HashiCorp Inc (HCP) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to HashiCorp.'s Fiscal 2022 Fourth 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 first speaker today, Alex Kurtz, Head of Investor Relations. Thank you. Please go ahead, sir.

Good afternoon, and welcome to HashiCorp.'s Fiscal 2022 Fourth Quarter Earnings Call. This afternoon, we will be discussing our financial results for the fourth quarter announced in our press release issued after the market closed today. With me are HashiCorp.'s CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar.

At the close of the market today and 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 our earnings call and encourage you to review the deck in advance of our calls. You can access the deck on our investor website at ir.hashicorp.com.

Today's call will contain forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition and our guidance for the first 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 good afternoon, everyone. Welcome to our first earnings call as a public company. We're excited to share with you that Q4 was a strong quarter for HashiCorp as we continue to execute on our vision of unlocking the value of the cloud for our customers through our automation offerings. We strongly believe that the move to a cloud operating model is the foundation for how enterprises everywhere will manage their infrastructure and application environments going forward.

We reported revenue of $97 million, representing year-over-year growth of 56%, along with the trailing 4-quarter average net dollar retention rate of 131%. But before diving deeper into Q4 results, I'd like to quickly reflect on our initial public offering we completed in early December. The IPO was a tremendous milestone for the company and reflects the hard work our team members have put in to build an incredible product portfolio for what we believe is a once-in-a-generation software business.

We're very proud to have some of the largest enterprises running their most critical applications on our products and view the IPO as the next step to support these customers with continued investments in our products and in our ongoing vision for enabling their move to cloud or multi-cloud, providing them cost savings, risk mitigation and revenue generation opportunities.

Organizations right now are undergoing a digital transformation across every business function driven by competition and ever-increasing consumer expectations. Key to this digital transformation is a replatforming from static on-premises infrastructure to dynamic and distributed cloud infrastructure. We realized early on that everything about the cloud requires new thinking. Existing procedures are too inefficient to scale with the distributed multi-cloud infrastructure reality that these organizations are adopting.

What's needed are consistent workflows, a new cloud operating model for enterprise IT to provision, secure, connect and run infrastructure and applications across multiple public and private cloud environments. Enterprises want a system of record for these workflows and for managing their significant investments in cloud programs. This system of record is what the HashiCorp product portfolio provides.

To make the most of this opportunity, we take a long-term view on making our market function. We build our products using an open core software development model with large communities of users, contributors and partners collaborating on their development. Our commercial software builds on our open-source products with additional enterprise capabilities.

Our sales efforts build on our broad open-source reach and are driven by an enterprise sales force that focuses on being a strategic partner of some of the most significant organizations in the world as they move to the cloud. In addition, our cloud offering supplements our direct sales motion with a self-serve offering for small and medium-sized businesses.

And to support all of these efforts, we have an ecosystem of partners including cloud service providers, independent software vendors and system integrators that standardize around our offerings and help to support our customers' needs. These elements are the foundation of our durable growth opportunity and are the critical components of our adopt, land, expand, extend business motion.

One more thing before I discuss the results for the quarter. I'd like to talk about the steps that we see enterprises taking in adopting this cloud operating model for infrastructure that I discussed earlier. Organizations typically move through multiple predictable stages of cloud maturity. Their initial forays in the cloud are usually driven by teams looking to build net new applications. Over time, the best practices and expertise learned from these siloed efforts can become a common consistent foundation to achieve cloud infrastructure automation. This common operating model is often centralized through a cloud program office for a cloud platform team, which is often the second step in the company's journey to a multi-cloud estate.

This centralized model ultimately becomes the basis for how enterprises interface their cloud infrastructure. As organizations mature, we see this model being applied to increasing amounts of their infrastructure, including private cloud and data centers, providing similar gains in consistency and automation. Our foundational technologies solve these challenges of cloud adoption by enabling this model and providing a system of record that unlocks the full potential of modern public and private clouds. We are excited by what we see our customers are doing so far and even more so about the road ahead.

Now taking a closer look at our results. A few highlights stood out in the fourth quarter. We added 10 new $1 million or greater ARR customers and 60 new $100,000 or greater ARR customers in the quarter for the company, a strong signal of our adoption within the largest IT organizations. And we're excited to share with you that we crossed a corporate milestone during the fourth quarter with our first customer reaching more than $10 million in annual recurring revenue, a Fortune 10 company that after starting their journey with us as an open-source customer all the way back in 2015, has made repeated investments in both Terraform and Vault, along with the major renewal and expansion of Vault in the fourth quarter.

Another key theme from the quarter was the momentum with customers purchasing multiple products. We continue to win the position of trust within the platform teams. And as an example from Q4, we saw a solid number of Consul deals as we remain highly focused on driving our cloud-based networking framework into the marketplace.

And to frame the progress we've made with the penetration of our core products of Terraform, Vault and Consul, the absolute number of $100,000 or greater annual recurring revenue customers that have purchased multiple products increased 42% year-over-year. This represents 45% of our $100,000 or greater ARR customers who are now using multiple products in the fourth quarter.

We believe that the 3 layers we are focused on, infrastructure, security and networking, represent extremely large total addressable markets, each of which are moving through generational changes. And we are investing against all of these opportunities.

Finally, we made steady progress in the adoption of our HCP cloud product offering in the quarter, growing nearly 350% in the fourth quarter from the prior period. As we previously discussed, FY '23 will be a year of ongoing R&D investment into HCP capabilities as we increase the number of cloud services and enterprise features as well as additional cloud regions.

Now turning your attention to notable fourth quarter transactions. I'd like to highlight a few examples of strategic deals that were completed and that demonstrate our execution in the marketplace and showing our adopt, land, expand, motion and action. As an example of a land transaction, a European-based consumer goods company standardized on Vault Enterprise after starting out as an open-source user. Vault will now provide a common workflow across clouds and enable a standardized approach to authentication. Vault also enabled this customer to save budget dollars through the consolidation of engineering resources and tools. I'll note that Amazon Marketplace was a central part of the sales process, demonstrating the go-to-market alignment we've built with the top cloud platforms.

An example of an expand transaction was a deal with one of the top consumer brands in Asia. This customer expanded the secrets management that was already in place on Amazon into their Azure environment with Vault, expanded Terraform license to support the Azure cloud deployments and further expanded Consul into additional business units in the quarter. At the core of this opportunity, our products accelerate this customer's time to market with new consumer services and simplified their compliance regime.

Finally, an example of an extend transaction. We had a global energy services company that extended into Vault during the quarter after starting out as a Terraform customer. This customer is using Vault to help centralize and protect its Azure and Google secrets as the company expands its multi-cloud estate. This customer chose Vault as it will enable faster development cycles and at the same time reduce costs.

I'd like to thank our entire team for their continued focus on delivering on our product road maps as well as engaging and delivering for our customers in the field. In addition, we wouldn't be where we are without our open-source community and the ecosystem of partners that work with us, and I'd like to also thank them.

With that, let me turn the call over to Navam.

Thanks, Dave, and thanks to everyone for joining us today. Turning your attention to our financial results. We produced strong fourth quarter results with total revenue of $96.5 million, which was up 56% year-over-year, and we maintained a trailing 4-quarter average net dollar retention rate of 131%.

We came 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 $1.70 per share on a GAAP basis and $0.24 per share on a non-GAAP basis. We would note that due to the structure of our stock-based compensation, we recognized all of our historical RSU expenses in the fourth quarter, resulting in $196 million in total SBC recognized. SBC will revert to a more normalized amount starting in the first quarter of '23, which we expect to be in the $50 million range.

We track several key business metrics, which we believe help in understanding our business and financial performance in our journey to deliver durable growth. We focus on, one, our revenue growth rate; two, the growth in the number of total customers we serve; three, the growth in the number of total customers that represent greater or equal to $100,000 in ARR as well as their aggregate contribution to revenue; four, the revenue we derive from customers on the HashiCorp Cloud Platform; five, our trailing 12-month free cash flow margins; and six, our non-GAAP RPOs. Our earnings deck contains detailed information on all these metrics.

Focusing on one of these core metrics, the greater or equal to $100,000 customer cohort. We made solid progress during the fourth quarter. We continue to execute our adopt, land, expand and extend model as outlined by the customer activity in the quarter, which Dave spoke about. On a trailing 12-month basis, we added 155 of these customers and grew their revenue from $123,000 per customer to $147,000 per customer in the quarter, a 20% year-over-year increase.

We are also encouraged by our HCP business during the quarter because we saw strong demand signals. Our cloud revenue number showed solid growth, and our cloud bookings more than doubled compared to a year ago period, setting the stage for continued strong performance.

Two final thoughts before providing forward guidance. First, we are very pleased with the pace of demand in the quarter driven by our $100,000 or greater ARR customer activity, and we remain on track executing on our long-term plan of delivering durable and high revenue CAGR. Second, similar to most other enterprise software businesses, we benefit from buying patterns where large enterprises tend to make sizable end-of-year purchasing decisions, leading to some seasonality in our business.

We continue to see strong demand signals coming from the G2K and our $100,000 or greater ARR customers. These signals give us confidence in the long-term secular shift that is happening in the cloud and are placed as a critical part of the technology stack underpinning cloud consumption. We intend to invest in our product and go-to-market teams to position the company to capture this large TAM transition. Further, we continue to expect leverage in our annual model beginning in the fourth quarter of fiscal 2023.

Now I want to provide our guidance for the first quarter and the full year FY 2023. For the first quarter of fiscal '23, we expect total revenue in the range of $92 million to $96 million. We expect a Q1 non-GAAP operating loss in the range of $52 million to $55 million. We expect non-GAAP net loss per share to be between $0.30 and $0.28 based on 182 million weighted average basic and fully diluted shares outstanding.

For the full fiscal year '23, we expect total revenue to be in the range of $413 million and $423 million. We expect FY '23 non-GAAP operating loss in the range of $231 million and $239 million. We expect non-GAAP net loss per share to be between $1.30 and $1.26 based on 184 million weighted average basic and diluted shares used for computing non-GAAP net loss per share.

In closing, we are very pleased with what we accomplished in our first quarter as a public company and in fiscal 2022. We are looking forward to the year ahead.

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

Thanks, Navam. Operator, let's start with the first question.

(Operator Instructions) Our first question or comment comes from the line of [Bob Wong] from Morgan Stanley.

Congratulations for a great quarter. I'm filling in for Sanjit Singh here at Morgan Stanley. Just the first question on your $100,000 customer adds. Obviously, the $100,000 customer adds for the quarter was very strong. Can you maybe help us think about potential $100,000 customer growth trend going forward? Are there factors that maybe we should consider when looking at this customer base that would lead us to believe that it would trend down a little bit? Or would it sustain at the current level?

So thanks, Bob. Let me answer that question. This is Dave. Just to underscore our model, we obviously -- these are huge spend categories that are transitioning, and they're all going to cloud and multi-cloud inevitability. Our model actually starts with the open-source part of our approach, which is the proliferation of open source to drive our products in the hands of practitioners. And then at some point down the road, that is when they become a commercial customer, the customer we indicated earlier in the prepared remarks.

So really, you got to think about the open-source community as the starting point, which has been a huge investment of ours for a very, very long period of time. We then saw 60 $100,000 customers, 10 $1 million customers and 1 $10 million customer and accompanied by another stat of the 131% net dollar expansion rate of that portfolio. Fundamentally, that is that model running, right? They adopt one open-source project. That becomes one product. As a multiproduct company, they then add another product. And over the course of time, they walk up that relationship with us to the scale of the opportunity that we're inferring.

Fundamentally, we are tied to the consumption of the cloud estate, right? As the cloud programs grow, generally speaking, our product portfolio grows with it. So I don't think there's anything unique to that $100,000 base. I think that's just an indication that once they're on that treadmill, they tend to grow as their cloud state grows.

Yes, bob, and I'll add to that. This is Navam. You got it exactly right. The way we think about the growth of our business is the $100,000 customer group growth. And the momentum in the fourth quarter was really strong. So we added, as you know, 60 net new $100,000 customers and 155 for the year. And as Dave mentioned during his comments, each of those customers continue to grow with us as evidenced by our strong net retention rate of 131%. So that 131% was also driven by the growth in $100,000 customers, and momentum remains very strong among that group.

Okay. That's very helpful. For my second question, can you maybe comment on just the adoption trends for some of your key products, right, Terraform, Vault and Consul at this point? Just curious if you can provide some type of revenue split out in terms of what percentage of the revenue came from Consul and Vault specifically. Or if not, just like maybe just compared to last quarter, how has that trended?

I'll let Armon answer that question.

Yes. Bob, let me take that one. So I don't think there were any significant shifts in the way our products were adopted by our customers. The lands are across our 2 core products, Terraform and Vault, and then we have also our emerging product, consul. So those 3 products were what the lands were in any given quarter.

The point to note is I think our base of multiproduct users also continued to grow. And we saw some strong growth of customers over $100,000 adopting multiple products, so 42% growth year-over-year in that $100,000 group adding their second and third product, which is obviously fantastic momentum. But in terms of product mix shifts and -- strong multiproduct usage.

Our next question or comment comes from the line of Alex Zukin from Wolfe Research.

I guess maybe, Dave, first, you're signing some truly unbelievable customers and customer sizes. As we think about just the level, for these largest customers, how do you think about for every dollar they spend on their cloud infrastructure and architecture, what percentage of their dollars or budgets ultimately do you think go to a solution like HashiCorp? And where is this relationship going forward? And then I've got a quick follow-up.

Yes. I think that's the appropriate question. I think it's so early, truthfully, that it's hard for us to know what percentage that normalizes. And I think we have to keep in mind how early we are in our evolution, right? I think we -- the company began in sort of 2013. Our first commercial products introduced really were not until late 2016. So early 2017 was our second product. 2018 was our third product. We're super early.

I would echo your view, which is I think the scale of $1 million customers and $10 million customers just underscores the size of the market. These are infrastructure markets that are large spend categories for customers. They spend billions of dollars inside the Global 2000 on these categories. So it's tough to put a number on the math other than to sort of highlight that we are very early, truthfully, in that evolution.

I think people are making strategic relationship bets in our view on who their partner for this multi-cloud infrastructure estate is going to be. And that's really why we are investing where we are. I think we don't know the exact number where that stabilizes, but it's very clear that it's correlated. And I think that conviction comes from seeing really the size of the commitments but also on the NDE that we're seeing from people both expand the existing use of the products and extend to adjacent products. I cannot answer you on that one for exactly, but hopefully that gives you a sense for how we think about it.

And this is Armon. The additional color I would add here is, like we shared, we have our first customer who crossed the $10 million mark this quarter, which we're super excited about. But when we look at even that singular customer, that is a single product driving most of that. This is not a wall-to-wall deploy, and this is within the context of a larger multibillion-dollar IT budget. So as we think about kind of what that spend ceiling looks like within any one of these accounts, we feel like there's a ton of headroom there. And I think that's representative of the broader Global 2000.

Perfect. And then, Navam, maybe one for you. If you look at the mix of bookings split between 1 year and multiyear deals, as you continue to become more strategic with your customers but also sell more of the cloud platform product, how should we think about that split trending in the future?

Yes. Thanks, Alex. Good question. As you know, most of our revenue is ratable. So more than 90% of our revenue is ratable. So regardless of the mix, I think we are holding good ratability and forward visibility into our revenue.

Now that being said, strategic customers do want to have longer engagements with us. So we're seeing a good mix of duration of multiyear deals. I don't think we are expecting anything different in the next year compared to what just happened this year in terms of the mix shift. As you saw, we saw a stabilization of duration this quarter and the prior few quarters. And that's pretty much how it's going to continue in the next few quarters. Overall, strong and very proud to be supporting these large customers in their journey in the cloud.

Our next question or comment comes from the line of Kash Rangan from Goldman Sachs.

Congratulations, Dave, Armon and Navam. Good to be able to talk to you guys. So in the quarter, it looks like there is a breakaway trend. The number of $100,000 customers you added, the number of customers in total that you added, I think it's the highest we've seen across the board in several quarters, even relative to your strong Q4 seasonality. Can you just talk about what might have changed? So is there an acceleration of the broader trends that you've seen at all? And maybe do you foresee any positive implications from the vertical landscape that's growing? Obviously, that's got implications for security and your Vault product. Maybe it's a little bit too far-fetched of a conclusion, but I'm just curious, what are some of the broader trends that seem to have accelerated in your Q4 results? And I have a quick follow-up question.

Yes. Thanks, Kash. Yes. This is Dave. I think honestly, it's pretty consistent through the inexorable shift to cloud. And if we see the results from the hyperscalers, you can see multi-cloud is the reality. So I think to a large degree, it's that continued shift coupled with our growing scale. Again, I always have to remind myself how early we are. When I joined here 6 years ago, we were only 20 people, right? So the scale of our organization has grown really, really rapidly. In fact, just had our sales kickoff event that just reminded us how big our organization is becoming. And I think that's -- the second part of it is our ability to engage with the market is certainly improving as we scale, and we're pleased with the progress there.

In terms of infrastructure as a category, yes, we are supporting many of the most strategic and important initiatives of our customers in the realm of not just infrastructure and network but also in security, and that's not lost on us. I also would just underscore that infrastructure is a deeply considered decision, right? These -- the velocity of conversations probably upticks as a result of what's happening in the world. But these are still deeply considered decisions. So I would expect us to be measured, drive that cadence of open-source proliferation coupled with land, expand and extend. And we're pretty excited about that. But probably those are the 3 kind of [outlooks], if that answers your question.

Yes, Kash, and let me add to it. Yes, let me add to it. On the point about Q4, I think we started the quarter with very strong pipeline for Q4, and we ended the quarter with a good conversion of that pipeline in Q4. So very, very positive about how that quarter turned out.

Just a reminder, we are just like any other enterprise software company and the buying patterns there. We experienced seasonality towards the end of the year as buyers tend to purchase more of our products. So we were a recipient of that in Q4. That being said, strong demand signals for the rest of the year in Q1 as well. So we're comfortable with the guidance that we had. But I wanted to remind you of the seasonality.

Got it. Final one was you started to see any breakaway trends in sales productivity. Of course, Terraform is the standard of the industry. Is it getting a little bit easier to sell Terraform? And maybe a couple of the other products like Vault and Consul are not too far behind in terms of maturity curve, customer adoption, overcoming hesitation, making the sale easier, et cetera. Any thoughts there?

So there are a couple of dynamics to that. I think the short answer is I think it's still relatively similar, I would argue. I think for the reasons as you outlined, there's broad generalization of the open-source community on our tech. But I think what we're seeing is generally pretty consistent. A lot of this is about market maturity. And I think as we've highlighted, the infrastructure and security markets are sort of increasingly mature, and we're able to meet the market where they are in a way that is productive for both of us.

I think the networking market, we're seeing great signs of it, of the transitioning, but that was still early. The cloud-native ecosystem, obviously, they're all bought into the notion of service-based networking. I would say in the Global 2000, it's a little bit earlier. So certainly for Terraform and Vault, about the same. Consul, I think probably seeing signs of market moving a little bit faster than it was.

Our next question or comment comes from the line of Mark Murphy from JPMorgan.

I'll add my congrats. So several software companies saw kind of a lull in consumption patterns in recent months. I'm curious, did you see any effect with HCP consumption to speak of? Or has that been more resilient? And then can you just remind us, what is it that can cause some of the sequential fluctuations in that cloud revenue trend?

Yes. So I'll answer the first one. The answer is we actually -- the predominant model for our cloud is, in fact, entitlement-based today still. So we don't see the shift in the consumption that other folks have. Navam, perhaps you can answer the question.

Yes. I mean I think the important part to note about HCP is that we saw -- we continue to see broad-based strong demand signals. And also, it's a new line of revenue for us, right? And it's opening up this new segment of customers below the G2K, the emerging enterprises. And to Dave's point, the consumption is strong within that group, which is reflecting our revenue, but it's more entitlement-based. Over time, as the conversion moves to consumption-based pricing, you'd see more of our SKUs trend that way. But overall, we're very pleased with the way HCP turned out and positive about the forward momentum of that line.

And I apologize for jumping in but also underscore that the first version of our cloud offering is really only 5 quarters old. We had one product on it. Last year, we added Vault for the first time and continued to roll out new products towards the end of the year and new regions. So it's really, really early for us in the cloud, but we actually had our best cloud bookings quarter ever, which is a milestone for us. But it's super, super early. And we're happy to talk a little bit about what's coming down the pike if you're interested. Otherwise, I can answer a different question.

Yes. Indirectly, Dave, yes, I do want to ask you and Armon about that. The -- what was on my mind is one of your customers had said that Hashi's suite of products is like the Apple ecosystem for IT. It was kind of just describing how everything just works harmoniously together, and I love that vision. Could you speak to how many customers today have reached this point of maturity where they're realizing a synergy across the products? And what I mean is multiproduct but also kind of woven together.

I'll let Armon answer that question.

Yes. No, it's a great question. I think there's a few different aspects to it. One is, as Navam shared, if you look at sort of the math of growth in terms of customers in the $100,000 segment going to multiproduct, so 42% growth year-over-year from where we are. So certainly, you can kind of see from a math perspective the customers are seeing that value of leaning into that kind of integrated platform experience.

And I think going back to, sorry, your previous question as well, I think one of the things we're seeing shift is customers are increasingly seeing Terraform as a standard in infrastructure. They're seeing Vault as a standard in zero trust security. And I think even with Consul, they're appreciating, hey, if we're part of this platform investment, we know HashiCorp is going to be a strategic partner to us for many, many years to come.

Now that we're actually under sort of the public governance, I think that was actually a huge aspect for us in terms of giving customers that comfort. And we're seeing that acceleration, as Dave mentioned, around the networking market as well, where people are really acknowledging that, hey, if Azure is going to be a strategic partner, these components are well integrated, and it makes sense for us to sort of invest in the broader HashiCorp platform vision as opposed to necessarily just coming in through a single product.

I just wanted to add one comment. I apologize. These elements are fundamentally connected. I think it's important for people to understand that if you have a provisioning problem, there's also a security aspect. There's also a networking aspect. In a sense, we sort of come from the future a little bit from the cloud world, and we know that our 1,000 customers eventually have all those problems. The product portfolio is designed that way, but we let people adopt the piecemeal. But if you talk to all of our scale customers, all of our more mature customers and certainly those in the cloud-native ecosystem like some of the folks that you see on the news, they are all using most of the products, not one.

Our next question or comment comes from the line of Jason Ader from William Blair.

Dave, what -- I guess when you think about 2023, what are your top 2 or 3 priorities? And what is the biggest constraint on your growth right now?

Jason, yes, it's really more of the same, truthfully. I think it's -- point number one is let's continue to scale our engagement with the Global 2000. I think history has thought us that when markets go through transitions, there's a time period where those decisions are made in terms of the new software stack. And we're deeply convicted about that, and we're committed to going after it aggressively. And you see that in the growth of our sales organization. And that is our priority #1. Priority #1, you saw us add 36 of the Global 2000 last quarter. We're going to keep doing that [sort of] that we want to partner with.

Second priority is our continued evolution of our products on HCP. That's an important new distribution channel for us. And perhaps Armon can just talk about some of the things that are happening there.

Yes. As Dave mentioned, cloud is a major investment for us from an R&D perspective. Last year, we went from just a single cloud product available at the start of the year, which is Terraform, to bringing Vault and Consul. That was initial SKUs on a few cloud regions. And so since then, through the year, we expanded the number of regions that we were in, the number of SKUs that were available, so adding kind of richer capability.

And as we think about carrying that into this year, to Dave's point, it is more of the same. But it is bringing additional products online, bringing additional cloud regions online, bringing additional cloud providers online, so really a heavy R&D investment in terms of enabling all of the HashiCorp tools to be consumed as a cloud service wherever the customer wants to consume it.

Got you. And so basically, you're saying that the biggest constraint right now sounds like it's adding as many salespeople and support people that you can to kind of capture that G2K opportunity as well as getting the HCP offering kind of fully ramped up across all major cloud regions. Is that fair?

Yes. On the first one, again, I make this point off, and these are considered decisions for a reason because they are durable. And so we can address it with the sales organization. But there's also aspects of the market, right, like certain regions are more mature than other regions. For example, North America, the Global 2000 shift to cloud is actually pretty mature. In other regions, it's less mature. And I think that's an important aspect that we keep an eye on. So infrastructure markets, as we like to say, move inexorably like the Mississippi, and that's been true.

Thanks, Jason. And just in the interest of time, we're going to stick to one question to get through all the remaining queue here. So operator?

Our next question or comment comes from the line of Derrick Wood from Cowen and Company.

Great quarter out of the gate, guys. I wanted to go back to the Consul topic. I mean it sounded like you had a strong quarter. I think Consul tends to generate bigger deals. I know it's still more of an emerging product. Just curious if there's anything you can do to proactively help kind of tilt the curve of adoption a little bit more in fiscal '23. And I know you guys announced an API gateway offering in tech preview recently. Just wondering how you're feeling about entering that market. And what kind of opportunity lies there?

I'll answer the first one, and I'll let Armon answer the second one. The first one is again, if you look at the cloud-native ecosystem in terms of the digital-native community, Consul is super broadly used. I just think the Global 2000's transition to cloud is actually really early, and they tend to run into the provisioning and security problem first. That's the simple truth.

So I think it's continued evangelism. It's continued demonstration within the lighthouse accounts, of which we have many, obviously, that are adopting this at scale and continue to push that message forward because the technology is very well proven in the digital-native ecosystem. Honestly, I think that's the constraint. It's a market constraint more than a product constraint.

You'll see us leaning in really heavily with the cloud providers themselves. We want to manage service with Microsoft and Azure. We do a lot of work to better link the runtime platforms on Amazon to Consul. And I think that's the second lever that we can do. And you've seen us investing deeply there. You want to talk about the other question?

Yes, I think there's a few fold there. So I think when we talk about accelerating kind of Consul overall, first piece, as Dave mentioned, is really the cloud delivery component. So as I mentioned, really only became available from middle of last year as a cloud service and the initial version. So this year, continuing to sort of expand the SKUs around console, the region availability, the cloud availability. So I think all of that will make it easier to kind of trial Consul as well as sort of go through the whole purchase experience with us as we add that as an option beyond just self-managed.

And the second piece is continuing to be deeply invested in the capabilities that it will enable Global 2000 customers as they're going through that transition of understanding, hey, what is our future of our zero-trust networking approach or how do we do cloud to ground networking or multi-cloud networking. There's a set of capabilities they continue to need to manage that sort of very, very large scale.

And then the API gateway is really about the completeness of vision, right? And I think what we're seeing is sort of an intersection of what was historically a separate north-south approach to networking versus an east-west. So I think historically, customers thought about those as sort of 2 different markets, different approaches, different vendors. I think as we're seeing the architectural patterns shift to being very microservice driven, services being deployed globally in kind of a multi-region way, that line is blurring increasingly. So I think east-west versus north-south is part of one logical networking story, and I think the API gateway rounds that out with Consul.

Our next question or comment comes from the line of Brad Sills from Bank of America Securities.

Congratulations on the nice quarter here. I just wanted to ask one on kind of that tipping point that you see in the customer base. For customers to kind of get to the scale, you talked about that kind of $10 million contract. Obviously, at this point, those are kind of the exception. But is there a certain footprint or number of applications that you see and which -- after which you really start to see customers really hit their stride in that expansion in their usage of HashiCorp?

Thanks. That's a very appropriate question given how we spend our days. The -- I think there's a transition that happens. I think there's a difference between a business group that's sort of building an application on cloud and that often ends up being an early adopter of our products. Maybe there's a couple of business groups. Maybe there's 3 business groups. And then at some point, it gets established more as a standard by a platform team.

And I think that's -- some of these companies are really big, right? So -- and these categories are so big that we can certainly have $1 million customers inside a single business with that issue. There are plenty of those. But I think it is when you sort of reach that [mark of] standardization in a platform team concept, which is probably the tipping point that we see being sort of the moment where it goes.

Our next question or comment comes from the line of Michael Turits from KeyBanc.

This is Steve Enders on for Michael. I just wanted to ask on the comment you had around seeing really strong conversion of the pipeline in 4Q. I guess is there kind of any deals that you felt like kind of pulled forward that maybe we're expecting to hit in 1Q? And kind of how are you feeling about the general pipeline into fiscal '23 at this point?

Yes. Good question, Steve. This is Navam. So I think the fourth quarter pipeline was high -- was very strong. And we saw good conversion of that pipeline. It wasn't unusual compared to what we expect in the fourth quarter. And I think we are comfortable with the signals we're seeing in the first quarter, and we have a strong pipeline in the first quarter that give us comfort in the guidance we have. So I think we're happy with where we landed, and we're optimistic about the full year.

Our next question comes from Ittai Kidron from Oppenheimer.

Congrats on a great quarter. Navam, a couple for you. Just I want to make sure I understand the correlation between cRPO and your guidance for the year. If my math is right, you've got at the midpoint at about 30% year-over-year growth, your cRPO growing much faster then. Maybe you can help us kind of reconcile the 2. And also on the gross margin, the same way, ACP is growing as a mix, your gross margin moving higher. How should we think about gross margins through the year?

Thanks, Ittai, and 2 good -- very good questions on our metrics. So the cRPO growth, we're very optimistic about it. We saw good momentum in the quarter, as I mentioned, strong bookings growth. And the result of that was the very high cRPO growth that you saw. The point to note is that we are seeing normalizing durations, and that's part of what's driving the cRPO growth normalization to what you're seeing. And that's basically the movement in cRPO that -- sorry, the movement in cRPO, which is driven by duration.

On your gross margins, we're very pleased with being a high gross margin company or a strong gross margin company. I think the main driver for that is we're ahead of our plan in terms of cloud gross margin. So we reached 50%, and we're confident we'll be able to scale that up to the high 70s. Overall, we expect next year to be at about an 80% margin. And as the cloud [rate] grows over time, we'd expect to normalize at the high 70s margin. But us, as a company, we believe we will remain a strong gross margin business.

Our next question comes from the line of Pat Walravens from JMP.

Let me add my congratulations on a great quarter. So Dave, lots of great information on this call. Maybe to help boil it all down for us, what are the sort of 2 or 3 most important things for you to get done in this next year?

Yes. I think it's, number one, trying to engage more of the Global 2000s and win the right to be their partner. That is -- that position of trust is the one we covet. That is what we're doing. And we're continuing to invest aggressively against that opportunity.

Number two is, as Armon highlighted, continuing to invest deeply in this new distribution channel of HCP, which is going to important not just for adding the longer tail of our customer base on to the emerging side of our business. But also there's clearly appetite from some of the larger organizations in the world to consume as a service [despite being] infrastructure. Those are really the 2 things that we're focused on.

If I can just make one comment about the first point around our continued investment in our field organization. We have a fundamentally strong unit economics in our business, high gross margin business, a well-capitalized company with an opportunity to pursue this massive market opportunity in front of us. And that's driving our investment in the field. That's driving our investment in the company to aggressively pursue it. That's the first of our 2 priorities.

Our next question comes from the line of Fatima Boolani from Citi.

Navam, my question is for you with respect to the non-GAAP operating loss guidance. I wanted to ask you to help us sort of unpack some of the primary assumptions that are baked into that expense profile next year and if you can sort of walk us through how you're thinking about expenses tracking back to pre-COVID levels and specifically tying it back to some of your comments in your prepared remarks and the deck around a challenging recruiting environment. I'd be curious to get your opinion on where you might be or if you're behind plan on certain areas of the business and where you might be understaffed or under-indexed at this point.

Yes, I'll just -- appreciate the question. It's good to talk in this forum for the first time. It's kind of fun. I'll just underscore my point about sort of strong unit economics, expenses that are -- strong unit economics in our business and our desire to keep investing against the opportunity. I think that underscores our expense profile that Navam communicated.

I'll hand things over to Navam to comment more deeply, but I'll just comment on the recruiting environment. I think we're very fortunate in that we're a net recipient of sort of a lot of the migration. So I think we've actually been in a good position. But we're also very aggressive in our hiring goals. We hired almost 1,000 people last year. And so we are optimistic. We are geared to keep investing in those people. We're not seeing much of an issue there. I think we're in a fortunate position that we just have aggressive goals. Navam?

Yes. I mean I'll comment a little bit about our philosophy of spend as well. The key thing to remember is that our net dollar retention rates, which were at 131%, was best in class in our opinion. And what that's telling us is that customers, once landed, will expand and extend. And that's been consistent across in the past. So the right thing for us to do is to continue to invest in our product group and to invest into our go-to-market group, and that's what's right for the long term.

So net is the high net retention rates, the good unit economics, the very strong balance sheet that we see and the high gross margin give us the flexibility to do so. And that's what we're doing over the next few quarters. You're going to see leverage, I'd say, towards the back half of the year in the fourth quarter where we're going to start looking at annual leverage after that point. But for now, I think we are consistent. We're convicted of the long term and are looking in the market.

Our next question comes from the line of Alex Henderson from Needham.

I've got 2 questions for you. One, I wanted to understand a little bit more about how transactions typically start with enterprise customers. Do they generally start off with a deployment of, say, perhaps Terraform in their on-premise data center to get experience with the product and then move to the cloud? Or are you increasingly seeing coder-centric adoption driving application workload to the cloud and then finding their way back into the enterprise data center? Which is the primary process flow?

And the second question I have for you is it seemed to me that the coder -- coding community and the dev ops community are the primary target customers here in terms of getting adoption. Can you talk at all about what portion or the number or the growth rate of that population that's currently utilizing your technology and writing to it?

Yes. To be honest -- I'm happy to answer that. Yes, I think the first question is fundamentally one of what's the adoption pattern. I'll try to steal it. We see the pattern of -- the adoption is by practitioners who are tasked of building new things on cloud. That's where it starts in open source. For example, that $10 million customer we mentioned had started out in 2015, starts to pay early. But that is happening in a cloud environment. They're using Terraform, Vault, Consul [and Packer] as the basis of how they're building new applications, but it's a bit tactical in that instance. And that is for the purpose of maybe 1 or 2 applications. So it's not in a private data center per se. It's literally how they're interfacing the cloud for a particular project.

What happens, what we call the 2.0 moment is when they get 12 months into that contract -- into that project and realize they're overspent on their Amazon bill and they have a bunch of apps that they shouldn't have from a security standpoint that are out there running because they're not secured. And that is when the corporation says, "Hold on a second. We're going to go cloud. It's going to be multi-cloud and need to standardize in some way."

And in that instance, they're already using open-source projects. In that instance, that becomes sort of, in some sense, the default, okay, let's use the commercial version of those products because that's what they're designed for. So they're already being used by the practitioners, but the conversion to a customer is when the organization makes that decision to say, "Hold on a second. Let's think about how we're going to do cloud in a way that is not irresponsible." So that's really point number one. And that's a very, very consistent mechanism.

Question number two in terms of the target customers. In a sense, our users are ops people as much as they are dev people. I think there's sort of a parallel focus on the dev community, sort of the analog and the ops community. I think that's probably the best way to think about it. That community has certainly grown quickly. We disclosed 100 million downloads of our products last year. And that is the basis of that community measurement.

Obviously, we also see strong data around certifications growing. That's not the key measure of a number of people in our Learn platform. But I think what we saw in Q4 was certainly a continued uptick. We're in the early stages of this cloud transition. And if anything, there is a staffing shortage of people that know how to use cloud.

Our next question comes from the line of Rob Galvin from Stifel.

This is Rob in for Brad Reback. I'm just wondering, how much of the $100,000 ARR customer cohort is from HCP, either in terms of the number of customers or the HCP portion of the 89% revenue contribution in that customer cohort?

I'll let Navam answer that.

Yes. Thanks for the question, Rob. HCP is a very new line of business for us. We essentially moved from a standing start to where we are right -- around last year to where we are right now. So we're pleased with the progress. It's also a new group of customers, like I mentioned before. So this is mostly for the emerging enterprises, the small- and medium-sized businesses. So they are growing in size, and we're optimistic that we'll start adding customers of scale and size as expansions and extensions [happen].

Thank you. I'd like to turn the conference back over to Mr. Dave McJannet for any closing remarks.

Yes, I'd just like to express my thanks for the participation from all of you, and I appreciate you dialing in and for the questions, and look forward to speaking to everybody soon. 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.