HashiCorp Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 7, 2023

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HashiCorp's Fiscal 20 24 First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, VP of Investor Relations and Corporate Development.

Operator

Thank you. Please go ahead.

Speaker 1

Good afternoon, and welcome to HashiCorp's Fiscal 2024 Q1 earnings call. This afternoon, we will be discussing our Q1 fiscal 2024 financial results announced in our press release issued after the market closed today. With me are HashiCorp's CEO, Dave McGannet CFO, Navam Willienda And CTO and Co Founder, Armand Dagar. In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information We encourage you to review that presentation in advance of our call. You can access it on our investor website at ir.

Speaker 1

Hasicorp.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 Q2 and full 2024 fiscal year. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek or will or similar statements. These statements reflect our views as of today only 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.

Speaker 1

During the call, we will also discuss certain non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. The financial measures presented on this call are prepared in accordance with GAAP unless otherwise noted. A reconciliation of these non GAAP financial measures To the most directly comparable GAAP financial measures as well as how we define these and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir. Hasheycorp.com. With that, let me turn the call over to Dave.

Speaker 1

Dave?

Speaker 2

Thank you, Alex, and welcome everyone to our Q1 earnings call for fiscal 2024. We're pleased to report 1st quarter results that exceeded our top and bottom line guidance with revenue of $138,000,000 representing year over year growth of 37% And solid improvements in our profitability with our Q1 of positive free cash flow as a public company. Current non GAAP remaining performance obligations reached $394,600,000 representing 29% year over year growth. And compared to last quarter, we added 32 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 8.30. Our HashiCorp cloud platform offerings reached $16,500,000 in revenue, representing 12% of subscription revenue in the quarter.

Speaker 2

We remain excited about adoption trends as we continue to roll out new features and new capabilities during FY 'twenty four. Against a challenging environment, I'm pleased with the solid Q1 results that the team delivered. However, macro challenges continue to impact our business And I'd like to provide more color on what we're seeing in the market. During Q1, Armin and I spent much of our time speaking with customers. The key theme from these discussions, regardless of customer size, is the uncertainty that they are feeling about the economy and what it means for their own businesses.

Speaker 2

As we have mentioned in the last few earnings calls, we saw this budget uncertainty start in October of last year as higher interest rates began to impact our customers thinking about their FY2020 3 budget cycles. This economic uncertainty is driving organizations to optimize their software spend. Procurement teams are scrutinizing many larger software purchases and stretching deal cycles. The deepening inspection of budgets is happening across all of our customer segments, but most noticeably in our largest customer deals. Despite these near term challenges, we believe the long term trend to cloud computing remains unabated.

Speaker 2

We continue to see demand for our products as customers continue to plan their cloud initiatives for the next several years. I would highlight the customer stories we have outlined in our earnings presentation on the IR site to give us confidence in our market opportunity and product fit. These customers include a large U. S.-based financial services company, a back of office software platform and a European Stock Exchange, All very diverse verticals and all very early in their cloud adoption journey. We are laser focused on building trust with these customers so that we can be a central partner as they continue to invest in their cloud initiatives.

Speaker 2

In addition, our focus on adding larger new customers produced solid traction during Q1 as we added 26 net new Global 2,000 logos, the largest number we've added in 5 quarters and we continue to add a healthy number of greater than $100,000 ARR customers as well. These large customers are an important part of our future and our model is built to grow our footprint with them as we become an increasingly critical piece of their infrastructure over time. So while we're seeing heavy budget scrutiny on our large expansion deals, these entry level deals with large companies give us confidence about the long term shift cloud and our role as the enabler of that transition. We also continue to see strong and growing interest in Boundary, which we introduced late last year. As a reminder, Boundary solves a key security challenge for organizations by using identity secure remote user access.

Speaker 2

As I noted earlier, Armen and I spent much of Q1 on the road with customers. In nearly every meeting, customers proactively inquire about battery, This is a great signal as to the longer term opportunity we see for the product. Next week, we will host Hashi Days, our European user conferences, where we will make a series of announcements Highlight ongoing product innovation, particularly around cloud security automation. I look forward to sharing more details during next quarter's call. Before handing over to Nivam, I want to provide more detail on the announcements we made after the market closed today.

Speaker 2

First, We announced a reduction of our workforce by approximately 8%. I want to acknowledge that a lot of talented people who made meaningful contributions to HashiCorp are leaving the company. This was not a decision we made lightly and is part of a necessary effort that Navam will describe to reduce our operating costs to reflect the current customer spending environment. 2nd, we are excited that Susan St. Legere will be joining the company in July as President of our Worldwide Fields Organization.

Speaker 2

Susan is a master of scale and a deeply technical sales leader who understands how to make the most of complex product portfolios. Susan has been on our Board since 2019, so she's already well acquainted with HashiCorp, our products and our team. With Susan, we get the rare opportunity to work with an experienced leader who has done this multiple times, having most recently led the field organizations for Okta and Splunk, where she helped them each surpass $1,000,000,000 in revenue. We have trust and confidence that her experience and leadership will serve our field and overall organization well Through the current economic conditions as well as through our next phase of growth. I believe strongly in our opportunity given the long term trend of cloud adoption and believe we are now better positioned to take advantage of that opportunity.

Speaker 2

And in line with the guidance we provided last quarter, we continue to operate against And aggressive goal to achieve profitability next fiscal year and remain on track to meet this goal. Now, I'd like to turn it over to Navam And I look forward to answering any questions.

Speaker 3

Thank you, Dave, and thanks again to everyone for joining us today. Our first quarter results showed solid progress in our fundamental customer adoption engine. Our process remains very consistent. Customers adopt our open source products throughout the organization. We land the organization as a commercial customer with a particular product.

Speaker 3

The customer expands its product usage and then extends into adjacent products. The success of this adoption engine drove our customer count to Our total customer count and 100 ks plus ARR customer count is currently 4,392 and 830 respectively. While the pattern of customer adoption remains consistent, as Dave mentioned, the economic headwinds we've noted in the past few quarters also continued into Q1. Combined with our typical Q1 seasonality, we saw ongoing pressure on customer budgets, which caused slowdowns in customer behavior and elongation of sales cycles. The impacts were most acute among our larger contracts within our global customer segment, along with the large enterprise customer segment.

Speaker 3

In addition, one of our largest customers in the retail sector Adjusted for some excess capacity and reduced a portion of their spend with us. The impact to our quarterly growth and net retention rates due to this customer spending adjustment was roughly 2 percentage points. Despite the adjustment, the customer continues to be very engaged with our team and remains one of our largest We expect the current buying environment will create ongoing uncertainty in the pace of large customer expansions and extensions for the rest of the fiscal year. Accordingly, we have reflected these expectations in our full year guidance. We've also widened The range of our potential revenue outcomes given the overall purchasing environment.

Speaker 3

While we have shown ongoing diligence in managing our expenses, We are operating in a very cautious customer spending environment. As a result, we took additional steps today to reduce our cost structure through a reduction in force of approximately 8% of our workforce. Before making any employee reductions, we took a number of other carefully considered actions, including reducing our program spend and eliminating open but unfilled jobs. It is difficult to transition out valued employees We have helped build HashiCorp, and this was a very hard decision for the company. However, we also believe it is necessary to have the right Following the reduction in force, which we expect to be materially complete by the end of Q2, we will begin to see the impact of these reductions in our free cash flow in Q3 of this year And beyond.

Speaker 3

We expect free cash flow margins of approximately negative 5% in FY 2024, followed by sustainably positive free cash flows on an annual basis the following year and beyond. Other than seasonally low second quarter cash flows, we're expecting all other quarters to have positive free cash flows. We are maintaining our target to reach non GAAP EBIT profitability in the second half of FY twenty twenty five. With that, let's move on to our guidance. Our full guidance numbers can be found in our earnings presentations available in our ir.

Speaker 3

HashiCorp.com website under Financials Quarterly Results. I encourage you to read through the doc for full metric disclosures, share count disclosures and GAAP to non GAAP reconciliations. To summarize our guidance, for the Q2 of FY 2024, we expect total revenue in the range of $137,000,000 to $139,000,000 and a non GAAP operating loss in the range of $46,000,000 to 43,000,000 For the full year 2024, we expect total revenue in the range of $564,000,000 $570,000,000 and expect FY 'twenty four non GAAP operating loss in the range of $113,000,000 $108,000,000 Thanks for your attention. Dave, Armand and I are available to take any of your questions. Alex?

Speaker 1

Thanks, Nivam. With that, operator, let's go to our first question.

Operator

Thank you. Please limit yourself to one question. Please stand by while we pile our Q and A roster. Our first question comes from the line of Sterling Auty with MoffettNathanson, your line is open. Please go ahead.

Speaker 4

Yes, thanks. Hi, guys. I'm curious with Susan St. Leger coming in to head up sales, Is there an early sense of the extent or magnitude of the changes that you want to make to the go to market structure in terms of either approach or either staffing etcetera because you also mentioned some changing in program spend as well. Thank you.

Speaker 2

Hey, Julien. Thanks for the question. I think it's really about as we step back and think about this next phase of growth in front of us. We had the unique opportunity to bring in a go to market leader who has done that now multiple times in multiple different companies. And so We're super excited about that opportunity.

Speaker 2

I think candidly, that's the aspiration. It's about setting ourselves up for the next generation of scale that we certainly envision ourselves progressing True is a strong independent company and that's really what it's about. There's really nothing beyond that. Navane, I I had alluded to some programs, Ben, changes. I think we're just reflecting some program changes that we had made over the last quarter or so to try and just keep the cost Relative to the revenue line, but not related to Susan.

Speaker 5

Understood. Thank you.

Speaker 6

Thanks, Sterling. Next question?

Operator

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

Speaker 7

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

Speaker 2

Hey, Derek. Dale will answer that one again. The short answer is no. The open source products solve a problem for an The commercial product solves a problem for an organization. So in a sense, they're fundamentally different products.

Speaker 2

And So, no, I think what we are seeing is very, very consistent with what we've been communicating over the last couple of earnings calls, which is as Armin and I So it's been traveling a ton. What we're seeing at the front end is very, very consistent in terms of interest in what we do, design win decisions being granted to us, no change competitive environment. What we're really just seeing is increased scrutiny in the procurement process that is it difficult to predict as we've indicated over the last couple of calls. And Much like other vendors in the market, that is putting pressure on us, but that is no different than really anybody else. What I don't hear anybody doing is changing their plans.

Speaker 2

The crypto cloud remains unabated and I think as you Start to look at some of the numbers in our earnings report, you'll see we added 26 new Global 2,000 customers, 32 customers over 100,000 in ARR And another quarter of strong NDE, which I think really just speaks to that consistent long term trend and really no material change otherwise. Okay. Thank you.

Speaker 6

Thanks, Derek. Next question?

Operator

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

Speaker 5

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

Speaker 3

Hey, Michael. Hey, it's Nivam here. Thanks for the question. So In terms of what's changed, I think the main points to talk about is what's not changed is the front end environment, which is The pipeline activity, the pipeline creation activity still remains very strong. As Dave mentioned in the call, Very healthy quarter in terms of the G2 ks ads, net 100 ks ads and total customer ads.

Speaker 3

So the activity of Cloud transformation efforts, cloud efforts, all those things remain similar. What happened in the Q1 and this is a little bit of Q1 seasonality as well, the Q1 in a very long year In this new budget cycle, you saw a lot of headwinds, a lot of procurement pressures in the Global segment and the Enterprise segment Related to very, very large deals or large deals. And that's reflected in the guidance range that we've given. So that's the material change we saw In the Q1, but the main thing to remember with these large deals and I'll give you an example of a Q1 deal that we were working on And it was held up in procurement due to some procurement process issue, ended up closing in the second quarter as a multiyear deal using several of our products. So these deals don't get lost for competitive pressures.

Speaker 3

They don't get lost because The cloud transformation effort is canceled. It just elongates and they happen when they move to they happen in different quarter.

Speaker 2

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

Speaker 5

Thanks, David and then Devon.

Speaker 6

Thanks, Michael. Next question?

Operator

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

Speaker 4

Thanks, guys. I'd like to dig in into the retail customer that reduced portion of the spend. Just a few things around this. First of all, how big of a customer is it as a percent of revenue to have a 2 point impact? It must be a quite significant Customer, can you give some color on why they reduced spend or just not using it or didn't see value there?

Speaker 4

And Navane, would it be fair to say that without this customer, you're actually, if I'm doing the math right, Murray, you're actually, if I'm doing the math right, actually guiding in line to consensus for next quarter. Is that the right way to think about the magnitude?

Speaker 2

Hey, guys, Dave. Thanks for the question. I'll let Navam answer the mass side of it. I'll answer the sort of the more subjective side of it. Yes, I think as we shared in the prepared remarks, There's a retail customer that had procured entitlements really for peak season.

Speaker 2

It's actually a really good example of what's happening across the board around Procurement and Finance Scrutiny. We they ended up rightsizing that particular entitlement for that particular product, for that particular application For their state, which is consistent with what other vendors have commented on. But in the sort of partnership, that's something that we want to do with them. I would just underscore that they remain one of our largest customers. They are a multi product customer.

Speaker 2

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

Speaker 3

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

Speaker 4

Appreciate it. Thanks.

Speaker 6

Thanks, Ittai. Next question, please.

Operator

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

Speaker 2

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

Speaker 2

Thanks for the question. Yes, just really quickly on I think we have a pretty good view of the overall customer state and I think our view is reflected in the guidance We have more generally of the guidance framework that Navam's shared, and this is a Retail is a very specific vertical for as you can imagine, so I don't I think we forget about the remainder of this year.

Speaker 3

Yes. In terms of the net retention rates, I'd point to there's a lot to be optimistic about after we get through this year's budget cycle, not whole, right? You've still got very healthy activity on the G2 ks. You've got very healthy activity on the 100 ks. These are all expansions and extensions And also multiproduct expansions that happen with our product portfolio and also the upcoming boundary Product which will impact our revenue going forward.

Speaker 3

So no, I don't think that this is a new reality of what net retention rates would be. I think it's more The purchasing environments along what's stopping sort of large contracts from proceeding to the finish line. Once these Once this budget cycle resets into the next one, I think we see the usual impacts of expansion, extension and multiproduct purchasing recoveries. So Our long term targets of being above 120%, which is the target we've set, remain intact and we're very optimistic about that long term.

Speaker 6

Thanks. Next question?

Operator

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

Speaker 7

Hey, guys. Thanks for taking the question. I've got a multipart first one and then just a clarification. So I guess if we think about some of these larger contracts, these larger deals, these longer sales cycles, Are you seeing like is this is the incremental scrutinization that's being put on these deals, is it anything to do you mentioned, Dave, about kind of a similar dynamics within the hyperscalers. Is this customers pausing on cloud migrations?

Speaker 7

Is this A greater focus on cloud optimization before the next phase of the journey. Like where what are you seeing In that dynamic, that's causing that incremental friction. And then can you comment on what you've seen kind of in the month of May June relative to how April and maybe March trended?

Speaker 2

Thanks, Alex. It's Super interesting because, it's also consistent. Like if you think about the conversations that we've been having for the last 7 months, they're the same conversations we're having now, which is, hey, we're going cloud. Those plans are unabated by the Global 2000. They are not slowing They are engaging with us to say, yes, we've created a platform engineering function.

Speaker 2

You guys are the basis of how we do that. It's just taking us time And some friction to align the organization towards the consumption of that design win, which is already in place. I had 2 conversations this week, one with the Massive utility, 1 with an insurance company, where that was exactly the conversation. What's happening is that those design wins are being done Given the front end consistency of the pipeline that we're seeing, what's not happening to the same degree is those things flowing Through procurement, in some instances, it's a question of the typical plan of buying slightly ahead of demand, which is what most companies do on the entitlement side. That's what's being stopped by finance department specifically.

Speaker 2

So one, it stands to reason because we won those design wins that that will flow through over the course of time. There's really no material change other than just Literally like, it's almost like if you're towing a boat behind you, the boat's a little further behind because that part needs to catch your procurement, but it's going in Maybe Arman has a point of view. He traveled I think 9 weeks last quarter.

Speaker 8

Yes. I think maybe anecdotally just to echo what Dave said, I think what we're seeing Pretty consistently is going into this fiscal year, most of these organizations are sort of have locked their budgets and the top focus for them is really in optimization and Consolidation of vendors focusing on rightsizing their estates. And so I think we continue to see that translate to the procurement pressure That you're seeing especially around the bigger deals. But that said, I think all these groups are still engaging with us on next product along, really thinking about great how do we architect tools like TerraForm and Vault into foundational layers of our platform, how do we start thinking about the other aspects of where we can help them on their automation journey. And I think in many ways, it's also accelerating the trend towards platform teams, right?

Speaker 8

Because I think these organizations are realizing if they're really going to get their hands around how do I do cloud efficiently at scale, You really need to have a central aperture for that. So I think it's accelerating a lot of those order transformations and it's also accelerating the need to have standardization around the tooling. So I think All that speaks well to the pipeline and I think the activity is happening there.

Speaker 2

I'd also just add just to add to Armand's point, it is also occurring to The general shift towards consolidation of vendors during this cycle, which is certainly a net positive for us, as you're going through the Diamond process, They are trying to rationalize in general their portfolio as a multiproduct vendor. It actually accrues very, very well to us On the design win side and as long as we make them those companies successful, the right things will happen over the longer term.

Speaker 7

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

Speaker 2

Yes. I mean, I would suggest normally, I feel it's very similar to me.

Speaker 3

Yes. Yes.

Speaker 8

I don't think there's been a marked change. And I think this really speaks to the fact that these budgets are generally set on an annual basis for organizations. And I think That's reflected in our guide. I think it would be for most organizations unusual to reset their budget mid year.

Speaker 7

Perfect. And then just maybe a clarification question on the appointment of Susan to that role. Is she Replacing someone, is this a new role? Is there kind of contemplated meaningful changes to the go to market organization Through the year given she starts in July, just any help there would be helpful.

Speaker 2

Yes. Hey, no, obviously we're super excited about the opportunity to bring in Susan. Suffice to say, it was never about her availability. It was always about her availability and not our lack of interest and having her play that role as someone It's very uniquely positioned to do that. And I think as we as I mentioned, as we think about the next phase of scale, The $1,000,000,000 number is the one ahead of us and that's certainly where our energy is pointed.

Speaker 2

And we think she's super well positioned to do that. And so we're bringing her in as President of Worldwide Feeder Outfield Operations. We think this is the right time to introduce that role as we think about the next phase of growth and that is More of a decision around a role requirement for us. So beyond that, no material changes. Obviously, her scope will be completely determined once she arrives Full time in the next month, but conceptually, it's just the addition of a new role and the existing team will report into her and obviously help she'll help us grow into the next phase and beyond.

Speaker 6

All right. Thanks, Alex. Next question.

Speaker 7

We're helping them.

Speaker 6

Got it.

Speaker 1

We're ready for next question.

Operator

Our next question comes from the line of Gary Powell with BTIG, your line is open. Please go ahead.

Speaker 1

Okay, great. Thank you very much for taking the question. So just if you can help me sort of dig into the revenue guidance more, I'd appreciate it. I think the full year guidance implies that you grow revenue Around 11% or 12% in the second half of the year. Just how should we reconcile that Again, CRPO, which just grew 29%.

Speaker 1

And then how should we think about the potential for growth To reaccelerate at some point or maybe the timing of a reacceleration.

Speaker 6

I know that last one is going to

Speaker 1

be hard to call, but any color would be really appreciated.

Speaker 3

Yes. Thanks, Greg. Again, good question on the CRPO side. So the CRPO is obviously reflective of the front Half seasonality compared to the back half seasonality, right. So when you think about it, as an we sell to large The price contracts, they're tailing weighted.

Speaker 3

So the back half has a is a much bigger impact to our revenue than the front half from a bookings perspective. So the CRPO growth rates will differ from the front half to the back half. So there is going to be a difference between the 1st quarter Absolute number CRPO growth rate and what the full year revenue growth rate is just from a timing perspective because it implies what the bookings are For the back three quarters of the or the back half of the year, right. So we've factored in basically Continued headwinds in the Global segment and the Enterprise segment and how we think about the revenue guidance. Now I also caveated this is really early in the year.

Speaker 3

So we'll execute every quarter and we'll give you updates as we move along. We're very optimistic about the front end, Especially given what we're seeing in terms of customer activity and especially given what we're seeing from the field when Arman and Dave go and visit our customers. So at some point, we're going to be out of this budget cycle. And at that point, I think we move to normal purchasing cycles with our customer base, and that's where we feel We'll be back to our normal growth rates. But as Armand mentioned, budgets are set once a year and we're reflecting sort of the Current budget environment we're seeing until that changes and every quarter will be an update.

Speaker 2

Got it.

Speaker 1

Okay. Thank you very much.

Speaker 6

All right. Thank you. Next question?

Operator

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

Speaker 9

Thank you very much. So seeing the heaviest scrutiny coming from your actually your largest customers And then in the expansions is not what we would typically see. I think we would assume those are the customers that they know you, they trust you. They They know you, they trust you. They would want to consume a larger footprint.

Speaker 9

Can you just double click on that and maybe explain why we're seeing that the behavior kind of shake out that way? And then As a follow-up, so what is the current number of $10,000,000 ARR customers as of June? Is that would that number be sitting at 2 now?

Speaker 2

Hey, Mark, it's Dave. Let me just answer the first one. Just to understand or just to clarify, yes, I think The procurement friction we're seeing is a general commentary inside existing customers as well as new. I think we Again, saw a very strong NDE in the quarter, which I think is reflective of those large companies continuing to purchase incremental pieces from us. But certainly the cycles for them are slower than maybe they were a year ago, just given the constraints in their own business.

Speaker 2

But That's more of a general commentary than anything, but overall exactly what I would expect and consistent.

Speaker 3

Yes, Mark. On the large customer side, yes, it is one of our largest customers. The one of our $310,000,000 customers slipped below the $10,000,000 line. They still remain engaged and large, as I mentioned. So yes, the count is now 2.

Speaker 6

Thank you. Thanks, Mark. Next question?

Operator

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

Speaker 10

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

Speaker 3

Hi, Nick. Yes. So just to clarify, the severance related to the RIF is factored into our current Q2, which impacts some of our margins. But overall, I think our EPS is guiding better than what we had previously factored in. And also note that it takes until the back half of the year after the first and second Q1 actuals and the second quarter severance to work its way through and really see the Impacts the long term impacts to your margins in the back half of the year.

Speaker 3

So that's what you're seeing in terms of the margin guidance. But that being said, our EPS guidance has ticked up and we expect to be apart from the Q2 seasonality, you're always going to expect A second quarter dip in free cash flow due to the 1st quarter ACV seasonality, You should expect positive free cash flow for the rest of the year.

Speaker 6

Great. Thanks, Nick. Next question?

Operator

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

Speaker 10

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

Speaker 2

Ashish, let me ask the first part of the question, I'll let Vam answer the second. I just want to underscore this is a hugely difficult decision for us to make And the one we felt that needed to be done. I just want to reflect back that we had gone through an investment cycle over the past 4 quarters very deliberately with an expectation of certain demand environment to be in place and clear that different demand environment did not materialize, obviously with sales cycles extending just like for everybody else. But I want to make clear that because of that investment cycle, we feel that we're in a good position to deliver on the capacity required to deliver this year and next. So while certainly there were modifications across all sectors, we forget about the capacity that remains across all segments required to do what we need to do both in R and D and in sales.

Speaker 3

Yes, that all right. Echoing Dave, this was a very difficult decision for us and not something we took lightly. We took many steps to impact spend before going down this path. And ultimately, we still are a growth company, so we want to make sure we're invested in the long term. And we were very careful in the large impacts When you think about the large organizations, which are sales and R and D, we maintained our investments in where we felt we needed the capacity.

Speaker 3

And in several geos or in certain product areas where we thought the payback was a little longer term, we took the action of Understanding what the criticality of that business is and trimming it down. So overall, we are still Very well staffed from a sales and R and D perspective to both deliver the quarters and also deliver the product roadmap. And we feel that the headcount that we have or the employee base that we have this quarter is sufficient for the year. So we don't feel like we're going to add unless So the environment materially changes.

Speaker 7

Understood. Thanks for the color.

Speaker 6

Thank you. Next question.

Operator

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

Speaker 11

Hey, guys. I asked Chad GPT what questions have not been asked by Mark Murphy and Alex Yukin And it timed out, so I have to do some thinking on my own here.

Speaker 7

In seriousness, when you look at

Speaker 11

the net expansion rate, Is the pressure coming from existing customers expanding more or is it because of existing customers Cutting down the scope of the deployment, if you can just give some color. And also, is there a way to triangulate, is that coming from TerraForm or non TerraForms, the house, that would be great. And also Susan, obviously, has got a great track record. She was at Salesforce, had Marketing Cloud, Sure. It's Splunk, President of World Wide Operations, I believe, and something pretty close to that Okta, very, very different business and very different products.

Speaker 11

What do you want Susan to accomplish for Hashi with respect to the Do you think she brings in that is so critical for Hashi at this stage of the game? Thank you so much.

Speaker 2

Sure. Hey, Kash, thanks. This is Dave. I'll answer the first one. I think I got it and I'll try to get the second.

Speaker 2

The I think my observation is It's largely around the net new expansion pace. It's the rebuy cycle. It's just because of that procurement pressure that we're seeing. Once deployed, our products are in the runtime path of applications and that makes them generally long relationships with our customers, notwithstanding Small optimizations here and there. So generally speaking, the NDE is notwithstanding the one thing that the one customer that Navar referred to It's just sort of a slight slowdown in the rebuy of next use case along, next product along.

Speaker 2

In terms of Susan, I think there I think we're cognizant of phase shifts of the company and we think about the next phase ahead and it is an operationally different phase at $1,000,000,000 in revenue and that's really where we think As opposed to anything specific about our product portfolio or type of go to market, it's there are very few people in the world Available to do that, and she's at the very, very top of that list. So it's more generally a scaling question for us as a company. As you can see, Our customers are among large companies on the planet. We play a critical role for them. They're going cloud and that is not shifting and our relationships will be extremely long as a result and we want to build The best possible company to support them.

Speaker 7

Wonderful. Thank you so much and all the best.

Speaker 6

Thank you, Kash. Next question?

Operator

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

Speaker 10

Great. Thank you. Hey, Arman, like At the beginning of the year, you were talking about how budget is aggregated across 3 layers of data And you thought there was a lot more variability in absent data. How are you thinking about that division today?

Speaker 8

Is it still a helpful way to

Speaker 7

think about the business?

Speaker 8

Hey, Pat, Yamo. Thanks for the question. I think that still is a useful way. And I think what we see in all these accounts is at the infrastructure layer, All these teams are still committed to cloud. They're still moving ahead.

Speaker 8

I think they're taking sort of a moment to pause a beat and look at, hey, over the last 3, 4 years, Spending on cloud has been gangbusters. Where is there opportunity to optimize and consolidate and drive a little bit of efficiency in these estates? I think what we broadly see is A fairly large amount of waste in the cloud environments, but I think no one is really divesting from cloud as a strategy, right? So our view is it's like everyone Pausing, taking a beat to do that optimization, but really forging ahead on sort of a multi cloud strategy. And I think In that sense, we expect infrastructure will sort of take that pause and then continue the growth as people move there.

Speaker 8

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

Speaker 11

All right, great. Thank you. And Navam, can

Speaker 1

I just as a follow-up, how confident are you in your new

Speaker 3

Hey, Pat? So yes, I think we're very confident about our new revenue guidance. It factors in this elongated large contract cycle into the rest of the year. And as Arman said, we're optimistic about not Losing out due to competitive pressure or losing out due to cancellation of the cloud program. So we expect this large contract activity to Occur as they will for the next three quarters, but as soon as the headwinds change, we should see return to normal.

Speaker 3

But the full year is reflecting Our confidence in what we can achieve next year or this year.

Speaker 6

Thanks, Pat. Yes. Next question. One moment.

Operator

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

Speaker 12

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

Speaker 8

Hey, Sanjeet. Thanks for the question. It's a really good question. So I think the shape of it takes a few different forms, right? I think part of it what we see is you have development testing environments have been relatively unconstrained and some customers might be as much as 50% of their cloud spend.

Speaker 8

So I think there is one side of this, which is really looking through those dev test environments and A whole lot of it is orphaned resources, things that developers spun up in environment, left it running for 3 months, you're paying the meter on that. So So I think there's a lot of that happening in dev test where that takes a you have to go through an inventory process, identify those workloads and shut them down. Then I think on the other side, you have production environments where you have kind of multiple forms of waste take place. 1 is, Hey, maybe this needs to run on 5 servers, it's really running on 10. Okay, can we identify that and sort of shrink the footprint down to 5?

Speaker 8

You have other cases where it's like I'm running on a double extra large when really I should be on kind of a medium sized capacity. So I think that also is a complex challenge if you have to All the assets really look through data and telemetry to understand where am I over utilized, where am I over deployed and then go through the change management to kind of right size some of that. In terms of how long that takes, I think there's a fair amount of variability. And frankly, it actually goes back to the maturity of their cloud program. The programs that were least mature, They don't have a good handle on it.

Speaker 8

The data is not readily available to them. They don't have a central team that was responsible for You're driving that in a standardized way. And I think, in fact, this has been an accelerant of conversations for us around the value of standardizing on tools like TerraForm and having a platform team Because that central aperture gives me visibility of what workloads are dev test, what workloads are production, it allows me to kind of do that instrumentation on usage. So For us, it's actually been a useful conversation driver on the importance of creating those sort of standardized layers. I think for the teams and organizations that don't have that, it's a longer journey, They have to sort of get their hands around the problem and there's multiple phases of identification, rightsizing and change management.

Speaker 2

Yes, Duncan, I just my My second comment is Sanjay. I think to me it's kind of 2 countervailing forces. 1 is, as Armin described, there is we see it, Obviously, we're doing it ourselves. There's a lot of cleanup of those orphan environments that we're all paying for and overspend. And so that is driving consumption down.

Speaker 2

At the same time, The velocity of new things going to cloud is not slowing. So at the same time, as that is coming down, you're seeing an increase in the slope of the line of new things going cloud. So in a sense, it's getting offset a little bit. And ultimately TerraForm is a critical element of how people actually solve that problem by putting constraints in front of the provisioning process. The irony being you have to get to the procurement function to put that in place, That is certainly what people are doing.

Speaker 12

That's really helpful context. And it seems to align broadly with how the hyperscalers are talking about How that's manifesting in the environment as well. And ultimately, we get to a place where new workload growth hopefully outpaces or surpasses the impact From optimizations, so that's encouraging. I have one follow-up for, Nivam and it goes back to the previous question around like your confidence in the guide. I hear you guys loud and clear in terms of the longer sales cycles and the procurement process.

Speaker 12

We do have a new sales leader in And so I wanted to understand like in terms of the magnitude of change, in terms of the blocking and tackling of sales, territory alignment, Comp, how much change is being instituted in the sales organization at a time where We've had a risk and then also, the environment is a little bit weaker. So I just wanted to understand like the magnitude of those changes and whether that creates incremental execution risk this year?

Speaker 3

Yes. Thanks, Anjeet. The short answer is no. We don't see incremental execution risk with the addition of Susan. And in fact, we're optimistic about Her impacts to the company and how she could help us grow into this new stage.

Speaker 3

Just as a reminder, when we took this very carefully considered Workforce reduction, we didn't overly impair the capacity in our core regions where digital transformation is the most Advanced or the most furthest along. Rather, we looked at where the geos were that potentially were longer term investments and We right sized those a little bit and those were the margin impacts that we saw on the workforce reduction plan. The existing sales leadership still is intact and they will, as a unit, report up to Susan. So the org still is very stable and we feel like there

Speaker 6

Thanks, Sanjay.

Operator

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

Speaker 2

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

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Earnings Conference Call
HashiCorp Q1 2024
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