HashiCorp, Inc. (NASDAQ:HCP) Q2 2024 Earnings Call Transcript

HashiCorp, Inc. (NASDAQ:HCP) Q2 2024 Earnings Call Transcript August 31, 2023

HashiCorp, Inc. beats earnings expectations. Reported EPS is $0.1, expectations were $-0.15.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp’s Fiscal 2024 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today to Alex Kurtz, VP of Investor Relations and Corporate Development. Thank you. Please go ahead.

Alex Kurtz: Good afternoon, and welcome to HashiCorp's fiscal 2024 second quarter earnings call. This afternoon, we will be discussing our second quarter fiscal 2024 financial results announced in our press release issued after the market closed today. With me are HashiCorp's CEO, Dave McJannet; CFO; Navam Welihinda; and CTO and Co-Founder, Armon Dadgar. 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. You can access it on our investor website at ir.hashicorp.com. Today's call will contain forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition and our guidance for the third quarter 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 and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

The financial measures presented on this call are prepared in accordance with GAAP unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these 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 11th. 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?

Dave McJannet: Thank you, Alex, and welcome everyone to our second quarter earnings call for fiscal 2024. We reported solid second quarter results that exceeded our top and bottom line guidance with revenue of $143 million, representing year-over-year growth of 26%. Current non-GAAP remaining performance obligations reached $420 million, representing 30% year-over-year growth and we added 21 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 851. Our HashiCorp Cloud Platform offerings reached $18.4 million in revenue, representing 13% of subscription revenue in the quarter. We're excited for the new capabilities we announced during HashiDays in Europe around HCP and Terraform, Vault, Boundary and across our whole product portfolio, and we have 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 and 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 the three sold out locations simultaneously, in Paris, Munich and in London. 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’ve become a strategic partner to the Global 2000.

Copyright: dizanna / 123RF Stock Photo

This customer shared how they approach their move to the cloud and 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 HashiDays, we also made several product announcements that highlighted continued investment in innovation across our portfolio, and I want to briefly share a few of those.

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 Consul. This quarter, as I traveled and met with customers in Europe and other parts of the world, I heard a consistent message from them. 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. Thank you. I look forward to seeing you at our investor event during HashiConf in San Francisco in October. Now, I'd like to turn it over to Navam and I look forward to answering any questions.

Navam Welihinda: 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 second quarter and delivered solid top line results. Compared to our seasonally low first quarter, we saw better contract activity both in total and also within the Global Enterprise segment during the second quarter. Similar to last quarter, sales cycles remain elongated, and procurement scrutiny was ongoing. We expect this cautious spending environment to persist through the rest of 2024. 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 second 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 second 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 four-quarter basis. Our full guidance numbers can be found in our earnings presentation available on our ir.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 third quarter of fiscal '24, we expect total revenue in the range of $142 million to $144 million.

and a non-GAAP operating loss in the range of $26 million to $23 million. For the full fiscal year '24 we expect total revenue in the range of $571 million and $575 million and expect FY24 non-GAAP operating loss in the range of $108 million and $105 million. A couple of final notes before Q&A. First, the severance costs from the reduction in force from last quarter was included in our non-GAAP expenses. These costs amounted to $7 million or an additional $0.04 in non-GAAP EPS. And second, as a reminder, our third quarter has typical seasonality due to the summer months, and we have factored the seasonality into our guidance. In closing, we are excited to see many of you at our investor event on October 11th that will also be live streamed on our IR site.

Thanks for your attention. Dave, Armon and I are available to take any of your questions. Alex?

Alex Kurtz: Thank you. Operator, can we go to our first question?

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Q&A Session

Operator: Thank you. [Operator Instructions] And I show our first question comes from the line of Ittai Kidron from Oppenheimer. Please go ahead.

Ittai Kidron: Thanks guys. Shortened 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?

Dave McJannet: Hey Ittai. Thanks for the question. It's Dave. On to 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, understands 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. The question around sort of progression and productivity, I think perhaps it's more of a broader question around sort of the demand environment and how we're seeing it. And I would say that -- I would say, I did like 20 meetings this week with companies who were in town for the Google Next event. 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 have reflected that in our approach. But that being said, we don't see any material change in 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.

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

Alex Zukin: I guess maybe just first one for you, Dave, like you mentioned the environment is 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 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? 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 next few quarters?

Dave McJannet: I'll try to tackle those in order and I’ll let maybe Armon to answer a couple of them. On the question on the demand environment, no, 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 through procurement is we find out later. So I would say net not a huge change. On the spend priorities, I would actually just point back to people need to keep in mind that this AI push implies cloud. New applications that are AI in their orientation are built on cloud infrastructure.

And in 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. So, that's probably the best way to describe it. Any other comment you’d make Armon about it?

Armon Dadgar: Yes, sure. I think I'd add two 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 one CSP or had a 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 Boundary and obviously provisioning across it with Terraform. So, I do think that priority shift has been interesting and helpful for us. And then to the folks that are heavily invested in private data center, we're also seeing interest there in tools like Nomad.

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. So, 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 is really understanding how do we get to the right long-term model that allows us to continue and invest in open innovation in the product. And that's really what it's about, and that's what the license change enables us to do. And so, no expectation in terms of revenue.

Operator: And I show our next question comes from the line of Nick Altmann from Scotiabank. Please go ahead.

Nick Altmann: Awesome. Thanks, guys. I just had a quick question on the acquisition of BluBracket. I guess maybe a two-part question here. The first one just being is, is there any revenue contribution that we should be aware of on a go-forward basis from BluBracket? And then, secondly, can you guys just maybe unpack your strategy around M&A and whether or not we should expect more of these types of acquisitions, or is there any appetite to maybe do larger acquisitions?

Armon Dadgar: Sure. Yes, let me take the first one, we can talk about kind of the philosophy of how we're thinking about M&A. So, on BluBracket, the company came with a small amount of incremental revenue. We're in the process of integrating the teams, integrating the products, and that's going well and is 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 as it's fully integrated. As we think about kind of the philosophy of M&A for us, we're very much focused on where there are products that are adjacent to our core offerings, where there's sort of a natural synergy.

So with BluBracket, 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 interval? And BluBracket helps solve that gap. So, it's an obvious adjacency, has clear synergy to same buyer and really helps accelerate Vault adoption. I think that's really where our interest lies. As we look across core products, where are there opportunities to accelerate our road map. And obviously, we look for alignment to our core products and core buyers.

Operator: Our next question comes from the line of Gray Powell from BTIG. Please go ahead.

Gray Powell: Great. Thanks for taking the questions. And congratulations on a good set of numbers here. So, I just wanted to maybe drill into current RPO and just how we should 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. So, I'm just curious, is there anything just other than conservatism that would explain why revenue was roughly flat in Q3 from Q2. Just any moving parts there to think about?

Navam Welihinda: Hey Gary, it's Navam here. Thanks for the question. So yes, we're very happy with the solid CRPO and bookings performance this quarter. So that was a solid quarter of performance. The thing you've got to remember is as 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 a 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 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. So overall, I think we're very pleased with the cRPO results forward.

Operator: Our next question comes from the line of Mark Murphy from JP Morgan. Please go ahead.

Mark Murphy: Navam, similar question to Gray’s. 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. For instance, did you have a few pretty chunky deals in the mix, anything different in terms of composition? And then for Armon, I wanted to ask you, we noticed at Google Next that your announcement that the Google provider for Terraform had been downloaded 350 million times. And I just looked at, it's climbed to 370 million. 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?

Armon Dadgar: Sure. Thanks, Mark. Let me take the second question, and then I can hand it back over to Navam. 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 had an impressive milestone. I think AWS recently crossed the 2 billion download mark as well. 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 access 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, and 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.

Navam Welihinda: Yes, Mark. And hey, it's Navam. On the customer mix question, just a 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, we saw some impact this quarter. 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 our sales team and the 100,000 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 second quarter for our revenue.

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

Brad Sills: 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 on Terraform versus Vault and 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? Thank you so much.

Armon Dadgar: Sure. Yes. Thanks, Brad. Yes. So some of the key cloud updates, and this is from our June HashiDays event in Europe 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 what driving a lot of customer conversation around what is a modern PAM tool and cloud solve for. And those updates span both our self-managed Boundary Enterprise as well as our cloud-delivered HCP Boundary. 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 data and made that available for the first time, really 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 different 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, a femoral 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.

And then with Consul, 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 Consul clusters, how do I do observability to understand to save these clusters. And so there was -- I think what we're seeing is the net new state of capabilities that are coming to cloud are differentiating the cloud offering from the self-management and continue to drive a healthy rate of adoption and inbound interest to the cloud. In terms of the -- how 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. I think Terraform continuing to benefit as customers want to go multi-cloud, Gen AI certainly helpful there.

I think cyber remains very robust. So lots of interest in our security portfolio and the Zero Trust tools around boundary Vault, Consul. So I think we're not seeing a whole lot of differential demand.

Dave McJannet: I’d just maybe add one comment, I think, I understand the essence of 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 a steady cadence like the ones that Armon 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.

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

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

Dave McJannet: Sure. I'll let Armon answer that one.

Armon Dadgar: Sure. Yes. Thanks, Andrew. Yes, in general, I'd say we're very excited about it. I think the general feedback we've gotten from customers is as they go to cloud, they have a much more dynamic infrastructure. It's much more a femoral and they're looking to adopt Zero Trust practices. And so I think Boundary fits right in that cross here. 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 with new enterprise capabilities that we announced at our conference.

Dave McJannet: I think what's very clear to me is that the cloud paradigm does introduce 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 the topic.

Operator: Our next question comes from the line of James Fish from Piper Sandler.

Unidentified Analyst: Hey, guys. This is Quinton on for Jim Fish. Thanks for taking our question. In the press release, you guys highlighted a really good win in the APJ government agency. Can you talk about any process or time line you haven't faced for FedRAMP across actually really Vault or Boundary or Terraform? And then how you're thinking about kind of the opportunity and when that opens up in the U.S. federal business for you guys? Thank you.

Armon Dadgar: Yes. Thanks, Quinton. 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, a 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. And so it's certainly on our road map as well.

Dave McJannet: I could perhaps just clarify to you because there's sometimes confusion around FedRAMP. FedRAMP really just applies to SaaS offerings, 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.

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

Unidentified Analyst: Great. Thank you. You’ve got Theo on for Sanjit. It looks like pretty steady quarter overall. And I wanted 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 adopted any early indications in terms of how customers are receiving that? Any color on that will be super helpful.

Dave McJannet: Yes. I’ll let Armon answer that.

Armon Dadgar: Yes. Thanks Theo. So yes, I think on the Terraform PMP, 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. So, what we've done was -- and the design goal here was to really bring that into one framework where there's a standard on a premium tier and the free tier is just a usage capped version of the standard tier. So what the value of that is, as our new customers and users on board, 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 in 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 PMP shift is 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. 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 an expectation it's going to make it easier for us to onboard users and then graduate them from our free 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 we 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. And so, we're always looking at how do we simplify that, but that's sort of the core philosophy.

Operator: And I show our next question comes from the line of Miller Jump from Truist Securities. Please go ahead.

Miller Jump: So maybe thinking about the existing customer base. Last quarter, you all called out the large customer that kind of rightsized 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. 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.

Dave McJannet: 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 on across all the software, and we're doing the same with our vendors. 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, and I wouldn't expect that to be representative to go forward.

Navam Welihinda: Yes. Specifically, the second quarter gross retention was a better quarter than Q1. So we were very pleased with that result.

Operator: And I show our next question comes from the line of Michael Turits from KeyBanc Capital Markets.

Unidentified Analyst: Hey, guys. This is Billy on for Michael. I think some of us have 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 is this change kind of more geared towards addressing competitive pressures or something else?

Armon Dadgar: 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 tools. 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. And so what this changes 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 it.

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

Patrick Walravens: Great. Maybe for you, Dave. I mean, just if you look at this business from a high level, in Q3 of last year, you were growing 52% and your guidance for this Q3 is 14%. I just never would have expected such a big slowdown. So, maybe rank the factors that have driven that slowdown? And when could it reaccelerate?

Dave McJannet: I'm not sure I have a simple answer to the elements. Certainly, I think the optimization cycle for infrastructure is all in the same path as everybody else. I think the reality is if you look at our Global 2000 customer adds and the customer wins that we're at and they're very, very consistent. What we're just seeing is 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 that are taking the propensity to start smaller rather than what was happening a couple of years ago. 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 two, I think we've seen an elongation of sort of the expansion and extension cycles, 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 in fact, different companies at different -- who are at different stages of their overall life cycle. We are sort of in early stages of our growth arc, and so have 4,000 customers, not 40,000 customers to work with. And I think that's indicative of what you're seeing in the impact of that on us. That being said, like I said, these trends are next moving forward, once we get to the digestion cycle that is in every Global 2000 account for every software vendor, we're super optimistic that we can get the growth rates to continue to be super aggressive.

And we'll keep executing towards that vision.

Patrick Walravens: I just want to take a shot at when we might see it?

Dave McJannet: I would refer to the guidance that you'll see from us at the end of this year, which reflects our best view of how that continues to progress. I think anything else will be speculation.

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

Dave McJannet: 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.