HashiCorp, Inc. (NASDAQ:HCP) Q4 2024 Earnings Call Transcript
HashiCorp, Inc. (NASDAQ:HCP) Q4 2024 Earnings Call Transcript March 5, 2024
HashiCorp, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.01. HashiCorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Alex Kurtz: Good afternoon, and welcome to HashiCorp's fiscal 2024 Fourth Quarter Earnings Call. This afternoon, we will be discussing our fourth quarter 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 financial 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 first quarter and the full 2025 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. With that, let me turn the call over to Dave. Dave?
Dave McJannet: Thank you, Alex, and welcome everyone to our fourth quarter earnings call for fiscal 2024. We reported solid fourth quarter results that exceeded our top and bottom line guidance with revenues of $156 million, representing year-over-year growth of 15%, and are pleased with our current non-GAAP remaining performance obligations performance which reached $483 million, representing 21% year-over-year growth. I want to start today's call by thanking everyone on the HashiCorp team for the solid fourth quarter close to our fiscal year. Through their hard work, we exceeded expectations in the quarter with important new enterprise logo wins and CRPO growth that demonstrated continued demand for our products as customers trust us with their most important cloud projects.
More broadly, based on conversations we had last quarter, we believe that the optimizations that enterprises undertook over the past 18 months are showing signs of abating and we are seeing early signs of reengagement on new cloud initiatives. Our confidence here comes from tangible proof points during the quarter, specifically improving renewal rates and overall better pipeline conversion. This is in line with what we've expected since the start of this cycle, and while there is some ongoing consumption of historical self-managed entitlements among portions of our customer base, the move to cloud is a secular trend with a clearer business need, and there is still a long runway ahead for the largest global enterprises as they mature their cloud efforts.
Today, I want to focus on our path to accelerated growth as we enter the new fiscal year. And to be direct, we are behind where we wanted the company to be at this point in our growth cycle and we have work to do. We are on a path back to 20% quarterly revenue growth during FY 2026 and I want to outline the top three initiatives taking place at the company to drive this acceleration. At a very high level, we are moving quickly to improve sales execution, turning the dial even more on commercial differentiation and in Q1, rolling out a plan to reallocate more R&D resources to our cloud products. The first initiative is simplifying our go-to-market strategy, which consists of a more prescriptive go-to-market approach and increased process rigor driven by our president, Susan St. Ledger.
We began implementing these initiatives back in -- in the back half of FY24 and are completing the rollout with the field teams this week at our sales kickoff. On the first front, we are shifting from best-in-class standalone products to infrastructure lifecycle management and security lifecycle management. That messaging is finding early traction with our sales teams and potential customers. On the second front, Susan will continue to drive sales process discipline, emphasizing speed, efficiency and simplification in the field while also concentrating our sales investments on additional technical field resources. We saw some early evidence of positive results in our fourth quarter with improved field execution and improved renewals. To give you an example of these efforts, I'd like to discuss a customer that extended from a single product to include a second one of our security offerings, Vault to Boundary in Q4.
This software company initially used Vault in conjunction with a homegrown solution to manage and issue one-time credentials for developer access to cloud infrastructure. After facing challenges enabling their R&D team to access their cloud infrastructure in a self-service manner, this customer quickly realized the need to replace their homegrown privileged access management solution. Given the customer's existing deployment of Vault, our field teams were able to show that adding Boundary would provide comprehensive security lifecycle management, reducing time to value. This customer started with just 500 engineers running on Boundary and now expects to grow to over 6,000. We strongly believe the simplified, multiproduct messaging will help us win more deals like these in FY25.
The second initiative is about commercial differentiation, greater separation between our commercial and free community offerings. While the ecosystem has clearly standardized on our community edition products, we need to drive more value for our commercial customers. Our product development efforts over the past two years have increasingly been oriented towards enterprise capabilities in our commercial offerings. We are further turning the dial toward commercial differentiation, which we believe will have a positive impact on wind rates and on renewals. One major example of commercial differentiation is Terraform stacks. We gave a preview of stacks at HashiCorp last year, which will bring major new functionality to Terraform and the ability to manage infrastructure estates that span multiple environments.
This feature is now in private beta with our commercial customers and will be made available through Terraform Cloud exclusively to our commercial customers later this year. This will drive significant differentiation, especially for our large customers with complex estates. During the fourth quarter, one of our larger land deals on Terraform Cloud demonstrates the power of our differentiated commercial products for customers. A global pharmaceutical company opted to replace their homegrown infrastructure provisioning process built on our community edition with Terraform Cloud. They became a paying customer for the first time because of Terraform Cloud specific features including no code provisioning and the upcoming stacks rollout, as well as our run pricing model update in Q2, which align pricing more closely with their Cloud budgeting process.
But in addition to focusing on differentiations through new capabilities, we know enterprise customers have elevated expectations for the life cycle of software that they deploy with a strong preference to minimize production changes. Earlier today, we introduced long term support, or LTS releases, for our commercial customers. The LTS releases enable customers to stay on a supported version for up to two years at a time with the promise to backport critical fixes, security patches, and hardened upgrade paths. Prior to the LTS announcement, customers needed to do regular major version upgrades to remain supported. This provides significant value for customers who want to manage their risk and operational efficiency, and we believe will be another significant driver to land new opportunities and strengthen renewals.
The LTS releases will be available with the upcoming versions of Vault, Consul and Nomad. In contrast, users of the community editions will have access to critical updates in the latest version and will have to perform frequent updates to stay current. While we continue to offer innovative technology to the community, our outside focus is on providing value to paying customers. Our prior approach provided the same lifecycle for commercial and community versions and we are now driving a clear differentiation. On that note, our third major initiative is to deliver the enterprise-ready HashiCorp Cloud platform across infrastructure lifecycle management and security lifecycle management. We are seeing strong customer interest for this and are taking steps to expedite our delivery.
Our new Chief Product Officer, Michael Weingartner, is focused on Enterprise Cloud delivery and is moving quickly to organize our product development teams to drive Cloud innovation at a faster pace. We have already reallocated resources to this initiative as it is central to an overall companywide shift to lead with our Cloud offerings. As we mentioned last quarter, we are defaulting enterprise land to cloud beginning with Terraform cloud in Q1. As part of this shift, incentives for our field teams are weighted towards cloud rather than self-managed software. We will prioritize enterprise land across infrastructure lifecycle and security lifecycle management with HCP. Landing our customers on cloud first with HCP enables them to realize value faster.
As we deliver more cross product experiences, it enhances our ability to drive and extend motion from our core land products as well. As our R&D teams continue to deliver new product innovations having customers on the cloud platform enables customers to use those new capabilities immediately, in contrast to self-managed software which requires planned upgrades. Combined, these facets will drive improved net retention rates over the long term. To show how this works in practice, here's an example of a customer that expanded both Vault and Terraform Cloud in Q4, doubling the size of their initial land deal. This travel agency had experienced significant resource constraints that made it difficult to deploy applications on BareMetal as fast as they needed.
They were also dealing with subsidiaries operating at different levels of cloud maturity. As a result, this customer realized that only Terraform Cloud could keep pace with their infrastructure complexity. They standardized on Terraform Cloud not just for its portability and lower operating costs, but also because Terraform Cloud enables them to deploy new applications much faster, improving their competitive positioning. To summarize, our goals for this year are to simplify our go-to-market, expand the differentiation of our commercial products, and shift our business to focus heavily on our HashiCorp managed cloud products. Now, I'll turn it over to Navam to walk through the details of our Q4 and full year performance, forward-looking guidance, and then we will be happy to take any questions.
Navam?
Navam Welihinda: Thank you, Dave, and thanks to everyone for joining us today. Echoing Dave's comments, I also want to thank our team for all the effort and continued focus that they have put in, which helped us close fiscal '24 on a positive note. We grew our fourth quarter revenue by 15% year-over-year, our full year revenue by 23% year-over-year, and ended with another free cash flow positive quarter. More importantly, our team put in a lot of work last year to set up HashiCorp for future success and momentum. As Dave mentioned in his remarks, there continues to be pockets of optimization among customers, but the environment in Q4, as well as the outlook for fiscal 2025 from a macro perspective, appears to be better than fiscal '24.
As Dave also mentioned, while we are not completely out of the woods on how customers are working through historical entitlements, our renewal rates improved in Q4 compared to Q3, and our pipeline conversion as well as our sales-driven customer activity also improved in Q4 compared to Q3. We believe the combination of abating market headwinds due to consumption optimization, as well as the three operational initiatives of GTM simplification, increased commercial product differentiation and more enterprise-ready HCP cloud offerings, puts us on a solid position to achieve improved bookings in fiscal '25. Given our entitlement model and as we have discussed before, there is a lag between bookings momentum and accelerating revenue growth rates.
Our expectation is to see a U-shaped recovery in our revenue growth rates this year, with Q2 being the trough in our revenue growth rates, followed by progressively better revenue growth rates in Q3 and Q4 of this year. We expect CRPO growth rates to follow the trough and recovery pattern with the lowest point of CRPO growth being in Q2 followed by improved CRPO growth rates ending in approximately 20% CRPO year-over-year growth by the end of fiscal '25. As Dave mentioned, we also expect the momentum in CRPO to put us on a path to reach 20% quarterly revenue growth during fiscal 2026. Let's move on to our fiscal '25 guidance and notes. For the first quarter of fiscal '25, we currently expect total revenue in the range of $152 million and $154 million and a non-GAAP operating loss in the range of $19 million to $16 million.
As a reminder, our business shows seasonal bookings patterns between Q4 and Q1. Q4 is a strong budget flush quarter where we see the highest number of large multiyear contracts. These multiyear contracts create a larger upfront revenue component in Q4 compared to Q1. Our Q1 guidance takes into account this regular seasonality pattern. For the full fiscal year '25, we currently expect total revenue in the range of $643 million and $647 million, and expect fiscal '25 non-GAAP operating loss in the range of $46 million and $43 million. As mentioned in my prior remarks, the quarterly growth rates in the back half of the year are expected to be higher than the full year revenue growth rate. We also currently expect our gross margins to remain strong throughout the year in the low to mid 80% range.
We will continue with the measured investment posture we've demonstrated in fiscal 2024, growing expenses slower than revenue growth. We currently expect to achieve non-GAAP operating income breakeven by Q4 of this year. On a final note, as you know, we posted two strong cash flow generating quarters in Q3 and Q4 in fiscal '24. We expect positive free cash flow results during this fiscal year other than in Q2 which has collection seasonality related to seasonal Q1 bookings. We expect to generate cash in all other quarters. Positive free cash flow generation combined with a strong cash balance puts us in a position of having excess cash relative to our operating needs and any potential midterm M&A expected cash needs. We believe HashiCorp has a lot of growth ahead of us and that there is still a lot of runway ahead for the largest global enterprises as they mature their cloud efforts.
In addition, we're always responsible in our capital allocation and believe the best use of excess capital is to return it to our shareholders via a share repurchase program. So as outlined in our earnings release today, the board has authorized the $250 million repurchase program to be executed commencing in fiscal 2025. This authorized program is expected to be the first of a continuing program of share repurchases. 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. Thanks for your attention. Dave, Armon and I are available to take any of your questions.
Alex?
Alex Kurtz: Thanks, Navam. With that operator, let's go to our first question.
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