few people in the world available to do that, and she is at the very, very top of that list. So it’s more generally a scaling question for us as a company. As you can see, our customers are among large companies in the planet, we play a critical role for them. They’re going cloud, and that is not shifting and our relationships will be extremely long as a result, and we want to build the best possible companies to support them.

Kash Rangan: Wonderful. Thank you so much and all the best.

Alex Kurtz: Thank you, Kash. Next question.

Operator: One moment. Our next question comes from the line of Patrick Walravens with JMP Securities. Your line is open. Please go ahead.

Patrick Walravens: Great. Thank you. Hey, Armon, at the beginning of the year, you were talking about how budget is aggregated across three [indiscernible] and data, and you thought there was a lot more variability in apps and data. How are you thinking about that division today? Is it still a helpful way to think about the business?

Armon Dadgar: Hey, Pat. Thanks for the question. I think that still is a useful way. And I think what we see in all these accounts is at the infrastructure layer, all of these teams are still committed to cloud, they’re still moving ahead. I think they’re taking sort of a moment to pause a beat, look at hey over the last three, four years, spending on cloud has been gangbusters, where is there opportunity to optimize and consolidate and drive a little bit of efficiency in these states. I think what we broadly see is a fairly large amount of waste in the cloud environment. But I think no one is really divesting from cloud as a strategy, right? So our view is it’s like everyone is pausing taking a beat to do that optimization, but really forging ahead on sort of a multi-cloud strategy.

And I think in that sense, we expect infrastructure will sort of take that pause and then continue the growth as people move there. If anything, I think where we feel some optimism is, I think, with a lot of customers who are now interested in leveraging some of the generative AI techniques, we actually think those will be drivers of net new cloud workload. And we’re already seeing that. There’s a very large financial group we’ve been working with, who has dramatically pulled forward and accelerated their efforts to get on to Azure for exactly that purpose. So that’s bringing net new workload, expanding them to multi-cloud and they’re using Terraform and Vault and Console to underpin that multi-cloud journey. So I think in that sense, we feel like there’s going to be this optimization that we’re seeing broadly across the market that will take a pause, and then we’ll continue to see workloads on cloud continue to grow at that infrastructure layer.

Patrick Walravens: All right. Great. Thank you. And Navam can I just — as a follow-up how confident are you in your — revenue guidance?

Navam Welihinda: Hey, Pat. So yes, I think we’re very confident about our new revenue guidance. It factors in this elongated large contract cycle into the rest of the year. And as Armon said, we’re optimistic about not losing out due to competitive pressure or losing out due to cancellation of the cloud program. So we expect this large contract activity to occur as they will for the next three quarters. But as soon as the headwinds change, we should see return to normal. But the full year is reflecting our confidence in what we can achieve next year or this year.

Alex Kurtz: Thanks, Pat. Next question.

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

Sanjit Singh: Thank you for squeezing me in. I had a question for Dave or Armon. I guess I’ll jump ball and it goes to the rightsizing of the environment, Armon that you mentioned in the previous question. In your conversations with your customers, when you talk — when they talk about optimizing their environment, rightsizing your environment, could you give us a sense of what that entails? And from the feedback that you’ve gotten, how long does a rightsizing initiative or project take from what you’re hearing from your customer base?

Armon Dadgar: Hey, Sanjit. Thanks for the question. It’s a really good question. So I think the shape of it takes a few different forms, right? I think part of it, what we see is you have development testing environments that have been relatively unconstrained and some customers might be as much as 50% of their cloud spend. So I think there’s one side of this, which is really looking through those dev test environments and a whole lot of it is orphaned resources, things that developers went up an environment left or running for three months, you’re paying the meter on that. So I think there’s a lot of that happening in dev test, where that takes — you have to go through an inventory process, identify those workloads and shut them down.

Then I think on the other side, you have a production environment where you have kind of multiple forms of voice take place. One is, hey, maybe this needs to run on five servers that’s really running on 10. Okay, can we identify that and sort of shrink the footprint down to five. You have other cases where it’s like I’m running on a double extra-large when really I should be on a kind of a medium-sized capacity. So I think that also is a complex challenge, if you have to inventory all the assets really look through data and telemetry to understand where am I overutilized, where am I over deployed and then go through the change management to kind of rightsize some of that. In terms of how long that takes, I think there’s a fair amount of variability and frankly, it actually goes back to the maturity of their cloud program.

The programs that were leased mature, they don’t have a good handle on it. The data is not readily available to them. They don’t have a central team that was responsible for driving that in a standardized way. And I think, in fact, this has been an accelerant of conversations for us around the value of standardizing on tools like TerraForm and having a platform team because that central aperture gives me visibility of what workloads are dev test, what workloads their production. It allows you to kind of do that instrumentation on usage. So for us, it’s actually been a useful conversation driver on the importance of creating those sort of standardized layers. I think with the teams and organizations that don’t have that, it’s a longer journey, right?

They have to sort of get their hands around problem and there’s multiple phases of identification, rightsizing and change management.

Dave McJannet: If I could add just my other comments, Sanjit. I think to me, it’s kind of two countervailing forces. One, as Armon described, there’s — we see it — obviously, we’re doing it ourselves. There’s a lot of clean-up of those orphan environments that we’re all paying for and overspend, and so that is driving consumption down. At the same time, the velocity of new things going to cloud is not slowing. So at the same time, as that is coming down, you’re seeing an increase in the slope of the line of new things going cloud. So in a sense, it’s getting offset a little bit. And ultimately, TerraForm is a critical element of how people actually solve that problem by putting constraints in from the provisioning process. The irony being, you have to get to the procurement function to put that in place, but that is certainly what people are doing.

Sanjit Singh: That’s really helpful context. And it seems to align broadly with how the hyperscalers are talking about how that’s manifesting in our environment as well. And ultimately, we get to a place where new workload growth hopefully outpaces or surpasses the impact from optimization. So that’s encouraging. I had one follow-up for Navam and it goes back to the previous question around like your confidence in the guide. I hear you guys loud and clear in terms of the longer sales cycles and the procurement process. We do have a new sales leader in place. And so I wanted to understand like in terms of the magnitude of change in terms of the blocking and tackling of sales, territory alignment, comp, how much change is being instituted in the sales organization, at a time where we’ve had a risk and then also the environment is a little bit weaker.

So I just wanted to understand like the magnitude of those changes and whether that creates incremental execution risk this year?

Navam Welihinda: Thanks, Sanjit. The short answer is no. We don’t see incremental execution risk with the addition of Susan. And in fact, we’re optimistic about or impacts of the company and how she could help us grow into this new stage. Just as a reminder, when we took this very carefully considered workforce reduction, we didn’t overly impair the capacity in our core regions where digital transformation is the most advanced or the most furthest along. Rather, we looked at where the geos were that potentially were longer-term investments, and we rightsize those a little bit. And those were the margin impacts that we saw on the workforce reduction plan. The existing sales leadership still is intact, and they will, as a unit report up to Susan. So the org still is very stable, and we feel like there’s no incremental risks with the change, no incremental organizational risks with the change.

Sanjit Singh: Understood. I appreciate the context. Thank you.

Alex Kurtz: Thanks, Sanjit

Operator: Thank you. And I would like to turn the conference back over to Dave McJannet for any further remarks.

Dave McJannet: I’d just like to express my thanks for the participation from everyone here, and we certainly appreciate you dialing in and for all the questions. Look forward to speaking to everybody soon. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.