HashiCorp Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp's Fiscal 20 24 Second Quarter Earnings. 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, to Alex Kurtz, VP of Investor Relations and Corporate Development.

Operator

Thank you. Please go ahead.

Speaker 1

Good afternoon, and welcome to HachiCorp's fiscal 2024 Second Quarter Earnings Call. This afternoon, we will be discussing our Q2 fiscal 2024 financial results announced in our press release issued after the market close today. With me are HashiCorp's CEO, Dave McJanet 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 information about our quarter. We encourage you to review that presentation in advance of our call.

Speaker 1

You can access it on our investor website at ir.hachicorp.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 Q3 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 should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Speaker 1

Forward looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. The financial measures presented on this call are prepared in accordance with GAAP unless otherwise noted. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures As well as how we define these and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashiCorp.com. Finally, we will be holding an investor event during our annual HashiCorp user conference in San Francisco on October 11.

Speaker 1

We look forward to seeing many of you there and we will also live stream the event from our IR site. With that, let me turn the call over to Dave. Dave?

Speaker 2

Thank you, Alex, and welcome everyone to our Q2 earnings call for fiscal 2024. We reported solid second quarter results that our top and bottom line guidance with revenue of $143,000,000 representing year over year growth of 26%. Current non GAAP remaining performance obligations reached $420,000,000 representing 30% year over year growth We added 21 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 851. Our HashCore cloud platform offerings reached $18,400,000 in revenue representing 13% of subscription revenue in the quarter. We're excited for the new capabilities we announced during Hashi Days in Europe around HCP, TerraForm, Vault, Boundary and across our whole product portfolio.

Speaker 3

And we have

Speaker 2

more to announce at our Global User Conference this October. Our team executed well and delivered solid results against an ongoing challenging backdrop. Although we continue to see elongated deal cycles, our performance shows that we remain a critical part of the Global 2000's cloud plans our strategic partner for their long term transitions to the cloud. To put it simply, though the purchasing environment is difficult, we continue to win the market. As an example of this, in June, we hosted our European user conference taking place in 3 sold out locations simultaneously in Paris, Munich and in London.

Speaker 2

During the keynote, I was joined by a large multinational financial services company who is a long time HashiCorp customer and an excellent example of how over time we become a strategic partner to the Global 2,000. This customer shared how they approach their move to the cloud how they adopted a platform engineering team to scale their consumption of cloud resources using automated provisioning from TerraForm Enterprise. As their platform team expanded their use of TerraForm, they enabled more than 3,000 developers to consume cloud resources autonomously and powered over 200 internal applications, which ultimately accelerated delivery of new capabilities for their banking customers. This customer use case is a great example of the long term journey their organizations make with us. At Hashi Days, we also made several product announcements The highlight of continued investment and innovation across our portfolio, and I want to briefly share a few of those.

Speaker 2

First, we announced the highly anticipated general availability of HashiCorp Boundary Enterprise. The early response to Boundary Enterprise has been exciting with a healthy initial pipeline and interest growing by the day. As organizations transition to cloud, they are finding they require a modern cloud friendly privileged access management solution, which until Boundary was not available in the market. We also announced several product enhancements across our portfolio, including TerraForm, Vault and Console. This quarter as I traveled and met with customers in Europe and other parts of the world, I heard a consistent message from them.

Speaker 2

The transition to the cloud is still in full swing and requires new approaches to managing infrastructure, which our products provide. And once these new approaches and technologies are adopted, teams are enabled to build faster, more efficiently and more securely. Despite macroeconomic conditions, customer planning for cloud hasn't changed. Finally, I want to reiterate that we remain focused on achieving our profitability targets while at the same time positioning ourselves for a future of continued cloud adoption. I remain very optimistic about our long term opportunity and we continue to build HashiCorp to meet it.

Speaker 2

Thank you and I look forward to seeing you at our investor event during HashiCorp in San Francisco in October. Now, I'd like to turn it over to Nivam, and I look forward to answering any questions.

Speaker 4

Thank you, Dave, and thanks again to everyone for joining us today. As Dave mentioned, we are pleased with our team's performance for the Q2 and delivered solid top line results. Compared to our seasonally low Q1, we saw better contract activity both in total and also within the Global Enterprise segment during the Q2. Similar to last quarter, sales cycles remain elongated and procurement scrutiny was ongoing. We expect this cautious spending environment persist through the rest of 2024.

Speaker 4

However, we also expect the bigger trend of enterprise cloud transformation efforts to continue despite the current economic uncertainty. On the expense side, we continue to operate the business with a heavy focus on ROI, resulting in better than forecasted non GAAP EPS for the quarter. As a reminder, the 2nd quarter for HashiCorp is a seasonally low free cash flow and cash flow from operations quarter, mainly due to the seasonal first quarter contract volume where collections occur in the 2nd quarter. Free cash flow reverts back to normal trends in Q3 and Q4, and we always view free cash flow and cash flow from operations on a trailing 4 quarter basis. Our full guidance numbers can be found in our earnings presentation available on our ir.

Speaker 4

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 Q3 of fiscal 2024, we expect total revenue in the range of $142,000,000 to $144,000,000 and a non GAAP operating loss in the range of $26,000,000 to 23,000,000 For the full fiscal year 2024, we expect total revenue in the range of $571,000,000 $575,000,000 and expect FY 'twenty four non GAAP operating loss in the range of $108,000,000 $105,000,000 A couple of final notes before Q and A. First, the severance costs from the reduction in force from last quarter was included in our non GAAP These costs amounted to $7,000,000 or an additional $0.04 in non GAAP EPS. And second, as a reminder, our 3rd quarter has typical seasonality due to the summer months and we have factored the seasonality into our guidance.

Speaker 4

In closing, we are excited to see many of you at our investor event on October 11 that will also be live streamed on our IR site. Thanks for your attention. Dave, Armand and I are available to take any of your questions. Alex?

Speaker 5

Thank you.

Speaker 1

Operator, can we go to our first question?

Operator

Thank But please feel free to go back into the queue and if time permits, we'll be more than happy to take your follow-up questions. Please stand by while we compile the Q and A roster. And I show our first question comes from the line of Ittai Kidron from Oppenheimer. Please go ahead.

Speaker 6

Thanks guys. Short and to the point, I like it. Maybe you can talk about Productivity, and this quarter on the sales force side, how do you feel about progression there? And maybe I know it's early, but anything you can share about Susan's first days in the field? Any noticeable thoughts perhaps on how she's doing and what she's planning?

Speaker 2

It's Dave. To answer the Susan question, just to remind folks that Susan understands the company well through her time on the Board and is certainly already adding value. She's been spending her time with the field teams. I understand the lay of the land and I would say that there's a lot of excitement for her leadership. It's super, super early For her involvement with us.

Speaker 2

The question around, sort of progression of productivity, I think perhaps is more of a broader question around So the demand environment, how we're seeing it. And I would say that I did like 20 meetings this week with companies who were in town for the Google And I'm reminded of the critical role that we play in the infrastructure life cycle is pretty profound for the largest companies in the world. And That being said, we're in the midst of an optimization cycle, I think, in the software market in general, and there's a lot of conservatism on spend, and we certainly I have reflected that in our approach. But that being said, we don't see any material change to people's cloud plans or the competitive dynamics of the market, And we're just focused on winning the trust of the largest organizations in the world.

Speaker 1

Very good. Thank you. Thanks. All right. Next question.

Operator

Thank you. And I show our next question comes from the line of Alex Zukin from Wolfe Research. Please go ahead.

Speaker 7

Hey guys, thanks for taking the question. I guess maybe just first one for you Dave, like you mentioned the environment It's kind of unchanged. I guess, did it change between kind of the beginning and the end of the quarter and here into the following quarter? Has it Has it gotten any better or worse? And then bigger picture, do you see changing spend priorities, meaning Generative coming in and almost crowding out some other projects, pushing out some other initiatives on a longer time scale.

Speaker 7

And then just one for Navam, if the recent BSL change, how should we be thinking about any numerical or model impacts from that over the course of the New quarter?

Operator

I'll try to tackle those

Speaker 2

in order and I'll let maybe Armand answer a couple of them. On the question on the demand environment, I know since in the last couple of months, honestly, it feels pretty consistent. As we've always been clear to communicate, our products are deeply considered because they're very, very seriously Parts of the infrastructure stack. And so the front end demand signals remain super consistent that How that flows to procurement is we find out later. So I would say net not a huge change.

Speaker 2

On the spend priorities, I would actually just point back People need to keep in mind that this AI push implies cloud. New applications That our AI in the orientation are built on cloud infrastructure. And then as much as that is the truth, our products play a role. So, I would say actually our products underpin much of what's happening under the covers in the cloud estates. And so we are part of that Strategic initiative, generally speaking.

Speaker 2

So that's probably the best way to describe it. Any other comment you make, Harmont, about it?

Speaker 8

Yes, sure. I think I'd add 2 things, which is one is, I think to Dave's point, it implies cloud, but I think more than that, it actually implies multi cloud. Because what we've seen from a lot of enterprise customers that maybe are Predominantly on 1 CSP or hybrid strategy, now people are looking at how do they leverage best of breed technology across a multi cloud estate. And I think that raises the salience of our portfolio in terms of enabling multi cloud access control with things like Vault, enabling user access across these different services with Foundry and Obviously, provisioning across it with TerraForm. So I do think that priority shift has been interesting and helpful for us.

Speaker 8

And then to the folks that are heavily invested in private data center, we are also seeing interest there in tools like No Man. And I think that was a major customer That we discussed this quarter that there was an on premise expansion around NoMad to drive GPU workloads. We are continuing to see sort of AI driving a bunch of interesting workload shifts both in cloud and on premise for us. I think to your last question, which was on the BSL change and should we expect any impact from that? No, I think the key motivation for us was really understanding how do we get to the right long term model that allows us to continue and invest Open innovation in the products and that's really what it's about and that's what the license change enables us to do.

Speaker 8

And so no expectation in terms of revenue.

Speaker 1

Thanks, Alex. Next question?

Operator

Thank you. And I show our next question comes from the line of Nick Altman from Scotiabank. Please go ahead.

Speaker 3

Awesome. Thanks guys. I just had a quick

Operator

question on the acquisition of Blue Bracket. I guess

Speaker 3

maybe a 2 part question here. I guess maybe a 2 part question here. The first one just being is there any revenue contribution that we should be aware of on a go forward basis From Blue Bracket. And then secondly, can you guys just maybe unpack your strategy around M and A and whether or not we should expect more of these types of acquisitions or is there any appetite to maybe do larger acquisitions?

Speaker 8

Sure. Yes. Let me take the first one and we can talk about kind of the philosophy of how we're thinking about M

Speaker 7

and A. So on Blue

Speaker 8

Bracket, the company came with a small amount of incremental revenue. We're in the process of integrating the teams, integrating Products and that's going well and sort of ahead of where we thought schedule wise from both team integration and product integration. So our hope is to have that On market in relatively short order. So small impact to revenue today and we expect more of a contribution next year it's fully integrated. As we think about kind of the philosophy of M and A for us, we're very much focused Where are there products that are adjacent to our core offerings?

Speaker 8

Where there's sort of a natural synergy? So with Blue Bracket, I think the obvious synergy for us was For customers that are starting with Vault, their first and obvious question is how do I help onboard secrets that I have in my estate into Vault And Blue Bracket helps solve that gap. So it's an obvious adjacency, it has clear synergy to same buyer and really helps accelerate Vault adoption. Think that's really where our interest lies as we look across core products, where are there opportunities to accelerate our roadmap and Obviously, we look for alignment to our core products and core buyers.

Speaker 1

All right. Thanks, Nick. Next question?

Operator

Thank you. Our next question comes from the line of Gray Powell from BTIG. Please go ahead.

Speaker 5

Great. Thanks for taking the question. Congratulations on a good set of numbers here. So I just wanted to maybe drill into current RPO and just how we translate that to the guidance, if I look at Q2, current RPO had a good sequential improvement, just on an absolute dollar basis versus Q1. And then the year over year growth actually ticked slightly higher in the quarter.

Speaker 5

So I'm just curious, is there anything just Other than conservatism that would explain why revenue is roughly flat in Q3 from Q2? Just any moving parts there to think about?

Speaker 4

Hey, Gary. It's Navam here. Thanks for the question. So yes, we're very happy with the solid CRPO and RPO bookings performance this quarter. So that was a solid quarter of performance.

Speaker 4

The thing you've got to remember is an enterprise software company, you have seasonality in the back half compared to the first half, right? So you have a seasonally larger second quarter, which has Different compared to last year's second half. And what we're factoring into Q3 and Q4 is basically the demand environment that Dave talked about, which is That's a challenging purchasing environment, but at the same time, digital transformation and cloud efforts continuing. So that's factored into Our Q3 and Q4 forecast guidance. So that's the impact you're seeing on revenue versus the CRPO growth line.

Speaker 4

So overall, I think we're very pleased with the CRPO results.

Speaker 6

Okay. Thank you.

Speaker 1

Thanks, Gray. Next question.

Operator

Thank you. Our next question comes from the line of Mark Murphy from JPMorgan. Please go ahead.

Speaker 9

Thank you so much. Nivam, similar question to Grace. I noticed that nice sequential growth in the CRPO that's great to see. That occurred with a low volume of customer adds. And so I'm wondering, if you could just explain the mechanics.

Speaker 9

For instance, did you have a few pretty chunky deals in the mix, anything different in terms of composition? And then For Arman, I wanted to ask you, we noticed at Google Next that your announcement that the Google provider For TerraForma, it had been downloaded 350,000,000 times. And I just looked and it's climbed to 370,000,000 So it looks like it's kind of shockingly active. And I'm wondering if Should we look at that as confirming what you're mentioning there just in terms of multi cloud movement? Is it Is that somehow moving faster, while the amidst this kind of slowdown where more companies are optimizing, do you actually see them kind of spreading their footprints over into Azure and Google a little more actively?

Speaker 8

Sure. Thanks, Mark. Let me take the second question, and then I can hand it back over to Nivam. Yes, no, I think certainly, I think we continue to be Impressed as those download counts cross new thresholds to your point, I think Google hit an impressive milestone. I think AWS recently crossed $2,000,000,000 download mark as well.

Speaker 8

So we're continuing to see a lot of download activity. I think going back to my comment earlier, I do think we're seeing The investments in generative AI driving more multi cloud interest and I think certainly customers that were maybe focused on one primary CSP are now looking at, hey, how do I Some of these best of breed capabilities that Google is announcing, Azure is announcing, AWS certainly has quite a bit of offering. So I think all the clouds are investing in focused offerings. I think that is driving sort of a look to how do you get access to best of breed. So I think that's certainly fair.

Speaker 4

Yes, Mark. And hey, it's Nivam. On the customer mix question, just Note on the customers, there are a wide range of customers in our total customer group, right? There's the G2K on the high end And then there's the smaller self serve customers on the low end and these are customers generally spending somewhere around $2,500 a year. So what you're seeing on sort of the total customer count perspective is the movement of that self serve small customer count, which saw some impact this quarter.

Speaker 4

But in terms of revenue impact, there's almost an immaterial impact of that customer group since they're so small. So in terms of sort of the gross customer additions from sales team and the 100 ks customer additions, they're remaining consistent. We're still taking ground there and there wasn't any outsized impact on any single Deal that we saw in the Q2 for our revenue.

Operator

Thank you. Thanks Mark. Thank you. And I show our next question comes from the line of Brad Sills from Bank of America Securities. Please go ahead.

Speaker 10

Thank you so much. I wanted to ask if you could provide some more color, please on the updates you mentioned to the cloud offering. What are those? And might that be a catalyst for that business? And then also any observations on the macro Impact TerraForm versus Vault in the core offerings, is Vault seeing more resilient results here given that it's going after security, perhaps more of an outsized impact that you saw last quarter to TerraForm, just any observation on that interplay?

Speaker 10

Thank you so much.

Speaker 8

Sure. Yes. Thanks, Brad. Yes, so some of the key cloud updates, this is from our June Hashi Days event in Europe, It was really a security focus set of thematics that we shared among a bunch of other updates. So across the board Dave mentioned The Boundary one certainly was a big launch for us was the introduction of Boundary Enterprise, which was our self managed product as well as a set of advanced privileged access management features like session recording and That's been driving a lot of customer conversation around what are the modern PAM tool and cloud solve for and those updates span both our self Foundry Enterprise as well as our cloud delivered HCP Foundry.

Speaker 8

On the with the other security tools, we introduced a net new cloud service around Vault. So this is called Vault Cloud Secret, so we introduced that in a public beta and made that available for the first time, really a multi tenant, Much easier to use, quicker to onboard and I think we've seen great adoption and interest in that. Really looking at how do we make it push button and very easy to onboard into Vault and continuing to see strong demand from customers looking for simpler solutions to get started quickly. Around TerraForm Cloud, there was a whole bunch of different updates around capabilities really focused on different areas around policy, cost management and ease of use and onboarding. So TerraForm import was a key thing to bring Unmanaged resources into TerraForm, ephemeral workspaces to allow better cost management, so users can basically deprovision dev test environments when they're not using them to reduce their cloud cost.

Speaker 8

And then with console, we introduced a few different cloud capabilities around observability and workflow management. So really for our at scale customers looking for how do I do global management of multiple console clusters, how do I do observability to understand the state of these clusters. And so there was I think what we're seeing is the net new set of capabilities that are coming to cloud are differentiating the cloud offering from the self managed and continue to drive a healthy rate of adoption and inbound interest to the cloud. In terms of the are we seeing the macro impact and is there any sort of delta between the various core products? I think by and large, we're not really seeing any difference.

Speaker 8

I think TerraForm continued to benefit as customers want to go multi cloud, Gen AI is certainly helpful there. I think cyber remains very robust, so lots of interest in our Security portfolio and the 0 Trust tools around Boundary Vault console. So I think we're not seeing a whole lot of differential demand.

Operator

So I guess maybe I

Speaker 2

had one comment. I think I understand the your question about cloud, I just I'm going to pull it back and say, historically, the cloud consumption has come from our corporate segment, the SMB segment. I think as we continue to invest at a steady cadence like the ones that Arman announced, we are seeing increasing interest from the enterprise customers, Certainly lots of green shoots from some of the very, very largest companies that are inclined to consume those as managed services. But as we've always said, Infrastructure is a lot more deeply considered than, say, a database. And so it is happening on a measured pace, but we're super Optimistic given the green shoots that we do see and the continued investment we're putting into our cloud offering that we'll continue to see steady growth there, but for now it is largely the smaller cohort of customers.

Speaker 10

Thanks so much, Dave. Thanks, Armand.

Speaker 1

Thanks, Brad. Next question?

Operator

Thank you. Our next question comes from the line of Derrick Wood from TD Cowen. Please go ahead.

Speaker 11

Great, thanks. It's Andrew on for Derrick. Dave, wanted to ask about Boundary, how traction is so far there. I know it's early with the self managed version that just went GA. But Maybe just talk about what you're seeing in that market?

Speaker 11

What are your reps saying about it as they go to market with this? And could we start See that contribute to revenue maybe early next year. Thanks.

Speaker 2

Sure. I'll let Arman answer that one.

Speaker 8

Sure. Yes. Thanks, Andrew. Yes. In general, I'd say we're very excited about it.

Speaker 8

I think the general feedback we've gotten from customers is as they go to cloud, they have a much more dynamic Infrastructure is much more ephemeral and they're looking to adopt 0 trust practices. And so I think Boundary fits right in that crosshair. And As a consequence of that, we're seeing a lot of inbound interest from existing customers and in fact new prospects as well. So this quarter, we landed a few pretty Significant boundary deals, some of these were expansion opportunities from existing customers and some were land customers as well. So I think from that perspective, we're excited in terms of the demand signals that we're seeing from customers and certainly the field feedback has been very positive and we're continuing to build momentum New enterprise capabilities that we announced at our conference.

Speaker 2

I think what's very clear to me is that the cloud paradigm does introduce Any new requirement for this particular market? And I think that was our theory early on and continues to be borne out in the customer demand, I'd say 9 out of 10 conversations I have with customers today, this is a topic.

Speaker 11

Great. Thanks.

Speaker 1

Andrew, okay, next question please.

Operator

Thank you. Our next question comes from the line of James Fish from Piper Sandler. Please go ahead.

Speaker 1

Hey guys, this is Quintin on for Jim Fish. Thanks for taking our question. In the press release, you guys highlight a really good win in the APJ Government Agency, can you talk about any process or timeline you have in place for FedRAMP across Hachi really if it's Vault or Boundary or TerraForm? And then you're thinking about kind of the opportunity and when that opens up in the U. S.

Speaker 1

Federal business for you guys? Thank you.

Speaker 8

Yes. Thanks, Quintin. In general, as we're thinking about cloud, it's a progression for us in terms of how do we move from today, as Dave mentioned, predominantly tends to be our SMB corporate customers that are consuming cloud, as we're looking at the next set of commercial opportunity for us, it's a big focus on unlocking the commercial market. So top priority for us is really PCI as we're going into next year and we think that's the largest opportunity ahead is bringing the commercial customers that today are Predominantly self managed within our Enterprise segment. Of course, as I think longer term, FedRAMP I think is going to play an important role, particularly for SLED And civilian agencies.

Speaker 8

And so it's certainly on our roadmap as well.

Speaker 2

I could perhaps just clarify to you because there's sometimes confusion around FedRAMP. FedRAMP really just applies to SaaS offerings, as to underscore the point that our products in self managed form are broadly used in that environment already. And we call that Fed Ready, Just to delineate.

Speaker 1

Understood. Appreciate it. Thank you. Let's go to the next question please.

Operator

Thank you. The next question comes from the line of Sanjit Singh from Morgan Stanley. Please go ahead.

Speaker 1

Great. Thank you. You got Theo on for Sanjeet.

Operator

It looks like pretty steady quarter overall. And I want to ask one question on Kind of the pricing changes that were announced and that are upcoming around like TerraForm Cloud. And my question is really like How should we think about pricing changes, both for TerraForm Cloud, but also maybe for the broader portfolio kind of on a go forward basis? Like what's the ability to make further changes? And then have you gotten any early indications in terms of how customers are receiving that?

Operator

Any color on that would be super helpful. Thank you.

Speaker 2

Yes. Armand has the best.

Speaker 8

Yes. Thanks, Theo. So yes, I think on the TerraForm PNP, our goal is really a few things, right? And so this is particularly the TerraForm cloud pricing and packaging changes. The goal was To simplify effectively before we had a few different tiers, and particularly there was a free tier that had sort of a very limited subset of capability that was distinct from sort of our standard and more premium tiers.

Speaker 8

So we've done was the design goal here was to really bring that into one framework where there is a standard and A premium tier and the free tier is just a usage capped version of the standard tier. So what the value of that is, is as our new customers and users onboard, they get access To the full suite of TerraForm Cloud capability, they get a sense for the value it adds. And as they continue to scale up with the product, They cross from the free tier into our paying tier, but on the same SKU. So it really simplifies in some sense that motion of Users signing up organically using the platform and then growing into being a paid customer. The near term impact of that P and P You had some customers at the very low end of our paid tier that move into the free tier just given the new structure of it.

Speaker 8

But the flip side of it, I think where we've been excited to see is that it's driven a substantial uptake in the sign up rate of TerraForm Cloud. So I think that's kind of the near term impact of it. And I think in expectation, it's going to make it easier for us to onboard users and then graduate them from our 3 tier into our paid offering as they continue to scale. In terms of I think the broader question, I think Obviously, we're constantly fine tuning and looking at pricing and packaging across. I think our goal philosophically is want to enable our customers to sort of land small and align a unit of value to ultimately their consumption and their usage So that as they grow their cloud programs and as they're getting more value out of the tooling that we grow with them.

Speaker 8

And so we're always looking at how do we simplify that, but that's sort of the core philosophy.

Speaker 1

Great. Thank you so much.

Operator

Thank you. And I show our next question comes from the line of Milajump from Churwood Securities. Please go ahead.

Speaker 12

All right, great. Thanks for taking the question. So maybe thinking about the existing customer base, last quarter you all called out of the kind of right size to a smaller contract. I'm curious, did you have any more of this activity with large customers in the quarter? Or is there kind of incremental confidence Now that this is more of a one off and I guess maybe just an add on to that about Q3, you're comping against a really strong Q3 from last year.

Speaker 12

So just Curious for any color on the renewal opportunity that you all have there and or any headwinds to call out on the flip side? Thanks.

Speaker 2

Sure. Thanks. Yes. No, I just underscore that customer that we called out last quarter remains one of our very largest customers. And I think more generally, as I pointed out, I think there's this optimization cycle going across all of software and we're doing the same with our vendors.

Speaker 2

And I think that is likely to continue for some period of time. But that What we called out in the last quarter was a very unusual scenario. I wouldn't expect that to be representative to go forward.

Speaker 4

Yes. Specifically, the 2nd quarter gross retention was a better quarter than Q1. So we were very pleased with that result.

Operator

Thank you. And I show our next question comes from the line of Michael Turits from KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hey guys, this is Billy on for Michael. I think some of us have

Speaker 13

been keyed in on the opportunities and risks associated with monetizing open source users. Does your switching of the source code license benefit that monetization in some way? Or has this changed kind of more geared towards addressing competitive pressures or something else?

Speaker 8

Yes. Thanks, Billy. I think right now there's a whole lot of misinformation in the market associated with our license change to the business source license. In practice, there is really no impact to our customers, our partners and 99 plus percent of the user community around the tool. So what it's really about was really addressing the sense that there's a handful of effectively product clones that are cloning our product and That's been enabled by our traditional NPL license.

Speaker 8

And so what this change is about is what's the right long term model for us to continue to innovate openly within the community. And so that's really what was motivating us.

Speaker 1

Thanks for the question. Let's go to the next question please.

Operator

Thank you. And I show our next question comes from the line of Patrick Walravens from JMP Securities. Please go ahead.

Speaker 1

Great. Thank you. Maybe for you, Dave. I mean, just if you look at this business from a high level, In Q3 of last year, you're growing 52% and your guidance for this Q3 is 14%. Just never would have expected such a big slowdown.

Speaker 1

So maybe rank the factors that have driven that slowdown and when could it reaccelerate?

Speaker 2

I'm not sure I have a simple answer to the elements. Certainly, I think The optimization cycle for infrastructure is on the same path as everybody else. I think The reality is if you look at our Global 2,000 customer adds and the customer wins that we're adding, they're very, very consistent. We're just seeing a slightly lower ASP starting price as those companies are applying more caution to the buying cycles. So if I were to Point something out, it would really be the starting point for some of these larger customers taking a propensity to start smaller rather than what was happening a couple of years ago.

Speaker 2

Yes. That being said, they're not changing their plans. Their cloud plans remain intact and we're still winning the market. It's just a function of the scale at which people are beginning. Point number 2, I think we've seen an elongation of the sort of the expansion and extension cycles.

Speaker 2

Not surprisingly, as a lot more scrutiny has been applied to the budgets that are out there. And I've always been of the view these sort of cyclical changes impact different companies at different who are at different stages of their overall life cycle. No. We are certainly in the early stages of our growth arc and so have 4,000 customers, not 40,000 And I think that's indicative of what you're seeing in the impact of that on us. That being said, No.

Speaker 2

Like I said, these trends are naturally moving forward. Once you get to this digestion cycle that is in every Global 2000 account for every software vendor, super optimistic that we can get the growth rates to continue to be super aggressive and we'll keep executing towards that vision.

Speaker 1

Okay. Well, that's it. You guys want to take a shot at when we might see it?

Speaker 2

I would refer to the guidance that you'll see from a familiar this year, which reflects our best view of how that continues to progress, I think anything else will be speculation.

Speaker 1

Thanks, Pat. Okay. Thanks.

Operator

Thank you. I'm showing no further questions in the queue. That concludes our Q and A session. At this time, I'd like to turn the call back to Mr. Dave McJanet for closing remarks.

Speaker 2

I just like to express my thanks for the participation from everyone here and we certainly appreciate you dialing in and for all the questions. So we look forward to speaking with many of you at our event in October. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for attending. You may all disconnect.

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Earnings Conference Call
HashiCorp Q2 2024
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