HashiCorp Inc (HCP) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp.'s Fiscal 2023 First Quarter Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Alex Kurtz, Head of Investor Relations. Thank you. Please go ahead.

Good afternoon, everyone, and welcome to HashiCorp's Fiscal 2023 First Quarter Earnings Call. This afternoon, we will be discussing our financial results for the first quarter announced in our press release issued after the market closed today. With me are HashiCorp's CEO, David McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar.

At the close of the market today, in conjunction with our earnings press release, we have published an earnings deck that contains additional financial information pertaining to our quarter. We plan to do this each quarter before earnings call and encourage you to review the deck in advance of our calls. You can access the decks 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, including statements concerning financial and business trends, our expected future business and financial performance and financial condition and our guidance for the second quarter of fiscal 2023 and the full fiscal year 2023.

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 metrics 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?

Thank you, Alex, and welcome, everyone, to our first quarter earnings call. We're excited to share with you that Q1 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $100.9 million, representing year-over-year growth of 51% along with the trailing 4-quarter average net dollar retention rate of 133%. We're also pleased to announce that during Q1, we had our second customer reached $10 million in annual recurring revenue. The most recent transaction by this global financial institution was a new commitment to Consul during the quarter, one of our largest Consul transactions ever. We'll discuss the strategic customer in a few moments.

Also in Q1, current non-GAAP remaining performance obligations reached $305.2 million, representing 64% year-over-year growth, and we added 49 customers with greater than or equal to $100,000 in annual recurring revenue, reaching a total of 704. Our HashiCorp Cloud Platform offerings reached $8.8 million in revenue, representing 9% of subscription revenue in the quarter. We're very pleased with the performance of HCP in Q1. And as we look out to the rest of the year, are excited about adoption trends as we continue to roll out new features and capabilities.

I thought it would be helpful to briefly reiterate what we see as our unique approach to the marketplace as we help customers navigate this once-in-a-decade architectural shift that is recasting enterprise applications to the cloud. As a reminder, we help enterprises with their transition to cloud and inevitably, multi-cloud, by delivering a suite of products that provide a consistent cloud operating model. As enterprises look to standardize their approach, they need a system of record for each layer of the infrastructure stack, and that is what our portfolio provides.

Why do organizations choose HashiCorp? Well, first, our products are designed with a cloud-first and cloud-agnostic approach, using infrastructure's code for provisioning, identity as the basis of security and service and service name as the basis of networking. Each of these represent the core paradigms of the cloud model.

Second, our global footprint of practitioners using our open source tools and the free tier of our cloud offerings makes our products the de facto standards in the marketplace for cloud provisioning, infrastructure as code, managing secrets in the cloud and increasingly for the still developing cloud service networking market. We're convinced that for most companies, the practitioner will decide how they approach cloud, which is why we focus on the practitioner experience above all else.

Finally, we've developed a rich ecosystem of technology integrations and partners around each of our products, which further accelerates adoption and standardization. Our products are designed to enable third parties to easily integrate their services into Vault, Terraform, Consul and our other products. And as we shared last quarter in our 10-K, we now stand over 2,050 providers in our Terraform ecosystem alone and 900 partners in total as of the end of last year. With over 3,000 paying customers using our software today, we believe all 3 of these differentiators have created a significant barrier to entry around our offerings.

With that background, I'd like to take a few minutes today to highlight important trends that we are seeing for our products and the broad demand for cloud and multi-cloud adoption that is fueling our business. Specifically, I'd like to highlight the continued emergence of central platform teams within larger enterprises that we touched on briefly last quarter.

During the quarter, our field teams were able to travel more freely to meet with customers, and Armon and I spent much of the quarter having in-person meetings with members of the Global 2000. In those meetings, we've been hearing a consistent theme around the emergence of centralized cloud program offices or what they often call platform teams within these accounts. The technology that underpins the transition to cloud and the growth of multi-cloud environments is fairly well known at this point. What is less well understood is the importance of the teams that are managing this transformation.

As companies undertake cloud migrations or digital transformation, CIOs often find themselves in a difficult position of sifting through the disparate pieces of infrastructure and cloud resources that their various teams have deployed in the past, usually with little or no coordination. This has cost implications but also efficiency implications, siloed teams with siloed infrastructure and little strategies underlies it all. And when developers want to develop and ship a new product to serve customers, they often encounter constraints and delays from their office security and networking teams who would like to apply some level of governance.

HashiCorp is sold to these various siloed teams to help them with their immediate cloud infrastructure issues for years, helping them with provisioning, security, networking and application delivery. However, we are now being brought in to help companies standardize their cloud infrastructure across teams. In many instances, in fact, those early adopters of our products are now being assigned to be the platform teams for their organizations as a whole.

The platform team is the group that consolidates and standardizes cloud infrastructure for an entire company. It controls cloud infrastructure as a single cost center, create standard processes and establishes compliance protocols for applications and infrastructure. With this central team in place, companies can control costs and enforce consistent security policies, allowing developers to deploy applications with far less friction.

Our cloud operating model with an integrated stack of products, including Terraform, Vault, Consul and others, enables these platform teams to succeed. We are seeing success in our larger deals each quarter being driven by these dynamics. We also believe that part of the success we are seeing in larger accounts is driven by our programmatic approach to selling what we call ALEER: adopt, land, expand, extend and renew. This motion happened initially in a single business group and is ultimately mimicked at a larger scale as platform teams are created to drive standardization across the organization. We believe that this methodology, coupled with our product innovation, can lead to durable long-term growth.

We continue to see ourselves as uniquely positioned to enable the largest of enterprises in their decade-long move to multi-cloud across what 650 Group has estimated as a $73 billion TAM through 2026. We saw these concepts play out in Q1, and now I'd like to turn your attention to notable first quarter transactions.

I'd like to highlight a few examples of strategic deals we completed that demonstrate our execution in the marketplace and show our adopt, land, expand, extend, renew motion in action. First, a land deal. A global insurance and financial services organization landed as an enterprise Vault user in Q1 after adopting Vault open source in 2019 for a small departmental use case. Vault, combined with our residential solution architect services, is enabling this customer to address audit findings and a global security mandate to address the management of sensitive credentials.

By centralizing the end-to-end process aligned to our jointly developed multi-cloud architecture, Vault will address significant worldwide risk of exposure for this company while providing cost efficiencies by automating the management and creation of globally secured credentials.

Next, an expand deal with one of the largest global financial organizations in the world. This customer expanded with Terraform Enterprise to standardize its infrastructure provisioning approach to bring secure applications to market more quickly. This will also enable them to reduce the operational costs of their estate by preventing the over-provisioning of resources. Terraform involves replacing homegrown and self-supported open source solutions, enabling the customers' business groups to deploy new applications on multiple cloud platforms in a consistent manner.

And third, an extend deal example. An energy company extended and became a Consul customer during Q1 after recently becoming a Terraform customer. The customer recognized that Consul was an agnostic platform that provides a consistent approach to service networking across multiple clouds. The customer chose Consul because it enabled them to accelerate the time to market for new applications, which are being migrated from private data centers to AWS. As an added benefit, Consul allows the customer to extend the life of their existing networking hardware via the Consul-Terraform-Sync capability.

And finally, I'd like to spend a minute on HashiCorp's second $10 million ARR customer that I mentioned earlier. This organization is also an example of a customer who started working with us around a single product and expanded and extended over time to include Terraform, Vault and Consul. This global financial institution began its journey using Packer, one of our open source products in 2017. It expanded to Terraform and then Vault Enterprise after that.

As its cloud journey matured, it faced heightened scrutiny and complexity across disparate networking control planes. These challenges led the organization to add Consul Enterprise this quarter. Consul Enterprise provides a cloud-agnostic approach to service networking that allows the customer to link a variety of infrastructure platforms from private data center to cloud to the edge. All of this enables applications teams to embrace these new platforms without compromising security, resiliency or agility. We're proud to count companies like these as our customers and are deeply committed to continuing to earn their trust. And with that, let me turn the call over to Navam.

Thank you, Dave, and thanks again to everyone for joining us today. Turning your attention to the top line financial results. We produced solid results in our first quarter of FY 2023, which exceeded the guidance from last quarter. Our total revenue increased 51% year-over-year and our trailing 4-quarter average net dollar retention rate reached 133%, which was over our 120% target rate.

Looking at our geographic segments, 78% of our revenue came from the Americas, 16% from EMEA and 6% from the APAC regions. The Americas region is the largest contributor to our revenue, but we are sequentially increasing the percentage of revenue from the rest of the world. As you know, on average, we have a high level of visibility into our revenue due to its recurring nature. This quarter, we saw more of our subscription revenue come in as recurring revenue. Approximately 96% of our subscription revenue was recurring.

Moving to the expense side. HashiCorp continues to prioritize resource allocation efficiency in the business. Doing so allowed us to come in ahead of our non-GAAP gross margin, non-GAAP operating income as well as our GAAP and non-GAAP net income plans. We incurred a net loss of $0.43 per share on a GAAP basis and $0.17 per share on a non-GAAP basis.

We track several key business metrics, which we believe help in understanding our business and financial performance in our journey to deliver durable growth. You'll find a lot of our KPI detail in the accompanying deck on our ir.hashicorp.com site. I encourage you to review that in detail.

Focusing on one of the core business metrics, the greater or equal to $100,000 customer cohort, we made solid progress during the first quarter. We continue to execute our adopt, land, expand and extend and renew model as highlighted in the customer activity in the quarter, which Dave just spoke about. On a trailing 12-month basis, we add 181 of these customers and grew their revenue from $124,000 per customer to $141,000 per customer in the quarter, a 14% year-over-year increase.

Our HCP business continues to show strong momentum. We grew our HCP revenue by 255% year-over-year. We launched several new HCP products and features this past quarter as we continue to invest in the platform. We are excited about the adoption trends we see with our cloud products.

Now I want to provide our guidance for the second quarter and the full year of FY 2023. For the second quarter of FY '23, we expect total revenue in the range of $101 million to $103 million. We expect Q2 non-GAAP operating loss in the range of $59 million to $56 million. We expect a non-GAAP net loss per share to be between $0.32 and $0.30 based on 184.3 million weighted average basic and fully diluted shares outstanding.

For the full fiscal year 2023, we expect total revenue in the range of $422 million and $432 million. We expect FY 2023 non-GAAP operating loss in the range of $224 million and $216 million. We expect non-GAAP net loss per share to be between $1.19 and $1.15 based on 184.9 million weighted average basic and diluted shares used in computing non-GAAP net loss per share. We are pleased with our Q1 results.

And with that, Dave, Armon and I are happy to take any of your questions. Alex?

Thanks, Navam. As a quick note, during the quarter, we will be attending the Bank of America Global Technology Conference and the William Blair Annual Growth Conference. With that, operator, let's go to our first question.

(Operator Instructions) Our first question comes from Jason Ader with William Blair.

Did you bake any macro pressures into your guidance? And then how resilient do you think your business might be if we do enter some type of a recession or a downturn?

So Jason, thanks for the question. This is Dave. Let me answer the first bit, and I'll ask -- let Navam and Armon weigh in as well. I think, generally speaking, what we saw -- what we have seen in Q1 is pretty consistent with prior quarters in terms of front-end demand of the pipeline build side. But maybe I'll let Navam comment specifically on the guidance question.

Yes. Thanks, Jason. So in Q1, we're seeing some pretty solid demand signals, so we're comfortable with our Q2 and FY '23 guidance that we provided. We're aware of global macro realities that are out there in the marketplace with the rising inflation, interest rates and the conflict in Europe. So as always, we're taking a measured view towards the back half of the year.

But that -- all that being said, the fundamentals of digital transformation and cloud adoption are very much intact, and these are very long-cycle markets, right? So we're encouraged by the year.

Yes. And then maybe I'll just add, anecdotally, I've spent the last few weeks visiting customers across North America, Europe and Asia Pacific regions. And I think what we've seen is it's a pretty consistent trend across customers regardless of region. They're continuing on their journey to cloud, continuing on their journeys to digital transformation. I think almost all of those customers see that as a long-term secular transition for them, realizing there might be some macro factors along the way, but most of these customers are sort of deeply committed to that journey. And I think for many of them, they've already made multiyear commitments to their cloud partners as well.

Yes. Jason, to answer maybe the second implicit question is around the durability part. Our products go to market around a very simple value proposition of cost reduction, risk mitigation and time to market, right? Think about Terraform as an example. One of the core value propositions of Terraform is allowing you to not overprovision compute resources, lots of cost savings. The Vault is allowing you to save cost and automation by rotating certificates around it. It could be a 10,000-machine estate and a script rather than having people do it.

So the value proposition is actually very clearly aligned to risk, cost and time to market, and I think we're pretty fine-tuned on that. The other thing -- so net is I think that actually plays really well despite the environment. The second bit, when you think about the role that our products play, unlike, say, a database, which is tied to a specific application, our products are more conduit to a utility once deployed, right? Vault underpins all the applications in your estate. And so as a result, it tends to be -- you tend to see that in our NDE numbers naturally, so both on kind of the new business side as well as the ability of our existing customer relationships are generally in a compelling spot.

Our next question comes from Mark Murphy with JPMorgan.

It feels like this is going to be a pretty amazing year for the cloud platform. You're going from 1 product to, I think, 5 or 6. You're extending some of those to Azure. Is it reasonable to think that, that's going to propel the customer adds pretty robustly or even just maybe start to influence some incremental migrations from self-managed to cloud? If you could just help us maybe sketch that out. And then I have a quick follow-up.

Yes. Mark, it's Dave. So yes, I think your observation is correct. Like this is a very new effort for us. It's a net new audience that we're targeting in terms of it tends to be the longer tail of the customer base that are big users of the tech is sort of who you tend to attract with that aspect of our offering as the hosted offering.

The second thing I'll just underscore is just to your point out early, this is, I think we ended the year with really a couple of products running on HCP. And to your point, we have a few more to roll out and certainly, you'll see announcements to that end. So I think we're pretty bullish on it. But it is a net new business for us. It's really a net new channel. So yes, I think what you'll see reasonably is continued adoption as we aggregate people on the free tier of those platforms, they do convert to paid customers with slightly less friction. So certainly, it's compelling in that respect.

So I think we're optimistic. I would say we are really looking at this as a net new thing. We're not yet in a position where we are flipping existing customers to renew on to HCP. And that's not a motion we've begun, just to be clear. So it's really just net new. Once we do that, maybe it will be different.

Yes. I'm sorry. I didn't mean to interrupt. Were you done there? I have a quick follow-up.

Go ahead.

Okay. Yes. Navam, it's great to see the increase in guidance and the overall traction. I'm just -- I'm trying to connect the dots on there's this tremendously large volume of customer adds this quarter. It's kind of an explosion. But it didn't translate maybe as much to the license revenue or the RPO growth or just kind of the sequential revenue growth. And I'm just wondering, should we interpret that as more -- it was more kind of smaller cloud customers, it will scale later, maybe a little less of the longer-term kind of larger deals that drive some of the other metrics? Or how do we connect the dots on some of that?

Yes. Thanks, Mark. So I think to your first point and to your earlier comment about HCP, very encouraged by that momentum and the strong customer -- net customer additions that we're seeing there. So we're encouraged by that momentum and we're encouraged by the volume of customer additions we saw in Q1.

Specific to Q1 subscription revenue, 1 point to note is that this was a very high recurring revenue quarter, which is great because that gives us visibility into the forward quarters that we're seeing. So that's what you saw in Q1, high subscription recurring revenue business out there that came in, in Q1, which is obviously great for future quarters. To your point earlier on the RPO side, we saw high RPO growth in the 50-plus percent and -- sorry, high cRPO growth in the 50-plus percent, which is -- shows the volume of growth of sort of our contracts that are coming in, in the quarter.

Our next question comes from Ittai Kidron with Oppenheimer.

I did want to focus on HCP. Perhaps you can talk about the customer adoption there. In what way is it different today than it was perhaps 2 or 3 quarters ago? And I know you don't have that much of a track record there. But maybe you could talk about the changing patterns of customers and how they use this. And in the past, you've talked about HCP as a way to go more lower end, open up the market more on the low end to mid-tier. Are those really the customers that you see coming in? Or is it really still large customers that are just, given their hybrid deployments, are also considering in deploying HCP?

Yes, great question, Ittai. I think as Dave mentioned, just sort of reiterating, it is sort of a blend of what we're seeing. On one side, it is opening up a new channel for us so it is a new audience and is that kind of long tail that he mentioned. So these are customers that we would not have historically engaged with, with sort of our outside field motion that are now coming in, obviously, driving lower ASP, more of a transactional business.

At the same time, we are seeing some of these larger enterprise organizations that are engaging with HCP at more of a departmental or project level where great, I have a project that's being built in native cloud. Rather than try and operate it themselves, they're going directly through to HCP. I think the -- by and large, most of where we're seeing sort of the net new logos is the sort of long tail. And we expect to see more of sort of those -- the kind of enterprise customers that they continue to gain comfort with the idea that core infrastructure is going to be provided as a managed service.

And I think that is probably the biggest question mark for us is just the comfort of those customers as they migrate to the notion of, hey, this is Tier 1 critical infrastructure being provided as a managed service.

Got it, very good. And maybe as a follow-up, Navam, on gross margins, good start for the year. You've talked about, I think, last quarter about 80% gross margin target for the year. With the strong start that you have, would you care to revise that up perhaps?

Thanks, Ittai. Always making me revise up. The -- so we're pleased with beating the gross margin plan. There's obviously 3 constituents to gross margin. There's the self-managed margin, the cloud margin and the professional services margin. The mix of that impacts the margin. So the good news that we're seeing is we beat our plan on cloud margins, and it's coming in ahead of what our expectations were.

So we're comfortable with where we're landing at the 80% mark. And over time, we should see, as cloud takes a bigger share, we should land towards the long-term targets. All that being said, we're a very high gross margin company and we're pleased with that.

Your next question comes from Brad Sills with Bank of America Securities.

I wanted to ask a question about HashiCorp Cloud as well, please. Is there something about these customers that are opting for the cloud option, that you think there's a different profile and trajectory of expand? In other words, do you think that those customer cohorts might have a higher propensity to add more over time if they're committing infrastructure to the cloud here with HashiCorp? Is it a different profile customer?

Yes. Thanks. This is Dave. I would say, yes, it is, to a degree. I think it's kind of in 2 categories. I think one is that sort of the -- perhaps the longer tail customers as we've indicated. But number two is the departmental user inside of these larger organizations, which, in some respects, lack the expertise of running the stuff even though they know they need it. So they almost -- that enables us, in a sense, to be their platform team for them.

The implication for those people that onboard, maybe really at the departmental level, is they get up and running far faster. So yes, you can infer that I would expect those customers on board and get to their expansion and extensions across product faster. And I think that's certainly the design principle of why we've created HashiCorp Cloud, not as just a cloud version of one of our products but rather as a single common chassis to which all our products drop, that allows us to then encourage that motion.

So yes, that is 2 audiences. Yes, I think I certainly believe, I'm optimistic that it leads to adoption faster. I would also -- maybe the last thing, I think generally, we're surprised at the growing appetite for people to consume HCP in the larger customers. And I think the operational reality of infrastructure products, it makes people slower to adopt, but also once they start running them themselves, realize how quickly they are. And so I think they're certainly optimistic and Armon and I traveled certainly the last quarter. You saw that express more often than I would have expected. Hey, can you run the stuff for us? And so we'll meet that market as it comes. Super optimistic.

Great. And one more, if I may, please. The NRR acceleration here the last several quarters. Where would you say that incremental expansion is coming from? Is it more on the expand side or more on the extend side as customers go from category to category? Or is it more just the expansion within whatever product they're running, whether it's Terraform or Vault or Consul?

Yes. The short answer is it's both. I'll just sort of recall that sort of our pricing model is aligned to as more applications go to cloud, more usage of our products results. So for each one of our products has that natural motion to it. So what you're seeing, as people's cloud estates grow, we are, in some sense, a portion of that spend category. And certainly, the fact that we can procure that through the marketplaces and those cloud providers makes that relatively frictionless.

And then number two, there's the extend cross-product opportunity. I think as we said before, there's just a maturity journey that people go on. They sort of start with the Terraform problem or the Vault problem, and then they realize they have the other problem and they sort of naturally extend. And that is just the journey. So it's almost inevitable that one customer becomes an extend customer. And I think what you're seeing is as cohorts go, that just is what's happening. So it's really both.

Our next question comes from Michael Turits with KeyBanc.

First is sort of an extension of the macro question. But did you see as a result of macro inflation, recession fears, et cetera, any change in people's attitude to, A, towards cloud migration? And two, although clearly, you wouldn't see it in your numbers for big deals, which were big deals, which are good, any change in their willingness to do larger projects?

I mean, do you have a point of view, Armon, probably?

Yes. No, I think a great question. I think in general, what we've seen is most of these large enterprises have embarked on their cloud journey several years ago, and I think they see it as a transition that's going to take them 5, 10 years to really complete. In many ways, I think we look back on things like the hypervisor transition, and that was a decade-long transition for a lot of those customers.

And there's going to be a lot of macro bumps in a decade-long period. So I think that's kind of the attitude of the customers. They realize that inevitably, they have to do these transitions. They have to sort of innovate and drive the sort of transformation of their digital estate. So although, yes, our European customer is very aware of, obviously, ground conflict there, customers around the world were aware of the macro environment, I don't think we've seen much impact to their plans around their adoption of cloud to a significant extent.

And on the large deal sizes, are people chunking up and doing smaller projects? Again, obviously, look, your big deal numbers are great. You signed another $10 million. So the numbers, you wouldn't think so. But anecdotally, any reluctance to get involved in larger and, say, longer implementation time type of projects?

No. Obviously, I think it's pretty consistent. I think the constraint is more around expertise in their particular region truthfully, like that is -- as with any platform transition that occurs, there's a skills challenge around people's understanding of that new platform, just like when we went from the mainframe world to the client server world, it took some time for the skills in the marketplace to emerge. I think that's the bigger constraint than anything else.

And maybe the piece I would add here is just talking about that, the sort of second $10 million customer, I think what's clear to our customers that they get to sort of a critical scale with us is they realize we will be a strategic partner to them. We are not a point vendor solving 1 problem. We offer sort of a suite of solutions. We're going to solve multiple problems for them.

And so I think there's a natural comfort with the idea that you guys are going to be a generational partner to me as I'm going through this transition. And they want to have a deep relationship and sort of plan over a multiyear horizon because we impact their strategy over a multiyear horizon.

Yes. I'm just going to echo that point because Armon's exactly right. That is what we hear over and over again. You think about the customer, it is generally a platform team inside of a large organization. They -- in these kinds of environments, their bias is to consolidate the relationships, not expand them. The fact that we have many products that address many of their problems from a single buying center, a single vendor is actually very compelling. And that term, strategic partner, is the one that gets used over and over and over again, like we're now certainly a significant material proportion of Global 2000 as in that seat. And I think that's the basis of our growth opportunity from here.

Our next question comes from Alex Zukin with Wolfe Research.

So not to kind of beat the dead horse on macro but maybe asked a different way, how should we think about the -- as you look at your pipelines and you evaluated them, any change in the length of the sales cycles, the velocity of pipeline conversion? Or any elements there that make you have an added level of conservatism into the guidance? And then I got a quick follow-up.

Yes, Alex. Thanks for that. Look, in Q1, we're seeing consistent and solid pipeline, and we're comfortable with what we're looking at, at Q2 in terms of what the guidance number is. For the back half, we're very aware of macro. So what we've taken is a wait-and-see attitude here on the guide. So at this point, demand remains pretty strong and we're encouraged with how the year is looking.

Perfect. And then, I guess is there -- was there anything in terms of the duration that was either different or nuanced this quarter? I look at the total dollars added on total RPO, and sequentially, they were a little bit lighter than maybe this time last year. But then current RPO was actually really strong. And then the logical question we're going to get is kind of to bridge the -- if I look at current RPO change plus subscription revenue, it looks like it's over 50%. And then the guidance for Q4, I believe, just implies a top line growth number. It starts with a 2 for subscription revenue. So just how do we bridge that?

Yes. Good observation. So the cRPO number is a good proxy as to what the 1-year remaining revenue could be, not including the renewals. So that's the number that you look at on an apples-to-apples basis for year-over-year. The duration did come down slightly, and that's what you're seeing on the total RPO growth line. So it is reflected in the total RPO growth, which is subject to duration. Also on the revenue line, you're seeing more ratability of revenue. So all those things are connected.

Our next question comes from Brad Reback with Stifel.

Navam, on the OpEx guide for 2Q, a fairly significant step-up after 2 quarters of basically flat. Just trying to figure out the degree of conservatism versus seasonal aspects that might be impacting.

Yes. And maybe a step back to talk a little bit about the OpEx philosophy here, which we touched on the last call as well. The plan is relatively consistent. We have a very high net dollar retention rate, high gross margin and a very solid balance sheet. So we made a decision to invest in the company. And starting Q4, to show leverage in the business on an annual basis as we move forward beyond Q4. So that's sort of the shape of the operating income line that you're seeing in the guidance.

Now that being said, in Q1, we're very encouraged by delivering the top line performance with better-than-expected operating income, and that's just part of our DNA as being a company that's very focused on efficiency. So we're looking forward to delivering more of that in the future and sticking to our DNA of being an efficient company.

If I just could make -- perhaps just a matter point on that to echo Navam's point. We've been a very efficient company historically, if you look at our cash consumption relative to our scale today all through our life because of a design principle around efficiency. We have, on top of that, a high gross margin business with strong NDE. That being said, we're constantly looking at investment efficacy opportunities, and you certainly saw that in Q1. But we also think there's an opportunity cost to not investing aggressively, given the blue ocean around us in this market and the fortress balance sheet that we have to work with. So that sort of underpins our philosophy. Hopefully, it gives a sense.

Our next question comes from Derrick Wood with Cowen.

This is Carson on for Derrick. So security seems to be one of the strongest spending priorities in software right now. Can you give us a sense on how Vault is performing relative to the broader portfolio? What kind of trends you're seeing around initial deal sizes and expansion?

Yes, I'll make the comment, this is Dave. I appreciate the question. Yes, I think, honestly, it's very, very consistent with what we've seen before. Our business remains relatively balanced across the different aspects of our portfolio. In terms of deal sizes, again, very, very consistent. I think what you've seen from us is considerate push for higher velocity lands at a lower cost, and that's sort of an instruction to our sales team. Let's land the smaller transaction faster as opposed to the larger one. And I think that holds true across our portfolio.

So what you've seen is actually an increase in the customer count and a slight drop in the ASP corresponding to that, which is on purpose. As you know, when you're talking about infrastructure, people tend to say, okay, hold on, let's price this across the entire state, and that tends to slow things down. The more we can constrain that to a starting point to grow from, that's what we're trying to do. So net, no real change in the dynamics across products or across deal sizes truthfully.

But yes, security and Vault as the broker of identity across your machine estate is one of those fundamental investments that I think most companies are making.

And I think the piece I would add to that is just from sort of a tailwind perspective, certainly, customers are -- cybersecurity is very, very top of mind. And I think for us having a Zero Trust narrative and a story around a portfolio of products rather than just Vault, clearly, Vault is sort of our anchor play there, where we tend to sort of land in customers but then being able to tell a compelling story around great, how can we extend that to service networking and really do bring a zero trust approach to network segmentation with Consul, right? And I think you saw that in our second $10 million customer, where they're really looking at great, how do we embrace those zero trust primitives and really extend that beyond just identity with Vault and application security into the networking aspect.

And then looking beyond into our portfolio with boundary as we think about expanding that further into privileged access management. I think that has been very compelling for our customers because we can present that kind of end-to-end zero trust architecture and certainly very top of mind for customers.

Our next question comes from James Fish with Piper Sandler.

One of the items we've heard over the last few weeks is just the strategy around the freemium model. How are you looking to better monetize some of the core offerings and, in particular, Terraform? Does it make sense longer term to put a limited time frame for the free version or you put in a few versions behind the paid offering?

Go ahead, Armon.

Yes, great. Thanks for the question. I think we've had a very consistent approach to how we monetize our open source, and it's premised around the idea around standardization of a whole market. So I think we invest genuinely in the success of our open source practitioners and really focus on how do we solve the technical problem for the individual users, whether that might be provisioning with Terraform, whether that's secret management with Vault, et cetera.

So the open source is really meant to be ungated in that sense to really drive practitioner bottom-up adoption, drive market standardization, and I think you see that with Terraform now having 2,000-plus integrations. And then ultimately, the commercialization is driven by a differentiated commercial product that solves the organizational challenges of using those products at scale.

So what we're not trying to monetize is the lone individual users. As you go from a single user to a team, great, that's where our entry-level commercial products are focused. And then as you move from a team to maybe a broader department level or platform level, it's how do you move from collaboration at the lower end to really around multi-tenancy, governance, security, policy, operations at scale at the upper end. And that's really where we focus on it rather than trying to create sort of a second-class experience around the open source.

Got it. And just to circle back in the pipeline part that you mentioned, Dave. As you were talking about the pipeline here being pretty consistent in terms of the front end of the pipeline, what are you seeing in terms of the lower part of the pipe and specifically on the large deals that could become plus $10 million contributors as it sounds like you're focused more on the low-hanging fruit to smaller customers at this point just as you kind of save some OpEx here?

No, not at all. I would say I think we have a segment view of how we cover the market. And what I was referring to previously was really the cloud offerings have a natural affinity for that lower-end segment, and that certainly has its own unit economics that we manage separately.

The inference on the rest of our business, no, is that's really unchanged. What I was referring to is that the pipeline build in the other segments continues to be strong. I think the guidance that Navam shared is reflective of just an awareness of the macro towards the end of the year, that which will become more clear as we get close to it. And that's really the visibility we have today, which is we see a lot of positive signs in the pipeline.

Our next question comes from Sanjit Singh with Morgan Stanley.

And congrats on the really -- you touch on a metric this quarter, both on the [interface side] and on the total customer base. That was very nice to see. Dave, I wanted to pick up on a comment you made on an earlier question around the multiple sources or the multiple value propositions that the platform provides. And I guess the spirit of my question is the ability to hone in on maybe the cost efficiency, cost savings TCO aspect as part of the sales playbook.

Is there an opportunity here to go into the customer base and say, we can dramatically lower your hardware spend by consolidating firewalls or your load balancers as you think about a 1-2 combination of Consul as well as Vault in a potentially tougher spend environment? Is that a playbook that can be used to a certain degree? And how effective has that message been in the past during prior periods of uncertainty?

Yes. Thanks, Sanjit. I'd say, yes, I think my core view is that there's heterogeneity to infrastructure and the apps that are running in your private data center being orchestrated by, say, a firewall in the load balancer generally are going to stay there. So our value proposition is really about providing that bridge to the new world for your new applications.

I think one of the real benefits actually I talked about in the prepared remarks was the Consul-Terraform sync capability, which basically allows you to update the configuration of legacy networking gear as part of your new application deployment. So I think the cost savings comes -- is a very, very easy value proposition around extending the life of your existing investments for maybe the 3-year view to the 5-year view, in that sense, not having to replace that legacy year because we are providing the bridge to the new world.

So I think that's actually closer to how the conversation goes. We don't generally go in and talk to you, say, "Hey, you're running firewalls or replace firewalls because it would require you to rebuild the applications." It's more, hey, for your new applications, you probably don't need that firewall approach. Let us help you provide a vehicle to bridge to keep your old firewalls relevant, and in so doing, save the cost of having to upgrade those to something newer. The cost value proposition is really, really strong, honestly, across all of our products and, in combination, even stronger. Though what you described is certainly a play, but it's probably not the one we leave it.

Understood. Understood. And then sort of another product and a topic I wanted to revisit again, again as part of an earlier question, which is around sort of modernization triggers. And it's a topic that I think we get quite often with respect to Terraform but also with respect to Vault. I think you sort of mentioned your strategic customer wins. You landed an enterprise Vault win. That customer started out in open source in 2019. And so I was wondering if you sort of -- is there any sort of narratives to draw between the customer landing with open source or starting with open source 2, 2.5, 3 years ago and ultimately becoming enterprise-paying customer, both on the Vault and the Terraform side, what is sort of that journey that they're going through? Help us understand how these monetization triggers have evolved over time.

Yes. I think that -- I'll take the Vault one first. The idea this one might be using Vault to basically authenticate the identity for a particular application in open source is how it begins. But it's sort of the minute that, that gets sort of established as a central shared service, that it's a Tier 0 application to your company, it's sort of an immediate trigger, right, it was okay that it was just running on 1 machine previously, but now you have to run it as a central shared service. There's redundancy. There's replication. If that thing goes down, it's like the power being turned off for all the apps that speak to it.

And once that realization is made, hold on a second, this is not just underpinning a single thing. This is actually a strategic Tier 0 application. It's a very simple conversion and that's what ends up happening. There's sort of this natural maturation through that organization that's very, very consistent.

On Terraform, it's a slightly different transition. It is someone -- to Armon's point, our first priority was around market standardization to the greatest degree possible by making that ubiquitous. And then we built Terraform Cloud, that as an example, to provide a broader workflow around people using Terraform provision infrastructure. So where someone may have initially adopted Terraform just as a provisioning tool on their laptop, when it gets established as that Tier 0 application that is underpinning the entire organization's provisioning process, now you need audit trails and policy and governance.

And it's that notion of a single platform team, ultimately, we need to run something as a service for the organization, maybe is an easier way to envision the value proposition because to be clear, these are Tier 0 applications that cannot go down. And that sort of underpins the overall value proposition of the commercial products.

Our next question comes from Pat Walravens with JMP Securities.

Here's a different perspective on all this stuff. So Dave and Armon, is there a way in which a tighter capital market, tougher venture financing environment will help Hashi? Are you getting e-mails from interesting private companies who are like, "We'd like to talk about selling to you?" Are you seeing less crazy pricing behavior from some competitors that are seeking to conserve cash or anything else like that?

Yes, I would say on the -- maybe the 2 things separately. I think it's a little early is a short version. I think the private market is taking a while to react. So I think we'll certainly be disciplined and aware of what's happening in the private markets. But it's early. Number two, in terms of the market dynamics, in truth, the competitive environment is not necessarily -- there are not a lot of smaller companies that we compete with truthfully. I think it's generally more of the market standardization around open source and then the engagement commercially is much more common for us.

So that long-term goal of driving standardization in order to provide an opportunity to be the partner of choice commercially is really more our model than competitively. But yes, if there are other startups trying to enter these markets, it certainly feels like it's gotten more difficult.

Yes. Maybe the one thing I would add is that certainly, we felt a bit of a tailwind on the recruiting side just because I think organizations and people looking around, see that, hey, Hashi just went through their IPO. We have a fortress balance sheet. We definitely are in a different stage relative to some of these folks that maybe had stratospheric valuations that are on their way back down to Earth.

Your next question comes from Fatima Boolani with Citi.

This is [Joel] on for Fatima. This one's just on Consul. Are you able to share with us how budgetary and competitive dynamics are evolving here, particularly as we see larger cyber vendors become more vocal about the service mesh opportunity? And then also related to that, given your recent announcement of the SVP for Networking, I was just wondering if you could update us on engineering, product design, where that stands as well as the R&D road map and sales road map? And then I have a quick follow-up.

Sure. Yes, great question. I think in general, what we feel optimistic about is that I think the market awareness and maturity around service mesh has evolved significantly, right? I think certainly 18 months, 24 months ago, relatively limited awareness. And I think now, I think we're seeing that we're moving out of just the bleeding edge of early adopters into the early majority, really starting to think about it and prioritize it as an infrastructure project. So that's certainly encouraging for us as now we feel like there's sort of a broader market that's sort of aware and starting to go through that conversation.

From an R&D investment perspective, yes, we announced Gurpreet Singh joined as our new SVP running our networking group. We are very excited for him to join and lead that. Certainly an area where we are very deeply invested, both with Consul as a service mesh. We had some updates to our API gateway capability in the quarter as well. And then obviously, our HCP Consul offerings as a managed service.

So continuing to invest deeply across all of those fronts. And I think again, pointing to some of these customers that are now extending from Terraform and only to bring in Consul, it really speaks to, I think, our platform opportunity and really the chance to be a strategic vendor.

Just one point I'll add because your question around the dynamics, I think we have learned that before you can tackle the service mesh problem, you have to generally solve the provisioning and security problem, right? Because until you move to the notion of service-based identity, it's hard to move to service-based orchestration, just to double-click on it a little bit. So that sort of underscores Armon's point is our focus are building the trust of the platform teams, Terraform and Vault. And then that, in a sense, makes us the incumbent for the service mesh opportunity because Vault at that point is the identity broker.

Okay. Great. And then just a quick follow-up here on consumption models. So many of your software peers have been alluding to moderating usage or consumption patterns. Are you seeing a similar dynamic to develop across certain customer cohorts and end markets? Or if not, what is keeping your adoption or pricing model more integrated? And that's all for me.

Yes. Why don't I take that quickly? From a results perspective, there really is no impact on consumption on our revenue. It's mostly entitlement subscription-based. So over time, you'll see more of that. But at this time, we're mostly subscription revenue that has entitlements.

Your next question comes from Kash Rangan with Goldman Sachs.

Congrats on the quarter. I'm curious to get your perspective on 2 things. One is the HCP. Are we at a point where the service is poised for prime time inflection? Or is there certain things from a product development perspective that you're looking to invest in that could enable HCP to really inflect? That's one. And number two, with respect to the cloud migrations vis-à-vis expanding current enterprises, at what point do this Hashi get typically involved? And is it at a fairly mature phase of the cloud migration process or is it at the front end?

The reason to ask that question is if due to the economic uncertainty, people stop for a little bit, pause the cloud migration, does that impact Hashi at all? Or are you getting involved in a later stage of the migration process there at the front end, even if things slow down a little bit? That provisioning networking security standpoint, you get involved much further along the way. And maybe that could help you. I'm not sure how exactly to think about it, I just wanted to get your thoughts.

Yes. Great question, Kash. Yes. So let me take the first question. In terms of sort of the momentum on cloud, I think we feel good that there's strong consistent delivery from an R&D perspective. I think there's a lot more we can do that will continue to accelerate that, right? Again, if we look at the beginning of last year, we entered with effectively 1 cloud product. We exited last year with 3 on a single cloud provider. We're now at 5 cloud products across 2 providers.

So I think what you're going to continue to see from us, and we have our upcoming user conference in the next 3, 4 weeks here, is you'll see more momentum in terms of adding additional support for net new products. You'll see additional cloud providers, additional cloud regions. And so I think each one of those continues to make that a little bit easier and expand the opportunity ahead of us. So I don't think there's going to be a particular inflection moment so much as we continue to deliver, it will just continuously improve.

And on your second question, I think -- we think about the usage of our products in 2 phases, in which step 1 is around our focus on practitioner adoption in open source. When people very much begin their cloud programs, they use our products in open source because that's what the practitioners use. And then the phase 2 is when they step back and go, hold on a second, I need to systematize this and that's the platform team creation. So that's the motion in the first instance to using our open source products and that's where these numbers come from. And then the second phase is when they become our commercial customers.

And I think irrespective of where you are in your journey, you are going to go through that -- those 2 processes. So I certainly am optimistic about the tailwinds around secular cloud adoption and whether it's early stage, just open source usage or later-stage commercial usage, one leads to the other. So certainly, the opportunity is a very durable one. It's not a onetime thing for us.

I would now like to turn the call back over to Mr. Dave McJannet for any closing remarks.

I'd just like to express my thanks for the participation for everyone here. We appreciate you dialing in for all the questions and look forward to speaking with everybody soon. Thank you.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.