Couchbase, Inc. (NASDAQ:BASE) Q4 2024 Earnings Call Transcript
Couchbase, Inc. (NASDAQ:BASE) Q4 2024 Earnings Call Transcript March 5, 2024
Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.14. Couchbase, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Couchbase's Fourth Quarter 2024 Earnings Call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase's Chair, President and CEO, Matt Cain, 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.
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-K 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.
Edward Parker: Good afternoon, and welcome to Couchbase's fourth quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase's Chair, President and CEO, Matt Cain, 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.
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-K 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.
Matt Cain: Thank you, Edward, and thank you all for joining us on the call today. I'm delighted to report that we have delivered a strong Q4 with all our key financial metrics exceeding our outlook. Highlights include growing Capella mix, continued big deal activity, including a particularly robust quarter for renewals and expansions, strong new customer logos, and overall excellent operational performance from all teams across the company. Total annual recurring revenue, or ARR, was $204.2 million, up 25% year-over-year. Revenue in Q4 was $50.1 million, up 20% year-over-year. Non-GAAP operating loss in Q4 was $4.1 million, representing a negative operating margin of 8.2%, 8.6 percentage points above the midpoint of our implied operating margin guidance range.
We finished fiscal 2024 with strong momentum, capping off a historic year for Couchbase. We drove strong top-line growth in a challenging macroeconomic environment, including accelerating our net new ARR growth. We achieved important milestones with Capella, which now represents 11% of our ARR and over 25% of our customer base. We worked tirelessly to improve our operational rigor and improve our efficiency across the entire company, which resulted in meaningful operating profit outperformance and substantial operating and free cash flow margin expansion. We enhanced and refined our go-to-market motion across marketing, sales and our partner ecosystems. Our product and engineering teams delivered multiple important enhancements and capabilities across our platform and did so at an accelerated pace.
And we welcomed many of you to our first Analyst Day as a public company just this last December in New York. I couldn't be more proud of the progress we made across all of our key strategic initiatives: deliver top-line growth, increase the mix at Capella, drive sales and marketing efficiency, and accelerate the pace of leverage in our model. Now, let me discuss some highlights of the quarter and the year. I'll start by reviewing the many innovations we have announced over the past few months. These have contributed to the inflection point we're seeing with Capella and will be instrumental in unlocking future growth and leverage opportunities. From day one, we've architected our platform to enable demanding applications to not only deliver premium performance, but also provide rich, hyper-personalized, differentiated experiences for end users.
Because of our differentiated architecture, our multipurpose platform converges operational and analytical capabilities and seamlessly integrates advanced services like indexing, eventing, full text search and more in a single solution. This approach is why Couchbase can uniquely power adaptive applications for customers. We've built a strong foundation with differentiation we can sustain. And now, we've taken that foundation and have layered on new features and capabilities that we have recently announced that position us well for how adaptive applications are evolving with AI. First, we increased developer productivity by introducing the Capella iQ copilot into our database as a service. iQ allows developers to interact with Capella using natural language conversation, making database interactions more intuitive, efficient and accessible for developers.
They can go from an idea to code in just a few clicks. Next, we further extended our platform capabilities by announcing a columnar service for Capella, which converges operational and real-time analytic workloads into a single platform. Customers can ingest data from anywhere into Capella in real time, reducing complexity and costs while increasing developer productivity. Initial feedback from the private preview has been exceptional and we are excited about what this key new service will unlock. Finally, as you may have seen last week, we announced vector search as a new feature in our platform, optimized for running on-site, across clouds and devices at the edge, including mobile and IoT. While vector database point solutions aim to solve the challenges of processing and storing data for LLMs, having multiple standalone solutions adds complexity to the enterprise IT stack and flows application performance.
Our multipurpose capabilities eliminate that friction and deliver a simplified and unified architecture to improve the accuracy of LLM results. We also make it easier and faster for developers to build applications by using a single SQL++ query, which incorporates vector index, removing the need to use multiple indexes or products. And we are the first vendor to announce vector search at the edge, enabling organizations to run AI applications anywhere in connected or disconnected modes. I'm also pleased to announce that we are extending our AI partner ecosystem with LangChain and LlamaIndex integrations, enabling a common API interface to converse with a broad library of LLMs, while providing developers with choices for LLMs. Taken together, we're embracing the opportunity to enable hyper-personalized, high-performing and adaptive applications powered by AI that deliver exceptional experiences to their end users.
Customers are responding very positively to how our approach is aligned to their AI-powered adaptive application journey. As you can see, we've achieved a lot in a short amount of time on both product innovation and customer uptake, and it's gratifying to see our efforts bearing fruit. As our Capella base continues to grow, we're seeing favorable consumption dynamics emerge as both existing and new customers realize our platform's unique performance and scale. We're seeing increased consumption across our customer base, which is indicative not only of the value we bring, but also gives us confidence in our ability to deliver sustainable growth. As such, we are committed to taking advantage of this recent inflection we've seen. We fully expect Capella to become an increasingly meaning driver behind ARR and net retention, as well as an important engine for new logo acquisition.
And it will contribute to leverage across our entire business. Now, I'd like to turn to customer wins. In Q4, we saw new Capella wins across many industries, including manufacturing, media, fintech, technology, retail and telco. Array is a financial innovation platform that helps digital brands, financial institutions and fintechs get compelling consumer products to market faster. Array's offerings helps its partners drive revenue, increase engagement and empower millions of consumers to achieve their financial goals. This quarter, Array selected Capella to support profile management for its privacy application because of the compelling value and impressive database performance. In Q4, a leading cloud communications provider expanded its investment in Capella to continue supporting its real-time communications platform.
This platform connects widely used applications to carriers worldwide with all conversations being managed and recorded with our cloud database platform. This customer initially began migrating to Capella because of the scalability and benefits that a fully-managed service provided to its developer team. They gain the ability to step away from database management and focus on developing core business applications. Another Capella expansion from the quarter came from a premier provider of life insurance in the Asia Pacific region. Couchbase powers Customer 360 data for this provider's many millions of customers. The customer decided to expand its investment in Capella on Google Cloud for cost optimization and to continue modernizing their architecture and database management in the cloud.
Of note, this was our first multimillion-dollar Capella migration. We also continue to see robust large deal activity with the strong foundation of our enterprise server. A new enterprise logo for us this quarter came from a multinational financial services company and one of Europe's leading banks, BBVA. They selected Couchbase to replace another NoSQL database at a worldwide level because of the price performance our platform offered and they will be using Couchbase to power profile management for its entire customer base. Finally, as I previously mentioned, we saw robust renewal and expansion activity in the quarter with some of our largest customers. This includes a Fortune 500 shipping and logistics company, which saw the largest expansion in our history, and a major multinational technology company that provides software solutions for the global travel and tourism industry.
Both customers rely on Couchbase for multiple applications and deployment modalities, and we're honored to continued their journey with them. As we look ahead towards fiscal 2025, we have a massive opportunity in front of us. 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. I strongly believe that our foundational tenets of scale, performance and flexibility have never been more relevant as we continue to leverage our core innovations while adding new ones. These include our new real-time analytic and vector search capabilities, both of which together have the potential to make a meaningful impact to our business.
Our priorities going forward are to continue to drive sustained growth, capitalize on the inflection we're seeing across the business and accelerate the pace of leverage in our model. If I were to emphasize one of these priorities, it's the forthcoming leverage that I see building across all aspects of our business. This spans from how we innovate and deliver new capabilities and services to how we go to market, growing our outstanding customers, while also acquiring new ones to driving more efficiency in our P&L and model. Having held our annual kickoff last month, I can say confidently that we have a strong, motivated and highly aligned team in place to achieve our ambitions in fiscal 2025. At Couchbase, we're inspired by the generational opportunity that is in front of us and in being a trusted advisor for our customers, partners and the broader industry.
It's an honor to be a strategic technology provider to so many organizations that are changing the way we interact through their modern applications. We have work to do and it won't be easy. But at Couchbase, we pride ourselves on attacking hard problems driven by customer outcomes. With that, I'll hand the call over to Greg to walk you through our results in more detail. Greg?
Greg Henry: Thanks, Matt, and thanks, everyone, for joining us. We finished fiscal 2024 with another strong quarter as we beat guidance across all key metrics. We are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment while driving very strong outperformance in our operating loss guidance. I'll now walk you through our fourth quarter and full year fiscal 2024 financial results in more detail. Total annual recurring revenue, or ARR, was $204.2 million at the end of the fourth quarter, representing 25% growth year-over-year and 8% sequentially, driven by strong growth in Capella contribution as well as our core enterprise business. At the end of the quarter, Capella ARR was $21.8 million, representing 11% of our total ARR.
Revenue for the fourth quarter was $50.1 million, an increase of 20% year-over-year and 9% sequentially, and $180 million for the full year, an increase of 16% year-over-year. Revenue growth benefited from growing consumption of Capella and strength in our enterprise business, partially offset by declines in professional services. Subscription revenue for the fourth quarter was $48.1 million, an increase of 26% year-over-year and 9% sequentially, and $171.6 million for the full year, an increase of 20% year-over-year. Professional services revenue for the fourth quarter was $2 million, a decline of 42% year-over-year and an increase of 12% sequentially, and $8.5 million for the full year, a decline of 29% year-over-year. As a reminder, this was consistent with our expectations following outsized strength in professional services in fiscal 2023.
We expect professional services to normalize at current levels in fiscal 2025. Our ARR per customer performance in the fourth quarter was $273,000, up from $264,000 in the third quarter, up 12% year-over-year, an indicative of the growing wallet share we have with large customers. As a reminder, as our Capella mix continues to grow in contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate, or NRR, continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers. Our NRR has been steadily improving, thanks to Capella. We exited the year with 749 customers, an increase of 34 net new customers from the third quarter. Capella once again represented the majority of new logos in the quarter, and we grew our Capella customer logo count by 41, over 25% from the third quarter.
We continue to be encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations and share count are on a non-GAAP basis. In Q4, our gross margin was 90.4%, benefiting from sustained enterprise gross profit margin strength, lower services revenue mix, the completion of the amortization from some of our initial Capella investments and leverage as a result of our expanding Capella revenue base, offset by growing Capella mix, which carries lower gross margins. This compares to a gross margin of 86.3% a year ago and 89.5% last quarter.
For the full fiscal year, our gross margin was 88.5% compared to 87.6% in fiscal 2023. As a reminder, as Capella mix increases, we expect gross margin will decline in fiscal 2025. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but are focused on driving leverage across our business. We are pleased with our execution on this front as our expense discipline and benefits from our cost savings initiatives resulted in us again outperforming our operating loss outlook. Our sales and marketing expenses for Q4 were $29.4 million or 59% of revenue compared to $26.7 million or 64% of revenue a year ago. For the full fiscal year, our sales and marketing expenses were $113.6 million or 63% of revenue compared to $101.3 million or 65% of revenue in the prior fiscal year.
Research and development expenses for Q4 were $12.9 million or 26% of revenue compared to $12.9 million or 31% of revenue a year ago. For the full fiscal year, our research and development expenses were $50.5 million or 28% of revenue compared to $49.7 million or 32% of revenue in the prior fiscal year. General and administrative expenses for Q4 were $7.1 million or 14% of total revenue compared to $6.3 million or 15% of revenue a year ago. For the full fiscal year, our general and administrative expenses were $26.5 million or 15% of revenue compared to $25.9 million or 17% of revenue in the prior fiscal year. Operating loss for Q4 was $4.1 million or negative 8% operating margin compared to an operating loss of $9.9 million or negative 24% operating margin a year ago.
Operating loss for the full fiscal year was $31.3 million or negative 17% operating margin compared to an operating loss of $41.3 million or negative 27% operating margin in the prior fiscal year. Net loss attributable to common stockholders for Q4 was $2.9 million or negative $0.06 per share. For the full fiscal year, net loss was $27 million or negative $0.57 per share. Before I turn to the balance sheet and cash flow statement, I want to mention an impairment charge of $5.2 million that we recognized in Q4. This impairment charge relates to a reprioritization of some R&D resources as we have focused our efforts on Capella, AI capabilities, services and related developments. This has been excluded from, but does not affect our non-GAAP results for the quarter.
Turning to the balance sheet and cash flow statement. We ended Q4 with $153.6 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations, or RPO, totaled $241.8 million the end of Q4, an increase of 46% year-over-year, driven in part by the timing of robust renewal activity with some of our larger customers, several of which are on multiyear contracts, driving higher average duration than we have seen in recent quarters. We expect to recognize approximately 61% or $147.6 million of total RPO as revenue over the fiscal year 2025, which represents 26% year-over-year growth. As a reminder, we experience fluctuations in our RPO balances due to a host of factors, including renewal time as well as changes in contract duration.
Operating cash flow for Q4 was negative $6.5 million, and for the full year was negative $26.9 million. Free cash flow for Q4 was negative $7.7 million or negative 15.4% free cash flow margin. Free cash flow for the full year was negative $31.6 million or negative 17.6% free cash flow margin. Now, I will provide guidance for Q1 and the full year fiscal 2025. As Matt discussed, we entered fiscal 2025 with very strong momentum across our businesses, and our pipeline remains strong. We achieved a critical milestone with Capella and expect it will continue to be an important driver behind all aspects of our business in fiscal 2025. Furthermore, we anticipate that our investment in our product capabilities, partner ecosystem and go-to-market motion will continue to complement our ARR momentum.
While we continue to scrutinize our expenses as we remain dedicated to increasing our efficiency, growing our free cash flow and operating margins and driving leverage across the business with continued focus on increasing the Rule of 40 metric, we will continue to invest in our strategic priorities. As such, we expect to grow OpEx slightly faster in fiscal 2025 than in fiscal 2024. We remain committed to achieving positive free cash flow by fiscal 2026 and positive operating income by fiscal 2027, underpinned by 20%-plus compound annual ARR growth, as I discussed last December at Analyst Day. Finally, we remain mindful of the macro headwinds and continue to carefully monitor their impact on our business. As such, our outlook maintains a consistent degree of conservatism to account for the uncertainty as well as lack of visibility into how the macro may impact consumption trends for our emerging as a service offering.
With these factors in mind, for the first quarter of fiscal 2025, we expect total revenue in the range of $48.1 million to $48.9 million or year-over-year growth of 18% at the midpoint. We anticipate ARR in the range of $206.5 million to $209.5 million, which represents 21% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $8.5 million to negative $7.5 million. For the full year of fiscal 2025, we expect total revenue in the range of $203 million to $207 million or a year-over-year growth of 14% at the midpoint. As a reminder, we've historically seen variability with respect to the implementation timing of certain enterprise deals and new or migrated Capella customers, which impacts our revenue visibility.
We expect this timing dynamic to influence the pace of revenue growth in fiscal 2025, with aforementioned large customer renewals continuing into the first half of fiscal 2025 and causing our revenue seasonality to be slightly more weighted in the first half of the year relative to what we saw in fiscal 2024. As such, we'd expect fiscal Q3 revenue could be flattish from Q2. We, therefore, continue to view ARR as a better indicator than revenue of the strength of our business. We expect full year fiscal 2025 ARR in the range of $235.5 million to $240.5 million or 17% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $27.5 million to negative $22.5 million. With that, Matt and I are happy to take your questions.
Operator?
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