Couchbase Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
June 5, 2024

There are 11 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, and welcome to Couchbase's Q1 2025 earnings call. We'll be discussing the results announced in our press release issued after the market closed today. With me are Couchbase's Chair, President and CEO, Matt Kane and CFO, Greg Henry. Today's call will contain forward looking statements, which include statements concerning financial and business trends and strategies, market size, product capabilities, our expected future business and financial performance and financial condition and our guidance for future periods. 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.

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. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10 ks or quarterly report on Form 10 Q filed with the SEC. During the call, we will also discuss certain non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. 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 releases, which are available on our Investor Relations website. With that, let me turn the call over to Matt.

Speaker 2

Thank you, Edward, and good afternoon, everyone. We entered fiscal 2025 with strong momentum, coming off a historic 2024 for Couchbase, where we achieved important Capella milestones, accelerated our net new ARR growth, increased the cadence of innovation with multiple enhancements and new capabilities on our platform and enacted initiatives that drove increased leverage and efficiency across the business. I'm pleased report that we've made continued progress on our growth, inflection and efficiency in Q1, delivering revenue and operating loss results that exceeded the high end of our outlook. Annual recurring revenue or ARR was $207,700,000 up 21% year over year, inclusive of a definitional change noted in our press release that Greg will discuss in more detail in a moment. Revenue in Q1 was $51,300,000 up 25 percent year over year, dollars 2,400,000 ahead of the high end of our guidance range.

Speaker 2

Non GAAP operating loss in Q1 of $6,700,000 was also ahead of the high end of our guidance range, which represented a negative operating margin of 13%, 3.5 percentage points above the midpoint of our implied operating margin guidance range. We added 19 net new logos and Capella now represents 29% of our customer base and 11.5% of ARR. This quarter, we saw new customer wins across a variety of industries, including manufacturing, FinTech, healthcare, retail, telco and gaming. Customer interest in and uptake of Capella continues to grow and feedback on our newest capabilities and enhancements has been very positive as customers are looking to Couchbase to enable the next generation of adaptive applications. Last quarter, I discussed the leverage that I saw building across our business as a result of our efforts to improve operational rigor and efficiency, and we made further progress on this front in Q1.

Speaker 2

Our first quarter Rule of 40 score improved by over 12 points year over year and 23 points from Q1 of fiscal 2023. This was also our Q1 of free cash flow positivity, and we remain on track to deliver on our profitability commitments we made at last December's Analyst Day. Driving efficiency across go to market, R and D and all aspects of our operations will continue to be one of our highest priorities for fiscal 2025. Despite these achievements in the quarter, our ARR performance was impacted by more pronounced timing dynamics than we anticipated. As we've often discussed, given our customer base of large enterprises, the mission critical nature of many of the applications we support and the sensitivities that our renewals, upsells and Capella migrations have on our reporting metrics, including ARR, quarterly timing is always an important element of our business.

Speaker 2

Now, we pride ourselves on focusing on what we can control, while also accounting for a variety of uncertainties that are not always in our control, including deal timing. However, these dynamics in combination with the ongoing macroeconomic headwinds, including longer deal cycles and elevated budget scrutiny, had an outsized impact on our ARR balance at the end of the quarter due to several deals which pushed beyond Q1. That said, we don't see any change to the momentum in our business or our ability to achieve our full year objectives. Adding to our confidence is that several of these slip deals have since closed and several more expected to close this quarter. More broadly, I continue to be very encouraged with our progress across many aspects of our business, including our strengthening pipeline, the growing relevance of our foundational technology and architecture, increasing demand for Capella, the strong interest in our new platform capabilities, the momentum building behind our go to market motion and especially the aforementioned efficiency improvements.

Speaker 2

As such, we believe that our ARR results in the quarter doesn't fully reflect the momentum we are seeing in our business and the trajectory of our business going forward. Now turning to product, I'm excited to share customer feedback on some new features we've announced over the past few quarters. These new innovative capabilities further enhance our ability to enable the building of adaptive applications alongside an evolving AI landscape. The first of these features was our co pilot capabilities, Capella IQ, now in GA, which allows developers to interact with Capella using natural language. Feedback on Capella IQ has been positive and customers are seeing results.

Speaker 2

A leading European travel comparison and booking website is leveraging Capella and the iQ Copilot to power development for their search engine to automate to automate more of their operations and significantly reduce their maintenance and administration investment. Next, we announced our Capella Columnar service, which converges operational and analytic workloads in real time valuing its ability to connect to multiple data sources, driving real time insights using the same familiar SQL plus plus query language for both query and analytics workloads and are benefiting from the simplified architectural approach of having their operational and analytic infrastructure tightly integrated. In Q1, we delivered the general availability of Vector Search to help businesses bring to market a new class of AI powered adaptive applications that engage users in a hyper personalized and contextualized way. Couchbase now supports Retrieval Augmented Generation Techniques or RAG in the cloud and the data center with mobile and edge vector search in public beta. Initial feedback on our Vector Search capabilities has been very positive.

Speaker 2

Customers appreciate having access to this feature across our entire platform and like the architectural simplicity inherent and not having it as a separate component within their infrastructure. Our customers are envisioning a range of use cases, including adding hyper personalized content generation into their applications and enhancing applications with hybrid search, which combines traditional search and similarity search all at once. We also remain focused on adding capabilities that make it easier for developers to rapidly create applications and increase developer engagement with Couchbase. Recent enhancements include the release of a new AI powered documentation chatbot built on AWS Bedrock and adding social sign on for Google and GitHub. The introduction of social sign on for Capella has contributed to significant growth in Capella sign ups.

Speaker 2

In fact, the number of trial sign ups per day more than doubled since the introduction of social SSO. Our foundation will always be our ability to support mission critical workloads with our leading performance and scale, and we continually add new features and services that enable our customers to power the applications they use to run their businesses. We've extended our alert notification capabilities so that external monitoring systems such as ServiceNow can receive alerts from a Capella cluster, further integrating Couchbase in the enterprise. We also added simple graph traversals using recursive common table expressions in SQL plus plus meaning developers can easily navigate relationship hierarchies like org charts within their applications unlocking new work workloads. And we introduced customer managed encryption keys to elevate customers' control over data security.

Speaker 2

These capabilities enable organizations to use Couchbase for new mission critical workloads. For example, Couchbase powers Verizon ThingSpace, an innovative end to end IoT development platform that helps enterprise customers build and deploy IoT solutions. Verizon originally needed a database with high availability and superior performance to provide real time visibility and status of the IoT devices to customers. Verizon is planning to consolidate multiple databases into Couchbase to simplify database administration and further reduce TCO. Verizon is not alone.

Speaker 2

While customer needs can vary from company to company, a common trend we see across but it's also our proven ability to lower customers' overall costs. Best in class price performance isn't just about delivering lower costs. It's also about helping organizations reduce or eliminate existing costs by delivering incremental opportunities for efficiency. This can include cost savings from database consolidation. Customers like Broad Jump, Talent Sky and Rakuten all selected Couchbase for our extensive features and exceptional price performance.

Speaker 2

Rakuten is a global technology leader in services that empower individuals, communities, businesses and society. Leveraging Couchbase to power its programmatic advertising systems, Rakuten was able to reduce its total cost of ownership by 20% through database consolidation using Couchbase's easily scalable platform. On the go to market side, we are continuing to make enhancements to our go to market motion in order to fully capitalize on our opportunity with our continued focus on operational discipline and gaining sales efficiencies. We're creating more intentionality on how we qualify new logos, migrations and opportunities for expanding the use of Couchbase for existing applications, while bringing new applications onto our platform. This includes driving improvements in how we identify prospects and compelling events that necessitate a fresh and modern approach that Couchbase offers.

Speaker 2

We're also placing more focus on strategic account teams that are supporting our largest customers, while allocating an increase in dedicated resources focused on generating new business. We need to make further progress on these efforts throughout fiscal 2025, which we believe will enable greater efficiency in our customer success and upsell motions and ability to win new applications, both of which will contribute to sustained growth. Finally, this quarter we announced the appointment of Julie Irish as Couchbase's 1st Chief Information Officer. In this role, Julie is driving Couchbase's global IT strategy in alignment with our key business objectives. She's leading the global IT and security team and setting the strategy for systems and IT to position Couchbase's internal infrastructure and product security for future growth and effectiveness.

Speaker 2

We're thrilled to have Julie as part of our world class team. As we look toward the rest of fiscal 2025, I remain confident in our mission, our strategy and our ability to achieve our objectives. While I am not satisfied with the full extent of our results in Q1, we made progress on our strategic priorities, and I believe that we have everything we need to make this year another exceptional one for Couchbase. Our foundation rests upon a carefully architected platform, purpose built to enable mission critical adaptive applications that are often being deployed at the edge in an increasingly AI powered world. We will continue to work tirelessly to support our customers and acquire new ones, enhance and extend our technology leadership, deliver new capabilities and services, drive increased Capella adoption, and we'll do so in a more efficient manner and with a maniacal focus on our Rule 40 trajectory.

Speaker 2

At the same time, we will prepare and manage against the things we cannot control, the macroeconomic environment and timing dynamics that are not always predictable. As I've said many times, at Couchbase, we attack hard problems driven by customer outcomes. With that, I'll now hand the call over to Greg to discuss our results in more detail. Greg?

Speaker 3

Thanks, Matt, and thanks, everyone, for joining us. We entered fiscal 2025 with significant momentum, and I am pleased with our top and bottom line performance in the quarter. Our dedication to delivering value to our customers and our ability to navigate the challenging environment while driving very strong outperformance in our operating loss guidance. That said, our ARR result was not what we had expected impacted by several deals that did not close on time in the quarter as planned. However, given the momentum we see in our business, we remain confident in our ability to achieve our priorities for fiscal 2025.

Speaker 3

Before I turn to the Q1 financial results, I want to share an update to our ARR methodology. Beginning this quarter, we adjusted our ARR calculation to include the on demand portion of our business. Under our previous calculation, ARR excluded revenue derived from the use of both Capella and Enterprise based on on demand arrangements as well as services revenue. In some cases, we have begun to see some Capella customers who bought the annual credit model go on demand. These shifts can be temporary or longer term.

Speaker 3

However, if customers oscillate between these two models, ARR under our prior methodology will not completely reflect how our business is actually performing. As such, we believe that including on demand in our ARR calculation more accurately reflects our business as more closely aligned to how we look at ARR internally. The impact on our Q1 ARR was an addition of $1,500,000 This change is reflected in our Q1 results along with our future guidance and reporting, but will not be retroactively adjusted in our previously reported results given its relatively immaterial impact. Additionally, we will now also include on demand customers in our customer count. This one time adjustment to our customer count was an additional 39 customers in Q1.

Speaker 3

Similarly, this will be included in our prospective results, but will not be retrospectively adjusted. Lastly, we will continue to not include services in ARR or customer count. Unless otherwise stated, all references to ARR and customer count are reflective of our updated methodology. I'll now walk you through our Q1 financial results in more detail. Total ARR was $207,700,000 representing growth of 21% year over year and 2% sequentially.

Speaker 3

Foreign currency fluctuations since we provided our Q1 guidance in March resulted in an approximately $350,000 headwind. We ended the Q1 with $23,900,000 of Capella ARR, representing 11.5% of our total ARR. Revenue for the Q1 was $51,300,000 an increase of 25% year over year and 2% sequentially. Capella consumption continues to be a tailwind for revenue growth. Professional services revenue was $2,300,000 in Q1, a decline of 7% year over year, an increase of 13% sequentially.

Speaker 3

As a reminder, we continue to expect professional services to remain normalized current levels throughout this fiscal year following declines in fiscal 2024 and outsized strength in fiscal 2023. Our ARR per customer performance in the Q1 was $257,000 roughly flat from Q1 2024 and down from $273,000 in the 4th quarter. As a reminder, ARR per customer growth could moderate or decline as our Capella mix continues to grow in contribution. Our dollar based net retention rate or NRR continues to exceed 115%. We exited Q1 with 8 0 7 customers, an increase of 58 net new customers from the last quarter.

Speaker 3

Under our prior customer count methodology, comp methodology, we added 19 net new customers in Q1. Once again, Capella represented the majority of new logos. This quarter, under our prior customer comp methodology, we grew our customer account logo by 26, an increase of 13% from the 4th quarter. Our strong retention metrics and steady Capella ARR growth continues to give us confidence in our new logo pipeline and our ability to consistently expand new logos. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to expenses, results of operations and share count are on a non GAAP basis.

Speaker 3

Our Q1 gross margin was 89.9 percent benefiting from sustained enterprise gross profit margin strength and lower services revenue mix, offset by growing Capella mix, which inherently carries a lower gross margin. This compares to 86.4% in Q1 of last year and 90.4% last quarter. As a reminder, we expect gross margin will decline as Capella mix increases. We remain focused on balancing leverage across our business while investing in areas that help us capture the massive opportunity in this space. I'm pleased with our expense discipline and cost savings initiatives, once again resulting in outperformance against our operating loss outlook.

Speaker 3

Turning to expenses. As Matt discussed, increasing our sales and marketing efficiency was an area of focus in Q1. Our sales and marketing expenses were $31,900,000 or 62 percent of revenue compared to $29,200,000 or 71 percent of revenue a year ago. Research and development expenses were $13,500,000 or 26 percent of revenue compared to $12,500,000 or 31 percent of revenue a year ago. General and administrative expenses were $7,400,000 or 14 percent of revenue compared to $6,700,000 or 16 percent of revenue a year ago.

Speaker 3

Operating loss for Q1 was $6,700,000 or a negative 13% operating margin. This compares to a loss of $12,900,000 or negative 32% operating margin in Q1 of last year. Net loss attributable to common stockholders was $5,200,000 or negative $0.10 per share. Turning to the balance sheet, we ended the Q1 with $160,200,000 in cash, cash equivalents and short term investments. We continue to remain well capitalized for executing against our long term strategy.

Speaker 3

Our remaining performance obligations or RPO was $220,000,000 at the end of Q1, up 33% year over year. We expect to recognize approximately 62% or $137,000,000 of total RPO as revenue over this fiscal year, representing growth of 22% year over year. As a reminder, we experienced fluctuations in our RPO balances due to a host of factors, including renewal timing as well as changes in contract duration. Operating cash flow for the Q1 was $1,600,000 Free cash flow was approximately $560,000 or a positive 1% free cash flow margin. As Matt noted, this was also our 1st quarter of free cash flow positivity and a significant milestone towards achieving our commitment of being free cash flow positive for fiscal 2026.

Speaker 3

Now I will provide our guidance for Q2 and the full year fiscal 2025. As Matt discussed, we entered Q1 with strong momentum across our business and our pipeline remains strong. Furthermore, we anticipate that Capella will continue to be an important driver of all aspects of our business, while investments in enhancing our product capabilities, partner ecosystem and go to market motion will continue to complement our ARR momentum. Will continue to invest in our strategic priorities. However, we are highly focused on continuing to drive rapid progress in increasing our rule of 40 metric as we remain dedicated to increasing our efficiency, growing our free cash flow and operating margin and driving leverage across our business.

Speaker 3

We remain confident in the massive opportunity in front of us and the ability to achieve our financial objectives for the year. In addition, we are highly focused on our execution in quarter linearity and visibility into factors not in our control such as deal timing. Finally, we remain mindful of the macroeconomic headwinds and continue to carefully monitor their outlook to our business. As such, our outlook maintains a consistent degree of conservatism to account for these variables, as well as lack of visibility into how the macroeconomic environment may impact upsell and migration timing, as well as consumption trends for emerging as a service offering. With these factors in mind, for the Q2 of fiscal 2025, we expect total revenue in the range of $50,600,000 to $51,400,000 or year over year growth of 18% to midpoint.

Speaker 3

We anticipate ARR in the range of $212,500,000 to $215,500,000 representing 18% growth year over year at the midpoint. We expect non GAAP operating loss in the range of negative $5,700,000 to negative $4,700,000 For the full year of fiscal 2025, we are raising our revenue outlook, while maintaining our ARR guidance and decreasing our operating loss. We note that despite the timing dynamics we experienced in Q1, there is no material change to our pipeline, opportunities and overall business momentum. As such, we remain confident in our ability to achieve our full year ARR guidance. We now expect total revenue in the range of $204,500,000 to $208,500,000 or year over year growth of 15% at the midpoint.

Speaker 3

We continue to expect ARR in the range of $235,500,000 to $240,500,000 representing 17% growth at the midpoint. And finally, we expect a non GAAP operating loss in the range of negative $26,500,000 to negative $21,500,000 With that, Matt and I are happy to take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. And our first question will come from the line of Matt Hedberg with RBC. Please proceed with your question.

Speaker 3

Great. Thanks for taking my questions, guys. So maybe I'll start with Matt. First of all, congrats on the cash flow generation in Q1. I know that's been a huge focus for you guys.

Speaker 3

Based on your commentary, I mean, it seems like the macros deteriorated a little bit from Q4. I'm guessing, was there any commonality to the deals that pushed? And is there any way to quantify the dollar value, just like just roughly speaking of deals that sort of you thought may have closed but didn't?

Speaker 2

Hey, Matt, good to hear from you and I appreciate the comment on cash flow. I'm sure that'll be something we come back to throughout the call. Look, we've been talking for some time about macro headwinds, longer deal cycles, higher levels of approval. In certain cases customers deciding to start smaller or shorter deal terms. And we've talked about how that's continued to persist for some time.

Speaker 2

Now as we evaluate our business, not all industries and verticals and geographies are affected in the exact same way. And so what we typically do is look at the overall pipeline against those dynamics and determine what we think we're going to be able to get done. Macro continues to be a factor. Is there a slight uptick on things like focus on budgets and approval cycles? Probably.

Speaker 2

But quite frankly, there was business there for us. And anytime we fall short of my expectations, my job and the job of the leadership team is to evaluate and really understand what happened and then not overreact and not underreact. And that's exactly how we've looked at things. So we've studied extremely closely the specific deals that went over the quarter boundary. And as you know, our business is driven by renewals with large expansions, new logos and more and more Capella migrations.

Speaker 2

As we got out of the gates with Q1, we did not have the same level of really big renewals with expansions as we have in previous Q1s. So that was always a factor. And the push from Q1 to Q2 was not one big deal, but it was more a collection of really good opportunities. And we've studied those and subsequently we've had many of them close. Some of them in fact, Matt, that went over the quarter boundary had increased in size.

Speaker 2

They go up to a different level and we benefit from a more strategic view and some of them are looking really good to bring in. So macro is a factor. Our job is to understand that and overcome it. We continue to believe in our value proposition and already have confidence in the business moving forward. So no change on our overall momentum.

Speaker 2

In terms of the dollar impact, Greg, I don't know if you

Speaker 3

Yes. I mean, again, as Matt said, it was several deals that several of which have closed. So again, it's all baked into the guidance as we go forward and we don't see it being an impact on the year. It's just the timing dynamic for us.

Speaker 2

Got it. Well, it's great that there are a

Speaker 3

lot of them are closing already. Maybe just a quick one follow-up for you, Greg. Maybe just a little bit more on why customers choose on demand pricing? And is it fair to assume given the $1,500,000 Q1 impact that it's kind of like a $6,000,000 impact to full year? Is that kind of

Speaker 4

the right way to think about it?

Speaker 3

Yes. Let me appreciate that. Let me start with the end of the question. No, it's not a $6,000,000 impact. It's a one time $1,500,000 pickup and the on demand business could grow from there, but it is not a revenue type thing where you could annualize it.

Speaker 3

It's a one time ARR balance item. So think of it as $1,500,000 not $5,000,000 or $6,000,000 for the year at all. And then why do we I mean, look, we've talked about in the past when I've met with you folks and the investor community that at the time, at the right time, we would include on demand. We felt it was the right time. It was the beginning of the year.

Speaker 3

To be honest with you, it's more about if you look at the materiality, it's less than a percent of ARR, it's 5 account. So we were doing it more for the customer account fluctuation than the ARR per se. And then also on your question about the impact, I mean, look, we think the on demand makes sense to be in the number. Customers can run out of annual credits at any point in time. They can go on demand for a period of time and then come back and rebuy the annual credits.

Speaker 3

But if that happens to be over the quarter point, based on our definition, they would be on demand customers and thus impacting customer count and ARR. So we wanted to include those to really be consistent with others and not have to have this dynamic of whether they're going to be in or out at a quarter point timing.

Speaker 2

Yes.

Speaker 3

Matt, the

Speaker 2

other thing I would add is we're working really hard to build up the consumption side of our business. And as we go down market, we want to make sure customers have the flexibility of just how they want to consume. And so I think this is additive to our business. It removes friction from the sales teams on getting them going with Capella. It's not the we want to enable that to the fullest extent possible and we actually see some healthy movement from a starter pack to on demand or on demand into credit.

Speaker 2

So we think it's a good time for it and it's more natural and indicative of how we're driving the business and customer relationships on a go forward basis.

Speaker 3

Thanks for the clarification. That certainly helps a lot. Thanks guys.

Speaker 5

Thanks Pat.

Operator

Our next question comes from the line of Howard Ma with Guggenheim Securities. Please proceed with your question.

Speaker 6

Great. Thanks for taking the question. I want to dovetail on Matt's question before. And so with respect to the slip deals, when you're talking to the decision makers, and Matt, you just said based on your own analysis, is it can you kind of if you were to kind of rank order the top three reasons, I mean, is it tighter budget constraints relative to the start of the year? I mean, would you say is it increased competition?

Speaker 6

Mean, maybe it's something more benign like Couchbase is offering more capabilities now. So you're being evaluated as part of a broader strategic decision and that can require more approval. So if you were to kind of rank order that what would you say to that?

Speaker 2

Yes, Howard, I think you nailed it. I think there are 2 big factors. One of them is just higher levels of approval. And I think sometimes even organizations may not understand exactly what approvals are going to get are going to be required. So they may think they have everything they need and it gets down at the end and it gets elevated and we just have a little bit more work to do.

Speaker 2

And I think that's the biggest dynamic that we've seen. And the good news is the value proposition holds true and we're able to do that work. The other dynamic that you touched on, and I'd say this is particularly relevant with Capella migrations, which is going to be a big driver of ARR for us. The consideration is a little bit different than would be the case with a big enterprise deal. How are they rationalizing cloud spend?

Speaker 2

How does that factor into the overall TCO? What kind of calculations are in there for developer productivity or What software version are they running? Where are they deployed? What's the What software version are they running? Where are they deployed?

Speaker 2

What's the complexity of the application? What's their cloud provider? And so as we go through this inflection in Capella and we continue to learn, I think that's a dynamic that continues to play out. And the fact that a bigger percentage of those are showing up to me is indicative of the product market fit that we have with Capella and the path that we're on. But it adds complexity and you combine that with higher levels of approval and the people that are asking those questions.

Speaker 2

I'd say those are increasing factors in how we're managing our business. And the thing that gives me comfort is we're leaning into investments and capabilities to drive that into the organization and ensure that we're able to act with better efficiency as we manage those. So I'd say those are two factors that played out in the quarter.

Speaker 6

Matt, thanks. That's really good color. And I just want to ask a follow-up on IT Ops information. So in light of that, I want to better understand how your customers are consuming, how they're choosing to consume Capella. Is it so is the dynamic more so that your Capella customers are choosing not to renew their commitments and then therefore they're moving completely to on demand or PAYGO?

Speaker 6

Or is it just that they're keeping the size of their commitments unchanged, but they're just over consuming more on demand? Thank you.

Speaker 2

Yes. So Howard, I'm going to take a crack at it and then I'll let Greg pile on. When we see the fluctuation for Capella customers between credit and on demand, I would say generally speaking that's smaller customers with smaller applications. With larger customers that have more significant Capella deployments, they're buying credits and we're managing their consumption and those metrics continue to look very positive. And then we get into rebuys and providing them with more credits and sizing and understanding the pace of their growth of initial applications or applications that they're adding.

Speaker 2

We spent a lot of time studying that and making sure that we have a healthy relationship quite frankly with the customers that they're not getting ahead of themselves and we're providing value as a strategic vendor. So the overall consumption that we're seeing in Capella, we're really excited about that shift to on demand again smaller customers and Howard as an example, we may sell a 5 or 10 ks starter pack, the customer gets going and they choose to move into that on demand as they're building out the application, we may very well move them back at the right time. But I'd say it's a different part of the pyramid than where the bulk of the Capella ARR is.

Speaker 3

Yes, I agree with everything Matt said. And again, you can have these dynamics, where even a large customer will say, hey, you know what, I'm going to buy more credits, but for some reason there's a timing element and they will say, I'll go on demand for a couple of weeks and I'll come back and place my rebuy. We do not see the larger scale Capella customers all going to on demand for any extended period of time, but there could be these windows and what we don't want to have see happen is have that window across a quarter point and based on our definitions not be able to report them as a customer or potentially ARR.

Speaker 6

Got it. Sounds like you're managing it really well. Thank you both.

Speaker 2

Thanks, Howard.

Operator

Our next question comes from the line of Austin Deats with UBS. Please proceed with your question.

Speaker 7

Thanks guys. I'm Matt at the next Connect. I was looking at your latest thoughts on columnar service. Obviously, the potential basis take off more analytics is exciting. So can you just unpack this opportunity a little further?

Speaker 7

Is this potentially going to pick up wallet share from existing analytical applications today? Is this more about net new applications? Do you mind just unpacking that opportunity further for us?

Speaker 2

Yes. Hey, Austin. Thanks for the question. When we think about the role that we play at Couchbase, we're very focused on enabling a very rich data platform to help enterprises build truly mission critical applications. And our job is to enhance our platform with additional capabilities that make those applications that much more sophisticated, that much more personalized, that much more real time for the enterprises that are deploying them.

Speaker 2

And a lot of that is bringing multiple data repositories into the database that the application then can derive performance and insights from. And clearly, we have access to a lot of data for the applications on the operational data side, but the addition of columnar allows us to ingest data from other sources and then unlock real time insights while the application is being performed that makes the application perform that much better. So this is not about moving into non real time operationally performing applications, but it's how do we bring the analytical capabilities with more and more data sources to make that application that much more sophisticated, that much more complete. Now as we think about the world of AI and what we call adaptive applications, think it's going to be really critical, particularly for business critical applications that multiple data sets are brought to bear for applications that analytics and AI capabilities can then enhance. And that structured data, unstructured data, data that we hold in the cloud, at the edge.

Speaker 2

And columnar is a big advancement on ingesting, manipulating, understanding data alongside the operational data store itself. In terms of how we will monetize this, I think it managing JSON and other capabilities. And it's a really powerful addition for developers that allow them to again build more and more sophisticated applications. So the feedback so far with customers has been really, really positive. As they're mapping out their strategic initiatives on a go forward basis, when we can sit down and show them this capability along with other services in the platform.

Speaker 2

And I think they really see the value and how they can leverage it on a go forward basis.

Speaker 5

Okay, great. Thanks guys.

Speaker 3

Thanks Austin.

Operator

Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Speaker 4

Thank you. The can I go back to Matt's question at the very beginning and just maybe clarify that one more time? So if you think about the ARR shortfall a little bit, like did the macro get worse? Or was it sales execution that kind of caused the delays when you looked at the deal afterwards? Because that's the Because we all have been working in that kind of tough environment for quite a while.

Speaker 4

So the Because we all have been working in that kind of tough environment for quite a while. So the question is, is it actually changing from here? Or was it more like deal specific? And I had one follow-up. Thank

Speaker 2

you. Hey, Raimo. Look, I think it's the 2 are interrelated, right? And again, if we have we've been talking about macro for some time. We've spoken with you about that many times.

Speaker 2

And our job is to articulate our value proposition despite macro and a big part of that is TCO. I think our business is built to sustain the environment that we're in and people need to invest and drive digital transformation and deploy platforms that are relevant and are going to unlock applications in an AI powered world and none of that has changed. As I mentioned, we had the business there and that business some of it is subsequently closed as I've articulated. If we go inspect each and every one of those, are there questions on are we extracting the right amount of value? Are the questions that delayed things macro related?

Speaker 2

Yes. Should we have executed and gotten more of them across the line? Yes. And so then we study those to say, well, has macro gotten worse and is it going to impact the go forward business? Or do we believe if we get further ahead of those and we have a little more time and we're spending time with the next level of approvers, are we going to get those over the line?

Speaker 2

And that's where we have confidence where we sit. And there's a lot of learning, particularly with Capella and migrations and the different types of questions that are coming with the different clouds. So I'd say macro persists. We're certainly very aware of it. Our value proposition is well aligned with Enterprise and Capella, and we know we can do better.

Speaker 4

Yes. Okay, perfect. That's very clear. And then Greg, one follow-up for you, like well done on the positive cash flow outcome this quarter. I know you're not guiding for cash flow, but how do you think about cash flows going forward for the rest of the year and from an annual perspective?

Speaker 4

Thank you.

Speaker 3

Yes. Thanks, Raimo. Yes, we're very proud obviously of getting to cash flow positive in Q1, particularly coming off the large Q4, which helps that. I think again, we will probably remain cash flow negative for the rest of the year. But I think you'll see by the time we get to the end of the year, we will have made significant progress again versus what we did last year.

Speaker 3

So we as I said in my remarks, we're still committed to being free cash flow positive next year in fiscal 2026, but you should still see cash flow negative for the remainder of the year. And I'd say general same seasonality you've seen historically.

Speaker 4

Okay, perfect. Thank you.

Speaker 3

Thanks, Raimo.

Operator

Our next question comes from the line of Sanjit Singh with Morgan Stanley.

Speaker 8

My congrats on the free cash flow positive quarter this quarter. And just a general improvement in operational efficiency on a year over year basis. I wanted to talk a little bit about the migration opportunity. I was wondering, Matt, it's just like a cohort of customers that migrated last year and sort of in that sort of near to that ramp. And what sort of trend lines you're seeing from those customers that have migrated in terms of their usage growth?

Speaker 8

And like if I look at the pipeline of opportunities for fiscal year 'twenty five, how much of migration play a role in that pipeline? If you could just some color on the migration opportunity there?

Speaker 2

Hey, Sanjeet. Look, I feel pretty good quite frankly about the whole dynamic of Capella migrations, both in the ones that we have migrated over and the monetization quite frankly, but equally important the customer feedback, as well as the number of opportunities that we have lined up and the advanced level of discussions that we're having with them on when is the right time for them to move and when do we create a compelling event. Customers understand the value proposition of TCO. They understand that they're able to go focus on building applications and we can run the database. We had one of our largest migrations, Sanjeet, stand up in front of a large group and say, I've hit euphoria with Capella and I've been working on databases for my entire career, 25 years and I never thought that I would get to the point where a database would just run on its own.

Speaker 2

Now this is a customer that's had a very long journey with us, starting with enterprise, some of our very early versions of our as a service offering. And it hasn't always been perfect to be frank, but they've stuck with us because the power of the Couchbase platform is so critical. Now we've gotten them migrated over and they're using the word euphoria. We have worked relentlessly to ensure that the customer experience is world class and we continue to get amazing feedback. And so the pace of it is going to depend on when customers are ready with that compelling event.

Speaker 2

Do they have other projects in line? Are there things they need to do with their software version to get moved over? Just the business side of the equation. So there's many factors that we're leaning into, but the pipeline has never been healthier. Our understanding of the variables that are important for us to address and for them to address to get things over the line and get up and running in a healthy way, We've never been better at that.

Speaker 2

Now we're not always going to be able to control the moment at which they go, but I'm comfortable with the fact that we look at Capella in a lot of different ways. If you look at the customer count number, that's gone up faster this quarter than the ARR percentage and that's just a function of when those migrations are going to happen. So again, there's a lot of things that I'm excited about as it pertains to the go forward, but Capella migrations is at the top of the list.

Speaker 8

That's super encouraging to hear, Matt. The other question, the follow-up I had, was putting around, you mentioned a couple of times in the Q and A far about Cauchy's role in supporting mission critical applications and driving digital transformation. And then I'm sort of wondering in the context of that, we have macro, but we also have just a lot of stuff being brought to market on the JetAI side. You guys just released vector search gene ACA that quarter. I'm wondering from like the customer's perspective, the ability to digest all of this new innovation in the sort of data infrastructure side.

Speaker 8

And then with a lot of proof of concept in eValve, is that slowing the ability to get to restart that digital transformation initiative or build that net new mission clinical application in your view?

Speaker 2

Yes. Sanjeet, I think it's a sophisticated point. And if we think about the world's mindshare, which is inclusive of our customer base, the amount of time that we're spending on AI compared to any point in the future is higher. And so if there's a always at the expense of digital transformation, but it's been certainly a topic that everyone is talking about that we need factor into our sales cycles and customers need to factor into their initiatives. I do think the distraction is larger the more simple the app is.

Speaker 2

I think when you get into mission critical high performing applications, it's an and not an or. And you still need operational data stores, you still need to ingest other data sets. It's going to be really important that you have edge capabilities. And so as we're articulating Couchbase in an AI world, that's a pretty natural discussion when we're thinking about and it's not, oh, it's this or some other tool. So I think it's a factor.

Speaker 2

We're having to arm our sales teams and spend time with customers. But we're still able to get things done done and that includes migrations as well as new logos. When we do have those conversations, we feel really good about what we can articulate because of all the capabilities we have and our multi pronged approach with respect to AI, which isn't just the platform, but unlocking improvements for developers, which is an area that's quite frankly only an accelerant, not slowing things down with IQ in our co pilot. So I'd say those are factors that were weighing into how we go to market and how we message. But all things considered, because of our strategic position, I think we can use that to our advantage.

Speaker 8

I appreciate your thoughts, Matt. Thank you so much.

Speaker 3

Thanks, Sung Ji.

Operator

Our next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Speaker 9

Thanks. Hey, guys. Greg, I wanted to dig again into your confidence around the ARR target for the year. I understand that you have another $1,500,000 of on demand. That's a little bit of a buffer there.

Speaker 9

But I'm kind of wondering the fact that deals get pushed out ultimately that means you do need to spend more time on those things in the quarter when you didn't expect it, which means ultimately sales bandwidth is not allocated to deals? And why isn't there like a rolling effect of this going forward? Why do you think you can catch up, especially since you're highlighting what is clearly a very still complicated, not easy backdrop?

Speaker 3

Yes. Hey, it's Ty. Look, we feel confident in the guidance. The reality is the way this year set up was going to have a larger amount of the renewals on the enterprise side of the business, which is still approximately 88% of our business in the second half of the year. And those are all still tracking.

Speaker 3

I've also had the ability to have May close now and see how we're in terms of having closed those deals we talked about from Q1 as well as what the pipeline and the deal activity is. So as Matt mentioned, most of the deals are really on the doorstep where we were one signature away in most cases. So that's why we still feel good about what we're able to deliver not only for Q2, but for the full year and really don't see Q1, which is typically, as you know, a small quarter really dictating how the rest of the year is going to perform. Okay. Ittai, if I

Speaker 2

could provide some additional context. When we moved into the year, we talked about driving efficiency and leverage and getting more out of our investment. And on the go to market side, there were probably 4 levers that we felt really good about new capabilities, new investments. That's really understanding how we qualify our opportunities and align our sales motions. A lot of tools and capabilities for Capella migrations as we've mentioned.

Speaker 2

More focus on strategic accounts with dedicated teams and then things that we're doing around the developer experience. And as we analyze when we expect to see that the impact of that, the reality more back more back end loaded. We're starting to see a little bit in Q2, but certainly in the back half. And so we feel really good about the operational improvements that we've driven there. We can see the leading indicators, and I expect those to have an impact as we go through the year as we plan for them to be.

Speaker 2

So that in addition to the renewal base, I think leads to our confidence on how we've laid things out.

Speaker 9

Okay. Maybe as a follow-up then on this, Matt. I'm just trying to make sure I get your perspective on the big picture on the macro. Is the macro unchanged from your perspective versus a quarter ago? Or has it become slightly more difficult, more negative?

Speaker 9

And if it did get a little bit more difficult, how is this informing the pace of your investment in the business between now and year end?

Speaker 3

Yes. Look, I'd say on

Speaker 2

the margin, it's hard to argue that it hasn't softened a bit. Now again, we've been talking about these factors for some time And there's multiple factors, approval cycles, size of deals, starting smaller. I wouldn't say that every one of them was a factor in Q1. It's probably, again, as I've talked about those migrations and approvals. But we've thought about that for the year.

Speaker 2

And again, the pipeline is there and we're in a good place to go execute. All that said, we remain very committed to driving leverage in the model and that's not about spending less, that's about doing things better. We're very proud of the rule of 40 improvement over the last year and certainly the last 2. And we've been talking about the foundation that we've built and now being a part of this Capella inflection, which is allowing us to just be better in how we develop product, how we support our customers, how we take things to market, the impact on the business with the monetization of Capella. So we remain very convicted on delivering what we articulated at Analyst Day.

Speaker 2

And as we've talked about, there are factors outside of our control like macro and then there are factors inside of our control and efficiency and leverage and being smart about how we do things is directly in our control and I'm very proud of the results that the team delivered and confident on the ones we're going to continue to put out.

Speaker 9

Appreciate it. Thank you.

Operator

The next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

Speaker 7

Okay, thanks. Can I ask a question just broadly on GenAI? AI. Has the focus on the training phase of Gen AI and perhaps the slower start of the inference phase had any impact on your growth either with new logos or migrations?

Speaker 2

I don't think so. I think, again, it's part of the dynamic and part of the discussion that we're having as customers evaluate AI in general, but not going to slow down the evaluation of Couchbase and Capella as an important data platform.

Speaker 7

Okay. And then I wanted to ask about the go to market changes you're making. It sounds like you're having your sales team focused on the larger strategic accounts. I'd assume those workloads are larger and presumably have more predictable consumption patterns. But are they also more competitive?

Speaker 7

Some of the other larger vendors are also targeting those same strategic accounts?

Speaker 2

Look,

Speaker 8

so I

Speaker 2

think this is an and not an or. And it's about really understanding the unlock potential of some of our really large enterprises. And if you look up the makeup of our business, we have some massive customers that are investing in Couchbase as a true, true strategic platform. We've unlocked a few of those that get us into some very significant deal sizes and they start to standardize on Couchbase for certain applications. The idea is that with more of that understanding, we can unlock these massive opportunities with dedicated teams and that selling motion and how you go to market is very different than engaging in the developer on a 5 ks starter pack and getting them to build a net new application for their company.

Speaker 2

And so it's about focus and ensuring that if we're expanding a use case at that size or working on a replacement of a legacy database, who we're talking to and how we're talking and what kind of proof of concept versus trial they're doing, those can be different. And with the specialization in certain areas, we're going to be that much more efficient and unlock opportunities. So it's about go to market motions, aligning to who we're talking to in those accounts, giving them what they need to advance through their either building or buying cycle, and just bringing the right resources to bear for the customers in mind. So, look, we see leading indicators. But as Greg mentioned, just the way the renewal base is built up, some of that activity is going to be more back end loaded, but we're pretty excited about what we see so far.

Speaker 7

Got it. Thanks.

Speaker 6

Thanks, Andy.

Operator

Our next question comes from the line of Rudy Kessinger with D. A. Davidson. Please proceed with your question.

Speaker 5

Yes, thanks for taking my questions and I appreciate the candor here and sort of pointing the finger more at yourself instead of just playing in the macro. I want to dig in again on just this 1,500,000 dollars of ARR that came from the reclassification. Because I guess one way you could look at it, if we exclude that $1,500,000 your ARR would been below the low end of your guidance range. And so how much of that $1,500,000 in ARR that you're now including came from customers who intra quarter in Q1 switched from credits to on demand versus how much was from customers who have been on demand for a while now?

Speaker 3

Hey, Rudy, it's Greg. Look, again, as I stated, we didn't do this, I would say, from an ARR perspective. We did it more from a customer account perspective because of the significant impact on the customer account. The movement that you talk about was probably generally immaterial in the quarter. So it's not driving that big a thing, but we have seen this and what we don't want to do because it's the beginning of the year, we thought it was the right time to put this out here that we would be sort of clean for the year, because we have seen some of that.

Speaker 3

We just don't want to get caught at a later point down the road where our definition would have had us reclass that out of customer or out of ARR. And then just for clarification on your point, yes, if you remove this on demand, but I did mention that there was $350,000 of FX headwind. So we would have landed within the guidance range, albeit on the low end as you noted, but not outside of it.

Speaker 5

Okay. That's helpful. And then I'm curious, some other competitors out there have called out kind of slowing consumption growth trends. Just curious what you guys have seen? And in particular, with some of your customers where they're on commitments, how are they tracking in their consumption growth towards those commitments?

Speaker 5

And do you later on

Speaker 2

throughout the

Speaker 5

year once customers get to that renewal point and maybe later on throughout the year once customers get to that renewal point and maybe they're not quite up to their commitment level on consumption?

Speaker 3

Yes. We have not seen any material we call breakage where they're not using their credits at all. In fact, most are using them early. So we still see very positive consumption trends throughout Q1 and even with the benefit of now having May, we've still seen another increase in consumption even in May. So because we're still in this early phase of this consumption model as compared to some of the other companies that are sort of more mature and have been doing this for a lot longer, We're still in this early phase of adoption.

Speaker 3

So we are still seeing positive consumption trends. We have not seen this optimization that is being spoken of. We're still seeing healthy growth and we're seeing customers like the one we talked about in Q4, which is a multimillion dollar account. It's 6 months in, they're now consuming at the level that they bought into. So it's not taking us even a full year to get them up to the full consumption level.

Speaker 3

So we feel pretty good about the consumption trends we're seeing at current time.

Operator

Our next question comes from the line of Taz Koujaghi with Wedbush Securities. Please proceed with your question.

Speaker 10

Hey, guys. Thanks for taking my question. Other questions, again, just to follow-up on that 1.5% adjustment, Greg. So when you gave us a guide for ARR last year for the full year, I guess you're not assuming to include the on demand portion in the ARR. So now that you're adding that on demand piece, I guess we've got an uplift of $1,500,000 in Q1.

Speaker 10

But shouldn't that be passed on to the full year guide as well because that uplift should was not factored into the initial guide? Or is it are you effectively, I guess, lowering the guide by 1,500,000

Speaker 3

dollars Yes. So Taz, we are we introduced this methodology change in Q1. It was not previously contemplated in the guidance. It is now contemplated in the guidance that we've reiterated for the year. But yes, it is in there now and it will be going forward.

Speaker 2

Got it. Thanks. And then secondly on the guide, I

Speaker 10

know you guys feel good about the second half of the year given the renewal base. But I'm asking about the my question is about

Speaker 2

the guide for Q2. When I look at

Speaker 10

the guide, the midpoint for ARR, you're expecting I think the net new ARR in flight is about 6,000,000 dollars You had about $2,500,000 in Q1. And then when you compare that to the businesses now, they look a little bit right? I mean, typically, you add Q2 ARR, net new ARR, which is almost in line with your Q1 net new ARR. Here, I guess, your guide is implying a big jump in what your the net new ARR you're supposed to add in Q2. So just in terms of guidance, I guess, philosophy or framework, are you assuming that whatever got pushed out is closing in Q2, nothing else is getting pushed out from Q2?

Speaker 10

How do you feel about that guide being, I guess, conservative or aggressive versus what you guys did in Q1?

Speaker 3

Yes. We're both comfortable with the Q2 and the full year guidance. As we've always said, we set that up taking in all the factors, including what Mac talked about in terms of the macro changes that we saw. So that's all factored into both Q2 and full year guidance. And we obviously, as we've said before, we always attempt to at a minimum meet it, if not beat it.

Speaker 3

As we sort of alluded to several of those deals from Q1 have now closed in Q2. We've had the benefit of seeing May. So we feel very comfortable with both the Q2 and the full year guidance in terms of our ability to execute and deliver on that.

Speaker 10

Got it. Thanks. One last one, if I may, guys. Just on the mix of new business between upsell and new logos, it looks like new logos are very strong this quarter. Does this seem the majority of the push outs and whatever weakness you saw was in renewals and upsells and new logo momentum seems pretty healthy this quarter?

Speaker 2

As I think it was a mix in terms of what went over the quarter boundary. And as we've said, new logos has been and continues to be an area of focus for us. So we are relatively pleased with that performance. And if we look back last year, we're off to a very nice start with respect to net logos. We think that's indicative of what we can do on a go forward basis.

Speaker 10

Thanks guys.

Speaker 3

Thanks Taz.

Operator

Thank you. We have reached the end of our question and answer session. And with that, I would like to turn the floor back over to Matt Cain for any closing comments.

Speaker 2

Thanks, operator. We started this year with continued progress following our historic 2024. I remain confident in our ability to drive leverage across our business and capture the generational opportunity in front of us. Thank you all for joining us and we look forward to speaking with you next quarter.

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Earnings Conference Call
Couchbase Q1 2025
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