GitLab Inc (GTLB) 2023 Q4 法說會逐字稿

Thank you for joining us today for GitLab's Fourth Quarter of Fiscal Year 2023 Financial Results Presentation. GitLab's Co-Founder and CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robbins will provide commentary on the quarter and the fiscal year.

Please note, we will be opening up the call for panelist questions. (Operator Instructions) Before we begin, I'll cover the safe harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws.

These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and when filed, our most recent annual report on Form 10-K.

Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events. We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with U.S. GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results.

A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which, along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today's call will also be posted on ir.gitlab.com.

I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij.

Thank you for joining us today. In the fourth quarter of FY '23, we continue to demonstrate our ability to grow while significantly improving margins. We generated a revenue of $122.9 million during Q4 FY '23. This represents a year-over-year growth of 58%. Our fourth quarter results also continue to exhibit improving operating leverage in our business.

Our non-GAAP operating margin improved. There is no question that the past several months have represented a difficult time for many companies. Economic headwinds have resulted in budget reductions. Companies are forced to figure out how to do more with less. They must continue to deliver customer value, they need to innovate with fewer resources than before. Some of the watch points we cited during our third quarter fiscal year earnings presentation became more pronounced during the fourth quarter. Being a growth company, offering a mission-critical platform, we saw these impacts later than other software companies.

The watch points that played out in the fourth quarter were longer deal cycle times, higher contraction of seats, lower expansion than historical trends. Based on this, we announced a 7% reduction in force on February 9. We see significant opportunities ahead. We're confident in the strong value proposition that GitLab provides to customers, and we are still in the early phases of capturing this estimated $40 billion addressable market. A market that we've seen evolve from point solutions to a platform, from DIY DevOps to a DevSecOps platform, a market that we created and we now have the most comprehensive offering with proven ROI. In this macro environment, it is critical for companies to show the immediate return on software investments.

Forrester found that as a result of implementing GitLab a company generated a total return on investment of 427% over 3 years. Even more critical, they realized a payback on the investment in less than 6 months. This payback enables companies to reinvest in future innovation. Companies now need to simultaneously innovate and reduce costs. We believe this environment provides an ideal backdrop for GitLab to demonstrate significant value. They consolidate their many DevSecOp tools, which saves cost and leads to efficiency gains. They can reduce or eliminate the amount spent on tool chain integrations. Their engineers become more productive by reducing time to deploy applications, and they can accelerate revenue by deploying their software faster.

Let me provide some customer stories in Q4 that demonstrate the value of GitLab's DevSecOps platform. Deutsche Telekom is the largest telecommunications provider in Europe. DevOps methodologies have become a cornerstone of their efforts to streamline software development, reduce manual tasks, break down silos, increase productivity. Since adopting GitLab, Deutsche Telekom has reduced the time to release software from 18 months down to an approximately 75 days. It's a 7x faster cycle time and we've achieved this velocity while streamlining security practices and improving team collaboration.

In Q4, they purchased over 1,000 additional ultimate licenses. GitLab is also helping MassMutual's subsidiary, Haven Technologies, a digital insurance leader. Using GitLab, they have cut costs, driven efficiency and increased development velocity, as they have doubled down on Kubernetes. In Q4, the team reported a 400% increase in development cycles from roughly 2 cycles per week to 2 per day. And they have greatly increased the number of security pipelines run on each merge request which helps to increase developer involvement in securing applications earlier in the development life cycle.

GitLab has also helped increase productivity by automating a number of processes, especially around branching. Finally, we're excited to see the results that Grammarly has achieved with GitLab. Grammarly powers effective communication for over 50,000 teams and for over 30 million people daily. Grammarly adopted GitLab in 2019 for source code management and continuous integration. Since then, they have steadily increased their GitLab adoption with the number of users increasing more than 4 times. As adoption grew, so did Grammarly's interest in additional GitLab capabilities. Grammarly wanted to implement robust security scanning into the software development life cycle but managing numerous disparate tools became a challenge.

Grammarly upgraded to GitLab Ultimate in 2021, so they could move from using GitLab for just SCM and CI to also use it for a number of advanced security capabilities all in a single application. These include static and dynamic security scanners, secret detection and container scans.

Grammarly added more ultimate licenses in Q4 and envisions everyone at the organization using GitLab. All of these customers, Deutsche Telekom, MassMutual and Grammarly and thousands more are realizing the benefits of GitLab's core value proposition, Software. Faster.

Now let's turn to our product priorities. Our pace of innovation is widening the competitive moat. We're confident that we have the right product priorities to capture even more share in this expanding market. Our platform is differentiated in a number of ways. We delivered the most comprehensive DevSecOps platform as a single application. We are open core, ensuring we are on the leading edge of innovation by building with our global community of customers and users. Over 3,000 new GitLab capabilities came from the wider community contributions in the last year alone. We have security natively integrated in our platform built in, not bolted on. We're cloud agnostic. We're not incentivized to push customers to use any cloud provider. So our customers don't fear vendor lock-in, and we offer flexibility, different deployment options, satisfying the needs of the most complicated compliance and security requirements across all sectors.

Our current product priorities are all about building on this differentiation and strengthening GitLab's position as the most comprehensive DevSecOps platform. And they are, number one, continue integrating advanced security and compliance. This strengthens our ultimate offering and helps customers bring software supply chain security to the forefront of software development. Number two, deepen native integration of observability, analytics and user feedback. This gives every stakeholder in the software development life cycle, the data and insight they need to unlock the value of their software investment. And third, expand to new use cases and audiences with artificial intelligence and machine learning. Here's an update on what we've accomplished since our last call.

In Q4, we released GitLab Remote Development, eliminating the need to configure and maintain complex local environments. This newly released Web IDE enables everyone to contribute from any web browser while reducing the need for contact switching. GitLab Remote Development also creates a more secure user experience by enabling organizations to implement a zero-trust policy that prevents source code and sensitive data from being stored locally across numerous devices. In addition, organizations can adhere to compliance requirements by ensuring developers are working with approved environments, libraries and dependencies.

Security and compliance continue to be the core reasons why enterprises choose GitLab over the competition. And in Q4, we continued our pace of innovation in this area. We launched new capabilities allowing security officers to enforce policy control, compliance frameworks and license policies for multiple development projects more easily at the group level rather than having to go project by project. We introduced browser-based Dynamic Application Security Testing, DAST to authenticate, crawl, and scan web applications for vulnerabilities. The browser-based DAST significantly reduces testing time, and it has the advantage of more seamlessly fitting into the software development workflow. And we improved the accuracy of our DAST API analyzer, reducing false positives by an estimated 78%, making it easier for customers to hone in on true security threats. We see DAST as a competitive advantage for us in the DevSecOps platform space, and I'm glad to see us continue to innovate with these types of security scanners.

These are just a few of the innovations we made in Q4 to make it easier to enforce security policies across the entire organization and enable companies to secure their software supply chain. We believe that these key additions to our security offering help our customers to build more secure software faster and more efficiently and with any other solution on the market.

To bring analytics and feedback into our DevSecOps platform last quarter, we shipped GitLab Value Stream Dashboard. I'm really excited about this new capability. We have seen how it delivers tremendous values to our customers. This is only possible with a comprehensive DevSecOps platform built as a single application with a unified data store. Value Stream Dashboard allows all stakeholders from executives to individual contributors to have visibility in the process and value delivery metrics associated with the software development life cycle. Now companies can see where their roadblocks are and take steps to ship software faster.

Our first iteration enables teams to continuously improve workflows by benchmarking key DevSecOps metrics. They can track and compare these metrics over time, helping teams identify and fix engineering inefficiencies and bottlenecks. One customer from a large financial services company was so excited about this new capability. He was able to use Value Stream Dashboard to identify his best Java programmers and have done work on mission-critical projects.

Another customer told me that this capability became a morale booster for all these engineers. They could now finally all rally around the same metrics to show what they were capable of doing. I believe Value Stream Dashboard is a game changer for our customers. No other platform can give this level of visibility across every step of the software development life cycle without needing to buy or maintain a third-party tool. AI clearly represents a major technological wave. I fundamentally believe that AI will revolutionize DevSecOps platforms. However, AI isn't a department. It's not a stand-alone capability it weaves through every function, every department and every persona involved in developing, securing and operating software.

We are pursuing AI as a fundamental and integrated part of the DevSecOps platform. First, we use AI to make GitLab's DevSecOps platform, automate mundane tasks and reduce the cognitive load for our customers. We are creating AI-assisted capabilities for everyone in the software delivery workflow. These improved productivity and efficiency.

Let me provide some examples. Suggested Reviewers, which we launched last September, automatically suggests the best available reviewer for code change. This capability removes the guesswork by ensuring the right reviewer with the right contextual knowledge is reviewing code changes so that customers can deploy software more efficiently. Our customers have told us that they absolutely love this new feature because it minimizes delays and leads to better reviews. They now have more confidence in the code they deploy. Already they have leveraged suggested reviewers tens of thousands of times to more efficiently and securely review code on our platform.

GitLab code suggestions, which we launched this past February, increases developer speed and productivity by providing code suggestions in their integrated development environment. We plan to add new AI capabilities throughout the DevSecOps life cycle. For example, we are developing an intelligent code security solution to reduce the risk due to insecure coding practices. We anticipate an intelligent code security will automatically detect and remediate code quality and security vulnerabilities. Second, we make it easier for customers to incorporate AI into their applications faster. We are working on integrating this model up solution into the GitLab DevSecOps platform to empower customers to build and integrate data science workloads and extend DevSecOps workflows to AI and machine learning workloads.

In summary, AI is going to dramatically change the way teams work, and the way organizations develop secure and operate software. We believe we will be on the leading edge of it, applying the same value of iteration that has led to the creation of the most comprehensive DevSecOps platform. We updated our pricing to reflect the significant enhancements we delivered over the past several years.

On March 2, we announced we have increased the list price of GitLab Premium from $19 to $29 per user per month with transition pricing for existing customers. This is our first price increase in more than 5 years. It reflects the evolution of GitLab from source control and CI to the most comprehensive DevSecOps platform. Since February 2018, GitLab Premium added over 400 new features, leading to improved cycle times, developer experience and collaboration for our customers. We've also rolled out a significant step to accelerate our product-led growth motion. This month, we will begin applying user limits to the GitLab SaaS free tier. With this change, organizations on our free tier will be limited to 5 users. This gives them the opportunity to experience the value of a comprehensive DevSecOps platform while also driving them to convert to a paid tier if they use it with a larger team. We believe this change will drive an even greater adoption of our paid tiers.

In summary, I'm confident in the opportunity ahead for GitLab is the right product for the right market at the right time. We have the most comprehensive DevSecOps platform. And now more than ever, companies will need to innovate faster and cut costs at the same time.

On a personal note, I'd like to thank the GitLab E-Group and the Board for their support as I'm currently going through some health challenges. I recently had surgery for spinal lesion and, after much consultation with medical experts in the field, I decided to undergo radiation and chemotherapy last month for osteosarcoma. I've completed radiation and I currently have 13 weeks left of chemotherapy. My scope and responsibilities as GitLab's CEO and Chair remain unchanged. I'm looking forward to making a full recovery, and I'm committed as ever to GitLab's success.

I will now turn it over to Brian Robbins, GitLab's Chief Financial Officer.

Thank you, Sid, and thank you again for everyone joining us today. I'd like to spend a moment discussing what we are seeing in the macro environment and will review the key characteristics of our business model. Then I will quickly recap our fourth quarter financial results and key operating metrics and conclude with our guidance.

On our last earnings call, I cited some watchpoints that we encountered towards the end of the quarter. We started seeing greater deal scrutiny on some deals, lower expansion rates than historical trends and a slight uptick in contraction. These factors became more pronounced during 4Q FY 2023. We believe the uncertain macro environment affected us in 2 ways. First, we saw that some of our customers experienced changes in their business, which led to either hiring slowdowns or a reduction in workforce. This impacted expansions, primarily in our premium tier. It also led to an uptick in customer contractions and terms. Second, we encountered greater deal scrutiny at the end of the calendar year as companies reevaluate their overall spending plans heading into the new year. We also saw more people involved in the approval process, which led to longer sales cycles.

Moving forward, our fundamental proposition to our customers hasn't changed. In a world in which software defines a speed of innovation, GitLab enables companies to build and deploy software better, faster, cheaper and in a more secure manner. We are the most comprehensive DevSecOps platform. Key aspects of our business model that enable our performance include; the predictability of a subscription rather than a consumption model, a platform sale rather than a point solution, a diversified base of customers across industry verticals, customer sizes and geographic regions and a short implementation cycle with an established and well-documented ROI.

Now turning to the numbers. Revenue of $122.9 million this quarter represents an increase of 58% organically from the prior year. We ended 4Q with over 7,000 customers with ARR of at least $5,000 compared to over 6,400 customers in the third quarter of FY 2023 and over 4,500 customers in the prior fiscal year. This represents a year-over-year growth rate of approximately 52%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 in ARR with us.

At the end of the fourth quarter of FY 2023, we had 697 customers with ARR of at least $100,000 compared to 638 customers in 3Q FY 2023 and 492 customers in the fourth quarter of FY 2022. This represents a year-over-year growth rate of approximately 42% and Also, as an annual disclosure, at the end of FY 2023, we had 63 customers with ARR of at least $1 million compared to 39 at the end of the prior year, which represents a year-over-year growth rate of 62%. As many of you know, we do not believe calculated billings to be a good indicator of our business. Given that, the prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multiyear deals.

This quarter, total RPO grew 39% year-over-year to $436 million and CRPO grew 51% to $308 million for the same time frame. We ended our fourth quarter with dollar-based net retention rate of 133%. For added context regarding expansion activity during the fiscal year, the metric exceeded 145% in each of the first 3 quarters of FY 2023.

Next quarter, we'll revert back to reporting this as a threshold metric using 130% or the actual number, if below 130%. The Ultimate tier continues to be our fastest-growing tier, representing 40% of ARR for the fourth quarter of FY 2023 compared with 37% of ARR in the fourth quarter of FY 2022.

Additionally, our ultimate tier performed well in the quarter with approximately half of our bookings coming from the Ultimate purchases given our strength and security in compliance. Non-GAAP gross margins were 90% for the quarter, which has slightly improved from both the immediately preceding quarter and the fourth quarter of FY 2022.

As we move forward, we are estimating a moderate reduction in this metric due to the rapid year-over-year growth rate of our SaaS offering. We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Non-GAAP operating loss was $13.8 million or negative 11% of revenue compared to a loss of $27.4 million or negative 35% of revenue in Q4 of last fiscal year. Q4 FY '23 includes a $5.9 million of expenses related to our JV and majority-owned subsidiary. Operating cash used was $11.7 million in the fourth quarter of FY 2023 compared to $1.1 million used in the same quarter of last fiscal year.

Now let's turn to guidance. First, there's been no change to our overall guidance philosophy. In light of the challenging macroeconomic headwinds, we have reassessed our near-term revenue growth outlook, assuming trends we saw in fourth quarter continued. Additionally, in response to our near-term revenue outlook, we have made adjustments to our expenses.

We believe these actions will lead to an accelerated path to profitability. For first quarter of FY 2024, we expect total revenue of $117 million to $118 million, representing a growth rate of 34% to 35% year-over-year. We expect a non-GAAP operating loss of $27 million to $26 million, and we expect a non-GAAP net loss per share of $0.15 to $0.14, assuming 151 million weighted average shares outstanding.

For the full year FY 2024, we expect total revenues of $529 million to $533 million, representing a growth rate of approximately 25% year-over-year. We expect a non-GAAP operating loss of $64 million to $59 million, and we expect a non-GAAP net loss per share of $0.29 to $0.24, assuming 153 million weighted average shares outstanding.

On a percentage basis, our new annual FY 2024 guidance implies non-GAAP operating improvement of approximately 900 basis points year-over-year at the midpoint of our guidance. Over the longer term, we believe that a continued targeted focus on growth initiatives and scale in the business will yield further improvements in unit economics.

Separately, I would like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood of timing of when this may potentially occur. Thus, for modeling purposes for FY 2024, we forecast approximately $33 million of expenses related to JiHu compared with $19 million in FY 2023. These JiHu expenses represent approximately 6% of our total implied 12% non-GAAP operating loss for FY 2024. As Sid and I have said over the last several quarters, our #1 priority is growth but we will do that responsibly. There has been no philosophical change in how we run the business to maximize shareholder value over the longer term. We continue to be focused on growth while driving improvements in the unit economics of our business. The overall fundamentals of our business have not changed. We believe we remain extremely well positioned to capture an outsized portion of an estimated $40 billion market opportunity.

With that, we'll now move to Q&A. To ask a question, please use the chat feature and post your question directly to IR questions. We're ready for the first question.

Our first question comes from Kash from Goldman Sachs.

Sid, I hope you feel recover completely. A question for you, Brian. With respect to the outlook, you have these price increases contemplated in the model -- and also a recurring revenue model, you would have to have with the price increases, some significant downtick in net new ARR added to get to your numbers. I'm curious, what are you seeing in the early month of February and actually maybe even March, that would justify these kind of inputs? And also, secondly, if you can, your confidence that the price increases would stick. Have you done some early assessments and check-ins to see if customers would be willing to part with the value that you clearly see in the product from an ASP perspective?

Yes. Absolutely. Thanks, Kash. Let me just sort of unpack what happened in the fourth quarter, and that sort of will go into the guidance. And so in the fourth quarter, up until earnings like in November, the dollar-based net retention rate was greater than 145%. And as I stated in the prepared remarks, for first, second and third quarter, it was above 145% as well. There was really no meaningful changes in the sales cycle duration. However, we saw some of it increasing in enterprise and mid-market. We saw a slight increase, nothing really that material and SMB was holding to historicals.

The pacing for the quarter was okay. Nothing was off that dramatically. First Order and Ultimate, we are happy with. And we had good pipeline coverage. Month 2 and 3 of fourth quarter acted differently than month 1 of fourth quarter. We saw a contraction increase. As you know, it's the largest quarter that we have. And so it was impacted related to layoffs. Deal sizes got smaller. So typically, when we go in and sell a deal, they buy a number of extra licenses for people in the enterprise, but they're buying just enough for what they needed at the time.

We started to see pipeline getting pushed out. And then our dollar-based net retention decreased in month 2 and month 3 of the quarter. And it increased almost equally across seats, ultimate upgrades and price yield. It increased against all of them. And so we've had real no -- no change in our guidance lossy. And so we took what we saw in fourth quarter and obviously, the month leading into the call and put that into our guidance.

As far as price increases and your confidence that they will stick, and are they included in the guidance as well?

Yes. No, thank you for that. So we did include price increase in the guidance. If you think about the price increase, it's for Premium. And so it doesn't take effect for existing customers until they come up for renewal. And so you have to actually roll that -- when the contract actually comes up and then what that revenue impact will be, we did serve a stair set for existing customers. And then when you look at new customers, the majority of our bookings within a quarter is from our existing customers, so that's a smaller amount. So we did factor that in. And then prior to implementing the price increase, we went out and did a lot of market studies and so forth on what the right price would be based on the number of features that we brought to market over the last 5 years.

Our next question comes from Sterling at MoffettNathanson.

Brian, maybe just following up on that. You mentioned pipeline. Can you talk about what you saw in terms of the sales pipeline? Have you gone back and kind of rescrubbed the pipeline? And what kind of coverage ratios did you assume in the new guide?

Yes. Thanks, Sterling. I mean, you could imagine the pipeline is getting scrubbed on a very frequent basis based on what's going on in the macro. And so we continue to see a lot of interest in the DevSecOps platform. The top of the funnel for pipe gen remains strong on both new business and growth. We believe we're in a big market. It's a $40 billion estimated TAM, and we're in the very early innings of that. And so the pipe gen growth that we saw was more in previous quarters. Obviously, with the macro, you need more coverage. And so we took that and factor that into our guidance based on what we saw in the fourth quarter and the first month of this quarter.

As I mentioned, deals in month 2 and 3 of fourth quarter, deals were taking a little longer. We didn't see that in Q2, Q3 or the first month of Q4 on expansion deals, typically, we would see them buying a number of licenses in the future for projects to be started and our team members, and we're seeing them buy basically what they need opposed to pre-buying a lot of licenses. And so we're continuing to focus on pipe generation and driving a positive ROI discussion and business outcome for those customers.

Next we have Matt from RBC.

I guess maybe one for Sid here. You talked a little bit in your prepared remarks about AI. I'm curious -- what are the thoughts on generative AI? And I guess, specifically, GitHub with copilots been making a lot of noise out there. A little bit of thought around that.

Yes. Thanks for that. I think AI is a really big change. It will change software, and it will change GitLab as a platform. It's -- the biggest impact is how fast people can use the platform. So our strategy for AI is more than just code suggestions. We think AI will change not just our code, but it will change how you classify issues, how you summarize suggestions how you hand over you work to someone else. So we're going to have AI features throughout the platform. For example, AI and security with intelligent code security in workflow automation. And we're making rapid progress on that. We have the Suggested Reviewers, which will soon be generally available. We have the code suggestions right now in closed beta, but we're working on many more AI-powered features.

Apart from that, we also want to empower our customers to add AI to their applications. So our model ops functionality already allows you to link your AI experience to GitLab experiments. We'll be expanding this further so our customers can use AI to make the applications they make with GitLab even better.

Got it. Can I ask a quick one for Brian then. With the pending price increase, does your Q1 guidance assume any sort of like run or push on Premium tier see -- seen anticipation of the price increase to push off a year? Or just sort of thoughts on how that might feather in.

Yes, we factored as we look at guidance, we look at the pipeline conversion rates, a number of different things. And so we did factor that in.

Got it. Thoughts with you as you go through your health challenges.

Our next question comes from Joel from Truist.

Sid, thoughts and prayers out to you as well. And Brian, a question for you. Just on the drivers of profitability going forward. You've made a lot of improvement on the operating margin line. I know you've talked about the cuts, but can you talk about any other levers that you have to pull in terms of driving you to free cash flow positive. I appreciate it.

Yes. Thanks, Joel. I appreciate the question. I'm happy with what we did in our FY 2023. We increased our revenue incrementally by $172 million, and we did that for $11 million less in operating loss. If you normalize the incremental public company expenses and JiHu expenses, we did that for $34 million less in operating loss.

If you look at the guidance, we guided to a negative 12% operating margin for the entire year. That includes JiHu, which is negative 6%. So GitLab, minus JiHu we're guiding to negative 6% for the full year. And we're seeing improvements across everything, right? And so if you look at our cost of goods sold, even with SaaS revenue becoming a greater and greater portion, we've been able to maintain our non-GAAP gross margins at a very, very high level.

And then if you look at sales and marketing, R&D and G&A as a percentage of revenue, despite the increased public company expenses with the growth of revenue, we're growing expenses less than that to get the leverage in the model. And so we'll continue to look at all areas to get greater efficiency in the business. But one of the key things we'll do is grow, but we'll do that responsibly.

Our next question comes from Michael at KeyBanc.

Sid, of course, best of health, you would be well. So for both Sid either or Brian, we've talked about some of the things that you've seen in the quarter, which are very similar to what other people have seen in terms of less expansion sales cycles, et cetera. But no, I'd love to hear your underlying analysis of what's taking place in the enterprise. In other words, at this point, obviously, fewer seats, but do you see people pulling back on software, new software development projects? Are they simply getting conservative there? Does it have to do with the optimization of cloud? What are some of the underlying factors? And then, my follow-up question, I'll just get it out now, Brian, if you could quantify for us how much do you think the tailwind from price increase would be this embedded in your guide, that would be helpful.

Yes, absolutely. Let me talk about -- I'll take both of those. But one is just sort of overall on the macro, I can give you a couple of anecdotes that sort of happened one, from -- you talk about cloud optimization. From a hyperscaler perspective, we had the most logos brought to us by the hyperscalers in company history. And so the hyperscalers are continuing to be a great channel for us and driving that.

As I said in previous calls, it's a little bit lumpy in the nature of how much bookings that comes with. And so bookings growth wasn't as high as the logo growth, but we're happy with the logo growth because now we have those landed accounts. and we know history shows, once we land them, we can expand them over time. I would say, generally, in the enterprise, we're seeing a couple of different things. One is, I think with the uncertainty in the macro with a seat-based model, we felt it a little later than in consumption-based models.

And most companies have been tasked with trying to save money. And so where we would go into a typical large enterprise and where we would try to sell licenses for an engineering group that we're doing 5 projects, they're actually trying to get approval to get 1 project done. And so instead of buying for what those projects may be, they're just buying for the project and the head count that they have at the time. And so it's just taking a little bit longer from a deal cycle perspective. And also those deals are a little smaller than they've been historically as well because they're not prebuying for future projects. They're buying for what they need at the time.

On the next question about price increase baked into guidance. I can walk you through the math, but if you -- majority of our bookings are from our existing customers, within a quarter. And so those have to actually come up for renewal before you get the impact. We have that transition pricing the first year for them. And then you basically -- we're starting 2 months into the year, so you're only getting 10 months of revenue. And then if you do a half year convention on that, we've baked the bookings in as well as the revenue. We haven't called out specifically how much it is, but that is baked into our guidance.

Next, we have Koji from Bank of America.

Sid, from all of us at BofA, we're rooting for you. Just maybe one question for me. Brian, can you remind us maybe how much of the business exposed to SMBs out there? And really kind of in the context of the recent developments in the financial industry over the past week, what sort of consideration that maybe the SMBs could be hindered out there, was incorporated into the guidance?

Yes. Thanks, Koji. We -- obviously, that was one consideration when we came up with the guidance. If you look at the technology vertical overall, the technology vertical is less than 20% of our ARR, it's about 20% of our ARR. If you look at technology start-up companies, which we identified with 200 or less employees, it's less than 5% of our ARR. Enterprise continues to be roughly about 60% of ARR. We talked about pub sec being around 10% to 12%. And so the SMB is relatively small. It's around the 10 -- call it, the 10% of our total ARR. And then if you look at verticals we don't really have one vertical that makes up the majority of our ARR. We're spread across all the different verticals. And so from that perspective, it's a long-tail business.

We'll now hear from Karl at UBS.

Okay. Great. Brian, just to carry on from that conversation, did you see disproportionate weakness in the tech vertical that you just sized at 20% of ARR, given that one of your comments was that you saw contractions due to layoffs and given that the layoffs were -- have been disproportionately tech vertical, I would assume that, that's been a little bit of a weaker vertical for you. Is that the case?

It's a good question. I didn't get a chance to specifically go in and look vertical by vertical by vertical. I did go back and look at the net dollar retention rate. And I did find it interesting that if you look at the net dollar retention rate, the ratio of change that we saw was the same between seats, upgrades and price yield. And that was actually for all years back 7 years, except for 1 year where we had some anomalies, all acted relatively about the same. And so that -- it needed to dive further into that, but that led me to believe that it was more of a broader macro impact than a particular vertical impact. I think all companies today are sort of feeling the demand side slow a little relative to purchases.

Okay. And maybe a second one for you, Brian. Just trying to gauge how conservative your guidance is. One way to do that is to look at your most recent cRPO guidance and your subsequent revenue guidance. The fact that you just put up a quarter with 51% cRPO growth. It's hard to think that, that translates to 26% revenue growth. So at first cluster guidance feels conservative. But I want to throw that at you. Maybe the cRPO metric is an imperfect predictor and it's only capturing a portion of the next 12-month revenue growth, and you're anticipating that new bookings are weaker. Do you mind unpacking the correlation between those 2 metrics?

Yes. Happy to do it. I mean, we've talked about historically how billings and some of the metrics weren't directly correlated, but -- directionally correct. And so the cRPO growth for the quarter was 51%, and then we did guide to right about 25%. And so there's been no change in our guidance philosophy and we try to factor everything that we see into that, and that's where we landed.

We have Rob from Piper Sandler.

Robbie Owens. You think after a couple of years, I would -- you think after a couple of years, I'd figure this out, but you know me. Brian, could you unpack maybe gross retention rates and the trends you're seeing on that front, trying to understand what would create a situation within the guidance that would have Q1 down quarter-over-quarter kind of given it's a subscription model. I understand there could be some timing issues with regard to what's self-managed versus cloud, but just trying to understand, a, what the gross retention rate trend looks like? And b, what could cause that Q1 to be down?

Yes, absolutely, Rob. Thanks for the question. From a gross retention rate perspective, it has declined a little, but it's still up in the 90s, sort of low to mid-90s from a gross retention rate perspective. And so I still believe that the -- every company has to become a software company and that the well-documented ROI and the payback period helps drive those renewals and those retention rates. And so ultimately, believe that, that will be a lift to revenue over the long-term. And so -- yes.

And thoughts around the Q1, what could create a -- I guess, a negative sequential compare?

It's -- as we go through, we look at basically all different components, churn, contraction, time to close deals and so forth. And so if -- obviously, if you had more churn and contraction than you anticipated, you wouldn't be able to recognize that revenue. So there's some headwinds to revenue that we -- from a Q1 perspective as well, we're in the process of going through our SSP analysis. That's the annual analysis we have to do for 606 and so we factored all that based on what we knew at the time and to the guidance.

Up next, we have Derrick from Cowen.

Great. Sid, sending the best wishes to you. I mean, for Sid or Brian, I just wanted to touch on the restructuring or the realignment and some of the headcount cuts, can you give us a sense of if you've made any changes on the go-to-market side. And I know you guys have been evolving from a bottoms up to more of a top-down model as you were kind of selling more on a platform basis. Is that platform sale going to be a lot tougher in this environment? And have you made any changes from a go-to-market perspective given that?

Yes, Derrick, thanks for your question. Our land and expand sales model continues to be relatively the same. We're getting -- as we got ready to go public, we talked about the various things that we're doing to change our go-to-market motions. And so primarily, we were a direct sales motion. We then added a channel program, an alliance program, the hyperscaler program and so forth. And so, as I mentioned earlier, within our hyperscalers, we had the most logos in a given quarter with our hyperscalers and they continue to be a good distribution channel for us. We're continuing to do that. One of the things that we started recently is doing value stream assessments, to where we'll go into a client -- a potential client and tell them about look at their stack and look at how much they're spending and look to see what GitLab can do to help them create faster -- Software. Faster and save money. And we typically go in at the exact level and sell that.

So I think we're doing a good job there. If you look at the business outcomes and the ROI that we're driving for our customers. We continue to get positive feedback. One ultimate customer, it was a finance -- global leader in financial services. We were able to save them $300,000 a year in just tool chain reduction and elimination of developer downtime. And so we're -- within that client, we replaced 4 security tools with GitLab, and we increase their velocity by about 55% without sacrificing quality. And so that is a common use case that we're seeing across all verticals in customers of really any size.

And Brian, just in terms of following the headcount restructuring, how should we think about investments for the year? Are you going to be pausing hiring? Are you still going to be investing, still be investing in sales capacity? Any color there?

Yes, absolutely. So when we looked at doing the reduction, obviously, a very difficult decision to make. We look to open headcount first and then looked at existing headcount. It was done across the company to basically align our cost model with our revenue projections to continue to drive operating leverage in the business. For the most part, based on the guidance, we have the capacity on board today to deliver what we committed to. And so we will continue to hire, but they'll be in very strategic areas of where we need to -- need to add headcount at. And so there will be some in sales and marketing, some in R&D, but at a much more measured pace.

We'll now hear from Ryan at Barclays.

So one for Brian, do you have a sense of how many customers have more than 5 free users on your free version? And have you seen increased instances of customers down tiering from Premium to free, any color?

Yes. I don't -- at my fingertips, I don't have the exact number of customers with 5 licenses or more. Typically outside of -- when we did the starter deprecation , we did see from the $4 product down to the free product, we saw people go that way, but have not seen a lot of people go from Premium to free, and that's due to the -- all the different functionality that you get with Premium over free.

And just a follow-up on the price increase. I know it's early and obviously how it flows through, but do you think a more expensive Premium tier could lead more users to reconsider Ultimate and upgrading from that.

I hope not. Based on the market research that we've done and the feedback that we've gotten from the customers, it's not viewed as a -- we've put over 400 capabilities into the platform in the last 5 years, and the payback period and the results that we drive and the business outcomes that we drive are so positive that based on market research that we've done, we felt like that was a fair price for what we're delivering.

Next, we have Jason from William Blair.

I guess, Brian, first one for you. With the 25% growth expectation for FY '24, is it right to think that it embeds an NRR of around 120% for the year? And is that about where it was in months 2 and 3 of Q4?

Yes, of Q4, yes, so we basically took everything to happen in fourth quarter and what we saw at the beginning of first quarter. and factored that into our guidance. In my prepared remarks, I said that if it was over [130], we would continue to report as a threshold. But if it dropped below 130 , we'd actually report the actual number in quarter. And so, we don't -- we didn't give specific guidance out on dollar-based net retention rate.

Okay. And then one quick one for Sid. Sid, how are you positioning the price increase versus GitHub?

Yes, I think what we have is a more comprehensive platform. So we do the entire DevSecOps cycle. It can replace more tools. In the end, what our customers need is to spend less time integrating tools to have fewer people to have a faster cycle time. So it's really about having a compelling value and having the most comprehensive platform. That's what we're selling, that's what the results are showing. And of course, there's the price of the software. But if you earn it back in under 6 months, it's an amazing deal.

Thanks. Be well.

Next, we have Mike from Needham.

I just wanted to circle up -- I know that you guys aren't quantifying what the intended benefit the revenue is from the announced price increase for Premium. But maybe for historical context, can you help us think about what the deprecation of the starter package did as far as a contribution of revenue? Again, just to help us kind of level set or rethink through how this price increase will phase in over time.

Yes. Thanks, Mike. On starter, just to update everybody, we have slightly over $1 million of ARR on starters, so we're almost completely through that transition. But the way that starter happened was about 2/3 went up to Premium and 1/3 either went to free or churn. As you know, when we did the starter deprecation , we actually offered a slow increase price, if you met certain requirements. And so the majority of our customers fell under that. And so it went from $4 to $6. And so 2 customers at $6 versus 3 at $4 was really the same revenue impact and we didn't get much of a financial lift in year 1 from the starter deprecation .

And then a follow-up, if I could, but I know that you guys announced the layoff reductions and made a tough decision there. Is there a way we can think about what those anticipated savings are to the company and the construct of the, call it, negative 12% operating margins you were calling out or negative 6% if we exclude the $33 million in expense from JiHu.

Yes. I guess the -- when we take the charge for that, it will be roughly around $9 million, give or take.

We'll now hear from Nick at Scotiabank.

Just trying to understand some of the assumptions around the guidance. Just going off of Rob's question, I think you guys said gross retention was sort of in the low to mid-90s. I guess when you look at the guide for this year, what does that sort of embed for gross retention? And then, as a follow-up, historically, you guys have talked about how 2/3 of expansion really comes from seat growth. And so can you maybe talk about what level of seat growth is embedded in that 26% guide?

Yes. So we obviously don't give like all the details of the model, but I can go through a lot of the characteristics that we -- or a lot of the things that we thought about in building out the guidance. So first, let me talk about the net dollar retention rate.

Seat growth is still the #1 contributor to the net dollar retention rate followed by tier upgrades and then price yield. And so that hasn't changed that much. Seat growth 2, 3 quarters ago was about 2/3. That's down to around 50% now, and then the other 2 make up the remaining 50%. And so as we went through guidance, we looked at in basically large, mid-market and SMB. We looked at pipeline, deal size, conversion rates. We looked at our contraction churn and basically built up the model from the bottoms up. Based on what we saw in fourth quarter and the beginning of the first quarter.

Next, we have Pinjalim from JPMorgan.

And best wishes Sid for your health. Brian, maybe one question on the price increase again. Any way to understand -- I know you saw about 1/3 churn, it went in the starter deprecation. Are you assuming somewhat similar kind of a churn level at this point for the Premium price upgrade here? And how should we think about that starter deprecation plan because that is supposed to go from [6] to [9] to [15] to [19] right? Now, will that 19 be basically [29], 15 going to 29 directly?

Yes. So on the starter package, they did go from [6] to [9]. And I'm trying -- what was the first question? Could you just repeat that?

The churn portion -- those 1/3, are you assuming something similar for price increase?

We built out a model to say, from new business, will we have the same close rate, we'll take the same amount of time for the existing clients that we have the same thing. And so we did assume some kind of churn. It wasn't the same exact, but based on the market research that we went through, we did assume some kind of churn.

But it's not as high as [$33] is what you're saying?

We didn't give out a specific number on that.

Yes. Okay. Understood. One for Sid, if I can. Sid, what is your vision on kind of the monitor stage of the Infinity loop, right? You acquired Opstrace. But we haven't heard much, I guess, on the observability side, how are you thinking about it?

Yes. We still believe there's a huge unmet need for observability. So servability fits in nicely with the rest of the loop. And we've been working on distributed tracing, air tracking and product analytics. Those are all shipping in GitLab. What it allows our customers to do is to identify performance issues they have with the specific services helping them improve their user experience.

And you can imagine the ability to automatically correlate errors to GitLab incidents to automatically monitor GitLab deployments that is super important. So we are starting with the things that are very close to GitLab. GitLab already does incident management. GitLab already does deployments. We're focusing the observability there first and making progress there because it adds a lot of value to close that loop with the customer.

Our final question comes from Shebly from FBN.

So are you considering raising prices on the ultimate tier as well?

Yes. All we announced was the price increase on premium. We have a pricing group. We look at pricing all the time. But the only decision that has been made is the pricing announcement that we made on premium.

Okay. The other part for me is in fiscal '25, it seems like there could be an exciting story for you because more of the existing premium subs are going to be moving to $29. And I'm also wondering whether the $33 loss from JiHu in '24. Does it go away in '25? Any kind of thoughts? And so you're going to have a combination of potentially better revenue growth and better margin expansion. But I just want to hear from you the opportunity you see for revenue acceleration in '25? And does that JiHu, $33 go away? Or does it go to a much smaller number?

Yes. Let me just -- for those who aren't as familiar with JiHu, I'll just give a quick overview. So JiHu is a joint venture that we contributed the IP, have not contributed any money. So the joint venture raised their own cash. And due to the VIE accounting structure, we need to consolidate our results. And so we've done another fundraising around there. So it's -- we have a footnote in our Qs and Ks around what we spend on that. So that's -- it gets consolidating our results, but it's the JV's cash and it's their expenses.

From a guidance perspective, we've been conservative in the sense that we don't include any revenue, and we include all the expenses because it's a JV that we don't control. And so we've been working with our auditors to see if the facts and circumstances have changed to see if we could deconsolidate that and we're in the process of going through that exercise. When it's deconsolidated, you would actually obviously see it all come out, and we would account for it differently.

And so from a revenue driver perspective, it's been somewhat the same. We continue to sell new customers. We're going to expand existing customers. We're going to go into new geos where we currently aren't today, geographies. We're also -- we have the benefit of the price increase as well that will happen. And so there's a number of different revenue drivers for the company. And then also last call, we announced Dedicated which is a single tenant offering that we're rolling out right now.

That concludes our 4Q FY '23 earnings presentation. Thanks again for joining us, and have a great day.